Elevance Health Inc (ELV) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Derek and I will be your conference facilitator. At this time, I would like to welcome everyone to the WellChoice 2005 Q1 Results Conference Call. [Operator Instructions]

Thank you. Ms. Bohren, you may begin your conference.

Thank you and good afternoon, everybody. Welcome to WellChoice’s Q1 2005 conference call. I’m Deborah 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 this evening with some brief comments about our Q1 performance, as well as discussing some current issues that we know are of interest to you. John will then discuss our financial results in more 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 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 2004 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the period ended March 31, 2005.

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

Thanks, Deb. Good evening, everybody. We are pleased to report that WellChoice continues to deliver strong financial performance for the first three months of this year. I’ll begin today’s call with earnings highlights.

For the first quarter 2005, we’re reporting net income of $70.9 million or $0.84 per diluted share. This is an increase of 18.3% over the prior year Q1 earnings of $0.71 per diluted share. This is $0.01 ahead of the high end of our guidance and $0.02 above the First Call consensus.

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. That’s based on 85 million average shares outstanding. Additionally, for the second quarter of 2005 we expect earnings to be in the range of $0.82 to $0.85 per fully diluted share.

With respect to enrollment, total corporate enrollment topped the 5.0 million mark at 5,024,000. This is a 3.3% increase over the prior year first quarter and a 1.4% increase since December 31, 2004. Enrollment in our Commercial Managed Care (CMC) products, excluding New York City and New York State account, was 2,627,000 at the end of the first quarter 2005. This represents an increase of 168,000 members, or 6.8%, over the first quarter of 2004 and an increase of 69,000 members, or 2.7%, since December 31, 2004.

We continue to be pleased with the growth in our local middle, market membership. As we discussed in our last earnings call in February, we lost the retiree portion of a single, large national account, 82,000 members. This had no impact on earnings. Growth in national accounts at 126,000 members as of January first remains strong.

As a result of the loss of this account, though, we are reducing our core commercial managed care membership guidance to a range of 5.0 to 6.0%. I would note, though, that we are finalists for several large ASO accounts between now and the end of the year, which could change this estimate upward.

Since December 31, 2004 membership in the entire CMC segment - now this includes New York City and New York State accounts - increased by 1.6% to 4,450,000. That’s a 4.1% increase between the first quarter of 2004 and the first quarter of 2005.

Self-funded membership increased 2.7% to 2,002,000 as of March 31, 2005. It now accounts for 39.8% of overall membership. That’s an increase of 40 Basis Points (BP) over the prior year-end. And for the quarter ended March 31st our administrative expense ratio was 15.3%. That’s a 110 BP improvement over the first quarter of 2004.

Now I’d like to take a few minutes to comment on some of the ongoing issues that I know are of interest to you.

First is an update on the dispute between the New York Public Asset Fund and the New York State Comptroller regarding what role, if any, the controller has with respect to the sale of WellChoice stock by the Fund.

In our February year-end earnings release, we discussed that the New York State Comptroller had issued a legal opinion in October 2004, asserting that significant contracts entered into by the Fund must be approved by the Comptroller under Section 112 of the New York State Finance Law. Both the Company and the Fund disagree with the Comptroller’s assertions, as does a legal opinion received by the Company in connection with our IPO.

Until this issue is resolved, the Fund may submit its contracts to the Comptroller and obtain approval or enter into an agreement without approval and risk challenge by the Comptroller. If not resolved, the dispute could jeopardize the ability of the Fund to meet the sell-down requirement, set forth in the voting trust agreement, in a timely fashion.

Legislation that would clarify the Comptroller’s role passed the New York State Senate but was not included as part of the final budget package passed earlier this month. However, the Governor has stated publicly that he anticipates a conversion legislation, which has the Comptroller language in it, will be addressed as part of ongoing legislative negotiations to fund the Healthcare Reform Act (or HCRA), which expires at the end of June.

This is the legislation that provides, among other things, subsidies for hospitals for graduate medical education and for bad debt and charity. Legislative action is expected before that time, otherwise a substantial flow of funds that goes to hospitals under HCRA will end.

Next, the pending Consumers Union lawsuit.

Yesterday the New York State Court of Appeals, New York’s highest court, heard arguments in this matter regarding both use of the funds and the constitutionality of the legislation underlying our conversion. We anticipate that the Court will issue a final decision in this matter by this summer.

I’d like to remind everyone that, from an operational standpoint, neither of these issues have any immediate impact on our revenue or operations, and we do continue to believe that these matters will be resolved favorably.

Third, Medicare - we will be participating in the new Medicare programs in a variety of ways.

The first, we have filed an application to offer a local PPO in the 9 down state counties where we currently offer our Medicare HMO with a proposed July 1, 2005 effective date. The Medicare PPO adds a significant addition to the Medicare Advantage HMO product in this marketplace and we believe that it will be attractive.

Second, we will begin to offer beneficiaries in Senior Plan, our Medicare Advantage HMO, and our new local Medicare PPO, a Medicare Part D prescription drug coverage effective January 1, 2006.

Third, we will expand our Medicare supplemental offers and plan to begin offering Plans C, E, and F later this year and once plan designs are finalized by CMS we will also consider offering Plans K and L beginning in 2006. We believe that the Medicare Supplemental market is a good market for us and that these new plans could provide substantial opportunity for growth.

We didn’t file to be a regional PPO for 2006, because New York State is in a single region our Blue Cross and Blue Shield (BC/BS) license would only permit us to operate on a branded basis in the 28 counties of Eastern New York. The Blues in New York are continuing to explore ways in which they can join together to offer this product in the CMS-designated region.

Similarly, we did not file as a Regional Prescription Drug Plan for the same region. However, in this case, our pharmacy benefit management company, Caremark, has filed an application to be a national PDP (or prescription drug plan) and we are working with them to develop a joint program for the New York region.

And then finally, we expect to be in the small group and middle market with our consumer-directed product in the second or third quarter of this year. As you know, we offer this in the national account basis and enrolled 42,000 members in consumer-directed products and national accounts in January of this year.

Finally, the New York City account. There is no news to report about the status of the contract renewal. We will keep you up to date regarding when and whether the City will complete the pending competitive bid process.

With that, I’m going to turn the call over to John.

Okay, thank you, Mike, and thank you for joining us for this evening’s call.

As Mike pointed out, WellChoice had a strong first quarter. We reported net income for the first quarter of 2005 of $70.9 million or $0.84 per diluted share. This represents an 18.3% improvement in EPS over the prior year first quarter.

Our fully diluted EPS for the quarter exceeded analyst estimates by $0.02 and is $0.01 above the guidance, which we provided to you in February. Our results, we believe, are the product of continued pricing discipline, good expense control, and organic membership growth.

As we look at membership, our core Commercial Managed Care membership, which once again excludes New York City and New York State PPO accounts, grew by 2.7% to total 2.6 million members as of the end of the quarter, compared to last year. Strong small group and middle market membership growth continues to drive the sequential increase.

Compared to the year-end, membership of the CMC segment as a whole, which includes the New York City and State PPO enrollment grew by 1.6% and totals 4.45 million members. Since year-end, total corporate membership grew by 1.4% and now totals 5,024,000 members. And our membership in our Other Insurance Products and Services Segment is unchanged since year-end.

National account membership grew to 1.3 million members, a 3.3% increase since year-end and given the loss of the retiree account Mike indicated to you and we told you about last quarter, in February, we feel very good about this growth rate.

Our small group and middle market membership grew to 484,000 members, a 2.5% increase driven primarily, as in the past, by continued strong HMO growth. Since year-end, self-funded membership increased by 2.7% to 2,002,000 members and now totals 39.8% of total membership, compared to 39.4% in December.

Turning to revenues, total corporate revenues were $1.5 billion for the quarter ended March 31st, an increase of approximately 11.6% over the first quarter of the prior year. Total revenues in our CMC segment were $1.3 billion. This represents an increase of 13.5%. Revenues in our Other Insurance Products and Services Segment increased by 1.8% to $229.6 million.

Insured premiums for all segments increased to $1.4 billion for the first quarter, an 11.2% increase from a year ago. Premiums for our core Commercial Managed Care business, which excludes the City and the State PPO accounts, grew by 13.4% over the prior year.

Premiums for our managed care business, including the City and the State PPO accounts, increased by 13.1% to $1.2 billion compared to the prior year. And premiums for Other Insurance Products and Services Segment were virtually unchanged from a year ago. Service fees totaled $141.3 million for the first quarter, which is a 16.6% improvement over the prior year.

As far as medical costs, our corporate medical loss ratio (MLR) for the first quarter was 86.4%, an increase of 110 BP from the first quarter of 2004. The MLR ratio for our core Commercial Managed Care products was 83.4%, which is a 180 BP increase from the first quarter of 2004.

Sequentially, both the MLR for the total corporation, as well as core Commercial Managed Care business, improved by 60 BP since year-end. Our MLRs are quite consistent with our recent quarters and are well within our 2005 corporate guidance.

Premium yield for our core Commercial Managed Care book was 7.8% and the change in the claim costs on a per-member, per month (PMPM) basis, was 10.3%. This change in claim costs, I want to point out, includes the effect in the prior year of medical cost timing differences between the first and second quarters. Consistent with our prior practice, these figures are obviously adjusted for the impact of account funding.

I’ll get right to the point here. You see a change. You see a difference between our premium yield and claim PMPM of 2.5 points or 250 BP. I want to point out that about half of this is due just to consistent pricing with trend. As we pointed out before, if you price consistently with trend -- and the example I always like to give is 80% loss ratio. If your claims increase by 10%, by the second year that 80% becomes 81.5%. That’s about half of it - a little bit more than half, actually.

And we also have some increase in our reserve margin, which constitutes about 120 BP of that change and that results, if you recall last year, we had a pretty good switch in timing differences on the PCPs especially, from the second quarter to the first quarter. And we have corrected for that this year, so we shouldn’t see any such noise in the numbers in the second quarter.

By components, we experienced a PMPM claim cost increase for inpatient services of 9.2%, which is basically driven by -- we have pretty much flat admissions, a little bit increased length of stays. Outpatient services increased by 14.8%, which is pretty consistent with prior periods, except you see a surge in ambulatory surgery as the highest component.

And physicians medical of 6.8%, which is fairly consistent with prior periods, as well as drugs of 11.1%, which is a little bit lower than you saw in the fourth quarter and some of last year. We continue to develop premium rates with medical trends in the 11 to 13% range, depending upon the product.

As was pointed out in our press release, we experienced $500,000 of net positive prior period development for the quarter for our prospectively rated business. Our days claims payable was essentially flat at 53.5 days in the quarter, compared to 53.6 days in the fourth quarter of year-end.

For administrative expenses, we believe we continue to achieve improvements in our administrative expense ratio, just as we saw in prior years, through a combination of strong expense discipline and improved operating efficiencies. I think the first quarter results of 2005 simply prove this to be continuing to be the case that WellChoice has made consistently.

For the first quarter of 2005, the administrative expense ratio of 15.3% is 110 BP lower than the first quarter of 2004 and is once again within our guidance range. On a sequential basis, the administrative expense ratio improved by 10 BP.

Due to the increasing significance of our self-funded business, as a proportion of our total business, expense ratios using premium equivalents do allow a better comparison between periods. Premium equivalents are the sum of premiums, service fees, and only those paid claims attributable to that self-funded book of business. On a premium equivalent basis, the administrative expense ratio for the first quarter of 2005 shows a 90-BP improvement to 9.3% compared to 10.2% for the first quarter of 2004.

Our effective tax rate continues to be 38% and cash flow from operations, as you noted in our release, was $149.7 million.

Total shareholder equity was $1.75 billion as of the end of the quarter, an improvement of $63.6 million or a 3.8% increase from year-end 2004. And WellChoice continues to have no debt on its balance sheet.

As of the end of the quarter, total investments and cash and cash equivalents at the parent company were $707 million. All other components of the stand-alone condensed balance sheet of WellChoice are provided in the Liquidity and Capital Resources section of our Quarterly Report on Form 10-Q, which we filed earlier today.

Investment income and realized gains increased $800,000 for the first quarter to $18.4 million, compared to last year.

In summarizing our performance, we continue to demonstrate our ability to meet our growth goals through disciplined pricing and aggressive administrative expense management. Our strategic outsourcing agreements have enabled us to reduce administrative expenses as a percentage of revenue. It is through these strong fundamentals that we believe we are positioned to meet our earnings growth expectations for 2005.

This concludes our review of the first quarter 2005 operating results. I’ll now review our guidance for the year.

As Mike pointed out earlier, for the full year we are confirming the guidance we provided to you in February and expect EPS in the range of $3.35 to $3.41 based on 85 million average diluted shares outstanding. For the second quarter, we expect fully diluted EPS between $0.82 and $0.85.

Membership in core Commercial Managed Care - we’re now guiding it to a range of 5.0 to 6.0% and for the corporation, that brings us to a range of 2.0 to 3.0%.

And with that, I’ll turn it over to Mike for any additional comments.

Thanks, John. We’re open for questions.

[Operator Instructions]

Your first question comes from Christine Arnold with Morgan Stanley.

Hi there. My first question relates to the New York State stabilization pool. Did you receive dollars from that stabilization pool and do you expect to in the near future?

Christine, we have kind of an elaborate write-up on the Reg 146 pool in our 10-Q that we filed, you have to remember that pool is an unfunded pool and there’s no way to be sure of two things.

Number one, the amount that they pay out is going to be directly proportional to the amount that’s paid in and right now there’s a lot of noise in the pool number. For example, the State goes back to 1999. They’ve got basically a delay of 7 years in terms of settling this pool.

The second thing is that the numbers for 2004 the Department of Insurance has withdrawn as being inaccurate. So right now there’s no fundamentally accurate way to assess what the pools will look like for the balance of the year. Except that we have been a net receiver of funds and we expect that will continue at least for this year.

Patrick Hojlo with Credit Suisse First Boston.

Good afternoon, guys. I’m wondering if you had any direct negotiations with the New York State Comptroller to try to, well, dispel his concerns and get this resolved without the court or without the legislature being involved?

Yes its Mike. We have. We have met with him and we’ve talked with his staff on numerous occasions. To try to give a little bit of background here, there is a dispute in New York over what is a state entity and what the Comptroller’s jurisdiction is. So it’s not just about the Public Asset Fund. There’s a dispute about the various authorities in New York, which is an important part of our kind of governing process, like the Port Authority and the MTA, the Power Authority and so.

So, I’m just paraphrasing this. This has not actually been said. But what we suspect strongly is that any precedent on any issue over what’s a state entity and what’s not a state entity would be used in other examples of disputes, over whether or not the Comptroller has authority over other entities in the state.

What happens is this usually -- its not the first time there’s been this kind of dispute. It often ends up getting resolved in terms of legislation and we believe that that will be the case, as I discussed earlier in my remarks.

Okay, fair enough. Now the cost trend side - did you have any impact from the late flu season this year? And secondly, regarding the ambulatory surgery centers or ambulatory surgery being the cause of a little bit of a pick up on the outpatient side. Do you see the proliferation of those outpatient surgery centers being a problem and being the source of that uptick in utilization?

No, not really. This is John. Actually, we didn’t see anything directly -- any upticks directly related to the flu, none whatsoever. As a matter of fact, if we just measure the coding factors with flu, we saw a little bit less frequency than last year.

As far as the outpatient, outpatient has been developing at a higher level than inpatient the last couple of years, so there’s nothing through there, there’s nothing different there.

As far as ambulatory surgery, we see -- I put that out there for information. That’s the one component we see growing the quickest and we’re putting more emphasis on centers, the stand-alone AmSurg centers, and we have good contracts in that area and have a good press on controlling costs that are developing in that segment.

Otherwise, there’s nothing alarming. As we pointed out when we talked about our PMPMs on claims, we’re essentially seeing it unchanged, basically, over a year ago, adjusted for normal inflationary cost increases. And since the end of the year and if you look at our ratios for the fourth quarter versus the first quarter, it’s a fairly sharp improvement. So we’re comfortable with that.

Okay. Do you have an exact number of what the PMPM number was, excluding last year’s prior period development in the second quarter?

No, Patrick, I don’t.

Okay. All right. I’ll get back in line.

So like I said, the difference is pretty evenly split between the normal pricing, the trend, and then, like I said, I thought we had like 120 BP in there just for reserve margins.

That alone. Okay. That makes sense. Thanks a lot.

Okay.

Matthew Borsch with Goldman Sachs.

Yes, hi, thanks. I wanted to ask a couple questions on enrollment, first on the change in the outlook. Just help us to understand the timing, because it makes sense to change the numbers in light of the retiree account. I’m just curious why you chose to do it this quarter rather than last quarter and whether there was any difference in your view on the marketplace then as opposed to now.

This is Mike. Yes, we talked about this a lot, actually. There are a number of accounts that are ASO accounts that we believe will have a good chance of coming in this year and they are at variable times.

So this quarter we kind of decided that it’s not a certainty and we don’t want to mislead, so what we did is we lowered the guidance. Instead of having a positive guidance with a slightly negative bent, we’ve downgraded the guidance but with a relatively positive tinge to it, in terms of the potential for accounts going forward during that year. I don’t know of that makes any sense.

No, that’s makes sense. That does make sense. And just on a somewhat related question, the fees came in a little higher than we were expecting. Was there a pick up in the sort of Blue Card host enrollment, if you will? I don’t think you guys disclose that regularly, but can you talk on that point at all?

No. We don’t usually put out number on the Par plan members. We’ve had good experiences with them the last few years, but most of the growth we’re seeing in fees now is an increase on ASO accounts. The Par plan members are still running pretty much similar to what they’ve run in prior years.

Okay, got it, and just two other quick questions. One, free cash at the parent, I couldn’t find that in your 10-Q. And the second is just bottom line on pricing and medical cost trend. You’re really saying that you expect it to be really the same in 2005 as it was in ‘04?

Okay. Point A, $707 million is what we have in cash and investments at the parent company. Part B is yes, it’s pretty much running the same on an adjusted basis for a PMPM and we do have it in the -- I’ll direct you to page 33 of the Q for the details.

Got it. Okay, thank you.

You’re welcome.

Scott Fidel with JP Morgan Chase.

Hi, thanks, good evening. The first question just had to do with operating cash flow, which came in quite robust in the quarter. Can you just update us on your expectations for the full year?

Yes, we’re not changing the cash flow estimate for the year we put out there in February. I think we said it was $375 million.

First quarter is always good, 211% over net income, I think was pretty the same, about 200% last year. Remember, we don’t make any estimated tax payments in the first quarter, so in the second quarter you have two estimated tax payments.

Also, we pay in a biweekly pay period, so you have three pays in June, so you have an extra pay in June. So first quarter is always strong. We also don’t do any annual settlements, which for good experience that we would return cash to policyholders until the second quarter. So the first quarter should be at this level of performance.

Okay, got you. Second question just has to do with the other enrollment in the other businesses, which actually looked like it was flat and sort of had, in modeling, some modest declines there. Do you expect that enrollment there should be stable this year or we should see the continuing trend of some continued enrollment declines in the other businesses?

No. It hasn’t completely run off yet. We anticipate seeing some continued run off. At the 300-and some-thousand member level, we still think that there’s going to be some intentional runoff of this business. What you see in the first quarter, surprisingly enough, one account that we have written for several years increased its membership by about 2,700 members and that offset a minor decline of about 300. Otherwise that would have been a minor decline of about 3,000 members for the first quarter.

Okay and then just a last follow-up question, actually, to Matt’s question on the ASO fees, which did look like, on the PMPM basis, were up by over around 9.0% year-over-year. Just wondering is there anything in there or is that sort of the new run rate we should think about on the ASO fees on PMPM at that sort of 23-50?

You’re looking at -- you’re trying to generalize the fees. That’s going to vary by account and the type of services that we’re looking at. So I’d say it’s too early in the year to conclude that. We have a lot of ASO business that we will do renewals on in the middle of the year also, so I think it’s too early to jump to that conclusion.

Carl McDonald with CIBC.

Good evening. Could you guys provide an update on any dividends you expect from subsidiaries over the balance of the year in addition to the $700 million-plus in cash you’ve got at the parent now?

Well, Carl, congratulations on your position, by the way.

Thank you.

As we said, our cash flow overall we expect is $375 million. Now most of that obviously is dividend-able from the subsidiaries. We have to make that decision as we go along, because that’s subject to review and approval by the New York State Insurance Department. However, we have a well-capitalized set of subsidiaries. We think we’ll keep them at that level of capital.

And I’ve said this before, technically or theoretically, 100% of our cash flow is dividend-able to the parent company, given the surplus position and the credit rating of our subs.

Got it. Okay.

But we haven’t made that decision yet.

And is your offer to repurchase $200 million in stock from the Fund a standing offer or did that proposal expire when the Fund turned down your initial offer? And also, could you envision a situation in which the Board would consider raising the amount of stock you’d be able to then repurchase from the Fund?

Yes, no, that offer has expired, actually, quite a while ago. Our intent is clear and it’s pretty obvious that we want to get the Fund sold down by the November deadline to get them below the 50%.

Right now, because we believe that we will get this resolved with legislation -- when we did the initial offer, we weren’t really quite certain what the Fund’s response was going to be and now we know. We would like to see this resolved through legislation and we think that there is a good chance that that in fact will happen.

So we haven’t done that recently, rather than trying to -- we think we know what the Fund’s response would be and rather than setting off a confrontation we hope this all gets resolved through the legislative process.

Joshua Raskin with Lehman Brothers.

Hi, thanks, good evening. The national account membership, just wondering if you could give us what a total sales number was versus the sort of 40,000 sequential [life] growth? Just trying to figure out what the lapses were versus [inaudible - multiple speakers].

: Yes, the 126,000 January 1st and that is -- then you have to add to that the 82,000 in the retiree account. The retiree business, because it’s basically wrapped around Medicare, is a very low revenue business. So we’re not really looking at anything that affects financials. It just reflects membership numbers, though.

So, really, so total sales was the 126,000. That’s offset by the retiree account loss?

Yes.

And how does that compare --?

It’s not exactly one for one. I mean, there’s other stuff in there, but yes.

That’s fair. How does that compare to last year?

: It’s over 100 and under 125. We’ve been very consistent in terms of new sales on national accounts.

Okay, great, thanks.

John Rex with Bear Stearns.

Thank you. Just wanted to go back again to the comments that you had made on pricing and cost trends and what you show in your Q in terms of the pricing lagging cost trend by a couple hundred BP within CMC segment. Now, is what you were saying there, is it posture, then, as one we would expect MCR to deteriorate? Does that mean because you’re pricing to a kind of constant gross underwriting margin dollar? Is that what you were indicating, John?

Yes, John. That exactly -- as long as we can continue the price and keep a steady revenue stream, pricing consistently in this New York market has helped us tremendously in terms of growth, especially in the small and middle market. That’s spurring our growth in HMO, for example.

When you do that, you’re going to show a moderate deterioration in your MLR, up to a point, okay, and that deterioration will get smaller and we’ll reach the point where we obviously wouldn’t continue it forever. Because if you did that, you’re working off a steady margin, for example, the example I gave with the 80% and $100 premium is going to give you a $20 margin. If you just kept that margin stable over the years, you’re not going to get your growth unless you get it through expense efficiencies or just pure volume, membership growth.

So, yes, there is a deterioration that’s built into our forecast that are just based on pricing the trend by product and that’s usually about -- it can be about 110 BP.

So we should not think, at least for ‘05, we should not think of premium pricing as matching percentage cost trends.

No.

You talked about 8.5% to 11.5% --

Right.

We should think there’s a negative spread there. Is that correct?

That’s correct. That’s absolutely correct, because the medical claims are never going to be 100% of the premium, so it’s always going to be in the 80 to 83%. So that’ll be basically the pricing. And like I said, John, and I’ll just say this broadly again, remember last year in the second quarter we had negative PPD and that affects the first quarter’s numbers. So the first quarter PMPM for the claims would be a little bit deflated when you compare the mechanicals year-over-year

So, right now, in our reserving for the first quarter, we’ve anticipated those claims coming in the second quarter, with first quarter incurral dates and that’s represents about 120 BP of the increase year-over-year in the PMPM cost trends.

All right. So, when you think about 11 to 13% cost trend, we should think -- we should be modeling for premium yield to lag that by 100 to 200 BP? Is that correct?

The 11 to 13% is the premium. What we’re pricing added about 11 to 13%. The cost trends were a little bit lower than that. Hold on.

Well, but then that would imply a positive spread instead of a negative spread.

Actually, we’re overall for core Commercial Managed Care, we’re saying the trend for the year of about 10.3%. I think the guidance that we’ve provided for 2005 was in the 7.5 to 8.5% overall.

Seven to 8.5% for pricing?

No. The 7.5 to 8.0% for -- hold on a second. Hold on a second. No, no, I’m sorry. I’m sorry. The cost trend is 8.5 to 10.5%. You’re looking at 8.5 to 10.5% guidance for medical cost trends and that’s going to vary a little bit by quarter.

And how about pricing?

Pricing? Depending on the product, we’re using 11 to 13%. But I expect -- I would guide you to premium yield, almost the same thing as we wrap up the year at about 8.5 to 10.5%. And basically how that’s going to develop is it’s going to trigger off pricing changes quarterly that we make, as we go forward.

I guess just where I’m a little confused -- if cost trend equals yield, we wouldn’t expect MCR deterioration. Yet we saw -- you illustrate it nicely in the Q that there’s some -- it would imply that there is a negative spread between yield and cost trend of about 100 to 200 BP.

Well, I think that there’s a negative spread implicit. If everything remains the same, exclusive of benefit changes and buy-downs, you’re going to see an implicit negative development or a negative spread of about 110 BP, the way I look at the book.

So I could think, for my purposes, I should think of cost trend 8.5 to 10% and premium yield lagging that by about 100 BP or so? Is that correct?

Yes. Yes, that’s a good way -- yes, correct, so exactly right.

Okay and then just a cleanup item here on your outpatient [indiscernible]. You said called it -- you said it was 14.8%; I think for ‘04 it was 10.9%. That was just a pretty healthy jump --

Yes.

-- and I wanted to --

Yes.

It seemed a pretty significant jump and I wanted clarification.

Yes, well, remember that’s a quarter, okay, and a quarter’s going to do that and what I’ve pointed out is the ambulatory surgery is the highest number or it’s the one area we’re focusing on that caused that jump. I don’t expect that -- that’s the problem when you’re reporting a quarterly PMPM. It will tend to jump on you, but if --

Sure. Is your view that should settle closer to the 11% you showed for ‘04?

I think so. I think so. What we saw in the first quarter is like -- that’s why I mentioned AmSurg, because that’s one number that’s responsible for the whole fluctuation and we’re looking at that and we think that’s very controllable. I don’t expect that to be like that for the year.

Okay and just to make sure I’m [indiscernible], as I’m thinking about my own modeling and I’m thinking out year’s and everything, you don’t expect the negative spread thing to persist multiyear? This is kind of what you think is an ‘05 thing and doesn’t persist into ’06. Is that correct?

No, I think it’ll probably persist to ‘06. I don’t think beyond that, though.

So you would expect MCR deterioration again in ‘06?

Yes I would.

Okay. Thank you.

You’re welcome.

Ed Kroll with SG Cowen & Co.

Good evening. Back on the enrollment, if you could just --for the potential new business that you mentioned earlier, what would the potential start date be for that business? And could you remind us what the old enrollment guidance was prior to today’s call?

Yes. This Mike Stocker -- 7.5 to 8.5% and the start date would be on the quarter. So it would either be July 1st or October 1st.

Okay and might you make an announcement? Would any of those be big enough to warrant an announcement or you’ll just tell us on the Q2 call?

Yes, our -- except for the City and State account, our tradition has been to reflect them, obviously, in our earnings release but not to pinpoint a particular account.

And that 7.5 to 8.5%, what would that -- what was the overall unit growth guidance? I think the new guidance is 2.0 to 3.0%.

Yes, this is John. The old guidance for the corporation?

Yes.

It was 3.0 to 4.0%. We brought that down to 2.0 to 3.0%.

Got it.

And then we brought core Commercial Managed Care from 7.5% to 8.5% to 5.0 to 6.0%. And as Mike pointed out, all of this is the loss of the retiree account and just to say where we are with this thing, it doesn’t affect our EPS. You know?

Right.

And I knew it wouldn’t, because the best we’d ever do out of that thing would be break-even and that’s why we didn’t want to do it. It was a pricing issue and it was good discipline on our part.

Sure.

But that’s why you can take that membership down and it doesn’t necessarily affect earnings. On the other hand, what Mike’s talking about, as far as some of the key manage care bids that are in the pipeline are positive all across the board.

Got it and then just a quick follow-up, relative to your Part D comments on Medicare. Have you decided yet how you would brand the Part D offering? Would it be under the Empire brand or would you call it WellChoice? Just curious if you’ve decided that yet.

No. To the extent possible, we will always brand under the BC/BS brand, the Empire BC/BS brand. So it’s only outside of our service area where we don’t use it.

Okay. All right. Thanks very much.

Charles Boorady with Salomon Smith Barney.

Thanks, good evening. On the small group HSA linked product that you were planning to launch I believe this summer, I’m wondering if you could give us an update on how that launch is shaping up. Whether there’s going to be significant initial expenses related to the launch and sort of how you’ll be targeting it, will it be through existing channels or specifically to the uninsured.

Yes. First of all, the only thing left to do is to get insurance department approval. So that’s why -- which we don’t foresee any real issues. But that’s why there’s some slight uncertainty about the launch date.

Second, it’s a different market segment that in a certain sense the technology, the service, and the product design is very similar to what we do for national accounts. So there really is not a huge amount of difference between the two, except this was, of course, fully insured and national accounts is self-insured.

We believe that the product will be particularly attractive in the under-50 market and we will target to that market. A very big chunk of that market are employed people without health insurance and so, yes, because the premiums are lower we would specifically target that part of the market. But we also think it will be attractive to people with existing insurance.

I see. And how does the premium compare or -- I know it hasn’t been approved yet, but your target premium compare with your preexisting HMO products?

This will all be public, obviously, when we launch it. Because it’s not approved, it just would be inadvisable to say that. One of your earlier questions I didn’t answer was “Is that going to be an expensive launch”. In reality not really. The investment that went into the national account market serves very well when you’re going into the small group and middle markets, so there’s not any particularly large investment in terms of launching the product.

Okay and then my follow-up is on the Medicare, just going into 2006, a similar question - big launch on the new Part D product and should we expect to see an uptick in expenses. Or what level of expense do you expense to incur and is that already contemplated in the guidance that you gave for 2005? And do you have an preliminary -- I know ‘06 feels like a long way away, but do you have any preliminary sense for what you can do in the Medicare Advantage existing book of business versus your existing Medicare?

Yes, we are aware that some people have made some estimates here. We just think it’s too early. I mean, it isn’t even clear what the premiums are going to be, so it’s just too early to make an estimate on what it means. Having said that, we think the products that I just discussed earlier will be attractive.

Okay. I have a numbers reserve-related question. Do you prefer I take that off line or do you want to hear it now? It just relates to the 10-K and you know.

That’s okay.

You might have seen the note that I did on this. It was your quiet period, so we couldn’t discuss it. But basically, just having gone through the reserve disclosure from your 10-K that came out, kind of going out and trying to restate what 2003 would have looked like had you made the adjustments or the developments in ‘04 that related to prior periods. And have you made the assumption that the prior period was all of 2003, then the pro forma EPS in ‘03 looks kind of flat versus ’02.

And I’m just wondering, was that a good set of assumptions and if so, could you explain that trend or if it was not a good set of assumptions, how should we think about the --?

I’m not really sure what the question is. Could you repeat that, because ‘02 we only had limited information out, for ‘02. We didn’t go public till the fourth quarter, so --

Right. This is for ‘03. From your 2004 10-K, looking at the full year developments that related to prior periods, if you add those back into the ‘03 reported results that takes down the ‘03 earnings, on a pro forma basis. And I was just curious how you looked at the ‘03 earnings growth versus ‘02 as you went back and reconciled for the prior period development that came out in the full year ‘04, related to ‘03.

I don’t think we can really do that, because you’re looking at a roll-forward schedule that’s on a gross basis, okay, and it’s heavily weighted by the City and the State accounts and the ASO account and retrospectively rated accounts.

Whereas what we like to talk about in terms of development is to give you guys some insight on actually what goes through the P&L. So we talk about the development in terms of our prospectively rated accounts. So you’re liable to get to the wrong place if you’re using year-over-year retro and ASO accounts. As a matter of fact, you’re most likely to get to the wrong place.

Right.

And with the degree of changes we’ve had and the increase in book of business in the ASO accounts, plus the minimum premium accounts coming in during 2004, I don’t think you could get there, Charles.

Got it. So, assuming these tables aren’t really helpful for what I’m trying to accomplish with you --

I see what you’re trying to do, but I don’t think you can get there from those tables.

What do you see as your organic earnings growth that’s adjusting out for changes in reserves? Is it materially different from what --?

Hey, 18.3% - what you see is what you get. That’s the good thing about it. We’ve had minimal development. I mean, we’ve had positive development, but it’s minimal and what you’re seeing is pretty good. It’s a pretty good run rate.

Got you. So the 18.3%, even adjusting out for all the changes in reserves, you feel like it’s a good number, is a real [inaudible - multiple speakers] number?

Yes. I think it’s a very good number. The only real reserve change, so you’re saying, is where I got caught up last year in underestimating the PCP stuff in the first quarter. Remember we put out a trend that nobody liked anyway of 1.1%?

Right.

And yes, we had a lot of questions on that.

So what you see is sometimes too good to be true?

Yes and that’s timing between quarters and that’s what we -- and we corrected for that.

Right. Okay, so this 18%, this number we’re seeing today --

It’s a good number.

Good number. All right, great. Thank you.

You’re welcome.

Follow-up, Christine Arnold with Morgan Stanley.

Yes, I just have a quick follow-up on the earnings guidance. You kind of beat the high end of your guidance this quarter and yet you didn’t raise the EPS range and it sounds like the loss of this retiree account doesn’t mean much to earnings. Can you help me understand why the earnings range didn’t go up?

Oh sure. I can help you. I was conservative with the guidance because primarily, if you look at the fourth quarter, fourth quarter was kind of an uptick in terms of the loss ratio. There were questions in my mind whether we’d see any spill over from that in the first quarter and at $3.35 and $3.41 per share we probably needed to do better than $0.80 to $0.83 in the first quarter.

But I wanted to give myself a little room until I could see how those losses that we saw develop in the fourth quarter, whether they were credible enough to warrant recognizing as a trend increase, or they were just a flash in the pan. And as it turned out, claims paid claims, paid losses and our loss experience came back to normal levels in the first quarter, which is good.

Okay. So what you’re saying is it looks like it’s coming back to normal but you’re not building it into the run rate. Perfect, thank you.

Alan Brochstein with Piedra Capital.

Hi, thank you for taking the question. Could you run through the economics, your assumptions, if you were to lose New York City or New York State? I know you’ve addressed those in the past, but if you could update them?

Yes. This is John. We have no plans to lose the State account. As a matter of fact, we’re in the second year of a 3-year contract, so that’s not going to happen. But for the City account, and obviously the City account has been out to bid for what, almost three years now.

If we were to lose the City account, effective July 1st -- now we’re into through June 30th, so if we were to lose City account effective July 1st, the EPS for 2005 would be $0.09. For full year, once we started eliminating some of the direct costs involved in it, for 2006 for example, it would be $0.13 for the full year.

Now that’s a little bit different than the last time I gave you guys that number, because obviously the premiums have improved and the margins have improved a little bit since the last follow-up. But it’s $0.09 if we lose it July 1st and $0.13 for a full year.

Thank you very much.

Patrick Hojlo with Credit Suisse First Boston.

Hey guys. I just want to make sure I have this whole cost trend versus pricing relationship stuff right, because last quarter you did explicitly state that you were pricing to your gross cost trend. Which implied that MLR would need to improve. What has changed, strategically, in your mind over the last three months?

Well, I don’t think anything changed in my mind. Our pricing guidance is pretty much what we’d like to do, is 11 to 13% and that depends on two things. One, the product, it’ll vary by product, and the second thing is that’s independent. That’s gross numbers, so we say it could be affected 2 to 3 points by buy-downs and buy-downs take the point of increased co-pays or benefit changes. That’s the only thing that really affects it.

Mix of products will always affect it. Unlike some of our competitors, we’ve got about 27 different products with about 4 to 5 funding arrangements per product, so that will affect it somewhat. But I think we’ve been fairly actually stable, as far as relationship between our PMPM or both costs, both our claims and our premiums.

And as you can see, whenever I get into this and you look at our 27 product, it gets a little bit dicey. So I’d like to point out the margin changes overall. If you look at the first quarter 2002, which you don’t have, it was 4.9%, underwriting ratio for CMC. If you look at the corporation, it was 4.0%. if you look at first quarter 2003, the underwriting margin was 5.2%; first quarter 2004 the margin was 5.8%; first quarter 2005, the margin 6.3%.

So we’re growing our margins pretty good. So what you make the decision on, based on your pricing, and based on your cost trends, is also what efficiencies you’re getting and where they are in terms of admin and we’ve been getting some good administrative expense ratios out of this Company. Which has operated and kept us very consistent in our competitive market, as far as pricing.

I guess that sounds more like your strategy of quarters past than what I heard earlier.

It is.

So I guess maybe it’s just my interpretation.

And well, strategies, certainly we watch all the variables and we watch them sometimes daily, but at least quarterly, and you make your decisions and we have quarterly steps that are built into our pricing. And we make those decisions as we look at it. So obviously we don’t just -- it’s not mechanical where only one factor is taken into consideration. And we do that, we go through that, those dynamics on every one of our products.

That -- you have, in the past, also talked about your product mix driving up the premium per member and therefore driving up MLR. Is that a factor in MLR going up as well? In other words is that -- I mean, maybe I’m saying the same thing you just said. But is it -- on an apples to apples basis, if you’re pricing the same exact plan, some one year to the next, are we going to see more of an equivalency between cost trends and pricing?

No, we’ve been pretty consistent on that, actually. What you see in the revenues, you see the effect of the increase in the ASO book of business, which is usually sometimes converted from a full risk basis to ASO for good risk, that will drive an MLR change, quarter-to-quarter. But I think when you get all the questions about are you pricing the trend, yes, are you moving your margin, yes. I think the real bottom line is that we consistently move all the right variables to improve our margin and to meet our earnings expectations and I think we’ve been consistent with that.

Fair enough. Thanks a lot.

You’re welcome, Patrick.

This is Mike Stocker. Earlier there was a question about what our new growth in national accounts was in January ‘04 - not ‘05, but ‘04. And the answer is it was 107,000 members and in January ‘05 it was 126,000 members.

That concludes today’s WellChoice 2005 Q1 Results 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 April 27, 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 products or changes in membership including the loss of either the New York City or the New York State account; 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. For a more detailed discussion of these and other important factors that may materially affect WellChoice, please see WellChoice’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, 2004 and its Quarterly Report on Form 10-Q for the three months ended March 31, 2005.