Elevance Health Inc (ELV) 2010 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'm Michael Kleinman, Vice President of Investor Relations.

With me this morning are Angela Braly, our Chair, 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, is available to participate in the Q&A session.

During this call, we will reference certain non-GAAP measures.

A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available in our press release and on the Investor Information page of our Company's website at www.WellPoint.com.

We will also 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.

WellPoint had a good first quarter of 2010.

Today we reported adjusted earnings per share of $1.95, which compares to adjusted EPS of $1.62 in the first quarter of 2009.

Our adjusted net income increased by 7.8% from the prior-year quarter due primarily to improvements in the local group and state-sponsored businesses.

Our results were higher than we expected for the quarter and benefited from a less severe flu season than predicted.

We are encouraged that our medical membership grew by $165,000 or 0.5% in the quarter despite continued high unemployment levels, which reverses the trend of quarterly enrollment decline that had persisted since mid-2008.

We achieved very strong growth of 536,000 members or 4.6% in the national business.

Our continued success in this area reinforces WellPoint's leading value proposition in the marketplace.

Through the BlueCard program, we offer access to the broadest provider network in the country, consisting of more than 80% of the nation's physicians and nearly 95% of all hospitals.

We also have competitive unit costs, provide reliable customer service, deliver innovative, consumer-friendly products, and are continuing initiatives to enhance both the cost and quality of healthcare for our customers.

We believe many of these attributes will continue to be valued in a changing marketplace and uniquely position WellPoint to respond to the changes forthcoming from the recently passed health care legislation.

Fully insured enrollment declined by 400,000 in the quarter, most of which related to our UniCare subsidiary's withdrawal from the commercial markets in Texas and Illinois at the beginning of this year.

While we experienced continued attrition due to the economy in our Blue-branded commercial and individual businesses during the quarter, membership grew in the Federal Employees Program and in our senior and state-sponsored businesses.

A delay in the conversion of a large municipal account to self-funded status caused our fully insured enrollment to end the quarter about 870,000 members above our plan.

However, this account converted on April 1, and our fully insured enrollment is now in line with our prior expectations.

Our Commercial membership continues to be unfavorably impacted by high unemployment levels, although the impact is not as significant as it was at this time last year.

We experienced net unfavorable in-group change of 70,000 members in our fully insured Blue-branded Local Group business this quarter, which compares to the 160,000-member reduction we experienced in the first quarter of 2009.

The weighted average unemployment rate in our Blue states is just over 10%, and we currently expect that it will increase slightly over the next several months before improving late in the year.

Operating revenue totaled $14.9 billion in the first quarter of 2010, a decrease of 2.8% from $15.3 billion in the first quarter of last year.

This was primarily due to a year-over-year decline of 5.5% in fully insured enrollment and the sale of the NextRx PBM.

We price our business in an actuarially sound and fiscally responsible manner and will continue to do so.

Health insurance is a competitive, low-margin business and ultimately all companies must price to cover their cost and risk.

Earlier this year, our Anthem Blue Cross subsidiary delayed, scheduled and approved premium rate increases for certain individual members in California in order to provide the insurance commissioner with additional time to review the rates.

Due to this delay, our individual business in California is performing below expectations this year and it lost money in the month of March.

The premiums we charge need to be sufficient to cover the underlying cost of care.

Also, due to the increasing popularity of high deductible products which help keep premiums affordable for many individuals, rate increases in the individual market may often exceed underlying medical trends as a result of deductible leveraging.

This occurs when deductibles are kept constant from year to year despite rising medical costs.

Changes in the age and mix of members we are serving further impact premium rates.

For these reasons, we typically offer a wide variety of products and price points to provide consumers with alternatives when the costs for their current plans rise.

In many such instances, consumers elect a new plan or a different set of benefits in order to keep their premium increases lower while preserving the security of insuring themselves against a serious medical event.

This is why the effective per-member premium increases for our individual business were just over 5% in the first quarter of 2010, far below the percentage increases recently cited by certain media.

Our state-sponsored business is exceeding our expectations so far this year.

Reimbursement levels have increased for certain programs, and we are seeing positive results from some of our operational initiatives, including provider capitation arrangements in California.

Our state-sponsored business also benefited from a less severe flu season in the quarter than was anticipated.

State-sponsored programs present a significant long-term growth opportunity for WellPoint and the industry as the eligibility thresholds for most state Medicaid programs will expand in 2014.

When adequately funding, Medicaid managed care can be a win, win, win situation for states, patients and managed care organizations as states can save money by working with health plans that coordinate care and help beneficiaries access the healthcare system in a more efficient manner.

We intend to continue to pursue opportunities with states that desire sound, long-term partnerships with managed care.

Earlier this month, we were one of four companies who received a notice of intent to award a contract to provide managed care benefits to 240,000 eligible enrollees under the BadgerCare Plus program in Wisconsin.

We look forward to serving these individuals.

The positive track record for certain Medicaid managed care programs illustrates that governments can successfully partner with the private sector to help manage their growing liability.

As the first wave of baby boomers becomes eligible for Medicare next year, incremental strain will begin to be placed on our nation's financial resources.

While Medicare Advantage reimbursement was reduced for 2010 and will be pressured further as a result of healthcare reform, managed-care alternatives to the traditional fee-for-service programs must be considered as a long-term option for delivering promised benefits to our seniors.

Due to the reimbursement changes for 2010, our Medicare Advantage results declined from the prior-year quarter, but this was offset by improved performance in the Part D business.

We're also the second largest writer of Medicare Supplement policies in the nation with 780,000 supplement members as of March 31, 2010.

Our benefit expense ratio was 81.8% in the first quarter of 2010, a decrease of 70 basis points from 82.5% in the same period of 2009.

The decline was driven by the Local Group and state-sponsored business and was impacted by the less severe than expected flu season.

We currently expect our benefit expense ratio to rise over the balance of 2010 due to seasonality as more of our members fulfill deductible limits towards the end of the calendar year.

We're also now anticipating a higher full-year loss ratio for the individual business as a result of the rate delays in California.

We have a number of programs that encourage cost-effective delivery of quality healthcare.

Among these is a new program in New Hampshire, where employees of the state's largest city can now earn rewards for choosing more cost effective healthcare providers.

There can be broad variation in cost for the same service based on where it's performed, as much as 250% for some procedures.

Our voluntary program offers financial incentives to employees who choose to receive their care in lower-cost, high-quality facilities for a number of high-volume elective healthcare services, including outpatient surgery, routine health screenings and diagnostic imaging.

The incentive program is location-based, not physician-based, which means that members may not be asked to change doctors.

Rather, the exact same surgeon likely can provide the exact same procedure in a number of facilities.

The member simply makes a call to receive cost and incentive information for area healthcare providers.

If a member chooses to receive care in a more cost-effective setting, they qualify for financial incentives ranging from $50 to $100.

We also have a number of consumer transparency programs that are designed to help members get the right care at the right time and in the most appropriate setting.

One such program is the Care Compare service that was originally developed by WellPoint and has since been expanded throughout the Blue Cross and Blue Shield system.

This online tool allows members to compare cost and quality metrics for numerous common medical procedures at various provider locations.

The tool provides an all-in price for an entire episode of care, which includes hospital, doctor, laboratory, anesthesia, and all other fees, while displaying selective quality factors, such as the number of patients treated at these locations and procedure outcomes.

With consumer-friendly services like Care Compare, we are empowering individuals to make more informed healthcare decisions.

Another example of how we can lower costs and improve quality for our members is a new partnership we have with Express Scripts.

Our relationship is off to a good start, and we passed a significant milestone on April 1 by successfully moving 3.4 million members in 130,000 groups from NextRx to the Express Scripts system.

We're looking forward to a positive long-term working relationship with Express Scripts over our ten-year contract term.

In addition to optimizing medical costs, we continue to take steps to improve our own administrative cost structure.

Our total SG&A expenses on a dollar basis was 1.3% lower than the first quarter of last year, reflecting lower selling costs and positive results from our strategic initiatives to become a more effective and efficient company.

We believe there is significant opportunity to continue to improve our service and capabilities while we optimize our administrative cost structure in the future.

Our Building a Better WellPoint program and North Star information technology strategy are designed to capitalize on these opportunities and put us in a position to be the long-run service, capability, efficiency and cost leader in this industry, thereby enhancing our already strong value proposition.

We're off to a good start in 2010 and have confirmed our outlook for the full year.

While we experienced a lower than expected flu season in the first quarter, and are modestly ahead of our plans in some of the capital management areas, we are reducing our full-year expectations for the California individual business.

We're also now expecting higher costs related to the implementation of healthcare reform, including coverage of dependent children to age 26 and higher taxes.

As we announced earlier this month, beginning June 1, our affiliated health plans will automatically retain young individuals up to age 26 on their parents' policies in both fully insured group and individual health plans.

Taxes will also increase in 2010 due to the healthcare reform legislation in addition to the significant amounts we already pay.

In 2009, WellPoint paid approximately $4 billion in federal and state taxes and assessments, significantly more than the adjusted net income we earned or the operating cash flow we generated.

I would further note that in addition to what WellPoint pays as a corporation, our 40,000 associates pay millions of dollars in federal, state and local taxes each year.

Regulations for healthcare reform implementation are now being written, and there are many uncertainties surrounding these regulations.

And our future operations and results are likely to be significantly impacted by reform.

We will continue to expect the impact of the legislation and will develop and execute strategies for continued success in the months and years ahead.

We have the best assets of any company in our industry, and I remain confident in our ability to successfully adapt to a changing marketplace and continue delivering value to our customers and shareholders.

Before I turn the call over to Wayne DeVeydt to discuss our first-quarter financial results and current guidance in detail, I feel it's important to comment on the recent allegations related to WellPoint's coverage of women with breast cancer.

To be absolutely clear, and as I stated in my response to Secretary Sebelius, WellPoint does not single out women with breast cancer for rescission.

In fact, we have more than 3,000 nurses and clinical associates on staff each day to encourage detection of breast cancer at its earliest stages and to ensure members are receiving the best breast cancer treatments available.

Their outreach has increased early breast cancer screenings by nearly 300,000 WellPoint members.

WellPoint also covers mammograms for members ages 40 and above, 10 years earlier than the guidelines published by the US Preventative Services Task Force.

We collaborate with leading industry experts from many of our breast cancer prevention and treatment programs, and we've received accolades for our work in support of cancer care.

Just last year, our giving and participation in cancer programs earned WellPoint the American Cancer Society's 2009 corporate impact award, their highest level of annual corporate recognition.

Needless to say, I was deeply disappointed that these allegations would be made without regard for the facts.

I proudly stand behind our Company and our associates and all they do to support WellPoint's programs and those we support through the WellPoint Foundation to improve the quality of healthcare for our members with breast cancer.

Our goal is to make healthcare reform work for our members and for the country.

This is why we announced yesterday that we would implement federal legislation regarding individual market rescission effective May 1, well ahead of the effective date contained in the legislation.

Rescissions, while rarely used, are one process insurers employ to reduce fraud and protect members.

The standard contained in the federal legislation requires insurers not to rescind policies except in cases of fraud or intentional misrepresentation of material fact.

WellPoint was the first insurer to enhance our practices, including being the first in the industry to offer a binding, external, independent third-party review process that goes beyond the requirements in the federal law.

We welcome greater uniformity among insurers in this area.

There have been many misrepresentations and inaccuracies in recent days that have caused confusion among our members and among the public generally about our policies in this area.

We think our announcement will go a long way towards bringing greater clarity.

With that, I will now turn the call over to Wayne.

Thank you, Angela, and good morning.

I agree we're off to a solid start in 2010.

Premium income was $13.9 billion in the quarter, a decrease of $293 million or 2% from the first quarter of 2009, primarily due to fully insured enrollment declines, including UniCare's withdrawal from Texas and Illinois commercial markets.

Administrative fees were $953 million in the first quarter, up $11 million or 1% in the same period of last year, primarily due to higher per-member, per-month revenue in our commercial ASO business; increased national account membership; and revenue from the DeCare Dental business that we acquired in the second quarter of 2009.

These increases were partially offset by lower revenues in the National Government Services business.

Other revenue, which historically consisted almost entirely of revenue associated with the sale of mail-order drugs by NextRx, declined by $148 million from the first quarter of last year reflecting the sale of NextRx in December 2009.

The benefit expense ratio for the first quarter of 2010 was 81.8%, a decline of 70 basis points from the first quarter of 2009.

As Angela noted, the decline was driven by the Local Group and state-sponsored business and reflected a lower than anticipated flu season.

Also, while COBRA enrollment remained elevated at approximately 2.2% of our fully insured commercial membership, the rate of increase in COBRA penetration has slowed relative to 2009.

We continue to expect that our benefit expense ratio will be 84.3% for the full year of 2010.

Since the passage of healthcare reform, much attention has been paid to the minimum medical loss ratio requirements that take effect for certain of our businesses next year.

The potential impact of these new requirements varies broadly and likely will depend on a number of factors.

We will not be able to provide an accurate estimate of the potential impact until we gain further clarity on how the final regulations are required to be implemented.

We are working with our industry partners to provide input as the guidelines are developed and will provide more information about the potential impact to WellPoint when we gain additional insight into the regulation.

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

For full year 2010, we continue to project that the underlying Local Group medical cost trend will be in the range of 8% plus or minus 50 basis points.

Overall, our medical cost trend continues to be driven by unit cost.

For the rolling 12-month period ended March 31, 2010, inpatient hospital trend is in the low double-digit range and is primarily related to increases in cost per admission.

It is approximately 85% cost driven and 15% utilization driven.

We are experiencing both increased average case acuity as well as increases in negotiated rates with hospitals.

Continued clinical management and recontracting efforts are in place to help mitigate the inpatient trend increases.

In some locations, contentious hospital negotiations have received media attention, as we're working hard on behalf of our customers to hold down medical cost increases.

Outpatient trend is in the low double-digit range and is 60% cost driven and 40% utilization driven.

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

We are introducing new reimbursement models to help our members and customers hold down their costs.

For example, we made changes to our physical, occupational and speech therapy networks in California.

We changed the manner in which we reimburse therapists and moved to a bundled payment rate rather than the traditional fee-for-service payment model.

These changes in the way we reimburse providers support our corporate mission to make costs more predictable and healthcare more affordable.

Physician services trend is in the mid-single-digit range and is 40% cost driven and 60% utilization driven.

We continue to collaborate with physicians to improve quality of care through pay-for-performance programs that focus on clinical outcomes.

Pharmacy trend is in the low double-digit range and is 80% unit cost related and 20% utilization driven.

Increases in cost per prescription are being impacted by recent inflation in wholesale drug pricing.

Pharmacy trends for the rolling 12-month period were also adversely impacted by H1N1 influenza activity and a slowdown in the release of new generics as compared to prior periods.

The increasing use of specialty drugs is impacting our medical trend and we are addressing specialty pharmacy costs through our American Imaging Management, or AIM, subsidiary.

We have had success in addressing high-cost trends for diagnostic imaging through AIM and we now have developed a program directed at high-cost specialty drugs.

This program helps ensure that physicians are selecting not only the most effective and appropriate drug, but also prescribing at the appropriate dosing level for the right amount of time.

We're already seeing a reduction of 5% to 7% in trend for the lives under management.

We also continuously evaluate our drug formulary to ensure the most effective pharmaceutical therapies are available for our members.

Moving now to selling, general and administrative expenses, or SG&A, the SG&A ratio was 14.8% in the first quarter of 2010, up 20 basis points in the first quarter of 2009.

The increase in the ratio was due to higher outside service costs primarily associated with our technology initiatives, as well as lower operating revenue in the current quarter, partially offset by lower selling costs and reduced other operating expenses.

On a per-member, per-month basis, our SG&A expense declined by 1.3% from the prior-year quarter as we've lowered our overall cost structure relative to this time last year, due in part to our strategic initiatives to improve productivity throughout the organization.

There are significant opportunities to further reduce our SG&A costs, and we believe doing so will become even more critical in a post-reform environment.

Turning to our reportable segments, commercial operating revenue was $9.1 billion in the first quarter of 2010, a $264 million or 3% reduction from the first quarter of '09, driven by fully insured membership declines in Local Group due to the economy and the transition of UniCare members in Texas and Illinois.

The revenue decline was partially offset by growth in our self-funded national accounts business.

Operating gain was $978 million in the first quarter of 2010, an increase of $76 million or 8% from the prior-year quarter.

The improvement was driven by the local group business and reflected more flu-related costs in the current quarter.

The operating margin for the Commercial segment increased by 110 basis points to 10.7% for the first quarter of 2010.

Note that we expect the operating margins for the Commercial segment to decline over the balance of this year due to the seasonality of our product design.

Our Consumer segment operating revenue was $4 billion in the first quarter of 2010, a small decline of $22 million or 1% from the first quarter of '09.

This was due to the loss of Medicare Part D auto-assigned membership and was essentially offset by growth in the Medicare Advantage program.

Operating gain for the Consumer segment was $326 million in the first quarter of 2010, an increase of $107 million or 49% compared with the first quarter of last year.

Performance in our state-sponsored business improved due to operational changes, increased reimbursement levels for certain programs, and a less severe flu season than was expected.

Medicare Part D results also improved from the prior-year quarter, which offset margin contraction in the Medicare Advantage program.

We recently received the projected 2011 rates for Medicare Advantage plans and will be adjusting our plan designs and pricing to align with expected reimbursement levels.

The other segment reported an operating loss of $18 million in the first quarter of 2010 compared with an operating gain of $112 million in the first quarter of 2009.

The decline in operating gain resulted predominantly from the sale of NextRx in the fourth quarter of 2009.

Net investment income totaled $201 million in the first quarter, up 2% from the first quarter of '09 due to increased investment balances.

Interest expense was $99 million, down 14% due to lower overall debt balances and lower short-term rates.

During the first quarter of 2010, we recognized net investment gains of $29 million pretax, consisting of net realized gains from sales of securities totaling $48 million, partially offset by approximately $19 million of other-than-temporary impairments.

As of March 31, 2010, the portfolio's net unrealized gain position was $839 million, consisting of net unrealized gains on fixed maturity and equity securities totaling $577 million and $262 million, respectively.

Also, in the first quarter of 2010, we recognized an impairment charge of $21 million for certain intangible assets associated with the UniCare provider networks due to a decision we made to transfer certain membership to an alternative network.

Medical claims payable totaled $5.5 billion as of March 31, 2010, an increase of $37 million or 0.7% from year end 2009 despite the 2.6% reduction of fully insured enrollment.

The medical claims reserves established at December 31, 2009 are developing favorably and are in line with our expectations.

Consistent with our historical practice, we have not included a reconciliation and roll forward of the medical claims payable balances in our first-quarter press release, but will do so in the second quarter.

We continue to believe our reserves are conservatively and appropriately stated.

As of March 31, 2010, days in claims payable was 43.3 days, an increase of 1.6 days from 41.8 days as of December 31, 2009.

The timing of pharmacy claim payments added 1.3 days to this metric in the quarter and 0.5 days of the increase was due to a seasonal increase in claims payment cycle times.

These increases were partially offset by a 0.2-day decline due to net other items.

Note that we've included reclassified prior-period DCP calculations in our press release this morning.

Turning now to cash flow and capital deployment, we had a net cash outflow from operations of $323 million in the first quarter, which was in line with our expectations.

This net outflow was due to the $1.2 billion of tax payments we made in the quarter related to the 2009 sale of NextRx.

Recall that when we sold NextRx in the fourth quarter of last year the proceeds were reported as an investing activity on the cash flow statement.

However, the tax payments related to the sale were required to be reported as a reduction to operating cash flow this year.

First-quarter operating cash flow was also unfavorably impacted by claims runoff in the membership transition in Texas and Illinois and a reduction in Medicare Part D Low-Income-Subsidy enrollment.

We continue to forecast full-year 2010 operating cash flow of approximately $1.1 billion, which includes the unfavorable impacts of the NextRx tax payments and the claims runoff in the UniCare membership transition and reduction in Low-Income-Subsidy enrollment.

We utilize our capital to invest in our businesses and enhance returns for our shareholders.

Year to date through April 15 of 2010, we repurchased 25.2 million shares of our common stock for $1.6 billion at an average price of $62.30 per share and we had $2.3 billion of Board-approved share repurchase authorization remaining as of that date.

We intend to utilize the majority of this authorization during the second quarter with the balance to be completed by year end 2010 subject to market and industry conditions.

As of March 31, 2010, we had $3.2 billion of cash and investments at the parent company and available for general corporate use.

We expect to receive approximately $2.3 billion of ordinary dividends from our subsidiaries over the balance of the year.

We intend to utilize $2.3 billion for share repurchases and we have approximately $400 million of debt and interest payments scheduled over the last three quarters.

Our insurance subsidiaries remain well-capitalized and highly rated with statutory capital levels $6.6 billion above state requirements, and $3.7 billion above Blue Cross and Blue Shield requirements as of March 31, 2010.

This provides our customers security that WellPoint's companies will be able to pay future claims even under adverse circumstances.

Our debt to capital ratio ended March at 25.5%, up just slightly from the 25.3% at year end 2009, and at the lower end of our targeted range.

So we have good financial flexibility, which we value in light of the current economy and the changing health benefits marketplace.

We plan to continue executing on our share repurchase program this year.

However, we routinely evaluate with our Board of Directors various methods of allocating capital.

These include operational investments, including internal spending and potential M&A transactions; the appropriate levels of leverage to maintain as an organization; and the manner in which we return capital to shareholders.

As we gain additional clarity around the implementation of healthcare reform and its resulting impact on our future growth prospects, we will continue to evaluate our capital strategies.

In summary, our first-quarter 2010 results were of high quality, reflecting higher membership growth and a less severe flu season than we anticipated, and we have reaffirmed our earnings-per-share outlook for the full year.

Specifically, we now expect net income to be at least $6 per share, including $0.04 of net investment gains, partially offset $0.03 per share impairment charge from the first quarter.

This does not include any further investment gains or losses or impairment charges other than those reported in the first quarter of 2010, and it is subject to our ability to secure and maintain sufficient premium rates.

[Year-end] medical enrollment is now expected to be 33.1 million, consisting of 13.6 million fully insured members and 19.5 million self-funded members.

Operating revenue is now expected to be $58.5 billion.

The benefit expense ratio is expected to be 84.3%.

The SG&A ratio is now expected to be 14.6%.

The operating cash flow is expected to be approximately $1.1 billion, including the unfavorable impacts of the NextRx tax payments and the claims run-out that I discussed earlier.

And finally, our diluted share count is now expected to be 424 million shares for the full year.

I would also like to remind analysts about the seasonality in our quarterly results.

Recall that earnings per share for our consolidated enterprise are seasonally strong in the first quarter and seasonally weak in the fourth quarter, primarily due to the fact that more members fulfill deductibles toward the end of the calendar year.

This typically results in a higher benefit expense ratio during the fourth quarter, particularly in our Commercial business.

While we reported a strong first quarter, we believe that the seasonality will be even more pronounced this year due to the continued growth of high deductible products.

We are also anticipating higher costs later this year related to healthcare reform implementation, which could further magnify the seasonality in our quarterly results.

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.

(Operator Instructions).

John Rex, JPMorgan.

Thank you.

So, my question is going to focus just, again, on thinking about assessing minimum MCR impact.

And what I really wanted to focus on is individual and small group, and if you can help size for us the impact of distribution costs in those med cost ratios that are reported.

So that is, when I think about those segments, if one were to strip out the commission costs from the revenue line, how much would your MCRs change in those segments?

And just if you can give us an order of magnitude, like how many hundreds of basis points in individual, how many basis points in small group would you see that flux [when you] consider those distribution costs?

John, thanks for your question.

I'm going to let Wayne get a little bit more to the specifics in terms of this.

But let me just kind of preface the questions and detailed questions around healthcare reform and the MLR definitions etc.

a little bit by saying first of all, this is the law of the land.

And obviously our customers are concerned and confused about what healthcare reform means for them.

And our commitment is to make sure we are taking the long-term strategic view about what these changes may mean for them.

And so as we think about even the broker question, remember, historically the brokers have sold individual products one at a time.

They sold them across the kitchen table.

Now they are selling them by phone and by Internet.

But they've been a critical partner to us in that.

So as we think about changes with respect to any of these implementation issues, we have to think about the long-term policy issues for us and for our customers.

So with that I think Wayne can be a little bit more specific about that.

Yes, thanks, Angela.

John, on the MLR impact, two things that we've been very public about.

One is the range of outcomes if we did nothing varies very much on the definition that we ultimately get clearly around whether it's defined at a consolidated level, a state level, or a legal entity level; and of course, how ultimately the legislation defines what costs regarding health IT need to ultimately be put in there.

And of course, as written in the law today, taxes need to be taken into consideration.

So there's a variety of factors that come up with the ranges we publicly discussed in the past.

Regarding commission rates though, I will say that we think the brokers are an important part of really the long-term stability of the health reform markets.

And so we've been hesitant to really target brokers for anything in particular because we really think this is a shared responsibility of all.

It's going to require not only payors but it is going to require providers and brokers and members to also share in the responsibility of the healthcare cost and those percentages.

From a commission perspective, generally, individuals can be -- commissions can be in the double digits in year one, but they generally trend down to the single digits thereafter.

And small groups are lower than that.

So that gives you an idea at least of some of the responsibility that's currently [lodged] in the broker community too that we will have to work with on a broader view when we deal with all constituents that will help to support this initiative.

So when you think about your average commission cost, let's just maybe focus on individual and understanding you start in the 20s and it comes down, but let's say it averages 10 or so, is that the right way to think about it?

And what I'm just trying to get at is it's not that I'm implying that broker costs or commissions are going to be stripped out of the calculation.

It just seems like an important swing factor as we think about it, and as we think about what elements can change an equation, even how those are paid.

So if I took an average individual product, and let's say it was running at 70% loss ratio, if I stripped out the distribution costs, would I essentially be at an 80%, an 80% plus?

Does that sound right to you?

Yes, I think John, if you are doing broad calculations like that, those would work; those numbers would work.

Again though, the problem is that even doing that, that's assuming more status quo.

It doesn't evaluate the fact that we will get changes for how taxes are accounted for and health IT investments.

It's also important to remember that some of the commissions are paid on a fixed per head basis, not as a percentage of revenue.

So that can distort the calculation a little bit.

But I think if you're doing just big picture math, the math is not unreasonable.

And are you contemplating moving away from embedding it in the commission and having the customer pay it directly so it's not included in the premium line?

Well, I think, John, the only thing I would say is that because of the shared responsibility here, it's going to be really important I think that we really get to the intent of the health reform bill, which is to ensure members are getting full value for the dollars they pay.

So our goal is not to -- we're considering all alternatives, but our goal is ultimately to make sure that members get maximum dollar for their value and not necessarily find ways around the law.

That is not our intention at all.

So again, I think there's a lot of things we'll have to explore though.

And I think there are models today though that really allow a member to really see how much of their dollars actually go right to health benefits, and they can have third-party broker arrangements where we are not involved, and that's one of many alternatives that we will consider.

Justin Lake, UBS.

Thanks.

Good morning.

First question just on some of the recent state decisions on rate reviews and things of that nature.

Wayne, can you just give us an update on your thoughts on what happened up in Maine and where -- what's kind of implied in guidance as far as the timing around California?

And then just quickly, it seems to be very focused upon the individual markets.

And I just wanted to see if you've seen any kind of chatter that this might leak into some of the other regulated areas like small group.

Justin, Wayne will get a little bit more specific than I will, but in terms of these recent decisions, I think we, again, have to keep in mind the longer-term strategic implications of these decisions.

And we've tried to do that all along.

WellPoint stayed in Maine when everyone else left the Maine individual business.

And we are really striving to make that a sustainable business over time.

And we did that through our pursuit of the legal remedies, and we will continue to pursue all the options that are available to us there.

What we have to be careful about is we have very long-term strategic ideals in place, and this is a very highly politicized environment in the short term, varying by state.

And so we're going to try to keep the long-term balance here; think about the long-term policy implications; think about how we desire to be able to serve this group of members in the individual market.

But we know we need to do so in a way that's sustainable over time.

So, as we described, in California in particular, we will continue to work with the California Department of Insurance.

Our current guidance does contemplate that we are going to have delays in the ability to assess these rate increases.

We're going to work to get the situation resolved as soon as possible, and you know we have to give a 30-day notice of the rate changes in order to comply with the law once we have them.

So we do think that that is built into our guidance now.

In terms of the question about is it leaking over to other places?

In Massachusetts, there's suggestion that small-group market would also be implicated by this kind of rate regulation.

So Wayne, do you have some specific [answer]?

No, I think Angela addressed most of it.

Hi, Justin.

The only thing I would add is regarding our existing small-group, we really haven't necessarily seen much bleed into our other states on this.

And I think it's been a challenging environment for us because in both Maine and California, we are talking about rate structures that result in us losing money in the state.

So these aren't -- these are very unusual times.

And I think as Angela said, they're much more politicized in the current environment.

And we don't want to make inappropriate short-term decisions for the long-term value of WellPoint.

But I would say we're managing it, and we will continue to manage it, and we have baked appropriately in our guidance certain delays that we would still further expect right now in California.

We are considering all options though.

As we can look at Maine, we do have to consider all options, and we will evaluate those in the appropriate context and properly notify all of you at the right time.

Okay, great.

And then just secondly in regards to results, obviously MLRs were a little better.

You talked about the flu season.

Can you just give us some color on two topics?

One, what do you think the flu benefit was in the quarter versus what you had expected?

And then second, in the Consumer business, obviously state-sponsored looked like it might have been a pretty good driver there.

Can you talk about some of the impacts there on the Medicaid business?

And it sounded like specifically your viewpoint on state-sponsored might be getting a little bit more positive after some of the tough times you saw in Ohio and a couple of the other states there were trying to be Blue and also work with states; some other provider issues you had there.

So can you just give us an update on your thoughts there?

And is Medicaid becoming more of a focus for the Company?

Thanks.

Yes, Justin, let me first address the flu.

And a little bit was state-sponsored.

These go a little bit hand-in-hand because if you recall last year, while many Medicaid entities were being hurt by H1N1 and other flu-related costs, we didn't have the same impact others did because we had done a number of changes in California in particular, our largest Medicaid market around capitated arrangement.

So in some ways, when you have a higher flu season it didn't really hurt us.

When you have a lower flu season we actually benefit.

So this year, our state-sponsored is benefiting not only from what I would call just really good management and the team that we brought in there, and the changes they've made, but we are benefiting also then within state-sponsored because of the lower flu season.

So clearly state-sponsored is a big driver.

But I would tell you that when you look at our Consumer segment, that really all of our segments are performing pretty well right now.

But state-sponsored is the primary driver within the Consumer segment for the first-quarter results.

And yes, we view this as an important business, a business that it's very clear within health reform will grow and expand.

And we are very pleased with the recent award of the Wisconsin Badger program expansion that we will get late this year going into next year.

And I think you will start to see WellPoint put more than just its toe back into the Medicaid and other states and continue to expand now that we really feel like we've got a great management team overseeing this group.

And Justin, to your question about Medicaid, obviously, there's going to be a significant need there to help states manage cost.

They're going to have significant obligations to their citizens, and we have lots of evidence of how we can get a better result for them and for the beneficiaries of Medicaid.

And As Wayne said, I think our team in Medicaid -- unfortunately Brian couldn't be here this morning, and he could've spoken to it -- but they really have figured out your question about can you be Blue and in these states providing this business?

And we believe that we can.

And we can do that not just ourselves, but partnering with other non-WellPoint Blue companies to provide these capabilities to additional states.

So we're looking forward to those opportunities.

The last thing I want to add, Justin, on the impact of flu in the quarter, as you know, there is no such thing as a flu code.

And so it's generally been very difficult to peg an exact number.

But when we try to take year-over-year changes, things we've seen, it could be anywhere in the $35 million to $50 million range-ish; somewhere in there is our best range of estimates of outcomes.

I do want you to be aware too that we have assumed a normal flu season though in our guidance for the remainder of the year.

And as you know, generally, there's not much of a flu season in the second quarter to begin with, but we are going to assume for the third and fourth quarter that we do return to kind of the normal flu levels.

Doug Simpson, Morgan Stanley.

Good morning.

Angela, in your comments, I think you mentioned the 5% rate increase on the individual and you talked about deductible leverage driving rates up more quickly than inflation.

And there's this disconnect where the industry remains this attractive target and obviously there's been a lot of unfavorable press.

Just trying to think through, what is the industry doing and what are you doing specifically to try to correct this?

And what do you think it's going to take to shift the debate away from the admin piece, which is a relatively small piece, to the overall growth in underlying medical cost trend, which really hasn't been as much of the focus over the last year?

I think, Doug, we have a number of initiatives underway to make sure that that message is understood.

You are right, we are being targeted and villainized.

They're shooting the messenger because the message is we have to address the underlying cost.

And that's our job each and every day.

And so as this implementation effort goes forward and we are working on implementation and the regulations etc., we are getting those facts out.

The real, I think the rubber meets the road as people start to experience these rate increases.

We are being very transparent about what the underlying costs are.

We're trying to use our tools like Care Comparison and other things so people truly understand what the underlying unit cost is; what the implications are; more clarity around what does cause rate increases to go up in addition to the underlying trend to things like deductible leveraging, aging; the implications of that on utilization.

So you will continue to hear from us based on the data and information; the facts, we'll get those out.

And we will be very transparent in the process, so people understand what is driving up rising healthcare costs and, as a result, premium rates.

Okay.

And then maybe just thinking about risk versus ASO growth over the next call it five years, obviously a lot of changes coming in the market.

But do you guys see larger employers potentially shedding coverage, moving from defined benefit to defined contribution?

Can we look at the pension and 401(k) path really seen in the '80s?

Is that sort of a reasonable trajectory?

And just how are you guys thinking about the relative growth and broadly defined as risk versus ASO?

Doug, you know Ken Goulet is here with us and he runs our commercial business; is working with our customers now on the issues and questions they have about health care reform.

So Ken, you want to address that?

Sure.

Good morning, Doug.

It's a good question, and we are doing a lot of market research to make sure that as we make decisions over the next couple of years, we'll be best prepared to win going forward.

I would say the ASO fully insured transition will occur.

There will be some transition of business from fully insured to ASO.

I would, however, highlight that stop loss will become incredibly important in the new world and will be a fully insured business that we'll be a very active participant in.

Because as customers transition and as there are no annual or lifetime maximums, stop loss will be very important for protection for our clients.

The question of defined benefits, quite frankly our clients haven't really thought about it enough.

As we talk with them about it, they are still considering their own options.

A lot of consultants are actively working with clients to share scenario planning with them.

There will be some transition to that, but it really will be segmented on the type of business, and the salary ranges of what the companies pay their associates.

Because depending on salary range, we will identify the subsidies that the individual receives.

So the lower salary ranges would be more likely to consider it.

But quite frankly most of the clients haven't given it enough thought at this point.

The other item I would just highlight, Doug, is that clearly I think we all know in the next five years we will see a growth in fully insured in the Medicaid environment.

You will see more members in the Medicare because of the influx.

And I think you will see a lot more wanting Medicare Supp because of what's going to happen with some of the benefits around Medicare.

And then of course we know ultimately the individual market will grow as the uninsured move over into this population as well as with these subsidies that are out there.

But even to the extent that there is a decline in fully insured, it's important to recognize that WellPoint is over $6.6 billion over-capitalized on RBC right now on a state regulatory basis.

And so to the extent you have that shift, we actually would have a significant free up of excess capital as well that's currently there to support that fully insured basis.

Josh Raskin, Barclays.

Thanks.

Good morning.

In the press release, Angela, I think you mentioned this as well in your prepared comments, that the Company was talking about strategic actions I guess to anticipate market changes.

And you've transitioned out of some of the non-Blues businesses and you sold the PBM.

And so I'm just curious at the end of the day, your business mix kind of looks similar still.

So first, maybe to set the table, could you tell us just from a revenue perspective how much of your business comes from, on the commercial side, large group versus small group under 100 and then individual?

And then how should we think about that mix going forward in light of your strategic actions that you are taking?

Let me talk about the strategy a little bit and then I'll have Wayne speak to the way that we report the revenue not gained by segment.

Clearly, Josh, you're right.

We have been preparing ourselves through more focus on our ability to take advantage of whatever marketplace changes were to occur.

Clearly we have the healthcare reform marketplace changes now to implement.

And I think that actually has been a great way to be prepared.

I think scale is going to matter tremendously in the future.

I think our brand is going to be incredibly important in the future.

And our ability to collaborate and work with other Blue plans is critical to that.

Our continuing ability to focus on medical costs and get the best-in-class solutions; that meant in the case of the PBM, the Express Scripts solutions for our customers.

So I think in each of the segments that we are going to serve, including individual and commercial small group, large group and Medicaid and Medicare, we are going to bring best-in-class capabilities.

I do think we have the best assets to bring, and I do think it will be a very challenging environment for other particularly smaller companies to navigate through.

So I think we've made the right decision going forward.

As Wayne described, our Medicaid team, we've got the right leadership in places to deal with some of the potential growth opportunities as well.

So Wayne, do you want to get more specific about the breakdown?

The only thing I would say, and Josh, I know you are aware of this, but we don't typically report operating results or MLRs by business.

What we have said very publicly, though, is that the operating earnings op gain from our individual represents less than 10% of our total EBIT.

So individual in and of itself has not been a significant driver.

And of course that number is only shrinking further with us, not getting appropriate rate increases in Maine and California.

So the impact is not really all that significant there.

We do think there will be a convergence though of the individual in the small group markets.

And we think that will be more driven by the health reform and the subsidies that will get put forward.

So I think over time, the real issue isn't so much what it is today.

It's whether or not we will get appropriate and adequate rates going forward.

We think in a post-reform environment that will occur and this is really more of a short-term issue, and it will need to occur for, quite honestly, for the health system to work the way it needs to work.

Right.

I apologize if I mis-asked the question, but regardless, I'm not looking for earnings contribution data.

I'm just looking from a revenue perspective, how much of your book is individual and how much is small group defined under 100?

And then how much of the rest is large group?

And then I think, Angela, you mentioned the PBM sale is sort of a relationship to medical manage?

And then I think in your prepared comments, you talked about low double-digit cost trends on the pharmacy, which is actually higher than what we saw last quarter, understanding that the big transition was April 1.

But I was just a little confused to see your pharmacy trends not improving a little bit quicker.

Maybe you could talk to that.

Josh, let me address the pharmacy trends real quick.

And in fact, let me address all the trends that you heard, and we use a rolling 12 month.

And because of the rolling 12 month, remember the first quarter of last year that really -- we didn't have the H1N1 starting at that point; we didn't have the COBRA uptick occurring at that point, etc.

So it is a little bit distorting and misleading because of it being a rolling 12 month of that going away.

We still think our full-year trend by the end of this year will be completely aligned with our guidance that we provided back in February.

So I would say everything is still in sync with what our expectations were.

It's just the way the math works on the rolling 12-month averages.

And Josh, this is Ken.

I can address your question regarding the size of each of the segments.

I won't get into specific revenue, but individual is just shy of 2 million lives.

Small group, which we currently define as under 50 is about 2.4 million lives.

Medicare Advantage, 472,000.

What I would say is in the -- as subsidies occur, please -- one thing that the post-reform world will do is put more insureds into the marketplace.

So there will be a much higher participation rate by small group and individual going forward.

Matthew Borsch, Goldman Sachs.

I'm just wondering, could you just talk a little bit more -- and maybe I missed something here -- but about the California individual rate increase?

Specifically, can you tell us what assumption is embedded in your guidance precisely in terms of when you expect that rate increase to go through, or what you are assuming for guidance?

And, also, just any more you can tell us about what are the points of discussion or debate around the rate increase?

Is it similar to Maine in which, the question being is WellPoint entitled to earn any profit on that business?

Or is it more around trend?

Matt, I'll take a stab at it and if anybody else wants to comment.

First of all, let me state that at this point in time we have not seen a final issue report.

So, it's very difficult for me to comment on where this ultimately will land.

What I can say though is because of the 30-day notice, we have no intention of putting forward rate increases for the members until we have closure on this.

And we plan to continue to work with the department to get this resolved.

So with that in mind, clearly, initially our assumption was we would delay till May 1.

At a minimum now because of the notice period, that is at least one more month out.

I will tell you we've baked a little more conservatism in our guidance though beyond that.

Because again, ultimately, we're not sure where this will land.

So we think we've got an appropriate provision in the guidance for potential delays and/or potential reductions in the rates.

But until we can see a final report and actually continue to get closure on this, I really can't comment beyond that.

But again, I think we're appropriately considering this at this point.

Okay.

But you know, Matt, the issue you raise is the issue we addressed a little bit earlier.

We know that we have to, and the policy has to, support sustainability in terms of this business.

So that means that the rate increases have to be actuarially sound.

They can't be arbitrarily capped because actuaries ultimately can't certify to that.

So, and that is not sustainable over the long term.

Originally, the way that the law worked in terms of state regulation of insurance companies, it was to protect the consumer.

And the question now is how does affordability fit there with the issues of consumer protection from insolvencies and other important things?

So we are very focused on making sure that over time, over the long term, keeping in mind there's highly political situations occurring, that over the long term, that this is a sustainable marketplace for us to serve individual members.

And I don't believe the state in any way, shape or form does not think it's appropriate or reasonable to not be able to earn a fair return.

And I think the goal is to comply with the law, and I think that's what the commissioner is trying to ensure.

But I will tell you because of the rate delays, we will lose money this year in the individual book in California.

Yes, okay.

Understood.

If I can just ask a follow-up on a different topic, can you just comment on the commercial enrollment outlook for the remainder of this year?

You know, and maybe I'm reading it wrong.

It looked like your first quarter came in better than expected.

What's pulling down the year-end figure relative to your prior projection?

Matt, the one difference -- this is Ken again.

The difference for now to year end is an accelerated transition of the UniCare business.

We are, as you know, we've transitioned UniCare in Illinois and Texas.

We've had conversations and agreements with other states to convert it to Blue in other states.

That's moving faster than we anticipated, which is a good thing.

And that's what's built into our guidance.

Christine Arnold, Cowen.

Thanks for taking my question.

On healthcare reform, you said that you anticipate increased costs associated with reform.

I know it's tough to quantify exactly kind of what's going to happen here, so if we just take MLR floors off the table, what kinds of increases do you think reform might produce in costs that of course have to be passed on to consumers in terms of SG&A and medical costs?

What categories and any quantification you could give would be great.

Christine, thanks for the question.

I'll begin to answer that.

When we committed to include in our plans individuals up to age 26 on their parents' policy, while younger members are usually relatively healthy, in many cases, we don't have the opportunity to collect that additional premium because they're getting added to existing family coverage.

So we made that commitment.

It was the right thing to do.

I think it serves our customer well.

There will be a cost incurred and it's contemplated in our guidance.

We also know there's going to be a higher full-year tax rate because of the changes specifically around healthcare reform around the deductibility of executive compensation.

But we don't know all the specifics around that and what that might mean overall for the overall effective tax rate.

You know there will be some higher -- there will be some operational costs for implementation.

And we are working on a number of those now that have a more immediate impact.

And then as we think about going forward, to your point, absent the MLR, we may make investments in creating the scale that we know we have the opportunity to capture, to position ourselves to serve the members of the future as they come through in 2014.

And so, we will get more specific as there's more clarity around implementation.

Wayne, do you want to add anything to that?

Yes.

The thing I would say, Christine is I'd say for those items Angela laid out so far, you know, we might have -- I think we've estimated about $0.10 for the year impact.

But that doesn't really consider the real significant IT, G&A costs, etc.

that until we get more clarity around some of the things that they are going to require and the pace the requirement will be implemented, we really can't bake that in.

It's kind of a little bit of an unknown.

So where we know things we taken actions on.

Again, as Angela said, like retaining individuals up to age 26, knowing the tax rates and the impact it's going to have on it, etc.

We've got an idea on what those are, and even with the no lifetime limits.

Now clearly, prospectively, we'll have to start pricing for some of this.

So you have that short-term hit that we've got in there now and we'll start pricing for some of that going forward.

But we really haven't been able to completely size what the ultimate kind of G8 technology costs are going to be.

And also, it's going to be important to know around health reform what those costs are going to be because it's going to be very relevant around what we need to invest, how those get classified, if they have to go to G&A, and whether or not then certain segments make sense still then.

So until we get more clarity there, I wish I could give you a better answer, but we really need more clarity around the legislation.

But what about insuring sick kids?

What might -- I know it depends on how we do this if it's full guaranteed issue forever versus an open enrollment period.

How are you thinking about the cost of that?

Again, we need more clarity on some of the regs there.

We've estimated some different scenarios, but we really need more clarity on the regs.

Carl McDonald, Oppenheimer.

Thanks.

I was hoping you could give us some visibility into what your premiums look like; if you got sort of a range from sort of high to low across your states?

I'm thinking specifically about the group business, or even better if you've got an average impact.

Wayne, do you have that?

Yes; I mean the one thing I would say, Carl, is they vary.

I would say on average, you're blending to about a 2% premium tax rate.

The problem is not all states have a premium tax.

So some states actually have more of a reciprocal state tax, which is a higher tax rate.

It could be as high as whatever the state tax rate is.

But that's based more on net profits in the state versus premium tax based on gross revenue.

So when you kind of take the average of averages of everything, you're blending around 1.5% to 2%.

Okay, great.

And then secondly, going back to the risk to ASO trend, do you have a sense of from a group size perspective, what that's looked like say over the last five years?

Was it initially more of the large employers consolidating the number of HMO plans moving everybody into ASO?

Has it moved more down market over the last couple of years?

Carl, you actually nailed it.

Initially there was a transition of fully insured to ASO as large groups were consolidating their coverages, pulling in HMOs and pulling it into one or two ASO plans.

Over the last couple of years, it has gone more downstream.

And because of the potential tax consequences, earlier question, which was will there be more of transition?

There will be a higher tax on fully insured as we know under the healthcare reform laws.

And we feel it will continue to go downstream.

The market right now -- you know customers are still looking for predictability in pricing, which is what they get through a fully insured basis.

But more have gone into the downstream level.

And I would say down to the 100 life group, many will, with high stop loss coverage or with solid stop loss coverage, consider an ASO policy.

Scott Fidel, Deutsche Bank.

Thanks.

Just wondering if you could talk about your thoughts around Blue's consolidation at this point post reform?

And it just seems pretty clear that given the Blue's focus on the individual and small-group market, just is there really a need or a capacity for 39 separate Blues in the system, given the ability to take down administrative costs across the Blues when you fold in all these duplicative administrative structures?

So just have you started those conversations with some of the other Blues executives?

And just given the changing environment, whether you think this accelerates consolidation amongst the Blues?

You know, Scott, I think it's a good question because we know, and I described earlier, scale is going to be incredibly important in this post-reform environment.

The ability to achieve that scale relatively quickly and then have the strength that our Blue brand represents so that we are deep in our markets; we have great relationships; we are very local.

So I would say there are two things that are occurring.

One, we continue to always be a potential partner for other Blue plans in terms of a true consolidation.

But as we've said before, you've seen one Blue consolidation deal, you've seen one Blue consolidation deal; because each of the Blue plans has a different history that regulates them and indicates what their capabilities and possibilities are for consolidation or acquisition.

The other thing though that is really happening is our ability to become more seamless as a Blue plan.

So essentially integrating through things like care comparison where WellPoint created this opportunity, and now it's really a shared opportunity around transparency.

So there's a lot of other potential opportunities for us to think about having a seamless Blue back office essentially over time.

But Blue plans are our top choice for consolidation opportunities.

We think scale is going to be incredibly important.

We think we have a great track record and history of creating those synergies and sharing best practices, getting the SG&A savings through consolidation.

And I look forward to the opportunity now that healthcare reform has gone through, to think about those opportunities more specifically.

And then just my follow-up question relates to the rate control authority legislation that's being proposed at the federal level by Senator Feinstein and essentially takes the President's proposal and tries to run with that.

And just your thoughts on how much potential there is that this could actually move at the federal level.

And clearly it's a very full legislative calendar for the rest of the year.

And CBO did score that proposal initially as essentially being a nationalization of the insurance market.

So clearly they would have to score very significant costs for the federal government.

But just your views on how much potential this is to move forward here.

Well, you know really, we believe it's not necessary.

For one, we have the MLR provisions in the legislation that haven't even been clarified at this point.

But that they have the effectiveness of holding us accountable with respect to how we are caring for our members.

So whatever -- to your point, to create another regulatory authority to invest in that regulatory authority, to go through that process, creates a whole other set of issues.

We know rates have to be actuarially sound.

To ensure that the health plans can pay the claims of their customers, that's what the philosophy of health insurance market regulation has been.

Those safeguards exist in the states.

The states have the authority to protect their consumers and to protect their consumers around affordability as well as the solvency of carriers who will be there to pay the claim.

So, we think it's an unnecessary requirement.

I can't tell you what I think about the political likelihood of it coming forward.

I think it's time for us now to turn to the real question about underlying healthcare costs and what are we going to do under this model of shared responsibility, where we as insurers pay -- we as payers for employers who are concerned about their cost, as government, as hospitals and doctors and suppliers and pharmaceutical companies think about what the future affordability is of all these benefits, that we need to really be focused on that now.

So with that, I think that was our last question.

I want to thank you all for your questions.

In closing, I want to reiterate we are pleased with the start to 2010, and we remain confident in the future.

There are opportunities and challenges presented by healthcare reform, and we are preparing for marketplace changes by taking strategic action to drive even stronger future membership growth and enhance our services and capabilities while we create a lower cost structure.

As the nation's leading health benefits company, our ongoing priority is to continue to meet the needs of our nearly 34 million members and ensure they have access to affordable, quality healthcare.

We will continue to do this while investing in our products and operations and enhancing value for our shareholders.

I want to thank everybody for participating on our call this morning.

Operator, would you please provide the call replay instructions?

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