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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FORM 10-K

(Mark One)

For the transition period from                  to                  

Commission file number 001-13083

WELLPOINT HEALTH NETWORKS INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (818) 234-4000
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
None

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.    o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes    ý    No    o

        As of June 28, 2002, the aggregate market value of the voting common stock held by non-affiliates of the registrant was $11,312,015,854.75 (based on the last reported sale price of $77.81 per share on June 28, 2002, on the New York Stock Exchange).

        As of March 15, 2003, there were approximately 144,984,323 shares of Common Stock, $0.01 par value of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Part III of this annual report on Form 10-K incorporates by reference information from the registrant's definitive proxy statement for its 2003 Annual Meeting of Stockholders.

WELLPOINT HEALTH NETWORKS INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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PART I

Item 1. Business.

General

        WellPoint Health Networks Inc. (the "Company" or "WellPoint") is one of the nation's largest publicly traded managed health care companies. As of December 31, 2002, WellPoint had approximately 13.2 million medical members and approximately 48.1 million specialty members. Through its subsidiaries, the Company offers a broad spectrum of network-based managed care plans to the large and small employer, individual, Medicaid and senior markets. The Company's managed care plans include preferred provider organizations ("PPOs"), health maintenance organizations ("HMOs") and point-of-service ("POS") and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical management and claims processing. The Company also provides a broad array of specialty and other products, including pharmacy, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration.

        The Company markets its products in California primarily under the name Blue Cross of California, in Georgia primarily under the name Blue Cross Blue Shield of Georgia, in various parts of Missouri (including the greater St. Louis area) under the name Blue Cross Blue Shield of Missouri and in various parts of the country under the name UNICARE or HealthLink. These products are marketed by the Company's various operating subsidiaries throughout the United States. The Company holds the exclusive right in California to market its products under the Blue Cross name and mark and in Georgia and in 85 counties in Missouri (including the greater St. Louis area) to market its products under the Blue Cross and Blue Shield names and marks. The Company's customer base is diversified, with extensive membership among large and small employer groups and individuals and in the Medicare and Medicaid markets.

        In 1996, the Company began pursuing a nationwide expansion strategy through selective acquisitions and start-up activities in key geographic areas. With the acquisitions in March 1996 of the Life & Health Benefits Management division ("MMHD") of Massachusetts Mutual Life Insurance Company and in March 1997 of certain portions of the health and related life group benefit operations (the "GBO") of John Hancock Mutual Life Insurance Company, the Company significantly expanded its operations outside of California. The Company's acquisition strategy during this period was primarily focused on large employer group plans that offered indemnity and other health insurance products that were less intensively managed than the Company's products in California.

        More recently, the Company has focused on acquiring businesses that provide significant concentrations of members in strategic locations outside of California. In connection with this strategy, the Company completed its acquisitions of Methodist Care, Inc. and its affiliates ("MethodistCare") in April 2002, RightCHOICE Managed Care, Inc. ("RightCHOICE") in January 2002, Cerulean Companies, Inc. ("Cerulean"), the parent company of Blue Cross and Blue Shield of Georgia, Inc. ("Georgia Blue"), in March 2001 and Rush Prudential Health Plans ("Rush Prudential") in March 2000. As a result of these acquisitions, the Company is able to offer a mix of products, including HMO and PPO products, to customers in Texas, Missouri, Georgia and the greater Chicago area. One component of the Company's expansion strategy outside of California is to evaluate acquisition opportunities that will allow the Company to complement its product offerings in selected target areas.

        As of December 31, 2001, the Company's primary internal business divisions were focused on large employer group business, individual and small employer group business, and senior and specialty business. As a result of the January 31, 2002 acquisition of RightCHOICE, the organizational structure of the Company changed effective February 1, 2002. As a result of these changes, the Company has the following two reportable segments: Health Care and Specialty. The Health Care segment is managed

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geographically and provides a broad spectrum of network-based health plans to large and small employers and individuals. The Specialty business is maintained as a separate segment providing an array of specialty and other products, including pharmacy, dental, vision, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. Segment information for the years ended December 31, 2002, 2001 and 2000 is included in Note 20 to the Consolidated Financial Statements.

        Unless otherwise indicated or the context otherwise requires, the following terms as used in this annual report on Form 10-K have the following meanings: "WellPoint" and the "Company" refer to WellPoint Health Networks Inc. together with its subsidiaries, "Blue Cross of California" refers to the Company's subsidiaries licensed to use the Blue Cross name and mark in California, "Blue Cross Blue Shield of Georgia" refers to the Company's subsidiaries licensed to use the Blue Cross and Blue Shield names and marks in Georgia and "Blue Cross Blue Shield of Missouri" refers to the Company's subsidiaries licensed to use the Blue Cross and Blue Shield names and marks in various Missouri counties. Any references in this annual report on Form 10-K to the Company's "plans," "services" or similar terms mean the plans and services offered through the Company's various operating subsidiaries.

Recent Completed Transactions and Pending Transactions

Acquisition of MethodistCare

        On April 30, 2002, the Company completed its acquisition of MethodistCare, which served over 70,000 members in Houston, Texas and surrounding areas at the time of acquisition. This acquisition was intended to enable UNICARE, WellPoint's national operating unit, to expand its product line by offering HMO and open-access products in the Gulf Coast and surrounding regions in Texas, including the greater Houston-Galveston metropolitan area.

Acquisition of RightCHOICE

        On January 31, 2002, the Company completed its merger with RightCHOICE, pursuant to the Agreement and Plan of Merger dated October 17, 2001 by and among the Company, RWP Acquisition Corp., a wholly owned subsidiary of the Company, and RightCHOICE. As a result of the merger, RightCHOICE has become a wholly owned subsidiary of WellPoint, and WellPoint now holds the exclusive license to use the Blue Cross and Blue Shield names and marks in 85 counties in the state of Missouri. The RightCHOICE acquisition was valued at approximately $1.5 billion on the closing date, which was paid with approximately $379.1 million in cash and approximately 16.5 million shares of WellPoint Common Stock.

Pending Acquisition of CareFirst

        On November 20, 2001, the Company entered into a definitive agreement (the "Original CareFirst Merger Agreement") to acquire CareFirst. CareFirst is a not-for-profit health care company which, along with its affiliates and subsidiaries, offers a comprehensive portfolio of health insurance products, direct health care and administrative services. As of December 31, 2002, CareFirst served approximately 3.2 million members in Maryland, Delaware, the District of Columbia and Northern Virginia. CareFirst operates through three wholly owned affiliates: CareFirst of Maryland, Inc., Group Hospitalization and Medical Services, Inc., doing business under the name CareFirst BlueCross BlueShield, and Blue Cross Blue Shield of Delaware, Inc. The CareFirst portfolio of products ranges from traditional fee-for-service health care insurance to fully managed care. CareFirst administers the largest federal employees health benefits plan in the nation. CareFirst affiliate companies also offer third-party administrative services and claims processing for self-insured groups.

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        The Original CareFirst Merger Agreement provided that a wholly owned subsidiary of the Company would merge with and into CareFirst. As a result of the merger, the outstanding shares of common stock of CareFirst would be converted into the right to receive an aggregate purchase price of $1.3 billion, at least $450.0 million of which the Company would pay in cash and the balance in shares of the Company's Common Stock based on its average closing price in the 20-trading-day period ending the fifth trading day prior to the closing of the CareFirst transaction. In the event that the average closing price is below $35 per share, the Company would have the option to issue a five-year subordinated note in lieu of a portion of the purchase price to be paid in its Common Stock. The subordinated note would rank pari passu with the Company's Zero Coupon Convertible Subordinated Debentures due 2019, which were redeemed as of October 28, 2002.

        In April 2002, the Maryland legislature adopted legislation that would, among other things, require that the consideration paid by the Company in the CareFirst transaction consist entirely of cash, prohibit certain change-in-control payments to CareFirst management previously approved by CareFirst's Board of Directors and delay for 90 days the effectiveness of any decision by the Maryland Insurance Administration regarding CareFirst's for-profit conversion and consummation of the CareFirst transaction in order to allow the Maryland legislature to review the decision.

        As a result of the Maryland legislation, the Company and CareFirst entered into an Amended and Restated Agreement and Plan of Merger (the "Amended CareFirst Merger Agreement") on January 24, 2003. The Amended CareFirst Merger Agreement provides, among other things, that the consideration for the transaction will consist solely of cash, if stock and other non-cash consideration are not allowed under any applicable law or regulation, and requires the termination of certain change-in-control payments as a condition to closing the transaction. In addition, the purchase price of $1.3 billion in the Original CareFirst Merger Agreement was increased by $70.0 million to $1.37 billion in the Amended CareFirst Merger Agreement. If the purchase price is paid solely in cash, the Amended CareFirst Merger Agreement allows up to $850.0 million of the purchase price to be financed by debt or equity offerings by the Company. If applicable law allows non-cash consideration, the purchase price will be paid in cash and stock or notes as provided in the Original CareFirst Merger Agreement. Before the CareFirst transaction is completed, CareFirst and certain of its subsidiaries will convert from their current status as not-for-profit corporations into for-profit, stock corporations. As part of this conversion, CareFirst will issue 100% of its outstanding common stock to charitable foundations established according to applicable law. If the transaction is consummated, on the closing date, one non-employee member of the existing Board of Directors of CareFirst will be appointed to the Company's Board of Directors. The chief executive officer of CareFirst will be named the president of the Company's southeast business region. Other senior executives of CareFirst will be assigned significant responsibilities with respect to the business of the Company in that area.

        The conversion will require the approval of insurance regulators in Maryland, Delaware and the District of Columbia, where CareFirst and its affiliates are domiciled. In addition, Group Hospitalization and Medical Services, Inc., CareFirst's operating affiliate in the District of Columbia, must have its federal charter amended or repealed by the United States Congress (subject to presidential approval) and obtain approval from the Washington, D.C. corporation counsel. The acquisition of CareFirst is also subject to antitrust clearance by the U.S. Department of Justice and the Federal Trade Commission and the receipt of a private letter ruling from the Internal Revenue Service that the conversion of CareFirst will constitute a tax-free reorganization and that gain or loss recognized by the holders of CareFirst stock in the merger will not be subject to unrelated business income tax.

        On March 5, 2003, the Maryland insurance commissioner issued an order disapproving the conversion of CareFirst to a for-profit entity. The Maryland legislature has 90 days to review the matter and has the power to veto the commissioner's decision. The Company has 30 days from the date of the

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commissioner's order to appeal the order. WellPoint intends to review the decision in greater detail and decide what actions, if any, are appropriate.

Managed Health Care Overview

        An increasing focus on costs by employers and consumers over the last decade has spurred the growth of HMO, PPO, POS and other forms of managed care plans as alternatives to traditional indemnity health insurance. Typically, HMOs and PPOs, as well as hybrid plans incorporating features of each (such as POS plans), develop health care provider networks by entering into contracts with hospitals, physicians and other health care professionals to deliver health care at favorable rates that incorporate health care management and other measures that encourage the delivery of medically necessary care as well as network credentialing and quality assurance. HMO, PPO and POS members generally are charged periodic, prepaid premiums and copayments (per-visit charges) or deductibles. PPOs, POS plans and a number of HMOs allow out-of-network usage, typically at substantially higher out-of-pocket costs to members. HMO members generally select one primary care physician from a network who is responsible for coordinating health care services for the member, while PPOs and other "open-access" plans generally allow members to select physicians without coordination through a primary care physician. Hybrid plans, such as POS plans, typically involve the selection of primary care physicians similar to HMOs, but allow members to choose non-network physicians at higher out-of-pocket costs similar to PPOs.

        The California Market.    The desire of California-based employers for a range of health care choices that promote effective cost controls and quality care has contributed to substantial market acceptance of managed health care in California, where the total penetration of managed health care companies is generally higher than the national average. Initial developments in California with respect to managed care were focused on HMOs and other tightly controlled plans. Over the last few years, this emphasis has decreased as consumers and media scrutiny have generally criticized the reduced choice typical of HMO plans and as greater regulatory restrictions have been placed on HMO offerings. The Company believes that this movement toward PPOs and other open-access plans will continue in the future. As of December 31, 2002, approximately 80.4% of the Company's commercial membership nationwide was in PPO plans or other types of open-access plans.

        Other States.    Outside of California, the past decade has seen significant transformations in the health care sector. Although market acceptance of the array of managed health care plans continues to grow throughout the United States, such acceptance still varies widely from state to state. In some states, especially larger population centers, members are offered health care choices focused on HMO or other closed-access plans. In other states, members are typically offered a spectrum of health care choices that are more focused on PPOs or traditional indemnity health models than in California. Indemnity insurance usually allows members substantial freedom of choice in selecting health care providers but without cost-control measures typical of managed care plans. Indemnity insurance plans typically require annual deductible obligations of members. Upon satisfaction of the deductible, the member is reimbursed for health care expenses on a full or partial basis of the indicated charges. Health plan reimbursement is often limited to the health plan's assessment of the reasonable and customary charges prevailing in a region for the particular health care procedure. As in California, initial developments in managed care in other states have generally focused on more restrictive plans. More recently, consumer and general public sentiment has shifted toward open-access plans.

Customer Segmentation

        WellPoint's products are generally developed and marketed with an emphasis on the differing needs of various customer groups. In particular, the Company's product development and marketing efforts take into account the differing characteristics between the various customer groups served by the Company, including individuals and small employers, large employers (generally with 51 or more

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employees), seniors and Medicaid recipients, as well as the unique needs of educational and public entities, federal employee health and benefit programs, national employers and state-run programs servicing high-risk and under-served markets. Individual business units are responsible for enrolling, underwriting and servicing customers in specific customer groups. The Company believes that one of the keys to its success has been its focus on distinct customer groups defined generally by employer size and geographic region, which better enables the Company to develop benefit plans and services that meet the needs of these distinct markets. Although the Company has experienced increased competition over the last several years, the Company has long been a market leader in the California individual and small employer group market.

Health Care Products and Services

Managed Care Products

        PPO and Other Plans.    The Company's PPO products are generally marketed in California under the name "Prudent Buyer," in Georgia under the name "Blue Choice PPO," in Missouri under the name "Alliance PPO" and in various parts of the country under the names "UNICARE" and "HealthLink" and are designed to address the specific needs of different customer groups. The Company's PPO plans generally require periodic, prepaid premiums and may have copayment obligations for services rendered by network providers that are often similar to the copayment obligations of its HMO plans. Unlike WellPoint's HMO and other "closed-access" plans, members are not required to select a primary care physician who is responsible for coordinating their care and members may be subject to annual deductible requirements. PPO members have the option to receive health care services from non-network health care professionals, typically at substantially higher out-of-pocket costs to members.

        In 1998, Blue Cross of California ("BCC") introduced its unique Employee Elect product in California, which allows small employers to offer their employees a menu of PPO and HMO options. In January 2001, BCC introduced its PlanScape family of individual PPO plans in California. The PlanScape plans are marketed toward purchasers with varying price preferences and offer a variety of coverage options and premium amounts. A similar small group program has been introduced by UNICARE in various states under the name "BusinessFlex." The Company's PPO members in California, Georgia and Missouri may also participate in the Blue Cross and Blue Shield Association's Blue Card program, which allows members to access other Blue Cross Blue Shield plans' PPO providers throughout the nation. In 2002, Blue Cross Blue Shield of Missouri introduced OptionBlue, a flexible health plan that allows employers to buy more than one PPO or POS design, while offering a choice of benefits to employees. Under OptionBlue, employers pay all or most of the cost of the lower-benefit plan and employees can purchase greater benefits if they choose. In January 2003, BCC introduced Power CareAdvocate PPO, which combines the choices of a PPO with the care management of an HMO. Power CareAdvocate PPO members who contact "health advocates" prior to receiving specialty care receive a higher level of benefits. Health advocates also assist members with special needs, such as those who are pregnant or awaiting surgery. In January 2003, UNICARE introduced CompleteChoice, which combines a high-deductible PPO with a supplemental employer-funded health reimbursement account and an optional member-funded flexible spending account. Cost incentives and information resources built into CompleteChoice encourage employees to become better-educated consumers of health care services. BCC introduced a similar product, also in January 2003, called Power HealthFund.

        The Company believes that an important growth opportunity in the individual market lies in the development of products that are priced attractively for previously uninsured people. In 2000, BCC introduced a new PPO product in California that offers significantly lower premiums in exchange for certain limited benefits, while still offering primary care physician visits, preventive care benefits and catastrophic coverage. During 2001, this product was also introduced in Georgia.

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        HMO Plans.    The Company offers a variety of HMO products to its HMO members in California, Georgia, Illinois, Missouri and Texas. HMO members are generally charged periodic, prepaid premiums that do not vary based on the amount of services rendered, as well as copayments. Members choose a primary care physician from the HMO network who is usually responsible for coordinating health care services for the member. Certain plans permit members to receive services from health care professionals that are not a part of the Company's HMO network at a substantial out-of-pocket cost to members, which may include a deductible and higher copayment obligations.

Management Services

        In addition to fully insured products, WellPoint provides administrative services to large group employers that maintain self-funded health plans. In California, the Company often has been able to capitalize on this relationship by subsequently introducing underwritten managed care products. The Company's managed care services revenues have expanded considerably during the last several years as a result of the MMHD, GBO, Cerulean and RightCHOICE acquisitions. These businesses are comprised of a higher percentage of administrative services business than the Company's traditional California business. Georgia Blue currently provides administrative services for several accounts sponsored by the state of Georgia. These accounts comprise approximately 22% of the Company's Blue Cross Blue Shield of Georgia members and are scheduled to be transferred to an entity unaffiliated with the Company over the next two years.

        WellPoint offers managed care services, including underwriting, actuarial services, medical management, claims processing and administrative services for self-funded employers. WellPoint also enables employers with self-funded health plans to use WellPoint's provider networks and to realize savings through WellPoint's favorable provider arrangements, while allowing employers the ability to design certain health benefit plans in accordance with their own requirements and objectives. As of December 31, 2002, WellPoint served self-insured health plans covering approximately 5.0 million medical members.

        In connection with the RightCHOICE transaction, the Company has acquired RightCHOICE's subsidiary, HealthLink, Inc. ("HealthLink"), which itself wholly owns HealthLink HMO, Inc. As a preferred provider organization, HealthLink organizes networks of providers who agree to provide health care services at reduced rates. HealthLink contracts with payers of health care, such as employers that fund their own health plans, commercial insurers and Taft-Hartley trusts for access to HealthLink's networks. HealthLink also provides access to its networks for workers' compensation programs. HealthLink currently serves the states of Missouri, Illinois, Iowa, Arkansas, Indiana, Kentucky and West Virginia. HealthLink derives a portion of its revenues from providers for administrative services. As of December 31, 2002, approximately 2.0 million people were members of plans contracted with HealthLink. One of HealthLink's business strategies is to expand the HealthLink business in selected regions of the country.

Medicaid Plans and Other State-Sponsored Programs

        The California Department of Health Services ("DHS") administers Medi-Cal, California's Medicaid program. BCC has been awarded contracts to offer Medi-Cal managed care programs in various California counties. Under these programs, BCC provides health care coverage to Medi-Cal program members, and DHS (or a delegated local agency) pays BCC a fixed payment per member per month. As of December 31, 2002, approximately 1.1 million members were enrolled in BCC's Medi-Cal and other state-sponsored programs in various California counties. The Company has also obtained contracts to serve Medicaid members in locations outside of California, including parts of Oklahoma, Virginia and Massachusetts. As of December 31, 2002, the plans serving these members had approximately 396,160 members. In 2000, the Company entered into a joint venture with Medical Card Systems, Inc., a Puerto Rico-based group health and life insurer, to pursue contracts under the Health

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Reform Program in Puerto Rico. As of December 31, 2002, the Company's share of this joint venture served approximately 288,151 members.

Marketing

        Sales representatives are generally assigned to a specific geographic region to allow WellPoint to tailor its marketing efforts to the particular health care needs of each regional market. Individual and small employer group products are marketed in California primarily through independent agents and brokers, who are overseen by WellPoint's sales departments, and through WellPoint's direct sales staff. The Company's Blue Cross and Blue Shield products in Georgia and Missouri are also distributed by independent sales agents working in conjunction with the Company's internal sales staff. UNICARE's individual and small employer group products are generally distributed on a regional basis by independent sales agents in the various localized markets in which UNICARE operates.

        WellPoint's managed health care plans to large employers are generally sold by WellPoint sales personnel, in conjunction with an employer's broker or consultant, to develop a package of managed health care benefits specifically tailored to meet the employer's needs. WellPoint believes that a key component of its success in this market segment is the Company's strength in developing complex, highly customized benefits packages that respond to the diverse needs of larger employers and their employee population.

Managed Health Care Networks and Provider Relations

        The Company's health care networks and provider relations reflect the different market positions of the Company's various operating subsidiaries and local market dynamics in the various jurisdictions in which the Company does business.

Blue Cross of California

        WellPoint's extensive managed health care provider networks in California include its PPO, HMO and specialty managed care networks. WellPoint uses its large California membership to negotiate physician contracts at favorable rates that promote delivery of quality care and encourage effective medical management. Under these contracts, physicians are paid either a fixed per member monthly amount (known as a capitation payment) or on the basis of a fixed-fee schedule. In selecting physicians for its networks, WellPoint uses its credentialing programs to evaluate the applicant's professional qualifications and experience, including license status, malpractice claims history and hospital affiliations.

        The following is a more detailed description of the principal features of WellPoint's California PPO and HMO networks.

        PPO Network.    WellPoint endeavors to manage and control costs for its PPO plans by negotiating favorable arrangements with physicians, hospitals and other health care professionals, and requiring participation in the Company's various medical management programs. In addition, WellPoint manages costs through pricing and product design decisions intended to influence the behavior of both members and health care professionals.

        WellPoint's California PPO plans provide for the delivery of specified health care services to members by contracting with physicians, hospitals and other health care professionals. Hospital contracts are on a nonexclusive basis and generally provide for per diem payments (a fixed-fee schedule where the daily rate is based on the type of service) that provide for rates that are below the hospitals' standard billing rates. Physician contracts are also on a nonexclusive basis and specify fixed-fee schedules that are below standard billing rates. WellPoint is able to obtain prices for hospitals and physician services below standard billing rates because of the volume of business it offers to health care

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professionals that are part of its network. Rates are generally negotiated on an annual or multi-year basis with hospitals. Rates for physicians in the Company's PPO network are set from time to time by the Company.

        HMO Network.    The physician network of participating medical groups ("PMGs") is comprised of both multi-specialty medical group practices and individual practice associations. Substantially all primary care physicians or PMGs in the Company's California HMO network are reimbursed on a capitated basis. These arrangements specify fixed per member per month payments to providers and may result in a marginally higher medical care ratio than a non-capitated arrangement, but significantly reduce risk to WellPoint. Generally, HMO network hospital contracts are on a nonexclusive basis and provide for a per diem payment, which is below the hospitals' standard billing rates.

        Contractual arrangements with PMGs typically include provisions under which WellPoint provides limited stop-loss protection. If the PMG's actual charges for medical services provided to a member exceed an agreed-upon threshold amount, WellPoint will pay the group a portion of the excess amount. Rates are generally negotiated with PMGs and hospitals on an annual or multi-year basis. To encourage PMGs to contain costs of claims for non-capitated services, such as inpatient hospital, outpatient surgery, hemodialysis, emergency room, skilled nursing facility, ambulance, home health and alternative birthing center services, WellPoint's PMG agreements provide for a settlement payment to the PMG based in part upon the PMG's effective utilization of such non-capitated services. PMGs are also eligible for additional incentive payments based upon their satisfaction of quality criteria and management of outpatient prescription drugs. In 2001, BCC announced plans to modify the incentive compensation arrangements for PMGs serving the Company's California HMO members to place greater emphasis on assessment of health outcomes, patient satisfaction information and generic outpatient drug utilization. The HMO Shared Risk Incentive Program was launched in July 2001. In the program, a new quality standards score card is used to evaluate all medical groups in the HMO network and to provide them with feedback and assistance to support quality improvement efforts. BCC will continue to seek to implement this modification as agreements with PMGs are renewed over the next few years. In 2002, BCC announced plans to introduce a similar program to improve the quality of clinical care and service delivered to Blue Cross PPO members and to specifically reward quality performance among its PPO physician network. The one-year pilot program for BCC's PPO, designated the PPO Physician Quality and Incentive Program, is not expected to result in a material increase in the Company's medical expenses.

Blue Cross Blue Shield of Georgia

        In 1995, Cerulean began using jointly owned integrated delivery systems for managed health care products, with community health partnership networks ("CHPNs") as the cornerstone of this strategy. CHPNs are locally based equity ventures between Georgia Blue and a local physician group or hospital. The physician or hospital joint ventures, as well as other health care professionals with which the CHPN maintains contracts, provide clinical services. Georgia Blue provides sales, management and administrative services, including information systems and data management services. Georgia Blue's HMO affiliate collects premium and fee revenues from subscribers and retains a flat percentage as a contribution to surplus. After deduction for premium taxes and administrative payments for Georgia Blue, the remaining premium revenue is used for payment of medical expenses and contributions to the CHPN's retained earnings. As of December 31, 2002, Georgia Blue had one active CHPN, which operates in the greater Atlanta area. Outside of Atlanta, networks for Georgia Blue's HMO products are maintained without the use of a CHPN. The HMO membership in Atlanta that uses the CHPN accounts for a significant percentage of Georgia Blue's HMO membership.

        Georgia Blue has developed extensive physician and hospital networks that serve Georgia Blue's PPO plans and certain of its indemnity products. For these products, Georgia Blue uses a variety of

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reimbursement methods, including per diem payments, maximum allowable charge, case rates, discounted fee-for-service and fee schedules.

Blue Cross Blue Shield of Missouri

        The health care services received by Blue Cross Blue Shield of Missouri members are provided primarily by physicians, hospitals and other health care professionals in proprietary provider networks. Blue Cross Blue Shield of Missouri maintains multiple managed care provider networks, including PPO and HMO networks. Networks are developed based upon the geographic locale of the provider, the appropriateness of the provider's specialty and the particular region for that network, as well as the convenience and accessibility of the membership. As with the Company's other networks, physicians' credentials and experience and other factors are evaluated. The managed care contracts with providers incorporate medical management and quality improvement provisions. Network physicians receive either a monthly capitation payment or are paid on the basis of a fixed-fee schedule, which is generally lower than standard billing rates. PPO physicians are compensated on the basis of a fixed-fee schedule. Most of the primary care physicians in the HMO provider networks are compensated on a capitated basis, while most specialist physicians are compensated on the basis of a fixed-fee schedule. Hospital contracts generally provide for inpatient per diem payments, which provide for a reimbursement that is below the hospital's standard billing rate for an inpatient stay.

HealthLink

        HealthLink has developed extensive PPO networks in Missouri, Illinois, Indiana and various other states in which it operates. HealthLink's current network expansion efforts are concentrated on developing and supplementing the HealthLink provider networks in existing and adjacent areas of regional Missouri, Illinois, Indiana, Arkansas and Kentucky. HealthLink has also developed an HMO network concentrated in eastern and central Missouri, southern and central Illinois and parts of Arkansas. To serve workers' compensation members, HealthLink has developed workers' compensation PPO networks serving portions of Missouri, Illinois, Indiana and Arkansas. Physician and hospital representation in HealthLink's various networks takes into account a number of factors, including the particular specialty or offered services of a contracting physician or facility. HealthLink's provider contracts generally incorporate medical management and quality improvement features. These contracts also obligate contracting providers to pay HealthLink a fee for administrative services provided by HealthLink.

        HealthLink also operates a PPO entity, National Capital Preferred Provider Organization ("NCPPO"), in the Maryland/Virginia area. NCPPO is a joint venture with local health care providers and is majority owned by WellPoint.

UNICARE

        Due to the more recent development of the Company's UNICARE national operations, UNICARE's relations with health care professionals are more varied than the Company's relations in California, Georgia or Missouri. The Company conducts its network development efforts in various states, including Arkansas, Illinois, Indiana, Massachusetts, Michigan, Ohio, Texas and Virginia.

        As a result of the Rush Prudential acquisition, UNICARE added Rush Prudential's existing networks to its proprietary networks in the greater Chicago area. The MethodistCare acquisition was intended to enable UNICARE to expand its product line by offering HMO and open-access products in the Gulf Coast and surrounding regions in Texas, including the greater Houston-Galveston metropolitan area.

        A large number of UNICARE members are served by third-party provider networks, which may lack the selectivity and discounts typical of the Company's proprietary networks. One of the Company's

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strategies for the expansion of its UNICARE operations is to continue building and acquiring proprietary network systems in certain geographies in order to provide a continuum of managed care products to various customer segments. As UNICARE expands its operations, it intends to build or acquire such network operations and, as appropriate, to replace or supplement the current third-party network arrangements. During the last three years, UNICARE has consolidated its third-party network relationships in an effort to further contain its administrative expenses.

Ancillary Networks

        WellPoint evaluates current and emerging high-volume or high-cost services to determine whether developing an ancillary service network will yield cost control benefits. In establishing these ancillary service networks, WellPoint seeks to enter into capitation or fixed-fee arrangements with providers of these services. WellPoint regularly collects and analyzes industry data on high cost or high volume unmanaged services to identify the need for specialty managed care networks. For example, WellPoint has created Centers of Expertise for certain transplant services.

Medical Management

        In order to better manage quality in its provider networks, WellPoint adopts medical management processes and guidelines that are intended to reduce unnecessary or inappropriate procedures and admissions and the costs associated therewith. The medical management systems seek to provide WellPoint's members access to quality care based on medical necessity where final decisions are made by physicians. Other than for BCC's HMO and individual PPO products, WellPoint uses treatment guidelines, requires pre-admission approvals of hospital stays and concurrent review of certain admissions and retrospectively reviews physician practice patterns. Medical management also includes an outpatient program, with pre-authorization and retrospective review, ongoing supervision of inpatient and outpatient care of members, case management and discharge planning capacity. In its California HMO, WellPoint permits PMGs to oversee most medical management for their respective medical groups under WellPoint's guidelines. Currently, substantially all of the PMGs in WellPoint's California HMO network have established committees to oversee medical management.

        In addition to the medical management services above, WellPoint offers certain disease management programs, a high-risk pregnancy identification and management program and a nurse health information line to various members.

        For the Company's UNICARE managed care health plans, medical management is provided by UNICARE through the Company's subsidiary, CostCare, Inc. ("CCI"). As part of the GBO acquisition, the Company acquired CCI, which provided medical management services. The Company has integrated CCI's medical management and case management services into UNICARE offerings.

        Review of practice patterns may result in modifications and refinements to the PPO plan offerings and network contractual arrangements. In addition, WellPoint manages health care costs by periodically reviewing cost and utilization trends within its provider networks. Cases are reviewed in the aggregate to identify a high volume of a particular type of service in order to identify the most effective method of treatment while managing costs. In addition, the Company reviews high-cost procedures in an effort to provide new quality, cost-effective treatment by utilizing new technologies or by creating additional networks, such as its networks of home health agencies.

        In January 2003, BCC achieved full accreditation status for its PPO and excellent accreditation status for its commercial HMO/POS products from the National Committee for Quality Assurance ("NCQA"). Full and excellent accreditation are the highest ratings possible for these products, respectively. In May 2002, HMO Missouri, Inc. was awarded an excellent accreditation by NCQA for its HMO/POS products. In July 2002, NCQA awarded UNICARE Health Plans of the Midwest, Inc. an excellent accreditation for its HMO product. In 2002, Georgia Blue was awarded an excellent

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accreditation by NCQA for its HMO/POS and Platinum Medicare + Choice products. Georgia Blue's PPO product was also awarded Health Network Accreditation and Health Utilization Management Accreditation by the Utilization Review Accreditation Commission ("URAC"), a private organization providing voluntary accreditation of medical review entities. In addition, Georgia Blue was granted disease management accreditation from URAC for all of Georgia Blue's disease management organization programs. These programs include diabetes, congestive heart failure, high-risk pregnancy and secondary cholesterol. In 1996, Blue Cross Blue Shield of Missouri developed its innovative Physician Group Partners Program, which is designed to increase collaborative managed care initiatives with primary care physicians in Blue Cross Blue Shield of Missouri's HMO and to provide those physicians with the opportunity to earn additional compensation by improving patient satisfaction and improving performance levels using nationally recognized health care industry standards. The program has subsequently been expanded to include a specialist program in the PPO. The Physician Group Partners Program strives to establish long-term business relationships with physicians. Blue Cross Blue Shield of Missouri believes that this program has resulted in reduced integration and oversight of physicians, enhanced member satisfaction and improved quality measure scores. Blue Cross Blue Shield of Missouri has also implemented additional initiatives to enhance its business relationships with the physician community. In 2002, the Company's subsidiary, UNICARE Health Plans of the Midwest, Inc., was awarded a three-year excellent accreditation from the NCQA for its HMO product.

        CCI (which operates as UNICARE/CostCare) received full accreditation for its medical management program from URAC. Additionally, CCI has received full accreditation from URAC for its health information line program and its disease management programs. Blue Cross Blue Shield of Missouri and HealthLink are fully accredited by URAC for their medical management and health networks.

Underwriting

        In establishing premium rates for its health care plans, WellPoint uses underwriting criteria based upon its accumulated actuarial data, with adjustments for factors such as claims experience, member mix and industry differences to evaluate anticipated health care costs. WellPoint's underwriting practices in the individual and small group market are subject to legislation in California, Georgia, Illinois, Missouri, Texas and other states. Because UNICARE's members are in most states, the Company's underwriting practices, especially in the individual and small group market, are subject to a variety of legislative and regulatory requirements and restrictions. See "Government Regulation."

Quality Management

        Quality management for most of the Company's business is overseen by the Company's Quality Management Department and is designed to ensure that necessary care is provided by qualified personnel. Depending on the local markets, quality management encompasses plan level quality performance, provider credentialing, provider and member grievance monitoring and resolution, medical group auditing, monitoring medical group compliance with Company standards for medical records and medical offices, physician peer review and a quality management committee.

Specialty Managed Health Care and Other Plans and Services

        WellPoint offers a variety of specialty managed health care and other services. WellPoint believes that these specialty networks and plans complement and facilitate the marketing of WellPoint's medical plans and help in attracting employer groups and other members that are increasingly seeking a wider variety of options and services. WellPoint also markets these specialty products on a stand-alone basis to other health plans and other payers.

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Senior Plans

        WellPoint offers numerous Medicare supplement plans, which typically pay the difference between health care costs incurred by a beneficiary and amounts paid by Medicare. For example, WellPoint offers a PPO-based product that offers supplemental Medicare coverage and a hybrid product which allows seniors over the age of 65 to maintain their full Medicare benefits for any out-of-network benefits while enrolled in a supplemental plan that allows them to choose their own physician with a copayment. As of December 31, 2002, these Medicare supplemental plans served approximately 402,433 members. These products are marketed under the "Senior Select" and "Senior SmartChoice" names in California, under the "65Plus" name in Georgia and under the "Blue Horizons" name in Missouri.

        WellPoint also offers an HMO plan under a Medicare + Choice contract in certain locations in California and Georgia. These contracts generally entitle WellPoint to a fixed per-member premium that is subject to adjustment annually by the Centers for Medicare and Medicaid Services ("CMS"), which administers the Medicare program, based on certain demographic information relating to the Medicare population and the cost of providing health care in a particular geographic area. In addition to physician care, hospitalization and other benefits covered by Medicare, the benefits under these plans (which vary by county) typically include routine physical exams, hearing tests, immunizations, eye examinations, counseling and health education services. As of December 31, 2002, the Company's Medicare + Choice HMO plans served approximately 77,657 members.

Pharmacy Products

        WellPoint offers pharmacy services and pharmacy benefit management services to its members. WellPoint's pharmacy services incorporate features such as drug formularies (Company-developed lists of preferred, cost-effective drugs), a pharmacy network and maintenance of a prescription drug database and mail order capabilities. Pharmacy benefit management services provided by WellPoint include management of drug utilization through outpatient prescription drug formularies, retrospective review and drug education for physicians, pharmacists and members. In December 2000, the Company completed its acquisition of a mail-order pharmacy facility, which now operates under the name PrecisionRx. As of December 31, 2002, WellPoint had approximately 35.0 million risk and non-risk pharmacy members.

Dental Plans

        WellPoint's California dental plans include Dental Net, its California dental HMO, and Blue Cross Dental Select HMO, a hybrid plan, a dental PPO and traditional indemnity plans. The Company's dental products outside of California currently include dental PPOs in Michigan, Missouri, Georgia and Texas and almost all of the other states in which the Company operates. The Company's dental plans provide primary and specialty dental services, including orthodontic services, and as of December 31, 2002, served approximately 2.7 million dental members.

        In December 2002, the Company announced the signing of a definitive agreement to acquire Golden West Dental & Vision, a privately held, stand-alone dental and vision company, headquartered in Camarillo, California. As of December 2002, Golden West served approximately 293,000 members, principally dental HMO members in California. The acquisition is subject to a number of closing conditions, including approval by the California Department of Managed Health Care. If the conditions are satisfied, the transaction is scheduled to close during the quarter ending June 30, 2003.

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Life Insurance

        The Company offers life insurance (primarily term-life) and accidental death and dismemberment insurance to employers, generally in conjunction with the Company's health plans. The MMHD, GBO and Cerulean acquisitions have expanded the Company's life insurance business both inside and outside of California. As of December 31, 2002, the Company provided life insurance products to approximately 2.6 million individuals.

Behavioral Health Plans

        WellPoint offers specialized behavioral health plans. These plans cover mental health and substance abuse treatment services on both an inpatient and an outpatient basis. In addition, the Company has implemented approximately 290 employee assistance and behavioral managed care programs for a wide variety of businesses throughout the United States. As of December 31, 2002, there were approximately 7.3 million members covered under WellPoint's behavioral health plans.

Disability Plans

        The Company offers short-term and long-term disability programs, usually in conjunction with the Company's health plans. As of December 31, 2002, the Company provided short-term or long-term disability coverage to approximately 513,520 individuals.

Long-Term Care Insurance

        In 1997, the Company began offering a group of long-term care insurance products to its California members through its indirect wholly owned subsidiary BC Life & Health Insurance Company ("BC Life"). These plans, which are marketed under the Blue Cross Long Term Care trade name, involve six different products. The Company's long-term care products include tax-qualified and non-tax-qualified versions of a skilled nursing home care plan and comprehensive policies covering skilled, intermediate and custodial long-term care and home health care services.

Workers' Compensation Managed Care Services

        In California, the Company offers workers' compensation managed care services, including bill review, network access and medical management, to employers who self-insure their workers' compensation coverage, as well as to workers' compensation carriers. The Company's HealthLink subsidiary also provides workers' compensation managed care services to its clients in the central portion of the United States. See "Managed Health Care Networks and Provider Relations—HealthLink."

Market Research and Advertising

        WellPoint conducts market research and advertising programs to develop products and marketing techniques tailored specifically to customer segments. WellPoint uses print and broadcast advertising to promote its health care plans. In addition, the Company engages in promotional activities with agents, brokers and consultants. WellPoint incurred costs of approximately $76.3 million, $59.6 million and $61.8 million on advertising for the years ended December 31, 2002, 2001 and 2000, respectively.

Competition

        The managed health care industry in California is competitive on both a regional and statewide basis. In addition, in recent years there has been a trend of increasing consolidation among both national and California-based health care companies, which may further increase competitive pressures. WellPoint competes with other companies that offer similar managed health care plans, some of which

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have greater resources than WellPoint. In addition, the development and growth of companies offering Internet-based connections between health care professionals, employers and members, along with a variety of services, may create additional competitors. Currently, WellPoint is a market leader in offering managed health care plans to individuals and small employer groups in California. The medical care ratio attributable to WellPoint's individual and small group business has historically been lower than that for its large employer group business. As a result, a larger portion of WellPoint's profitability on a per-member basis is due to the individual and small group business. WellPoint has experienced increased competition in this market over the last several years, which could adversely affect its medical care ratio and future financial condition, cash flows or results of operations. See "Factors That May Affect Future Results of Operations."

        The markets in which the Company operates outside of California are also highly competitive. Because of the many different markets in which the Company now serves members, the Company faces unique competitive pressures in regional markets as well as on a national basis. The Company competes with other companies that offer managed health care plans as well as traditional indemnity insurance products. Many of these companies have greater financial and other resources than the Company or greater market share on either a regional or national basis. As the Company continues to geographically expand its operations, it will be subject to national competitive factors as well as unique competitive conditions that may affect the more localized markets in which the Company operates.

        WellPoint believes that significant factors in the selection of a managed health care plan by employers and individual members include price, the extent and depth of provider networks, flexibility and scope of benefits, quality of services, market presence, reputation (which may be affected by public rankings or accreditation by voluntary organizations such as NCQA and URAC) and financial stability. Over the last couple of years, a health plan's ability to interact with employers, members and other third parties (including health care professionals) via the Internet has become a more important competitive factor. The Company has made technology investments to enhance its electronic interactions with third parties. WellPoint believes that it competes effectively against other health care industry participants.

Government Regulation

California

        DMHC and DOI Regulation.    WellPoint offers its managed health care products in California principally through its wholly owned indirect subsidiary, BCC, which is subject to regulation by the California Department of Managed Health Care (the "DMHC") under the Knox-Keene Health Care Service Plan Act of 1975. The insurance business conducted by the Company's subsidiary, BC Life, is regulated by the California Department of Insurance (the "California DOI"). Each entity is subject to various minimum capital and other requirements, such as restrictions on the payment of dividends or the issuance of capital stock, established by its respective regulatory authority. BCC's managed health care programs are also subject to extensive DMHC regulation regarding benefit and coverage levels, relationships with health care providers, administrative capacity, marketing and advertising, procedures for quality assurance and subscriber and enrollee grievance resolution. Any material modifications to the organization or operations of BCC are subject to prior review and approval by the DMHC. BC Life must obtain approval from the California DOI for all of its group insurance policies and certain aspects of its individual policies prior to issuing those policies, as well as certain other material actions that BC Life may propose to take. The failure to comply with applicable regulations can subject BCC or BC Life to various penalties, including fines or the imposition of restrictions on the conduct of its operations.

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California Health Care Reform Legislation

        Since September 1999, the California legislature has adopted a number of health care reform measures and other legislation affecting the Company's operations. The following is a summary of the material terms of the most significant of these laws.

        The Managed Health Care Insurance Accountability Act of 1999 established an explicit duty on managed care entities to exercise ordinary care in arranging for the provision of medically necessary health care services to their subscribers and imposes liability for all harm legally caused by the failure to exercise such ordinary care. Managed care entities may be held liable if their failure to exercise ordinary care results in the denial, delay or modification of a health care service recommended for or furnished to the subscriber and the subscriber suffers "substantial harm." For purposes of the statute, "substantial harm" is defined as the loss of life, loss of or significant impairment of a limb or bodily function, significant disfigurement, severe and chronic pain or significant financial loss. Liability may be established for health care services regardless of whether the recommending health care provider is a contracting provider with the managed care entity. Managed care plans may not seek indemnity from a health care provider for the liability imposed by the statute. A cause of action may not be maintained under the statute against a managed care entity unless the subscriber has exhausted independent medical review procedures, except in instances where substantial harm has occurred or will imminently occur prior to the completion of the independent medical review.

        Assembly Bill 55 established an independent medical review system. Every health plan enrollee, whether currently under the regulatory supervision of the DMHC or the California DOI, must be provided with an opportunity to seek an independent medical review whenever health care services have been denied, modified or delayed by a managed care entity or one of its contracting physicians, if this decision was based on a finding that the proposed services are not medically necessary. There is no minimum dollar level for claims to be subject to the independent review process and the enrollee does not have any responsibility for the payment of any application or processing fee. An enrollee's provider may assist and advocate in the review. All health plan contracts must provide an opportunity to seek an independent review. The statute does not apply to decisions by a health plan that health care services are not covered under the plan issued to the subscriber.

        Assembly Bill 88 requires that any health care service plan contract or disability insurance policy must provide coverage for the diagnosis and medically necessary treatment of severe mental illness under the same terms and conditions applied to other medical conditions.

        Assembly Bill 78 provided for the creation of the DMHC, which now regulates the health care service plan operations previously under the supervision of the California Department of Corporations. The DMHC is advised by an advisory committee consisting of 22 members, 11 of whom are appointed by the California Governor, 10 of whom are appointed by the joint recommendation of the California Governor, the Speaker of the California Assembly and the California Senate Committee on Rules and one of whom is the Director of the Department (who is appointed by the California Governor). This advisory committee is required to issue an annual report, which is to include a report card issued to the public on the comparative performance of managed care organizations. This bill also established an Office of Patient Advocate, who is appointed by the California Governor, to represent the interest of enrollees. The Office of Patient Advocate is charged with the responsibility of helping enrollees secure health care services and will have access to the records of the DMHC. Under the legislation, the new DMHC has been granted expanded powers, including the ability to order the discontinuance of "unsafe or injurious practices."

        Senate Bill 260 established a Financial Solvency Standards Board (the "Board") comprised of the Director of the DMHC (the "Director") and seven members appointed by the Director. The Board reviews financial solvency matters affecting the delivery of health care services and recommends financial solvency requirements relating to plan operations, plan-affiliate operations and transactions,

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plan-provider contractual relationships and provider-affiliate operations and transactions. Every contract between a health care service plan and a risk-bearing organization (i.e., any provider group that provides services in exchange for fixed capitation payments) must include a requirement that the risk-bearing organization furnish financial information to the health care service plan. In addition, the health care service plan must disclose information to the risk-bearing organization that enables the organization to be informed regarding its financial risk. Plans must provide payment of all risk arrangements, excluding capitation payments, within 180 days after the close of each fiscal year. Risk-bearing organizations may not be at financial risk for the provision of health care services unless a particular contract provision allocating such risk has first been negotiated and agreed to between the health care service plan and the risk-bearing organization. In addition, no contract between a health care service plan and a risk-bearing organization may include any provision that requires a health care provider to accept rates or methods of payments unless the provisions have first been negotiated and agreed to between the plan and the risk-bearing organization.

        Senate Bill 559 ("SB 559") imposes certain disclosure obligations and other limitations on health care plans, such as the Company, that make their networks of contracted providers available to other entities. Under SB 559, health care plans must disclose to contracting providers that they intend to make their health care networks, and the negotiated discounts, available to other payers, such as self-insured employers or workers' compensation insurance companies. Providers may decline to be included in any list of contracted providers made available to any payer entity that does not provide financial incentives to, or otherwise actively encourage, the payer's members to use the list of contracting providers when obtaining medical care.

        Assembly Bill 1455 ("AB 1455") imposes new time limits for the payment of uncontested covered claims and required health care service plans to pay interest on uncontested claims not paid promptly within the required time period. AB 1455 also granted the DMHC additional authority to impose monetary penalties and other sanctions on health plans engaging in certain "unfair payment practices" (as defined in AB 1455).

        Senate Bill 168 ("SB 168"), which became effective January 1, 2002, prohibits publicly displaying an individual's social security number or printing an individual's social security number on any member identification card. Compliance with SB 168 is being phased in over periods extending to July 1, 2005.

        Senate Bill 1411 ("SB 1411") prohibits health plans that provide maternity coverage from imposing copayments or deductibles for inpatient hospital maternity services that exceed the most common amount of the copayment or deductible for inpatient services provided for other medical conditions. SB 1411 will become effective on July 1, 2003.

        The California Legislature has also adopted legislation that imposes restrictions on the categories of persons that may be involved in medical management activities and on the conduct of such activities. Various other newly adopted bills mandate coverage for certain benefits, such as the provision of oral contraceptives, and place further limitations on health plan operations.

Federal

        A variety of federal laws have been adopted in the last several years affecting the Company's operations and a significant number of measures have also been proposed for future adoption. The following is a summary of the significant enacted measures as well as proposed measures.

        HIPAA.    The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the implementing regulations that have thus far been adopted impose new obligations for issuers of health insurance coverage and health benefit plan sponsors. HIPAA requires certain guaranteed issuance and renewability of health coverage for individuals and small groups (generally 50 or fewer employees) and

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limits exclusions based on preexisting conditions. Most of the insurance reform provisions of HIPAA became effective for "plan years" beginning July 1, 1997.

        HIPAA also establishes new requirements regarding the confidentiality of patient health information and regarding standard formats for the transmission of health care data. In December 2000, the Department of Health and Human Services promulgated final regulations regarding the privacy of "protected health information." These regulations become effective in April 2003. The rules, among other things, require that health plans give patients a clear written explanation of how they intend to use, keep and disclose patient health information, prohibit health plans from conditioning payment or coverage on a patient's agreement to disclose health information for other purposes and create federal criminal penalties for health plans, providers and claims clearinghouses that knowingly and improperly disclose information or obtain information under false pretenses. Final regulations regarding the standard formats for the transmission of health care information became effective in October 2002. In December 2001, legislation was enacted that offers health entities the option of extending the date for compliance with these regulations until October 2003. The Company has filed for such extension. The Company, like many other entities in the health care industry, has incurred substantial expenditures as a result of the various HIPAA regulations, and expects that it will continue to incur expenditures as the various regulations become effective. The Company is working diligently to achieve compliance with these regulations in the time periods required. However, there can be no assurances that the Company will achieve such compliance or that the other entities with which the Company interacts will take the appropriate actions to achieve compliance in a timely manner. Upon effectiveness in October 2003 of the HIPAA regulations governing standard formats for health care transactions, the Company may see an increase in the number of health care transactions that are submitted to the Company in paper format, which could have the effect of increasing the Company's costs to process medical claims.

        Balanced Budget Act.    In August 1997, President Clinton signed into law the Balanced Budget Act of 1997 (the "Balanced Budget Act"). The Balanced Budget Act included a number of measures affecting the provision of health care. The act placed restrictions on the variation in Medicare reimbursement amounts (so-called "risk adjusters") between counties. CMS has released proposed risk adjusters, which are currently expected to be implemented in phases through the year 2005. In addition, the Balanced Budget Act ostensibly expanded the managed health plan options available to Medicare enrollees to include PPO, POS and high-deductible health plans intended for MSAs. Regulations regarding these changes were adopted in June 1998. Finally, the Balanced Budget Act implemented certain changes with respect to Medicare supplement programs, including guaranteed coverage issues. Certain of the changes under the Balanced Budget Act could have the result of increasing the Company's costs.

        Medicare Legislation.    WellPoint's health benefits programs include products that are marketed to Medicare beneficiaries as a supplement to their Medicare coverage. These products are subject to federal regulations intended to provide Medicare supplement customers with standard minimum benefits and levels of coverage and full disclosure of coverage terms and assure that fair sales practices are employed in the marketing of Medicare supplement coverage.

        In California and Georgia, WellPoint provides a senior plan product under a Medicare + Choice contract that is subject to regulation by CMS. Under this contract and CMS regulations, if WellPoint's premiums received for Medicare-covered health care services provided to senior plan Medicare members are more than the Company's projected costs associated with the provision of health care services provided to senior plan members, then WellPoint must provide its senior plan members with additional benefits beyond those required by Medicare or reduce its premiums or deductibles or copayments, if any. CMS has the right to audit HMOs operating under Medicare contracts to determine the quality of care being rendered and the degree of compliance with CMS contracts and regulations. During 2003, Congress is expected to consider a number of proposals to reform the

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Medicare program. These proposals may range from extensive reform of the program itself to the addition of a prescription drug benefit for Medicare beneficiaries. It is unclear what legislation, if any, may be adopted and, if any proposals are adopted, the effects of such measures on the Company's results of operations or financial condition.

        Future Health Care Reform. A number of legislative proposals have been made at the federal and state levels over the past several years. These proposals would, among other things, mandate benefits with respect to certain diseases or medical procedures, require plans to offer an independent external review of certain coverage decisions or establish health plan liability in a manner similar to the California legislation discussed above or the Georgia and Texas legislation discussed in the following section. The United States Congress is currently considering a number of alternative health care reform measures that would, among other things, mandate external review of treatment denial decisions and provide for managed care liability. There have also been proposals made at the federal level to implement greater restrictions on employer-funded health plans, which are generally exempted from state regulation by the Employee Retirement Income Security Act of 1974, as amended. During 2003, Congress may consider a proposal to authorize so-called association health plans ("AHPs"), which would allow small employers to associate for the purposes of obtaining health coverage. AHPs would be generally exempt from state insurance regulation and, as a result, could potentially have a significant competitive advantage over the small-employer group products currently offered by WellPoint's operating subsidiaries.

        WellPoint is unable to evaluate new legislation that may be proposed and when or whether any such legislation will be enacted and implemented. However, many of the proposals, if adopted, could have a material adverse effect on WellPoint's financial condition, cash flows or results of operations, while others, if adopted, could potentially benefit WellPoint's business.

Other States

        The Company's activities in other states are subject to state regulation applicable to the provision of managed health care services and the sale of traditional health indemnity insurance. As a result of the Company's various acquisitions, the Company and certain of its subsidiaries are also subject to regulation by the DOI in Delaware (which is the state of incorporation and domicile of UNICARE Life & Health Insurance Company, one of the Company's principal operating subsidiaries outside of California), Georgia, Illinois, Indiana, Missouri, Texas and in most other states. As the Company expands its offering of managed care products in new geographic locations, it will be subject to additional regulation by governmental agencies applicable to the provision of health care services. The Company believes it is in compliance in all material respects with all current state regulatory requirements applicable to its business as presently conducted. However, changes in government regulations could affect the level of services which the Company is required to provide or the rates which the Company can charge for its health care products and services.

        As the Company continues to expand its operations outside of California, new legislative and regulatory developments in Delaware, Georgia, Illinois, Missouri, Texas and various other states will have greater potential effect on the Company's financial condition, cash flows or results of operations. In 1999, the Georgia Legislature adopted several new bills, including one that requires managed care plans to offer coverage for services rendered by out-of-network providers and one that establishes a Consumers' Insurance Advocate with authority to review and comment upon matters pending before the Department of Insurance. Over the past few years, there has also been an increase in other states in proposed legislation regarding, among other things, mandated benefits, prompt payment of claims, health plan liability, third-party review of health plan coverage determinations and health plan relationships with providers. The Company expects that this trend of increased legislation will continue. These laws may have the effect of increasing the Company's health care services expense.

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        In 1997, the Texas legislature adopted SB 386 which, among other things, purports to make managed care organizations ("MCOs") such as the Company liable for the failure by the MCO, its employees or agents to exercise ordinary care when making "health care treatment decisions" (as defined in the legislation). The legislation became effective as of September 1, 1997. To date, this legislation has not adversely affected the Company's results of operations. However, although the Company maintains insurance covering such liabilities, to the extent that this legislation (or similar legislation that may be subsequently adopted at the federal or state level) effectively expands the scope of liability of MCOs, such as the Company, it may have a material adverse effect on the Company's results of operations, financial condition and cash flows. Even if the Company is not held liable under any litigation, the existence of potential MCO liability may cause the Company to incur greater costs in defending such litigation.

        In connection with the GBO acquisition, the Company has entered into a reinsurance arrangement, on a 100% coinsurance basis, of the insured business of the GBO. This business includes a small number of insured persons in Canada covered by group policies issued to U.S.-based employers. As a result, the Company may be subject to certain rules and regulations of applicable Canadian regulatory agencies.

Service Marks

        WellPoint and its subsidiaries have filed for registration of and maintain several service marks, trademarks and trade names at the federal level and in various states in which it operates. WellPoint and various of its operating subsidiaries are currently parties to license agreements with the Blue Cross and Blue Shield Association (the "BCBSA") which allow them to use the Blue Cross or Blue Shield names and marks in California, Georgia and parts of Missouri with respect to WellPoint's health plan business. The BCBSA is a national trade association of Blue Cross and Blue Shield licensees. Each licensee is an independent legal organization and is not responsible for the obligations of other BCBSA member organizations. A Blue Cross or Blue Shield license requires payment of a fee to the BCBSA and compliance with various requirements established by the BCBSA, including the maintenance of specified minimum capital. The failure to meet such capital requirements can subject the Company to certain corrective action, while the failure to meet a lower specified level of capital can result in termination of the Company's license agreement with the BCBSA. Pursuant to the rules and license standards of the BCBSA, WellPoint has agreed to guarantee specified obligations to customers of certain of WellPoint's subsidiaries holding controlled affiliate licenses from the BCBSA. WellPoint considers the licensed Blue Cross and Blue Shield names and their registered service marks, trademarks and trade names important in the operation of its business.

Employees

        At December 31, 2002, WellPoint and its subsidiaries employed approximately 16,200 persons on a full-time basis. Approximately 142 of the Company's employees were covered by a collective bargaining agreement with the Office and Professional Employees International Union, Local 29 as of December 31, 2002. Approximately 175 of the Company's office clerical employees in the greater Detroit area were covered by a collective bargaining agreement with the International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America, Local No. 614 as of March 1, 2003. WellPoint believes that its relations with its employees are good, and it has not experienced any work stoppages.

Executive Officers of the Registrant

        Leonard D. Schaeffer, age 57, has been Chairman of the Board of Directors and Chief Executive Officer of the Company since August 1992. Mr. Schaeffer served as Chief Executive Officer of Blue Cross of California from 1986 to 2002 and has served as Chairman of its Board of Directors since 1989.

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From 1982 to 1986, Mr. Schaeffer served as President of Group Health, Inc., an HMO in the midwestern United States. Prior to joining Group Health, Inc., Mr. Schaeffer was the Executive Vice President and Chief Operating Officer of the Student Loan Marketing Association, a financial institution that provides a secondary market for student loans, from 1980 to 1981. From 1978 to 1980, Mr. Schaeffer was the Administrator of HCFA (now known as CMS), which administers the federal Medicare and Medicaid programs. Mr. Schaeffer serves as a director of Allergan, Inc.

        D. Mark Weinberg, age 50, has been Executive Vice President and Chief Development Officer since February 2002. From March 1999 until February 2002, he was Executive Vice President, Individual and Small Group Division of the Company. From October 1995 until March 1999, he served as Executive Vice President, UNICARE Businesses of the Company. From August 1992 until May 1996, Mr. Weinberg served as a director of the Company. From February 1993 to October 1995, Mr. Weinberg was Executive Vice President, Consumer and Specialty Services of the Company. Prior to February 1993, Mr. Weinberg was Executive Vice President of Blue Cross of California's Consumer Services Group from December 1989 to February 1993 and was Senior Vice President of Individual and Senior Services of Blue Cross of California from April 1987 to December 1989. From 1981 to 1987, Mr. Weinberg held a variety of positions at Touche Ross & Co. From 1976 to 1981, Mr. Weinberg was general manager for the CTX Products Division of PET, Inc.

        Joan E. Herman, age 49, joined the Company in June 1998 as Executive Vice President, Specialty Division. From April 1999 until March 2000, Ms. Herman was Executive Vice President, Senior and Specialty Businesses. Since March 2000, Ms. Herman has been Executive Vice President, Senior, Specialty and State-Sponsored Programs Division. From 1982 until joining the Company, Ms. Herman was with Phoenix Home Life Mutual Insurance Company, a mutual insurance company, most recently serving as Senior Vice President. Ms. Herman is a member of the Society of Actuaries and the American Academy of Actuaries.

        David S. Helwig, age 46, has been Executive Vice President, Blue Cross of California Businesses since February 2002. From March 2001 until February 2002, he was Executive Vice President, Large Group Division of the Company. From May 2000 until March 2001, Mr. Helwig was Senior Vice President, Western Region, Large Group Businesses of the Company and from March 1999 until May 2000, Mr. Helwig served as Senior Vice President and Chief Actuary for the Company. From 1995 until March 1999, Mr. Helwig served as Senior Vice President of Individual and Small Group Services for the Company and from May 1994 until 1995, Mr. Helwig was Senior Vice President of Consumer Services for CaliforniaCare Health Plans, a subsidiary of the Company. From 1991 to May 1994, Mr. Helwig was Senior Vice President and Chief Actuary of Blue Cross of California and from February 1993 until May 1994, Mr. Helwig also served as Chief Financial Officer and Treasurer of Blue Cross of California.

        Rebecca Kapustay, age 51, has been Executive Vice President, Central Services since January 2003. From March 2001 until January 2003, she served as Executive Vice President, Blue Cross Blue Shield of Georgia. From 1979 until 1992, Ms. Kapustay held various positions with Blue Cross of California of increasing responsibility in both operations and data processing. From 1993 until April 1994, Ms. Kapustay was General Manager of the Company and from May 1994 until 2000, Ms. Kapustay held various positions with the Company including Senior Vice President, California Operations and more recently Senior Vice President, Large Group Services.

        John A. O'Rourke, age 59, joined the Company in February 2002 as Executive Vice President, Central Business Region. From February 1997 until January 2002, Mr. O'Rourke was Chairman and Chief Executive Officer of RightCHOICE Managed Care, Inc. From January 1985 until joining RightCHOICE, Mr. O'Rourke was President and Chief Executive Officer of HealthLink. Prior to joining HealthLink, Mr. O'Rourke was Deputy Director of the Office of HMOs in the U.S. Department of Health and Human Services.

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        David C. Colby, age 49, joined the Company in September 1997 as Executive Vice President and Chief Financial Officer. From April 1996 until joining the Company, Mr. Colby was Executive Vice President, Chief Financial Officer and Director of American Medical Response, Inc., a health care services company focusing on ambulance services and emergency physician practice management. From July 1988 until March 1996, Mr. Colby was with Columbia/HCA Healthcare Corporation, most recently serving as Senior Vice President and Treasurer. From September 1983 until July 1988, Mr. Colby was Senior Vice President and Chief Financial Officer of The Methodist Hospital in Houston, Texas.

        Thomas C. Geiser, age 52, has been Executive Vice President, General Counsel and Secretary of the Company since May 1996. From July 1993 until May 1996, Mr. Geiser held the position of Senior Vice President, General Counsel and Secretary. Prior to joining the Company, he was a partner in the law firm of Brobeck, Phleger & Harrison from June 1990 to June 1993 and a partner in the law firm of Epstein Becker Stromberg & Green from May 1985 to May 1990. Mr. Geiser joined the law firm of Hanson, Bridgett, Marcus, Vlahos & Stromberg as an associate in March 1979 and became a partner in the firm, leaving in May 1985.

        Woodrow A. Myers, Jr., M.D., age 49, has been Executive Vice President, Chief Medical Officer of the Company since September 2000. From 1995 until September 2000, he served as Director, Healthcare Management of Ford Motor Company. From 1991 until 1995, Dr. Myers served as Senior Vice President and Corporate Medical Director of The Associated Group (now known as Anthem Blue Cross Blue Shield). From 1990 to 1991, Dr. Myers was the Commissioner of Health for the City of New York. Dr. Myers serves as a director of Somnus Medical Technologies.

        Alice F. Rosenblatt, age 54, has been Executive Vice President, Actuarial and Integration Planning and Implementation, and Chief Actuary of the Company since March 2002. From March 1999 to February 2002, Ms. Rosenblatt was Senior Vice President, Actuarial and Integration Planning and Implementation and Chief Actuary of the Company. From August 1998 to February 1999, she was Senior Vice President, Mergers and Acquisitions Integration and from October 1996 to July 1998, she was Senior Vice President, Chief Actuary of the Company. From February 1994 until September 1996, Ms. Rosenblatt was a partner with Coopers & Lybrand LLP. From May 1989 until December 1993, Ms. Rosenblatt served as the Senior Vice President and Chief Actuary of Blue Cross Blue Shield of Massachusetts. From 1987 until 1989, Ms. Rosenblatt served as the Chief Actuary and Senior Vice President of Blue Cross of California's health maintenance organization and group services.

        Ronald J. Ponder, Ph.D., age 60, has been Executive Vice President, Information Services and Chief Information Officer since July 2002. From April 1999 to June 2002, Dr. Ponder served as President and Chief Executive Officer of Telecom, Media & Networks Americas, a Cap Gemini Ernst & Young company. Prior to that, Dr. Ponder was President and Chief Executive Officer of BDSI, Inc. from November 1997 to April 1999. Dr. Ponder has also held senior officer positions at Federal Express, Sprint and AT&T.

        John S. Watts, Jr., age 43, became Executive Vice President, Blue Cross Blue Shield of Georgia in January 2003. From March 2001 to January 2003, Mr. Watts served as Senior Vice President for Blue Cross Blue Shield of Georgia's Large Group Division. From February 2000 to March 2001, Mr. Watts served as Acting Senior Vice President, UNICARE commercial accounts for the Company's Large Group Division, eastern, southern and central regions. Prior to that, Mr. Watts was General Manager of Blue Cross of California's Large Group Services, key and major accounts serving employer groups of 51-2,000 employees. Mr. Watts joined Blue Cross of California in 1995 as regional director responsible for the Los Angeles sales office.

May 1996 Recapitalization and Restrictions on Ownership and Transfer of Securities

        The Company's predecessor, WellPoint Health Networks Inc., a Delaware corporation ("Old WellPoint"), was organized in 1992 as a public for-profit subsidiary of Blue Cross of California

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("BCC"), to own and operate substantially all of the managed health care businesses of BCC. In order to fulfill BCC's public benefit obligations to the State of California arising out of the creation of Old WellPoint, BCC and Old WellPoint undertook a recapitalization (the "Recapitalization"), which was concluded on May 20, 1996. As a result of the Recapitalization, among other things, Old WellPoint merged into BCC, a special dividend of $995.0 million was made to the shareholders of Old WellPoint and the California HealthCare Foundation (the "California Foundation") became the holder of 53,360,000 shares, or approximately 80%, of the surviving WellPoint entity. As of January 2001, the California Foundation ceased to own any shares of WellPoint Common Stock.

        In connection with the Recapitalization, BCC relinquished its rights under the Blue Cross License Agreement dated January 1, 1991 between BCC and the BCBSA. The BCBSA and the Company entered into a new License Agreement (the "License Agreement"), pursuant to which the Company became the exclusive licensee for the right to use the Blue Cross name and related service marks in California and a member of the BCBSA. See "Service Marks."

        At the time of the Recapitalization, pursuant to an agreement with the BCBSA, the Company's Certificate of Incorporation included an "Ownership Limit" with respect to the Company's voting securities. At such time, the "Ownership Limit" was established as one share less than 5% of the Company's outstanding voting securities. In December 1997, the Company and the BCBSA, in accordance with the provisions of Article VII, Section 14(f)(2) of the Company's Certificate of Incorporation, agreed to modify the Ownership Limit to the following: (i) for any "Institutional Investor," one share less than 10% of the Company's outstanding voting securities; and (ii) for any "Noninstitutional Investor," other than the California Foundation, one share less than 5% of the Company's outstanding voting securities. For these purposes, "Institutional Investor" means any person if (but only if) such person is (1) a broker or dealer registered under Section 15 of the Securities Exchange Act of 1934 (the "Exchange Act"), (2) a bank as defined in Section 3(a)(6) of the Exchange Act, (3) an insurance company as defined in Section 3(a)(19) of the Exchange Act, (4) an investment company registered under Section 8 of the Investment Company Act of 1940, (5) an investment adviser registered under Section 203 of the Investment Advisers Act of 1940, (6) an employee benefit plan or pension fund which is subject to the provisions of the Employee Retirement Income Security Act of 1974 or an endowment fund, (7) a parent holding company, provided the aggregate amount held directly by the parent, and directly and indirectly by its subsidiaries which are not persons specified in paragraphs (1) through (6), does not exceed one percent of the securities of the subject class, or (8) a group, provided that all the members are persons specified in paragraphs (1) through (7). In addition, every filing made by such person with the Securities and Exchange Commission under Regulation 13D-G (or any successor Regulation) under the Exchange Act with respect to such person's beneficial ownership must contain a certification (or a substantially similar one) that the WellPoint Common Stock acquired by such person was acquired in the ordinary course of business and was not acquired for the purpose of and does not have the effect of changing or influencing the control of WellPoint and was not acquired in connection with or as a participant in any transaction having such purpose or effect. For such purposes, "Noninstitutional Investor" means any person that is not an Institutional Investor. The License Agreement is subject to termination by the BCBSA in the event that any stockholder of the Company becomes the beneficial owner of shares greater than the applicable Ownership Limit.

        In December 1997, the Company and the BCBSA also agreed that the License Agreement would be subject to termination in the event that any entity other than the California Foundation became the beneficial owner of 20% or more of WellPoint's then-outstanding Common Stock or other equity securities that (either by themselves or in combination) represented an ownership interest of 20% or greater. WellPoint also agreed that it would not issue any class or series of securities other than shares of Common Stock, non-voting, non-convertible debt securities or such other securities as WellPoint may approve, provided that WellPoint will provide the BCBSA with at least 30 days advance notice of the

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issuance of such securities and the BCBSA will have the authority to determine how such securities will be treated for purposes of determining a particular holder's beneficial ownership of Common Stock.

        In connection with the Recapitalization, BCC also received a ruling from the Internal Revenue Service (the "IRS") that, among other things, the conversion of BCC from a nonprofit public benefit corporation to a for-profit entity (the "BCC Conversion") qualified as a tax-free transaction and that no gain or loss was recognized by BCC for federal income tax purposes. The California Foundation and the Company entered into an Indemnification Agreement which provides, with certain exceptions, that the California Foundation will indemnify WellPoint against the net tax liability as a result of a revocation or modification, in whole or in part, of the ruling by the IRS or a determination by the IRS that the BCC Conversion constitutes a taxable transaction for federal income tax purposes.

        In August 1997, pursuant to approval by the stockholders at the Company's 1997 Annual Meeting, the Company reincorporated in the state of Delaware. Each of the material agreements (other than the Indemnification Agreement) entered into in connection with the Recapitalization was amended and restated on substantially similar terms at the time of the reincorporation.

        During the quarter ended September 30, 1998, the Company received a private letter ruling from the IRS with respect to the treatment of certain payments made at the time of the Recapitalization and the acquisition of the commercial operations of BCC. The ruling allowed the Company to deduct as an ordinary and necessary business expense the $800.0 million cash payment made by BCC in May 1996 to one of two newly formed charitable foundations. As a result of and in reliance on the ruling, the Company experienced a reduction in its income tax expense of $85.5 million and the Company reduced its goodwill resulting from the Recapitalization by $194.5 million during the year ended December 31, 1998. The Company filed for refund claims of approximately $198.6 million of previous year income tax payments and reduced income tax payments during 1998 and 1999 by approximately $81.4 million. In August 1999, the Company received a cash refund (including applicable accrued interest) of approximately $183.0 million, which was reflected in the statement of cash flows for such year. The Company has refund claims pending of approximately $39.3 million.

        In March 2002, the Company received a letter from the IRS notifying the Company that the IRS was considering revoking the September 1998 private letter ruling. The letter stated that the IRS was considering, in essence, reversing its earlier position and concluding that the $800.0 million payment was not an ordinary and necessary business expense. The letter further stated that the IRS was withdrawing the private letter ruling and that the Company could no longer rely on the private letter ruling. Under Section 7805(b) of the Internal Revenue Code, the IRS has discretionary authority to limit the retroactive effect of any revocation of a letter ruling. In March 2002, the Company submitted a written request for such relief under Section 7805(b). On April 9, 2002, the Company received a letter from the IRS notifying the Company that its request had been granted and that the September 1998 private letter ruling would not be revoked on a retroactive basis. Based on this April 9, 2002 let