Barclays Managed Care Weekly

Equity Research3 October 2013

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 15.

BARCLAYS MANAGED CARE WEEKLY

You’re Raskin For It! –Vol. 12, Issue 40 “You're Raskin For It”: What should we expect from the 2014 Medicare stars announcement next Tuesday?

Trivia Question: We estimate that Centene could generate more than $3 billion in premiums in the state of Florida once the new contract is implemented. What were total company revenues five years ago?

Our coverage universe finished the week in positive territory, up 0.7% since last Thursday. In comparison, the S&P 500 was down 1.2% for the week, while the Russell 2000 was down 0.7% and the NASDAQ Composite declined 0.3%. Hot Topics for the Week: 1) The exchanges officially opened for business despite a host of technical issues. 2) The government “shutdown” without meaningfully impacting our coverage universe. 3) WellCare acquired Healthfirst, a New Jersey Medicaid plan with 47K lives. Recent Notes & Reports: 1) Private Exchanges Explained; Potential for Material Positive Impact

Stat of the Week: According to a recent poll, 65% of uninsured Americans plan to buy insurance by January 1, 2014.

Source: Gallup

INDUSTRY UPDATE

U.S. Health Care-Managed Care POSITIVE Unchanged

U.S. Health Care-Managed Care Joshua R. Raskin, CFA 1.212.526.2279 [email protected] BCI, New York

Jack Meehan, CFA 1.212.526.3909 [email protected] BCI, New York

Rachana Fellinger 1.212.526.3647 [email protected] BCI, New York

Alex Pachman 1.212.526.3302 [email protected] BCI, New York

Barclays | Barclays Managed Care Weekly

3 October 2013 2

Barclays Managed Care Trivia We are pleased to introduce the latest installment of the Barclays Managed Care trivia question of the week. Each week, we will ask a question about the managed care industry. We would prefer you don’t look up the answer, but we won’t police it. It’s that simple. Answer is in next week’s weekly.

Trivia Question: We estimate that Centene could generate more than $3 billion in premiums in the state of Florida once the new contract is implemented. What were total company revenues five years ago?

Last Week’s Answer: Aon expects approximately 600 members (including dependants) to be covered on their active employee exchange in 2014.

I. YOU’RE RASKIN FOR IT

Question – What should we expect from the 2014 Medicare stars announcement next Tuesday? On Tuesday, October 8th we anticipate CMS will release the 2014 Medicare Advantage Star ratings, for bonus year 2015. Quality metrics will play a critical role in the future profitability of the Medicare Advantage segment, particularly in light of the tighter reimbursement environment expected as a result of healthcare reform. Remember, Medicare plans run margins that we estimate are close to 5% so every 100bps in additional reimbursement is a major positive for the plans. This week, we review the MA Star bonus demonstration pilot, and last year’s results which impact 2014 plan rates.

One key provision in the Patient Protection and Affordable Care Act (PPACA) is that it allows MA plans to earn up to 5% additional reimbursement from the government for quality metrics based on the CMS star system (and 10% in double bonus counties). This star system has historically been the sole guide on MA plans for consumers. However, there were never any previous financial implications for these ratings. To say that the MA plans put less than optimal resources toward star quality ratings in the past would be an understatement. The recent results indicate plans are making the necessary investments to improve their plan ratings, which we expect continue in 2014.

Quality star ratings are scored out of 5 stars, and are based on a number of quality metrics including access to care, communication with members, and clinical quality of care. Under the original program, only plans earning 4 or 5 stars qualified for a bonus. In an effort to further offset expected MA rate cuts, CMS announced a pilot demonstration extending bonus eligibility to 3 star and 3.5 star plans for plan years 2012, 2013 and 2014. It remains unclear as to whether or not CMS plans to extend the pilot beyond 2014. This is probably the most important question to answer for 2015 as the decision will have a major impact on reimbursement changes for 2015.


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FIGURE 1 Bonus Payment Schedule Demonstration Project vs. Previous Method

Source: CMS

Although CMS may extend the pilot, increased scrutiny will likely be placed on the percentage of members insurers enroll in four or five star plans for the 2015 payments. The current demonstration is set to expire after the 2014 plan year. Remember, 2015 plan year bonuses are based on this year’s score.

As shown below there are 4.89mm lives in 3.5 star plans or about 36% of our coverage universe. This is particularly important for Aetna (93%), Health Net (61%) and Humana (51%) that would see a significant sigh of relief from a half of a star improvement on those members. There is another 20% of our coverage universe’s membership that are in 3 star plans but that seems less likely to improve to 4 stars.

2013 Performance We estimate that 37.1% of all Medicare Advantage plans weighted by membership reported a star ranking above 4 stars in 2013, compared 93.4% of weighted average plans enrolled in 3+ star plans. Humana and Health Net scored the best among our coverage universe in 2013, with 39.0% and 38.1% of MA membership enrolled in 4+ plans, respectively. Conversely WellCare, Molina and Universal American did not receive and 4 or 5 star rankings for plan year 2013.

Actual Bonus Under Demonstration Actual Bonus Under Previous MethodPlan & Year 2 Year Counties 4 Year Counties 6 Year Counties 2 Year Counties 4 Year Counties 6 Year Counties5 Star Plans:

2012 5.0% 5.0% 5.0% 0.75% 0.38% 0.25%

2013 5.0% 5.0% 5.0% 3.0% 1.5% 1.0%

2014 5.0% 5.0% 5.0% 5.0% 3.8% 2.5%

2015 (ACA Rules) 5.0% 5.0% 3.33% 5.0% 5.0% 3.3%4 Star Plans:

2012 4.0% 4.0% 4.0% 0.75% 0.38% 0.25%

2013 4.0% 4.0% 4.0% 3.0% 1.5% 1.0%

2014 5.0% 5.0% 5.0% 5.0% 3.75% 2.5%

2015 (ACA Rules) 5.0% 5.0% 3.33% 5.0% 5.0% 3.3%3.5 Star Plans:

2012 3.5% 3.5% 3.5% 0.0% 0.0% 0.0%

2013 3.5% 3.5% 3.5% 0.0% 0.0% 0.0%

2014 3.5% 3.5% 3.5% 0.0% 0.0% 0.0%

2015 (ACA Rules) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

3 Star Plans:2012 3.0% 3.0% 3.0% 0.0% 0.0% 0.0%

2013 3.0% 3.0% 3.0% 0.0% 0.0% 0.0%

2014 3.0% 3.0% 3.0% 0.0% 0.0% 0.0%

2015 (ACA Rules) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


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FIGURE 2 2013 Enrollment by Star Rating

Source: CMS, Barclays Research

CMS does not give rankings on a consolidated basis for parent organizations. The stars are assigned at the specific plan/contract level. Our summary rankings are therefore partially estimates, based on weighted average rankings by membership. Humana recorded the highest enrollment-weighted star score in 2013, with an average plan score of 3.80, which was a 0.62 star increase from 2012.

FIGURE 3 Historical Enrollment-Weighted Stars

Source: CMS, Barclays Research estimates Note: Uses December year-end enrollment for weighting (ex: 2011 stars came out in November 2010, use December 2010 enrollment) Assumes 3 stars for low enrollment and new plans, Uses overall ranking for 2011, 2012 and 2013 summary ranking for prior years

Bonus County Impact for Plan Year 2014 Under the quality incentive program of the ACA, plans in qualifying counties can receive a “double bonus”. In the 45 Day Notice, CMS defined three criteria that must be achieved to earn the status of a “Qualifying County,” which will earn a double quality bonus starting in 2014.

1. In 2004, had a MA capitation rate with a population of more than 250,000, specified as a Metropolitan Statistical Area.

2. As of December 2009, had at last 25% Medicare Advantage penetration among Medicare beneficiaries.

3. Has average FFS county spending for 2014 less than the national average FFS spending for 2014.

Company Enrollment by Stars 5 4.5 4 3.5 3 <= 2.5Low

Enrollment New Plans Total2013 Star Ranking

% in 4 or Above

Aetna Inc. 0 4,021 21,682 415,269 3,068 0 3,377 0 447,417 3.53 5.7%Coventry Health Care Inc. 0 0 129,569 73,653 55,038 0 0 340 258,600 3.64 50.1%

Centene Corporation 0 0 0 0 1,344 1,943 1,711 0 4,998 2.81 0.0%Cigna 0 77,364 0 144,903 128,512 63,210 0 0 413,989 3.38 18.7%Health Net, Inc. 0 0 89,001 144,142 0 0 156 0 233,299 3.69 38.1%Humana Inc. 8,379 734,492 150,527 1,167,113 193,456 34,997 1,060 0 2,290,024 3.80 39.0%Molina Healthcare, Inc., 0 0 0 0 8,231 23,379 3,449 0 35,059 2.67 0.0%UnitedHealth Group, Inc. 0 4,331 235,935 1,371,215 997,147 136,020 17,358 177 2,762,183 3.31 8.7%Universal American Corp. 0 0 0 47,401 46,612 40,673 137 0 134,823 3.02 0.0%WellCare Health Plans, Inc. 0 0 0 0 135,678 80,888 0 0 216,566 2.81 0.0%Wellpoint, Inc. 0 0 65,753 308,008 269,702 17,629 0 71,806 732,898 3.34 9.0%Total Medicare Advantage 1,263,464 2,108,556 1,642,993 4,892,231 2,715,815 735,694 60,457 94,304 13,513,514 3.70 37.1%

Star Ranking Results 2013 201213/12

Change 201112/11

Change 201011/10

Change 200910/09

ChangeAetna Inc. 3.53 3.47 0.05 3.32 0.15 3.05 0.27 3.07 -0.02

Coventry Health Care Inc. 3.64 3.39 0.25 3.49 -0.10 3.20 0.29 3.11 0.10Cigna 3.38 3.30 0.08 4.00 -0.70 3.99 0.01 3.50 0.49Health Net, Inc. 3.69 3.60 0.10 3.39 0.21 3.06 0.33 3.09 -0.03Humana Inc. 3.80 3.18 0.62 3.04 0.14 2.76 0.28 2.62 0.14Molina Healthcare, Inc., 2.67 2.89 -0.22 2.91 -0.02 2.68 0.24 3.00 -0.32UnitedHealth Group, Inc. 3.31 3.22 0.09 3.18 0.03 2.93 0.25 2.87 0.06Universal American Corp. 3.02 2.85 0.17 3.17 -0.32 2.97 0.20 3.00 -0.03WellCare Health Plans, Inc. 2.81 2.96 -0.15 2.99 -0.03 2.39 0.60 2.00 0.39Wellpoint, Inc. 3.34 3.29 0.05 3.05 0.24 2.83 0.22 2.64 0.19Total Medicare Advantage 3.70 3.56 0.14 3.44 0.11 3.24 0.20 3.06 0.18


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We estimate that there are ~3.9 million lives that reside in qualifying counties for 2014, or ~27% of the total MA population. There will be 223 qualifying counties for 2014, up from 207 in 2013.

Using data from CMS, we estimate that the enrollment weighted-average increase to reimbursement from quality star bonuses is 4.75% in plan year 2014. The distribution of bonus increases varies by plan, from Coventry which will have a 5.58% boost, to AMERIGROUP with a 1.62% increase. The variance in reimbursements is due to the different geographic footprints for each company in double bonus counties, along with their individual plan star rankings.

FIGURE 4 2014 Boost from Star Bonuses (September 2012 Enrollment)

Source: CMS September 2012, Barclays Research

The reimbursement impact from double bonus counties is meaningful. We estimate that double bonus counties will add ~100bps to reimbursement across the entire Medicare Advantage program. Coventry, Health Net and Aetna are the biggest beneficiaries from double bonus counties (of plans with meaningful scale), with ~130bp boosts to reimbursement (each has >30% of enrollment is in double bonus counties).

FIGURE 5 Impact from Double Bonus Counties


September 2012PMPM w/ Star

BonusPMPM Excluding

Bonus % IncreaseEnrollment in Double

Bonus Counties Enrollment% of Enrollment in

Bonus CountiesCoventry $865.48 $819.71 5.58% 94,495 253,916 37.22%Health Net $863.53 $819.09 5.43% 79,983 229,096 34.91%Humana $852.29 $813.01 4.83% 453,558 2,259,273 20.08%Aetna $849.99 $812.14 4.66% 135,011 435,606 30.99%UnitedHealth $856.96 $822.91 4.14% 725,515 2,714,024 26.73%Cigna $923.97 $892.40 3.54% 56,343 405,747 13.89%Centene $846.70 $824.60 2.68% 1,522 4,529 33.61%Universal American $883.07 $861.25 2.53% 13,754 133,085 10.33%Wellcare $865.07 $848.58 1.94% 24,306 164,840 14.75%Molina $813.70 $800.68 1.63% 14,438 32,886 43.90%Amerigroup $928.07 $913.30 1.62% 2,488 32,003 7.77%Total MA $851.15 $812.55 4.75% 3,371,654 13,863,250 24.32%

September 2012Star Bonus w/ Double Bonus

Star Bonus w/o Double Bonus

Benefit from Double Bonus

CountiesCoventry 5.58% 4.14% 1.44%Health Net 5.43% 4.07% 1.35%Aetna 4.66% 3.58% 1.08%UnitedHealth 4.14% 3.28% 0.86%Humana 4.83% 3.98% 0.85%Centene 2.68% 1.90% 0.78%Molina 1.63% 1.00% 0.62%Cigna 3.54% 3.10% 0.44%Universal American 2.53% 2.25% 0.28%Wellcare 1.94% 1.71% 0.23%Amerigroup 1.62% 1.47% 0.15%Total MA 4.75% 3.77% 0.98%


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Special Enrollment Period (SEP) For 5-Star Plans As part of the quality star bonus demonstration, CMS established a Special Election Period (SEP) for 5-star rated Medicare Advantage plans. In essence, as a reward for earning top quality metrics, MA plans that earned 5 stars in 2013 have the opportunity to enroll membership year-round in 2014, rather than just during the annual enrollment period. CMS expanded the program to include 5-star Part D plan eligibility for year-round enrollment.

In 2013, Humana was the only company in our coverage universe to achieve a 5-star rating, with its Wisconsin plan covering roughly 8,000 beneficiaries. Humana also achieved a 4.5 star rating for plans covering 730K lives. Cigna, Aetna and UnitedHealth also all achieved plans with scores of 4.5 stars. At this point the extended annual enrollment period for 5-star plans remains more of a slight risk to our coverage universe than a benefit, as 5-star plan has an opportunity to take market share year round.

FIGURE 6 Distribution of MA Enrollment by Star Category


Plan Termination Possibilities for 2016 HHS issued a final rule on April 12, 2012 that gives CMS the ability to terminate Medicare Advantage and Part D health plans that fail to earn at least a 3-star summary rating over the course of 3 consecutive years. CMS will use the summary ratings, since the overall score for MA-PD plans could mask underperformance in one program with strong results in another. This rule went into effect this year, with the 2013 plan rating season.

Next, the rule also gives CMS the authority to deny applications submitted by organizations that have performed poorly in the past. CMS has the authority to deny an application if it has terminated or non-renewed a MA or PDP organization’s contract within the past 38 months. For new plans, there is a fourteen month window to comply with the new regulations. CMS thinks that this is an appropriate amount of time, however it could deter plans from joining the program (and be a positive for current participants).

Using the 2013 star ratings, just under 390K MA lives across our coverage universe are enrolled in plans with less than three summary stars. Among the companies with the greatest risk, Molina is most exposed, with roughly 66.5% of its membership in plans below three stars. Humana continues to makes strides with the company’s “at risk” enrollment declining significantly, from roughly 550k lives in 2011 to 40k lives this year.

Star Category Enrollment % of Total5 Stars 1,263,464 9.3%4.5 Stars 2,108,556 15.6%4 Stars 1,642,993 12.2%3.5 Stars 4,892,231 36.2%3 Stars 2,715,815 20.1%2.5 Stars 708,519 5.2%2 Stars 27,175 0.2%Low Enrollment 60,457 0.4%New 94,304 0.7%Total 13,513,514 100%


3 October 2013 7

While no plans will be terminated until the end of 2015, since star ratings are based on lagged metrics, plans need to immediately start making improvements to avoid any issues.

To prevent organizations which have had contracts terminated or non-renewed from “gaming” the system, CMS added new language to its definition of covered persons. CMS may deny an application where the applicant’s covered person includes:

1) All owners who are natural persons, other than shareholders with an ownership interest of less than 5%.

2) An owner in whole or part interest of any mortgage, deed of trust, note or other obligation secured by the organization, or any of the property or assets thereof, with an interest equal or greater than 5%.

3) A member of the board of directors of the entity if it is structured as a corporation.

FIGURE 7 Exposure to Plan Termination for Poor Performance from 2013 and 2012 Star Ratings


II. Barclays Managed Care Research Summaries In this section we summarize our recent research publications. Please contact us at (212) 526-6026 for copies.

“Private Exchanges Explained; Potential for Material Positive Impact” (Managed Care, September 27, 2013) We believe the private exchange opportunity is a clear benefit to the managed care industry, and makes a lot of sense from an employer perspective. The shift to a defined contribution model through private exchanges could mark a meaningful shift in the health insurance landscape. The plans best positioned to take advantage of the opportunity are those with stronger risk offerings and limited ASO exposure.

III. Top Three “Hot” Topics 1) The exchanges officially opened for business despite a host of technical issues.

2) The government “shutdown” without meaningfully impacting our coverage universe.

3) WellCare acquired Healthfirst, a New Jersey Medicaid plan with 47K lives.

Total "At Risk" Enrollment 2013 % of Total 2012 % of TotalAetna Inc. 0 0.0% 0 0.0%Coventry Health Care Inc. 0 0.0% 7,805 3.5%Centene Corporation 1,943 38.9% 0 0.0%Cigna 63,210 15.3% 27,275 7.1%Health Net, Inc. 0 0.0% 0 0.0%Humana Inc. 34,997 1.5% 112,148 5.5%Molina Healthcare, Inc., 23,379 66.7% 6,783 22.4%UnitedHealth Group, Inc. 136,020 4.9% 172,787 6.8%Universal American Corp. 40,673 30.2% 47,655 29.9%WellCare Health Plans, Inc. 80,888 37.4% 11,138 8.3%Wellpoint, Inc. 17,629 2.4% 0 0.0%Total MA 735,694 5.4% 1,082,553 8.8%

In this section, we present the three “hottest” topics in our discussions with investors over the past week.


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IV. Price Performance and Valuation Update Our coverage universe finished the week in positive territory, up 0.7% since last Thursday. In comparison, the S&P 500 was down 1.2% for the week, while the Russell 2000 was down 0.7% and the NASDAQ Composite declined 0.3%. Year-to-date, the group has seen 25 positive weeks and 15 negative weeks. Health Net was the best performing stock in the group, up 4.5%, followed by WellCare up 3.4%. To contrast, Healthways and Aetna were the weakest performers, down 4.7% and down 0.8% respectively. More broadly speaking, the week was neutral with 9 stocks advancing and 3 declining. Since December 31, 2012, our covered universe is up 37.5%, compared to the S&P 500 up 17.7%, the Russell 2000 up 26.1% and the NASDAQ composite up 25.0%.

At current levels the managed care group is trading at 13.8x our forward 12-month estimates. This multiple compares to the market (represented by the S&P 500) selling at roughly 16.3x forward 12-month EPS projections. In addition, we note that the group is trading at 2.1x book value and 4.1x tangible book value.

FIGURE 8 Managed Care Performance

Source: FactSet and Barclays Research

Trailing Twelve Months The managed care group currently trades at 17.7x trailing twelve month (TTM) earnings. This compares to the S&P 500, which is at 17.2x. On a relative basis, the managed care group multiple is currently trading at a 3% premium to the market multiple. The average absolute TTM multiple for the managed care group since the beginning of 2003 is 15.8x, and 16.6x for the market multiple, with an average relative premium to the S&P of -5%.

Looking at a five year chart, the group multiple of 15.8x has come down from its previous peak of 28.1x (July 2005) on an absolute basis, versus a trough multiple of 5.7x in July 2008. The relative premium to the S&P multiple has fallen from its peak premium of 75%, but remains above its trough discount of -46%.

10/03/13 9/26/2013 12/31/12 1-week QTD YTD P/E TTM P/E FTM P/BV P/TBVAetna $64.23 $64.78 $46.31 (0.8)% 0.3% 38.7% AET 12.5x 11.6x 2.4x 5.6xCentene $64.57 $64.17 $41.00 0.6% 1.0% 57.5% CNC 48.7x 28.8x 3.9x 6.1xCigna $78.10 $78.04 $53.46 0.1% 1.6% 46.1% CI 13.9x 11.4x 2.8x 4.8xHealth Net $32.80 $31.40 $24.30 4.5% 3.5% 35.0% HNT 21.1x 16.0x 2.0x 3.5xHealthways $17.77 $18.65 $10.70 (4.7)% (4.0)% 66.1% HWAY 36.7x N/A 1.4x N/AHumana $94.38 $93.78 $68.63 0.6% 1.1% 37.5% HUM 12.4x 10.8x 2.1x 3.2xMagellan Health $59.55 $59.81 $49.00 (0.4)% (0.7)% 21.5% MGLN 11.6x 13.7x 1.9x 3.8xMolina Healthcare $36.32 $35.89 $27.06 1.2% 2.0% 34.2% MOH N/A 19.7x 2.2x 3.7xUniversal American $7.71 $7.70 $8.59 0.1% 1.2% (10.2)% UAM N/A N/A 0.4x 0.6xUnitedHealth $72.52 $72.16 $54.24 0.5% 1.3% 33.7% UNH 13.8x 13.9x 2.9x N/AWellCare $72.08 $69.71 $48.69 3.4% 3.4% 48.0% WCG 12.5x 15.0x 3.3x 3.4xWellPoint $86.48 $84.11 $60.92 2.8% 3.4% 42.0% WLP 11.6x 10.5x 1.3x 10.6x Average 0.7% 1.2% 37.5% AVG 17.7x 13.8x 2.1x 4.1x

National (AET,CI,UNH,WLP) 0.6% 1.7% 40.1% National 12.9x 11.8x 2.4x 7.0xRegional (CVH,HNT,HUM) 2.5% 2.3% 36.2% Regional 11.2x 8.9x 1.4x 2.2xMedicaid (CNC,MOH,WCG) 1.7% 2.1% 46.6% Medicaid 30.6x 21.2x 3.1x 4.4xMedicare (HUM,UAM) 0.4% 1.2% 13.6% Medicare N/A N/A 1.3x 1.9xAncillary (HWAY, MGLN) (2.6)% (2.3)% 43.8% Ancillary 24.1x 13.7x 1.7x 3.8x

S&P500 Index 1,678.66$ 1,698.67$ 1,426.19$ (1.2)% (0.2)% 17.7% SPX 17.2x 16.3xRussell 2000 Index 1,070.90$ $1,078.41 849.35$ (0.7)% (0.3)% 26.1%NASDAQ Composite 3,774.34$ $3,787.43 3,019.51$ (0.3)% 0.1% 25.0%

Returns Closing Stock Price 10/03/13 10/03/13

Our coverage universe finished the week in positive territory, up 0.7% since last Thursday. In comparison, the S&P 500 was down 1.2% for the week, while the Russell 2000 was down 0.7% and the NASDAQ Composite declined 0.3%.


3 October 2013 9

FIGURE 9 Trailing 12 Months HMO versus S&P 500

Source: FactSet, Barclays Research Estimates

Managed Care Segments Trailing Twelve Months The commercial managed care group currently trades at 12.2x trailing twelve month (TTM) estimates, a 29% discount to the S&P 500 which is trading at 17.2x trailing twelve month estimates. The average absolute TTM multiple for the commercial managed care group over the past five years is 13.8x, and 16.6x for the market multiple, with an average relative discount of -18%.

Meanwhile, the Medicaid managed care group currently trades at 30.6x TTM estimates, a 78% premium to the S&P while the Ancillary names are trading at 24.1x TTM estimates, a 41% premium to the S&P 500.

FIGURE 10 Trailing 12 Months by Segment

Source: FactSet, Barclays Research Estimates

Forward Twelve Months The managed care group currently trades at 13.8x forward twelve month (FTM) estimates. This compares to the S&P 500, which is at 16.3x forward twelve month estimates. On a relative basis, the managed care group multiple is currently trading at a 15% discount to the market multiple. The average absolute FTM multiple for the managed care group over the past five years is 14.2x, and 15.5x for the market multiple, with an average relative discount of 2%.

Looking at a five year chart, the group multiple of 13.8x is down from its previous peak of 22.9x in February 2006 but above its trough multiple of 5.8x in July 2008. Current multiple levels relative to the S&P 500 are down from a peak premium of 50% (October 2005).

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3 October 2013 10

FIGURE 11 Forward 12 Months HMO versus S&P 500

Source: FactSet, Barclays Research

Managed Care Segment Forward 12 Months The commercial managed care group currently trades at 10.6x forward twelve month (FTM) estimates. This compares to the S&P 500, which is at 16.3x forward twelve month estimates. On a relative basis, the managed care group multiple is currently trading at a 35% discount to the market multiple. The average absolute FTM multiple for the commercial managed care group over the past five years is 12.1x, and 15.5x for the market multiple, with an average relative discount of -22%.

Meanwhile, the Medicaid managed care group currently trades at 21.2x FTM estimates, a 30% premium to the S&P while the Ancillary names are trading at 13.7x FTM estimates, a -16% discount to the S&P 500.

FIGURE 12 Forward 12 Months HMO versus S&P 500

Source: FactSet and Barclays Research Estimates Commercial Group includes: AET, CI, HNT, HUM, UAM, UNH, WLP Medicaid Group includes: CNC, MOH, WCG Ancillary Group includes: HWAY, MGLN

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3 October 2013 11

V. Key Metrics for Covered Companies

FIGURE 13 Sector View: Positive

Source: Company data, Barclays Research analysis, First Call. Stock prices as of October 3, 2013 Industry View: Positive Stock ratings: OW = Overweight; EW = Equal Weight; UW = Underweight, RS = Rating Suspended Price Target methodologies can be found below in Section X: Valuation Methodologies Note: UAM returns include $14 cash payment related to CVS transaction

FIGURE 14 EPS 2011-2014E

Source: Company data, Barclays Research, First Call

FIGURE 15 Year over Year; P/E and P/BV Multiples

Source: Company Data, Barclays Research

Current Target Implied YTD Shares MarketCompany Name Ticker Rating Price Price Return High Low Change Outstanding Cap ($MM)Aetna AET OW $64.23 $78 21.4% 69.20$ 40.32$ 52.2% 372.1 24,097.20$ Centene CNC OW $64.57 $68 5.3% 65.05$ 34.73$ 63.1% 54.6 3,512.84$ Cigna CI EW $78.10 $83 6.3% 84.68$ 48.63$ 86.0% 282.8 22,180.23$ Health Net HNT UW $32.80 $28 (14.6)% 33.90$ 21.09$ 7.8% 79.4 2,609.81$ Healthways HWAY UW $17.77 $14 (21.2)% 22.20$ 8.58$ 159.0% 34.4 627.09$ Humana HUM OW $94.38 $109 15.5% 99.85$ 63.93$ 7.7% 156.5 14,843.65$ Magellan Health MGLN OW $59.55 $70 17.5% 61.36$ 46.00$ 20.4% 26.8 1,612.64$ Molina Healthcare MOH EW $36.32 $46 26.7% 40.90$ 21.74$ 62.7% 45.7 1,650.14$ Universal American UAM RS $7.71 N/A N/A 11.13$ 7.26$ (39.3)% 88.8 685.81$ UnitedHealth UNH OW $72.52 $82 13.1% 75.88$ 51.09$ 43.1% 1,016.7 73,781.92$ WellCare WCG EW $72.08 $74 2.7% 73.02$ 44.75$ 37.3% 43.6 3,166.59$ WellPoint WLP EW $86.48 $96 11.0% 90.00$ 53.69$ 30.5% 299.0 25,889.94$ S&P 500 SPX-SPX 1,678.66$ 1,729.86$ 1,343.35$ 33.5%

52 Week

Company Name 1Q12 2Q12 3Q12 4Q12 FYE EPS 1Q13 2Q13E 3Q13E 4Q13E FYE EPS 1Q14E 2Q14E 3Q14E 4Q14E FYE EPSAetna $1.34 $1.31 $1.55 $0.94 $5.13 $1.50 $1.52 $1.60 $1.23 $5.85 $1.45 $1.59 $1.83 $1.38 $6.25Centene $0.45 ($0.16) $0.47 $0.35 $1.11 $0.42 $0.70 $0.77 $0.86 $2.75 $0.70 $0.85 $0.95 $1.25 $3.75Cigna $1.28 $1.52 $1.71 $1.57 $6.08 $1.72 $1.78 $1.75 $1.25 $6.50 $1.81 $1.90 $1.85 $1.34 $6.90Health Net $0.10 $0.19 $0.38 $0.36 $1.03 $0.62 $0.52 $0.55 $0.46 $2.15 $0.49 $0.40 $0.73 $0.63 $2.25Healthways ($0.08) $0.15 $0.15 $0.05 $0.27 ($0.12) ($0.03) $0.13 $0.26 $0.24 ($0.06) $0.01 $0.18 $0.27 $0.40Humana $1.49 $2.34 $2.62 $1.19 $7.64 $2.95 $2.63 $2.00 $1.12 $8.70 $2.47 $2.79 $2.14 $1.30 $8.70Magellan Health $0.75 $0.97 $2.36 $1.32 $5.41 $1.01 $1.15 $0.85 $0.58 $3.60 $0.90 $0.96 $0.82 $0.82 $3.50Molina Healthcare $0.39 ($0.80) $0.07 $0.54 $0.20 $0.64 $0.34 $0.32 $0.25 $1.55 $0.40 $0.56 $0.61 $0.58 $2.15Universal American N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AUnitedHealth $1.31 $1.27 $1.50 $1.20 $5.28 $1.16 $1.40 $1.46 $1.43 $5.45 $1.24 $1.42 $1.52 $1.52 $5.70WellCare $1.32 $1.25 $1.05 $1.32 $4.93 $0.63 $1.35 $1.50 $1.32 $4.80 $0.43 $1.22 $1.93 $1.72 $5.30WellPoint $2.34 $2.04 $2.09 $1.03 $7.49 $2.94 $2.60 $1.70 $0.86 $8.10 $2.86 $2.61 $1.82 $1.01 $8.30

2012 2013E 2014E

2012/ 2013/ 2014/ Target Target Target Target Target Company Name 2011 2012 2013 P/E12 P/E13 P/E14 P/E TTM P/E FTM P/BV P/TBV P/CYE10 P/CYE11 P/CYE12 P/CYE13 P/CYE14Aetna -0.5% 14.1% 6.7% 12.5x 11.0x 10.3x 12.5x 11.6x 2.4x 5.6x 21.3x 15.1x 15.2x 13.3x 12.5xCentene -47.7% 147.7% 36.4% 58.2x 23.5x 17.2x 48.7x 28.8x 3.9x 6.1x 37.0x 32.0x 61.3x 24.7x 18.1xCigna 16.6% 6.9% 6.1% 12.8x 12.0x 11.3x 13.9x 11.4x 2.8x 4.8x 17.9x 15.9x 13.7x 12.8x 12.0xHealth Net -66.8% 108.3% 4.9% 31.8x 15.3x 14.6x 21.1x 16.0x 2.0x 3.5x 10.7x 9.0x 27.2x 13.0x 12.4xHealthways -67.1% -12.1% 69.1% 65.2x 74.2x 43.9x 36.7x 475.0x 1.4x -4.2x 10.7x 16.9x 51.4x 58.5x 34.6xHumana N/A 13.9% -0.1% 12.4x 10.8x 10.9x 12.4x 10.8x 2.1x 3.2x 16.8x 13.0x 14.3x 12.5x 12.5xMagellan Health 29.6% -33.4% -2.7% 11.0x 16.5x 17.0x 11.6x 13.7x 1.9x 3.8x 18.0x 16.8x 12.9x 19.4x 20.0xMolina Healthcare -88.2% 686.6% 38.9% 184.6x 23.5x 16.9x 223.1x 19.7x 2.2x 3.7x 35.1x 27.5x 233.8x 29.7x 21.4xUniversal American N/A N/A N/A N/A N/A N/A N/A N/A 0.4x 0.6x N/A N/A N/A N/A N/AUnitedHealth 11.7% 3.1% 4.7% 13.7x 13.3x 12.7x 13.8x 13.9x 2.9x 74.7x 20.0x 17.3x 15.5x 15.1x 14.4xWellCare -26.6% -2.7% 10.4% 14.6x 15.0x 13.6x 12.5x 15.0x 3.3x 3.4x 27.8x 11.0x 15.0x 15.4x 14.0xWellPoint 8.0% 8.1% 2.5% 11.5x 10.7x 10.4x 11.6x 10.5x 1.3x 10.6x 14.3x 13.8x 12.8x 11.9x 11.6x


3 October 2013 12

VI. Managed Care Stat of the Week In this section, we present an interesting statistic related to the managed care industry.

Stat of the Week: According to a recent poll, 65% of uninsured Americans plan to buy insurance by January 1, 2014.

Source: Gallup

VII. This Week in Managed Care In this section we present news summaries and relevant articles from the past week.

Company Specific News

“Blue Cross and Blue Shield of Alabama Expands Partnership with Healthways to Offer Silver Sneakers Fitness Program to C Plus SM Members”, Company Press Release, October 3, 2013

Healthways entered a partnership with Blue Cross and Blue Shield of Alabama to expand its relationship and offer SilverSneakers to the plan’s Medicare Select members in Alabama. Healthways had previously offered the product to BCBS of Alabama’s Medicare Advantage members.

“WellCare to Acquire Select Assets of Healthfirst New Jersey”, Company Press Release, September 30, 2013

WellCare announced the acquisition of Health first Health Plan of New Jersey, a Medicaid plan with 47K lives across 12 counties. WellCare received state approval to provide Medicaid managed care in several counties as of December 1, 2013. The deal makes New Jersey WellCare’s ninth Medicaid market. The transaction is expected to close in the first quarter of 2014.

News Around the World

“Why Kentucky’s Health Exchange Worked Better Than Many Others”, Arian Campo-Flores, Wall Street Journal, October 3, 2013 Kentucky’s exchange enrolled 2,989 individuals or families by Wednesday afternoon. The exchange was not glitch free, but managed to correct an initial lack of sufficient processing capacity.

“Opening Rush to Insurance Market Runs Into Snags”, Abby Goodnough, Robert Pear and Richard Perez-pena, New York Times, October 1, 2013 The exchanges new website, HealthCare.gov generated over 2.8 million visitors on the first day of enrollment. The systems were seemingly unprepared and riddled with technical issues that prevented many from getting rates, or singing up for coverage. Although the administration was quick to point to the volume as the reason for the technical errors, the cause is not entirely clear.

“Poll Finds Most Unaware of Tuesday Opening of Health Insurance Marketplaces”, Jordan Rau, Kaiser, September 28, 2013

A new Kaiser Family Foundation poll shows 74% of uninsured were unaware the exchanges opened on October 1. The responses also show a general distrust with the media representation of information regarding the ACA.


3 October 2013 13

VIII. Company Filings & Insider Activity

SEC FILINGS

Monday, September 30th WellCare 8-K: WellCare announced the acquisition of Health first Health Plan of New Jersey, a Medicaid plan with 47K lives across 12 counties. WellCare received state approval to provide Medicaid managed care in several counties as of December 1, 2013. The deal makes New Jersey WellCare’s ninth Medicaid market. The transaction is expected to close in the first quarter of 2014.

Tuesday, October 1st Magellan 8-K: Magellan completed its acquisition of Partners Rx, a full service PBM for $100 million.

WellCare 8-K: WellCare received a stand-alone PDP contract for 2014. The new deal is a renewal of a contract dated September 14, 2012 between CMS and the plan. The company also renewed its Florida Medicare Advantage contract with CMS.

Wednesday, October 3rd Healthways 8-K: Healthways entered into an investment agreement with CareFirst relating to disease management and care coordination services. As part of the arrangement, Healthways issued CareFirst a $20 million convertible note, with a conversion price of $22.41 per share.

Molina 8-K: Molina’s board authorized a new repurchase program of $50 million, replacing the previous authorization of $75 million.

INSIDER SELLING

Molina Filer: Mario Molina M.D. Title: President & CEO Sale: 10,157 shares on 9/30/13 at an average price of $35.60 for $361,589 Filer: Norman Nichols Title: President of MMS Sale: 370 shares on 10/01/13 at an average price of $35.60 for $13,172 Filer: Terry Bayer Title: COO Sale: 4,063 shares on 9/30/13 at an average price of $35.60 for $144,643 Filer: Jeff Barlow Title: SVP General Counsel Sale: 1,422 shares on 9/30/13 at an average price of $35.60 for $50,623 Filer: Joseph White Title: VP, Accounting Sale: 1,828 shares on 9/30/13 at an average price of $35.60 for $65,077 Filer: John Molina Title: CFO Sale: 6,094 shares on 9/30/13 at an average price of $35.60 for $216,947


3 October 2013 14

IX. Upcoming Events Centene NDR with CEO Michael Neidorff: Boston, October 3-4, 2013

Barclays Select Growth Conference: New York, November 18-19, 2013

Barclays Global Healthcare Conference: Miami, March 11-13, 2014

X. Valuation Methodology

FIGURE 16 Valuation Methodologies

Source: Barclays Research Estimates Industry View: Positive / Stock ratings: OW = Overweight; EW= Equal Weight; UW = Underweight; RS = Rating Suspended Price targets are based on a multiple of 2014 EPS estimates. For full disclosures on each covered company, including details of our company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com.

Price '14 Target 2014 Prem/Disc Group Prem/Disc CurrentRating TICKER Target Multiple EPS Est to Group Mult Multiple to Current Mult. Multiple

OW AET 78.00$ 12.5x $6.25 -23% 16.3x 14% 11.0xOW CNC 68.00$ 18.1x $3.75 12% 16.3x -23% 23.5xEW CI 83.00$ 12.0x $6.90 -26% 16.3x 0% 12.0xUW HNT 28.00$ 12.4x $2.25 -23% 16.3x -19% 15.3xUW HWAY 14.00$ 34.6x $0.40 113% 16.3x -53% 74.2xOW HUM 109.00$ 12.5x $8.70 -23% 16.3x 16% 10.8xOW MGLN 70.00$ 20.0x $3.50 23% 16.3x 21% 16.5xEW MOH 46.00$ 21.4x $2.15 32% 16.3x -9% 23.5xRS UAM N/A N/A N/A N/A 16.3x N/A N/AOW UNH 82.00$ 14.4x $5.70 -12% 16.3x 8% 13.3xEW WCG 74.00$ 14.0x $5.30 -14% 16.3x -7% 15.0xEW WLP 96.00$ 11.6x $8.30 -29% 16.3x 8% 10.7x

http://publicresearch.barcap.com/�


3 October 2013 15

ANALYST(S) CERTIFICATION(S):

I, Joshua R. Raskin, CFA, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

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Industry View

Positive - industry coverage universe fundamentals/valuations are improving.

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Negative - industry coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "industry coverage universe":

U.S. Health Care-Managed Care

Aetna Inc. (AET) Centene Corp. (CNC) CIGNA Corp. (CI)

Health Net (HNT) Healthways Inc. (HWAY) Humana Inc. (HUM)

Magellan Health Services (MGLN) Molina Healthcare (MOH) UnitedHealth Group (UNH)

Universal American Corp. (UAM) WellCare Health Plans (WCG) WellPoint, Inc. (WLP)

Distribution of Ratings:

Barclays Equity Research has 2450 companies under coverage.

44% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% ofcompanies with this rating are investment banking clients of the Firm.

40% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 46% of


3 October 2013 16

IMPORTANT DISCLOSURES CONTINUED

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Barclays Managed Care Weekly