MARCH 19, 2014 via USPS Delivery and eFile

Pamela D. Kehaly, President BLUE CROSS OF CALIFORNIA 1121 L Street, Suite 500 Sacramento, CA 95814

FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA

Dear Ms. Kehaly: Enclosed is the Final Report of a routine examination of the fiscal and administrative affairs of Blue Cross of California (Plan), conducted by the Department of Managed Health Care (Department), pursuant to Section 1382(a) of the Knox-Keene Health Care Plan Act of 1975.1 The Department issued a Preliminary Report to the Plan on January 2, 2014. The Department accepted the Plan’s electronically filed response on January 29, 2014. This Final Report includes a description of the compliance efforts included in the Plan’s January 29, 2014 response, in accordance with Section 1382(c). Section 1382(d) states “If requested in writing by the plan, the director shall append the plan’s response to the final report issued pursuant to subdivision (c). The plan may modify its response or statement at any time and provide modified copies to the department for public distribution not later than 10 days from the date of notification from the department that the final report will be made available to the public. The addendum to the response or statement shall also be made available to the public.” Please indicate within ten (10) days whether the Plan requests the Department to append its response to the Final Report. If so, please indicate which portions of the Plan’s response shall be appended, and electronically file copies of those portions of the Plan’s response exclusive of information held confidential pursuant to Section 1382(c).

1 References throughout this report to “Section” are to sections of the Knox-Keene Health Care Service Plan Act of 1975, as codified in the California Health and Safety Code Section 1340, et seq. References to “Rule” are to the regulations promulgated pursuant to the Knox-Keene Health Care Service Plan Act, found at Title 28, Division 1, Chapter 1, California Code of Regulations, beginning with Section 1300.43.

Edmund G. Brown Jr., Governor State of California Health and Human Services Agency 980 9th Street, Suite 500 Sacramento, CA 95814 916-255-2441 voice 916-255-2280 fax bchang@dmhc.ca.gov e-mail

PAMELA KEHALY, PRESIDENT MARCH 19, 2013 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 2 If the Plan requests the Department to append a brief statement summarizing the Plan’s response to the report or wishes to modify any information provided to the Department in its January 29, 2014 response, please provide the electronically filed documentation no later than ten (10) days from the date of the Plan’s receipt of this letter through the eFiling web portal. Please file this addendum electronically via the Corrective Action Plan system (CAP system) within the Online Forms Section of the Department's eFiling web portal https://wpso.dmhc.ca.gov/secure/login/, as follows:

• From the main menu, select “eFiling”. • From the eFiling (Home) menu, select “Online Forms”. • From the Existing Online Forms menu click on the “Details” for the DFO Corrective

Action Plan S13-R-303 • Go to the “Messages” tab

o Select “Addendum to Final Report” (note this option will only be available for 10 days after the Final Report has been issued)

o Select the deficiency(ies) that are applicable o Create a message for the Department o Attach and Upload all documents with the name “Addendum to Final Report” o Click “Send Message”

The Department finds the Plan’s compliance efforts are responsive to the deficiencies cited and the corrective actions required. Therefore, no further response is required. Questions or problems related to the electronic transmission of the response should be directed to Susan Levitt at (916) 255-2443 or email at slevitt@dmhc.ca.gov. You may also email inquiries to wpso@dmhc.ca.gov. The Department will make the attached Final Report available to the public in ten (10) days from the Plan’s receipt of this letter through the eFiling system. The report will be located at the Department’s web site at View Department Issued Final Examination Reports. If there are any questions regarding this report, please contact me. Sincerely, ORIGINAL SIGNED BY Bill Chang Supervising Examiner Office of Financial Review Division of Financial Oversight Cc: Jim Tucker, Interim Deputy Director, Office of Financial Review

PAMELA KEHALY, PRESIDENT MARCH 19, 2013 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 3 Steven Alseth, Oversight Examiner, Division of Financial Oversight

Lorilee Ambrosini, Examiner, Division of Financial Oversight Kristene Mapile, Counsel, Division of Licensing Laura Dooley-Beale, Chief, Division of Plan Surveys

BACKGROUND INFORMATION FOR BLUE CROSS OF CALIFORNIA

Date Plan Licensed: January 7, 1993 Organizational Structure: The Plan is a wholly owned subsidiary of WellPoint, Inc. Pursuant

to various intercompany administrative services agreements, the Plan receives from its affiliates, and provides to its affiliates, services such as health plan services, claims processing, provider contract services, and other financial management and administrative support, including computer data processing services. The Plan has a wholly owned subsidiary, Blue Cross of California Partnership Plan, Inc. (“BCCPP”), which is licensed under the Knox-Keene Act as a health care service plan. BCCPP was formed to facilitate the implementation of the quality improvement fee imposed by the Department of Health Care Services. The financial report of the Plan as filed with the Department is presented on a consolidated basis with BCCPP

Type of Plan: The Plan is a for-profit, full service health care plan offering a

variety of health services, including specialty managed care networks (i.e., dental, behavioral). These services are provided to individuals, small and large groups, seniors, and state-sponsored programs.

Provider Network: The Plan contracts with participating medical groups (“PMG”) to

provide health care services (such as primary care, specialty care and some ancillary services) and compensates them on a capitated basis. The Plan also contracts with hospitals to provide hospital services on a capitated, per diem, case rate, or other basis. The Plan contracts with a number of skilled nursing facilities, home health agencies, and freestanding ambulatory surgical centers. Specialty care is provided by the PMG through contracted specialists. The Plan also contracts with physicians statewide to provide services to its preferred provider organization (“PPO”) enrollees.

Plan Enrollment: 3,233,107 enrollees as of quarter ended December 31, 2012,

including 907,375 PPO enrollees. Service Area: All major counties within the State of California Date of last Report for Routine Claim & Provider Examination: November 15, 2013 Date of last Report for Routine Examination: May 6, 2010

FINAL REPORT OF A ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA

This is the Final Report of a routine examination of the fiscal and administrative affairs of Blue Cross of California (the “Plan”), conducted by the Department of Managed Health Care (the “Department”) pursuant to Section 1382(a) of the Knox-Keene Health Care Plan Act of 1975.1 The Department issued a Preliminary Report to the Plan on January 2, 2014. The Department accepted the Plan’s electronically filed response on January 29, 2014. This Final Report includes a description of the compliance efforts included in the Plan’s January 29, 2014 response to the Preliminary Report, in accordance with Section 1382(c). The Plan’s response is noted in italics. We examined the financial report filed with the Department for the quarter ended December 31, 2012, as well as other selected accounting records and controls related to the Plan’s various fiscal and administrative transactions. The Department’s findings are presented in this report as follows: Section I. Financial Statements

Section II. Calculation of Tangible Net Equity Section III. Compliance Issues

The Department finds the Plan’s compliance efforts are responsive to the deficiencies cited and the corrective actions required. Therefore, no further response is required.

1 References throughout this report to “Section” are to sections of the Knox-Keene Health Care Service Plan Act of 1975, as codified in the California Health and Safety Code Section 1340, et seq. References to “Rule” are to the regulations promulgated pursuant to the Knox-Keene Health Care Service Plan Act, found at Title 28, Division 1, Chapter 1, California Code of Regulations, beginning with Section 1300.43.

PAMELA KEHALY, PRESIDENT MARCH 19, 2014 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 4 SECTION I. FINANCIAL REPORT A. BALANCE SHEET AT MONTH ENDED DECEMBER 31, 2012

ASSETS Bal. per F/S

@ AJE or Exam Adjustments Bal. per Exam

@ Account 12/31/12 RJE Dr. Cr. 12/31/12 Cash and Cash Equivalents 100,695,176

100,695,176

Short-Term Investments 1,849,040,180 1,849,040,180 Premiums Receivable – Net 478,843,807 478,843,807 Interest Receivable 14,345,817 14,345,817 Shared Risk Receivables – Net 0 0 Other Health Care Receivables-Net 75,599,869 75,599,869 Prepaid Expenses 23,177,581 23,177,581 Secured Affiliate Receivables – Current 0 0 Unsecured Affiliate Receivables – Current 73,950,474 73,950,474 Aggregate Write-ins for Current Assets 210,038,276 210,038,276 TOTAL CURRENT ASSETS $2,825,691,179

$2,825,691,179

Restricted Assets 349,335 349,335 Long-Term Investments 36,568,570 RJE 1 102,877,379 139,445,949 Intangible Assets & Goodwill- Net 5,130,154 5,130,154 Secured Affiliate Receivables - Long-Term 0 0 Unsecured Affiliate Receivables - Past Due 0 0 Aggregate Write-ins for Other Assets 135,367,394 RJE 1 102,877,379 32,490,015 TOTAL OTHER ASSETS $177,415,453 102,877,379 102,877,379 $177,415,453 Land, Building and Improvements 0 0 Furniture and Equipment – Net 2,690,786 2,690,786 Computer Equipment – Net 7,658,043 7,658,043 Leasehold Improvements – Net 37,673,003 37,673,003 Construction in Progress 0 0 Software Development Costs 664,851,307 664,851,307 Aggregate Write-ins for Other Equipment 1,927,361 1,927,361 TOTAL PROP & EQUIP $714,800,500 $714,800,500 TOTAL ASSETS $3,717,907,131 102,877,379 102,877,379 $3,717,907,131 BALANCE SHEET (Continued)

PAMELA KEHALY, PRESIDENT MARCH 19, 2014 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 5

LIABILITIES Bal. per F/S

@ AJE or Exam Adjustments

Bal. per Exam @

Account 12/31/12 RJE Dr. Cr. 12/31/12

Trade Accounts Payable 359,249,454

359,249,454 Capitation Payable 20,521,839 20,521,839 Claims Payable (Reported) 75,916,787 75,916,787 Incurred But Not Reported Claims 806,767,431 806,767,431 POS Claims Payable (Reported) 0 0 POS Incurred But Not Reported Claims 0 0 Other Medical Liability 83,555,441 83,555,441 Unearned Premiums 250,225,127 250,225,127 Loans & Notes Payable 0 0 Amounts Due to Affiliates – Current 0 0 Aggregate Write-ins for Current Liabilities 567,923,483 567,923,483

TOTAL CURRENT LIABILITIES $2,164,159,562

$2,164,159,562 Loans and Notes Payable (Not Subordinated) 0 0 Loans and Notes Payable (Subordinated) 0 0 Accrued Subordinated Interest Payable 0 0 Amounts Due To Affiliates - Long Term 1,527,825 1,527,825 Aggregate Write-Ins for Other Liabilities 341,881,713 341,881,713

TOTAL OTHER LIABILITIES $343,409,538 343,409,538

TOTAL LIABILITIES $2,507,569,099

$2,507,569,099

NET WORTH Common Stock 331,319,000 331,319,000 Preferred Stock 0 0 Paid in Surplus 0 0 Contributed Capital 0 0 Retained Earnings (Deficit)/Fund Balance 766,600,098 766,600,098 Aggregate Write-ins for Other Net Worth Items 112,418,934 112,418,934 EXAMINATION ADJUSTMENTS (from Income Statement) 0 0

TOTAL NET WORTH $1,210,338,032 $1,210,338,032

TOTAL LIAB & NET WORTH $3,717,907,131

$3,717,907,131

PAMELA KEHALY, PRESIDENT MARCH 19, 2014 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 6 B. STATEMENT OF INCOME AND EXPENSES FOR THE MONTH ENDED DECEMBER 31, 2012

Bal. per F/S

@ AJE or Exam Adjustments Bal. per Exam

@ Account 12/31/12 RJE Dr. Cr. 12/31/12 REVENUES:

Premiums (Commercial) 8,632,720,635 8,632,720,635 Capitation 0 0 Co-payments, COB, Subrogation 0 0 Title XVIII – Medicare 154,221942 154,221942 Medicaid, Healthy Families 2,444,548,014 2,444,548,014 Fee-For-Service 0 0 Point-Of-Service (POS) 0 0 Interest 0 0 Risk Pool Revenue 0 0 Aggregate Write-Ins for Other Revenues 123,109,690 123,109,690

TOTAL REVENUES $11,354,600,282 $11,354,600,282

EXPENSES:

Inpatient Services – Capitated 418,436,389 418,436,389 Inpatient Services - Per Diem/Managed Hospital 1,416,543,838 1,416,543,838 Inpatient Services - Fee-For-Service/Case Rate 2,545,315,437 2,545,315,437 Primary Professional Services – Capitated 1,401,212,065 1,401,212,065 Primary Professional Services - Non-Capitated 1,336,669,136 1,336,669,136 Other Medical Professional Services – Capitated 22,873,146 22,873,146 Other Medical Professional Services - Non-Capitated 516,223,362 516,223,362 Non-Contracted Emergency Room and Out-of-Area Expense, not including POS

593,059,568 593,059,568

POS Out-Of-Network Expense 0 0 Pharmacy Expense – Capitated 0 0 Pharmacy Expense – Fee-for-Service 1,386,861,536 1,386,861,536 Aggregate Write-Ins for Other Capitated Medical and Hospital Expenses

0

0

Aggregate Write-Ins for Other Non-capitated Medical and Hospital Expenses 35,201,911 35,201,911

TOTAL MEDICAL AND HOSPITAL EXPENSES $9,672,396,388 $9,672,396,388

Compensation 80,297,048 80,297,048 Interest Expense 0 0 Occupancy, Depreciation and Amortization 18,608,358 18,608,358 Management Fees 0 0 Marketing 406,539,264 406,539,264 Affiliate Administration Services 540,305,605 540,305,605 Aggregate Write-Ins for Other Administration (36,156,094) (36,156,094) Rounding TOTAL ADMINISTRATION EXPENSES $1,009,594,181 $1,009,594,181

TOTAL EXPENSES $10,681,990,569 $10,681,990,569

INCOME (LOSS) $672,609,713 $672,609,713 Extraordinary Item Provision for Taxes

0 265,162,856

0 265,162,856

NET INCOME (LOSS) $407,446,857 $407,446,857

PAMELA KEHALY, PRESIDENT MARCH 19, 2014 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 8 SECTION II. CALCULATION OF TANGIBLE NET EQUITY (TNE) (in thousands) Section 1376 states that each plan shall have and maintain TNE equal to an amount that is calculated based upon requirements set forth in Rule 1300.76. Rule 1300.76(e) states that the required amount of TNE must be maintained at all times. Rule 1300.76(a) also sets forth the method for determining the required amount of TNE that shall be maintained at all times. Net Worth per Examination as of Month Ended December 31, 2012 [From Section I. A.] $1,210,338 Less: Intangible Assets 37,620 TNE position per Examination $1,172,718 Required TNE 319,195 TNE Excess per Examination as of December 31, 2012 $ 853,523 The Plan is in compliance with the TNE requirement of Section 1376 and Rule 1300.76 as of December 31, 2012. No response to this Section was required. SECTION III. COMPLIANCE ISSUES SOLICITOR CONTRACTS All arrangements with third parties and affiliates that solicit enrollment on behalf of the Plan must be documented in a written contract which meets all the minimum requirements under Rule 1300.67.12. The solicitor firm shall comply and shall cause its principal persons and employees to comply with all applicable provisions of the Act and the rules thereunder [Rule 1300.76.12(c)]. The Department’s examination disclosed that Plan contracts with solicitor firms failed to contain language compliant with the following in its contracts with solicitor firms:

1. Solicitor contract must provide that all records, books and papers shall be open to inspection by the director during normal business hours; and, shall not be removed out of state without prior consent by the director. [Section 1381 and Rule 1300.81]

2. Solicitor contract must provide that books of account and other records are maintained on a

current basis, which includes a current list of the names and addresses of its partners, if any, and all of its employees who may act as solicitors. [Section 1385 and Rule 1300.85]

PAMELA KEHALY, PRESIDENT MARCH 19, 2014 FINAL REPORT OF ROUTINE EXAMINATION OF BLUE CROSS OF CALIFORNIA Page 9

3. Solicitor contract must provide that books and records shall be preserved for a period of not less than five years, the last two years of which shall be in an easily accessible place at the offices of the solicitor firm. After such books and records have been preserved for two years, they may be warehoused or stored, or microfilmed, subject to their availability to the Director within not more than five (5) days after request therefore. [Rule 1300.85.1]

The Preliminary Report required the Plan to amend the contracts with solicitors to add the language that is required for solicitor contracts. The Plan was also required to state the date of implementation of the corrective action, the management position(s) responsible for ensuring compliance and the controls implemented for monitoring continued compliance. The Plan responded that it prepared and filed an amendment which will be issued and signed by its Small Group General Agents. The Plan stated that the underlying General Agent agreement will not be used without including this required language. The Plan stated that the person responsible for ensuring compliance and monitoring on-going compliance is the Director of Sales. The Department acknowledges that the Plan filed the Small Group General Agent Agreement as an amendment (efiling #20140622) on March 12, 2014. The Department finds that the Plan’s compliance effort is responsive to the corrective action required.