Elevance Health Inc (ELV) 2015 Q1 法說會逐字稿

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Welcome to Anthem's first-quarter 2015 earnings call.

This is Doug Simpson, Vice President of Investor Relations.

With us this morning are Joe Swedish, President and CEO, and Wayne DeVeydt, our CFO.

Joe will discuss our first-quarter 2015 financial results and the macro backdrop and also provide additional commentary on our 2015 outlook.

Joe and Wayne are then both available for Q&A.

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 antheminc.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 Anthem.

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.

We are pleased to announce a strong first quarter 2015 adjusted earnings per share of $3.14 with membership and margins tracking well thus far.

We ended the first quarter of 2015 with over 38.5 million members, in excess of 1 million members more than the 37.5 million members we reported on our fourth-quarter 2014 earnings call.

Our growth continues to be balance so far in 2015 as we added 429,000 Medicaid members, 371,000 National members, 102,000 Individual members and 82,000 Local Group members.

Notice that this is the first quarter where our results include the impact of Simply Healthcare which we closed in February and which contributed 205,000 members as of March 31.

Driving our strong first-quarter results were solid contributions from both our Commercial and Government segments.

Specifically in the first quarter, we reported earnings per share of $3.09 on a GAAP basis and $3.14 per share on an adjusted basis.

Our GAAP earnings per share and adjusted earnings per share increased from the first quarter 2014, driven by revenue growth, an improved medical loss ratio, and opportunistic capital deployment.

We are pleased with the evolution of our diversified business model and believe it bodes well for future growth opportunities.

In the first quarter, our membership grew to over 38.5 million lives and our quarterly revenue approached $19 billion.

This quarter also marked the first time that Government business represented slightly more than half of our consolidated operating revenues.

The diversity of our business model is serving our members and our shareholders well as we leverage capabilities and investment to drive improvements in cost and quality.

During the quarter we closed on the acquisition of Simply Healthcare, a Medicaid/Medicare company in the state of Florida.

The deal is expected to be earnings neutral on a GAAP basis and to be slightly accretive on an adjusted basis in 2015.

Simply's local market experience and strong provider relationships augment our position in the important Florida market and improves our ability to serve local communities with Medicare and Medicaid offerings.

Our provider collaboration efforts continue to grow and we now have roughly $50 billion of our aggregate healthcare spending in value-based contract of which over half flows from shared saving, shared risk or population-based payments with the balance in pay-for-performance arrangements.

Details vary by contract and market but they are generally characterized by upfront payments for care coordination and an opportunity for shared savings with our enhanced personal healthcare program as a good example.

It is about aligning incentives to encourage smarter collaborative decision-making that fosters healthier outcomes and a better patient experience.

Our position aligns with the goals laid out by HHS earlier this year calling for 30% of all Medicare fee-for-service provider payments to be in alternative payment models that are tied to how well providers care for their patients by 2016 and increases the goal the 50% by 2018.

In the first quarter of 2015, we have added 18 accountable care organizations bringing our total number of ACO contracts to 139.

To date, the program includes contracts with over 37,000 primary care physicians through ACOs and patient centered medical homes who are accountable for the cost and quality of care of 3.8 million Commercial members.

Notable among our new ACOs is an extended partnership with UC Health, which is Greater Cincinnati's Academic Medical System covering both our Commercial and Medicare Advantage plans.

Under this new arrangement, UC Health's providers will accept value-based reimbursement tied to the total cost of care for their panel of attributed members and gain the opportunity for shared savings payments for meeting specified quality and cost efficiency targets.

We have finalized a study of the results of the first year of enhanced personal healthcare and are encouraged by what we have found.

We conducted a rigorous analysis of the results comparing members in our enhanced personal healthcare program versus those who were not to determine the programs effect.

Early results show improved acute-care admissions, inpatient days and lower ER utilization and these improvements led to gross savings per attributed member per month of $9.51.

Additionally, our focus on cost of care management is advancing generating incremental improvements of over $150 million for 2014 and 2015.

We have improved analytics to identify actionable trend drivers and we have increased the sharing of best practices across our Commercial and Government segments.

We are conducting deep dives on cost of care across our markets and identifying local leadership to drive further improvements in cost outcomes.

Finally, our focus on an improved customer experience is aimed at delivering intuitive and easy experiences to our customers through the channel of their choice.

Our consumer culture team is dedicated systematically modifying the mindsets and behaviors of our associate.

Our consumer work is concentrated on improving the experience associated with key areas such as shopping, host enrollment and transparency and payment.

Our research confirms that customers don't want to exert too much time or effort on their health insurance.

Consequently, we are focused on optimizing our capabilities to deliver exceptional services that more closely mirror those experiences that consumers enjoy in other aspects of their lives.

We have a partnership with American Well whereby our consumers can have a virtual physician visit 24/7, 365 days per year in 44 states.

We also offer convenient care options through Live Health Online which lowers costs and reduces unnecessary ER and urgent care visits.

Tools such as Anthem Health Guide help navigate the healthcare system and our relationship with Castlight helps our members better understand their healthcare options and choices.

We believe the ability to reduce complexity and frustration will be differentiating factors for us.

I would like to now turn to discuss our Commercial business and execution of our strategies.

Commercial membership rose 555,000 in the first quarter to 29.9 million members.

However, revenues declined in the first quarter by 3.4% to $9.4 billion primarily due to the previously announced decision to discontinue our Employer Group Medicare offering in the state of Georgia account.

Self-funded membership trends in the Commercial business during the quarter were encouraging, increasing by nearly 800,000 versus year-end 2014.

This was primarily driven by better than expected growth in our Large Group business.

Private exchanges remain a smaller part of the story but they are growing off that smaller base.

We currently serve 280,000 Commercial members through active group private exchanges, up from approximately 127,000 at year-end 2014.

Roughly two-thirds 2/3 of these lives are on a self-funded base and most of this growth is flowing from our National Accounts segment with membership coming through exchanges operated by major consulting firms with the balance generated either through Anthem Health Marketplace or broker led exchanges.

The majority of this volume is from existing business but approximately 35% represent new members to Anthem.

While still a small piece of the overall book, we expect private exchange enrollment will continue to grow within our mix over time.

We are optimistic about the outlook for the 2016 National Accounts selling season having already closed on two large new accounts with a combined membership opportunity of several hundred thousand lives.

We have a solid pipeline for National Accounts and expect solid growth in this area in 2016.

Insured membership in the Commercial business declined as expected in our Large Group and Small Group businesses.

The Large Group business decline reflected the decision to exit the employer group Medicare Advantage market in the state of Georgia account which was reflected in our Local Group membership as it was with the Commercial customer.

Small Group membership declined by 96,000 in the quarter with total membership ending at 1.36 million.

Individual membership grew by 102,000 during the quarter due to growth in public exchange lives partially offset by expected contraction in nonmetal products.

The amount of contraction was less than anticipated as retention rates in these nonmetal products were better than expected.

We believe our exchange strategy is playing out well overall and our early read is that the demographics of exchange lives appear slightly younger than last year's population.

In the first quarter, we grew exchange membership by 191,000 lives to 898,000.

Overall in the first quarter, Individual exchange enrollment growth was light of our expectations due to lower aggregate growth in exchange lives in our served markets and continued pricing pressure in certain markets including New York, Kentucky and Colorado.

We believe that we will continue to grow share as the market pricing backdrop stabilizes toward a more sustainable level and co-ops and other new entrants gain more experience.

For 3Rs we continue to book reinsurance as appropriate.

For risk adjusters, we have slightly increased the net payable position for the 2014 benefit year and have established a net payable position in 2015 benefit year as well.

For risk quarters, we are now in a slight net payable position for the 2014 benefit year and are in a net neutral position for the 2015 benefit year.

We believe our estimates are prudent given the dynamic nature available information and we expect to continue to refine our estimates in these areas as the relative risk profile of our various competitors become clearer within our markets.

I would now like to turn to the Government segment and speak to the solid first-quarter results.

Our Government business segment is having another strong growth year adding 483,000 members in the first quarter driven by strong organic growth in Medicaid and the addition of Simply Healthcare while generating revenues of $9.5 billion, up approximately 19.4% quarter over quarter.

Medicaid enrollment was up an additional 429,000 members in the first quarter.

We are very pleased as both organic membership growth and enrollment coming online from recent contract awards exceeded our expectations.

The pipeline of opportunity for our Government business remains substantial.

We currently estimate $65 billion of new business could be awarded by the end of 2018, split about evenly between traditional Medicaid and new populations in specialized services.

We believe our experience and footprint positions us very well to continue our growth as we help states address the challenges of lowering healthcare costs and improving quality for their residents.

Our Medicare enrollment grew slightly in the first quarter largely due to the acquisition of Simply Healthcare.

Excluding Simply, Membership remained stable as our retention was slightly better than expected.

Government operating margins improved 40 basis points quarter over quarter to 3.4%.

This primarily reflected improved medical cost performance in certain markets in our Medicaid business.

I now want to turn to discuss the key consolidated financial highlights from the first quarter of 2015.

I will also provide updated commentary on our 2015 outlook.

As I stated previously on a GAAP basis, we reported earnings per share of $3.09 for the first quarter of 2015.

These results included net investment gains of $0.08 per share, $0.01 per share of expenses for the early retirement of debt and $0.12 per share of expenses for deal-related amortization.

Excluding these items, our adjusted earnings per share totaled $3.14 for the quarter.

Medical enrollment increased by over 1 million members or 2.8% during the quarter to approximately 38.5 million medical members as of March 31.

This reflected membership increases in virtually all lines of business.

Operating revenue was nearly $18.9 billion a quarter, an increase of approximately $1.2 billion or 6.8% versus the first quarter of 2014 reflecting robust enrollment in the Government business and additional premium revenue to cover overall cost trends and new fees associated with healthcare reform.

For the first time in our Company's history the Government business accounted for more than 50% of our quarterly revenue.

The growing diversity of our business aligns with our long-term strategy as we believe we are well positioned to continue capitalizing on future growth opportunities.

The benefit expense ratio was 80.2% in the first quarter of 2015, a decrease of 250 basis points from the prior year quarter.

The decline reflected a lower medical cost ratio in the Local Group and Individual businesses due to the timing of medical cost experience, improved medical cost performance in the Medicaid business and the impact of an increase in the health insurer fee for 2015.

For the full year 2015, we continue to expect underlying Local Group medical cost trends to be in the range of 7% plus or minus 50 basis points.

Our SG&A expense ratio increased by 50 basis points from the first quarter of 2014 to 16.7% in the first quarter of 2015.

As expected, largely due to higher healthcare reform fees in 2015 and higher administrative costs as a result of the strong membership growth during the first quarter.

Moving to the balance sheet, days and claims payable was 45.7 days as of March 31, up 3.2 days from the 42.5 days as of December 31, 2014.

The increase was primarily due to higher reserve associated with new membership coming online throughout the quarter.

As previously discussed, we expect delays in claims payable to come back down closer to 40 over time.

Our debt to capital ratio was 39.4% as of March 31, 2015, up 90 basis points from 38.5% as of December 31.

We ended the first quarter with approximately $2.8 billion of cash and investment in the parent company and our investment portfolio was in an unrealized gain position of approximately $1.1 billion as of March 31.

Moving to cash flow, we generated strong operating cash flow of nearly $1.7 billion in the first quarter or 1.9 times net income.

As a reminder, our first-quarter cash flows are historically higher than the average quarter as we pay our first and second estimated federal income tax payment in the second quarter.

That said, cash flow trends in the first quarter are encouraging and we remain comfortable in our outlook of greater than $3.5 billion for the full year.

In addition to closing the Simply acquisition during the quarter, we repurchased nearly 5.7 million shares during the quarter for approximately $774 million representing a weighted average price of $136.88.

As of March 31, we had approximately $4.9 billion of share repurchase authorization remaining which we intend to utilize over a multi-year period, subject to market conditions.

We used $167 million during the quarter for our cash dividend and yesterday the Audit Committee declared our second-quarter 2015 dividend of $0.625 per share to shareholders.

Turning to our full 2015 outlook, we continue to see 2015 as a year of continued growth across our business.

We are updating our outlook for full-year 2015 adjusted EPS from greater than $9.70 to greater than $9.90 which reflects the solid core trends and run rate seen in the first quarter.

First-quarter results and underlying medical cost performance tracked well versus our expectations and bode well for the remainder of 2015.

As we said last quarter, the first quarter was expected to represent our highest quarterly earnings level this year.

While we do not offer quarterly EPS guidance, we expect the second quarter to be the strongest of the remaining three quarters with the first half of the year approaching 60% of our full-year EPS.

We expect the fourth quarter to be the lowest quarterly EPS figure of the year as a result of the diminishing impact of the 3Rs, the timing of member months and our overall business mix.

We continue to expect operating cash flow in 2015 to be greater than $3.5 billion and this will be another active year of capital deployment.

In that regard, we remain focused on maintaining an appropriate balance between returning capital to our shareholders and ensuring financial flexibility for investments in the future growth opportunities and potential M&A.

While we are encouraged by the underlying trends in the first quarter, it remains early in the year and we believe our full-year outlook is reasonable and prudent.

Wayne and I will now be available for questions.

Operator, can you open the queue?

(Operator Instructions).

A.J. Rice, UBS.

Thanks.

Hi, everybody.

Maybe just asking on the cost trend I know you highlighted the experience with the new members being part of the dynamic but you did outperform us by quite a wide margin I think consensus on the MLR trend.

Can you drill down a little bit more what you are seeing?

I know some of the others have talked about the updated hepatitis C contracting being a factor.

Are you just being conservative at this point and not signaling maybe that you are toward the low end of her medical cost trend outlook for the rest of the year or is there something that we should keep in mind on that?

Good morning.

Appreciate the question.

Let me start by saying that we are only 90 days, really one quarter into the year and I think from our perspective, it was just prudent to wait till we saw the second quarter settle itself out.

That being said, if the trends we had seen in the first quarter were to continue, we clearly would have a bias toward the lower end of our current guidance range at this point in time.

Really around the things you highlighted, we are expecting a lower hepatitis C cost for the year and a lower utilization than we had anticipated at this point in time and overall we think trend is playing well in all lines of business and in all segments.

Okay, great.

Then maybe just quickly on my follow-up, I think there was an expectation that there might be some 3R data available from CMS in the spring.

That seems to have gotten pushed back.

I know there is a hope that we get some final data out in the fall.

Can you just maybe walk us through what you are expecting, if you have gotten any preliminary information from them and how that might affect the back half or the rest of the year cash flows and your thinking about these days claims payable you are running?

Yes, so relative to the 3Rs, we really don't think that we will get as an industry real quality data until early third quarter, most likely in the July timeframe.

The question will we get it prior to 2Q earnings where we will have an opportunity to reflect that.

That being said, we are using the Wakely data and other information that we can find available and we continue, we believe, to reserve toward the more conservative end of a range of outcomes.

We hope that proves to be the case which is a reflection of why our DCP is also continue to be at an elevated level and the impact of those.

It is important to recognize though that there is a combination of DCP being impacted by just strong reserves.

The 3Rs in and of themselves do not necessarily reflect NDCP so we think we have conservatism beyond what is in the DCP at this point in time.

Relative to cash flow, our outlook does assume a payout relative to the expectations we booked at so far.

So again to the extent that that proves to be conservative, we would have upside both in our outlook and our cash flow.

But I do want to reiterate there are a lot of moving parts on the 3Rs and a lot of data that is not in our current custody and we're going to need to get the actual data from CMS to be able to finalize any estimates.

Okay, great.

Thanks a lot.

Josh Raskin, Barclays.

Thanks.

Good morning.

Just want to talk about the Membership trends.

I am curious, the additional 200,000 lives on the ASO front that maybe just some color as to where that is coming from.

Is that in group growth or is that better sales?

And then it looks like you are expecting membership to actually trend down the rest of the year.

I don't know but that is exchanges or if there is something there.

And then I guess part C of my one question is just any expected impact from the Assurant sale and what you see in the market from those guys?

Good morning, Josh.

Relative to the ASO, it is a combination of mostly in Local Group so we are winning new accounts in Local Group.

We obviously had already assumed significant membership growth in our guidance regarding National Accounts but we are being successful in the markets.

There is some in group change but I would say it is a much smaller impact of the membership beat than it is actual new membership wins.

So we are definitely encouraged by that.

We have the membership trailing down though in the back half of the year primarily due to the exchanges.

We saw last year that a lot of the enrollees after Q1 actually migrated down throughout the year.

We took a conservative posture in our guidance last year assuming that would be the case and that in fact played out to be the case.

So we are going to assume a similar trend this year which is a lot of the membership comes in heavy in Q1 and then as the year progresses, it slowly ratchets down.

Relative to the Assurant, which I know many of you probably saw last night, I would just say this, Josh, that this is the trend that we thought would be occurring regarding the public exchanges and I think we have been fairly vocal that we think that companies have to not only be local to get the cost of goods sold advantages they need but they have to have significant depth and you need to have national G&A leverage to be able to comply with the MLR rules.

So I think these opportunities are going to become more and more as this environment has the 3Rs go away and from our perspective we plan to be a participant in that membership as it becomes available.

And they just a quick one, Wayne.

Josh, this is Joe.

I just want to add on to the nice commentary Wayne provided, kind of small wrinkle is the Small Group which we are going to continue to see declines in membership as we expected something north of 100,000 lives.

So I just wanted to bring that in because last year we had a decline that escalated a little more than we had originally forecast and I think this year we are expecting continued decline albeit maybe not as aggressive.

Okay.

And, Wayne, I think you said in the release that DPRD was a little bit higher than expected.

Was there a P&L impact that didn't get replenished?

Regarding prior period, we did not, while it was slightly better than we expected, we believe we have reestablished all of it within the balance sheet as of March 31 and we think the DCP would be a good idea to point to in terms of that strength.

It did come in better.

That generally bodes well then as well as you know for underlying trend our pricing is assuming a higher level than what we actually saw come through but we do believe we have reestablished it at March 31.

Okay.

Thanks.

Scott Fidel, Deutsche Bank.

Thanks.

Just questions on the Medicaid side.

First, maybe if you can just flag some of the markets that you referenced where you are seeing the particularly favorable medical cost trends and how that is playing out maybe with some of the four requirements in those markets?

And just unrelated follow-up would just be interested in -- I know it is a small market for Anthem overall but your thoughts on the Kentucky Medicaid re-procurement and how much rebasement in the rates you think could occur as a result of that?

Thanks.

Good morning, Scott.

Let me first talk about the Medicaid and where we are seeing the positive trends.

To be candid, I would say that we are generally seeing it across the board.

This appears to be a muted trend versus expectations.

All markets are performing well relative to our expectations.

We continue to have states such as the state of Florida where we assume that the extension that we would have a much higher MLR, that proved to be the case.

We are looking for continued improvement in that market versus the pricing environment but we are expecting rates that will be much more commensurate with what we are seeing in the actual underlying trends in the state of Florida.

The last thing I would say is regarding Kentucky Medicaid at this point, we are happy with the re-procurement, we think it will give us an opportunity for a bigger piece of the pie than what we initially got with our entry into the market last year.

As you know, the rates are an evolving process so more to come on that is what I would say.

But generally speaking, we are very encouraged not only at the re-procurements that are out there because we think we have a chance not only of retaining but growing but the significant pipeline that Joe highlighted earlier on in the dialogue today.

Okay, thanks.

Chris Rigg, Susquehanna Financial Group.

Good morning.

Thanks for taking my questions.

Just wanted to see if you guys could provide any color with regard to public exchanges enrollment and how or if utilization has changed amongst those members sort of year-to-year, people that you have had enrolled for 15 months or so whether there has been any material difference between how they have used the system versus people that are more traditional to the healthcare system?

Thanks.

Chris, let me first start by saying that generally speaking the demographics this year on a blended base versus a year ago are just slightly younger so I would say all things being equal, things are playing out relatively similar to what we had expected in the prior year.

I would say the volume though is not what we had expected.

So if we were to point to one area where we were anticipating more volume than we actually got it was in the public exchange arena and we think that is going to result in an interesting dynamic as the year progresses on what lives shifted to where in terms of a new lives that came in and what implications that may have on the 3Rs.

That being said, I would say that it is still early in the 90 days and remember a lot of these members last year because of the exchanges not operating effectively in Q4 really didn't come on until late Q1, early Q2 and so they started to burn through their deductibles early on in that period, more on the Q2 timeframe versus this year it is in the Q1.

So it is too early to really make a declaration if the trends on that previous membership are improving this year.

That is part of the reason for us maintaining our current trend outlook.

Okay, great.

Thanks a lot.

Christine Arnold, Cowen.

Could you talk -- I know you're not giving guidance for 2016 but could you give us broad strokes kind of how you see things playing out?

Is there still opportunity to improve the public exchange margin from here?

Is Medicare Advantage going to improve?

How do we think about the duals versus Medicaid and Small Group?

How do we think about kind of pluses and minuses for next year?

I will take a run at it briefly and then let Wayne jump in.

But just to underscore what we said last year and we are continuing into this year, our margin expectation in that space is about 3% to 5%.

We see no reason that that would change through the balance of the year even going into next year.

I think a driver going into next year is the fact that we are going to see this marketplace stabilize in the sense that other players are going to gain more experience.

We have said repeatedly that we believe pricing will probably gravitate toward a tighter band as more plans become -- getting better experience at the membership they are pricing.

So our sense is that this market will evolve by way of maturity and we think stabilization will certainly play to our benefit in terms of membership capture going into 2016.

To add to Joe, Christine, I agree with everything Joe highlighted and I think it is just important to recognize what makes 2016 so unique is that it is the first year with no meaningful headwind.

We don't have an increase in the health insurer fee in 2016, our Small Group attrition will have meaningfully run its course by the end of this year in terms of the [opting] impact.

So as we move into next year, we don't have a meaningful headwind to point to but we do expect a tailwind from public exchange growth with stability in margins.

We do expect growth in National Accounts.

In fact, we are already logged and locked into significant accounts that will be north of $100,000 in growth already and we are still in the midst, early in the selling season for National for next year.

We expect Large Local Group growth as well.

Medicaid, not only the expansion of margins in those states that are not at our targeted margin levels but at the same time we expect more membership to continue coming with all of the RFP procurements.

We do expect meaningful EBITDA improvement in Medicare starting in 2016 as the first year of the meaningful improvement in our multi-year.

And then finally, we expect capital deployment to still play a factor in our EPS growth, not as meaningful maybe as it has in the past but to really start seeing our investments paying off on the top line in the operating earnings growth.

Great, thanks.

David Windley, Jefferies.

Good morning.

It is Dave Styblo in for Windley.

Thanks for the questions.

Wanted to come back to A.J.'s original question about the cost trend and actually take it a step further and translate that to EPS.

With you guys beating by $0.45, $0.50 at least relative to the Street, how did that compare to what you were expecting?

And then I also know you mentioned there was some benefit of timing related to the Local and Individual medical cost experience.

Can you quantify how much that was and at the end of the day I'm just trying to get a better sense of why the guidance increase was only $0.20 versus something that perhaps might have been better than the 1Q out performance.

Let me first point to a few things.

We had previously highlighted that we expected first-quarter to be the highest quarterly earnings level for us.

That being said, we did obviously outperform on a run rate basis our own expectations.

And so at the same time as we saw last year there was a significant amount of uncertainty around the 3Rs and how the membership mix would come into play.

We believe that uncertainty is real and will continue through 2Q.

If that plays out to be better than expected we would consider raising more.

But at this point in time we felt comfortable and confident in the $0.20 raise with good line of sight.

And again as more time pans out, we will see where that goes.

But as I said early on in the call, if cost trend stays where it was at in Q1 we could have much more out performance than we have guided to at this point.

But again, it is 90 days into the year, it is a little early to declare this.

Sure, that is fair.

Just a follow-up on the Medicare margins, you talked about that in 2016 as an opportunity to expand.

What is your overall book of margins and how much or at least how much further margin expansion potential is there to get to your targeted range over the next two or three years, whatever that might be?

We believe a more sustainable margin in Medicare is around the 5% range and we are several points below that on a sustainable basis so I would view it as several points to go on a book that is also going to be growing over time.

But I would remind everyone that that is over a multi-year period as we get more of our Membership into the four-star rated programs.

I apologize if I missed.

I was actually referring to Medicaid.

I'm sorry, on the Medicaid.

On the Medicaid front, we generally think still 3% is a targeted margin that you would want to be participating in over time.

We continue to perform well in many of our markets at our targeted margin levels but I would tell you we have markets that -- new entry markets that are performing below that level.

And so we have opportunities not only to improve those markets, Florida being one of those but in addition to that, and Kansas being another one.

But I would say in addition to that, the RFP topline is meaningful and just keep in mind that with the RFPs, individuals generally bid closer to a breakeven in year one and then you ratchet it up over multi-year period to your target margin.

Okay, thank you.

Matt Borsch, Goldman Sachs.

Yes hi, good morning.

I thought maybe we could just go back to the enrollment trends for a minute and maybe talk about what you saw, I think you said 96,000 down in the Small Group.

And given your knowledge of the customer base, what is giving you confidence that we are reaching the point where that is going to stabilize and you won't see more attrition?

And to the extent you have had some (inaudible) time now, do you see that -- where do you see that enrollment going if coverage drops to the ACA exchanges, Medicaid or other places?

Real good question and I want to clarify a point here that the stabilization is not so much in the membership of Small Group.

We may see it attrit much more.

Stabilization is in the margin fungibility between Small Group and public exchanges.

As you know our goal was to build the biggest catcher's mitt we could build so that whether a member was in Medicaid or public exchange, Small Group that we would have the ability to pick them up in whatever market.

And so we are seeing what I would say a much bigger headwind in EBIT that has been coming down between last year and this year versus the actual membership.

So you may continue to see Membership in Small Group attrit but that just recognize that we are now getting closer to a targeted margin whether they are in the exchange or Small Group or Medicaid that we would be comfortable with it.

Sorry, just a follow-up on the Larger Group side, what are you seeing there in terms of -- is it continued preference particularly in the middle market at least out in the margin for self funding given the added burden of the ACAC that has now increased for this year?

We are still seeing the self-funded be the preference on the Larger Group side but I will tell you as the private exchanges are growing and still small but more than doubled in the last year, we are starting to see some accounts move from self-funded to fully insured.

Not many yet but the early trend is starting to occur.

So again, I think as we get closer to 2017 and the Cadillac tax, that may potentially be an accelerator.

Great, thank you.

This is Joe.

Just to underscore, you recall last year we were talking about a private exchange membership enrollment of about 100,000 lives and we certainly have seen that grow this year not substantially but certainly the pace has picked up that gives us some line of sight to Wayne's point that we believe that there is probably an escalating interest in private exchanges.

So we are very mindful of that and we are building our platform to adapt to that shift and as we consistently stated, we will be ready when that inflection point occurs and there is quite frankly a very quickened pace toward private exchanges which we believe will occur in the coming year or two.

Thank you.

Kevin Fischbeck, Bank of America.

Great, thanks.

A question on the public exchanges.

So I guess you are booking a risk corridor for 2014 but not for 2015.

Does that imply that maybe you outperformed your margin target there in 2014 and expect a little bit of pressure in 2015?

No, I wouldn't necessarily view it as that.

We had a very de minimis risk corridor though in 2014.

We achieved our targeted margins.

We had a little bit of a receivable that we'd booked a valuation allowance on it.

We had obviously a payable as well.

The net of the two is a net payable but not meaningful.

And I would just say that as we priced for this year we were trying to price at a level that would be commensurate.

We didn't see much value in contributing money into a kitty at the expense of consumers not getting the best price available in the market.

Okay, but it sounds like you maybe were at the high end of the range and now you are pricing to the normal margin, is that they way to think about it?

Again, I would say the corridor last year was so de minimis that we are still at high end of a range.

Okay, and then just to clarify a comment you made on the private exchanges, you said I guess 35% of the membership that you got was new to you.

But I guess did you see net enrollment growth there because I guess your customers would have contributed some membership into the exchanges as well.

So trying to figure out whether there was a net addition?

On the private exchanges, yes.

Yes, we saw enrollment move from around just north of 100,000 at the end of 2014 to over 280,000 at the end of the first quarter of this year so about 180,000 member growth almost, both a combination of new membership as well as conversions.

But I guess I'm just wondering if you had customers representing 300,000 members that moved into the exchange getting 200 plus is actually a net loss.

So I am just trying to understand if you have that number whether overall it was a net win for you?

It was a net win.

About 35% represent new members to us in the exchanges.

All right, thanks.

Andy Schenker, Morgan Stanley.

Just first a housekeeping question following up on the last one there.

So the true ups on the 3Rs related to 2014, did they actually have an impact in the first quarter here or was there actually some slight negative impact on the MLRs related to that?

Very de minimis, very de minimis.

We took advantage of some new data and did a slight strengthening on the risk adjusters but again very de minimis to us.

Okay, so nothing meaningful going on.

No one has asked yet, I guess I will.

Given the close of Simply Health in the quarter if you could just remind us on our outlook here for capital deployment and your thoughts on M&A.

Thanks.

Well, as you know, we funded Simply Health with cash on hand which we were pleased with and bought back more than 2% of our stock in the quarter.

We still expect for the full year to deploy between $2 billion in $2.5 billion in the form of buybacks as well as continue to pay our annualized dividend of $2.50.

And we still believe that will leave us with some flexibility to parent north of $750 million of excess cash which we like to maintain to have flexibility for tuck-in M&A along the way.

Thanks.

Peter Costa, Wells Fargo Securities.

You mentioned you expected a strong selling season for 2016.

I think that was in relation to the Commercial business.

Can you put a little bit more clarity on why you believe that this early in the season and also how you contrast that with your view of the expanded use of private exchanges by large employers?

One of the things is we obviously at this point in time have line of sight on those large national accounts that are choosing to take their business out for either renewal or for new opportunities for us.

The reasons for that is that at this point in time if the RFPs have come out is that they have to make decisions generally by midyear so that they can implement the new accounts by the end of this year so that they have a January 1 effective date.

So at this point, we have been very pleased with what we are seeing in the early selling season.

We have already locked in two meaningful accounts that are new to us, net new accounts to us and again, we would like to think that we could have a similar close rate as we did last year which was almost 50% success rate on new business.

So again early but feeling optimistic.

One of the things I would highlight though that we think has lended itself to our success is that over the last several years for year one, we have had the ability of offering a zero trend guarantee and simply put what we are finding is that our customers in year one are actually getting negative trend and continue to get negative trend that our cost of goods sold advantage on a national basis is so meaningful that anybody that switches to us that we can generally show them in year one that they will actually have their cost go backwards.

And that continues to be the case.

We have not paid any performance guarantees in three years or on that zero cost trend guarantee and that gives us a real unique advantage as we go after national accounts.

And I think you asked a tagalong question about the exchanges, private exchanges and we don't really see that having any kind of material impact on shifting Membership capturing like National Accounts, etc.

As Wayne said earlier, we have seen a net add related to private exchange uptake and it is still modest.

Let me just underscore, it is modest.

But we are going to be very vigilant going into the year to determine how much more positioning we ought to establish relative to the growth of private exchanges because we do believe it is coming.

But again, it is not having any material impact on our Membership capture going into 2016.

Just as a tagalong to that, one of the weak points this quarter was the Group Medicare Advantage business which shows up as Commercial business for you guys.

Can you talk about what you are doing to shore up the Group Medicare Advantage business or do you think that is just going to migrate to Individual business going forward?

Keep in mind that with the state of Georgia procurement that we won last year as you know, the state was required to make a decision to bring in more competitors and so we made a decision to actually lead the group MA business in the state of Georgia.

So I think that is distorting the actual results of our performance was the exit from the state of Georgia account for purposes of group MA.

But we plan to be a participant in the Group business going forward.

So you view that as still an ongoing strong product for yourselves going forward and for everybody?

We do, we do.

Okay, thank you.

To make it clear, I guess we can say that Georgia was an (inaudible) we believe.

Thanks.

Ana Gupte, Leerink Partners.

Thanks, good morning.

I wanted to follow up on the commercial questions.

Your operating margin expanded by 440 basis points to quite a remarkable 13.5%.

What I'm hearing you say is you are still seeing continued margin compression in Small Group.

As I had understood last year, your Individual margins on the [op] exchange had expanded.

You did not allude to much pressure on the public exchange side.

In fact it seemed like it was generally profitable from the get go.

So it sounds like comps would have been tougher there.

So what is exactly driving so much margin expansion and is it hepatitis C or weather?

It doesn't sound like it is [DCP] so is that sustainable?

Thank you, Ana.

The one thing I would remind everyone though is last year in Q1 we had very little visibility on any public exchange membership.

As you know, that membership came in in late February, March timeframe, a lot of it came on in April because they extended the open enrollment period and we maintained very conservative reserves a year ago in Q1 for the unknown.

So if you looked at our DCP a year ago, you will see that it actually ratcheted down as the year went down and we got better visibility.

So some of the profitability that we saw last year in Q3 and Q4 with hindsight really belonged in Q1.

And it is also important to recognize that deductibles are being met in Q1 of this year versus last year they were being addressed in Q2.

So I think you will see those margins come down as the year progresses.

We clearly will not maintain that level of margin but when the year is done, I think we will still have a very strong year-over-year margin of high single-digit, low double-digit range.

It sounds like public exchanges.

Okay, follow up on that then on the public exchange membership growth, where did you see the most competition if you will?

Was that more from new membership on uninsured or was it retention of your existing Small Group or existing 2014 exchange membership?

What is interesting is we found the business to be fairly sticky so we think the year one strategy was the right strategy and the existing business remained fairly sticky.

We did not garner as much business as we had expected on the new lives coming in.

Again, we grew but not nearly at the level we had anticipated for a couple of reasons.

One is we still have not seen the co-ops necessarily shore up their pricing to the levels we believe are going to be necessary.

And we had anticipated they would shore up a bit more going into this year but that in fact did not occur.

So there are markets and I think you can view those markets like a Kentucky and a Colorado and other areas where we are impacted by the co-ops.

But generally speaking, we would say the large national players publicly traded companies seem to be pricing fairly rationally and so it is more on the co-op side that we saw the pricing that we are willing to wait it out on.

Very helpful color, thank you.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

I may have missed this.

Did you talk about the ASO book and what drove the higher enrollment guidance and how much is being driven by new wins versus conversion of risk?

And I guess is it your sense that more mid and smaller employers are contemplating sort of shifting to sell funding in part to avoid the industry fee or do you think we are past that point?

Ralph, we highlighted briefly at the beginning just the idea that the stronger enrollment was really around new Local Group membership wins.

Very little was due to in group change.

So just new wins in the market continue to be successful across our many segments.

I would say the ASO trends have stabilized.

As we said earlier, we are starting to see even in the private exchanges that people are starting to migrate to fully insured.

Again, it is small but in general it seems that the ASO trends have stabilized and I think the next couple of years with the Cadillac tax will be an important inflection point to see how the markets respond.

Okay, that is helpful.

Just on that private exchange and the shift.

In your opinion I guess going forward, do you see that migration to private ASO exchange or private risk exchange?

I think it will be a little bit of both.

Right now it is about two-thirds on an ASO basis and about one-third is on a fully insured.

The thing I would say is any member that moves from ASO to fully insured, while lower margin is better cash flow so it is all what you believe is the most valuable input but from our perspective we prefer the cash flow.

And I guess just on that point, if it is sort of ASO to ASO, can you talk about the dynamics of the economics or the profitability of that?

Is it fair to assume that given the greater competition that that would be somewhat lower in terms of shifting to a private exchange?

Moving from an ASO to ASO does not necessarily change the economics.

Moving from ASO to fully insured does create a cap for the employer more, a more meaningful cap that they can manage over time.

At the same time it does move to a lower margin business which requires risk-based capital associated with it but that lower margin generally still generates two to three times more cash flow on a per member per month basis than you would have otherwise generated in ASO.

So it is a little more capital intensive if they switch over but in the long-term it generates a lot of cash flow which gives us more flexibility in terms of investing in our business and in M&A.

That is helpful.

I guess I was just talking more about ASO to ASO.

So you are saying the profitability on that would be similar.

I would have just assumed when you are moving to private ASO there could be more competition in there that maybe would drive the economics of that business lower.

Is that not the right way to think about it?

I think it is fair to assume that that would be the case but I would say because of our COGS advantage we think we can show a value proposition that allows us to maintain comparable membership and margins.

Okay.

Thank you very much.

At this time we have no further questions in queue.

Please continue with your closing remarks.

Thank you for your questions.

Great having you on the call today.

We are pleased with our first-quarter performance and our updated outlook for 2015.

I want to thank our associates for their efforts in advancing us toward our goals of increased provider collaboration, cost of care management and consumer centricity.

We believe our efforts will help drive greater affordability and access to quality healthcare for our growing membership base.

The [growth] of our business was apparent this quarter as we added 429,000 Medicaid members, 371,000 National members and 102,000 Individual members and 82,000 Local Group members.

In closing, I would simply like to say we look forward to speaking with you at upcoming conferences and events.

Again, thank you for being on the call today.

Thank you.

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