Elevance Health Inc (ELV) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WellPoint conference call.

At this time all lines are in a listen-only mode.

Later there will be a question-and-answer session.

Instructions will be given at that time.

(Operator instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Company's management.

Good morning and welcome to WellPoint's first quarter earnings conference call.

I am Michael Kleinman, Vice President of Investor Relations.

With me this morning are Angela Braly, our President and Chief Executive Officer; and Wayne DeVeydt, Executive Vice President and Chief Financial Officer.

Angela will begin this morning's call with an overview of our first quarter results, actions and accomplishments.

Wayne will then offer a detailed review of our first-quarter financial performance and current guidance, which will be followed by a question-and-answer session.

Ken Goulet, Executive Vice President and President of our Commercial Business; Dijuana Lewis, Executive Vice President and President of Comprehensive Health Solutions; and Brian Sassi, Executive Vice President and President of our Consumer Business, are available to participate in the question-and-answer session.

This call will contain certain non-GAAP amounts.

A reconciliation of these non-GAAP amounts to the most directly comparable measures calculated in accordance with GAAP is available on the investor information page of our Company web site at www.WellPoint.com.

We will be making some forward-looking statements on this call.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in our press release this morning and in our quarterly and annual filings with the SEC.

I will now turn the call over to Angela.

Thank you, Michael, and good morning.

Today we announced first quarter 2009 net income of $580 million, or $1.16 per share.

This included net realized investment losses of $228 million after tax or $0.46 per diluted share.

Net income in the first quarter of 2008 was $588 million or $1.07 per share, which included net realized investment losses of $0.06 per share.

First quarter 2009 earnings per share increased by 8% on a GAAP basis.

On an adjusted basis excluding the investment losses in each period, earnings per share increased by 43% from $1.13 in the first quarter of '08 to $1.62 in the first quarter of '09.

Our first quarter was solid in light of the current economy, and it is clear that the performance improvement initiatives we put into place last year are having positive results.

Strategic enhancements to our Senior business and successful actions to improve visibility into claims level and medical costs have contributed to an improvement in our operating results despite a decline in membership.

At March 31, 2009 our medical enrollment totaled 34.6 million members, a decrease of 814,000 or 2.3% from March 31, 2008.

Enrollment declined by 490,000 in the first quarter of 2009, which was in line with our expectation for total membership, but we lost more fully insured business than we expected.

The decline in fully insured membership occurred primarily in the employer-based businesses, which is a reflection of the economic downturn.

The marketplace remains competitive but generally rational in most of our service areas, and we are seeing signs of firmer pricing from certain competitors.

We will remain disciplined in our pricing and currently have a number of strategies in place to enhance fully insured enrollment in a sustainable, long-term manner.

While our customer retention levels remain strong at nearly 85% for fully insured business, we continued to experience historically high levels of negative in-group change in the first quarter.

Self-funded and fully insured sales were strong, even while we maintained pricing discipline, but negative in-group change was approximately 200,000 for fully insured business.

We have been tracking layoffs in larger accounts and have implemented a program to gain clarity on in-group change by researching why members in all group sizes are leaving their group coverage.

In addition to layoffs, we have been evaluating the impact of reductions in hours, higher employee contribution requirements and other contributing factors.

We are also learning where these members are going so that we can attract and retain a greater share of these individuals with the products that meet their needs.

To improve individual membership retention, we are expanding our successful health plan advisor's program across the nation.

Through this program, a team of licensed professionals intervenes when a member contacts customer service to explore their coverage options.

We offer a wide variety of plan designs and price points in all of our service areas, and we are dedicated to working with our members to find the plans that most appropriately match their needs from both a care and value perspective.

Our experience shows that after consulting with one of our health plan advisors, 90% of members commit to staying with WellPoint, and more than half of those members choose to remain in their current plan, as they then know more about the value their existing plan provides.

We also continue to introduce new product designs in targeted markets.

In March we introduced our SmartSense and Premier health plans in Ohio and Wisconsin.

SmartSense is a price-conscious, choice-driven option for individuals, the uninsured and for those who may have lost their jobs and find that the COBRA coverage that's available to them does not meet their needs.

The Premier plan is designed for customers who want the security of a more comprehensive benefit design with lower out-of-pocket costs and is a popular choice for families with children or those planning to have children.

Both SmartSense and Premier offer coverage for office visits before having to meet a deductible, a number of preventative benefits and choices of different prescription drug coverage options.

We're launching products in Georgia this year priced to reflect the significant savings we'll get from our recent network re-contracting that will significantly enhance our competitive position.

Likewise, in Virginia, we have already launched a new consumer-directed health product using our HMO network to offer additional savings to members.

We're also piloting new individual products geared toward early retirees in Ohio, Indiana and Missouri.

We see the early retiree market as a growth opportunity for our individual segment as well as a pipeline for future sales of our senior products.

We continue to sell new policies to those who were previously uninsured.

During the first quarter, an estimated 73,000 individuals who chose one of our health plans were previously uninsured.

This continues our achievements in covering previously uninsured individuals and families and follows the success we had in 2008, when an estimated 349,000 previously uninsured individuals joined WellPoint.

Membership in state-sponsored programs is trending higher than our original plans, which we believe is also a reflection of the economy.

Given first-quarter results and based on the favorable impact that we expect economic stimulus package to have on Medicaid enrollment, we have increased our outlook for state-sponsored membership, which is partially offsetting the decline we are experiencing in the employer-based risk business.

Self-funded membership increased during the first quarter and is slightly ahead of our expectations.

We added over 400,000 members in our national business, including 314,000 national account control or home lives.

This is an indication that our value propositions remain market-leading with the industry's broadest provider network, attractive discounts, high-quality customer service and effective medical management programs.

We expect continued success with large self-funded customers going forward.

We recently reached a multi-year agreement to continue serving as the primary insurance health carrier for more than 220,000 Commonwealth of Virginia members, and we will be adding Blue View Vision coverage to this account beginning July 1, 2009.

We are also in the midst of a very active 2010 national account selling season.

We are bidding on more cases this year than we did for 2009, and the groups have a larger average employee population.

We believe our strong value propositions should position us well for the 2010 selling season.

Operating revenue totaled $15.3 billion in the first quarter of '09, a small decrease of 0.4% from the first quarter of '08.

The decline reflected the impact of lower fully insured enrollment offset by disciplined pricing across all medical lines of business and increased reimbursement in the federal employee program.

We continue to price business for a slight increase in medical cost trends this year, and premium yields are running in line with our expectations.

The benefit-expense ratio was 81.6% in the first quarter of 2009, a decline of 350 basis points from 85.1% in the prior-year quarter.

The decrease was driven primarily by the senior and Local Group businesses.

We implemented changes to our Medicare Advantage product portfolio for 2009, which, along with operational improvements in other Medicare product categories, positively impacted senior business results.

The Local Group benefit expense ratio declined, primarily due to disciplined pricing and a higher level of favorable reserve development.

Due to reserve strengthening in the first quarter of 2008 and service improvement over the past 12 months that are reflected in lower claims inventory levels, prior-year reserve development in the first quarter of last year was lower than in the first quarter of 2009.

In fact, medical claims reserves established at December 31, 2008 developed as expected in the first quarter and were reestablished with a comparable level of conservatism at March 31, 2009.

We believe we have significantly enhanced our insight into medical costs and trends as a result of the process improvement and claims inventory reduction activities we initiated early in 2008.

Our claims inventory levels have continued to trend downward this year, declining by nearly 6% since year end 2008.

We also continue to find more effective and efficient ways to improve the quality and affordability of health care for our members.

We look forward to our new strategic alliance with Express Scripts, which will allow us to deliver even more cost-effective and state-of-the-art pharmacy services to the marketplace.

In addition to better negotiated pricing that, over time, will result in greater savings for our members, Express Scripts' approach to the consumer through focused communication and enhanced tools will help members better understand generic options, mail order availability and co-pays, all of which can help drive lower out-of-pocket costs and improve quality.

This relationship will strengthen and accelerate our ability to execute on our integrated health benefits model, which will provide medical and pharmacy benefits seamlessly to our members.

We will maintain control and management of drug formularies and we'll have access to all data necessary for appropriate benefits modeling and product pricing to effectively manage overall health care costs.

While we expect the sale of our NextRx subsidiary to Express Scripts to close in the second half of 2009, we have not reflected this transaction in any of our guidance measures for 2009.

In another transaction designed to bring new and better services to our integrated benefits model, I am pleased to announce that we completed our acquisition of DeCare Dental earlier this month.

DeCare is one of the country's largest administrators of dental benefit plans, serving 4 million people and 22,000 employer groups.

The acquisition of DeCare enhances our ability to offer industry-leading dental products that balance affordability and access, drawing upon DeCare's expertise in dental analytics and operations to further integrate dental and medical benefits.

With this acquisition, WellPoint now manages dental benefits for more than 8 million people and has one of the nation's largest dental PPO networks.

We continue to refine our product portfolio and service offerings both organically and through best-in-class strategic transactions to meet the diverse array of demands in the marketplace.

As our nation debates how to best reform the health care system, it is imperative that we continue to foster the choice, flexibility and innovation that American consumers embrace.

Our leadership team is actively involved in this important dialogue, and we bring extensive experience and data to these discussions as a result of our strong legacy as a Blue Cross and Blue Shield plan and a health benefits leader.

We are advocating for responsible and sustainable health care reform that is designed to improve the quality and safety of medical care while addressing costs and increasing access to care for all Americans.

For 2009 our original plan anticipated overall employment declines in our key states with unemployment reaching double-digit levels by year end.

Employment data has since shown a steeper decline in overall employment in the first quarter, yet many economists project that employment levels will stabilize and the trend will become flatter for the remainder of the year.

Although the current economy is difficult and will continue to present challenges, we are cautiously optimistic, given the strides we have made as an organization over the past 12 months.

We have successfully executed on many performance improvement items, and these efforts are paying off, as demonstrated in our solid and vastly improved first-quarter performance.

We continue to take actions to make our products more attractive and create more value for our customers and shareholders.

As reported in our press release, our share repurchase program resulted in the repurchase of 17.7 million shares of our common stock for $681 million.

Given that we are performing better than we originally planned, particularly in capital management areas, we now expect full-year GAAP earnings per share to be in the range of $5.14 to $5.20, which includes $0.46 per share of net realized investment losses from the first quarter.

I will now turn the call over to Wayne DeVeydt for a more detailed discussion of our first quarter 2009 financials and outlook for the year.

Thank you, Angela, and good morning.

I also agree that we had a solid first quarter of 2009.

Premium revenue totaled $14.2 billion in the quarter, down just slightly from the first quarter of 2008, as fully insured membership declines were essentially offset by premium rate increases in all of our medical lines of business and increased reimbursement in the FEP program.

As Angela noted, we are maintaining discipline in a competitive and difficult economic environment and are pricing for a small increase in medical cost trends this year.

Premium yields and benefit buy-downs are tracking in line with our expectations.

We have seen a slight increase in buy-downs in the small group in large group segments, but no significant change in the individual market.

Administrative fees were $942 million in the quarter, a decline of $28 million or 3% when compared to the first quarter of 2008, primarily due to lower revenues in our BlueCard and National Government Services businesses.

This was partially offset by membership growth in the self-funded national accounts segment.

The benefit-expense ratio was 81.6% in the first quarter of 2009, a decline of 350 basis points from 85.1% in the prior-year quarter.

The decline resulted principally from disciplined pricing, operational improvements, including market-leading care management programs and higher levels of favorable reserve development in the senior and Local Group businesses.

We expect the benefit-expense ratio to increase for the last nine months of 2009 relative to the first quarter, primarily due to the benefit designs in our Commercial business, where more members satisfied their deductible limits as we progressed through the year.

We continue to experience a shift in seasonality reflecting the growing popularity of consumer-driven health plans and high deductible products.

Our CDHP enrollment increased by 242,000 or 14% in the first quarter alone and exceeded 2 million members as of March 31, 2009.

While the economy is impacting our fully insured enrollment levels, it does not appear to be negatively impacting the risk profile of our membership base.

The comparison of active to cancelled benefit expense ratios remains favorable across our small and large group businesses, which indicates that we are appropriately pricing our business for the risk we are taking.

For full year 2009 we continue to project that underlying Local Group fully insured medical cost trends will increase slightly from 2008 but remain within the range of 8%, plus or minus 50 basis points.

Unit cost increases continue to be the primary driver of medical cost trends.

We continue to price our business so that expected premium yield exceeds total cost trend where total cost trend includes medical cost in selling, general and administrative expense.

Inpatient hospital trend is in the low double-digit range and is almost all related to increases in cost per admission.

Unit costs are rising due to an elevated average case acuity and higher negotiated rate increases with hospitals.

Re-contracting, clinical management efforts and monitoring hospital coding practices are methods we are using to mitigate the inpatient trend increases.

Key efforts in managing unit cost trends include our enterprise-wide enhanced 360 Degree Health care management programs, more focused review of high-cost admissions and programs targeted at reducing the free hospitalizations.

Cost trends for outpatient services are in the low double-digit range and are about 75% unit cost driven and 25% utilization.

Outpatient costs are a collection of different types of expenses such as outpatient facilities, labs, x-rays, emergency room and occupational and physical therapy.

Outpatient cost increases are primarily driven by higher per-visit cost.

Price increases within certain provider contracts as well as more procedures being performed during each visit, particularly emergency room visits, continue to apply upward pressure on per-visit costs.

We are continuing to develop plan designs and medical management programs to encourage appropriate utilization of outpatient services, and we are seeing the positive impact of expanding radiology management services to our American Imaging Management, or AIM subsidiary.

We are also expanding AIM's technology to nuclear cardiology management.

Physician services trend is in the mid-single digit range and is about 50% unit cost driven and 50% utilization.

Increases in the physician care category are partially driven by fee schedule changes.

We continue to collaborate with physicians to improve quality of care through pay for performance programs.

Pharmacy trend is in the mid-single digit range and is 70% unit cost related and 30% utilization driven, the increased use of specialty drugs as a primary driver of the higher unit cost trend.

Specialty drugs, also known as biotech drugs, are generally higher cost and are being utilized more frequently.

We are addressing pharmacy cost trends by increasing our generic usage rates, adjusting benefit plan designs, improving pharmaceutical contracting and implementing specialty pharmacy management programs.

We also expect that our new strategic alliance with Express Scripts will positively impact our pharmacy cost trends in 2010 and beyond.

Our selling, general and administrative, or SG&A expense ratio, was 15.5% in the first quarter of 2009, an increase of 90 basis points from 14.6% in the first quarter of 2008.

The increase is predominantly related to the reestablishment of incentive compensation accruals this year, as we are performing in line with our operating plans.

Our first-quarter SG&A expense was also unfavorably impacted by assessments related to the New York State deficit reduction plan.

While most of these costs will be recovered over the balance of 2009 through premium rate adjustments or lower state income taxes, we have raised our full-year SG&A expense ratio as a result of this.

Turning now to our segments, operating gain in the Commercial segment was $903 million, a decline of less than 1% compared with the first quarter of 2008.

The decrease reflected the impact of higher SG&A expenses and lower fully insured members, which were substantially offset by a decline in the benefit expense ratio due to disciplined pricing and a higher level of payroll reserve development in 2009.

Operating gain in the Consumer segment reached $219 million in the first quarter of 2009, an increase of $339 million compared with an operating loss of $120 million in the prior year quarter.

The performance improvement was driven primarily by the senior business due to product portfolio changes, disciplined pricing and a higher level of favorable reserve development in 2009.

Operating gain in the Other segment increased by 19% to $112 million in the first quarter of 2009, primarily due to improved results on our NextRx PBM operation, reflecting the transfer of approximately 1 million members in New York to NextRx from an outside vendor, effective January 1, 2009.

Net investment income decreased by $36 million or 15% from the first quarter of 2008 to $197 million in the first quarter of 2009, primarily due to reduced investment balances and lower yields on short-term investments.

In the first quarter of 2009, we realized after-tax investment losses of $228 million consisting of other than temporary impairments of equity securities and fixed maturity securities totaling $110 million and $87 million, respectively, and realized losses of $31 million, resulting primarily from sale of securities.

At March 31, 2009, we had a fixed maturity and equity securities that were in pre-tax net unrealized loss position of $385 million and $146 million, respectively.

We continue to review our investment portfolio under our conservative policy.

Given the current market conditions and the significant judgments involved, there is a continuing risk that further declines in fair value may occur, and additional material other than temporary impairments may be recorded in future periods.

Turning now to our claims reserves, medical claims payable were $6.2 billion at March 31, 2009, essentially flat compared to December 31, 2008, while fully insured membership and claim inventories declined during the quarter.

Days in claims payable was 47.9 days as of March 31, 2009, a 0.2 day increase from 47.7 days at December 31, 2008.

The increase in DCP was driven primarily by lower benefit expense per day in the first quarter of 2009.

Consistent with our historical practice, we have not included a roll-forward schedule of medical claims payable reserves in our first-quarter press release.

In the first quarter of 2009 we again experienced significant favorable prior-year reserve development.

The level of favorable development was higher in the first quarter of 2008, as the prior year results included significant reserve strengthening.

We did not need to strengthen reserves in the first quarter of 2009, as our December 31, 2008 claims liability developed as expected.

As of March 31, 2009, we have reestablished medical claim reserves at a comparable level of conservatism to that reflected in our December 31, 2008 balance sheet, as evidenced by the small increase in DCP and sequentially flat medical claims payable balance.

We continued to establish reserves in a consistent conservative manner, and we plan to provide a roll-forward schedule in our second-quarter press release as we historically have done.

Operating cash flow from the three months ended March 31, 2009 was $1.2 billion, which was in line with our expectations for the quarter.

We remain comfortable with our full-year guidance of at least $3 billion.

As a reminder, operating cash flow in the second quarter is usually our lowest cash flow quarter of the year, due to making two estimated federal income tax payments in the quarter.

As of March 31, 2009, we had approximately $1 billion of cash and investments held at the parent company and available for general corporate use.

During the quarter we issued $1 billion of senior notes on favorable terms, effectively pre-funding expected 2009 debt maturity.

From cash on hand we repurchased 17.7 million shares of our common stock for $681 million at an average price of $38.55 per share.

We expect a dividend of approximately $2.4 billion from the subsidiaries to the parent company over the balance of this year.

At March 31, 2009 our debt to cap ratio was 30.3%, an increase from 29.2% at year-end 2008 due to our senior debt issuance.

During the quarter we paid down approximately $200 million of debt that was expected to come due later this year, and we also reduced our commercial paper balances, leaving $625 million outstanding under our CP program at March 31, 2009.

We have approximately $700 million of debt maturities expected to come due in the second half of this year, which we expect to fund from cash on hand.

During the quarter, the Board of Directors increased the share repurchase authorization and we had approximately $1.8 billion of the authorization remaining as of March 31, 2009.

We expect to continue share repurchases subject to market conditions and in connection with the sale of our NextRx subsidiaries to Express Scripts.

Our share repurchase program reflects our belief that our stock is undervalued based upon the Company's fundamentally strong financial position with predictable cash flow from operations.

We do very much look forward to our strategic alliance with Express Scripts and believe that the transaction will generate significant benefits to both customers and shareholders.

Turning now to our updated outlook for 2009, which, again, assumes no impact from the Express Scripts transaction, in summary, we remain comfortable with our assumptions around core operating performance in 2009 and now expect better results in some of the capital management areas.

Specifically, we now expect year-end 2009 medical enrollment to be $33.9 million including $18.5 million self-funded customers and $15.4 million fully insured.

Operating revenues totaled approximately $61.2 billion.

The benefit expense ratio to be approximately 82.7%, the SG&A expense ratio to be approximately 15.6%.

Earnings per share are now expected to be in the range of $5.14 to $5.20 on a GAAP basis, which includes the $0.46 of net realized investment losses from the first quarter.

It does not include any future realized investment gains or losses.

And, operating cash flow is still expected to exceed $3 billion for the full year of 2009.

We are very pleased at the operational improvements we have achieved over the past year and the strategic actions we have taken so far in 2009 are improving the consumer experience and enhancing customer and shareholder value.

I will now turn the conference call back over to Angela to lead the question and answer session.

Operator, please open the queue for questions.

Josh Raskin, Barclays Capital.

Question just relates to the high deductible health plans, I guess, in this new world that we are speaking about.

Can you give us some statistics around what is the average deductible for your membership in '09 versus '08, and how many members are in plans with -- I don't know, pick a number -- if it's $500 or a $1000 deductible?

Josh, thanks for that question.

We know that the consumer directed health plans and these high deductible plans have been very popular, and you are seeing some more of the seasonality in our results you will see throughout the year because of this consumer directed plans and high deductibles.

So I'm going to turn it over to Ken to talk a little bit about what we are seeing in the market place.

First, Josh, as you stated, there is a lot more popularity.

Our CDHP membership was up 242,000 in the first quarter of 2009, or 14%, and it brought our overall CDHP membership to 2 million members.

We are seeing high deductible plans on both the CDHP plans and on our general programs.

Our PPO products have much higher deductibles across the board, and as buy-downs occur amongst our membership, many of the by-downs are in the deductible areas.

The average -- and I do not have the specifics with me, and we would need to get back to you, but the average deductibles of many of our small group plans are well over $1000 now, and it has changed significantly in the last couple of years, which is what impacts the seasonality of our program.

I guess, maybe let me try and ask it a different way.

The seasonality that we are seeing in terms of your guidance now this year is sort of unprecedented and massively different than anything we've seen since Anthem went public in '01 or WellPoint even back into the early '90s.

So the question is, this really wasn't mentioned previously, it didn't come up at the investor day February 24.

And while we clearly missed this trend, we are just trying to size it.

And if you are telling me that consumer-directed health plan membership was up 14% and that's 200,000 lives, I just can't understand how that's a 350 basis point impact on the MLR.

And I understand there was reserve boosting, etc.

So just any sort of numbers that you could give us to help corroborate why the seasonality is occurring so dramatically, I think, would be very helpful.

I'm going to cover a couple of things that you have in that question.

In the fourth quarter of '08, adjusted EPS was lower than in the third quarter, due to the seasonality.

And so we are expecting a similar pattern this year.

It's evolving as that CDHP and high deductible membership goes up and now 2 million members.

But on the reserve question specifically, I'm going to address that head-on.

It's a really important question.

The reserve releases did not significantly contribute to our first-quarter net income.

We've talked about, throughout this discussion, that throughout 2008 we strengthened reserves, and we did that as we regained clarity into the medical trends and we've reduced inventories and improved our processes throughout.

So when we looked at first quarter of '09, it did reflect a higher level of favorable development when we compared it to the first quarter of '08.

And we reestablished these reserves in hour 3/31/09 balance sheet, and we did so because we did it at a comparable level and we continue to book reserves on a consistent and conservative manner.

So I wanted to address that reserve question because I know it's a part of it.

But in terms of the seasonality, we will continue to reflect, I think, as the CDHP membership continues to grow, that seasonality.

There's a slight counter-effect of the senior business there, but we are seeing the CDHP impact much greater.

I apologize if I insinuated that the reserves had anything on income.

I understand that that in fact sort of strengthens the seasonality to these high deductible health plans.

I'm just still struggling with how they could go up by 200,000 lives and cause such a big differential in the seasonality.

Is it even remotely possible that the weak economy is reducing utilization patterns?

Josh, at this point I would say it's too early to call that.

What I would tell you is that we are clearly not seeing a spike in utilization patterns at this point in time.

But I would also tell you that I wouldn't at any point declare right now that we have an expectation it's coming down.

We are cautiously optimistic for the year.

And while we don't give quarterly guidance, I want to ensure people recognize, we are running this business for the long term, managing it for the long-term.

I think where the biggest paradigm shift is occurring is between the first and the fourth quarter.

And that's probably the best way for me to help you in terms of understanding where that's happening over time in terms of where consensus maybe was at versus where it would be at over the longer term.

So most of that shift is really a first versus fourth quarter and really is the dynamic of the high deductibles.

But right now, Josh, we are not assuming any upside in our guidance for lower utilization, and I do think it's too early to call at this point.

And, Josh, back to the first quarter of '08, remember we did have to significantly strengthen reserves for that quarter.

And so, just looking at that 350 BPS is a reflection more of what happened in '08.

Matthew Borsch, Goldman Sachs.

I'd like to continue along the same theme of questioning.

Looking at the back nine, your outlook for the back nine months of the year, unless I'm missing something, it looks like you're actually pointing to a comparable MCR for the back nine months because it was about 83.1 for the back nine months of 2008, and that seems to be about what you are guiding to for the back nine months of 2009.

But the guidance also implies your pre-tax income for the back nine months would be down maybe 10% year-over-year.

I think I'm missing something in the equation here, but just hoping you can help me out on this.

Well, let me say first, and then I'll ask Wayne to help me here, clearly we are performing better than we planned in the quarter.

But given that it's early in the year and the uncertainty in the economy, we are reluctant to bring too much of that confidence forward.

But we are cautiously optimistic that we are going to see some stability and that's going to be reflected in the nine months.

And you're right to say we are fairly consistent.

Wayne, do you want to be more specific than that?

Yes.

And the other thing I would just say, Matt, as Angela reiterated, we are maintaining reserves in a consistent and comparable level that we've had, and we have not made any assumptions for any positive development that may come through relative to that full-year guidance or relative to that MLR.

So that would be upside.

If the patterns continue that we've seen on March 31, it is very fair to say that we've had a very good experience in our reserve development really since the first quarter of last year, but we continue to maintain that high level of conservatism.

So, that being said as well, I think if you're looking at taking the first quarter, I think you have to bake in seasonality.

But I also think you have to recognize that we would prefer to maintain a cautious optimistic look at this point and hold our high end of the guidance range until we get further detail in the next quarter.

And then, in addition, we are assuming that fully insured will continue to decline at a faster pace than we originally assumed at this point.

So again, we feel pretty good.

We clearly had it beat relative to plan, which is part of the reason we've raised the low end of the range.

But we'd like to remain cautiously optimistic for the remainder of the year.

Charles Boorady, Citi.

In terms of the shift to high deductible plans, and I understand that the reality is it's a lot less binary than just a set of lives moving from one product to another, and there's more of a continuum of rising deductibles, rising out-of-pocket.

So maybe to get a better sense for that, can you perhaps tell us what the PMPM trend has been when you look at your overall commercial book, as we don't have the commercial premiums?

But just give us a rough sense.

Are the PMPM's growing, shrinking, and approximately by how much?

Obviously, Charles, we don't typically provide that level of granularity, for competitive reasons.

I will tell you that PMPM's are growing, and the premiums and buy-DOWNS are in line with our expectations at this point in time.

Are you able to quantify single-digits growth, mid-single-digits growth, just to that level of granularity on your commercial book alone?

It's more mid, Charles.

And in terms of the loss ratio changes, just given the wide swing -- and I know you also don't provide loss ratio by product.

But just help us understand what was the really big shift from last year to this year.

Can you characterize the directional changes in the commercial and Medicare Advantage books, in particular?

I think we should talk about the real turnarounds that we experienced in the senior business.

And Brian Sassi is here with us, so I'd love for Brian to comment on that.

As you are aware, we have made significant investments over the last year in our senior area to address our infrastructural needs, as well as in the Medicare Advantage lines, we did strengthen our bid last year as well as make some product changes.

So all of those investments are having a very positive impact on year-over-year performance for Medicare Advantage, as well as the infrastructure enhancements are actually helping all of our Medicare lines of business.

So we are seeing year-over-year improvement in Medicare Supplement, which is about two-thirds of our membership, Medicare Advantage and Part D.

So that is helping to contribute to more favorable loss ratios.

And if we exclude all prior period developments from first quarter '08 and first quarter '09, did the commercial loss ratio get better or worse?

The answer is, it obviously improved.

I think one thing that's difficult for investors to see is when you look at the segment reporting of the Commercial segment, it looks essentially flat year-over-year when you look at operating gain.

However, I want to emphasize a couple of points.

Keep in mind that fully insured membership has in fact declined, yet we were able to maintain that level of operating gain.

In addition, this year with the New York State assessment that Angela spoke about, there also was a premium tax assessment.

And essentially, for WellPoint, it ended up being a net neutral for us for the year.

But what it did do is it moved costs into a premium tax line, which now affects our operating gain from a segment reporting perspective.

But the benefit of that is below the line, in the effective rate.

So while to the total Company it's essentially flat, it makes it look year-over-year as if we didn't have improvement in the commercial book, and that is in fact not the case.

We had significant improvement in the book despite the decrease in fully insured membership and covering that as well, as well as the incentive compensation for our employees is also being covered within those numbers year-over-year.

On the federal employees, plan, was that a one-timer, or is that going to continue?

And can you roughly size it for us?

I'm sorry, Charles?

In terms of the federal employees plan?

Yes.

There was a benefit in the quarter from higher reimbursement, or something to that extent.

Yes, it's just a pass-through, though, so it doesn't ultimately impact our bottom line because essentially it's a cost plus program.

It's more of a one-time true-up, but it's essentially just a pass-through.

So bottom line, no impact.

Christine Arnold, Cowen.

I'm trying to understand what the underlying MLR looked like year-over-year.

And understand, I was a little out of the loop for awhile.

But if I subtract $120 million last year of negative development out of the first-quarter loss ratio, I kind of get 84.3 versus 81.6 now.

And at those comparable levels of reserve conservatism because you upped the reserves last year, then that implies significant improvement.

And even if the seasonality gets worse, you are still at like a 300-basis-point improvement.

How much of your expected MLR increase the rest of the year is COBRA, negative selection and -- versus these high deductible health plans?

Because I'm just confused.

Let's try to address some of those things, Christine.

In terms of COBRA, even with the COBRA subsidies, we aren't really saying that that's going to have a big impact for 2009.

In terms of where we are with reserves, I'll go back to my first statement.

We did significantly strengthen reserves in the first quarter of '08.

You referred to $120 million.

I think it was north of that, really, in establishing -- and we have, given the uncertainty in the economy, particularly over the last six months, we are conservatively re-establishing reserves at that comparable continuous level that we saw through the last three quarters of '08 through the first quarter.

So there is a fair amount of the seasonality that we've described in terms of the consumer directed and high deductible health plan.

Wayne, do you want to add to that?

Yes, thanks Angela.

The other thing I would just highlight is, keep in mind, a lot of the improvement, as well, though, is the exiting of some of the enhanced plans within our senior products.

As you recall, those are items that obviously won't continue the run rate because we obviously put a lot of medical management initiatives throughout the year last year, once we identified those, what was driving some of the adverse behavior.

And we're trying to drive down some of those costs.

But essentially, those programs have been eliminated.

We took those products off the market completely, and that is part of the big reason we are seeing a huge improvement in the MLR this quarter as well.

(multiple speakers) feeling good about the active and canceled loss ratios.

We feel good about the decisions we made in senior.

In retrospect, as we look at what has come through from a reserving point of view, we did believe we made the right decisions there, and it's being reflected in our results.

But I guess, even if you put $200 million and you take it out of the first quarter '08 for reserve strengthening, you still improve the MLR 200 basis points year-over-year.

And you are saying you are not going to hold that; that's going to almost entirely -- that's going to entirely reverse because of exclusively the high deductible health plans?

Is that what you are saying?

Well, we are saying that you will see obviously a shift in the fourth quarter.

I think that's the big paradigm shift in the seasonality patterns between first and fourth quarter.

We are also saying that we are providing no upside for any positive development in reserves.

And again, we would spike that out separately and call that out separately in the second quarter.

John Rex, JP Morgan.

Hi, thanks, so same topic.

What we are all struggling with is and really want to know is the seasonal pattern change, and you are not the only guys talking to this, so it's fair.

But always seems a bit mysterious in terms of magnitude.

Because when we think about it, of your consumer directed business, only about half of that is risk business.

So if 200,000 adds followed that pattern, that's 100,000 members; that's under 1% change in your fully insured membership.

So how much of this -- just maybe, with less precision -- how much of this is about trying to anticipate or add some conservatism for an uncertain economy and an uncertain outlook versus really knowing about this drastic shift in seasonal patterns?

John, I think you are hitting on the right issue.

Clearly, we are performing better than our plan in the quarter, but it is very early in the year.

The economy over the last six months was more tumultuous than we expected, and we are trying to really understand its impact in the fourth quarter.

And until we see that stability, we are reluctant to suggest that the fourth quarter wouldn't repeat.

And any metrics -- like can you tell us bed days per thousand -- are those still trending down slightly?

And any statistics on doc visits?

You may not believe these numbers yet, but what are you seeing in the current data?

Let me speak to, before we get off that CDHP issue, is CDHP plus the high deductible pieces.

And we are seeing a focus there.

So make sure that you encompass not just the CDHP membership but is the deductible leveraging growth.

We need to be thinking about that.

In terms of the inpatient trends, it's really pretty flat.

We are seeing higher acuity there.

So I think our medical management techniques are being effective overall.

That may be that we are seeing some of what was an inpatient at lower acuity levels go to outpatient.

But we are refocusing on some of those high-acuity issues to make sure we see some stability there.

Any indications on doc visits and such, in terms of where those volumes have been impacted?

Pretty flat, John, with our expectations.

And I said that bed days per thousand is pretty flat as well, so we're not really seeing an uptick there at all.

And you edged up your outpatient view from last quarter, right, a little bit?

Yes.

And again, more just on the little slight acuity.

And, again, recognize that at IR day we were high-single digit, now we are saying low double-digit.

And as you can probably imagine, we are just talking a matter of BPS between those two.

So it's fairly tight.

It's fairly tight.

And I think the best way to respond, as Angela said, I think we are cautiously optimistic on the year and we'd just like to see how the economy develops more at this point.

Justin Lake, UBS.

Angela, you just mentioned that you performed better than your plan in the quarter.

I think that's a great way to look at this, given all the questions around the seasonality.

Can you give us an idea of how much better you did versus your plan, just in round numbers, and then break that out between better MLR versus the below the line items?

Well, clearly we saw below the line improve in many ways, in terms of the debt offering and the cost of debt for us.

We had an advantage.

Obviously, we are very transparent about what we saw in terms of the number of shares outstanding.

And given the price that we were able to repurchase, the share count is down pretty significantly.

In terms of the operating results, we are really pleased with how the turnaround has occurred in the senior book.

State-sponsored is running better.

I'm not sure how descriptive, and I'll let Wayne measure this here, we are going to be in terms of our success over plan, given how early it is in the year.

But let me talk about what we looked at for the first quarter.

As we were looking at guidance originally in the plan, we were looking at unemployment data in our state, in our key states.

And what has happened with unemployment data is actually -- employment level has declined on a steeper slope than we had first anticipated.

But the economists that we follow would suggest it's going to stabilize and moderate.

And we'll get to the same place at the end of the year that we originally expected; it has just gone faster than we thought.

Despite that, we still performed on an overall enterprise basis better.

So that's part of our cautiousness.

We are optimistic but we are looking at that employment essentially stabilizing a little.

And, I don't know, Wayne, can we be more specific to Justin's question than that?

Just a few edits.

Angela pretty much answered the key items.

But, obviously, it was to beat the plan, which is why we raised the low end by $0.09.

We are effectively passing through primarily below the line at this point in time and maintaining a cautious but nonetheless optimistic outlook for the full-year as it relates to above the line, and we are not reflecting any potential reserve redundancies in excess of our high single-digit margin at this point.

So what I'd say is, from our perspective, the economy is still in overhang, but we are cautiously optimistic, and we were very comfortable and obviously pushing on the below the line.

And I think, even there, we believe we have a level of conservatism that's still appropriate as well.

I would also add, even though this economy has been, certainly, troubling and uncertain in many respects, our national account sales and the pipeline that we have there really gives us a reflection of how our value proposition is market-leading.

And I'd love for Ken to just touch on that a little bit because we described it in our comments.

But to me, it's a reflection of the capability, our ability to continue to make the right decisions about how we can lead in the market place.

We've gone over some of the numbers on investor day of what we were anticipating in some of the groups we were bringing on board, but we grew by over 400,000 members in first quarter, approximately 315,000 of which were control.

What I would say with those growth numbers and what doesn't show in there is 125 -- that covers an additional 125,000 of in-group change loss, where employers laid off in the first quarter, where it was current customers releasing, which, if I will be an optimist, those will come back at some point in the future.

But it is because of economy related.

So we had a net growth of 400,000 including in-group changes of over 125,000 in the quarter.

We are anticipating some continued in-group change loss throughout the year, but we have a very high close ratio.

It is a good indicator of our value prop overall, and our close ratios are in the mid-40% range.

So if I were to think about the way you are looking at this, the below the line items, I would say, in the quarter were probably $0.04 to $0.05 from interest expense and lower share count, it would seem it.

Would you say the other $0.04 to $0.05 in the high or low end of guidance is better operating results?

Is that the way to think about it for the first quarter?

And maybe the beat versus plan was somewhere in the $0.10 range or $0.09 range?

I think that's generally correct.

Okay.

And then one question on the SG&A.

Wayne, you talked about the impact of the New York state assessment, and I think you laid some of that out.

But can you be specific as far as -- you know, you took up your SG&A by 30 basis points.

How much of that is due to this New York state assessment issue?

And then, how much of that comes back, and where does it come back in the two spots?

Can you put numbers around that for us?

Yes.

There's actually two assessments there.

So one is the deficit reduction assessment, which essentially -- as that comes through, we in fact will be passing it on through premium throughout the year.

So a big portion of that should theoretically have a nominal impact on the SG&A.

What does have the impact is the assessment around the shift between a premium tax assessment versus the below-the-line state tax assessment.

So as it relates to that particular assessment, probably about 20 BPS or so is probably a reasonable gauge.

So it's about 20 BPS above the line on the SG&A and 20 BPS below the line?

That's correct.

And so, again, for a net bottom-line impact to our shareholders, it's zero.

But nonetheless, it creates geography as well as metric noise.

And any update on the CMS, and I'll jump off -- on the CMS suspension?

Justin, I'm going to turn that over to Brian Sassi, who has been leading our important work there.

As you are aware, we had a goal of completing our remediation work by the end of March.

We did achieve that.

We had a third-party independent reviewer come in and validate our remediation efforts.

All of that information and approved document has been sent to CMS.

Over the last 10 days, CMS is actively working at reviewing that information, and we are having continued dialogue.

So we are very optimistic about our prospects of reentering the market well in time for the annual election period this year.

Scott Fidel, Deutsche Bank.

I just want to follow up on the 2010 national account selling season, and maybe if you could talk about just how much more active you expect it will be than '09.

Will it be a material change or just a modest change?

And then maybe on a percentage basis, how many more cases you are bidding for and what the average change in case size is?

Sure, Scott.

Ken's here and he'll address that.

I think economy-related number of larger employers are looking to make sure they have the right carrier and the right value prop.

We had a very successful year this year in national accounts.

We anticipate a very good year going into 2010.

What we found is that the number of prospects going out is up significantly.

So when you say -- I would say it's in the overall moderate increase range, but we are seeing more cases out to bid, and our proposal activity is up right now.

Probably more importantly, it's some of the jumbos.

There are a number of larger, significantly large employers who are out to bid from some of our competitors and looking to make sure they have the right value prop in place.

I think many of them will choose not a single carrier solution but a multiple carrier solution, going network by network, and that we should fare very well in that.

Our own activity is up slightly but not at all.

If I look at the ratios of what we are competing on for other business out to bid in our own, it looks like it could be a very good year going into 2010 for us.

It's still early, and we are just seeing the proposal activity.

We don't see the outcomes yet, but the activity is in our favor at this point.

And if I could just have a follow-up in terms of maybe how you're planning to prepare for two of the bigger wash-in risks that, obviously, the sector is dealing with right now -- one, just the tough 2010 MA rate outlook and maybe your initial views on how you want to position on MA, granted your exposure there is already more limited than most of the peers?

And then more broadly, just to health reform -- and maybe if you could just touch on your thoughts on how probable it is that we see a public plan option and whether that would actually leverage Medicare or commercial rates.

I'll speak to the health reform issues and then have Brian speak specifically to the Med Advantage issues.

Editorially, with respect to Med Advantage, I really want us to work together with all the parties involved in health reform to make sure that Med Advantage is a mechanism that can meaningfully address medical costs and be very transparent about that because I really think that's the heart of the health reform discussion.

We have to have mechanisms to address cost and quality, and Med Advantage, I think, creates an opportunity for us to do that.

In terms of the overall health reform and particularly the government plan issue, there are significant concerns that relate to having a government-run option.

If we look at history in terms of what the Medicare program originally anticipated years ago in the '60s, they said they were going to negotiate for pricing.

Well, in fact, we know that's not the case, and Medicare pricing is dictated.

I think the same would be true in a government-run public plan option here.

We would have Medicare fee schedules likely to be paid, which creates a big, big cost shift and considerable issues in terms of who's really going to deliver cost and quality management.

So I think there are some very strong voices with respect to the issues that that would create.

And so I think it's obviously too early to say what will happen overall.

But we are very active in making sure that that story is told, and we can really get to the heart of what we do, which is cost containment and quality improvement and the need for that function on a go-forward basis.

So with that, I'll turn it over to Brian to talk about Med Advantage.

We are actively preparing for projected reimbursement cuts.

I think, as you are all aware, we are estimating it to be in the 4.5% range.

That, coupled with just projected trend increases, we're looking at all the different levers that we can pull to offset that, which includes benefit design changes, potential changes to premium levels.

We're looking at general and administrative costs, marketing and selling expenses.

So, we feel that we'll be prepared to tackle and really come through this fairly well.

But as you mentioned, our exposure to Medicare Advantage is different than some of our competitors.

We are the second largest provider of med sup plans in the country.

We are seeing nice growth in Medicare supplements, and so our renewed efforts on that product line, I think, will position us well offering a comprehensive suite of solutions for Medicare beneficiaries.

Carl McDonald, Oppenheimer.

Do you have any statistics you can give us on high deductible risk enrollment, so if we look at -- I'm assuming it, with the risk enrollment down 340,000 lives in the first quarter, that your risk high deductible enrollment was also down.

But maybe it's better to look at it as a percentage of the overall books.

Anything you can give us this quarter versus end of '08 or versus a year ago?

I'm not sure that we have that specifics to provide.

Unfortunately, I don't have that with me right now.

I don't know that I would say that it's -- I'd say it's probably generally pretty evenly split across the book.

I wouldn't see anything that would lead me to believe it's -- folks are concentrating in any one segment.

Okay.

And then, touching on the adverse selection and the canceled versus active benefit expense ratio, what is the time period that you're looking at?

Is that through end of '08, or does that include some data from the first quarter of '09?

We update some of the data through '09.

Obviously, you have more of a lag, though.

So it's a little bit difficult when you're looking at.

Obviously, March data; you don't get better visibility on that until April, etc.

But it does run through '08, and then we've got some data points that would tell us that that is continuing to trend.

And quite honestly, I think, just looking at our results in the quarter, the operating cash flow that we are generating relative to those results -- I think that would imply while we have less visibility on the active versus canceled, that in fact, things are handling themselves the way we would have expected it.

And I would say the one other item that we indicated at investor day that we would track, a leading indicator, was the age/sex demographics, or the age demographics.

And we are checking that monthly to see what the economy impact is.

The read right now through first quarter is surprising.

In two thirds of our states, it's actually a less impact year over year than we normally experience.

So it's fair to say that we have not seen a significant age demographic change as a result of employer cutbacks and that the layoffs have been of a general mix of all ages, rather than the youngest being laid off.

Tom Carroll, Stifel Nicolaus.

Could you just quantify for us the amount of positive development that was realized in the first quarter?

And then secondly, maybe to put a sharper point on John's question, how much of your conservative outlook is influenced by the upcoming discussion of health care reform that's going to really increase in volume?

I don't know that we are ready to talk specifically about quantification of the positive development.

As we said, in the second quarter we began to share with you our roll-forward schedule.

That gives you some added transparency about the reserve strength that we have, and it is our goal to be very transparent, as we were about this quarter not contributing significantly to the bottom line.

So I'm not sure that we can provide more specifics.

But Wayne, do you want to add to that?

Yes.

What I would say is, obviously, the positive reserve development in the quarter as it relates to 12/31 was significantly higher than where we were at a year ago this time.

That being said, we have essentially reestablished that same level of conservatism in a comparable manner at March 31, which essentially means there is very little impact at all to the bottom line in the quarter.

So I'm just trying to think about this $1.62 number.

If you had softened that position a little bit, given the trends we're seeing out there in terms of utilization and whatnot, the $1.62 would have been higher, then; correct?

That's the correct way to look at it.

And, Tom, what we are saying, too, is that's where part of the caution is, that we are looking at utilization, seeing it's pretty flat.

We are not ready yet to say that it's going to be a significantly positive contributor to '09 because we are not at that point yet.

It's early in the year.

So on the reserve development, just to confirm, you guys are putting that money back up on the shelf just as conservatively as you did all of last year, which was a difficult year for the industry?

That's right.

We are reserving -- reestablishing those reserves.

We did, at March 31, comparable level; conservative, consistent methodology.

That's exactly what we are doing.

Very good, and then maybe just to the second part of my question?

Could you repeat that second part?

Just how much of your conservative outlook is really influenced by the discussion that we are going to hear about health care reform in the coming months that's really going to ratchet up in volume?

We really didn't try to bring the reform uncertainty into where we are right now.

What we are reflecting here is that the economy over the last six months has created more uncertainty around employment and whether or not utilization will be positively or negatively impacted.

So really, what you hear from us today is clearly we are seeing some upside, which we wanted to bring the lower end of the range up.

But it's so early in the year we don't want to really fold that in for the rest of the year.

But we are cautiously optimistic that we're going to see some stability in the economy, and that will be reflected over the year.

In terms of the reform debate, we really think that at this point there's not enough specifics to build it into the plan.

And we are optimistic that, between the efforts of the industry and all of the players that will come forward with the result that we think is positive and reflects the value that we create for our customers on an ongoing basis.

Beth Senko, Williams Capital.

I want to dig deeper on this age/sex demographics issue.

In particular, I guess the issue for me is, I'm not sure the data and the reality are held together.

But what have you learned from last year?

I know that the age numbers say that you are not getting an adverse selection.

But what other measures are you guys going to be able to use or have you developed relative to last year that will help you understand sort of in-group declines, utilization, etc., etc.?

My thought being that health care utilization isn't a normal curve, it ebbs and flows as people get older.

And also, some of this may very well be an in-group situation on the risk business.

Ken, do you want to add to your earlier comment on that?

Yes, a couple of things.

The age is just one indicator that we've used as a leading indicator of the economy.

We take a look at a number of metrics on an ongoing basis to see how the book is performing.

We mentioned earlier the active/canceled ratios, which is taking a look at the groups that are remaining with us versus those that are leaving.

How are we managing that to keep our risk profile solid overall?

We have risk scores through predictive modeling, which identify where we are running.

But most of those are after-the-fact, and the age is a -- it's an ongoing basis, but the age is a leading indicator of saying how is our book changing as a result of the economy?

And that's why we have spiked that out.

We feel we have a pretty good grip on how the book is performing, and I think the one area that we are having as a disparity between consensus goes to the seasonality issue.

And we have really looked at seasonality and looked at it over the last years and looked at it regarding how does higher deductibles impact that.

And we see the fourth quarter, and very mainly November and December, more than October, changing significantly over the last two years.

I think there's another approach here that really isn't directly related to what Ken was talking about.

But if you look on the Consumer side, we're actually looking at age differently.

And there are some opportunities.

We have an individual -- Brian, do you want to talk about that in terms of our approach to the early retiree and some of the older individual folks?

Sure.

We have made significant progress during the quarter in kind of improving our ability to understand and diagnose different customer segments.

We built an individual [data mart] during the quarter that takes a look at all of the different demographic and performance data from a distribution standpoint, from a claims and membership standpoint, as well as we purchased external data that brings in over 250 different customer attributes.

And by using that data and being able to profile behaviors, both retrospective and use it on a predictive modeling basis, we are better able to tell where the sweet spots are within our business and within the market overall.

And as a result of that, we are really shifting a lot of our product focus towards more high-value, more lifetime value segments.

I think you'll see an increased focus on the pre-retiree and early retiree, the 50 to 64-year-old segment.

That is a segment that on a compounded annual growth basis, if you look at the trends and the demographics, that is an area that is going to be growing and outpacing growth in many other age segments.

And so just recently we were piloting some pre-retiree and early retiree plans in the Midwest that look at -- a key component of that is multi-year rate guarantees.

As we have done consumer research, stability and predictability of that customer segment is more valued than virtually any other attribute.

And so I think you'll see us flex our product portfolio to meet the new demands of that growing segment plus, from a lifetime value standpoint, higher lifetime value than some other segments that we've focused on historically and has a nice transition into the senior segment.

It's really the baby boomers that are going to be aging into senior are in the early and pre-retiree segments.

So I think we will be seeing a nice shift in our strategy relative to individual.

I'd like to say, too, that this kind of micro segmentation that Brian is describing is really going to be a powerful tool in terms of changing the outreach in product, communications, bring that together with Express Scripts' approach to the consumer and the way that they look at the consumer.

That's a very powerful thing on an integrated basis, so we are really looking forward to bringing that to market and taking full advantage of that.

Matt Perry, Wachovia Capital.

Question on a separate topic.

I think one of the themes you've talked about today in the 2009 outlook is remaining cautious, given some of the uncertainties of the economy and uncertainties around utilization, which, to me, makes a lot of sense.

And then I look at the way you deploy your capital, and it seems a little less conservative, in my opinion.

You are not the only company in this sector that's doing it.

But just wondering how we should think about that.

You are deploying most of your free cash to buy back shares, and then you've talked about using a lot or most of the after-tax proceeds from the NextRx sale to also buy back shares.

I'm wondering if maybe a little bit more conservative outlook on that capital deployment, given the uncertainty of health care reform, might be prudent.

Let me speak to that, and then I'll turn it over to Wayne.

Given the valuations and just our fundamentals, we do think that share repurchase is the right use of our capital.

But we have bought down [the CP].

We are using part of the proceeds we've described, using part of the proceeds from the NextRx sale to pay off some debt for some general corporate purposes.

So not all of it was going to flow through, necessarily, on a buyback basis.

Clearly, this is an issue we continue to evaluate, making sure that we are prepared for liquidity issues that we saw in the last quarter of last year.

We think, given our cash flow, we're in a good position to deal with those.

And given where we are, having paid down some debt, we are being appropriately conservative there.

But I'll let Wayne add to that.

Just a couple things.

One is I would say, while obviously we cannot predict the ultimate outcome of reform and we believe there will be aspects of reform, we also believe that there are, obviously, different opinions right now from a variety of parties, and we do think over time more reasonable reform will come forward.

That being said, too, our cash on cash yields are so significant -- so even if you -- and recognizing the reform that's out there, when you are generating over 15% cash on cash yield, we do believe we would be able to manage to reform that would come forward in some capacity and still be able to maintain very high cash on cash yields.

So at these yield levels, it's very difficult to not see buying our shares to be extremely compelling.

What I would say is with the Express Scripts transaction closing in the second half of the year, we do believe at that point that we will have a lot more visibility, too, around health reform, what is out there and how we'll respond with it as well.

So from that perspective, while we've said this would be our intentions to use that, clearly the Board has not authorized but they have approved the use of proceeds from the perspective of when the transaction closed.

They have not authorized the ultimate authorization increase in the buyback program until we have better visibility around that.

And I do think we are still being somewhat cautious as you look at the strength of our balance sheet during this period, having over $1 billion in cash and investments at the parent, essentially having pre-funded our entire debt position for the year already and having over $2.4 billion being given up in the second half of the year.

So I do think that will still allow us to still have an extremely strong cash position if things were to change overnight, but at the same time be opportunistic in what we believe is a significantly undervalued stock.

And as we get more visibility on health reform, hopefully we will all agree that we've made the right decision.

If I could just ask a second question, on the sale of NextRx, it looks like both companies, Express Scripts and WellPoint, expect to generate some significantly lower purchasing costs on drugs there.

And you've talked about getting back to slight accretion even without considering share buybacks.

I'm just wondering how the deal might be structured in terms of who gets that ultimate savings.

Does WellPoint recoup a certain amount of savings from dollar one, or is that just split in a certain way from the first dollar?

Just wondering how that might be structured.

Well, Matt, we don't want to get into too great detail about that because obviously we would lose a competitive advantage if we did.

But I think it's fair to say that from our perspective it is a win-win for both parties, for a couple of reasons.

One is, we do think the value that we got up front was the right reflection for the asset.

But we wanted to make sure that on a go-forward basis we had the ability to be extremely competitive and create customer value for the long-term.

And so, in this situation, it was unique in that for both parties and for both of up-front purchase price as well as the long-term contracts, we sought and received advantages over our ability on a stand-alone basis to drive that kind of reduction in cost of goods sold.

Obviously, as we come together, Express Scripts then has that advantage not only for our book of business but for the rest of their book of business.

So they see a great advantage.

So it was clearly one of those unique transactions where we both won, and the customer wins and the shareholder wins.

Ana Gupte, Sanford Bernstein.

I was looking for some color on the in-group attrition that you mentioned earlier today.

I was wondering if, in addition to layoff of the early retirees, are you seeing actives and/or their dependents dropping group coverage?

And is that varying by state or geography?

And the follow-up to that is, if they are, then where exactly are they going?

Are they dropping it and staying uninsured?

Are they going to individual?

Are they moving to the competition?

You have a small sequential decline in your individual book, and I was trying to understand the outlook for growth in MLR.

I'm going to let Ken and Brian speak to this a little bit.

But earlier in my comments, I talked about the fact we have definitely had a process in place to track some of these layoffs, and we are digging deeper to make sure we -- for two reasons.

One, we want to understand what's happening to the group member who's departing as well as enhancing our ability to capture that member on an individual and senior product basis.

So Ken and Brian have been working together to address both of those issues, so I'll turn it over to them.

And I'll start.

Much of the information will be anecdotal now, and we could give very specific information at the next quarterly call.

The change of in-force is a direct result of the economy, and we see that people are leaving group coverage.

And when we say in-group change, it is where the employers stay and the individual members of the employers decline.

Historically or a year ago, it was about even.

In prior years we actually would grow through in-group change.

This year on a fully insured basis we lost over 200,000 first quarter and over 125,000 on the ASO.

I commissioned a study to really take a look at that because we haven't run through something like this before.

We know they are leaving.

We are not 100% sure if they are being laid off or if it is because of contribution levels or because of other behavioral patterns.

We have anecdotal information that the majority is layoffs, and we have worked between our individual and group areas to begin to capture that the best we can.

But I really need to get the market data back because where it's leaving from, which was built into the plan but we hadn't experienced it at this level, is it's really the small group level, so I would say the 25 and under.

And to be able to grab information from that, we need to do some detailed research.

So we're actually going member by member and doing some detailed research to find out what they are doing, whether they have real patterns, why they left, and would be better able to understand that for ourselves and for future product needs.

Thanks, Ken, and as you indicated, the economy is certainly having an impact on in-group change within the employer market.

We are very focused and have a number of initiatives, as Ken mentioned, underway to strengthen the linkages between the commercial side and the consumer side so that we can improve upon our member conversion rates.

Last year we initiated some pretty targeted programs at converting the over-65 members, both within individual and our group segments into our senior business, and then we are continuing to strengthen and roll out that process from commercial membership to individual.

Historically, a large portion of the individual market actually does come and historically has come from group.

So we are very focused on increasing that rate of conversion.

With that said, we are having another very good sales year in our individual segments.

We are, however, seeing that the economy is having an impact on lapses.

So we, as Angela mentioned, are rolling out -- continuing to expand our health plan advisors, where we are having a great degree of success, plus we are implementing a number of different and new tools so that we can better predict those types of customers that could lapse, and do proactive outreach to those members.

So we are making a number of improvements.

And as we look at our active versus canceled loss ratios within the individual segment, we are still trending very positively on that front.

Peter Costa, FTN Equity.

Not to finish off on the same note that we started on, but I'm going to do it anyway.

Last year at this time, in the first quarter conference call, you were able to tell us that the prior period favorable development was $120 million less favorable in 2008 than it was in 2007 first quarter.

Can you tell us that same -- what's the change year-over-year in prior period favorable development this year?

And then, second question gets to the same issues again.

On the time of the investor day, you discussed having a higher medical loss ratio factored in because you assumed that younger people were going to be laid off, so people going to be sicker in your population mix.

And yet, now you're telling us you haven't really seen that trend, so that theoretically should have produced some of the outperformance this quarter and going forward.

Can you describe how much of that is still in the numbers and what impact that had in terms of that not showing up?

We are going to continue to reiterate that we had a higher level of favorable development in the first quarter as compared to the first quarter of '08.

We are not going to get that specific in terms of the difference at this point.

Before I turn it over to Wayne, I would add too that, certainly in terms of the age/sex, we're feeling good about where we are coming in.

In terms of active canceled, we're feeling good about that.

I would say that part of our cautiousness is a result of the fact that unemployment rates increased faster in the first quarter than we had expected.

We still think it may get to the same place at the end of the year because that trend will flatten somewhat, but that's where a lot of our cautiousness comes from.

And, given the seasonality that we experienced in particularly November and December, we are reluctant at this point -- and given what we are seeing in terms of overall utilization being relatively as expected, we are reluctant to go there yet at this point in the year.

So, Wayne, do you want to add to that?

As Angela said, our preference has always been to wait until the six-month mark to give more clarity.

What I can say that, based on what we have said before is, clearly you would have expected the reserves to be strengthened by at least the $200 million miss we had last year.

What I can tell you is in fact the number has in fact been strengthened by that, and it is north of that.

And we've reestablished that fully in the quarter.

So, again, we will provide better granularity at that point in time.

That ought to give you at least a reasonable gauge of year-over-year improvement in the number, based on the fact we would have to [re-strengthen].

The other thing I would say is similar to Angela's comment.

Please recognize, we did lower our MCR guidance at the lower end of our range as well, but we are remaining cautiously optimistic about the economy at this point.

I would say, too, there's a very significant difference between where we were last year at this time and where we are this year.

The processes have been strengthened significantly.

We have much greater visibility into medical claims.

The claims inventories are down.

The processes have been improved.

And so in terms of where we -- as we look at reserves now being consistent and conservative, having a comparable process is really significant.

I think, as you see the roll-forward schedule beginning in the second quarter, you will understand that strength in the reserves, and the DCP is up too.

So another indication in the strength and in terms of overall cash flow.

So thank you.

Unfortunately, we are not going to be able to get to everyone's questions.

I want to thank those who were able to ask questions.

So let me close here.

I want to say just how pleased I am with this solid start that we have for 2009.

Clearly, we believe there are both challenges and opportunities in the current economy, and we are taking strategic and operational actions to lead the Company in addressing both the challenges and capitalizing on the opportunities.

Our core operations are improving.

We have greater visibility into medical costs.

We have remained disciplined in our pricing, and we believe that the strategic initiatives we have underway are laying the groundwork for even better performance in the future.

I want to thank you all for participating in our call this morning, and I want to turn it back over to the operator to provide the call replay information.

Ladies and gentlemen, this conference will be available for replay after 11 AM Eastern time today through May 5.

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(Operator instructions).

That does conclude your conference for today.

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You may now disconnect.