Anthem Blue Cross 2002 Annual Report Download - page 47

MANAGEMENT’S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations (Continued)
42 Anthem, Inc. 2002 Annual Report
On May 31, 2001, we sold our TRICARE opera-
tions. The results of our TRICARE operations were
reported in our Other segment during 2001 and included
$263.2 million in operating revenue and $4.2 million in
operating gain for the five months ended May 31, 2001.
The results of our TRICARE operations for the year
ended December 31, 2000 were $353.9 million in operat-
ing revenue and $3.9 million in operating gain, and were
included partially in our Other segment and due to vari-
ous intercompany reinsurance and service agreements
which were in place during 2000 were partially recorded
in our Midwest health business segment during 2000.
On June 5, 2000, we completed the purchase of Blue
Cross and Blue Shield of Maine, or BCBS-ME. We
accounted for this acquisition as a purchase and we
included the net assets and results of operations in our
consolidated financial statements from the date of
purchase. The results of BCBS-ME for the year ended
December 31, 2001 were $948.1 million in total revenue
and $12.6 million in operating gain. The results of
BCBS-ME from June 5, 2000 through December 31, 2000
were $489.4 million in total revenue and $8.7 million in
operating gain.
Premiums increased $1,507.5 million, or 19%, in
part due to our acquisition of BCBS-ME in June 2000 and
the additional risk we assumed as of January 1, 2001, associ-
ated with the TRICARE business. Our subsidiary Anthem
Alliance had retained 35% of the risk on its TRICARE
contract as of January 1, 2000, and we increased the reten-
tion as of January 1, 2001, to 90% of the total risk for the
contract. We sold the TRICARE business on May 31,
2001. Excluding our acquisition of BCBS-ME and our
TRICARE operating results, premiums increased $1,089.5
million, or 15%, due to premium rate increases and higher
membership in all of our health business segments.
Administrative fees increased $61.7 million, or 8%,
with $30.2 million of this increase from our acquisition
of BCBS-ME. Excluding our acquisition of BCBS-ME
and our TRICARE operating results, administrative fees
increased $112.2 million, or 20%, primarily from increased
Local Large Group self-funded and BlueCard activity.
Excluding our acquisition of BCBS-ME and our
TRICARE operating results, other revenue, which is com-
prised principally of APM’s sale of mail-order drugs,
increased $12.1 million, or 27%. Mail-order revenues
increased primarily due to additional volume resulting from
the introduction of APM as the pharmacy benefit manager
at Blue Cross and Blue Shield of New Hampshire, or
BCBS-NH, in late 2000 and Blue Cross and Blue Shield
of Colorado and Nevada, or BCBS-CO/NV and BCBS-
ME in the first six months of 2001.
Benefit expense increased $1,263.7 million, or 19%,
in 2001 primarily due to our acquisition of BCBS-ME and
the additional risk assumed by Anthem Alliance for TRI-
CARE business on January 1, 2001. Excluding our acqui-
sition of BCBS-ME and our TRICARE operating results,
benefit expense increased $888.6 million, or 15%, prima-
rily due to higher average membership and increasing cost
of care. Cost of care trends were driven primarily by
higher utilization of outpatient services and higher pre-
scription drug costs. Our benefit expense ratio decreased
20 basis points from 84.7% in 2000 to 84.5% in 2001 pri-
marily due to disciplined pricing, implementation of dis-
ease management plans and improvement in provider
contracting. Excluding our acquisition of BCBS-ME and
our TRICARE operating results, our benefit expense ratio
decreased 40 basis points from 84.3% in 2000 to 83.9% in
2001 for the same reasons.
The following discussion summarizes our aggregate
cost of care trends for the 12-month period ended
December 31, 2001 for our Local Large Group and Small
Group fully-insured businesses only. Cost increases have
varied among segments and products. Our aggregate cost
of care trend was approximately 13%, driven primarily by
pharmacy and outpatient costs. After taking changes in
our mix of business between regions into consideration,
our aggregate cost of care trend was approximately 12%.
Pharmacy cost trends for the 12-month period ended
December 31, 2001 generally averaged from 16% to 17%.
The cost increases resulted from the introduction of new,
higher cost drugs and higher overall utilization as a result
of increases in direct-to-consumer advertising by pharma-
ceutical companies. In response to increasing prescription
drug costs, we have implemented three-tier drug programs
and expanded the use of formularies for our members.