信諾集團 (CI) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by for CIGNA's first quarter 2003 results review.

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Once again, you are connected for CIGNA's first quarter 2003 results review. We will go live to Greg Deavens in just a moment. We do thank you for your patience.

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Ladies and gentlemen, thank you for standing by for CIGNA's first quarter 2003 results review. We do thank you for your patience at this time. You will hear music until we start.

We will begin by turning the conference offer to Mr. Greg Deavens. Mr. Deavens, please go ahead.

Good morning everyone, sorry for the brief delay.

Welcome to CIGNA Corporation's first financial results review meeting for the first quarter of 2003.

I'm Greg Deavens, Vice President of Investor Relations and with me this morning are Ed Hanway, CIGNA's Chairman and Chief Executive Officer, Mike Bell, our Chief Financial Officer, Pat Welch, the President of CIGNA HealthCare and Dr. Allen Schaffer, CIGNA HealthCare's Chief Medical Officer.

Ed will open the call with some brief observations on our first quarter results. Mike, Pat and Allen will also provide prepared remarks. After Ed's closing remarks we will respond to questions.

The Securities and Exchange Commission has issued new rules dealing with the use and presentation of financial measures that are not determined in accordance with generally accepted accounting principles or GAAP.

We have modified our documents and presentations for this quarter to streamline our reporting and comply with these new rules. For example, in our earnings release we now reconcile nonGAAP measures to the most directly comparable GAAP measure.

We posted to the investor relations section of the Cigna.com web site, today's earnings release as well as our statistical supplement. The supplement is complementary to the earnings release and contains the reconciliation to GAAP for the nonGAAP measures that we will be providing in today's remarks.

We continue to use income from continuing operations excluding realized investment results and special items such as unusual charges and gains on sales of businesses as the principal measure of performance for our operating segments.

In accordance with the new SEC rules that I referenced to previously, this measure, whenever used, is reconciled to income from continuing operations determined in accordance with GAAP. Certain other measures including medical cost ratios, administrative expense ratios, that were not determined in accordance with GAAP, are no longer included in our reported results.

In some cases, these metrics have been replaced with similar measures which are calculated using amounts determined in accordance with GAAP.

In our remarks today we will be making some forward-looking comments regarding segment and company outlooks. We would remind you that there are risk factors that could cause actual results to differ materially from our current expectations. Those risk factors are discussed in a form 8 K filed this morning with the Securities and Exchange Commission.

With that, I'll turn it over to Ed.

Thanks, Greg.

Good morning everyone.

Today I want to begin our call with comments on our first quarter 2003 results, and the progress that we are making. Mike Bell is going to review the specifics of the first quarter 2003 financial results and he's going to provide our outlook for full year and second quarter 2003. Pat Welch is going to provide an update on the actions we are taking to improve results in CIGNA HealthCare. And Pat's comments will include an update on the key initiatives under way in that business, including a review of key performance metrics that we are using to track our progress.

And as Greg noted, our Chief Medical Officer, Dr. Allen Schaffer, will also discuss some key initiatives and results in the medical management area. And then I'll conclude prepared remarks with a few closing comments and we'll go to Q&A.

Okay, regarding the first quarter earnings. First quarter 2003 earnings excluding realized investment results, discontinued operations and one special item, were $1.46 per share. Earnings for the first quarter 2002 on the same basis were $1.92 per share, and the first quarter '03 results are up, this year's results are up, from $1.27 per share in the fourth quarter of 2002. They are consistent with the projections we provided on our February 7th conference call, and ahead of the Wall Street consensus estimate.

Earnings in the employee HealthCare, Life and Disability benefits segment were consistent with the projections we provided in February and the Street expectations. Our results for the quarter reflect strong execution against our HealthCare priorities, and continued good results in our Disability, Life and Accident and Specialty HealthCare businesses.

Our retirement business again posted strong results in the face of volatile equity markets. This operation continues to attract new customers and assets, it is benefitting from movement of assets to our higher margin products and is generating good returns.

The International operations also posted strong results for the quarter primarily reflecting growth in our ex-patriot benefits business. Our International Life and Accident businesses also continued to perform well.

The previously disclosed sales of our Brazilian HealthCare and Pension operations have been completed as expected. The sale of these businesses will allow to us focus our efforts on those non-U.S. markets and businesses with greater growth potential. The combined results for our other segments, including runoff reinsurance, other operations and corporate, were essentially in line with our expectations and Mike's going to talk more about these segments later.

In summary, all of our employee benefits operations are performing as expected. We are seeing the improvements from the fourth quarter performance levels that we anticipated, and the actions initiated to improve the operating performance at CIGNA HealthCare are paying off. So I'm pleased with the progress we are making across all of our businesses.

In HealthCare, we have moved aggressively to improve customer service and to reorganize and realign our operations. And improvement plans are proceeding.

In a moment, Pat's going to share with you the specifics of our progress on key HealthCare initiatives, but I'd like to emphasize that , we understand the HealthCAre challenge, we have taken agressive action and we are seeing evidence of improvement.

In Retirement, we continue to differentiate ourselves with retirement plan sponsors and we are attracting new plans and assets while retaining our existing base of customers. We are also experiencing solid sales growth in our Group Life and Disability business, reflecting successful efforts to grow our sales force and to penetrate the middle market.

And on the International front, we are making good progress in expanding our Specialized Life and Health businesses and in addition, our ex-patriot HealthCare business continues to perform quite we well.

Overall, I feel good about the significant progress we are making on our key initiatives in HealthCare and the continued performance of our other employee benefits businesses.

And with that, I'm gonna turn it over to Mike who is going to go through the financial details of the quarter.

Thanks, Ed, good morning everyone.

In my remarks today, I'll discuss CIGNA's first quarter 2003 earnings and I'll also provide earnings guidance for the full year and second quarter of 2003. I'll begin by covering two reporting items. First, during the first quarter, we completed the sale of our Lovelace subsidiary as well as our Brazil HealthCare operations. Sales-related gains for the businesses, $32 million for Lovelace and $18 million for Brazil HealthCare, are reported in discontinued operations.

Second we completed the sale of our Brazilian pension operations in April, and there will be no material impact on our financial results from this transaction.

Turning to the quarter. CIGNA reported net income for the first quarter of $236 million or $1.68 per share, which compared to $218 million or $1.52 per share in last year's first quarter. These results included realized investment losses of $21 million this year and $57 million last year. Net income also included results from the discontinued Lovelace and Brazil HealthCare operations, and in this year's first quarter a $4 million favorable special item related to our HealthCare restructuring program.

I'll now comment on earnings from our continuing operations before realized investment results and special items.

This view of earnings is useful in understanding the performance of our businesses, it is also the basis on which we provide our earnings outlook. On this basis, earnings were $205 million or $1.46 per share in this year's first quarter, versus $275 million or $1.92 per share last year.

Our first quarter result is consistent with the estimates we provided in February, and is improved over our fourth quarter result which was $178 million or $1.27 a share.

The balance of my comments on earnings will be on that same basis. That is, I'll discuss earnings from continuing operations before realized investment results and special items.

I'm going to start with HealthCare Life and Disability segment. Segment earnings for the first quarter of 2003 were $155 billion. While lower than last years first quarter earnings of $216 million, this result was improved over our fourth quarter result of $122 million and was consistent with our expectations. The year-over-year decline reflected lower margins on the medical indemnity business and higher per member operating expenses, partially offset by an increase in Specialty HealthCare and Life and Accident results.

The improvement over fourth quarter reflected lower per member operating expenses, rate increases, and the nonrenewal of some unprofitable business. Relative to the components of the segment, I'll talk about HMO and then indemnity.

HMO earnings include results from our health plans and from our Specialty HealthCare businesses. Excluding amortization of intangibles, HMO earnings in the quarter totaled $110 million, versus $124 million in the first quarter of 2002, and $85 million in the fourth quarter of 2002.

The decline in HMO results from a year ago reflects increased reported medical costs on insured products, higher per member spending, and lower membership, partially offset by higher earnings in our Specialty HealthCare businesses.

Our first quarter commercial HMO medical loss ratio increased by 160 basis points compared to the first quarter of 2002, principally reflecting 110 basis points of unfavorable prior period claim development. The remainder of the increase reflects higher than expected inpatient costs.

The improvement in HMO relative to fourth quarter of 2002 was driven by solid execution of our restructuring plan, and strong pricing actions. On a sequential basis, the commercial HMO medical loss ratio improved 50 basis points and the administrative expense ratio improved by 70 basis points.

For full year 2003, we continue to expect commercial HMO net premium yields, to be approximately 14 to 15%. And excluding the prior period claim development that I mentioned a second ago, we expect full year medical cost trend for the commercial HMO business to be in the 13 to 14% range.

For our HMO business that is funded by ASO agreements, which is about 2/3 of the HMO book, we expect full year medical cost trend on a constant mix basis to be in the 12 to 13% range, likely closer to 12%. And this is consistent with our experience for first quarter.

HMO revenues, including premium equivalents, were up 10% from the first quarter of 2002 on the same-store basis excluding the impact of the Lovelace sale. Excluding premium equivalents, HMO revenues were up 3% reflecting commercial HMO price increases, higher fees and specialty business growth, partially offset by lower membership.

Moving on now to Indemnity. First quarter indemnity results, excluding amortization of intangibles, were $49 million. This compares to $95 million for the first quarter of 2002, and $42 million for the fourth quarter of 2002. The year-over-year decline reflects lower medical indemnity results partially offset by increased Life and Accident earnings.

As we've discussed before, the decline in medical indemnity results is caused by last year's pricing execution short fall and increased per member operating expenses.

Relative to fourth quarter of 2002, the first quarter's results benefited from lower large case losses, and an improvement in operating expenses per member. Within indemnity, earnings on Group Life and Accident business increased year-over-year and our Disability business continued to perform well on an absolute and competitive basis.

Now from a revenue perspective, Indemnity premiums and premium equivalents were up 3% compared with the first quarter of 2002. Excluding premium equivalents, revenue was flat, due to lower medical membership, offset by higher medical premium fees and increased revenues in our Disability business.

With respect to medical membership, total membership on a same store basis was down 6% from December 31st and from March 31st of last year. The decrease from year-end was primarily due to lower enrollment in commercial HMO and indemnity PPO programs, and was in line with our expectations.

Moving on now to the Retirement segment. Earnings were $55 million, compared with $57 million the first quarter of 2002. This result was consistent with our expectations and was strong, particularly in light of the equity market performance in 2002, and the first quarter of 2003.

Results primarily reflect the impact of the declining stock market on asset-based fees, partially offset by a favorable shift of assets into higher margin products. In addition, earnings benefited from favorable timing of expenses.

Ending assets under management were down slightly from year-end and were down 3% versus the end of first quarter 2002. The year-over-year decline reflects a decline in separate account assets which are largely equity-based, partially offset by higher general account and corporate life insurance assets. Overall, this segment's results for the quarter were strong on an absolute and competitive basis.

In our International segment, earnings were $10 million, versus $8 million in the first quarter of 2002. The increase in earnings was largely driven by continued growth in our ex-patriot benefit business which continues to deliver strong results.

I'll now summarize the results that I've just walked through for all employee benefits business. Our HealthCare Life and Disability, Retirement and International segments generated $220 million in earnings in the first quarter.

Earnings from these core employee benefits operations were up 16% on a sequential basis.

Relative to the remaining segments, in the aggregate, our runoff reinsurance, other operations, and corporate segments reported a loss of $15 million which was in line with our expectations.

I'll comment briefly on each of the pieces. The runoff reinsurance segment includes CIGNA's remaining reinsurance operations which are inactive and in runoff mode. The segment reported a loss of $15 billion for the quarter, compared to a $2 million loss in the first quarter of last year.

The increased loss reflects the impact of revised assumptions related to amounts recoverable from reinsurers and recognition of increased liabilities for reinsurance contracts that guaranty minimum income benefits.

We've discussed the runoff variable annuity death benefit product, or VADB, in the past. And as you know, we established an investment program last August to reduce our equity market exposure for this product.

That program is working as designed, generating gains, which have effectively offset the increase in liabilities resulting from the equity mark declines. On a related note, our first quarter disclosures will continue to indicate that there's meaningful uncertainty related to the reserve assumptions or VADB. We regularly review assumptions used to estimate reserves and expect to complete another in-depth review in the second quarter.

Moving on to other operations, which include the amortized gain on the sale of the individual Life and Annuity business, the runoff leveraged Corporate and Life insurance business and certain investment operations. Earnings for this segment of $20 million were essentially flat with first quarter of 2002, and in line with our expectations.

For Corporate, which includes unallocated investment income and parent company expenses, the first quarter loss was $20 million, compared to a loss of $24 million in the first quarter of 2002. The decreased loss reflects lower operating expenses and lower interest costs.

To recap the quarter, earnings in total were lower than last year but improved sequentially and were in line with our expectations.

I'll now comment briefly on our capital position. As we've said before, reducing leverage and restoring financial flexibility to historic levels are key priorities for us.

As of the end of first quarter, our leverage ratio improved to 30% compared to 33% at year-end 2002. This mainly reflects the impact of scheduled debt maturities. This places us at the upper end of our 20 to 30% leverage ratio target and we expect to further reduce leverage in the balance of the year.

Now, with respect to cash flow we continue to expect positive cash flow at the parent company level during 2003 and we expect to end 2003 with approximately $75 million in cash at the parent company group.

Before discussing the earnings outlook, I'd like to briefly discuss an additional initiative we have undertaken to reduce costs. This initiative will be mentioned in our 10-Q.

As you know, we've taken aggressive actions in all of our businesses to improve our competitive cost position. As part of this effort, we are currently reviewing our corporate staff functions, with the objective of improving our operational effectiveness and reducing the expenses which are allocated to our business segments.

This review is not complete and we've not yet finalized our estimates of the expense savings. We also have not yet finalized our estimates of the related implementation costs such as severance. Nevertheless, we do not expect to incur implementation costs that would be material to full-year consolidated earnings.

Turning to the outlook for full year 2003. Consistent with our normal practice, I'll provide estimates of after tax earnings from continuing operations before realized investment results and special items. On this basis, for the full year, we expect earnings of six and a quarter to $6.50 per share and this is consistent with the projections we provided in February.

With respect to the segments, starting with the employee HealthCare Life and Disability benefits segment, we remain comfortable with the previous estimates of $675 to $725 million of full-year earnings, including amortization of intangibles of $15 million. We expect HMO earnings of $465 to $495 million and expect indemnity earnings of $225 to $245 million. This reflects a modest shift in expectations between the HMO and indemnity components within the segment.

I'll now address how we expect to achieve earnings improvement from our first quarter earnings run rate for this segment. Annualizing our first quarter earnings of $155 million, brings us to $620 million for the full year compared to the midpoint of our outlook for the segment which is $700 million. There are two major factors which will contribute to the improvement for the remainder of 2003.

The first is medical cost improvement. We are executing a number of actions including improvements to utilization and case management and provider contracting which we expect to result in improved medical costs in the balance of the year. Pat Welch and Allen Schaffer will discuss our actions to address medical costs in a few minutes.

The second is price increases. About 60% of our commercial HMO and experience rated book were renewed in first quarter. An effective pricing execution on the remainder of the book as it renews will contribute to additional earnings improvement throughout the remainder of the year. In addition to these two major drivers, we expect to continue to generate the strong Disability Life and Accident and Specialty HealthCare results that we delivered in the first quarter. We also expect continued strong expense management results in the balance of the year.

So to sum up for the employee HealthCare, Life and Disability benefits segment, we expect to achieve earnings of $675 to $725 million for full year 2003.

Now turning to the other segments. We expect the companies' other segments in the aggregate to contribute approximately $200 million in earnings, which is consistent with our previous projections. We expect $210 to $220 million for the retirement business, and this assumes a return to historical levels of stock market appreciation of approximately 2% per quarter in the remainder of the year.

We expect $45 to $50 million of earnings for the International segment, $15 to $25 million for the combination of the other operations and runoff reinsurance segments, and a loss of $70 to $95 million in corporate.

So to recap further 2003 outlook, we continue to expect consolidated after-tax earnings from continuing operations, before realized investment results and special items, of $875 to $925 million or $6.25 to $6.50 per share for the full year of 2003.

Now turning to the second quarter. We currently expect consolidated earnings before realized investment results in special items of $1.40 to $1.60 a share. Our expectations for the second quarter by segment are as follows; for employee HealthCare, Life and Disability benefits, we expect total segment earnings of $156 to $176 million, including amortization of intangibles of $4 million. Within this segment we expect HMO earnings of $110 to $120 million, and Indemnity earnings of $50 to $60 million.

For the retirement business we expect earnings of $52 to $55 million and for International, we expect $10 to $12 million. In the combination of the other operations and runoff reinsurance segments we expect zero to $5 million. And we expect a loss in corporate to be $20 to $22 million. So in total, we expect second quarter consolidated after tax income from continuing operations, before realized investment results and special items, of $198 to $226 billion or $1.40 to $1.60 per share.

So to recap, our first quarter 2003 results across all segments were in line with expectations. We're making good progress on a number of fronts and our expectations for full year 2003 consolidated earnings are unchanged from the estimates that we provided in February at $6.25 to $6.50 per share.

And with that, I'll turn it over to Pat Welch who will provide an update on key initiatives in our HealthCare operations. Pat?

Thanks, Mike. Good morning everyone.

This morning I will give you an update on the key initiatives we have undertaken to improve the performance of CIGNA HealthCare. As we've discussed previously, our five initiatives are: one, organizational realignment, two: Service improvement, three: Medical management and provider contracting improvement; four, the strengthening of underwriting; and five, operating cost reductions.

In a minute, I will have Dr. Allen Schaffer, our Chief Medical Officer, discuss our new medical management model and implications for medical costs in 2003 and beyond.

Turning to the initiatives, starting with organizational realignment. In order to better serve customers and focus resources, we have aligned the HealthCare business around three customer segments: National accounts, Regional accounts, and Specialty HealthCare.

The first segment is National accounts, accounts with more than 5,000 eligible members. As part of the realignment, we have expanded our national accounts unit and transferred to them responsibility for all large multisite employers, including most that were previously managed by our regional offices. Customers are benefitting from the higher touch service model that is delivered by our National Accounts team.

This model will result in higher retention and greater in-group growth, consistent with the historical track record of our National Accounts Group. I spent a reasonable amount of time with customers who are moving to the new model and they are very pleased with the transfer.

In our second segment, the Regional segment, our resources are now focused on one of the areas of greatest opportunities for us. That is, expanding our share in the middle market. This is an area of opportunity for us because margins are generally higher and there is increased potential for our Specialty product sales.

I would note that we already have a large middle market book of business but we believe that with clear focus and our broad and flexible benefit plan offerings, we should be able to expand our market share.

Our Specialty segment sells dental, behavioral, pharmacy, vision, case and disease management products and services. These operations continue to perform well and grow, serving both existing CIGNA HealthCare medical members, as well as members who do not currently have a CIGNA medical plan.

Our second initiative is service improvement. We built a new senior leadership team in our service operations. We outlined our recovery plan and continue to communicate our metrics and timetable to consultants, brokers, and our customers. We've made very good progress here.

As expected, we have stabilized the service operations and achieved competitive parody or superiority across a range of service metrics. Now given the tremendous attention we placed on our service challenges last year, let me stop and say that again.

We have made significant progress and we believe that we have achieved competitive parody or superiority across a range of service metrics.

Let me give you a few examples of the improvement. Customer satisfaction with the conversion of their accounts to our new systems and the initial account setup process continue to improve. Satisfaction levels were 92% for the migrated customers in 2003, versus only 57% in January of 2002. A 35-point increase year-over-year.

Telephone service statistics and claim metrics have improved dramatically versus prior year levels as well. Our first call resolution rate, which is a key measure of member satisfaction, is running over 90% in the first quarter of 2003. A 15-point increase over the first quarter of last year.

Based on consultant feedback this rate is competitively superior and it is above our original expectations. Our average speed of answer is running at 24 seconds for our National accounts, again, a very competitive result.

Overall, service performance is well ahead of where we were at this time last year. Our near term goal was to be a competitive parody by April. We've attained that level of performance and will continue to improve. As such, we believe that we are well-positioned for the second half of 2003 and for the 2004 selling season.

Our third initiative is improving medical management and provider contracting. We're making very good progress in this area as well. Our objective is to promote quality outcomes at the lowest total cost. And in this area, we are enhancing our approach to medical management and contracting. We have centralized responsibility for contracting, we have clearly defined national standards, and they are being driven through four contracting hubs.

These contracting hubs have clear lines of accountability, clear contracting standards and guidelines, and appropriate staffing complement and specific contracts targeted to address certain contract features and to support the local market strategies.

These changes will decrease unit cost, variation in our contracts and contract setup time, while increasing claim auto adjudication rates and the overall efficiency and effectiveness of our claims-paying operations. These actions will also strengthen our relationship with employers, members, doctors and hospitals.

In the medical management area, we have four key areas of focus. They include, one: Wellness, prevention and early detection. Two: Consumer advocacy and outreach to get more of the right customers into our case management and disease management programs where we know that we can positively affect outcomes and lower costs. Three: Integration of Medical and Specialty HealthCare capabilities. And four: Technology and the strategic use of clinical and other information.

With that, I'll turn it over to Dr. Allen Schaffer who will discuss our direction in medical management. After Allens' remarks, I'll provide updates on our other key initiatives.

Thank you, Pat. Good morning.

As Pat indicated, I'm going to provide some highlights on our new medical management approach and implications for medical costs in 2003 and beyond.

CIGNA has for many years had a significant emphasis on clinical quality and made substantial investments in clinical resources. In fact, we have approximately 3,000 clinicians in the business. These include physicians, nurses, pharmacists, dentists and behavioral health professionals.

As Pat described, we have recently enhanced our medical management model. Our enhanced model focuses our clinicians on the highest value activities that help our customers achieve quality, cost-effective HealthCare outcomes.

Specifically, the enhanced model shifts resources to case management and disease management programs while the deemphasizing low value activities that customers and providers view as annoyances.

Many of these resources are focussed on serving the 10% to 12% of eligible members enrolled in our case and disease management programs. This is important because 20% of our members typically drive 80% of medical costs.

We have found that case and disease management programs improve customer satisfaction by also helping to control costs and to improve outcomes.

We have a significant focus on wellness prevention and early detection. Our enhanced model is essentially a health facilitation model based on information, outreach, and coordination by clinical case managers with an emphasis on wellness, prevention and early detection.

The strength of our wellness and prevention programs has been independently verified. 100% of CIGNA's health plans are NCQA accredited and we are rated either excellent or commendable. CIGNA's HETA's ratings, which measure effectiveness of care on a host of preventative screenings, have consistently increased since 1999. Compared to our three largest competitors we ranked highest in virtually every measurement category.

Given the strength of our programs, we are well-positioned to help employers control costs and to help consumers understand their options, to realize quality, cost effective outcomes relative to their personal health and wellness.

Advocacy and outreach is another key element of our enhanced medical management approach. This includes helping consumers deal with the challenges of chronic, or severe health conditions. We help identify patients at risk through predictive modeling and then manage the risks through case and disease management activities.

Our case and disease management business, Intracore, is the recognized industry leader in case management services with one of the industry's few accredited disease management programs.

Our disease management programs cover conditions such as diabetes, asthma, low back pain, and chronic obstructive pulmonary disease. These programs are nationwide in scope and are consistent from market to market ,unlike the programs of some of our competitors.

In our asthma program, we evaluate medication use patterns to help improve compliance and to reduce the risk of hospitalization. We also conduct proactive outreach to members and to their physicians.

In the first four months of 2003, we identified 5,000 members using consistently high quantities of asthma rescue medications. Half of these members were not using controller medications that would result in a reduction in their risk for hospitalization. This was a clear opportunity to improve outcomes and to reduce cost.

As an employee benefits company with a large medical benefits franchise, and the largest most comprehensive set of wholly owned Specialty HealthCare businesses of any company in the industry, we are uniquely positioned to impact health outcomes and medical costs through clinical integration.

In the area of clinical integration, we help our members care for their total health by integrating the clinical data accumulated through our administration of their medical, pharmacy, behavioral health, dental and other Specialty HealthCare plans.

Let me give you an example of the benefit of integration. In 2002, we evaluated the use of prescriptions for antidepressant medication and observed some variation in clinical practice patterns. We distributed national clinical practice guidelines for the treatment of depression to over 100,000 network physicians.

During 2003, we have provided individualized analysis of antidepressant treatment patterns to over 12,000 practicing clinicians. This includes primary care physicians, specialists and psychiatrists. As a result of these and other efforts, we reduced the number of members on antidepressant medication by 24,000 people.

These are people who were taking medications that were inappropriate because they exposed them to drug interactions or provided no benefit. We also improve the compliance of 19,000 members and gave them a better chance of recovery, while also avoiding an estimated 8,300 incidents of single-time prescription refills for medications which would have been wasted.

This is just one example of the power and the benefits of integrating medical, pharmacy and behavioral data while driving better quality and cost outcomes. When you consider our large HealthCare franchise with 12 million medical members, 14 million behavioral members, 12 million dental members and 9 million pharmacy lives, you can see why integration is a significant opportunity for us.

Now let me comment on the use of information to facilitate consumer and employer decisions. All of the efforts I have discussed are worthwhile uses of our resources. However, the impact can only be maximized when consumers and employers are engaged and informed.

As a carrier with access to data from various sources across the healthcare spectrum, including hospital, laboratory, physician and pharmacy, we're able to provide information that helps consumers and employers make strategically important decisions that result in quality cost effective outcomes.

In 2002, an early 2003, we introduced a series of online decision support tools to help consumers do several things. First, to evaluate condition-specific drug treatment options. Second to compare procedure-specific quality metrics for certain hospitals. Third, to monitor their health status using an online questionnaire. And finally, fourth, to access medical information on over 5,000 topics.

These tools are available through our "my CIGNA.com portal which provides consumers personalized access to details about their CIGNA medical, Specialty HealthCare and retirement plans. CIGNA currently has approximately 800,000 registered users and we are currently adding new users at a rate of 1,000 to 2,000 people a day. This is the type of tool that makes members want to keep CIGNA as their carrier.

We further assist members by providing them access to nurses via our telephonic health information line service, 24 hours a day, seven days a week. We are one of the few companies that can offer this broad array of consumer support tools.

We have employer support tools that allow employers to understand the drivers of medical cost trends and utilization and what can be done to influence trend going forward. Actions to influence trends might include product or benefit design changes and these employer tools have been well-received in the marketplace.

Our enhanced approach to medical management, including our unique set of consumer and employer information tools, help differentiate our capabilities in the marketplace. These efforts will also contribute to better medical cost results going forward.

By reorganizing, refocusing and concentrating our clinical resources in seven health facilitation centers we will be able better to drive outcomes. These outcomes will result from increasing the number of members in our case and disease management programs, establishing groups of clinicians that specialize in dealing with certain conditions or treatment protocols, such as cardiology and organ transplants.

As I noted earlier we currently have 10% to 12% of our eligible members engaged in our case and disease management program. These members are, in most instances, among the highest users of medical services and consequently the drivers of significant cost. Helping them to get the most appropriate care based on independently developed national standards, can help reduce practice variation, lower the cost and improve the quality.

Overall, we are excited about the progress we have made in enhancing our medical management model, and the implications for driving quality, cost effective outcomes.

With that, I turn it back over to Pat.

Thank you, Allen.

I truly believe with the depth of our clinical resources, the breadth of our Specialty businesses, and our analytical capabilities, CIGNA's uniquely positioned to improve quality outcomes and lower cost.

Our fourth initiative is strengthening underwriting. We have installed a new management team in underwriting, including a new head of underwriting.

Using a back-to-basics approach we have restored and strengthened underwriting and pricing guidelines and procedures consistent with CIGNA's historical strength in this area.

Specifically, we have strengthened our front end monitoring tools, improved the audit and peer review functions, and implemented stricter levels of authority. We have restored the appropriate level of discipline in this vital part of our organization.

We now have the underwriting organization focussed on appropriately executing our case-specific pricing plans and helping to improve retention of existing customers and closing new sales. These efforts are key to our profitable growth.

The fifth and final initiative is reducing operating cost. We are aggressively reducing operating costs to streamline decision-making, increase operational efficiency and improve the competitiveness of our products.

It is important to note that we are realizing substantial work force reductions while also improving the quality of the service experience for our customers. These and other ongoing efforts will contribute to sustainable improvement in our competitive position. We remain focussed on strong execution of these initiatives and delivery on our financial and other commitments.

Before I turn it back over to Ed, let me comment on our membership levels.

As expected, medical membership on a same-store basis, excluding the Lovelace operation, declined approximately 5% as of January 1st, 2003. First quarter 2003 membership levels were down approximately 6% from year-end 2002, and could be down another 1% to 2% by the end of 2003. We are working diligently to stabilize membership levels. The actions that I have just outlined will contribute to the stabilization over time.

We recently made a decision to exit our only Medicaid business, located in Arizona, effective in October of 2003. As a result, we will not renew our 75,000 Medicaid members when the current contract expires later this year.

In summary, we believe we have the organization focussed on the right priorities and actions. We are driving significant but necessary change in the short time frame. The actions that we are taking are already benefitting our customers.

There's clearly more work to do but our performance improvement efforts are well underway. We have broad product and service capabilities that can meet our customers' needs and the actions that I have outlined will further improve our competitive position.

Furthermore, we are improving the competitiveness of our offerings with a differentiated medical management approach and improving service proposition, new consumer tools, and enhanced employer reporting. Through these efforts we are preparing a solid foundation for future profitable growth.

With that, I'll turn it back to Ed.

Thanks, Pat.

Now, before we take your questions, I want to provide just a few summary comments. First, our first quarter results were slightly above Street consensus and in line with our expectations.

As I've said, I think we are executing well against the HealthCare initiatives that Pat just went through, particularly in the service area. And we are keeping our customers, benefit consultants and brokers apprised of the progress we're making. And our other employee benefits businesses continue to perform well in the first quarter of 2003.

We believe our earnings projection for 2003 is appropriately challenging, but achievable. We are clearly working to position this business for stronger competitive results in 2004 and beyond.

Our top priority in 2003 remains improving our HealthCare operation, which is essential to restoring investor confidence and interest. We have the right people in place and appropriate actions underway to achieve this result.

And with that, I'm going to turn it back to Greg and we'll be happy to take your questions.

Thank you.

Today's question-and-answer session will be conducted electronically. If you would like to signal to ask a question, please do so by pressing star key, followed by the digit 1 on your touch-tone telephone. Once again, that is star 1 to signal to ask a question.

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And we'll go first to Josh Raskin with Lehman Brothers.

Hi, thanks. Good morning.

Just want to talk a little bit about membership trends here. You gave a little bit of detail as towards expectations for the rest of the year, which is helpful.

But I want to think about sort of, you know, what are the initial expectations for 2004? And I understand that we're really just starting the RFP process, you know, for even just a large group, but what would be targets, or goals?

Where would you be satisfied in 2004 and maybe even if you could give us a little bit of guidance as to the RFP activity you're seeing right now?

Josh, it's Ed. I'll start.

First, I think it's pretty early for us to comment on 2004. To be candid with you.

Clearly, as we just said, all of the actions that we have underway are designed to improve our competitive position and convince the market that that is, in fact, the case.

You know, the items that Pat went through, the service improvement, the underwriting focus, the medical management model, which we believe is getting reasonable recognition in the marketplace as being somewhat differentiated and having good value, all of those things we think are critically important to improve our ability to grow in 2004. And that's what we're focussed on.

But in terms of exactly what we should expect, I think it's still a little early for that.

Pat, I don't know if you want to add anything or not.

Yeah, I think, it is a little early.

Most of the National Account business is just kind of getting started now and we're seeing some picking up in the pipeline there. And in the middle market, that's in full swing for the July time frame. But it is really a little early to be projecting '04.

I think, though, reemphasizing Ed's points, we're coming off of a tough time in '02, we're doing I think the right things to stabilize our organization. I think we've made tremendous progress.

There is a little downward momentum on membership you see, and our goal is to get that flattened out and start bringing back profitable growth in the future.

Okay, that's helpful.

Switching gears a little bit, just on the medical cost trends, they sounded like they were basically, you know, relatively flat and consistent with expectations. More importantly, could you give us a little color on components? Were there any movements within any -- particularly inpatient hospital trends?

Josh, it's Mike.

The -- in terms of commercial HMO in particular, you know, we continued to believe the full-year outlook for 13% to 14% trend is reasonable.

In terms of the pieces, inpatient was a shade higher than expected in first quarter. I do think, though, the -- we're seeing some benefit on the physician and pharmacy side. I'd say net-net the 13 to 14 is still very doable.

Okay. That's helpful. Thanks.

We'll go next no William McKeever with UBS Warburg.

Yes, congratulations on the quarter. A couple of questions on the system.

You mentioned that you had achieved parody with your competitors and I think I sort of got a sense from your tone that you actually might be, in some ways, a little bit ahead of others, your competition.

Could you tell us maybe what features you have or something in your system that gives you that edge?

Well, I think -- I wouldn't necessarily go as far as saying we've got a major edge.

I'm saying coming from the position that we were in, which again, we've got a lot of visibility, we have made tremendous progress. If you look at all the measures in terms of first-call resolution, the average handle time, the abandonment rate, the ASA's, claim in the inventory, we're way, way ahead of where we were.

Our call technology is superior, we think. And going forward, I think we're going to continue to take even more improvements. So I'm not -- I think on some of the measures I think we're superior. But overall, what we're really saying is we're back basically at competitive levels in service now.

Okay.

And then just pressing out the employees that are involved in service and the overall infrastructure, number of employees to run your business, are you adding on the service side and taking away from other areas? Or are you looking now across the board to cut personnel?

Well, as you remember, Bill, we did staff up in the service areas in the third and fourth quarters. And that did cause some of the pressure on cost in the third and fourth quarters. As we went through our organizational realignment and our cost reduction activities, we really protected the service area. Because it's a key area for our position going forward.

We, in fact, retained that staffing level so that the 1/1/03 time frame, our service standards were going to be high. That has paid off. We're seeing very good productivity numbers, we're seeing very good service metrics.

Over time, we would hope to see those, the level of staffing decline as we get the benefits of the greater technology improvements we've made. But we have protected those service operations this quarter.

Okay. Thank you for that.

I think my last question, last quarter, you talked about reduction in force of approximately the 32 to 3300 individuals. Can you give us an update on where you are, where you were at the end of the first quarter, and if that's still a good target?

Well, we're -- it's still a good target. Yes, it's still a good target.

A couple of areas we've maybe delayed some of the terminations after the first quarter. But in general, we're on plan for those reductions.

And, in fact, the number of people terminated may be a little less because we've had a higher level of attrition in some areas. So I think we're on track with our plan.

Great, thank you.

We'll take our next question from Matthew Borsch with Goldman Sachs.

Hi, good morning. Questions on enrollment.

Can you give us an idea of where you stand now with national accounts and what percent of your total medical enrollment national accounts now represents?

Yeah. It's now - just roughly, it's about 50-50, national accounts and our regional middle market segment, within a reasonable range of accuracy it's roughly 50-50.

And, you know, just to try to understand where the enrollment decline came from, how much did your enrollment drop in national accounts, year-over-year? Or sequentially, actually, from the fourth quarter?

Matthew, it's Mike.

As you know, our total membership was down 6% relative to year-end. The national was a little better than the 6. And the regional was a little worse.

Our national account persistency has run in the low 90s the last couple years, and that continued in 2003.

And do you see the potential to lose any national accounts during the year 2003?

Well, you know, you used the appropriate adjective, "potential." I think there's always potential to lose accounts. But we are working very hard to make sure that we are meeting the needs of those national accounts. So we're not necessarily anticipating any, but there's always potential.

Matthew, one of the -- just to pile onto that, we've mentioned a couple of times as we've gone through this material that we are communicating very proactively with producers and customers. And obviously, we want to turn the market perception about some of the issues we experienced last year as quickly as possible. And as you might expect, a lot of that is directed at our national account book.

Right. Got you. Okay. And last question on enrollment here.

The possibility of a further 1% to 2% decline this year, is that inclusive or exclusive of the Arizona Medicaid exit?

It excludes the Medicaid exit.

Great, gotcha. Okay, thanks.

We'll go next to Eric Veal with Deutsche Bank.

Thank you.

Just a question about the indemnity guidance. If I look back over the last three times you guys have given guidance on that, the mid point of your guidance has gone from 275 to 255 to 235. What can you tell us to give us comfort that this time the guidance on indemnity is really, you know, the bottom and we're not going to see that revised down again?

Okay. Eric, it's Mike.

We have now performed a detailed review on the January 1 book. Specifically we now know what's sold, we know what we kept versus what we've lost. You know, we've clearly acknowledged from, you know, beginning in the fall of last year, that we are suffering from an overhang from some pricing decisions made last summer.

You know, that has been reflected in the guidance and, again, between the detailed reviews and the stronger underwriting process that we have, we're comfortable with the guidance that we just articulated.

So the detailed review is done, though, so there would -- it would be a surprise if that went down again having spent a lot of time now reviewing all of that information?

That is correct. It would be a surprise.

Okay.

And the second question, On the Medicaid business, was that a profitable contributor to operating income in 2003?

It has a very minor positive impact. I mean, you're talking about one quarter's worth so it's relatively small impact here for '03.

And can you give us some of the key rational behind that decision, was it strictly a rate issue or something else going on there?

Well, it was, quite honestly, it was really not a strategic business for us. We've been reducing our government business over time. So it was not strategic and we were concerned about the profitability over time.

Okay. Thank you.

We'll go next to Dan Johnson with UBS Warburg global asset management.

Great, thank you very much.

In light of your medical cost trends that you discuss which I believe those are just in your at-risk book, it makes we wonder, can you talk a little bit about the trends in the ASO book, please?

Sure, Dan, it's Mike.

The trends that we're seeing in our ASO HMO book are running in the 12 to 13% year-over-year range. Again, closer to the 12. And we'd expect that to continue through, throughout the year.

What do you think accounts for the difference in the at-risk and non-at risk trends?

I'd be speculating, but the -- first of all, the commercial HMO book did decline about 14% versus year-end '02. So we did see a fairly significant change in mix. Whereas the ASO book is, you know, is more stable.

As we've gone in specific cases, gone in and looked at the geographic mix, as an example, we did see a meaningful geographic mix shift. It was actually slightly favorable for ASO.

On the other hand, geographic mix for commercial HMO added about 100 basis points to the medical cost PNPMs which I think accounted for the bulk of the difference between the 12 to 13 that we expect for ASO versus 13 to 14 for the full year for commercial.

Great,

And then a question on the assumptions, you mentioned about 150 basis point impact due to prior period negative adjustments. Can you just provide a little color behind what drove those?

Yeah. Just to be clear on the numbers, we had about 110 basis points in first quarter '03 related to last year.

This relates to inpatient and professional claims from last year, you know, as these claims developed and matured they did so at higher overall costs than we had expected. Most of it relates back to fourth quarter of last year.

You think this is late receipt of notification or is this actual case development?

Dan, I think it's more the -- well, I think it's a combination of things.

First, to go back to the last call we had, we've acknowledged that we had significant changes in both our claim and medical operations in third and fourth quarter of last year.

You know, we had people changes, we had process changes, we put in new leadership in both of those organizations.

You know, we implemented the new medical management model.

And as Pat Welch indicated on the February call, we did have some claim inventory late last year, third and fourth quarter in particular, and as part of the service improvement, we have worked that back down to industry norms. In fact, well below levels we've seen since '01.

So the -- good news is we've got the claim inventory levels back to where they should be, the new medical management model is now operational. You know, I think what we saw there was an aberration and we're comfortable that it's behind us.

Given sort of prior period adjustments that everyone else is reporting, would it be fair to assume that the 110 is really a net between probably some very good favorable underlying trends, the way everyone else has reported, and then some negative specific issues that you just addressed?

Well, I'm not going to try to speculate on what our competitors are saying about trends or prior period adjustments. Again --

Well, they've pretty much just mentioned that costs have begun to moderate a bit more than they anticipated, seems like an industry phenomena, I think across everyone.

Again, my main point is, Dan, I'm not going to try to comment on what they're describing as prior period adjustments but I would tell you that, we continue to feel comfortable that we'll see some moderation in medical costs inflation this year versus last.

I mentioned to Josh's earlier question the moderation in physician and pharmacy and, again, we're comfortable with our own guidance.

Appreciate your answers. Thank you.

You bet, Dan.

We'll go next to Roberta Goodman with Merrill Lynch.

Not to beat the medical cost trend issue to death, but I had two questions here. Actually, three.

First, could you discuss what the impact was of the weather and the weak flu season on the trends you saw in the first quarter?

Yeah, Roberta, this is Mike. I wouldn't suggest that that's a material driver of our claim experience.

You don't think it could have been had any impact on the professional fees and the prescriptions?

Roberta, I'd be speculating. I think it's a reach to suggest that that's material. Allen, do you want to add anything to that?

We didn't identify it as a driver.

Okay.

Secondly, you talked about the trends on the HMO (indiscernible) on a funded and ASO basis, but could you talk about what you're seeing on the PPO and indemnity side of the business?

Sure.

The -- in terms of the PPO and indemnity trends, they're running, I'd say, over all, one to 2% higher than what we're seeing in HMO. So we'd expect full-year trends there to be in the mid teens.

Okay.

And if you could talk, I guess, both segments, about what the various components, the hospitals, the professional fees, and the prescription drugs would be doing and then break that if you could between utilization and unit cost.

Sure.

In terms of the components of the 13% to 14% year-over-year trend that we're expecting in commercial HMO, we would -- we expect full year cost trends to be in the mid teens for inpatient and outpatient. We expect for physician costs to be on a year-over-year basis up in the low double digits, 11 to 12%. And for pharmacy, something in the low teens.

And in terms of the mix between utilization and unit costs, I'd say overall a little more than half of the increase would be unit costs and the other piece utilization.

The other piece, actually, just to add, back to, I believe Dan's question, we did see the geographic mix in commercial HMOs that I referenced earlier that added about 100 basis points.

And can you quantify the difference between the inpatient and outpatient piece, because obviously there's some trade-off there?

When you say quantify, can you be more specific?

Well, if the inpatient trend, 10% of the outpatient 20 or is it more evenly.

Oh, I'm sorry, evenly split between the two, mid teens.

Both?

Yes, both of them.

Okay.

So your hospital utilization rates, therefore, would be rising somewhere in the 7% to 8% range, if it's roughly half of the increase in the inpatient trend?

Yeah, it would be just a shade less than that for the full year would be our expectation.

Okay. Thank you.

You bet, Roberta.

We'll go next to Ed Kroll with SG Cowen.

Good morning.

I've got a couple of quick numbers questions if I can get those out of the way first. What was your operating cash flow on a GAAP basis for the first quarter?

Ed, it's Mike.

I think as we've pointed out before, excuse me, that number bounces around so I would sort of evaluate it with caution, if you will. But the -- that specific metric was a positive 552 million for the first quarter of '03.

Now, again, I'd emphasize that bounces around, changes in insurance liabilities, you got tax payments impacting that. And, in fact, just again to give a little more color commentary, we did get about $300 million in tax refunds.

We also, in terms of the insurance liabilities, you'll note in the disclosures that we had about a $56 million gain on the VADB hedge. So all of those numbers are in there.

So, again, between that, and the fact that we to obviously took some charges like the restructuring charge in '02, with the cash flow, will leave the company for a while. I just wouldn't overemphasize that particular measure.

Sure.

And what is -- what do you think that will be for the full year?

Well, I'm not going to try to project the GAAP cash flow per se, I'd be happy to talk about cash flow at the parent company, if you'd like.

Okay. Why don't we do that, then.

In terms of full-year 2003 at the parent company, we continue to project that we're going to get about $600 million of dividends from our operating subsidiaries. We continue to project it will pay out dividends to our shareholders and interest role bond holders in the neighborhood of $300 million, so we'd expect positive free cash flow from operations after dividends and interest to be about $300 million.

As we've talked about before, we matured about $125 million of debt, and we've got $100 million going to some other sources. So at the end of the year, we continue to expect to end the year with about $75 million.

Okay. That's -- thank you for that.

And then on the unfavorable development, 110 basis points, could you put a dollar amount on that, a pretax dollar amount?

Yeah, let's see. It would be $12 million pretax, $8 million after tax.

Thank you. Okay.

And then on the mix of your membership, the nonrisk portion seems to have ticked up here to 85%. Where do you see that going, you know, by the end of this year, if you're going to suffer some more attrition?

And then longer term, is there anything, you know, any change in strategic thinking you have? Or is this just a function of, you know, the accounts you kept and the accounts you lost?

Ed, it's Mike.

First off, in terms of this year, we obviously targeted some pretty specific pricing and underwriting actions for first quarter.

I think that did have, with the benefit of hindsight, a disproportionate share of impact on commercial HMO as opposed to ASO. I don't think that will change materially over the course of the year.

See if Ed wants to comment on the longer term strategy here.

Yeah, I think, Ed, going forward, obviously we continue to have the philosophy that we have a broad base of products, and we can respond in whatever way a customer or the market tends to be moving.

I think as a practical matter, the industry in total has seen some continuing shift to nonrisk, to ASO and we're very well positioned to support that. So I would expect that relative to how the membership moves going forward at least in the near term, our outlook would be that the nonrisk would likely be a greater opportunity for us.

Okay. Thanks for that color, Ed.

And final question on the transformation project, just give us an update on that. I mean, you've referenced it several of your team have referenced it during the course of this call, just kind of a quick recap update, how things are going?

Yeah, things are going -- this is Pat. Things are going very well.

We've had about 43% of our membership is now currently on the in-state platforms and we'll have about 70% to 75% of our members as of 1/1/04. We've had a couple new releases this year that went in very well, getting us prepared for some greater product functionality and HIPPA compliance. So that project is going, actually going very well right now.

Thank you, that's great.

We'll go next to Peter Costa with Leerink Swann.

Hi, a couple questions.

First, you implied that you're continuing with your review of your costs as well as second sort of review of reserves in the runoff reinsurance business.

Is that to imply that we should be expecting a severance charge or a likely addition to the reserves for the runoff reinsurance business in the second quarter?

Peter, it's Mike.

First in terms of VADB, I mean, as you know, we periodically review all of our reserve assumptions for all of our major products. I mean, as we've acknowledged before, there's obviously a significant amount of money at stake here in VADB and a significant amount in the reserve balance. There are a lot of assumptions, there's a lot of uncertainty, there'sa a lot of moving parts.

All I was trying to communicate is, it's just simply prudent to let you know we're performing another end-to-end review of all assumptions and whatever we learn, we'll share it with you.

On the corporate staff expense reductions, we're still pretty early in the process there. You know, I certainly expect that we will see some layoffs. And, therefore, there will be severance costs associated with that.

The main point that I wanted to make there is that this is an area that we're focussed on and any charge that we would have with that, I would not expect to be material to full-year income.

Okay.

And then the second question regarding, I just with and to go through the medical loss ratio one more time. You said 110 basis points of the current quarter's medical loss ratio was prior period negative adjustments?

That's correct.

So if we looked at the current quarter, without that, you'd be something, you know, like 84.8% medical loss ratio, and then if we added that back into the fourth quarter, would be something like 87.5% for the fourth quarter medical loss ratio or thereabouts. So does that imply MLR improved from the fourth quarter to the first quarter, if we readjust for these prior period adjustments, by about 270 basis points?

Peter, first off, I'd just remind you, back at fourth quarter we did have some prior quarter development primarily going back to third quarter. I don't have that number handy but it was order of magnitude like 160 basis points I want to say.

So, I would look at it more as a - if you add this quarter's prior year development back to fourth quarter we had probably about 100 basis points, maybe a little north of that, of sequential improvement.

Okay, great.

And we'll go next to Charles Boorady with Solomon - excuse me, Smith Barney.

Thanks. I make that mistake all the time. The uh - just a couple of questions.

One, you mentioned, the recontracting effort this year with providers. I'm curious what percent of your providers would you be able to recontract with and are there any specifics about things you'd like to change in the contracts?

I recall last year going through a process of revising some of the stop-loss provisions a little ahead of the tenant curve actually and I'm wondering are there other provisions like that where you found they were very inefficient and disadvantageous to you? And also, as part of answering that question, how does your lower enrollment growth impact your negotiating leverage as you're going through the recontracting process?

Hey Charles, it's Mike. I'll start now, ask Pat to add on here.

In terms of the percentage of provider contracts that we can impact, most of our contracts we can implement throughout the year. So I think there's certainly some room there.

In terms of specifics, the -- certainly the one specific that I would note would be the inpatient stop-loss. I mean, this is certainly an issue that the whole industry is dealing with and stop-loss is certainly not part of our preferred contracting model. And the changes that Pat's made to centralize oversight of the provider contracting is intended to get at better contracts, to get at stricter standards and in particular, to minimize the stop-loss stuff.

Pat, do you want to add to that?

Yeah, Charles, we've got about 80% of the facility contracts that are pretty much locked down. So we've still got 20% left open and on the particular features clearly the one that is of most concern is the stop-loss. We also have some carve our provisions on some of the contracts that we're finding are being a bit challenging. So, some of the of the specific carve out, the stop-loss would be going after it.

On the professional side, though, the majority are open and those were really - those, you know, come up for, kind of, revisiting of those contracts in the spring, summer time frame. So there's still some opportunities there.

You can't deny that if your membership level is less, you have a little less, I guess clout, but on a relative basis we don't think that's going to be a big issue for us. It's spread over a wide geography. I think there's things that are more important in terms of our negotiating power really than the absolute level of membership.

Yeah, Charles, this is Ed.

Let me pile on one other thing as well. Pat mentioned it, but I do think it's important in this contracting area.

Clearly from an economic standpoint we're focused on where we think the best economic benefit can be gained. But one of the other benefits of having this centralized approach is going to be on, what I'll call the back end of this, which is the standardization, the consistency in dealing with the providers, the ability to load those contracts more effectively and adjudicate them more consistently.

So there are both economic benefits from the repositioning of how we're doing contracting, all the way through how we're processing them and paying claims. So this is a fairly significant undertaking as well as potential benefit for us.

Last summer when I was there, you know, a few months ahead of the tenant surprise, you guys had picked up on fact that the stop-loss provision was a major inefficiency in your contracts that you were addressing back then.

And I'm curious, with about 20% of your hospital expenses up for renewal this year, is it sort of a 20% a year you can go after things like this? Or when you cash an inefficiency like that, can you go back to contracts that are not up for renewal, even if they're locked down, so to speak? If you find some unanticipated inefficiency in or a loophole in those contracts, can you still go back after them?

What percent of your contracts would you say you've addressed the stop-loss provision in particular with hospital for?

Yeah, I'll start, Charles. First of all, to the extent that we find troublesome contract provisions, we go back whenever. So, you know, these - this is not a one bite of the apple, once a year.

Now obviously, that's a negotiation, so you need to be in a good position with those hospitals to be able to effect those changes. But, we wouldn't hesitate, as we find issues, to go back.

And in fact, the work that Pat's people are doing is to prioritize those hospitals where both we believe we can accomplish some change, and that change will have some meaningful impact for us.

I'm not sure that I have the specific, or we have, I'll turn it over to Pat, the specific statistics as to exactly what percentage we've impacted. But in answer to your first question, no. We wouldn't simply deal with ones that are supposedly closed, we'd deal with the ones that have the most opportunity.

Yeah, and I think the, I don't have a specific number either, Charles. Just from, kind of, our challenges on stop-loss, 'cause we have been concentrating geographically more on the south, in the southwest and the west, and we can always go back and attempt to open up major contracts. It is always a negotiating point. And so, we are targeting the facilities that have been the most troublesome for us. And so, we'll hope to move this needle forward, probably more of an impact in '04 than you'll see in '03.

Last question is somewhat related.

There was a press release from a stent manufacturer saying, maybe it came out from CIGNA saying as well, that you would be covering the Cipher stent.

I'm just curious, with respects to carve outs, is the cost of a stent, drug alluding stent, something that would be carved out and you would be billed for on an item by item basis or is that something that depends on the hospital? Do you have a , sort of a, firm wide policy on that or is it a hospital by hospital decision? And which way is it leaning?

This is Allen Shaffer.

First off, we- we publicly announced that we would cover the stent, it clearly is a medical advance that will, we believe, reduce medical costs over time.

Second part of your question, it is carved out, it's an additional charge outside of the per diem rates on the contracts.

We are working to create or institute reference pricing or a reference reimbursement for some of the carve outs. Obviously, this particular new technology, the price is the price. But for other, the other stents, we are working to introduce reference pricing into the carve out contracts.

Thanks, Allen.

What are you expecting to see from a volume growth standpoint in terms of the number of stents per procedure used when the - the drug alluding stents, are available versus what you saw before they were available?

This is anticipatory comment, but we don't expect to see increases in the use of stenting. In fact, because of the nature of the new drug alluding stent, you should have less repeat procedures because of it's ongoing efficacy.

And just to remind you, the stent is not widely available and is available, right now, in the smaller sizes, so it's not usable in all of - all stenting procedures to date.

Yea, and that's probably what's behind my question.

I'm sort of curious what your building into assumptions this year in terms of, while there are, you know, long term benefits, you get a period of time where there's an up front higher expense as you're paying for more and more expensive stents. And then a benefit later on from reduced repeat procedures and sort of how we - Does that have any impact on the cost trends that we should expect to see as the drug alluding stents become more available?

We haven't modeled it that specifically. This is one of a handful of items where additional up front spending does reduce future spending. We saw that in the proton pump inhibitors, we saw that in the asthma routines that we mentioned, it's good to improve the quality and reduce future spending by spending more up front. But that's all we've done with it.

Thank you.

Our last question will come from Ellen Wilson with Sanford Bernstein.

Yes. I was wondering if you could comment a little bit more on really what's driving the up side to your HMO full year expectations?

So, you know, it sounds like if you're price trend on your HMO business is the same, and your cost trend assumption is the same, then where is the up side coming from 'cause it definitely doesn't seem that it's enrollment.

Ellen, this is Mike.

The numbers I was referencing in the prepared remarks compares first quarter versus - versus full year. And in terms of what's going to be the difference and what's driving that, we are counting on about $40 million of improvement for second, third and fourth quarter combined, as compared to the first quarter annualized.

And of that $40, first off you've got the, we have the prior year development of about $8 million in first quarter. Obviously, we don't expect that to repeat, which will give us some additional tailwind of, call it, $25.

The other, roughly, $15, which really is the boost to our guidance, we believe that we will get price increases - put aside first quarter for a second - we think second quarter through fourth quarter we'll get price increases of around $15. Which will put the full year pricing outlook at $14 to $15. And we think medical costs will be at the lower end of the 13% to 14% range.

And that, that leverage on the first on the price increases on the book that hasn't renewed yet, coupled with the improved medical costs will give us the additional boost and also caused us to increase the earnings.

Okay. Just to make sure I'm thinking about it the right way.

So then, it sounds like for the balance of the year, you know, even though you're still within the range that you'd set out, say at the fourth quarter. It sounds like you think pricing in the residual quarters comes in at a little bit higher in medical costs on the lower end versus maybe where you were before?

Certainly relative to where we are in first quarter, which was the basis of the run rate.

Okay.

And one quick follow up. On the Indemnity side, excuse me, the guidance there. The, you know, bringing it down, is that all due to experience rated, sort of, misspricing actions coming through? Is there anything else going on there?

It's a combination of experience rated and the guaranteed cost indemnity book. We now have a lot better visibility into what how the 1-1accounts were priced, what accounts we kept, what accounts we lost, that kind of thing.

That's what drove the $20 million there.

Okay. Thanks.

You bet, Ellen.

Thank you.

Ladies and gentlemen this does conclude CIGNA's first quarter 2003 results review. CIGNA investor relations will be available to respond to additional questions shortly.

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