Elevance Health Inc (ELV) 2004 Q4 法說會逐字稿

Good afternoon.

My name is Wade and I will be your conference facilitator.

At this time, I would like to welcome everyone to the WellChoice 2004 Q4 Result conference call. (Caller Instructions)

I will now turn the call over to SVP Communications, Ms. Deborah Bohren.

Ma'am, please go ahead.

Thank you and good afternoon, everybody.

Welcome to WellChoice's Q4 and full year 2004 conference call.

I'm Deb Bohren, SVP of Communications and with me are Mike Stocker, President and CEO of WellChoice and John Remshard, SVP and CFO.

Mike will start off the call with some brief comments about our 2004 performance, as well as discussing some current issues that we know are of interest to you.

John will then discuss our financial results in detail, after which we will go to questions.

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

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

For a detailed discussion of these and other risk factors, please see our Company filings with the SEC, including the risk factors contained in our quarterly reports on Form 10-Q for the 2004 reporting periods, as well as its annual report on Form 10-K to be filed with the Commission.

And with that, I'd like to turn the call over to Dr. Stocker.

Thanks, Deb.

Good evening, everybody and thank you for joining our fourth quarter and full year 2004 earnings conference call.

We're pleased with our 2004 financial performance.

It's primarily driven by very strong growth in core Commercial Managed Care products and our continued focus on achieving administrative expense efficiencies.

First the earnings.

Our full year reported net income was $246.2 million or $2.94 per diluted share.

That represents an EPS growth rate on a reported basis of 22%, compared to 2003, or 19.1% excluding a tax benefit in the second quarter of $0.07.

Our reported net income for the fourth quarter 2004 is $59.6 million or $0.71 per diluted share.

We are reconfirming that we expect our full year 2005 EPS to be in the range of $3.35 to $3.41 per diluted share, based on 85 million average shares outstanding.

Please note, however, that this does include the affect of accounting changes for stock-based compensation that goes into effect in the second half of the year.

We are also reconfirming that we continue to anticipate our core Commercial Managed Care growth to be between 7.5 and 8.5% for '05.

For the first quarter of '05, we expect earnings to be in the range of $0.80 to $0.83 per fully diluted share.

With respect to membership growth for the full year, enrollment in our Commercial Managed Care products, excluding the New York City and New York State accounts, increased by 257,000 members or 11.2% since year-end 2003, to 2,558,000 members.

This is, if you remember, above our guidance for the year of 9.0 to 11% growth in core Commercial Managed Care.

Overall Corporate membership increased by 201,000 members to 4,955,000 members as of December 1, 2004.

This represents a 4.2% increase over the same period last year and also was above our previously issued guidance of 3.0 to 4.0%.

Self-funded membership increased 12.3% year-over-year to 1,950,000 members and now represents 39.4% of total enrollment.

A word about January membership.

We saw strong growth in both new and existing accounts, enrolling 126,000 new national account members for January '05.

However, the number of net new National Account members in January was 44,600 and the difference in the net versus the new National Account membership reflects the loss of the retiree portion of a single large national account, coupled with our inability to make up the net enrollment in the balance of that account.

It's important to remember for an account like this that revenue from a retiree account is ASO and it's about 43% of the revenue associated with the typical ASO account and since it then therefore has a very de minims impact on profitability.

So, notwithstanding this membership loss, we continue to anticipate that core Commercial Managed Care growth will be in the range of 7.5 to 8.5% for the full year 2005.

For the year ended December 31, 2004, our administrative expense ratio was 15.7% compared to 16.5% for the prior year.

That's an 80 basis point improvement.

At this point, I'd like to discuss the recent dispute between the Fund and the Comptroller, which is described in detail in the press release.

The dispute really has to do with what role the Comptroller has, if any, with respect to the sale of the Fund stock.

The dispute has no immediate impact on our revenue or operations.

The key issue is that in October 2004 the Comptroller issued a legal opinion asserting that, contrary to a legal opinion previously received by the Company in connection with its initial public offering in November 2002, he believes that significant contracts entered into by the Fund must be approved by the Comptroller under Section 112 of the New York State Finance Law.

The Company and the Fund disagree with the Comptroller's assertions.

However, until the issue is resolved, the Fund may not be able to enter into additional contracts, including agreements to sell shares, unless and until the Comptroller's approval is obtained.

This issue can be resolved if the Fund submits its contracts to the Comptroller and obtains approval.

If the issue is not resolved, the dispute could jeopardize the ability of the Fund to meet the sell down requirements set forth in the agreement in a timely fashion.

In this regard, in November 2004, WellChoice made an offer to buy back $200 million of WellChoice common stock from the Fund and this offer was not accepted.

The next sell down deadline is November 14, 2005, by which time the Fund must reduce its WellChoice ownership to less than 50%.

This would require the Fund to sell approximately 10 million shares of WellChoice common stock by that date.

Since the issue has come to our attention, the Company has worked with all parties to try to resolve the issue.

While we believe that this matter will be resolved, as the parties are working towards resolution, the timing of any such resolution is unclear and the Company believes that the dispute has reached the point where disclosure may be important to investors.

We have promoted legislation that actually passed the Senate yesterday but did not pass the Assembly today.

Now for a few comments on other issues of interest.

We are very pleased with the market's initial response to our Empire Total Blue suite of Consumer-Directed Health Plan products, which we launched in the second half of 2004 for an effective date of January 1, 2005.

We have enrolled 42,000 members in these products and we believe that going forward demand will be very strong.

As I think you know, we have entered into a relationship with Luminos to provide the administrative support and with Mellon Bank for financial support, which we believe will help ensure that we provide a seamless member experience.

We anticipate rolling out our HSA product in the small market this summer in New York.

We're really very excited about this suite of products and believe that they help position us for a successful year and future.

Other programs that we are introducing during 2005 include - and some of these we've talked about in the past --

* A Personal Medical Record that includes information contributed by the member and health assessment by a vendor as well as lab, pharmacy, and selected claims data information.

This allows the member to download this information to a new doctor or to an ER, also to review the information and transport it online as they feel the need to.

* Consistent with this, in partnership with Relay Health, we have started a pilot program with two large hospitals in the area where members can talk online to physicians.

We pay the doctors $25 per visit for each visit.

* We've also introduced a ranking of hospitals using CMS and leapfrog criteria and this will be discussed this year with effective dates of January 1st.

It allows accounts to provide financial incentives to go to preferred quality hospitals in the marketplace.

* With respect to the Medicare program, we're in the process of filing to offer a local Medicare PPO in September of 2005.

Overall, I believe strongly that the Company that can execute on this set of core competencies will have a significant strategic advantage in the future and all these core competencies are part of our consumer-directed health plan product in the marketplace.

Last call I talked about the New York State account, which has close to 1.0 million members.

We then reported that approximately 80% of the account agreed to join a PPO that has an out-of-network benefit differential.

By the time open enrollment was finished, I'm happy to say that 95% of the State employees joined the PPO, which allows us, when we contract with hospitals, to use the leverage of this large account in order to get favorable rates with hospitals.

Finally, on the New York City account, once again there's no new news to report about the status of the contract renewal.

I'll reiterate, though, that it is not possible for us to predict whether or when the City will complete the pending competitive bid process that started more than 3 years ago.

As you know, we have agreed upon rates through June of '05.

Once again, we will keep you up to date with new developments.

Having said that, our relationship with the City continues to be, I believe, productive and ongoing.

And with that I'm going to turn the call over to John.

Thank you, Mike, and as Mike has said, WellChoice completed its full year of 2004 with a record of strong earnings and membership growth.

We reported net income for the fourth quarter of 2004 of $59.6 million, or $0.71 per diluted share, which represents a 12.7% improvement in EPS over the prior year.

For the full year ended December 31, 2004 we reported $246.2 million or $2.94 per diluted share, which represents a 22% improvement over the prior year.

Our fully diluted EPS for the year and for the quarter both met our expectations and our guidance.

The results of the products, we believe, are the strong membership growth, administrative expense efficiencies, and strong pricing discipline.

To comment on our membership, our core Commercial Managed Care membership, which excludes the New York City and the New York State PPO accounts, grew by 11.2% to 2.6 million members as of December 31, 2004, compared to last year.

This exceeds our guidance of 9.0 to 11% for the full year.

Sequentially, our core Commercial Managed Care membership increased by 70 basis points or 19,000 members since the third quarter of 2004.

This sequential increase was driven by strong small group and middle market membership growth, which has been a target area.

Compared with year-end 2003, membership for the Commercial Managed Care segment as a whole, which includes both the New York State and City PPO enrollment, grew by 6.7% and now totals 4.4 million members.

Total corporate membership grew 4.2% to 4.96 million members during 2004, which exceeds our guidance of 3.0 to 4.0% growth for the full year.

Membership growth was higher than expected in 2004 due to a very strong position in our regional market.

Membership in our Other Insurance Products and Services segment declined as we expected by 11.4% to 574,000 members since year-end of 2003.

Our National Account membership now is 1.2 million members, a 10.9% increase at year-end, compared to the prior year.

Small Group and Middle Market membership grew to 472,000 members, a 6.3% increase, driven primarily by very strong HMO growth.

Since year-end 2003, Self-funded membership increased by 12.3% to 1,950,000 members and is now represents 39.4% of the total membership over our book of business, compared to 36.5% last year.

Once again this increase was largely driven by very strong membership growth in our National Account business.

Commenting on revenues, our total corporate revenues were $5.8 billion for the year, an increase of approximately 8.0% over year-end 2003.

Total revenues in our Commercial Managed Care segment increased by 11.4% over 2003 to $4.9 billion, while total revenues in our Other Insurance Products and Services segment decreased by 6.3% to $896.7 million.

Insured premiums for all segments increased to $5.3 billion for the year ended 2004, a 7.8% increase from a year ago.

Premiums for our core Commercial Managed Care business, which once again excludes the New York City and New York State PPO accounts, grew by 8.3% over the prior year.

Premiums for our Managed Care business, including the City and State PPO accounts, increased 11% to $4.5 billion compared to the prior period.

These increases were partially offset by a 9.0% premium decrease in our Other Insurance Products and Services segment, once again as expected.

Total corporate revenues were $1.5 billion for the quarter ended December 31, 2004, an increase of approximately 8.0% over the fourth quarter of last year.

Total revenues in our Commercial Managed Care segment increased 10.9% over the fourth quarter of 2003 and now total $1.3 billion, while total revenues in our Other Insurance Products and Services segment decreased by 5.5% to $223.3 million.

Insured premiums for all segments increased to $1.3 billion for the fourth quarter of 2004, a 7.0% increase from a year ago.

Premiums for our core Commercial Managed Care business - which excludes the City and State accounts - grew by 9.1% over the fourth quarter of last year.

Premiums for our Managed Care business, including the City and State accounts, increased by 9.8% to $1.2 billion compared to the fourth quarter of last year.

These increases were partially offset by an 8.8% premium decrease in the Other Insurance Products and Services segment.

On a sequential basis, our core Commercial Managed Care total revenues increased by $24 million or about 3.5%.

In the fourth quarter of 2004 Self-funded membership increases in our core Commercial Managed Care business generated very strong service fee growth of $15.9 million, a 23.7% increase, compared to a year ago.

For the subjects of our Medical Loss Ratio (MLR) and premium yield, for the full year our total MLR was 86.3%, which represents a 90 -basis point increase from the reported 12 months MLR for 2003.

For the full year, the MLR for our core Commercial Managed Care business was 83%, which is exactly our guidance, a 90 basis point increase for the full year.

Both MLRs fall within our full year MLR guidance.

Our total corporate MLR for the fourth quarter was 87%, an increase of 130 basis point from the fourth quarter of 2003.

The MLR for our core Commercial Managed Care products was 84%, a 260 basis point increase from the fourth quarter of 2003.

Sequentially, the MLR for the core Commercial Managed Care products increased by 170basis points.

But I'll point out that increased claim costs in both our Medicare risk and our HMO products were the primary driver of this quarterly increase of MLRs and both are attributed to significant increases in physician utilization.

As we've mentioned from time to time in prior calls, we have seen some seasonality in the fourth quarter, especially for PCP utilization.

I think we made a very significant point of this in our second quarter conference call.

PCP utilization in the fourth quarter of this year was 25% higher than what you're comparing it to in the fourth quarter of 2003.

In evaluating it, I believe that the 2003 results were just simply unusually positive.

For example, if I give you some numbers that we don't usually provide, take our very significant driver - this is our Medicare Plus Choice product with 56,000 members - for 2004 for the full year we have an MLR of 85%.

At the same time last year, it was a lower 81.6%.

If we go back two years to 2002, you'll find that it had a MLR of 84.6%.

So, to move from 84.6% to two years later 85% is not an unpleasant experience.

The interim move last year, we had a very unusually positive fourth quarter, with MLRs being flat to improving between the third quarter and fourth quarter.

That's something that just simply doesn't usually happen.

Going on, adjusted for the impact of account funding changes, the premium yield for our core Commercial Managed Care book is 9.5% and the change in claim costs on a per-member per month (PMPM) basis is 11.5%.

By components, we experienced a PMPM claim cost trend for inpatient of about 9.2%.

Outpatient services was 10.9% and for physicians medical it was 7.9%.

Drugs continued in middle double-digits at 14% for the full year ended 2004.

We continue, however, to develop our premium rates with increases in the 11 to 13% range, depending upon the product.

As far as days claim payable and prior period development, as we noted in our press release, we experienced $1.0 million of positive prior period development in the quarter for our prospectively-rated business, which is the only development that goes through P&L.

Days claim payable declined by 2.3 days to 53.6 days in the quarter ended December 31, 2004.

It was 55.9 days in the third quarter of 2004.

This change is just simply due to an acceleration of claim payments of about $30 million or 2.6 days during the quarter.

We just sped up processing.

For administrative expenses, as you know and as we've been consistently saying, we work very hard to realize improved administrative expense ratios and have concentrated our efforts on a number of issues including: Spending disciplines, improving our processes and operating efficiencies, and continuing to benefit and see good results from these actions.

For the fourth quarter of 2004 the administrative expense ratio of 15.4% is about 50 basis points lower than the fourth quarter of last year.

For the 12 months ended 2004, the administrative expense ratio is 15.7%, which is an 80 basis point improvement over the full year of 2003 and certainly within our guidance range.

Due to the increasing significance, as I'd like to point out, of our self-funded business as a proportion of our total book, expense ratios, using premium equivalents, allow a better comparison between periods.

Premium equivalents are the sum of premiums, service fees, day claims attributable to the self-funded business, for which we provide a range a service including claims administration and membership and billing services.

On a premium equivalent basis, the administrative expense ratio for the full year ended December 31, 2004 shows a 110 basis point improvement to 9.5% and this compares to 10.6% for the 12 months ended 2003.

And this is, once again, consistent with our expectations and our guidance and as we've mentioned previously, we continue to work hard to improve our administrative costs and expect our administrative expense ratio to be in the range of 14.5% and 15.5% for 2005.

As far as income taxes are concerned, we've been fairly stable.

Our effective tax rate for the fourth quarter was 38% and we expect this for the first quarter of 2005 and for the full year as well.

Our full year tax expense, as you know, contained a tax benefit of $5.7 million or $0.07 a share for the settlement of a tax audit, which we reported previously in the second quarter.

Cash flow for the year was very strong at $339.4 million or 1.4 times net income for the full year ended December 31, 2004.

Our total stockholder's equity was $1.68 billion as of the end of December, an increase of $250 million or 17.5% from the prior year.

WellChoice continues to have no debt on its balance sheet.

As of year-end, total investments and cash and cash equivalents at WellChoice the parent holding company were $565.8 million and last week we received the approvals needed to dividend an additional $125 million to the parent company.

All other components of the stand-alone condensed balance sheet of WellChoice will be provided in our annual report in the Form 10-K.

Investment income and realized gains increased by $1.5 million for the fourth quarter to $18.6 million, compared to $17.1 million for the fourth quarter of 2003.

In summarizing our performance, I think we continue to demonstrate our ability to meet our growth goals through disciplined pricing and aggressive administrative expense management.

Our investments in technology and infrastructure and strategic outsourcing agreements have continued to enable us to reduce administrative expenses as a percentage of revenue.

It's through these strong fundamentals that we believe we are continuing to be positioned to meet our growth expectations for 2005.

That concludes our review of 2004 operating results.

I'll now provide a little guidance for our numbers for 2005 --

* For the full year of 2005, as Mike pointed out, we are confirming the guidance we provided to you in our third quarter conference call.

* We expect earnings per share to be in the range of $3.35 to $3.41 per share based on about 85 million average diluted shares outstanding and this excludes the affect of the change in accounting for stock-based compensation as a result of implementing FASB 123R, which will be for quarters after June 15, 2005.

* For the first quarter of 2005, we expect earnings per fully diluted share to be in the range of $0.80 to $0.83 per share.

* Also, we are maintaining our membership range for core Commercial Managed Care growth of 7.5 to 8.5%.

* In addition, we continue to expect our total corporate membership growth to be in a range of 3.0 to 4.0%.

* Cash flow for 2005 should approximate $375 million for the full year.

With that, I'll turn it back to Mike for additional comments.

We'd be happy to take your questions.

Thank you, sir. (Caller Instructions.) First question comes from Matthew Borsch of Goldman Sachs.

Hi, good evening.

My first question is if you could just comment and I know I guess I ask this question every quarter, but on the competitive environment, both locally in the small and middle market, and as you gear up of the 2006 national account season?

Yes, I'll do that.

We always give -- the answer really -- this market in our perspective in national accounts has not changed since we've been having these quarterly calls.

It's a competitive marketplace nationally and locally, but it's just not irrationally competitive.

We do not see people who are substantially under-pricing.

Okay.

What are you expecting, at this point - and I'll apologize if you had already touched on this - but in terms of pricing and medical cost trends for 2005?

Hey Matt.

This is John.

I think we've been very consistent in terms of what we've seen on cost trends.

We see a slight improvement next year and think our medical cost trend will probably move in the range of 8.5 to 10.5%.

That's versus what we reported this year on a PMPM basis of 11%.

Don't forget.

Some of the reason it looks like 11.5% this year is because I think we had and I think the industry had an extremely good 2003, especially the fourth quarter.

That sort of exacerbates the change in PMPM.

For premium yields, we continue to price in the 11.5 to 13% fairly consistently and I think I've used the same numbers now for a couple years.

And we see premium yield increases, depending on the product being between 8.5 and 10.5% next year.

Once again, we're continuing to price to trend and when we price to trend I think you'll see it has an implicit increase in the effect on MLR, primarily because we're only pricing the claims component into our new premium.

Charles Boorady with Salomon Smith Barney.

Hi, thanks.

I actually have a question on the dispute with the Comptroller of New York.

I'm just trying to understand what his goals are or what you expect he would do differently if he's successful, just being that he's being persistent on the issue.

And I assume he's not trying to slow down the process of selling stock that would jeopardize the Blue licenses that would just destroy value for the State of New York.

So, can we deduce, then, he's trying to either sell more aggressively or perhaps pursue strategic sales or any other alternatives?

No.

I also have Linda Tiano here, General Counsel, who might add to this, but no.

He's not trying to increase the sell down and the effect of this dispute - you know this is a risk - could affect the sell down of the share, could actually slow down the sell down of the shares.

So it's really a dispute about jurisdiction and whether or not the Fund is a State entity that is subject to the laws that give the Comptroller its authority.

I don't know how else to -- I really wish very strongly we had resolution of this.

I believe we will have.

We worked very hard in trying to get resolution and we just felt that this has gone on long enough, since October, that we need to announce it.

It's hard for me to believe we won't get resolution but we don't now.

We worked hard to get legislation, which would resolve the issue and which came pretty close and we were unsuccessful.

So, as a result of that, we felt it was time to announce this.

As you know, we had offered to buy back $200 million worth of shares in November of last year from the Fund and they had said no.

Right.

Just to be clear, this is not a question of ownership.

It's just a question of who has custody for decisions on sale of the stock?

Yes.

I'm going to -- because this is very much about New York law, I'm going to turn that question over to counsel, Linda Tiano.

There are really two issues, Matt.

One is what they call the custodial issue.

I'm sorry, Charles.

One is the custodial issue.

That's all right.

Somebody called me Josh a couple days ago.

One is the custodial issue, where really just relates to their having a relationship with the trustee that holds the shares and it really doesn't impact ownership or anything else.

The other issue relates to the Section 112 issue that Mike mentioned and as far as we can tell, they're really not interested in getting involved strategically in when the stock gets sold or to whom it gets sold.

It really relates to their approving the agreements that the Fund enters into in the same manner that they do for State agencies.

So, for example, their job is to ensure that there's a proper process followed and that the agreements are fair.

That's really all this relates to.

I see, I see.

I guess I'm just struggling with the motivation and why, whether they're dissatisfied with something about the existing process or if they have a specific goal that they'd like to accomplish that they don't feel they can accomplish with the existing process.

Yes, I just want to say the effect of this is that it has prevented the sell down of the stock since the Comptroller issued his opinion in October and I think the rationale is related to a dispute about authority between the Fund and the Comptroller.

Okay.

Thanks.

In terms of -- I'll just change to a fundamental questions.

The stock option expense and Sarbanes-Oxley were two items I had a question on, if you had sized up what that expense is expected to be in the second half and whether you would modify any of your compensation plans to try to mitigate the impact from that.

And then also, Sarbanes-Oxley preparedness.

This is John.

As far as Sarbanes-Oxley, we expect sign off with no exceptions from our auditors at the time we file our report, our [S2] report, which will be Tuesday, okay.

And that's already been reported to our audit committee so we think we're in good shape, very good shape, actually, on Sarbanes.

I think, given the size of the Company we have the ability to go in a lot of detail in every one of our operations.

As far as stock-based compensation, we just sort of want to hold off on that.

There are decisions, obviously, that have to effect how stock options are valued, what the price will be, and what Board decisions are made.

So, given all that, we don't have a public sizing at this point.

But as these factors become known we will modify -- we will make the public announcements and talk about any modification and guidance that's required.

Tom Carroll with Legg Mason.

Hey, good evening.

Again, a follow-up question on the New York Public Asset Fund.

Again, I still am struggling, I think, with the motivation that the Comptroller is putting forth here, but move on from that, I suppose.

What -- and I see the issue, you had said the issue can be resolved if the Fund submits its contracts to the Comptroller and obtains approval.

Number one, what's wrong with that process?

Is it just another signature that has to be obtained?

Yes, just remember, though, that its the Fund's decision not to submit the documents to the Comptroller.

We don't have any role in that.

If the Fund submitted the documents and they were approved by the Comptroller, it would resolve the issue but they have declined to do that.

Oh, I see, the Fund has declined to do that.

Right.

It's not us.

So is that what prevented the repurchase of the shares in November?

I can't speak for what the Fund's intent was when they declined the offer.

I can only tell you the facts.

But that would be a plausible assumption, but I honestly I don't know what their -- I don't go to their meetings.

They have them in Executive Session and so.

Okay, so you don't actually know then.

So in that scenario, the Fund could have just not wanted to go to the Comptroller and because of that they refused the buyback?

I can't say that for a fact.

That's plausible.

But it's plausible.

Yes.

Okay.

Are you trying to paint a worst case scenario with the description of this?

No.

This is --

It certainly seems like it.

Yes, I understand what you're saying.

No.

We think this is a factual representation of where we are.

We don't think it's alarmist but we also want to get the information out.

And then just to follow-up on the legislation you mentioned.

I think I'm over my allotted number of questions, but (inaudible).

You said you thought you created legislation that passed the Senate yesterday?

Yes.

But did not pass -- what was the other?

Is it the Assembly of New York?

The Assembly.

Okay and it did not pass today?

The Assembly, which is the other House in New York.

Correct.

Any primary reason for that?

Yes, I'm going to -- Linda, do you want to comment on that?

Yes.

I mean, it's important to know that it's not that it was voted down.

It just didn't get through.

It still could.

I don't think we know why it did or didn't, but it's still out there, but it was not turned down.

Any guess at time frame?

No.

No.

I don't think I'd know that.

I want to interject a human word here, that we are frustrated by this process but we do think it will get resolved.

Okay.

All right.

I'll stop there.

Thank you.

Joseph France with Banc of America Securities.

Thank you, Mike.

I wanted to follow-up - or John, I guess - with the guidance for enrollment even though it was down in January you're still sticking with 7.5 to 8.5%, how do we get there?

I'm going to give a start at that.

This is Mike.

We looked at that very hard and it was our feeling that we have sufficient prospects during the year to continue with the guidance that we had said earlier.

I mean, there isn't any other way I could characterize that.

Can you -- I guess a related question would be this account had dropped coverage of its retirees.

Is that what you said?

Yes.

And is that something that you've seen regularly or is it just a very unusual account?

Well, it's kind of an unusual business.

It's people who are over 65.

The major risk is taken by Medicare and we provide the wraparound coverage and the customer service for something like a Medicare wraparound and drug coverage.

It's the kind of business that will be different next year, 2006, as Medicare changes, probably.

Okay.

Just finally, then, can you just give us a breakdown, remind us the renewals by quarter, percentage?

Yes, Joe.

We can do that.

One other thing.

You asked if that had ever happened before.

Yes.

We did have one other heads up we gave you guys about a year ago, okay, where we lost a 50,000 member group going into the fourth quarter, based for the same reason.

This retiree issue has been with us, okay.

This is a pricing discipline issue, as far as I'm concerned.

Yes.

People want this thing priced very low into the red and we won't do that and we're willing to lose that rather than under-pricing.

Now, as far as renewals, as you know, the large group business primarily renews in obviously January 1 and July 1.

For the small group, small group has a kind of even distribution.

In the first quarter you've got a little over 27% - 27.7% to be precise, second quarter 26.5%, third quarter 25.5%, and a fourth quarter just slightly over 20%.

So the renewal pattern of the small group business is split pretty evenly.

For the large group stuff, excluding obviously the New York State and the New York City account I pointed out, January is where you have the biggest hit at 65% and you have a good third quarter pick up of about 22%, with about 7% in the second quarter and just around 6% in the third.

I just want to add two things.

One is we do not have any more of these kinds of accounts.

We have some smaller ones, but nothing similar to this and it's a piece of business that's not certain what its future is, given the changes in Medicare.

The other thing is that if you look at last year there's a fair amount of large local account that comes in off cycle.

So we had -- I can't give you a precise number, but I think we projected 9% to 11% growth last year in core Commercial Managed Care and we ended up at 11%.

I think we're at 6% at the first quarter.

So there are other large accounts that are not January 1st.

Scott Fidel with JP Morgan Chase.

Hi, thanks, good evening.

My first question just had to do with the pick up in physician utilization, which you referenced in Medicare.

I was just wondering, first, whether you think -- was there any impact from the changes in the benefits with the Medicare regulations?

Do you think that might have had impact there or did you see generally similar trends in both commercial and Medicare so that might not be the case?

Scott, John.

No.

I think we saw -- I gave Medicare Plus Choice as an example of why last year was so low, but I could have done the same thing with HMO.

We saw it primarily driven by PCP utilization for the fourth quarter in both HMO and Medicare Plus Choice.

No, nothing unusual, like I said.

What I really think was unusual was last year it was unreasonably low and you look at last year at like Medicare Plus Choice.

You saw a significant improvement in MLR from the third quarter to the fourth, from 84% to 81.5%.

That is unusual.

That usually doesn't happen.

What we're seeing now - and I think, like I said, we spent a lot of time talking about this in the second quarter - is we typically will see a high PCP utilization in the fourth quarter.

We just will and especially in HMO Medicare Plus Choice.

Now, if you remember, HMO was one of our top selling products.

We actually increased HMO membership by 15% last year.

So when you see the increase in the fourth quarter, it's a little exacerbated from a population that was much smaller from last year.

But I would say for you guys, when you do your model, that 2004 for us is a very classic base case year.

Okay, so that would indicate then, thinking about the MLR in the mid-86% area for '05 would probably be reasonable?

Yes, very much so.

Okay and then just a second question, not to beat a dead horse here on this issue with the Fund, just wanted to see.

So I'm assuming you've been in negotiations with the Association and just wondering whether they would have leeway, given that you're negotiating in good faith here and it seems to be a sort of unique issue, just in terms of some of the issues associated with the Association.

Yes, I'm going to refer that to Linda.

I think in terms of the current issues, we think that the Association is okay with the changes that we're going to need to make on the custodial issue and on whether or not the Comptroller has a role or not is not an issue with them.

In terms of whether or not they would agree to a sell down, that's not something -- or whether or not they would agree to postpone the sell down date, we have not discussed that with them.

And I would not have any expectation that they would agree to that.

Josh Raskin with Lehman Brothers.

Hi, thanks, good evening.

Just a quick question on the cash flow number.

The fourth quarter came in a little bit better than we expected.

Wondering if there were any positive timing affects and I guess even more so with the mentioned acceleration in the claims payments that you stated that impacted the days claims payable?

Well, I think we always expected a pretty strong fourth quarter for cash and as was pointed out when we did the third quarter conference call.

Somebody pointed out that CMS was going to stop giving the payments in December and start transferring that to January so that might be a hit for us for the fourth quarter, for cash flow.

We didn't think so and we did receive our payment from CMS, which was $43 million in December.

So that's in there in the fourth quarter.

Otherwise, I think it was a pretty strong earnings year.

I think those earnings, just to Warren Buffet style, did translate into really good cash flow for us.

Okay and any rationale behind the acceleration, a specific reason for the claims payment?

Is there any --?

Yes, we were just getting on, we're fishing.

This has been on an upward trend for the last two years.

If I go quarter-to-quarter for the last two years and look at the amount of claims that Gloria McCarthy, COO, has gotten in, that's increased as far as first pass rate.

We've increased our first pass rate significantly.

I don't mind giving you a couple statistics if you want.

Sure.

Yes.

Fourth quarter 2004, for example, the average claim payment lag for us, was 46.5 days.

That compares very favorably to the third quarter of 2004, 49.1 days, the second quarter 52.4 days, the first quarter 50 days, the fourth quarter of last year 49 days, the third quarter of last year 50 days and then the second quarter 51, the first quarter 51.

So whoa!

We've just gotten progressively quicker and I think the only think the only place you see where there was any slowdown between the fourth quarter of '03 and the first quarter of '04, if you recall last year, we're telling you we're putting everything on CS 90.

Okay?

We were migrating our national accounts over at that time.

So that slowed down a little bit.

Then it picked back up again and that would have been like quarter two, where you saw it go from like 50 days in Q1 of '04 to 52 days in Q2.

And once that migration was done, this is a combination of why we're getting more efficient in our expenses also, with the outsourcing contract and I think I mentioned earlier this year that as we go into the third year of a contract like this, that's usually where you start getting some of the pick up in terms of accelerated savings.

The first and second year you have a couple.

You have a few expense items where you're double covering and you're double testing everything.

But as you get in the third year you're starting to realize your optimum value and that's what we're seeing - speed and lower costs.

Good stuff.

Got you.

That's helpful.

And just one last follow-up on the physician utilization uptick.

I know you sort of explained the over, the 2003 comp period is a little bit difficult.

Any sense as to what we we're seeing early in the first quarter and any comments on potential flu impact, maybe?

No.

Well, yes and no.

I don't think it's flu, okay.

I mean, I think a lot of people probably went to the doctor's every time they coughed or had a respiratory symptom because of all the publicity on the -- because of the flu vaccine shortage, okay.

But it's hard for me to tell it was that.

It didn't look like we had like a flu epidemic or anything, although it may have been a cause of some of it.

I think what I've said and what I truly believe and what's truly in our numbers for years is that you do get these PCP upticks in the fourth quarter, okay, and that's where it is.

Now, you want to know about January.

Okay.

January we don't say it.

It was there in October and November in the fourth quarter and it sort of normalized in January or where it looked, January claims, obviously.

And you don't see the high level of PCP utilization in January just on a fourth quarter.

But in the second quarter it's that same thing.

You see it in the fall, in October and November especially and this is what we saw.

And it always affects Medicare Plus Choice, senior population, and the HMO population more than the other products and those are areas that we've grown the most in year-over-year.

This is Mike.

I just want to add this is not a bad flu season per se, but all the publicly in the fall sent people to the doctor to try to get the shots.

When they couldn't get the shots or if they had a cold they were worried about it and went to doctors more often.

I think that's part of what you've seen.

John Rex with Bear Stearns.

Yes, I was wondering if you could give us a sense of the component cost trends that build up to your '05 medical cost trend guidance, in terms of maybe how that compares to what you saw in '04 and where you might see any shifting going on?

It hasn't changed that much, John, from what we've seen in the past.

For example, for what we've seen for '04, is as we said, the PMPM year-over-year is 11.5% and we break that down by component.

About 9.2% is inpatient and most of that is unit cost driven, not utilization driven.

Actually days per thousand is off a little bit and Length of Stay (LOS) is purely flat, up maybe under 2.0%.

Outpatient, still -- we don't break outpatient out between utilization cost, because it's just too difficult.

It's hard to do it with any type of credibly.

That's 10.9% and medical is probably the strongest component at about 7.9% and drug, as I said, still in the double-digit range there at about 14%.

The biggest driver is sort of like we're shifting our mix to lower PMPM products, okay, in terms of going forward and that's what I think is going to influence the decrease the most in terms of 2005.

So if your question is if you're seeing that level -- you're seeing an increase in MLR in 2004 and you're seeing trend 11.5%, why do we think in our guidance for next year we think trend's going to be 8.5 to 10.5%.

And I think part of that is primarily a shift from products that we're approved with higher contributory requirements.

So, in terms of these individual components, as you build to that rate for next year and you got 8.5 to 10.5%, are they in the same relative range as inpatient/outpatient, M.D.

RX that we're seeing these year?

Yes.

Or is there one of them that declined more than another or?

No.

I think if you look at the relativity, it's probably about the same.

I think we've done probably about everything we can with drugs, okay, and I think that's probably true for most people.

I think you continue to see, especially in New York, inpatient getting a little bit more expensive as the hospitals coalesce and get better at negotiating.

And I think that's already been in our trend numbers, in our breakdown.

So I think the relativity between inpatient, outpatient, and medical would be probably not that much different than you're seeing now.

And the premium yield you described as 9.5% on core Commercial seems a bit lower than what you talked about last quarter.

Was there any significant change that would drive that just a single quarter, or did I misinterpret your comments last quarter?

Well, last quarter I think it said the premium yield year-over-year in the PMPM was 9.9%, okay, and this time we're talking a full 12 months, not the quarter, the full 12 months it's 9.5%.

No, there's nothing unusual.

That just has mostly to do with product mix and when rate increases kick in.

Christine Arnold with Morgan Stanley.

Good morning.

I have a question on the cost trends.

If I take these components and I weight them, I come up with a 10% medical trend using a 20% weight for inpatient, 20% for outpatient, doctor 40% and 20% for drug and I'm not coming up with like 11.5%.

Is there a mix issue or can you help me with that?

Yes, Chris, it's John.

Christine, it's probably product mix.

You remember you have the retrospective funding arrangements in there, which sort of affect the premiums for this year, based on their low cost experience for last year.

Okay.

That probably has the most impact on it.

Otherwise that's PMPMs work out pretty clean.

So the retrospectively rated brings down the component.

Yes.

But it's not considered in the aggregate.

That's correct.

Okay.

That's correct.

Perfect and then could you just address how you think about the Medicare opportunities, how you're thinking about, broadly speaking, kind of 2006, recognizing that you've got a couple months but still only a couple months?

Yes.

There's a ways to go between now and 2006.

I guess I would say, if you look at those things -- let me talk about both HSAs days and Medicare opportunities.

They both represent significant opportunities, in particular in this marketplace and we're actually quite excited about them.

Having said that, it's really too early to say anything more than that about 2006.

Okay.

Thank you.

Patrick Hojlo with Credit Suisse First Boston.

Thanks, just one quick one.

Most of the questions have been asked, I think, that are worthwhile, but I am curious.

Last quarter you were looking for and you were working for a cost trend of 9.0 to 10.5% for '05.

I'm going to beat a dead horse here, but did you see some sudden uptick in buy-downs and cost shifting that caused you now to look for that lower trend?

Well, I don't think we gave any guidance out for 2005 on cost trends last time.

I know I was very clear about that.

We did work up our EPS but I didn't get into the cost trends.

But yes, it was something, Patrick.

In January 2004, just this past month, New York State allowed HMO riders to increase the physicians co-pays that could be offered from a flat $20 per visit to either a flat $25 or a split $25 for PCPs and $40 for specialists.

And this has been a pretty popular change in terms of the product you're selling and this has -- we've seen more of this in our sales going forward and we'll expect this.

Now this was implemented January 4th, so as you go forward now you have full year under it, this will have a bigger drive on our medical trend in 2005 than it did in its initial year of 2004, now that we've been through a full selling season.

Okay.

That makes sense.

That's all I have.

Thanks a lot.

You're welcome.

Ed Kroll with SG Cowen & Co.

Good evening.

My questions on the New York State legislative scene.

Not what you've discussed in length on that Comptroller's issue, but anything else going on at the State level, either pending, that's already been passed by the legislature say regarding premium taxes?

Any changes like that coming in '05 that are significant?

Yes.

This is really -- trying to predict this is very hard.

The HCRA, which is the funding mechanisms for hospitals, is up for renewal in July and the HCRA bill determines the subsidies to the hospitals for bad debt and charity and graduate medical education, which gets built into our rates.

It's not -- we don't know what the outcome is going to be and we aren't going to know for my guess is three or four months.

But there is a potential there for increasing revenues to hospitals, which would result in an increase in our costs and our rates.

On the other hand, it may not and just I think at this point it's just too hard to predict.

Okay.

Anything else other than that, though?

I mean, I know that's a significant issue.

Well, I mean, at this time of year there are a whole bunch of things at float every year in the legislature, so people have talked about premium taxes and so on, like that, but they do that every year and I don't know.

It's hard to say now.

I just think there's a fair amount of uncertainty with that.

Okay.

Thank you.

Last question, Carl McDonald with CIBC.

Thank you.

I just have one quick question.

Pending resolution of the Comptroller issue, [its not likely the cash] (ph) the parent company is going to continue to grow as you receive the subsidiary dividends if you float fairly constrained.

Has the Board considered any other alternatives to try and put that cash to use?

Yes that's a good question.

It's obvious that because it was our intent and we obviously had authorization from the Board to do the buyback of the stock from the Fund and I mean, obviously that was our intent.

You know we're kind of stuck in this position where if we do a buyback from minority shareholders we reduce the float and our float is not great right now and if you look at the volume per day it's substantially lower than it would be, obviously.

I think we're at 230,000 shares per day.

Where companies of similar size may be 4 times that amount in terms of float.

So buying back from minority shareholders has not been to us the best solution, because it makes it more difficult from them and we hear this from shareholders quite frequently because of the limit in restricted stock.

So our basic goal is one way or another to get the Fund to sell down and keep the schedule that the State and we have agreed to.

So, unlike almost everybody else in the sector, we are not doing stock buy downs, but although we would very like to with the Fund from the stock.

And I would just mention, even though it has nothing do with organic growth, if we had done that we obviously would have beat our EPS for '04.

We also continue to look at M&A opportunities and we do that a lot and quite aggressively.

This concludes today's conference call.

You may now disconnect.

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 Februart 9, 2005.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: our 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; our ability to maintain or increase our premium rates; possible reductions in enrollment in our health insurance programs or changes in membership; the regional concentration of our business in the New York metropolitan area and the effects of economic downturns in that region or generally; future bio-terrorist activity or other potential public health epidemics; the impact of health care reform and other regulatory matters; the outcome of litigation; and the potential loss of our 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, 2003, as amended, its 2004 Quarterly Reports on Form 10-Q and in its Annual Report on Form 10-K for the year ended December 31, 2004 to be filed with the Commission.