Elevance Health Inc (ELV) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the WellPoint Inc.

fourth-quarter results conference call.

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

Later we will conduct 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.

Please go ahead.

Good morning and welcome to WellPoint's fourth-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 fourth-quarter and full-year 2010 results, actions, and accomplishments.

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

Ken Goulet, Executive Vice President and President of our Commercial Business, and Brian Sassi, Executive Vice President of Strategy and Marketing and President of our Consumer Business, are 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 on the Investor Information page of our Company 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.

Today, we're pleased to report strong results for the fourth quarter of 2010.

Earnings per share totaled $1.40 on a GAAP basis and included net investment gains of approximately $0.07 per share.

Earnings per share in the fourth quarter of 2009 totaled $5.95 which included net after-tax income of $4.79 per share resulting from a gain on the sale of the NextRx subsidiary, partially offset by costs for restructuring activities and intangible asset impairment.

Excluding the items noted in each period, our adjusted EPS was $1.33 for the fourth quarter of 2010, representing growth of 14.7% over adjusted EPS of $1.16 in the same period of last year.

Our fourth-quarter operating results exceeded our forecast primarily due to lower than expected medical costs and a reduction in the targeted margin for adverse deviation in our medical claims payable balance, partially offset by higher incentive compensation and other administrative costs related to our ongoing efficiency and continuous improvement initiative.

We also experienced lower state income taxes in the quarter and favorability in our capital management areas.

The fourth-quarter results were a continuation of the strong overall performance we experienced throughout 2010, as almost all of our businesses performed better than we planned.

For the full year, we reported GAAP earnings per share of $6.94, which included net investment gains of approximately $0.23 per share, partially offset by an impairment charge of $0.03 per share.

Excluding these items, our full-year 2010 adjusted EPS totaled $6.74, which was above our original guidance and represented growth of 10.7% over $6.09 of adjusted EPS in 2009.

As of December 31, 2010, our medical enrollment exceeded 33.3 million members, representing approximately 11% of the US population.

Our enrollment declined by 347,000 members or 1% during 2010, primarily due to the strategic transfer of UniCare business in Texas and Illinois to another Blue Cross and Blue Shield plan.

This membership transfer drove a reduction of 516,000 in our non-Blue enrollment while we achieved organic growth of 169,000 members or 0.5% in our Blue-branded and government-sponsored businesses, collectively.

Blue-branded commercial membership grew by 119,000 members despite only minimal improvement in employment during the year.

Enrollment in the federal employee program increased by 56,000, and we added 44,000 and 23,000 members, respectively, in our Senior and State Sponsored programs.

Our Blue-branded Individual membership declined by 73,000 during 2010, most of which occurred in California.

We experienced net negative in-group change of 228,000 members in the Local Group business during 2010, nearly all of which occurred in the first half of the year.

The negative impacts of the economy on our Local Group enrollment are stabilizing, and we grew Local Group membership by 45,000 in the fourth quarter.

This was the first quarter of enrollment growth in Local Group since the recession began.

While this is an encouraging sign, the weighted average unemployment rate across our 14 Blue states is still high at nearly 10%.

We expect unemployment to remain elevated during 2011 and are anticipating minimal impact on our enrollment from in-group change this year.

As of December 31, 2010, 59% of our membership base is self-funded, and 41% was fully insured.

We experienced a shift in our enrollment base towards self funding arrangements during 2010, primarily due to the conversion of a large municipal account and continued market share gains in the National business.

We expect the shift towards self-funded products to continue within the employer-sponsored segment, albeit at a slower pace than occurred in 2010.

We are well positioned to achieve additional membership from this dynamic, given our leadership position in the commercial ASO marketplace.

We provide a very compelling value proposition for self-funded National accounts and large local employers.

For our Blue Cross and Blue Shield affiliation, we offer access to the largest networks of doctors and hospitals in the United States, with a leading cost structure, innovative medical management programs and capabilities, and strong customer service.

These assets have been the primary driver of our continued success in the self-funded marketplace, and we exceeded 350,000 net new National accounts lives, effective January 1, 2011.

We are one of the largest National account carriers in the country, and we will maintain our disciplined approach to growing National business in the future.

Another market in which we continue to grow is the Senior business.

We recently completed a successful 2011 annual open enrollment period for our Medicare Advantage products.

Based on current enrollment results, we are optimistic that Medicare Advantage membership will exceed expectations in January, and are confident we will be able to achieve moderate growth in our Senior medical membership this year.

More importantly, 2011 marks the beginning of a significant demographic change in our nation with the first baby boomers turning 65.

We estimate that over the next 20 years, at least 1 million baby boomers will age into the senior market each year in our Blue states.

This presents a substantial growth opportunity for WellPoint and we are well positioned to benefit from this movement in the marketplace.

We have programs in place to assist individuals in understanding their healthcare options as they transition from commercial coverage to the senior market.

We are able to address a variety of needs for seniors through our balanced portfolio of Medicare Advantage, Medicare Supplement, and Medicare Part D products, and our Blue Cross and Blue Shield brand name is particularly strong with this group of consumers.

We plan to continue investing for long-term growth in our Senior business.

There's also significant growth potential in the State Sponsored market with an estimated 20 million individuals expected to enroll in Medicaid or related state programs over the next decade as a result of changes in eligibility levels for these programs.

States are also increasingly evaluating the benefits that managed care can bring to under-penetrated areas within the Medicaid program.

In 2011, we anticipate incremental membership growth in Wisconsin and Indiana from our recent contract award, and also expect new membership from the Medi-Cal Seniors and Persons with Disabilities, or SPD program, scheduled to roll out later in the year.

We also expect to respond to multiple RFPs during 2011, creating the potential for additional growth in our State Sponsored business in 2012 and beyond.

Medicaid managed care can be a positive solution for many states as health plans are often able to lower state Medicaid costs while improving the quality of care for program beneficiaries.

We will continue to pursue opportunities to partner with states for which we believe we can provide long-term value for their Medicaid programs while attaining actuarially sound rates.

We believe there is a significant opportunity to assist states in the care management of their aged, blind, and disabled population that comprise a large percentage of overall state Medicaid costs.

I would also like to highlight that Kevin Haden, the President of our State-Sponsored business, was recently appointed as Vice Chair of the Board of Directors of Medicaid Health Plans of America.

This is the leading trade association focused on positively impacting the delivery of healthcare to our country's most vulnerable populations.

We are pleased to have Kevin in this leadership role as we prepare for future growth in the Medicaid market.

Given our strength in the commercial ASO business, the growth opportunities we see in the Senior and State Sponsored markets, the potential for an improving employment situation and the changes taking place within our industry, we are optimistic that we can grow membership organically over the next several years.

Our benefit expense ratio was 84.5% in the fourth quarter of 2010, a decrease of 130 basis points from the same period of last year.

This was driven primarily by the Local Group business and a reduction in the targeted margin for adverse deviation in the fourth quarter of 2010, and was partially offset by an increase in the benefit expense ratio for Medicare Advantage business.

Recall that utilization increased in our Local Group business during the latter part of 2009 due to elevated flu activity and the impact of the recession on business mix shift, including higher COBRA enrollment.

We experienced a lower level of utilization than we expected during 2010.

We now estimate that underlying Local Group medical cost trends within the range of 6% to 6.5% for the full year of 2010.

We continue to project that underlying macro trends will rise in 2011 due to a variety of factors.

These include our expectation for a trend rebound related to flu.

Flu-related trends are unusually low in 2010 after the spike in 2009, but are expected to return to more average levels in 2011.

We also expect a rebound in our pharmacy trends during 2011 as the Express Scripts drug discounts we've achieved this year will repeat, but not incrementally.

We will also see an increase in trends through the implementation of certain requirements of healthcare reform.

These increases in trend are expected to be partially offset by lower COBRA costs in 2011 and positive results from our ongoing contracting and medical management initiatives.

We are pricing our business to reflect our expected future cost trends and view the marketplace as competitive, but generally rational overall.

With the exception of a few states in which the regulatory environment for Individual business has been challenging, we've been receiving the approvals necessary to manage our businesses appropriately.

In California, we implemented premium increases in the Individual market, effective October 1, 2010.

Despite these increases, we lost more than $110 million in California Individual business during 2010, and we recently filed additional rate increases for that market.

We ultimately believe that appropriate rate increases will be approved and obtained in order to maintain a sustainable market for Individual members in California.

Premiums are a reflection of the underlying cost of providing healthcare benefits to our members, and we continue to implement innovative programs designed to lower costs while improving quality for our members.

We are taking a leadership role in the area of payment reform, having introduced a number of new reimbursement models throughout 2010.

We are currently working with three provider organizations in accountable care organization pilot programs.

These programs are designed to enhance coordination of care throughout the health system, appropriately align incentives and encourage responsibility among patients, payers, and providers to enhance member health outcomes.

We're also advancing 10 patient-centered medical home programs in eight of our states to help modernize and increase the coordination of care throughout our market.

Earliest estimate of these programs demonstrates a favorable impact on the quality and cost of healthcare, and we will continue evaluating the results over the next few years.

We also recently received a grant from the Robert Wood Johnson Foundation to implement a health disparities pilot aimed at helping African-Americans and Hispanic members to better manage their diabetes.

Through this program, we plan to work with physician practices in California, New York, Ohio, Virginia and Georgia to identify interested members with poorly controlled Type 2 diabetes.

In coordination with doctors from the UCLA School of Medicine, we will then study the application of behavioral economics by offering financial incentives to those members who reduce and maintain their blood sugar levels within healthy ranges.

We'll also assess whether improvements in diabetes control are sustained after the financial incentives are removed.

Programs like these are consistent with our mission of improving the lives of the people we serve and the health of our community.

With health-care costs now comprising 17.6% of our nation's gross domestic product and rising, we will continue to look for new and more effective ways to lower the rate of increase for our customers.

We will be evaluating how we can impact the way consumers access healthcare in the future, especially as we expect to have a more direct relationship with millions of members who will buy their coverage directly from us either on the open market or through a future health insurance exchange.

We believe we will be successful if we were to give consumers to personalized information they need to improve their overall healthcare experience and access the right care at the right time and in the most appropriate setting.

We intend to leverage our assets to help consumers navigate more simply through the system and continue educating consumers about the importance of good health and the cost implications of their choices.

Another key to our continued success in the future will be the ability to generate even greater administrative efficiency as an organization.

We currently have one of the leading SG&A cost structures within our industry, and we have plans and programs in place to further improve upon this position.

In 2010, we reduced total SG&A expense by $271 million or 3%.

We had this success while improving on many customer service and operational efficiency measurements during the year.

For example, our auto adjudication rate was above 80% for much of 2010 and our electronic data interchange, or EDI rate, increased from 2009.

We continued to improve our claims payment speeds, as we paid 89.6% of the claims we incurred during 2010 in the current year.

This is an increase of 70 basis points from 2009 and an improvement of 190 basis points relative to 2008.

Our claims inventory ended 2010 in a nearly three-year low level, and we successfully migrated more than 15 million members to the Express Scripts pharmacy system with minimal customer abrasion.

We are seeing benefits from the continuous improvement programs we're expanding throughout the Company and expect that our recent creation of the enterprise business services team will drive further savings and synergies going forward.

Among other goals for this team will be to continue executing on our strategy of streamlining our information technology framework.

We retired three legacy claims processing systems during 2010 and now have 10 systems remaining.

We will shut down one more system in 2011 and migrate 2 million members to a preferred platform in preparation for future system retirement.

We continue to move towards our in-state technology environment, under which we will support all of our members on three core claims processing systems.

So to summarize, 2010 was a productive year for WellPoint.

We exceeded our goals in many areas of the Company and provided a significant return of capital to our shareholders following the sale of NextRx.

We also formulated a strategy for continued success in the changing healthcare marketplace, and to take advantage of new opportunities to drive growth.

We've implemented a number of programs and organizational changes that enhance our ability to provide affordable and valuable products to our customers and position us to be a long-run winner.

While unemployment remains high, we're seeing signs of improvement in our commercial enrollment results and expect to grow overall membership in 2011.

Our benefit expense ratio is likely to rise in 2011 due to the implementation of minimum medical loss ratio requirements.

Though we expect to significantly mitigate this impact through top-line revenue growth and continued SG&A expense reductions.

All in, we currently anticipate that earnings per share for 2011 will be at least $6.30 and we continue to view 2011 as a base year from which we can grow in the future.

Before Wayne discusses our financial results and outlook in more detail, I want to take a minute to thank our nearly 38,000 associates for their hard work and dedication.

This is a very eventful year for WellPoint, and it's a testament to the focus and determination of our workforce that we were able to execute on our plans and exceed our goals as a Company.

I would also like to highlight that these associates, together with our WellPoint Foundation, pledged to donate $6 million to support charities in local communities during our recently completed Annual Giving Campaign.

It's an honor to lead this team, which continues to create value for our customers, our communities and our shareholders.

I will now turn the call over to Wayne.

Wayne?

Thank you, Angela, and good morning.

I'm pleased to have the opportunity to comment on our positive financial results.

Premium income was $13.4 billion in the quarter, a decrease of $545 million or 4% in the fourth quarter of 2009 due primarily to the conversion of a largely municipal group to a self-funded arrangement during the second quarter of 2010 and the transfer of UniCare business in Texas and Illinois at the beginning of the year.

Premium income increased by $73 million or 0.5% in the third quarter of 2010, representing the second consecutive quarter of sequential premium growth.

Administrative fees were $969 million in the fourth quarter, up $16 million or approximately 2% from the same period of last year.

This was driven by growth in self-funded membership and an increase in yield in our National account business, partially offset by lower BlueCard revenue and a reduction of certain PBM-related revenues earned in 2009.

For the full year of 2010, our National accounts administrative fee revenue increased on a per member, per month basis, indicating that we continue to grow our National business with discipline as a result of our strong value proposition.

Other revenue, which historically consisted almost entirely of revenue associated with the sale of mail-order drugs by NextRx, declined by $112 million from the fourth quarter of last year, reflecting the sale of NextRx in December of 2009.

The benefit expense ratio for the fourth quarter of 2010 was 84.5%, a decrease of 130 basis points from the same period of 2009.

As Angela noted, this was driven by the Local Group business and a reduction in our targeted margin for adverse deviation, partially offset by an increase in the benefit expense ratio for Medicare Advantage business.

During the fourth quarter of 2010, we lowered the targeted margin for adverse deviation in our medical claims payable balance from the high single-digit range to the mid to upper single-digit range.

This drove an estimated $105 million of higher than anticipated pretax income in the quarter as compared to $50 million of higher than expected favorable reserve development that was recognized in the same period of 2009.

Due to recent changes within our Company, including a significant reduction in claims inventories, greater stability in our overall claim levels, faster claims payment speeds and much higher than anticipated levels of favorable reserve development over the last two years, we determined that using a lower target margin to establish the provision for adverse deviation will provide a similar level of confidence as we had in the prior period that our established reserves were adequate.

We expect to consistently apply this lower level of target margin for adverse deviation in future periods.

We also believe that our margin for adverse deviation is still among the most conservative levels for companies in our industry.

We currently estimate that underlying Local Group medical cost trend was in the range of 6% to 6.5% for the full year of 2010.

Unit cost increases continue to be the primary driver of overall medical costs trends while underlying utilization was lower than expected in 2010.

In-patient trend is now in the very high single digit range, and is primarily unit cost driven.

We are working to lower hospital cost trend as we negotiate with hospitals, and we continue to have success with many health systems agreeing to moderate unit price increases or rate reductions.

During 2010, our average rate increases were less than 2009 levels, and we remain committed to modifying our networks as needed in order to address the health system but are not willing to help alleviate the cost pressures faced by employers and consumers.

During the fourth quarter of 2010, we successfully negotiated a significant rate reduction with five large network hospitals in California, which will help hold down costs increases for our customers in 2011 and beyond.

Outpatient trend is in the high single digit range, and is 85% unit cost driven and 15% utilization driven.

The cost of advanced imaging procedures has increased in recent years, contributing to higher medical trends.

Using technology from our American Imaging Management subsidiary, we recently introduced a pilot program in one of our major markets to provide consumers with powerful information about cost and value for imaging services.

This program, which includes outreach to members who were referred to higher-cost facilities, highlights convenient locations that offer equal or better quality at a lower cost.

Our early results are promising with savings of more than $1000 per imaging procedure, or a reduction of approximately 50%, and positive consumer feedback.

Physician services trend is now in the low to mid-single-digit range and is 55% unit cost driven and 45% utilization driven.

In order to lower costs and expand network access for our members, we recently implemented an advanced patient notice policy in one of our markets, which requires our participating physicians to notify their patients in advance when they intend to involve an out-of-network physician in their treatment or care and obtain the patient's written consent.

We monitor compliance with this policy through reports and implemented an aggressive physician education and outreach plan.

Early results are encouraging.

In the fourth quarter, we were able to bring a large number of non-participating anesthesiologists and assistant surgeons into our network, yielding significant anticipated future savings for our customers.

Pharmacy trend is in the mid-single-digit range and is 70% unit cost related and 30% utilization driven.

Our pharmacy trend has benefited significantly in 2010 due to our Express Scripts contract.

And while this relationship will help hold down future costs, increases for our customers, prescription drugs, drug trend will increase in 2011 as the benefits repeat but do not repeat incrementally.

We continue to believe that underlying medical trend will increase in 2011, and we are reflecting this assumption in our pricing.

Our SG&A expense ratio was 16.4% in the fourth quarter of 2010, an increase of 40 basis points from the fourth quarter of 2009.

This reflected higher incentive compensation expense and the impact of lower operating revenue in the current-year quarter, partially offset by net reductions and other administrative costs due to our ongoing efficiency initiatives and the sale of NextRx.

We have undertaken a number of initiatives to reduce our SG&A ratio, and expect improvement in both our total SG&A expense and the SG&A ratio in 2011.

We also believe there needs to be a shared responsibility among all participants in the health care system to lower costs for consumers.

So while we are targeting and achieving reductions in our own internal cost structure, we also recently made changes to broker compensation structures in some of our markets.

While these changes will reduce certain selling expenses for 2011, we expect them to have a more significant impact on our business model in future years by constraining the annual rate of increase in selling expense, thereby driving positive operating leverage for our business in the future.

Turning to our reportable segments, Commercial operating revenue was $8.6 billion in the fourth quarter of 2010, a $787 million or 8% reduction from the fourth quarter of 2009.

This was driven by the municipal account conversion in the second quarter of 2010, as well as fully insured membership declines due to the UniCare member transition and the economy.

Operating gain was $601 million in the fourth quarter of 2010, an increase of $284 million or 90% from the prior-year quarter.

The increase was driven by improvements in Local Group business during 2010.

The Local Group benefit expense ratio was elevated in the fourth quarter of 2009 due to high flu activity and increased COBRA-related expenses, while utilization was lower than anticipated during the fourth quarter of 2010.

During the fourth quarter of 2010, we recognized and estimated $65 million of operating gain in the Commercial segment, primarily due to the lower targeted margin for adverse deviation compared to an estimated $17 million of higher than anticipated reserve development in the same period of 2009.

Our Consumer segment operating revenue totaled approximately $4 billion in the fourth quarter of 2010, increasing by $122 million or 3% from the fourth quarter of 2009.

This was driven by higher membership in our Senior business and higher revenue in our Individual business.

Operating gain for the Consumer business segment was $112 million in the fourth quarter of 2010, a decrease of $47 million or 30% compared to the same period of last year.

The decline in operating gain was driven primarily from costs incurred during the fourth quarter of 2010 as part of our ongoing efficiency and continuous improvement initiatives and higher incentive compensation expense.

Operating gains in the Senior business also decreased primarily due to a decline in Medicare Part D membership and the reduction in federal reimbursement rates for the Medicare Advantage program.

These declines in operating gain were partially offset by improved performance for our Individual business.

During the fourth quarter of 2010, we recognized an estimated $40 million of operating gain in the Consumer segment, primarily due to the lower targeted margin for adverse deviation compared with approximately $33 million of higher than anticipated reserve development that was recognized in the prior-year quarter.

The Other segment experienced an operating loss of $20 million in the fourth quarter of 2010, which represented a decline of $120 million from the fourth quarter of 2009 operating gain, primarily due to the fact that two months of operations from NextRx were included in the fourth-quarter 2009 results.

Net investment income totaled $195 million in the fourth quarter of 2010, down $7 million or approximately 4% from the fourth quarter of 2009, driven primarily by lower yields earned on short-term and fixed maturity investments in 2010.

Interest expense was $113 million in the fourth quarter of 2010, up $9 million or 9%, due primarily to higher average debt balances in 2010 as a result of a third-quarter debt issuance.

We recognized net investment gains during the quarter totaling $37 million pretax, consisting of net realized gains from sale of securities totaling more than $47 million, partially offset by $10 million of other-than-temporary impairments.

As of December 31, 2010, the portfolio's net unrealized gain position was just over $905 million, consisting of net unrealized gains on fixed maturity and equity securities totaling $530 million and $375 million, respectively.

Medical claims payable totaled $4.9 billion as of December 31, 2010, a decrease of $598 million or 11% from December 31, 2009.

This decline was due in part to the 11% reduction in our fully insured enrollment during 2010, including the conversion of certain large group accounts to self-funded arrangements.

The decline also reflected the favorable reserve development we experienced in 2010, including the impact of the lower targeted margin for adverse deviation.

We have included in our press release a reconciliation and roll forward of the medical claims payable balance.

This disclosure is comparable to the reconciliation provided in our fourth-quarter 2009 press release.

We report prior-year redundancies in order to demonstrate the adequacy of prior-year reserves.

Medical claims reserves established at December 31, 2009, developed favorably, and for the full year of 2010 we have significant positive prior-year reserve development of $718 million.

This is modestly lower than the $807 million of favorable prior-year development we experienced in 2009.

We estimate that we experienced $315 million of higher than anticipated favorable reserve development, including the impact of the lower target margin for adverse deviation in 2010.

Approximately $180 million of this was recognized in the Commercial segment and $135 million in Consumer.

This compares to approximately $262 million of higher-than-expected favorable development that was recognized in 2009, approximately $81 million of which was in Commercial and $181 million in Consumer.

As of December 31, 2010, days in claims payable was 39.3 days, a decrease of 1.4 days from 40.7 days at September 30, 2010.

Approximately 0.6 days of the reduction related to favorable reserve development, including the lower targeted margin for adverse deviation in our December 31, 2010 medical claims payable balance.

Changes in the timing of payments and claim seasonality reduced DCP by 0.4 days in the quarter.

The remaining 0.4 day decline related to year-end provider settlements and other items.

Turning now to cash flow and capital deployment, for the full year of 2010, operating cash flow totaled $1.4 billion.

This result was impacted significantly by $1.2 billion of tax payments we made during the first quarter related to the 2009 sale of NextRx.

Operating cash flow was higher than we expected in the fourth quarter at $587 million, or approximately 1.1 times net income.

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

For the full year of 2010, we repurchased 76.7 million shares of our stock or 17% of the shares that were outstanding at year end 2009, or $4.4 billion, or an average purchase price of $56.86.

As of December 31, 2010, we had approximately $149 million of Board approved repurchase authorization remaining.

We ended 2010 with $3.3 billion of cash and investments at the parent company and available for general corporate use.

We utilized approximately $700 million of this to repay debt that matured in mid-January, and we had approximately $500 million of interest payments scheduled in 2011.

We also expect to receive at least $2.2 billion of ordinary dividends from subsidiaries in 2011, most of which we anticipate receiving in the second half of the year.

Our Board of Directors plans to address capital deployment during its meeting next month.

Our debt to total capital ratio ended 2010 at 27.3%, up 200 basis points from 25.3% at December 31, 2009 due to a third-quarter debt issuance.

We remain near the low end of our targeted range of 25% to 35% and continue to have significant financial flexibility, which we value in light of the current economy and the changing health benefits marketplace.

We are in a strong capital position heading into 2011 and we expect to continue making strategic investments in our businesses to drive long-term success for our customers and our shareholders.

We currently project that net income will be at least $6.30 per share in 2011.

Some of the more significant headwinds and tailwinds impacting our 2011 outlook include we recognize an estimated $315 million of higher than anticipated favorable reserve development, including the impact of the lower target margin for adverse deviation in 2010 that we do not expect to recur in 2011.

2011 will also be the first year of minimum MLR requirements for the Individual and group markets, and we estimate that these will negatively impact our operating gain by approximately $300 million.

We also expect lower net investment income in 2011, given the continued low interest rate environment and the anticipated nonrecurrence of some dividends we received in 2010.

We continue to view the economy as a net neutral impact for 2011.

Unemployment has leveled off though we are not expecting a significant improvement in employment levels this year.

In terms of tail winds, we have taken action to lower distribution and administrative costs next year and believe we can achieve savings that will offset a significant portion of the operating gain impact we expect from minimum MLR requirements in other areas.

In California, we implemented premium increases in the usual markets effective October 1, 2010, and improved our results.

And we expect that appropriate rate increases will be obtained in the future in order to maintain a sustainable market for individual members in California.

In the Senior market, we expect to modestly grow membership while maintaining steady margins despite the changes impacting the private fee-for-service program.

We also had another strong year of growth in our National accounts business.

And finally, our diluted share count will be lower in 2011 given the repurchases we completed in 2010.

On a normalized basis, which excludes the $315 million of higher than anticipated reserve development from 2010 results, we are targeting flat operating gains in 2011.

We plan to provide more detailed information about our financial outlook for 2011 and our longer-term strategy during our Investor Day on February 23, 2011.

I'll 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).

Josh Raskin, Barclays.

Thanks.

Good morning.

Just a quick follow-up.

I just want to make sure I understand what you were saying about the Individual book in California.

It sounded like you were expecting, should we say lower losses or do you actually expect profitability in 2011 because of future anticipated rate increases?

And I don't know if it's easy enough to just sort of give us -- what's the delta I guess in operating gain from that segment?

Wayne, do you want to -- Brian and Wayne are here and can address a little bit more about California.

Yes, Josh, let me start off with saying that what we expected and had forecasted was much more of a normal seasonality in the fourth quarter, and the lower trends that we saw across the US continue in the fourth quarter.

And so for that reason, we did not lose as much, but nonetheless, still lost more than $110 million in California for the year.

So, it benefited a little bit by the adverse deviation reserve release we did in the quarter, as well.

So net net, if you said what was the final loss in California, it's over $110 million.

So that's the delta going into 2011.

We are working with the regulators, and I will let Brian comment on that in more detail around how to mitigate that.

Our goal, obviously, is to return to profitability by 2012 at the latest, but clearly trying to find mechanisms to substantially mitigate that for next year.

Brian, do you want to add some more around your recent meetings?

Sure.

Hi, Josh.

You know, as Wayne said, we did lose about $110 million last year.

We've got a couple of active rate filings that we're working closely with both the California regulators on as of today.

And while we anticipate that -- some positive outcomes as a result of those discussions, it is our plan at the moment that we won't return to profitability, but we will make some substantial headway against kind of what happened last year.

I think the overarching issue also is, we need a sustainable solution in California and other states, not only for the business model, but importantly, for customers in these geographies.

We need sustainable long-term solutions where the Individual market can be viable.

It's going to be increasingly important in the future, and so we are going to work collaboratively with regulators across the various states to get to that result.

Okay.

So it sounds like you guys are still expecting a loss.

That loss is including some expectation of these rate filings that are currently active coming through, and then by 2012 that will be a profitable book of business?

Yes, I think that's correct.

Okay, and then I'm sorry, you talked about 2011 I guess as a base year or a trough year or however you want to think about it.

What is a longer-term growth rate?

As we think about 2012 and beyond, where do you think EPS growth for the overall enterprise is at this point?

You know, Josh, part of describing 2011 as a base year is illustrating the impact of the minimum medical loss ratio.

And we've been describing about a $300 million headwind to overall operating income.

What we will do at IR Day is give a little more explanation about some of the assumptions that we have moving forward in terms of future growth.

As you heard us say, we do think we have an opportunity and we are really well-positioned for organic membership growth.

We think there are other acquisition opportunities as we go forward.

Given the diversity of the segments that we are in as well, we think that positions us well for growth.

And Senior, as it goes forward, and the demographic produce a potential membership growth.

We obviously think we are really well-positioned for our State Sponsored or what we call State Sponsored, which is the Medicaid managed care business.

And given our expertise in the ASO market, we think we're in a really great position, and you are seeing some of that come through.

We are positioning ourselves for future growth in Individual as the exchanges would come on in 2014.

So, we want to tell you all about that at IR Day, and we look forward to seeing you there.

Josh, one thing I would add is that if you look at even Commercial this year, despite a difficult economy, recognizing that we made a decision to sell UniCare, if you exclude that, we actually grew in our commercial book this year across all of our Blue states.

And we grew in our Senior book this year and our Medicaid book.

So, I am very optimistic as to our growth.

And I think as Angela said, 2011 is just a base year reset because of the MLRs, but we believe we are showing the top-line growth that we wanted to see, and our investments are paying off.

Okay, thanks.

Charles Boorady, Credit Suisse First Boston.

Thanks.

Good morning.

You mentioned a lot of intriguing things related to your provider contracting trends, especially with hospitals.

And I wonder if you could just bottom line for us what you're building into your guidance for 2011 in terms of utilization expectations, but also pricing.

It sounds like you are getting some pretty good success, especially in California, with renegotiating unit prices.

I know some unit price increases are already locked in as a result of previous years' multi-year contracts, though.

So maybe you can share with us what the bottom line increase in pricing is you are expecting, and just bifurcate what recent trends are from what you are locked into from previous years.

Charles, I will let Wayne be a little more specific.

Philosophically, we are feeling like we are well-positioned to make a difference in terms of the discussions with providers of hospitals, doctors, and others, both on two fronts, one, on the traditional contracting; and remember, in that vein, we have contracts that typically about a third of our contracts might renew in a given year.

And then, on the provider payment innovation side, we are seeing a lot of receptivity to working with us in a collaborative, innovative payment arrangement, whether it be an accountable care organization, which we are working with a number of different facilities on, and a number want to have those conversations.

Also, patient-centered medical homes, bundling, pilots.

We're working on making sure that those are programs that we can really scale for the future, but we need to move forward on this, and we feel like we are.

We feel like transparency has made a difference here as well.

And particularly given the minimum medical loss ratio that go into effect in 2011, with those in place, yet we still see these rising rates, I think it is moving the discussion to a more meaningful conversation about what is driving underlying cost of care.

Now Wayne will probably want to give more specifics to that.

Okay, just Charles, a few things to add.

Angela covered a lot of it, but, our unit price trends on hospitals this year are actually lower than what we had the previous year and we expect going into 2011 will be even lower.

So I think we are clearly getting to the point that we are driving the unit price down in the negotiations, and in the way we are partnering with our providers.

That being said though, we are assuming though the trend will actually go up next year, and we will provide more details at IR Day.

And that's primarily due to the fact that we believe we will see a more normalized level of utilization in 2011.

Now whether or not that ultimately occurs remains to be seen, but, we are starting to see what we believe will be the beginning of the rebound.

We think that should begin and so we're pricing for that.

In addition, we are assuming a flu rebound that will get back to a much more normal flu-related trend than what we saw in 2010.

We also assume we have baked in the health-care reform costs that will come through and how those will affect trend.

So ultimately, when you look at them all in, where we finish this year, we are assuming trend will be higher next year despite the lower unit price that we are negotiating in many of our contracts.

But we will provide better detail at IR Day as to those Individual components for you.

And in terms of just quantifying the better unit pricing, is it that you are getting 3% or 4% now versus 7% or 8% in previous years, or just kind of ballpark how big of an improvement is that on the unit price side?

In some cases, the prices are going down over what they got this year, so in some cases we're not even giving increases.

Some are below range.

Some, quite honestly, Charles, could be higher, meaning at the 9% or 10%, but these would be organizations that have the highest quality and the lowest paid providers in their markets.

And what we're trying to do is make sure that they get rewarded and compensated for that high quality.

So, but I think net net, all in, we will give more details, but we believe we will definitely be in the single-digit range for next year, and we will talk more at IR Day.

All right.

Thanks.

John Rex, JPMorgan.

Thanks.

I wanted to look at operating expense for a moment here.

Could you talk to just kind of maybe perhaps a cleaned up op.

expense number for the 4Q.

You spiked out some things on the call.

I think probably in there is maybe like roughly $100 million of fixed asset write-off, and that wasn't spiked out, so is there a view to recurrence of that?

And then maybe just kind of clean up that op.

expense number so we can think about a jumping off point for 2011.

You know, John, I think that's a good question.

We are really pleased with the performance for the quarter, and I think it is important to understand what is in the SG&A number.

We did cover a number of non-cash items and we made a number of investments, some of which may recur relating to health care reform and our strategy for future growth.

So Wayne, why don't you go through that.

Yes, John, let me walk you through the pieces.

We had about $150 million of what I will call non-cash charges that we covered in the quarter.

And I'll walk through each one of these in a little bit of details.

One is, as we looked at healthcare reform and how we saw it evolving over the next say five plus years, we did a deep dive of all of our assets in the organization; that would include internally developed software, core systems, locations, et cetera, and made a decision around our longer-term strategy on those assets that we thought we could take an impairment charge today.

And so we took a $95 million non-cash impairment charge in the quarter.

In addition, we took a $30-plus million pension charge.

Now while our pension plans are fully funded on a cash basis, this was an accounting non-cash charge.

Specifically, while our plans are frozen, what we're finding is that more Individuals are electing to take a full payout upon retirement versus deferring that payout over the life of their retirement.

We think that's primarily a reflection of what we're seeing in the economy.

When that occurs, you are forced to accelerate the accounting component of that charge regardless of the funded status.

Now, we think that that trend could continue into 2011; we're not assuming the economy will improve, and for that reason, we are assuming people will continue to elect to take lump-sum payments.

And so while it's a non-cash charge in the quarter of $30 million, I would not necessarily assume that that would not repeat.

There's a higher probability it would repeat next year, and so we've made that assumption as well.

And then we had about $25 million, just under $25 million of lease write-offs as well that we accelerated as we consolidated our location.

That's about, again, when you add those up, about $150 million that we cover in the quarter.

And then on top of that, we made some investments in some other items.

For example, we made some additional investments in our marketing advertising, and our STAR investments around Senior.

With private fee-for-service going away, we saw a unique opportunity to really accelerate those investments this year, not only for enrollment in 2011, but for the STAR program to set ourselves up very well for 2012.

We started making those investments and already qualify, we believe, under the new STAR calculations for enhanced payments, but we think we can even accelerate that more, and made those investments.

We also had some severance in the quarter and enhanced incentive comp as well.

So when you add all that up, we believe we had a very strong quarter covering those components.

That said, I think when we look forward to 2011, we did make some tough decisions about SG&A.

We expected the ratio to decline in 2011 and we'll see some of that coming through as we execute against these initiatives that are producing lower SG&A.

But also we are maintaining and improving our service levels.

Great.

And then turning to the med cost expectations, so you've gone to 6%, 6.5% for 2010.

Can you then get [a size in], what is the number that you expect for a churn factor for group for 2011 that's incorporated in your pricing view?

Again, John, we will talk more at IR Day as to what we're pricing for with trends at that point.

But again, we expect it to be up for all the reasons we outlined.

We see a few things that could mitigate that, which would be some improvement in COBRA.

But all in, we still expect it to be net up.

And again, we will provide more detail and we believe we are pricing accordingly.

Scott Fidel, Deutsche Bank.

Thanks.

Just had a question on fully insured enrollment for commercial for 2011.

You walked through pretty much all the other customer segments, so just interested directionally in how you are thinking about commercial fully-insured enrollment for this year.

I'm going to let Ken Goulet handle that.

Ken?

We are anticipating a continuation of strong results from the execution we have had this year.

However, there will be a slight reduction in fully insured as there continues to be a transition of fully insured to ASO business, and there continues to be some attrition due to the economy.

But it's essentially slightly lower than flat, but it's solid.

And we feel very good about our results.

And Scott, the one thing I would add as well is, as we will talk more at IR Day, we are not assuming improvement in the economy.

So similar to what Ken said, generally with that assumption though, that assumes that we will lose slightly more in a group change potentially versus actually getting growth.

If the economy does improve, then that obviously would help our results.

But I think right now, we're feeling pretty good in light of the economy that we are in.

And then as Ken mentioned, even on the fully insured where we might see a slight decline, we're actually picking that up on the ASO.

So it's not that they are leaving WellPoint.

They are staying with us.

And then we see very significant growth [for 1/1] related to National accounts.

And do you have just a ballpark estimate of what that in-group attrition is that you are building in for 2011 that's directly related to the economy?

Yes, give you a couple of numbers on first the ASO side.

We have been losing, and by losing, it is not losing to a competitor.

It's simply someone going from the insured ranks to the employers downsizing their size.

We've been losing in the 20,000 to 25,000 members a month range.

And on the fully insured side, it's been about half of that.

But then offsetting most of that with new sales.

And we've been offsetting it with new sales and good retention, exactly.

Okay.

Thanks.

Matt Borsch, Goldman Sachs.

Yes, good morning.

When -- you made a reference to claims trends so far or that perhaps you are seeing a bit of a rebound in utilization, is that strictly -- did I catch you right on that, and is that based on year-end trend or a little bit of what you've seen so far this year?

And is there anything you can spike out there?

Yes, you know, Matt, it's interesting.

We look at rolling 12 month, rolling six month, rolling three months, and so if you're looking at a rolling 12 month, the decline is quite steep and you really don't see it turn.

If you look at rolling six, it's still fairly steep and you don't see it turn.

If you look at rolling three, it's more flattening.

And so what I mean by that is that we're not seeing what I will call that steep decline anymore, and the fact that it's flattened now on a rolling three gives us pause to think it's probably ready to start the rebound at this point, so we're not seeing that continuation.

So I don't want to imply, and I apologize if I did, that we are seeing this big spike or rebound or even subtly.

It's more that it's flattened, and we're not seeing on a more three-month rolling trend, that continuation of a downward decline.

So I think what we'll start to see, and that's why we priced accordingly, is a rebound in 2011.

Okay, great.

And if I could just ask a separate question on Medicare Advantage.

You referenced in your press release some pressure there, and cited the 2010 rates, and we haven't seen that I don't think for many others this year because the underlying cost trends seem to have offset the rate pressure, but you guys appear to have felt it in this quarter.

Is that -- does that preview more pressure that you expect in 2011 given rates are flat, or what's your view there?

You know, Matt, I don't think we meant to over-emphasize that.

I think it was more a reflection of just the fact that we experienced the reimbursement coming down, and that's going to continue, we expect, over time.

But you are right, we did see a better trend overall.

So Brian, do you want to speak to Med Advantage in particular?

Yes, I think Angela was spot on, and I think our comments were comparing last year Q4 to this year Q4; there is a net reduction in reimbursement.

But we are very confident in how the Med Advantage book is performing right now.

We are coming out of open enrollment.

We're very pleased with how our sales are coming in.

We continue to, year over year, make improvements in both our sales and our marketing.

And early view is that sales are coming in much better than projected, about 15% to 20%.

We don't have 100% visibility in terms of elapses, but what we do know is it looks like lapses are favorable too.

So one, we have been successful at converting a higher percentage of our private fee-for-service into network products in our 14 states.

And overall, I think we are going to have a very positive year for Med Advantage.

Yes, I would say we've really executed well in terms of Med Advantage business.

We're really positioned for growth there.

The brand is very strong for the senior market, and so we are very positive about it.

The other positive thing that we are starting to see is really forward momentum in terms of net sub sales in a number of our key markets.

So, part of our goal is to run on all cylinders in the Senior business.

And we have such a great footprint already in Med Sup, and we've been trying to re-energize that engine.

And it looks like through this open enrollment, we're starting to see the results of that.

You know, as part of our strategy that we will talk about at IR Day too, we think that we can capture a lot of membership in the Senior coming from the commercial ranks.

So we are looking forward to that.

Okay.

Fantastic.

Thank you.

Ana Gupte, Sanford Bernstein.

Thanks.

Good morning.

I had a question on what you are seeing playing out in the marketplace with regard to pricing and broker commissions, your own philosophy as well as that of your competition.

So, on the pricing, are you seeing your competition in your sales mainly pricing to cost trend, and then looking to pay the rebate out?

Or are selective competitors also pricing to loss ratio floors possibly to gain share?

Ana, I'm going to let both Ken and Brian -- there's a couple of different questions in your question -- one about broker comp, one about pricing as well.

And, as you know, in the different geographies, depending on where you come from with the impact of the minimum medical loss ratio, you have different stories there.

So Ken, you want to take that broadly?

Yes.

I'd say in general, pricing is rational and all carriers are pricing to trend now.

With that said, there are small pockets in geographic areas where you will see a competitor that has an MLR ratio and then making a little bit more aggressive pricing, not for a membership play, but probably because of where they were positioned relative to MLRs.

And you see a little bit of a change in the competitive position.

But in general, we feel very comfortable that the market has been rational, and has actually seemed to solidify over the last year.

Hi, Ana.

This is Brian.

I would echo that.

In the Individual market, it all depends on the specific carrier's starting point, and how far off they were from the MLR floor, including us.

We had more favorable starting points in some areas than others, and so I think that's having a factor.

You know, with respect to broker commission, we have announced broker changes -- Q4, Q1, as have a number of our competitors.

I think in the Individual market, there was an expectation across the brokerage community that there were going to be changes.

And I would say there weren't many surprises, and it does not look like broker commission changes are having a dramatic impact on the overall market or level of sales activity.

And on the group side, I would just add that across the board, we all feel that the brokers and agents are an important part of the distribution system.

It's going to be very complex over the next couple of years, and there's still going to be a very big place where they will be representing clients.

As Brian said, there was changes in the Individual side.

We have already been transitioning on the small group, large group side in many of our markets to a PMPM basis.

And we are continuing that through the remainder of our markets, but talking with our partners in each of the markets as we do it and understanding the best rollouts.

And on the large group side, a couple of our competitors have gone to a service fee arrangement.

We have assessed that.

We continue to look at options and we will assess that in 2012 and beyond.

Great, thank you.

Justin Lake, UBS.

Thanks.

Good morning.

First, just wanted to follow up on the '11 EBIT discussion.

So you said SG&A cuts should offset the MLR floor impact and then, you will see some improvement in California.

So, from a headwind/tailwind basis, it would see seem the jumping off point for EBIT should actually be up rather than flat.

I just wondered if there's anything I'm missing here or is there -- are we looking for growth in the core business X these items?

Let me speak to that a little bit and then I will turn it back to Wayne and we can go back over the headwinds and tailwinds.

Obviously, we will go over that in greater detail at IR Day.

If you look at op.

gain and exclude the $315 million of favorable reserve development for 2010, we do think we made some good calls on how to manage SG&A to bring op.

gain to flat.

Given the economy, the changes that we have seen relating to health care reform, where employment is and we're looking specifically at employment with coverage, so not just unemployment -- we're looking at affordability -- we think it is appropriate in this environment to be conservative.

But Wayne, why don't you go through the headwinds and the tailwinds on the op.

gain side?

And then Justin, when we get to IR Day, our Board is meeting next month, and we will finalize our capital deployment strategy, and we will be able to give you more details about below the line as well at IR Day.

So Wayne, why don't you go through the headwind/tailwind [question] again?

Yes, so Justin, again, as we said, if you take the $315 million off, we don't believe that's a stretch anymore; as you will see, we said we believe that's achievable.

And so, ultimately from our perspective, then it would be how those underlying trends evolve throughout the year?

Clearly, our G&A efficiencies we think will come through and they will cover what we talked about.

We obviously have to cover the private fee-for-service in our non-Blue states going away.

And as you heard Brian say, we believe we are covering that, and right now, slightly better than expectations, so we're feeling pretty good there.

And then ultimately, we wanted to see how health reform actually played out over the next year and how states implemented and rolled it out.

To the extent that things are more favorable, then obviously we would spike that out and let folks know.

But I think at this point, we think setting that as the original goal, outlining that and driving further G&A efficiency while making investments in 2011 as we prepare for 2012 STAR environment, further system consolidation, things that we think will show that not only is G&A down in 2010 on an absolute basis, you will see it down substantially in 2011.

And our goal is to position ourselves for 2012 to be down again.

So ultimately, I think if we do even better, some of that EBIT will be used to drive further efficiency at a more accelerated pace, not a less accelerated pace.

So again, we believe that that is actually in the year of reform and so much headwind and so much uncertainty, we actually are very pleased with that being the initial goal, and we will give more details below the line at our IR Day around our assumptions as well.

But we also think that being conservative in this environment is prudent.

Okay.

So it sounds like you do have conservative below-the-line assumptions there as well.

Can you outline -- is there anything you can outline there as far as the thoughts on investment income, interest expense and share count?

Justin, I would say that at this point on interest expense, again, we will give more details, but as we said, we talked about that we are assuming from a cash flow perspective about $500 million being used.

Clearly, that would be larger than our typical run rate, but nonetheless, we have debt coming due in 2012, and the assumption is that we may choose to finance that debt sooner and carry it sooner.

So, some may say that's conservative but we think it's prudent depending on where the debt environment is.

We're also assuming the headwind from investment income will be in excess of $100 -plus million.

If you look at our portfolio, we have about $16 billion in fixed maturities with an average duration of less than four years, about 3.65 years.

So when you look at the churn on that, if you look at where reinvestment rates have been at, on say a five-year treasury, they're down over 200 basis points; so just doing the simple math, you can easily come up with $100-plus million headwind.

Now clearly, to the extent investment rates improve throughout the year, and they have improved since fourth quarter already, that could be better.

But nonetheless, we are not in the business of predicting what investment rates will be.

We draw our own conclusions, and we think being conservative there is, again, appropriate.

In terms of share repurchase and capital distribution, we're meeting with our Board next month, and we would prefer to wait till then and then discuss that in further detail at IR Day.

But as you saw from our ending cash balance and the dividends we expect for the year, we will be in a good position for capital deployment.

Sounds good.

Thanks for all the detail.

Michael Baker, Raymond James.

Thanks.

You indicated that you sunsetted a number of platform this year and you are now down to 10.

Can you give us a sense of the annualized savings you expect to achieve?

And then what your ultimate expectation is when you go from 10 to three over time?

A couple of things about the platforms.

First of all, we think we are really well-positioned in terms of the execution of these transitions.

We moved all of our pharmacy benefits off of our NextRx system onto Express Scripts systems, and as a result, there's numerous retirements that will result from that.

And the other transitions that occurred both in National and in our Medicaid Managed Care or State Sponsored business really occurred with very, very minimal disruption.

So we're really pleased with the execution of that.

You know, as we get to IR Day and we talk a little bit more about the strategy, we can be more specific about some of the savings we think are going to result there.

But a couple of things we did this year that relate to that is we've brought together this Enterprise Business Services unit, led by Lori Beer.

It brings together not only the IT function but also the service function, some of the sourcing function, so -- our procurement area.

And by bringing those elements together, we think that really is going to drive not only the right news in terms of system consolidations, but the right process changes for really great execution going forward.

So Wayne, do you want to say anything more about that?

Yes, the only thing I would add is that many of these migrations are contributing savings initially.

So the fact that we have closed down three systems does give positive run rate going into say next year and the next year.

Now the downside to that is, we've got the new government requirements around ICD 10.

And you have to be compliant on ICD 10 by October of 2013.

So our goal is between now and that date, is to get down to six systems with an ultimate goal of being three so that we don't have to actually build mitigation programs for ICD 10 on those systems and not -- basically preserve those funds to reinvested in the business versus put on systems that we're going to retire.

And then ultimately, we'll be preparing for ICD 10 on six systems, and then around closer to 2015 or so, our goal is to get closer down to three systems.

So, with a pretty sizable system that we want to migrate in 2011 -- I think it's about 2 million members.

But what's great is our core three platforms have been functioning well.

We migrated the three this year in addition to the ESI migration.

And I think you would all agree there's been very little disruption at all during that process.

So we really think this has become a core competency of ours.

You will start to see a run rate, but you've got to get past 2013 to get the real incremental benefits of these system consolidations.

Well and throughout -- and we can take you through this a little bit more.

Throughout these changes, we make some investments in the new systems that are going to serve a broader membership base, and we can leverage them.

So for example, we have a new member-facing portal that has much more capability than our prior systems, and we can retire those prior portals.

We're doing the same on the provider side and getting much more satisfaction from providers being able to use multi-payer portals, and then we can retire systems.

We've brought our databases together, and have the opportunity, while you initially make that investment, to bring up the new systems; and then you can retire the older systems as we go forward.

I think Brian is experiencing -- in his business.

Yes, I think, Michael, another byproduct of the system conversions is an enhanced customer experience for our members.

For example, migrating all of our pharmacy business to an enhanced Express Scripts systems gives availability of much more detailed reporting on the pharmacy benefit for employer groups and internally to us.

Another byproduct of moving all of our State Sponsored business is really positioning ourselves as a platform for growth over time.

And almost immediately, we saw a dramatic uptick in our auto adjudication rates, which also has shown an improvement in claims quality.

So there's a lot of downstream impacts that positively influence both our customers, be it Individual members or employers.

Thanks.

And I had a follow-up on the pharmacy strategy.

I was wondering if you could just update us on your thoughts as it relates to mail and how important that is in terms of driving efficiency going forward, particularly given the fact that retailers have gotten more aggressive with their pricing at 90-day at retail?

I would say as we joined in with our partnership with Express Scripts, we think their capabilities are really going to help us accelerate the move to mail.

I would say if you look at 2010, our focus in 2010 was moving the membership onto Express Scripts systems because we do believe their capabilities there were superior to ours.

And frankly, I think 2011 is the year we are really going to start to executing strategy, taking advantage of their capabilities, moving to mail and further, thinking about ways to reduce overall pharmacy costs.

Thanks for the update.

Peter Costa, Wells Fargo.

Thank you.

Can you describe what happened with your tax rate in the quarter?

You talked about lower state taxes.

Is it a true-up of the [user's] taxes or is that more of an ongoing thing?

Do you want to take that, Wayne?

Yes, hey, Pete.

No, I wouldn't view that as -- I would get back to a more normalized rate next year.

This was just the regular true-up that we do on all of our state tax accruals.

And as it's probably fairly evident to all that in some states that have generally higher tax rates, we made less than we typically do.

And obviously you guys are very aware of some of those states.

And so as we did our final apportionment factors and true-up for the year, it was just a settlement on those.

But I don't necessarily expect that to repeat.

And obviously, we expect to increase profitability in certain states next year.

Okay, thank you.

And just one follow-up question if you don't mind.

The growth you had in Medicare and the comments you've made today, it sounds like you're sort of accelerating your view or improving your view in terms of what you think of that product relative to the past?

Is that fair to say or is that not a change in strategy for you guys?

Yes, let me talk about it because -- and then I'm going to turn it over to Brian.

You know, clearly over the last couple of years, we've done some really foundational improvements in terms of compliance and execution around our Medicare business.

We've always thought it was an inherently great growth opportunity for us because of the strength of our brand and size of the market that exists.

So Brian, why don't you speak to how we're feeling about it and where we think it is in the priority of order here?

Yes.

Certainly, as we've talked about, we've made a lot of investments over the last couple of years really to position ourselves for future growth.

A lot of those investments are really starting to pay off.

Year over year from a sales and marketing standpoint, we continually do much better than the year before.

Operationally, we're very strong.

We have greatly improved our relationships with the regulators.

And as we went through our strategy development over the last year, we really categorized our business, and we will talk about this more at Investor Day, but certainly Senior is one of our business segments that we have designated as an accelerated business, which means that we are going to continue to invest almost on a disproportionate share to capitalize on the growth.

Looking at just the potential membership in our 14 Blue states, there are millions of baby boomers that are aging into Senior, and so we want to take position -- take advantage of our brand and really grow that position.

And given our historical placement of that business, we still have a lot of headroom just to get up to our commercial market share levels in Medicare.

So we're pretty optimistic about our ability to do that.

Yes, I think despite the belief in cutting that will continue to occur in Medicare that's out there, this is really a tailwind for us, both the membership gain and the op.

gain on it because of our starting point.

So -- and again, as Brian said, with the strength of our Blue brand, with the success we are seeing so far and with over 1 million plus baby boomers aging in every year in our Blue states for the next 19 years, that is a market that we do not believe you can ignore.

And we think it will give us some very good cash flow growth over time.

Great.

Thank you.

I want to thank everyone for their great questions.

In closing, I'm going to reiterate, we have had a good year in 2010, and we are confidently looking towards the future.

We believe we have both the right strategy and the right structure in place to address the challenges and capitalize on the opportunities that we believe will be presented.

We plan to continue delivering value to our customers and our shareholders in 2011 and beyond, and we look forward to sharing more about our strategy to take advantage of new opportunities for growth.

We will be providing you with more detail about our 2011 plans and our long-term strategy at Investor Day on February 23.

So to register, please contact our Investor Relations department.

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

Operator, could you please provide the call replay instructions?

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