Elevance Health Inc (ELV) 2001 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by, and welcome to the WellPoint Health Network conference call to discuss first quarter 2001 financial results. This call is being recorded. During the course of the call, WellPoint's management may comment upon expected pricing or cost trends or may make other projections or forward looking statements regarding the future financial performance of the company. WellPoint cautions you that these forward looking statements are merely predictions based on current circumstances and that these statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected. Factors that can cause actual results to differ are discussed in WellPoint's Form 10K and the companies other periodic filings with the SEC. Now, I would like to turn the conference over to Mr. Leonard Schaeffer, WellPoint's Chairman and Chief Executive Officer. Mr. Schaeffer, please go ahead.

LEONARD SCHAEFFER Thank you, operator. Good morning and thank all of you for joining us for a discussion of our first quarter results. We also welcome those of you who are listening over the Internet. Our earnings press release is available at our website wellpoint.com and our Internet audience may find the release helpful in following our remarks this morning. We have two presentations today followed by plenty of time for questions. First, I will cover operational performance for the first quarter and then Dave Colby, our CFO, will discuss our financials. I would like to begin by noting that we achieved a major milestone this quarter and by closing the Cerulean deal, the Blue Cross and Blue Shields of Georgia Transaction, which closed on March 15th. As a result, our 03/31/01 membership numbers include Blue Cross Blue Shield of Georgia and the income statement includes 15 days of their operations during the quarter. Let me update you on two key areas. First from a management perspective, at the close of the transaction we named Rebecca Kapustay, who many of you know, to run the Georgia operation. Becky has a long and outstanding career with us, most recently managing large groups in California

with responsibility for 2.5 million members. She is now living in Atlanta and I know that she will bring value and leadership to our Georgia operations I am also pleased to tell you tell that has become chairman of the Cerulean Company. He will be providing assistance to Becky, and he will be taking on new role in helping me and the rest of our team explore merger and acquisition and new business opportunities in our strategic markets. Dick did a great job building value in Georgia. His industry experience and his stature within the blue system will make him a key contributor to our expansion efforts. On day one we also promoted several extremely capable key managers within the Georgia plan to help Becky grow the business. In addition John Watt, who is already living in Georgia and learning our UNICARE business will play an important operational role in supporting Becky with our large commercial accounts integrating our UNICARE business in Georgia into Blue Cross Blue Shield of Georgia. I visited Georgia and with Becky met with all of our associates with the key elected officials in the state and with our key customers. Everyone is very positive about what is going on in Georgia and we look forward to excellent results. From an operational point of view, we were able to connect the system speeds to WellPoint's general ledger and data warehouse on day one. We expect Georgia's April close will be accomplished on WellPoint's actuarial and financial system. Our goal as we communicated to our customers, is to make this integration the standard for the industry. Adding Blue Cross and Blue Shield of Georgia to our financial statements makes the Q1 results slightly more complex to interpret. For example, our consolidated medical loss ratio was slightly higher than it would have been without the addition of Cerulean. Dave Colby will take you through all the numbers and explain the effect of adding Cerulean and will dissect any numbers that anyone has questions about. Let me talk now about our membership growth in Q1, which reflected strong performance in most of our market segments and strategic geography. As I'll discuss in the minute, with good growth in

California, primarily in the southern two-thirds of the state, we experienced good member growth in Midwest aided by our acquisition last year of West Prudential. In addition, Georgia had strong growth in membership. The key point here, our membership growth would have been significantly higher had we not taken aggressive actions to improve the profitability of UNICARE business primarily in non-strategic states. Two specific actions led to the attrition of one Large Group ASO account with sixty-four thousand members and to the attrition of forty-five thousand Small Group members in associations mostly in states that are not part of our long-term growth strategy. This is what allows us to focus more resources on our strategic states. I'll review our overall medical membership growth and the UNICARE member attrition by customer segments and geography. California Large Group experienced excellent growth in the first quarter. We added almost 81,000 new members in the quarter with regular growth rate of 9.3% and almost three hundred and twenty-eight thousand members over the past twelve months. Our keys for success with these customers are simple. First, customers in this segment are attracted to and pay more for good service and we are the service leaders and second, financial stability is important, and third, an increasingly stable network that have interest to these customer. As you know, all the agreements that we have signed are multi-year agreements in our network and we successfully settle with our major systems including Catholic Healthcare West and Sutter. In terms of outside California Large Group, we aggressively raised premiums for January 1st on this large ASO account and we acquired from John Hancock. The account, which was not meeting our profitability target and diverted resources from our key states at 64,000 members. This account left us to split its business among three regional TPAs which is really not the type of business that we focus on. Our membership count outside of California was also reduced by eight thousand a quarter when another large ASO account determined that many dependents no longer

met the definition of eligibility for their program. This actually has no impact on our top line because like most ASO accounts, our fees are based on the number of employees not employees plus dependents. Looking forward we are optimistic about future growth for UNICARE in Large Group area because the number of prospects for later this year and in 2002 is significantly higher than last year at this time, primarily, in the Midwest, where the market position has been enhanced by the acquisition of West Prudential. Turning now to Individual and Small Group business in California we grew by forty thousand five hundred members at 2.6% over the last year. In southern California our Small Group enrollment growth in the first quarter was good across our full portfolio product. In northern California we took deliberate actions that led to a sequential eight thousand member decline in our HMO membership. First we raised HMO prices and introduced a pharmacy deductible to maintain desired margins relative to other products. Second, we moved some IHC HMO members to alternative medical groups as part of our hospital contract negotiations and some of these HMO members subsequently left our company. In addition in northern California in the second half of the quarter, we experienced some in-group membership decline that is a reduction of members in existing Small Employer accounts. This likely reflects some of the problems the technology sector is having in northern California. We also believe that extended contract discussions with Sutter in January and February may have caused some Small Groups to consider alternatives. However, the good news is the is behind us. We have got a multi-year agreement in place. In addition, we strengthened our multi-year relationship with Catholic Healthcare West. We entered into a strategic partnership to focus on key areas affecting patient care and health outcome. We are optimistic that Small Group sales will accelerate after the launch on April 1st, of our Flexscape for Small Groups. This is a quasi-defined contribution

product that offers employers more predictability in a cost structure and more choice for their employee. Flexscape should be especially attractive for certain northern California Small Groups that need to move down the price spectrum in a tougher economy. Also the buzz in the agent and broker community around this product is very positive. Most of our competitors are following the traditional path in dealing with higher costs, which means they are simply raising prices. Over time this is not an effective strategy. As many of you know, on January 1st we launched Planscape for the Individual California market segment. Planscape offers lower priced products with more member cost-sharing features. Agents and brokers began focusing on Planscape only after the California regulator approved the program in December. So it has taken some time for agents and brokers to understand the changes and explain them to existing and potential customer. We are optimistic that sales of this product will increase for two reasons. First, applications steadily increased in each month of the first quarter and second, direct sales of this product are particularly strong. I would like to point out that we will describe our new product in detail at a day at WellPoint on May 15. We will describe how we design a lower priced product with reduced benefit that yields a consistent level of profitability. Outside of California, we took action to improve profitability for marginal Small Group accounts in few non-strategic states, where market conditions were becoming unfavorable for conducting association related business that was acquired from John Hancock. Associations typically are Small Group in the specific industry that combine the purchase healthcare insurance. While, we have gradually reduced the size of this business over the past 18 months, on January we took more aggressive action. First, we issued direct policies to many small employers who formerly were covered under an Association master policy. This allowed us to achieve better financial control by

establishing more competitive pricing, more efficient claims processing, billing and collection. In non-strategic states we moved all accounts to a single high deductible indemnity plan which will make money for those who stay. In strategic states we work closely with each Small Group to help them transition to our proprietary network-based portfolio of low, medium, and high price point product. As a result, at the end of the first quarter we had seventeen thousand former Association members. This is a reduction of forty-five thousand from our previous number of Association members primarily in nonstrategic-states. Two comments that IST growth in our strategic states outside of California. We continue to have very good growth in the Midwest, capitalizing a momentum from our acquisition and greater market presence. In Texas, a significant pricing increase action last fall slowed sales. We believe it is prudent to maintain pricing discipline in this market that is not yet known for adequate pricing and profitability. We're enthusiastic about growth prospects in Georgia, where the IST market historically has been fragmented and there is no clear market leader. Overall, we believe we are well-positioned for member growth because we've launched products that help employer residuals manage the trade off between premiums and benefit levels. Now lets look at Georgia. In terms of their membership growth over the last twelve months, they grew by a hundred and thirty seven thousand or 7.7%. We added about forty thousand new members in the first quarter. We look forward to building on the success of Blue Cross and Blue Shield of Georgia by introducing hybrid products and, as I said, increasing penetration in the IST market segment. We also intend to offer enhanced services to Georgia employers that have a presence in WellPoint's other strategic states. I will turn now to pricing. We remain comfortable with our prior guidance on pricing and cost trends. With faster growth in our Large Group segment where more expensive products are sold we see net

premiums are a bit ahead of the expectations but we expect no material change in margins. We said for several quarters that at some point employers will react to the relatively high premium increases of recent years. We successfully manage through periods where benefit redesign has been used to mitigate premium increases and we expect some similar behavior over the next several years. We have excellent actuarial, underwriting, and sales capabilities and they are focused on watching for changes in the market and we have experience designing products with lower benefits and pricing that maintain profitability for various market segments. The first signs of an employer pushback will probably occur in Small Group and at mid-sized companies and we are prepared for this with our current portfolio of lower price point products. It is too early to know how serious large jumbo employers will be about reducing the rate of increase in premiums for 2002. Pricing discussions for the largest accounts generally begin in the summer and we are looking forward to those discussions and we are prepared to meet the needs of our customers. That is, if they want to reduce the rate of increase in premiums, we have techniques available for that. If they are content to go with the premium increases that spring from the medical trends, we are prepared to go on that way, but it will probably play out one customer at a time. Now I would like to turn the call over to the Dave Colby. Dave?

DAVE COLBY Thank you, Leonard, and again we are very pleased with our first quarter 2001 financial results for two reasons. First, our continued focus on operations has resulted in yet another quarter WellPoint has met or exceeded on those expectations, and second, after 2-1/2 years of waiting we did finally close that Cerulean transaction. In the first quarter 2001, our net income was 96.5 millions dollars or a $1.48 per diluted share which was about three cents higher than consensus estimates. The first quarter earnings per share represented a 20.3% increase over comparable

results for the first quarter of 2000, which were $1.23. During the quarter, ownership of Cerulean for fifteen days of March without any corporate allocations contributed $1.7 million to WellPoint's net income or about two and a half cents per diluted share. Although this is a very strong financial performance in fifteen days, we remained comfortable with our prior guidance that Cerulean will be neutral to slightly accretive in 2001, mainly because the market performance does not include expected integration related expenses that we'll incur throughout the year and Cerulean's first quarter is usually their strongest. Also on future quarters Cerulean will absorb an additional corporate allocation. The quality of our earnings is supported by strong, what I call cash in the bank cash value, that is net after capital expenditures, taxes, and working capital which was in excess of 120 million dollars or 128% of net income for the quarter and our GAP operating cash was 170 millions dollars. I would again like to reiterate that it is impossible to achieve this level of net cash flow without high quality earnings. Our balance sheet claims reserves continue to be based on moderately adverse conditions not estimates. Days in claims payable increased by 4.9 days and this change can be explained by the following four practices. First, the mathematical addition of Blue Cross Blue Shield of Georgia only a portion of the quarter had a major impact. Second, we had a decrease of actual claims inventory due to year-end back out caused by the holiday period and the West Prudential computer conversion. We also had lower pharmacy claims due to biweekly payments on a federal timing and a slightly higher IB&R which I will discuss a little bit later. I will now briefly discuss each of the key income statement and balance sheet items as Leonard indicated. This discussion will be more complicated this quarter as I explain the financial impact of consolidating Cerulean's operations for fifteen days in the quarter. Let's turn

to the income statement first. Continuing to the enrollment period and disciplined pricing resulted in healthy revenue growth. Our first quarter 2001 revenues excluding invested income was 2 billion 562 millions dollars. That is a 21.9% increase in the first quarter of 2000 or a 17.3% increase if we excluded the Blue Cross Blue Shield of Georgia revenue for the first quarter. The Cerulean merger also gives WellPoint a slightly higher percentage of ASO members. Year over year on insured members will Cerulean grew 26.3% and ASO members grew 35.8%. Insured lives now represent 65% of our total lives compared to the 66.6 at the end of the year. The medical loss ratio in the first quarter 2001 was 80.8% which was about four basis point higher than the fourth quarter 2000 and nineteen basis points lower than the first quarter of 2000. It's medical loss ratio was slightly higher than previous guidance due to first, a higher proportion of growth in our Large Group and Healthy Family business which has a higher medical loss ratio on the company average and second, the inclusion of Blue Cross Blue shield of Georgia which for fifteen days of March 2001 had a medical loss ratio of 84%. If you exclude the Blue Cross Blue Shield of Georgia operations, WellPoint's medical loss ration in the first quarter of 2001 would have been twelve basis point lower. The SGNA ratio continues to show year over year improvement. By the first quarter of 2001 it was 18.3%, which was down from 18.6% in the first quarter of 2000. This reduction is due to improved productivity from some our e-business, technology initiatives along with the fact that we are able to spread some of our fixed SGNA costs stable in a larger membership base. The 18.3% SGNA ratio was lower than previous guidance of 18.7 because of the drastic growth in our Large Groups for business and the effects of this defense management. Investment income was 52.8 million in the first quarter of which $1.1 million came from the Blue Cross Blue Shield of Georgia operations and also

included about a 2.5 million dollar net loss in our bond portfolio. That loss had no impact on investment earnings and I loss on a sale of debt securities offset by higher coupons on reinvestment but you get the opportunity for a tax reduction and the loss was realized. If we had chosen not to incur the capital loss, fully diluted earnings per share would have been two cents higher. Interest expense and other expenses net, which was primarily amortization, were $8.2 million and $13.3 million respectively in the first quarter. Interest expense increased due to a 500 million dollars of additional borrowings associated with the Cerulean acquisition which equated to about 2.5 million dollars of interest in March. And other expenses increased in the first quarter of 2001 primarily due to a million dollars of additional amortization associated with the Cerulean transaction. In response to some discussions I have gotten, if you include the Cerulean transaction the accounting impact of the new proposed financial accounting standard board pronouncement related to goodwill amortization. If it were to pass in its current exposure graph form, would increase WellPoint's reported net income by about 8.5 million dollars per quarter or 13 cents, 52 cents on an annual basis. The first quarter 2001 effective tax rate of 39.4%, relatively consistent with 2000 experience though it was increased slightly to about 40.2 percent due to the Cerulean merger as we have given previously on our guidance. Let me turn to the balance sheet. Due to solid financial performance and cash flow, WellPoint continues to enjoy financial position that allows big benefits and future opportunities. At the end of the first quarter, our debt to total capital ratio was 33.8%, up from 19.6% at year end, this being entirely due to the additional borrowings associated with the Cerulean acquisition. We do expect to generate sufficient cash flow in 2001 to reduce this leverage ratio to the mid 20s within the next year. We

are very pleased that despite this increase in our leverage ratio, that Moody's raised our senior debt rating to BAA1 this week. Cash flow is again very strong for the quarter. Cash and investments on our balance sheet increased by $508 million during quarter to $4.3 billion dollars. Using my definition of cash in the bank cash flow after cap ex tax and the working capital, you can see that our cash and investments increased by $508 million, however, we did increase long term debt by about $500 million and we did the Cerulean acquisition. The Cerulean acquisition required total cash payment of about $710 million but we acquired cash and investments of 593 or net $117 million. So had we not borrowed any money and done the Cerulean acquisition, actual cash in the bank would have increased for about $125 million, again compared to about $96 million of net income and I would again like to remind people that it is impossible to quarter after quarter generate cash flow greater than net income without high quality earnings. We continue to feel comfortable with our balance sheet reserve for medical claim. Medical claims payable were one billion eight hundred nineteen million at March 31. Days of medical claims payable based on the mathematical calculations increased from 78.4 days to 83.3 days with 4.9 day increase. Primarily and relevant, first, the mathematical impact of adding Cerulean's COBRA claims liability with only fifteen days of claim expense. That contributed to about nine days of the increase. Without Cerulean, WellPoint's days in claims payable, decreased by 4.1 days. That is associated with primarily, one, the timing of our PBN valuation of pharmacy claims payment which reduced days in claims payable by 1.2 days and those who remembered our first quarter conference call last quarter knew that because of the holiday period we only had three work days in the last seven days of the year and the conversion of West Prudential to the new system increased days in claims payable by three

out of the 5.4 day increase that we had in the fourth quarter. Those inventories have been brought down to normal levels so we actually had a reduction of three days associated with that so the rest of the 4.1 days is in higher IB&R so it is at about one-tenth of a day. So Cerulean days in claims payable went our at approximately 52 days compared to WellPoint's 74 days. Our second quarter 2001 days in claims payable should be approximately 70 days going forward. Long term debt increased by $500 million due to our Cerulean acquisition on March 15th. In the first quarter of 2001, WellPoint did not buy back any stock in order to use available cash for the Cerulean acquisition. From the third quarter of 1998 to today, we have used $660 million dollars to purchase 10.3 million shares of our common stock so our first priority in the short term will be to reduce leverage and pay down debt. We will periodically look at acquiring WellPoint stock based on the price of that stock, future cash flows and the alternative opportunities to invest cash in acquisitions and our commitment to maintain or improve our current credit rating. In conclusion, the first quarter was a strong quarter for WellPoint. We are very pleased with the Blue Cross Blue Shield of Georgia integration process today and we have not made a decision to rule out some capital losses in our bond portfolio we would have exceeded first call estimates by about five cents, half of which we obtained from the Cerulean merger but even more important, our business fundamentals are strong. Enrollment source and favorable pricings have resulted in 22% top line growth. Year over year medical loss ratio had declined despite the proportionally faster enrollment Group and our higher loss ratio in business segments. E-business and technology investments have shown material improvements in productivity and lower ratios and WellPoint continues to generate net cash flow greater than net income. Although I expect numerous industry-wide challenges in the quarters

ahead such as the strength of the California economy and customers that want new plan designs that mitigate the current medical I believe as Leonard does that WellPoint is well-positioned to deal effectively with these challenges. We have a diversified customer base and over one million individual members. The customer segment that has consistently done well in a slowing economy. We have experience and technical competence to offer a wide range of products, choices, profitably including lower priced point plans and we have an effective planning process that identify the potential issues early, so that our manager can take appropriate actions in advance. Our prior guidance for 2001 was earnings per share was in the six dollar to $6.05 cent range and this quarter exceeded guidance by three cents. We don't envision any change in our guidance for the future quarters, which would increase its annual range from 2001 by about three cents. I will now turn the call back over to Leonard for some closing remarks.

Thanks, Dave. Let me close our formal remarks today with a few comments about our merger and acquisition strategy. I know there has been some conjecture on Wall Street about our intentions. I would like to clarify them as much as our lawyers will let me. First, we believe we can achieve 15% earnings per share growth without future acquisitions, therefore we do not have to do any deals. We will be opportunistic but we will be prudent.

Our core competencies must add value and that value must be greater than our risk-adjusted cost of capital. That is the principal we use in investigating any transactions. Any potential acquisitions has to survive or rigorous due diligence process in which we attempt to understand the underlying numbers and how we would add value before any deal is made. I think you all know that we have done relatively few deals but those we have done have been successful. Transactions like West Prudential and Cerulean are the types of transactions that we like to do. One closing comment regarding a unique initiative that we have

undertaken. We are the first non-pharma company ever to petition the FDA to remove a drug from its list of pharmaceuticals requiring a prescription. We believe that these drugs, Claritin, Allegra and Zyrtec are excellent medications. They are effective and they are safer than what is currently available over the counter. Therefore, we hope the FDA will decide to make them more easily available to all Americans. Well, there is a hearing scheduled on May 11th in Washington, D.C., where our company will be represented by Rob Seidman, our Chief Pharmacy Officer, who as you know has a Ph.D. in pharmacology. We are looking forward to this opportunity to encourage the FDA to participate with us in making safer drugs available to Americans and obviously helping to lower the cost of care that Americans need. That completes all the topics we wanted to cover. We would be happy to answer any questions from anybody on the line. Operator? Thank you, Mr. Schaeffer. Ladies and gentleman, if you have questions or comments at this time please press the 1 followed by the 4 in your telephone touch pad. You will hear three-tone prompt acknowledging your request. If your question has been answered and you wish to withdraw your polling request you may do so by pressing the 1 followed by the 3. If you are using a speakerphone, please pick up your handset before answering your request. Also, please restrict yourself to two questions per cue. One moment please for the first question or two. Our first question or two comes from Bill McKeever at UBS Warburg. Please go ahead Mr. McKeever. McKEEVER:) Good Morning. I had a question about the economy and the impact on enrollment. First of all is it having an effect of driving a slow economy, pushing people toward a self-funded product and possibly slowing down overall enrollment...and I have a follow-up

to that.

Actually in California, there has been a lot written but not much experienced. We have not seen slow down other than in certain geographic locations. In northern California in the Small Group area it appears that some of the high-tech companies have had, you know, people moving around from one company to another but actual unemployment has not gone up that dramatically so we really haven't seen the impact yet. We have tried to position our company for a slowing economy but we can't say that we've felt it.

Just a quick follow-up. For 2002, now has there been any feedback at this point at to how 02 is shaping up from a pricing standpoint?

No. I tried to make the comment in my prepared remarks. We have been expecting a push back but corporate American has been doing so well, the economy has been so strong, large employees tend to not want to do anything that is going to discombobulate their employees in any way so what we saw was a very high pricing umbrella going into 2001. We don't know how it is going to play out in 2002. I can tell you that there is more discussion of alternatives but we really haven't experienced, we haven't experience that yet, either here in California or in Georgia. I was in Georgia and met with some of the Large Group consultants, the jumbo account guys and they are having discussions but nobody has come forward and said, "I really want to try define contributia."

Thank you. Line is now open to Joshua Raskin at Lehman Brothers. Please go ahead.

Hi, thanks. My question is also a little bit on the economy. I was wondering if you have seen any evidence of benefit buy-downs for 2001 or if that is still sort of in anticipation and then I guess a follow-up to that is how do you anticipate that changing maybe your margin profile going forward?

Well, we have not seen that coming

large employers yet. We are anticipating that if this does occur, it will occur first in the Small Group market and that's why we repositioned our Individual products and why we are repositioning our Small Group product as of April 1st. What we tried to do is to fix our margins per member per month basis so that even though we may have lower premiums, our margins will remain the same and that's why we have spent as much time and energy as we have on repositioning these products and that's margins on a gross dollar basis and not a percentage basis.

And Josh, I think we have to also realize that we've always had a range of products from, you know, higher and lower. What we're doing is probably giving offerings in that lower price point span because we think that people want more choice in that area. It's not something brand new that we have never had experience with. We've always had lower priced plans that have to yield higher percent margins to yield the same dollar profit.

Dave makes a good point. From our perspective or from the investor perspective, we are concerned about maintaining the margins but, you know, this is about meeting the needs of our customers and what customers want is a wide range of choices so we have a wide variety of options that are available for our customers at slightly lower price points. What we expect to see is those customers, where there is some pressure and we've all read about what is going on in northern California, doesn't seem to be in terms of the unemployment statistics showing as much as the anecdotes but we imagine out there that we will see some trading to lower priced product but we are positioned for it. It has not yet occurred to any great degree.

I understand and I guess there's one last followup on that. What sort of anticipation do you have if some of the smaller groups started buying down their benefits. How does that change the yields? Where would the yield expectations, just quantitatively?

If we designed the products correctly, we shouldn't see a big change in the yields. Our goal has been to develop products that have the same margin regardless of what the premium is. Now this is difficult to do but that has been our goal and I think we are the only company that has had experience doing that. The other issue, of course, is choice. We make available not just one product but a number or products and people will find the one that makes the most sense to themselves and their families. But we shouldn't expect to see a significant change as people buy down in terms of our bottom line. We might not see the top line growing as fast but we shouldn't see the bottom line negatively impacted. We are now ready for questions or comments from Jim Ling at Salomon Smith Barney. Please go ahead Mr. Ling.

Hi, good morning. I think you partially answered this. I just wanted to, you know, narrow it down a little further. In your underwriting and actuarial processes, I'm wondering if you could comment on whether or not WellPoint makes any utilization of behavior change assumptions on higher co-pay, higher deductible, experience-rated accounts or are the pricing adjustments to the customers only tied to the economic impact to the members? And then I have a followup.

I think I understand your question and the answer is...the question was to you assume that there will be behavioral changes as a function of product design and, you know, cost incentives and the answer is yes. However, we do it in a very disciplined way. That is to say our business units tend to be, you know, optimistic about the impact of their

design but our corporate actuaries have a "wait and see" attitude. So, we are not betting on the come we are looking at what is actually happening and the result is that, you know, we can be conservative in our estimates, the impact of these changes but behaviors do change. The question is how much is the change going to be and you want to find that in the actual data as opposed to hope for the best.

Thank you for clearing up my question and then my second question is, I'm wondering if it would be fair for us to assume, to read anything into the fact that WellPoint seems to be retrenching in some markets besides California and Georgia where it seems like the growth is going very well and even in California, seems to be taking some steps to try to improve selection. I was wondering if you could comment on that at all.

I don't think we're retrenching. I think that we have history that ever since we have been a public company, making sure that we are financially strong and that our profitability, you know, remains intact and I think if you go back to, you know, presentations we made in public forums and you look at the history of our membership growth, whenever there had been, you know, a price war, we have stuck to our guns and we do not cut prices to build market share. We're doing well in California. We're doing well in Georgia. We're doing well in the Midwest. Texas is a difficult market for everybody who is there and as I've said earlier, we raised prices in Texas and it slowed our growth but our fundamental responsibility is to our members to finance their healthcare services and we have to be financially strong to do that. If we do that well, we create value for our

shareholders and that's our view of the world. So I don't think we're retrenching but I don't think you'll ever, you know, see us taking risks with either member or shareholder assets.

Just to follow on, Leonard, I guess maybe retrenching was the wrong term, but more have you see any change in the behavior of your chief competitor in California that you might be reacting to or do you see as rational a pricing environment as we've had in the last couple of years.

Well, I think there has been every three or four years, people seem to rediscover the Individual and Small Group market and we may be going through a period of that right now where there is more attention being paid by some other organizations on that market. Our experience has been that if we sense that market requires and if you understand the unique diameter of that market and that you build product and relate to the distribution channel in a way that is substantially different from the product distribution channel in Large Group. There seems to be a little bit of that going on now but what tends to happen is over time that normalizes and we just saw a competitor with a major increase in prices in that market and we think we'll see other competitors do the same thing. You know, the issue for us is to make sure that we are going to be, you know, financially stable, to make sure that we're the company that is known as having high service and predictable, dependable premium increases, predictable, dependable earnings. So whenever I'm in one of these discussions, I worry that, you know, were not...we don't seem to have the flash that maybe some others do. But I apologize. I would say we're in the business where people depend on us and we have got to continue to be financially

strong. Robert Goodman at Merrill Lynch we are now ready for your question or comments.

Thanks, talking about the strong cash flow that you have been generating combined with the internet strategy clarification that Dave wanted, could you rank, order what your priorities would be and how you would go about deciding between the debt retainment through purchases and looking at potential acquisitions and then I also do have a follow-up on that.

Sure. Right now our focus is on the debt retainment simply because we'd like to get that debt to cap ratio down a little bit. We're more comfortable with it being a little bit lower. That would be the number one priority. You know, if the stock price were to fall below a certain number, we would buy stock. We are not under pressure to pay the debt down but we just like to do that as sort of a matter of principle. In terms of acquisitions, we are always looking at an opportunity and we look at them very, very carefully. One of the benefits of being financially strong is we can do transactions if we choose to, but they have to make sense for us and they have to pass the hurdle I mentioned which is can we, with our company's core competencies trade value that exceeds our cost of capital. And, you know, I'm sort of responsible for figuring out what the value will be and young Dave Colby over here is responsible for telling me what the cost of capital is and between us, we have been very conservative and I think we will continue to be conservative. Again, the fundamental principle is our members depend on us to finance our healthcare. We have to be able to do that on a timely and accurate basis and if we do that, you know, we create value and, you know, that is the principle. We are looking at all things that come our way to make sure we don't

miss any opportunities but I think we have been very prudent in the past and we'll continue to be.

Okay, on a follow-up to that. As you mentioned West and Cerulean as being the models, might it be correct to assume from that that you would be more apt to look at either blue fields or situations in which you have a strong regional employer to whom you can bring additional products or infrastructure capabilities rather than looking at other types of situations more seriously or would that not be correct?

While I can't comment on any specific transaction, what I can say is that we have enunciated several times our focus on strategic areas and obviously an opportunity that puts us in a better position in a strategic state is a better opportunity for us. We believe that healthcare locally delivered and locally consumed and we want to add a significant local market share so I think the geography is probably the thing that is most important, you know, right now but I guess that is about as far as I can go.

And the only other thing that I would add is that we have some very successful specialty products and we're very excited about our mail-order facility that we acquired the end of last year. We think that is going to be a great addition to our PBM and just the other transactions like that also things that we will see.

I think at the Day at WellPoint, we will maybe spend some time on the pharmacy business. We have really had some excellent people focusing on this and that would be a good discussion to have. Christine Arnold at Morgan Stanley. Your line is now open for questions.

Good morning. You said that there was no change in the cost trends guidance. Can you give us a flavor for what you see in cost plans,

what expectations are and maybe a flavor by cost category?

I think that what we had given guidance on in 2001 was, you know, cost trends in California around 7% and premium increases slightly in excess of that, 7.5% to 8%. I don't think, the change that we are seeing, growth in large groups versus individual small Groups so actual premiums are up a little bit more but that would be pretty consistent and we gave guidance outside of California in a much wider range because they have much different products and much wider geography where costs trends anywhere from the high single digits to to low double digits to low double digits. Again, in terms of looking forward to 2002, as Leonard said, you know, we are just now getting into the mode of starting to look at that, we actually won't be setting the best prices until later in the year.

And what are you anticipating for drugs and hospital and other changing over time in terms of your cost trend expectations given what you are seeing early in the year.

Not really. I mean, I think, you know, when we saw looking forward, I mean there are some opportunities potentially on the drug side with...I know our pharmacy people are looking at some major drugs coming off of patent protection in 2002 which could have an impact that we offset by and I'm sure some new drugs but, you know, hospitals and physicians are basically going with inflation and higher outpatient utilization but all within the guidance that we've given. Ed Kroll at S.P. Collins please go ahead with your questions or comments.

Good morning. Can you hear me? Yeah. Please go ahead, Mr. Kroll.

My first question is on the Individual and Small Group business in

California. Leonard you eluded to northern California where you have seen some activity or some lighter growth than we would have thought maybe. What portion of the 1.5, 1.6 million you are in northern California versus the rest of the state.

The bulk of the members are in southern California, the southern two-thirds of the state. Let us scurry around and find the numbers. We'll get to the numbers. If you cut the state in half, it's about half and half but we'll get you the numbers for northern California. You really were interested in what is going on in...the bay area is that what you men Ed?

The bay area. Silicon Valley, there has been so much...

They have a lot of agriculture in northern California...

We will get to those, get those numbers and make them public. I just don't have them off the top of my head. What I said in my remarks is we have strong growth in the southern two-thirds of the state and additionally the add was, as you say in the Silicon Valley area. I just don't have off the top of my head what that total number of lines is up there. What we think is going on in the California economy is that it is spotty. That is to say different things are happening in different geography, but it appears to date and this is the first quarter here, that we have not seen the spike in unemployment that people would imagine. That is to say a lot of Small Groups go out of existence or get smaller but people are landing elsewhere. If the economy really does trend down, what we've seen historically is people leaving both Small Group and Large Group who'll be looking for individual policies, provided those policies are lower cost than COBRA and that's what we've done. We've

positioned our individual policies to be lower cost than a COBRA extension. But in the beginning of an economic dislocation, people sort of automatically take COBRA because they know they've got it and nobody has talked it up that there are other opportunities. We think, you know, if the economy worsens, people will begin to go to individual policies.

Similar to the experience you had in the early 90s.

Right, but I am talking about history, I am not projecting. If that history were to repeat itself, we would be well positioned but I think the media attention has proved, bated the actual event and we just haven't seen it yet.

Great, thank you for that color and then just a quick follow on. I know you're not a risk vendor but you were part of the recently concluded 2002 negotiations. Can you give us a little color on that? I believe you are the ASO vendor for them and...what changes will occur for you in 02.

Right. Ed, I want to make sure everybody, all our listeners understand the point you make. It is very important. We are not a risk vendor. We do not offer an HMO. We do not take risks in the relationship. You may recall several years ago they had a policy to roll back premiums and rather than after a year or two of that, where they roll back other premiums, did not roll back ours because ours was lower to start with, we resigned the account rather than be in a situation where there would be arbitrary cutbacks. We can't do that. We try to come up with a premium that reflects the underlying

costs so we are not an HMO vendor. We're not part of those negotiations. We did not make a bid and the resubmit the bid. However, subsequent to resigning the account, as an HMO vendor, we did get the larger piece which is the ASO PPO for and we now have over two hundred thousand members in that PPO. They chose us because of the very cost effective network that we have. They set their own premiums. We do not, although we consult and what happened two years ago is there were discussions around the notion of using benefit redesign to reduce costs. The board decided at that point that that is something they would rather not do. This year, however, they reevaluated and they made decisions about, if you will, changes in benefits that reduce their costs. As an example, we have mental health parity in this state by law but under the constitution, the state does not have, the states employee system does not have to put mental health parity in their benefits and they chose not to. So they did some benefit redesign. We consulted with them a methodology to reduce their costs but from our perspective the issue is AFO not risk and the issue has to do with frankly a lot of their members going through our network which helps disability of our network and helps us make them cost effective. So we have a very good relationship with who is different than some of the other players in the state and we have a great deal of respect for them and the pressures they have to deal with in terms of doing planned design. However, it is I think the tip of the iceberg. This is the first major employer, jumbo account employer, to take a

long look down the road and decide that benefit redesign is an appropriate way to go. However, the state of California has many other issues and I think those other issues may have impacted their decision but they have been very careful and very focused in doing the right thing for their members and we want to be very supportive.

I also think the has a little more presence and discipline within the industry where in the past they would have been pushed out to reduce prices. Now they at least acknowledge to get lower presence they have to change benefit design. Paul Golekas at Conning and Company. Your line is now open for question.

Good morning. Couple of questions. One is about the Texas market, it's been relatively competitive and I was wondering how you were faring there and the other would be an update on and how you're doing in improving earnings there.

Well, Texas is a very tough market as you know and to make sure that we can be success full there, we had an increase in our Individual and Small Group products and as I mentioned in my remarks, that sort of flattened our growth. That is, you know, our position as a company and that if we can't make our numbers, in terms of growth numbers...let's put it differently. We focus on the possibility of function and we price for profitability and if that means we don't make our growth numbers then that's what it means so that is what is going on in Texas, although we see there as well as in other places in the country some of the local competitors needing to increase their prices as well. In terms of we had to go through a conversion to get the folks onto our system. It is interesting. Not

just corporate American in the sense of big corporations but small companies, and particularly agents and brokers had learned when they heard the word "conversion" to run for the hills, so there was a punitive time where people were waiting to see what would happen. All of those issues are behind us and I do deal with some brokers and consultants in the Chicago area and I think we have the reputation now of a company that service is very good so we are optimistic about what is going to happen in Midwest. We are seeing many more proposals and opportunities to bid. Again, you know, our pricing are based on what we think we need to do business so we are certainly not going to be the low cost auction there but I think we will get our fair share of business and I think we will do well there and we think the Midwest is a very good market for us and remember now, is the first HMO that we ever purchased that allows us to develop and offer hybrid products which is where we think our advantage is and you'll see those products rolled out over the next six months to a year.

Thank you very much. John Rex at Stern. Please go ahead with your questions on comments.

Good morning. Are state programs enrollments continuing to be a nice contributor with the Large Groups in California. I was wondering if you could discuss are there any policy changes on the horizon especially that you think that will continue to feel that growth...has anything occurred recently that has been part of that, that was part of that at least in the current quarter?

Well, I think you are aware in California the Healthy Families Program now covers parents and children who are eligible, I'm sorry, will be,

will be covering them in the second half of the year. I think, I want to back up and talk a little bit about the mentioned state programs. California is a bit unique in that the state programs you're talking about which are both federally and state funded are operated at a county level so we have chosen to participate in those county programs where we think our product and our skills can make us successful so we are not a vendor statewide. We are a vendor in those areas where we think we have an advantage and in those areas things continue to go well for us. We are very pleased by a number of evaluations that had been done that has shown a positive impact on quality of care and availability of care for people eligible for these programs but we are not a statewide vendor. We, if you will, focus on those counties where the county design, and it varies by county in California. It's not a uniform program but we focus on those counties where the county design gives us an advantage or to put it the other way. Our networks and our capabilities meet the need for those counties in ways that are beneficial for the county government. It is beneficial for the eligibles and it is beneficial for us. So the secret or the focus for us is to make sure that we participate in these programs where we have value and where we receive value in return.

Okay. And you look out this year having I think about a hundred fifty thousand ads in the last twelve months of this quarter. Do you expect similar levels of unit growth in terms of the opportunity you see out there for potentially for counties that are not in yet but you would like to be in or any desired changes?

I don't think you'll see growth in California in terms of counties. I think there will be

growth in terms of the parents available, the fact that the Healthy Families Program will now cover parents but we are in most of the counties where we think we offer value. Now it is interesting to note that we are sometimes asked to consult or to advise some of these counties the design of their plan so should a county plan be one where we think we can add value we might expand but right now I think there aren't any other counties except for these targeted.

I should point out in that in that state-sponsored number there are some other states, the Commonwealth of Massachusetts on more of an ASO basis where we don't take risks. Again, as Leonard said, we have gotten a number of awards for improving quality of care and have gotten invited into Oklahoma to do consults. We are very conscious of turns out to be decent business for us and one that certainly meets the need of a low income segment.

Those of you who have been at a Day at WellPoint, I think in the past may recall that we had a telemedicine pilot that was funded and we have been very innovative in trying to make the health care services available to this population in innovative ways and we are very proud of the work that has been done but it has been done in a very controlled environment in the sense of this stuff has to make financial sense. In the counties where we chose to participate, it does and we are able to both feel good about the value we are adding and to make sure that we receive value in return. We are now ready for questions and comments from Charles Brady at Goldman Sachs. Please go ahead.

Hi, Good morning. One for Leonard. I am wondering if you can give the unit prize and

utilization components of your California hospital trend in light of the new contracts, what you are expecting for one and then I'll have a follow for Leonard.

I think that we said that the hospital component is basically three to four percent range on the average.

Is that your unit price component or utilization or is that combined?

That is the unit price.

Okay. And any utilization trends?

Yeah, the utilization trends are based what kind of design and other factors.

Is the underlying trend that your are seeing in your markets?

What is the question? CHARLES BRADY: What the underlying trends are that your are seeing in California, in your markets? There are dramatic changes. CHARLES BRADY: Okay, and then the following for Leonard was regarding his Planscape product and products converged with it. Now that they are mainly behind you in California, if you can quantify the impact of the transition to sales in the first quarter or any other financial metrics in the first quarter and also elaborate on the plan in Georgia towards a new product rollout, a time frame and if you're going to take a similar approach to what you did in California, replacing existing products or is it going to be adding to the current portfolio?

In terms of California, what I mentioned in my previous remarks was that we didn't get the approval until December so we had a, you know, a slower start in terms of the sales of the new products than we expected in California. In terms of Georgia, there were two things going on and it will take a while for the both of them to conclude. The first is that we want to update what I call the UNICARE ISU products in Georgia and then we want to combine the UNICARE

products with the Blue Cross Blue Shield of Georgia products and have them all blue branded and we are in discussions, literally as we speak, with the regulator to make sure that can be done in a way that is appropriate, you know, for him. When you are the new player you want to make sure that everything you do is understood and is viewed positively. We have very good relationships with the regulator and his staff by virtue of spending time with him and explaining everything that we want to do so we are optimistic that we'll get all these approvals but Georgia is a bit behind the rest of the country because we wanted to get the Georgia deal closed first and then begin discussions about product changes. Ron Sasbro at CIPC World Markets. We are now ready for your questions or comments.

Thanks, two questions. First, just relative to this potential shift to the Individual market, I was wondering if there are any efforts underway to market individual products to people who are losing their jobs and if so how are you doing this? Is that through a telemarketing program or through agent referrals? And then secondly I guess a question for Dave. I was wondering if you could give us some examples of how you risk and test capital in evaluation acquisitions.

In terms of the move into Individual products. You know I keep saying this and I don't know if I'm communicating it. We do not hope for bad news in the California economy or for bad news in the economy across the United States. That is not our goal so if it doesn't play out this way, that would be fine with us as we are doing very well as a company. The issue is that back in history

when the economy of California did not do well, what we saw was a movement out of some Large Group and particularly Small Groups into Individual because for many people, particularly healthy people, an individual policy is much less expensive than a COBRA extension. For people who are ill, they will tend to stick with their current insurer. They will tend to stick with the COBRA extension and pay the higher dollar amount so this is a very interesting opportunity for us. We position our products as of the first of the year and we are working with our traditional distribution channels to make sure that these products are understood and being sold and as we said, there was a slight delay in that because we didn't get the regulatory approval here in California until December. However, we also have a direct sales effort and that effort has been particularly strong. We have seen our direct sales go very high in comparison to the previous year. We are also exploring some opportunities of what just exactly along the line that you imply and I'd rather not tell you all the details but basically, we are taking steps to make our Individual policies very, very easily available to people who are the subject of layoffs as soon as those layoffs are made public and we're working with people in northern California to make sure that we are the company of choice should that happen. My comments earlier though are that while we see those kinds of announcements, there hasn't been enough in the real world of that thing going on to create what I would call a large stream of activity but should it occur, you will see us becoming

involved in a variety of innovative programs where we will literally be on site and literally be available on the Internet to help people very quickly determine the appropriate option and recall, for a healthy person and Individual policy will be a lot cheaper than a COBRA policy. We just have to make sure these people understand their options so we are heavily involved in that thinking and in that preparing. It just has not played out that way yet.

And just going to your second question, regarding how we look at, you know, what risk adjusted returns on capital it would be fairly similar to business school 101. We obviously, when we look at any transaction, we do look at what are the range of opportunities and range of potential outcomes to the extent that if there is a broader range of uncertainty then we have to demand a higher return to compensate for that risk. A good example is Cerulean. Back in July of 1998 when Cerulean was making, I think it generated about $17 million a year net income, we modeled what we thought it could do and we thought it could do a lot better and, you know, we bid $500 million for that but there were some risks of making it better. Two and a half years later, they do actually perform. The risk of us to make more money in Cerulean has gone down and when a competing bid comes in we were able to go from $500 million to $700 million and still feel comfortable about we're getting a good return. Now we all would have preferred to do it at $500 million but my risk adjusted return on capital from this point of view, we felt just as comfortable at $700 million given the improvement than at $500 million

when we knew we would have to do the improvements, if that makes sense to you. Ladies and gentleman, we are quickly approaching the end of the question and answer period and therefore our last question or two will come from Bill France CS First Boston. Please go ahead Mr. France.

Thank you very much. I just had a quick question. How much of your business David renews in January and what are couple of other important months in the percent of the business in renews?

We have not actually updated that number now with the Georgia plan but right now it is about 32%, so it really has a number of accounts that are in July so I don't think that would change real dramatically although they are a little bit more Large Group oriented which tends to be a little bit more January 1st oriented.

One other thing stimulated by the comment that Leonard made. Why is the COBRA product so much more expensive than the Individual?

Well, what happens is that under COBRA, you know, if somebody leaves WellPoint or we lay somebody off, we are obligated to sell them in essence our policy at, I think it is a 102% of our average cost per employee. So our average cost per employee includes the entire risk pool of WellPoint, well pretty good benefits probably. If you get laid off and determine that you can pass medical underwriting, they'll generally be healthier than the risk pool and you may want benefits that are less generous than what a Large Group employer has and those two combinations can save you sometimes a dramatic amount of money and still have protection against a catastrophic health event. Mr. Schaeffer please continue with any closing remarks you may have.

Well, thank you all very much for joining us this morning. We are very pleased with the quarter and we look forward to

having all of you who can make it join us for a Day at WellPoint. We will be covering in greater detail some of the topics that came up today and would appreciate any guidance or suggestion from any of you about the things that you would like us to cover. We think it will be an excellent opportunity to get more detail and we look forward to seeing all of you out here in California. Thank you and have a real good day. Ladies and gentleman you may all disconnect and thank you for participating in the WellPoint Health Network conference call to discuss first quarter 2001 financial.