eating at our own Restaurant

Ann

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Re p

o rt

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03

H A R V A R D P I L G R I M H E A L T H C A R E

Everyone is lookingfor answers to the problem of rising health care costs.

I spend a fair amount of my time talking to our key constituents

about just that. For the past couple of years my conversations

with employers have been very focused. A lot of them start

something like this:

“What are you doing about the cost

of health care?

My business can’t keep absorbing

double-digit increases!”

W H O C A N B L A M E T H E M ?

Charlie BakerPresident & CEO

A M E S S A G E F R O M T H E P R E S I D E N T

I n A m e r i c a , t h e c o s t o f m e d i c a l c a r e r i s e s n o m a t t e r h o w y o u s l i c e i t .

T h e s e f a c t o r s d r i v eH a r v a r d P i l g r i m’ s a n n u a l c o s t i n c r e a s e s .

19% physician outpatient care

16% prescription drugs

22% hospital inpatient care

6% governmentassessments

12% outpatient surgery, behavorial health, and

other provider payments

25% laboratory,radiology, and medical

injectables s

3

Then we talk about what’s driving thetrend, like new drugs and medical devices, rising hospital

payments, higher use of medical services, wide variations in

practice, the under-use of evidence-based medicine, cost-

shifting from under-funded government programs, and the

aging of the population. And the fact that many of them have,

over the years, minimized their employees’ awareness of a

responsibility for the costs of health care, while maximizing

provider choice and access.

Next we have a deeper discussion about what they as an

employer and we as a health plan can do about it. A N D

W E D O H A V E O P T I O N S . Not that we can control

aging or government cost-shifting, but everywhere you look,

you’ll find new benefit plans, products, services, and programs

that are designed to chip away at health care inflation. But,

given the underlying realities of what’s driving up medical

costs, they all require pretty F U N D A M E N TA L C H A N G E S

in how we operate.

Not surprisingly, this makes employers profoundly nervous

about doing much of anything to rock the boat. They’re

worried about disrupting their business and alienating

their employees. They fear poor execution, rocky transitions

and everything else that’s associated with U N K N O W N

T E R R I T O R Y .

Which then gets us back to,

“What are you doing about the cost

of health care?

My business can’t keep absorbing

double-digit increases!”

4

These questions kept playing in my head as Harvard Pilgrim prepared – as an employer – for our 2004

benefits enrollment period. W E ’ V E H A D T H E S A M E

P R O B L E M S W I T H R I S I N G H E A L T H C A R E

C O S T S A S O U R E M P L O Y E R C U S T O M E R S ,

with double-digit increases each year for the past few years.

Our 1300 employees expect us to offer a competitive,

forward-looking, well-designed choice of benefit plans, and

our reputation as an employer is critically important to us.

As we reviewed our options – N O N E O F T H E M V E R Y

G O O D – it suddenly occurred to us:

“Why not treat ourselves the same way we would

treat any employer that came to us for help?”

• What solutions would we propose?

• How would we work with them throughout the process?

• Would we be able to support them and their employees

during and after the enrollment period?

• Would they secure the benefits they were seeking to achieve,

financially and operationally?

After all, we’ve been talking – including in my annual report

letters for the past two years – about how we’re developing new,

more affordable products and better decision-support tools for

our employer customers and members, so wasn’t it about time

we put ourselves to the test? What better way would there

be to understand whether we were meeting the needs of our

customers – and uncover ways to do better – than to

“eat at our own restaurant?”

W E H A D T O B E O U R O W N

T O U G H E S T C U S T O M E R .

it’s easy: to give advice

it’s hard: to be your own client

Amanda complained that her toes were numb and tingly. She had just gone to the prom and I thought it was the crazy shoes she was dancing in.A few days later she said, “My fingers feel weird,” and all of a sudden it hit me.I remembered about Guillain-Barre Syndrome [a disorder that attacks the nervous system and results in paralysis and loss of muscle function] from nursing school. I brought her to UMass Medical Center and they admittedher to the ICU that day. Once the paralysis reached her diaphragm shecouldn’t breathe on her own. It was absolutely awful. Here was a vibrant 16-year-old who went from the peak of health to the point where she couldonly move her head from side to side. E l i s e W i l s o n

It was the most helpless and afraid I’ve ever felt.The only comfort we hadwas knowing Amanda would come out the other side with the proper treatment and care. I’ve been in the insurance business for 30 years, so Iknew what to look for in terms of exclusions and limitations, and I didn’t seeany of it.That was wonderful.The Harvard Pilgrim care managers assured usthat whatever Amanda needed to heal and get better, that’s what she wasgoing to get. One of them said, “The best thing that could happen is that youforget we’re here.” And that just blew me away. We were able to focus fullyon our daughter and she’s recovered beautifully. C l i f t o n W i l s o n

C L I F T O N , E L I S E A N D A M A N D A W I L S O N

Member s , ,Dudley , Massachus e t t s

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We began with a pretty standard bromide:

“If nothing changes, then nothing changes.”

Simply expecting our health care expense trend to drop for

no apparent reason – and with no significant changes in plan

design or contribution policy, or engagement by our employees

other than the nanosecond most people spend thinking about

their annual benefits decisions – seemed kind of unrealistic.

So, we began with an expectation that S O M E T H I N G

S I G N I F I C A N T would need to occur if we were going

to see any real improvement.

W E WA N T E D T O A C H I E V E F I V E O B J E C T I V E S :

• Reduce our projected premium trend from just under 15%

to under 10%;

• Allow our employees to choose from among several benefit

options according to their needs and preferences;

• Structure our contribution policy so that more expensive

options would be...well...more expensive;

• Have employees make active choices about their benefits,

rather than simply defaulting to whatever coverage they

chose last year; and,

• Make sure their health plan (that’s us) does a great job

helping them understand how to use the benefit option they

chose, including how to make the best decisions when they

need care, and how to manage their financial responsibilities

under their plan.

d e s s e r t

d e s s e r t p l u s

d e s s e r t p l u s p l u s

We began with a discussion about ourcontribution policy.

Like many employers our size, we offered T H R E E P L A N

C H O I C E S :

• an HMO with a deductible (ours is “Best Buy HMO”);

• a standard HMO; and,

• a more expensive point-of-service (POS) plan.

And like most employers, we split the premium cost with

our employees on a percentage basis – we paid 80 percent

of whatever option they chose and they paid 20 percent.

As we considered this arrangement we all asked,

M A N Y O F U S F O R T H E F I R S T T I M E ,

“Why we would want to contribute more of

our benefit dollars to people who chose the

high-end plan and significantly less to those

who chose the most affordable option?”

Under that arrangement, the payroll deduction for employees

who chose the least expensive plan design was modestly less

than for those who chose the traditional and high-end product

offerings, but because the lion’s share of the premium was

being paid for by their employer, Harvard Pilgrim, most of

the savings accrued to us and not to the employee.

Not surprisingly, O N L Y A H A N D F U L O F T H E M

C H O S E T H E M O S T A F F O R D A B L E O P T I O N .

9

The YMCA and Harvard Pilgrim have a lot in common.

The Y is in the preventive health business and the quality of care for our employees is directly related to our nonprofit mission:“health of body, mind and spirit for children and adults.” We also advocate for the importance ofour employees and members taking responsibility for their own healththrough exercise, health education, and a holistic approach. Harvard Pilgrimand the YMCA make good partners because Harvard Pilgrim shares thesesame goals for their members.

After completing our open enrollment with Harvard Pilgrim, we learned once again what a valuable partner Harvard Pilgrim is. I was very impressedwith the level of attention we received, with twenty-one open enrollment meetings at sixteen branches, and an overall seamless process. Health insurance is the most important benefit to our employees, and our HRdepartment was very happy. When looking for a health plan, we wanted awide range of coverage, broad network, good administrative support, as wellas a strong reputation and leadership.We’ve found this in Harvard Pilgrim.

J O H N F E R R E L L

Pres iden t ,YMCA of Grea t e r Bos t onBos t on , Massachus e t t s

11

So we decided to see what the contribution policy

would look like if we switched to an “equal-dollar”

employer payment, fixed at 80 percent of the HMO premium,

and allowed employees to “ B U Y U P ” or “ B U Y D O W N ”

from that level. The difference in the employee’s portion of

the premium would then be dramatic. By choosing the least

expensive family plan – the Best Buy HMO – they would pay

$120 per month less than the traditional HMO and $400

per month less than the POS plan.

This was eye-opening, to say the least.

Suddenly, the leverage created by how we funded each offering

became obvious, and the T R U E D I F F E R E N C E between

the costs of each option became real for the employer and

the employee.

As an additional incentive for our employees to consider

choosing the M O S T A F F O R D A B L E P L A N D E S I G N,

we decided to fund half the value of the Best Buy HMO’s

deductible through a Health Reimbursement Arrangement

(HRA). And, we decided to encourage all of our employees

to set up Flexible Spending Accounts (FSA) by giving them

our SmartSpend debit card to pay for eligible drug copayments.

Since dollars stashed away by an employee in an FSA are

pre-tax dollars, it’s always been surprising to me to see how

few people use these accounts.

fresh ingredients!

12

With our health benefits strategy prettymuch decided, we then had to implement it. A typical

open enrollment period is a bit of a snore. No one does much

thinking about it, and most people simply default to the plan

they had last year. This time, however, their selection would

have R E A L F I N A N C I A L C O N S E Q U E N C E S .

We were still offering three options, but with our change in

contribution strategy, many more employees would be taking

a close look at the lower cost “Best Buy HMO,” which is a

relatively new product. And since it has a deductible for some

services, they would have more “ S K I N I N T H E G A M E ”

than with a standard HMO. So, we needed to come up with

a more effective way of C O M M U N I C A T I N G what we

were doing, why we were doing it, and how we would help

our employees make their decisions.

n o m o r e “ I ’ l l h a v e t h e u s u a l ” f o r u s

You’re living up to your slogan‚”making health care easier.” I’m thrilled that our company partners exclusively with Harvard Pilgrim for our healthcoverage. We sell and service only the highest quality security solutions tosome of the most prestigious companies and institutions, and it’s important tous that we provide the same level of excellence to our employees with ourbenefit package. Since Harvard Pilgrim is very much recognized and accepted throughout New England, our employees have easy access to the excellenthealth care available in our region.What’s also impressive is that you’re recognizing the challenges of a slow economy and rising medical costs withmore affordable plan choices. As a business owner, it’s just what I need.

I oversee our health plan administration personally because it’s so important to me. HPHConnect is absolutely my favorite thing. It allows me to monitor the Plan whenever I want, even from home at night. It’s so easy to keep information up-to-date. My employees are using your online services moretoo, which makes my work a little easier. Despite the many complications ofhealth care and our growth in staff, you continue to keep it effortless.

K A T E M C M E N I M O N

Pres iden t , MA C Sys t ems , Inc .Canton , Massachus e t t s

To begin with, we gave our open enrollment process

a name. We called it: “You Decide.” As in, “You need to

make an active enrollment decision if you want health coverage

in 2004, and we’ll do our best to give you the information and

support you need to make the choices that are right for you.”

With the cost of benefits a much more significant factor, one

of the most important decision support tools we created was

an O N L I N E C O S T E S T I M A T O R . It was pretty simple,

both in concept and design. It allowed employees to plug in

estimates of how many office visits, emergency room visits,

prescriptions, and other medical expenses they thought they

might have in the coming year. An underlying database then

calculated for each benefit option what their contribution

to premium would be and what their out-of-pocket costs,

copayments and deductible (minus our HRA contribution

for the Best Buy HMO) would be, and gave them a bottom-line

cost comparison.

We also R E D E S I G N E D our benefits comparisons, set up

workshops and one-on-one counseling sessions, developed

comprehensive online resources, and used regular email

updates to help staff learn more about their options and

what we were doing with our contribution policy, and why.

Our goal was to have our employees U N D E R S T A N D

T H E R A T I O N A L E for our decisions, as well as the

choices they needed to make.

A L L O F T H I S W A S D E S I G N E D T O D O

T H R E E T H I N G S :

• Give our employees more useable information about

their benefit options;

• Engage them in a more active and intense open

enrollment process; and,

• Make sure they felt comfortable about the decisions

they were making.

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16

During open enrollment...

• The benefit options guide was downloaded

over 2,000 times, even though we have

only 1,300 employees;

• About 850 staff attended our benefits

workshops; and,

• The cost estimator was downloaded

more than 1000 times.

We had, for the first time in a very long time, an active open

enrollment period – one in which everyone had a chance

to A S K Q U E S T I O N S , M A K E C H O I C E S , A N D

D E C I D E what options made the most sense for themselves

and for their families.

If I needed to talk to Charlie Baker, I‘m confident that I could get him onthe phone today. Not that I need to call him, but it makes me feel good toknow that the people I work with at Harvard Pilgrim - and even those that I don’t - are accessible to me.

We are very big on relationships and I have a close one with Harvard Pilgrim.Whether it’s customer service, sales or management, the people at Harvardmake you feel like an extended part of the Harvard Pilgrim family. AndHarvard Pilgrim’s service is generally considered the best.

The online services, in particular, greatly improve our role as a HumanResources Department for some of our smaller clients. HPHConnectimproves our workflow and makes it easier to service a large number ofclients.With personalized service, technology, and minimal red tape, HarvardPilgrim is an exceptional organization. For our clients, it’s the combination ofcustomer service, seamless network, and access to Boston hospitals thatmakes Harvard Pilgrim stand out.

D A N C R O N I N

Owner , Cron in and Gerv ino Insuranc e and Inve s tmen t sSalem, New Hampsh i r e

19

In the end, a lot of people did make different decisions. Our Best Buy HMO enrollment

went from a H A L F - D O Z E N in 2003 to almost 2 0 0 in

2004, and the number of people enrolled in the point of

service plan fell to just a handful. The rest opted for the

traditional HMO plan. We also saw a H U G E I N C R E A S E

– almost a doubling – in the number of staff who chose to

open a Flexible Spending Account. Apparently, the more active

process we used for open enrollment also produced a new

appreciation for and understanding of the benefits of pre-tax

health care spending accounts. now that’s a good tip!

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We also surveyed our staff after the enrollment

process, to determine which tools were useful, how they

thought the process went, and what they might have learned.

Over 90 pe r c en t o f r e sponden t s f e l t t h e in f o rmat i on th ey r e c e i v ed washe lp fu l , tha t th ey go t th e suppo r t th ey

needed f r om us , and tha t th ey f e l tth ey ’d made th e r igh t d e c i s i on f o rth emse l v e s and f o r th e i r fami l i e s .

The ave rage t ime spen t mak ing a de c i s i onabou t h ea l th c o v e rage f o r 2004

was abou t two hour s !

Not surprisingly, people who ultimately chose the Best Buy

HMO spent more time, on average, reviewing their options

than people who stayed with the more traditional offerings.

They also said the Cost Estimator was the M O S T H E L P F U L

T O O L we offered and the one that most influenced their

decision-making process.

Interestingly, employees who selected the Best Buy HMO also

demonstrated A B E T T E R U N D E R S T A N D I N G of

how the various coverage options actually work, proving that

they were, in many cases, the most involved in collecting and

understanding the information we made available.

Joanne [Uvanitte] always seems to call me at just the right time,whenever I have a question about any one of my six children’s health! She first called after Kennedy - my baby - was hospitalized when she wasonly five days old.We hit it off right from the beginning. It was a very scarytime, especially since Kennedy was having seizures and my nine-year old hadsuffered from neurological problems as a toddler. Joanne helped us throughthe challenging times. She’s a very knowledgeable nurse with many resourcesto share. Joanne led me to informative health-related articles on the Web,helped alleviate my worries when Kennedy weaned off her medication, andtracked Kennedy’s developmental milestones along with me. Fortunately,Kennedy has hit all of them and well before expected.

Joanne even looks out for my own health.When I got sick, she encouragedme to talk to my doctor about having an MRI due to some personal symptoms and my children’s neurological problems. It’s reassuring to knowhow great Harvard Pilgrim takes cares of its members. In my many years with the plan, I’ve never had a problem. Harvard Pilgrim takes care of myfamily and me.

D E N I S E A N D I R V I N J O H N S O N A N D T H E I R C H I L D R E N

Samantha , Kennedy , Noah, Kelc i , Marlena and Irv inMember s , New Bedfo rd , Massachus e t t s

By the time I met Sandy Swartz, my nurse care manager, I was in prettybad shape. I suspect my lymphedema resulted from ovarian cancer surgery I had in 2001. It started last year and got progressively worse.

This caused infections and swelling of my leg and I hadn’t been out anywhere,except to my doctors. I still can’t walk or stand for very long because the painis so excruciating. I felt like, “God, my whole life has just stopped. I’m a prisonerin my own home.”

Sandy helped me tremendously. I got my power chair because of her. I wasable to get out and go places again, and that meant a lot because I was atsuch a low point.With Sandy you’re just not another case in the insurancecompany’s files.You’re a human being with needs.

I’m very grateful to Harvard Pilgrim. Anything I’ve needed, I haven’t had anyproblems at all. I don’t know where I’d be without them. It’s comforting toknow that you can get what you need without having to fight for it.

J E A N N E C H A D W I C K

Member , Hiram, Maine

So what did we learn by“eating at our own restaurant?”

We learned that I T ’ S P O S S I B L E to tackle the rising

health care trend by dramatically re-structuring the options

we make available to our employees, as long as we give them

good information and data and an adequate process to absorb

it and use it.

When they were G I V E N M O R E O P T I O N S for

how they could use their health care dollars, along with the

D E C I S I O N - M A K I N G T O O L S they needed, more

than 15 percent of Harvard Pilgrim employees decided to

choose a less expensive option and take more responsibility

for managing their own care.

We found that we could provide our employees with an active,

engaging, informative open enrollment without creating a

major distraction. Remember, our open enrollment happened

at the same time that we were busy servicing the open

enrollment process for hundreds of employer customers and

over half of our membership. And, we learned that when these

issues get personal, as they did throughout this process, they

become F A R M O R E R E A L than when we’re merely

engaged in a hypothetical conversation with our customers.

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24

This knowledge is critical to our successand to the success of the employers and providers we work

with as well. The H E A L T H C A R E M E N U of the future

is sure to be more complex than the past, as we all scramble

and search for new and different ways to offer and administer

more affordable products and services. We’ll continue to

develop tiered provider-network products, cost-sharing benefit

designs, comparative provider cost and quality data, and much

more. It’s clear that our future will be, in large part, determined

by our ability to give our constituents the information they

need to make different – and hopefully, better – decisions,

as we all wrestle, in our own way, with the rising cost of

health care. I think it’s fair to say that E A T I N G A T O U R

O W N R E S T A U R A N T has made us a better employer

and a better health plan.

So, pull up a chair!

Charles D. Baker

President and CEO

C E O @ H A R V A R D P I L G R I M . O R G

There just aren’t enough pediatric psychiatrists and psychologists in the behavioral health field to meet the need that’s out there. As a result, more pediatricians are treating children and adolescents for behavioral disorders.With so many treatments and medications available, we have to find better ways to helppediatricians who are busy caring for patients keep up with the latest information.Thanks to Harvard Pilgrim’s Quality Grant Program, we’re able to host physicianroundtable discussions on subjects such as understanding medications and theirapplications for more serious diagnoses like bi-polar disorder. Some feature guestlecturers while others involve observing interviews between behavioral healthproviders and families.They help primary care pediatricians to better understanddifferent diagnostic issues and treat their patients more effectively.

The grant also enabled us to develop a web-based tool for improved communication and information sharing among doctors, counselors, teachers and families. Creating a comprehensive and secure, real-time resource is a tremendous opportunity. It provides a platform for everything from displayingscreening guidelines for conditions such as Attention Deficit Hyperactivity Disorderto using confidential e-mail for conversations between the different parties caringfor children.With access to so many resources, parents and teachers feel moreempowered and children feel less labeled.We’re very optimistic about the long-term potential for the online programs we’re developing. If we do it right, we’ll be able to take care of children in ways that were previously impossible.

S T E V E N R . M I C H E L S O N

Ph.D. Psycho l og i s t , Dire c t o r o f Li f e Managemen t Asso c ia t e sHarvard , Massachus e t t s

27

Harvard Pilgrim Health Care is a nonprofit health plan operating inMassachusetts and Maine and, through our affiliate, Harvard Pilgrim Health Careof New England, in Vermont and New Hampshire. Another corporate affiliate,HPHC Insurance Company, is the carrier for certain products with indemnityinsurance components.

Our product portfolio includes a wide range of HMO (health maintenanceorganization), POS (point-of-service) and PPO (preferred provider organization)plans. We also offer non-group coverage and, in some parts of Massachusetts andNew Hampshire, we enroll Medicare beneficiaries through our First Seniority andMedicare Enhance programs.

Harvard Pilgrim’s provider network includes more than 22,000 physicians and130 hospitals. Our affiliated physicians practice in a variety of settings, ranging in size from individual primary care offices and community practices to large,multi-specialty groups.

Since 1980, the Harvard Pilgrim Health Care Foundation has been promotingprevention and health improvement through the funding of teaching, researchand community service.

H i g h l i g h t s o f 2 0 0 3

Harvard Pilgrim Health Care, Inc. was the only health plan in the

country to be rated among the top ten for both member satisfaction

and clinical effectiveness according to the National Committee for

Quality Assurance (NCQA) Quality Compass® 2003 report. Our

New Hampshire affiliate had the highest health plan member-satisfaction

scores in the country. NCQA is widely recognized as the most trusted,

reliable source of information about the quality of the nation’s health plans.

We received NCQA’s highest accreditation rating - Excellent - for our HMO,

POS, and Medicare+Choice plans. Excellent Accreditation is based on NCQA’s

rigorous evaluation of all aspects of the plan, including preventive health services, member

satisfaction, physician credentialing, and quality improvement initiatives.

Physician practices in Massachusetts, New Hampshire, and Maine received grants totaling $1.5

million from Harvard Pilgrim to improve clinical care, quality, and service. Harvard Pilgrim’s fourth

annual Quality Awards Program will fund 18 physician-group initiatives that focus on managing

chronic and preventable diseases, increasing patient satisfaction and safety, and increasing preventive

care.The results of the grant programs will be shared with other Harvard Pilgrim providers so that

their “best practices” can benefit a broader patient population.

The provider groups receiving grants are: Boston Medical Center ; Carney Hospital IPA;

Dartmouth-Hitchcock Clinic; Dedham Medical Associates; East Boston Neighborhood Health

Center ; the Greater Milford Health Alliance; HealthAlliance with Physicians of Leominster ; Highland

Healthcare IPA of Winchester ; Lawrence General IPA (Choice Plus Network); Lower Merrimack

Valley PHO; Maine Medical Network Inc. in collaboration with the Maine Health Information Center ;

Pediatric Associates of Brockton; the Pediatric Physicians’ Organization at Children’s Hospital; Primary

Care Center/SHS Ventures of Plainville; Primary Care, LLC; St. Anne’s IPA of Fall River ;Western

Maine PHO; and,Woburn Pediatric Associates.

About Harvard Pilgrim

H A R V A R D P I L G R I M ’ S M I S S I O N I S T OI M P R O V E T H E H E A L T H O F T H E P E O P L E W E S E R V E , A N D T H E H E A L T H O F S O C I E T Y .

Spec ia l s

28

Fallon Clinic, a premier community-based physician

network in central Massachusetts, joined Harvard Pilgrim’s

provider network, giving our members access to more than

240 Fallon Clinic physicians and specialists starting January 1,

2004. Fallon Clinic’s physicians practice in 27 locations staffed

by nearly 1,700 employees and provide comprehensive care

during more than one million patient visits a year.

Members of Harvard Pilgrim can use new online tools

to help them improve their health, understand their

coverage and costs, and compare their care options at

www.harvardpilgrim.org. With the expanded features of

HPHConnect, our members can view their prescription drug

history; check the amount and status of claims; compare

hospitals using information about quality, patient safety, and

other criteria that are important to them; look up typical

costs for outpatient medical services; and communicate with

Harvard Pilgrim using a secure message center. In addition,

they can communicate securely with some of the area’s leading

medical specialists through Ask a Specialist and use our Web

Librarian and other online resources to find reliable, current

medical information.

Harvard Pilgrim introduced Easy Online Renewal, a faster,

more efficient way for brokers to quote Massachusetts small-

group accounts, look up product summaries, change benefit

options, accept rates electronically, and email or fax renewal

rates at their own convenience. Easy Online Renewal is the

latest of several timesaving online tools that help brokers

eliminate unnecessary paperwork.

We launched NetOption NH, which allows New Hampshire employers to reduce their benefit

costs by offering a “preferred network” product with incentives for their employees to receive any

needed specialty hospital care in New Hampshire.

HPHConnnect, our electronic tool for health care administration, is saving employers time and

money with online enrollment, roster management, and verification. More than 86 percent of

Harvard Pilgrim’s employer customers have set up HPHConnect accounts that allow them to reduce

paperwork and gain greater control over the accuracy, timing, and payment of their premiums.

By year-end, almost 60 percent of our employer transactions were being processed electronically

rather than on paper.

By the end of 2003, providers and billing agents were conducting a million electronic transactions

a month using HPHConnect and our other electronic channels. HPHConnect provides instant checks

on patient eligibility and claims status and ensures that referrals arrive before patients do.This means

less paperwork and more control over cash flow for clinicians, and fewer administrative hassles for

patients, before and after they receive care.

The Harvard Pilgrim Ethics Advisory Group, which includes members, employer representatives,

clinicians and staff, helps provide an “ethical compass” for our business and clinical decisions. In 2003,

the group discussed, and suggested principles and guidelines on, a number of important issues facing

the health plan, including the proper use of members’ health data to identify and respond to health

risks; the introduction of so-called “consumer-driven” insurance products with high levels of patient

cost-sharing; the use of doctor-patient email in clinical practice; and the proliferation – and growing

cost – of advanced imaging technologies like MRI and CT scans.

Cash on Hand2001 . . . . . . .$214 million

2002 . . . . . . .$327 million

2003 . . . . . . .$442 million

Net Wor th pe r Ful lyInsur ed Member2001 . . . . . . . . . . . . .$235

2002 . . . . . . . . . . . . .$303

2003 . . . . . . . . . . . . .$344

Curr en t Rat i o2001 . . . . . . . . . . . . .1.08

2002 . . . . . . . . . . . . .1.47

2003 . . . . . . . . . . . . .1.54

29

The Harvard Pilgrim Foundation’s Community Service Grants Program increased its financial

awards to a total of $1.7 million in 2003.These grants supported prevention programs that address

the growing problems of disparate health outcomes across diverse populations throughout

Massachusetts, Maine and New Hampshire. In addition to the grants program, Foundation staff

actively engaged in more than 15 ongoing community partnerships to promote solutions for

community health issues such as suicide, physical activity and nutrition, school health, substance

abuse, and drunk driving.

The Foundation awarded grants to 18 New Hampshire-based organizations and coalitions for

projects that address a variety of individual and family health issues in their communities.The grants

will support programs ranging from substance abuse and violence prevention to providing medical

interpreters for non-English-speaking patients to stress reduction for elementary school students.

The Center for Child Health Care Studies was launched as part of the Department of

Ambulatory Care and Prevention (DACP), a unique research and teaching collaboration between

Harvard Pilgrim and Harvard Medical School.The Center specializes in

research that evaluates how health care practices, financial and organiza-

tional processes, social factors and personal behaviors affect children’s

health. Areas of research include asthma, infectious diseases, the use of

vaccines and antimicrobials, nutrition, newborn health, cultural diversity,

and community-based health.The Harvard Pilgrim Foundation provides

core funding for the Center. In addition, the Center has received more

than $2 million from the Agency for Healthcare Research and Quality,

Centers for Disease Control and Prevention, Maternal and Child

Health Bureau, National Institutes of Health, and The Robert Wood

Johnson Foundation.

Tracy Lieu, MD, Associate Professor of Ambulatory Care and

Prevention at the DACP, was named director of the Center. Dr. Lieu

is nationally recognized for studies of the quality and cost-effectiveness

of children’s primary care. Her research has focused on vaccine safety

and economics, asthma and infant outcomes. Center investigators are

Harvard Medical School (HMS) faculty appointed in the DACP, the

HMS Department of Pediatrics, or both. Other Center members

include general pediatricians, pediatric specialists, epidemiologists,

social scientists, and staff.

In July, the National AIDS Fund approved the Harvard Pilgrim

Foundation as the host and convener of the Massachusetts

Community AIDS Partnership (MCAP), one of 29 Community AIDS

Partnerships across the U.S. MCAP brings together concerned

individuals from government, academia, business, education, health, and

civic organizations to raise and distribute funds to local community-based HIV/AIDS prevention

programs throughout Massachusetts. In its first six months, MCAP distributed over $150,000 in

prevention grants.

To honor and encourage the spirit of community caring that was awakened by the tragic

events of September 11, 2001, the Harvard Pilgrim Community Spirit 9/11 Mini-Grants program

gives employees the opportunity to apply for small grants to support local service activities and

organizations. During 2003, the program distributed a total of $50,000 to 111 organizations

with which our employees are involved.

*The source for this data is Quality Compass® 2003 and is used with the permission of the National Committee for Quality Assurance (NCQA).Quality Compass is a registered trademark of NCQA. NCQA is a private, non-profit organization dedicated to improving health care quality.

Member sHMO . . . . . . . .673,229

POS . . . . . . . . . .54,744

PPO . . . . . . . . . . .25,864

Medicare . . . . . . . .40,787

Non-group . . . . . . . . .9,335

Total . . . . .803,959

2003 Net IncomeQ1 . . . . . . . . .$8.9 million

Q2 . . . . . . . . .$9.1 million

Q3 . . . . . . . .$16.6 million

Q4 . . . . . . . . .$9.6 million

Total . . . .$44.2 million

In the middle of contract negotiations, we were trying to structure a

health plan with good coverage that was affordable to our employees and

the hospital. Once we made our decision, Harvard Pilgrim’s representatives

answered questions about plan design changes so well and with such care

that the employees’ anxiety about the changes was diminished. When my HR

vice president said Harvard Pilgrim would be here in two weeks to start the

actual open enrollment I had significant doubts. I thought maybe someone

would be here for an hour with some paper forms and that would be it.

But it was a complete open enrollment and a Harvard Pilgrim team was here

at our beck and call for two days.

Part of our mission is to deliver care in a manner that’s both respectful and

reflective of the diverse communities we serve. As a result, we have a very

multicultural workforce. Harvard Pilgrim offered plan materials in multiple

languages and even translators on site for Spanish and French Creole.They

really stepped up to ensure our people understood their plan details. And the

ID card turnaround using HPHConnect was just amazing.The fact that people

got their cards that fast, that efficiently, yet still done correctly...I was stunned.

The whole thing was done in under a month, from finalizing plan design to ID

cards. It was pretty dramatic.The service we received from Harvard Pilgrim is

a model for all of us.

K I M B E R L Y S M I T H

Pres iden t and CEO, Jewi sh Memor ia l Hosp i ta l and Rehab i l i t a t i on Cen t e rBos t on ,Massachus e t t s

31

C o m b i n e d S t a t u t o r y S t a t e m e n t o f I n c o m eFor the years ended December 31, 2003, 2002, and 2001 (000’s omitted)

2 0 0 3 2 0 0 2 2 0 0 1

P R E M I U M I N C O M E $ 2,090,999 $ 1,782,060 $ 1,712,826

E X P E N S E S

Medical and hospital 1,852,523 1,564,688 1,508,632General administrative 207,640 185,972 165,709

2,060,163 1,750,660 1,674,341N E T U N D E R W R I T I N G G A I N 30,836 31,400 38,485

O T H E R I N C O M E (expenses)

Net investment income 15,201 14,116 10,127Other expenses (1,794) (458) (19,720)

13,407 13 ,658 (9,593)N E T I N C O M E $ 44,243 $ 45,058 $ 28,892

C o m b i n e d S t a t u t o r y B a l a n c e S h e e tAs of December 31, 2003, 2002, and 2001 (000’s omitted)

2 0 0 3 2 0 0 2 2 0 0 1 A S S E T S

Cash and invested assets $ 441,529 $ 326,664 $ 213,711Premium and health care receivables 46,400 48,821 66,858Real estate, furniture and equipment 32,483 32,656 98,770Other assets 56,616 56,628 49,986

T O T A L A S S E T S $ 577,028 $ 464,769 $ 429,325

L I A B I L I T I E S & N E T W O R T H

Liabi l i t ies

Claims payable and accrued

medical incentive pool $ 204,704 $ 156,823 $ 174,294Premiums received in advance 57,648 42,246 38,846Accounts payable and accrued expenses 91,216 85,489 74,487

T O T A L L I A B I L I T I E S 353,568 284,558 287,627

Net Worth 223,460 180,211 141,698

T O T A L L I A B I L I T I E S & N E T W O R T H $ 577,028 $ 464,769 $ 429,325

H A R V A R D P I L G R I M H E A L T H C A R E , I N C .

Health care is a priority at my firm. It’s one way I can keep the best people

on staff, and show them how much I value their efforts.The rising costs of

health care are a challenge though. And what led us to switch to Harvard

Pilgrim after 30 years with another carrier.

Harvard Pilgrim has impressed me from the beginning, and your service

continues to exceed expectations. Right before our coverage began, my

son had a major accident. His recovery and return to college life was my

immediate concern, but I was also worried about changing plans during this

crisis. I was put in touch with a Harvard Pilgrim transitional care manager who

was absolutely phenomenal. She put me at ease and handled everything,

ensuring that my son had the care he needed without me worrying about

insurance. A year later, he’s fine and still able to see his out-of-state surgeon

for follow-ups. And, in fact, the care manager recently steered me in the right

direction on another issue. It’s nice to know you can still find a person to talk

to when needed, someone who remembers you even!

This spring, I faced talking to my 50 employees about the realities of increasing

health care costs. Would they prefer to keep their current Harvard Pilgrim

benefits and pay a 15% employee contribution or have me continue to pay

100% with a different plan? We took a vote, and chose to keep the Harvard

Pilgrim plan we’ve come to trust.

M I C H A E L C O U T U

Pres iden t , The Sudbury Des ign GroupSudbury ,Massachus e t t s

F R A N C E S F E E L E Y

Member , Dorche s t e r , Massachus e t t s

onthI’m retired from the City of Boston and joined Harvard Pilgrim in July.

I was a little nervous about switching because I have congestive heart failure.

When I went for a doctor’s appointment a few months later, I was dizzy and

having trouble breathing - and my doctor put me in the hospital right away.

That’s when Denise O’Connor called my daughter, who was visiting from

Florida. Denise is a HarvardPilgrim nurse, and that call began a relationship that

I cherish. I talk to her often, and she even shares recipes with me! Since I met

Denise I have lost 23 pounds and have not been hospitalized.

I’ve come a long way. I can’t go out dancing or anything, but I am in much

better shape thanks to Harvard Pilgrim’s Health Advance program and Denise

O’Connor. Denise asked me if I would ever consider moving to Florida to be

close to my daughter and I said, “Why would I do that? My healthplan is here!‚”

With my old insurance carrier I was just paying the bills and that was the

relationship. I never received a phone call to check in with me or to see how I

was feeling. As far as I’m concerned, Harvard Pilgrim is the only health plan.

I’ve been working with insurance companies for over 20 years and have

seen the industry change a great deal. It is a vastly different world today.With

rising insurance costs, renewals were becoming increasingly problematic.We

were frequently switching insurance carriers to try to maintain the high level of

coverage we sought while minimizing the overall cost so that Airmar and its

employees were not facing huge increases.

Since we’ve been with Harvard Pilgrim, I’ve never been happier dealing with

an insurance company. Harvard Pilgrim has our interests at heart - wanting to

know what they can do to help manage our plan, and what they can do in

terms of service. It’s very apparent in some of the benefits they’ve introduced.

We are really on the same playing field, playing the same game.

Harvard Pilgrim works really hard at maintaining the relationship after the sale.

I’ve always wondered about the difficulty other insurance carriers had with

maintaining the relationship from the sales people (pre-sale) to the account

managers (post-sale).They appeared to have opposing goals. At Harvard

Pilgrim, that’s not the case.The transition has been seamless and has never

faltered.The bottom line is this: service is excellent and our employees

are happy.

C L A I R E S I M A R D

Direc t o r o f Human Resour c e s , Airmar Techno l ogy Corpo ra t i onMil fo rd , New Hampsh i r e

K A T H L E E N L U B E C K

Member , Graf t on , Massachus e t t s

thesideWe thought we were going to lose Jason that night. It was just a week

before his second birthday, a Sunday, and we put him down in the crib for

the night.When we left his bedroom, we heard a THUD and found him

unconscious on the floor of his room.

When people are their lowest, when there’s a crisis in the family, the last thing

you want to be concerned with is who is going to pay this bill or how much

time it will take to deal with claims. Alot of health plans don’t offer that to their

members.They leave them on their own to fend forthemselves.

I’ve never found that to be the case with Harvard Pilgrim. For the entire time

Jason was in the hospital, all I needed to do was hand my ID card over and

I could focus on my son.

Today Jason is doing great — we even joke about what a hard noggin he has.

But when he was in the hospital, it was scary and we really thought about how

fortunate we were to have Harvard Pilgrim there. It’s always been behind the

scenes, very quiet. In a way, I actually think we took Harvard Pilgrim for granted

until Jason got hurt.

Charles D. Baker - ChairHarvard Pilgrim Health Care

John H. BuddMirick O’Connell DeMallie & Lougee,LLP

Raphael Dolin, M.D.Harvard Medical School

Joseph L. Dorsey, M.D.Harvard Vanguard Medical Associates

James HooleyNeighborhood Health Plan

Antonia JimenezExecutive Office of Health and Human Services Commonwealth of Massachusetts

H. Eugene Lindsey, Jr., M.D.Harvard Vanguard Medical Associates

Lois A. Monteiro, Ph.D.Brown University

David MulliganBoston Public Health Commission

Joseph F. O’Donnell, M.D.Dartmouth Medical School

Richard Platt, M.D.Department of Ambulatory Care andPrevention, Harvard Medical School

John A. Rich, M.D.Boston Public Health Commission

John H. Budd – ChairMirick O’Connell DeMallie & Lougee,LLP

Charles D. BakerHarvard Pilgrim Health Care

Constance S. Barr, M.D.Dedham Medical Associates

Ann ClarkeMassachusetts Teachers Association

Jack T. Evjy, M.D.Commonwealth Hematology-Oncology, PC

Zoila Torres FeldmanGreat Brook Valley Health Center

Katherine A. HesseMurphy, Hesse, Toomey & Lehane, LLP

Herman B. Leonard, Ph.D.John F. Kennedy School of Government

Edward J. McCauleyRetired Partner, Deloitte & Touche

Barry L. SheminJohn Hancock Financial Services, Inc.

Mary Ann TocioBright Horizons Family Solutions

Julius T. Williams, Jr.Christensen/Williams & Associates

H A R V A R D P I L G R I M H E A L T H C A R E

Board o f Dire c t o r s

H A R V A R D P I L G R I M H E A L T H C A R E

F O U N D A T I O N

Board o f Dire c t o r s

The Management

Anita Feins, M.D. – HPPA PresidentHarvard Vanguard Medical Associates

Constance S. Barr, M.D.Dedham Medical Associates

John R. Butterly, M.D.Dartmouth-Hitchcock Medical Center

Steven C. Flood, M.D.Caritas Medical Group at Foxboro

William B. Fox, M.D.Briar Patch Medical Associates

Steven T. Golden, M.D.Health Care South, Cohasset FamilyPractice

Susan T. Haas, M.D.Boston Medical Center

Peter B. Johnson, M.D.Attleboro Medical Associates

H. Eugene Lindsey, Jr., M.D.Harvard Vanguard Medical Associates

Peter J. Lydon, M.D.Caritas Norwood Hospital

E. James Monti, Jr., M.D.PRIMA, Inc.

Walter J. Murphy, Jr., M.D.Plymouth Medical Group

Russell J. Nauta, M.D.Mount Auburn Hospital

Anne Seger, M.D.UMass Memorial Medical Center

Carl A. Soderland, M.D.Lahey Ipswich

James K. Vernon, M.D.Newton-Wellesley Surgeons, Inc.

Charles A. Welsh, M.D.Massachusetts General Hospital

H A R V A R D P I L G R I M P H Y S I C I A N S

A S S O C I A T I O N

Board o f Dire c t o r s

H A R V A R D P I L G R I M H E A L T H C A R E

Leader sh ip Commi t t e e

Charles D. BakerPresident and Chief Executive Officer

Leanne BergeSenior Vice President, Network Servicesand Operations

Bruce M. BullenChief Operating Officer

John J. BurkeVice President, Corporate CompliancePrograms

Joseph C. CapezzaChief Financial Officer

Vincent CapozziSenior Vice President, Sales andMarketing

David Cochran, M.D.Senior Vice President, StrategicDevelopment

George H. DixonVice President, Treasury

William F. Frado, Jr.Senior Vice President, General Counsel

Roberta Herman, M.D.Senior Vice President and ChiefMedical Officer

Deborah HicksVice President, Human Resources

Kristen KeelVice President, Financial Planning andAnalysis

Gary H. LinSenior Vice President Actuary Services,Chief Actuary

Marie MontgomeryVice President, Controller CorporateAccounting

Deborah A. NortonSenior Vice President, ChiefInformation Officer

Harold E. Putnam, Jr.Vice President, Finance

David SegalSenior Vice President, Customer Serviceand Operations

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M a s s a c h u s e t t s • 93 Worcester Street, Wellesley, MA 02481

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