Stronger together. Blue Cross Blue Shield of Michigan 2016 Annual Report

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1 Stronger together Blue Cross Blue Shield of Michigan 2016 Annual Report

2 Table of Contents We aspire to be clear and simple, to help you make the right choices, to offer valuable coverage, and help you get quality health care for you and those you love. Blue Cross Blue Shield of Michigan Customer Commitment A message from our president and CEO A message from our chairman of the board Customer experience Diversity and inclusion Quality and innovation Blue Cross Complete of Michigan Business diversification: Health Plan Business and Emerging Markets Social mission A message from our CFO Consolidated financials Board of directors 1

A message from the President and CEO A message from the Chairman of the Board We at Blue Cross Blue Shield of Michigan are best known for our nearly 80-year heritage in promoting wide access to

We are one of the nation s leading health insurance companies.

3 A message from the President and CEO A message from the Chairman of the Board We at Blue Cross Blue Shield of Michigan are best known for our nearly 80-year heritage in promoting wide access to quality, affordable health care for our health insurance members. We are less known for the complex approach we undertake to achieve these goals in today s increasingly challenging world. We are one of the nation s leading health insurance companies. But we are also a multidimensional enterprise with subsidiary operations providing products and services in markets as diverse as workers compensation, long-term care insurance, Medicaid and Medicare. As a nonprofit mutual insurance company, Blue Cross Blue Shield of Michigan is focused every day on keeping costs as affordable as possible for our health insurance membership. Maximizing opportunities for revenue growth in emerging markets outside of traditional health insurance relieves our members health care premiums and customers administrative fees of the pressure that would otherwise come if health insurance was our only line of business. A big part of our story in 2016 was our success in structuring our emerging markets businesses for growth. Growing beyond traditional health insurance derives value for our health insurance members. Growth means that we and our membership can be stronger together in facing the challenges of access, quality and affordability. Michigan is a diverse state racially, culturally and economically. The stakeholders of Michigan s health care system reflect this diversity. Health care companies that have a foundation of respect, understanding and appreciation for diverse cultures are those best positioned for continued success. In 2016, Dan Loepp celebrated 10 years as CEO of Blue Cross Blue Shield of Michigan. Early in his tenure, Dan made it a strategic priority to elevate cultural competency and the critical role of diversity within the Blue Cross enterprise. The results are nothing short of spectacular. In 2016, for the second straight year, Diversity Inc. magazine placed Blue Cross Blue Shield of Michigan atop its list of Top 10 Regional Companies for excellence in diversity management practices. Companies that achieve this recognition don t do it by accident. At Blue Cross, we achieved it by committing to cultural competency with 97 percent of our workforce completing cultural competency training, spending $226 million with diverse suppliers and the completion of more than 200 diversity learning labs to benefit our employees engagement. I am proud to lead a board that reflects Blue Cross diverse membership and stakeholders within Michigan s health care system. We are stronger together when the companies that serve our most critical social needs recognize and leverage our greatest human asset. 2 3 Daniel J. Loepp DANIEL J. LOEPP President and CEO Blue Cross Blue Shield of Michigan Gregory A. Sudderth Chairman of the Board Blue Cross Blue Shield of Michigan Gregory A. Sudderth

Strengthening Bonds with Our Customers Diversity and Inclusion We re Stronger Together Our members and customers relationships with their health care coverage are stronger when their experiences are

We launched our mobile app in 2016 and eager members downloaded it tens of thousands of times to use our suite of online health plan management and wellness resources on their smartphones.

4 Strengthening Bonds with Our Customers Diversity and Inclusion We re Stronger Together Our members and customers relationships with their health care coverage are stronger when their experiences are easy, useful and enjoyable. This idea is the driving force behind Blue Cross efforts to help our members access their health benefits on their terms and at their chosen time. We launched our mobile app in 2016 and eager members downloaded it tens of thousands of times to use our suite of online health plan management and wellness resources on their smartphones. And our Customer Experience team went on the road with our Digital Experience Showcase to meet with nearly 261 customers, representing 1.6 million members, to share how our online capabilities add value to the management of employee health and the administration of health benefits. As the demographics of the insurance marketplace continue to evolve, it s critical for our workforce to represent and respect the human differences that combine to strengthen our society. $226 million spent with diverse suppliers in % of employees trained in cultural competency In 2016, we continued our strategic effort toward having a diverse and inclusive culture that is best positioned to serve our diverse membership. Our business is stronger because of this work, and our membership and stake- Corporation of the Year, Michigan Minority Supplier No. 1 in diversity Development Council management practices Diversity Inc. magazine 4 holders are stronger as a result % MALE 41.3% MINORITY FEMALE 70.3%

Partnering to Improve Quality Innovating to Lower Costs For more than 10 years, Blue Cross Blue Shield of Michigan has worked with doctors and hospitals to improve care processes, increase efficiency

5 Partnering to Improve Quality Innovating to Lower Costs For more than 10 years, Blue Cross Blue Shield of Michigan has worked with doctors and hospitals to improve care processes, increase efficiency and improve outcomes. These Value Partnerships have yielded results. In our Patient- Centered Medical Home program the nation s largest we see 15 percent lower rates of adult emergency room visits. There s real savings in that number. Together Blue Cross and hospitals are evolving payment away from the old fee-for-service model, and reimbursing hospitals based on their success in coordinating care and lowering costs. Today, 85 percent of Blue Cross hospital payments flow through valuebased reimbursement arrangements compared to the national average of 38 percent. The work we ve done with physicians and hospitals is translating into insurance products that are lowering costs for customers and members. In 2016, we launched Blue Cross Physician Choice PPO. This new approach to the PPO provides broad access for members, but lowers costs when members choose doctors and hospitals that are proven to deliver more affordable care. With 4,534 doctors at 1,638 medical practices, Blue Cross has the largest Patient-Centered Medical Home program in the nation. More than 1.2 million Blue Cross members receive care from PCMH-designated practices. 6 7 $ 58 hospitals in Michigan have signed a 85% of Blue Cross payments flow through value-based arrangements. value-based contract with Blue Cross as part of our value-based reimbursement program.

Expanding Medicaid Services Across Michigan 8 In 2016, Blue Cross Complete of Michigan a joint venture between Blue Cross Blue Shield of Michigan and AmeriHealth Caritas expanded its service area

The fastest-growing Medicaid health plan in Michigan, Blue Cross Complete served more than 167,000 people in 2016 who qualify for Medicaid and Healthy Michigan Plan benefits.

6 Expanding Medicaid Services Across Michigan 8 In 2016, Blue Cross Complete of Michigan a joint venture between Blue Cross Blue Shield of Michigan and AmeriHealth Caritas expanded its service area within the state of Michigan from three counties to 32. The fastest-growing Medicaid health plan in Michigan, Blue Cross Complete served more than 167,000 people in 2016 who qualify for Medicaid and Healthy Michigan Plan benefits. Benzie Leelanau Barry Emmet Charlevoix Montcalm Gratiot Saginaw Ionia Clinton Alpena Manistee Wexford MissaukeeRoscommon Ogemaw Iosco Mason Osceola Clare Gladwin Oceana Mecosta Isabella Newaygo Muskegon Ottawa Van Buren Grand Kalkaska Crawford Oscoda Alcona Traverse Lake Allegan Kent Antrim Cheboygan Presque Isle Otsego Blue Cross Complete of Michigan Service Area Expansion Midland Arenac Bay Genesee Tuscola Lapeer Kalamazoo Calhoun Jackson Washtenaw Wayne Huron Sanilac St. Clair Macomb Eaton Ingham Livingston Oakland Benzie Leelanau Barry Emmet Charlevoix Montcalm Gratiot Saginaw Ionia Alpena Manistee Wexford MissaukeeRoscommon Ogemaw Iosco Mason Osceola Clare Gladwin Oceana Mecosta Isabella Newaygo Muskegon Ottawa Van Buren Grand Kalkaska Crawford Oscoda Alcona Traverse Lake Allegan Kent Antrim Cheboygan Presque Isle Otsego Clinton Midland Shiawassee Montmorency Shiawassee Montmorency Arenac Bay Genesee Tuscola Lapeer Kalamazoo Calhoun Jackson Washtenaw Wayne Huron Sanilac St. Clair Macomb Eaton Ingham Livingston Oakland Blue Cross Complete holds a commendable accreditation status from the National Committee for Quality Assurance. It is among the top-rated health care plans for quality by the Michigan Department of Health and Human Services, which rates plans on doctors communication and service, members ability to get the care they need when they need it, the plan s ability to keep kids healthy by covering regular checkups and shots, the plan s coverage for members who live with illness and preventive treatment for women. 26,486 Blue Cross Complete membership growth 44,014 74,353 88, ,668 90% membership increase in one year 9 Berrien Cass St. Joseph Branch Hillsdale Lenawee Monroe Berrien Cass St. Joseph Branch Hillsdale Lenawee Monroe

Diversifying Our Business to Strengthen Our Core As a nonprofit mutual insurance company, Blue Cross Blue Shield of Michigan attempts to keep health insurance costs as affordable as possible by

7 Diversifying Our Business to Strengthen Our Core As a nonprofit mutual insurance company, Blue Cross Blue Shield of Michigan attempts to keep health insurance costs as affordable as possible by maximizing revenue from two alternative sources investment income and subsidiary businesses. The greater the income derived from these two sources, the less we must depend on our health insurance customers for profitability. This promotes more affordable health care for people. In 2016, Blue Cross made strategic moves to broaden and diversify our subsidiary portfolio and capture opportunities presented by the expanding Medicare-eligible population. The company leveraged its long experience in offering highly ranked Medicare Advantage programs in Michigan, and market-leading technology and capabilities, to launch new subsidiary brands, Visiant and Tessellate. These brands will partner with other health care plans and providers to offer Medicare Advantage products and services in markets outside of Michigan. Also in 2016, Blue Cross CEO, Dan Loepp, reorganized the company into two divisions Emerging Markets and Health Plan Business. This major reorganization sets the stage for Blue Cross immediate future growing nationally through the subsidiary structure of Emerging Markets in order to maximize revenue and return that value back to support our core health insurance services offered through Health Plan Business. Elizabeth Haar Executive Vice President and President Emerging Markets Kenneth Dallafior Executive Vice President and President Health Plan Business Emerging Markets afgroup.com tessellate.com visianthealth.com bcbsm.com bcbsm.com yourlifesecure.com TM Health Plan Business

Emerging MArkets 11 Lisa Corless President AF Group Blue Cross Blue Shield of Michigan s subsidiary companies play a critical role in supporting our health insurance members by delivering revenue

In 2016, we organized our Emerging Markets division to seek revenue growth opportunities in dynamic market segments in Michigan and around the nation. Included in Emerging Markets is AF Group.

AF Group delivered one of its best years of profitability in 2016, based on the performance of its workers compensation business.

We also launched two brands in 2016 allowing us to to partner with health care plans exploring opportunities in the growing Medicare Advantage market.

Services within our own Medicare Advantage portfolio. The expertise and technology of our subsidiary companies now can be leveraged by partner health plans.

8 Emerging MArkets 11 Lisa Corless President AF Group Blue Cross Blue Shield of Michigan s subsidiary companies play a critical role in supporting our health insurance members by delivering revenue and profitability that doesn t come from health care premiums or administrative fees. In 2016, we organized our Emerging Markets division to seek revenue growth opportunities in dynamic market segments in Michigan and around the nation. Included in Emerging Markets is AF Group. This for-profit property casualty carrier is wholly owned and operates its national business from its headquarters in Lansing, Michigan. AF Group delivered one of its best years of profitability in 2016, based on the performance of its workers compensation business. The company also introduced new products to the marketplace in 2016, marking its first year of diversification outside of workers compensation insurance. We also launched two brands in 2016 allowing us to to partner with health care plans exploring opportunities in the growing Medicare Advantage market. The two brands, Visiant and Tessellate, bring forward expertise, capabilities 12 and technology that have enabled us to earn consistently strong star ratings from the Centers for Medicare & Medicaid Services within our own Medicare Advantage portfolio. The expertise and technology of our subsidiary companies now can be leveraged by partner health plans. Visiant and Tessellate offer a 360-degree Medicare solution for health plans around the United States that seek a proven partner to successfully conduct business in a market where an estimated 14 million Americans will become Medicareeligible, with up to 41 percent of them expected to enroll in Medicare Advantage plans by Mary Smith President, Tessellate and Senior Vice President, Blue Cross Blue Shield of Michigan Medicare Advantage star rating performance HMO PPO Julie Smith President, Advantage Solutions and Senior Vice President, Blue Cross Blue Shield of Michigan

Health Plan Business Providing members with access to quality doctors, hospitals and medicines this remains Blue Cross Blue

As ongoing cost pressures cause employers to challenge their health plan partners for innovative solutions that deliver both

Health Plan Business provides innovative, customer-directed health plan solutions across the individual and group segments

Our approach is to work collaboratively with customers, listen to their concerns, leverage data and analytics to identify

Blue Care Network remains the largest HMO in Michigan. We consider these successes as a starting point, not an end point.

affordability of coverage and care. Blue Cross membership growth (members in millions) 5.05M 5.10M 5.20M 5.25M 5.

9 Health Plan Business Providing members with access to quality doctors, hospitals and medicines this remains Blue Cross Blue Shield of Michigan s driving force after nearly 80 years. As ongoing cost pressures cause employers to challenge their health plan partners for innovative solutions that deliver both quality and cost-efficiency, we believe it s time to deliver more and we start that effort from a customer-centric view. Health Plan Business provides innovative, customer-directed health plan solutions across the individual and group segments that improve our members care and health, and address employers concerns about the cost of care. Our approach is to work collaboratively with customers, listen to their concerns, leverage data and analytics to identify opportunities to deliver value, and advance solutions that work for both employers and members. Thanks to our customers loyalty and trust, we experienced our sixth consecutive year of membership growth in 2016 adding an additional 114,000 members for a nationwide total of 5.35 million. We concluded 2016 with a record 3 million contracts. Blue Care Network remains the largest HMO in Michigan. We consider these successes as a starting point, not an end point. They give us the energy and drive to work even harder with our customers to meet our mutual goals of quality, access and affordability of coverage and care. Blue Cross membership growth (members in millions) 5.05M 5.10M 5.20M 5.25M 5.35M Nicole Winters-Smith Director, Middle Group Sales and Service Blue Cross Blue Shield of Michigan Pam Braund Vice President, Group Customer Advocate and Performance Blue Cross Blue Shield of Michigan Tiffany Albert President and CEO Blue Care Network

Strengthening Our Communities 16 Blue Cross Blue Shield of Michigan is a nearly $26 billion corporate enterprise, but our character remains firmly rooted in our nearly 80-year-old heritage as a

In 2017, we paid another $60 million (based on our 2016 financial performance) to the Michigan Health Endowment Fund.

10 Strengthening Our Communities 16 Blue Cross Blue Shield of Michigan is a nearly $26 billion corporate enterprise, but our character remains firmly rooted in our nearly 80-year-old heritage as a nonprofit organization. Nonprofits are mission focused to give back. We are no different, despite our size. In 2017, we paid another $60 million (based on our 2016 financial performance) to the Michigan Health Endowment Fund. This fund, established when Blue Cross transitioned into a nonprofit mutual insurer in 2013, is a continuing expression of our longstanding social mission. Over 18 years, we will pay $1.56 billion to the Endowment Fund to further its mission of protecting vulnerable people in our home state, and subsidizing Medicare Supplement coverage for older adults. We continued our $1 million annual contribution to Michigan safety net providers. Caring for uninsured people in our communities helps meet critical human needs, but also helps hospitals control their costs for uncompensated care. This helps our members and customers. We also continued to lead statewide efforts to prevent childhood obesity through our Building Healthy Communities program partnership. Through these efforts and many others, Blue Cross remains deeply rooted in Michigan s communities and able to contribute in substantive ways toward a healthy future for all who call Michigan home. Michigan Health Endowment Fund Our payments to this state fund help Michigan s vulnerable residents $210 million $270 million paid to date $60 million Total commitment $1.56 billion over 18 years 17

A message from the Chief Financial Officer Blue Cross Blue Shield of Michigan ended 2016 in strong financial position.

companies and strong returns on the enterprise investment portfolio.

Revenues were enhanced by the company s continued track record for excellence in Medicare Advantage quality, achieving a 4-star rating from the Centers for Medicare & Medicaid Services for our PPO

11 A message from the Chief Financial Officer Blue Cross Blue Shield of Michigan ended 2016 in strong financial position. The company s financial performance was driven by a number of positive results, including record-setting contract membership within Health Plan Business, excellent performance by our subsidiary companies and strong returns on the enterprise investment portfolio. The enterprise concluded 2016 with a Risk Based Capital (RBC) measure of 547 percent and a positive net income of $122 million on a GAAP basis on revenue of $25.9 billion. Revenues were enhanced by the company s continued track record for excellence in Medicare Advantage quality, achieving a 4-star rating from the Centers for Medicare & Medicaid Services for our PPO for the fourth straight year, and a 4.5-star rating for our HMO for the fifth straight year. Because of our long track record for quality, we have maximized our potential for star ratings-based revenue from the federal government. Importantly, we also successfully modernized our rate structure for Medicare Supplement (also known as Medigap) products in We introduced modern Medigap plans and brought its rates up to the competitive market standard, concluding decades of required rate subsidization that resulted in a $244 million loss on these plans in In 2017 and beyond, we expect financial performance in Medigap to be dramatically improved. Our company continues strategic efforts to grow revenue and profitability in our subsidiary lines of business, to deliver strong results from our investment portfolio and to build efficiencies into our administrative costs. Collectively, these efforts enable us to promote more affordable health coverage, continue to support our nonprofit social mission and back our membership s health care needs with financial strength Mark R. Bartlett Executive Vice President and Chief Financial Officer Blue Cross Blue Shield of Michigan Mark Bartlett

Consolidated Financial Information (in millions) 2016 Key Indicators December 31, 2016 and 2015 (GAAP* basis) Assets 2016 2015 20 Investments $7,275 $7,132 Other 6,628 6,304 Total assets $13,903

12 Consolidated Financial Information (in millions) 2016 Key Indicators December 31, 2016 and 2015 (GAAP* basis) Assets Investments $7,275 $7,132 Other 6,628 6,304 Total assets $13,903 $13,436 Liabilities, capital and surplus Total liabilities $9,579 $9,338 Total capital and surplus 4,324 4,098 Total liabilities, capital and surplus $13,903 $13,436 Premium revenue $25,902 $24,222 Claims under self-funded arrangements (11,574) (11,039) Expenses (14,508) (13,461) Operating (loss)/gain (180) (278) Investment Income and other, net Other (33) (47) Reduction/addition to policyholders reserves $122 $(68) Nationwide Membership 5.35 million Sixth consecutive year of growth GAAP Revenue $25.9 billion Strong financial performance Net Income $122 million Positive margin less than 0.5% claims $22.7 billion Paid an average of $62.2 million per day 21 To see our detailed consolidated financial statements, go to bcbsm.com/annualreport. *Generally accepted accounting principles

13 Board of Directors (as of March 30, 2017) James Agee* President JG Agee Consultants LLC Peter Ajluni, D.O. Orthopedic Surgeon (Retired) Reneé Axt* President RCP Associates LLC William Black* Executive Director Michigan Teamsters Joint Council 43 Terry Burns Executive Vice President Michigan Automobile Dealers Association Steven Cook President Michigan Education Association Patrick Devlin Financial Secretary/Treasurer Michigan Building Trades Council Sarah Doyle International Union, UAW (Retired) Darrell Burks* Linda Forte Gary McInerney* James Settles Jr.* PriceWaterhouseCoopers Comerica Bank (Retired) Owner Robert Patzer Vice President 22 (Retired) Michigan Health & Hospital McInerney & Associates Michigan Infrastructure & International Union, UAW 23 Association (Retired) Yousif Ghafari Chairman and Founder Ghafari Associates LLC Diane Goddeeris, RN, B.S.N. Registered Nurse, Obstetrics Informatics Sparrow Hospital James Grant, M.D. Chair of Anesthesiology Beaumont Health System and Oakland University William Beaumont School of Medicine Norwood H. Jewell Vice President and Director UAW Chrysler Department International Union, UAW Spencer Johnson* Vice Chairman of the Board President Emeritus Melvin Larsen Larsen & Associates Inc. (Retired) Daniel J. Loepp* President and Chief Executive Officer Blue Cross Blue Shield of Michigan Christopher Maksym, Pharm.D. Director, Pharmacy and Home Care Operations, HomeMed, MedEQUIP and Wheelchair Seating Services University of Michigan Hospitals and Health Centers Anne Mervenne Chief Executive Officer Mervenne & Company William Meyers Wm. Meyers & Associates LLC (Retired) Dan Musser III President Grand Hotel Kathleen Neal* Director, Integrated Health Care and Disability Fiat Chrysler Automotive US LLC Transportation Association (Retired) Brian Peters Chief Executive Officer Michigan Health & Hospital Association Wallace Riley Wallace D. Riley & Associates PLLC (Retired) Jean Rose Executive Director, Global Manufacturing Human Resources General Motors LLC Edwin Secord, D.D.S., M.S. Orthodontist (Retired) F. Remington Sprague, M.D.* Ministry Organization Vice President and Chief Medical Officer Mercy Health Muskegon, CHE - Trinity Health Gregory Sudderth* Chairman of the Board President and founder Executive Labor-Management Services Inc. Laura Swartzmiller Director, Health & Welfare Benefits Ford Motor Company Karla Swift Michigan AFL-CIO (Retired) Gary Torgow Chairman Talmer Bancorp Inc. Renee Turner-Bailey Sr. Benefits Consultant International Union, UAW *Member of Executive Committee

14 Connect with us bcbsm.com MIBluesPerspectives.com 24

15 Blue Cross Blue Shield of Michigan and Blue Care Network are nonprofit corporations and independent licensees of the Blue Cross and Blue Shield Association. R066324

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