Humana Inc (HUM) 2002 Q1 法說會逐字稿

Good morning. My name is Melissa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Humana's first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. and questions will be taken in the order they are received. If you would like to withdraw your questions, press your pound key. Thank you. I would now like to turn the call over to Miss Regina Nethery, Vice President of Investor Relations. Miss Nethery You may begin.

Thank you. And good morning, everyone. We appreciate you joining us this morning for a review of Humana's first quarter 2002 performance and an update on our earnings guidance. This morning's call and virtual slide presentation are being recorded for replay purposes that replay will be available approximately 2 hours after the conclusion of this call on Humana's website, humana.com. I'll begin by reminding everyone of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. All participants in this conference call are advised to read Humana's press release issued this morning as well as our form 10-K for the year ended December 31, 2001, as filed by Humana with the Securities and Exchange Commission. Our form 10-K contains detailed discussions of important risk factors. Today's call includes a question and answer session for industry analysts. But we encourage the investing public and media to listen in. And now I'll turn the call over to Humana's President and Chief Executive Officer, Mike McCallister.

Good morning. We'd like to welcome those participating in today's call both over the phone and via the internet. With us for this morning's call are James Bloem, Senior Vice President and Chief Financial Officer; and Art Hipwell, Senior Vice President and General Counsel. Today, Humana reported its first quarter 2002 Financial results of 28 cents per diluted share. That includes 8 cents per diluted share related to the cessation of goodwill amortization under the new accounting rules that became effective for all companies on January 1 of this year Excluding the 8 cents per share, we picked up as a result of the required accounting change. Our earnings are up 25% over our reported earnings for the same period in the prior year. At several points in this call, we will refer to adjusted numbers. To clarify, adjusted numbers are those we reported in 2001 adjusted to reflect the impact of the new goodwill accounting, allowing for an apples-to-apples comparison of 2001 and 2002 numbers. Our pre-tax margin continues to improve nicely now at 2.5%, a 30 basis point improvement over the prior year's adjusted pre-tax margin of 2.2%. By the fourth quarter of 2002, we expect our pre-tax margin to be around 2.8%. Our first quarter MER of 83.1% is 10 basis points more favorable than the 83.2% we experienced in the first quarter 2001. We were pleased with this progress, especially given the shift in our mix of fully insured, commercial medical business to a heavier concentration of large group members. Remember that the large group business which now accounts for over 60% of our fully insured, commercial medical membership traditionally experiences higher medical cost trends than does our small group business. Our commercial medical membership increased sequentially by over 60,000 members during the first quarter and for all of 2002, we now expect to achieve a year-over-year increase in our commercial medical membership of 3 to 3.5% as our sales efforts continue to bear fruit. Customers continue to recognize the benefits of Humana's concentrated focus on the three elements of our strategy; product design, process design, and information technology. These strategic components translate into a value proposition that will drive enrollment growth. Employers are looking for health plans that can provide solutions to the biggest issues they face; Rising health costs, the complexity of administering health plans for their employees, and employees who want health plans with expanded choices. Our SmartSuite product design answers each of these challenges for large group employers and are adaptable to both a fully ensured and an an ASO environment, allowing employers to choose the method of financing which they are most comfortable with. We provide similar solutions for the small group employers through an array of offerings including both low cost and digital health plans. All of our health plans are supported by both award-winning, information technology capabilities and by increasingly recognized service excellence. Our customer service and information technology teams work in tandem to ensure we keep the consumers' needs in the forefront as we redesign operational processes using technology. We made the decision a couple of years ago to invest in technology that could provide meaningful and actionable information, not just content, to our customers and providers. The result is adoption rates that are just beginning to take hold. For our customers, our user-friendliness is confirmed by the growth rate in our transactions being handled via technology as opposed to human interaction. In March of last year, only 6% of our members customer service transactions were handled through interactive voice response or via the Internet. By the end of this March, only year later, we were handling over 26% of our members' inquiries through these technologies. Providers can and are simplifying their administrative processes through online interactions with Humana. During March, 2002 alone, approximately 60% of provider inquiries were handled electronically, allowing them to reduce the waiting time for routine inquiries and giving health professionals more time to spend on patient care. This percentage is nearly double that a year ago. The number of providers registered through the provider portal at humana.com continues to increase substantially as these groups begin to take advantage of other web-based capabilities such as access to referral authorizations, certificates of coverage and if authorized by members, claims histories. We also made a decision sometime back to focus specifically on a provider portal joint venture with Blue Cross/Blue Shield in Florida called Availity taking advantage of the combined breadth of our networks and transaction volume within that state. This targeted effort gives us an edge in advancing adoption rates allowing us to take the lessons learned from that venue and transfer them to other parts of the country. We're already seeing 15,000 electronic transactions submitted per day through this portal from over 1,000 of the 35,000 providers in Florida. While it's still early, this volume compares favorably against the other provider portals including multi-state ventures. The take-away is providers will and are adopting and even embracing technology solutions to the administration of their relationship with us. Turning to our Medicare+Choice business, we continue to demonstrate our strength in this line of business. Actuarially, there's the headroom to adjust benefits by at least 20% in counties that represented approximately 60% of our Medicare+Choice revenues. We also have as much as 15% benefit adjustment capacity in several other counties. Consequently, through a combination of operational expertise and actuarial precision, we will be able to continue to offer these high-value benefits to seniors through this profitable program. Our Tri-Care line of business also continues to perform well and the Tri-Care for Life program began catching on with military retirees in this most recent quarter. Jim will speak to the impact this had on our financials in just a moment. With respect to the remaining line of business in our government sector, Medicaid, some of you have asked about our exposure to state government budgetary cuts. In response, I point out that this company is clearly not Medicaid dependent. Our exposure to this line of business is primarily limited to one geographic location, Puerto Rico, and its financial performance, while profitable, is not material to our earnings. In closing, Humana is well positioned across all lines of business to meet customers where they are. We are pleased with the first quarter's results and believe those results are only a preview of the type of performance that Humana is positioned for in the future. To that point, we will be hosting an Investor Day in New York City on September 25th of this year to share with you additional details with respect to both our progress over the last couple of years and our vision for Humana's future. We'll be sharing more details regarding our investor conference with you at a later time but invite to you mark your calendars for this day with Humana's management team. With that, I'll turn the call over to Jim Bloem for a more in-depth review of our financials. Jim.

Thanks Mike and good morning everyone. As usual, let's begin our review of the financials with a look at the cash content of our operating earnings. EBITDA, or earnings before interest expense, income taxes, depreciation and amortization, grew to $103 million in the first quarter compared to $88.1 million in last year's first quarter. Our EBITDA margin of 3.8% in the first quarter was 20 basis points higher than in the same period a year ago. We are pleased with the continued improvement in these important measures of earnings strength and quality. Turning to the segments, I'll begin with our commercial business. The more than 60,000 net new medical members for the first quarter is the solid start toward the 3 to 3.5% increase we expect for the full year in combined fully-insured and ASO membership. The bulk of the remaining commercial medical membership increase for 2002 should come during the third quarter with immaterial movement expected in both the second and fourth quarters. Those familiar with Humana will recall that the first quarter of each year is when most of our larger groups of commercial prospects and customers select and renew their carriers, while the third quarter is the second most prevalent time for those events. The mixed shift toward a higher percentage of larger group fully-insured medical members did in fact occur as we anticipated. Nevertheless, the actual metrics we used to monitor the risk mix of our commercial business have not deteriorated as might have been expected with more fully-insureds. Actually, these actuarial metrics improved slightly. Our commercial medical cost trends for the first quarter came well within the 11 to 13% range we had projected. And we continue to feel comfortable with this guidance for the full year. We also continued to project total commercial premium yields of between 12 and 14% for all of 2002. Our ability to maintain pricing discipline while achieving sales and membership growth is reflective of the value of our product designs and service excellence. Our first quarter commercial segment pre-tax margin improved slightly. Reaching 1.8% versus 1.7% in last year's first quarter. For the year, we expect the pre-tax income from this segment to be at least $60 million, nearly double last year's pre-tax income of $31 million. Turning now to the government segment, as expected, our Medicare+Choice business maintained its margins with premium yields and medical cost trends for the first quarter each coming in between 6 and 8%. For the remainder of 2002, we're expecting both premium yields and cost trends of 5 to 7%. Our membership levels for the Medicare+Choice business also are in line with our previous guidance and now total 364,000 members. We expect some attrition for the remainder of the year ending up at between 345 and 355,000 members. Turning to Tri-Care, as Mike stated earlier, the Tri-care for Life program has begun to ramp up as military retirees are increasingly recognizing the benefits associated with this new program which began in October of 2001. It's useful to remember that we administer this program on an ASO basis and, thus, we do not retain the medical risk associated with these benefits. During the first quarter, our receivables for administrative service fees with the new Tri-care for Life program increased somewhat as we accrued for - accrued for amounts consistent with our discussions with the Department of Defense. Based on these discussions, we anticipate collections of these receivables later in the year. Turning to the selling, general and administrative expense line on the income statement, our never-ending search for ways to improving efficiencies has allowed us to hold our sequential increase in the SG&A ratio to only 20 basis points despite sequential increase in the percentage of ASO members. Our ASO membership now constitutes 25% of our total medical membership. The year-over-year increase in our total SG&A dollar spending is entirely attributable to the increase in our ASO business. Salaries, benefits and I.T. spending were each slightly lower. The quarter-over-quarter increase in total SG&A dollar spending was also primarily attributable to the increase in ASO related expenses as well as those variables selling costs which are associated with greater revenue. We continue to forecast our full year SG&A ratio will be between 15 and 16% as the percentage of our revenues derive from administrative service fees continues to increase throughout the year. Looking at our earnings guidance, our earnings guidance for 2002 continues to be between $1.15 and $1.19 per diluted share. We are forecasting our second quarter earnings to be 26 or 27 cents per diluted share an operational increase of between 20 and 27% over the prior year's second quarter reported results. Switching to the balance sheet, our debt-to-total capitalization ratio has now declined to 26.9% versus 27.8% at December 31st and 29.7% a year ago. Our debt-to-total capitalization ratio is now the lowest it has been in about five years. Total interest-bearing debt was approximately $570 million at March 31st. In light of our improved capital and surplus position, Standard & Poor's recently affirmed our investment grade credit ratings and revised upward its outlook rating from negative to stable. Looking at cash flows, we particularly are pleased with our cash flows from operations this quarter. After giving effect to the usual adjustment for the timing of the receipt of the CMS premium payment, our first quarter cash flows provided by operating activities were $76.5 million, compared to a use of cash in operations of $75.1 million in the first quarter of 2001. Based on this $151.6 million year-over-year improvement, we are raising our 2002 guidance for this important financial operating measure to at least $300 million, which would be an 81% increase over the $165.8 million that we generated in 2001. In summary, our solid first quarter results are further evidence of an effective team effort by all Humana associates to consistently implement our strategy of innovative product and process designs aided by technology that Mike described earlier. These efforts continue on a daily basis, giving us confidence in both the attainability and sustainability of our forecasted improvements. Improved performance that we expect to provide corresponding benefits for our shareholders. I join Mike in looking forward to seeing many of you at our Investor Day conference in New York City on September 25. Please mark your calendars now.

And now we'd like to open the phone lines for questions from industry analysts. Operator, would you please introduce the first caller.

At this time, I would like to remind everyone in order to ask a question, please press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. If you have -- if you are on a speaker phone, please pick up the handset before asking your question. We'll pause for just a moment while we queue the roster. Your first question is from Roberta Goodman of Merrill Lynch.

Thanks. I was wondering if you could describe the magnitude and the nature of any benefit buy-downs on the commercial business and then I was -- I have a follow-up, too.

Okay. Again, looking at our buy-downs, as you know, the mix shift that we have had has been toward -- more toward the larger group business. Nothing has really changed dramatically on buy-downs. We don't -- we don't make behavior assumptions -- we don't make behavioral change assumptions when we do our buy-downs or when we take buy-downs into account, so pricing discipline continues to be our watchword here.

Okay. But how many basis points would that have been that you were talking about the 12 to 14% net? What would that have been before the buy-downs?

Generally, we don't give that information.

Okay. Could you describe in any way the types of changes that you are seeing in -- in the nature of the benefits, are employers upping their deductibles, moving co-insurance, moving to tiered benefits? Could you give any flavor on that?

Roberta, it's all of those things and it really depends on where they're at. We're seeing deductibles climb. Deductibles are really going up in the small group sector, of course. We're seeing that as well in the large group. But we're actually pushing very hard around the idea that -- that they need to deal with our co-pays and sort of the costs as their people move through the system because that sets the stage for behavior modification down the road so we as a company are pushing the idea that -- that cost sharing at the time of service is where the strategy ought to be for the employer.

Okay, great. Thank you.

Your next question comes from Josh Raskin of Lehman Brothers.

Hi. Thanks and congrats on the quarter. Quick question on the membership gains. It's, you know, obviously adding a few more [items I anticipated] this quarter. Can you talk a little bit about if there were specific geographies where were you seeing that? And then maybe which areas you think you're taking share from? Is it some of the other national competitors or is it, some of the local provider-sponsored plans, et cetera? Any color there would be helpful.

All right, Josh. First of all, we've been talking for some time about how we were getting in the ASO business basically for the first time. So some of this is just competing in a market segment. We were really not involved with much historically. So... You see some traction there. The growth is clearly coming in those markets that we are focusing on as -- as core markets for us. And we've used that language in the past so I hate to do it again. But basically, those markets where we have the combination of market share, which will drive provider pricing and name recognition all the basic components. So it's the, its the top 10 markets that we're in where this growth comes from.

Okay. Now, that's helpful. Then I guess on the risk side, any sense of sort of any geography-based gains there?

No. That's mixed across the board. When it gets down to -- I assume you're thinking -- where we take risk as opposed to the self-funded business, is that the question?

Yeah, yeah.

There is not a lot of difference in these markets when you talk about that. Really, it gets down to size. Obviously, the larger companies are in a very relentless way moving towards self-funding. The smaller companies are clearly in the fully-insured category. So, you know, you can look at the local economics of any community and see where that's going to go. But it's -- the issues are the same everywhere. All the employers are really suffering under these premium increases and the rising costs, whether they're self-funded or not. And they're just make the calls by the one. So it's -- it's market-specific but I don't see anything that would -- inside of our growth numbers that would say that one place is materially different than another.

Okay. And then just one separate question. On the cost trends it sounds like everything was running 11 to 13 in line with expectations. Were there any specific components that were out of the range, be it positive or negative, or was it all pretty much in line when you drill down further?

We've shared that with you in the past. There's been no major changes at all in that. The components are remaining steady.

Okay, and more importantly in line with expectations?

Yes.

Okay. Thanks, guys.

Your next question comes from Jim Lane of Salomon Smith Barney.

Good morning. Congrats on the quarter. I had a question about cash flow and hopefully get a little more color on cost trends. On the cash flow, right, I think you mentioned $300 million was the number you were expecting from cash flow and a guess that's a normalized number. Can you give us a prior guidance number? It sounds like you raised that and also if -- do you have any color on how we sort of, translate that into potential dividends out of your operating subsidiaries this year on a net basis? Kind of a follow-on if that's not three follow-ons. Thanks.

Okay. No, you're right. We have -- we are raising our guidance from 250 to -- to at least 300. And again in looking at it as I described last quarter, we have sort of a sequential set of steps that we need to go through. We obviously need to make sure that we maintain our standing, our investment-grade standing with the rating agencies and we've been working through that. We also need -- we also are subject to continuing shifts and continuing regulation by each of the departments of insurance. And so we -- and we are working through that. Our statutory surplus probably won't change much. We are computing that right now for the first quarter. So again, looking at all those things together, we then take the dividends from the subsidiaries that -- that we're allowed to take and then we give a projection about free cash flow -- or free cash at the parent. And free cash we guided last quarter -- we said that that was around 200 and that we were going to continue to monitor the process through this quarter and then when we give the second quarter results in about 90 days we'll talk about all these things and where they settled out.

Okay. Just to clarify the free cash number you gave, is that at the parent company or is that free cash you expect to be received by the parent company this year?

The second one.

Okay. Thanks. On the -- on the cross trend front, Mike I think you have mentioned you have given these in the past. Could you remind us of what your various trend components are, whatever you're comfortable giving those.

Jim has, I think. Hang on a second.

Okay, again, it's useful to look at the hospitals, the physicians, and -- and pharmacy. When we look the relative weight of each of these, the hospitals and the physicians are each about 45% of total medical cost, and drugs or pharmacy is about 10%. And then it's useful beyond that to sort of break down with between let's say Medicare and the commercial business, because they're slightly different, obviously. In the Medicare, we had just said that we completed a quarter where we had cost trends of 6 to 8 equaling our premium yields. And there, the hospitals are just slightly higher than that range, and the physicians are also slightly higher. But the RX benefits are down substantially. And they really account for the ability to -- to reach the 6 to 8. Looking over at the commercial, the hospitals are -- again, there the cost trend just to remind everybody, was 11 to 13 and we're well within that range. The hospitals were slightly higher than that aggregate trend. The physicians were slightly lower. And as was pharmacy. Again, with the RX3 and RX4, although those were slightly less than they were a year ago in terms of their positive impact.

Okay, thanks a lot.

Your next question comes from Charles Boorady of Goldman Sachs.

Thanks. Good morning. I'm wondering if you could give us some guidance based on where you expect the mix of earnings to come from in terms of government versus commercial and either for the for the full year or just sequentially for the next few quarters in terms of the trend that looked quite strong on the commercial side and though we're not sure how to think of the offset there being not quite as strong as I expected on the -- on the -- on the government side. And I know you haven't given, a lot of guidance in the past on that. Is there anything you can say going forward in terms of the mix to expect of earnings from government versus commercial?

Sure. Again, I think that we don't look at those as related. We look at them as independent businesses. And we run them as independent businesses. We run them each differently for the -- for each of the attributes that they -- that are required in order to make them successful. And if we look at the commercial again, as we said, we're looking for at least 60 million this year versus 31 million of all of last year, really two times. And again, that's going to be fueled by the membership growth that we're also guiding. Again, that's -- that's really what's different than last year. And then on the Medicare side, we -- we had a strong year last year because of the geographic mix shift, and we had a strong first quarter this quarter. But we look at that as, again looking at the membership of 45 -- 345 to 355,000, and the fact that we have the lock-in and the fact that we had a shift toward more profitable markets last year all year that that will remain -- that that will remain steady. But again, in order to guide toward the earnings number that we are you can see that the commercial is where the real growth is coming from.

Charles, you need -- if you look first quarter over first quarter, both segments profitability was up. But I have been telling you all for a long time, obviously, that we're in the process of transitioning ourselves over multiple years into a less Medicare-reliant company. So you are going to start seeing that play out.

And -- and you'd expect the -- for the commercial improvement to coincide with a slight deterioration in Medicare over time?

No. I haven't -- I haven't assumed deterioration in Medicare in anything I have told you so far. If you looked out five years, we can have a discussion around what Medicare might look like. But in the manageable future, which is 2003, 2004, and '05, we -- we expect to be profitable in Medicare and be able to manage -- manage through those changes.

At the current levels of profitability, you think they'll be sustained through '05 roughly?

We haven't shared specific Medicare results, but I can tell you in government as a segment, we expect to hold our profitability levels or improve them.

Fine. Great. Terrific. Thanks.

Your next question comes from Ed Kroll of SG Cowen.

Good morning. Couple of questions, I think they're all on the balance sheet. They're all pretty quick. Jim, what is the target debt-to-total capitalization ratio you're -- you're looking at right now? Where do you want to bring that down to? And -- and does -- I mean, you're upping the cash flow guidance here pretty significantly again. Does payment -- paydown of debt remain the main use of that increment to cash flow in '02? And then I've got a quick follow-up.

Okay. The level -- the absolute level of debt as we said of 530 million at 3/31, is sort of what I consider to be the last -- the last piece of the puzzle. When we look at maintaining our standing with the rating agencies; we look at the department of insurance; we look at where we can invest the money, and then we also in terms of -- to make the company more valuable, in terms of of strategic things, then whatever is left after that is really what goes -- well what could be used for debt reduction. Right now we have a very -- like most people, we have a very reasonable cost-to-debt. And so in looking at opportunities to make the company more valuable through making investment expenditures, we'll look at that and that will be one of the things, but I look at that as sort of the last piece of the puzzle. So the progress that we make on that tends to come after we have looked at the first three things.

So do you have a target for the debt-to-total cap ratio or you just work it --

Actually then -- actually the answer is no, then, because basically we let that solve itself based on the investment opportunities that we have and the cost of capital and particularly the cost of debt capital.

Got it. Okay. And then quickly to follow up. and I'm sorry if you said this when you were responding to Jim Lane's question earlier. At March 31, how much free cash do you have at the parent?

The sum of free cash at the parent plus what we believe we can withdraw in dividends plus what we -- and maintain our standing with the departments of insurance and the rating agencies, is around 200. So that 200 -- that 200 is the sum of all of those things.

Okay. Got it. And then where do -- where do you think the days-of-medical claims trend from here? Do they stay pretty flat at 47 going forward?

We don't expect any major changes there.

Okay. Great. Thanks very much.

Thank you.

Your next question comes from Kurt [Schnackenberg] of Castle Rock Management.

Good morning. I was offline for a bit of this call. So please tell me if this is redundant. But could you please discuss IBNR? Any comments would you like to make on your reserves? Any changes in reserves? And any change in your guidance on reserves?

Okay. We strengthened our medical claims division by about 64 million. And again, that really is in line with membership increase and a growing business. So again, as Mike just said, we don't expect days-in-claims to change much and we believe that our reserves are indicative of the quality of earnings that we have reported.

Thank you.

Your next question comes from Michael Stanski of Tudor Investments.

Yes. Can you just comment on free cash flow? The 300 number is before about 115 million of Cap-x, is that correct?

That's correct. 115.

And we have about 185 adjusted for receipts as free cash flow for '02?

Yeah. Then subtracting 115 from 300, correct.

Could you comment on what you plan to do as far as continuing your buy-back program? You haven't really been in the market for the last few quarters.

Yes. That's what I was alluding to earlier when we look at the increased cash flow and we look at -- again -- we're going through a series of steps with the rating agencies because again those standards evolve and with the departments of insurance, because those standards evolve, and then we're also continuing to look at investment opportunities that we have and then when we get -- and when we get through those three steps, we have said that at this time, when we -- next quarter, when we report our second quarter results, we'll talk more about that particular aspect -- that particular use of cash. But again, it has to be a sequential kind of process to go through to do this. Because everybody has slightly different criteria.

But as far as an option for use of your cash, you think you can address that after the Q2 call and you would be interested in buying shares?

We haven't said that yet. [INAUDIBLE] we haven't said we won't do it. Let me get [INAUDIBLE] We have not said we won't. All of these things are on the table, and we'll update you as soon as those decisions are made.

Your next question comes from John Szabo of CIBC.

Good morning. I had a question regarding your efforts to improve the transparency of your hospital providers to your consumers. I think you have taken some steps to segment your hospital providers. Could you give us a little bit of color as to how that's going and -- and what the results if any have been?

It's still early, John. We've -- we're rolling out products in several markets that are built off of that premise. We call it tiering to where there's different financial exposure based on selection of providers. On a broad basis, that's the way we believe products are going to roll out, and we have a lot of work around that sort of product build. It's still too early to tell how that's going to work. There's been -- if you read all the media around all this some of the hospitals are trying to push back on the premise. Frankly, I just don't think that is something they can sustain and benefit is -- benefit design is something that's crucial to what we do, and I think it's a great way to engage consumers in doing something about the costs of healthcare. I mean they need to be informed and they need to have some stake in the game in determining their choices. So we're a big believer in it. We're building it, we're rolling it out. We have some early results with our own associates who are in Kentucky in a very early product experiencing some of that. So a lot of news to come on that, but it is a -- it is a real move in the industry, I believe, that's a direct result of medical costs doing what they're doing.

Do you think it will be as effective as, say, the -- the tiering on the pharmacy, given that that benefit is more at the point of care versus the hospital tiering which is going to be done at the point enrollment? How do you -- how do you change behavior when you're really only getting one -- one shot there?

Let me -- let me correct something new. It's not going to be just at the point of enrollment where that sort of thing takes -- takes hold. We -- we are building products exactly like the drug tiering with the provider side. Starting with the hospitals. So it's the same premise at the point of service. Now, is it going to be as effective? Thats what where going to find out. I would -- I would admit that drugs are more of a consumer good in terms of how people think every day than perhaps seeking out hospital care but there is no reason to believe that given an opportunity especially when it comes to the outpatient services and things that are not here -- here in an emergency in a rapid sort of time environment, they have an opportunity to think and choose and, I think that working with their physicians around those choices is going to be a real positive move. So we're -- we believe in it.

With your own employees, did you see a -- a noticeable decline in the trend?

Well, we have been sharing that information with people as we go around the country. Our own experience with our own people this year has been very positive given the array of products I've been talking about. We've -- we've given them lots of choices, laid in the technology, given them access to information, changed the benefits. And our own trend as a company for our Kentucky associates has gone from 17% to something in the mid-to-high single digits. So we are still studying exactly -- we have a lot of moving parts so we are still studying exactly what has driven that, in all of that but basically, the answer is yes. I mean, we're pretty pleased about what product design can do.

Okay. Thanks.

You have a follow-up question from Jim Lane of Salomon Smith Barney.

Yes. Actually, I was just wondering if you could give us a little bit more color on the second quarter. I apologize if you did when I was off the call. But I know typically, you have some seasonality and given your full year guidance, I was hoping maybe you could provide us a little bit of color on the sequential expectations. Thanks.

We did say that we would have -- we would earn either 26 or 27 cents for the second quarter. That would be very consistent with prior years where there is a slight sequential decline from first to second, and then -- then earnings re-accelerate later in the year. Again, if you look at that, that we have talked a number of things about what's driving that. We see the commercial business getting better, again, at least 60 million for the year. We see the Medicare business, remaining constant and --and not deteriorating. So those are sort of the color comments that we gave. As you know, in the second quarter, too, members get through their deductibles and things like that in the first quarter. And that's one of the reasons for the seasonality.

So just to touch on that Medicare, when you say remaining fairly constant, you are saying the a -- that pre-tax contribution number for the government -- for the government side, would you expect that to be flat or increase throughout the year? And then I believe on the commercial side, you indicated 60 million in pre-tax projected for 2002. Is that correct?

Yeah. We said at least 60 million.

Okay.

And then with respect to medicare, yes.

Yes, that -- that... quarterly pre-tax would remain relatively constant?

Yes.

Okay. Thank you.

Sorry. Yup.

Great. Thanks.

There are no further questions at this time. Gentlemen, do you have any closing remarks?

Yes. In the past, I have talked about progress in each of these quarters over the last couple of years. I'm going to go a little further this time. And in fact, there was pretty good progress this quarter. But this was a good quarter, characterized by a good medical expense ratio that is under control, commercial growth for the first time in some time in our company driven in an environment where we have pricing discipline. We had strong cash flow. The technology adoption is really beginning to pick up. And profit and profit margin is up so we are pretty pleased with where we are. We are optimistic about the future. And let me close by once again thanking those Humana associates who are on the call for everything that you're doing to make this possible. With that thank you for being with us.

Thank you for participating in today's teleconference. You may now disconnect.