8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): February 12, 2004

PACIFICARE HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 0-21949
(Commission File Number) 95-4591529
(IRS Employer
Identification Number)

5995 Plaza Drive, Cypress, California 90630-5028
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (714) 952-1121

TABLE OF CONTENTS

	Item 7. Financial Statements and Exhibits.
	Item 9. Regulation FD Disclosure.
	Item 12. Results of Operations and Financial Condition.
SIGNATURE
EXHIBIT INDEX
Press Release

Item 7. Financial Statements and Exhibits.

(c) Exhibits.

Exhibit No.	Description
99.1	Press Release issued by the Company on February 12, 2004.

Item 9. Regulation FD Disclosure.

     The information included in Item 12 of this Form 8-K, including the press release attached as Exhibit 99.1, is incorporated by reference into this Item 9 in satisfaction of the public disclosure requirements of Regulation FD. This information is “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such a filing.

Item 12. Results of Operations and Financial Condition.

     On February 12, 2004, PacifiCare Health Systems, Inc. (the “Company”) issued a press release announcing its financial results for the quarter and year ended December 31, 2003 and provided forward-looking earnings and operational guidance for 2004. A copy of the press release is attached hereto as Exhibit 99.1 and is incorporated herein in its entirety by reference into this Item 12. The information included in this Item 12, including the press release attached as Exhibit 99.1, is “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, or otherwise subject to the liabilities of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such a filing.

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PACIFICARE HEALTH SYSTEMS, INC.
Dated: February 12, 2004	By:	/s/ Peter A. Reynolds Peter A. Reynolds Senior Vice President and Corporate Controller (Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release issued by the Company on February 12, 2004.

EX-99.1

EXHIBIT 99.1

5995 Plaza Drive
Cypress, California 90630
Tel. (800) 631-0969

News Release

CONTACT: Tyler Mason
Media Relations
(714) 226-3530 Suzanne Shirley
Investor Relations
(714) 226-3470

PacifiCare Health Systems Announces 4th Quarter and Full Year 2003
Results and Guidance for 2004

• Fourth quarter GAAP EPS was $0.36 per diluted share, net of $0.19 in costs related to debt redemption

• Fourth quarter operating income up 20% from prior year

• Q4 consolidated MLR improves 200 basis points year-over-year to 83.6%

• Commercial membership grows by 33,000 from prior quarter

• Full-year GAAP net income was $242.7 million, or $3.04 per diluted share

• Estimated 2004 net income up 15%-19% to $280-$290 million

• Estimated long-term net income growth raised from 15% to approximately 25% in 2005

CYPRESS, Calif., February 12, 2004 — PacifiCare Health Systems, Inc. (NYSE: PHS), today announced that reported net income for the fourth quarter ended December 31, 2003 was $31.5 million, or $0.36 per diluted share. This compares with reported net income of $37 million, or $0.50 per diluted share for the fourth quarter of 2002. All EPS numbers in this release have been adjusted to reflect the 2-for-1 stock split that was effective January 20, 2004. Results in the fourth quarter of 2003 are net of $28 million ($17.5 million net of tax, or $0.19 per diluted share) in costs related to the previously disclosed redemption of $175 million in debt, as well as dilution equal to $0.03 per diluted share from both the 7.6 million new shares of common stock

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outstanding as a result of this redemption and 6.4 million shares included in the calculation of weighted shares outstanding related to the company’s convertible debt.

For the full-year 2003, reported net income was $242.7 million, or $3.04 per diluted share. The full-year results include previously disclosed favorable changes in estimates of $54 million ($33.6 million net of tax, or $0.42 per diluted share) for health care costs in 2002 and prior periods, as well as the $28 million ($0.22 full-year diluted EPS) in costs related to the debt redemption.

“With pricing discipline and improved health care cost management contributing to a 280 basis point improvement in consolidated MLR year-over-year, and Federal legislation that sustains the life of the Medicare+Choice program, we were excited to see our stock perform well enough in 2003 to allow for the stock split that increased the company’s liquidity, as well as the early redemption of a significant portion of debt,” said President and Chief Executive Officer Howard Phanstiel. “These events, along with our new commercial products and proprietary PPO network, have given us the momentum to resume membership growth in 2004.”

Phanstiel added, “Our 2004 net income guidance of $280 to $290 million is up 15% to 19% from reported net income in 2003, and reflects the focus on investing in our member growth in 2004 and beyond. Looking out to 2005, we’re guiding for a net income increase of 25% as a result of our renewed Medicare growth strategy.”

Revenue and Membership

Fourth quarter 2003 revenue of $2.8 billion was 2% higher than the same quarter a year ago, primarily due to an increase in commercial premiums of 18% per member per month (PMPM) and senior premium increases of 5% PMPM. These increases offset a 7% decrease in commercial membership year-over-year that was due mainly to the planned loss of the CalPERS account as of January 1, 2003 and a 10% reduction in Medicare+Choice membership year-over-year. Commercial risk membership increased by 33,000 members, or 1.5% sequentially.

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Specialty and Other revenue grew 18% in 2003 over the prior year, primarily due to the continued strong performance of the company’s pharmacy benefit management subsidiary, Prescription Solutions. Prescription Solutions’ unaffiliated membership rose by 436,000, or 27%, over the fourth quarter of last year.

Health Care Costs

The fourth quarter consolidated medical loss ratio (MLR) of 83.6% decreased 200 basis points from the fourth quarter of 2002 and was flat sequentially. For the year, the consolidated MLR improved by 280 basis points to 84%.

The private sector MLR, which is composed of commercial and Medicare Supplement members, decreased 310 basis in the fourth quarter of 2003 compared with the prior year and increased 110 basis points sequentially to 83.8%. For the year the private sector MLR improved by 300 basis points to 83.7%.

The government sector MLR, which includes Medicare+Choice membership, was 100 basis points lower than the fourth quarter of 2002 and decreased by 120 basis points from the third quarter of 2003, to 83.4%. The full-year government sector MLR was 84.2%, or 270 basis point lower than 2002.

Selling, General & Administrative Expenses

The SG&A expense ratio of 14.8% for the fourth quarter of 2003 increased by 140 basis points from the prior quarter, and 100 basis points year-over-year. SG&A in the fourth quarter of 2003 included expenditures totaling approximately $38 million related to severance for 300 employees, bad debt, legal settlements and fees, as well as increased discretionary spending for advertising and promotion. The year-over-year increase in this ratio was primarily the result of increased marketing and advertising expenses related to the development of new products, the expensing of stock-based compensation, bad debt and severance costs.

Other Financial Data

Medical claims and benefits payable (MCBP) totaled $1.03 billion at December 31, 2003, which

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was comparable with the prior quarter, while the IBNR component of MCBP increased 3.6% sequentially.

Cash flow from operations in the fourth quarter of 2003 was $515 million. Excluding the normal fourth quarter timing effect of the early receipt of the January 2004 premium payment from the Centers for Medicare & Medicaid Services (CMS), fourth quarter cash flow from operations was $80.2 million, or 2.5 times net income. For the full-year 2003, cash flow from operations was $414 million, or 1.7 times reported net income.

Days claims payable for the fourth quarter compared to the third quarter decreased to 41.3 days from 42.4 days. After excluding the non-risk, capitated portion of the company’s business, days claims payable decreased one day to 73.8. The slight overall decrease in days claims payable reflects periodic payments made to capitated providers in connection with contractual risk-sharing agreements, as well as an additional 8% decrease in our claim turnaround time from the third to the fourth quarter.

Conference Call, Webcast and Website Information

PacifiCare will host a conference call and webcast on Thursday, February 12, 2004 at 2:00 PM Pacific time, 5:00 PM Eastern, to discuss this release in further detail. Interested parties can access the live conference by dialing (800) 857-9879, password “PacifiCare”. A replay of the call will be available through March 5, 2004 at (888) 296-6944. Additionally, a live webcast of the call will be available at www.pacificare.com. Click on About PacifiCare, Investor Relations, and then Conference Calls to access the link. In accordance with Regulation G, a reconciliation of GAAP results to non-GAAP measurements referred to in this release and during the conference call will be posted with the earnings press release on our website.

Risk Factors Regarding Forward-Looking Statements

The statements in this news release, including those made by Howard G. Phanstiel that are not historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Such forward-looking statements include, but are not limited to, the benefits of the new Medicare legislation and the competitive landscape

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of the Medicare+Choice program, the success of the company’s new commercial products and related increases in commercial membership, and statements related to 2004 and 2005 earnings guidance. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, failure to implement programs to achieve expected membership targets as a result of premiums or benefit adjustments, inability to execute cost control strategies, including medical management programs, actual medical claims differing from current estimates, inability to maintain required capital levels at the company’s regulated subsidiaries, inability to maintain profitability and growth at the company’s specialty businesses, provider financial problems or bankruptcy, provider contracts oversight relations and other matters, unexpected increases in competition, new regulations or laws relating to capitation, Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters, inability of proposed new portfolio offerings to improve membership and profitability, the inability to comply with existing bank covenants, and earnings dilution caused by potential conversion of the company’s convertible debt into common stock. Additional information on factors, risks, and uncertainties that could potentially affect our financial results may be found in documents filed with the Securities and Exchange Commission.

PacifiCare Health Systems serves more than 3 million health plan members and approximately 9 million specialty plan members nationwide, and has annual revenues of about $11 billion. PacifiCare is one of the nation’s largest consumer health organizations, offering individuals, employers and Medicare beneficiaries a variety of consumer-driven health care and life insurance products. Specialty operations include behavioral health, dental and vision, and complete pharmacy and medical management through its wholly owned subsidiary, Prescription Solutions. More information on PacifiCare Health Systems is available at www.pacificare.com.

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2/12/04

PacifiCare Health Systems, Inc.

2004 Guidance
Revenue	Increase of 14%-14.5%
EBITDA	$575-$585 million
Free Cash Flow	$270-$280 million
Net Income	$280-$290 million
EPS	$2.95-$3.05
Weighted average shares outstanding	95.0 million
Margins
Commercial	15.5%-16.0%
Senior	13.0%-13.5%
Specialty & Other	48.5%-49.5%
MLRs
Consolidated	84.5%-85.5%
Private commercial	83.0%-84.0%
Private senior	68.5%-69.5%
Government senior	86.5%-87.5%
SG&A ratio	12.5%-13.0%
Tax rate	38.1%
Membership Growth
Commercial	3.0%-5.0% (pending outcome of UFCW strike)
Medicare+Choice	7.5%-8.0%

PACIFICARE HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)			Three Months Ended						Year Ended
			December 31,						December 31,
(In thousands, except per-share amounts)			2003			2002(1)			2003			2002(1)
Revenue:
	Commercial		$	1,309,879		$	1,198,970		$	5,043,257		$	4,782,973
	Senior			1,335,578			1,409,014			5,395,265			5,887,603
	Specialty and other			134,756			113,981			498,668			421,439
	Net investment income			16,302			21,981			71,321			64,487
		Total operating revenue		2,796,515			2,743,946			11,008,511			11,156,502
Expenses:
Health care services and other:
	Commercial			1,114,182			1,056,972			4,270,329			4,205,376
	Senior			1,113,301			1,187,208			4,540,301			5,104,275
	Specialty and other			63,397			48,125			255,164			176,050
		Total health care services and other		2,290,880			2,292,305			9,065,794			9,485,701
Selling, general and administrative expenses				411,442			374,812			1,452,542			1,370,160
Impairment, disposition, restructuring, Office of Personnel Management and other (credits) charges, net				—			(1,711	)		—			3,774
Operating income				94,193			78,540			490,175			296,867
Interest expense, net				(43,647	)		(19,553	)		(100,531	)		(74,904	)
Income before income taxes				50,546			58,987			389,644			221,963
Provision for income taxes				19,056			22,002			146,896			82,792
Income before cumulative effect of a change in accounting principle				31,490			36,985			242,748			139,171
Cumulative effect of a change in accounting principle				—			—			—			(897,000	)
Net income (loss)			$	31,490		$	36,985		$	242,748		$	(757,829	)
Weighted average common shares outstanding used to calculate basic earnings (loss) per share				78,752			71,477			74,409			70,474
Basic earnings (loss) per share:
	Income before cumulative effect of a change in accounting principle		$	0.40		$	0.52		$	3.26		$	1.98
	Cumulative effect of a change in accounting principle			—			—			—			(12.73	)
Basic earnings (loss) per share			$	0.40		$	0.52		$	3.26		$	(10.75	)
Weighted average common shares and equivalents outstanding used to calculate diluted earnings (loss) per share (2)				90,147			73,910			79,963			70,474
Diluted earnings (loss) per share (2):
	Income before cumulative effect of a change in accounting principle		$	0.36		$	0.50		$	3.04		$	1.98
	Cumulative effect of a change in accounting principle			—			—			—			(12.73	)
Diluted earnings (loss) per share			$	0.36		$	0.50		$	3.04		$	(10.75	)
(1)		Presentation changes have been made to December 31, 2002 to conform to the 2003 presentation.
(2)		Dilutive potential common shares are excluded from the calculation of the year ended December 31, 2002 loss per share because they are antidilutive.

OPERATING STATISTICS
Medical loss ratio:
	Consolidated	83.6	%	85.6	%	84.0	%	86.8	%
	Private — Commercial	84.2	%	87.2	%	84.0	%	87.1	%
	Private — Senior	54.2	%	56.8	%	63.4	%	53.5	%
	Private — Consolidated	83.8	%	86.9	%	83.7	%	86.7	%
	Government — Senior	83.4	%	84.4	%	84.2	%	86.9	%
	Government — Consolidated	83.4	%	84.4	%	84.2	%	86.9	%
Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income)		14.8	%	13.8	%	13.3	%	12.4	%
Operating income as a percentage of total revenue		3.4	%	2.9	%	4.5	%	2.7	%
Effective tax rate		37.7	%	37.3	%	37.7	%	37.3	%

PACIFICARE HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)				Three Months Ended						Year Ended
				December 31,						December 31,
(In thousands)				2003			2002(1)			2003			2002(1)
Operating activities:
Net income (loss)				$	31,490		$	36,985		$	242,748		$	(757,829	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Deferred income taxes				(33,969	)		(12,013	)		(46,088	)		18,559
	Expense related to bond redemption				28,155			—			28,155			—
	Depreciation and amortization				10,248			12,201			44,713			50,284
	Tax benefit realized upon exercise of stock options				10,130			720			17,838			1,009
	Provision for doubtful accounts				6,792			(9,517	)		10,271			6,346
	Stock based compensation expense				5,957			227			19,092			693
	Amortization of intangible assets				5,431			5,879			21,908			23,600
	Loss on disposal of property, plant and equipment and other				3,983			14,530			22,328			12,793
	Amortization of notes receivable from sale of fixed assets				(1,453	)		(816	)		(5,641	)		(3,107	)
	Amortization of capitalized loan fees				1,105			1,161			7,481			7,784
	Amortization of discount on notes payable				97			157			424			266
	Employee benefit plan contributions in treasury stock				—			2,546			1,363			12,132
	Impairment, disposition, restructuring, Office of Personnel Management and other (credits) charges				—			(1,711	)		—			3,774
	Cumulative effect of a change in accounting principle				—			—			—			897,000
	Marketable and other securities impairment for other than temporary declines in value				—			—			—			12,543
	Adjustment to cash received in purchase transaction				—			—			—			17
	Changes in assets and liabilities:
		Receivables, net			19,610			37,134			19,327			82,369
		Prepaid expenses and other assets			(3,825	)		17,006			(33,748	)		2,627
		Medical claims and benefits payable			(10,800	)		(17,626	)		(17,000	)		(52,226	)
		Accounts payable and accrued liabilities:
			Payments for Office of Personnel Management settlement, net of amounts received		—			(11,318	)		(10,000	)		(65,441	)
			Other changes in accounts payable and accrued liabilities		7,214			(42,706	)		74,031			59,027
		Unearned premium revenue			434,926			417,030			16,928			(69,841	)
Net cash flows provided by (used in) operating activities				$	515,091		$	449,869		$	414,130		$	242,379
Investing activities:
	Purchase of marketable securities, net			$	(32,485	)	$	(38,326	)	$	(169,102	)	$	(113,987	)
	Purchase of property, plant and equipment				(15,224	)		(16,296	)		(52,271	)		(59,274	)
	Sale (purchase) of marketable securities — restricted				2,006			(14,263	)		19,643			(117,368	)
	Proceeds from the sale of property, plant and equipment				9			80			30			12,492
Net cash flows provided by (used in) investing activities				$	(45,694	)	$	(68,805	)	$	(201,700	)	$	(278,137	)
Financing activities:
	Proceeds from equity offering used for the redemption of $175M of senior notes			$	199,424		$	—		$	199,424		$	—
	Principal payment on senior note redemption				(175,000	)		—			(175,000	)		—
	Payment of premium to bond holders for senior note redemption				(18,813	)		—			(18,813	)		—
	Proceeds from issuance of common stock and treasury stock				18,180			2,210			41,146			4,893
	Principal payments on senior credit facility				(744	)		(62,676	)		(151,329	)		(554,308	)
	Repurchase of common stock				(493	)		—			(493	)		—
	Payments on software financing agreement				(388	)		(2,231	)		(3,683	)		(2,231	)
	Proceeds from 3% convertible subordinated debentures				—			135,000			—			135,000
	Loan fees				—			(5,250	)		(6,949	)		(37,789	)
	Proceeds from senior credit facility				—			—			150,000			—
	Use of restricted cash collateral for payment of FHP senior notes				—			—			43,250			—
	Principal payments of FHP senior notes				—			—			(43,250	)		(41,750	)
	Proceeds from the sale of 10 3/4% senior notes, net of discount				—			—			—			496,945
	Proceeds from draw down on equity commitment arrangement				—			—			—			8,928
Net cash flows provided by (used in) financing activities				$	22,166		$	67,053		$	34,303		$	9,688
Net increase (decrease) in cash and equivalents				$	491,563		$	448,117		$	246,733		$	(26,070	)
Beginning cash and equivalents					706,859			503,572			951,689			977,759
Ending cash and equivalents				$	1,198,422		$	951,689		$	1,198,422		$	951,689

(1) Presentation changes have been made to December 31, 2002 to conform to the 2003 presentation.

PACIFICARE HEALTH SYSTEMS, INC.

BALANCE SHEET DATA

(Unaudited)

			December 31,		September 30,		December 31,
(in thousands)			2003		2003		2002(1)
Assets:
	Cash and equivalents and marketable securities		$	2,558,142	$	2,042,058	$	2,190,552
	Receivables, net			265,943		290,892		289,900
	Property, plant and equipment, net			149,407		146,807		161,685
	Goodwill and intangible assets, net			1,204,212		1,209,643		1,226,120
	Other assets			441,600		404,077		382,876
		Total assets	$	4,619,304	$	4,093,477	$	4,251,133
Liabilities and equity:
	Total medical claims and benefits payable		$	1,027,500	$	1,038,300	$	1,044,500
	Current portion of long-term debt			7,496		6,232		107,235
	Long-term debt			612,700		787,067		731,961
	Other liabilities			1,120,071		669,995		1,039,132
	Total stockholders’ equity			1,851,537		1,591,883		1,328,305
		Total liabilities and equity	$	4,619,304	$	4,093,477	$	4,251,133
(1)		Presentation changes have been made to December 31, 2002 to conform to the 2003 presentation.

MEMBERSHIP DATA

		December 31,		September 30,		December 31,
		2003		2003		2002
Commercial:
	HMO		1,994,800		2,002,400		2,252,000
	PPO and indemnity		183,500		142,600		75,100
	Employer self-funded		24,600		24,500		34,800
			2,202,900		2,169,500		2,361,900
Senior:
	HMO and PPO		682,300		687,200		760,500
	Medicare Supplement		26,900		26,200		15,600
			709,200		713,400		776,100
Total HMO and other membership			2,912,100		2,882,900		3,138,000
Pharmacy benefit management(A)			4,983,500		4,931,200		4,773,100
Behavioral health(B)			3,660,100		3,792,000		3,876,000
Dental and vision(B)			719,600		703,200		687,300

(A)	Pharmacy benefit management membership includes PacifiCare members that are in our commercial or senior HMO, PPO, indemnity, employer self-funded or Medicare Supplement plans. All of these members either have a prescription drug benefit or are able to purchase their prescriptions utilizing our retail network contracts or our mail service.
(B)	Behavioral health, dental and vision membership includes PacifiCare members in our commercial and senior HMO that are also enrolled in our behavioral health, dental and/or vision plans.

PacifiCare Health Systems, Inc.
Membership Information
(Unaudited)

		December 31, 2003						September 30, 2003						December 31, 2002
(in thousands)		Commercial		Senior		Total		Commercial		Senior		Total		Commercial		Senior		Total
Medical Membership:
HMO Membership
Arizona			148.5		86.6		235.1		144.9		86.8		231.7		141.3		88.4		229.7
California			1,333.0		348.4		1,681.4		1,330.0		348.8		1,678.8		1,543.0		386.1		1,929.1
Colorado			173.7		52.6		226.3		173.0		53.5		226.5		178.3		57.6		235.9
Guam			26.4		—		26.4		31.3		—		31.3		32.2		—		32.2
Nevada			25.8		25.3		51.1		24.7		25.7		50.4		24.3		27.4		51.7
Oklahoma			87.2		18.4		105.6		88.3		18.9		107.2		101.1		19.8		120.9
Oregon			58.2		24.0		82.2		61.6		24.4		86.0		68.0		25.3		93.3
Texas			76.5		74.5		151.0		80.5		76.0		156.5		101.1		100.4		201.5
Washington			65.5		52.5		118.0		68.1		53.1		121.2		62.7		55.5		118.2
	Total HMO		1,994.8		682.3		2,677.1		2,002.4		687.2		2,689.6		2,252.0		760.5		3,012.5
Other Membership
PPO and indemnity			183.5		—		183.5		142.6		—		142.6		75.1		—		75.1
Employer self-funded			24.6		—		24.6		24.5		—		24.5		34.8		—		34.8
Medicare supplement			—		26.9		26.9		—		26.2		26.2		—		15.6		15.6
	Total other membership		208.1		26.9		235.0		167.1		26.2		193.3		109.9		15.6		125.5
	Total HMO and other membership		2,202.9		709.2		2,912.1		2,169.5		713.4		2,882.9		2,361.9		776.1		3,138.0

	December 31, 2003						September 30, 2003						December 31, 2002
(in thousands)	PacifiCare		Unaffiliated		Total		PacifiCare		Unaffiliated		Total		PacifiCare		Unaffiliated		Total
Specialty Membership
Pharmacy benefit management(1)		2,912.2		2,071.4		4,983.5		2,882.9		2,048.3		4,931.2		3,138.0		1,635.1		4,773.1
Behavioral health(2)		2,013.4		1,646.7		3,660.1		1,956.1		1,835.9		3,792.0		2,194.7		1,681.3		3,876.0
Dental and vision(2)		485.0		234.6		719.6		458.1		245.1		703.2		442.5		244.8		687.3

(1)  Pharmacy benefit management PacifiCare membership represents members that are in our commercial or senior HMO, PPO, indemnity, employer self-funded or Medicare Supplement plans. All of these members either have a prescription drug benefit or are able to purchase their prescriptions utilizing our retail network contracts or our mail service.

(2)  Behavioral health, dental and vision PacifiCare membership represents members in our commercial and senior HMO that are also enrolled in our behavioral health, dental and/or vision plans.

PacifiCare Health Systems, Inc.
Percent of Health Care Services and Other Expenses
Capitated vs. Other Expenses
(Unaudited)

	Year Ended December 31,
(in thousands)	2003								2002
	Commercial				Senior				Commercial				Senior
Capitation expense	$	1,488	35	%	$	2,704	60	%	$	1,795	43	%	$	2,994	59	%
All other health care services and other expenses		2,782	65	%		1,836	40	%		2,410	57	%		2,110	41	%
Total health care services and other expenses	$	4,270	100	%	$	4,540	100	%	$	4,205	100	%	$	5,104	100	%

	Three Months Ended December 31,
(in thousands)	2003								2002
	Commercial				Senior				Commercial				Senior
Capitation expense	$	360	32	%	$	657	59	%	$	432	41	%	$	714	60	%
All other health care services and other expenses		754	68	%		456	41	%		625	59	%		473	40	%
Total health care services and other expenses	$	1,114	100	%	$	1,113	100	%	$	1,057	100	%	$	1,187	100	%

PacifiCare Health Systems, Inc.
Changes in Medical Claims and Benefits Payable
(Unaudited)

(in thousands)

Balance September 30, 2003		$	1,038,300
	IBNR health care increases		47,000		Primarily due to increases in commercial risk membership and increases in commercial and senior health care costs.
	Risk programs		(18,400	)	Primarily due to the settlement of risk program liabilities with providers.
	All other changes		(39,400	)	Primarily due to decreases in capitation payables and other health care accruals.
Balance December 31, 2003		$	1,027,500

PacifiCare Health Systems, Inc.
Medical Claims and Benefits Payable (MCBP) Information
(Unaudited)

		Three months ended
		December 31, 2002		September 30, 2003		December 31, 2003
Commercial	Days in the quarter	92		92		92
A	MCBP ($000s) at end of period	$	615,425	$	634,432	$	667,002
B	Total HMO and PPO commercial members (000s) at end of period		2,325		2,144		2,176
C=A/B	MCBP per member at end of period	$	264.70	$	295.91	$	306.53
D=A/(Health care costs/Days in quarter)	Days claims payable		51.2		52.0		52.1
E	IBNR ($000s)(4)	$	410,357	$	472,724	$	505,312
F	Claims expense per day	$	5,269	$	6,178	$	6,598
G=E/F	IBNR days claims payable		77.9		76.5		76.6
H	Days to turn claims(1)(2)		62.6		54.9		54.9
Senior
A	MCBP ($000s) at end of period	$	429,075	$	403,868	$	360,498
B	Total HMO and Medicare Supplement members (000s) at end of period		776		713		709
C=A/B	MCBP per member at end of period	$	552.93	$	566.43	$	508.46
D=A/(Health care costs/Days in quarter)	Days claims payable		33.3		32.9		29.8
E	IBNR ($000s)(4)	$	311,660	$	281,865	$	276,226
F	Claims expense per day	$	3,970	$	3,915	$	3,997
G=E/F	IBNR days claims payable		78.5		72.0		69.1
H	Days to turn claims(1)(2)		58.9		49.2		49.2
Consolidated
A	MCBP ($000s) at end of period	$	1,044,500	$	1,038,300	$	1,027,500
B	Total members (000s) at end of period		3,101		2,857		2,885
C=A/B	MCBP per member at end of period	$	336.83	$	363.42	$	356.15
D=A/(Health care costs/Days in quarter)	Days claims payable		41.9		42.4		41.3
E	IBNR ($000s)(4)	$	722,017	$	754,589	$	781,538
F	Claims expense per day	$	9,239	$	10,093	$	10,595
G=E/F	IBNR days claims payable		78.1		74.8		73.8
H	Days to turn claims(1)(2)		60.7		52.2		52.2
I	Days receipts on hand(3)		6.6		5.4		5.5

Note 1 — Excludes PPO, POS, Specialty Company and third party administered claims. These excluded claims do not materially impact the calculations.

Note 2 — December 31, 2003 days to turn claims assumes no further improvement in speed.

Note 3 — Excludes Specialty Company claims. These excluded claims do not materially impact the calculations.

Note 4 — IBNR related to medical claims only (pharmacy IBNR is not included in this metric).

PacifiCare Health Systems, Inc.
Medical Claims and Benefits Payable (MCBP) Information
(Unaudited)

	Q4 2003 compared to Q4 2002
Analysis	Commercial			Senior			Consolidated
Days to turn claims — December 31, 2003		54.9			49.2			52.2
Days to turn claims — December 31, 2002		62.6			58.9			60.7
Decrease in days to turn claims from December 31, 2002 to December 31, 2003		(7.7	)		(9.7	)		(8.5	)
Q4 2002 claims expense per day ($000s)	$	5,269		$	3,970		$	9,239
Expected IBNR decrease from improved speed of claims payments ($000s)		($40,571	)		($38,628	)		($78,809	)
Total members at December 31, 2002 (000s)		2,325			776			3,101
IBNR decrease per member from improved speed of claims payments		($17.45	)		($49.78	)		($25.41	)
MCBP per member at December 31, 2002	$	264.70		$	552.93		$	336.83
Expected MCBP per member Q4 2003 assuming improved speed of claims payments	$	247.25		$	503.15		$	311.41
MCBP per member at December 31, 2003	$	306.53		$	508.46		$	356.15
MCBP per member increase over prior year (trend covered)		24.0	%		1.1	%		14.4	%
Compares To:
Health care cost per member — Three months ended December 31, 2002	$	157.65		$	505.84		$	244.98
Health care cost per member — Three months ended December 31, 2003	$	181.47		$	523.17		$	265.86
Health care cost increase per member over fourth quarter of prior year		15.1	%		3.4	%		8.5	%

PacifiCare Health Systems, Inc.
Medical Loss Ratio Information
(Unaudited)

(amounts in millions)

	COMMERCIAL							SENIOR							TOTAL
			Health Care							Health Care							Health Care
			Services							Services							Services
	Premiums		Expenses		MLR			Premiums		Expenses		MLR			Premiums		Expenses		MLR
Year Ended December 31, 2003:
Private Sector	$	5,320.3	$	4,471.2		84.0	%	$	79.1	$	50.2		63.4	%	$	5,399.4	$	4,521.4		83.7	%
Government Sector		—		—		N/A			5,319.2		4,478.1		84.2	%		5,319.2		4,478.1		84.2	%
Consolidated	$	5,320.3	$	4,471.2		84.0	%	$	5,398.3	$	4,528.3		83.9	%	$	10,718.6	$	8,999.5		84.0	%
Q4 2003:
Private Sector	$	1,382.1	$	1,163.9		84.2	%	$	21.6	$	11.7		54.2	%	$	1,403.7	$	1,175.6		83.8	%
Government Sector		—		—		N/A			1,315.5		1,097.5		83.4	%		1,315.5		1,097.5		83.4	%
Consolidated	$	1,382.1	$	1,163.9		84.2	%	$	1,337.1	$	1,109.2		83.0	%	$	2,719.2	$	2,273.1		83.6	%
Year Ended December 31, 2002:(1)
Private Sector	$	5,055.5	$	4,400.9		87.1	%	$	50.3	$	26.9		53.5	%	$	5,105.8	$	4,427.8		86.7	%
Government Sector		—		—		N/A			5,833.6		5,068.9		86.9	%		5,833.6		5,068.9		86.9	%
Consolidated	$	5,055.5	$	4,400.9		87.1	%	$	5,883.8	$	5,095.8		86.6	%	$	10,939.3	$	9,496.7		86.8	%
Q4 2002:(1)
Private Sector	$	1,269.3	$	1,107.4		87.2	%	$	12.9	$	7.3		56.8	%	$	1,282.2	$	1,114.7		86.9	%
Government Sector		—		—		N/A			1,395.2		1,177.7		84.4	%		1,395.2		1,177.7		84.4	%
Consolidated	$	1,269.3	$	1,107.4		87.2	%	$	1,408.1	$	1,185.0		84.2	%	$	2,677.4	$	2,292.4		85.6	%
(1)  Presentation changes have been made to December 31, 2002 to conform to the 2003 presentation.

PacifiCare Health Systems, Inc.
Reconciliation of Non-GAAP Measures
(Unaudited)

Non-GAAP Measures

We utilize certain non-GAAP measures to evaluate our performance and consider these measures important indicators of our success. These measures should not be considered an alternative to measurements required by accounting principles generally accepted in the United States of America. In addition, our non-GAAP measures may not be comparable to similar measures reported by other companies.

Medical Loss Ratio Premiums and Health Care Services Expenses

The following sets forth a reconciliation of premium revenues and health care services expenses used in the calculation of our medical loss ratio to the revenue and health care services and other expenses (which is the closest GAAP financial measure) as shown on the consolidated statements of operations:

	Three Months Ended						Year Ended
(amounts in millions)	December 31,						December 31,
	2003			2002(1)			2003			2002(1)
Commercial:
Commercial revenue	$	1,309.9		$	1,199.0		$	5,043.3		$	4,783.0
Net effect of specialty premiums, administrative service fee revenue and eliminations		72.2			70.3			277.0			272.5
Consolidated commercial premiums	$	1,382.1		$	1,269.3		$	5,320.3		$	5,055.5
Commercial health care services and other expenses	$	1,114.2		$	1,057.0		$	4,270.3		$	4,205.4
Net effect of specialty health care services and other expenses and eliminations		49.7			50.4			200.9			195.5
Consolidated health care services expenses related to consolidated commercial premiums	$	1,163.9		$	1,107.4		$	4,471.2		$	4,400.9
Senior:
Senior revenue	$	1,335.6		$	1,409.0		$	5,395.3		$	5,887.6
Net effect of specialty premiums, administrative service fee revenue and eliminations		1.5			(0.9	)		3.0			(3.8	)
Consolidated senior premiums	$	1,337.1		$	1,408.1		$	5,398.3		$	5,883.8
Senior health care services and other expenses	$	1,113.3		$	1,187.2		$	4,540.3		$	5,104.3
Net effect of specialty health care services and other expenses and eliminations		(4.1	)		(2.2	)		(12.0	)		(8.5	)
Consolidated health care services expenses related to consolidated senior premiums	$	1,109.2		$	1,185.0		$	4,528.3		$	5,095.8
(1)  Presentation changes have been made to December 31, 2002 to conform to the 2003 presentation.