Elevance Health Inc (ELV) 2005 Q2 法說會逐字稿

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 August 3, 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; and 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 and for the six months ended June 30, 2005. .

At this time, I would like to welcome everyone to the WellChoice second-quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you.

I would now like to turn the call over to Ms. Deborah Bohren, Senior Vice President, Communications.

Ms. Bohren, you may begin your conference call.

Thank you, and good afternoon, everybody.

Welcome to WellChoice's second-quarter 2005 conference call.

I'm Deborah Bohren, Senior Vice President of Communications, and with me are Mike Stocker, President and CEO of WellChoice;

Jason Gorevic, Senior Vice President and Chief Sales and Marketing Officer; and John Remshard, Senior Vice President and Chief Financial Officer.

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

Jason will then briefly discuss Medicare, after which John will discuss our financial results in more detail.

We will then 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 Securities and Exchange Commission, including the risk factors contained in WellChoice's annual report on Form 10-K and 2005 Quarterly Reports Form 10-Q, including the Form 10-Q filed this afternoon for the three months ended June 30, 2005.

In addition, please note that our discussion today will include non-GAAP financial measures.

As required by SEC rules, we will provide the most directly comparable financial measures calculated in accordance with GAAP, and provide a reconciliation of differences between the non-GAAP financial measures and the most directly comparable GAAP measures on our website under the quarterly financial reporting and supplemental data section of the financial reporting tab at www.WellChoice.com/investors.

And now, I would like to turn the call over to Dr. Stocker.

Thanks, Deb, and welcome to our second-quarter 2005 earnings conference call.

I'm just going to begin with earnings highlights.

For the second quarter 2005, reported net income was $74.6 million or $0.88 per diluted share.

This is $0.03 above the top end of our guidance and $0.04 above the First Call consensus.

This also includes a $0.02 per share net benefit that John Remshard, our CFO, will address in his comments.

We are raising our full-year 2005 earnings per share from a range of $3.35 to $3.41 per diluted share, based on 85 million average shares outstanding, to a range of $3.37 to $3.43 per share.

Additionally, for the third quarter of 2005, we expect earnings to be in the range of $0.84 to $0.88 per fully-diluted share.

With respect to enrollment, total corporate enrollment at the end of the second quarter was 5,025,000.

This is a 3% increase over the prior year's second quarter and a 1.4% increase since December 31, 2004.

Enrollment in our core commercial managed care products that excludes the New York City and New York State accounts was 2,631,000 at the end of the second quarter.

This represents an increase of 152,000 members or 6.1% over the second quarter of 2004.

It is also an increase of 73,000 members or 2.9% since December 31, 2004.

The Suffolk County employees account was awarded to us in late July.

The account will add approximately 45,000 members.

The effective date of the account is still under discussion.

It could be this year, as early as November 1st or January 1st of next year.

We are not going to change our membership guidance at this time until we know the effective date, but we continue to anticipate commercial managed care membership growth in the 5% to 6% range for 2005.

Membership in the entire commercial managed care segment, which includes the New York City and New York State account, increased by 3.7% to 4,455,000 compared to the second quarter 2004 that had 74,000 members increase since year end 2004.

Self-funded membership was 2,002,000 as of June 30, 2005, and that accounts for 39.8% of overall membership.

For the quarter ended June 30, 2005, our administrative expense ratio was 15.4% on a GAAP basis and 9.2% on a premium equivalent basis.

Now, some comments about issues that we suspect are of interest to you -- first, the Consumers Union lawsuit.

On June 20th, the New York State Court of Appeals – that is New York State's highest court -- concluded that the plaintiffs' allegation in the Consumers Union suit against New York State and Empire were legally insufficient to support any cause of action.

We are pleased with this decision, which resolves all legal issues pertaining to our conversion, including the issue of the appropriate use of the proceeds.

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

This issue has also been favorably resolved.

Legislation passed in June specifically provides that the Comptroller does not have the authority to review any contracts relating to underwriting agreements, pricing agreements or other documents relating to the sale of stock or stock offering entered into by the Fund with respect to the sale of our stock.

The Fund does have to submit vendor contracts for consulting and professional services to the Comptroller for review.

The one exception to this is that all contracts recommended or entered into by the fund prior to June 23rd of this year are grandfathered and deemed approved.

This quarter, we launched our online personal health record that gives our members the ability to go online via our member website and create a secure Internet-based health record that will gather and store extensive individual medical data.

This feature is appropriately named My Health Record.

This is the first online medical record available in the New York marketplace.

It also is the most technically adept online medical record, as far as we know, in the entire country.

We have talked in the past about the core competency that we believe will be important for companies like ours of being able to handle medical information and being able to give that information to our members and also allow them to communicate that information to our physicians.

The My Health Record, which is now available to all of our members, allows our members to get organized information from claims records, from lab records and from pharmacy records, but also allows them to populate the information that they think is important to their health record in terms of allergies, medications, past diagnoses and so on.

In October of this year, we will be able to transmit this information online to physicians, so it means that if you are going to an emergency room, you can download your information to the emergency room prior to going to the emergency room.

If you see your doctor, you can download the information prior to the visit to the doctor.

This is not the electronic medical record that you hear so much about in the press; this is the personal medical record.

It means that the member has total control over the information.

It also means that they can edit the information as they desire.

We believe that this will substantially reduce the number of repetitive tests that are done in our current system, because information about past tests and drugs and drug reactions are not available.

We also think it has the potential to substantially improve the healthcare of our members when they see care doctors, especially in an emergency.

A couple comments about the New York City account.

In May, we announced that the City once again agreed to a one-year contract extension of the existing contract.

This is through June 30th of 2006.

We are pleased with the extension and the agreed-upon rates for the year new 12-month period.

The new rates are in-line with our expectations.

With that, I'm going to turn the call over to Jason Gorevic to talk about our new Medicare products, and then to John Remshard, our CFO.

Thanks, Mike.

Our product development and marketing activities in Medicare fall into four major components -- PPO, HMO, Part D prescription drug coverage and, lastly, other Medicare supplemental products.

Our PPO in the nine downstate counties where we currently offer our Medicare HMO was approved for CMS for sale beginning September 1st.

We did not file to be a Regional PPO for 2006 because, under the new Medicare regulations, New York State is a single region, and our Blue Cross/Blue Shield license would only permit us to operate on a branded basis in the 28 counties of eastern New York.

We will also be offering Medicare Part D prescription drug coverage for our members in our Medicare advantage HMO and PPO, beginning January 2006.

We think both of these products will be attractive to current Medicare fee-for-service members, and we're particularly optimistic about their prospects.

Similar to the Regional PPO, we did not file as a Regional Prescription Drug plan.

However, our PBM Caremark has filed an application to be a national PDP, and we're actively working with them to introduce a joint product for the New York individual and group markets.

In addition to our efforts on Part D, we'll be adding Plans C and F to our portfolio of Medicare Supplemental products later this year, with an eye towards offering plans K and L beginning 2006.

We continue to believe the Medicare program offers good opportunity for us to grow in both existing and new products.

Now, I will turn it over to John to discuss the second-quarter financial results.

Thank you, Jason.

WellChoice had a very strong second quarter.

We reported net income for the quarter of $74.6 million or $0.88 per diluted share.

The reported results include $0.02 per share of Regulation 146, Non-Medicare Supplemental Stabilization pool refund of $37.7 million, offset by an increase in reserves held for litigation of $35 million.

Excluding these items, our fully-diluted earnings per share was $0.86, which exceeded analysts' estimates by $0.02 and the high end of our guidance by $0.01.

For membership, our core commercial managed care membership, which excludes the New York City and New York State PPO accounts, grew by 2.9% to 2.6 million members as of June 30, 2005, compared to year end 2004.

Strong small group and middle market and national account membership growth drove this sequential increase.

Compared to year-end 2004, membership for the Commercial Managed Care segment as a whole, which includes the New York City and State PPO accounts, grew by 1.7% to 4.46 million members.

Since year end, total corporate membership grew by 1.4% to 5,025,000 members.

Membership in our Other Insurance Products and Services segment declined during the same period by 0.7% to 570,000 members.

National account membership grew to 1.3 million members, a 3.1% increase since year end.

Given the loss of the retiree account, which we told you about in February, we believe that this is a very good result.

The small group and middle market membership grew to 490,000 members, a 3.8% increase, driven primarily by continued strong growth in our HMO products.

Since year end, self-funded membership increased by 2.7% to approximately 2 million members, and is now 39.8% of our total membership compared to 39.4% in December.

Sequentially, core Commercial Managed Care membership increased by 4,000 members or 0.2% since the end of the first quarter, due to growth in small group and middle market.

If we turn to revenues, corporate revenues were $3.2 billion for the six-month period, an increase of approximately 10.7% over the prior year.

Total revenues in our Commercial Managed Care segment were $2.7 billion, an increase of 12.2%.

Total revenues in our Other Insurance Products and Services segment increased also by 2.7% to $460.9 million.

Insured premiums for all segments increased to $2.9 billion for the first half of 2005, a 10.2% 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 13.3% over the prior year, while premiums for our Managed Care business including the New York City and State accounts increased 11.5% to $2.5 billion compared to last year.

Premiums in the Other Insurance Products and Services segment increased 1.9% from a year ago.

Service fees totaled $281.1 million for the first six months of 2005, a 14.6% increase compared to last year.

Going to our medical loss ratio, our MLR for the Corporation for the six-month period was 86.2% on a reported basis, flat from the first half of 2004.

I want to point out that the impact of our second-quarter Regulation 146 pool refund and litigation reserve adjustments do affect our corporate and our segment medical loss ratio reporting for the quarter and for the six-month period.

All of the $37.7 million pool refund was recorded as a reduction to reported medical claims. $15 million of the $35 million litigation reserve increase was recorded as an increase to claims liability, with the remaining $20 million recorded as an administrative expense.

And if you want to go to the website, the website points out specifically how these adjustments affect the segments and affect the medical loss ratios.

Excluding these items, the corporate medical loss ratio was 87% for the six-month period, an 80 basis point increase from the prior year.

And for the quarter, it was 87.6%, a 60 basis point increase from the prior year.

After eliminating the impact of pool refunds and litigation adjustments, the core Commercial Managed Care medical loss ratio for the six-month period was 83.4%, a 50 basis point increase from the prior year.

For the quarter, the core Commercial Managed Care medical loss ratio was 83.5%, a 70 basis point improvement over the prior year.

Sequentially, the core commercial Managed Care medical loss ratio increased by 10 basis points.

Our core Managed Care medical loss ratio is stable, and since the fourth quarter of 2004 has been in the range of 83.5 to 84%.

On a year-to-date basis, our premium yield for our core commercial Managed Care book was 8%, while the change in claim costs, PMPM, was 8.9%.

And I want to digress a little bit here.

I want to point out that for the first quarter, we reported premium yield increases of 7.8%, while we reported medical cost trends on a PMPM basis of 10.3%.

I want to remind everybody that last year, we had a switch in claim costs between the first and second quarter, having understated a little bit of the PMPMs for private practitioners in the first quarter, and then having some negative development in the second quarter.

If you adjust all this out, what you are really seeing for this quarter is a premium yield increase of 8% and a medical cost trend increase of 7.5%.

And as the year moves on, these numbers are more in line, are more in our respective line.

On a component basis, we experienced a per member per month claim cost increase for inpatient services of 10.7%, for outpatient services of 12.8% and for physician medical costs of 6.3%.

Drug trend during the period was 10.6% for the six months.

We continue to develop our premium rates, with medical trend in the 11 to 13% range, depending on the product.

And this is always before buy-downs.

Days claim payable -- and a few words about that in prior period development.

As we noted in our press release, we experienced $2.2 million of net positive prior-period development for the quarter for our prospectively rated book of business, and this includes adjustments for the two items mentioned earlier.

Our reported days claims payable was 53.6 days.

Excluding the adjustments, it was 51.6 days in the quarter, which is 1.9 days less than the 53.5 days reported in the first quarter.

This decrease is primarily due to two extra claim processing days in the second quarter compared to the first.

We are pleased that throughout the year, we continue to achieve improvements in our administrative expense ratio, just as you have seen in prior years.

This is achieved through a combination of expense discipline and operating efficiencies.

As reported, our administrative expense ratio for the six months was 15.4%, a 30 basis point reduction from the prior-year six-month period.

Excluding the litigation expense which was charged to administrative expenses of $20 million, our administrative expense ratio for the first half of 2005 is 14.7%, a 100 basis point reduction from the six-month period of 2004.

For the quarter, our administrative expense ratio excluding the litigation charge was 14.2%, an 80 basis point reduction from the prior-year second quarter.

On a premium equivalent basis, our administrative expense ratio continues to show improvement.

Premium equivalents are the sum of premiums -- as you know -- service fees and paid claims attributed to our self-funded business, for which we provide a range of services, including claims administration and membership and billing services.

On a premium equivalent basis, the administrative expense ratio for the first half of this year, excluding the litigation charge, shows a 90 basis point improvement to 8.9% compared to 9.8% for the first half of 2004.

If we look at our taxes, you'll see that our effective tax rate for the quarter was 37.2%.

I continue to urge you to continue using 38% in your model.

The change in the second quarter is the truing-up of our tax estimates versus our filed returns.

And usually it is affected by the range of earnings between our Article 42 and our Article 43 company.

But in the future, 38% is a good rate to use.

Cash flow was strong.

Cash flow from operations for the first six months of 2005 was $241.7 million.

It was $92 million for the quarter, which is pretty much double the second-quarter level of last year.

Total stockholder's equity was $1.84 billion as of the end of the quarter, as of the end of the six-month period, June 30, 2005, an increase of $153.3 million or 9.1% from year end.

WellChoice continues to have no debt on its balance sheet.

As of the end of the second quarter, total investments, cash and cash equivalents at the parent company were $731 million.

I also might add that on July 18th, we received approval to dividend an additional $75 million from our subsidiaries to the parent company.

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 a little earlier today.

Investment income and realized gains increased by $7.4 million for the first half, and totaled $41.5 million compared to last year.

In summarizing the 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 continued to enable us to reduce administrative expenses as a percentage of revenue.

And it is through these strong fundamentals that we believe we are positioned to meet our growth expectations for 2005.

This concludes our review of the second quarter, and I'll talk a little bit about guidance for the balance of the year.

As Mike pointed out, for the full year, we're raising our guidance and now expect earnings per share of $3.37 to $3.43, based on 85 million average diluted shares outstanding.

And this simply recognizes the $0.02 per share that we had this quarter as a combination of Regulation 146 versus litigation costs.

For the third quarter of 2005, we expect earnings per fully-diluted share to be $0.84 to $0.88.

Based on the results of our year to date and the expectations that we will receive the indicated Regulation 146 pool funds during the third quarter, we're raising our operating cash flow guidance from $375 million to approximately $425 million for the year.

With that, I will turn the call back over to Mike for any closing comments.

Thanks, John.

We're ready for questions.

(OPERATOR INSTRUCTIONS).

Matthew Borsch, Goldman Sachs.

If I could just ask with regard to The New York Public Asset Fund and the shares that they hold and the divestiture schedule, can you give us some sense of where you are in planning the offering that you'll need to do prior to November, and any directional thoughts on how much of an offering you might buy back as a company, and how much you might make available for sale?

First of all, we believe that the Fund will and we will be able to sell down to meet the deadlines for the sell-down requirements to 50%.

Second, I really don't want to characterize the conversations with the Fund until and when and if we file the SEC documents for registration.

We will continue to say that, and that's what we have always said in the past.

The only other thing I would add is that in November last year, we had requested to buy back $200 million worth of stock.

On a different topic, as you look ahead and are in the midst of the 2006 national account selling season, can you just give us an update of how it's going, how employers are responding to Blue Card, and anything that seems different this year compared to last year, perhaps with CIGNA back in the marketplace more so than they had been and what impact, if any, that might be having on the intensity of competition?

This is going to be kind of a soft comment, because it's a little early for that.

Although this is the national account selling season, there's still a lot of decisions to be made before the end of the year.

Having said that, I would describe the climate as good.

And we don't see irrational pricing in the marketplace, and I think the reception of the Blue Card, both for us and generally for the Blues, is still quite good.

Josh Raskin, Lehman Brothers.

First question on My Health Record.

I was a little interested to hear a little bit more about that.

How does that sort of work with the doctors?

Can they request that, or does that solicitation have to come from the member?

And I'm just wondering, in terms of going forward from a medical management perspective, how you guys sort of think about integrating that into some of your programs?

I just want to, once again, distinguish between the medical record -- the electronic medical record, which is the information that doctors and hospitals have -- and the personal health record, which is really in control of the individual.

So the information is actually relatively extensive, and it's available to all our members now.

So, having been through my own information, it is surprisingly extensive and well-organized.

But it also means that the member is in total control of it, so they don't have to pull it up and they don't have to forward it, and they can edit it as they wish.

So it is not complete, and we go to great lengths to make sure people understand that it's not complete.

We get about 90% of outpatient labs, for example; it's incorporated into the record, but it's not 100%.

So there was a lot of confidentiality issues that HIPAA has enlightened everybody on and somewhat standardized how you handle this information.

But the real point of this is that it is in the control of the individual consumer.

They are -- and this is not yet, but it will be by the end of the year -- able to then download the record in an organized format, as they wish.

They can also, obviously, print it out in hardcopy.

We also have pilots now with Relay Health, our vendor in the New York marketplace, with selected hospitals, to allow our members to speak online to doctors.

And we pay a fee to the doctor; it's a $20 payment and a $5 copay.

And so the member is able to talk to the doctors online, which is a highly desirable benefit for members, and then also, after conversations or before, download their medical information to the physicians or an emergency room or, frankly, wherever they wish.

I don't know if that answers your question.

Yes.

No, that's helpful.

Yes, absolutely.

If you kind of extend this to consumer-directed healthcare, you can think of people with discretionary money, with information about the quality of doctors and hospitals.

Our Health IQ website program that's available to all our members gives information about hospital quality.

They then have information about their own medical information, which they can distribute at will.

No, that's very helpful, exactly what I was looking for.

My thanks.

Second question, just on the litigation settlement, the 35 million.

What was that related to?

What was the litigation?

I'm going to ask our General Counsel, Linda Tiano, who is here, to answer that.

The litigation reserve was established essentially because several other managed care plans settled the Thomas case as well as the Shane case, which is a similar, almost identical case, including a large Blue plan.

So we, accordingly, think settlement appears more likely, and the amount is essentially consistent with those settlements.

Should we think of this as you guys are getting closer to your own settlement, or is this just based on your size relative to what the other couple of large settlements have been?

This is your best estimate?

I would use the latter.

I can't really comment on the former.

Fair enough.

Scott Fidel, JPMorgan.

I appreciate the comments on Medicare before.

It also looked like your Medicare enrollment growth in the quarter was solid.

I just wanted to get some more color on exactly what is driving that growth, and whether you think that's a good run rate for Medicare growth in the back half of the year, as well.

We're happy with our Medicare growth thus far.

We continue to have a competitive product in the market, both in terms of our benefits, our provider network and our premiums.

We see benefit from having been in the multiple counties in the metro area for a substantial amount of time, and our longevity there has paid off for us.

I think we generally don't speculate on product-specific enrollment going forward, but we are optimistic.

And as I said, we are happy with the product development we have going on in that area.

And then just the second question, just to mention again another specific product, but just in terms of on the small group side, it looked like your small/middle markets increased a bit sequentially.

Just wondering how the progress of the POS product and small group is developing at this point in the market.

We are seeing good success in the small group market, as John said.

That is in part based on our HMO success, and we have continued to see strong progress and growth in the small group market from our HMO product.

The POS is growing according to our plans, and it actually acts as a very good complement to our HMO product.

And then, John, just on that front, I was just thinking about the underwriting performance so far and the cost trends there.

How are you seeing that develop relative to the overall book of business?

Well, we have never talked about the individual profitability of that line, but, as you know, we are a company that stayed in Medicare Plus Choice, Medicare Advantage, throughout the years; we have never withdrawn and gone back in.

And we've learned a long time ago how to make that work well for us.

We are happy with our results.

They are well within our expectations, and POS results have been extremely good.

Charles Boorady, Smith Barney.

The first question is on the New York State contract, just for anything you can tell us about the renewal process, any changes for either the structure or the duration of that contract.

We had a three-year contract which ends at the end of this year.

I would characterize the relationships with the state in terms of this product as good, and we are in negotiation for another three-year contract.

In terms of how that contract might look, anything new they are asking for, or changes to the profit model?

I wouldn't comment on negotiations.

I will say this, and we have said this in the past, that they were converted to a -- they have an out-of-network benefit differential for not all but almost all of the state employees, as of last January, so that is a change that has already taken place.

But other than that, I wouldn't want to characterize the negotiations.

Fair enough.

My second question is on Part D. Can you help us understand what the opportunities and any potential risks in '06, once Part D is implemented, in terms of, for example, your existing retiree enrollment?

Any retirees that are Medicare eligible that might be lost to a competing plan as a result of the rollout of Part D, for example?

Let me comment first as far as what I see, Charles.

We offer Med Sup. plans A, B and H. And H is the only one that offers the prescription drug.

When the drug benefit under Part D is implemented in January 2006, of course, we can no longer sell the standard Med self plans with pharmacy benefits to new subscribers or renew existing subscribers who elect it.

But at the same time, we feel that there is the possibility for some cannibalization; however, we still believe that we have a strong position relative to our competitors.

And retirees with the New York City or State or any of your big corporate accounts?

Are they potentially lost to a competing plan for Part D, or can they potentially be sold Part D by yourselves next year?

Just a couple of comments.

As I mentioned in my earlier comments, we're working with Caremark to introduce a Part D plan in the New York area, so we will have a Part D plan available to our members as well as prospective members, including a group product to go after the group market that may be migrating benefits from traditional retiree benefits to a group Part D product.

And we're actively working on that market.

What is the size of that, Jason, in terms of how many covered lives you have in the corporate and the City/State contracts, just roughly, that would be eligible?

One of the things -- I just want to remind you that the State and City contract is hospital only; we don't currently write drug coverage.

Oh, right.

The corporate accounts, then?

I don't have the retiree population off the top of my head.

Joe France, Banc of America Securities.

You had mentioned in the last call that you're going to offer Part D coverage to your local PPO members, as I understand, the Medicare members.

Do you ever -- I can't find it.

Have you ever indicated what the cost would be for that, and if that is included in the guidance?

We have filed both our PPO and HMO for next year with Part D coverage, as well as without Part D coverage.

It's built into our filing, and part of the benefits and premium expectations.

I know from listening to the other calls that there has been a couple of mentions about large startup costs;

I recollect $70 million and $30 million.

I hope yours is less than that.

-- for two of our national competitors.

And our plan is under statewide plans; we have it built into our projections, but it's like insignificant.

It's nowhere near of any significant amount of money.

If I'm doing the math right, to get to the midpoint of your range on your enrollment guidance, you need to pick up another 50,000 or 60,000 lives over the balance of the year.

What percentage of your business renews in July and then in the fourth quarter?

We don't have a big concentration, because we have a large middle market group, but our renewal percentage -- and we've gone through this a little bit before.

First quarter it's 28.8%, second quarter is 27.4%, third quarter is 22.1 and fourth quarter is 28.8.

And I'll just remind you how Mike opened up the meeting -- Suffolk announced that they are coming with us.

And it's still unclear whether that is going to be a November date or a January 1 date.

Did you say how many lives that is?

That was about 45,000 lives.

That's great.

Ed Kroll, S.G. Cowen.

My question is on the revenue, the premium revenue for Q2 as compared to Q1.

I mean, you had essentially the same enrollment and about 100 million more in premium revenue.

Is that a mix shift, product mix shift?

Can we just get a little color on that?

No, that’s the City and State accounts.

As you know, the City and State hospital accounts claims also go into premium, so any large variation in that will affect the premiums quarter over quarter.

But all the profitability and all the numbers have stayed within our guidance, our forecast.

I'm sorry;

I am still not following that.

What is the difference between the two quarters?

Well, basically, claims.

If you have a spike, if you have an increase in City and State account hospital claims, that will go into premiums.

I got it.

Now, the way those accounts work, it doesn't matter for profitability, because they are fixed retention contracts.

So whether -- they are not responsive to losses; they are not loss-sensitive.

The fees and the profit percentage or the profit numbers stays the same.

But shifts in claims in those hospital-only accounts also cause shifts in revenue.

And that's what you see in the first and second quarter.

John Rex, Bear Stearns.

First, just on the component cost trends, I just wanted to see if the trends you gave -- is that an apples-to-apples comparison, in terms of the period you're using with what we had last quarter?

I think you said this was the six months to date, and I'm trying to figure out how I can compare it to kind of the four component trends you gave last quarter?

John, all the trends bounce around quarter to quarter.

As the year goes on, they obviously do.

But also, the medical cost trends on a PMPM basis are year over year.

So consequently, what happens is when you're comparing PMPMs, any adjustments you had last year will affect, obviously affect the denominator.

So what I tried to remind everybody of last year is we had some negative PPD in the second quarter relating to the primary care physicians, whereas it looked a little low in the first quarter.

So on a quarter-to-quarter basis, it bounces around.

But we feel good about the six-month numbers.

For example, when you adjust them for the Regulation146 pool stuff that we talked about, we are saying pretty much 10% adjusted trend in the second quarter versus like a 10.3% trend in the first quarter.

Very stable.

Very stable.

So just on those components, last quarter -- what I was trying to get at here was you said these were six-month-to-date trends.

Were the trends you gave last quarter for just three months?

Yes, they were just three months.

The only significant difference I will point out that we have noticed that changes a little bit is in drugs, we have mostly seen increases, and we reported 10.6% for that, driven by costs.

This quarter, we saw a little bit uptick in utilization.

I'm not sure what that means yet, but it's about 1.9% of it coming from utilization.

We'll just keep our eye on that.

And then, the other change, the inpatient looked like it was up in the quarter, if we went from a three-month to the six-month.

It must have been up fairly sharply, and outpatient must have been down pretty sharply in the quarter, going from three to six months.

Is that correct?

That is correct.

But nothing unusual?

Just your normal bouncing?

No, just normal seasonality.

And then the next question, just on the Suffolk County account, I take it that is going to be a self-funded account?

Is that correct?

Yes.

And then, on your investment income, I think you noted in the Q there was $3 million there on gain from your investment in ActiveHealth.

Yes, $2.5 million.

So is the run rate a good run rate?

Do you have more gains, I should say, like that?

Or should we expect that to bounce down a bit in the 3Q?

No, it's not going to bounce down.

We had a $2.5 million gain on our share of the sale of ActiveHealth Management to Aetna.

Otherwise, if you look at last year, interest rates are up, you see a 78 basis point increase in the yield.

And that's a combination of higher interest rates and just a stronger cash position.

And that was true in the first quarter, and I mentioned the first quarter, but if you guys go back a year, we have excess cash on hand about a year ago when we were negotiating with Oxford.

Okay?

So all that stuff has been redeployed and now fully invested, and you're just seeing the result from that.

So looking at -- just adjust for the $2.5 million, you have got a good run rate there.

So that $23.1 million is a good run rate jumping off for 3Q/4Q?

Yes. very good.

And just the last thing on your litigation settlement.

Had you set up any reserves prior to this?

Is this adding or is this all new?

It's all new.

So you had not set up any reserves for this piece of litigation prior, at all?

No.

As Linda point out, we felt that we had a good case here, but with the settlements going on by the other carriers who gave in, once that starts, it's very hard not to put up the reserve.

Lennox Ketner, CSFB.

I have just one question on enrollment, and I'm sorry if I missed it.

But I was just wondering, since membership is a little bit soft in the large group and national accounts this quarter, which is usually a really strong area for you guys, is that purely due to the loss of that retiree account, or are you guys seeing anything else there?

Membership in national accounts, usually January and July.

I think our membership is doing well.

The only difference in the membership is in the first quarter, we reported that we had given up an 80,000 life case, which is a retiree program in national accounts, primarily because of pricing.

And as I pointed out in the first quarter, that was priced in our plan.

It didn't have a financial impact because we priced it to break even.

The customer wanted us to lose money on it, and we said no.

So we lost that.

It had no impact on our financial projection, but it did impact the membership, obviously.

But that you have taken in the first quarter, right?

Yes, and that's why I say excluding that, we're pleased with the way things are going.

Charles Boorady.

Looking at 2006, can you give us any preliminary views in terms of targets for the customer growth or earnings growth?

The only thing I know, Charles, about 2006 is that we are five months away.

I've got a lot of time to do my projections.

But no, we don't have anything to give out on that yet.

It's too early.

At this time, there are no further questions.

Do you have any closing remarks?

No.

We will end the call, then.

Thank you very much.

This concludes today's WellChoice second-quarter earnings conference call.

You may now disconnect.