Humana Inc (HUM) 2002 Q2 法說會逐字稿

Good morning. My name is Tiffany and I will be your conference facilitator. At this time, I would like to welcome everyone to Humana's second quarter earnings release conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question-and-answer session. If you would like to ask a question, press * and the number 1 on your telephone keypad. If you would like to withdraw, press the pound key. I will turn the call over to Regina Nethery, vice president of investor relations.

Good morning and welcome, everyone. We appreciate you joining us for Humana's second quarter 2002 performance and update on earnings guidance. Participating in today's call are Michael McCallister, Humana president and chief executive officer; James Bloem, chief financial officer and Art Hipwell, senior vice president and general counsel. 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. Also, Humana will be hosting investor day in New York City on Wednesday, September 25th at the Millennium Broadway Hotel. We invite the investor community to attend this event and look forward to sharing more detail around strategy and operations with you on that day.

Please feel free to contact me directly at 502-580-3644 to obtain more information on the conference. Information on the conference is also available via the investor relations section of Humana's website. For this morning's call, I need to remind you of our cautionary statements. Certain of the matters 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, July 29th, 2002, as well as our form 10-K for the year ended December 31, 2001 and 10-q for the quarter ended march 21, 2002, as filed by Humana with the Securities and Exchange Commission.

These documents contain details and discussions of important risk factors. New accounting rules related to goodwill amortization became effective for all companies on January 1, 2002. All prior year numbers in this call have been adjusted to reflect the impact of the new goodwill accounting, allowing for an apples-to-apples comparison between 2002 and 2001 financial metrics. Today's call includes a question-and- answer session for industry analysts. We encourage the investing public and media to listen in. I will turn over to Michael McCallister, to begin review of the quarter.

Good morning. Today Humana reported earnings per diluted share of $27 cents, 17% increase over the prior year's quarter. Excluding the implementation of goodwill accounting rules, our second quarter results improved by 27%. Our company's dedication to product design, process design and technology continues to bear fruit. Not only in our financial results for this quarter, but also in ways we predict will lead to progressively better results.

Because of our confidence in these results we are revising earnings estimates to $1.17 to $1.19 per diluted share with pre-tax margin at or above 2.8% by the end of this year. We are also projecting earnings per share growth for 2003 of at least 15%. While our medical expense ratio increased during the quarter, this had to do with positive developments around our product mix. Specifically affecting mar were year-over-year increase in large group membership and substantial increase in TRICARE change order activity. There were a number of events this quarter in both commercial and government segments. I will begin with commercial segment.

First and foremost, pre-tax income for the commercial segment more than tripled over prior year. Year-over-year increase of 55,000 medical members, combined with cost spending offset year-over-year pressure from the shift to more large group accounts. Over 60% of our fully insured commercial medical members come from the large group business.

In last quarter's call we forecast our commercial segment pre-tax income would be nearly double last year's results of $31. We expect commercial pre-tax income for 2002 to approximate $70 million. The commercial segment also experienced operational strides this quarter, related to product development, which will sustain and more importantly further improve commercial segment results beginning in 2003.

During the second quarter, we began marketing SmartSuite product. You may recall Humana introduced this product to Louisville, Kentucky associates in July of 2001. With a year of claims data in, the improvement in medical cost trend is significant. Declining to a range of 7 to 9% from last year's medical cost trend of 20%. Employers are starting to take notice. We are encouraged by the reception in the broker community and those employers have been early adopters. Last week one customer testified before Congress about his belief in this solution to addressing underlying cost trend and the driving force of premium increases for employers. Earlier this month, the Humana social securities outside of Louisville went live with SmartSuite. At the same time, 4500 Louisville associates were introduced to the next generation of this product SmartSelect.

Initial reaction to SmartSuite has been positive. Employees are empowered to select for themselves the health plan that matches their needs. At the same time, they become engaged in the connection between decisions surrounding health care and financial implications of those decisions while be given more expansive choices. We believe empowering and engaging the end user was health care can have impact on medical cost trends, while enhancing customer satisfaction.

We launched our individual product Humana one. This ducktails with small group products. We are introducing Humana One in select markets where we can utilize existing networks and distribution channels to provide health insurance for college students, self-employed and small business owners.

Turning to the government segment. There was significant news for each of the three lines of business. On June 24, we announced the government of Puerto Rico awarded Humana contracts to administer Medicaid benefit plans for two of the eight regions. These agreements extend the five-year partnership with the Medicaid program in Puerto Rico and provide stability for this relationship over the next three years. The reimbursement rates we negotiated for this business are with profitability expectation, as well as open us up for the opportunity to grow commercial base of 61,000 commercial numbers. With respect to Medicare Choice, we were pleased to see deferral of ACR filings. Delaying filings from July until September allows us to use current claims data in making decisions for 2003. We don't anticipate material movement in geographic presence next year, but we will make a final decision in early September.

The results have been significant activity in Congress with respect to potential increases in Medicare Plus Choice reimbursement. However, only time will tell how much, if any of the proposed changes are enacted. We continue to assume no change in Medicare+Choice, reimbursement in the business model. Absent change in methodology, we anticipate Medicare will be a profitable line of business for us for three or four more years. In the meantime, we intend to continue transition business mix toward a heavier concentration of commercial and specialty business.

Turning to TRICARE. Congress enacted myriad of change orders that significantly increase benefits associated with the TRICARE program. With Humana's history of operational excellence in this product line, this bodes well for our company. As you may recall, we bring outstanding TRICARE issues to closure in the latter part of each year. As usual, we expect resolution of these issues with the department of defense later in 2002, to favorly impact our TRICARE operations longer term. Jim will discuss the financials in his comments in a few moments.

I have spent time talking about operational segments. However, second results are driven by products and incorporating process design and technology into every aspect of our business. The service proposition and technology we bring to our customers is exceptional. Key service metrics have improved significantly year-over- year as result of the implementation of this strategy. For instance, claims move through the largest claims processing platform electronically on first-pass basis 67% of the time, versus 61% in June of 2001. Claims processed via manual calculations have declined 37%. Our processes are streamlined and technology has enabled us to provide actionable information to customers and ease administrative burdens. Both members and providers are embracing using technology. In June 2001, customer service representatives received 77% of the contacts coming in from members and providers, today only 50% of the inbound contacts we receive are made to customer service reps. The other 50% is evenly divided with voice response and the web. Availity(phonetic), our joint venture with Blue Cross of Florida, recently processed their 2000th transaction. We believe the companies who take the lead in the technology area will begin to move away from the pack, creating elite group of competitors. We fully expect to be one of those companies.

As you can surmise, streaming manifested itself. On total company basis, our headcount declined by approximately 4% since the end of last year. Now at 13,900 versus 14,500 at the end of December. These reductions, as well our discipline are positively affecting our SG and A ratio. It is Humana's strategy to incorporate product design, process design and technology into every aspect of our business as reflected in our results this quarter, as well as positioning us for positive results moving forward.

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

Thanks, Mike. Good morning. Let's review progress on EBITDA. In the second quarter EBITDA or earnings before interest expense, income taxes and depreciation and amortization expenses totaled $101.3 million, increases $16.3 or 19% over the second quarter of 2001. For the first half of 2002, EBITDA increased by $31.2 million or 18%, compared to last year. We are pleased with the continuing improvement in this key measure of the cash content of operating income.

Looking closer at each of the operating segments, commercial segment profitability more than tripled to 14.9 million in the second quarter of 2002. Commercial segment pre-tax income for the first half of the year was $41 million, up 48%, compared to the same period a year ago. Premiums for the fully insured commercial medical business continued to yield 12 to 14%. We anticipate yields for the full year will be in the same range. We continue to apply our strict pricing discipline, as we quote accounts for 2003. Although it is too soon to project firm premium yields for next year, we fully expect to realize double digit premium yields in 2003. With pricing continuing to be in excess of related medical cost trends.

The current run rate of our commercial medical cost trend remains at 11 to 13%. We are forecasting medical cost to hold in the same range for the remainder of 2002. We also are keeping a close eye on potential upward movement in cost trends in 2003, and again, we are not hesitating to price premiums accordingly. Our commercial segment medical expense ratio experienced normal seasonality moving from first to second quarter. In addition, the second quarter mar reflects shift to large group accounts, which traditionally are associate wide higher expense ratios. Large group business now accounts for 60% of our fully insured membership. As previously projected, our commercial segment medical membership did not experience significant sequential movement during the second quarter. We still anticipate commercial fully insured and ASO membership to achieve I combined increase for all of 2002 of 3 to 3 and a half percent. The majority of additions for the remainder of the year will come during the third quarter.

Turning to the government segment. Although Medicare+ Choice came in as expected, the related medical cost trends were slightly better than previously projected. Slightly moderated provider unit cost trend and a lower hospital utilization trend combined to edge overall cost trends into a slightly lower range. We now anticipate these cost trends to continue in the 4 to 6% range for the remainder of 2002. The impact of the recently delayed lock-in provision for the Medicare+Choice program has result indeed our enrollment already reaching the upper end of the projected range for the year. Notwithstanding, we remain comfortable with our (inaudible) of between $-345 to 355,000. Looking at TRICARE, the new higher levels of benefits and participation in the TRICARE program are a positive development for Humana, which is well positioned in this business.

As Mike mentioned earlier, we experienced significant TRICARE activity this quarter. This activity was in three areas: the first relates to change orders for congressionally legislative TRICARE benefits. These benefits include reduction of member maximize out-of-pocket costs. Also, elimination of certain co-payments and continued implementation of the TRICARE for life and senior pharmacy programs. Due to various of these benefit and enhancements being approved retroactively to October of 2000, this quarter's TRICARE results include the recognition of offsetting premiums and medical costs of $55.5 million. This result indeed non-recurring impacts on both our mar and SG and A ratios during the second quarter. As always, we have taken a very conservative approach to recognizing the revenues associated with these change orders. We recognize revenue only as outlined in interim agreements with the department of defense. Secondly, the second part of the activity of TRICARE is the number of TRICARE beneficiaries increased in the quarter sequentially and year-over-year.

Thirdly, we experienced decrease in use of military treatment facilities, which means TRICARE beneficiaries used Humana contracted providers more often than the department of defense originally contracted for. Again, cost related to each of these items have been expensed and corresponding amounts of revenue recognized only after consultations with the department of defense. Because of this increased activity, we had 370 million dollars in outstanding TRICARE receivables at June 30th, 2002. Of this amount, $190 million relates to normal recurring revenue for base contracts, all of which we collect monthly in the ordinary course of business. The remaining $180 million of TRICARE receivables is based on agreements with the department of defense. Our TRICARE management team always takes a collaborative approach with the department of defense and this, combined can consistent, conservative booking practices, has result indeed our never having had to write-off uncollected TRICARE receivable.

Our SG and A ratio during the quarter was 14.8%, compared to 16.1% in the first quarter. Bear in mind, however, this quarter's SG and A ratio was favorably affected by the $55.5 million of non-recurring TRICARe premium that I just described. We project consolidated SG and A ratio will be in the $15.4 to 15.6% range for the remainder of 2002.

This is in line with our previous guidance. Now, looking briefly at the balance sheet. Debt to total capital improved this quarter. The June 30th ratio of 26.6% is lowest in 5 years and compares with 29% at June 30th, 2001. Also during the second quarter, AM Best, Moody's and Standard and Poor's improved their credit ratings for Humana and its subsidiaries. As a result, as well as dividends received from operating subsidiaries after discussions with various state departments of insurance, we are confirming our previous estimate of $200 million of free cash for 2002.

We have targeted a portion of the free cash to be used for $100 million share repurchase program, which we also announced today. The remainder of the free cash remains available for investments, mna activities, additional liquidity and debt reduction. Turning from the balance sheet to the statement of cash flows, we used $43.8 million of cash flow for operations during the second quarter. However, it is important to note this figure includes quarterly increase in TRICARE receivables of $132.4 million. Excluding those incremental receivables, we provided cash from operations in the amount of $88.6 million in the second quarter, compare wide $45.9 million of cash provided in the second quarter of 2001.

Without adjusting for the incremental TRICARE receivables, normalized cash flows were up $62 million for the first 6 months, compared to the first 6 months of last year. Because we anticipate collection of substantially all of the outstanding incremental TRICARE receivables during 2002, we remain comfortable with our forecast for a normalized cash flow from operations of at least $300 million, compare wide $166 million last year.

On a separate note, most of you are aware the Securities and Exchange Commission has announced it will routinely issue form 10-K comment letters to each of the fortune 500 companies by September 15th. Humana has received its comment letter, which contains seven comments. The comments are focused on expanded our supplemental disclosures and none of the comments require us to restate consolidated financial position, results of operations or cash flows. We have submitted our response to the letter and expect that the substance of our response will be accepted by the commission. Our rationale for noting the receipt of a comment letter is heightened sensitivity regarding corporate accounting practices, rather than any materiality in the comments themselves. (inaudible) policy, we expect to make no further note of this matter unless and until a material development would occur.

Additionally, Mike and I will file our personal certifications for the 2001 form 10-K and for form 10-Q for each of the first quarters of this year, as originally filed. We will be filing these certifications at the time we file our 10-Q for the second quarter, which will be on or before August 14th. I am sure most of you are aware the commission is requiring the chief executive officer and the chief financial officers of all companies with 2001 revenues in excess of $1.2 billion to file a personal certification by that date.

Lastly, Regina mentioned investor day in New York city on September 25th. We are pleased to share with the investment community the progress Humana has made over the past two years and more importantly, the future direction of the company. We hope to see each of you in New York on September 25th. With that we will open the phone lines for your questions.

Operator, would you introduce the first caller? 00:37:47

I would like to remind everyone in order to ask a question, please press * and the number 1 on your telephone keypad. If you are use using a speakerphone, pick up the handset before asking your question. We will pause for just a moment to compile the Q and A roster.

Your first question comes from Joshua Raskin upon Lehman Brothers.

Good morning. Great quarter. First question has to do with TRICARE and couple of pieces here. First, could you go over the impact through the financial statements on the 55 and a half million dollar item in this quarter? If you could tell us what line item that impacted that would be helpful. Secondarily, there has been talk and we have heard from competitors that anticipate in the program of consolidation down to three regions from the - I guess three providers from the current four and wondering what you thought the opportunity could be there and any sense of timing for the potential rfp?

With respect to the $5.5 million, that comes basically from three different things. It is reduction in member maximum out-of-pockets and elimination of co-pay for active duty dependents. Those are retroactive of September of 2000. In this quarter, we booked the expenses that were associated with that and after consultation with the department of defense, the revenues. The effect of that is to basically have a one 100% mar on the amount and the zero on SG and A. So, those two numbers look abnormally out of balance with what normally what we report. Again, we are predicting and guiding toward further reversion to where they normally are.

Again, we are very conservative in how we book these and do them in a consistent approach. We do change orders in the TRICARE business. We book to our best estimate after consulting with the department of defense.

Okay.

The regional alignment, Josh. First of all, it is real early to come to a conclusion about this. We have talked about this in the past. These things tend to drag out. I mean, it is possible we could get rfp in the next couple of months. By the time that gets done, there will be a transition period in this process. They have already talked about 10 months or so. If you put all that together, we are looking at a couple of years likely before something happens. The impact on the company can be positive. We are always in this business, in the position of renewing contracts and having to deal with the contracts themselves in terms of timing. But, just to give you scale on it.

This has not said how the regions are likely to be aligned. One possible scenario has region six with three and four. We have been in three and four for a long time. One of our competitors has had six. For three and four, we are strong in the regions in terms of service and networks. We would be well positioned there. If six were bolted on to that and we lost two and five, we would end up with a bigger business than we have today. If we ended up with one, two and five and didn't get three, four and six, we would be smaller. Combine both of those, which we could argue about the likelihood of that, would make us bigger. It is too early to tell. We are positioned really well both in the southern region of three, four and six, as well as two, five and one in the north. Two and five are bigger than one. Put all of that together. We are in really good shape to deal with this renewal process. It will take a couple of years.

One quick follow-up on the cost trends Jim mentioned. I think he said there were provider costs lower and the hospital utilization was down. Can you talk about how long you have seen that trend and what your expectations are going forward? Then, any other color on what you expect for the rest of the year?

That was for Medicare+ Choice only when I mentioned that. We are looking for cost trends to be four to six there. Again, look at the components. We can say in the Medicare+Choice program that hospitals and physicians are probably each 45% of the total component and rx is about 10%. The hospital component in that is a little really better than the trend that I mentioned the 4 to 6. The physician is higher than I mentioned. The rx part is much better. That is where benefit design has helped us a great deal in the continued profitability of the program.

How does that compare to commercial , similar or different?

Commercial is different. I would say, again looking at the relative percentages of each of them, roughly the same, 45, 45, 10. Then, looking on the commercial side, the hospitals generally are a little higher than the trend. There we said the aggregate trend was 11 to 13. Positions are a little better than the aggregate trend. Rx is higher than the trend because we are not getting quite as much benefit as we did last year from rx-3 and the buydowns.

Okay. I will get back in queue. Thanks.

Your next comes from James Lane, of Salomon Smith Barney.

Roughly 60% of the commercial business now is large group. I was wondering if you could give us further color on that. Number one, is that 60% of your insured commercial business? Then, secondly, could you compare that to June 30th, 2001 and June 30th, 2000. You indicated it was a higher percentage. I am wondering by how much and how has that influenced the reported loss ratio? Thanks.

It has been trending up. More than 60%. And it is probably a year ago it was about in the upper 50s. Then, probably the year before that, 2000, it was probably around - probably more small and closer to 50/50, let's say.

Okay. But, could you answer the other question I asked about is it of the commercial insured business?

Yes.

Or overall?

Commercial insured.

Thank you.

Your next question comes from Roberta Goodman of Merrill Lynch.

Can you hear me okay? Great. Two questions. Talking about the premium, could you talk a bit about the impact of benefit design change and how much of that would come from adjustments to old products and how much would come from adoption of your new products? And I have a follow-up one.

Okay. We don't generally go into the amount people buy down or do those things for competitive reasons. Then people will know what we are looking for. On the commercial side, what we do is working more closely all the time with employers regarding helping them solve their cost. So, we are coming in with a full canopy of products that enable them to do that. Mike mentioned a few of those. We have been selling those products. They are not in effect, in a big way yet. We think over time they represent the only way to solve the employer's cost dilemma. None of the employers can continue to pay the premium yields that all of us in the industry that we are giving.

None of the numbers really assume a big impact from the newer products. It is early in that process. They are very powerful products, but they require full replacement. There is an awful lot of risk pool management that occurs in that, requiring them to be full replacement. It is early. The point I was trying to make, they are incredible door-openers to get in and talk to people. It does get at the heart of the problem. At the end of the day, some are ready for it, which I indicated we have accounts that picked it up. Others are still sucking the old product mode. They take away ideas from the benefit mode. We offer them a more traditional product. We will sell them in terms of wherever they are is what they get.

The level of through-put around proposals rfps, interest in the product and Humana has risen as a result of new things to talk about.

Any - I guess you may not want to answer this or have an answer. As you look at 2003 and the business you write for the year. Dow have any sense as to where the new product might be in that mix? Whether it would be 5 to 10% range or more?

We are not ready to guide on that at this point. Because of the full replacement nature of them, you are not going to see early products, especially as - the way they are structured. You are not going to see them in giant accounts, but the mid-market. It is too early to tell how aggressive the mid-market is in terms of being ready to move into the new product designs. Early indications are people are struggling and looking for solutions. This is a great one. It is too early to be really guiding specifically on how big this new product will be. Take away from it, it generates interest in the company. A lot of opportunity to sit in front of employers who were not talking to us.

Would you expect then to see increase in commercial growth rates in the (inaudible) you are forecasting for this year?

We have not taken anybody there yet. I will not be satisfy wide 3 and a half percent commercial growth rate next year.

Thank you.

Your next question is from Bill McKeever of UBS Warburg.

Two questions. On the small group business, can you give us color on how the medical loss ratio may be doing relative to last year? Second question, on the Medicare side, just a clarification. You mentioned in terms of the profits from Medicare, it would be relatively - you be profitable in the next three to four years. Is that absolute level of profitability sustained for three or four years or might there be (inaudible) in the level of profits if there is no change in the program?

Starting with small group answer n. small group, our mar continues to improve slightly. It is basically in the same neighborhood. A lot of business, over the last couple of years in small group because of regulatory outlooks in some states. There is improvement there and lesser premium increases going out. Smaller group declined in membership, improving mar is being realized.

With respect to the Medicare+Choice. Again, we manage that business for profitability. We have become good at designing benefits that go along with the reimbursement rates that we receive. So, as we look at where we are and where the program is, we think as Mike indicated, we have three or four years conservatively of continued profitability at whatever level comes along. There is lots of changes and lots - if you are correcting for those two variables and analyzing those two, we feel confident about the continuation of the program.

From a business planning perspective, we are not assuming growth in profitability in Medicare during that period. I think we are going to be - we haven't shared long-term projections in Medicare because it is hard to do it. You can never be certain where the trends will come in and how much benefit movement and flexibility you will have based on competitive positioning. It will be a very solid contributor during the period. We are not looking to grow profits there.

Thank you.

Your next question comes from Joe France of cfsb.

TRICARE, will you get paid in the third quarter or did you mean in the second half?

Substantially by the end of the year. There are lots of different moving parts and negotiations with the government. Different things will be paid at different times.

I could get paid a lot really any time I want to. The key here is - there is short-term implications to our discussions with the dod and longer term implications. As we agree upon the ultimate resolution of some of the payment amounts, it affects the going forward reimbursement to the company. You know, we would prefer not to have receivable where it is. But, given the deliberate nature of our discussions and what we want to take out of this, we do not want to lead to resolution just for cash flow cosmetic purposes. We need to make sure we cut the right deal for ourselves.

Everything on the book today is worst-case scenario.

Okay. Thanks. One more question. What do you estimate excess cash to be at this point?

$200 million.

Thank you, Jim.

Your next question comes from Christine Arnold of Morgan Stanley.

Good morning. The first question. Does large group medical loss ratio improve year-over-year?

We don't really segment by large and small group. In the commercial, as I mentioned, in the year-over-year, it was basically in line with a year ago.

Okay. The commercial mro row, you said small group improved and large group deteriorated. Is that not the case?

That is not the case.

Small group is stable and large group has improved.

Okay. And could we quantify TRICARE there was $100 million in revenue and 55.5 sounds like it is not recurring. If we take 55 and a half million off the second quarter, is that run rate still doable through the rest of the year for TRICARE?

Yes.

Another question. Are there any TRICARE medical payables in this quarter?

That increase the medical payables sequentially?

Yes, there are.

Is it safe to assume in the neighborhood of the 55 and a half million without resolution?

There is that. Then, there is also we have - because there is resolution, you can imagine, we risk share with the government. So, whatever the resolution is, some of it will go to other people. What we did was in the 55, we booked the 55 and corresponding amount of revenue after consultation with the department of defense.

Okay. The full 55.5 million was booked also as medical payable?

That is correct.

If sequentially medical payables were up (inaudible) by 10?

Yes, because we paid down inventory. I would like to take a minute. That always comes up in these calls. In looking back for the last year, if you take where we were to where we are now, the large majority of that is inventory pay-down. That is why we have begun to disclose claims data and estimated claims onhand are. People start to get a look at that. It is always a good question to ask and a fair question. But, again, we think that you have to really look at how much inventory we have paid down really over the last couple of years and really over the last year. 2.3 days of payments - of days and claims payable over reduction has to do solely with the reduction of inventory. We think we have a very competitive position in the industry with respect to that.

How much membership is in the (inaudible) form?

Couple thousand. It is relatively small. What is happening, we take out digital health plan. They look at it and go that is nice, but we are not ready for that. They buy the traditional PPO product. Over time, we will see more business on the digital platform. The people on really like it. But, it is one more portfolio offering at this point. It has some people that are ready for it and some aren't.

Great. Thanks so much.

At this time, I would like to remind everyone in order to ask a question, please press * and then the number 1 on your telephone keypad. The next question comes from Ed Kroll of SG Cowen.

Couple of questions. On the medical loss ratio for the second half - I should say for third and fourth quarter, just trying to get a sense of the trend. It looks like this TRICARE retro-adjustment cost you about 30 basis points in this quarter? Is that right?

Close to 40.

Okay. Do you think we go into sort of 83.5ish for Q3 and Q4?

Between there and 84.

83 and a half to 84 for the rest of the year?

I would say those are good estimates. If I were doing it, that is how I would do it, yes.

On the cash flow. What is your sense of you are reaffirming $300 million previous guidance for the full year. Will that - do you think you will collect - will that be about equal in Q3 and Q4 the ramp necessary to get you to the $300 million goal?

That is what I was trying to elude to before. I don't know that because that is the subject of discussions we are having with the department of defense. (inaudible) confident that by the end of the year we can hit the 300 number.

Timing is less important than getting it right because it affects contracts going forward.

Okay. Got it. Then, finally, appreciate the comment you made, Jim, about financial transparency, let's call it. You and Mike will sign off on your financial statements personally. How about on the options front? I don't think we have heard much from any of your piers at other companies. Are you contemplating expensing options and maybe just tell us what the impact on earnings would have been this quarter.

We will settle context for it. We have 10 and a half million options outstanding with average duration left of 5 and a half years. The range on them is $6.40 to $26.94. Mike and I walk by the people with the $26.94 everyday. The average, though, is 1284. That compares right around where the price is today at $13 on Friday's close. We have been using fasb 123, but have been doing the note disclosure like 95% of the other companies. Our - of the effect last year was 2 cents per share.

I think we will be looking at this as a company, but there is still a lot of changes that I think will come as the corporate oversight bill gets implemented. We don't really want to do this twice. We are spending a lot of time on this thing. It is all good. The public's confidence needs to be restored, but we can't afford it to do it a couple of times. We have lots of other things to do. Right now, for example, it is perspective only, not retroactive. You can have a lot of different changes. In looking at it, we think it is a sound policy and our board will be looking at it for sure. It is 2 cents on last year's earnings.

2 cents for the full year?

For the full year.

This quarter would have been immaterial?

Yes. Again, as I said before, a lot of people don't realize it is prospective only, it doesn't take care of the ones out there. I think when it is talked about as public policy, people are saying we think the options will be in there. It is my personal prediction that will change. I think it is better to wait and see what the rule really is and do it. It is a sound policy. It is an expense for all economic purposes.

Okay. Great. Appreciate your comments on that. Thank you.

Your next question comes from Greg McCosto of Lord Abbott.

Yes, with regard to Medicaid. I see the number of members is creeping down each quarter. Could you talk about the rates and if there are issues with regard to state?

Medicaid for Humana is almost all in Puerto Rico. We have a little bit of business elsewhere, but basically a Puerto Rico issue for us. The way it is contracted is region by region t. is an exclusive contract. We negotiate rates. We just completed renewal of two regions in Puerto Rico. Rates are acceptable, based on our business requirements down there. So, we are not really at very Medicaid-driven company, but have two contracts we have had for a number of years.

With regard to self-insured business. How much do you have at this point and what are your expectations there?

Let me get the number. $600-something thousand. 622. It is growing. It is a real focus for the company. We have seen real good leading indicators around our ability to grow the business. Somebody asked are we going to grow commercial business in an escalating way next year? Of course we are. A lot will come from ASO space. As we have talked about, this is an area we have just begun to focus on in the last year or so. We have seen good progress there. We have cleaned up old business and started to add nice accounts. We are very competitive in a number of markets because of basic requirements of good back office and have infrastructure build material over the last year or so. We are going to do quite well in the ASO business over the next couple of years.

Thank you.

Your next question comes from Todd Richter of Banc of America Securities.

My question has been answered. Thank you.

There are no further questions.

Let me just close by thanking you for joining us on the call. I would like to thank the Humana associates for the work they are doing to make this possible. Let me just once again at the risk of being redundant, go over what I think are take-aways from this quarter. Commercial business has stabilized and is in a position to grow nicely. We grew nicely in the first quarter. Profits are up significantly. ASO business is growing. I think it is a good indicator we will be competitive there. Cash flow has been good. New products are on the street. Innovation is something driving interest in this company. Lastly, technology does matter. I think we are beginning to see good traction around application of that. One, getting good service and also to start getting administrative efficiencies, which this industry needs. It is a good quarter overall. We appreciate you joining us. Thank you very much.

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