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Operator
Ladies and gentlemen, thanks for standing by for Cigna's fourth quarter 2005 results review.
At this time, all callers are in a listen-only mode.
We will conduct a question and answer session later during the conference, and review procedures on how to enter queue to ask questions at that time. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference including the Q&A session is being recorded.
We will begin by turning the conference over to Mr. Ted Detrick.
Please go ahead, Mr. Detrick.
- VP, IR
Good morning everyone, and thank you for joining today's call.
I am Ted Detrick, VP of Investor Relations.
With me this morning are Ed Hanway, Cigna's Chairman and Chief Executive Officer, Mike Bell, Cigna's Chief Financial Officer, David Cordani, President of our Healthcare business, and Jon Rubin, Cigna Healthcare's Financial Officer.
In our remarks today, Ed Hanway will begin by discussing highlights of Cigna's results for 2005.
He will also make comments regarding strategy and our prospects for 2006.
Mike Bill will then discuss Cigna's fourth quarter and full year 2005 financial results, and provide the financial outlook for both the first quarter and full year of 2006.
David Cordani will discuss our medical membership results and outlook, and provide an update on the Medicare Part D initiative.
We will also make remarks about Cigna health care's improving competitive position, and our value proposition as it relates to consumers.
Ed will then conclude our remarks by commenting on a variety of topics including our key priorities for 2006 and our longer term growth strategy.
At that point, we will open the line for your questions.
As noted in our earnings release, Cigna uses certain financial measures which are not determined in accordance with Generally Accepted Accounting Principles, or GAAP, when describing it's financial results.
Specifically we use the term labels 'Adjusted income from operations,' which is income from continuing operations before realized investment results and special items, with special items being unusual charges or gains, as the principal measure for performance for Cigna and our operating segment.
This measure is most directly comparable to the GAAP measure, income from continuing operations.
A reconciliation of these two measures and additional information is contained in today's earnings release, which is posted in the Investor Relations section of Cigna.com.
Now in our remarks today we will be making some forward-looking comments.
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 today's earnings release, which was filed this morning on Form 8(K) with the Securities and Exchange Commission.
Now before turning the call over to Ed, there is one item that I want to cover pertaining to our 2006 results.
As we previously disclosed, we will no longer be managing the New York State prescription drug program.
The loss of this contract will result in a decline in annual revenues of approximately $1 billion, which is reported in our experience rated book of business in the health care segment.
However, the annual contribution to earnings from this contract was modest, and therefore go not expect any material impact to our 2006 earnings resulting from the absence of this business.
With that, I will turn it over to Ed.
- Chairman, CEO
Thanks, Ted.
Good morning, everyone.
I am going to apologize in advance for a rather raspy voice this morning.
I want to start today's call with a couple of comments on our fourth quarter and full year 2005 results, as well as our continuing progress on initiatives to strengthen our health care business.
I am then going to provide my perspective on the 2006 outlook, and briefly comment on our strategic focus on consumerism, and why we are well-positioned to be the leader in this rapidly growing movement.
Fourth quarter adjusted income from operations was $249 million, or $1.98 per share.
Our fourth quarter results were strong, and well above our previous estimate.
The results were driven by solid fundamentals in all of our ongoing businesses.
Our health care operations reported strong earnings and continued to have stable membership.
In fact, we added approximately 85,000 members in the first quarter of 2005.
Now moving to our full year 2005 results.
Overall 2005 was a very good year for Cigna.
We made significant progress in strengthening our health care fundamentals, improving our competitive position, profitably growing our group disability and life and international businesses, and maintaining a robust capital position.
Specifically our health care membership has been stable since January, primarily driven by success in the regional market, which had growth of 5% during the balance of the year.
Full year health care earnings were strong, and were above our previous estimates even as we invested in significant amounts in product innovation, particularly our consumerism capabilities.
We also delivered fully competitive medical cost management results for our customers.
In addition our customer service levels are strong.
Third party survey data indicates that our service levels are ranked as the best of the Big Four national players.
We now have migrated 99% of our members to the in-state platforms.
Conversion to these platforms enable us to deliver an enhanced service experience for our customers, and customer satisfaction rates on the new platforms continue to exceed 90%.
We are also a leader in clinical quality and health advocacy.
As independently confirmed by several external benchmarks, including the HETA's effectiveness of care scores.
We developed an award-winning set of consumer-directed capabilities and have taken advantage of the opportunity presented by consumerism, to differentiate ourselves and to further enhance our competitive position.
We have also made considerable progress in improving our comprehensive suite of disease management and specialty health care capabilities.
We have strengthened our sales talent, adding over 50 seasoned sales and marketing professionals, including several executives with proven experience in consumer-driven health care.
Overall we are seeing increasing recognition in the marketplace of our improved results and leading capabilities, and this positions us well for 2006 and beyond.
Now as it relates to our group and international businesses we delivered another year of strong results.
Group disability and life continues to achieve competitively superior margins and solid revenue growth.
We are very pleased with the earnings growth in our international business, which is competitively very well-positioned and tightly focused on its core competencies.
And finally, we continued to maintain a strong capital position.
While we repurchased $1.6 billion of stock in 2005, we began 2006 with over $1 billion of free cash.
This provides us with significant financial flexibility.
Now turning to 2006, we expect another strong year with continued improvement in our business fundamentals across all of our businesses.
We are expecting to grow our health care membership by 1 to 2% in 2006, consistent with our previous guidance.
And we expect our group disability and life and international segments to report strong earnings and very competitive margins.
As we look forward, our focus will continue to be centered on consumer consumerism.
We see consumerism as inevitable, and a fundamental change in the way health care services will be delivered in the marketplace.
Feedback from customers and brokers continues to validate that consumer-directed solutions are the most effective way to meet the primary market needs, which are to improve health outcome, and take cost out of the system.
We are making significant investments in our capabilities to develop a differentiated approach, to deliver value-added services to consumers.
By way of overview, our strategy which we detailed at our forum on consumerism is to build on our strong fundamentals and differentiate ourselves through an approach, which focuses on three strategic pillars: Consumerism, health advocacy, and the use of actionable information.
The consumerism trends will have a significant impact on our industry, similar to the movement to managed care, from the old indemnity fee-for-service environment.
Several recent studies predictor that approximately 25% of the commercially insured population will be in some form of consumer driven plan in four years.
And it is our view that health care companies that do not embrace this shift will struggle.
This movement poses a major challenge for many players in our industry who do not possess the quality clinical skills or the financial strength to fund the investment necessary to compete in a consumer-driven marketplace.
Clearly we have the clinical quality and financial strength to succeed.
Mike is now going to cover the specifics of the fourth quarter results and our outlook for 2006.
- CFO
Thanks Ed.
Good morning everyone.
In my remarks today, I will review Cigna's 2005 results, and also discuss our outlook for the full year and for first quarter 2006.
In my review of consolidated and segment results, I will comment on adjusted income from operations, this is income from continuing operations before realizing investment results and special items.
This is also the basis on which I will provide our earnings outlook.
Overall our consolidated 2005 earnings were higher than we had previously estimated, and reflected strong results in each of our health and related benefits businesses.
Our full year earnings were $1.06 billion, or $8.14 per share, compared to 1.04 billion, or $7.55 per share in 2004.
I will now review each of the segments results beginning with health care.
Health care earnings for the year and fourth quarter reflected strong execution of fundamentals, and were higher than our previous estimates.
Specifically full year health care earnings were $702 million, compared to 791 million in 2004.
Membership at year-end was stable relative to third quarter, and modestly higher than January 2005 levels.
This result reflected regional market growth of 5% since January.
Favorable prior year claim development for the full year 2005 was 137 million after tax including 11 million in fourth quarter. 5 million of the 11 million was in commercial HMO.
I would note that fourth quarter earnings included some favorable non-recurring items, primarily related to the experience rated business.
Fourth quarter results also included start-up expenses of $8 million after tax for the Medicare Part D program.
Premiums and fees for the segment were down 6% for the full year, primarily reflecting lower membership, partly offset by price increases.
Relative to medical cost trend, the full year trend for our total book of business was approximately 8%.
In our commercial HMO business, which represents 9% of our total membership, our full year medical loss ratio excluding prior year claim development was 85.3%.
To recap our health care results reflected continued strong execution of fundamentals.
Excluding favorable prior year claim development and non-recurring items, health care earnings were modestly higher than the outlook we discussed on our third quarter call.
Now I will review the results for our other segments.
Full year 2005 earnings in the disability and life segment were $227 million, which was 24% higher than our 2004 results of 183 million.
As we have discussed full year earnings in this segment benefited from favorable mortality earlier in the year, which we do not expect to recur in 2006.
I would note that our fourth quarter results reflected more normal mortality in the group life business.
Overall our results in disability and life continued to be very strong competitively.
Turning to our International segment, full year 2005 earnings were 102 million, versus 76 million in 2004.
The 34% increase in full year earnings reflects very good performance in our life, accident and health and expatriate benefits businesses.
In aggregate the remaining operations including run-off requirement, run-off reinsurance, other operations and corporate, had combined earnings of 26 million for full year 2005 versus a loss of 9 million in 2004.
It's important to note that the corporate segment loss of 5 million in fourth quarter was better than the run rate in the previous three quarters, primarily reflecting a favorable tax item.
Before providing our outlook for fourth quarter and full year 2006, I will comment briefly on our 2005 year end capital position, and 2006 capital outlook.
Our parent company capital position continues to be strong and our subsidiaries remain well-capitalized.
At the end of 2005, cash and investments at the parent company were approximately $1 billion.
During fourth quarter we continued our share repurchase program, and repurchased 5 million shares of our stock for 566 million.
For the full year, we have repurchased 15.4 million shares at a cost of $1.6 billion.
In January, we repurchased an additional 635,000 for 73 million.
We have approximately 700 million of remaining repurchase authority at this time, which includes an additional 500 million authorized by our Board of Directors in January.
During the fourth quarter three rating agencies, Standard & Poor's, Moody's and AM Best, increased their ratings our look for us from stable to positive.
Their actions reflected our improved healthcare results and our strong financial position.
We believe that upgrades to our current ratings are achievable based on our outlook.
In summary, our capital position remains very strong.
Now I will comment on our Capital Management priorities.
Our priorities remain consistent with our communications last quarter.
The first priority is to maintain appropriate liquidity at the parent company, and to ensure that our subsidiaries remain adequately capitalized to support growth and to maintain and improve their credit ratings.
Our second priority for excess capital is to consider acquisition opportunities.
We regularly review a range of acquisition opportunities that would enhance our strategic position, and meet our return on investment goals.
We do not know when or if we would find additional opportunities that would meet our criteria.
Absent these items, our priority would be to buy back our stock.
Regarding the 2006 outlook, we expect to maintain our strong capital position and good financial flexibility.
We expect to generate full year 2006 subsidiary dividends of approximately $1 billion.
This estimate reflects operating earnings and the anticipated withdrawal of excess surplus from C.G.
Life in 2006.
At this point, we expect other sources and uses to approximately offset each other excluding any share repurchase.
Overall, we expect to continue to have significant capital flexibility.
Now I will review the earnings outlook for the full year and first quarter of 2006.
For full year 2006 we currently expect consolidated adjusted income from operations of 900 to $960 million, which is unchanged from the estimates we provided last quarter.
I will discuss the components starting with health care.
For the full year 2006, we continue to expect that our membership will increased by 1 to 2%, driven by continued success in the regional market.
We estimate that our January 2006, membership declined by 1% with growth in the regional market, offset by a decline in national accounts.
We currently expect 2006 premium yields to be in the range of 8 to 8.5%, and we expect medical cost trends to be in the same range.
Our estimate for full year 2006 health care earnings is a range of 600 to $650 million; which is unchanged from the guidance we provided in November.
Now I will recap the comparison of this estimate to our full year 2005 results.
First it's important to remember that our results in 2005 included 137 million of favorable prior year claim development, while our 2006 projection assumes zero prior development.
A useful way to understand the 2006 healthcare outlook is to start with our full year 2005 results for health care which was 702 million, and back out the favorable prior year development.
This yields a starting point of 565 million.
The $625 million midpoint of our 2006 range represents growth of 60 million from this space.
While there are several puts and takes the main driver of the increase is improved operating expense productivity.
Relative to Medicare Part D, our 2006 outlook includes a projected Part D result, of between breakeven and 5 million in after tax earnings.
This range reflects our updated estimates for individual Part D enrollment in the range of 250,000 to 350,000.
Overall our progress in improving healthcare fundamentals, has positioned us to increase earnings in 2006 relative to the underlying 2005 results, which excludes prior year development.
Turning to the balance of our reporting segments, we expect our remaining operations to contribute approximately 300 to $310 million of earnings in 2006.
This estimate is unchanged from our November outlook.
Within this estimate, we expect our disability and life and international businesses to maintain strong margins while growing revenues.
Our estimates for these segments reflects the absence of the unusually favorable mortality we saw in 2005, in our group life and corporate owned life insurance businesses.
Another contributing factor is the lower amortized gain on sale, which we will report on our run-off retirement segment.
Putting together all the pieces we estimate that our full year 2006 consolidated adjusted income from operations will be in a range of 900 to $960 million.
Our consolidated EPS will be affected by any share repurchase that occurs in future periods.
As I mentioned before, we do not predict the amount or pace of repurchase, and our EPS estimates do not reflect the impact of any further repurchase activity.
On this basis our estimate of full year EPS for 2006 is now a range of $7.25 to $7.70 per share, which is higher than our previous range, reflecting the benefit of share repurchase activity since last November.
Turning now to the first quarter of 2006, we currently expect adjusted income from operations of 205 to $225 million.
First quarter health care earnings are estimated to be in the range of 140 to 150 million.
We expect the balance of our reporting segments to contribute approximately 65 to 75 million of earnings.
Excluding the impact of future share repurchase our estimated first quarter 2006 EPS is in the range of $1.65 to $1.80 per share.
To conclude, our 2005 results reflected continued strong execution in health care and attractive results in other businesses.
Our earnings estimates for 2006 reflects further progress in improving our health care results, and continued strong performance in group disability and life and international.
With that I will turn it over to David who is going to discuss our continuing progress on improving our membership results, and our capabilities in the areas of consumerism.
- President, Cigna Healthcare
Thanks, Mike, and good morning everyone.
As Mike noted, we maintained our positive momentum by delivering strong earnings for the fourth quarter.
Most importantly, we stabilized our membership which was our top priority for the year.
Additionally as Ed mentioned, we materially improved our competitive position in 2005.
This included strengthening the fundamentals of our business, specifically cost and service, as well as improving the breadth and depth of our product portfolio.
This is evidenced by our stabilized membership results, our award-winning set of consumer-directed capabilities, our industry leading clinical quality and health advocacy programs, and our enhanced customer reporting and member transparency tools.
For remainder of my comments, I will discuss our membership results and outlook in more detail.
I will summarize our progress on Medicare Part D, and I will review our strategy to capture and maintain a leadership position in the consumer driven health care marketplace.
First let me comment on membership.
We ended 2005 with approximately 9.1 million medical members, an outcome that was better than our original expectations.
The regional segment finished the year with 4.8 million members, which represents a 5% growth rate post-January, and a net growth rate of 2% for the year.
Our client retention rates improved by approximately 1,000 basis points, moving from 75% to 85% since 2004.
And we are also generating better sales results due to a stronger pipeline and improved ratios.
National accounts ended 2005 with 4.3 million members, a result that was consistent with our expectations.
Moving to the outlook for 2006, we expect to grow our total membership by 1 to 2%, consistent with the out like we provided on the third quarter call.
For the regional segment, we now expect growth for the full year to be in the mid to high single digits, supported by strong persistency, strong sales pipeline, and improving close ratios.
On January 1, enrollment for the regional segment yielded net growth of approximately 3%, which was consistent with expectations.
As a reminder, about 60% of this segment renews on January 1.
For the national accounts segment, we expect membership to decline in the mid single-digit range for 2006.
This full year outlook represents a significant improvement over the 14% decline we posted in 2005.
Our January 1 enrollment for the national accounts resulted in a decline of 5% and, as a reminder, about 85% of this book renews on January 1.
Now, as we noted in the past we expect the national accounts improvement to show a similar pattern as our a regional block did.
Specifically, first we expect improved customer retention levels, second, additional sales to existing customers, third, an improving sales pipeline, and fourth and last, improved close ratio.
To that end in January 2006, our customer retention level for our national accounts segment improved by 500 basis points, from 86% to 91%.
For January 2006, we did experience a much stronger pipeline versus 2004, as well as 2005, and we did have some meaningful progress with PDHP sales.
It's also important to note that virtually all major requests for proposals we receive now in both the national account and regional segment, includes some major component of consumerism.
Additionally the feedback we continue to receive from brokers, consultants and customers is very positive.
From a consumerism and consumer-directed standpoint which are fund based plans, specifically HSAs and HRAs, progress continues to be very positive.
In 2004 we had only 10,000 members in consumer driven plans.
That number grew to approximately 100,000 members in 2005.
Based on our January 1, 2006 enrollment, we now have approximately 250,000 CDHP members, and we are well on our way to our goal of tripling our 2005 membership level for the full year of 2006.
This growth rate represents a pace that will outperform the industry average.
To recap membership, we made significant progress during 2005 and early 2006.
And during the rest of 2006, we will take advantage of our improved competitive position and compelling value proposition, to grow our membership.
Now I would like to talk about our 2006 outlook for Medicare Part D. As noted in our third quarter call Cigna is a national provider of Part D programs.
We believe that Part D is a good strategic fit for us, as it leverages our capabilities to deliver value-added prescription services, to employer groups and individuals.
Before I walk through our Part D status and outlook, I would like to take a minute to review our strategic objectives for entering Part D. Specifically, our target market is first and foremost, our employer sponsored customers.
This is followed in importance by free agent individual customers.
Finally, we like other providers will take duel-eligible members when allocated.
On an employer sponsored basis as expected most employers did opt for the Federal subsidy for 2006.
To date we have facilitated approximately 150,000 employer sponsored members in the Federal subsidy and employer sponsored Part D plans.
We are well-positioned to facilitate and support this for our employer-sponsored programs.
Now for the individual customers, our product strategy is to deliver a complete product offering, that is priced appropriately, and will sustain a long-term relationship with those customers.
For the free agent population, we are marketing our programs through an exclusive partnership with Nations Health.
We have also established distribution relationships with several major pharmacy and retail chains.
To date we have enrolled approximately 165,000 individual members through direct marketing and dual-eligible auto assigns.
Our projection for 2006 is for individual enrollment of 250,000 to 350,000 members, which is short of our initial estimate of 400,000 to 600,000 members.
Overall we are pleased with our Part D business strategy and market entry.
We are well-positioned to support our employer sponsored customers, and although the individual enrollment results are short of our initial estimate, we continue to be very excited about both employer and individual growth opportunities for Part D.
Now I will turn to reviewing our approach for consumerism.
What it is, why we are confident that it is a winning strategy, and where we are in terms of the implementation.
I talked about consumers in our previous calls, both in terms of broad market impact and specifically in relation to Cigna.
Today I would like to reinforce and highlight several points.
It's clear to us that consumerism represents the health care marketplace of the future.
Over time we believe consumerism broadly defined, will supplant managed care as the industry standard.
Why?
Because consumerism when linked with health advocacy, truly removes cost from the health care system, rather than simply shifting it.
By engaging consumers in managing their own health, and helping them to be more informed healthcare shoppers.
Capitalizing on this potential, insurers, providers and employers must engage, educate and enable consumers with the right information and resources, to make sound decisions for themselves and their families.
We must act as true health advisors and advocates, committed to helping consumers achieve their personal health goals.
As I've noted on previous calls, our approach to health care consumerism is unique in the industry.
Our comprehensive approach builds on three pillars, all required for success.
Specifically consumerism, health advocacy, and actual information.
An early analysis of actual members experience suggested our approach is yielding success.
We recently completed a study of first time users of consumer-driven health plans, which we believe is one of the largest and most comprehensive studies to date.
The results indicated that these consumers generated an 8% reduction in medical costs, while making positive changes to their health behaviors.
Changes in health care spending were driven by a reduction in both in-patient and out-patient facility costs.
All through behavior modification, not through cost shifting.
Analysis also showed that cost savings were observed across all categories of spending ,with the most pronounced savings occurring amongst the medium and heavy users of care.
This early data suggests that health advocacy programs, like health coaching, along with access to information tools, are essential components of an effective consumer-driven health plan.
Now regarding actual information we bring real value in health care to consumers, as we give consumers and employers ready access to transparent data on provider efficiency, which includes both quality and cost data.
For example, our groundbreaking hospital value tool helps consumers assess the efficiency, that is quality and cost, of hospitals on a broad spectrum of procedures.
Our industry leading pharmacy pricing tool includes the industries first and only tool for pricing pharmacy at point-of-sale.
Our Cigna care network identifies the most efficient specialists in select markets, again based on quality and cost criteria.
And our award-winning website, MyCigna.com, includes our health risk assessment that can be automatically prepopulated with the members lab scores, for more complete and thorough risk assessment.
Today we stand above the crowd in our ability to provide actionable personalized information that our members can use, to make the best possible health care choices for themselves and their families.
Our approach also fully embraces the concept of health advocacy.
Here we build the knowledge, teach the skills, align the incentives, and create opportunities to help consumers reach their personal health goals.
Our Cigna health advisors work directly with members, to help t,hem understand their burden of illness, the alternative courses of treatments that are available to them and help coordinate their care where appropriate.
Additionally we provide the largest population based disease management program in the country, more than 700,000 people are enrolled in our award-winning program for asthma, cardiac care, diabetes, low back pain, and other targeted conditions.
We also have the industries only fully integrated depression and obesity disease management programs.
What does this mean at the member level?
For one large employer that I just visited last week, our integrated medical and pharmacy program that targets cholesterol reduction for members resulted in 50 fewer heart attacks over that five-year period for that employer's associates and dependants.
As you can see through these and other capabilities that we offer, our members enjoy better health, better quality of life, and lower cost.
While our employer customers benefit from lower costs and higher productivity.
Our success in this arena has led us to launch a new Cigna health care business unit called Care Allies, to provide medical management, disease management and health advocacy services, to large complex plan sponsors.
Care Allies can be offered to employers who use a multi-vendor strategy for health care, and desire a consistent medical management and health advocacy solution across all health carriers.
Today some employers allow their employees to choose from several healthcare carriers, each offering different programs with various clinical and administrative inconsistencies, Care Allies provides a complete suite of solutions to help employers improve the health and productivity of their entire work force.
Care Allies also offers a consistent set of clinical management programs and personalized physician support services for consumers.
Plan sponsors are increasingly adopting strategies that encourage engagement in health care, so having an organization solely focused on facilitating better health and optimal delivery of health care service to individuals, will be a competitive advantage for Cigna health care.
Looking ahead we continue to be very excited about the prospects that consumers and movement presents for Cigna Healthcare.
This change is real.
This change is necessary.
And this change is one in which we intend to lead.
To summarize, 2005 was a strong year for Cigna Health care, in terms of earnings, service, improving our membership, and expanding our capabilities.
The consumerism and the health advocacy demand continues to grow at an accelerated pace, and our capabilities at Cigna Health care have risen to meet the markets challenge.
Finally we are well-positioned to grow membership and earnings 2006.
We that I will now turn it back over to Ed.
- Chairman, CEO
Thanks, David.
Now before we respond to your questions I want to cover three items.
First I want to highlight our key priority for 2006, which will build off of our strong 2005 results.
Second I will provide a recap on consumerism and describe how we are well-positioned for the future.
And finally I will share with you my thoughts on our longer term growth strategy.
In 2005 we achieved strong earnings across each of our businesses, and we expect 2006 to be another good year.
Our focus in '06 will be on profitably growing our membership base in health care.
We expect to grow our medical membership 1 to 2% for the full year 2006.
Our health care operations will continue to produce good earnings growth, with the expectation that earnings excluding prior year development will grow 600 to $650 million in 2006.
We expect our group disability and life and international businesses, to capitalize on their strong market position, to deliver competitively superior margins, and strong earnings.
Finally, our capital position is strong as we have noted, and will provide us with significant financial flexibility.
Now I want to spend just a few moments recapping the highlights of what we have discussed regarding consumerism.
The market shift to consumerism is inevitable.
It is a fundamental change in the way health care services are delivered.
Our integrated model will win in the marketplace.
Given the investments we have made in consumerism, health advocacy, and actionable information.
We will differentiate ourselves competitively.
Relative to both the top tier competitors and particularly against second tier players.
And we expect to generate both revenue and earnings growth by capitalizing on these opportunities.
Successful health care organizations in the future will be the ones who execute the strategies we've laid out for you today, and we are well-positioned in our industry to capitalize on this opportunity.
The third and final topic that I will cover is our long-term growth strategy, which focuses on the following major areas: First, our primary focus for growth will remain the employer-sponsored health care arena.
We will focus on profitably growing health care membership by differentiating ourselves based on our consumer-directed capabilities, and our strength in health advocacy, clinical quality and disease management.
In addition, we will look to more fully penetrate our existing health care customers with our broad array of specialty health care products and services, and we will continue to expand our presence in the small employer and government markets.
In addition, we are developing health care solutions to address the senior segment, with a particular emphasis on the fastest growth segment which is the 55 to 64 age cohort.
We are also developing new capabilities to address the emerging needs for voluntary health coverages, that complement our strong employer group position.
And finally, we will also continue to grow our group and international businesses, while maintaining their competitively strong margins.
M&A is an option to support the growth opportunities that I just discussed.
However, any potential acquisition would need to enhance our capabilities, or contribute to a stronger market position.
And in 2005 we executed some small targeted transactions, that added capabilities and market position for us.
The Choice link purchase was an example of an acquisition that provided us with leading-edge technology, that will strengthen our product portfolio.
Similarly, the purchase of MCC of Nevada, provided us a stronger market position in the fast-growing Las Vegas market.
While M&A is not a necessity to achieve our objectives in 2006, we will continue to consider opportunities for transactions that meet the following criteria: They must add strategic value.
They must meet our financial targets.
And we must be able to successfully complete any transaction without disrupting our current momentum.
We feel very good about our position currently, and believe we are on the right track towards sustainable growth.
This concludes our prepared remarks, and now we would be glad to take your questions.
Operator
[OPERATOR INSTRUCTIONS].
Our first question from John Rex, Bear, Stearns.
- Analyst
Could you size for us any intra year development in 4Q?
You had also mentioned there were some special items in the experience rated book, and I wanted to delve into quantifying that.
I was noticing revenues were up in that book about 10% sequentially, on down membership, I know that bounces around a little bit.
Can you help us understand what was driving that this quarter, and what would have been the earnings impact from that?
- CFO
[inaudible-microphone inaccessible] Overall the quarter was strong, and the quality of the earnings in the quarter was strong, but as I noted there were some non-recurring items, and John, I would knowledge that classifying items as non-recurring does require some judgment, but one of the moving parts in the quarter was the experience rated results.
The experience rated results do bounce around in any given quarter, as you have the pattern of medical costs [inaudible-microphone inaccessible] All-in, we estimate that the quarter's results for experience rated were 9 to 10 million after tax higher, than what we would estimate the underlying run rate to be on a going forward basis.
Now included in that 9 to 10 million that I just referenced, there was approximately 5 million of after tax benefit in experience rated from what we would characterize as included in that non-recurring items.
So about 5 million relates to the benefit of medical costs emerging more favorably from earlier in the year.
In addition to that, there was for guaranteed cost, there was about 1 million of favorable development from earlier in the year.
Now in terms of your question on revenue, as we talked about last quarter, revenue for experience rated does bounce around a fair amount.
And we did point out in that quarter, third quarter was unusually low.
But it is the case that experience rated revenue was up sequentially, and that's because of the nature of the rate credit liability.
When we have favorable medical cost experience for customers that are in surplus, that increases the rate credit liability, since we expect to dividend that back ultimately to the customer, an increase in rate credit liability decreases net premium in any given quarter.
So that's what happened in third quarter that made it unusually low.
Fourth quarter was more of a normalized pattern.
- Analyst
So all in about 6 million of intra-year favorable development in the quarter.
Is that right?
- CFO
That's correct.
- Analyst
If you kind of think about that in terms of how you are describing full year '06, and not looking for any favorable development after 137 million in '05, what would your early indication, what's your early gut on what's more realistic, going from 137 to zero probably isn't realistic, and given what you are seeing in trend results, should we expect that it's half that amount, that it's 25%?
What would the early trend results indicate we should be thinking about for prior year occurring in '06?
- CFO
John, I understand your question.
As you know we don't estimate prior year development going forward.
So we don't have any prior year development built into our estimated range of 600 to 650 million.
Now just as you noted, I would acknowledge that we have had a significant level of prior year development in the last couple of years, and this mainly reflects the success that we've had with our medical management initiatives.
It also reflects the fact that we've had faster claim processing from our higher auto adjudication rates.
And both factors contributed to the fact that medical costs emerge more favorably than we had originally estimated, creating the favorable development.
We don't expect the same magnitude of improvement going forward.
But I would prefer not to give you a specific estimate, and to the extent that we have prior year development in 2006, we will obviously report what it is, and we will reinforce again at that time, that it's not included in the range.
- Analyst
If I were to try to pin you down and not get specific, would it be more than half the '05 level, or less than that have the '05 level, as you are looking at your current developments right now?
- CFO
I would expect it to be less than half, I would prefer not to be more specific than that.
- Analyst
Okay.
Thank you.
Operator
Next, Josh Raskin with Lehman Brothers.
- Analyst
Thanks.
Good morning.
A question relates to the membership totals.
Sounds like maintaining that full year estimate despite what I think, and correct me if I'm wrong, is a weaker first quarter now, I believe last quarter you said stable, and this quarter now sounds like January down 1%.
Is that the difference between January and March or am I reading too much into that?
- President, Cigna Healthcare
Josh, this is David.
Our guidance for the third quarter we indicated that for January we expected membership to be stable.
For us, stable membership is plus or minus a point.
I would also note that fourth quarter was a reasonably strong quarter for us.
We ended up having a few sales that transpired in December, that we thought would take place in the January 1 timeframe.
So on an all-in basis the absolute number of members, the 9.1 million members we start the year with is where we expected to start the year, and you should not read into a minus one as a negative result at all.
We continue to be confident in the plus 1 to 2% for the full year.
- Analyst
Okay.
Sounds like there really was no change there.
In terms of the geography of that membership, I was wondering if you could help us out any, and I don't need obviously membership percentages specifically, but pluses or minuses, any specific geographies?
- President, Cigna Healthcare
Josh, David again.
Obviously we flagged the regional segment as the largest mover here.
Just by way of background, again we define regional segment as commercial employers from 2 to 5,000.
We also include governmental in our definition of regional segment.
Broadly speaking you are asking about geographies, we have seen material improvement in all of our regions of the country that we manage, some more pronounced than others.
We consistently flagged for example, the Southeast as performing better than average of all of our regions, but the headline would be on a year-over-year basis within that segment, for the commercial population and the governmental population all regions of the country have improved dramatically on a year-over-year basis, with the Southeast as being probably the strongest of the bunch.
- Analyst
I assume that's related to the one big account in Tennessee?
- President, Cigna Healthcare
No, it's actually broader than that one account.
You are referencing the state of Tennessee, which was an important win for us in the part of the Southeast, but exclusive of that, the Southeast has consistently performed very well for us.
Inclusive of that, the Southeast has perform extremely well for us for 1/1/2006.
- CFO
The only thing I would add to that has to do with national accounts, and that is, regional has been particularly strong.
I want to reemphasize something that David pointed out in his remarks, which is national accounts is behaving pretty consistently with what we expected.
We have seen very good improvement in account retention there for 1/1, as David highlighted, our progress with consumer-directed capabilities, is having a meaningful impact there on our ability to retain and then grow existing account relationships and membership from those relationships.
While the regional segment is doing quite well, we also are very encouraged in what we are seeing in national accounts, and believe that momentum will continue.
- Analyst
On the consumerism, you said 250,000 currently, expect 300,000 by the end of the year.
How many of those 250 were previous Cigna members, i.e., just switching product?
- President, Cigna Healthcare
It's David again, I'm not going to pinpoint the exact number number, of the growth if I went from 100,000 members to 250,000 members, slightly greater than half would be expansion of existing employer relationships relationships, slightly less than half of that would be new employer, new employee relationships.
Again that's consistent with where we expected to see our growth, retention first, expanding relationships with existing employers, pipeline and new relationships third.
Slightly more than half of that I would pin to existing employer conversions or expanding relationships, less than half new relationships.
- Analyst
Great, thanks.
Operator
Christine Arnold, Morgan Stanley.
- Analyst
My question relates to kind of SG&A, you have 99% of your enrollment on your end stage platforms.
Could you review with us how you see opportunities to reduce the SG&A load, and give us some sense for an updated outlook for operating expenses in 2006?
- CFO
It's Mike.
The main driver of the improvement in operating expenses that we are expecting in 2006, and also in future years beyond that, is our health care service operations.
Specifically the service operating expenses in 2006, are currently expected to be $75 million, obviously pretax, below the 2005 full year results, despite the fact that the membership we expect to be up 1 to 2% by the time we get to year end.
So we expect to achieve those reductions over the first three quarters of the year, while still focusing on providing strong customer service particularly in consumer directed.
Those reductions would drop to our bottom line in 2006, and drive $50 million of after tax year-over-year earnings improvement.
Now as we've discussed, this is just the first of several major installments that we expect over the next several years.
So beyond 2006, in addition to the 75 million pretax drop in '06, we expect an additional $200 million per year of pretax savings.
And approximately half of that is additional savings in service operations through the productivity gains in claim and in call, and in employer services, and the other half to be in technology.
Both the benefit of sunsetting our legacy systems, as well as winding down the amortization of the operating expenses that have been capitalized several years ago.
- Analyst
You have given us a sense for what happens to service expenses, but I don't have a real sense for how much that is of your total operating costs, can you translate that into what we will see in the actual income statement for the health care operating costs?
- CFO
First in terms of service operating expenses it's about, today it's a little less than a quarter of our overall operating expenses supporting the health care business.
And again that we expect to drop 75 million pretax year-over-year.
For the rest of the core medical operating expenses we expect those to be roughly flat.
Now there are a number of moving parts and we will make some judgments over the course of the year, but ex service ops, we expect our core medical operating expenses to be flat full year '06 versus full year '05.
As we have talked about previously we will have some higher operating expenses in some other areas.
As an example Medicare Part D, we expect it will have 250,000 to 350,000 individual Part D members that will provide service to, also have marketing expenses there, and all in we expect Medicare Part D to add to earnings.
But as an example in the first quarter we expect Medicare Part D to have anywhere between, call it 30 to 40 million of operating expenses in first quarter.
So that would be an example of, you will see that in the all-in health care operating expenses, but it does not relate to our productivity per member.
A couple of other examples.
We are expanding our disease management programs.
We are also increasing our pharmacy penetration in each of those cases, we collect incremental revenue to provide those services.
Now similar to what you and I talked about before, we are working on expanding our stat supplemental disclosures, to increase transparency for you throughout 2006, so more to come in first quarter on that.
- Analyst
In terms of the operating expenses we will see in health care, is it stable year-over-year, dollars expenses, up 10%, down 10%?
I'm not able to put it all together here.
- CFO
Again that's very difficult to estimate, because it really will depends upon exactly how Part D goes, exactly what the disease management programs are, the pharmacy penetration.
The more meaningful comparison, in terms of how it relates to earnings, is that core medical expenses excluding those items, we expect to drop on a year-over-year basis by 75 million.
But I would expect at this point, that operating expenses just for Medicare Part D, for example, could be in excess of 100 million for the year.
So all-in OpEx is probably going to be up year-over-year, but from an earnings leverage standpoint, a more meaningful number is core medical, and that's the piece we're working on the enhanced disclosure for you.
- Analyst
So down ratio, but an up absolute dollar amount?
- CFO
Yes.
- Analyst
Thank you.
Operator
Next question, Goldman Sachs, Matthew Borsch.
- Analyst
Thank you, good morning.
I had a question about the competitive environment, and in particular I realize you guys aren't answerable for the growth targets of your competitors, but if we look at the aggregate across the core public companies, it looks like the public companies are looking at about 2.7 million commercial members this year, and that's actually more than twice as many commercial members as were added in both 2004 and 2005 -- I'm sorry, that's more than was added in 2004, 2005.
And the biggest difference is really Cigna, because as you guys know, there was substantial enrollment declines in '04 and '05, and now you are looking at some growth for this year.
My question here is really, how do you think this plays out as we move toward the year?
Do you think that there are changes in employer contracting or health coverage, that would maybe lead to a greater pool of members being available for the public companies?
To the extent you can comment on that, thank you.
- Chairman, CEO
Matthew I will start and then invite David to add any color he would like.
First I think I would point to our ability over the last couple of years to predict pretty effectively our own membership levels.
I think throughout '05 we were very consistent, and we have a very good handle on our forecast for '06.
So in terms of understanding where our growth is coming from, I won't speak to anybody else, but I think we have a very good sense of where that is.
As we've said, it is coming from both our ability to take advantage of less well-positioned regional players, TPAs, but also coming from our ability to compete much more effectively on an equal footing with the larger national players.
So clearly our situation as compared to a couple of years ago is much different.
We are much stronger, and we are getting in some places more than our fair share, as a result of our very strong service levels and consumerism capabilities.
I won't comment relative to other people's expectations, other than to say from a buyer's perspective, I do think there is an ongoing interest in limiting the number of players that someone deals with.
And particularly for those, I will call them, marginal players.
I think it makes it very difficult for them to compete then.
They don't have the kind of informational tools, and the breadth of product that we bring to the marketplace.
Hence I think that gives us a better opportunity to compete with many of those.
David, you want to add anything?
- President, Cigna Healthcare
I do.
I would add a couple of points.
One to your point so the industry starts in a commercial population of about 150 million lives.
To Ed's point, there is an opportunity for growth for the major players versus local players, TPAs, et cetera, and we continue to see some share movement there.
The only other comment I would add is around two broader themes.
The industry is seeing increased demand for what is broadly defined as voluntary services where employers, who are trying to bring on different coverage alternatives, potentially for folks who might not have had access to full coverage previously.
And then a final note in terms of a market trend.
While early, about a quarter of all small segment purchasers of HSAs, previously did not offer health care to their employees.
You might speculate that those employees were previously in the uninsured rolls, and now are having access to insurance through HSA alternatives, so those are some trends we see in the early stages, coming into the commercial insured population.
- Analyst
If I can ask a follow up on a different topic on Medicare.
Can you just comment on environmentally, what might have been different from what you expected on the Medicare Part D lives, in relation to maybe competitor pricing out there, or just the broader uptake of the product?
And finally if you could wrap into that your outlook now on Medicare advantages as we go into 2007 with the reimbursement changes?
Thank you.
- President, Cigna Healthcare
A couple of pieces on Part D here.
First, we went and put forth an estimate, I think you are going directly at the estimate of 400,000 to 600,000 members.
Based on the early assessment of the market demand, the uptake of enrollment for the free agents, et cetera.
I highlight point 1 for us is, strategically our #1 thrust for entering this space was to ensure that we had the right solutions for the employer sponsored customers, that are our primary target audience.
Secondly, we consciously built a product portfolio that we believed was a more complete product portfolio, and therefore priced to be appropriate for our longer term relationships, not short term relationships.
As we see the early enrollment, about a third of the free agent population is enrolled by the latter part of January of this year.
So there is still two-thirds of the available population yet to enroll.
There is a lot of speculation, in terms of will that entire two-thirds of the population enroll by May 15, or not.
As I said in my prepared remarks we feel good about our market entry plan, we feel good about the solutions we bring to partner with our employer sponsored customer, and we continue to believe that the individual market presents a good growth opportunity for us intermediate term.
Ed.
- Chairman, CEO
I think David said it very well.
Our view is a long-term commitment to this business, and one where we provide good value.
If you look at our positioning it is somewhat higher cost, but also we think better benefit level, better coverage vis-a-vis the formularies, and we think over time seniors who are interested in that kind of value proposition, will migrate to the kinds of programs that we are offering.
So we feel pretty good about the response so far, a bit less than what we might have expected, but given where other people ended up and some of their strategies, we are not uncomfortable at all with our position.
- Analyst
And on the Medicare advantage outlook going into '07?
- Chairman, CEO
As you know, Matthew, our participation in Medicare advantage is fairly limited.
I think we are comfortable with the position that we have in the market, where we are active and as we have said in prior conversations, we are actively looking at the advantage area, to determine exactly longer term, how, if and how with will participation I think is we likely will, but I think that's something that we will continue to work on throughout '06.
- Analyst
Okay, thank you.
Operator
Next question, Scott Fidel with JP Morgan.
- Analyst
Hi, thanks.
First question has to do with, can you give us an update on some of the regional partnerships that you established, for example , in Boston and Michigan, how that might be helping with enrollment and also with relative discounts, and whether there are any markets that you might be looking at doing additional partnerships like this, for example, California, or other markets?
- President, Cigna Healthcare
You point toward the alliance relationships we have specifically, Tufts in Boston and HAP in Detroit.
Broadly speaking, we feel very good about the relationship and the partnership.
I will highlight the fact that culturally the organizations lineup quite well with a commitment to clinical quality and customer service.
From a membership standpoint, we have already seen success and progress from both relationships, complementing the multi-sided value proposition for both relationships, the combined value proposition has fully competitive discounts, as benchmarked against the best-in-class players in those respective markets.
So broadly, our joint distribution teams, or joint leadership teams feel really good about their relationships, and the market is beginning to reward us with membership progress in both geographies.
As relates to opportunities in other marketplaces we won't comment specifically on markets.
There is an opportunity for a couple or three more of these around the country potentially.
As we talked before, we shouldn't expect to see 10 or 15 of these in our portfolio.
But over time expanding the 2, to 4 to 5 is indeed a viable path for us, as we seek the right partners and the right geographies.
- Analyst
Just as a follow-up question if you could walk us through the expected components of cost transfer in '06, and how those are relative to 2005?
- FO, Cigna Healthcare
Good morning, Scott, it's Jon.
As Mike mentioned earlier, for our total book of business we currently have a full year medical cost trend of between 8 and 8.5, built into our 2006 medical cost and earnings outlook.
At a high level the components of this range are as follows.
Inpatient, high-single digits, out-patient, 9 to 11%, professional, 5 to 7%, and pharmacy, 4 to 6%.
And there are a few puts and takes, those are relatively consistent with what we saw in 2005.
- Analyst
Okay.
Thank you.
Operator
Thank you Mr. Fidel.
Next question, Charles Boorady with Citigroup.
- Analyst
Thanks, good morning.
First question about Part D, and I'm wondering if you've got the information yet on the risk score of the population that you did enroll.
I understand the enrollment was a bit lower than what you initially had anticipated, but wanted to just peel back the onion a bit, and understand what the characteristics were of the people who you did enroll.
Was it the good risk or the bad risk, or do you not have enough information yet to assess that?
- President, Cigna Healthcare
Charles, it's David.
What I would tell you from the members we have enrolled, the only thing macro I would tell you, is about a third of our individual enrollment is dual-eligibles, two-thirds are free agents.
Broadly speaking, we don't have the risk profile to walk through with you guys.
And again I would stress it's in the early innings of the relationships with these members.
We are in the early consumption of their pharmaceuticals.
- Analyst
Got you.
On the M&A front, which I appreciate getting the extra color today on your thoughts on M&A, by the way, I'm curious, is the 1 to 2% medical membership growth, is that year-over-year from 12/31/05, and does that include M&A?
- CFO
It's Mike, the 1 to 2% is 12/31/06 versus 12/31/05, and it does not include any M&A.
- Analyst
There's been a lot of M&A in this space, and a lot of it has been bigger acquisitions and a lot of companies have made the comment that it's about as much work to acquire a big company, as it is to acquire a little company.
Do you agree with that observation?
- Chairman, CEO
Charles, it's Ed.
Could you repeat the observation again, I kind of missed you there in the middle.
- Analyst
Basically that a lot of the acquisitions have been on the larger size, and some companies have made the comment that it's about as much work to make a big acquisition, as it is a little acquisition.
And I'm wondering if you share that observation, or do you have a different opinion on size of acquisition, the complexity of undertaking it?
- Chairman, CEO
Well, I think the approach we take, Charles, is pretty consistent regardless of the size or would take is pretty consistent regardless of the size, and I go back to the prepared comments.
It's got to be strategic.
Financially it has to be attractive, and the third point I made was, I don't want it to disrupt the momentum that we have.
I think we look at any acquisition, even the two relatively modest ones that we did last year, and look very hard at whether or not it's going to be complicated from an integration standpoint, and how we are going to leverage the value of the assets we are buying, we would do that regardless of size.
So I don't know that I would conclude that a big one is more challenging or less challenging than a little one.
I think if you are going to get most value out of the assets you are buying, you have to be focused on integration on all of them, and that's the way we would approach it.
- Analyst
Last question on cash being dividended up to the parent, the billion dollars, Mike, I'm wondering if you could normalize that for us, for anything that might be sort of non-recurring in nature, such as any release of reserves, give us what the stat balance sheet might look like, in terms of where your reserves are relative to where you want them to be in your key subs?
- CFO
Okay.
Charles, two parts of that question, first, in terms of the billion dollars of subsidiary dividends that we are currently expecting for full year 2006, that reflects a run rate of approximately 900 million, and approximately 100 million of additional surplus being dividended out of C.G.
Life, that represents extra surplus that was there at year end 2005.
Now specifically in terms of where do we stand at year end 2005, for C.G.
Life on a rating agency basis, our overall surplus at year end '05 is approximately $2.5 billion.
That equates to an RBC based on the company action level of approximately 365%.
That's higher than what I would expect we would need longer term.
And we are in the process of reviewing our long-term targets.
Now our long-term targets will not be a fixed percentage of RBC.
Moody's and S&P are a lot more sophisticated than the RBC standards.
But suffice it to say, that we would expect longer term our surplus to be lower than where it ended at 2005.
- Analyst
Okay.
Did you get a CapEx earlier in the call outlook for 2006?
- CFO
We did not.
We don't have a significant amount CapEx on the horizon.
Certainly less than I would expect at this point, less than $100 million.
And overall that would be reflected in the dividend power of the subsidiaries.
I think the more meaningful number to focus on, just as you did is the billion dollar projection for sub dividends.
- Analyst
Okay.
So that already includes reductions so to speak for what you are investing in CapEx?
- CFO
Sure.
- Analyst
Okay.
Great.
Thanks.
Operator
Carl McDonald, CIBC.
- Analyst
Can you give a sense for how you think the PDP program is going to play out as we approach 2007, particularly in the employer segment, which hasn't really participated to this point?
Do you have get the sense that employers are interested in the stand alone program, and what are the big factors going to be, in terms of choosing the external vendor?
- President, Cigna Healthcare
It's David.
Relative to the employer-sponsored demand, if you will, for Part D. First, as expected most employers opted for the Federal subsidy in 2006.
Both based on time compression, the massive amount of change, et cetera.
Indications from the producer community and employer community is that there is going to be significant demand for employer sponsored PDP programs.
Stepping back, employers that typically have this demand, are employers that are dealing with a reasonably robust employer-sponsored retiree medical benefit.
So many of these employers see the fact that integrating the pharmacy benefit with the medical benefit reduces costs.
For example the average senior actually consumes about 33 prescriptions per year.
So you get an idea the fact that this population typically has numerous prescriptions that they are taking, as well as numerous co-morbidities.
So the early employer dialogue is really around making sure there is the right clinical programs matched around an employer-sponsored Part D program, that will be complementary to and supportive of their retiree medical benefit more broadly speaking.
To recap we do expect an uptake and much more attention for employer sponsored Part D going into 1/1/07, and expect that there is going to be a lot of attention around the design of the Part D program, and the clinical components as a complement to the retiree medical benefit.
- Analyst
Great.
Thank you.
And on the, how comfortable are you with the size of the workforce today, relative to the scope of the business?
And just to follow up on that, what kind of employee reductions are you including in the 75 million in savings this year, and the 200 million in savings beyond 2006?
- CFO
It's Mike.
The bulk of the savings in 2006, the $75 million year-over-year reduction in service ops, is related to employees and employee-related expenses.
And I would expect as I noted to Christine's question, I would expect that we will see those savings emerge here over the first three quarters.
And we are comfortable at this point, that we can provide the levels of customer service that our customers expect and still achieve those savings.
In terms of the projected savings beyond 2006, again I would expect that that would be a combination of employee costs.
Also facilities that will not be needed.
Also there were some technology savings in there, which would obviously be, some of that would be non-people related as well.
- Chairman, CEO
[inaudible-microphone inaccessible] We are very comfortable that the efficiency gains that we are getting, are not at the cost of service quality, just the opposite.
I think I commented in my formal remarks, that we have got independent surveys now that clearly demonstrates that service levels we're delivering are best-in-breed, and we do not intend to see those service levels diminish at all.
What we are getting is productivity improvement, but we are also seeing the service deliver gain from these new platforms that we had intended.
So we are very comfortable that we have got the right balance.
- Analyst
Great.
Thank you.
Operator
Next question, Justin Lake with UBS.
- Analyst
Thank you.
First, quick question on the prior period development , does the 137 million that you reported after tax include intra year development, or is that just prior year?
- CFO
Justin, it is Mike.
Just prior year.
- Analyst
So how much intra year development, is the 6 million all inclusive for intra year this year?
- CFO
That would be all-inclusive in fourth quarter for this year.
- Analyst
How much have you seen for all of 2005?
- CFO
It has not been significant.
I mean I don't have that number committed to memory.
It has not been significant in any given quarter.
And each quarter we've answered the question to the extent that there was any.
- Analyst
Okay.
Great.
And my other question is, given the increase in the health care expectation ex prior period development of about 60 million that you talked about after tax, and with 50 million of that coming from lower operating costs, can you go over what your expectation is for medical cost trends and pricing yields, that are going to result in a relatively flat outcome for the health care business ex these operating costs?
- CFO
Sure, Justin.
We are expecting as we talked about in our prepared remarks, we are expecting pricing yields for the guaranteed costs, as well as the experience rated book, to be in-line with our medical costs trends.
So in the 8 to 8.5% range.
We do expect that to lead to some overall earnings increases for guaranteed costs.
It's a combination of favorable medical loss ratio, a modest increase in membership, and the premium yields, that I just talked about.
We expect overall that to contribute about $15 million in year-over-year earnings.
We do expect the experience rated earnings to be down modestly year-over-year.
This is a combination of a modest decline in experience rated membership that we are expecting in 2006, and also the fact that we have fewer deficits out there to recover which reflects the stronger health of the book of business, that we end the year 2005.
- Analyst
Can you just touch on what you are expecting when you say a modest decline in experience rated membership?
- CFO
Justin, it's hard to tell at this point, so I would rather not be overly precise.
We have a number of quotes out there right now, where we have quoted on really all three major funding types.
We have offered a guaranteed cost quote, an experience rated quote, and an ASO quote.
We will give some additional details here at first quarter once the visibility is a little greater.
- Analyst
Great.
Thank you very much.
Operator
Thank you, Mr. Lake.
We take our next question from Doug Simpson with Merrill Lynch.
- Analyst
Good morning everyone.
Most of my questions have been answered, but I want to clarify a couple of things.
On the enrollment mix, it sounds like you are saying now national accounts you expect to be down mid-single digits.
If I recall correctly you were saying low to mid single digits before.
So you are still talking about the 1 to 2%, but am I hearing you right that the mix shift is going to be a bit towards the regional, and away from national accounts?
- President, Cigna Healthcare
The macro conclusion you have is right, so the outlook for the regional segment is slightly higher.
One note I would have for the national accounts, in the prepared remarks we went through we indicated, that the retention rates did take the step forward that we expected and desired, from 86% to 91%, secondly, expanding relationships with the existing employers.
We were happy with our success on CDHP sales.
For some employers the first year adoption of CDHP membership was a little lighter than we might have expected in the first year, but for us the most important was securing the CDHP relationship, and being the provider of choice for those employers as we expanded membership with them going into 2007.
- Analyst
And then the last quarter Mike you had mentioned you were expecting about 200 million of Q2 tax benefits in this quarter, in Q4, I'm wondering where did that hit the cash flow statement?
- CFO
First, Doug, it did come in as cash flow. 222 million to be precise, I don't have the cash flow statement right at my fingertips.
I will follow up with you with Ted, but it's cash flow related to discontinued operations since it relates to the tax benefit from the sales of the property & casualty business.
- Analyst
It was 222 you said.
- CFO
Correct.
- Analyst
That shows up right there.
And you had a $349 million income from discontinued ops, that shows up for the full year number.
Did that get reallocated back to an earlier quarter?
- CFO
No, that 340 that you just quoted, I believe that was a second quarter item, and again it's the same item that we are talking about here, the tax benefit from the sale on the P&C business.
The cash in the quarter was 222, but the overall amount was the number in excess of 300.
I just don't have that number right at my fingertips here.
- Analyst
Okay.
Great.
Thanks a lot.
Operator
We take our last question from Patrick Hojlo with Credit Suisse.
- Analyst
Thanks.
Good morning, guys, one follow up here on the Part D question.
It looks like your dual-eligible enrollment for January 1 was significantly below where we thought it would be, where you were thinking you were guided with less than 100,000.
Anything unique going on there, perhaps is there a retention issue?
- President, Cigna Healthcare
Patrick, it's David.
Nothing unique.
Our product strategy complemented what our second strategy was.
So our primary target audience was our employer-sponsored customers, making sure we designed the right product.
Secondly was the independent free agents.
Hence if you look at our product design across the country, our price point is what we believe is appropriate, for a more thorough coverage.
For example, if you look at the formulary with CMS we cover 99 of the top 100 pharmaceuticals, and we believe that was a more thorough appropriate coverage, hence our product is priced a bit higher, hence we are going to pick up less dual-eligibles, and that was expected on our behalf.
- Analyst
Fair enough.
Does your guidance potentially double this Part D enrollment between now and the end of May imply any employer business coming on, or simply the fact that you see that other two-thirds of eligibles still out there to capture?
- President, Cigna Healthcare
It does not assume any major pick up in employer-sponsored Part D between now and mid-year.
The growth there and the number I quoted, the 250,000 to 350,000 represent individual enrollees.
So today I have 165,000 individual enrollees.
I have somewhere between 30,000 and 40,000 Medicare Advantage enrollees, and we expect that to grow in the 250,000 and 350,000 member range.
In the prepared remarks, we commented that we facilitated subsidy and Part D coverage for 150,000 employer-sponsored members to date.
But that's separable from the 250 to 350.
- Analyst
One last question, you other health care revenues line was up substantially, almost 10% sequentially.
I know that's largely mail order revenue and some specialty revenue.
What is that specifically from, that growth this quarter, is it behavioral membership being up, or something else?
- CFO
It's Mike, for the quarter it was up as you described significantly.
It was primarily growth in our disease management programs, and also continued increases in pharmacy penetration.
- Analyst
What have those pharmacy penetrations gone up to now from last quarter?
- President, Cigna Healthcare
Patrick, it's David.
The industry doesn't have a consistent way of measuring pharmacy penetration.
Dealing with round numbers, pharmacy penetration is in the upper 20s.
A more relevant measure is you have to look at what's the pharmacy penetration on maintenance medications.
But the typical industry quotes are as a percentage of total pharmaceuticals, and we are dealing in the high 20s.
- Analyst
Fair enough.
Thanks a lot again.
Operator
Thank you.
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