Equity Research22 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.

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PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 10.

U.S. Health Care Managed Care

Detailed 2014 MA Bonus Star Announcement Shows Broad Progress CMS released the 2014 Medicare star ratings yesterday, with positive data points for reimbursement and enrollment eligibility for plan years beginning in 2015. As we have discussed, 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. Recall that Medicare plans run margins that we estimate are close to 5%, so every 100bps in additional reimbursement is a major positive for the plans. For 2014 the overall Medicare Advantage star rating increased to 3.86 stars, up 0.16 stars y/y.

Importantly, assuming no change in qualifying counties for 2014, we estimate that quality star bonuses will increase reimbursement 3.29% in 2015 for the aggregate Medicare Advantage program. Recall that the 2014 plan quality results will be used for 2015 reimbursement. We estimated that 2013 quality star bonuses are augmenting reimbursement by 4.75% in 2014 for the aggregate Medicare Advantage program, including a 100bp contribution from double bonus counties. In 2015, unless the demonstration is extended, only 4-, 4.5- or 5-star plans receive a reimbursement bonus.

The largest plan to receive a 5-star rating is offered by Kaiser on the West Coast. CMS established a Special Election Period (SEP) for 5-star rated Medicare Advantage plans as part of the quality star bonus demonstration. Kaiser had over 234k lives enrolled in one of its five 5-star rated plans. Overall, there were 16 contracts that earned 5-star ratings in 2013. Within our coverage universe, only Cignas 44k-lives Florida plan and Uniteds 5K-lives contract (across a few states) received five stars.

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. This rule went into effect last year, with the 2013 Plan Rating season. At this point, we see no expected terminations.

SECTOR UPDATE

U.S. Health Care-Managed Care POSITIVE Unchanged

U.S. Health Care-Managed Care Joshua R. Raskin, CFA 1.212.526.2279 joshua.raskin@barclays.com BCI, New York

Jack Meehan, CFA 1.212.526.3909 jack.meehan@barclays.com BCI, New York

Rachana Fellinger 1.212.526.3647 rachana.fellinger@barclays.com BCI, New York

Alex Pachman 1.212.526.3302 alex.pachman@barclays.com BCI, New York

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2014 Medicare Star Ratings Review Yesterday CMS released the 2014 Medicare star ratings, with positive data points for reimbursement and enrollment eligibility for plan years beginning in 2015. As we have discussed, 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. For 2014 the overall Medicare Advantage star rating increased to 3.86 stars, up 0.16 stars y/y.

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. That said, the 2014 ratings indicate progress on improvement and suggest that the plans are making the necessary investments.

Importantly, assuming no change in qualifying counties for 2014, we estimate that quality star bonuses will increase reimbursement 3.29% in 2015 for the aggregate Medicare Advantage program. Remember, the 2014 plan quality results will be used for 2015 reimbursement. We estimated that 2013 quality star bonuses are augmenting reimbursement by 4.75% in 2014 for the aggregate Medicare Advantage program, including a 100bp contribution from double bonus counties. In 2015, unless the demonstration is extended, only 4-, 4.5- or 5-star plans receive a reimbursement bonus.

We also note the following company highlights:

1. Aetna, with Coventry, now screens as the highest overall rated company with an average star rating of 4.03.

2. Cigna achieved a 5 star rating with its HealthSpring plan in Florida, which we see as a meaningful advantage in an important market.

3. Health Net now has 80% of its membership in 4 star plans. This was followed by Aetna with 62%.

4. WellPoint was the only company in our coverage universe to see a decline in star ratings.

2015 Results Showed Continued Improvement Based on our calculations of CMS data, quality scores among the majority of Medicare Advantage plans within our coverage universe increased for 2014, after receiving higher scores in 2013. Quality star ratings are scored out of five stars, and are based on a number of metrics, which we provide in detail at the end of the note. WellPoint had the largest drop in quality stars, down 0.07 stars. Aetna (inclusive of Coventry) received the highest star rating of 4.03 after gaining 0.51 stars in one year, followed by Humana which received a rating of 3.98 after gaining 0.18 stars in the past year. The overall Medicare Advantage star rating for our coverage universe increased to 3.86 stars, up 0.16 stars y/y.

Importantly, CMS does not give rankings on a consolidated basis for parent organizations. The stars are assigned at the specific plan/contract level. Our summary

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rankings are therefore partially estimates, based on weighted average rankings by membership. While our estimates may not be exact, we think they are representative of how the bonuses will be distributed.

While CMS provides star rankings for each health plans individual H-contracts, the best way to analyze trends is through the overall score for the parent company on a membership-weighted basis. In essence, the star rankings for each parent organizations plan are weighted by their associated enrollment, in order to provide an overall score for the entire company.

Based on the new methodology (plans with at least 3 stars rather than 4 or above), we note all eight companies within our coverage space would be eligible for bonus payments for at least some contracts, versus six last year.

FIGURE 1 Historical Enrollment-Weighted Stars

Source: CMS, Barclays Research estimates Note: Uses most recent month enrollment for weighting (ex: 2011 stars came out in November 2010, use November 2010 enrollment) Assumes 3 stars for low enrollment and new plans, Uses overall ranking for 2011, 2012, 2013 and 2014 summary ranking for prior years

Distribution of Star Rankings Using September 2013 enrollment, the average membership-weighted star ranking for all of Medicare Advantage for 2013 is 3.86 stars, up from 3.7 stars for 2012. Roughly 80% of Health Nets MA beneficiaries were enrolled in plans rated as 4 stars or better. Aetna and Humana also scored well, with 62% and 59% of beneficiaries enrolled in plans with at least 4 stars. WellCare, Molina and Centene did not have any 4-star plans. Beginning in 2015, unless the current demonstration program is extended, only plans with four or more stars will receive bonuses. The figure below shows a breakdown of our coverage universes enrollment and their associated star rating.

We estimate that 52% of all Medicare Advantage plans weighted by membership reported a star ranking above 4 stars, which is the threshold to receive bonus payments from CMS, this compares to 37.1% for 2013.

Star Ranking Results 2014 201313/14

Change 201213/12

Change 201112/11

Change 201011/10

Change 200910/09

ChangeAetna Inc. 4.03 3.53 0.51 3.47 0.05 3.32 0.15 3.05 0.27 3.07 -0.02Cigna 3.76 3.38 0.38 3.30 0.08 4.00 -0.70 3.99 0.01 3.50 0.49Health Net, Inc. 3.89 3.69 0.20 3.60 0.10 3.39 0.21 3.06 0.33 3.09 -0.03Humana Inc. 3.98 3.80 0.17 3.18 0.62 3.04 0.14 2.76 0.28 2.62 0.14Molina Healthcare, Inc., 3.24 2.67 0.57 2.89 -0.22 2.91 -0.02 2.68 0.24 3.00 -0.32UnitedHealth Group, Inc. 3.46 3.31 0.15 3.22 0.09 3.18 0.03 2.93 0.25 2.87 0.06Universal American Corp. 3.69 3.02 0.67 2.85 0.17 3.17 -0.32 2.97 0.20 3.00 -0.03WellCare Health Plans, Inc. 3.04 2.81 0.23 2.96 -0.15 2.99 -0.03 2.39 0.60 2.00 0.39Wellpoint, Inc. 3.23 3.34 -0.11 3.29 0.05 3.05 0.24 2.83 0.22 2.64 0.19Total Medicare Advantage 3.86 3.70 0.16 3.56 0.14 3.44 0.11 3.24 0.20 3.06 0.18

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FIGURE 2 2015 Enrollment-Weighted Star Rankings

Source: CMS September 2013, Barclays Research Note: Assumes 3 stars for low enrollment and new plans

FIGURE 3 2014 Enrollment-Weighted Star Rankings

Source: CMS September 2012, Barclays Research Note: Assumes 3 stars for low enrollment and new plans

Star Bonuses Boost 2015 Reimbursement by 3.29%, due to Demonstration and Double Bonus Counties Using data from CMS, we estimate that the enrollment-weighted average increase to reimbursement from quality star bonuses is 3.29% in 2015. The distribution of bonus increases varies by plan, from Health Net which will have a 5.16% boost, to Centene, Molina and WellCare which did not have any four-star plans. 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. As a reminder, we estimate that the enrollment weighted-average increase to reimbursement from quality star bonuses is 4.75% in 2014.

The following table shows the impact of quality star bonuses, incorporating these assumptions:

Uses September 2013 enrollment by state and county contract. Low enrollment plans and new contracts receive 3 stars. The following table shows the reimbursement impact from quality stars, assuming no change to qualifying counties and star bonus methodology for 2015 (expect to learn this Spring with the 45-day announcement and final 2015 rates). The Medicare Advantage program should see a 3.29% benefit from star bonuses, ranging from 5.16% at

Company Enrollment by Stars 5 4.5 4 3.5 3

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Health Net to 0.00% at Centene, Molina and WellCare. We note that Health Net, and Aetna are both expected to have at least a 4% higher reimbursement due to quality star bonuses.

FIGURE 4 2015 Boost from Star Bonuses (September 2013 Enrollment)

Source: CMS September 2013, Barclays Research

As a reminder, we estimate that the enrollment weighted-average increase to reimbursement from quality star bonuses is 4.75% in 2014. The distribution of bonus increases varies by plan from Coventry (now part of Aetna) which will have a 5.6% boost, to AMERIGROUP (now part of WellPoint) which is closer to 1.6%. The variance is a result of the different geographic footprints for each company in double bonus counties, along with their individual plan star rankings.

FIGURE 5 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 roughly 69bps to reimbursement across the entire Medicare Advantage program. Aetna and Health Net are the biggest beneficiaries from double bonus counties (of plans with meaningful scale), with a 122bp and 117bp boost to reimbursement, respectively (each has >30% of enrollment is in double bonus counties).

September 2013PMPM w/ Star

BonusPMPM Excluding

Bonus % IncreaseEnrollment in Double

Bonus Counties Enrollment% of Enrollment in

Bonus CountiesHealth Net $876.30 $833.30 5.16% 78,980 237,205 33.30%Aetna $861.98 $826.34 4.31% 321,994 949,158 33.92%Humana $848.90 $820.69 3.44% 467,949 2,445,366 19.14%Universal American $899.57 $870.97 3.28% 12,824 130,929 9.79%Cigna $904.72 $884.70 2.26% 90,876 449,828 20.20%UnitedHealth $842.15 $829.22 1.56% 848,768 3,156,517 26.89%WellPoint $833.19 $828.71 0.54% 182,205 621,997 29.29%Centene $835.44 $835.44 0.00% 1,860 5,771 32.23%Molina $818.21 $818.21 0.00% 15,847 37,206 42.59%WellCare $854.59 $854.59 0.00% 33,734 280,454 12.03%Total MA $842.64 $815.81 3.29% 4,012,647 14,873,778 26.98%

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%WellPoint $848.13 $811.91 4.46% 202,199 679,775 29.74%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%

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FIGURE 6 Impact from Double Bonus Counties

Source: CMS, Barclays Research

Special Enrollment Period (SEP) For 5-Star Plans As part of the quality star bonus demonstration announced last November, 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 2014 have the opportunity to enroll membership year-round in 2015, rather than just during the annual enrollment period. CMS expanded the program to include 5-star Part D plan eligibility for year-round enrollment.

Medicare Advantage Our coverage universe has modest exposure to 5-star MA plans offered by Kaiser on the West Coast. The table below show the current enrollment-weighted star rankings for MA plans across our coverage universe. Of these companies, Cigna is the only to achieve a 5-star rating, with its Florida plan covering roughly 44K beneficiaries. Cigna also achieved a 4.5 star rating for plans covering 38.4k lives. Aetna, Humana and UnitedHealth also all achieved plans with scores of 4.5 stars. Among the names with high MA earnings exposure, Humana posted the best weighted average score, at 3.98, followed by Health Net at 3.89 stars. Humana has enrolled 59% of its beneficiaries in plans given at least four stars.

FIGURE 7 2015 Enrollment-Weighted Star Rankings

Source: CMS September 2013, Barclays Research Note: Assumes 3 stars for low enrollment and new plans

September 2013Star Bonus w/ Double Bonus

Star Bonus w/o Double Bonus

Benefit from Double Bonus

CountiesAetna 4.31% 3.09% 1.22%Health Net 5.16% 3.99% 1.17%Humana 3.44% 2.93% 0.51%UnitedHealth 1.56% 1.18% 0.38%Cigna 2.26% 2.01% 0.25%Universal American 3.28% 3.16% 0.13%WellPoint 0.54% 0.46% 0.08%Centene 0.00% 0.00% 0.00%Molina 0.00% 0.00% 0.00%WellCare 0.00% 0.00% 0.00%Total MA 3.29% 2.60% 0.69%

Company Enrollment by Stars 5 4.5 4 3.5 3

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Additionally, we note that ~6.2 million lives (representing 42.4% of MA enrollment) are within one star or less of reaching a 5-star ranking. The biggest chunk of MA enrollment is in 3.5 star plans, which had 4.4 million lives as of September 2013.

FIGURE 8 Distribution of MA Enrollment by Star Category

Source: CMS, Barclays Research

Our coverage universe has exposure to Kaisers 5-star MA plan in California. 16 plans earned 5-star overall ratings for 2014:

Kaiser Contract H0630, ~86K lives in California, Arizona, Colorado and Nevada Kaiser Contract H2150, ~53K lives in Maryland, Virginia, Florida, Delaware California

and Washington D.C.

Kaiser Contract H6052, ~2K lives in California Kaiser Contract H9003, ~69K lives in Arizona, California, Hawaii, Oregon and

Washington

Kelsey-Seybold Medical Group Contract H0332, ~24K lives in Texas Medical Associates Clinic, P.C. Contract H1651, ~10K lives in California, Illinois and

Iowa

Blue Cross Blue Shield of Massachusetts Contract H2261, ~11K lives in Massachusetts Spectrum Health System Contract H2320, ~75K lives in Michigan Health Partners, Inc. Contract H2462, ~46K lives in Arizona, Minnesota and Wisconsin Marshfield Clinic Contract H5211, ~42K lives in Wisconsin Gundersen Lutheran Health System Contract H5262, ~14K lives in Iowa and

Wisconsin

Dean Health System, Inc. Contract H5264, ~21K lives in Wisconsin Cigna Contract H5410, ~44K lives in Florida UnitedHealth Contract H5652, ~5K lives in Colorado, Kansas, Maryland, Michigan,

New Jersey, Pennsylvania, Texas and Virginia

Blue Cross Blue Shield of Florida Contract H5938, ~15K lives in Florida Providence Health & Services Contract H9047, ~42K lives in Oregon and Washington

Star Category Enrollment % of Total5 Stars 1,408,806 9.6%4.5 Stars 2,967,199 20.3%4 Stars 3,237,369 22.1%3.5 Stars 4,398,237 30.0%3 Stars 2,389,006 16.3%2.5 Stars 155,046 1.1%2 Stars 1,167 0.0%Low Enrollment 52,896 0.4%New 31,680 0.2%Total 14,641,406 100%

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We believe that Kaiser has the best opportunity to gain market share in California, where it has a dominant presence in almost every county it participates in. UnitedHealth has ~17% of MA enrollment in the state as the number two plan in California. Health Nets geographic footprint largely overlaps with Kaisers five star plans, and WellPoints California share is ~17% of its Medicare Advantage book.

FIGURE 9 Largest MA Plans in California

Source: CMS September 2013 Enrollment Data, Barclays Research

CMS Sanctions CMS has also decided to issue rules on how to treat plans with serious compliance issues. Plans that are currently under sanction will have their 2015 Plan Ratings reduced, under two scenarios:

Contracts with a ranking of 3 or more stars will be automatically assigned 2.5 stars Contracts with a ranking with less than 3 stars will receive a 1 star reduction Contracts already under sanction will be evaluated and adjusted at two periods during the year, on August 31st and on March 31st. Contracts under sanction on August 31st will have their plan ratings reduced for that falls Medicare Plan Finder (MPF). On March 31st, the MPF will be adjusted for contracts either coming off sanction or going under sanction. Contracts that are placed under sanction will have their status updated immediately on the MPF and for quality bonus purposes. Contracts will be informed of the changes in time to synchronize their submission of plan bids for the following year.

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.

Company Enrollment Market ShareKaiser Foundation Health Plan, Inc. 911,867 45.7%UnitedHealth Group, Inc. 341,105 17.1%Health Net, Inc. 147,396 7.4%SCAN Health Plan, Inc. 135,255 6.8%WellPoint, Inc. 104,266 5.2%Blue Shield of California 68,769 3.4%WellCare Health Plans, Inc. 54,979 2.8%Care1st Health Plan 34,373 1.7%Aetna Inc. 31,437 1.6%Humana Inc. 25,219 1.3%InterValley Health Plan 20,230 1.0%CalOptima 15,621 0.8%Other 105,634 5.3%Total 1,996,151 100.0%

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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 an MA or PDP organizations contract within the past 38 months. For new plans, there is a 14-month window to comply with the new regulations. CMS thinks that this is an appropriate amount of time; however, we think it could deter plans from joining the program (and be a positive for current participants).

Using the 2014 star ratings, just over 156K MA lives across our coverage universe are enrolled in plans with less than three summary stars. Among the companies with the greatest risk, Centene is most exposed, with roughly 43% of its membership in plans below three stars, followed by WellCare with roughly 15% of its membership in plans below three stars. Humana continues to makes strides with the companys at risk enrollment declining from roughly 550k lives in 2011 to 35K lives in 2012 and further declining from 35K in 2012 to zero this year.

While no plans will be terminated until the end of 2015, since star ratings are based on lagged metrics, plans need to start making improvements immediately 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 applicants covered person includes:

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

6. 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%.

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

FIGURE 10 Exposure to Plan Termination for Poor Performance from 2013 and 2012 Star Ratings

Source: CMS, Barclays Research

Total "At Risk" Enrollment 2014 % of Total 2013 % of TotalAetna Inc. 0 0.0% 0 0.0%Centene Corporation 2,569 42.7% 1,943 38.9%Cigna 1,167 0.3% 63,210 15.3%Health Net, Inc. 0 0.0% 0 0.0%Humana Inc. 0 0.0% 34,997 1.5%Molina Healthcare, Inc., 0 0.0% 23,379 66.7%UnitedHealth Group, Inc. 33,813 1.1% 136,020 4.9%Universal American Corp. 0 0.0% 40,673 30.2%WellCare Health Plans, Inc. 41,551 14.8% 80,888 37.4%Wellpoint, Inc. 5,519 0.9% 17,629 2.4%Total MA 156,213 1.1% 735,694 5.4%

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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 ofthe subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectlyrelated to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and eachindividually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a writtenrequest to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.comor call 212-526-1072.

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Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below)relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverageuniverse").

In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral orNegative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investorsshould carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

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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)

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IMPORTANT DISCLOSURES CONTINUED

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