Elevance Health Inc (ELV) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint fourth quarter results 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).

And 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 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 a summary of our fourth quarter and full-year 2011 performance.

Angela will also provide an overview for our strategies for continued success in 2012 and beyond.

And will be followed by Wayne, who will review our 2012 financial expectations and capital management plans in detail.

Our prepared remarks 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 measures 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.

The 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 fourth quarter and full-year 2011 results that are at the high end of our guidance range.

In the fourth quarter, earnings per share totaled $0.96, and included net investment losses of $0.03 per share.

Earnings per share in the fourth quarter of 2010 totaled $1.40, including net investment gains of $0.07 per share.

Excluding the net investment gains and losses in each period, our adjusted EPS was $0.99 in the fourth quarter of 2011, compared with adjusted EPS of $1.33 in the same period of 2010.

Our fourth quarter results concluded a successful 2011 for our Company.

During the year, we added 928,000 new medical members, and achieved financial results that were in line or better than we expected in most of our businesses.

We also created a more efficient organization, and executed on a number of strategic initiatives, as we prepared to capitalize on the important future growth opportunities we see in the market place.

For the full-year of 2011, we reported GAAP earnings per share of $7.25, which included $0.25 per share of net investment gains.

Excluding the net investment gains, our adjusted EPS was $7.00, which exceeded our original plan and represented an increase of 3.9% from adjusted EPS of $6.74 in 2010.

We've now grown adjusted earnings per share for 3 consecutive years, and we expect our positive momentum to continue in 2012.

As of December 31, 2011, our medical enrollment totaled nearly 34.3 million members, and represented approximately 11% of the US population.

Our enrollment decreased by 104,000 during the fourth quarter, as we lost 1 very large self-funded group, and to a lesser extent, continued to experience negative in-group change.

For 2012, we expect that in-group membership change will continue to be negative, although the amount of attrition has and should continue to moderate.

As we've discussed previously, we remain thoughtful and disciplined in our actions throughout the year, and currently expect enrollment to decline by 600,000 members in 2012.

Most of this is the result of specific actions we've taken with certain self-funded national accounts, and the California Regional PPO Medicare Advantage product, and in the New York Small Group market.

With the most recognizable brand name in our industry, comprehensive and high quality provider networks, strong medical management programs, a leading cost structure and excellent customer service, our valued proposition remains very compelling.

We believe our 2012 plan reflects a proper balance between generating appropriate returns for the value we are providing to our customers, and positioning the organization for continued profitable growth beyond 2012.

Despite these selected membership declines in 2012, we've had a positive start to the year.

In commercial, sales remained strong, due to our value proposition, and we had successful open enrollment results outside of the specific decisions we made on certain accounts and in certain markets.

In the Senior business, our sales of both Medicare Advantage and Medicare Supplement products met our goals, and membership retention has been in line with our expectations.

We put our customers first, and took a number of actions to make sure our customer's needs were met, concerning the Walgreen's exclusion from our pharmacy network.

To date, the Walgreen's contract termination with Express Script has not meaningfully impacted our medical enrollment.

Our operating revenue totaled approximately $15.2 billion in the fourth quarter of 2011, an increase of 5.5% from the fourth quarter of 2010.

Approximately 1.6% of the increase related to the CareMore acquisition.

The remaining 3.9% was driven by premium increases designed to cover overall cost trends and membership growth in the Senior business, partially offset by a decline in fully-insured commercial membership.

Our operating revenue was just under $60 billion for the full-year of 2011, an increase of 3.7% from 2010.

Overall, the market place is competitive, but generally rational.

Our benefit expense ratio was 87.6% in the fourth quarter of 2011, which was in line with our expectations, and represented an increase of 310 basis points from the fourth quarter of 2010.

The increase was driven by our consumer segment, and included adverse selection in certain Medicare Advantage products.

While most of our businesses performed well in 2011, results in Senior were significantly behind our plan.

We believe we have taken the appropriate actions to improve our Senior business results for 2012.

Our fourth quarter benefit expense ratio also increased in the Local Group business, as we complied with the Patient Protection and Affordable Care Act or PPACA, and as a result of changes in reserves.

In the fourth quarter of 2010, we recognized an estimated $105 million of pre-tax income due to a reduction in the targeted margin for adverse deviation, and higher than anticipated prior period reserve development.

For the full-year of 2011 the benefit expense ratio was 85.1%, an increase of 190 basis points from 2010, driven primarily by higher medical costs in the Senior business, changes in prior period reserve development, and the impact of minimum medical loss ratio requirements in PPACA.

We estimate that underlying medical cost trend in our Local Group business was approximately 7% for the full-year of 2011.

Medical cost trend increased during 2011, but by less than we originally anticipated.

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

During 2011, we executed on a number of initiatives designed to improve the quality and cost of healthcare for our members.

We formally announced our value-based contracting initiative, where the vast majority of hospital payment increases are predicated on a demonstration of customer value, such as participation in our Quality Inside Hospital Improvement Programs or QHIP.

We're also focusing our strategy on collaborating with primary care physicians in ways that allow them to thrive in a value-based environment, while helping our members manage their health.

We've expanded our patient-centered medical home program, and launched new Accountable Care Organizations or ACOs.

We're now partnering with 6 organizations in ACO pilot programs across the country, encompassing 120,000 members and over $240 million within a shared savings framework.

We believe these payment models have the potential to meaningfully reduce future healthcare cost increases, by appropriately aligning incentives among patients, payers and providers.

For example, in our medical home program in Colorado, we experienced an 18% decrease in acute inpatient admissions over the first two years, and a 15% reduction in emergency room visits.

We also experienced consistent results in the first year of our ACO partnership with the Dartmouth Hitchcock Medical Center in New Hampshire, where inpatient admissions and avoidable ER visits declined.

Total per member per month medical costs were lower than expected, and member satisfaction has been high.

We've also advanced our use of technology to foster better healthcare decision-making.

In December, we announced a partnership with Verizon Wireless that will enable our members to communicate face-to-face with nurse case managers via video consultations on their mobile devices.

We expect this service will help consumers take a more active role in their healthcare, leveraging the power of personalized interventions to positively influence behavior and improve the lives of the people we serve.

We also recently announced the innovative utilization of IBM technology known as Watson.

And together, we're developing a program that can help doctors make more informed, personalized treatment decisions for and with their patients.

We'll begin piloting the IBM Watson technology with our nurses and utilization management this year.

And we'll be partnering with oncology specialists at the Cedars-Sinai Cancer Institute to develop the clinical protocol to expand the applications to oncology.

Our leadership in promoting high quality and more affordable healthcare is being recognized.

Last month, our Patient Safety First program in California was recognized by the Blue Cross and Blue Shield Association and Harvard Medical School with a 2011 Best of Blue Clinical Distinction Award.

Patient Safety First is a collaboration between the National Health Foundation, three regional hospital associations representing 95% of all hospitals in California, and our Company, Anthem Blue Cross, to improve the consistency and quality of healthcare, and save lives by reducing avoidable medical errors.

In addition to reducing hospital-acquired infections, Patient Safety First is focused on reduction of elective deliveries prior to 39 gestational weeks, and reduction of sepsis mortality.

The interventions use evidence-based medicine, such as care bundles, and leveraging a peer-to-peer regional learning network, to accelerate adoption and improvement.

To date, more than 160 hospitals in California are engaged, making it the largest patient safety collaborative in the nation.

Year one analysis showed that more than 800 lives have been saved through Patient Safety First.

More than 300 patients have avoid hospital-acquired infections, and millions of dollars have been saved on patient care.

We're excited about the initial success of this program, and believe it is scalable to other states.

While we're focused on optimizing healthcare costs and quality, we've continued to streamline our administrative cost structure to better serve our members and provide more affordable benefits.

During 2011, we lowered our selling, general and administrative or SG&A expenses by $297 million or 3.4%, even as we served nearly 1 million more members than we did in 2010.

This achievement brings our two year SG&A cost reduction efforts to $584 million or 6.5%.

And the reduction would be even larger, if we adjusted for the impact of our CareMore acquisition, and the $50 million of restructuring expenses in branding investments we recorded in the fourth quarter of 2011.

We've become a more efficient Company, while continuing to invest for the future, and maintaining excellent service for our customers and business partners.

Our electronic data interchange or EDI rates exceeded 90% every month in 2011, and our auto adjudication rate is above 80%, meaning that at least 8 out of every 10 claims we received are now processed electronically, while our claim inventory levels remain low.

We also exceeded our member satisfaction and first call resolution targets during 2011.

And we've improved our member touch point measures, which are the customer service metrics our members value the most, and are shared with other Blue Cross and Blue Shield plans.

Our success in diligently reducing administrative costs reflects our focus on continuous improvements, as we create a more affordable operating model for our customers.

Our SG&A expense ratio of 14.1% for the full-year of 2011, is at what we believe to be an industry-leading level for comparable books of business.

There continued to be opportunities for further improvements in our SG&A ratio, and we will maintain our goal by keeping SG&A expenses flat to down, on a per member per month basis.

We expect to achieve this goal again in 2012, excluding the impact of CareMore.

Recall that our 2012 results will reflect a full-year of CareMore activity, compared with only four months that were reported in 2011, and that the care center model incorporates a higher SG&A requirement, than our traditional commercial and Senior businesses.

We'll also be making investments in 2012 to expand CareMore services to new markets and more individuals.

We currently have 29 CareMore Care Centers in operation, and expect to open several more this year.

These investments are part of a multi-year expansion strategy that will provide meaningful returns over time.

In total, our 2012 plan includes approximately $700 million of business investments, designed to ensure we continue to be a leader in the market place.

We will advance successful medical management programs and payment reform models.

And also pilot new, innovative opportunities to improve quality and lower the cost of care, such as the IBM Watson initiative and other programs to assist providers in the support of their patients, our members.

We will also be working to engage consumers in more affordable products, as the marketplace becomes increasingly consumer-centric.

And we anticipate incremental investments in our consumer business to develop a broader portfolio, through which we can meet the needs of individuals who are dually eligible for both Medicare and Medicaid.

By building on our CareMore foundation, and our experiences in Medicaid managed care, we believe we will be well-positioned to serve the burgeoning dual-eligible opportunity.

We'll also continue our significant activities in legacy system consolidation, and large scale regulatory requirements such as ICD-10, which will enable increased clinical quality information.

We plan to shut down one of our legacy claims processing platforms next month, and expect to complete the transition of another system in December.

By year-end, we expect to have 96% of our membership on the platforms that will be ICD-10 compliant.

We are a financially strong Company, and will continue to reinvest in our businesses, while also returning capital to our shareholders.

In 2011, we generated operating cash flow of nearly $3.4 billion, or 1.3 times net income.

We repurchased 44.5 million shares of our stock, or almost 12% of the shares we had outstanding as of year-end 2010 for $3 billion.

We also utilized $358 million for our quarterly dividends.

We have $4.3 billion of Board-approved share repurchase authorization remaining as of December 31, 2011.

And we expect to repurchase at least $2.5 billion of our stock during 2012, subject to market conditions.

Our Board has also increased our dividends by 15%.

And our first quarter dividend of $0.2875 per share will be paid on March 23, 2012 to shareholders of record as of March 9.

This increased dividend represents an annualized yield of 1.6%.

The Board's continued support of our share repurchase and dividend program reflect their commitment to and confidence in our strategy and execution.

In summary, we're pleased with our fourth quarter and 2011 results.

At this time last year, we laid out a plan to grow adjusted earnings per share by at least 10%, on a compound annual basis over a five year period.

We produced membership and earnings per share results in 2011, that have positioned us ahead of this road map.

And we anticipate accelerating growth, in both operating gains and adjusted earnings per share in 2012.

Our core objective of creating the best healthcare value in our industry, excelling at day-to-day executions, and capitalizing on new opportunities for growth, all while continuing to stay focused on our core value of customer first, continues to drive us forward.

We believe we have the best assets in the business, and we'll continue to invest in new services and capabilities to ensure our leadership positions.

We are look forward to delivering even more healthcare value in 2012, and continue to expect long-term growth and success.

I'll now the turn the call over to Wayne to discuss our 2012 expectations in more detail.

Wayne?

Thank you, Angela, and good morning.

I agree that we're building off a solid 2011, and are well-positioned for continued success in 2012 and beyond.

Let me begin with our membership expectations for 2012.

As Angela discussed, we currently have project a decline of 600,000 members in 2012, approximately 70% which is related to strategic decisions we've made in selected markets, and will result in margin improvement.

From a funding perspective, we expect self-funded and fully-insured enrollments to decline by approximately 350,000 and 250,000, respectively.

The declines will occur in the commercial segment, and reflect our disciplined pricing in national accounts, the actions we've taken in the New York Small Group market, and our expectation for continued in-group membership attrition.

We expect Senior membership to grow modestly as declines in California, related to the regional PPO product are offset by growth from our expansion to new service areas, and the roll-out of our CareMore model.

State Sponsored enrollment will likely remain relatively flat, with growth in the California Seniors and Persons With Disabilities Program and in Texas, predominantly offset by anticipated declines in MediCal.

Our outlook for State Sponsored membership reflects our strategy to maintain our market share in these programs given current state fiscal situations, while we continue to be optimistic about the significant value that can be created through Medicaid managed care over the long-term, including new opportunities to serve the dual eligible population.

Premium revenue is expected to increase by 4%, to $58.2 billion in 2012.

The increase reflects commercial pricing, that is generally commensurate with underlying cost trend, and the inclusion of CareMore for a full-year, partially offset by the decline in fully-insured membership.

Our pricing assumes minimal rebates related to minimum medical loss ratio requirements, and that benefit buy-downs are consistent with historical averages.

Administrative fees are expected to be flat at $3.85 billion, as the impact of lower self-funded membership is offset by an increase in our member per month fees.

Our overall operating revenue is expected to increase $62.1 billion.

The benefit expense ratio is expected to be approximately 85.3% in 2012, up 20 basis points from 2011.

The benefit expense ratio in our State Sponsored business is expected to increase, as a result of the MediCal provider rate reductions in Assembly Bill 97.

We're evaluating strategies to address this issue, including adjusting our provider contracts and reimbursement, but we expect our 2012 results to be negatively impacted.

The benefit expense ratio in our commercial segment is expected to increase slightly.

And growth in the Cost Plus Federal Employee Program will also cause the consolidated ratio to rise.

These increases are expected to be mostly offset by a decline in the benefit expense ratio for Senior business, reflecting the product changes in California.

I will also note that our guidance assumes no net favorable impact from prior reserve releases.

We believe our medical claims liabilities are conservatively and appropriately stated as of December 31, 2011.

We slightly strengthened our reserves during 2011, and our days and claims payable increased during 2011 by 0.9 days, excluding CareMore, and by 1.3 days, including CareMore.

Underlying medical cost trend in our Local Group business was approximately 7% for the full-year of 2011.

And we expect medical trend to again be in the 7%, plus or minus 50 basis points range for the full-year of 2012.

By component, we expect inpatient trend to decline slightly to the upper single digits, as an improvement in unit cost trends resulting from our contracting efforts is partially offset by an expected increase in inpatient utilization.

Outpatient trend is expected to remain in the upper single digits increasing slightly, due to primarily to unit cost influences other than contracting, such as a continued increase in the acuity of outpatient services.

Professional trend is expected to remain in the mid single digits, increasing slightly due to higher unit costs, and an expected increases in physician utilization.

And pharmacy trend is expected to decline to the mid single digits, due to an improvement in cost trends, including savings from generic drug conversion.

Turning to selling, general, administrative expenses, our SG&A expenses is expected to increase by approximately $40 million, or about 0.5% in 2012 due to the impact of CareMore.

CareMore expenses will increase by approximately $160 million, 75% of which is simply annualizing results, while $40 million is related to integration and expansion.

Excluding CareMore, our SG&A expense would be declining by $120 million, and our SG&A expense would be flat on a per member per month basis.

I would like to highlight that the incremental investments we're making in 2012, including those in our consumer business, our cost of care, and enhanced care management initiative, systems integration, ICD-10 and related quality measures, branding, marketing and other expansionary ventures, will be more than covered by SG&A cost reductions we've achieved in other parts of our business.

We expect the increase in our reported SG&A expense to be offset by the impact of higher operating revenue in 2012, resulting in a 50 basis point improvement in our SG&A ratio, to 13.6%.

We expect operating gain to reach approximately $4 billion in 2012, which represents an increase of approximately 6% from 2011.

Moving to below the line items, as we've he discussed previously, we anticipate a combined headwind of approximately $125 million pre-tax, between our investment income and interest expense.

With a fixed income portfolio of $16.2 billion, we reinvest around $4.5 billion of our securities each year due to the timing of maturities, and many of our (inaudible) securities are currently invested at higher rates.

We also anticipate that we will carry higher average debt balances during 2012, than we did over the course of 2011.

We expect amortization expense to be $235 million in 2012, and our effective tax rate is expected to be approximately 35%.

Please recall that we benefited from some favorable tax settlements during 2011.

We are now projecting additional settlements in 2012.

We expect to generate at least $2.9 billion of operating cash flow in 2012, which is lower than the $3.4 billion we reported for 2011, due in part to reserves strengthening and rebate accruals in 2011 that will be paid in 2012.

However, operating cash flow is expected to remain strong, and in excess of our net income.

As of December 31, 2011 our investment portfolio was in an unrealized gain position of $936 million.

And we had $2.7 billion of cash and investments at the parent Company, of which $350 million was used to repay a senior note that matured in mid January.

We expect a dividend of approximately $2.4 billion from our subsidiaries to the parent Company in 2012.

We have scheduled interest and other payments totalling $500 million, and an additional $800 million note maturing in August that we intend to refinance, subject to market conditions.

Our debt-to-capital ratio was 29.6% as of December 31, 2011.

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 market place.

We expect our share repurchase and dividend programs to utilize at least $2.9 billion during 2012, subject to market conditions.

We expect our full-year diluted share counts to be approximately 335 million, which for comparison is 44% lower than it was in the full-year of 2007.

We are committed to managing shareholder capital with discipline, while continuing to invest in products and services for our customers to enhance future growth in our businesses.

Putting all of the pieces together, we expect earnings per share of at least $7.60 in 2012, which represents an increase of greater than 8.5% over adjusted EPS of $7.00 in 2011.

In conclusion, I would characterize 2012 as a year for which we anticipate continued strong performance in our commercial and individual businesses, and a turnaround in Senior.

We expect the growth and operating gain from these businesses to be partially mitigated by margin pressures in State Sponsored programs.

We believe our assumptions related to the economy, in-group change, medical cost trends, claim reserves and low (inaudible) metrics are appropriate.

And we believe WellPoint continues to be very well-positioned for the future, and we expect to continue creating value for our customers and shareholders in 2012 and beyond.

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.

Thank you.

(Operator Instructions).

Due to limited time and in fairness to other listeners, we ask that you please limit yourself to one question and one related follow-up per turn.

Our first question will come from Justin Lake from UBS.

Please go ahead.

Thanks, good morning.

A couple of questions here.

First on the Medicare side, Wayne or on the consumer side, I should say, can you talk about the Op gain there, and specifically what you saw in the quarter, maybe back in, kind of spiking out the California PPO from the rest of the business?

Walk us through Medicaid, in terms of what you saw in cost trends and the impact of pricing?

And how that -- and how that business ended up relative to your expectations coming into the quarter?

Justin, let me start and then turn it over to Wayne.

Clearly, our consumer segment underperformed, and it was almost entirely due to the Senior business.

You know that the most significant issue we had related to the California RPPO product, where we had a pretax loss of about $150 million for the full-year.

And as we've discussed with you all earlier, the product was not renewed for 2012, and we are expecting improved results.

Now, outside of California, we did have lower Op gain than we expected for 2011, but it was profitable.

And we think we've priced our products appropriately in these markets for 2012.

And then going into the year, in Medicare Advantage, we grew our service territories, and we achieved the growth we expected there.

And that the Op gain is going to turn around -- this business is going to turn around.

So Wayne, do you want to break it out, and also kind of talk about the seasonality for the fourth quarter as well?

Yes, just to give everybody -- we recognize this is probably the biggest question on folks' minds, give you some comfort here.

If you look at fourth quarter of 2010 versus fourth quarter of 2011, and really try to do a comp.

And we like that comp better, simply because seasonality, doing a sequential third quarter to fourth quarter, can be misleading.

But I will do that as well, just to give you some data there.

But if you look at Q4 of last year versus this year, consumer segment made about $112 million versus a loss this year of $5 million.

So there is about a $117 million gap.

Of that gap, about $50 million is the California RPPO as we had highlighted in previous calls, and said that we expected about $50 million for the remaining three quarters.

$35 million of that gap relates to fourth quarter of 2010 positive reserve releases that were above and beyond our expectations, which we did spike out in the fourth quarter of last year.

And then about $15 million is related to AB97, which was passed in California, although CMS is still evaluating it's implementation.

That represents about $100 million of the gap.

And the remaining $20 million on additional reserves that we chose to put up to reflect any potential adverse deviation, from any of the runoff on the businesses that we have as we go into 2012.

So, whether or not we'll need that reserve remains to be seen, but we thought it was appropriate in light of the runoff that was going to occur there.

But that's essentially the gap, when you compared 4Q to4Q.

And it is almost entirely related to our Senior business, which we believe we've corrected for next year.

In addition, if you were to look at it sequentially, in -- you've got about a $250 million explanation between the consumer, what it made in the third quarter of around $245 versus the minus 5 for this quarter.

About $200 million of that delta is the normal seasonality, with almost the vast majority of that, over 60% of that being in individuals.

That's the normal seasonality.

Individuals was fine in the quarter.

In fact, it over-performed versus our expectations.

I would say that medical trend both for individual as well as our commercial book came in lower than our expectations.

And we think we're well-positioned with our pricing going into 2012.

So the issue really is directly related to Senior, specifically California RPPO, PPO being the vast majority of it, where we have already made the decision to exit.

Our pricing is for 2012, is actually reflecting in the membership of what we would have expected it to do in our other locations.

So, we're fairly -- feeling fairly good about entering 2012, with it being isolated to Seniors.

Thanks.

And that's a lot of detail.

Just one quick follow-up on the commercial cost trend commentary, Wayne.

It sounded like it would be -- you're expecting trend to be relatively flat.

Can you talk about where it ended the year, versus that 7%?

And then can you give us an idea -- one of the things I've been thinking about is, just in terms of the core trend coming out of the year.

And how that 7% compares to core trend, given the moving parts on, for instance PPACA costs, like the impact of 26 year olds, and the cost of covering deductibles that are kind of one-time, and may be inflated core trends.

So maybe there is more price cost [spread] there than looks apparent, at first glance.

Yes, so, Justin, just to make sure I understand your question.

But trend finished about 7% for the year in 2011.

And obviously our guidance for '12 is 7%, plus or minus 50.

But all things being equal, it is obviously year-over-year relatively flattish.

However, when you look at -- where pricing is a rising trend, we believe trend is rising.

If you consider PPACA was first implemented though in 2011, with the benefit of hindsight now depending on markets, it had anywhere from a 1 to 1.5 point impact on trend for the year.

Because, again, as you know, you had the impacts of dependents up to the age of 26, no lifetime limits, and certain preventive care being part of the baseline policy.

So when you evaluate from that perspective, and you bifurcate that component out, you will see we are predicting the trend will, in fact, rise from '11 to '12, with the PPACA effects pulled out.

But because they're in the baseline, you get to little more of a flattish trend year-over-year.

And again, our pricing reflects that rising trend that we're expecting, excluding PPACA.

And I would say, fourth quarter, on the commercial book and individual came in slightly lower than our expectations so far.

So, I would still say, that I still think we are entering the year with a more muted trend at this point.

Great.

Thanks for all of the detail.

Thank you.

And our next question comes from John Rex from JPMorgan.

Please go ahead.

Thanks.

I just wanted to continue on the Senior books.

I guess first, you referenced that there was also lower than expected performance in some other Senior books in the country.

And can you talk about what you were seeing there and what was driving it?

And I think you commented that you think you incorporated that into your '12 benefit design.

And maybe I'm over-reading your commentary there.

It wouldn't seem like in June, you had to submit those bids, that you would have had this kind of visibility into poor performance.

Hi, John, let me -- I'll go ahead and start on this one.

And Brian, feel free to add commentary on this as well.

I would say that first of all, John, we saw what we needed to see, back by the time we submitted the bid.

So in many of our bids, we reflected benefit design changes, pricing changes.

We don't want to be an alarmist here.

In our other markets still performed profitably, we still grew in our membership.

We have a roughly a two year lag though, before you get the all revenue risk, correlating revenue that you're entitled to on the membership, which actually deflates your profits in the early period, but not anything we're concerned about, and our ability of going out and getting risk or adjustors improved year-over-year.

And we expect that with our mid year spike.

This year there will be settlement, as well as the final settlement related to this year, so not concerned on that.

I would also say the new membership that we've seen coming on the books, we have a view of that.

And the average risk scored premium, we're going to be getting on day one for these members.

And so, I would say that -- I want to make sure folks are clear.

California RPPO was the primary driver for our Senior issues.

It was the primary driver.

We had small pockets in a few markets, but they weren't pocket that meaningfully moved the needle, relative to our ability achieve our guidance, or the fourth core.

I mean, really California RPPO was a major area.

That being said, we feel very confident going into the next year.

But Brian, do you want to comment on that?

Yes, I think, Wayne, I think you covered most of the points.

Certainly, we adjusted the bid for the RPPO, we also took a look at all the other geographies at the same time.

We have a -- a growing book of business in certain geographies.

And I think what we saw was a reflection of kind of the growth in those markets.

And as Wayne indicated, it takes a period of time for the revenue to catch up.

And so we've got aggressive programs in those markets that we've grown to drive the revenue up.

And we're confident that our forecast and our guidance reflect current claims trends, as well as expected premium for this year.

I would also add, John, that one difference between this year and next, is next year we'll have had the CareMore team as part of our care management capabilities.

And their expertise, in both maximizing the revenue related to the risk scoring, as well as the core management capabilities, we think can be put to work here, in terms of the Senior membership.

So overall, we're expecting a $150 million tail wind for the Senior products.

So, Angela, can you just help us understand kind of how the CareMore team will fit in?

I mean, and I acknowledge my perspective here, kind of as the team expresses confidence in kind of getting it, it is like the track record in the Senior book for the last several years has been spotty at best.

So kind of help us get -- kind of understand a little more, how we get more predictability and more consistency here?

Well, I think that's a fair comment and question, John.

A couple of things.

One, we did make some changes in the management of our Senior business line.

And we do have this opportunity with the management team of CareMore to look at the whole model for Senior, and the capabilities both as I said on the revenue side, as well as on the care management side.

So, the capabilities around a healthy start visit, collecting more risk information, improving the star rating are all brought together by this combined management group now, that we have serving both the Senior product side, as well as the Senior care management side.

And we think the capabilities around care management are really designed for the Senior population.

And so we've made changes there.

We're going to focus on making sure we're integrating the capabilities that we have, maximizing the risk revenue, managing the cost of care for the senior population.

We hear you.

The brand is attractive to seniors.

We think that this is an asset that we have in our portfolio that can make a big difference.

We're also motivating our local leadership, our plan president to have a specific incentive relating to growing the business in their state, that Senior business.

So, I think that alignment will also help us take advantage of the assets we have in the market place.

Okay.

Thank you.

Thank you.

Our next question is from Charles Boorady from Credit Suisse.

Please go ahead.

Thanks, good morning.

My question is around, about how much are you budgeting in 2012, that you're going to spend on new care delivery models, and also reform implementation specifically for accountable care organizations, bundled payments, CareMore expanse, and then healthcare IT-related changes for ICD-10 and other reform-related changes.

I understand those have been pretty big expenses in the recent past for you.

I'm wondering what's in the budget for 2012?

And then, what do you hope to get out of the investments, in terms of by how much do you think you can bend the cost curve from implementation of bundled payment or ACL arrangements, and from the rolling out of the CareMore operations in other markets?

Charles, I'm going to let Wayne get into some of the numbers here.

Let me talk a little bit about the new care delivery models.

As we've described, we've had a number of ACOs in patients that are in medical homes.

And over the next few days, you're going to hear more and more about our primary care, the patient center, primary care model, that we're going to be announcing.

And so, you'll see we think really there's a lot of power in just better care coordination, led by primary care focus.

And in terms of the investment, a lot of the expenses associated with the processes are really already in the run rate.

In terms of additional capabilities, there are some cost care analytic capabilities that we continue to invest in.

As we -- as you acknowledged and we've described, the ICD-10 expenses have been included and described.

We've also made a number of transitions off of systems that went quietly.

You haven't heard much about those, which is exactly how they should be, to avoid the remediation of certain systems for ICD-10, when we wanted to consolidate and get to fewer platforms.

So Wayne, can you be more specific about the budget impact?

Yes, Charles, if you look at what I'll call discretionary investment dollars in total -- let me first start there, and then kind of pull you back into some of the questions you had.

We are investing $700 million total this year into a variety of programs, all which are not related to the specific question you asked.

And about $400 million becomes an actual expense, about $300 being Cap Ex over a period of time.

If you get to some of the more detailed questions though around how much we're spending on ACOs, care management models, which we view CareMore being a care management model, the expansion there, et cetera, when you add up those combined, it is about $100 million-plus dollars.

When you look at implementing reform, new regulations, ICD-10 is almost $100 million by itself for this year.

Expense?

Yes.

Yes.

Almost -- a big support -- a big portion of that is fully expensed.

And the other thing I would say, is we have about $100 million in additional cost associated with the other mandates, associated with the Reform Act, and preparing for the exchange environment.

We have also baked in incrementally, additional expense this year on top of the branding that we did, investments we made in the fourth quarter, we're spending about $35 million more in branding in a multi-year branding strategy.

Because we think as we get to the exchanges, the brand will be a very important asset for us.

And so we're going to have incremental investments there as well.

So, this is a massive -- you're expensing alone $400 million in 2012, related to these items, and spending a lot more than that.

When will that curve invert, in terms of the return on these investments, exceeding the amount that you're investing?

Because these are all things that should have long-term pay back, in terms of bending the cost curve.

When will we hit that inflection?

Charles, obviously each investment has a different inflection point.

ICD-10 itself will be complete, assuming they don't push the reg out.

We're not going assume that, so we'll be done by October of '13.

So the benefits on a run rate basis of that, we'll begin to see in '14.

Obviously, under our CareMore model, we're expanding that this year.

We effect -- expect to expand that again in '13.

I think you'll start seeing some very good incremental benefits, starting in '14 and beyond.

The branding is more one that, you'll start to see the real incremental values, as we do a multi-year branding strategy, as we get to the exchanges, again our '14, '15 period.

And I would say that we are trying to make sure that some of the benefits we are seeing each and every year, in fact, are going to the benefit of our shareholders in the interim.

So as you have seen, we're trying to remain disciplined in the investments.

We took down absolute G&A in 2010 by $270 million.

We're down another $300 million in 2011.

And that included all of CareMore, the acquisition cost, it's G&A, as well as the $50 million that we took in charges in the fourth quarter.

So we actually have achieved over $400 million of savings in the quarter -- or in the year, last year.

So, our goal this year though, was to make some more of the incremental investments, maintain a flat PMPM in 2012.

And as you'll see, even on a total G&A basis, it is only up modestly, despite a full-year CareMore and all these investments.

Are you holding back on the CareMore expansion as a result of, results coming in a little bit light in the fourth quarter?

Did you change your 2012 plan?

No.

Quite the contrary.

The CareMore model is a proven model, it's had excellent results.

They continue to have those positive results that we would have expected, in the four months that we've been fortunate to own this enterprise.

And we see this as a future model around care management.

So, we will not be slowing down that expansion.

Okay.

Great.

Thanks.

Your next question is from the line of Josh Raskin with Barclays.

Please go ahead.

Hi, thanks.

Good morning.

Just a question.

Maybe you could walk us -- I'm just trying to figure out the bridge for the MLR increases, up 310 basis points (inaudible) maybe year-over-year, Wayne, just because you talked about the seasonality impact.

So I think I know 80 basis points was clearly that $105 million release, but I just want to make sure I have the moving parts on what's impacting the MLR on the year-over-year basis?

Maybe the rest of that, the 230 points extra?

Yes, Josh, a couple of things to keep in mind.

I would tell you that almost the vast majority of that though, still relates directly to the Senior business, and what we spoke about.

When you look at it, it by itself, from a year-over-year basis, it was about 650 bips unfavorable relative to it's -- on a weighted average basis, though it's about 95 bips of that 310.

So almost a full point of that 310, when you weight average it versus the rest of the books, relates to that.

About 45 bips, about half a bip, relates to -- a basis point relates to individual.

And while individual improved in the quarter relative to California, this was the first year of PPACA MLR minimum requirements.

And so you have the whole rebate effect coming through in the fourth quarter, and continued true-up of that.

And we took a cautious posture on those as well, as we continue to wait for final definitions around rebates.

State Sponsored was around 30 basis points of that delta.

And that -- that was primarily related to the fact we took an AB97 charge in the quarter, and we had the lower rates we reflected -- we've talked about in the third quarter, and we said, we see as the one headwind going into '12, because the new rates went into effect on October 1 in California in particular, which is our largest market.

And then about 10 points is for FEP and other, and again, as you know, that's just Cost Plus program, with the Delta being what you highlighted, being primarily the reserve changes and that.

Just so I understand, when you talk about that -- so the 95 basis points in the overall Senior, that meant that the Senior MLR was up 650 basis points.

And then maybe you could give us corresponding numbers for the individual, what does a 45 basis point increase mean?

And Medicaid, what is a 30 basis points contribution, what's that mean, in terms of an overall medicate MLR?

Well, just to give you a feel, Josh, and I obviously don't have every one of those pieces.

The Senior, obviously was our big focus, it was the primary driver.

Yes.

But what I can tell you is that, Senior by itself, as I said when you weight average it was at 95, but 650 in total.

State Sponsored though, is below the 650, but not substantially below that.

Obviously, the other ones are much, much smaller numbers.

So you can pretty much see it is a Medicare and a Medicaid driver.

And the rebates being the biggest impact on individual.

Okay.

And then on the rebates, when you guys finally file your forms, and I know they'll be public at some point.

Any sense as to what the total dollar amount is going to be?

No, we really can't speak to the total dollar amount yet.

As you know, the regulations have continued to come out and be clarifying, in terms of what that calculation is going to be.

We still don't have the form of the rebate notice going out to consumers.

So we're not yet ready to say the total amount.

We tried to be thoughtful about how we could use the potential for rebates strategically in certain markets.

And we believe we've priced products and have -- the resounding commercial long-term impact of the value of that.

Okay.

Thanks.

And our next question is from the line of Doug Simpson from Morgan Stanley.

Please go ahead.

Hi, Wayne.

Maybe just following on some of those G&A comments.

Can you just walk us through a little bit, exactly what you're doing to bring down the G&A dollar spend to offset some of the investments that you're making?

And just talk about sort of your level of comfort that those cost reductions are not going to have any, sort of adverse impact on ability to execute?

Doug, let me start that, and then Wayne can be more specific.

We have -- and it is in flight now.

We are in our third year of a continuous improvement program, that is really a multi-year productivity enhancement program.

And what is critical about it is, is the multi-year plan to take out the legacy of being 14 different Blue Cross plans, we have a lot of runway, frankly to consolidate systems, simplify and standardize processes that are not distinctive in the market place, but that can both reduce cost and improve capabilities.

So, we're both automating certain capabilities, creating more self-service opportunities for consumers and physician offices.

Through our portals, we're improving our EDI rates, our auto adjudication rates.

We have been improving significantly our member touch point measures, and other metrics that relate to service.

So while we are taking out admin, what I would call the traditional admin run rate costs, we're improving service levels at the same time, and improving member satisfaction because we're giving them self-service tools.

So, I feel really good about our ability to execute on those fundamental administrative operating, deliverable, improving service while reducing costs at the same time, as Wayne described.

And we make investments from some of those savings in the capabilities that we think will enhance growth for the future.

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

Just a couple of things.

As Angela said, one of the biggest savings though is, we've been consolidating systems now over the last three years, and have been doing that quite successfully, while managing our inventories, having a good outlook on where that was going.

We shut down another system this past year.

And the vast majority of our membership is on the surviving systems.

So, while it may not seem like a big deal to move 200,000 lives off one system to another system, and shut it down, the cost of running that system is no different, whether we have 200,000 lives on it or 20 million lives on it.

And so the more that we continue to consolidate these systems and platforms, the more that you'll start seeing the savings.

And we're consolidating to the platforms that have better automation for auto adjudication, better EDI rates.

We will be shutting down another system next month.

And we have another one scheduled for later this year.

And those are some of the benefits.

The other thing I want to highlight though, that we've said many times, that should give you some comfort too, is that we believe the brokers are a very important part of our business.

And at the same time, we recognize the minimum medical loss ratio requirements, and they recognize the shared responsibility we all had.

So we had a multi-year program, to help maintain our brokers, to give them an opportunity to adapt their business models just as we're doing, and that the benefits of the commission structures would inure over time.

And so you are seeing in 2012, in '11 they were relatively flat, and we tried to maintain that.

And in '12, and those will ramp up over time as well, because of the PCPM model that we're on.

Okay, Okay, And then maybe just switching gears a little bit.

On the Senior -- back to the senior business -- in the process of integrating CareMore obviously, how do you think about your capacity to think about other opportunities to serve the more chronic populations, duals, those types of folks in light of some of the challenges that have popped up over the last 12 months in the Medicare business?

I think it is a fair question.

But I do think that the CareMore capabilities and the lessons through -- that they have learned over their expansion, so part of the interest we had in CareMore was it had scaled to some level.

They were up to -- now they're up to 29 neighborhood care centers, they grew their book of business, when we acquired them.

So, their ability to scale and serve a broader population is evident and proven, and we think we can bring that to bear.

And they are designed to address both the needs of the healthier senior.

They have -- in their neighborhood care centers, these Nifty after Fifty workout training facilities.

They do the healthy start visits, have high number satisfaction there.

But then with the very acutely ill population, they have this extensive model.

And so, I think those capabilities are going to be critical to the dual eligibles.

As we look at, where we think the dual eligible market place will begin, our expertise and experience in the Medicaid population, the footprint we've had in the Medicaid population in California in particular, will be relevant here as well as CareMore's footprint was primarily in California as well.

So, I think in terms of readiness for our ability to do that, I think we're better positioned than anyone else in the market place.

Okay, great.

Then maybe just one last one, if I can sneak it in.

Wayne, in your list of investments, did I miss something about exchanges, or did you comment at all about investments specifically in preparing for exchanges in 2014?

They are in there.

And that's part of two things.

One was we talked about ICD-10 being by itself, a $100 million-plus.

That does not relate to exchanges at all.

Okay.

Another $100 million-plus though, related to mandates and exchange preparation.

Okay.

As well as the additional incremental investment dollars for branding to prepare for exchanges.

And that will be $35 million incremental this year.

Okay, great.

Thank you.

Your next question comes from Christine Arnold from Cowen and Company.

Please go ahead.

Hi, there.

I just want to make sure I understood what your response to Josh's question.

Did you say that the Medicare Advantage MLR was up 650 basis points?

Yes, if you look at the quarter by itself, Christine, that would be the driver.

Weighted though.

(Multiple speakers).

You gave some great detail on kind of what had happened year-over-year.

And $50 million year-over-year was the (inaudible) California PPO.

Can you give us -- you said also though that ex-California, the operating gain was less than expected.

How much less than expected was the ex-California Medicare Advantage operating gain?

And then can you review for us your outlook for your Medicaid book?

Is it still a $75 million headwind in 2012 for Medicaid versus 2011?

And does that include or exclude the $650 million -- or 650 basis point up tick this quarter?

So, make sure I answer these questions in parts.

For Medicaid, we estimate headwind the being up to $75 million.

We do reflect still AB97, and some run rate impact into next year.

We still think that's a highwater mark.

And believe we can hopefully do better than that.

I would make that the highwater mark, Christine, not the absolute water mark.

The other thing I would say relative, is to Medicare, again with us exiting the California RPPO, we were able to retain membership but it was in the southern aspects, in our local PPO where we had a very good book there.

So we are feeling pretty good about that, that we will actually get the tail winds we expected.

Relative to the miss in the other markets, it's not significantly off from where we would expect the long term margin to be in this book, which is closer to a 5% margin.

So I would say that, as we were bidding for the next year and keeping that in mind, we're bidding it to closer what we think a long-term margin is.

So, it's not substantially off the long-term margin target that we had.

Okay.

And then, the deterioration in Medicaid, you said it could be up to $75 million.

It sounds like you hope it will be better.

Is that because you reserved for any retroactivity already?

Is that because SPDs or medical trends in Medicaid are coming in better?

Why would it be less than the $75 million?

Christine, this is Brian.

The reason for that is we did reserve for anticipated retroactivity.

So we did take into consideration worst case.

Certainly, CMS has not approved all aspects of it.

SO there could be upside there, depending on how that unfolds.

Okay.

Thank you.

Thank you.

Our next question is from the line of Scott Fidel from Deutsche Bank.

Please go ahead.

Thanks.

First question, if you can talk to -- with the enrollment losses expected in commercial for 2012.

How much of those, would you say specifically are due to some of the targeted actions that you've said you've taken, in the self-funded business?

And maybe just talk a bit about your ASO pricing strategy?

Our survey had shown you raising your fees a bit higher or keeping those in line a bit more than some of the competitors.

So you're comfortable that, that's not resulting in the loss of any profitable business?

And maybe your ASO pricing strategy in general?

Thanks.

Yes.

I am going to, obviously, have Ken speak to this.

When you look at the total membership decline for 2012, we think there are specific actions we took, the California Regional PPO comes out, our actions In New York Small Group does comes out.

So, Ken, you want to focus then on the ASO national accounts in particular?

Yes, let me -- let me really take us back to first quarter of last year, when we discussed that we would be doing this.

We felt we were in a very strong position.

And we indicated we would be strengthening pricing in ASO, particularly for some existing groups that were not covering their share.

We had a -- actually we had a wonderful growth year last year.

We had for 1-1-12, very good new business growth and expansion of current.

But there were certain accounts that we set price levels that you would need to go up to, that were significantly greater than where they were.

And we did lose about half of the cases that we had substantial increases on.

We kept the others.

70% of the overall losses in our business were targeted.

And the remaining 30% is really based on in-group change and the economy.

Where -- our numbers are right where we expected them to be a year ago, when we stated that we would take this strategy.

And we feel very comfortable with it.

So we are selling new.

We are expanding, but we needed to clean up some of the book.

The changes are in ASO, they are in -- and also New York, where you saw that we repositioned our Small Group book.

I would say too, we really know our market advantages, in terms of our overall discount levels, and we're enhancing our costs of care and care delivery, platforms significantly, as well as our other related offerings.

And we think some of that membership will come back, because when you interface with a procurement officer, they may look at the fees disproportionately.

But when they experience the P&L impact of losing our discount advantage, we expect some of that membership will be back in a year, for the greater value proposition that we have to offer.

Okay.

Thanks.

And then just a follow-up, just going back to the dual eligibility opportunity in California.

And it would certainly seem that the CareMore acquisition should help your platform from the cost management side.

How do you feel though about how you think pricing will look in this dual eligible opportunity in California?

Obviously, it's still a ways out.

But just given some of the rate dynamics we've seen with MediCal recently and historically, do you think that this dual eligibility opportunity in California will be structured in a way that it could be profitable for the industry?

Let me speak to it broadly.

And then Brian, will speak to it, in terms of California specifically.

We do believe that the dual eligible population and the lack of coordination today between the Medicare and Medicaid program creates a great opportunity, both for creating revenue opportunities to serve this type of membership across the country.

But also, this is -- the disconnect between these programs are really tough on human beings.

You have complexities that are unnecessary there, and so we're very supportive of the dual eligible population and the rationalization of those two programs.

We absolutely believe that the CareMore capabilities, as well as our history in Medicaid and in California will position us uniquely to serve that membership.

So, would you want to speak to Brian, the specifics around California pricing now?

Yes, I think you were accurate, in that we're still a ways off.

But I think early indications and discussions that we're currently having with the state, and certainly our experience with the expanded ABD population, we're hopeful that pricing will be adequate again.

As well, as Angela had mentioned, we feel very well-positioned.

We're the leading provider of Medicaid services today in California.

CareMore is primarily [situs] within California.

We feel that the combination, of not only their care model and infusing some of that into how we managed the duals will set us up for success.

But we're -- we're confident, based on where we are today in discussions with the state, that it will be somewhat rational pricing environment.

Okay.

Thank you.

Thank you.

Our next question is from the line of Tom Carroll from Stifel.

Please go ahead.

Please go ahead.

Hi, good morning.

I just -- I want to be super clear on the Medicare Advantage book issue.

And I want to make sure that, there was nothing -- no new reason over and above what you gave us on second quarter, that would account for the deterioration that you saw at the end of the year.

Let's be really clear, Wayne, in terms of the number.

We think that, that we have $150 million impact from the California Regional PPO.

We've exited that program.

We saw some impact.

But the other business -- while we saw the impact, we did see to the earlier question -- the ability -- we see -- we saw those claims, and we priced, and made adjustments in benefits in the filing that went in, to improve operating margin in the Senior line.

We think overall, it is a $150 million tail wind for 2012.

But Wayne, do you have more to say than that?

Yes, Tom, I think I want to be very, very clear.

Our other markets had some slight deterioration relative to our margin expectations, but relative to our long-term margin goals, they don't.

The benefits designs that we wanted reflect them.

We think we'll be at our margins -- our targeted margins we want to be at for this year.

And our 150 tail wind, that we committed to earlier in the year, that we with thought would be the tail wind for Senior, we also believe that's an at least 150 tail wind for us, and feel very confident in that, going into the year.

Thanks for that.

And just as a follow-up, given the changes you've made in Medicare products, and moving into the second year with some Accountable Care Act items in place, and the SG&A items that you've highlighted for us today, how do you expect the quarterly earnings to progress in 2012?

So that maybe, current expectations that are out there, could perhaps be rationalized, as we kind of move through the yea?

Tom, we don't give specific quarterly EPS guidance.

Wayne, I don't know that we can say too much more?

We've tried to be clear about the progression of the quarters, in terms of seasonality.

But do you want to speak to that?

The only thing I would say, Tom, is that -- obviously, always directionally, there's nothing secret here about our history, that the first quarter is always our highest EPS and the fourth quarter is always our lowest.

I don't expect that to change.

The only thing I would highlight is keep in mind the first quarter of '11 is a little distorted, just as such as our '12 -- our second quarter is, because of the unfavorable development in our Senior business from the first quarter.

And then we took an opportunity then, to move our reserves to the higher end of our adverse deviation range.

So just keep that in mind.

I would say, first quarter last year is probably a little -- it's over-inflated, and second quarter is under-inflated, and you got to adjust for that.

But you should be able to pull all those adjustments from our public comments.

Great.

Thank you.

Our next question is from Matt Borsch from Goldman Sachs.

Please go ahead.

Thank you.

Just wanted to get a little more on the 2012 commercial trend view.

I think last quarter, you had talked about seeing utilization increase in 2012.

The -- your outlook for flat trend, does that embed some utilization increase, or are you not expecting that at this point?

Matt, we have embedded some utilization increase, although I will tell you we are still finishing with the admits per thousand still down at this point, and bed days per thousand are just slightly up so.

But we're assuming that the utilization will, in fact, rebound in in-patient.

But we do have improved unit cost trends, which we have great visibility on regarding our contracting that we think would offset that, but nonetheless, we are assuming a rising utilization pattern.

And we did price for that.

Got it.

And relative to fourth quarter, and I realize you don't give the commercial MCR, but if you were to -- if I could ask the question this way, if we back out the reserve changes, and we back out the impact of rebates, would the commercial MCR have been flat or higher, relative to a year ago?

Matt, let me maybe answer a little bit differently.

I would say the commercial MCR was much lower in the quarter than we would have anticipated, but Senior offset that delta.

Okay.

Okay.

And last question on the pricing.

Can you spike out any markets, or any general change in the intensity of price competition, either risk or ASO relative to your view maybe three, four months ago?

Ken, you want to address that?

Yes, Matt, I would say, it is consistent with what we've been saying.

2011 was a different year, and '12 will be slightly as well, simply because there are certain pockets where a competitor may worked around the MLR issue.

And we may do the same, as we're working toward our MLR base lines.

But it is a competitive, but rational market.

There is no spike out of any area, where we don't understand what's going on.

And in all of our markets, we've fully priced for our forward cost.

And it seems to be, we are well-positioned in 2012, and feel very comfortable with where we are.

Thank you.

Thank you.

And our next question is from Kevin Fischbeck from Bank of America Merrill Lynch.

Please go ahead.

Great.

Thank you.

It sounds like most of the commentary around the government business and the headwinds there, has been from kind of a pricing perspective.

Can you talk a little bit about trend, on the Medicare and the Medicaid side?

Was there any change there, and are you forecasting a change going forward in 2012?

On the Medicaid side, we didn't see any real change on trend there.

Again, it was pretty much as expected.

In some ways, it was a little bit better than expected, slightly better than expected in the quarter as well.

So again, I'd say, when you look at individual, commercial and Medicaid, slightly better than expected, pretty much across the board.

When you looked at the Senior, we obviously knew what the big item would be, which was the California RPPO.

And again, I want to emphasize, we did make a decision because of runoff to put up additional reserves of about $20 million for any adverse deviation that could occur.

So that also, causes obviously, I would say something normal -- above normal, but that was an intentional decision we made, but whether we'll need that or not, we'll see, as the first quarter progresses.

Okay.

And then maybe just to follow up on that.

Because as far as the reserve position I think last quarter, you categorized this, kind of the high end of your range.

And it sounds like you boosted it here in Q4 I mean, do you feel comfortable with that categorization?

Oh, yes.

Yes, and having the benefit of 930 running out, I would say we are at the high end of our range.

Okay.

And then just one last question here, can you give a little more color on your Medicaid plans?

I mean you talked a little bit about the ABD side of things.

But when we look at some of the RFPs, you weren't really aggressive in Kentucky, which is a state that you're in.

You've got, I guess a Kansas re-bid, where you're the incumbent, but you're not the actual Blue in the -- there.

Any thoughts about, your willingness and ability to compete for new RFPs?

Yes.

Let me speak to it broadly, and then Brian can speak to it more specifically.

We do think we have opportunities to look and expand the Medicaid managed care business.

A couple of things we did, if you look back two years ago, we had a platform that really now, is quite scalable for this business, and the processes and procedures all around it, to really grow in a couple of different ways.

One way is to grow in the states in which we have the Blue Cross licenses.

Other opportunities, include partnering with other Blue plans.

But with each of these RFPs, we really need to look at that -- at the sustainability of that program, as evidenced by their RFP.

And some of the -- frankly, some of the RFP situations do not look sustainable from a pricing perspective, or they create pretty significant predictability issues, in terms of kind of drawbacks into prior performance.

So, we're going to be thoughtful about the choices that we make in those programs.

And we do have opportunities here to go beyond what have been our traditional borders.

So, Brian, you want to be more specific than that?

Yes, I think that's right.

Certainly, we're taking a look at all of the opportunities, both within our Blue states.

And then potentially with other Blue partners.

As we evaluate that, it has got to be -- we've got to feel comfortable from a rate adequacy standpoint.

And outside of our states, our partners have to feel comfortable with that.

And so, that kind of all goes into the mix.

Sometimes, it is our partners that aren't comfortable.

And sometimes, our valuation of it is, is that it is not -- sustainable rate environment over time.

So, that all goes into the mix.

So we're taking a very measured approach to growth in that segment, as we also prepare for the dual opportunity within the states that we do business in.

Yes, I think there is an important element of the Medicare managed business in that, it is strategic for two opportunities.

One is the dual eligible population, and our combination of our Medicare managed care and our Medicare capabilities, which obviously, we've invested in with CareMore and other things.

The other strategic element is how Medicare opportunity aligns with the exchange opportunities in the future.

And as we've said, we can't predict yet, what states will be in or participate in exchanges, or participate off exchanges or in exchanges.

But the -- the idea that the Medicaid managed care members maybe, in some respects very similar to the exchange members who are subsidized.

And they may come in and out of Medicaid, into a subsidized exchange product, means that Medicaid, those Medicaid capabilities are strategic and important for the long run.

So, we don't want to get distracted by difficult contracts that we don't think are sustainable.

We're going to stay focused on the more strategic opportunities that, that platform will allow us.

Just maybe to build on that, if you have the opportunities outside of the core business that you're bidding on -- it sounds like you're not willing to use that as a loss leader to get access to these other opportunities.

You want the core plan to make money before incorporating these other things, or is it potentially you might [accept] that lower margin on the initial bid, for the opportunity to address those other strategic markets?

Lost leader is not a word that we accept in those contract discussions.

So, I think it is important, that it'd be a rational contract.

It would be worth both -- the investment in terms of setting up for that state, and having a successful execution over time.

And strategically positioning us well with those state regulators who administering the Medicaid program, as well as they then -- start to consider both the exchange opportunities, as well as the dual eligible opportunities, we want them to think about the preferred partner.

Okay.

One last quick question here.

I think last quarter, Wayne, you highlighted the headwind from interest income expense being about $125 million.

Do I have -- is that still the right number?

Yes, Kevin.

That's still the number that we anticipate at this point in time.

Okay, great.

Thanks.

Thank you.

Our next question is from David Windley from Jefferies.

Please go ahead.

Hi, thanks for taking the question.

So Wayne, I believe you said that, that share repurchase and dividend will consume about $2.9 million which is -- or $2.9 billion, excuse me, which is also the amount you expect to generate in operating cash flow, I believe.

So, wondered what your appetite was, if you could characterize around M&A, if you do have appetite there?

And confirm for me, that you would feel comfortable taking up the leverage to do that.

Wayne, before you do that, I think it is important for you to talk about the whole approach we have to capital management.

Let me talk to the M&A idea though for a minute, because I think that's an important one.

We do think there are opportunities in M&A.

We always have and will, having the opportunity, uniquely to be a Blue consolidator has been important.

But in this environment that hasn't been as apparent, in the process that Blue plans, those are (inaudible) unique in every state.

But those are time -- they take time.

And so our approach has been, and has been successful to continue to partner with our Blue brethren, in terms of capabilities, for example, our acquisition of Bloom Health was a shared acquisition with other Blue plans.

As we've talked about, we had the opportunity to partner with other Blue plans on Medicaid managed care.

We think there are other opportunities beyond that as well, which we think are ways to create more scale.

And then it is short of an ultimate M&A acquisition, but gives us new capabilities and opportunities.

When we look at other capabilities, acquisitions, in the M&A market, we're interested in and we're looking at those consistently.

But they need to make sense, economically and financially.

We always do a build versus buy analysis, in terms of the opportunities out there, that are similar to our core capabilities.

We also look at opportunities that are more diverse than our core businesses, and those need to make sense economically.

So, Wayne, why don't you talk about both the way would we analyze that.

And then also go back to the question about capital management?

Yes.

So, David, just at a very high level, obviously, our debt to cap is at 29% at year end.

Our targeted range has been 25% to 35%.

Our preference would be obviously over time to be closer to that 35.

But right now, we like where we're at, because it gives us the financial flexibility to the lever up quite significantly for an M&A opportunity if we wanted too.

We would be willing to go higher than that.

Both of the asset, actually having enough cash flow putting off, that we could to drive that back down pretty quickly to our targeted range.

We are finishing the year with $2.7 billion at the parents.

You are correct in saying, that if we just generated our operation cash flow, and just deploy that in dividend and buyback, you see that does give us additional powder as well, for an acquisition either through cash or through levering up and accessing debt markets.

We have about $350 million coming due though, in January.

It has come due actually.

We're paying that down out of the free cash flow, that we have at the parent.

About $800 million in August, but we do plan to refinance that during that period.

So, we -- I would tell you, we clearly have a bias towards M&A, and the opportunity for top line growth.

But that bias will never be trumped by the economics of what w think makes sense for longer term returns.

And if -- very few things would better than a buyback initially.

But as long as we can show the long-term growth potential and the top line is better over the longer term, we will err on that side of an M&A that we think that makes a lot of strategic sense for our business, that will have a longer term return for us.

CareMore is a perfect example of that.

But there are many assets we think we can build as well.

Thanks.

If I could go back to trend, and just understand -- I don't know if you're willing to put numbers on it.

But if you would, put numbers on the relative difference in trends between the books of business, commercial, and Medicare, Medicaid, if not, talk relatively to those.

And specifically, help me to understand how the composition of trend changes as you move to '12?

We don't break down the segments, the trends by segments.

But hat we have done, is we do describe the trend expectations for '12, and where it comes from.

So, about 22% of it, we think is coming from in-patient.

It is in the high single digits, and that's down from the low double digits in 2011.

We see improving unit cost trends in '12 due to our contracting efforts and our care management efforts, partially offset by some rebound that happens mathematically, and over time, in in-patient utilization.

And the in-patient trend is still primarily unit cost driven.

The outpatient piece of that is about 24% of the total, it's the high single digits, up just slightly, but in the same range as 2011, unit cost driven as well.

Shift of services from inpatient to outpatient, is something we're managing care carefully.

The professional piece of that, is about 34% of the total, in the mid single digits, up slightly, but in the same range as 2011.

Our contracting changes are driving an increase in unit costs.

You'll hear more in the days to come, about how we really want to motivate primary care physicians, and reward them appropriately for care throughout the system.

So we do expect a slight increase in physician utilization, a bit of that rebound, and expectation of (inaudible) utilization overall.

Pharmacy is about 20% of the total.

It is in the mid single digits.

It is down from mid to high single digits in 2011.

It is improving, and due to unit costs, and there are a lot of [brands] in there, [generic] conversions in 2012, Lipitor, Plavix, Lexapro, Singulair there.

So we think those have an impact.

So that is kind of the breakdown.

Thank you for that.

If I could just clarify, or ask it a slightly different way.

So, if I think about book of business, I would expect that you think your MLR for MA is coming down significantly.

And you're expecting the consolidated MLR to increase, I think you said 20 basis points.

And so, I was hoping to get a little more clarity on the composition of, say trend across all books of business as it affects MLR -- differences, we think about how it affected MLR in 2011, versus how it will affect MLR in 2012, and it, being the three different books of business.

Let me take a stab at that, maybe this will help.

When you look at Senior, we think Senior, obviously, will improve quite a bit.

That improvement though, we expect to be offset by FEP, which again is a Cost Plus program.

We're expecting a lot more FEP members, it's a MOR that is in the 90%-plus range.

And we're expecting that to be offset by State Sponsored business, because we've taken a more cautious view on AB97, and the rate environment that we've seen out there.

Commercial has a very small impact on it, in total, about 10 basis points at most.

Okay, great.

Thank you very much.

Our next question is from Chris Rigg with Susquehanna.

Please go ahead.

Thanks for taking my question.

I just had one qualifying -- or clarifying question on the Medicaid headwind for this year, and the $75 million that you characterize as the highwater mark.

What -- I think you made it -- you commented on an earlier question, that there is retroactive assumption in the $75 million headwind.

Can you help me better understand what you mean by that?

And then in addition, when did you assume in 2011, the AB97 hit, in your MLR assumptions?

Wayne and Brian, you want to address that?

Let me first start off, the retro impact, we have reflected in our fourth quarter of 2011.

Okay.

So that's the first part.

But we also assume that, because the implementation continues to get delayed, and how it's going to be effective, we have a prospective projection, that the pace will be able to implement.

We're not allowed to take certain actions until it is finalized.

And as soon as it is, we'll be taking the actions we need to take to try to mitigate.

We've also baked into our 2012 guidance, a prospective view, how that could affect us as well.

That prospective view is part of that, up to $75 million number, but we think we have opportunities throughout the year to hopefully improve either on that, or other areas of our Medicaid.

And I guess, so, in 2011, in the Medicaid business, when did you assume -- I'm assuming, you're saying AB97 is the 10% reduction.

When did that begin to impact your numbers?

Was it June 1 or July 1, or how did that impact you last year?

At least from a timing perspective?

Impacts are in the fourth quarter, right, in the fourth quarter.

We guided in the third quarter, we would be assuming some impact for that in the fourth quarter.

Okay.

Great.

Thanks a lot.

We did not have anything reflected in the third quarter for AB97.

At that point, it was still unknown, as to even if it was going to forward in any capacity.

Okay.

Perfect.

Thanks a lot.

Thank you.

Our next question is from Ana Gupte from Sanford Bernstein.

Please go ahead.

Yes.

Thanks for taking the question.

The questions on the PBM.

And I'm just going back to 2009.

I think on the other segment you used to run $450 million to $500 million.

And if I remember right, your initial expectation had been that the sale would be accretive on Op earnings, even before share repurchase.

So while 2010 and 2011, there have been multiple moving parts on individual and Medicare and Medicaid and other headwinds, are you -- have you realized the synergies, in terms of [dropped] costs and SG&As, is there more room to go there?

And can you comment on what the source and driver was of the dispute with Express, and where you are on that?

Let me speak to that.

I think -- even though we will speak to some of the issues with Express Scripts, we are pleased with the results of the transaction, and have done a number of look backs in our -- and are really supportive of having done that transaction.

I'll let Wayne be more specific to that.

We continue to have a multi-year contract with Express Scripts.

And we are in negotiations with them to resolve the differences that were expressed by them, and we'll continue to focus on that.

We need to get resolution and the resolutions are important to us, and important to our customers.

And so we're going to stay very focused on resolving that in the right way that needs to happen.

So, I think that's our expectation overall.

As we described earlier, we took a very proactive approach to the Walgreens contract issues with Express Scripts.

And that is not really the most significant concern we have in that discussion.

Wayne, do you want to be more specific than that, in terms of our analysis?

Yes, Ana, the one thing I would say is the transaction did exactly what we want it to do.

In some ways, I would say it turned out better than we expected.

Clearly, part of the better than expected, was at the time when we were deploying the capital, we were able to deploy it when the stock price was closer to $45.00 a share, and we were able to take advantage of that.

At the same time in the last two years, as you said, while there has been a number of moving parts, the one thing that we can comment on, is that everybody would agree, was that the economy has been anywhere but up.

It has been down substantially, and has had a substantial drag on in-group change in membership.

And at the same time, we had PPACA implemented which put a floor on minimum MLRs.

And if you look at the 2012 guidance of our Op gain that we've said of approximately $4 billion, and you compare that back to '09, you'll see that our Op gain is actually not that far off at all, despite the economy, and despite the PPACA regulation.

Now keep in mind, because of the minimum MLR though, some of the benefits that we would get, obviously have to be passed on along the way.

That is all the more reason we wanted to protect our shareholders, and get the [$4.65] billion up-front.

Okay, thanks.

I'm understanding the full $50 million was somehow absorbed or recovered in the other two segments.

So, follow-up to the Walgreens issue, can you give us an update on your retail selling season and how that looked in terms of the growth ads, the retention, both across the per (inaudible) as well as the MPD book?

Yes, let me speak to it generally.

What we did is took a very customer-first approach here, and anticipating that Walgreens would not be in the network, we did very direct outreach to the members who had access -- who were utilizing Walgreens pharmacy.

We also made sure, almost in every case, there was another pharmacy that was in our network that was within a half a mile of an existing Walgreens pharmacy.

So we took, and we made a number of communications and outreach to them.

And as a result, we do not think it had a meaningful impact on our medical management enrollment.

And I think people are adjusting, frankly to it, in the market place, and we aren't seeing -- I'll turn it over to both Ken and Brian, in terms of other impacts that it had.

In terms of the Part D membership, really when we look at Part D, we don't think the Walgreens, specifically had that much of an impact.

We do think that membership is going to PBM available Part D programs, and moving in a number of ways.

So I'll let them speak to that.

Yes, I think as far as MAPD sales, we didn't see any deterioration in our sales expectation, as a result of this.

MAPD sales were strong.

Stand alone, Part D, we have been seeing obviously more competitors with the PBMs entering the space.

So that is kind of a challenging environment, although on an overall basis, our Part D membership is pretty flat and it is what we expected.

So, no real deterioration as a result of Walgreens.

Okay, thank you.

And same on the commercial, I would simply say that we did a tremendous outreach to all of our clients, who were both at the employer level and at the member level, gave the options, shared the information, and it was a very smooth transition for us.

Operator, I think we have a chance for one more question.

Thank you.

Our last question this morning will come from the line of Carl McDonald from Citigroup.

Please go ahead.

Thanks.

There's been some commentary from other parts of the healthcare chain, that utilization ticked up a bit in the fourth quarter.

So it would be interesting if you could correlate that to your commentary around the 7% cost trend.

Are you seeing utilization pick up in the fourth quarter, but it is being offset by lower unit costs?

Are you seeing utilization pick up in certain areas, but more than offset by say, the drop in the admits per thousand?

Carl, I think it is a combination of normal seasonality.

I mean, e always see utilization uptick in the fourth quarter.

So I'm not sure what people are publishing is wrong, or writing about.

We did see an increase slightly, in most categories, but in accordance with our expectation, but still a little bit lower than maybe we would have expected at this point.

And then again, with our admits per thousand being down, it's more on elevated case acuity we are seeing, but then we know our unit prices are improving quite dramatically from our negotiations.

So, all in all, I would say that it is going to move up in the quarter, because it always does in the fourth quarter for utilization.

It's just a common pattern we typically see, in most lines of business, and with deductibles being met.

But I would still say, it is not the levels we would have expected.

Thank you.

Thank you for all of your questions.

In closing, I would like to reiterate that we're pleased with our 2011 results, and we're excited about our business prospects for 2012.

We have made important changes to address some of the challenges that our businesses face.

And we do have the right strategies in place to continue improving the lives of the people we serve, and the health of our community.

I would like to thank our more than 37,000 associates for their commitment, their dedication and their innovation.

It is their hard work that provides excellent service to more than 65 million individuals that we touch each and every day.

As a team, we produced better than originally expected 2011 results.

And we believe we are well-positioned for the future.

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

And I'll now turn it over to the operator who can provide the call replay instructions.

Thank you.

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