Via USPS and Electronic Mail February 27, 2008 Dan Mannen, O.D., Chairman of the Board Vision Service Plan 3333 Quality Drive Rancho Cordova, CA 95670 RE: FINAL REPORT OF THE ROUTINE EXAMINATION OF VISION SERVICE

PLAN Dear Mr. Mannen: Enclosed is the Final Report of the Routine Examination of the fiscal and administrative affairs of Vision Service Plan (the “Plan”) for the quarter ended March 31, 2007. The examination was conducted by the Department of Managed Health Care (the “Department”) pursuant to Section 1382 of the Knox-Keene Health Care Service Plan Act of 1975 ("Act").1 The Department issued a Preliminary Report to the Plan on December 20, 2007. Section 1382 (d) states “If requested in writing by the plan, the director shall append the plan’s response to the final report issued pursuant to subdivision (c). The plan may modify its response or statement at any time and provide modified copies to the department for public distribution not later than 10 days from the date of notification from the department that the final report will be made available to the public. The addendum to the response or statement shall also be made available to the public.” Please indicate within ten (10) days whether the Plan requests the Department to append the Final Report. Please file the Plan’s response to the Final Report electronically via the Department's eFiling web portal https://wpso.dmhc.ca.gov/secure/login/, as follows:

• From the main menu, select “e-Filing”. • From the eFiling (Home) menu, select “File Documents”. • From the File Documents Menu for:

1) File Type; select “Amendment to Prior Filing”;

1 References throughout this report to “Section” are to sections of the Knox-Keene Health Care Service Plan Act of 1975, California Health and Safety Code Section 1340, et seq. References to “Rule” are to the regulations promulgated pursuant to the Knox-Keene Health Care Service Plan Act, found at Division 1 of Chapter 1, Title 28, and California Code of Regulations, beginning with Section 1300.43.

Arnold Schwarzenegger, Governor State of California Business, Transportation and Housing Agency Department of Managed Health Care 980 ninth Street, Suite 500 Sacramento, CA 95814 916-255-2438 voice 916-255-2280 fax sbabich@dmhc.ca.gov e-mail

Mr. Dan Mannen, O.D., Chairman of the Board of Directors File No. 933 0049 Re: Final Report of the Routine Examination of Vision Service Plan Page 2

2) Original Filing, select the Department’s assigned “Filing No. 20072333” by clicking on the down arrow; and

3) Click “create filing”. • From the Original Filing Details Menu, click “Upload Amendments”; select # of

documents; select document type: “Plan’s Response to Final Report (FE10)”; then “Select File” and click “Upload”.

• Upload all documents then upload a cover letter as Exhibit E-1 that references to your response.

• After upload, then select “Complete Amendment”, • Select a “Signatory,” • Complete “Execution” and then click “complete filing”.

Questions or problems related to the electronic transmission of the response should be directed to Siniva Pedro at (916) 322-5393 or email at spedro@dmhc.ca.gov. You may also email inquiries to wpso@dmhc.ca.gov. The Department will make the attached Final Report available to the public in ten (10) days from the Plan’s receipt of this letter. The Executive Summary to the Department’s most recent Plan Survey Report is located at the Department’s web site at www.dmhc.ca.gov. If there are any questions regarding this report, please contact me. Sincerely, ORIGINAL SIGNED BY: Stephen Babich Supervising Examiner Office of Health Plan Oversight Division of Financial Oversight

cc: Patricia Cochran, CFO, VSP

Laura Olson, Controller, VSP Mark Wright, Chief, Division of Financial Oversight

Marcy Gallagher, Chief, Division of Plan Surveys Marie Eppler, Counsel, Division of Licensing

Allan Campbell, Corporations Examiner IV (Supervisor) Barbara Yaklin, Examiner, Division of Financial Oversight Maryam Tahriri, Examiner, Division of Financial Oversight

Mr. Dan Mannen, O.D., Chairman of the Board of Directors File No. 933 0049 Re: Final Report of the Routine Examination of Vision Service Plan Page 2

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FINAL REPORT OF THE

ROUTINE EXAMINATION OF

VISION SERVICE PLAN

FILE NO. 933 0049

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SUPERVISING EXAMINER: STEPHEN BABICH

EXAMINER-IN-CHARGE: ALLAN CAMPBELL

FINANCIAL EXAMINERS:

LORILEE AMBROSINI ANNA BELMONT DANIELE LOPES

MICHAEL LUCHESSI MARYAM TAHRIRI

Mr. Dan Mannen, O.D., Chairman of the Board of Directors File No. 933 0049 Re: Final Report of the Routine Examination of Vision Service Plan Page 3

BACKGROUND INFORMATION FOR VISION SERVICE PLAN

Date Plan Licensed: February 14, 1978 Organizational Structure: Vision Service Plan (VSP) is organized as a nonprofit corporation

under the laws of the State of California to provide and administer vision care plans. The Plan through its network of providers provide optometric services to eligible member of participating clients. VSP exercises control over 17 affiliated vision services plans, a frame distribution company, and an Internet services provider. The combined organization (Company) operates vision care plans in all 50 states under the federally registered service mark “Vision Service Plan” or “VSP”.

Type of Plan: A Vision Service Plan is a specialized service plan. The Plan

distinguishes its revenue between amounts associated with funding optometric benefits (Claim Fund) and those related to the administration (Administration Fund) of its Plans. Two general funding agreements are used to provide vision plans:

Administrative Service Program: Administrative service programs represent clients which are on a cost reimbursement basis plus an administrative fee. Revenue is recognized over the period of coverage and is generally based on the claims paid. The Plan acts as a principal as it has separate contractual relationships with administrative services program clients and with its network of optometric providers. The Plan also assumes credit risk for amounts due from clients. As a result, the Plan records revenue for both the cost of benefits and administrative fees.

Prepaid Programs: Prepaid programs represent clients with a fixed premium per participant. Revenue is recognized over the period of coverage and is generally based on the number of eligible participants. The claims and administrative portions are determined based upon underwriting rates established for the clients. Receivables and related revenue are estimated based on the most recent eligibility received from the clients under the program.

Plan Enrollment: A total of 8,751,955 enrollees were reported for the quarter ended

March 31, 2007. Service Area: California Date of Last Public Routine Financial Examination Report: December 3, 2003

Mr. Dan Mannen, O.D., Chairman of the Board of Directors File No. 933 0049 Re: Final Report of the Routine Examination of Vision Service Plan Page 4 FINAL REPORT FOR THE ROUTINE EXAMINATION OF VISION SERVICE PLAN This is the Final Report of the Routine Examination of the fiscal and administrative affairs of Vision Service Plan (the “Plan”) for the quarter ended March 31, 2007. The examination was conducted by the Department of Managed Health Care (the “Department”) pursuant to Section 1382 of the Knox-Keene Health Care Service Plan Act of 1975 ("Act").1 The Department issued a Preliminary Report to the Plan on December 20, 2007. We performed an examination of the financial report filed with the Department for the quarter ended March 31, 2007, as well as other selected accounting records and controls related to the Plan's various fiscal and administrative transactions. Our findings are presented in the accompanying attachment as follows:

1 References throughout this report to “Section” are to sections of the Knox-Keene Health Care Service Plan Act of 1975, California Health and Safety Code Section 1340, et seq. References to “Rule” are to the regulations promulgated pursuant to the Knox-Keene Health Care Service Plan Act, found at Division 1 of Chapter 1, Title 28, and California Code of Regulations, beginning with Section 1300.43.

Section I. Financial Report Section II. Calculation of Tangible Net Equity

SECTION I. FINANCIAL REPORT Our examination resulted in no adjustments or reclassifications to the Plan’s March 31, 2007 financial report filed with the Department. A copy of the Plan’s financial statements can be viewed at the Department’s website by typing the link http://wpso.dmhc.ca.gov/fe/search.asp and selecting Vision Service Plan on the first drop down menu. No response was required to this Section.

Mr. Dan Mannen, O.D., Chairman of the Board of Directors File No. 933 0049 Re: Final Report of the Routine Examination of Vision Service Plan Page 5 SECTION II. CALCULATION OF TANGIBLE NET EQUITY (TNE) Net Worth per Examination as of March 31, 2007 $345,429,716Less: Receivables from officers, directors, and affiliates 115,801,645Less: Intangibles 00TNE $229,628,071

TNE required at March 31, 2007 27,488,398

Excess TNE per Examination as of March 31, 2007 $202,139,673

As of March 31, 2007, the Plan was in compliance with the TNE requirements of Section 1376 and Rule 1300.76. No response was required to this Section.