Elevance Health Inc (ELV) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the WellPoint Fourth-Quarter (sic -- see press release "First-Quarter") Conference Call.

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

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to the Company's Management.

Good morning, and welcome to WellPoint's First-Quarter 2013 Earnings Call.

This is Doug Simpson, Vice President of Investor Relations.

Presenting today are Joe Swedish, Chief Executive Officer, and Wayne DeVeydt, Executive Vice President and CFO.

Joe will start the call today with an introduction and offer some of his views on WellPoint's positioning near term and longer term and also lay out some of his expectations as CEO.

Wayne will then offer an update on the business and highlight progress against our operating goals.

He will also review the quarterly financial highlights and our updated outlook.

Q&A will follow Wayne's remarks.

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

Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are available on our website at www.wellpoint.com.

We will also be making some forward-looking statements on this call.

Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC.

I will now turn the call over to Joe.

Good morning, and thank you for joining us today.

This is my first of what I expect to be many discussions, and I look forward to meeting more of you at upcoming conferences and industry events.

I expect to maintain an active dialogue and appreciate your interest in WellPoint.

As Doug mentioned, this morning, I'm going to focus my remarks on two principal areas.

I want to start with an overview of my decision to join WellPoint and then discuss some of my expectations and how I am approaching my responsibilities.

I've worked with many healthcare enterprises over my 40 years in the industry.

As I think about the evolution of the system over the next 10 years, I am optimistic about the prospects for WellPoint and the opportunity to deliver value to our customers, members, associates, and shareholders.

I am encouraged by the recent operating momentum as demonstrated by this quarter's performance, which builds upon the improved operating trends seen in the second half of 2012.

I would like to take a minute to thank John Cannon for his efforts during the interim period in stabilizing the Company for 2013.

There is much to be done with exchanges coming quickly and the market backdrop constantly evolving.

It is helpful to start a year on a strong note, as shown by our strong bottom line, strong cash flow, and expense controls in the first quarter.

I have now been here for a month, and my emersion has been constructive and supports my due diligence prior to accepting the opportunity.

Joining WellPoint was a major personal and professional decision for me, one that I did not take lightly.

I was intrigued by the opportunity as it became apparent to me that our Board was looking for someone to position the Company for the next decade amidst what I think will be a quickly changing landscape.

The key to my decision was my view that WellPoint's assets are very well positioned for the changing environment to help deliver more affordable coverage to more customers across different segments of the population.

At its core, I believe WellPoint will benefit from the strength of its local market depth and its commercial and retail experience, with a key opportunity to improve execution on a sustained basis.

For those of you who do not know me, I've spent my career on the provider side of the healthcare industry with substantial experience dealing with payment models, reform changes, reimbursement changes, and operational improvements.

My background as an executive has been characterized by an intense operational focus and a drive for expense efficiency, leveraging technology investments.

You can expect that focus to continue during my tenure here at WellPoint.

Specifically, the entire US healthcare system needs to focus on lowering care delivery costs while improving quality.

Financial challenges abound across federal and state governments as well as in the commercial and retail markets, and these pressures are not going to improve with age.

This is not a trend that emerged in the last year alone and will not be solved by anything short of a fundamental realignment of the way in which the industry addresses the issues of access and affordability.

Understanding the perspective of various constituencies, including providers and patients, will be critical in forging partnerships to drive down costs by rewarding the most efficient and effective partners.

In my discussions with some of our stakeholders, a number of them have asked for my views on provider collaboration.

I think the best way to address this is to say that providers are experts at clinical performance, while we provide infrastructure associated with critical risk management capabilities.

I look forward to areas, of which there are many, where we can effectively collaborate to bring down costs and improve access and quality.

I always stress that solutions vary sharply from market to market.

However, all are fundamentally based on this need.

To be clear, I do not currently see vertical integration as a likely path for WellPoint.

The models are so divergent that it just does not seem to be a best use of capital.

Aside from that, we will certainly engage with leading providers that are similarly addressing cost efficiency challenges and are willing to align with our products and networks.

Their clinical expertise and community engagement will be critical to driving toward the best solution for our members and the communities we serve.

Over the past few weeks, I've had the opportunity to meet with our senior executives from each market and many of our associates, and I look forward to meeting many more.

There are many very dedicated and talented people here, and I am excited to join the Team.

I remain in the process of digging into the businesses but want to offer a draft blueprint of our priorities at this point.

We will plan to update you on these as we speak on future conference calls.

We are operating in a very dynamic environment, and these priorities will evolve over time, but I thought it would provide some helpful context to understand where my initial focus lies.

I'm generally focused on three buckets as I assess our Company.

The first bucket is the initial here and now.

Call this the 90 to 120-day review, and the goal here is to assess the Company's structure and to continue our recent operating momentum.

The second bucket is the medium-term, where I am assessing our preparations for 2014 and beyond to ensure that we are on track to address the opportunities and challenges in front of us with discipline and consistency.

And the third bucket is simply the longer-term outlook.

Starting with the near-term, those first 90 to 120 days, my focus lies on meeting with my Executive Leadership and assessing the progress against goals for 2013 and developing the strategic foundation for the future.

We need to continue developing and delivering on our commitments to further the positive momentum we've gained since last fall.

So far, I am encouraged by the operating trends we experienced in the first quarter and believe the Company took a prudent stance in developing the initial 2013 Outlook.

A few specific highlights from the quarter include meaningfully exceeding our operating gain and EPS targets, driven primarily by strong performance in the Commercial segment.

Our positive results reflected favorably on both the gross margin and administrative expense lines.

Membership declined modestly from year-end 2012 but is trending better than we originally planned.

Looking ahead, we are optimistic about our future enrollment growth prospects, given the coming Medicaid expansion and individual membership opportunities through the exchanges.

We're also seeing improving trends in our Commercial ASO businesses.

Stepping back, I am reviewing our structure within the context of a broader view of the Enterprise performance.

While trends in the last several quarters have been encouraging, I recognize that performance over the last five years was inconsistent.

I know the issues that created the volatility, but I want to better understand some of the dynamics that contributed to the deviation in expected performance.

It is incumbent upon us to ensure that we have the processes, infrastructure, people, incentives, and culture in place to drive consistent performance over a multi-year period.

Over the medium-term, I'm digesting and assessing our positioning and preparedness for the opportunities and challenges we expect as we move into 2014 and beyond.

This will include a review of several areas, such as investments, information systems, structure, and the level of operational centralization.

Part of this review will be assessing the level of investments planned this year in the Medicare market and in preparation for exchanges.

In short, we are planning to spend a lot of capital on these investments, and I want to fully understand the expected returns on those investments versus other uses.

On the issue of centralization, we need to strike the right balance needed to execute while maximizing the costs and operational efficiency of the Company as a whole.

This is an ongoing balancing act to achieve SG&A improvements along with optimizing engagement in the new marketplace.

We need to ensure business unit autonomy is balanced with appropriate accountability for results, as well as the need for overall organizational cohesion.

Longer-term, I believe we can accelerate earnings growth by capitalizing on opportunities to serve the growing retail and government segments while continuing to develop our employer focused businesses.

I joined this Company because my experience on the provider side tells me there is an opportunity to better leverage the assets of the Company and lift our valuation over time through more consistent execution against these opportunities.

I am reviewing the components of our previously communicated strategic plan, building toward a double-digit EPS CAGR over the next five years.

This review continues, but I will say that the overarching strategic framework seems reasonable.

This is all pointing to an environment for greater consumer engagement driven by the leveraging of technology to improve information flow, the restructuring of incentives to reward care quality more than volume, and advanced partnering skills to improve alignment throughout the payer and the provider community.

Over the course of my career, I have managed enterprises through numerous changes across reimbursement and payment methodologies.

I lived through various generations of payment reform in Medicare and commercial managed care across markets in the 1990s, including Florida.

Throughout all of this, there have been persistent discussions of the need for the system to better control costs to varying degrees of success.

However, I believe the next decade will be different.

We have reached an inflection point reflecting the convergence of challenges related to funding, regulatory changes, demographics, technology, and data informatics.

I believe the healthcare industry transformation has accelerated.

There will undoubtedly be winners and losers.

I believe WellPoint is very well-positioned to win.

As the industry evolves to more of a retail model that is consumer-centric, affordability and access will be critical to the value proposition in every market.

Key to that will be an intense focus on G&A efficiency and direct care costs, including provider reimbursement models.

Both are critical to support product design that advances toward the goal of improved affordability and access for a broader population.

While constructs around margin component are influenced by certain provisions of the Affordable Care Act, the overarching dynamic is the move to a retail market focus on the need to contain health-care costs.

The challenging fiscal trends and the reform debate seen over the last five years are to some extent now coming to a head with the rollout of many of the Affordable Care Act provisions.

The stakes are very high for payers, providers, customers, and patients.

We recognize that this is a very dynamic backdrop and will remain so through the coming years.

On that front, I'm going to drive WellPoint forward with an emphasis on performance, transparency, and accountability.

As we face this period of rapid evolution, we need to be nimble and proactive.

Our goal is to recognize the challenges and opportunities we face and ultimately create a sustainable and sensible economic model that unlocks the value of this Company's platform.

To achieve this, we must consistently execute on the commitments we've made to our customers, our business partners, our members, shareholders, and ourselves.

This will be a paramount focus of mind in leading this organization through what I believe will be a very exciting and transformational period.

So to summarize, we're pleased with the start of the year and feel good about the assets we have to succeed over the long term.

As I have only been here a month, and we're also just one quarter into the year, we've taken a prudent stance with respect to our updated financial outlook for 2013.

That said, I am still pleased to be increasing our full-year EPS expectation, albeit somewhat modestly at this early juncture.

I'm still in the process of my 90 to 120-day assessment and plan to provide more clarity once that is complete.

Now, before I turn the call over to Wayne, I would like to thank our 43,000 associates for their efforts in delivering results.

It is an honor to lead WellPoint forward, and I believe we will be successful in helping to enhance healthcare quality and affordability across our markets and ultimately increase access to care for millions of people over time.

With that, I will turn the call over to Wayne to discuss our first-quarter results and outlook in more detail.

Thank you, Joe, and good morning to those joining the call.

My comments today will focus on the key financial highlights from the quarter.

Additional details are included in this morning's press release.

I'll also provide some business-line commentary and then close with a discussion of our outlook for the balance of the 2013.

Please note that Amerigroup was included in our consolidated operations for the entire first quarter of 2013 and, therefore, impacts both the quarter-over-quarter and sequential comparisons.

Overall, first-quarter results were stronger than we expected, driven by a combination of improved core operating performance and favorability in the capital management areas.

On a GAAP basis, we reported EPS of $2.89, which included $0.05 per share of net investment losses.

Excluding these losses, our adjusted EPS was $2.94, or an increase of over 25% from the first quarter of last year.

Our quarterly results were comfortably ahead of our plan both at the operating gain level and below the line where we benefited from some favorable tax planning strategies.

Our results were supported by strong operating cash flow and a sequential increase in the DCP metric when adjusting for the impact of Amerigroup.

As Joe mentioned, we have modestly raised our full-year EPS outlook as a reflection of our performance, but are still being prudent as many of the uncertainties inherent in our original guidance still exist.

Medical enrollment declined by 321,000 members, or less than 1% on a sequential basis.

The decline occurred almost entirely in fully-insured business as we commenced our transition toward HMO product offerings in the Medicare Advantage market and experienced modest attrition in our local group, state-sponsored, and individual businesses.

While fully-insured enrollment ended the quarter about where we expected, our ASO enrollment is trending favorably relative to our original plan.

I would also note that our Specialty business grew nicely in the quarter, reflecting some of our recent investments in this area.

Dental membership expanded by 794,000, or 19%, due primarily to a large new customer win, while Vision added 100,000 members, bringing its 12-month member growth to nearly 350,000, or 8%.

Operating revenue increased by $2.4 billion, or 16%, versus the first quarter of 2012, driven by the inclusion of Amerigroup this quarter.

The revenue increase from Amerigroup was partially offset by the reduction in fully-insured local group and senior membership.

The benefit expense ratio was 83.7% in the quarter, favorable to our expectation, and up 40 basis points from the first quarter of 2012, due to the inclusion of Amerigroup business, which carries a higher/benefit expense ratio than our consolidated Company average.

The increase from Amerigroup was partially offset by an improvement in the local group business reflecting lower-than-expected medical costs so far this year.

As we are only three months into the year, we continue to expect 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 2013, though our bias would be towards the lower 50% of the range if our first-quarter experience were to continue.

Our SG&G expense ratio declined by 80 basis points from the first quarter of 2012, primarily due to the inclusion of Amerigroup business which carries a lower SG&A ratio than our consolidated Company average.

Without Amerigroup, the SG&A ratio was essentially flat and modestly favorable to our expectations.

A quick comment about below-the-line activity.

We experienced a lower-than-expected effective tax rate in the quarter, resulting primarily from the inclusion of Amerigroup in our state tax apportionment factors calculation and favorable tax planning strategies which produced a lower effective state tax rate.

These changes will benefit us going forward, and we now expect our full-year 2013 effective rate to be in the range of 34% to 35%.

Our interest expense increased from the prior-year quarter due to the Amerigroup acquisition financing, although our expense in the quarter and our net investment income were modestly better than we expected, due primarily to effective capital management.

Consistent with our past practice, we have not included our roll forward of the medical claims payable balance in this quarter's press release but will do so in the second quarter.

That said, our year-end 2012 reserves developed favorably during the first three months of 2013 and are generally in line with our expectations as of March 31.

DCP was 40.7 days as of March 31, an increase of 1.2 days from December 31, 2012 when adjusting year-end metric from the impact of Amerigroup.

Our debt-to-cap ratio of 37.8% was down 80 basis points from 38.6% as of December 31, 2012 as we repaid the note we assumed from Amerigroup.

We continue to expect this ratio to be below 35% by the end of 2014.

Our parent cash balance was $1.4 billion as of March 31, 2013, down from $2 billion at year-end 2012 due primarily to the Amerigroup debt repurchase.

We continue to expect over $2 billion of subsidiary dividends over the next three quarters.

We generated strong operating cash flow of $957 million, approximately 1.1 times our net income in the first quarter of 2013, supporting earnings quality in the quarter.

We repurchased approximately 5.5 million shares or nearly 2% of the shares we had outstanding as of December 31, 2012, for $340 million.

We had approximately $1.5 billion remaining under our Board-approved authorization at quarter end and continue to expect approximately $1.5 billion of share repurchases for the full year of 2013.

We used $113 million during the quarter for our cash dividend.

Recall that our Board increased the dividend in February, and our annualized yield dividend is now approximately 2% based on yesterday's closing price.

I would like to take a few minutes to do some business-line commentary and talk a little bit about the market environment in general.

The market environment remains competitive but rational overall.

But when we look to Commercial, we continue to be pleased with our performance as first-quarter operating gain grew 12% and operating margin expanded by 150 basis points, both primarily reflecting lower-than-anticipated medical costs in the current-year quarter.

While commercial mentioned declined slightly from year-end 2012, we are encouraged by the stability in our ASO enrollment and are now seeing less pressure from in-group attrition than we experienced in recent years.

We have also had some recent new account wins, and while it's still early, we are targeting a return to national accounts growth next year.

On the fully-insured side, we continue to actively prepare for the coming marketplace changes and have substantially completed our exchange-based product design and pricing development work in each of our Blue markets.

We continue to believe our brand name strength and unit cost advantages position us well to achieve meaningful new growth through exchanges over time.

Moving to Medicare, membership declined in the quarter, which we expected given our strategy to begin transitioning the Medicare Advantage business more towards HMO product offerings.

We continue to believe there is an opportunity to increase volume and improve our MA margins over time, although we are evaluating our strategies on a market-by-market basis in light of the reimbursement pressures we expect to face in the next few years, including certain risk model changes recently finalized by CMS that disproportionately impact funding for plans serving some of our nation's most frail and elderly members.

As Joe alluded to, we previously allocated approximately $150 million of incremental investments in our 2013 plan to our Medicare business.

As we have said previously, this investment plan is flexible, and we are in the process of reviewing it to ensure the expected returns are appropriate or whether investments should be redirected.

That being said, we remain committed to serving our Medicare members and continue to believe there is strong enrollment growth potential over the long-term horizon.

Moving to Medicaid, our Amerigroup integration plans are fully underway, and we are pleased with the first-quarter performance of Amerigroup overall.

Our synergies are on track with our plans to date, and we continued to believe we'll deliver mid single-digit EPS accretion this year.

We're also pleased to have been selected during the quarter to serve two counties in Florida's upcoming long-term managed-care expansion, as well as several new markets as part of the California Rural County Medi-Cal expansion.

We also just recently received notice from the state of Nevada that we'll continue to participate in the state's TANF and CHIP programs for the next four years.

We look forward to serving beneficiaries in each of these markets.

Turning now to our updated 2013 outlook, we currently expect adjusted EPS of at least $7.80, up from our prior outlook of at least $7.60.

First-quarter results were better than expected in most of our businesses and give us reason for optimism about business performance for the full year.

While it is fair to say that we did not incorporate the full level of our performance we achieved in the first quarter into our outlook for the balance of 2013, we believe the current consensus expectations appear reasonable relative to our updated views.

We are encouraged by the first-quarter results but want to retain a prudent stance in light of what we expect to be a fluid and dynamic market over the next 18 to 24 months as we described in our earnings call last quarter.

For example, while the first quarter benefited from lower-than-expected medical costs, there continues to be uncertainty around the timing of initiatives such as exchanges, Medicaid expansion, dual eligible managed-care programs, and the outlook for Medicare Advantage.

Also, as you know, we do not provide quarterly EPS guidance, but would note that, from an earnings seasonality perspective, the first quarter has historically been our strongest quarter of the year with the fourth quarter traditionally the weakest.

We believe we've taken a disciplined stance on pricing to cover cost trend and would remind you that our 2013 outlook continues to include a drag from the expected impact of sequestration, Amerigroup integration costs, and planned incremental investments of approximately $300 million, primarily in the Medicare and exchange markets.

So in summary, I will simply reiterate that we are pleased with our start to 2013 and optimistic about our continued business momentum.

I will now turn the call back to Joe to lead Q&A.

Thanks, Wayne.

With that, operator, please open the queue for questions.

Thank you.

(Operator instructions)

Your first question comes from the line of Justin Lake from JPMorgan.

Please go ahead.

Thanks.

Good morning.

First question is on Medicare Advantage.

Can you talk through your thoughts on final rates and specifically what you think the impact is of the new risk score model on 2014 rates?

Thanks.

Thanks, Justin.

This is Joe.

Let me briefly comment on that.

As you may recall, the advance notice occurred in January, which projected a cut of about 8%, and the final rule, which came out on the heels of my arrival in late March, and it stated that it would improve to about a negative 3%.

We've looked at that very carefully, and in particular related to the new risk adjustment model, which we believe on average will impact our rates by an additional negative 2%.

So the risk adjustment change will have an even greater impact on those plans serving the most frail elderly.

So we've look at it related to our strategy, and let me just share with you that we are evaluating this part of our business portfolio in front of our June bids.

We're also looking at our $150 million investment that we have made public, and I think Wayne has commented on that in his remarks.

We believe that that investment is flexible, and so we're taking some time to more closely examine where we might better spend $150 million within that space.

The risk coding change probably has less impact on our Blue business, which accounts for roughly 90% of our MA book.

This is clearly one example of how the funding challenges can impact access and quality and ties back to my earlier comments about the need to address affordability across all markets.

One additional little reflection I can give you that I've keyed in on is that I recall back in January, we did share with you that we accounted for the sequestration exposure, which I believe is something on the order of about a less than $50 million amount that's been baked into our '13 performance, and so we believe we're fully accounted for there, and so we continue to examine this very carefully and believe we can create some accommodations to adjust accordingly.

And you mentioned the Blue business has less of an impact form the risk scores, and one would think CareMore might have more significant impact given the structure of that business.

Can you give us an idea what the CareMore headwind might be to raise?

Is it -- clearly, I would think it's more than 2%, but is it 3% or 5% or 10%?

Well, first of all, it's certainly going to have an impact at a greater rate than the rest of the book.

Our expectation is probably approaching in excess of the 5% hit.

So Wayne, you may want to talk on a specific level about that.

Justin, the one item that we're still evaluating is how we could respond to the impact of the hit.

Obviously, there's been a lot of initiatives, even when the final rule came out to see if they there was still some opportunities to influence that rating environment.

We think at this point in time, any changes would be more of a reflection in the environment in 2015, not what we're going to deal with in '14.

So I think as Joe has said, many individuals are viewing the industry cut as closer to 3%, but when you think about risk coding, the average cut is going to be closer to 5%, and then when you look at those organizations that really focus on the most frail members with the most chronic conditions, we think it's well north of that, so -- and meaningfully north of that.

So from our perspective, the good news is it's only 10% of our book, but it's a real challenge to those members that really need this care management more than anybody else, and it's on the backs of the largest cuts that we're going to see out there.

So we'll adjust our model accordingly.

I think, as Joe said, the $150 million was a combination of how to invest more into this frail management model as well as other ways to start the growth model engine and get it reinvigorated, and we're going to have to look at that in light of those larger cuts.

Thanks.

And then just my last question is on looking ahead, obviously, on 2014, a ton of focus.

So Medicare Advantage you had thought would be a tailwind with all the investments.

Can you give us an update there?

One of your peers said they expect to see exchanges not have -- generate significant disruption.

So can you walk us through the 2014 headwinds, tailwinds, just an update, and specifically, if you want, and if you can give us some color as to whether you think you can grow EPS?

Obviously, we're all certainly focused there.

Thank you.

Well, as I have said, I like our chances to win in the new market.

It's probably too early to comment on '14 because I've been in the process of reviewing the businesses, and there are a lot of moving parts over the next year as we move into '14.

We'll refine our views and internal targets as the year progresses.

And we're focusing on positioning the Company for long term and making those right investments that I think we've already spoken to.

Specific to headwinds and tailwinds, a couple of observations that I've picked up on since I arrived, we currently expect a manageable headwind related to the Commercial EBIT, primarily resulting from the expected loss of small-group customers who may discontinue offering health insurance coverage to their employees when exchange options become available.

Realistically, the timing of that really remains uncertain.

We are also currently evaluating the outlook for our Medicare business and our investments in that area as well, particularly in light of what we've already commented on, which is the risk coding changes.

The effective tax rate well rise with continued implementation of ACA, including the introduction of the insurer fee.

Maybe flipping the other side of the coin, key tailwinds looks something like this.

New business is coming into the individual markets from the introduction of exchanges, certainly brings some opportunity for us to really focus heavily on that tailwind.

Operating margins on the exchanges will definitely vary by state, but we currently believe that they will be in the low to mid single-digit range across our markets over time.

The timing and magnitude of those kinds of gains are tough to peg accurately at this point.

In Medicaid, we expect to grow primarily from the eligibility expansion as well as some of our recent contract wins.

This group may be -- excuse me.

This growth may be partially offset by start-up costs related to the duel expansion in California and potentially other states.

Key to our Medicaid performance will be the ultimate rates we receive in those markets and from those members.

Specialty continues to perform well and should continue to grow.

Increasing accretion from the Amerigroup transaction is certainly something we're examining.

And below the line, should continue to benefit from our share repurchase activity.

Wayne, do you want to comment on the last point of the question?

Yes.

So Justin, relative to are we targeting EPS growth, I think the answer is we're always targeting EPS growth, and I'd say we'd like to build plans that continue to target for EPS growth.

But to Joe's comments, two things.

One is, how we finish this year is very relevant.

It's hard for me to say what we're targeting until I know how we finish this year.

And as you know, we've started our quarter quite strong and are optimistic at this point but prudent in our outlook.

And two is, some of these unknowns that Joe just highlighted, we'd like to get a little more clarity before we put a stake in the ground.

But it's our goal to target growth, but more to come.

Okay.

Thanks for all the detail.

Your next question comes the line of Tom Carroll from Stifel.

Please go ahead.

Hi, good morning.

So just a question on Medicaid, since we have Amerigroup fully baked in now, would you comment on perhaps any cross currents between what I would call legacy WellPoint Medicaid and the Amerigroup book?

Have you identified any new synergistic opportunities that might help you out?

And then secondly, related to that, maybe give us an update on your communications with the state of California in terms of the dual demo and perhaps if you are going to be expecting, or do you anticipate, any similar deal that one of your California competitors received?

Thank you.

Let me take the Amerigroup inclusion for the first quarter.

We are pleased with the first quarter performance from Amerigroup overall.

And I have looked carefully at the synergies that were projected, and I'm really pleased to say that synergies are on track with our plans to date.

We continue to believe we'll deliver mid single-digit EPS accretion this year.

The financial comparisons between Q12 and for the first -- 1Q '12 versus 1Q '13 were impacted by Amerigroup, and we have highlighted those impacts throughout our press release.

We remain comfortable with our previously communicated accretion targets for the Amerigroup transaction.

Wayne?

Thanks, Joe.

To elaborate, then, on so are we learning anything new, the short answer is yes.

We did not bake in those numbers that Joe quoted any assumption for the improvement in the WellPoint book over time, and I think as Dick and the Team have had a chance to really dig in, one of the things we looked at is that the margins versus -- or Amerigroup, rather, and versus our historical margins are significantly divergent from each other.

And just a 1% improvement in margins for us is worth over $100 million of EBIT to our shareholders.

So one of the things we are doing is starting to reallocate some of the investment dollars we committed to this year to shift a few of those dollars to our Medicaid book to start those investments to drive that EBIT growth.

So we're hopeful that will create a different tailwind for us to offset maybe some of the headwinds that Joe highlighted.

The other I would highlight is on your question, Tom, regarding the dual rates and other items.

We did receive rates last evening after hours, and with that being said, we basically started looking at them this morning.

So I don't have any comments on the adequacy of rates at this point beyond just that we've got them and we need some time to assess them and evaluate them.

But we are hopeful that they will be appropriate and adequate for a sustainable program for the long term.

And then relative to the broader Medicaid, Medi-Cal in particular in California, we continue to work with them on not only the expansion in the rates needed within the expansion, but to also talk to them about the ABD population, which is one specifically we're focused on, on ensuring we get appropriate rate adequacy.

But we have not, for lack of a better phrase, struck a deal yet.

We're just trying to make sure that we create a long-term, sustainable model for both the state, the beneficiaries of that program, and WellPoint shareholders.

So do you expect to have some kind of downside protection from the state?

What's your guess there?

I'm cautiously optimistic, Tom.

I think that Health Net had a similar announcement that they've talked about publicly in their contracting, and I think for us, we'd like to ensure that we're mutually at risk for the performance of this book.

We think ultimately, we have to be ready to serve this population.

Thank you.

Your next question comes from the line of AJ Rice from UBS.

Please go ahead.

Thanks.

Congratulations, Joe, to getting off on a good start there.

Just a couple of quick questions.

First of all, we talk around this a little bit, but I know you guys have been doing a lot of focus group studies and other investments to understand and get ready for the exchanges.

As you sit here today and think about what's the biggest unknown or challenge to you, maybe one or two if there are, in putting that into place and making WellPoint successful on that.

As you sit here today, what remains uncertain for you in terms of the biggest item?

And then if there is an opportunity, perhaps, that maybe is misunderstood, you think, in terms of WellPoint's opportunity on the exchanges?

Thanks, AJ.

Let me emphasize, we continue to work very actively to prepare for that October 1 open enrollment period.

As you noted, we've been in some very deep analysis of how it might roll out and then how to best develop our portfolio of products for the exchange market.

So I think we're really ahead of the game, and I've been very impressed with the commitment that we've made to the analytics.

We have substantially completed the exchange-based product design and pricing development work.

We've signed contracts with the majority of our providers across our markets.

We feel very good about that.

We continue to believe our brand name strength and unit cost advantages positions us will to achieve meaningful growth related to the exchanges over time.

And obviously, I've related the risks, the timing of the new growth in our related investments are going to be influenced by the pace at which the exchanges ultimately roll out and the underlying regulatory framework in each of the markets.

We do believe that half the states are expected to use the federal fallback exchange.

Others are expected to use some form of state-based models, and so basically, we continue to focus on competing the exchanges in all of our Blue markets, but obviously, can't fully commit until we know the rates and regulations as they evolve and particularly as we get closer to implementation.

Okay, great.

Let me just ask you real quick on Medicaid, have you guys done an assessment of the expansion in the states that you're in that have said they're going to do the expansion?

How many incremental Medicaid beneficiaries will be up for grabs for you to potentially pick up, and do you have any early thoughts on the medical risk profile of those Medicaid beneficiaries versus legacy Medicaid beneficiaries?

It's too early to provide membership estimates for '14.

It has a lot to do with the fluidity of state positioning on Medicaid expansion.

We expect states to continue to evaluate the benefits of expansion as we move throughout this year.

So obviously, we are looking very, very carefully for these signals.

We believe we're very well positioned to gain meaningful new Medicaid membership in '14 and beyond from eligibility expansion.

I think it's worthwhile to note that states are going to have flexibility to participate in the expansion after 1-1-14 should they choose to do so at a later date.

AJ, one thing I would add to Joe's comment, too, is that when you typically roll out a new program, you, in some cases, for Medicaid, you either break even or lose a little bit of money.

But in the case of expansion, our up-front build-out costs have already it occurred.

So in essence, we're able to leverage our current infrastructure and G&A structure.

So we think there's a reasonable possibility that this membership will potentially be profitable on day one, albeit at a lower margin than what we have because it's still going from a very unmanaged care environment to a managed care environment, but we also think the benefits of how we're positioned already and the G&A infrastructure that already exists actually gives us an offset to that adverse selection we get out of the gate until it becomes more managed.

Okay.

That's a good point.

Thanks a lot.

Your next question comes from the line of Matt Borsch from Goldman Sachs.

Please go ahead.

Thank you, and good morning.

I was hoping that maybe just so we're all on the same page you could try to walk through -- when you talk about the minus 5% on the MA rate, can you just give us your view of getting from the core trend update that included the doc fix of about positive 3% down to that figure and if you can break out the component factors that get you there?

I just want to make sure that you're looking at it in a way that's consistent with what we're hearing from others.

Yes, Matt.

I'll take a stab at it.

And it's quite complicated.

And I don't mean that to be flippant in the response but simply to say that it very much could differ based on plan and product design, and so please understand that our comments are really focused on our view of an industry impact and then a specific view of how we think that industry impact might play out for us.

So when we looked at the original cuts being in the 8% range, all of us when we saw the final notice were obviously a little more optimistic in where that would land.

And ultimately it landed in the minus 2% to minus 3% range as Joe has commented on.

But as we really got into the HCC coding model and what that meant, we saw that it actually would create, in our opinion, an impact of that change is about another 2% on top of that final rules.

And so I think it was a little bit of one item that until you could get more due diligence on, it was hard to really understand the components.

When we look at it relative to WellPoint specifically then, you're looking at potential impact of around minus 5% for the industry.

We think on our Blue MA book, as Joe mentioned, which is about 90% of our book, we think we're going to be a little less impacted versus that 5%.

But we think the CareMore plan, specifically, which really focuses on the more frail and elderly population, will be disproportionately impacted versus that broad average of around 5%.

And granted, while it's only 10% of our book, what we're more focused on is the consumers that are impacted by it and what benefits can we continue to offer with such a steep cut.

Got it.

I hope that helps answer your question, Matt.

Yes, that will do.

If I could just shift gears, I know you elaborated at some length on the 2014 outlook and where we are now.

I guess the question I would -- since you had said on the last call that it was your intention to grow earnings, and I think people took that to be to some degree a statement that you would target earnings growth for '14.

Maybe putting it a little differently, aside from the MA rate factor, which I don't want to brush over, but for you, obviously, it's a smaller piece of your business, is there anything that has deteriorated in terms of your outlook for 2014 relative to the way you saw the world in late January?

Matt, this is Joe.

My sense is that the answer is no.

Nothing has changed in terms of where we were in January, notwithstanding the MA dialogue we've just had with you.

So I can give you I guess the quick response on that.

I don't know, Wayne, if you want to add any color to that brief statement?

No.

I think Joe's comment is it.

The short answer is no.

Short of EMA, which we need to evaluate, nothing else has really changed from our view.

We're walking through all the details with Joe, but we remain optimistic on the tailwinds we highlighted.

But we've got to manage this -- the only thing will be what's the timing of duals.

Maybe that might be one item, too.

Duals keep getting pushed back a little bit more each time, so that could be something that could change a little bit.

But other than that, Matt, no.

Okay.

Okay.

Thank you.

Your next question comes from the line of Josh Raskin from Barclays.

Please go ahead.

Hi.

Thanks.

A good morning.

Question back on MA, and I'm sorry to beat the dead horse here, but I just want to understand repositioning better.

It sounds like it's a product.

I want to make sure I understand that it's a product repositioning.

I think you've got over 50% of your MA live in HMO.

The other 50% is split between regional and local PPO.

I would have thought the regional PPOs would have seen a bigger decline than the locals, but it seems different this year.

Ultimately, what does that product mix look like?

And then the second part of the question is, there were some geographies that popped up in the CMS data, the Wisconsin, Connecticut, Georgia, Colorado.

Those look like significant reductions.

And I'm just curious, is there also a geographic overlap where certain markets are not sustainable going forward?

Hi, Josh.

I'll try to hit all the questions.

I know you have a number of them there.

Let me start with the geographical one first.

I think it's fair to say that we are trying to be focused on our investments where we can drive the greatest value for both the members and our shareholders and leveraging the assets that exist where they're at.

So I don't want to give any broad strategy comments away about what markets we're more focused on than others, but I would simply state that it's important for us to leverage where we believe we can create an advantage to begin to grow in this membership and expand margins.

And that has both a product focus as well as a geographic focus for us.

Relative to the broader comments on the -- our assessment, again, when we looked at our PPO book, and I think this is really important in the comments, we're trying to give some broad views of what we think can happen.

But again, it is going to be so plan and Company-specific that you really should not take any commentary from us beyond the WellPoint commentary because that's all we can really speak to.

But on the WellPoint specific, looking at our book, looking at how the final codings worked out on that, we actually think the impact to us on 90% of our book, even though it's heavily on the PPO side, is actually less of an impact than what we'd assume for the average to be for the industry.

So from that perspective, I think logically, it would make sense, Josh, to think about it the way you're thinking about it, but I think it's so specific to your product designs that until you can get to that level of detail, it's hard to have that conclusion, ultimately.

So Wayne, would you say there'd been less -- just from a pure membership, total numbers of members, not profits or anything like that, but number of lives, would there be less pruning to do in '14 than what you did in '13?

I would think so.

I would think so.

But again, it's also going to be relative to how we position our products for these markets going forward.

But yes, Matt, I think that's a fair assessment.

Maybe I can step to a higher altitude, in looking at this from a strategic perspective.

As we've said, we believe there's a significant improvement in opportunity in our Medicare business over the next five years, which reflects the potential improvement in the Blue MA business as well as the maturation of our CareMore expansion.

We're in the process of re-examining that outlook for sure as we prepare for the upcoming bid submissions in June.

And so while the absolute opportunity may not be as robust at this stage, given some of the comments that have just been delivered, we continue to believe there is a potential to both increase volume and improve our MA margins over time, particularly as we continue to emphasize our HMO products.

Okay.

And then, just last question on the exchanges.

How are you thinking about competition?

Do you think you're going to see a significant number of competitors on the exchanges in your Blues markets, or would you expect it to be less robust in terms of other plans' offerings?

Let me take a shot at it.

Obviously, since I arrived, I've been spending a lot of time with the team, and they've been at it at for quite a long period of time.

What has struck me, and certainly all of you have commented on, it's a significant part of our book regarding the individuals and small group.

And so as I look at it, I really reflect on the reality that I think our performance is -- we represent somewhat of a bell cow in terms of the leadership that we'll probably administer in this space.

In terms of competition, I think we're focused on our own product and portfolio development.

My sense is, as I said earlier, really like our chances, especially given the analytics we've gone through over recent months and our continued positioning going into later this year as regs and rates become clearer in the markets that we're going to compete in.

One other observation, I may have said it earlier, we certainly have a desire to be in all of our Blue markets.

However, we're definitely looking very carefully at that as the markets evolve, and we're going to reserve judgment as to exactly how, where, and how much that may occur based on those characteristics market by market.

Okay.

Fair enough.

Thanks, Joe.

Your next question comes from the line of Chris Rigg from Susquehanna.

Please go ahead.

Good morning.

Thanks for taking my question.

Joe, just to come back to a comment you had made earlier when you were talking about the headwinds and tailwinds related to next year and you mentioned the EBIT headwind in the small-group market.

Obviously, this is a key variable to the way investors think about earnings next year.

Can you give us a sense for your latest thinking as to what type of attrition would seem reasonable in your minds for small group to individual conversion?

Thanks.

I think it's a little too early to opine on that for a variety of reasons.

I think our sense is that because the timing of this remains so uncertain, we're like letting some period of time evolve this year to better understand the play in the small-group space.

And even so, with some of the delays that have been announced, I think we'll have the ability to get clearer and crisper insight into small-group migration as the year progress.

I think the issues of costs and affordability is key regardless of the pace.

So there are a lot of moving parts here, and so we're going into this eyes wide open regarding the small-group space.

Okay.

And then just a follow-up in the Medicaid business as it relates to the industry tax, can you give us your latest thinking as to how much margin pressure, if any, you're currently expecting?

And I think when Amerigroup was initially announced, there was an assumption -- there is an assumption in the accretion for some margin headwind.

Just any update as to how you're thinking about the tax with regard to Medicaid would be helpful.

Thank you.

Yes, Chris.

Just a couple of comments I'll raise on at this point.

Were obviously still in the process of continuing to work with our states.

The big renewal period for some of our states comes up in October.

So far, I would say our states are understanding.

They get it.

They recognize this is a new cost that the country bears and that the country bears it with the goal of providing coverage for more individuals broadly.

And so, so far we're cautious but optimistic in our ability to have the fee reimbursed as part of our broader funding.

The one thing I would continue to highlight, though, is that the lack of deductibility of the fee is what I think investors need to focus on because that's a hard cost for anybody to bear without being more efficient in your G&A, and I think this is where we think as a Company, we think we can be successful in passing on the tax, but we think it will be challenging to completely offset the deductibility, or lack thereof, of that tax, without being more efficient in G&A.

Okay.

That's great.

Thanks a lot.

And I'd now like to turn the conference back to the Company's Management for closing remarks.

Well, thank you for your questions and participating on the call today.

In closing, we're pleased with our first quarter results.

I'm impressed by the way in which our associates have delivered in a challenging environment during a period of some uncertainty.

As I look ahead to the coming changes, there will be challenges and opportunities that I believe we are well-positioned that will help drive access and affordability and expand our role as a trusted partner, advancing solutions to this country's healthcare challenges.

I want to thank everybody for participating on our call this morning, and I'm looking forward to meeting many of you in person in the very near future.

Operator, please provide the call replay instructions.

Thank you.

Ladies and gentlemen, this conference will available for replay after 10.30 eastern time today through May 8th.

You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 272699.

International participants dial 320-365-3844.

Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 272699.

That does conclude your conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.