Elevance Health Inc (ELV) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the WellPoint conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

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

Please go ahead.

Welcome to WellPoint's first-quarter 2014 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 this morning with an overview of our first-quarter 2014 financial results got and the broader backdrop.

And then Wayne will review the quarterly financial highlights in detail and provide an update on the 2014 outlook.

Q&A will follow Wayne's remarks.

During the call this morning 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 FCC.

I will now turn the call over to Joe.

Thank you Doug and good morning.

It was great to see many of you at our Investor Day last month and I look forward to building on the dialogue today and into the future.

Let me begin by stating we are pleased with our performance in the first quarter.

And continuing our focus on execution and fostering a culture of discipline, consistency, and accountability to drive value for our customers and shareholders.

Before I get into the review of the quarter, I want to frame the discussion this morning around our goals of driving affordability and better health outcomes for our members.

Which we laid out in detail last month and which are key to our capitalizing on our future opportunities.

The overarching goal of our 48,000 associates is to provide the most attractive product in the market to serve the healthcare needs of our customers.

Our view is that the complexity of the healthcare industry combined with growth and national health expenditures, that consistently out paces GDP, creates a need for health plan leadership with creative solutions to drive better costs and quality outcomes.

We believe our broad-based engagement with providers, employers, and policymakers will continue to benefit our members and their families as we address the goal of achieving affordability and improving outcomes.

This is a time for creativity not passivity.

To that end, we continue to invest for success in the evolving marketplace focusing on areas such as provider collaboration, information technology, and process improvements to improve customer experience.

Over the last two years, we have invested approximately $550 million in our health insurance exchange buildout, improved analytics, and predictive modeling.

These investments are foundational to leveraging our assets against the growth opportunities across our segments.

These investments are clearly creating better solutions that are valued by our 37 million members representing roughly one in nine Americans.

We are pleased to share that in the first quarter of 2014, our products have been chosen by 1.3 million new consumers across both our commercial and government segments.

Importantly, these new consumers represent a broad mix of customers including individuals and their families, employers, and government programs.

We believe our enrollment success demonstrates the strength of our product design and our prudent pricing strategy.

I would also note, that we are a leader in the new markets being created under the Affordable Care Act.

In the newly created public exchanges, a marketplace which was specifically intended to enhance price transparency, and drive affordability, we committed to participate by making the needed investments to be successful.

Applications, especially near the end of the quarter, were robust.

Our March 31 membership includes applications through February 15.

And we have enrolled over 400,000 members.

Through the entire open enrollment period, which officially ended April 15, we now expect to add more than 600,000 members from public exchanges.

We're also serving approximately 100,000 members in private exchanges.

Which represents a new option for employers and their employees to obtain health coverage.

Taken together, our overall enrollment growth and our positioning in the exchanges, represent tangible examples of how our commitment to driving value for our customers is resonating with employers, individuals, and their families on a daily basis.

Now, focusing on first-quarter results, I am happy to report a solid quarter during a very dynamic period for our industry.

We believe this serves as an indicator about our continuing improvement and execution as well as the benefits we are capturing from our investments across both the commercial and government segments.

Specifically in the first quarter, we reported earnings per share of $2.40 on a GAAP basis and $2.30 on an adjusted basis.

Our GAAP EPS and adjusted EPS decreased from first-quarter 2013 as a change in the mix of our product portfolio and the implementation of the Affordable Care Act, has changed the quarterly earnings patterns of our core business results.

Both of these results compare favorably to our initial expectations for this first-quarter of 2014.

We also generated higher-than-expected operating cash flow of approximately $1.4 billion, which has allowed us to continue executing on our share repurchase and dividend programs.

We repurchased 14.3 million shares or nearly 5% of the shares outstanding at the start of the quarter.

For approximately $1.3 billion, and paid $123 million of dividends.

Turning to our Business segment performance, our commercial business had another strong quarter.

Our product portfolio and leading cost structure drove commercial membership growth of 1.2 million lives in the quarter and first-quarter operating revenues of $9.7 billion.

Investments made in recent years are translating into profitable market share capture as evidenced by our 648,000 new lives in national and our strong growth on the health insurance exchanges.

Which is expected to exceed 600,000 new lives by the end of the open enrollment.

Commercial operating margins declined as expected, from 12.8% a year ago to 9.1% in the first quarter of 2014.

Due to our SG&A investment spending and the changing quarterly earning pattern of our business.

Which we discussed with you previously.

The implementation of our public exchange strategy is progressing well, based on our read of available data, and provides a foundation for future commercial risk growth opportunities over the coming years.

To update you on the various metrics that support our position, let me say that our enrollment is tracking well.

Individual membership and total stood at roughly 1.85 million at the end of the first-quarter 2014.

Consistent with our expectations and up 95,000 lives during the quarter.

For exchanges, the general characteristics of applicants, including average age, are tracking well versus our 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 reflect this view.

We did notice the average age of applicants decreasing the further we got into the open enrollment period indicating that younger age applicants signed up later in the period.

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

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 are continuing to see signs that our brand name and network quality are carrying more of an advantage in the market that we had expected.

For example, there are geographies where we believe we are gaining shares despite lower priced competition.

Which points to the value of our local market to depth, knowledge, brand, reputation and networks.

Finally, with respect to our small group business, we continue to be mindful of the potential for employer coverage changes in light of the exchanges, and we did see Q1 small group member declines above our expectations.

However, this was offset by stronger large group membership trends in the quarter.

These dynamics are reflected in our outlook.

Turning to the Government Business segment, our government business division added 75,000 lives in the quarter.

Driven by strong growth of Medicaid, and generated revenues of $7.9 billion up approximately 4.9% year-over-year.

The government business represented 45% of operating revenues in the quarter, as our business continues to evolve and diversify.

Medicaid enrollment is off to a strong start in 2014, growing by 121,000 lives in the quarter.

And is expected to continue growing throughout the year driven by our written recent RFP wins in Florida, Kentucky, Georgia, and California as well as the ACA driven expansion.

Medicare enrollment declined by 62,000 end of the quarter in line with our expectations.

As we work to reposition our individual Medicare Advantage portfolio, a products to preserve affordability and benefits for our members and improve our performance.

Government operating margins improved 160 basis points to 3%, reflecting continued medical cost management efforts and an improvement in expense efficiency as well as receiving actuarially sound rates in certain states.

We are updating our 2014 financial outlook this morning and now expect adjusted earnings per share of greater than $8.40 for full-year 2014.

This outlook reflects the stronger-than-expected Q1 results while also incorporating an incremental $100 million in hep-C spending over the balance of the year, to reflect the potential for higher-than-expected utilization of new drugs in that area.

Wayne will discuss these elements in more detail.

We believe this is a prudent outlook in light of the dynamic nature of our markets and the potential for future changes in the regulatory framework.

As we articulated at our Investor Day last month, we believe we have a clear strategy to deliver more affordable products to more people, across the commercial and government markets.

This includes our differentiated approach provider collaboration.

The site one specific relationship, our new partnership with Emory Healthcare System in Atlanta, integrates the CareMore clinical model into their delivery system.

The goal is migrating to full-risk contracts and leveraging CareMore capabilities to drive performance under those arrangements.

More broadly, we note our momentum in the market with 87 ACOs currently in place and over 70 in the pipeline to come online between now and the end of 2015.

So wrapping up, we're very pleased with our Q1 performance.

We believe that by focusing on improving healthcare costs and quality and leveraging our understanding of consumer trends and preferences, we have delivered on our commitment, and will continue to demonstrate market-leading solutions to our growing number of customers.

With that, I will turn it over to Wayne.

Thank you, Joe and good morning.

My comments today will focus on the key financial highlights from the first quarter of 2014.

I'll also provide an update on our 2014 outlook.

On a GAAP basis we reported earnings per share of $2.40 for the first quarter of 2014.

These results included net benefits of $0.10 per share reflecting net investment gains to $0.07 per share and approximately $0.04 per share of income from 1-800 Contacts, which we sold in January 31, 2014.

Partially offset by $0.01 per share of debt extinguishment expense recorded in the quarter.

Excluding these items, our adjusted EPS totaled $2.30 for the quarter.

These results were favorable to our expectations and as Joe noted, we are pleased with how our 2014 has progressed so far.

To anticipate the question, roughly one third of the outperformance versus our previous expectations in the quarter, turn stronger operating gain and about two thirds came from below-the-line items and while positives, we'll not necessarily repeat.

Operating outperformance in the quarter reflected higher enrollment, moderately favorable medical cost experience and G&A expense control.

March results reported some of the early positive trends we had seen in January and February.

Below-the-line, our tax rate, while increasing from last year, was lower than expected due primarily to favorable state tax developments.

Medical enrollment group grew by 1.3 million.

Or 3.6% sequentially to approximately 36.9 million medical members as of March 31.

This reflected membership gains in our national and local group ASO, individual, and Medicaid businesses.

Operating revenue exceeded $17.6 billion in the quarter, an increase of approximately $210 million or 1.2% versus the first quarter of 2013.

Driven by higher overall enrollment and growth in the government business.

These increases were partially offset by a decline in commercial resulting from the previously discussed impact of the transition of the State of New York account from fully insured to self-funded on January 1.

The benefit expense ratio was 82.7% in the first quarter of 2014, a decrease of 100 basis points from the prior year quarter and favorable to our expectations.

The decline reflected continued strong medical management and the impact of the premium revenue designed to help cover new HealthCare reformed fees, partially offset by changes in our quarterly earnings pattern Joe discussed previously.

For the full-year 2014, we continue to expect underlying local group medical cost trend to be in the range of 6.5%, plus or minus 50 basis points.

Our SG&A expense ratio increased by 280 basis points from the first quarter of 2013.

As expected due to the inclusion of various healthcare reform fees in 2014, continued investment spending in preparation for ACA driven market changes, and higher administrative costs as the result of strong commercial membership growth during the first quarter of 2014.

Moving onto the balance sheet.

Days and claims payable was 44.2 days as of March 31.

Up 5.5 days from 38.7 days as of December 31.

We continue to maintain mid to upper single-digit margin for average deviation, and believe our reserve balance remains strong and consistently conservative as of March 31, 2014.

Our debt-to-capital ratio is 38.2% as of March 31, 2014, up from 36.9% at December 31 but down from 38.6% from year-end 2012.

We ended the first quarter with approximately $2 billion of cash in investments for the Parent Company and our investment portfolio was in an unrealized gain position of $995 million as of March 31.

We generated stronger-than-expected operating cash flow of $1.4 billion in the first quarter or two times net income.

We continue to expect cash flow timing to remain volatile, partially reflecting the timing of exchange-based enrollment this year and the timing of payments related to the health insurer fee and the 3R's.

That said, cash flow trends in the first quarter have been encouraging and we remain comfortable in our outlook of greater than $2.4 billion for the full-year.

We repurchased nearly 14.3 million shares for nearly $1.3 billion during the quarter.

This is a weighted average price of $88.14.

As of March 31, we had approximate $2.4 billion, a board approved repurchase authorization remaining which we intend to utilize of our multi-year period, subject to market conditions.

We used $123 million during the quarter for our cash dividend and yesterday the audit committee declared our second quarter dividend to shareholders.

Turning to our 2014 outlook.

As Joe noted, we currently expect adjusted EPS to be greater than $8.40 for 2014.

The increase in our full-year outlook reflects a balance contribution from higher operating income and below-the-line items.

Above-the-line, the improvement reflects stronger enrollment, strong medical management and expense controls, and some recapture of the non-deductibility of the health insurer tax.

Below-the-line, our outlook includes a slightly lower tax rate than we originally expected due to favorable state tax developments.

These positives are partially offset by roughly $100 million in incremental hep-C costs we now have factored into the remainder of 2014.

So a logical question is, could this prove to be conservative in light of the Q1 results?

It is fair to say, that if the level of outperformancing Q1 were to persist, or if hep-C costs failed to increase as currently factored into our forecast, then our current outlook could prove conservative.

In addition, while our outlook factors in some recapture the nondeductible the health insurer tax and our Medicaid block of business based on sign contracts thus far, incremental contributions from this block could add modestly to results all else being equal.

That said, it remains early in the year in which the industry is undergoing substantial change and our biases to maintain a prudent stance in this dynamic environment.

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

There were also investments in our business that we do not expect to repeat in 2015 including at least $30 million to cost associated with implementing the first year of public exchanges and nearly $20 million for the start up costs associated with dual eligible programs.

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

Thanks Wayne.

Before we moved to the Q&A section of the call, I do want to update you on a few senior leadership changes.

Dick Zoretic, who heads our Government Business division, has recently informed us of his decision to retire for personal reasons at the end of May.

I first want to express our sincere thanks to Dick for everything he has done to position our Government Business division for the continued growth opportunities we see in that area over the coming years.

The success of the Amerigroup integration, and our success in accelerating growth in our government business under his leadership, are the result of a reinvigorated organization leveraging its key assets more fully.

In addition to Dick's leadership, a key driver of this improvement has been the level and depth of leadership and talent throughout the division.

As such, I'm very pleased to announce that Pete Haytaian, President of our Medicaid business, will be taking over Dick's role next month.

Pete joined Amerigroup in 2005 and many of you have met Pete over the years, but for those that have not, Pete has been a key factor behind the sustained growth and execution track record at Amerigroup.

And has been absolutely instrumental in the successful integration over the last year.

And the improved performance of the Legacy WellPoint Medicaid business.

Pete brings substantial operating experience across both the Medicaid and Medicare markets and a track record of operating execution and discipline to the role.

I have every confidence that Pete will lead our Government Business to further success across our markets.

I'm also pleased to announce that Tom Zielinski has agreed to join us as Executive Vice President and General Counsel.

I've known Tom for many years.

He's a fantastic addition to our team bringing extensive legal and industry experience having previously served as General Counsel at Coventry.

I believe both of these appointments strengthen our company and strengthen our prospects going forward.

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 on the exchanges.

Can you tell us what margins you're booking for these exchange revenues at this point?

And then just a quick question on the 3R's.

The government is now looking for risk corridors to be budget neutral, so I'm curious if you are running a negative margin in a specific state for instance.

Would you be comfortable -- would your auditors be comfortable with booking a receivable in that risk corridor given the budget neutrality?

Hello Justin, good morning.

Let me first start by saying that relative to margins, we're very pleased with the mix of business and probably more importantly the affirmation of the strategy we laid out around the design of our products and formulary.

So our margins within our markets vary but they're still within our targeted range in total of the 3% to 5% category.

Relative to the 3Rs, it's a little bit of a hard question for us to answer because we do not believe we'll be in a receivable position on the corridors.

From our perspective we believe we're in a situation where we're within the sweet spot of maintaining the appropriate margins.

So I couldn't respond to what the auditors may or may not say.

If anything we have evaluated a few markets where we may end up booking a payable.

In fact, in the quarter while de minimis have booked a small payable towards the corridor.

Okay and just a quick follow-up on hep-C.

You talked about a $100 million of cost.

I just want to confirm that's incremental to what you had already expected?

And then can you share with me what you had already expected for hep-C and what that implies for an overall US spend, in your mind?

So Justin, for hep-C we had actually priced in our book for hep-C costs to double over what those costs were for last year.

In the first quarter we were just shy of $50 million in cost, so we're still well within our pricing that we laid out for the year.

But we thought it would be prudent to at least incrementally increase by an additional $100 million in our outlook.

In the event that we would see a continued ramp up in utilization.

As I mentioned in my comments, if that proves to be conservative in our outlook than that would provide upside to our guidance.

I'm sorry, what was that number last year?

We doubled it from last year, so last year it was at a level comparable to what you saw in the first quarter.

So we had in excess of $100 million-plus in pricing for this year.

Great.

Thank you.

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

Hello guys, good morning.

So with government accounting for like 45% of your operating revenue, I think is what you said, so basically half.

How do you see this trending going forward and it certainly should increase I would think a bit given the dual programs coming on and the growth in Medicaid.

Are you comfortable at the current level, or do you have a particular target in mind in terms of how much explicit government business you want contributing to the total revenue number?

Tom, let me start by first hearing that -- I wouldn't say that we have a targeted goal as a percentage of our book.

What we have is a goal to really maintain, as Joe said at IR day, a number one or number two market position in every segment, whether it be government or not government.

And then ultimately how that plays out will be very dependent on how the commercial book shifts over time.

But that being said, we're bullish on our outlook for Medicaid and duals, and longer term for Medicare.

We expected the government Medicaid to ramp up as the year goes on in terms of membership so we're actually pleased with where we're at in first quarter.

Relative to expectations and expect that to continue to ramp up as the year progresses.

And as you know our dual revenue really doesn't start coming on until mid and late this year.

So full run-rate impacts of that really start to ramp up beginning next year.

Do you think greater efforts on Medicare or Medicaid, which one?

I would say from the Medicaid, we really like the expanding RFP pipeline not just on the TANF population but as Dick highlighted a month ago, you know there's over 40 billion of RFP pipeline in the next 18 to 24 months.

So we plan to actively participate, but I will tell you that Joe has made it clear to this leadership team that on the Medicare front we're going to get our shop in order.

And we're getting close to that and then we expect to start expanding in there much more aggressively beginning in 2016.

Great thank you.

This is Joe, good morning.

Let me add some color commentary.

I think we're very solidly positioned for continued growth in space.

We believe, and just maybe affirm what Wayne just shared with you, in that we're actively pursuing duels.

We're repositioning in Medicare, believing that there will be an inflection point sometime in the not-too-distant future that would call us back in.

But we certainly want to do that with a stable portfolio.

And we have other government initiatives in terms of expectation with respect to Medicaid member growth.

So, all-in we see the horizon.

We believe that the building a team as well as an infrastructure to support that growth is absolutely essential for success going forward.

We're well on our way and I think we're perfectly positioned for continued growth in this space.

Great thank you.

You next question comes from the line of A.J. Rice from UBS.

Please go ahead.

Hello everybody.

Thanks.

Maybe first I'll go back to the public exchanges.

Can you expand in any way, I know you said the demographics are consistent with your expectations.

Do you have any data at this point about Legacy WellPoint to the extent to whether their previously uninsured?

Any commentary about the enrollees that sort of that big push at the end in February and March?

Were they materially different than what you were seeing earlier in the sign-up period?

Any color along those lines?

Good morning A.J.

I'll give you a little bit of background on what we saw.

First of all just as a reminder, the membership you see in our current 1.3 million member growth only reflects open enrollment through February 15.

So clearly applications received post that date have much more meaningful lift beginning in April and May.

Relative to our expectations, the volume we saw is specifically in the last two weeks of March and then that actually continued into the first two weeks of April for the extended enrollment period.

Not only was substantial versus our expectations, but I would tell you that we saw in each days applications the average age coming down in a meaningful fashion.

From our perspective again, only time will tell but relative to the average age we've assumed in that, we've hit the sweet spot.

Relative to claims activity, we have pushed over 90% of the claims we received in the first quarter through our predictive analytics in the modeling we've done.

As we were building out whether we thought we hit the sweet spot or not, and at least as of today, everything continues to be in the green status meaning positive status for now.

We've maintained a cautious outlook though until we can get through second quarter at this point because so much volume comes in, in April and May.

Okay.

Joe, one other wrinkle might be helpful because we're still tallying related to the post February 15.

And we're witnessing about a 90% premium pay relative to the enrollment capture, which I think is very strong.

And I think we've settled out on that number at the moment so I think that might help you in terms of envisioning where enrollment might land regarding April 15.

Yes, that's great.

And maybe just one follow-up Joe.

WellPoint is often in the press.

Talked about various potential scenarios, acquisition-wise and otherwise you seem to be doing well on integration of Amerigroup at this point.

Obviously you got a complex year.

What's your view on looking at transactions to help build up some of the areas you've identified that you want to build up?

Yes good question.

At IR Day, I emphasized that last year's effort certainly going into this year is all about stabilization of the Company and I underscored the belief that going forward we were really keying in on transformation of the enterprise.

Reaching out into some new initiatives and strengthening some long-standing commitments we've made to the market.

Our sense is that we've got a very strong base to work off of and obviously we are now going forward observant about possibilities.

No specifics obviously, but we certainly are observant and we believe we can continue to grow our position with what we've got.

And we may look at further opportunities going into the future.

All right.

Thanks a lot.

Your next question comes from the line of Christine Arnold from Cowen.

Please go ahead.

Good morning.

In your assumptions now are you assuming that the non-deductibility of the health insurance fee will be a collected in Medicaid and how much did you collect in health insurance fee in SG&A and revenue this quarter?

And how might that change going forward?

Christine first, in terms of the non-deductibility of the fee relative to Medicaid.

The vast majority of the states have now either in writing or verbally committed to covering that fee.

However, as we've said previously, we believe it is prudent to not recognize that fee until you can see the all-in rates because we think ultimately rates are fungible and fees are fungible.

So while we've included some of this in our first quarter and our outlook, I will tell you it is less than $0.05 at this point in time.

So I think we still have a reasonable amount of modest upside as we see the all-in rates if they in fact reflect true trend and a true gross-up.

And $0.25 to $0.35 would probably be the gross-up, so less than a $0.05 of $0.25 to $0.35?

Is that the right way to think about it?

That's a reasonable proxy.

And then in small group you said that you had less than expected enrollment.

You had more lapses, but was offset by some other factors.

Could you just highlight that?

I missed that.

Thank you.

What was interesting is for all the areas that outperformed on membership, the one that was a little surprising was the level of small group membership that actually no longer provided coverage post January 1. So our early renewals were successful but for those post that date, once the exchanges got up and running, we saw -- really we missed our expectations on some of the small group in the quarter.

From our perspective, you know we expected that to occur at some point in time.

The fact that it occurred sooner was a little surprising but nonetheless we like the fact that our positioning on the exchanges is what it is.

It was more than offset though by large group in and of itself, in the exchanges.

Thank you.

Your next question comes from the line of Kevin Fischbeck from Bank of America.

Please go ahead.

Just want to follow-up on the small group point there.

One of your competitors talked a lot about how they were seeing disruptions in the state of New York and I guess maybe some other pockets as well.

I just wanted to hear your thoughts about your expectations for small group margins.

I know you have already talked about $200 million-plus of margin compression this year.

I wanted to understand whether that was focused in a couple of states specifically or whether that was a broad-based trend?

Kevin, good morning.

In terms of the small group margin compression, either through moving to the exchanges or no longer purchasing with us, we had that pretty much as a broad-based trend across all of our states and in fact that's what we're seeing.

Relative to the state of New York, I don't think it's any secret that the past several years prior to this year we've indicated we thought that was a very challenging market for anybody to get actuarially early sound rates and make a profitable return.

The comments about an aggressive market there are nothing new to that particular market.

We play very small in that market and we have only around 25,000 small group members in total there.

And that's about half of what we finished the year at.

So clearly in membership there is moving but we're okay with that, because until rates get improved we really don't want to be an active participant.

Wayne.

We exited New York to a degree in 2012 and I guess we're holding firm where we are in a very de minimis position.

That's correct

And just one quick follow-up.

I think you mentioned DCP was modest in the quarter.

Do you have an actual number there?

Yes.

I would tell you while modest, I don't think it actually benefited the quarter at all.

What I mean by that is, we exceeded our high single-digit margin for average deviation that we typically record.

It came in modestly better than that.

But we believe we reestablished it all as of March 31 until we can see further development on the underlying book.

And I think that's evidenced in the DCP being up over 5.5 days.

So we think the quarter did not benefit from any development.

Okay.

Great, thanks.

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

Please go ahead.

Hi thanks.

Good morning.

So, I wanted to follow-up on the individual book and just sort of help understand the churn there.

I know sort of a 95,000 lives sequential increase but I don't believe that tells much of the story.

So I'm just curious what new sales were versus what lapses were?

It sounds like obviously 400,000 in the exchanges but that seems like a relatively low number.

I think you're saying 600,000 total.

We have you guys at almost 400,000 in California alone.

So I just want to make sure I understand all the moving pieces in the individual book.

Hi Josh, good morning.

Let me first state that I think that we've taken a prudently cautious outlook on the exchange membership that hopefully will prove to be a more of a low bar when we talk about the 600,000 members.

Recognize that a lot of the volume that we got came in, in the last two weeks of March and a lot of it came in, in the first two weeks of April.

[Amended] to that membership does not have an effective date till May 1 though.

So, from our standpoint until we can see that each of those members that we got an application on actually converts to a paying member, we're going to go ahead and maintain maybe a lower bar on our outlook.

If it converts at the rates as Joe has said, that we've started to see which is closer to 90%, we will outperform that greater than 600,000 exchange based members.

So, I think all-in, you know when you look at the mix we are off exchange but metal products we're quite strong as well in the roughly 400,000-plus range.

So you're looking at almost 1 million, what I'll call metal based members.

And then the Delta represents that which was grandfathered in existing products.

Unfortunately, we cannot tell you if a member was previously uninsured or not.

We just know that we're winning a lot of new members and whether they had coverage previously at this point we do not know.

Do you know how many were previously WellPoint members?

We clearly know who was or wasn't a member but until we see all these applications we recently received pushed back through, its hard for us to give you a definitive figure at this point.

Okay, got you.

A quick follow-up on the exchanges.

Have you guys thought about 2015 and what you are going to do from rates?

It doesn't sound like you're going to have all your information before you have to go to rates.

So, I'm curious if you think they'll be significant rate increases or it really sounds like maybe pricing was where you thought it should be.

Again, we're really pleased with our strategy and the information of a pricing strategy relative to what we've built.

We actually feel like we have more data to go into 2015 pricing than we did going into 2014 and we've got validation.

And we see the areas where we need to tweak on the fringes.

Now based on getting into the market early and with the market share we have.

So, I think if you were to talk to our actuarial team Josh, they would tell you that we feel really good about moving into the new market.

What we can't control is what competitors do.

But we really like our chances.

And we think because we hit the sweet spot, there will be less volatility in pricing for our members then there would be for others.

We should think about commercial that 6% cost trend that you guys -- or 6.5% we should think about that as representative of exchange trend as well?

Yes, I think it's a reasonable proxy for medical trend in general.

Perfect, thanks.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse.

Please go ahead.

Thanks, good morning.

You talked about change to seasonal earnings pattern a few times in your prepared remarks.

And I think when you updated guidance about a month ago, you said you expected fairly even distribution each quarter and that would sort of imply closer to a $9.20 EPS number for the year just based on the 1Q results.

So, is that fair or is there some sort of pull forward in 1Q that's changed how you're thinking about the quarterly progression?

Will first of all, I think it's important to recognize that the reason for some of the smoothing, not only relates to ACA related products where you were forced to move up what the actuarial valuation would be for the products offered.

So you have -- in some cases a smaller deductible or smaller co-pay in the first quarter then you would've seen in historical products.

Which allowed you to earn more in the first quarter historically versus now you earn less but more straight line.

Additionally keep in mind, the reinsurance does not kick in until [$45,000] and so you are bearing more of the cost early in the quarter this year.

But towards the end of the year, you'll bear less of those costs for those that exceed the reinsurance threshold.

So that's just a simple factor of why we think it's more smooth.

That being said, that outlook hasn't changed for us.

The only reason I wouldn't run-rate first quarter though is, keep in mind that we know that storms had to play some positive factor.

We can do a variety of modeling and it has a variety of outcomes.

But we definitely don't believe that all of that would necessarily run-rate.

But we're encouraged with our underlying results.

As we said at IR Day, if we can get through 2Q and this trend continues, then I think our guidance will prove to be conservative.

Okay.

Fair enough.

And then just the follow-up.

Are you seeing any acceleration in script trends?

Just overall or within the exchange or Medicaid expansion population at this point?

You know, any specific categories worth highlighting and maybe how comfortable you are on the pricing side relative to your exchange premiums and or the Medicaid expansion rates that you're seeing within your territories?

Thanks.

We see modest acceleration in script trends.

But I think it's important to recognize too, for example, on exchanges we expected accelerations in script trends and in some ways the exchanges are still early but coming in slightly better than the acceleration we expected.

Really, hep-C, guys, is the biggest issue right now.

I think it's the biggest watch item for the industry.

We think we've provided adequate coverage by including an incremental $100 million in our outlook and it's the one area that we feel we have a responsibility as an industry to help control cost for the consumer.

And we plan to be very focused on that.

And the other thing I simply say, is the unit price is a pass through fee for us.

So as other industries are getting their taxes from the ACA, those taxes are ultimately being passed on to us, which ultimately get passed on the consumer.

So while we are seeing rising prices, there again, I think we expected much of that to occur.

Okay.

Thank you.

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

Please go ahead.

Yes.

If I could just circle back to the recovery of the tax impact of the insurer fee.

Am I correct going back to your original guidance that you had none of that impact baked in for the commercial side of the business nor Medicaid?

I know you discussed Medicaid.

But on the commercial side, that seemed to be worth something upwards of $0.65.

Is that something that you don't expect to realize this year or is that potential upside?

Hi Matt.

I think the best way for me to answer this on the commercial front was, to the extent that our membership can exceed our expectations, that additional member incrementally begins the recovery of that non-deductibility of the tax.

We're out of the gate strong.

We're raising our membership outlook.

We hope that proves to be conservative and if it does, in theory we will begin to cut into the nondeductible tax which would also be upside.

And just a related question, if I could.

You touched on the attrition in small group and the growth in large group.

On the large group side, is that primarily reflecting account wins?

Are you -- the question I'm getting at, are you seeing increased uptake of coverage by employees that you might attribute to the ACA?

You know, I think what I would highlight Matt, right now more in large group is, retention is solid.

Sales have been solid with expectations.

Probably the more beneficial item has been the inflection point.

We talked about it at Investor Day about four or five weeks ago around the level of in-group change has really moderated.

And so while we had -- and then assuming that we would continue to see negative net in-group change, we didn't really see that in the first quarter.

Now we're going to continue to maintain an outlook that's cautious for that to occur.

But, I think what we're finding is, we got good retention.

We got good sales and it appears that the layoffs have substantially declined at large group employers.

Great.

Thank you.

Your next question comes from the line of Dave Windley from Jefferies.

Please go ahead.

Hi.

Thanks for taking the question.

I wanted to follow-up on Josh's question around exchange and price for next year.

I just want to make sure I understand that Wayne you're basically saying that you don't think that there will be an inflationary impact from things like uptick and insurer fee, lower support from 3Rs, broader network requirements, those types of things.

I was interested in what you think the impact of those things will be on top of what underlying trend might influence in price increase?

Dave, yes.

Thanks for the question.

Let me please clarify.

There will clearly will be an uptick for each of those items.

The response of Josh was simply to say that, you know, your starting point is just what underlying trend will most likely didn't like.

And today, we're at 6.5%, plus or minus 50 basis points.

There is no reason to believe that wouldn't continue.

Items that I think would obviously impact pricing further, are going to be the fact that the ACA fee increases next year for us and for other industries and those become ultimately pass-throughs.

Clearly hep-C, if it continues based on our new outlook at the level that it is at.

That would be something that would have to be added in as well.

But we do think with the size of our book and the positive younger age as we've seen coming in, that could be a more muted utilization in folks we're expecting going into next year.

But there are many other factors beyond just trend that we think are going to uniquely impact rate increases.

So is your expectation then likely to be into the double-digits?

And what would your thoughts be relative to rate review and I guess President Obama's meeting with insurance commissioners lately to encourage them to scrutinize rates pretty aggressively?

I would say it's not an easy one to answer because it's going to vary by market, by product.

You know, I think that every commissioner has an obligation to ensure that the rates are reasonable and appropriate, and we have an obligation to ensure we're driving the most affordable product for the members.

So the pricing will ultimately be reflective of what we're required to cover.

And if we're required to cover more and required to bear more cost, then the rates will reflect that.

Okay.

Thank you.

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

Please go ahead.

Good morning.

Thanks for taking my question.

Just on hepatitis C again.

Could you give us a sense for how the expenses were allocated by business segment?

Commercial, Medicaid, Medicare in the quarter?

And when you think about them going forward is there one area where you're most concerned over the balance of the year?

Thanks.

Thank you.

Good morning again.

The March pattern for fully insured claims was roughly 40% commercial, 35% Medicaid, and 25% Medicare.

And this does match our revenue mix.

So on expense basis the distribution is about half commercial, half government, and then when we adjust it for Medicare portion paid by CMS, so it's within government Medicaid having the largest share of that book.

Okay.

And then just one quick follow-up here.

On the Medicaid membership growth of about 121,000 in the quarter.

Do you know how much of that was sort of ACA expansion related growth versus just sort of what I would call core growth?

Thanks.

Yes Chris.

The majority of that was some early expansion.

Obviously though, some of the new markets such as Kentucky and that we expected to come a little slower.

The item we can't gauge right now that we're getting very positive feedback, is at the ACA expansion growth that is in the pipeline with the states right now, is quite substantial.

And so, I think you're going to see much more of that coming through and then a lot of the other expansion growth that we get this year actually phases in as the year goes.

So in Medicaid we actually expect our membership to ramp up from the current level of 122,000 roughly sequential growth to get much closer to that 400,000 or 500,000 level we had talked about previously.

Great.

Thanks a lot.

Your next question comes from the line of Scott Fidel from Deutsche Bank.

Please go ahead.

Thanks.

First question, just wondering if you had a breakdown just within your silver members, what percentage of those are eligible for cost sharing subsidies at less than 250% of FPL as compared to those that are above?

And just whether you've made some assumptions around whether you expect to see different utilization patterns amongst that cohort of members as compared to those that aren't eligible for cost sharing subsidies?

And so relative to that about 80% of the members were eligible for some degree of the subsidy is what we saw.

I would say Scott, that our pricing was assumed not just by metal level but as you know, within the metals you still have rating bands and aid bands and it varies very much by segment.

But again, I would say all-in as we try to carve the data down by market into the different segments that we looked at.

And we did evaluate whether subsidy eligible or not would have a different outcome.

But I think, probably the most optimistic thing I can say is the risk pool and the product selection seems to be coming in, in the manner that we had hoped it would.

And you know again, I really want to see second quarter because of the volume of applications that will affect 2Q.

And then make sure that converts before we officially say that we've got it all right.

But it's very encouraging right now.

Okay.

Then just had a follow-up question.

Just interested in your thoughts on how the co-ops have been pricing in the market?

And just interested from your perspective since you are expecting WellPoint could have 3% to 5% positive margins and are actually booking payables in some of your markets.

If the co-ops ended up taking a big bath in the exchanges in terms of their profitability, how would that affect their consumption of the 3R's?

And would that be an issue in terms of potentially increasing the payable that WellPoint would have to actually put in to the risk corridors?

That's a good question.

Unfortunately, it has a lot of hypotheticals so I'll talk about what I can say or know at this point.

We're following the law.

In the way the calculations play out in the 3R's.

I will tell you the amount that we had to accrue as a payable is so di minimus it will bail nobody out.

We're within our 3% to 5% targeted range.

Slightly over in a few markets which is why we booked a very small payable.

Relative to co-op pricing in the market, when you've seen one co-op you've only seen one.

So, this is not meant to be broad speaking but I think it's fair to say there are some co-ops that we do not understand the pricing and we don't know how economically it will work for them as time progresses.

And so, from our perspective, it's important to recognize that because of revenue neutrality and we think the market gets smarter as each year passes by with data, that the probability of money being paid in the pool actually gets lessened, not enhanced over the next several years.

And so, I'm not sure there's going to be much in the kitty to begin with this year, if anything, when it's said and done.

And I would personally be cautious against believing there will be anything in the kitty and the out years.

Okay.

Thanks.

Your next question comes from the line of Ana Gupte from Leerink.

Please go ahead.

Yes, thanks.

Good morning.

I just wanted to follow-up again on the membership that you've offered for the quarter.

If you could just elaborate on the $1.1 million loss in the fully insured?

How much of that is coming from that New York state account that shifted to self-insured?

And what is that mean for your small group membership at this point?

I think you had $1.85 million and you had mentioned potentially booking or including $200 million of EBIT loss in your guidance for the year.

I just wanted to understand how those pieces are fitting together?

Good morning, Ana.

The fully insured $1.1 million loss that you saw is all due to the conversion of New York ASO.

So from our perspective we have had very strong growth in maintaining our book and then growing.

In terms of the small group margin loss or EBIT loss that we expected in the year.

It is more than the $200 million that we talked about at IR Day that we expected.

It's actually going a little bit higher than that, but as I said earlier, we're recapturing the vast majority of that back in exchanges and other areas.

So I would say that a big portion of the headwind we expected in that business, we had anticipated it would incur this year and in fact is incurring this year.

And the more that continues to incur will actually create less of a headwind in future years for us.

So we're actually not discouraged by it.

That's helpful.

Thanks.

So what it means is you've already booked it in the first quarter and it would minimize the headwinds for 2015.

And just another follow-up is, if I'm understanding this right you have a pretty small interest in the individual books right now, $100,000?

Does that include your off exchange and on exchange?

If so, even if you're only booking $600,000 in public exchanges, why is your net increase only about $100,000?

The Blues seem to be pretty positive about the off exchange rates if that's what I read correctly.

Yes thanks, Ana.

A couple things to keep in mind.

While we've grown by what is only $100,000 net in individual, keep in mind that's essentially retaining the vast majority of our existing book plus adding to that book.

More importantly, it does not include membership enrollment post February 15.

So you should see 150,000-plus more members coming in if not 200,000 plus more members in the next two months that would get added to that number.

And then finally, the one thing that's very hard to model right now is, what will happen with small group attrition throughout the year or even the broader economy?

And if layoffs start to pick up again or if small group attrits faster than we expected, those lives end up having what we'll call a life-changing event.

Which allows them then to still go back and enroll in the exchanges.

And so, the one piece I can't answer for you is how much more of a net additive it will be in this year.

We've taken a cautious view of that for now.

But if that actually picks up, I think you'll see the membership really start tracking well above the 2 million-plus lives for the year on individual.

Okay, got it.

So basically what you're saying is, the 1.3 million to 1.4 million membership increase is conservative in your guidance.

Yes.

Okay, got it.

Thank you.

And your final question today comes from the line of Andy Schenker from Morgan Stanley.

Please go ahead.

Hi, this is Cornelia in for Andy.

Thanks for the question.

Just a quick one here on the commercial and specialty MLR commentary in the release.

You mentioned it was stable year-to-year and I thought we would've seen some improvement given the inclusion of the industry fee and potentially some benefit from weather.

Is there anything going on in that space that is worth highlighting and how did that ramp versus your expectations?

Thanks.

Thanks, Cornelia.

I appreciate the question.

First thing is it was actually better than our expectations in the quarter.

The biggest thing I can point to though as to why you're not seeing as much improvement as we thought it was a prudent thing to maintain as strong a balance sheet in this quarter until we get through second quarter.

As we said at IR Day, it's important to get through 2Q before you really start understanding the results and we think we can show that to our investors.

As you can see the DCP is up 5.5 days and the underlying cash flow is quite strong relative to that DCP.

Okay.

Thank you for your questions.

In closing let me reiterate a few key messages I'd like for you to take away from this call.

Our better than expected first-quarter results reflect our strong position in the managed care industry.

The benefits we are seeing from our strategic investments and our intense focus on execution.

We made substantial investments to enhance the depth and breadth of our experience as well as to improve our responsiveness to the needs of our customers.

The addition of Marty Silverstein which was previously announced as Chief Strategy Officer and today's appointments of Pete Haytaian and Tom Zielinski, continue that momentum.

Recall the IR Day theme.

You don't know what you don't know about us because we've not told you.

With that backdrop, let me summarize.

We're off to a strong start in 2014 supporting an increase in our earnings guidance for the year.

Perhaps most important though, is that we have executed on our commitments.

We told you we would make operational improvements and we have.

We told you we would manage capital prudently and we have.

We said we would be a winner on the exchanges and we are.

I hope you see that when this Management team tells you it will do something we follow through.

I want to thank everybody for participating in our call this morning.

Operator, please provide the call replay instruction.

Thank you.

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