Elevance Health Inc (ELV) 2003 Q3 法說會逐字稿

PLEASE NOTE THIS TRANSCRIPT HAS BEEN EDITED FOR ACCURACY.

COMPANY DISCLAIMER Some of the information in this transcript could constitute forward-looking information relating to WellChoice's future financial or business performance and reflect management's views as of October 23, 2003.

Forward-looking information is based on management's estimates, assumptions and projections and is subject to significant uncertainties and other factors, many of which are beyond the Company’s control.

Important risk factors could cause future results to differ materially from those estimated by management.

Those risks and uncertainties include but are not limited to: the company’s ability to accurately predict health care costs and to manage those costs through underwriting criteria, quality initiatives and medical management, product design and negotiation of favorable provider reimbursement rates; the company’s ability to maintain or increase the company’s premium rates; possible reductions in enrollment in the company’s health insurance programs or changes in membership mix; the regional concentration of the company’s business; the impact of health care reform and other regulatory matters; the outcome of litigation; and the potential loss of the New York City account.

For a more detailed discussion of these and other important factors that may materially affect WellChoice, please see the company’s filings with the Securities and Exchange Commission, including the discussion of risk factors and historical results of operations and financial condition in its Annual Report on Form 10-K for the year ended December 31, 2002, and its Quarterly Reports on Form 10-Q for the three months ended March 31, 2003, June 30, 2003 and September 30, 2003.

This transcript is included on this website for historical reference only, and has not been updated.

You should consider the information to speak only as of its date of original publication.

WellChoice does not assume any responsibility to update the information to reflect subsequent events.

Ladies and gentlemen, thank you for standing by and welcome to the WellChoice third quarter 2003 earnings conference call.

As a reminder, today -- Thursday, October 23, 2003 -- this call is being recorded. (Operator instructions) At this time, I would like to turn the conference call over to Deborah Bohren, SVP of Communications.

Thank you, and welcome everybody to WellChoice’s third quarter 2003 conference call.

I am Deborah Bohren, SVP of Communications and with me this afternoon are Mike Stocker, President and CEO of WellChoice;

John Remshard, our SVP and CFO; as well as Linda Tiano, SVP and General Counsel.

Mike will start off the call with some brief comments about our third quarter performance, after which John will discuss our financial results in more detail.

And then, Mike will also conclude our remarks before we go to Q&A.

On today’s call, we will be making some forward-looking statements.

Listeners are cautioned that there are factors that could cause actual results to differ materially from our current expectations.

For a detailed discussion of these and other risk factors, please see the company’s filings with the SEC, including the risk factors contained in WellChoice’s Form 10-K for the year ended December 31, 2002 as well as Form 10-Qs for the quarters ended March 31, 2003 and June 30, 2003 and the Form 10-Q for the quarter ended September 30, 2003 to be filed with the SEC.

And with that, I am going to turn the call over to Dr. Stocker.

Thanks, Deb.

Good afternoon, thanks for joining our third quarter 2003 earnings conference call.

I am going to talk a little bit about the quarter, the New York City account, 2004 guidance, and the other thing that happened during the quarter was the Consumers Union lawsuit.

I am going to ask our general counsel, Linda Tiano, to address that before I turn the call over to John Remshard, our CFO.

We are happy with the results of the third quarter and we continue to successfully execute the fundamentals of our business.

Specifically, third quarter reported net income was $52.1M, resulting in EPS of $0.62.

This is $0.04 per share above the upper range of our guidance and $0.04 ahead of current consensus.

Commercial managed care product membership, excluding New York City and New York State accounts, increased 12.8 % since year end 2002, and 12.2% compared to the prior third period of 2002.Overall corporate enrollment increased 4.2% since December 31, 2002 and 3.6% between September 2002 and September 30, 2003.

For the rest of the year, based on our performance, WellChoice is raising its guidance for 2003 earnings to be in the range of $2.36 to $2.40 per share from our previous guidance of $2.25 to $2.30 per share.

That is based on 83.5M shares outstanding.

A couple words about the New York City account.

As you know, last week we announced that we had negotiated rates between now and next June.

Just a little bit about the history of the account, the RFP came out at the very end of 2001, the initial expected initiation date for the five-year contract was January 1st of this year.

It got extended for six months, and then it got extended again.

We negotiated the interim rates for the first six months of the year and we have negotiated rates consistent with our expectations from July this year through June of next year.

We believe that the RFP will be awarded sometime next year, probably in the first half of the year, more likely second quarter than first quarter, then of course the RFP rates will be effective at the time of the initiation of the contract;

We continue to negotiate this heavily, we are very engaged in this process and we will keep you up to date.

2004 guidance.

The outlook for next year is positive.

We expect earnings for calendar year 2004 to be in the range of $2.75 to $2.79 per share.

This is fueled by growth in the small and middle markets as well as continued national account growth.

Before I turn the call over to Linda and John, I would like to -- I can’t resist this -- reiterate the competitive advantages that we enjoy in our marketplace.

The first is the value of the Blue Cross and Blue Shield name and marks in this great New York marketplace.

Second is the value of business that is founded on a very diverse customer base and a broad array of products.

Third is the value of an extremely disciplined approach to managing medical costs, improving quality that is set upon a strong technical foundation.

Fourth is the value of a proven track record, responding to needs in the medical marketplace, and finally, the value of a smart, dedicated and innovative management team that differentiates WellChoice from the competition.

With that, I would like to turn this over to Linda Tiano to talk about the Consumers Union lawsuit.

Thanks, Mike.

As you know, in August of 2002, Consumers Union and several other groups and individuals brought a lawsuit challenging the legislation authorizing our conversion on a number of grounds.

On November 7, 2002, Judge Gammerman issued a restraining order requiring that the proceeds of the sale of stock by the Fund and the Foundation be held in escrow pending the final decision of the court and that the proceeds not be distributed to the selling shareholders.

The plaintiffs did not seek, and the Judge did not grant, any restraining order preventing the conversion or the IPO.

In March, the court dismissed all of the causes of action set forth in the original complaint but gave Consumers Union and one other group leave to re-plead the complaint based upon a different theory, that the statute violated the State constitution on the grounds that it exclusively benefits us.

On April 1, 2003 the plaintiffs served an amended complaint with this single cause of action.

This cause of action seeks to have the statute authorizing the conversion declared unconstitutional because it applies exclusively to us and seeks to rescind the conversion.

We believe that the cause of action is without merit because the constitutional provision only prohibits laws that create monopolies, and the conversion legislation clearly does not give us a monopoly.

On October 1st, 2003, Judge Gammerman issued an opinion dismissing the claim against the individual director defendants, but refusing to grant our motion to dismiss.

This means theoretically that we would proceed to have a trial.

However, since we planned on appealing immediately, and since the plaintiff has filed an appeal regarding the prior decision dismissing the other causes of action, the plaintiff agreed to an immediate stay of further proceedings in the court pending the appeal.

We should point out that the Judge also noted in his decision that even if the case were decided in the plaintiff’s favor, the plaintiff’s failure to initially seek an injunction relating to the conversion would impact on whatever relief may ultimately be granted.

The next step is an appeal to the appellate division and then to the Court of Appeals.

Each step is expected to take four to six months.

And now I will turn it over to John.

Thank you, Linda.

As noted in our press release and as Dr. Stocker indicated a few minutes ago, WellChoice reported net income for the third quarter of 2003 of $52.1M, or $0.62 per share.

This result exceeds our current first call earnings expectations by $0.4 a share, and it is $0.04 above the high end of the range we provided to you during our second quarter conference call.

Before we discuss the results of our operation, we would like to once again note that the impact that taxes have on comparison over 2003 administrative expenses to the prior year, nine months and third quarter results.

Our conversion to a for-profit entity added $17.1M in premium and sales and use taxes to our administrative expenses during the third quarter, compared to $900,000 in the third quarter of 2002.

For the first nine months of 2003, premium and sales and use taxes were $54M compared to $2.4M for the prior year nine month period.

In the third quarter, administrative expenses were increased by the recognition of a $13.4M charge related to unoccupied leased office space.

This charge equals the present value of the difference between future lease payments and current market rates for similar space.

This is a result of a comprehensive real estate review that we just finished this past month.

This expense also reflects changes in our current and projected operating requirements.

The impact of earnings of these costs were offset by a $15.3M net benefit to our premiums and claims due to funds received from the New York State Small Group and Individual Product Stabilization Pool for the years 2000 through 2002.

All in all, we are pleased with our third quarter results as we continue to see stable claim trends, which combine with strong, core commercial managed care membership growth.

In general, the same factors that we have been highlighting throughout the year remain in place.

First, revenue increases resulting from growth in self-funded accounts; second, disciplined pricing; third, stable claims trends, especially for our commercial managed care products; and fourth, good expense control.

We report membership in two business segments.

Commercial managed care, which includes our network products, and other insurance products and services which include our indemnity and individual products.

We break our commercial managed care business into two components, The New York State and New York City PPO accounts, and our core commercial managed care membership.

Core commercial managed care membership excludes the State and the City PPO accounts and includes group PPO, HMO, EPO, POS, and other memberships, which is primarily dental.

Our core commercial managed care membership grew by 12.2% to 2.3M as of September 30, 2003 compared to the third quarter of the prior year.

Membership for the commercial managed care segment as a whole, which includes New York City and New York State PPO enrollment, grew by 6.9% to 4.1M in September, compared to September 2002.

Total corporate membership grew by 3.6 percent to 4.8M as of September 30, 2003 compared to the prior year.

Since year end, core commercial managed care membership increased by 12.8%.

The commercial managed care segment as a whole increased 7.2%.

On the same basis, corporate membership has grown by 4.2% to total 4.8M members.

Since year end, our small group and middle market membership grew to 433,000 which represents a 9.9% increase.

National account membership grew to 1.2M, a 14.3% increase since year end.

Membership in our other insurance products and services segment declined by 10.3% to 720,000 members since year end, and this is totally in line with our strategy to convert indemnity members to managed care.

Since year end, self-funded membership increased by 15.3%and now totals 1,785,000 members as of September.

This self-funded membership is now 37.2% of our total corporate membership compared with 33.6% at year end, 2002.

This increase was largely driven by our strong membership growth in national account business.

Total corporate insured membership did drop by 45,000 since year end, and now totals 3,015,000.

This is a result of some shifts of large accounts to ASO funding basis and a decline, a continued decline, in our other insurance products and services segment.

Sequentially, our core commercial managed care membership increased by 3,000 since the end of last quarter, but excluding a decline of 12,000 in attrition in national account membership, our local core commercial managed care membership grew by approximately 15,000 members.

As we have said before, in a weak economy national accounts typically increase membership at the beginning of the year through new enrollments, and then experience membership decline throughout the rest of the year due to employee attrition.

We have not lost any national account customers during the third quarter.

However, I will note to you that we expect to lose in the fourth quarter approximately 75,000 ASO members, of which 52,000 are national account members --hospital only members-- due to our decision we hold the line on rates.

However, because this large account is consolidating its membership with another Blues plan, we will continue to receive fee-based revenue for the membership in our area.

Consequently, we do not expect the loss of these 75,000 ASO members to have a negative impact on our earnings in the fourth quarter or next year.

Total corporate revenues were $1.3B for the quarter ended September 30th, which represents an increase of approximately 9.7% over the same period last year.

Growth in managed care revenue was partially offset by decreased revenue in our other insurance products and services segment.

Total revenues in our commercial managed care segment increased by 13.5% over the prior year third quarter to $1.1B, while total revenues in our other insurance product and services segment declined by 5.7% to $227.7M.

Premiums for our core commercial managed care business, which excludes New York City and New York State PPO accounts, grew by 9.2%over the prior year third quarter.

Core commercial managed care premium yield -- that is the change in premium per member per month -- was 10.9% for the nine months of 2003 compared to the prior year.

Premiums for our managed care business including the New York City and State accounts increased by 13 percent to a little over $1B compared to the third quarter of 2002.

These increases were partially offset by a 5.5% premium decline in other insurance products and services segment.

Insured premiums for all segments increased to $1.2B for the third quarter, a 9.8% increase from a year ago.

The corporate premium growth rate was primarily the result of underlying rate increases and higher claims levels in some of our retrospectively rated business.

In general, claim expense movement in retrospectively rated business generally results in an equivalent change in premium.

Year over year self-funded membership increases led to strong service fee growth of $9.5M, or 9.1%.

This was especially true in our commercial managed care segment where service fees increased by 22.5% over the prior year.

In sum, premium and service fees in our most profitable segments continue to grow due to increased self-funded membership, higher premium yields on our insured business and increased membership in our core commercial managed care products.

Well before I get into a discussion of our medical loss ratio, we’d like to make a few points regarding our experience of a year ago.

In the second half of last year we experienced quite low medical loss ratios due to favorable post 9/11 conditions which were unique to our regional market.

We have discussed this in previous conference calls.

At that time, we made the decision to price products based on what we believe to be stable and consistent trends, recognizing that some of the second half of last year’s experience was very unlikely to repeat itself.

Our financial results this year proved that that approach was exactly the right one to take.

Our medical loss ratios and trends have been stable throughout 2003 and we expect that to continue.

Our nine month year-to-date medical loss ratio was 85.3% overall, or 60 basis points lower than the prior year nine months.

For the nine months 2003 year to date, the medical loss ratio for our core commercial managed care products, which exclude the city and the state PPO, was 82.4%, which is basically flat in comparison with the prior year.

For the nine months year to date, the reported change in per member per month claim cost is 11%.

Our current pricing uses medical trend rates in the 11% to 13% range, depending on the product.

Third quarter results included $600,000 of favorable prior period claims development in prospectively rated lines of business.

The corresponding amount for the third quarter 2002 was $10M.

The decline in prior period development is the result of high levels of favorable development throughout the latter half of 2002 and an increase in hospital claims in the third quarter, resulting from a review of claims for one of our hospital systems.

The cost of this for the third quarter was $9.6M.

For the other insurance products and services segment, our medical loss ratio for the third quarter was 71.9% compared to 78.9% for the prior period, 2002.

The MLR for the other insurance products and services segment was reduced in this quarter by the one-time recognition of the $15.3M net benefit arising from funds received from the New York State Stabilization Pool Refunds for the year 2000, 2001, 2002.

Technically the benefit represents a $34.9M reduction in claims, offset by a $19.6M reduction in premiums.

Excluding the effect of the refund, the medical loss ratio for the other insurance segment would have been about 82.3%.

Days claim payable.

Our days claim payable increased by 3.8 days and now is 54.7 days in the quarter ended September 30, 2003.

And this is an increase from 50.9 days in the quarter ended June 30th 2003.

The one-time New York State Stabilization Pool Refund accounts for 1.8 days of this increase.

The remainder was simply caused by a lesser amount of claim processing days in the third quarter versus the second quarter.

On administrative expenses for the third quarter of 2003, they increased by $18.1M compared to the third quarter of 2002, and totaled $231.5M.

The recognition of an expense for unused leased facilities accounts for $13.4M of this increase.

For the year to date, 2003, administrative expenses increased by $45.9M compared to the prior period and total $660.6M.

For the year to date as a percentage of premium plus service fees, the administrative expense ratio is 16.7%, which is in line with our expectations and our guidance.

However, I would like to point out again that due to the increasing significance of self-funded business as a proportion of our total book of business, expense ratios using premium equivalents allow for a clearer comparison between periods.

On a premium equivalent basis, which adds self-insured claims to revenues, the expense ratio shows a 100 basis point decline from 12% in the third quarter of 2002 to 11% in the third quarter of 2003.

For the year to date, on a premium equivalent basis, the expense ratio declined 60 basis points from 11.4% for the nine months ended 2002 to 10.8% for the current period.

Liquidity is good.

Cash flow from operations was $228M for the first nine months of 2003.

We expect cash flow from operations for the full year to be in the range of $285M to $300M.

Total stockholders equity was $1.4B as of the end of the quarter, an increase of $147M, or 11.9% since year end.

WellChoice continues to have no debt on its balance sheet, but we have available a $100M revolving line of credit.

As of the end of the quarter, free cash at the parent totaled $300M.

The statutory surplus of our insurance subsidiary exceed both the Blue Cross/Blue Shield Association capital requirements as well as all applicable New York and New Jersey statutory reserve requirements.

Investment income and realized gains or losses increased in the third quarter 2003 by $900,000 to $16.7M compared to the prior year third quarter.

This concludes our review of the third quarter 2003 operating results.

I will now discuss a bit of our guidance for the rest of 2003 and for the full year 2004.

As we noted earlier, we are expecting the loss of ASO membership of approximately 75,000 members in the fourth quarter, so this lowers our membership targets for the year back to our original guidance of the 2% to 3%.

However, we are raising full year guidance and expect earnings for the full year to be in the range of $2.36 to $2.40 per share based on 83.5M shares outstanding.

For the fourth quarter, we expect earnings, as Mike pointed out, to be in the range of $0.58 to $0.62 per share.

For the full year 2004, we expect earnings per share to be in the range of $2.75 to $2.79 per share.

That ends the review and I will turn this back over to Mike.

Mike.

Thanks John and Linda.

We are ready for questions.

At this time we would like to open the call up for a question and answer session. (Operator instructions) Your first question comes from Matthew Borsch with Goldman Sachs.

Hi, congratulations on the results this quarter.

My first question is on the pricing environment, if you could just update us on what you are seeing in New York in terms of the pricing on your full risk products, particularly in small and middle market segment.

And then, maybe talk about the pricing on national accounts and if you are seeing somewhat more aggressive pricing on fees for non-risk business.

I’ll do that.

Hi Matt.

New York is, as you know, a competitive marketplace with a lot of significantly capitalized competitors.

Having said that, it is competitive but I honestly don’t see any material change recently from the beginning of the year or last year.

We don’t see irrational pricing in the marketplace, and so although it remains very competitive, I don’t really -- you hear anecdotal cases occasionally -- but in general I don’t really see any difference in pricing in terms of the competitiveness of the pricing than we have in the past.

I would say pretty much the same thing for national accounts.

It is competitive, there is no question about that, but it is not irrationally competitive and I don’t see any major difference from last year in terms of the competitiveness of the pricing.

You had mentioned though that the 75,000, which I assume were mostly ASO members related to a price point that you didn’t want to match.

Is that accurate?

Yes.

And of those 75, one is one account, 52,000.

First of all, it’s indemnity, hospital-only business.

So really kind of an artifact of our business in the past, although it went to another Blue, so we will receive the par plan fees, as you know, for those people in our service area.

In fact, we were unwilling to match the price for that.

So in that sense, yes.

Although I have to say, in a competitive environment, you’re not going to win every time.

Right, got it.

Okay.

And if I could just ask one follow up on the situation with the one hospital that you mentioned which was an offset to your other prior period favorable development.

Is that situation resolved?

Can you give us any more detail on that?

And, is that something that could be an issue with any other hospitals?

We don’t think it is.

It was a one-time only.

There were some complicated issues in a contract that goes back several years, and we weren’t even aware there were complicated issues.

Apparently there were some billings that weren’t made and weren’t paid by us.

They were all reconciled throughout the last few months.

We see this as an unusual situation and we decided to record just our estimate.

It could true up at a lower number, but we recorded our estimate during the third quarter and are continuing to work out and review the details of the claims.

But we don’t see it as a repeat item, although it does affect the third quarter medical loss ratio.

So you see part of the balance of the medical loss ratio in the third quarter is related to that one-time adjustment, and we will see it more true up, especially in the managed care book, where it occurs, in the fourth quarter.

Great.

Thank you.

Your next question comes from Charles Boorady with Salomon Smith Barney.

Hi, good afternoon.

I am wondering if you can go through the components of the medical cost trends for hospital physician, pharmacy, and give us any color on utilization versus pricing.

Sure Charles, I’ll do that.

Overall I think we said we would see the medical loss trend overall about 8% to 11% and it’s running within the range, but it’s running right at the top of the range of 11%.

By component what we are really seeing is 15%, 15.3% for in-patient costs.

I can break that down.

Unit costs, 10.1%, much higher than utilization which is about 4.7%.

Outpatient we are looking at about 13.5%, and those are the two primary drivers.

Drug is still running in that neighborhood at 13.7%, and really drug is a matter of unit cost, not utilization.

Unit cost has gone up about 12.8% but utilization is pretty much flat with last year, maybe less than a point, about nine-tenths of a point.

Medical is right there in the middle, very average at about 4.9% and that is pretty much an even split between utilization and unit cost.

And are those numbers apples to apples with the overall 8-11% range, because --

They are.

So if I weight the percents you gave by the dollars that you spend for each of those three, I come up with the 8-11%.

Because the facilities cost appear high versus what we are hearing from some of the publicly traded hospital companies.

Is there something in the New York marketplace that you would say is driving pricing higher than elsewhere?

Well the unit cost for our in-patient is a function of last year, right before we did the IPO we had probably negotiated about 50% of the contracts, and you know we had a pretty broad-based dispute out there with Long Island, and I think it was pretty public that we set that rate at about 18% year over year, because we hadn’t really given a rate increase for several years prior.

All you are really seeing, Charles, is those working through our numbers a year later, and you have a year’s worth of claims now in the numbers, and it is pretty much consistent with our plan and expectations.

That’s obviously a huge system in an unusual situation.

If you smooth that out over say the life of the contract where you weren’t paying increases, what would you say is an underlying trend in this marketplace?

About 10, 10.5% I think where it is now, that you’ve seen all these contracts and everything else go through a year, and we’ve gotten a year away from some of the big PPD changes from last year related to the deceleration trend, I think it’s pretty stable now.

And we’re seeing fairly stable costs all through this year, so I don’t have any expectation for any radical changes.

So looking next year to stay in that same range.

Absolutely, yes.

And a question on your product design going into next year.

Is there any way to give us color on the relative change in co-insurance rates or deductibles being put in place for 2004 versus this year?

Our ratios, it’s sort of hard to talk about that, that is all part of the buy down approach and we don’t track a lot of that separately.

We think it’s 2%overall and our medical loss ratios and our forecast include sort of an all-in.

So when we quote our MLRs, I mean, that’s pretty much on an all-in basis.

The same is true with trend.

So I don’t see it any different this year than last year, in the large account and especially in the small to middle market, we don’t see it as much.

Got you.

Just a final question in terms of the outlook for 2004 enrollment.

How much visibility do you have right now on that, I imagine some of the larger accounts may have already made the commitments for 2004, can you give us any quantification on what’s been booked already for new growth next year, what you know you might have lost for next year and sort of how much you have to accomplish during the year to meet your goals?

I’ll do this, Mark.

Obviously you don’t know completely.

The hardest thing to predict is the business that you already have but you don’t have all of it and you are moving parts of enrollment over from other carriers.

Often it’s from other insurers, so you have to kind of make an estimate of what you think the enrollment is going to be.

But anyway, having said that, we know that January 1st national accounts enrolment will be in excess of 100,000.

This is new members, will be in excess of 100,000 members.

I obviously don’t have a precise number.

Got you.

Okay.

Well I just renewed, so you can add three enrollees for me and my family to your projections for next year.

Congratulations.

You guys do a great job with your product.

Thanks.

That’s really great.

We are going to put you personally in our national account roster.

Your next question comes from Joshua Raskin with Lehman Brothers.

Hi, it’s Greg Nersessian actually sitting for Josh.

Just a quick question on the guidance for 04, it assumes that you retained the New York City account, correct?

Yes, it does.

Okay.

And then could you just talk a little bit of a follow up on Charles’ question.

Any preliminary indications on contract wins in the new POS product?

July’s, last quarter?

We haven’t broke POS out separately.

It started, got good acceptance in the marketplace and we believe it will do well in 2004, but we just haven’t broken it out separately.

Okay, thank you and congrats on the quarter.

Thank you.

Your next question comes from Christine Arnold with Morgan Stanley.

Good evening.

Could you clarify something for me?

You said you had an 11%claim trend this quarter, and yet last quarter I think you said it was 10%.

Is your claims trend rising or is that an apples to orange number, or am I misremembering?

It’s year to date, the 11% is year to date.

It is not a quarterly number.

The quarters are going to bounce based on anything unusual.

For example, that $9.6M that I talked about as far as the claims, the claims audit, the claims review we did, that is in the third quarter, but you know, at 11% trend and all the components are in line, we don’t see that moving a lot.

Okay, so there hasn’t been an increase from the 10% cited last quarter, it was just a one-timer?

Yes.

We see it at 10% fairly stable, Christine.

And then if you think about the ‘04 guidance, I’d like to probe that a little bit more.

It sounds like enrolment is a key driver.

Can you give us some feel for SG&A and MLR expectations that is built into your guidance?

It’s a little bit early.

You know, I think the numbers are solid.

I don’t think you are going to see that many changes that we are going to make in next year’s guidance as far as the underlying support versus this year.

I’ll give you a little.

We think that administrative expenses are going to be in the15% to 16% ratio.

We think membership will continue to be around where it is in the 3% to 4% range.

And as we said, we continue to feel the trend will be the same next year as this year.

Okay, so it sounds like an enrollment driven story for the most part.

Basically, basically.

But we still have some efficiencies we are leveraging off of administrative expenses.

And my final question is, how much of your book for the non-city, state, commercial, at-risk stuff is a PPO with an upfront deductible?

Is that a big portion of your book?

Christine, would you repeat that question?

I don’t think it all came through.

The PPO portion of your book of business with an upfront deductible, is that a big portion of your book?

I’m trying to figure out if there is seasonality in your MLRs?

No, the indemnity book kind of works like a cumulative deductible, that when you put through the deductible more costs go through.

The managed care book just doesn’t normally work that way.

Okay, so it would be more an indemnity than managed care?

Yes.

Great.

Thank you.

Your next question comes from Scott Fidel with JP Morgan.

Hi, good evening.

I was wondering if you could talk a little bit about the attrition that you saw from the economy and your book in the third quarter, especially given that unemployment did pick up to around 8.8% in the quarter?

That 8.8% was in New York City, the unemployment I was referring.

We didn’t see a whole lot of attrition in the book at all.

I mean, we’ve seen some growth in our local experience.

In national accounts, we are seeing some increased penetration of existing accounts.

Accounts are starting to consolidate, offer fewer carriers and consequently we are picking up some members that way, so we are showing some pretty good growth.

The fourth quarter preview that we put out there about the 72,000 members, that is all rate related, that is not attrition related.

From the point of view of the general economic conditions, and I think I’ve said this once before, we have kind of grown the national account books sharply over the last three years, so it is not a business that we were mature in three years ago.

And as we grew in it sharply, we are new entrants to a lot of these accounts.

And as they begin to consolidate, at the same time our service level and our network is pretty broad, and of course we have the national Blue network, the national PPO network that we have actually been increasing our penetration in the existing accounts.

So as these accounts attrite in general due to the economic condition, our membership on an account level has actually increased, so we are, I guess, counter-cyclical in that way.

Does that help, Scott?

Yes, it does.

And then also, just sort of breaking into the small and middle market group where you did see very nice sequential growth, can you sort of tease out what the small group growth was relative to the middle markets?

I know that you are not breaking out the POS product, but maybe just break out between small and middle markets?

I’m sorry, we put that all together in one, and our lawyers don’t want to do a lot of S-8’s tomorrow, so we put that all together and all combined.

We can give you some breakdowns by rating regions, if you like.

I mean, we can say that our down state, we’ve said before that we had multiple rating regions and would try to withdraw from certain areas upstate where we feel as though there were fewer hospitals, more competition or less ability to negotiate rates, so we’ve attrited somewhat our membership in our upstate mid-Hudson areas and grown sharply by about 23% in the downstate areas in the small middle group over the prior year, and sequentially we are showing a 5.5% growth rate in that group.

So that’s good, but it’s all combined, small and middle market.

Okay, got you.

That’s helpful.

Thank you.

Your next question comes from Tom Carroll with Legg Mason.

Good evening.

A question for you regarding the $13.4M expense for the unoccupied office space.

Is this related to your second quarter comment about how your SG&A would, you’d expect it to be higher in the fourth quarter due to some relocations to a new building?

No, no we really didn’t plan on doing this when we had the second quarter, I didn’t know about it in the second quarter.

The comment about SG&A increasing in the latter, that comment -- the question was asked on a sub-quarter conference call, are we guiding up administrative expenses for the latter half of the year and therefore keeping our earnings kind of flat, and I said “yeah”.

The reason for that is we began to move from our temporary space into the Metro Tech facility.

And we continue to do that.

Our people are there now, and we expect to see admin a little bit unfavorable to us by $8M in the fourth quarter, primarily because we are paying higher levels of rent at the Metro Tech facility plus through the end of November we will still be paying some rent on temporary facilities.

That was what was behind that.

What was behind the utilization was we did a comprehensive real estate review, Gloria McCarthy did it in the third quarter, looked at all responsible, all expiring leases and looked at the best way to configure people.

What we found is the result of some of the outsourcing that we had done and some of the expense controls that we were a number of hundred people shorter this year than we were last year.

I remember, we leased up and made the arrangements for Metro Tech in the wake of 9/11.

That was well before, that pre-dated our decisions to do the outsourcing with IBM and it pre-dated a decision that we had board approval on this quarter to do some additional business process outsourcing.

So when Gloria looked at the plans and considered all the impact of that, we felt that we had some idle space and we felt that we had, with the additional efficiencies and continued outsourcing as these things transitioned that we would not have the opportunity to use that space in the near-term so we thought it was appropriate to charge it off from an accounting point of view.

So that 13.4M is specific to third quarter and we are not going to see anything like that in fourth quarter.

Yes, absolutely.

Yes.

Thank you.

You are welcome.

Our final question comes from John Rex with Bear Stearns.

Yes, thank you.

A couple of questions here.

First of all, I wonder if you could just talk to the shift in funding status in the commercial managed care, and also the insurance product services.

Has that jumped around?

Were you seeing actual insured account losses being replaced by new sales of ASO, self-funded business, or was there just a lot of funding status shifting going on of existing accounts?

John, let me try to answer your question.

There was movement from full -- it’s a movement from full risk accounts into an ASO basis.

You recall during the year for us, two things happened and we were able to handle it because of good expense control.

But (a)we went from non-profit to for-profit so we had [preview] taxes, boom.

Then, in their ultimate wisdom the states decided to increase this preview tax by 75 percent and made it retroactive to being a year, which is another big bad thing.

So the accounts that could afford to and were running very -- most of these accounts were already retrospectively rated.

So if they are retrospectively rated and they felt they had good loss ratios, they just moved to ASO.

I will give you some numbers here.

We had 46,400 members shift from insured to self-funded status.

You know, in adjusting for these actions the growth rate for the insured bulk 6.3% for the third quarter rather than what it was.

Okay, right.

I am seeing in both those categories, your commercial managed care and other insurance, there is like a 20,000 or so member shift in each category, and so that is coming into your 46.

Okay.

So that was the primary thing going on, though?

That’s it.

Okay.

Also, if I am just looking sequentially on the premium revenue, part of that decline is obviously due to the shifting of status.

I suspect a good part of that is also due to just the way you book your New York City revenues.

Can you help us understand how much of the sequential declining premium --

Two things happened with that.

One, obviously as you shift membership to ASO it affects the revenue line because you are not booking the claim component of the premium, obviously.

The second thing is we mentioned about the Reg 146 Pool money.

The way that is accounted for is half of that is accounted for as a reduction to premiums.

So for the quarter, you had about I think it was $19M of that that just simply reduced the premium.

Okay, right.

You have a reduction in premium and then you have a reduction in your medical cost line also?

Right.

And $21.6M, about $21M of that rested in the commercial segments.

Okay.

Thanks.

Also, it seems like you brought down a bit your operating cash flow guidance for the year, yet your earnings are coming up.

I think last quarter you had moved up from $288 to $300M, and now you are broadening the range going down to $285M to $300M.

What is impacting the reduced operating cash flow outlook?

Actually as we were preparing for this earnings release, we had a request for dividend for the settlement of the city account that would be approximately $50M.

Consequently, since that is occurring and will occur in the fourth quarter, that will affect fourth quarter cash flow.

It is a non-operating thing but it will affect cash flow.

So versus where you were last quarter, ex- that dividend, you are actually edged up a little bit then?

Yes, a little bit.

I mean, I think in the beginning of the year we kept saying we think it is going to be around $288M.

And we are going to wind up there or a little bit better.

Okay.

And then just finally back on the New York City account.

I wonder if you can provide a little color for us on your approach to this on bidding at it.

With the competitors looking to take on the entire account, and you having had the hospital portion only before, as you’ve approached this -- and you mentioned you are aggressively negotiating this -- are you approaching it with the potential of not just retaining your hospital-only portion but also taking over the entire piece as they are proposing to do?

Help us to understand what kind of scenarios we can anticipate here.

Hi John, It’s Mike.

Let’s see.

If you want a little bit of color on the New York City account you could get the Chief, the recent edition --

I’ve got that in my office right here.

-- Laughter

All right.

So that gives you a feeling about -- it’s not really about WellChoice, Empire, it’s about the relationships of the various unions with the city and among themselves.

Anyway, that will give you a feeling for it.

So they are really caught up in union negotiations, and part of the negotiations are about health care benefit.

That would be the first thing.

Second, there are three bidders for the accounts.

All of them are currently active in the account in one way or another.

It’s ourselves, GHI and HIP.

Both GHI and Empire are bidding on the entire business, and also bidding on the piece of business we currently have.

So we’re bidding on both the medical and the hospital.

You are bidding on both pieces also.

So you potentially you would increase your presence in that account?

Well obviously yes.

Not in terms of members, but obviously in terms of revenues.

Revenues.

And then we are also bidding on the piece that we currently have.

In terms of the approach to the account, we have a very long-standing relationship, both with the unions and with city management.

We believe that in particular for the people that are in our service area but also the people, the retirees that are out of our service areas, which tend to be in the surrounding states and in Florida that we have a product that is superior to the competitors and that’s why we’ve retained the account over all of these years.

Having said that, it still has to be listed as a risk.

It is price sensitive and we are working very hard in that.

But we will not renew unless the pricing is consistent with our expectations.

I don’t know if that helps.

It helps a lot.

Can you get more precise on how much impact there would be to your ‘04 guidance if you don’t win the account?

Seven cents a share, that’s what it would be.

If we lost the account as of June 30th, 2004 and that is what this number is based on, and we were able to eliminate -- the same scenario we talked about before -- if we were able to eliminate about 25%of the overhead related to that account, which is a reasonable number between June and year end, for the full year it would have an impact of $0.07 a share.

So actually, as you describe that, kind of eliminating it between June and year end, we shouldn’t think that of necessarily a $0.14 run rate then, that would be too high probably, because you are going to be eliminating that over a six month period?

Yes.

So the impact would be less, more around a $0.10 run rate impact, probably.

I feel the need here to just make sure that we are clear.

We did negotiate rates through next June.

They have the right to move from the rates we negotiated to the new RFP rates any time next year.

I think it’s unlikely they’d do it in the first quarter.

It’s conceivable that they could do it in the second quarter, which means the new RFP rates would take the place of their currently contracted rates for the second quarter next year.

Is that clear?

Can you just repeat that again?

No, it wasn’t.

Yeah, I know, it’s kind of -- we negotiated through June of next year.

We don’t know when the RFP, the five-year contract is going to be awarded.

It’s conceivable it could be awarded in the second quarter next year, so when you are talking about the number of months that, if we potentially lost the account, it could be conceivably more than six months, it could be seven, eight months, and so on, like that.

I don’t think that’s likely, but that certainly is a possibility so I wouldn’t want to not have that out there.

Got it.

Okay.

That’s very helpful.

Thank you.

I think we have a follow-up?

We have a follow-up question at this time from Charles Boorady with Salomon Smith Barney.

Hi, thanks.

Just to follow on John on the New York City account, the $0.07 is a half-year impact or a full-year impact?

No, it’s a half year, Charles.

That’s the half year.

And also, you are now bidding on both parts of the contract.

Is there upside if you win both parts of the contract?

Sure.

So what approximately would that be?

So if you lose it, it is $0.07 a half year below your guidance.

If you win both parts, is that reflected in your guidance or not reflected in your guidance?

No, I can tell you for sure that is not reflected in our guidance.

I don’t even have an estimate for what it would be if we won both parts, and I wouldn’t even want to venture that at this point.

I think that, you know --

Is the $0.07 half year, is it double the size of winning just one part, or is one significantly better than the other?

-- Laughter

I’ll venture if you won’t, and then you can tell me if I am venturing outside of the range.

You know, the $0.07 it just assumes that what we have, we lose.

If we hooked up any more, you know, I don’t even have a guess on that, to be honest with you.

Okay.

Thanks.

If there are no further questions, we will end the call.

Thank you very much.

Thank you for joining today’s WellChoice conference call.

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