Elevance Health Inc (ELV) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WellPoint conference call.

(Operator Instructions) As a reminder, your conference is being recorded.

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

Please go ahead.

Welcome to WellPoint's fourth-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 with an overview of our 2013 financial results.

He will then discuss our ongoing implementation of the Affordable Care Act and other key business initiatives before concluding with some initial commentary around our outlook for 2014.

Wayne will then review the fourth-quarter 2013 financial highlights in detail and provide some incremental perspective on the 2014 outlook.

We plan to provide details of 2014 financial guidance at our investor day on March 21.

Q&A will follow Wayne's remarks.

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

Reconciliations 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.

Thank you, Doug, and good morning.

I'm pleased to begin today's call with a brief review of highlights from our stronger-than-expected 2013 results, which we previewed earlier this month.

For the year, we reported earnings per share of $8.20 on a GAAP basis and $8.52 on an adjusted basis.

Our GAAP EPS increased slightly from 2012, while adjusted EPS grew by nearly 13%.

Both of these results compare favorably to our initial expectations for 2013.

And our key operating metrics were consistent with those we discussed at the time of our third-quarter earnings call.

Operating revenue increased by $9.7 billion, or 16%, during 2013 to $70.2 billion, driven by the Amerigroup acquisition.

Our 2013 operating revenue and adjusted EPS results are both all-time records for WellPoint.

Our business mix also continues to diversify with 45% of our operating revenue now coming from the government business segment, up from 36% in 2012.

2013 was a year of preparing and investing for future growth across our Company.

Our results included significant investments related to the Affordable Care Act implementation and other growth opportunities, as well as the integration of Amerigroup.

These investments, along with our ongoing provider collaboration initiatives, are setting the stage for a period of stronger top-line and bottom-line growth.

We also generated robust operating cash flow of approximately $3.1 billion and continued to execute on our share repurchase and dividend programs.

We repurchased nearly 7% of the shares outstanding as of December 31, 2012, for approximately $1.6 billion and paid $450 million of dividends.

We are pleased with our performance, particularly considering the significant time and resources we needed to dedicate to ACA implementation.

We entered 2014 with a strong foundation and we look forward to the opportunity to serve a growing part of the marketplace this year and into the future.

Turning to our business segment performance, our commercial business had another strong year as operating revenue totaled nearly $39 billion.

Commercial operating margins declined from 2012 due to our SG&A investment spending, which we have discussed with you in prior quarters, but they remained comfortably in the upper single-digit range.

Our 2013 commercial benefit expense ratio improved slightly from the prior year, even with an uptick in the individual business utilization during the fourth quarter.

We believe this uptick year over year in the individual market was prompted by some members taking service prior to the potential changes in coverage in 2014.

In addition, recall that our local group business benefited in the prior-year fourth quarter from lower-than-expected medical costs.

Switching to enrollment, we returned to growth in the commercial business during the fourth quarter.

Our growth will accelerate meaningfully in the first quarter of 2014, driven by ASO momentum during this past selling season across both our large group and national businesses.

Our improved 2014 results reflect recent investments in clinical capabilities and a proven ability to create meaningful healthcare cost savings for our customers.

We are also optimistic about the growth opportunities in fully-insured commercial products.

The rollout of exchanges will provide a strong foundation for significant commercial risk membership growth opportunities over the next few years.

While it is early, we are encouraged by the level of applications we have received and the indicators that profile our risk pool.

We believe our strategy and investment for exchanges, which are based on proprietary research and data-driven processes, are serving us well.

For competitive reasons, we are going to be careful about how much data and interpretive insights we share at this stage, but we do want to offer some perspective about what we are seeing in the market.

First, on enrollment.

Our individual memberships stood at roughly 1.75 million members at the end of 2013.

Our experience thus far with retention is encouraging.

Our early renewal process was more successful than we anticipated and the persistency of members who are in discontinued legacy plans is also trending consistent with our expectations.

Additionally, new policy applications are higher than historical levels, with volumes from the public exchanges ahead of our most recent projections.

As of last week, we have received around 0.5 million applications for individual coverage as activity grew from Thanksgiving through December, including a spike at the end of the year.

The majority of these applications have been for members new to WellPoint.

We anticipate another increase in applications in March ahead of the second enrollment deadline.

We are seeing signs that our brand name and network quality are carrying more of an advantage in the market than we had expected.

There are a few geographies where we believe we are gaining share despite lower price competition, which points to the value of our local market depth, knowledge, brand, reputation, and networks.

The general characteristics of applicants are also tracking fairly closely with our expectations.

As you know, it will be quite some time until we are certain regarding the risk profile of our new business, but we do have several early indicators.

For example, the average age of individual customers is closely tracking expectations.

We anticipated that exchange enrollees would generally be older than our legacy individual customers and our pricing assumptions for both on- and off-exchange products reflected this view.

Product selection has also been consistent with expectations as silver and bronze have been the two most popular metal levels by a wide mark.

The actuarial value of the products selected by new applicants is also in line with our projections to date and we will continue to monitor product mix on a state-by-state basis.

We expect a trend toward lower actuarial value plans over the remainder of the open enrollment period.

I believe that preliminary scoring from our predictive modeling capabilities on a sample set across our seven-highest volume states also suggest that risk levels are within the range of our pricing assumptions.

Finally, with respect to our small group business, we continue to be mindful of the potential for employer dumping into the exchanges.

We now believe this risk appears lower for 2014 than we originally anticipated.

Turning to the government business segment, we are pleased with the results in 2013, which were driven primarily by benefits from the Amerigroup transaction and growth in the markets served.

The Amerigroup transaction is contributing meaningfully to our ability to serve more customers across government markets, which is a key part of our longer-term growth strategy.

In 2013 we achieved our first-year target of at least mid-teen EPS accretion net of integration costs, and we are on track to deliver at least $1 per share of accretion by 2015.

We also saw improvement in our California Medicaid program during 2013 and are pleased to announce that we have reached a risk-sharing agreement with the state that enhances the outlook for this business.

This agreement encompasses our traditional Medi-Cal business, seniors, and persons with disabilities, dual eligibles, and the ACA expansion lives.

We believe this is an important step to advancing our long history of service to California and its public program beneficiaries.

We continue to expect strong growth in Medicaid during 2014, driven by our recent RFP wins in Florida, Kentucky, Georgia, and California, as well as the ACA-driven expansion.

Nine of our 19 Medicaid states expanded eligibility levels effective January 1. We are working closely with our state partners to serve this new population.

I would note that our membership growth is expected to ramp up throughout the year as our marketing and enrollment efforts take effect.

We also remained focused on capitalizing on the numerous RFP opportunities.

We were just recently selected as one of three plans to serve approximately 1.2 million Medicaid beneficiaries in Tennessee.

This award will be implemented over the course of 2015 and is expected to add close to $1 billion of annualized revenue.

Moving now to Medicare, we are making significant progress restructuring our Medicare Advantage business model to preserve affordability for our members and improve our performance.

This multiyear effort encompasses product repositioning as well as operational improvements around medical cost management, provider contracting, network design, quality, and revenue optimization.

Operating gain in our Medicare Advantage business grew during 2013, consistent with this multiyear effort.

While Medicare Advantage comprises a small percentage of our revenue and earnings, we are focused on advancing our long-term positioning, recognizing the challenging near-term reimbursement environment.

For 2014, we made significant changes to our Medicare Advantage product portfolio.

We had assumed these changes would drive a reduction in Medicare Advantage enrollment during 2014, but we are pleased to report that sales during the open enrollment period tracked favorably to our initial expectation.

We also had a successful membership migration strategy, with many customers who were impacted by product changes opting to stay with us in more preferred HMO product.

We believe this demonstrates the strength of the Blue brand, which bodes well for us as we continue to rationalize our product portfolio and related provider network offerings in the coming years.

I would also note that in addition to the better-than-expected individual MA sales, we also expect Medicare Advantage membership growth from the State of Georgia account win.

Given the long-term growth opportunity associated with the senior market, we remain focused on serving the Medicare population with affordable and competitive product offerings.

This includes a diverse array of Medicare Advantage, Supplement, and Part D products.

Our Medicare Supplement business remains strong and consistent, with 844,000 members as of December 31, and we expect growth in our Part D membership in 2014.

With respect to our financial outlook for 2014, we currently expect earnings per share above $8 for full-year 2014.

As Wayne will discuss in more detail, we believe this is a prudent outlook in light of the continued uncertainties around the ultimate level of exchange enrollment, the resulting risk profile, SG&A costs associated with attracting and servicing this new membership, and the potential for further changes in the regulatory framework.

On that last point, I highlight that we remain confident in this outlook despite headwinds related to the regulatory changes made to the ACA late in 2013.

At this stage, we expect full-year 2014 operating revenue of approximately $73 billion with growth of over 1 million new customers.

However, we are going to hold off on more specific enrollment and margin details until the investor day, by which time we expect to have greater clarity on our exchange-related business.

The coming revenue and membership growth we expect annualized cash flows to remain attractive and we expect to continue using this capital to invest for future growth and enhance returns for our shareholders.

In closing, we are building off a strong year in 2013 and encouraged by the sizable growth opportunities we see across the commercial and government segments.

We are positioning this company to leverage our brand, local density, scale, and investments to drive greater affordability and access to quality healthcare for our members in 2014 and beyond.

With the exchange rollout, our associates are working diligently to assist members during this dynamic period.

I want to thank our associates for their efforts and also our members for their patience.

We are committed to delivering high-quality, affordable healthcare in the most expeditious and responsible manner.

With that, I will turn the call over to Wayne.

Thank you, Joe.

Good morning.

My comments today will focus on the key financial highlights from the fourth quarter and full year 2013.

I will also provide some incremental perspective around our initial 2014 EPS outlook.

Please note that the Amerigroup acquisition impacts the quarter-over-quarter and year-to-date comparison as only eight days of Amerigroup's operating activity were included in the prior-year results.

On a GAAP basis we reported earnings per share of $0.49 for the fourth quarter of 2013.

These results included net costs of $0.38 per share, reflecting an impairment charge of approximately $0.55 per share related to the pending 1-800 CONTACTS transaction, partially offset by net investment gains of $0.37 per share.

Excluding these items, our adjusted EPS totaled $0.87 for the quarter, bringing our full-year adjusted EPS to $8.52.

These results were favorable to the outlook we provided in our third-quarter earnings call and, as Joe noted, we are pleased with our 2013 performance overall.

Medical enrollment grew by 145,000, or 0.4% sequentially to approximately 35.7 million medical members as of December 31.

This reflected membership gains in the local group ASO business and in California Medicaid programs, partially offset by attrition in the individual and national businesses.

Operating revenue exceeded $17.6 billion in the quarter, an increase of approximately $2.5 billion, or 16%, versus the fourth quarter of 2012, driven by the inclusion of Amerigroup for the entire quarter in 2013.

Operating revenue in the commercial segment also increased from the prior-year quarter.

The increases in Amerigroup and commercial revenue were partially offset by lower Medicare revenue due to a decline in membership.

The benefit expense ratio is 87.8% in the fourth quarter of 2013, an increase of 50 basis points from the prior-year quarter.

I would note that the benefit expense ratio came within the range we provided at the time of our Q3 conference call.

The increase occurred in the commercial segment and was partially offset by an improvement in the government segment.

The increase in the commercial segment ratio reflected higher utilization of individual products in advance of ACA's implementation.

The ratio for local group business also increased, as we expected, as medical cost experience was lower than anticipated during the fourth quarter of 2012.

The improvement in the government segment ratio was driven by our Medicare Advantage product repositioning initiatives and improvements in the California Medicaid business.

For the full year 2013 underlying local group medical cost trend was approximately 6%.

We currently expect that medical cost trends will increase by approximately 50 basis points in 2014.

Our SG&A expense ratio decreased by 70 basis points from the fourth quarter of 2012, primarily due to the inclusion of Amerigroup business for the entire period in 2013, as this business carries a lower average SG&A expense ratio than our consolidated average.

The decrease from Amerigroup was partially offset by higher investment spending during the current year quarter in preparation for ACA implementation and other growth opportunities.

I note that most of the investment spending was recognized in the commercial reporting segment, particularly as it relates to the exchange growth opportunity and other new business activity.

This factor drove the 7.4% decline in commercial segment operating gain reported for the full year of 2013.

Our full-year commercial benefit expense ratio improved slightly in 2012.

Just a quick comment on items relating to the pending 1-800 CONTACTS transaction.

As previously disclosed, we recorded an impairment charge for certain intangible assets in the fourth quarter of 2013 which totaled approximately $165 million after tax.

We also reclassified the current and prior-period operating results with 1-800 CONTACTS as discontinued operations net of the related tax effects.

Previously results for 1-800 CONTACTS were reported in the commercial segment.

We expect this transaction to close soon and the proceeds will support our ongoing capital deployment strategies.

Moving on to the balance sheet.

For the full year 2013, we experienced favorable prior-year reserve development of just under $600 million, which is generally in line with our expectations.

Development was higher than prior year-to-date period and weighted more towards the government segment in 2013, reflecting the new mix of our business after the acquisition of Amerigroup.

We continue to maintain our upper-single-digit margin for adverse deviation and believe our reserve balance remains strong and appropriate as of December 31, 2013.

DCP was 38.7 days as of December 31, down 1.3 days from 40 days as of September 30, primarily due to a seasonal increase in benefit expense, partially offset by a sequential rise in medical claims payable.

Our debt-to-capital ratio was 36.9% at December 31, 2013, down from 37.5% at September 30 and down from 38.6% from year-end 2012.

We ended 2013 with approximately $2.2 billion of cash and investments at the parent company and our investment portfolio was in an unrealized gain position of $776 million as of December 31.

We generated stronger-than-expected operating cash flow of $273 million in the fourth quarter, bringing our full-year 2013 total to approximately $3.1 billion or 1.2 times net income.

This was modestly ahead of our prior expectations and supports the quality of our 2013 earnings.

We repurchased nearly 5.1 million shares for $450 million during the quarter.

For the full year of 2013, we repurchased 20.7 million shares, or 6.8%, of the shares as of December 31, 2012, for $1.6 billion.

This is a weighted average price of $78.08.

As of December 31, we had approximately $3.7 billion of Board-approved repurchase authorization remaining which we intend to utilize over a multiyear period, subject to market conditions.

We used $111 million during the quarter for our cash dividend and yesterday the Board authorized an increase of nearly 17% in our quarterly dividend.

On an annualized basis this equates to a dividend of $1.75 per share or a yield of approximately 2.1%.

Our annualized dividend per share has grown by 75% since we initiated it 2011.

Turning to our 2014 outlook, as Joe noted, we currently expect EPS above $8 for 2014.

While we will provide a detailed financial outlook in March, for comparability purposes versus our peer group we do highlight four specific items that are already included in our forecast.

First, our outlook reflects updated thinking on the impact of recent regulatory changes made to the ACA over the last three months as implementation approached, including grandfathering and catastrophic coverage.

We estimate this unfavorable impact at over $100 million in 2014.

Second, it includes a higher effective tax rate due to the headwind from non-deductibility of the ACA insurer fees.

The total impact of the non-deductibility of the fee was over $1.10 of earnings per share.

Third, our outlook reflects some investments in our business that we do not expect to repeat in 2015.

These investments include at least $30 million of costs associated with implementing the first year of public exchanges and nearly $20 million for the start-up costs associated with dual eligible programs.

Finally, I would note that our outlook includes approximately $210 million of intangible asset amortization expense in 2014 related to prior acquisitions, including Amerigroup.

We consider this part of ongoing business, but wanted to quantify it for comparability purposes.

As Joe noted, we currently expect operating revenue to grow to approximately $73 billion in 2014, but recall this growth is net of the $2 billion unfavorable revenue impact resulting from the conversion of a large state account to a self-funded product.

Absent this conversion, operating revenue would be expected to grow by nearly $5 billion or almost 7%.

We continue to expect solid operating gain growth in 2014.

Finally, I note that while we expect to generate significant cash flow again in 2014, we do expect some potential timing issues related to the ACA rollout such as collection of premiums and subsidies and the payment of the insurer fee.

A large ASO account conversion will also impact 2014 cash flow.

We look forward to seeing many of you at the upcoming investor day.

Logistical details about the event will be forthcoming from our Investor Relations department.

With that, I will turn the call back over to Joe.

Thanks, Wayne.

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

(Operator Instructions) Josh Raskin, Barclays.

Thanks, good morning.

Appreciate the commentary around some of the exchange enrollment.

I guess just one point of -- or I guess one or two points of follow-up.

The first would be when do you think you are going to have claims data to help support -- I know you guys are doing some of the data analytics and forecasting, but when are you going to have actual claims data that would support what you think the risk profile for those members will be and maybe how does that play into your 2015 strategy around pricing?

Then also, do you have a sense of how many of those exchange lives that you guys have added so far, how many of those were previously uninsured versus how many are actually previously insured coming from other sources?

Good morning, Josh.

Happy to answer both those questions with what we know at this point in time.

Let me start with your first question around when do you have claims data or know the risk profile better.

Because of the delay in when the exchanges got rolled out, we would have liked to have been able to say that we were starting to get some early data reads by the end of February going into March.

I think that essentially gets pushed out about two more months further and you start getting what looks to be more of a run rate view of this.

That being said, we get pharmacy data real time and we get it daily, and so we are able to look at the pharmacy data that we have out there along with the data analytics profiling we are able to do using our historical small group and individual and the metrics we built.

We look at product selection, sex, age, ZIP code, income levels, etc.

Running a small portion of the population through, the analytics would imply that that, coupled with pharmacy, it is aligning with our pricing right now.

On your second question about how many are previously uninsured, we are not able to really track that yet.

What we do know, based on the screening that we have of the new applications coming in, that approximately 80% of those were not previously insured by WellPoint.

What we can't tell you, though, is what percentage was uninsured or what percentage came from the industry at large that was previously insured.

But we do know that the majority at this point is not previously a WellPoint member.

Is California representative?

I know you guys have about 31%, 32% share on the exchange in California, so that is slightly below what your individual membership would line up for in that state.

Is that representative?

Is that a good way to think about it?

It's a reasonable proxy.

The size of California is a good proxy for a broader book.

Okay.

And then just to confirm the MA membership, I think CMS had you down just under 70,000 lives in January.

Is that consistent with what you guys were looking at?

No, I would say (multiple speakers) our applications are coming in better than we had expected, Josh.

While we were in a process of assuming down membership, I would say it's still early but we are actually performing a little bit better than we had anticipated.

So you don't think you will be down for first quarter, is that the idea?

No, I didn't say that.

We will give more guidance.

I would just say that at this point we are not saying whether we will grow, but we are feeling better about what we've been expecting regarding our repositioning of product.

Okay, thanks.

Justin Lake, JPMorgan.

Thanks, good morning.

First question -- obviously appreciate all the color on the exchanges.

In terms of -- so it sounds like things are going pretty close to as expected.

Remind us, did you -- you had targeted I think, Wayne, you had said a 3% to 5% margin on exchanges; is that right?

Correct.

And is that margin what is assumed in your $8-plus guidance?

That's correct.

We have assumed that we will achieve our targeted margin levels.

Okay.

So if there's downside to that margin, it would potentially be pressure on that number is the way to think about it?

Correct.

Okay.

Then, secondly, on the tax.

Specifically, I know the $1.10 number you talked about there, but is the right way to think about that from an investor's perspective -- Medicaid it sounds like you haven't assumed you get, in that $8-plus, any of the states to pass through the lack of deductibility, right?

So you've taken a very conservative approach there.

Is that right?

That's correct.

So every state that makes an announcement that this is going to get passed through essentially flows to the bottom line dollar for dollar relative to that $8-plus number?

Yes.

Okay.

Then on Medicare and commercial, the way to think about it is that has already been priced through.

It's built into either the bids or the rates, so there's no real upside/downside at that point?

It's all kind of baked in.

That's correct.

It becomes then a function of what underlying trend looks like and what we are able to do to medically manage it on the commercial and MA book.

Okay, great.

If I could just sneak in one last quick numbers question, you put in 500,000 in exchange enrollment.

Can you tell us how many of those have actually paid in your month or what you've seen?

Justin, very good question.

Let me first start off putting this in perspective.

Of the original 1.75 million members we had at 12/31, a reasonable portion of that had a January 1 renewal date and the majority of that did early renew or went into a grandfather product and we have full premium on that already.

Relative to the 500,000-plus applications that we have, we are still getting enrollment with a January 1 effective date as early as this week for what they call phantom files that the various states or the federal exchanges found at this point.

So it is really hard for me to quantify what has been fully billed and collected at this point since we are still getting files as recent as this past Monday for January 1.

That being said, the vast majority of those files we received have been pushed through.

Enrollment cards have been submitted and bills have been submitted.

And they have till January 31.

We have collected premium on a majority of that, but we are not at what I will call a vast majority yet.

Okay, great.

Thanks for all the color.

In the context of maybe giving a little more color, I would like to comment on the fact that we are pleased with how the situation is tracking regarding the exchanges.

It's still early, but our preliminary data is certainly reinforcing our confidence in the strategy that we've implemented and that the investments that we have made I think are very wise in terms of arriving at the current state of affairs.

We believe that we are well set up to potentially serve an even larger part of the market in 2014 and beyond.

And we believe also that because the policy applications are higher than historical levels, our sense is that again we are very well positioned regarding the migration path to March 31, when enrollment does close out.

Great.

Thanks for all that color, Joe.

Christine Arnold, Cowen.

Thank you.

With respect to Medicare, I sense that you guys were thinking maybe given kind of where you started out and all the leverage you have to pull you could keep the profitability of the Medicare book kind of stable year over year.

What is assumed in your $8-ish guidance -- at least $8 guidance in terms of Medicare earnings?

And how are you feeling about the overall Medicare book?

Christine, while we will give more details at our IR day, let me first state that our guidance did assume that we would begin to reposition our book even further, placing ourselves over both 2014 and 2015 to prepare for 2016, recognizing we would have membership attrition, but we would go for margin retention and expansion.

So we are expecting to at least maintain margins into the at least $8 number with the upside opportunity being for some further expansion.

And, as Joe commented earlier, we are starting to see even slightly better enrollment versus what our expectations would have been with those margin expansion.

Okay.

Then with respect to the health insurance fee and Medicaid, could you highlight for us what you are seeing and how that and the three Rs could affect the seasonal earnings patterns of EPS?

Thanks.

Let me start with the Medicaid and how that's going and then we will talk about the seasonal patterns.

You know, it's early but I would say that the dialogue continues to at least improve each day, but we are far from having this finalized and inked with our various states.

Until we actually give a signed contract, we are going to withhold at least recognizing that opportunity.

That being said, Kentucky has agreed to allow for the [growth] of the fee.

They understand the need for a sustainable Medicaid program and this is part of sustainability.

But I do want to highlight that for WellPoint we were not in Kentucky last year so the fee did not get assessed to us related to Kentucky Medicaid in 2014, but we will get that beginning in 2015.

So we have a state there.

We have another state that we are very close to, but still more to come there and a lot of work to still be done.

But the industry is focused on this and the states are really understanding the need for a viable program requires this fee to be passed on.

Great.

And quarterly earnings progression?

That does it for me, thanks.

Christine, great question.

To be candid, with the exchanges and the timing and how that is rolling out, I am more concerned about how that progresses.

The reduction of the reinsurance down to a level close to 45,000 versus the 60,000 for metal products both on and off exchanges also will influence that.

So I think that -- let's wait for IR day because I think I will have a better feel, too, of some of that timing.

We have a point of view today, but that view is going to evolve quickly as these exchanges continue to evolve.

It's such a large amount of risk enrollment coming in that we really have to get our hands around the final volume there as we see it.

So some more at IR day.

Thank you.

A.J. Rice, UBS.

Maybe first, you guys are indicating for 2014 that you are looking at about a 50 basis point pickup in your medical cost trend of 6.5%.

Is there any further commentary on how you are thinking about ACA's impacting that versus sort of a core trend?

A.J., very good question.

That is core trend when we talk about the 50 basis points.

That is completely separate from the impact of the ACA; the adverse deviation we thought would happen to the book with a higher risk profile member as well as an older member.

So that is purely core trend.

Okay.

There is -- this is a little bit of a look back, but I'm trying to understand what you are saying when you talk about the fourth quarter and seeing some change -- an uptick in utilization.

I guess there has been debate about whether people would postpone care because they are going to get better coverage starting January 1 or pickup utilization because they might drop coverage.

Can you flesh out a little bit more what you actually saw in the fourth quarter in terms -- around your utilization comments?

Yes, A.J., we had assumed that we would see actually an uptick in utilization, that we would not see a postponement.

And the theory behind that, which was validated, was that as individuals began to receive cancellation notices that there would be many individuals that would consider utilizing their services due to the uncertainties of what the new benefits may look like.

I think what happened from our perspective, though, is that not only did they receive cancellation notices, but as the exchanges were not functioning properly in October and November, there was also nowhere to go to even compare what options would be available to them.

So we actually saw in our individual book specifically in those markets that received the majority of the cancellation notices that's where we saw the much more significant uptick in utilization in the book.

All right, thanks a lot.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, great.

Can you talk a little bit about -- you mentioned earlier that the small group dumping looks like it's not going to be an issue for 2014.

Can you just talk a little bit about what you're seeing there and if you have any sense for whether this is going to be a bigger risk for 2015 or with a delay of shop?

And just the way the exchanges are going, generally whether you view that to be the same risk for 2015 that maybe you thought a few months ago?

Kevin, good morning.

Let me start with saying there is dumping occurring for 2014 so the question now becomes one of relativity.

What I would say is that while there wasn't an option in many cases where that member could go in October and November, that allowed to probably a higher persistency level than we were initially anticipating.

That being said, our above $8 does assume still a level of dumping that occurs and it also assumed the margin contraction within the existing small group book as that margin is lower than what we have historically managed to, but is better than what we would have saw on an exchange margin.

So as we go into 2015, more to come, but I actually think a reasonable amount of the headwind that we would anticipate is going to come through our 2014 numbers.

Okay.

I guess I was having a hard time coming up with your at least $8 number when you provided it initially.

And I think consensus is obviously ahead of that and some of it is going to probably be as to how much that we think you're going to collect on the Medicaid insurance fee.

But it sounds like most of the things that you've talked about so far maybe just have all been positive and maybe the only new negative being the $100 million of recent ACA regulation.

Is that how you are thinking about it, that your guidance is basically the same as last time and would have been better if not for some of the recent changes on regulations?

Or are there any other moving parts that we should think about between then and now?

Because it sounds to me like the tone is much better today about some of the risks and so I'm just trying to understand why the number is staying where it is.

This is Joe.

Thanks for the question.

Maybe step back for a moment and just restate that, as we have said, we expect EPS above $8 in 2014 and maybe I should even underscore greater than.

I think I'm comfortable saying that at the moment.

We do feel good about what we've seen thus far on the exchanges and we feel good about our growth opportunities more broadly in a variety of areas as commented on in our statements a moment ago.

I think our execution, with respect to how we have evolved this Company operationally and strategically, is very strong and the structural realignment that has occurred in the Company is also bringing a lot more accountability and focus because we've got a lot of seasoned executive leaders that are really dialed in to the opportunities that are being presented to us.

A couple of points I want to bring out in terms of what we see as positives.

We are growing our ASO space and Medicaid membership nicely and all of our proprietary work and the efforts that we've put in to the exchange environment certainly appears to be producing some upside for us that we believe will carry nicely into 2014.

We recognize there's a lot of work to do regarding the challenges that occur from time to time, but I think the early read for us going into 2014 is that we've got opportunities that we will be able to accumulate because of the leverage that we have created in terms of investments as well as a variety of strategic positioning that has occurred.

All that said, the changes that are facing our industry are I think admittedly very substantial and it still remains very early in the year.

So we are trying to be realistic about all these moving parts and how they are coming together so that we can provide you a much more clear picture of what 2014 may turn into.

But, again, I wanted to underscore that we believe there's positive operating momentum as we see it at the moment and we believe that it will continue.

All together I think we just want to underscore that something greater than $8 is definitely where we are headed.

That makes sense.

If I could just slip one more in.

I just wasn't sure, the California risk share agreement, is that similar to how we should think about the ones that your peers have done?

And do you have a total dollar amount that might be covered under that?

The short answer is yes to both parts of the question.

We won't disclose the details of the contract, but we do believe it gives us an appropriate opportunity to earn a fair margin on that business up to a dollar amount cap.

Will you give that guidance at the investor day or is that something you are going to keep confidential?

I don't have that we will disclose what the dollar amount cap is, because we really don't know what the terms of our competitors are.

I would say that it would achieve our higher-level margins we would expect for a Medicaid book, which is very encouraging for us.

And it provides some protection in the early years of duals.

But it also is a program that has a cap at some point in that time.

So we feel good about it for 2014 for certain and we will see how it evolves in the out years.

Great, thank you.

Matthew Borsch, Goldman Sachs.

Thank you, good morning.

I just wanted to ask a couple follow-up questions on the exchanges.

The first just to understand, on the age distribution that you are seeing in the applications, does it look like you are getting on balance a younger population, or I should say, a more evenly distributed age population than the statistics are showing for the exchanges overall?

I'm just try to get to -- because you are talking about getting a reasonable distribution there and yet all the reports on some of the exchange distribution, maybe not California, suggests that it's highly skewed to the older segment.

Thanks for that question.

This is Joe again.

Obviously we are tracking this as best we can, given the development of the exchange marketplace.

What we can say at the moment based on our data is that the application activity so far is very consistent with our expectations, meaning that the average age of the application reflects individuals that are close to what we anticipated in our pricing.

And I think that's important to underscore.

The actuarial value of the plans selected by those folks is also close to what we expected.

So all-in, I believe we -- because of having invested in some predictive modeling capabilities that allows us to carefully analyze the data, we believe that we've got an early read that is giving us insight into a risk profile that confirms that again we are tracking close to what we anticipated with respect to both pricing as well as actuarial value of the plan that is selected.

So it might be more accurate to say that the age distribution that's being seen in the exchanges overall is something that was less of a surprise to you guys given your modeling?

I think that's a good way to put it, yes.

Just also were you surprised by a recent survey, the McKinsey survey, finding or implying, because it was a survey, that the very high majority of the exchange enrollment was coming from people previously covered.

Does that -- I can tell you I was surprised because of the other indication from HHS that 80% of the exchange enrollment was subsidy eligible, so it would've suggested to me it was more uninsured.

I know you don't know yet.

I am just wondering what your perspective is.

Well, maybe to step back a little bit and look at the all-in enrollment as we now see it.

Just roughly 0.5 million applications for individual coverage has been received thus far, and that is actually as of last week.

What we have observed is that the majority have been from new members to WellPoint and I think it is important.

Secondly, over 80% have come through the public exchange with a balance remaining off-exchange.

And then about 95% of the people have applied online.

So put all that together, about two-thirds of the applicants were subsidy eligible and I think we really don't know how many members came from the uninsured.

We only know that they are new to WellPoint.

So those are some of the data points that we've collected and we're trying to better understand the meaning behind those data points.

Again, I think we're going to learn more as we kind of approach March 31.

Got it.

Last question; do you have any read on the Medicaid expansion lives yet?

The early read is encouraging.

And I think at this point the next phase of actually getting those members officially enrolled and working with the states, I think the volume is probably larger than many had expected.

And the woodworking effect for those that maybe don't qualify for the exchange but always qualify for Medicaid within the states that agreed to expand is encouraging at this point as well.

So at this point, I would say that it's going to ramp up as the year goes through.

But we think it only validates the strategic bet we made in acquiring Amerigroup and we are very encouraged by that.

Thank you.

Also, let me piggyback on Wayne's comment about the Amerigroup integration.

It really has been a remarkable year bringing in what I would declare to be a very strategic asset for the Company.

We have commented already that I think our accretion targets are on track.

But more importantly, I think with respect to our engagement in the markets, it's an incredibly growing space that we are extremely well positioned to serve in multiple states with some new wins, as well as some projected outlook that suggests that we've got continued upside in this growing space.

So, again, I just want to underscore the strategic value, as well as the performance that we have realized thus far, point to many wins for us regarding that acquisition.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

I wanted to first go back to California.

Any update on the dual demo and maybe where you stand on rates there?

And then similarly -- in that state you talked about outperformance I think in the release in the California Medicaid book.

Any specific commentary there?

Ralph, good morning.

Let me first start off by saying that we were selected to participate in three counties in California: Santa Clara and Alameda and then as a subcontractor in LA County.

We are in at this point, so we've worked with rates.

We've got contracts inked in two of the three counties.

We are very close to finalizing the third at this point, but we are planning to participate.

I think it's fair to say that there's a lot of uncertainty still, but we think we've got within striking distance on rates.

And the contract that we have with state that provides downside protection we think will give us a unique strategic opportunity over the next couple years to not only engage in the duals but use it as a competitive advantage to learn and to grow our membership and our revenues in a profitable way in the out years, both within the state and hopefully use that experience as we bid on other states going forward.

Okay.

Then the outperformance on the California Medicaid book?

Some of it is as simple as we've got a darn good management team we have picked up from Amerigroup.

This is what they do for a living all the time and they have brought some unique capabilities and perspective to helping us manage that book on what a Medicaid chassis needs to look like, not a commercial chassis.

I think there's a lot of work to still be done there.

I think Dick would tell you that as well.

I think he is encouraged that the contract he was able to get negotiated for our Company to give him even further time to maintain those margins while he continues to work on the underlying improvement needed in that book.

But a lot of it is blocking and tackling with a good management team.

Then just my last one.

Could you give us the impact of the early collection of the industry fee and maybe the fourth quarter and maybe for the full year 2013?

Ralph, I want to make sure I understand the question.

So we have passed on in our pricing the fee; the issue becomes the non-deductibility.

But relative to the fee, our pricing has assumed in all of our books that the dual fee will be passed on.

The industry, as you know, has roughly an $8 billion fee being assessed to it in the current year.

WellPoint's share of that fee is north of $900 million.

We have fully passed that on in our pricing, but it gets to the challenges of the non-deductibility.

That's why I think we mentioned, too, the cash flow.

Core run rate cash flow we think will be very strong, but there will be some unique timing issues this year between the payment of the fee and the collections of the fees.

Right.

I just meant obviously you've already started to collect for the book that hasn't started on January 1 of 2014, right?

So there's some level of benefit because you don't have any costs associated with it sort of in the fourth quarter.

Is it sort of the straight up math of --?

It's de minimis still.

On the big scheme of things, it's de minimis.

The majority of the fee is going in on January 1.

Okay, fair enough.

Thank you.

Scott Fidel, Deutsche Bank.

Thanks.

First question, just a couple more on the exchanges.

And first, how much of the $150 million in exchange investments that you were targeting for 2013 did you end up incurring?

Then we will be interested, Wayne, if you could just maybe talk about what type of higher morbidity levels that you were assuming in the exchange population.

So clearly you said that you are comfortable with where the pricing was relative to where the risk profile is coming in, but just -- so interested relative to the existing population how much more morbid were you expecting the exchange population to be in your pricing?

Scott, good morning.

Let me first start with your $150 million.

The vast majority of that ended up getting spent, substantially spent in the fourth quarter.

It wasn't all quite spent the way we would have anticipated though or expected.

I think we had assumed a larger level of marketing; that did gets slowed down because the exchanges weren't up and running as aggressively as we had anticipated.

But the volume that came in in the month of December and early January was much more than we could have ever anticipated and so the level of staffing and overtime that we incurred in December specifically really is a reflection of using those dollars.

So at this point I would say those dollars have been used.

Now relative to morbidity, let me simply state this.

We assumed that the population on exchanges would be older than our book that we had within the existing WellPoint book, both individual and small group.

So I would say, first and foremost, we have seen that we would have an older age group on exchanges than what we already have with large market share within our existing books.

We also assumed that we would lose part of our existing book that was healthy in exchanges and that we would pick up a sicker population.

So we assumed both what I would call adverse selection for age and an adverse selection for health status.

I think in many markets you can see where we are priced 20% to 30% higher in certain large metropolitan markets than our competitors.

We are still winning market share, which we are encouraged by, but that price delta really is a reflection of a higher morbidity than we had historically experienced.

Okay.

Then I just had a follow-up question for Joe, and maybe it's something you plan to probably touch on in more detail at the investor conference, but just interested in your comfort level at this point in the longer term $90 billion revenue target for 2016.

It looks like you are tracking towards $73 billion this year and that's around a 4% growth rate, but you have the conversion of the large account to ASO so maybe it sort of a 7% clean growth rate.

Would it sort of imply that you need to sort of accelerate to around an 11% CAGR in 2015 and 2016?

And just interested if you still feel comfortable you can see that type of revenue growth rate acceleration in 2015 and 2016 to get to the $90 billion by 2016.

Yes, I appreciate that portrayal.

I think that maybe what I can do is begin with a quick summary of what I've witnessed thus far.

As you know, I'm nearing the completion of my first year with the Company and what I have seen gives me a lot of cause for optimism.

We have really focused heavily on a combination of both a strategic engagement as well as an operational improvement focus.

Then, on balance, I think the two together positions us extremely well regarding the opportunities that you have just described that I believe we can pick up.

Maybe I should underscore that, as I said earlier, the Amerigroup acquisition I think has been incredibly successful for us and has positioned us well in the government space, both Medicare, Medicaid, and other facets of government work.

Our exchange preparation that began prior years I think has created an incredible strong position for us as we have entered into the enrollment phase.

And we will certainly witness how that will play out by March 31.

Our focus on duals growth I believe will certainly create opportunity for us.

Medicaid expansion, I think that certainly has a strong outlook.

A great example there is our Tennessee award, which I think is a huge lift for our Medicaid focus.

That in Tennessee will create, we believe, over the next few years $1 billion in added revenue.

And I think in the main we are very well positioned regarding our engagement in all of our markets by way of increasing performance and provider collaboration, huge commitment for us in that space.

We now have 60 ACOs, 80,000 providers engaged with us through value-based payments which total something on the order of $300 million of payment stream.

So when you put all that together, I think -- and what I'm most proud of, we have a very, I think, stabilized platform.

We've got a great strategic outlook in terms of these so-called headwinds that are ever-present in our industry.

We have fine-tuned the Company, great future outlook.

And having said all that, certainly want to be realistic about all the moving parts as we've talked about that have come upon us.

Getting deeper into the year, we are going to know a lot more about some of the points that you raised and probably be able to comment quite a bit at investors' day.

But net-net we see positive momentum and I am optimistic about our ability to execute given all these challenges that are with us.

Okay, thank you.

Let me just express my thanks for all of you to join us, as well as for your great questions.

In closing, let me reiterate that we are pleased with our 2013 performance, which I believe reflected strong execution across our commercial and government business segments, leading to the 13% growth in adjusted earnings per share.

And also the continued strong operating cash flow generation.

The rollout of exchanges continues to progress, as we have underscored, and our preliminary membership indicators are tracking very well.

Our 2014 outlook for earnings per share is greater than $8.

We believe is a prudent position at this stage in light of the continued uncertainties around the exchanges.

We look forward to providing you with more details about our financial outlook and strategies to drive this future growth at the upcoming investors' day.

So, again, I want to thank everybody for participating on our call this morning.

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