Year in Review

YEAR IN REVIEW

Through Consistent Financial Performance

For four years, including an unbroken string of 16 consecutive quarters, we have achieved positive financial results.

Our corporate surplus was $149.8 million at year-end, and our liquidity ratio has increased from 2.85 in 1993 to 7.36. The liquidity ratio is a measure of the proportion of a company's assets that can be converted readily into cash when needed, and ours is one of the best among all Blue Cross and Blue Shield Plans. Our investment portfolio has increased to $214 million, an increase of 40 percent over the past four years.

We are also operating efficiently. Our administrative expense ratio of 9.3 percent, also among the best Blue Plan performances, means more than 90 percent of premiums received is used for the benefit of our customers in the form of health care services. Our total administrative expenses increased slightly during the year due largely to Year 2000 preparedness and new information technology, but they remain approximately 15 percent below the total for 1993.

Traditionally

Underpins Gains in Evolving Product Lines

Thanks largely to the strength of the Blue Cross and Blue Shield brands, a remarkable number of our customers have remained loyal to our company, its products and services.

Last year, we were able to retain 94 percent of our customers across all lines of business. Among group customers, 95 percent of fully insured, and 96 percent in the administrative services only, or ASO segment, were retained. This exceeds our corporate goal for retaining business, and is largely responsible for helping us exceed our overall corporate enrollment goal.

We are pleased to note that our high customer loyalty is transferring to new product offerings. The fact that two-thirds of 1997's new members selected a new PPO program shows that the public's ongoing confidence in our performance is clearly helping us transition to the future.

Our enrollment successes are consistent with the positive findings reported both by internal and external customer satisfaction studies. For example, we routinely exceed service standards established for Blue Plans by the National Management Information System (NMIS), which rated us 11th best in the most current rating of the Blue Cross and Blue Shield system. Our own Customer Service Index (CSI) scores, which measure timeliness and accuracy of claims, inquiries and membership processing, similarly have remained high.

Reorganized Medical Affairs Division Reflects

By the end of 1997, our Medical Affairs Division had been reorganized and re-staffed to meet rising expectations for quality in health care.

The new Medical Affairs Division takes a proactive approach in the interest of better serving our customers and protecting their health. Disease management initiatives, for example, assist customers who have, or who are at risk for developing, chronic diseases. Through direct communications with these individuals and their physicians, we are able to reduce disease and complications of medical conditions such as asthma and diabetes before they seriously affect the customer's health.

Medical Affairs' quality improvement initiatives also apply to other departments such as claims and service. In this way, the division supports our corporate goal of improving the quality of each and every point of contact between our customers and the company.

Traditionally the Largest FEP Plan, In 1997 We Performed

Protecting more than 400,000 federal employees, we have the largest enrollment among the Blue Plans participating in the Federal Employee Health Benefit Program (FEP).

This is an awesome responsibility. But more than that, it is also an honor. We take great pride in the fact that the people we serve, in turn serve the nation.

The Blue Cross and Blue Shield Association evaluates and compares the performance of individual FEP Plans using its Plan Incentive Program (PIP) scoring system. PIP assigns points based on achievement in two main areas: service (meeting claims processing and service goals) and administrative and benefit costs.

Consistent with our performance on other lines of business, December, 1997 marked the 18th consecutive month of improved PIP scores. As a result, we achieved our highest national FEP performance ranking ever.

Our Plan also has been named a "Helping Plan" by the Association, qualifying us to provide assistance to any Plan experiencing financial, claims processing or customer service problems.

In terms of FEP enrollment, our competitive rates, brand equity, customer satisfaction and service resulted in excellent 1997 Open Season gains in excess of 5,000 contracts. We also are one of eight Plans piloting Blue Health Connection - an innovation that should help to ensure that health care is provided in the most appropriate setting. Other features include early medical intervention and health education. FEP customers also are eligible for our newly enhanced vision care product.

We are also proud to report that we have awarded 10 college scholarships to children of local federal and postal employees through the Federal Employees Education and Assistance Fund (FEEA). The scholarships were paid for by funds that would normally have been used to advertise our brand during Open Season health fairs at federal sites.

Carrying on the

Our Role as a Good Corporate Citizen

We have always believed that there is more to good health than just paying claims. Since the overall health of the community is affected as much by the quality of life it enjoys as the medical care it receives, we consider it our duty to support the organizations and causes that devote themselves to helping people lead richer lives.

Through the years, organizations and agencies have arisen to address the shifting health and social needs of the region. Our strategy has been to focus our support in response to those changes.

In November, we concluded the most successful United Way campaign in our history, raising $126,000 for various agencies. This 26 percent increase from the 1996 drive was made possible by the fact that a record percentage of our associates submitted pledge forms. In observance of our associates' wishes, additional funds were distributed to organizations addressing such causes as AIDS, cancer and elder care.

Our associates also assisted persons suffering from the HIV/AIDS virus and AIDS-related illnesses by participating in the 11th annual AIDS Walk Washington. They raised more than $15,000 in pledges and corporate contributions, and were joined in the walk by 35 Boys and Girls Club members.

In April, we placed first in our size category and fifth overall in the Washington-area March of Dimes WalkAmerica. Fueled through the personal participation of some 60 associates, we raised more than $11,700 to fight birth defects. In a kindred effort, more than 100 associates formed "Team Blue," raising more than $7,000 in support of the 1997 National Race for the Cure® for breast cancer.

Washington has the highest rate of kidney disease in the nation. The Blue Cross Blue Shield Emergency Transportation Fund (ETF), created through our initial 1997 contribution of $5,000 to the National Kidney Foundation of the National Capital Area, will make it possible for dialysis patients to receive life-saving treatments when they have no other means of reaching them. We will contribute a total of $22,500 through 1999.

More than 2,000 area young people between the ages of 6 and 14 learn about nutrition, health and fitness through the Blue Cross and Blue Shield Superfit Healthy All-Stars program, in which we are proud to partner with the Boys and Girls Clubs of Greater Washington. We support and participate in all of the Clubs' annual activities.

Launch Meets Changing Information Needs

We launched our Internet web site in October, a step we consider absolutely essential for keeping up with the expanding information needs of virtually all of our key publics: customers, prospective customers, health care providers, brokers and consultants, government officials, and the media.

Visitors to the site find information on our products, health education and wellness, and newsletter articles, as well as our history and statistics describing the company.

Readers are invited to visit the site at http://www.bcbsnca.com.

BCBSA Made It Official:

As documented throughout this report, we achieved new benchmarks in 1997 against which our future progress will be measured. By presenting us with its first-ever "Turnaround Award" in September, however, the Blue Cross and Blue Shield Association offered gratifying validation of the steady progress we have made for the past four years.

To honor the contribution made by our associates in achieving this distinction, full-color replicas of the Turnaround Award were presented to each of them.

The turnaround was also symbolized by our ability to reduce our debt by $15.3 million, a step that will save our company millions of dollars in interest payments.

Tradition Comes Full Circle:

The Blue Cross and Blue Shield tradition of placing the needs of customers first is reflected in the spirit of the "Consumer Bill of Rights and Responsibilities," released in November by a 34-member Presidential commission.

The commission's report is consistent with the Blue Cross and Blue Shield Association's Quality Commitments to Managed Care Members, which include assuring patients of accurate benefit and provider information, flexibility in choosing providers, involvement in decisions affecting their medical treatment, and respect for the confidentiality of medical information.

Our Blue Cross and Blue Shield Plan has also adopted a 20-point Members' Rights and Responsibilities Statement that guarantees their right to select a primary care physician to deliver and coordinate their care. It also assures that they will be treated with respect, that their privacy will be honored, and that they will have access to information about their coverage.

It is rewarding and reassuring to realize that the Blue Cross and Blue Shield tradition of offering quality health care coverage to the community, in ways that respect the dignity of our customers, can be a model for others across the country.

We're proud of our heritage, and our traditions form the foundation of our progress. At Blue Cross and Blue Shield of the National Capital Area, our tradition is transition.