Table of Contents - Palmetto GBAFile/2002annualreport.pdf · 2011. 6. 9. · Palmetto GBA, LLC...

Introduction 3President’s Letter 4Chief Operating Officer’s Letter 5Palmetto GBA 7Communication 9Responsibility 13Integrity 17Service 19People 21Innovation 23Quality 27Board of Directors/Corporate Officers 30Closing 31Report of Independent Auditors Letter 32Financials 33-40

Table of Contents

Palmetto GBA, LLC

Annual Report 2002

aking a long journey can be filled with risk. We never know what the future holds. But when a company travels the road to success, it’s good to have a trusted navigator along to steeraround any obstacles.

The journey began on July 30, 1965, when President Lyndon B. Johnson signed Medicare into law.There were 19 million beneficiaries who enrolled in the Medicare program in its first year. That number is significant for Palmetto GBA and our sister company, TrailBlazer Health Enterprises,because the two companies now process approximately 19% of all Medicare claims filed on behalf of 40 million Americans.

While we embarked on our journey many years ago, this year marks the 10th anniversary of the introduction of the navigation system that has lead us on to greater things. That “system” is our values — seven principals that guide everything we do: Communication, Responsibility, Integrity,Service, People, Innovation and Quality. These values have helped us map out our future as a successful Medicare contractor.

As you read these pages, we will tell you about our values, what they mean to us, and how we live by them on a daily and continuing basis.

After all, the road to success is a journey, not a destination. Come travel with us.

Introduction

Palmetto GBA, LLC

Annual Report 2002

The Road to Success

T

3

Palmetto GBA is on the road to success. Our mission is to be the number one Medicare contractor in the United States. With manycompetitors falling by the wayside, we reached a milestone in 2002when we achieved the top Medicare contractor market share.Palmetto GBA was number one with a 9.30% market share, and oursister company, TrailBlazer Health Enterprises, was second with a7.94% market share.

Both are subsidiaries of BlueCross BlueShield of South Carolina. Itstotal market share for Medicare contractors is about 19% — up fromjust 5% in 1997. Our total Medicare revenue has grown from $77

million that year to nearly $300 million in 2002. The road to success has been clearly marked and we are on our way!

We’re proud of our accomplishments and we are determined to continue following the path that has brought us such success. The road signs are there, and we’ll stay focused on them by adhering to our strong values and commitment to excellence.

This annual report illustrates the successes we’ve realized already, and it will show you the secret to our success — our dedicated associates at every level. We know this kind of progress cannot happen without them. We appreciate each and every one of them and are grateful to be on this exciting journey with them!

Palmetto GBA’s 2002 journey on the road to success was one of itsbest. The Ohio/West Virginia Part B carrier operations was PalmettoGBA’s single largest business assumption to date. Palmetto GBA alsowas selected for CMS’ Performance Contracting Pilot; was awardedCMS’s Train-the-Trainer contract; significantly increased its networksupport business; and implemented electronic Medicare SummaryNotices (e-MSNs), the first Medicare program Internet transaction.

Though much attention was focused on growth in 2002, performanceunder our core businesses also was very good. Results from our cus-tomer satisfaction surveys were higher in 2002 than 2001 in all but oneof six contracts. The results from our associate morale surveys also improved. Finally, Palmetto GBAbecame registered under the ISO 9001:2000 standard for four functional areas.

The excellent year experienced in 2002 was directly attributable to our outstanding associates. Theteamwork, dedication and “can do” attitude embraced by our associates coupled with the unmatchedbreadth of experience, commitment and knowledge of our leadership team produced the successeswe have enjoyed over the past year. I hope that you share my pride in our organization’s people asyou read about a few of these successes in this report. Truly, our people are our success.

2003 promises to be another great year for Palmetto GBA. We look forward to a successful HIPAAimplementation, rollout of our new strategic management process, and completing the assimilationof recent business assumptions into our company. We also look forward to continued growth and tobeing a leader among Medicare contractors in moving Medicare services to the Internet.

Our journeys down the road to success are fueled by our people and guided by our commitment toethics and integrity. We understand there are no shortcuts on the road to success. Through hardwork, adherence to our values, and a commitment to excellence, we will strive to reach our vision tobe the number one Medicare contractor.

President’s Letter

Palmetto GBA, LLC

Annual Report 2002

Chief Operating Officer’s Letter

Palmetto GBA, LLC

Annual Report 2002

William R. HortonPresident and Chief Operating OfficerGovernment Programs DivisionBlueCross BlueShield of South Carolina

Bruce W. HughesExecutive Vice President and Chief Operating OfficerPalmetto GBA, LLC

4 5

With more than 35 years ofMedicare experience,we’re one of the nation’slargest and most diverseMedicare contractors.

Palmetto GBA

Palmetto GBA, LLC

Annual Report 2002 7

Headquartered in Columbia, S.C., we

have offices in six other states: Florida,

Georgia, Illinois, North Carolina, Ohio

and West Virginia. We also have full-time

field staff in 14 states.

In 2003, our nearly 2,700 employees will

help us process a forecasted 102 million

claims, pay $19.5 billion in Medicare

benefits and serve 7.8 million Medicare

beneficiaries. As the numbers show, the

value we bring to our customers is great —

and the values we believe in will make

us even better.

almetto GBA is the largest

Medicare contractor in the country,

solely devoted to government

programs contracting activity. With more

than 35 years of Medicare experience,

we’re one of the nation’s largest and most

diverse Medicare contractors. Palmetto

GBA has three major areas of responsibility:

processing and paying claims; fighting

Medicare fraud, waste and abuse; and

providing excellent customer service to

beneficiaries and customers.

P

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

$1,895,956,590 $2,113,843,461 $2,489,317,352 $2,966,461,834 $7,518,397,017

$6,335,944,832 $4,694,738,102 $4,252,676,308 $4,367,737,605 $4,537,471,172

$ 512,326,252 $ 569,310,915 $ 640,403,371 $ 739,783,860 $1,490,906,556

$2,230,083,294 $2,306,748,615 $2,525,460,344 $2,826,474,041 $3,347,759,119

N/A N/A $ 40,115,308 $ 751,410,612 $ 790,098,378

$10,974,310,968 $9,684,641,093 $9,947,972,683 $11,651,867,952 $17,684,632,242

Part A Benefits

Home Health Agency

Part B Benefits

DMERC Benefits

RRB Benefits

TOTAL BENEFITS

Benefits Paid

Claims Processed

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

2,320,421 2,542,405 2,705,727 2,986,567 3,052,671

7,525,321 5,834,628 5,543,410 4,658,625 4,823,746

N/A N/A N/A N/A 4,108,902

9,756,399 10,253,562 10,780,387 11,375,296 11,981,981

N/A N/A N/A N/A 8,182,248

N/A N/A N/A N/A 1,501,482

17,904,946 18,967,692 20,258,797 21,004,303 23,604,443

N/A N/A 603,635 12,295,928 14,234,696

37,507,087 37,598,287 39,891,956 52,320,719 71,490,169

4.36% 4.33% 4.48% 5.62% 7.12%

Part A Claims

Home Health Agency Claims

Part A-North Carolina

Part B Claims

Part B-Ohio

Part B-West Virginia

DMERC Claims

RRB Claims

TOTAL CLAIMS

% OF NATIONAL TOTAL(MARKET SHARE)

Being a customer service representative ismore than just answeringthe phone. Some callsrequire research and also a lot of listening. Somebeneficiaries call youbecause they have no oneelse. If you think of eachcall like helping a familymember, it makes it morepersonal, and the personon the other end of the lineknows that you are doing everything you can to help.

ommunication comes in many

forms. On the street, it is often

what we see — the colors of a

traffic light, the symbols on a highway sign,

the lines on a map. Other times, it is what

we hear — a honking horn, a screaming

siren, a screeching tire. No matter what

form it takes, communication on the open

road is vital. You must stay alert, listen

carefully and respond quickly.

The road to success is just the same. At

Palmetto GBA, our communication efforts

also take several forms. But no matter the

format, we pay close attention and act

appropriately. In most cases, our goal is

customer satisfaction. In a few situations,

it can be a matter of life and death.

On October 16, customer service

representative Jill Akerley received a call

from a Medicare beneficiary. The caller

was tremendously distraught. Jill remained

calm, listening to his problems and

concerns. The caller said he was ill, in a

lot of pain and was afraid that he might

hurt himself or even end his life. He also

felt that no one cared about his situation.

Fearing for her customer’s safety, Jill

immediately alerted her supervisor to

listen in on the call. Jill calmed the caller

down, gave him alternative solutions and

assistance, and even offered to contact a

psychiatrist for him.

The beneficiary was grateful that Jill took

the time to listen to his concerns and

would take additional time to help him

get in touch with a doctor. Jill remained

on the line with the caller to make sure he

was okay while someone else contacted a

hospital in his area. A nurse there talked

to the beneficiary and asked him to come

in that day. Jill’s quick response made

sure the customer received the assistance

he needed!

Another example of an associate making

the right call came in December. Sharon

Crumpley, a customer service representa-

tive in Ohio, received a frantic call from a

Medicare beneficiary who had outstanding

balances with her doctors. The Social

Security Administration (SSA) had

terminated her Medicare coverage, so

Medicare was not paying her bills. The

pressure was getting too much for the

customer to bear. Emotionally and mentally

at the end of her rope, the beneficiary felt

she could not take it anymore.

Sharon told the customer she would

contact SSA to see what could be done.

After talking to SSA, Sharon found that

there had, indeed, been a mistake — the

patient still should have Medicare cover-

age! Sharon then offered to contact the

beneficiary’s doctors about the mix-up. She

Communication

Palmetto GBA, LLC


CJill Akerley

My job as a Medicare customer service representative can berewarding. Helping a beneficiary resolve a difficult situation makesthem feel better and gives me a feeling ofaccomplishment.Sometimes their reactionis so much more than Iexpect. Often a kind word or helping hand is all they need.

explained to them that we would consider

the charges once SSA had updated its files.

Sharon also advised her supervisor, who

then notified the beneficiary’s doctor

about her desperate call. Sharon exercised

sound judgement, compassion and a

resolve to help the beneficiary through an

extremely stressful and emotional time.

Truly, Sharon shows the remarkable job

that Palmetto GBA associates exhibit

everyday — going the extra mile even in

the toughest of situations.

Fortunately, these tough situations don’t

happen everyday. But what does occur

each and every day are the thousands

of phone calls from both beneficiaries

and providers. To keep the lines of

communication open, our nearly 500

customer service representatives receive

thorough training — training that goes

beyond simply explaining benefits and

coverage or answering questions.

And once we’ve trained our associates, we

continually put them to the test. Each

year we commission an independent

company to survey the Medicare physicians

and beneficiaries we serve so that we can

determine how well we’re meeting their

expectations. Once again, in 2002, our

associates passed the test — a clear sign

that our communication and customer

satisfaction efforts are working!

Communication (Continued)

Palmetto GBA, LLC


13.0% 17.0% 21.0% 19.0% 24.0%55.0% 62.0% 61.0% 62.0% 63.0%

7.0% 9.0% 14.0% 12.0% 13.0%53.0% 56.0% 57.0% 60.0% 63.0%

10.0% 14.0% 17.0% 16.0% 15.0%51.0% 55.0% 61.0% 61.0% 60.0%

18.0% 21.0% 22.0% 21.0% 20.0%58.0% 59.0% 58.0% 58.0% 58.0%

7.0% 8.0% 10.0% 13.0% 19.0%41.0% 48.0% 50.0% 46.0% 48.0%

N/A N/A N/A 10.0% 12.0%N/A N/A N/A 52.0% 55.0%

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

54.0% 49.0% 56.0% 52.0% 61.0%41.0% 45.0% 41.0% 45.0% 35.0%

56.0% 58.0% 55.0% 60.0% 60.0%38.0% 38.0% 39.0% 36.0% 35.0%

48.0% 53.0% 52.0% 60.0% 60.0%46.0% 42.0% 43.0% 36.0% 38.0%

Provider Satisfaction Survey

Beneficiary Survey Results

ExcellentGood

ExcellentGood

ExcellentGood

ExcellentGood

ExcellentGood

ExcellentGood

PART A

PART B

DMERC

SADMERC

NSC

RRB

ExcellentGood

ExcellentGood

ExcellentGood

PART A

DMERC

PART B

Sharon Crumpley

FY 1998 FY 1999 FY 2000 FY 2001 FY 2002

Without the EducationAssistance Program, Iprobably would not havemy 21 accounting hourswithin such a short time.The program gave me themotivation to go aheadand get the hours as soonas possible because theEducation AssistanceProgram reimburses 75%.Therefore, money was nota barrier to me in the pursuit of my education.

esponsible driving is one of the

first and most important

lessons driver’s education

students learn. Mastering the rules of the

road does not end, however, once we

acquire our license. The more we drive,

the more we improve our skills. And as

we enhance our abilities, we prepare

ourselves to handle the curves that come

along the way.

At Palmetto GBA, being responsible means

making sure our actions protect and

preserve our organization, our associates

and our customers. It means that we will

perform all of our contractual obligations

prudently, successfully and ethically. Many

operational units — made up of hundreds

of associates — support this objective by

taking the responsibility of bringing their

skills and abilities up to the next level.

Palmetto GBA assists in these worthy

endeavors by offering financial support to

associates who pursue higher education.

Throughout our company there are

dozens of success stories about individuals

who took advantage of this benefit.

Joel Ijaja is one of these successes. Joel,

who is originally from Nigeria, West Africa,

came to the United States in 1984. Joel

earned his bachelor’s degree in business

administration from John Brown University

in Arkansas, and a master’s degree in

business administration from Regent

University in Virginia. He subsequently

joined BlueCross’ TRICARE staff.

After three years with TRICARE, Joel

became part of the Palmetto GBA team,

working in Part B/DMERC overpayments

as an analyst. Even though Joel held a

master’s degree, he did not have the 21

accounting hours necessary to move into

an accountant position on the staff.

Through the educational assistance

program at Palmetto GBA, Joel took

evening classes and completed the needed

accounting hours. Shortly thereafter, he

was promoted to the position of

Accountant I. Joel rises to the many

challenges that accompany his new role

every day.

Not only is Joel achieving major goals in

his professional life, he also is conquering

unpaved territories outside of work.

Responsibility

Palmetto GBA, LLC


RJoel Ijaja

Recently, he had his first opportunity to go bowling

when the Finance division had a quarterly meeting

combined with a bowling outing. Joel says he had a

blast on his bowling outing, and he hopes to make it

a new hobby!

With employees like Joel moving up on a fast track,

Palmetto GBA will always be ahead of the curves. That’s

especially helpful when we approach the twists and turns

that come with new regulations from CMS or other

government agencies. For example, we bring to CMS

unmatched involvement with the Health Insurance

Portability and Accountability Act (HIPAA) regulations.

CMS benefits from our active participation in numerous

committees, advisory groups and task forces that apply

HIPAA regulations and standards affecting the delivery of

Medicare. We have established a comprehensive

corporate project that encompasses HIPAA for the

entire corporation and all its subsidiaries.

CMS also will benefit from our ability to draw on HIPAA

expertise throughout our organization, as we continue

to take a very active role in standards development and

Coordinating system andoutreach efforts for sixMedicare contracts usingfive different shared processing systems is anexciting challenge.Versatility and flexibilityare key components asHIPAA information continues to change during the implementationprocess. We have established a great teamof associates who havetaken on the challenge of system testing andHIPAA outreach.

Responsibility (Continued)

Palmetto GBA, LLC


implementation for the healthcare industry. Our involvement

with various government standards organizations and

committees allows us to remain abreast of the upcoming

versions of the legislation while providing input into the

development of the standards. We also have been involved

in a number of workshops with CMS.

Our Electronic Data Interchange department is performing

system testing and our professional relations areas have

provided information to Medicare providers across all of

our contracts. We’ve included HIPAA information in all

outreach activities including workshops, professional society

meetings and provider visits.

Taking the wheel on our HIPPA efforts is Korene Smith, who

is our Medicare HIPAA project manager. She manages the

portion of the project devoted to the transaction and code

set legislation. That is a huge responsibility, but Korene

doesn’t stop there! She also plays a key role in the HIPAA

certification process and is involved with our communications

and outreach initiatives.

To make sure the information remains current and uniform,

we developed a presentation and fact sheet for all lines of

business. Palmetto GBA is using printed publications and our

Web site, www.PalmettoGBA.com, to distribute information.

We have devoted a section on our Web site to HIPAA

Responsibility (Continued)

information with a direct link from the

home page. This section contains general

information for beginners as well as

advanced information for all of our con-

tracts. We frequently update information

on our Web site. We find it is an effective

way to disseminate new information as

quickly as possible.

Another responsibility Palmetto GBA takes

seriously is healthcare fraud. We work hard

to detect and deter fraud, waste and

abuse in the Medicare program. Palmetto

GBA holds multiple contracts with the

federal government to administer the

Medicare home health, hospice and

medical equipment benefits in 18 states,

Puerto Rico and the Virgin Islands.

The following table summarizes our

program safeguards savings:

Palmetto GBA, LLC


Part A Part B DMERC RRB

$ 35,615,874 $ 825,233 $ 61,920,063 $ 432,375

$207,409,940 $ 31,969,198 $ 28,236,721 $ 5,429,573

$ 18,406,877 $ 33,018,404 $324,325,236 $24,473,223

$101,822,380

$363,255,071 $65,812,835 $414,482,020 $30,335,171

Fraud and Abuse

Medicare Secondary Payer

Medical Review

Audit

TOTAL

TOTAL

$ 98,793,545

$273,045,432

$400,223,740

$101,822,380

$873,885,097

Medicare Summary of Savings — FY 2002

Korene SmithHIPAAProject Manager

ome directions are pretty clear.

There is a right way, and there

is a wrong way. Turn the wrong

way and you just might have an accident.

At Palmetto GBA, acting with integrity is

no accident! That’s because there are

signs along the way to point us in the right

direction. Sometimes the signs are

intangible — like the seven values of our

compliance program. Often, the signs are

quite literal — like the ones made by

associate Audrey Shivar.

Audrey, a compliance specialist, saw a need

for increased visibility for our

compliance program. So she designed

and produced colorful, catchy posters

reminding associates of the importance

of compliance. Now, in all our locations,

Audrey’s posters enhance compliance

awareness and visibility.

“One of the best ways to place an idea in

the forefront of people’s minds is visually.

A quick glance at a poster while walking to

a meeting or lunch is enough exposure to

plant a message or leave a lasting

impression,” says Audrey.

But Palmetto GBA doesn’t stop at simply

promoting a program — we also promote

ethical and lawful business practices. We

strive to provide an environment and

culture committed to compliance. An

effective ethics and compliance program

is a living and evolving program, as no

single model is appropriate for every

circumstance. During 2002 and continuing

into 2003, the Palmetto GBA compliance

unit is pursuing several key initiatives

to further develop the effectiveness of

the compliance program.

We’ve implemented an automated data-

base tracking system to better analyze and

track trends by type of compliance issue,

division and operational unit. Additionally,

the Palmetto GBA compliance unit is

implementing an executive compliance

committee, and will publish an online

compliance newsletter. The unit is also

preparing a Web-based training program

for the management control reviews in

2002. These compliance efforts will

continue into 2003.

That’s because no matter where the road

takes us, the directions will always be the

same: do the right thing.

How often have you been flipping through amagazine or passing astore window and seen agreat ad for a product or a how-to idea and said toyourself, “I could use that.”Well, I hope the postersproduce the same effectwhen associates are conducting business...something to make thempause and think whenmaking a decision as wellas to let them know theirCompliance staff is available for them to talk to.

Integrity

Palmetto GBA, LLC


SAudrey Shivar

On-site investigators areoften on the front lines of healthcare fraud cases.Although we often get allthe credit and attention,what makes our casessuccessful is the outstanding cooperationand service we get fromour support systems. I am talking about the managers, the supervisors,the team members, thebehind-the-scene supportstaff from the NSC,SACU, MSAD, and mostimportantly, the supportwe receive from ourspouses and our families.

Palmetto GBA — as part of BlueCross

BlueShield of South Carolina —actively

participates in numerous community

events and fund raising campaigns every

year in all our locations. These campaigns

and events include the United Way, March

of Dimes, Juvenile Diabetes Research

Foundation, Salvation Army and the

American Heart Association.

Palmetto GBA is also involved with a

community service project through the

Columbia Urban League called the

Summer Work Experience Leadership

Program (SWELP). The program provides

work experience to young students, 12-15

years old. Palmetto GBA fully supports

SWELP with an annual corporate donation

and by arranging for supervisors to guide

the students during their employment by

the company. SWELP provides a challeng-

ing and rewarding experience for the

youth. They get a feeling of accomplish-

ment, pride of earning their own money,

and often, career goals for their future.

This is a valuable community service

program, and Palmetto GBA is proud to

be a part of it.

We are proud of the time and money that

our associates willingly donate to make

our communities better places to live for

everyone! Because at Palmetto GBA, we

believe that good service applies not only

to how we treat our customers on a daily

basis, but how we help our communities

in the long run.

Service

Palmetto GBA, LLC


nyone who has traveled outside

of his driveway knows how

important good service is.

Sometimes, good service is routine and

quick — like an oil change for your car.

Sometimes, it’s a little more complicated

and lengthy — like overhauling your

transmission. Serving our customers is

much the same. Sometimes, it’s as easy as

a polite answer to a customer’s inquiry.

Other times, it can be as long and difficult

as a criminal investigation.

Louis Collado knows this better than

anyone. He is a Benefit Integrity Senior

Investigator in Miami, Fla. Louis was

instrumental in a five-year investigation

of a major healthcare fraud case. The

case finally went to trial, which lasted

five-and-a-half months. The end result:

26 convictions including two doctors, two

pharmacists and four DME and pharmacy

owners. In recognition of his efforts,

Louis received a commendation from

the U.S. Attorney for the Southern District

of Florida. The commendation cited: “The

substantial impact of this case could not

have been accomplished without the

valuable assistance of Senior Investigator

Louis Collado.”

Providing valuable assistance is also what

we do when it comes to the communities

in which we work and live. We believe in

giving back to that community.

ALouis Collado

hen you travel down a

shady neighborhood lane,

you drive slowly. On busy

downtown boulevards, it’s constant stop

and go. Hit the highway — and you hit

your accelerator.

New situations call for new strategies —

and talented drivers equipped to handle

those changes. Our people — more than

2,700 associates — drive our business, no

matter what avenue Palmetto GBA takes.

These associates are responsible for and

credited with bringing in new business and

transitioning us into new contracts.

In 2002, we won five contracts totaling

more than $48 million in revenue over a

five-year period. To land those lucrative

contracts, many associates participated in

preparing proposals to acquire the new

business and bring it on board — all while

performing their daily jobs.

One such person is Cathy Caudle. She

has been the transition manager in the

majority of our business acquisitions for

Palmetto GBA contract awards. Cathy

exemplifies the quality and dedication of

the employees who work at Palmetto GBA.

Cathy has been with BlueCross BlueShield

of South Carolina and Palmetto GBA for

more than 32 years; 25 of those years have

been devoted to our Medicare

Administrative Services contracts. Her

diverse knowledge of Medicare regulations

coupled with her wide range of expertise

in all facets of the program make her

extremely valuable to our organization —

and to others like CMS. CMS respects

her ability to get the job done right — and

so do we!

Getting things right takes a team effort.

People like Freyda Sherard, a Medicare

Secondary Payer Auditor/Outreach

Trainer in North Carolina, pitched in dur-

ing hectic transition times. Freyda’s knowl-

edge of MSP is well known among her

coworkers, and so are her achievements!

She kept up with the workload of two peo-

ple for part of

the year, willingly stepped in on several

critical projects outside the usual scope

of her job and picked up audit work

for South Carolina in addition to

North Carolina.

Thanks to the hard work of people like

Freyda and Cathy, Palmetto GBA has

enjoyed an easier drive through the

meandering streets of CMS contract

proposals. And when we approach the

intersections of new business ventures on

the road to success, we know that all of

our associates are along for the ride!

Workload transitions arechallenging and each hasits own unique aspects.We put together a terrificteam who understandsexactly what’s needed tomake the transition a success. Working with theright people and the senseof accomplishment at theproject’s end make theextra effort worthwhile.

People

Palmetto GBA, LLC


W

Freyda Sherard

Cathy Caudle

very road to success undergoes

new construction from time to

time. It makes the highway safer

and more easily traveled. One such improve-

ment is an access ramp to a highway. Here at

Palmetto GBA, we’ve given our customers

and our employees access to the highway as

well — the information superhighway.

In 2002, we implemented electronic

Medicare summary notices, or e-MSNs. In

the past, CMS has prohibited the use of

the Internet for Medicare program transac-

tions — with one notable exception. In

September, we began a pilot project that

allows beneficiaries to access their Medicare

summary notices (MSNs) through

Palmetto GBA’s Web site.

The idea for e-MSNs came about after

we constantly received requests from

beneficiaries for additional copies of their

MSNs. “In the past, every time a beneficiary

requested an additional copy, we had to

retrieve one and mail it out. Having them

on the Internet saves time and money,” says

Beth Clack, director of Medicare’s

Professional Relations.

We took the idea to CMS for the right to be

the first to make it happen. “CMS is a little

apprehensive about putting any personal

information on the Internet. However,

after meeting with CMS and pitching our

ideas, we were given a five-year pilot

program to show it can work and be very

secure,” Beth says.

“What we would like in the long run is to

be selected by CMS to provide this service

for other government contractors,” Beth says.

“Until then, we will keep working to make

this a great service for our beneficiaries.”

Working together is what made the e-MSN

project a reality. Associates from Palmetto

GBA’s e-commerce team joined forces with

operations units to construct an on-ramp to

the information highway that’s truly super

for our beneficiaries.

We also began using the Internet for online

training. Centra is our online learning

system that enables virtual classrooms and

real-time group collaboration over the

Internet. By incorporating features such as

audio conferencing, application sharing,

The idea for e-MSNs cameabout after we constantlyreceived requests from beneficiaries for additionalcopies of their MSNs. “In thepast, every time a beneficiaryrequested an additional copy,we had to retrieve one andmail it out. Having them on the Internet saves time andmoney.”

Innovation

Palmetto GBA, LLC


E

E-commerce Team:Standing: Jimmy Witherspoon, Donald Walker,Kim Bevier, Tammy Stephens; Seated: SusanMoore, Elaine Sharp

Beth Clack, Director of Medicare’sProfessional Relations

Palmetto GBA, LLC

Annual Report 2002

chat and whiteboard, our online workshops

simulate an instructor-led physical

classroom environment.

Sandy Sowell, a member of the e-commerce

team that implemented Centra, says Centra

has been a hit: “Centra allows us to provide

effective, intuitive and engaging eLearning

for our customers. The software lets us

easily design, develop and conduct online

education in an easy-to-use, cost-effective

application. We are able to interact with

our customers more often and provide

them with the most current information

available. The number of customers that

have expressed thanks for the opportunity

to receive education online lets us know

Centra was the right choice.”

Beyond the information superhighway,

Palmetto GBA is fortunate to have innova-

tions taking place in all our locations. In

Georgia, the Augusta Railroad Medicare

staff worked with the Ohio and West Virginia

operations to develop an imaging solution

for a workload of 18,000 paper claims per

day. After extensive testing, the program has

led to a more cost-effective and productive

claims adjudication system. As a result, the

Ohio/West Virginia operation ended its

claims processing arrangement with a third-

party vendor. The document control center

reduced “prep time” through fewer sorting

requirements. Data entry costs have

decreased considerably as a result of minimal

operator intervention, and we have improved

our service to providers and beneficiaries

with their immediate access to claims.

Innovations are all about teamwork, and

this one is no different! Often it takes an

engineer with technical expertise to remove

the roadblocks obstructing the path. For

the imaging solution, Mike “Pritch” Pritchard

is one such engineer who has the uncanny

ability to analyze a problem and quickly

implement innovative solutions. He is always

there to make others’ innovative

solutions a reality.

“I have to credit all the members of our

Palmetto GBA Railroad Medicare family in

the drive for improving processes and

thinking of new ways of doing things. It

really is a great place to be – Railroad

Medicare. I can see why we have so many 10,

15, and 20 plus-year employees,” says Pritch.

I have to credit all the members of our Palmetto GBARailroad Medicare family inthe drive for improvingprocesses and thinking ofnew ways of doing things.It really is a great place to be – Railroad Medicare. I cansee why we have so many 10, 15, and 20 plus-yearemployees.

Innovation (Continued)

25

Mike Pritchard

E-commerce Centra Team:Jimmy Witherspoon, Elaine Sharp, Kesha Morris,Candice Poole

he best roads are those that are not

covered with potholes, uneven

pavement or hazardous conditions.

The asphalt is smooth, the shoulder is wide

and the lines are clearly marked. It’s all

about quality workmanship.

At Palmetto GBA, we strive for excellence

in everything we do for our customers,

members and ourselves. Whatever work we

do, we do it to the best of our abilities, the

right way, the first time around. To accom-

plish this, we have built a workplace that is

supportive, reliable and cost effective.

In September 1993 we established Partners

in Excellence (PIE) as our first official

quality initiative. With education, determi-

nation and hard work from our dedicated

associates, PIE is becoming an every day

part of our work lives. It helps us make

sure we provide superior quality services

to our customers in a workplace

committed to continuous improvement,

uncompromising integrity and respect

for all associates.

In 1993, we formed the Palmetto Quality

Council to establish and maintain the

Partners in Excellence process, thereby

creating and fostering a quality culture for

the Medicare division.

The Quality Council formed workgroups

to improve communications, plan for

training and education, improve measure-

ment capabilities, implement teamwork

and award and recognize our outstanding

associates.

Further, we created the position of director

of Total Quality Management to help

focus the management team and provide

guidance and expertise on quality and

process management. This person is

responsible for guiding the implementa-

tion of the ISO 9000 quality management

system across all of Palmetto GBA.

ISO 9000 is a group of quality standards

that provides the guiding principles that

lead an organization to improved perform-

ance. In 2002, four areas received their cer-

tification. They are Document Control,

Medical Review, the Palmetto Training

Team and Palmetto Administration.

Quality

Palmetto GBA, LLC


TWinning the Divisional Honors for ProcessImprovement of the Yearwas beyond my wildestexpectations. It is great tobe recognized for a jobwell done, but to have yourpeers recognized alongwith you is the ultimatereward. It takes everyoneto make it work. On behalfof the Provider ServiceCenter, I would like tothank all areas of PalmettoGBA who provide us withtheir support daily. Wecould not have done itwithout them.

Teresa Lancaster Process Improvement of theYear Team Member

I think that we are a greatteam. We are always seeking ways that will helpthe team as well as thecompany. We have hadseveral members of TAC619 promoted within thecompany. Through it all, weare proud of who we are.We have an excellentdirector, Tammy Brown,and an excellent manager,Ed Stepro. They were therewhen we needed them the most.

Cynthia WileyTeam of the Year

Quality (Continued)

Palmetto GBA, LLC


In 2003, the majority of Palmetto GBA functions will

earn ISO 9000 registration. That certification assures our

customers that we have implemented an internationally

recognized, quality management system and have successfully

passed detailed audits by a third party registrar.

To achieve quality workmanship, you need superior employees.

Palmetto GBA recognizes our outstanding work force through

a lengthy and thorough process. Each year, Palmetto GBA

presents three organization-wide awards: Associate of the Year,

Process Improvement of the Year, and Team of the Year. Our

Awards Banquet, held in March, recognizes all of those who

were nominated and met the stringent award criteria.

We thank each and every one of them and are proud to

present the 2002 winners.

2002 Associate of the Year — Sallie Noble

Sallie Noble epitomizes the qualities one would expect of

an Associate of the Year. She somehow manages to do it all:

produce high quality work, exhibit a commitment to

continuous process improvement and show a willingness

to work on projects that promote company growth. She

demonstrates loyalty and commitment to her peers, her

team, management and Palmetto GBA. And what is one of

the nicest things of all? Sallie does it all with a smile and

winning attitude!

2002 Team of the Year — Division 36 DMERCTelephone and Claims TeamIn true team spirit, this team adopted a nickname — the

Chameleons — and a team slogan: “Able to Blend into Any

Situation and Get the Job Done.” One of their goals was to

reduce cycle time for paper claims processing while maintain-

ing quality. Through their hard work and dedication, they

reduced cycle time by 2.6 days during the benchmark period,

which increased productivity by 28% and improved quality by

3.53%. They did this while realizing a cost savings of $11,074

for the month of December 2002.

Underlying their hard work is a set of ground rules that

outlines everything from how the team treats each other and

approaches work to how they handle meetings and make

decisions. We’re grateful for the Chameleons’ efforts that help

us navigate the road to success.

2002 Process Improvement of the Year

Team: Division 35 Medicare Part BProvider Customer Service

Process Improvement: Web siteRemittance Advice Educational Tool

The Medicare Part B Provider Customer

Service area traditionally has received

many phone calls from Part B providers

who were confused about return-reject

denials. Without an understanding of how

to read the remittance, providers thought

Medicare was denying claims without

telling them why.

To improve customer

service and reduce the

amount of time associates

spent on the phone

explaining these denials,

this team devised a provider educational

tool for the Palmetto GBA Web site. This

tool clearly explains the meaning of the

CMS return-reject codes found on the

remittance advice.

The team gathered benchmark data

during the months of March – May 2002,

and established a goal to reduce the

number of phone inquiries related to

return-reject claim denials by 10%. By

implementing this process improvement,

the number of calls received on this topic

during November and December was

reduced by 16%; exceeding the goal by 6%!

Quality (Continued)

Palmetto GBA, LLC


2002 Process Improvement Team of the Year:Seated: Karen Thompson, Teresa Lancaster, Lavetta Gordon, Alisha Cornelius,Gladys Wilson; Back row: Peggy Stephenson-Aun, Charles Norton, Alysia Naig,Christina Koehler, Daniel Jacobs, Annette Scott, Rosemary Stover, Raechele Johnson

2002 Team of the Year:Seated: Kelsalie Stephens, Michelle Sanchez, Jessica Messer, Valerie McFadden;Middle row: Charles Stepro, Lakisha Prioleau, Andrea Hallmon, DarylRichardson, Cynthia Wiley; Back row: Christina Hudgins, Allison McLeod,Angela Horne, Loretta Lassiter-Belton

Congratulations to all our winners!

I really enjoy my work andgetting this award is anadded bonus. In ProviderReimbursement, we areconstantly keeping up withchanges in Medicare lawsand regulations. Thismakes our job challenging,but also very interesting. Iam also lucky that I workwith such a good group ofpeople. My manager, LisaHutchinson, is a great person to work for. Sheprovides excellent leader-ship and encourages others to do their best.It’s this combination of interesting work and good people that makesPalmetto GBA a great place to work!

Sallie Noble

“Do not follow where the path may lead.

Go instead where there is no path andleave a trail.”

Board of Directors/Corporate Officers

Palmetto GBA Board of Directors Seated: William R. Horton , President, Government Programs, BlueCross BlueShield of South Carolina, M. EdwardSellers , President, Chairman and CEO, BlueCross BlueShield of South Carolina, Bruce W. Hughes, Executive Vice President and COO, Palmetto GBA,Standing: Martin L. Kappert , Retired Deputy Assistant Secretary Health Affairs, Department of Defense, Washington, D.C., Martha P. Mahaffey , ExecutiveVice President and COO, TrailBlazer Health Enterprises, Thomas J. Littlefield , PGBA, Vice President Regions 9, 10, and 12, Eileen T. Boyd , ManagingDirector, KPMG, Joseph F. Sullivan , Past Chairman of the Board, BlueCross BlueShield of South Carolina, Edwin R. Kohn , Consultant, Navy ResearchAdvisory Committee, Retired Vice Admiral, US Navy

Robin E. SpiresAssistant Vice President

DMERC Operations

Palmetto GBA, LLC


As we travel along on our journey, we know that the road we take may

well be the road that we make. Yet clearing paths and blazing trails is

nothing new for Palmetto GBA. As we continue our excursion, we will

be driven by excellence. Our ventures will be guided by our values.

The race continues — and so will our success.

Palmetto GBA, LLC


William R. HortonPresident

Bruce W. HughesExecutive Vice President

and Chief Operating Officer

B. Sue PearcyVice President

Medicare Integrity ProgramOperations

Roslyn C. CatoVice President

Processing and CustomerService

Ann S. ArchibaldVice President

and Compliance Officer

Richard P. ButlerVice President

Systems and Support

Joseph D. WrightVice President

and Chief Financial Officer

Richard M. BarlowVice President

Ohio/West Virginia Operations

Jean CatalanoAssistant Vice President

Railroad Medicare Operations

Michael N. BurkheadAssistant Vice President

Part A Operations

John N. DartAssistant Vice PresidentPart B Operations, NSC

W. Joseph JohnsonAssistant Vice President

Electronic Data Interchange

Elaine G. MyersAssistant Vice President

Beneficiary Services,Congressional Affairs,Provider Education

Robert A. LeichtleTreasurer

Angela D. RoweSecretary

BALANCE SHEETS (in thousands)

Report of Independent Auditors

December 31,

2002 2001

Assets

Current assets:

Cash and cash equivalents $ 3, 168 $3,686

Short-term investments - 822

Accounts receivable, net 3,745 4,137

Total current assets 6,913 8,645

Long term assets:

Long-term investments 2,564 -

Investment in affiliate 656 294

Deferred income taxes 189 126

Total long-term assets 3,409 420

Total assets $10,322 $ 9,065

Liabilities and member’s equity

Current liabilities:

Payable to parent $ 2,147 $ 1,695

Payable to other affiliates 113 182

Other liabilities 587 337

Total current liabilities 2,847 2,214

Long-term liabilities:

Deferred income taxes 3 -

Total long-term liabilities 3 -

Member’s equity:

Contributed capital 4,389 3,959

Retained earnings 3,274 2,882

Accumulated other comprehensive income (191) 10

Total member’s equity 7,472 6,851

Total liabilities and member’s equity $10,322 $ 9,065

Palmetto GBA, LLC

Annual Report 2002 32Palmetto GBA, LLC


Board of Directors Palmetto GBA, LLC

We have audited the accompanying balance sheets of Palmetto GBA, LLC (the“Company”) as of December 31, 2002 and 2001, and the related statements ofoperations, changes in member’s equity, and cash flows for the years then ended.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all materialrespects, the financial position of Palmetto GBA, LLC at December 31, 2002 and 2001,and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

February 14, 2003except for Note 7, as to which the date isFebruary 27, 2003

The accompanying notes are an integral part of these financial statements.

STATEMENTS OF OPERATIONS (in thousands)

STATEMENTS OF CHANGES IN MEMBER’S EQUITY(in thousands)

Year ended December 31,

2002 2001

Revenues:

Medicare Part A $ 50,708 $ 44,387

Medicare Part B 29,905 11,803

Durable Medical Equipment Regional Carrier 57,156 57,047

Railroad Retirement Board 19,088 20,513

DDI System Access 3,239 3,668

Other CMS contracts 3,444 3,996

Total revenues 163,540 141,414

Expenses:

Medicare Part A 51,262 44,650

Medicare Part B 30,204 11,895

Durable Medical Equipment Regional Carrier 57,801 57,357

Railroad Retirement Board 19,308 20,628

DDI System Access 1,622 1,252

Other CMS contracts 2,817 3,521

Other administrative expenses 254 385

Total expenses 163,268 139,688

Gain from operations 272 1,726

Investment income, net 270 250

Income before income taxes 542 1,976

Provision for income taxes 150 289

Net income $ 392 $ 1,687

AccumulatedOther

Contributed Retained ComprehensiveCapital Earnings Income Total

Balance January 1, 2001 $3,653 $1,195 $ 14 $4,862

Net Income - 1,687 - 1,687

Change in unrealized gain on

securities classified as

available-for-sale - - (4) (4)

Total comprehensive income 1,683

Contribution of capital 306 - - 306

Balance December 31, 2001 3,959 2,882 10 6,851

Net income - 392 - 392

Change in unrealized gains (losses)

on securities classified as

available-for-sale - - (201) (201)

Total comprehensive income 191

Contribution of capital 430 - - 430

Balance December 31, 2002 $4,389 $3,274 $ (191) $7,472

Palmetto GBA, LLC



The accompanying notes are an integral part of these financial statements.The accompanying notes are an integral part of these financial statements.

STATEMENTS OF CASH FLOWS (in thousands)

NOTES TO FINANCIAL STATEMENTSDECEMBER 31, 2002

NOTE 1 — BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Palmetto GBA, LLC (the “Company”) is a single-member limited liability company organized on January1, 1998. The Company’s sole member is Blue Cross and Blue Shield of South Carolina (“BCBSSC”). TheCompany is engaged in the business of providing Medicare Part A fiscal intermediary services, MedicarePart B carrier services and Medicare Durable Medical Equipment Regional Carrier services in variousstates. These services include health insurance claims processing and payment, customer service forMedicare beneficiaries and health care providers, and payment safeguard functions designed todetect and prevent fraud and abuse in the Medicare program. The Company provides services toMedicare beneficiaries residing in several states, Puerto Rico and the U.S. Virgin Islands. The statesinclude South Carolina, North Carolina, Kentucky, Tennessee, Alabama, Arkansas, Colorado, Florida,Georgia, Louisiana, Mississippi, New Mexico, Oklahoma, Texas, Indiana, Illinois and Ohio. The Company’smajor customer is the Centers for Medicare and Medicaid Services (“CMS”), the federal agency withfiduciary responsibility for the Medicare program.

The financial statements have been prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”). The preparation of financial statements in conformity withGAAP requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

Significant accounting policies and the methods of applying those policies are summarized below.

Cash EquivalentsCash equivalents represent certificates of deposit that have maturities of less than three months at dateof purchase and money market fund investments.

Short-term investmentsShort-term investments are classified as available-for-sale and are carried at fair market value. Suchinvestments have maturities of less than one year at the balance sheet date. Realized gains and loss-es are computed using the specific identification method.

Concentration of credit riskFinancial instruments that potentially subject the Company to concentrations of credit risk, consist ofshort-term investments in overnight repurchase agreements.

Asset valuation allowancesThe Company recorded an allowance for uncollectible receivables in the amount of $1,000 atDecember 31, 2002. No allowance was recorded at December 31, 2001.

Investment in affiliateThe Company has a 25% interest in TriCenturion, LLC that is accounted for using the equity method. TheCompany’s proportionate share of earnings or losses of this affiliate are reflected in income as earnedand dividends or distributions are credited against investment in affiliate when received.

Assets, liabilities and results of operations for TriCenturion, LLC were as follows:

Year ended December 31,2002 2001

(in thousands)

Assets $3,645 $1,692Liabilities $1,031 $ 525Net Income $ 697 $ 273

Year ended December 31,

2002 2001

Cash flows from operating activities:

Net income $ 392 $ 1,687

Adjustments to reconcile net income to net cash

provided from operating activities:

Amortization 3 -

Realized loss on investments 52 -

Equity in (income) of affiliate (174) (68)

Deferred income tax provision (60) (126)

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivable 392 (1,444)

Increase in payable to parent 452 133

(Decrease) in payable to other affiliates (69) (177)

Increase in other liabilities 250 157

Net cash provided from operating activities 1,238 162

Cash flows from investing activities:

Investments sold – held-to-maturity 951 1,565

Investments sold – available-for-sale 264 -

Investments purchased – held-to-maturity (1,352) (1,605)

Investments purchased – available-for-sale (1,861) -

Capital contribution to affiliate (188) (138)

Net cash used in investing activities (2,186) (178)

Cash flows from financing activities:

Capital contribution from parent 430 306

Net (decrease) increase in cash and cash equivalents (518) 290

Cash and cash equivalents, beginning of year 3,686 3,396

Cash and cash equivalents, end of year $ 3,168 $ 3,686

Palmetto GBA, LLC



The accompanying notes are an integral part of these financial statements.

InvestmentsInvestments are comprised of common stocks, bonds, United States Government mortgage-backedsecurities and money market mutual funds. These assets are accounted for in accordance withFinancial Accounting Standards Board Statement No. 115, Accounting for Certain Investments in Debtand Equity Securities (“Statement No. 115”). Statement No. 115 requires that fixed maturities are to beclassified as either “held-to-maturity”, “available-for-sale”, or “trading”.

Management determines the appropriate classification of its fixed maturity securities at the time of pur-chase and reevaluates such designation as of each balance sheet date. Fixed maturity securities areclassified as held-to-maturity when the Company has the positive intent and ability to hold them tomaturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premi-ums and accretion of discounts to maturity. Such amortization as well as interest earned is included ininvestment income.

Fixed maturity and equity securities not classified as held-to-maturity are classified as available-for-sale.Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported inmember’s equity. The amortized cost of debt securities in this category is adjusted for amortization ofpremiums and accretion of discounts to maturity. Such amortization and interest earned is included ininvestment income. The cost of securities sold is based on the specific identification method. AtDecember 31, 2002, the Company classified all of its debt securities as held-to-maturity and all of itsequity securities as available-for-sale. The Company’s equity investments are substantially concentrat-ed in industrial stocks.

Revenue recognition policiesThe Company recognizes revenues based upon allowable costs incurred which are reimbursableunder the terms of the following contracts:

• Medicare Part A Fiscal Intermediary subcontract between BCBSSC and the Blue Cross and BlueShield Association (“BCBSA”) (this includes the Regional Home Health Intermediary subcontract)**

• Medicare Part B Carrier Services contract between BCBSSC and CMS**

• Durable Medical Equipment Regional Carrier (“DMERC”) contract between BCBSSC and CMS (thisincludes the National Supplier Clearinghouse contract and the Statistical Analysis of DMERC con-tract)**

• National 1-800 Beneficiary Telephone Inquiries (“IDIQ”) contract between BCBSSC and CMS (thisincludes the Managed Care Disenrollment task order)**

• Railroad Retirement Board Part B Carrier Service contract between the Company and the Railroad Retirement Board

**These contracts are executed to the Company under a special power of attorney given by BCBSSC.

The Company recognizes revenue on the DDI System Access contracts with various third parties whenservices are performed and billable.

NOTE 2 — INVESTMENTS

Short-term investments consist of a U.S. Treasury Bill at December 31, 2001.

Long-term investments consist of the following at December 31, 2002:

Amortized Gross GrossCost Unrealized Unrealized Fair

Or Cost Gains Losses Value

(in thousands)

Bonds and mortgage-backed securities -- held-to-maturity $1,223 $41 $ 9 $1,255

Common stocks – available-for-sale 1,532 31 222 1,341

$2,755 $72 $231 $2,596

Expected maturities of debt securitiesThe amortized cost and estimated market values of held-to-maturity debt securities, by contractualmaturity, at December 31, 2002 are as follows:

Book Value Market Value

(in thousands)

Held-to-maturity securities:

Due in one year or less $ - $ - Due in one year through five years 304 324 Due in five years through ten years 302 324 Due after ten years - -

606 648Mortgage-backed securities 617 607 Total held-to-maturity $1,223 $1,255

There were gross realized gains of $12,000 and gross realized losses of $64,000 during the year endedDecember 31, 2002. There were no realized gains or losses during the year ended December 31, 2001.Gross unrealized holding gains and (losses) on securities classified as available-for-sale in the amountsof $31,000 and ($222,000), respectively, at December 31, 2002 and gross unrealized holding gains of$10,000 at December 31, 2001, are reported in accumulated other comprehensive income in theaccompanying balance sheets. No cash or assets are pledged or restricted for any purpose.

NOTE 3 — INCOME TAXES

As a single-member limited liability company, “disregarded entity” status has been elected for federalincome tax purposes. Therefore, the Company’s taxable income is included as a division of its owner,BCBSSC. Under a written tax-sharing agreement, BCBSSC allocates the tax provision to each companywithin the consolidated group based upon the company’s proportionate share of the consolidated fed-eral income tax liability computed on a stand-alone basis multiplied by the total consolidated federalincome tax return liability. The following entities were included in the consolidated federal income taxreturn of BCBSSC:

Blue Cross and Blue Shield of South CarolinaCompanion HealthCare CorporationCompanion Property and Casualty Insurance Company (and subsidiaries)Companion Technologies Corporation (and subsidiaries)Planned Administrators, IncorporatedPalmetto GBA, LLCTrailBlazer Health Enterprises, LLCPGBA, LLCCompanion Information Management ResourcesCompanion Capital Management, IncorporatedCompanion Benefit Alternatives, IncorporatedAlpine Agency, IncorporatedPreferred Health Systems, Inc. (since December 1, 2001)

The Company has an income tax payable to BCBSSC of $14,000 at December 31, 2002, and anincome tax receivable from BCBSSC of $40,000 at December 31, 2001, which are included in the netpayables to the parent. The Company made payments to BCBSSC for income taxes of $156,000 and$483,000 during the years ended December 31, 2002 and 2001, respectively.

The Company recognized a provision for income taxes as follows:

Year ended December 31,2002 2001

(in thousands)

Current $210 $415Deferred (60) (126)

$150 $289

Palmetto GBA, LLC



The provision for income taxes differs from the amount computed by applying the federal statutory taxrate of 35% to income before income taxes primarily due to the dividends received deduction allowedfor tax and benefits derived from filing on a consolidated basis versus separate company basis. Thetemporary differences that give rise to deferred tax assets and liabilities are primarily related to accruedexpenses. There was no valuation allowance at December 31, 2002 or 2001.

Deferred tax assets and liabilities are classified as current and long-term based on the classification ofthe related asset or liability. The deferred tax asset recognized at December 31, 2002 and 2001, andthe deferred tax liability recognized at December 31, 2002 are classified as long-term.

NOTE 4 — RELATED PARTIES

The Company is a wholly-owned subsidiary of BCBSSC, has no employees, no depreciable assets, and itsoffices, other facilities and services are provided by BCBSSC pursuant to an administrative servicesagreement. Expenses associated with the administrative services agreement are allocated from BCBSSCto the Company. The Company paid $163,924,000 and $142,385,000 during the years ended December31, 2002 and 2001, respectively, to BCBSSC for expenses paid on behalf of the Company.

BCBSSC made capital contributions related to the job tax credit to the Company of $430,000 and$306,000 during the years ended December 31, 2002 and 2001, respectively.

The Company made payments in the amount of $1,121,000 and $1,188,000 to TrailBlazer HealthEnterprises, LLC, a subsidiary of BCBCSC, during the years ended December 31, 2002 and 2001 for serv-ices subcontracted to TrailBlazer Health Enterprises under the Company’s Disenrollment contract withCMS.

NOTE 5 — COMMITMENTS AND CONTINGENCIES

A financial guarantee has been issued by BCBSSC, which equals the Company’s estimated annual netoperating expenses multiplied by 8.33%, less current capitalization. This guarantee is estimated to beapproximately $6,000,000 at December 31, 2002.

BCBSSC has also executed an indemnification agreement, pursuant to minimum reserve and otherrequirements established by the Blue Cross and Blue Shield Association (“BCBSA”). BCBSSC is thereforeliable to the Company to the extent of its financial guarantee, and to the BCBSA to the full extent of itsassets for any claims asserted against the BCBSA resulting from the contractual and financial obligationsof the Company arising out of its Medicare Part A subcontract with the BCBSA. In addition, BCBSSC hasexecuted a statutorily required financial guarantee of $75,000 on behalf of the Company in order for theCompany to obtain a Third Party Administrator’s license pursuant to the South Carolina insurance laws.

The Company recorded an estimated contingent liability for potential repayments of costs claimed onits contracts with CMS. The liability was $540,000 and $360,000 for the years ended December 31, 2002and 2001, respectively.

The Company is obligated for additional capital contributions of up to $1,169,500 to its affiliate,TriCenturion, LLC.

NOTE 6 — CMS CONTRACT NOVATION STATUS

As of January 1, 1999, BCBSSC’s Medicare administrative services contracts are executed through theCompany through a special power of attorney since CMS has not yet approved the novation ofBCBSSC’s contracts to the Company. The Company expects the novation to be completed in 2003.

As part of the novation process, on January 1, 2003, fixed assets in the amount of $5,193,000 were trans-ferred from BCBSSC to the Company in exchange for a promissory note. The Company has requesteda capital contribution to liquidate the promissory note. The Company’s personnel, previously employ-ees of BCBSSC, have been transferred as well.

NOTE 7 — SUBSEQUENT EVENTS

Subsequent to December 31, 2002, a capital call from TriCenturion, LLC to Palmetto GBA, LLC wasmade in the amount of $150,000.

Effective January 15, 2003, the Part A and Part B Benefit Integrity workload was transitioned to aProgram Safeguard Contractor, TriCenturion, LLC, in accordance with the long-term strategy of CMS.

Palmetto GBA, LLC


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