Elevance Health Inc (ELV) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WellPoint first quarter conference call. At this time all lines are in a listen only mode. Later there will be a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to the Company's management.

Good morning and welcome to WellPoint's first quarter earnings conference call. I'm Michael Kleinman, Vice President of Investor Relations. With me this morning are Angela Braly, our Chair, President and Chief Executive Officer, and Wayne DeVeydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with an overview of our first quarter results, actions and accomplishments. Wayne will then offer a detailed review of our 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, is available to participate in the Q&A session.

During this call we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP are included in today's press release and available on our Company website at www.WellPoint.com.

We will be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectation. We advice listeners to review the risk factors discussed in today's press release 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. Earnings per share in the first quarter of 2012 totaled $2.53 which included net investment gains of $0.19 per share. Earnings per share in the first quarter of 2011 were $2.44 and included net investment gains of $0.09 per share. Excluding the net investment gains in each period, our adjusted EPS was $2.34 in the first quarter of 2012 which exceeded our expectations and was just slightly below the $2.35 we reported in the prior year quarter.

Our first quarter results were driven by improved performance in the senior business and continued strong operating results in our commercial segment. We also executed well in the capital management areas of our Company and achieved better than expected, below the line results. Based on our first quarter performance, we are raising our full year 2012 GAAP earnings per share guidance to at least $7.84, which includes $0.19 per share of net investment gains. Excluding the net investment gains, we are increasing our full year adjusted EPS guidance to at least $7.65.

Medical enrollment declined by 578,000 during the first quarter and totaled approximately 33.7 million members as of March 31, 2012. The decline occurred in the commercial segment and reflected our strategic product repositioning in the New York small group and national accounts markets. Our commercial enrollment was also impacted by continued and group membership attrition during the quarter, and by competitive situations in certain local group markets. While the overall competitive environment remains rational, we have lowered our year-end 2012 fully insured membership expectation as we maintain pricing discipline.

Operating margins in the commercial segment are in line with our expectations and we continue to be well positioned for future success in this marketplace. We have won several sizeable customers that will become effective later this year and although it is still early in the 2013 national account selling season, our value proposition continues to be market leading. We currently expect to grow national membership next year.

In the senior business we grew membership during the first quarter as a result of our geographic expansion into new Medicare Advantage service areas. As expected, this new business more than offset the membership declines in California related to the regional PPO products. Our senior business operating gain increased in the first quarter and we continue to expect additional enrollment growth in this business over the balance of 2012.

We're also very excited to welcome Raja Rajamannar to WellPoint as our Executive Vice President of Senior Business and Chief Transformation Officer. Raja's extensive experience in global business management, marketing, product development and consumer engagement will be a great asset to our Company, especially at a time when consumers are taking a more active role in the selection and management of their healthcare options. Our senior business has under performed in recent years and under Raja's disciplined leadership we have detailed action plans and expect to make investments to position this business for strong future growth and performance. Raja's expertise will also help us expand in other areas.

In the state sponsored business, membership remains flat in the first quarter while the operating performance deteriorated as we anticipated it would due to higher medical costs and state budgetary pressures. We continue to expect that state fiscal conditions in California and other markets are likely to pressure reimbursement related to state funded programs for the foreseeable future. As we continue to evaluate the important future growth opportunities in the Medicaid marketplace, we're balancing state fiscal constraints with our desire to partner with state in a long term sustainable manner that recognizes the quality and efficiency we can provide to government programs and their beneficiaries.

We believe we are well positioned to meet the needs of the dual eligible population in California and in other markets, due in large part to the combination of our CareMore comprehensive care model and our extensive history in Medicaid Managed Care. We expect to participate in Los Angeles County's dual eligible demonstration through a subcontracting relationship with LA Care beginning in 2013. The CareMore delivery model gives us unique and market leading capabilities to reduce costs and improve health outcomes for individuals participating in this emerging program. We look forward to serving this population and are hopeful that California's program will be expanded to include two additional counties in which we are a Medi-Cal provider and also operate, or soon will be opening CareMore facilities. In total we now have 29 CareMore care centers in operation across California, Arizona, and Nevada and we're on track to open at least 12 additional centers, including seven in new states by January 1, 2013.

Our benefit expense ratio was 83.3% in the first quarter of 2012 and was in line with our expectations. We continue to expect that underlying local group medical cost trends will be relatively stable in the range of 7% plus or minus 50 basis points for the full year of 2012. Unit cost increases, including an increase in the acuity of services, continued to be the predominant driver of overall medical cost trends. We are anticipating lower increases in unit cost trends this year which reflects our successful hospital contracting initiatives, as well as the impact of certain generic drug introductions. We also continue to expect that inpatient and professional utilization will rise this year and are pricing our business accordingly.

During the first quarter, we continued to advance our strategic initiatives to create the best healthcare value in our industry. Most significantly, we announced an innovative patient centered primary care program, or PC2, that we expect will fundamentally change our relationship with primary care physicians. Primary care is the foundation of healthcare delivery and care coordination and we believe it can and should be the foundation of our members health. Therefore, we will be significantly increasing our investment in the primary care that our members will receive. Primary care physicians who are committed to expanding access, coordinating care and being accountable for the quality of care and the health outcomes of their patients will be able to get paid more than they do today for delivering quality care to our customers.

Our deep market share positions us to have a meaningful impact on primary care decision-making, which will support our efforts to drive improved quality and reduce costs throughout the rest of the delivery system. We're committed to helping participating physicians achieve these goals by moving away from volume to value-based payment, sharing meaningful and actionable information and providing tools and practice transformation support, including support for physician-lead care management. This PC2 program will incorporate best practices from our multiple medical home pilots which have been proven to make a meaningful difference in patient quality, outcomes and costs. We plan to begin implementing this program in select markets during the third quarter of this year with a goal of expanding it across our entire primary care network by the end of 2014.

Over time, we believe this collaboration, in addition to our complimentary value-based payment program such as our bundled payment initiatives, will substantially improve quality and member health while reducing overall medical cost trends. Recognizing that the evolution towards the patient centered care model and the consolidation of the provider delivery system will continue, we will continue to support our current six accountable care organization, or ACO project, and will leverage these growing capabilities in the provider community by launching similar arrangements with other advanced patient center practices and organizations in 2012. Between our PC2 program and the expansion of our relationships with ACOs, we expect to have value-based patient centered care models in place with over 100 practices and organizations by the end of 2012.

We are supplementing our initiatives to improve healthcare costs and quality with a disciplined focus on our administrative expenses. We continued to execute very well in this area during the first quarter, achieving favorable results compared to our plans for selling, general and administrative expense in total dollars and on a per member per month basis. Our SG&A expense increased by 4% from the prior year period which reflects the inclusion of CareMore this quarter and the investments we're making to expand these capabilities to new markets.

Our SG&A costs were also higher in the first quarter than we anticipate for each of the next three quarters as we implemented a national branding campaign earlier this year. We continue to forecast an improvement in our SG&A ratio for the full year of 2012 and believe our continuous improvement culture and drive to be the low cost leader will enhance our long term competitive advantages.

As we are improving our underlying cost structure, we're also improving service to our members and business partners. In the first quarter we exceeded our performance targets for nearly every key claims inventory metric with overall inventory levels ending March approximately 14% lower than a year ago. We achieved our member touch point measure goals for the quarter and continued to execute on our information technology strategy. We're also improving our customers experience through initiatives such as our care comparison transparency tool. Care comparison is a first to market innovative comparison tool that discloses real price ranges for 102 specific healthcare procedures and services. All costs are expressed as a bundle of care meaning all facility specific charges that are typically a standard part of a procedure or treatment including inpatient, outpatient and diagnostic tests such as radiology, are included in the cost ranges displayed in the tool.

Care comparison also includes facility specific measures of quality including measures such as procedure volumes, mortality and complication rates, average length of stay and compliance with patient safety standards. The care comparison tool is designed to provide consumers with an easy to use cost and quality comparison to promote informed decision-making and has been implemented in all 14 of our Blue markets. It was also adopted as a national cost transparency solution for all Blue plans nationwide, serving approximately 100 million members.

In summary, our commercial and Individual businesses are continuing to perform well and we have made important progress to focus on and improve the results in our senior business. We are moving forward with our initiatives to create a lower cost operating model, both in terms of medical costs and SG&A expense with best-in-class service for our customers and we believe this strategy will drive long term growth and success as the healthcare system evolves over time. I'll now turn the call over to Wayne to discuss our first quarter results and updated outlook in more detail.

Thank you, Angela and good morning. Premium income was $14.1 billion in the first quarter, an increase of $454 million, or over 3% in the prior year period, due in part to the inclusion of CareMore business in 2012. Excluding CareMore, premium revenue increased by $200 million, or 1.5%. We experienced growth in senior membership, partially offset by a decline in fully insured local group enrollment. Premium revenue was modestly below our expectations for the quarter.

As the membership transitioned away from some of our small group products in New York occurred more rapidly than we anticipated. While this situation resulted in more revenue, our earnings have been and will continue to be favorably impacted. Also, as Angela noted, the competitive pricing environment remains rational overall, but our local group membership was impacted during the quarter in what we expect to be some short-term competitive situations in select markets. We have lowered our full year 2012 operating revenue guidance to $61.2 billion for these factors.

Administrative fees were $996 million in the quarter, an increase of $34 million, or 3.5% in the first quarter of last year. This reflects our strategic decision to obtain pricing in line with a significant value we provide to our ASO customers, which drove higher administrative fee revenue despite a reduction in self-funded membership. The benefit expense ratio for the first quarter 2012 was 83.3%, in line with our forecast and an increase of 120 basis points from 82.1% in the same period of last year. The increase was driven by the local group and state sponsored businesses and was partially offset by an improvement in senior.

In local group, we anticipated that the ratio would rise this quarter due in part to our continued adjustment to minimum medical loss ratio requirements throughout 2011. We also had a difficult comparison to the first quarter of 2011 which was historically strong from local group business and benefited from lower than anticipated medical costs. Our state sponsored benefit expense ratio increased from the prior year quarter due to higher medical cost and the impact of state budgetary pressures.

In senior, our performance improved this quarter due to the actions we have taken to improve results in the Medicare Advantage Business. Overall, we are comfortable with our first quarter performance and have slightly lowered our guidance for the full year benefit expense ratio to 85.1%. We expect a favorable comparison next quarter due to the reserve strengthening that occurred in the local group and senior businesses during the second quarter of 2011. For the rolling 12 months ended March 31, 2012, underlying local group medical cost trend was in line with our expectation.

Inpatient trend is currently in the high single digit range and is unit cost driven. Admissions per 1,000 members are down slightly, while the average length of stay increased although the impact of higher acuity appears to be moderating. Outpatient trend is in the high single digit range and is 75% unit cost driven and 25% utilization. Physician services trend is in the mid single digit range and is 80% unit costs and 20% utilization related, and pharmacy trend is currently in the high single digit range and is expected to improve over the balance of this year due to generic drug introduction. Pharmacy trend is currently approximately 80% unit cost and 20% utilization driven. We continue to estimate 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 2012.

Turning to our reportable segments. Our commercial segment operating revenue was $8.5 billion in the first quarter of 2012, slightly below the first quarter of 2011 as a decline in fully insured local group membership was mostly offset by premium increases designed to cover cost trends. Commercial operating gain was $992 million in the first quarter of 2012, a decrease of $133 million or 12% from the prior year quarter. The decrease was driven by the local group business as the first quarter of 2011 benefited from lower than anticipated medical costs. Despite the decline in first quarter operating gain, our commercial operating margins remain strong and was 11.7% in the quarter and we continue to project solid growth in the commercial operating gain for the full year 2012.

Our consumer segment operating revenue totaled approximately $4.8 billion in the first quarter of 2012, increasing by $516 million or 12% from the first quarter of 2011. This was driven primarily by the inclusion of CareMore in 2012 results and our organic membership growth from the expansions in new Medicare Advantage service areas. Operating gain for the consumer segment was approximately $218 million in the first quarter of 2012, an increase of $12 million or nearly 6% compared with the same period of last year. The increase was driven by the senior business and reflected our actions to improve results in our Medicare Advantage products. The improvement in senior was partially offset by a deterioration in state sponsor performance due to higher medical costs and the impact of state budgetary pressures.

Net investment income totaled $169 million in the first quarter of 2012, down $16 million or approximately 9% from $185 million in the first quarter of 2011. The decline was driven primarily by lower overall investment balances and lower investment yield in the current year quarter, and also reflected a reduction in income from certain alternative investments. Interest expense was $109 million in the first quarter of 2012, up $3 million or 3% from the first quarter of 2011 due to higher average debt balances in the current year quarter, partially offset by lower short-term rates.

We recognized net investment gains during the quarter totaling $96 million pre-tax, consisting of net realized gains from the sale of security totaling $107 million, partially offset by $11 million of other than temporary impairments. As of March 31, 2012, the portfolios net unrealized gain position was approximately $1.1 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $753 million and $356 million respectively. Our effective tax rate was 34.6% in the first quarter, 50 basis points lower than in the same period of last year. We continue to expect our full year tax rate to be approximately 35%.

Moving to claims liabilities. Medical claims payable totaled $5.4 billion as of March 31, 2012, a decrease of $86 million or 1.6% from December 31, 2011 as our fully insured enrollment declined by 2.1%. Consistent with our historical practice, we have not included a reconciliation and roll forward of the medical claims payable balance in our first quarter press release but we plan to do so in the second quarter. Our year-end 2011 reserve balance has developed favorably and in line with our expectations during the first three months of 2012, and we continue to believe our reserves are appropriately stated. As of March 31, 2012, days and claims payable, or DCP, totaled 41.8 days, an increase of 1.2 days from 40.6 days at December 31, 2011. The increase reflected lower benefit expense per day in the first quarter 2012, partially offset by the decrease in medical claims payable. Claims receipt cycle times increased primarily as a result of the HIPAA 5010 migration.

Turning now to cash flow and capital deployment. In the first quarter of 2012, operating cash flow totaled $1.2 billion or 1.4 times net income. Our first quarter cash flow was impacted both positively and negatively by the timing of payments in certain government contracts. We received our April 2012 monthly payment from CMS early at the end of March, which increased our first quarter operating cash flow by approximately $520 million. We also experienced delays in certain payments, primarily from the state of California, related to our participation in the Medi-Cal and Healthy Family programs. This unfavorably impacted first quarter cash flow by approximately $160 million. We received a majority of these payments in April and expect the remainder by the end of the second quarter. Most of these timing related payment issues were anticipated and our first quarter operating cash flow of $1.2 billion was slightly favorable to our plan. Considered along with the 1.2 day increase in DCP, and continued low claim inventory levels, we believe this will supports the quality of our first quarter performance.

We are utilizing our capital to reinvest in our businesses and enhance returns for our shareholders. During the first quarter we utilized $680 million to repurchase 10.2 million shares, or 3% of the shares outstanding at year-end 2011 on the open market. We also used $96 million to pay our quarterly dividend. We ended the first quarter with approximately $1.8 billion of cash and investments to the parent company and available for general corporate use. Over the next three quarters, we expect to receive approximately $1.9 billion of ordinary dividends from our subsidiaries. We expect to utilize at least $2.1 billion for share repurchases and dividends, and we currently expect to end 2012 with approximately $1.6 billion at the parent company.

Our debt to total capital ratio was 28.7% at March 31, 2012, down 90 basis points from 29.6% at December 31, 2011. We are in the lower end of our targeted range of 25% to 35% and continue to have significant financial flexibility. We do have an $800 million senior note maturing in August that we expect to refinance in the near future. We are in a strong capital position and we will continue making strategic investments in our businesses and effectively utilizing our capital to drive long term value for our customers and our shareholders.

Moving now to our updated outlook. We are raising or full year 2012 earnings per share guidance. Specifically we now expect that net income will be at least $7.84 per share, including net investment gains of $0.19 per share from the first quarter of 2012. Excluding the net investment gains, our adjusted EPS is now expected to be at least $7.65. Year-end medical enrollment is now expected to be approximately 33.6 million, consisting of approximately 20.2 million self-funded members and 13.4 million fully insured members.

Operating revenue is now expected to be $61.2 billion. The benefit expense ratio is expected to be 85.1% and the SG&A expense ratio is now expected to be 13.9%. We continue to expect that operating cash flow will be at least $2.9 billion. 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). Josh Raskin, Barclays.

On the MLR increase, 120 basis points. Is there a way to break down some of the component drivers of that? How much of that was sort of Medicare under accrued last year? Was some of that due to leap year, maybe how much was state sponsored and any other factors in there.

Obviously there's a lot of moving parts. You highlighted basically all of them, which is clearly the leap year influences it and two was that we know in the senior book that we had to strengthen that book further, so that's clearly part of what we saw happening as well in the quarter. The state sponsor did impact it. It's not material but if you think about most of our contracts and California being the largest of our state sponsored, those renew in October of the previous year. What you're getting the first quarter this year is that lower rate environment that is reflected in there versus the first quarter of last year as well.

What I can tell you there, Josh, is that relative to our overall expectations, all of the moving parts came in pretty much where we expected them to be in total for the year. We weren't disappointed with how they played out at this point in time and the actual run-off of our reserves at 12-31 are coming in at the higher end of our margin for average deviation as we want it. So, feeling pretty good about that as we see some stability it there in the book.

Is it fair to say, Wayne, if I say a third of the impact, a third of the 120 bips is leap year, a third is senior and a third is all others including state sponsored; is that fair?

Josh, to be honest, I haven't looked at it at the level of how of a percentage is a third, a third, a third. I don't think it's an irrational view though to look at it as those being the primary factors that affected it and that's a pretty good proxy for how they would have fallen out. To be fair, I haven't quantified and said is this equal one third of the delta but relative to the big three, those are the big three.

Just to follow-up on that state sponsored comment you talked about higher cost trends. I think we're familiar with the idea of the budgetary pressures, but are you indicating a change, some sort of inflection in medical costs and maybe you could help us understand what markets and what drove some of those cost increases in state sponsors.

I wouldn't say so much a change as much as we had expected to see trends start to rebound a bit. As we mentioned, the admissions per day are still slightly down. We saw the extended stay actually slightly longer. We are seeing acuity down slightly. When we talk about trend being up slightly, it's all relative to the starting point and just having a 7.5%, plus or minus 50 basis point trend it inherently says the trend is moving up. What I'd say there, Josh, is relative to expectations and relative to pricing, things are coming in pretty much as expected in our markets so no real surprises with that rising trend. It's nothing that we haven't communicated previously and I would say the broader industry is communicated as well.

I'm sorry Wayne I was alluding to the Medicaid trend. You guys talked about state sponsored cost trend.

Relative to Medicaid trend specifically, we saw some slightly higher trends in a few of our states but I wouldn't call them any major outliers at all and they were all fairly minor in the big scheme of things. We aren't seeing huge spikes anywhere. At the same time, we have a few markets where we have a little more membership that was awarded to us. In those markets where you get new members, it's not unusual to expect a slightly higher trend until you get them medically managed along the way but nothing really too crazy. I'd say MLR is expected in those markets.

(Operator Instructions). Charles Boorady, Credit Suisse.

I'd like to hear more about CareMore. Obviously you're making a big investment in clinics and those clinics should become a profitable business on their own but also the use of those clinics should improve your loss ratios in the markets that they serve. I'm wondering for CareMore, can you give us a sense of what is the profitability like of the already seasoned clinics and then what are the start up losses that you're incurring that you're expensing and capitalizing on growing new clinics that are not yet fully seasoned?

Charles, I'll let Wayne speak to some of the specifics around the profitability and the rollout expenses for CareMore, but it serves a number of purposes. Clearly it has the capability to address the senior market, particularly intense care management needs and special needs plans. It's a capability that's for, not only to serving the senior population, but also we believe that uniquely positions us to serve the dual eligible market. As we look at our opportunities around dual, you really have to have the capabilities to manage very intensely care managed populations and work with community organizations. Carefully, we don't call them clinics, we call them neighborhood care centers because CareMore is centered in the community and addresses through pretty important care management capabilities more efficient way to deliver quality healthcare to those members. Wayne, do you want to speak about CareMore itself in terms of the profitability and the cost of the rollout?

Charles, when we look at the 29 clinics we have today and they are obviously all in different maturity schedules in terms of some being newer and some being much more mature models, but what we're seeing pretty much on average across the entire book is that it takes about 18 months for the clinic to get to scale, that gets to breakeven. After that, they're driving roughly a 30% IRR, so very, very pleased with what I'll call the normal maturation schedule. Those that were scheduled to improve this year have improved, those that have opened up are coming out of the gate the way we expected them so that's all very good.

What I would highlight though is this is a multi-year build out for our Company. This year alone we are spending more than $40 million on integration and expansion and we don't expect that to slowdown. As Angela mentioned, with the dual opportunity out there, we see a CareMore model as the third leg to an important stool which is you need to have Medicaid, you need to have Medicare but you need a high touch point care management model for the consumer that we're serving here. I think if anything we're going to try to even accelerate more in expansion of the CareMore model into more markets to really take advantage of what we think uniquely differentiates us on the dual opportunity.

And California, where you'll be getting some duals in 2013, roughly what is the size of the new revenues from duals you'll be getting and how well prepared will you be with the neighborhood care centers and other clogs on the ground as I call them to help manage those highly complex lives?

Well let me speak to the readiness. In terms of CareMore's footprint in California and specifically in LA County where the dual eligible demonstration project is going forward, we feel like we're really well positioned with the care centers in LA County and we are doing some of the growth or rollout in California as well. There are also two other counties that we hope essentially in the next round of consideration in California for the dual project that we're really well positioned in two other counties that we have an expectation for growth there as well. What was the first part of the question Charles?

The rough revenues that you expect from those duals and you're preparedness and I know you aren't going to give 2013 guidance, but a lot of these new businesses turn out to be unprofitable year one as you're investing in taking on the new lives and there's a period of time before you can start to really manage their care lower. Trying to piece together how that all will play out next year.

Well and I think what's important and you should know is a lot of -- we are saying investments in 2012 which will be reflected in the senior and the Medicaid segment for the growth opportunity, both in senior and in the dual beginning in '13. Because of the intensity of the population within the dual eligibles, the premiums, which are a compellation of Medicaid and Medicare premiums, could be in the PMPM range of $2,500 PMPM in year one and so it akin to what we experienced today in CareMore for the special needs plan members and some of the duals that we are really taking care of within CareMore today.

Charles, the other thing I would add is really as you highlighted, there's really two types of investments that happen when you first rollout a program like this. One is in the core infrastructure you need to medically manage and support this consumer base. Two is, because this consumer base is now moving to managed care you initially have losses early on but then as you give them more of the managed care environment you transcend to a more profitable position. The one thing we like about the demonstration project in California is that where they are rolling it out, that first major cost meaning, the actual infrastructure cost we already have established in LA, and that's CareMore. It's already built, it's already there so we don't have to bear that cost.

We will have to bear the cost of migrating and integrating and really supporting this consumer base well. Relative to Santa Clara County, we already have operations for CareMore there as well, which is the other county we've bid on that we are hopeful will get approved this year. Relative to Alameda, we already had baked into our plans to build out a CareMore facility there. Those core costs are already baked into our current guidance and assumptions but nonetheless, the real cost that we'll bear for the first year run up will be the cost of actually migrating to a managed care population.

When we think about taking CareMore capabilities to other states where we have the Blue brand in particular, we're evaluating what both the senior opportunities are there as well as the dual eligible opportunities in other states, and we're really marrying the capabilities that we have in CareMore now to the capabilities that we have and the brand that we have and the relationship we have with consumers in these other states.

Doug Simpson, Morgan Stanley.

I have a broader question aside from Q1 results. If we step back and think about some of the execution challenges over the last two years relative to peers, it seems like everyone is just trying to get a handle to understand your level of satisfaction with operations and how this might drive your thinking around strategy longer term, perhaps investments in people. Obviously there's been a fair amount of turnover among the senior operating ranks as we think back over the last few years and we're all trying to understand what you see as perhaps the underlying challenge that's driven some of the operating volatility in the last few years and do you see it more is it a technology issue, people issue, distribution, how do you see it? As you look forward, how do you plan to improve the consistency of execution? Do you think there's an incremental investment that's needed in some senior operational leadership or where do you think the push points are to really get the consistency of execution up to where we would all like it to be?

I think that's a really important question and one that I've been thinking a lot about. It's reflected, obviously, in some of the changes we made but we're really pleased to have Raja Rajamannar joining us and very focused on execution and delivery in the senior segment. When we look back, we had a couple of very strong years in senior performance and as we looked into the pricing that resulted in the performance we had in '11, I think in many respects we had a desire to grow that business and grow fairly aggressively. When we look at the pricing and product, we do think that in '12, we looked carefully at what our experience had been through '11 and got very intent on looking at the capabilities to make those moves within the confines of the senior pricing limitations where we couldn't do that. We also exited, for example, the Northern California market.

In terms of the broader question though, we've done a couple of things. One is we moved the actual function into finance with Wayne who I think has done a great job of bringing those two elements together and creating a pricing discipline and redundancy, frankly, around the pricing areas. We're also very focused on execution overall and we made some -- actually I put someone in a position of really focusing on driving execution throughout the organization, Gloria McCarthy, who's experienced operator, who was the COO for Empire Blue Cross Blue Shield for many years and has been really instrumental in a lot of execution success we've had across the Company, and so where the intersections of our Company are, she's driving through and making sure they're followed through and delivering. I really feel great about our team.

Today we've got folks who are very focused on where the future is. We're transforming ourself to be a consumer company. No matter what happens in terms of a regulatory environment, we need to really not try to build on the base of how we've serve a group customer, but really transform ourself to be focused on the consumer and deliver products and capabilities that are doing that. From a service, a pure service point of view, we continue to improve.

Our service capabilities, our inventories, the stability and the improvement in our service metrics, our customer satisfaction continued to improve and we have been doing that while we have been migrating systems quietly under the radar. We moved, really over the last 1.5 years, 1 million members on to national account members, we're shutting down systems. The purely operational execution actually has been going well for the last 2 plus years. I think as we focus on and we have this additional pricing discipline for each of our segments and I think we're improving there and we have the right processes in place to continue to improve.

If we look at, for example, the senior pricing year-over-year, this year we feel like there's much more stability in terms of the overall inventories that we have fewer H claims, we have better transparency, we frankly have better analytics into predictive modeling. We're going to continue to make investments though in places that we think need to continue to be improved and enhanced, like enhancing our risk coating revenue enhancement opportunity, continuously looking at cost of care capabilities and what CareMore has brought to us and are some new insights. We're really looking carefully at product designs to create the discipline around product design but also to really make sure it is rooted in the insights we have from the consumer and what's important there within the parameters of the regulatory environment. We're obviously very thoughtful about these issues, have taken a number of actions and are accountable to deliver.

Doug, one thing I want to add too is that the senior business, as Angela mentioned, is really a long term turnaround for us. We've seen the value of some of that in the current year, but we're going to need to make even more investments this year and next year to really get to where we think is a competitive position that takes advantage of our market share and our brand. One of the things we're trying to leverage is Raja's leadership and expertise as well and the lessons learned from that group. I don't want folks to assume that this is the fix this year. In fact, we're far from being where we ultimately want to be.

We are taking our strides in it, but it is important to recognize that we may choose to make even more investments this year that we think really drive longer term value for us in the long term, and couple that with the investments we're making in the duals and the investments for the exchanges coming out. Really, '14 ends up looking like what I'll call a broader lift year as we get the value of exchanges starting in '13 -- or starting in '14, getting the value out in '15, but dual starting in '13 and getting the lift. As the pace of duals rolls out, even those investments are going to have to ramp up across the country. Some of that value and EBITDA will come in more back end loaded because you're covering up the EBITDA value you're getting from the first year rollout with the new investments for the second and third year rollout.

Christine Arnold, Cowen & Company.

Could you help me think about your reserves. What's on the balance sheet for exited businesses and did you say you increased your senior reserves again this quarter?

For exited businesses, we had put up reserves for both the California PPO product that we exited. Those reserves panned out to be fairly close to our anticipation on that. We did put up, for the small group in New York, some additional reserves for that run out as well, as well as areas that we knew we had benefit design changes where sometimes you get a little bit of a run on the bank when those changes occur. I'd say everything there has panned out to be at our expected reserve or better at this point in time. Our total reserves at 12-31 are really coming in at the high end of our range as we anticipated with three months of runoff that's good visibility and with inventories being 14% lower.

Now, we drove inventories down aggressively this quarter because, as you know, for rebate purposes, you have the benefit of 12 months plus 3 months of run-on, so it was really important for us to get our rebate accounting as tight as we could get it. All that being said, Christine, no we did not strengthen reserves in the quarter. Our reserves are maintained at we believe at similar strong levels that we saw similar to year-end. We still think we're in the upper end of our range of margin for average deviation and three months of run out is showing it as such.

How should we be thinking about the California ballot initiative, looks like they have 350,000 signature which is about 0.5 what they're targeting. How are you thinking about the potential risk there?

Well we don't know for sure that they are going to get all of the signatures by the deadline or not. We really think it's a redundant process and that potentially it could cause further delay if the prior approval authority is effected and implemented. The Federal Government has already said that what California has now is an effective rate review procedure. We will continue to deliver with the kind of transparency around pricing and our expectations around trend. Frankly, it's never easy but those relationships are, I think, very straightforward and we'll continue to make sure people understand the sustainability of the product in the marketplace is critical no matter what happens, but I don't think we yet know if they are going to get it. We shall see. There's a number of other initiatives on the ballot as well.

Angela, what's the deadline and did you say there could be authority to reverse prior approvals?

No. What I was saying is what my understanding is the deadline is May 4, and my point here is what they are seeking is prior approval authority, which we think is redundant and unnecessary in light of what we think has already been declared by the Federal Government as being an effective rate review procedure. We don't have an expectation they would go backward, Christine.

Scott Fidel, Deutsche Bank.

Interested in how you're thinking about the MLR rebate accruals in the case that reform does get struck down. Just some interesting timing dynamics given that the first tranche of rebates for 2011 won't actually be paid out until July and if under the scenario that reform was struck down in June, how would you think about that from an accounting perspective and from a cash flow perspective?

Well let me say right now, we're operating as if the ACA is the law of the land and we're going to continue to execute and prepare ourselves for the experience of the future, which we think is very consumer focused and oriented. In terms of our rebate accruals, I think we have been very precise and created processes to be as precise as possible in terms of what the rebate accruals would be. We obviously took that into account in terms of how we priced products. Our rebate accruals are, we think, where they should be on a relative basis. We don't want to declare where that would take us in terms of July and we would carefully consider the circumstances at that time.

Interested in your thoughts on -- there's been recently a series of public sector losses by some of the non-profit Blues to some of the rational MCOs, particularly United and Cigna, and just interested first in terms of how you might see the landscape shifting competitively around that public sector market and whether you're seeing similar inroads against some of your public sector clients from those companies. And how the Blues are planning on responding to what seems to be a pretty concerted effort to up root some of the traditional strong share positions the Blues have had in that marketplace.

Well let me first speak to our efforts and, Ken, maybe you can speak to that as well. We think we have a strong relationships in a few states. We don't have the state accounts in each of our 14 Blue states and where we think there are good opportunities to do that, we either have them or are pursuing them as well. Ken, do you want to speak to what you're seeing elsewhere?

I'd just say that a state makes a decision on a variety of factors including network, total health management, service, innovation and others. While there have been some inroads across the states, have not been our states, we're pretty comfortable with the value proposition that we provide. We need to continue to evolve to meet customer needs, and we have been as you can hear earlier on today's conversation regarding PC2 and the approach we bring value to our clients. We actually have a couple of opportunities that we see in the next two to three years. Two large states that we want ourselves that are in our area and we're going to do everything we can to win them. Very comfortable with our positioning and yes, it is a competitive market. In certain states there have been progress made, but we feel comfortable with our value proposition.

Well let me go back to that broader Blue question because clearly, some folks are aiming to disrupt that. What we have seen and we've seen it over time too in our national account segment which is some types the competitors promise things to be on the if come. If you come we will build a different network or something and produce savings. Our new national account customers that have been with us, some big ones that have been with us over the last year joined us over the last year or two, are telling us what tremendous savings they are receiving as a result of moving away from the competition to us and the strength of our really our value proposition are quite obvious. Sometimes these things turn and people understand the difference, which we continue to sell against this promise of the future versus the reality of where we are today.

On the broader Blue question, I would say there's a lot of focused efforts at the Blue Cross system level in terms of competition and collaboration and working together, and creating more consistency, and I think you can see that around a couple things. One, around care comparison, the tool that was created here at WellPoint but then became the broader tool and a real focus on transparency and making sure that all Blue plans have the capabilities and transparency tools that the customers are seeking consistently. The medical policy areas are much more consistent than they were in the past.

We're working together on Bloom, a potential private exchange market for the future, and then there's a lot of collaboration among Blue plans really in what we always call the coalition of the willing. Rather than always having a system wide effort, we see more innovative approaches by a few plans coming together, adopting an approach and working together and then scaling that approach over the broader Blue Cross network. The momentum is positive and I think that these couple of accounts are going to create more momentum for people to think about ways to work together.

(Operator Instructions). Matt Borsch, Goldman Sachs.

Yes, I was hoping that you could talk a little bit more about the competitive situations on the commercial side that you referenced. I'm just interested any detail you can give on what segments you're seeing that in, if it's more risk, more ASO and maybe geographically if there's anything you can tell us there.

I think I'll clarify our numbers a little bit just to reconfirm something we started discussing last March and then in June. We did go backwards in membership this quarter, but there was some very strategic repositioning. We stated a while ago, after a very successful 2011 national account year, that we were going to reposition several clients and make sure that they were carrying their full share. We had actually good national account growth ourself this year on new business. We had over 55 cases added substantial business or new, 27 over 5,000 lives each. We won a very good amount of business, but the repositioning in national was a one year phenomenon that we told you about last March. On the local New York, we made a very significant product positioning change that didn't occur a little faster than we expected, but that's okay and actually a good thing for us from a shareholder perspective.

It is a little bit more competitive. There's some pockets but in general our markets are rational. We're finding that there are some competitive pockets which we still feel are MLR related in certain areas, and that is a multi-year phenomenon, but we feel in general it's not really changed. Our numbers look a little distorted because of our strategic decision, but the markets are remaining very rational.

Kevin Fischbeck, Banc of America Merrill Lynch.

Wanted to go back to the MA side of things, I guess some of the commentary was a little bit confusing to me. In the comments you indicated that the senior business is one of the reasons why the consumer business grew earnings year-over-year but then in response to Josh's question earlier, you mentioned as one of the reasons why MLR was up year-over-year. Can you talk a little bit about how to reconcile those two things and then talk a little bit about where we are in the comps around what happened last year as far as exiting California. Do you still feel good about the 150 number and last year you mentioned the other business was a little bit weak. Give more color about where we are and how good you feel about the MA business at this point.

A couple comments and thanks, Kevin, for the opportunity to clarify some of this. Keep in mind that while senior improved in the quarter, obviously it made sense (inaudible) and MLR, but this is the first quarter you have CareMore in the model as well, CareMore being a SNP model so as a result you have much higher MLRs. From a mix perspective, you can actually have a higher MLR, but still be performing better than expected and that is in fact the phenomenon that is happening within our book.

Relative to the at least 150, obviously we have that designated in expectations by quarter. We did exceed that in our expectations for the first quarter. However, what I want to remind folks is with Raja here and the other initiatives we're taking, we are evaluating whether we should make further investments in senior this year as well to drive even longer term value, versus more of what I'll call an ankle bite approach to get a little bit of improvement each year. We're going to evaluate that and we're going to make those decisions later, but again relative to first quarter expectations, we are out more positive than that, but we don't want to make short-term decisions for the detriment of the future.

Tom Carroll, Stifel.

Also follow-up on CareMore. What states other than California are you targeting for duals? Angela, I think you mentioned seven states. I wonder if you could list those for us. Secondly, on cost trends, you made some comments about admits and acuity but what were hospital days in quarter relative to the first quarter last year?

Okay, let me speak a little bit in terms of the CareMore growth potential and how it relates to the dual eligible opportunity. We continue to build out California but we, for competitive reasons, don't want to declare the other states in which we're going to grow the CareMore capability. As we acquired CareMore, they had the across state lines so they had gone both Nevada and Arizona, created neighborhood care centers, created the network and the rap network that they have that helps to service the member that they work with. We are taking them to some states where we are Blue where we think there's a unique opportunity to marry their capabilities with the brand and grow where we anticipate there will be dual eligible opportunities in the future as well. Right now, for competitive reasons, we want not to have that declaration overall. Wayne do you want to speak to the trend question specifically?

Yes, as we commented earlier on in the call, our admits per 1,000 are down slightly but in a vacuum that sounds good, but we have to look obviously at the length of stay as well. We are seeing a length of stay be up slightly on acuity, but the dollar value of that acuity is moderating versus a year ago. In essence, it's three moving parts, overall admits are down, length of stay is still remaining longer from what we've seen historically, but the actual cost is moderating. Basically inpatient unit costs are up but utilization is down a bit so all in, it's in line with our expectations.

But it's really flat.

Let me reinforce in terms of trend. Trend is coming in where we thought it would. It is where we thought it would be for pricing purposes. There's a little up and down here and there, but we are doing a good job at contracting and we think we're doing a good job at managing the care that's being delivered as well, but it's right where we thought it would be.

Angela, on the state question, is it fair to assume that you're mostly targeting your Blue franchise markets?

Yes.

Chris Rigg, Susquehanna.

Can you help us better understand the change in the revenue outlook from your previous guidance to today? I know you brought down enrollment by 100,000, but it seems like there may be some other moving parts. If you could give us a little more detail there that would be great.

Okay, I'm going to have Wayne answer that, but I want to go back to the prior question too. We are targeting our Blue states. We think over a long term perspective though and the collaboration that we have with other Blue plans gives us an opportunity, frankly, to offer through other Blue plans the capabilities that we have at CareMore. I think that's a longer term perspective and we're going to stay focused on where we have the brand and where we see the future dual opportunities. Wayne, do you want to address the revenue question?

Yes, we've lowered our overall revenue guidance by about $900 million and the primary driver of that was really the decline in fully insured membership. Part of that is driven by the fact that the small group in New York actually exited sooner than expected which is, as Ken mentioned, a positive thing for us in terms of our product group positioning in the state, but at the same time, that leaves sooner than expected you'll get lower revenues but ultimately you're going to get lower claims as well. A substantial portion of that is the repositioning and we look at other areas of our business though, we actually have our ASO actually slightly improving as the year goes versus our original expectation. It's really a volume issue at this point and a timing issue relative to volume on the fully insured, but nothing more than that. That's actually the same reason for the SG&A percentage going up is that the actual dollars that we plan to take out for the year we're still on track for and we're actually on track to do a little bit more than that, but the ratio is actually being affected by the revenue coming down.

Ana Gupte, Sanford Bernstein.

I wanted some more color on your MLR guidance. You've now brought it down by 20 bips and going back to Q4 reporting, based on your disclosures I think it appears about 15 bips of a headwind from the 97, there was about a 30 whip tailwind from Medicare and there was an implied commercial MLR deterioration of 35 bips. What has possibly changed assuming that's roughly in the ballpark to get you to the 20 bips better guidance?

A couple things I want to highlight is that we are still forecasting that AB97 will be pushed through in some capacity, so we have not adjusted our guidance for that at this point in time. We did see some slightly better improvement though relative to the small group in New York. Again, as we mentioned, with that being repositioned sooner, we are going to get a slight benefit in MLR. It does benefit EBITDA a little bit but not a lot. It's more about timing. Again, as we get lower revenue we're also getting lower claims, but that does position us there. That's part of the driver.

Similar to our longer term outlook based on what we saw with trends being relatively consistent with the expectations but not really rebounding much more than we had expected. There's some belief too that we may see some improvement there, but we're really not forecasting much. Most of it is just timing on the small group and really a lot of small pieces in a variety of areas.

Just following up on that then, on commercial, I think United saw some favorable true up on MLR rebates. Is that in your guidance? Is that potential upside or did you not see any at all?

No, we had been truing up our rebates all throughout last year as HHS continued to provide more clarity. From our perspective, we thought our number was fairly stated and weren't really surprised by -- to us all the regulations had been pretty much clarified throughout last year by December, so we had ours trued up to be accurate as best as we could assume. We have no rebate releases in our first quarter or are we expecting any changing.

Then on the 30 bips on Medicare, is it possible that is conservative do you think? Because I was only in California, would you see some other pricing reaction in other parts outside California as gain on potential source of upside?

No. At this point, Ana, I wouldn't because again I think we have a multi-year fix and because of that we were limited in product design changes and other changes. For that reason, I think what we had assumed would occur, we did the maximum that we were entitled to do and we're seeing that come through as expected. I'm not really anticipating what I would call further upside in Medicare. I'm expecting it to be very much in line with our expectations at this point, albeit a little bit higher and obviously, more interested how we invest more in that business for the long term. So, not expecting much upside there.

David Windley, Jefferies.

Wanted to come back to the duals and particularly California. I wondered how much visibility you have on premium PMPM rates there. I've heard quite a wide range of numbers thrown out. You mentioned, Angela on the call earlier $2,500, so visibility on PMPM rate, visibility on included populations and how that might break out. If you can give us any color on how you would anticipate sharing economics with LA Care and LA County.

Well let me speak to the rates because there are really two cohorts that get different rates in the dual California mix as we understand it. One is really for the SNP population which is different than the rate you would get from an other dual. It's not clear, based on either the demonstration or what the department in California has announced, about how those rates will be blended. Our estimate at $2,500 on a PMPM basis is essentially a blended expectation.

We've had a longstanding relationship with LA Care and we'll be working with them to understand what the subcontracting relationship is. We think we have a very compelling case for enrollment in CareMore given its facilities in LA and they were quite impressive in terms of the presentation for the other two counties that we're hoping would be the next round of that. They're essentially going to be allocated enrollment so we're going to continue to work with both LA Care and the state to reflect those market leading capabilities and make sure that we get that share of the population that we think will be well served by the neighborhood care center model, and the CareMore capabilities that really extend beyond its care center capabilities; that really do a lot that relates to the inpatient care as well and they have a model of extensiveness that helps manage and coordinate care in those settings as well. It is an evolving process and one that we're seeing very close to both the department and LA Care on.

If I could just ask on the same topic, same issue, quite a wide range of thoughts around margin on this business. Does WellPoint have a thought? Is it more Medicaid looking, more Medicare looking or some number on the margin?

Well when you look at it combined, obviously the majority of the PMPM you're looking at is essentially the equivalents of Medicare payment. Now the way we are managing it because the contracting authorities for it are the Medicaid authorities in the state, so you're interfacing with them. When we think about it though, we think it's almost more akin to the SNP population that CareMore takes care of. Even in some cases, more than that so to speak, very community-based relationships with local community organizations, so it's an interesting blend. We had community focused initiatives in Medicaid and CareMore has had community focused initiatives. It's a unique blend, but the majority of the premium looks like it comes from the Medicare payment string.

Michael Baker, Raymond James.

Previously, you had one senior executive responsible for both the Medicare and Medicaid businesses. Now it seems like that's split out and I'm just wondering in light of the dual opportunity, how you plan effective coordination of the effort.

Yes, that's a great question. It's something that we'll continue to think about as this opportunity evolves. What we ask is that Pam Kehaly, who reports to Ken Goulet and is our plan President in California, that she lead our Medicaid businesses and she's doing and it makes sense for a lot of reasons. One is, she's the plan President in California. California is the state in which we have had historically our largest Medicaid business, which is Medi-Cal, and Pam has the capability and the relationships there to evaluate the dual opportunities, in particular and create a growth plan for us overall. We will continue and so it's an interesting place for all these things to come together and for us to really focus on how the consumer is served through this market.

As this evolves and we look at broader markets and places, we'll continue to evaluate whether Medicaid and Medicare should come together in a more specific way. In terms of operating right now, we're making sure that there's absolute transparency and coordination because, as I said, Medicaid is essentially the front end of Medicaid is with the state regulator and California is the first place to really see this evolve, demonstration project and the back end care is the Medicare capabilities that we bring through CareMore. It's a fair question and one that we'll continue to analyze. We're really pleased with Pam's leadership and the relationship that she has now and Ken's staying very involved.

Peter Costa, Wells Fargo securities.

I'd like to explore a little bit more about the slow claim receipts and what do you think that's doing to your recognition of medical costs in the quarter. If I assume it's not doctors wanting to be paid slower so I assume it's them not being compliant with HIPAA 5010. Can you talk a little bit more about what your awareness is in the claims that haven't come in yet and how you know exactly what's out there still?

We've had very intense efforts around 5010 and we make sure, in terms of any claims, that in the EDI process, don't come through as we expected that we reach out and we're really analyzing the reach out and making sure that the providers are either 5010 compliant and understand it, or if we see issues, we're really reaching out to them proactively to address those issues. While the incurred to receipt cycle time increased, the receipt to paid cycle time declined. We continue to get the transparency that we think we need and the stability in the inventory for us is really important to the actuaries and they're feeling quite comfortable with what they're seeing in terms of overall inventory stability it.

Pete, as we've seen in the past, whether it be the HIPAA 5010 or other issues where providers are required to change to a new identifier, this is not unusual. One of the things we prepared for was not only from an actuarial standpoint on where we picked completion factors, but more importantly we built a swat team whose sole job over the last three months was that when a claim got rejected, because we knew it wasn't complying with HIPAA 5010, there's an immediate reach out, so the vast majority of claims were reprocessed within 24 hours of the reject. That is the discipline we're reporting on.

That being said, three months later you'd like to assume most of them are in but we aren't assuming that's in our completion picks at this point in time from an actuarial perspective, but there's both the operational group that we put around and of course there's the completion factor pick. In terms of our own internal, as Angela highlighted, our paid cycle times are actually faster, it's the HIPAA 5010 receipt time from the providers.

Around our continuous improvement efforts, we are really trying to avoid rework. We want to be proactive with the providers because we don't want them to resubmit and have duplication and efforts so we did a number of things around 1-1. We really improved our implementation around new accounts and renewals. A lot of times accounts want to wait until the last minute and see what happens and change their benefits. We really work with them to make sure that our implementation with them went really well. We're also really working to make sure our contract on the provider side come in without any efforts to do rework or retrospective changes. Those are hitting as our expectations. Despite 5010, we think this is the best 1-1 implementation cycle we've ever had.

Is there a type of provider or geography where the sole claims have been more significant?

No, not really. In terms of -- we've always found that there are providers at different levels of sophistication. Sometimes larger systems have better preparedness for 5010 and we had been better prepared for ICD9 to 10 and how that's going to go forward. We think it's more a level of sophistication and technological capability and not specific to geography.

Carl McDonald, Citigroup.

Looking at your cost trend, over the last decade, you've been fairly close to whatever the industry average looks like, generally within 20 to 50 basis points for every year. In the last couple of years there's been a much wider disparity between your trend and the 5.5% to 6% that some of your competitors have seen. Be interested if you have any view on why that difference has emerged. Second part would be if you started to see that be an issue in any of the negotiations with employers, particularly considering since the PMPM for the Blues generally on an absolute basis is already higher than what some of the other companies were offering.

First, I think it's really important to make sure that you're looking at an apple and an apple because each of the trend descriptions can be different. For example, what we use is we focus on our local group fully insured business which is a very large, very steady block of business. Others sometimes include their Individual business, sometimes others even include their specialty business which may have a much lower trend so it brings the overall perception of that number down.

What we look at and what we talk to customers about is the overall cost of care. We think we have a definite advantage, both in terms of the depth of the discount arrangements we have the management of the utilization we have and then the SG&A that we have. Trend is always relative to your starting point as well and we think that we're delivering the overall value proposition in the marketplace and we're winning accounts with discipline, frankly as Ken described, so that we are getting appropriately compensated for the value proposition that we deliver.

Okay, with that, that was our final question. In closing let me say that we expect continued success by delivering on our mission to improve the lives of the people we serve and the health of our communities, while creating a more affordable operating model. We're confident that as we execute and fulfill these objectives, we will continue to deliver excellent overall healthcare value. I want to thank everyone for participating on our call this morning and ask the Operator to provide the call replay instructions.

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