Letter: From Our Chairman and Our Chief Executive Officer

2016 was a pivotal year for Highmark Health

Our organization entered the year determined to improve our financial performance and break new ground in fulfilling the promise of our integrated delivery and financing system. Our focus was on reinforcing the financial strength and stability of the overall enterprise and continuing to build the core operational and technology platforms needed to support the long-term strategy we laid out in 2015.

We delivered financial performance improvements in three key businesses — the Highmark Health Plan, Allegheny Health Network (AHN), and Medicaid — resulting in reaffirmed positive ratings from ratings agencies for the Health Plan while maintaining our competitive position as the fourth-highest capitalized, and fourth-largest overall, Blue Cross Blue Shield affiliate in the country. Most notably, a $680 million turnaround was achieved within the Health Plan through aggressive implementation of customer care value initiatives and complex care management in Affordable Care Act (ACA) book of business. We also continued to invest in AHN facilities, programs and technology to improve access to highly advanced treatment capabilities across every medical specialty, including pioneering therapies being explored in clinical trials. We are committed to providing every patient with advanced, personalized solutions for their every health need.

All of this was achieved in the backdrop of an increasingly dynamic marketplace and unsettled political environment.

2016 was a year characterized by major decisions

Highmark Health Plan was one of the first health insurers in the country to file a lawsuit against the federal government to recover risk corridor payments as required under the ACA, resulting in strengthened relationships with and offers of public support from elected state officials across all of the Health Plan's core markets. This action was not about politics; it was about a contractual dispute. Our vision aligns with the individual insurance marketplace goal of guaranteeing that individuals receive the best coverage for their needs at an affordable price, and we firmly believe that we have a fiduciary responsibility to the Health Plan customers to recover these contractually obligated funds.

Highmark Health and AHN welcomed new leadership team members who are focused on accelerating Highmark Health's transformation strategy and committed to leading the change that is needed in our national healthcare system. Incorporating their new perspectives on the strategic planning process, business plans, enterprise portfolio, and capabilities across the Highmark Health enterprise will create greater value for patients and customers and drive business growth.

As a result of these changes, Allegheny Health Network shifted to a clinician-led care delivery model, which is designed to reduce medical costs through the creation of customer value programs, care model redesign, and complex care management. A key component of this model is establishing strategic partnerships to address patient needs. Among several of these partnerships, 2016 included the launch of the Highmark Cancer Collaborative, a collaboration between Highmark Health Plan and AHN Cancer Institute and the The Sidney Kimmel Comprehensive Cancer Center at Johns Hopkins that consists of a number of interdependent initiatives including implementation of treatment pathways founded on best practices, provider reimbursement methods to reward those best practices and removal of administrative barriers that could impact patients' access to care.

HM Insurance Group, a risk management and reinsurance business, divested its workers compensation business in order to streamline its portfolio of businesses, placing more focus on its core national medical stop loss and managed care reinsurance lines.

Additionally, despite the uncertainty raised during the 2016 presidential election cycle regarding the future of the ACA marketplace, combined with the financial challenges this book of business presented during 2015, Highmark Health Plan committed to remaining in the individual marketplace in 2017. New care management programs and productive discussions with the insurance departments in the Health Plan's core markets supported this decision, and the Health Plan's top priority is to ensure that there is a smooth transition in the individual market with minimal disruption to Health Plan members.

We do believe that changes are needed in the individual market. Americans need a solution that is sustainable and addresses underlying cost drivers. By taking immediate steps now, the healthcare sector can improve the functioning of the individual market so reforms can begin on the best possible footing. Highmark Health Plan leadership is working with federal and state lawmakers to ensure that an alternative solution leads to a competitive, private health insurance market.

2017 will continue to accelerate the pace of change

We anticipate that new challenges will emerge as we continue to take bold action in order to fully deliver on the promise of our integrated health care delivery and financing model. We are prepared. We have a clear roadmap to the future, strong leadership, and the financial strength and stability to execute.

And we are confident, based on the significant progress made in 2016 and the dedication of our more than 40,000 employees, that the Highmark Health organization is well positioned to be aggressive and nimble in our actions during the coming years.

We are proud to share even more of our 2016 achievements in this report, all of which illustrate how we are determined to create more value for patients, members and customers through improved access, experience, value and outcomes. Because we remain committed to getting health care right, now and for the future.

Sincerely,