Elevance Health Inc (ELV) 2011 Q3 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 Third 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 third-quarter 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 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 measure calculated in accordance with GAAP is available on 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 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 not turn the call over to Angela.

Thank you, Michael, and good morning.

Today we are pleased to report third-quarter 2011 earnings per share $1.90, which included net investment gain of $0.13 per share.

Earnings per share in the third quarter of 2010 totaled $1.84 per share and included net investment gain of $0.10 per share.

Excluding the net investment gains in each period, our adjusted EPS was $1.77 in the third quarter of 2011 an increase of 1.7% compared with adjusted EPS of $1.74 in the same period of last year.

Our third-quarter results were higher than we anticipated and were driven by continued strong performance in our commercial segment.

On a consolidated basis, we experienced sequential increases in both membership and operating gain during the quarter, and based on our overall results, today we're raising our full-year 2011 earnings per share guidance to a range of $7.18 to $7.28 on a GAAP basis, which includes $0.28 per share of net investment gain from the first 3 quarters.

On an adjusted basis, or excluding the net investment gains, our full-year EPS guidance is $6.90 to $7.00.

Our medical enrollment increased by 169,000 members during the third quarter and totaled approximately $34.4 million as of September 30, 2011.

We added 99,000 members organically in our local group business during the quarter, while our senior enrollment increased by 89,000, including 57,000 members from the CareMore acquisition and organic growth from AGIM.

These increases were partially offset by modest in-group attrition in our national business.

We believe that further attrition is likely during the fourth quarter and we therefore expect to end 2011 with approximately 34.2 million members.

In light of current economic conditions, we anticipate that in-group membership attrition will continue to pressure our enrollment in 2012.

We currently expect that the number of workers with health benefits may decline modestly, as many employers are facing a challenging business outlook.

We also expect that individual membership will continue to be negatively impacted by the economy.

In our national business, we expect to maintain our leadership position next year with enrollment in excess of 12 million members.

We had another successful selling season in a competitive marketplace with some very large account wins, and we continue to attract new customers as a result of our compelling value proposition.

By offering access to the broadest provider network in the country with the leading cost structure, strong medical management program, innovative health and wellness capability, actionable transparency tools, and superior customer service, our value proposition is excellent for national accounts.

We remain disciplined in our pricing of new business and renewals and as a result, will lose some no- or low-margin accounts next year.

Coupling this with our expectation that negative in-group change will continue for national accounts, we now expect a small decline in national account membership for 2012, while we continue to anticipate that our national operating gain will grow.

In the senior market, we're making a number of changes to our business for 2012.

In California, we've restructured our Medicare Advantage portfolio and will be offering products on a local basis.

We believe our plan designs and pricing appropriately reflect the underlying cost of the local market, and we expect improved financial results.

Additionally, we will be expanding our Medicare Advantage footprint outside of California, including large expansions in Georgia, Missouri, Virginia, and Wisconsin.

In total, we will be growing our Medicare Advantage service territory by 136 counties in 11 states, and we expect this to drive growth in our senior membership next year.

We're also pleased that the CareMore acquisition closed earlier than we'd anticipated.

We're working diligently to bring the CareMore model to more members across the country, and currently expect to open at least a dozen new care centers in 2012.

We believe this will enhance our ability to create better quality health outcomes for seniors and improve our future membership and revenue growth.

In our state-sponsored programs, we expect relatively stable enrollment for 2012.

We expect to gain additional members through the continued implementation of the California Seniors and Persons with Disabilities Managed Care Program.

I'm also pleased to announce that we will be serving as an administrative services partner to Health Care Service Corporation, or HCSC, the parent company of the Blue Cross and Blue Shield plans in Texas, Illinois, New Mexico, and, Oklahoma.

Together, we will provide Medicaid benefits in the Austin, Texas, area beginning March 1, 2012.

We're also awaiting final RFP decision in some of our existing service areas.

Our operating revenue totaled approximately $15.2 billion in the third quarter of 2011, an increase of nearly 6% from the third quarter of 2010.

This was driven by premium increases designed to cover overall cost trends and membership growth in the senior business and the federal employee program, partially offset by a decline in fully insured commercial membership.

Overall, the marketplace is competitive, but generally rational.

Our benefit expense ratio was 85.1% in the third quarter of 2011, an increase of 130 basis points from 83.8% in the third quarter of 2010.

This was driven by changes in prior period reserve development, as we recognized an estimated $110 million of higher-than-anticipated favorable prior-year reserve development during the third quarter of 2010.

The benefit expense ratio also increased due to business mix changes, including growth in our senior membership and adverse selection in certain Medicare advantage products.

We now project that underlying medical cost trends in our local group business will be in the range of 7%, plus or minus 50 basis points, for the full year of 2011.

Unit cost increases, including an increase in the acuity of services, continue to be the primary driver of overall medical cost trends.

We're intensely focused on holding down unit cost increases through various contracting strategies, especially our value-based contracting initiative.

This initiative conditions negotiated payment increases on a demonstration of customer value, such as participation in our Quality Insight Hospital Improvement Program, or QHIP, which focuses on improving quality and lowering costs for all in-patient admissions.

Since July 1 of this year, when we formally announced our intention to tie payment increases to quality measures, over 97% of the eligible hospitals have agreed to participate in QHIP.

In total, we have now completed nearly 90% of our hospital contract negotiations for 2011, and we've had a successful year.

On average, the hospital rate increases we've negotiated are lower than they were in 2010, and we've worked collaboratively with hundreds of institutions to ensure that these increases are being supported by quality performance scores and to preserve an extensive high-quality network for our customers.

In addition to our focus on contracting, we continue to expand innovative and successful medical management programs designed to optimize health care costs and quality for our members.

Last month our American Imaging Management, or AIM, subsidiary announced the results of a customer case study showing that prospective clinical review for echocardiography improves the clinical appropriateness of cardiac imaging services and helps prevent unnecessary utilization.

AIM evaluated a client population of approximately 3 million members over a 2-year period to determine the impact its clinical review program had on provide ordering behaviors and utilization patterns.

Under this program, a physician ordering a particular cardiac image study contacts AIM via phone or the web to supply the demographic and clinical information appropriate to the requested procedure.

This information then allows AIM to evaluate the request using tools consistent with the guidelines established by the American College of Cardiology.

AIM's case study found that its clinical review program resulted in an 18% decline in the utilization of certain imaging services when compared to the prior year.

As unnecessary imaging procedures are frequently cited as contributing to our nation's rising health care costs, we're pleased that AIM's clinical review program continues to demonstrate success in improving patient safety, decreasing unnecessary utilization, and delivering savings for the health care system.

Another way in which we're advancing evidence-based medicine is through our recently announced innovative agreement with IBM to develop Watson-based solutions for health care.

By combining our extensive health care knowledge base with the IBM Watson technology, we envision a tool that can help doctors more efficiently access information from their patient's medical record, compare it with the latest evidence-based medical research, and make more informed health care decisions for and with their patients.

We know that high-quality health care could actually cost less, and through this partnership we expect that Watson will be able to help our members receive more appropriate and effective treatment.

We recognize that there is an extensive pipeline of diagnostic and therapeutic technology that can favorably impact the cost and quality of health care, and we see Watson as an enabler to assuring that these tools are used at the right time and in the right setting.

We'll begin piloting the Watson technology with our nurses early next year.

We will continue to invest capital in support of our objectives to create the best health care value in our industry, to excel at day-to-day execution, and to drive future profitable growth.

In addition to investments in CareMore, AIM, Watson, and other ongoing initiatives related to ICD-10 and health care reform, we also recently announced the strategic partnership with HCSC and Blue Cross Blue Shield of Michigan to acquire a majority ownership stake in Bloom Health.

Bloom is an innovator in the defined-contribution health care marketplace, and through this investment we intend to offer a nationwide defined-contribution solution for employers to use in managing their health benefits.

We believe employers will continue to search for more predictability in their health care spending, and the defined-contribution solution that we can offer through Bloom will help us to continue leading the marketplace.

The Bloom solution will begin offering limited enrollment for groups renewing in 2012 and will be fully operational in all markets by 2013.

While we continue to invest for the future, we are becoming a more efficient Company.

On a year-to-date basis, we've grown by more than 1 million new members, while reducing our Selling, General and Administrative expenses by $185 million, or 3%.

Our SG&A expense increased sequentially during the third quarter due to expenses designed to enhance our low-cost operating model and the acquisition of CareMore.

We're also anticipating some restructuring costs in the fourth quarter, but we remain on track to significantly reduce or SG&A costs for the full year of 2011, even with our stronger than expected growth in membership this year.

We're now serving more than 66 million people across our businesses, including our medical and specialty products, our comprehensive health solutions businesses, and other small, but growing, ventures.

Our ability to add new customers while controlling costs demonstrates our execution and emphasis on creating a more affordable operating model for our customers.

We now expect that our SG&A expense ratio will improve to 14.1% for the full year of 2011, which we believe is an industry-leading level for comparable booked-to-business.

We're also maintaining modest profit margins, and on average expect to earn approximately $3 per individual served per month, after paying taxes in 2011, while providing these individuals with access to more affordable quality health care.

We understand the need to optimize our cost structure, and through our continuous improvement initiative, we intend to become an even more efficient and effective organization.

While we will require continuous investment over the next few years to comply with new regulations and prepare for a changing marketplace, our goal is to at least cover these required investments and those needed to continue to grow our business with administrative cost savings from other areas so that our SG&A expense remains flat to slightly down on a per-member, per-month basis.

Longer-term we see significant SG&A opportunities, particularly as we achieve ICD-10 compliance, complete our migrations to preferred claims systems, and continue to drive greater economies of scale.

We're actively preparing for another successful year in 2012.

We expect to continue improving the lives of the people we serve and the health of our communities by delivering new products and services to the marketplace, by partnering with providers that enhance the quality and manage the cost of healthcare, by increasing productivity across our organization, and by investing for future growth and greater long-term performance.

We expect that our focus on creating the best health care value in the industry will continue to drive success for our customers and shareholders in 2012 and beyond.

I'll now turn the call over to Wayne to discuss our financial results and updated outlook in more detail.

Wayne?

Thank you, Angela, and good morning.

Premium income was $14.2 billion in the third quarter, an increase of $815 million, or 6% from the prior-year quarter.

This reflected rate increases designed to cover overall cost trends and membership growth in the senior and FEP businesses, partially offset by a decline in fully insured commercial membership.

Administrative fees were $963 million in the quarter, an increase of $26 million, or 3% from the third quarter of last year, driven by growth in self-funded membership.

As of September 30, 2011, approximately 60% of our medical enrollment was self-funded and 40% was fully insured, compared with approximately 59% and 41%, respectively, as of September 30, 2010.

As Angela noted, we now expect to end 2011 with approximately 34.2 million members.

We also now estimate that full-year operating revenue will be approximately $60.1 billion.

The benefit expense ratio for the third quarter of 2011 was 85.1%, highly favorable to our expectation and 60 basis points lower than the second quarter of 2011.

We now expect our benefit expense ratio to be in the range of 85% to 85.2% for the full year of 2011, which is a reduction from our prior guidance and reflects lower-than-anticipated underlying medical cost trends in the commercial segment.

The benefit expense ratio is expected to increase sequentially during the fourth quarter, primarily due to the seasonality of our commercial and individual part designs.

We now anticipate that underlying local group medical cost trend will be in the range of 7%, plus or minus 50 basis points, for the full year of 2011.

For the rolling 12-months ended September 30, 2011, medical trend continued at lower-than-expected levels.

Inpatient trend is currently in the very low double digits, outpatient trend in the high single digits, physician services trend is in the low to mid-single digits, and pharmacy trend is in the mid-single digit range.

Our rolling 12-month medical trend increased slightly this quarter, but by less than we expected.

Unit cost increases continue to drive overall medical trend as utilization has remained stable to declining in all categories except pharmacy, which is modestly higher.

We are recognizing an increase in the acuity of services, as evidenced by the fact that our inpatient admissions per thousand members are down but the average length of stay has increased.

We currently anticipate that inpatient utilization will rebound in 2012 and we are pricing our business accordingly.

Our SG&A expense ration was 14% in the third quarter of 2011, and was slightly higher than we expected, due primarily to expenses designed to enhance or low-cost operating model and the acquisition of CareMore, which closed earlier than we anticipated.

Overall, CareMore negatively impacted our third-quarter EPS by $0.02 as we recognized only 39 days of operating activity in the quarter, but incurred the one-time transition closing costs.

Turning to our reportable segments, commercial operating revenue was approximately $8.7 billion in the third quarter of 2011, $172 million, or 2%, increase from the third quarter of 2010.

This reflected premium increases designed to cover overall cost trends, partially offset by a decline in commercially fully insured membership.

The commercial segment operating gain was $712 million in the third quarter of 2011, a decrease of $49 million, or 6%, from the prior-year period.

The decline was driven by lower prior-period reserve development in the third quarter of 2011, which was offset the impact of lower-than-anticipated underlying medical cost trend.

Commercial reserve development was in line with our expectation for the third quarter of 2011, while we recognized an estimated $75 million of higher-than-anticipated favorable prior-year reserve development during the third quarter of last year.

Our consumer segment operating revenue totaled approximately $4.6 billion in the third quarter of 2011, increasing by $537 million, 013% from the third quarter of 2010.

This was driven by membership growth in senior, including CareMore, higher risk score revenue, and premium increases designed to cover overall cost trends.

Operating gain for the consumer segment was $245 million in the quarter, a decrease of approximate $17 million, or 6%, compared with the third quarter of last year.

This was driven by changes in prior-period reserve development and higher medical costs in the senior business.

We recognized an estimated $35 million of higher-than-anticipated favorable prior-year reserve development in the consumer segment during the third quarter of 2010, but modestly strengthen consumer reserves in the third quarter of 2011.

These declines in operating gain were substantially offset by improved results in our California individual business and higher risk score revenue in senior.

Operating gain in the other segment was $16 million in the third quarter of 2011 and was nearly equivalent to the $17 million we reported in the third quarter of 2010.

Net investment income totaled $171 million in the third quarter of 2011, down $35 million, or 17%, from the third quarter of 2010, primarily due to a decline in dividend income from a cost-method investment and lower yields on investment balances in the current year quarter.

Interest expense is $108 million in the third quarter of 2011, up $2 million, or 2% from the third quarter of 2010, due to higher average debt balances in the current-year quarter.

In August, we issued $1.1 billion of long-term notes at a weighted average interest rate of approximately 3.2%.

We recognized net investment gains during the third quarter of 2011 totaling $72 million pre-tax, consisting of net realized gains from sales of securities totalling $95 million, partially offset by $23 million of other-than-temporary impairments.

As of September 30, 2011, the portfolio's net unrealized gain position was $749 million, consisting of net unrealized gains on fixed maturity and equity securities totaling $574 million and $175 million, respectively.

We continue to be in a sound financial position, with subsidiary capital levels comfortably in excess of our targeted thresholds.

Our effective tax rate was 34.6% in the third quarter of 2011, down slightly from the prior-year quarter and in line with our expectations.

Turning now to our earnings quality metrics.

Our higher-than-anticipated third-quarter membership and earnings results were supported by a slight increase in days and claims payable, and adjusted operating cash flow of 1.2 times our net income.

Medical claims payable totaled approximately $5.5 billion as of September 30, 2011, an increase of $118 million, or 2%, from June 30, 2011.

The increase was due to the CareMore acquisition.

Excluding the impact of CareMore, our reserves developed favorably in the third quarter of 2011, relative to our expectations as of June 30, 2011.

We chose to modestly increase our reserves at September 30, 2011, primarily in senior business, and now believe that we're in the upper end of our margin for adverse deviation target range.

Included in our press release is a reconciliation and roll-forward of the medical claims payable balance.

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

Medical claims reserves established at December 31, 2010, developed favorably and we experienced positive prior-year reserve development of $206 million for the 9 months ended September 30, 2011.

The level of prior-year positive development declined by $16 million during the third quarter, predominantly in our refunding business, including FEP.

Prior-year development for our traditional risk business was is essentially stable in the quarter.

We believe our medical claim reserves are conservatively and appropriately stated as of September 30, 2011.

Days in claims payable, or DCP, was 41.6 days as of September 30, 2011, an increase of 0.8 days from 40.8 days at June 30, 2011.

The increase was almost entirely related to CareMore, as we recognized only 39 days of benefit expense in the quarter, while our medical claims reserves fully reflected the CareMore membership.

Excluding CareMore, DCP was 41 days as of September 30, 2011, an increase of 0.2 days from June 30, 2011.

Operating cash flow in the third quarter of 2011 was $1.4 billion, or 2.1 times net income, and included receipt of the October 2011 monthly payment from CMS, which totaled $597 million.

Excluding this payment, our adjusted operating cash flow was $833 million, or 1.2 times net income in the third quarter of 2011 and $2.7 billion, or 1.2 times net income for the 9 months ended September 30, 2011.

We now anticipate that full-year 2011 operating cash flow will be at least $2.9 billion.

Please note that our reported fourth-quarter operating cash flow is expected to be usually low due to the timing of the October CMS payment.

In the third quarter, we utilized $898 million to repurchase the 13.4 million shares of our common stock, bringing our year-to-date re-purchase activity to 34.2 million shares, or 9% of the shares we had outstanding as of September 30, 2010, for approximately $2.4 billion.

On September 30, 2011, our Board of Directors increased our share repurchase authorization by $5 billion, which we currently intend to utilize over the next couple of years.

Also during the quarter, we used $88 million to pay our quarterly cash dividend, and yesterday the Board approved a fourth-quarter dividend of $0.25 per share.

We ended the third quarter with $2.4 billion of cash and investments at the Parent Company.

We expect to receive approximately $600 million of ordinary dividends from our subsidiaries in the fourth quarter, and anticipate uses of Parent cash totaling approximately $800 million.

We therefore expect to end 2011 with approximately $2.2 billion at the Parent Company.

Our debt to total capital ratio was 29.7% at September 30, 2011, an increase of 290 basis points from 26.8% at June 30, 2011, due to the August dead issuance.

We are currently in the middle of our targeted range of 25% to 35%, and continue to have significant financial flexibility, which we value in light of the current health benefits marketplace.

Moving now to our updated outlook.

We are increasing full-year 2011 guidance for membership earnings-per-share and operating cash flow based on our strong year-to-date results.

Specifically, we now expect that net income will be in the range of $7.18 to $7.28 per share, including net investment gains of $0.28 per share recorded during the first nine months of 2011.

On an adjusted basis, or excluding the net investment gains, our EPS guidance equates to a range of $6.90 to $7.

Year-end medical enrollment is now expected to be approximately $34.2 million, consisting of 13.7 million fully insured members and 20.5 million self-funded members.

Operating revenue is now expected to be approximately $60.1 billion.

The benefit expense ratio is now expected to be in the range of 85% to 85.2%.

The SG&A expense ratio is now expected to be approximately 14.1%.

This expectation now includes the impact of CareMore, as well as approximately $50 million, or $0.09 per share of restructuring costs anticipated in the fourth quarter that will yield savings for 2012 and beyond.

Finally, operating cash flow is now expected to be at least $2.9 billion.

We are currently finalizing our business plans for 2012.

While it is too early to provide specific guidance, we currently expect growth in both operating gain and earnings per share next year.

Some of the tailwinds to EPS growth include the following.

We expect significant improvements in the senior business, given the changes we are making to our Medicare Advantage portfolio and the expansion of service areas.

I will note that the 2011 outlook for our California Medicare Advantage business has improved modestly from last quarter, and we now anticipate that our senior business operating gain will improve by approximately $150 million in 2012.

In commercial, we expect fully insured pricing to be generally commensurate with medical cost trends, although these increases are expected be partially mitigated by in-group membership attrition and lapses due to the economy.

We also expect operating gain growth in the national business.

We expect our focus on SG&A efficiency and continuous improvement to yield a lower SG&A expense ratio.

Finally, our share re-purchase activity will result in a lower diluted share count.

In terms of headwinds, we continue to expect that state-sponsored business will be pressured due to state fiscal situations and legislative changes in certain markets.

This could reduce operating gain by up to $75 million based on the outcome of certain regulatory issues and rate negotiations.

We also expect a combined headwind of approximately $125 million pre-tax between our investment income and interest expense.

With a fixed-income portfolio of $16.7 billion, we re-invest around $4.5 billion of securities each year due to the timing of maturities, and many of our existing securities are currently invested at higher rates.

We also anticipate that we'll be carrying higher average debt balances during 2012 than we did over the course of 2011.

Finally, we expect our effective income tax rate to increase and be closer to 35% for the full year 2012.

Please recall that we benefited from some favorable tax settlements in the second quarter of 2011, and we're not projecting additional segments in 2012.

In summary, we are pleased with our performance in 2011, which continues to exceed our original expectations for 2011.

We have significantly grown our membership this year, executed on our SG&A reduction initiatives, and continued to manage our capital effectively, resulting in year-to-date adjusted earnings per share of $5.96, which represents a growth of 10.8% over the same period of 2010.

Based on these results, we have raised our full-year 2011 adjusted earnings per share guidance, and we anticipate that we can grow from this increased base in 2012.

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)

Our first question will come from John Rex with JPMorgan.

Please go ahead.

Thank you, so appreciate your comment on describing how you see the 2012 coming up.

I want to come back particularly to your commentary that you are looking for your pricing in line with cost trends.

Can you tell us what you're expecting in terms of cost trend for 2012 versus what you've seen in 2011 thus far?

Wayne, do you want to speak to the trends for 2012?

Yes.

Thanks, Angela.

Hi, John.

Let me first state how we've been pricing so far for renewals that have occurred this year as they relate to 2012.

We clearly have been pricing to date based on trend elevating to more historically normal levels.

Obviously through the first nine months of this year, we have not seen that occur yet.

But we are making the assumption that will in fact occur, and that we will price as if that event would happen.

Again, for the first nine months it has not happened at this point, but we would prefer to take that more cautious view.

As we mentioned earlier relative to trend, we are lowering our full-year guidance now from previously 7.5% plus or minus 50 down to 7% and that will become at least a new starting point for us as we look forward.

When you view historically normal levels -- if you look past over time in this country, it's probably been 8%, 8.5% in terms of trend.

Can I think about that as your view for 2012 then, in terms of what you're pricing would reflect?

I'm talking about before mix shift and such?

I think John, I wouldn't be viewing it from that.

But again, when you look at mix shift we are assuming more normalized flu, we're assuming more normalized utilization, the mix shift of the business changes it in some ways.

All in all, yes I think it's clearly at levels over where we've been seeing trend at over the last 9 months, or for that matter, over the last 2 years.

Let me try it this way.

How much would trend have to rise from where we are today to get to -- I'm talking about would we need a 100-basis-point rise in trend from where we are today to match, to take away what would be otherwise favorable spread?

No, John, it's not nearly that high though.

Okay, something less than 100 basis points in terms of what you envision?

Okay.

I think we should add a couple of comments there.

One is, when you look at trend and obviously lowering it for this quarter announcement, and everyone is talking about utilization, which we are experiencing as well.

But also, we've been successful in our contracting efforts this year, which have contributed significantly to our results.

We typically have 2-year contracts, and this was the first year I think we've seen better than expected contracting results and we have a cycle now of 2 more years, and we're going to be very focused on getting the right results there.

Also, I think it's important, Ken maybe you can speak to pricing, the rationality of pricing in the commercial market for sure, and how this trend assumption is working out in the marketplace.

John, as I look at how we're working in each of our markets, we're in a competitive marketplace, but a very rational marketplace.

As we indicated last quarter, there's occasionally a few activities where carriers may be responding to MLR activity, but in general, very rational across the board.

We're anticipating a slight rebound in trend and pricing for it, and it appears that our positioning remains very consistent with others in the market.

I'm very couple with our pricing, and at the same time very comfortable with where we are competitively and with our membership.

Great, thank you very much.

Thank you.

Our next question in queue, that will come from the line of Charles Boorady with Credit Suisse.

Please go ahead.

Thanks, good morning.

I just wanted to ask a longer-term, forward-looking question around CareMore, which is a pretty bold step in the direction of vertical integration.

I wanted to understand a little bit more about how much you plan to invest in growing that business 2012 and beyond?

Also how you manage the risk.

Looking back over -- and this might be dating myself a little bit -- but looking back over the last time the industry went through a cycle of more vertical integration, you had some plans, like Sierra Health looking to expand into Texas, the Las Vegas model, Kaiser looking to expand out of California, its model.

Aetna buying US Healthcare to try to re-tool itself as more of an HMO.

We saw some upside and also some risks in those ventures, and I'm wondering how you're thinking about managing those risks and how much you plan to invest in the coming years to build off the CareMore platform?

Charles, I want to speak a little bit about CareMore.

Brian and Wayne might speak to the specific investments.

CareMore, while yes, it is more of an integrated delivery entry for us, it really is a unique care coordination model.

I think it does a couple of really exceptional things, one of which is it really captures the member and engages them very early in the process.

They have these healthy start visits, they engage them in the care centers, and then they -- through the spectrum of care and the special needs plans specifically focus on certain conditions.

They have extends of us that really are engaged in coordinating care, and really no way that we've ever seen executed as well as we see at CareMore.

While I understand your question about, is this a full splash into integrated delivery of health, I would say no, it's an exceptional care coordination model with physicians who are really terrific at touching the health delivery system in the right way to make a difference for the members, very member focused.

We have committed to expand the CareMore model across our states and have some targeted plans to do that.

Brian and Wayne might talk about the investment, but Brian, do you want to add to that?

Sure, hi Charles.

As Angela said, the expansion of CareMore is really very focused.

We thought it was an exceptional model, particularly focused on the special needs plans and the chronically ill.

Currently, CareMore operates in -- the largest footprint's in California with a small footprint in Arizona and Nevada.

We are taking a close look at how can we expand that model and our plans are to at least add 12 more care centers to the existing 25 care centers that exist.

We're going to be very selective about the markets that we go into.

We have large HMO Medicare populations in a couple of our other geographies, so we're taking a closer look at that.

But this is going to be a very measured approach, because this is really a targeted model.

Plus the other thing that's really attractive to us about this model is it's very effective at managing the chronically ill, which is going to be very instructive and helpful in managing those populations in some of our other businesses.

Taking some of the principles of care management that CareMore has successfully deployed and rolling that out across some of our other businesses was one of the other strategic values in the CareMore purchase.

Thanks.

Is the 12 centers, is that a 2012 target and am I right that it's around $3 million per site?

Yes, it is a little higher than that, part of that's capital, part of that is expense, but that's pretty accurate.

The 12 in 2012?

12 in 2012.

All right, great.

Thanks.

Charles, one last comment I want to add to that, though.

Just to remind, too, is that unlike other expansions in the vertical model, CareMore has had 5 years of piloting, 5 years plus, the model works, we've seen the results.

We do want to highlight that the -- it's approximately an 18-month break-even period per location as they open.

Then we've seen IRRs in each location well in excess of 25%.

This is clearly an investment in our future.

We have a track record from this Management team of great success already, and we're going to be very focused on how we roll it out.

We're doing this while making it neutral to earnings, so in this case, CareMore is generating enough profit from its other facilities and locations that we can actually cover these investments through their existing operations.

Thank you.

Thank you very much.

Our next question in queue, that will come from the line of Justin Lake with UBS.

Please go ahead.

Thanks, good morning.

First, I just wanted to follow up on John's question around cost trend.

You talked specifically about the third quarter trend still being well below typical, but being up slightly.

Can you give us any greater specificity there, Wayne, in terms of what you're seeing and what the actual -- let's call it a 3-month rolling cost trend was in the third quarter?

I would say beyond normal seasonality, Justin, that we saw in the third quarter that you would typically see anyway, trends are playing very similar to what we saw earlier in the year versus expectations.

I'd say we're still seeing muted trend on both utilization -- and I think the point that Angela highlighted is probably even more relevant, that while utilization is staying very muted at this point, our activities around pricing has been quite significant, and that will continue to get better, we believe, over the next several years.

It's important to recognize, too, that about a third of our hospitals renew each year when our provider contract's due.

We're just starting to see even more of the impact of that come through as well, in tying competition to quality.

Okay, and would it be fair to say that the 3-month trend might be closer to 6%, which I think is what one of your peers mentioned last week?

That's reasonable, Justin.

Okay, and normalized trend, if we think about your guidance coming into the year was probably closer to around 7.5% I think is what you initially guided to, is that right?

That's correct.

So you said it was well less than 100 basis points, but if we think about the real trend right now running at closer to six, and that normalized trend being 7.5% unless it's changed.

Does that add up in your mind?

It is reasonable, but again, let's wait until 2012 for further guidance.

But I'd say right now we have confidence in our pricing and our outlooks.

Okay, great.

Then just quickly on the headwinds/tailwinds.

You gave specific numbers on most of them, and the one we didn't really get a ton of specificity on was SG&A.

If we were just to think about the moving parts, obviously you've got a pretty big headwind in there from investment income and interest expense, which typically ends up proving somewhat conservative, I think, over time.

Would it be fair to say that maybe the SG&A savings that you have kind of targeted for next year might offset that?

Just to kind of ballpark the number.

You put interest expense at $125 million, I think, plus investment income.

Would it be fair to say that SG&A maybe offsets that number, or is it not that meaningful?

I think SG&A will be meaningful, but I also think we're having very positive results in a lot of our lines of business beyond just SG&A, so I think we're seeing core improvements in our operating results.

We've seen that in our individual business and all of our segments this year.

We're very happy with that and how that's progressing.

Our small group is doing quite well, as well.

The one thing I would say Justin, it's not just going to be the G&A that will help us achieve our EBITDA growth that we believe we'll achieve as well, but we are seeing core improvements in investments we've made in our businesses coming through in virtually every line of business.

Okay, great, thanks for all the color.

Thank you.

(Operator Instructions)

Our next question will come from Josh Raskin with Barclays Capital.

Please go ahead.

Thanks, good morning.

My question is on 2012.

I think you guys have talked about a long-term growth rate of about 10% for EPS.

I know you're saying operating gains going to be up, and obviously with share re-purchases that may indicate something close to that range, but just curious if you confirm or want to wait on whether or not 2012 is going to be within or close to that longer-term goal?

And just 2 specific components that you talked about.

I think you said Medicare Advantage would be up next year, and I'm just curious, it looks like that exit in California is going to affect about 110,000 lives, so curious what the expectation there?

Do you think your going to retain some in local products?

I guess the last part, hopefully, of this one question is you added to your reserves this year.

You talked about the senior as well in the third quarter, so I didn't hear that mentioned as a tailwind for next year, but can we assume there won't be reserve boosting for next year?

Let me try to address the big long-term question.

As you said we really post-reform wanted to look out longer-term.

That's when we really set forth on a pathway to the 5-year plan.

So the 10% was a compound annual growth rate over the 5-year period and not an annual target.

We're not going to give guidance on this call.

We need to go through our Board and go through the annual plan, but we wanted to really reflect kind of our focus on the long-term.

That was part of our authorization for the $5 billion share re-purchases over time.

The plan, the road map that we have for this long-term CAGR is really looking at operating gain growth, as well as below the line return of dividends and share re-purchases, as well as making investments like we did in CareMore and in our core business.

So, thinking about that long-term, we'll get back to you with guidance early next year in terms of what that means specifically for 2012.

Also, in terms of the reserves, remember we did take some of the reserve releases in 2010, so you're right in saying in '11 we had some strengthening.

I'll let Brian speak to the Medicare issues and Wayne, if you want to add to that.

Okay.

Good morning, Josh.

You're correct, we have a little more than 110,000 members in the RPPO in California.

Exiting that, we do expect to attrite a fair amount of that membership.

As you'll recall, we do have 13 local PPOs approved in California, so we will be expecting to retain a portion of that membership.

As Angela mentioned, we also have quite a bit of expansion in other geographies ongoing next year, 136 new counties across 11 states.

So, we do expect to gain membership and to grow Medicare Advantage, given that overall footprint.

Given the -- we've been very focused on expanding the footprint across our 14 geographies.

We still have a lot of head room to go in future years, we're not border-to-border in terms of HMOs or local PPOs.

So, you can look to expect additional expansion, not only next year, but in the years ahead.

The only last thing I'd like to add, Josh, to your question is clearly just as prior period reserve development gave us a negative comp for the current year will give us a positive comp for next year because we strengthened reserves.

There's no need for us to further strengthen.

We are well within our targeted range and the upper end of our targeted range.

From that perspective we would fully expect not to have to do that.

The only other thing I'm going to highlight, again as Angela said, we cannot get ahead of our Board of guidance for 2012.

What we try to do is be transparent with our shareholders based on what we know at this and point time depending on other assumptions you may make as you develop your models around headwinds and tailwinds.

It may lead to an EPS increase in the general direction of our long-term targeted range.

But, again, the key for now is we want you to beware that even with the headwinds we've outlined, we believe we will more than cover those and we really think we are positioned well.

I would also state that the clarity around '11, '12 and '13 is much easier to evaluate and look towards as we still wait for clarification around some of the rules for '14.

So, we think we have a pretty good outlook in terms of the next several years based on the clarity we have in the current regulatory environment.

And Wayne, what's the quantification of that reserve tailwind?

What was the total strengthening that we've seen from the first three quarters?

Josh, we haven't quantified that because it has both a mix of refund business and non-refund business.

What we had said is that if you looked at how our reserves developed as of 12-31 versus how much we tried to strengthen at a minimum, we have said publicly in the past about $40 million would get you to a more normalized level, but, obviously, we saw opportunity to strengthen a little more than that this year as well.

Okay, thanks.

Thank you.

Our next question in queue that will come from the line of Doug Simpson with Morgan Stanley.

Please go ahead.

Good morning, everyone.

Just a two-parter on sort of where employers or how employees are viewing the market right now.

If you could flush out the comments, the Bloom Health field, the defining benefit moving to defined contribution?

What's the level of interest from employers and those products?

And maybe talk a little bit about how your products line up against a direct defined contribution employer channel versus the more traditional individual market?

And maybe also just on the inpatient contracting improvements that you are seeing, it sounded, Angela, like you said you may have some opportunity for further improvement in '12 and '13.

What's changing there with respect to the conversations you're having with employers and sort of how are they viewing cost drivers and what's their willingness to move to more lower price point products maybe narrow network products given those challenges?

Clearly, and I will let Ken speak to this, he's been leading the efforts around Bloom and our efforts with all of our employers.

Affordability is a real issue, whether it is individuals or company, and the obvious interest of companies is to create a hedge against their long-term health care liabilities.

So, they are quite interested in defining contributions, particularly as they go into a reform environment.

They have been looking at it for retirees for the last couple of years.

So, Ken, do you want to speak to Bloom and the defying contribution and the appetite for that?

Sure.

The Bloom acquisition that we did along with HCSC in Michigan was a joint approach to help meet employer needs.

I'd first say, one -- your general question, employers are looking at affordability and predictability over the next several years.

Many of them, along with their consulting partners, are doing multi-year planning right now.

And we wanted to make sure that we had a portfolio that met the needs of many different ways that employers could go.

One of the ways, and the strong interest is in the affordability or the predictability of a defined contribution model.

There are advantages over individual and that it offers both some tax advantages, as well as the guaranteed underwriting across your entire population.

So, we've had a lot of interest since announcing it from a number of both large and small group employer's.

We plan to be introducing it in 2012 on some renewals and then fully introduce it in 2013.

I would just say that the market feedback has been quite strong.

And I think what employers like are the tools that are available through the asset that we purchased to help someone choose their coverages in a variety of coverages is available.

And that it really lets the member look at the dollars available to them and make sure that they make a plan choice that's best for them and their families.

Let me speak, Doug, to the issue about contracting too, our approach is very focused on the right partnerships with providers, a focus on primary care in particular and what we are doing through these contract negotiations and the focus on quality is aligning the risks and incentives that we have that employees who are self-funded have with the provider community.

Also, we are anticipating and executing on quality measures like the star program in Medicare, the HEDIS measures in state-sponsored, we anticipate exchanges will be quality oriented as well, and so as we align with providers around those incentives, they see the upside in the essentially risk relationship that we are developing or rewarding them for quality.

And as Wayne said, we have typically three-year contracts.

This, I think, was a year where we really experienced a better contracting relationship with some of our providers and we have two years in that essentially three-year cycle.

You will see a lot of evolution though over the next couple of years in terms of the models that we are bringing forward, whether there are patient centered medical home models, ACO models, whether it is bundled payment arrangements, capitation, as well as the benefit design changing.

So, we have reference pricing designs in some geographies.

So, I would expect those efforts to continue to evolve over the next few years and it is a recognition that we all have that we need to appropriately manage cost and improve quality.

Okay, thanks.

Thank you.

Our next question in queue, that will come from the line of Christine Arnold with Cowen.

Please go ahead.

Hi, there.

A couple of follow-ups here.

SG&A, I think you said that you expected it to be flat to down on a PMPM basis, is that on total medical membership?

Is that how we should be thinking about that?

And can we assume with this extra investment spending and a one-time transaction cost of CareMore that it should be down as opposed to just flat on the SG&A per member?

And then can you update us on California rate increases, is that about $2 billion in premiums and have you asked for the rates to be increased for next year?

Thanks.

Overall in SG&A, and Wayne you can ask Christine's specific question, but our goal is as we look longer term as we are created this five-year road map, we really have developed a multi-year plan that focuses on getting to an affordable operating model, both efficiency from and SG&A perspective as well as the right investments to manage and lower the cost of care.

So, Wayne, I think we touched on that in the remarks, do you want to add to that?

Yes, Christine the only thing I would comment is one would be pull CareMore off to the side for me, because clearly as we grow that model those will be separate investments and we will highlight that.

But, in terms of the pure run rate, SG&A it is based on all memberships on a PMPM adjusted basis.

While a senior member does cost us more, we recognize that mix shift, but we still believe on a run rate basis we can get our SG&A PMPMs flat to down.

So, we are covering other investments that we are making.

But, in and of itself, CareMore will add a lot more G&A.

The thing for CareMore for the quarter, Christine, was about a $30 million impact on our SG&A for the quarter, but only about half of that related to the one-time cost that we incurred with the transaction.

It gives you a little bit of a gauge of the impact, so when you get a full-year impact on there, the one-time costs aren't significant to the full year for this year, they more or less affected the quarter only.

Which transitions into your question about rate increases in the individual market in California.

Our focus is on reducing our SG&A, on making cost of care at lower cost, higher quality, all of which contribute to our ability to get rates that we think our essential and sustainable to create a sustainable individual market place.

So, clearly that will continue to be our focused and, frankly, I think it is the focus of the regulators to make sure there's not a major disruption in this important segment of business, particularly now between now and 2014.

So, Brian, do you want to speak more to that?

Yes, specifically to your question Christine, we're currently working on our 2012 rate increases.

We have not filed with either of the California regulators yet, but expect to be doing that shortly.

Is that about $2 billion in revenue still?

Yes, approximately, maybe a little less.

Thank you.

Thank you.

Our next question in queue that will come from the line of Matthew Borsch with Goldman Sachs.

Please go ahead.

Yes, I wanted to ask a question about the pricing environment.

I know you talked about that already, but in California in particular, a peer company of yours talked about seeing really spiking out California as a market where price competition had become noticeably more intense.

Do you think that's just their perspective or would that be one that you would share and any elaboration you can give?

I will turn this over to Ken.

It is the only state where we compete with another Blue plan, although we think we have a lot of benefits relative on a relative basis around our efficiency and our scale, but Ken, do you want to speak your pricing experience in California?

Yes.

First, as Angela said, it is the only when we compete with another Blue, it has always been a competitive market and California has a large number of competitors, but we've seen, in general, we are beating our plans in both membership and in our general positioning for California this year and small and large groups.

We are aware of the comment made in the other -- with one of our peer groups and we have seen some more competitive positioning, but it is more in the ASO market than in the fully insured.

So, the fully insured seems to be rational in there.

As there always are, there are spikes in certain areas where a competitor gets a little more aggressive with one type of program or another and we've seen that in California, but nothing that really has moved us, moved our needle much at all.

Good, great.

And one more if I could on the you comment on Medicaid and the possibility that could reduce you're operating gain by $75 million next year.

Can you just give us a little more detail on that?

Yes, Brian, do you want to speak to that?

Yes.

Matt, that's really a combination of a couple of things.

One, we've taken a look at the impact of AB97 in California, remember that about half of our Medicaid population is still in California, so we've taken, I think, a fairly conservative view, but accurate and built that into our 2012 plans.

And then that coupled with the ongoing situation with state budget deficits and other geographies and anticipating that some of the rate negotiations may result in slight premium reductions.

So, it is really the combination of expectations of those two things.

Great, thank you.

Thank you.

And our next question in queue that will come from the line of Scott Fidel with Deutsche Bank.

Please go ahead.

Thanks.

First, just if I could actually just follow up on Matt's question on Medicaid and maybe just highlight what you are seeing on the cost side on Medicaid.

With some of the recent reports there has been some conflicting sort of just directionality in terms of whether Medicaid cost trends are actually up, stable or down right now.

So, interested in your view on that?

Yes, I will take that Scott.

Medicaid is really the story of where you do business and so as we look across our different geographies, we have seen, in the first half of the year, a slight uptick in some markets.

We haven't seen that in other markets.

So, I think that's why your hearing potentially kind of conflicting stories because as you look cross our footprints, our footprints are all very, very different.

Got it and then just if I can ask about a question and just interested in an update on the Blue's conversion to for profit possibilities.

Obviously, there hasn't been much at all to speak with, but just given that the state budget challenges are going to remain an issue for quite some time and we have a whole crop of new GOP governors and just based on the news up in Michigan that the governor has directed a review of feasibility of converting BCS of Michigan to for two profit status.

Just interested if you think there could be some renewed possibilities of states looking again at Blue's conversions?

Let me answer that in a couple of ways.

One, obviously, WellPoint is uniquely positioned for Blue plan consolidation opportunities.

That's who we are and where we came from.

But, I have to say and it's reflected, I think, in our partnership, both with Michigan for the Bloom acquisition as well as with HCSC in South Carolina, on Medicaid that we have a number of opportunities short of conversions and combinations to create more scale and seamlessness throughout the Blue Cross system.

We've done that very effectively in national accounts.

With the Blue card program, we are doing it in quality initiatives, we are doing it in transparency initiatives, our instant care comparison tool was adopted as the Blue Cross Blue Shield tool for transparency for all members.

We have a great dental program that we are working with other Blue plans to create really an unbeatable dental network that's seamless.

So, yes, think over time the benefits of scaling and consolidation benefit our customers, and as result, they benefit our shareholders.

I think, realistically, we are not expecting that in the short-term.

But we're going to continue to work on these partnerships which we think will add scale in any event.

Thank you.

Thank you.

Our next question in queue, that will come from the line of Kevin Fischbeck with Bank of America, Merrill Lynch.

Please go ahead.

Okay, thank you.

You mentioned that in the quarter you did some consumer reserve strengthening and I was wondering what you needed to do that.

It sounded like that was one of the areas of strengths as far as modest cost trends in the quarter.

Wayne, do you want to speak to that Brian?

Yes, Kevin, the answer is we didn't need to do it.

Essentially, we saw things coming in better than anticipated and rather than holding those reserves down, we rather chose to maintain them at the more elevated levels that they developed that.

So, it was just another opportunity to further strengthen our balance sheet and so, from our perspective, it was just positioning us well as we move forward into 2012.

Okay and then related to that on the trend commentary, you talked a lot about how you're doing a better job on provider contracting, but if I compare what you said this quarter about trend versus what I had my notes about last quarter with inpatient being low double-digits, I think last quarter was high single digits and outpatient being high single digits, I think the last quarter it was mid to high single digits.

With commentary that utilization remains flat to down I guess, I think, similar comments about acuities last quarter and I guess what is the delta there when we think about what looks like a slight uptick in some of these numbers?

I really appreciate the question on this one because essentially what you are seeing is as we do the rolling 12 months you can have disparities in those metrics move from one quarter to the next quarter as an old three month period rolls off and a new three month period rolls on.

But, I can tell you that on an absolute basis, trend is still coming in lower than our expectations.

We model what we expect to get for pricing in a year and then we aggressively go out and negotiate based on quality metrics and others, and we are beating that across the board in all areas.

We will get the run rate benefits of the first year of those contracts over the next two years but, as Angela said, we will get them thereafter.

It is literally the math.

I hate to make it that simple, but that is really what it is.

It is simply the math of when one quarter rolls off and another one rolls on and depending on the time of those roll offs and what happened in that previous quarter versus the current quarter, it can distort the small differences between things, slightly up or slightly down.

Okay, one last question if I could sneak it in.

You talked about operating gain being up year-over-year, but I guess interest income and investment expense being a drag, and I guess the tax rate being a drag.

Is there a comment in there about net income being up year-over-year or --

On a run rate basis, again, we haven't given guidance yet, and, obviously, our net income is influenced by a lot of other items where we realize gains and losses in others, but I do believe that our tailwinds will exceed our headwinds on an absolute dollar basis going in the next year.

Okay, great, thanks.

Thank you and our next question in queue will come from the line of David Windley with Jefferies.

Please go ahead.

Thanks.

A couple of questions on the fourth quarter if I could make a two-parter here.

First of all, your implied MLR for 4Q does suggest a pretty substantial sequential uptick more than looks like explained by seasonality.

Wondered if you could elaborate on that a little bit.

And then secondly, I don't think I've heard you describe the specifics of the restructuring and what you hope to achieve with the $50 million restructuring in the fourth quarter?

Thanks.

A couple of items, first of all, when comparing last year to this year, keep in mind that last year we did have a favorable reserve of leases of over $105 million.

That doesn't create a comp issue for us on an MLR basis.

In addition, recognize that we will have CareMore in our results for the first time.

As you know, the senior business is an overall higher MLR business than other businesses, so that does create a little bit of a comp problem.

If you're looking to periods and addition, as Brian mentioned, we are assuming that AB97 will, in fact, impact us starting at some point in the fourth quarter and that, of course, does create a little bit more of a minimal impact for us as well.

Obviously, if that doesn't occur then you'll get a different result.

Relative to the charges that we are taking in the fourth quarter, of the $50 million, there are a number of initiatives that we've been doing across the Company to continue to become administratively efficient and create a low-cost operating and affordable model for our members.

As we continue to make those investments, we have certain facilities that we are consolidating and about $30 million of that relates purely to one facility that as approximately 8 years left on a lease.

So, we are taking the present value of those lease payments as a write off in the fourth quarter.

We will clearly try to sublet that over the next 8 years and if we are able to do that, that will be upside, but if you think about it in simple terms, the $30 million divided by 8 years on a present value basis, you pick up about $4 million per year run rate.

But, we also save, obviously, around utility costs, we save on insurance and some other things, and it is part of our longer term plan to getting to a more efficient model.

The remaining $20 million just relates to some of the benefits and savings that we expect to further get as we consolidate systems and are able to be more efficient in the support that we have around our remaining business.

Thanks for that.

Thank you.

Our next question in queue, that will come from the line of Carl MacDonald with Citigroup.

Please go ahead.

Thanks.

Now that the CareMore acquisition closed and with the expansion you're projecting for Medicare next year, do you think the business has enough scale or are you still interested in acquisitions?

We're always interested in acquisitions and we think that the senior business is one that we are going to invest in as we described the roll out of the CareMore model and we think our organic, essentially our core senior business has opportunities to grow as well.

Brian, do you want to speak to senior any further?

I think you covered the pertinent points.

We are looking to increase the scale of the business, both organically, and we will continue to look at every acquisition opportunity that comes up.

Great, thanks.

Thank you.

Our next question in queue, that will come from the line of Ana Gupte with Sanford Bernstein.

Please go ahead.

Hi, thanks.

Good morning.

My question is, again, about the Medicare book, I think you said it was $150 million in Op gain going from 2011 to 2012.

Would you be able to tease out how much of that is coming from repricing versus new membership given CMS is guiding to 10% overall in attrition growth?

Ana, we will provide more detail at our IR day.

One thing that I will say is part of that improvement clearly is because our California business is improving over our initial estimates of the loss of 170, that's improved for us already.

It is still a loss, obviously, in excess of $130 million, $140 million already.

We are seeing some improvement.

With the exit, there are certain fixed unit costs that we have to absorb.

That cuts into our G&A efficiencies.

We're expecting growth though in many markets and while we expect good membership growth, in fact even with the exit, we do believe we will be able to potentially grow in senior even with us exiting the RPPO in terms of membership.

But it is important to recognize, too, there were headwind cuts across the board, though, for everybody next year regarding the pricing environment from CMS in terms of what we are paid.

So, we believe are able to offset all of those as all and still grow modestly, excluding the RPPO next year.

And the RPPO, obviously, adds a big tailwind for us.

Looking at the product design though, you have a local PPO now about $40 plus and premium and then there's about two or three still zero premium plans, HMO I think there is one from United, one for CareMore, probably one from Kaiser.

As you've been now two weeks into the selling season, where do these 100,000 plus seniors go next?

They were first in (Inaudible) and you got them.

Do you have a sense for where they'll go?

Ana, if you look at the distribution of our membership and the RPPO, we have a lot of population in Northern California.

If you look, there are a number of plans that are offering either PPO or HMO plans there.

So, I think there are available options.

In Southern California, again, we had 13 local PPOs approved.

The majority of which are kind of in Southern California or in central California.

And really if you look across, we have a variety of plan options ranging from slight benefit changes, slight increases in co-pays, up to, as you said, $40 and we felt that we're going to be competitively priced in the middle of the pack and be able to recapture a portion of that membership.

One final one on CareMore, how much of a boost do you expect in rate risk scoring?

And then you did very well -- CareMore does very well on star, so on a long-term sustainable basis and just related to that, what percentage of your Medicare membership do you think you have in clinic-based models, say by 2013?

Well, okay, that's a couple part question.

So, in terms of -- you're correct, CareMore has historically done a very good job in terms of risk coding and revenue enhancement and so, certainly, with that expertise in the Company we've had a number of initiatives for the past several years.

We've made, I think, some pretty good strides in that area ourselves, but, obviously, we want to leverage the expertise that we have in-house.

So, we expect that to continue.

If you look at our stars ratings on our just organic business, all of our markets are at least a minimum of 3.0, some of our key markets where we have a lot of our membership, particularly in clinic-based models, are already at 3.5.

So, again, we will leverage the expertise that we brought in-house from the CareMore team, but we're also making, I think, significant inroads.

If you look across our population I would say about half of our current M&A population is in managed HMO products already.

And we're looking to not only continue to grow clinic-based HMO products, but also on a local PPO business.

Great, thank you.

Thank you.

I want to thank everyone for their questions.

In closing, I want to reiterate that we are pleased to be exceeding our original goals through the first nine months of 2011.

We've grown organically and modestly through acquisition this year and have done so while realizing significant administrative savings and efficiencies across the organization.

We expect additional success in the years to come and will continue to focus on providing outstanding and innovative products and services for our customers.

We look forward to providing you with more information about our future expectations in the months ahead.

We are currently planning to host an analyst guidance conference call in February to discuss our 2012 financial expectations and longer term outlook in more detail.

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

Operator, please provide the call replay instructions.

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