Merrill Lynch Health Services Investor Conference The Waldorf Astoria, New York CityDecember 3, 2003

Gregory W. Scott Gregory W. Scott Executive Vice President and CFOExecutive Vice President and CFOPacifiCare Health SystemsPacifiCare Health Systems

The statements made during this presentation that are not The statements made during this presentation that are not historical facts are forward-looking statements within the historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Factors that could cause number of risks and uncertainties. Factors that could cause actual results to differ materially from expectations include, but actual results to differ materially from expectations include, but are not limited to, the risks discussed in the company's most are not limited to, the risks discussed in the company's most recent filings with the SEC, including the Form 10Q as of recent filings with the SEC, including the Form 10Q as of September 30, 2003, and the Form 10K as of December 31, September 30, 2003, and the Form 10K as of December 31, 2002.2002.

Cautionary StatementCautionary Statement

• Medicare Supplement• PBM• Behavioral Health

2003 Market Expansion

2003 Market Expansion

2002 Health Plan + Specialty Companies

2002 Specialty Companies only

2003 Market Expansion

A Fortune 200 company with• $11 billion in revenue• 2.2 million commercial lives• 686K Medicare+Choice HMO lives• 9 million specialty lives

Largest purchaser of health care services in the Western U.S.Largest purchaser of health care services in the Western U.S.

Third Quarter Performance and FY 2003 Guidance

Q302 Q303 2003 Guidance

Operating Revenue $2.8B $2.7B (1%-2%)

MLR Commercial (Private) 86.7% 83.0% 84%-85%Senior (Government) 84.9% 84.6% 84.5%-85.5% Operating MarginCommercial 12.4% 16.4% 15.0%-16.0%Senior 15.3% 15.3% 14.5%-15.0%Specialty & Other 59.9% 48.3% 47.0%-48.0%

EBITDA $109M $142M ~$550M

CFFO -- -- $350-$360M^= 1.4X Net Income

SG&A ratio 13.2% 13.4% 12.5%-13.0%

EPS $1.20 $1.72 $6.00-$6.05

WANS 36.4M 39.2M 39.7M**

** Includes effect of convertible debt equity offering on Q4

^ Assumes CMS continues to make Q1 payment in December of prior year

2003 Membership & Pricing Guidance

Membership Commercial up 1%-2%, ex-CalPERS M+C down to 680,000 Medicare Supplement doubles from 17,000 to ~35,000

Pricing Commercial pricing up 17% after buydowns ~250 bp M+C premium yield up ~4% Specialty & Other up ~20%

Membership & Pricing Trends

• Commercial membership up sequentially despite Commercial membership up sequentially despite modest declines in national accounts tied to slow modest declines in national accounts tied to slow economyeconomy

• gross new small group sales in Q303 up 100% y-o-ygross new small group sales in Q303 up 100% y-o-y

• retention rate higher than expectedretention rate higher than expected

• Expect moderate single digit commercial membership Expect moderate single digit commercial membership increase in 2004 increase in 2004

• Pricing for Jan ‘04 renewals up mid-teens before Pricing for Jan ‘04 renewals up mid-teens before buydowns ~400 bpbuydowns ~400 bp

Issuance of 3.8 Million Shares of Common Stock

• Approximately $200 Million net proceeds• Use of proceeds

– $175M redemption of 10 3/4% Senior Notes– accrued interest, redemption premium, other transaction costs.

• Benefits:– Improve cash flow– Improve balance sheet platform for Medicare diversification– Promote credit rating increase

Decrease cost of debt

• EPS effect:– Q4’03 guidance lowered to $0.59-$0.64 due to $17.3 million one-

time expenses and 1.9 million weighted share increase – 2003: Full-year guidance lowered by $0.52 to $6.00-$6.05– 2004: Net Income increases $12 million net of tax; modestly

dilutive to EPS

Issuance of 3.8 Million Shares of Common Stock

• Why Equity?

• Why Now?

• Credit Ratios – Debt / book cap (9/30/03)

From 33.3% to 25.7%– Debt / EBITDA (LTM 9/30/03)

From 1.5x to 1.1x

Free Cash Flow Growth Before Note Redemption

$129

$275

$156

$0

$100

$200

$300

2001* 2002* 2003 est.

Millio

ns

• Free cash flow is defined as net income plus depreciation and amortization, less capital expenditures

• Best measure of resources available at Parent to pay down debt, build statutory capital, pursue opportunistic acquisitions

*Excluding non-recurring items

Excess Statutory Capital

$218

$276

$375

$574

$100

$200

$300

$400

$500

$600

2000 2001 2002 9/30/03 est

mill

ions

Weighted average company total > 300% RBCWeighted average company total > 300% RBC

Expanding Commercial Insured Gross Margin

$130

$150

$170

$190

$210

2001 A 2002 A 2003 E

$ P

MP

M

$16.37$16.37

$22.81$22.81

$33.10$33.10

2001-2003 Improvement = $335 million or 65%2001-2003 Improvement = $335 million or 65%

Health Care CostsHealth Care Costs

PremiumPremium

• Growing Commercial Business

• New product introductions

• Diversify to Individual/ Small/ Mid-sized groups

• Advertising/Branding Campaign

• Build Senior Solutions Products/ Distribution

• Medicare Supplement

• Disease Management

• Caregiver

• Expanded Specialty Company Membership

• Organic growth

• Small acquisitions

2003 - 2004 Product Leadership Strategy

Recently Launched Products and Services

• PPOPPO

• Self Directed Health PlanSelf Directed Health Plan

• Medicare SupplementMedicare Supplement

• Self-Funded PPOSelf-Funded PPO

• Tiered HMO Hospital ProductTiered HMO Hospital Product

• Value PlanValue Plan

• Senior Rx Card- complement to Med SuppSenior Rx Card- complement to Med Supp

• PPO DentalPPO Dental

• Medicare PPO (pilot) Medicare PPO (pilot)

Recently Launched Products and Services

• A Solution for CaregiversA Solution for Caregivers

• Healthy Renewal PassHealthy Renewal Pass

• Hospital Quality IndexHospital Quality Index

• Latino Health SolutionsLatino Health Solutions

• Women’s Health SolutionsWomen’s Health Solutions

• African American Health SolutionsAfrican American Health Solutions

• Private Label Life & Disability InsurancePrivate Label Life & Disability Insurance

• Flexible Spending Account Debit CardFlexible Spending Account Debit Card

• Premier Pass (physician concierge service- pilot)Premier Pass (physician concierge service- pilot)

• Extended customer service hoursExtended customer service hours

Building Our Brands

SecurePacifiCare Horizons

Brand Strength up 19% up 9%Brand Stature up 180% up 144%

Relative Ad SpendingRelative Ad Spending

ResultsResults

36%

16%13%

13%

10%9% 3%

Blue Cross / Blue Shield CignaKaiser AetnaHealth Net UnitedPacifiCare

Source: BrandEconomics®Source: BrandEconomics®

48.0% 47.0%38.5%

24.7%16.4%

9.6%

52.0% 53.0%61.5%

75.3%83.6%

90.4%

0%

20%

40%

60%

80%

100%

2001 A 2002 A 2003 F 2004 F 2005 F 2006 F

Senior HMO All Other

New Forecasted Gross Profit Goal (after Q203)

Managing Medicare+Choice

2002 2003 2004*

Exits 44 cos.; 5 states 5 cos.; 2 states 0

Affected members 64,000 37,000 0

Premiums up 6.0% ~4% ~4%

Benefits down 5.10% 1.60% ~1%

Mbrship (loss)/gain (~200,000) (~83,000) ~10,000

MLR vs Prior Year down 350 bp flat up

* Before Medicare reform bill; revisions in progress* Before Medicare reform bill; revisions in progress

Medicare Reform Summary

• Key Benefits to PHS areKey Benefits to PHS are

• ‘‘04 and ‘05 M + C reimbursement increase04 and ‘05 M + C reimbursement increase

• ’’04 prescription drug benefit for low income M + C 04 prescription drug benefit for low income M + C enrolleesenrollees

• ‘‘06 prescription drug benefit also conferred to M + C 06 prescription drug benefit also conferred to M + C enrolleesenrollees

• PBM participation in management of Rx Discount Card PBM participation in management of Rx Discount Card & drug benefit& drug benefit

• Medicare Supplement plans without Prescription Medicare Supplement plans without Prescription benefit not affectedbenefit not affected

Medicare Strategy 2004 and Beyond

Before ReformBefore Reform

Maximize Cash FlowMaximize Cash Flow

Current StrategyCurrent Strategy

GrowthGrowth

New life for strengthened Medicare+Choice programNew life for strengthened Medicare+Choice program

Medicare+Choice After Reform

Focus on growthFocus on growth from from membershipmembership expansion expansion rather than rather than marginmargin expansion: expansion:

20042004-- -- modest net income growth (~modest net income growth (~5%-5.5% premium5%-5.5% premium increaseincrease))

20052005-- -- keep pace with cost trend (keep pace with cost trend (high single digit increasehigh single digit increase))

20062006-- -- substantial new reimbursement with Rx benefitsubstantial new reimbursement with Rx benefit

Medicare Reform Bill

• Passed by Congress 11/25/03Passed by Congress 11/25/03

• Will be signed by Bush in Dec. ‘03Will be signed by Bush in Dec. ‘03

• CMS county calculationsCMS county calculations

• Revised ACRs Revised ACRs

• Increased reimbursements to begin ~3/04Increased reimbursements to begin ~3/04

• Drug card to start ~4/04Drug card to start ~4/04

• PPO/PDP regions announced by 1/1/05PPO/PDP regions announced by 1/1/05

• PDP/MA regulations in early ‘05PDP/MA regulations in early ‘05

• Drug benefit & new private plan options start 1/1/06 Drug benefit & new private plan options start 1/1/06

Medicare Disease Management Pilot Program

• HeartPartners- collaboration of PHS, Prescription Solutions, QMED, HeartPartners- collaboration of PHS, Prescription Solutions, QMED, Alere Medical, Inc.Alere Medical, Inc.

• Enroll up to 15,000 members w/ heart condition starting 1/04Enroll up to 15,000 members w/ heart condition starting 1/04

• Estimated revenue = $120 million in 2004; up to $1 billion over 3 yearsEstimated revenue = $120 million in 2004; up to $1 billion over 3 years

Disease Management

Total Membership

17,660

23,700

35,700

10,000

20,000

30,000

40,000

9/30/01 9/30/02 9/30/03

Savings > $117 million over last 12 monthsSavings > $117 million over last 12 months

Equity & Debt Value Appreciation

• Stock appreciation since 12/31/01 ~ 300%

• 10 ¾ % High Yield Note appreciation since issuance: issued at 99.4% recently indicated at ~116% total return since issuance ~30%

$16.30

$27.20

$49.33

$64.35

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

6/30/01 6/30/02 6/30/03 12/1/03