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Financials: Overview

2014 was a year of tremendous change for the health care industry – both nationally and in western Pennsylvania.

The breadth of Highmark Health's diversified businesses is what sets us apart, and it's important to underscore that one-third of our revenue came from businesses other than our health plan. In 2014, the financial stability provided by that diversity enabled us to invest more than $500 million across the enterprise to help us exceed customers' expectations, support our social mission, and continue to build Highmark Health into an integrated health care delivery and financing system that is leading the change in healthcare. A significant portion of those investments were in facilities, technology and capabilities at the Allegheny Health Network.

At the same time, the Highmark Health organization continued to make investments to further diversify and expand, pursuing a merger of Highmark Inc. and Blue Cross of Northeastern Pennsylvania, expanding health insurance product offerings to the Affordable Care Act (ACA) exchange and Medicaid markets and launching HM Health Solutions.

These investments contributed to Highmark Health's growth in revenue as the organization realized total revenues of $16.8 billion in 2014, an increase of $1 billion year over year. This represents growth of 6.2 percent and was seen across all of our lines of business. Our health plan revenue grew as a result of strong membership retention in commercial business as well as new enrollment in ACA products. Allegheny Health Network revenues grew due to the timing of hospital system affiliations and increased volumes as the turnaround of the system continues, and our vision business had one its strongest years ever.

Highmark Health had a deficit of revenue over expenses of $83 million in 2014, primarily driven by a one-time accounting action related to the collectability of risk corridor payments for ACA exchange products. While this represents an improvement of more than $50 million from 2013, had the enterprise recognized the $155 million from the government risk corridor program, our improvement would have been even more substantial. We remain confident that those funds will be fully recovered; however, from a financial accounting standpoint, we thought it prudent to be conservative. Despite this conservative accounting action, the consolidated company remains strong and stable with nearly $6.5 billion in cash and investments and $5.4 billion in net assets.

Allegheny Health Network continues to deliver on its turnaround plan, demonstrating improved operating results year-over-year. At the same time, our diversified businesses continued to provide strong operating margins and reported a gain comparable to the prior year.

Our year-over-year pre-tax income remained relatively flat, while we pared our overall deficit of revenues over expenses from a $134M loss in 2013 to an $83M loss in 2014, a 38 percent improvement. In addition, Highmark Health companies paid taxes totaling $243 million; $93 million in federal, state and local taxes, more than $9 million in property taxes in Pennsylvania, and an ACA health insurer provider tax of $141 million.

Health Plans

The health plan business reported breakeven operating results in 2014, a substantial, but expected, reduction from the prior year operating gain of $309 million. This reduction was primarily driven by two non-recurring items. The first related to the $155 million of risk corridor revenue that was not recorded in 2014 but which is expected to be collected in future periods. The second related to the release of a liability in 2013 called a premium deficiency reserve that was related to guaranteed-issue products. Excluding these two items, the health plan results would just slightly lag the prior year's performance. The health plan continued to spend 90 cents of every premium dollar for care in 2014.

Highmark health plan enrollment totals exceeded expectations and show that health plan products are providing the quality, access and customer experience that members need in light of the unprecedented marketplace challenges faced in 2014.

Our Blue-branded health plans continue to be the market-share leaders in western Pennsylvania, Delaware and West Virginia with membership of 5.3 million policyholders as of January 31, 2015. Enrollment stability was driven by growth in the ACA product offerings, which added 343,000 members, and strong retention of Pennsylvania membership among group purchasers. Community Blue enrollment has continued to grow with membership totaling 420,000 members, demonstrating the value consumers find in the product and its network of providers. Member retention rates among group purchasers remain strong, averaging nearly 90 percent across the health plans' core markets of western and central Pennsylvania, Delaware and West Virginia.

Highmark health plans remain the largest Medicare Advantage providers in Pennsylvania and West Virginia with more than 300,000 members. That represents a retention rate of nearly 90 percent from 2013. The health plans also continue to expand their business by taking such steps as entering the Medicaid markets in Delaware and West Virginia. We anticipate that the Delaware plan’s Medicaid subsidiary will add approximately 95,000 new Medicaid members by the end of 2015.

Diversified Businesses

The Diversified Businesses — dental insurance, vision care and supplemental health products (including stop loss) — continued to provide strong operating margins in excess of $243 million.

HVHC Inc., our vision company, experienced among its best results ever with revenue of more than $1.4 billion and operating income of nearly $120 million. This is attributable to strong retail sales at more than 650 Visionworks stores and a 2.4 million member increase in our Davis Vision insurance enrollment, which now totals 21 million members. We anticipate announcing a significant customer win for Davis Vision later this year.

United Concordia, our dental business, also had another strong year with operating margins near $80 million, driven by favorable operating results in its commercial business — both nationally and in Pennsylvania. The results year-over year were lower, as expected, following the renewal of two long-term government contracts in 2014.

Our stop loss business, HM Insurance Group, had lower results than the prior year due to a greater volume of high dollar claims, consistent with patterns seen in the industry. Even with these higher claims, this business still provided nearly $40 million in operating earnings.

Allegheny Health Network

The Allegheny Health Network, our health care provider system, is comprised of eight hospitals; 2,100 employed and aligned physicians, residents and fellows; a group purchasing organization; and six ambulatory surgery centers.

Allegheny Health Network continues to make significant progress in improving its financial position. At the formation of Allegheny Health Network, the collective entities that made up the system reported an operating loss of $175 million for the twelve months ended June 30, 2013, and just one and a half years later, we are proud to be restoring these significant community assets to financial viability. For the year ended December 31, 2014, Allegheny Health Network recorded an operating loss of $37 million.

Allegheny Health Network's 2014 performance reflects the tremendous progress we've made in implementing our sound business strategy and the efforts and contributions of the organization's employees at every level to help Allegheny Health Network become a more efficient and effective health system.

Allegheny Health Network's current year results reflect activity for the full year ended December 31, 2014 for West Penn Allegheny Health System, Jefferson Regional Medical Center, and St. Vincent Health System and Saint Vincent Health Center compared to a partial period for the year ended December 31, 2013 based on the effective date of each system's affiliation.

HM Health Solutions

HM Health Solutions (HMHS) was launched as a stand-alone entity in 2014 and employs 2,000 people. This business is focused on meeting the platform and technology needs of the Highmark Health Plans, as well as other health insurance plans, and currently provides services to 11 Blue plans in seven states. We are encouraged and excited about the opportunities this entity will provide to customers and the important role it will play in our organization's growth strategy.