Humana Inc (HUM) 2003 Q1 法說會逐字稿

Good morning. My name is princess and I will be your conference facilitator today. I would like to welcome everyone to the Humana first 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 during this time press * and the number 1 on your telephone keypad. If you would like to withdraw the question, press the pound key. I would like to turn over to Ms. Regina Netherly. You may begin your conference.

Thank you and good morning everyone. We appreciate you joining us this morning for review of Humana first quarter 2003 performance and update on our earnings guidance. Participating in today's call are Mike McCallister, Humana Chief Executive Officer, Jim Bloem, our Chief Financial Officer and Art Hipwell, our General Counsel. This morning's call and virtual slide presentation are being recorded for replay purposes. That replay will be available approximately two hours after the conclusion of this call on Humana's website, www.humana.com. As we begin this morning's call, I need to remind each of you 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, April 28th, 2003 as well as the company's form 10-K for the year ended December 31st, 2002, as filed by Humana with the Securities and Exchange Commission. Our form 10-K contains detailed discussions of important risk factors. On December 5, 2002, Humana issued a press release describing charges that the company would be taking in the fourth quarter of 2002 and the first half of 2003. As described in this morning's press release, we have adjusted (ph) quarter 2003 results to exclude restructuring charges. In our fourth quarter 2002 earnings release dated February 3, 2003, we had also adjusted those results to exclude unusual items. Consequently, any 2003 or 2002 amounts referred to in our conference call this morning are on an adjusted basis. A detailed reconciliation from GAAP to adjusted results for first quarter 2003 may be found in the statistics pages included with this morning's press release and for 2002, in our February 3rd, 2003, earnings press release. Each of the releases is available via the investor relation page of Humana's website. Today's call include a question-and-answer session for industry analysts. We encourage the investing public and media to listen in. Now, I'll turn the callover to CEO, Mike McCallister.

Good morning and thank you for joining us. As Regina (ph) said in opening remarks, all results are adjusted to exclude previously announced unusual items reported in first quarter of 2003, and the fourth quarter of 2002. Today Humana announced earnings per diluted share of 31 cents, 11% improvement over the prior year's quarter. We were particularly pleased with these results because as many of you will recall we previously expected our results for first quarter to be relatively flat year-over-year due to about four to five cents in TRICARE earnings shifting to the latter part of the year. However, strong showing by Commercial in the quarter partially offset that earnings shift. Our Commercial segment earned more in first quarter 2003, than it did in all of 2002. This operational achievement gives us confidence to forecast Commercial segment pre-tax earnings for 2003 of at least $120 million, increase of more than 120% over the $54 million earned by this segment in 2002. As expected, the shift in the mix of our earnings profile to less dependency on Government business is clearly underway.

As for Commercial membership we expect organic growth for the year. We expect approximately 70% of net growth to come from additions from large group line of business with remaining 30% in small group and individual block. For the quarter, pricing discipline resulted in lower retention group in large group in the high 80s compared to the low 90s last year. The positive impact on earnings is evidence of the effectiveness of our pricing strategy and opportunity for margin expansion presented by our cost and service propositions relative to our competitors. New sales in the first quarter were approximately 200,000 members. We relinquished 190 members in accounts that were no longer attractive to the company due to their high medical expense ratios, including 70,000 members in slice accounts. As (ph) we have stated many times, we will price our products appropriately and will not sacrifice profitability for membership.

Our earnings improvement reflects adherance to this pricing philosophy. I am pleased with the growing quality of our Commercial book of business. Looking ahead to the remainder of 2003, we have several large other slice accounts with high MERs that are going through the renewal process. We delivered rate increases commensurate with the claims accounts and are prepared to walk away should they not accept our proposals. Consequently we have updated Commercial guidance to grow at rate of two to four percent or 60,000 to 120,000 net new members. We are seeing positive sales indicators in all of our Commercial segments. In the national account space, we have for sometime been building strength in the sales organization through combination of people, reporting, network expansion, dedicated administrative infrastructure and most importantly, relationships with major consulting firms.

During the first quarter we have seen 70% increase in request for proposals from these targeted firms, a clear indication of their increased confidence in Humana. Quotes for the mid-market space are also up, rising 30% in the first quarter of 2003, over that of the first quarter of 2002. Results will ultimately be measured by sales, but in the interim, we gained confidence from building pipeline of opportunities from important distribution sources. We are also seeing increasing activity with smart suite quotes. For example, in January, we quoted smart suite for 30 quarters, double monthly quotes during 2002. Quote activity continued to accelerate during the quarter with 45 quotes during the month of March. Close ratios in smart suite are picking up with three to four companies moving each week during April. We now have more than 30 accounts with approximately 80,000 members in the smart suite and select products. These groups are geographically disbursed and are a mix of new accounts and renewals and combination of ASO and fully-insured groups. The medical cost trends for customers that have implemented smart suite generally average in midsingle digits. The 4.9% trend the Humana associate group experienced in it's first year of smart suite is projected to be in five to seven percent range in the second year based upon six months of incurred claims. Two of our customers even experienced a decline in claims expense year-over-year based on strategic contribution choices they made. The beauty of the smart suite (inaudible) products is that the risk pool is kept in tact. Employees can choose the individual option that works best for them personally. The smart suite offers HMO to PPO to coverage first, our high deduct you believe, consumer-directed plan. All the while, the employers design the contribution strategy that provides the desired ramification for their companies. Would we sell our coverage first, consumer plan separately? The answer is yes.

Small groups are also looking for solution and the coverage first plan provides them with innovative solution, as well. While our innovative solutions and related speed of implementation distinguish Humana, our competitive advantage is application of the ever maturing acturial and underwriting (ph) data, including planned choice and behavior changes and it is expanding rapidly, particularly with increase in new groups sold. While products are important, equally important is customer service and the consumer experience. Technology has been the backbone of much of the work we have done with respect to our innovative product design. In fact, technology applications have been a driving force behind much of the operational progress we have made in streamlining our administrative cost. The overwhelming majority of inbound contacts into customer service centers are for two things, checking eligibility and claim status. We have made it easy to get the information we need in the format that suits them personally. For the past several months our members and providers have consistently demonstrated their desire to get the information they need electronically for inbound contacts handled electronically, growing at least 30 to 40 basis points per quarter during the last year. The comprehensiveness of the data we include in our website, supported by the appropriate privacy controls, facilitates detailed analysis of eligibility, claim status and a host of other options all of the member (ph) or provider's convenience. Many opt to use voice response, another quick and convenient way to get information they need. Approximately 63% of inbound contacts are handled electronically, versus 48% in March of 2002. However, our approach is to meet customers where is they are, our customer service reps are still ready and available for people who wish to speak directly to an associate to resolve their questions.

We also continue to make strides in our electronic judication platform now moves 75% of claims through the system without being judicated by claim staff. That compares to 66% at the beginning of 2002. This has led us to again have the all-time low of four days of unprocessed claims on hand. It is important to note that speed in claims payment is couple with IT applications and process changes that also ensure optimization of subrogation, fraud review and maximization of appropriate discounts.

Because of the speed and accuracy of our claims payments, providers spend less time and ours following up on the status of claims they have submitted and send in far fewer duplicate billings. Elimination of redundant work such as this is why we are now seeing increased productivity in service operations and reduced overhead. We consistently said that we believe we offer the best service proposition in the business. This time I will refer you to what the Texas Medical Association says. The TMA has been outspoken in the industry. Yet, in its most recent hassled (ph) report, Humana was rated as health benefit company with least hassles for Texas providers. As we compete for commercial business, I believe brand, equity and reputation will matter when combined with product innovation and competitive price. Turning now to our Government segment. Our Medicare Plus Choice membership experienced a higher level of attrition in the quarter than anticipated. However this is the time of the year when Medicare membership tends to move around. We now expect Medicare Plus Choice membership to approximate 310,000 to 320,000 by the end of the year. Of the decline in first quarter, 14,000 were in the Chicago market where Medicare Plus Choice MER had been higher than average. As a result our newly updated forecast indicate projected profits are not expected to be significantly affected. As far as T-Nex bid, the process continues to move forward. We expect to hear a decision on both the south region, as well as the subcontracting relationship with Aetna in the North sometime late this summer or in the Fall. The come RFP for retail pharmacy contract was issued on March 13th. We are evaluating details of the RFP and (ph) our related bidding options. Should we decide to participate, the bids are due to the Department of Defense on May 12th. The government expects contractors to start work on pharmacy business 180 days after the contract is awarded. The DOD currently has set a goal of July 1st for their decision on the contract. In summary, we believe in 2003 we will earn between $1.37 and $1.43 per share, an increase of approximately 15% over the prior year. Characterized by significant shift toward the Commercial earnings strength. We are pleased with first quarter and are excited about 2003. We believe the significant improvement in Commercial business is the foreshadowing of continued improvements to come in 2004. With that, I'll turn the call over to Jim Bloem for review of quarter's financial performance.

Thanks, Mike. Good morning, everyone. I concur with Mike. Financially this quarter's Commercial results are very encouraging. The Commercial results for the full year also are expected to show dramatic progress. They will be complemented by continued profits from our Government segment. Again, all the numbers in this morning's call are on an adjusted basis. Let's begin this quarter's financial review with our first quarter revenues. Consolidated revenues reported in first quarter 2003 of $2.9 billion improved seven percent from the $2.7 billion in the first quarter of last year. Higher Commercial premiums accounted for majority of the year-over-year increase. Consolidated revenue for all of 2003 are forecasted to be in excess of $12 billion, compared to $11.3 billion for 2002. Again, the majority of the increase will come from the Commercial segment. Our consolidated medical expense ratio of 83.4% in the first quarter was 30 basis points higher than in the first quarter of 2002. Increases in the Government segment MER outweighed improvements in the Commercial segment.

Looking at the Commercial segment MER, due to a - despite a shift to heavier year-over-year large group membership, 65% versus 63% a year ago, our Commercial segment MER improved 60 basis points over last year's first quarter to 81.3%. With most of 2003 already priced at this point, we are watching medical cost trends closely as we refine our pricing strategies for 2004. So, let's discuss what we are seeing with respect to these trends. In the first quarter, we noted that utilization patterns appeared to be somewhat favorable. However, it is much too early to project these patterns forward as a permanent change in trend. Our data tells us that our Commercial trend forecasting for pricing purposes was on target. Possible costs which approximate 40 to 45% of our medical costs continue to run higher than the aggregate trend. We continue to expect hospital pricing for both inpatient and outpatient to increase at rates similar to last year. Physician costs continue to run better than the overall aggregate trend. Pharmacy trends which account for around 15 to 20% of our medical cost spend are just slightly higher than the aggregate trend, but well below the secular pharmacy trend. In short, our review of the major components of medical cost trend result in our continued expectation of Commercial medical cost trends in the 12 to 14% range for 2003. The Government - the medical expense ratio for the Government segment did not show improvement we experienced in the Commercial segment and that was expected. Just as we discussed in February, the deployments to the Middle East have resulted in escalation of claims cost for TRICARE, with offsetting revenues anticipated to come in the latter half of 2003. The medical expense ratio for our Medicare and Medicaid products was flat year-over-year. Medicare Plus Choice premium yields and cost trends are both expected to range between four and six percent for 2003. Turning to administrative costs.

Our first quarter SG&A ratio for the Commercial segment improved by 80 basis points year-over-year. The full year is expected to show a similar improvement. We are forecasting the Commercial SG&A ratio will range between 16.3 and 16.5% for the year, as many of the business process improvements that we have been making will benefit the Commercial segment. The Government SG&A expense ratio is likely to be flat year-over-year for 2003. We continue to optimize the profits this business while focusing on earnings growth in the Commercial segment. On a consolidated basis, our revenue per associate has been increasing steadily since 1999 when we averaged 590,000 dollars of revenue per associate, compared 834,000 in revenue per associate in 2002. We anticipate the initiatives we have undertaken to streamline our administrative costs will further improve this metric in 2003 and beyond. Together, all these factors resulted in consolidated EBITDA of $113 million for the first quarter. Up 10% from the first quarter 2002 EBITDA of $103 million. Improvements in Government segment EBITDA of $31 million were offset by decline in Government segment EBITDA of just over $20 million. Continuing our February guidance, we expect the Government segment contribution to EBITDA and pre-tax income to come in the second half of 2003. As Mike stated, we now anticipate earnings per share of $1.37 to $1.43 in 2003. The normal second quarter sequential drop should result in second quarter earnings per share of 28 or 29 cents.

Now, turning to the balance sheet. Recently there has been discussion regarding the adequacy of our allowance for bad debt. The short answer is we have been collecting our Commercial accounts receivable much faster and the allowance has been reduced accordingly. At the end of 1999, nearly 30% of non-TRICARE premium and ASO fees receivable was more than 30 days old. That percentage dropped to 13.7% at end of 2000, 10.2% at the end of 2001, 6.7% at the end of 2002 and was 6.4% at March 31st, 2003. The decline in our allowance for bad debt over the last several quarters has been driven by and consistent with the decline in aging of our outstanding commercial receivable balances. As far as our TRICARE receivables, our accounting methodology does not set up a reserve against these accounts, since they are not booked until first, the amount becomes determinable after discussions with Department of Defense and second, the collectibility is reasonably assured. As we have said many times this policy has resulted in never having to write-off TRICARE receivable. With respect to our medical claims reserves on the balance sheet, our days in claims payable increased by just over one day, and now are at 46.5 days. As in the fourth quarter of 2002, the statistics pages of this morning's press release disclose detailed information regarding our claims reserve.

We encourage you to review this data. You will note that we will (ph) disclose favorable development of prior year estimates of medical claims liability totaling approximately $54 million, including approximately $19 million for TRICARE. If the results of any quarter include either the benefit of an explicit reserve release or unfavorable impact of reserve strengthening, we always will disclose it. For the first quarter of 2003, TRICARE's net income was -- net impact was less than a penny per share. There was no impact from any other of our lines of business.

Moreover, the earnings per share guidance for 2003 of $1.37 to $1.43 does not anticipate any impact of prior year favorable developments. Turning to cash flow, normalized cash flow from operations during the quarter were $98 million, up over 27% from the prior year. The increase in our adjusted earnings accounted for most of the improvement. We now anticipate cash flows from operations of between $340 and $360 million for all of 2003. Looking briefly at the capital structure, the first quarter was also marked by a sequential improvement of 40 basis points in interest bearing debt to total cap ratio, which was 27% at March 31st. Finally, our share repurchase program was about - has about $5 million remaining on the existing $100 million authorization of July 2002. During the first quarter we repurchased an additional 2.2 million shares for aggregate purchase price of $20.8 million, or average of $9.31 per share. We are in the middle of annual discussions with rating agencies and the regulators regarding capital adequacy and financial liquidity. Once these meetings have concluded, the Board of Directors will review the merits of our further share with purchased authorization. The timing of this review is likely to occur around mid-year, similar to the timing in 2002. To conclude, we are excited about both the demonstrated progress in Commercial segment and the continued improvement in our overall financial performance. With that, I (ph) will open the lines for questions. Operator would you please introduce the first caller?

Your next question comes from Joshua Raskin (ph), Lehman Brothers.

Hi, thanks. Good morning. Quick question on just the Government profitability there. Wondering if you could just again explain one more time the differential in the TRICARE profit early in the year. And then the second question just relates, if you could give more color on inpatient utilization that you mentioned? Was there impact on the flu, maybe specifically for the Medicare book that you guys saw in the quarter?

With respect to the second one, the inpatient and the flu and admits, again, we see pretty much the way we see it that the hospital trend was little bit higher than the aggregate trend. There was some relief sort of on an inpatient basis. The outpatient continues to have a higher rate. Overall, we rate the hospitals higher than the aggregate trend. With respect to the TRICARE question, the thing to always remember with TRICARE is that the second half of our calendar year, that is quarters three and are the first two quarters of the TRICARE year. So, the profitability and this is the advantage of Humana because it has a diverse supplied (ph) set of revenues and profits, the profitability of the TRICARE is generally down or lower than it will be ultimately during the year during the first two quarters than it is in three and four.

Okay. Just one more quick follow-up on the inpatient side, again. So, did you say on utilization, is there any characterization between the Commercial and the Government side of the business, did you see any changes in utilization versus segment?

Not really. We would say in counts, the trend is higher than the aggregate trend.

Okay. Last quick question on the membership, are you guys seeing impact from slower in-group growth, from (inaudible), et cetera, the expiration of Cobra?

Josh, this is Mike. There has been some of that, I don't have the specific numbers. Clearly with all the lay-offs and that sort of thing in the economy, there has been an effect. Our clients vary from two members to 100,000. In the larger space you can clearly see it.

Okay. Thanks.

Your next question comes from Christine Arnold (ph) of Morgan Stanley.

Good morning. I didn't catch the TRICARE receivable and then I have a follow-up?

Okay. The TRICARE receivable basically, I think the best way to look at it is from the cash flow standpoint and from the balance sheet standpoint. Starting with the cash flow standpoint, if you look at our total receivables ad for the quarter from the end of the year to this quarter, total receivables were up $48 million. 23 of that was TRICARE. 25 of that was Commercial. Just to put away the Commercial a minute, the Commercial basically comes from people who paid us on April 1, instead of March 31st. The TRICARE was up about 23 million there. Then, when you go to the balance sheet, you will see that the sum of premiums receivable plus ASO fees receivable changed by 112 million. 112 million and the difference between that and 48 is 64 million. Those two numbers basically, one other component make up the 64 million. It is 23 million for TRICARE that -- they are both reclasses. The first one is 86 million, which was a reclass, long-term assets for BPAs because at year-end those normally wouldn't have been collected until early in 2004, so they got reclassed to long-term. Then, there is also that goes along with that, $23 million paid out to subcontractors and government reshares and other things. That is how you get the 64. Here is the recap one more time. Cash flow difference of 23 on TRICARE receivables and then plus 25 from the Commercial, that is the cash flow - that is the economics. Then, the accounting reclassifications are difference of 64 and that gets you to 112.

That is really helpful. Thank you. My follow-up question is, you did a great job with aging on the Commercial receivables. Could you give us the aging on your TRICARE receivables?

Again, most of the TRICARE receivable as we go forward -- let's talk about it in general. We have two different components. Change orders get sort of negotiated and hammered out during the year. The normal bid price adjustment process, what happens there is normally until after the six months after the contract year is over, there is not -- you are not to expect a receipt of that. What we have done is we've talked to the Department of Defense during the quarter and we've got them to look at the increased activity both of more beneficiaries and of lower medical treatment facilities productivity and they have agreed that the beginning in third quarter they will put that in our base receivable, which we receive every month. So, in the aging question on TRICARE is we're generally looking for six months after the end of the contract year, around mid-year. We have accelerated that going forward. I think that is an important fact going forward. And then, but right now, normally, until we get into the third quarter, we are still in a position where we generally get BPAs six months later.

You don't have any receivables that are more than 18 months old?

Yes.

Perfect. Thank you.

Your next question comes from Charles Boorady (ph) of Smith Barney.

Thanks, good morning. Just a couple of questions. First, on the table you put in related to the receipt cycle, which was very helpful. Is it dollar weighted or based on the average for (ph) the individual claims? Then, what would the days to pay look like? For example, the number of days from incurred date to the date you actually made payment or from the receipt date to the date you actually made payment?

It is dollar weighted, otherwise the math would be difficult to do. The amount of time continues to get shorter and shorter. Again, we three different platforms. They all have varying days. What Mike said about the Texas Medical Association are is the main thing to look at and also to look at the cash flow statements over the past couple of years where we really declined in the claims inventory and the number of claims payment cycle, which is what your question was getting at. We spent quite a bit of cash in the year 2001 in really reducing that. That has become a very good competitive advantage. As Mike said, the Texas Medical Association and people who criticized our industry for being slow pay, we've really - I think taken a competitive advantage here.

Yeah, that table is helpful and a step beyond what most companies do. If you could take it a step further, maybe not now, but down the road, it would give the other half of the equation. If we could see how time has changed from the time you receive it to the time you physically pay it. That would affect the balance sheet.

Let me just say, we will consider that. The thing is, always remember, there are cut-offs and that could be a real -- not see meaningful. We will take a look at it.

Understood. Just to reconcile the balance sheet would be helpful to see how it was impacted by the change from the time you receive to the time you pay something in the same period as the balance sheet stated.

Before you change subjects, actually we think of it beyond from the time we receive it to the time we pay it. That front-end work around getting electronically connected to the doctors, shorten the time from when they provide service and when they get the bill to us.

Right, and that is clear on the table you gave us. I was - just my wish list to take it a step forward to reconcile - change in accounts payable on the balance sheet or claims payable on the balance sheet we have to include the other half from when you actually get it to the time you actually pay it. Just trying to understand that because you can receive something faster and then sit on the check and not cut it which I know you are not doing, but would be helpful to see data behind that. Just a follow-up question in terms of the TRICARE profitability guidance, you think you were saying two to four percent in the press release, was that intended as change, if so, was that just first quarter or full-year impact?

Full year impact. You know, the TRICARE profitability moves around in that over a number of years - moves around in that two to four range. This year because of the question I answered previously, we will have less opportunities for BPAs and will get more in the base. Just looking at the amount of activity we see out there now, we lowered it to two to three for this year.

Got it, so that would include anything coming in the (ph) back (ph) half (ph) related to call-up in the Middle East? Could you quantify where ...

... that is correct. It is a full year.

Could you quantify the full-year impact of the Middle East situation, if it's possible this early on to try to assess that?

No, we can't. We are still trying to assess it. It is a competitive thing, as well. The one thing we always stress this, but getting information -- the information we get to process claims for TRICARE comes from the Government itself, like who is the beneficiary and sort of what the productivity things and we analyze that. That is very different than the way we do Commercial business. We enroll people and we gauge the progress from there.

Got it. Last clarification, Jim, you mentioned $54 million from prior period development, the 18 8 for TRICARE and 35 for non-TRICARE, which is 54 million or 21 cents per share. I thought you said a lower per share number like seven cents or something like that, can you repeat what you said earlier? I was trying to reconcile the 21 cents per share I calculated with 54 million to what you said.

The net impact was less than a penny. TRICARE we keep separate because the contracting for TRICARE and all of the things I described about bid price adjustment and risk share and everything else, those things really if we were to lump that in with Commercial business, it is very difficult to make a real assessment of really what is going on.

Non-TRICARE of $35 million -- I'm trying to figure out how you get a penny. I calculated 21 cents using 54 million and even taking TRICARE out it would still be about 14 cents.

There is no impact in the 35 million. That is our best guess estimate as to what how last year turned out.

Offsetting 35 provision, is that ...

Yes, yes.

Okay. Thank you very much and thank you for the added detail in the press release.

Your next question comes from William McKeever (ph) of UBS Warburg.

Thank you. My question has to do more with strategy and longer term which are (inaudible) on the Medicare side of the business, given that you have had a slight increase in MER, what are your thoughts going into '04 how you might manage Medicare Plus Choice and what changes you might make to your benefits?

It is too early to get any specivity around actual benefit changes. We will (inaudible) that September at some time but I can step back up to 25,000 feet and tell you the Medicare business is actually stronger today than I would have answered 12 months ago if you would have asked me. The reason is because of the competitive landscape continues to change a little bit. We've had some real positive outcomes relative to the positioning of premiums and benefits in these markets. In all but one market, we have actually seen going forward, higher possibility around premium yield, based on the government fine-tuning some of their premium measurements and risk selection and that sort of thing. The Medicare program is stronger today than it would have been 12 months ago at this time. So we will be -- I anticipate in all markets we are in now for 2004, although we are not finished with that. I don't anticipate any major geographic changes relative to where we do business and I think it will be a strong contributor to our earnings next year, as well.

Okay. Thank you.

Your next question comes from John Szabo (ph) of CIBC World Markets.

Good morning, thanks. Just a question about the comment on the mid-year financial review, would that imply that you'd wait for any further share repurchase authorization until that is completed?

Right. We have probably the most scrutinized capital structure of any company I have ever been associated with because so many people look at it. So, when we look at liquidity and capital adequacy we make sure everybody takes a look at everything before we make a decision. The other thing we have always said with respect to share repurchase, we are always looking for things that will strategically fit and grow the company. After those two things are done, then generally around mid-year that is when we take a look at what we could do with anything that is over and above the needs that are dictated by those things.

Given the fact the stock is about the same price you purchased those shares on average, would it be fair to assume if everything goes well with rating agencies and barring acquisition, you would again be an aggressive buy are of your shock as you were this last quarter?

If we indeed had the excess. Again, that is still -- looking at the investment alternatives that the company has, rating agencies, regulators, then generally -- and our general overall financial needs, yes, we would be. Obviously these are evaluation basis, we feel the company is very attractive from cash -- just starting with the - just the mention the cash flow perspective.

Do you have any idea of the free cash flow for the parent company would be this year based on your already published guidance?

What we had said before, we wouldn't change that. I mean, we continue to look at the aggregate surplus that builds up in the subs. That would be included in the 10-Q. We work on that basically all due at the end of this week. We continue to still look at that. We have a number of entities, of course. So, but looking at it, I think things continue to build as they have in the last couple of years.

Okay. Thanks. Could I follow-up with two quick detailed questions on TRICARE? The sequential decline in revenue, was there something -- something come out that quarter?

If you are referring to the sequential decline in ASO revenue, ASO revenue in TRICARE basically started last year and with TRICARE for life and senior pharmacy, those year-ago estimates were based on estimates - basically they were just estimates from the third-party payer and as we work through the year, we took those estimates down all year long. In the fourth quarter we ended up with 28.6. Now, we are back to 31. As you can see it is 39 in the ASO portion. So, again, you know, that plus the timing accrual on the basic premium business is the difference.

Okay. And then, with regard to the actual impact of the medical expenses incurred from the dependence of the reservists, would that flow through that TRICARE RBNR line or expense payable line in your -

Would flow through both, both -- first, on the top because that would be the BPR and those such things that go with it. Then, what would go back out be the sun contractors and risk share with the government and those types of things. We break them both out because the prime contractor, we handle all the cash.

Is it fair to say most of that increase in TRICARE was from that particular event?

This quarter, the actual increase came from the fact that third-party administrator slowed down the payments on claims that were not submitted electronically. So, that's basically again, people have been seeing the wisdom of moving to electronic and taking advantage of the technology as a tool. Now, the payer, Blue Cross Blue Shield of South Carolina has put that also on TRICARE claims from providers.

So, very little impact on the in that line item from reservists?

Yes.

Thanks.

Your next question comes from Adam Miller (ph), William Capital.

Good morning. I have two questions. One, the first is can you talk more about the member self-service and how much is coming from availability versus the other initiatives you are developing yourself?

I will take a shot at that. We're now seeing transaction volume coming through Avail (ph), which is in Florida of a million per month now. It has a pretty significant impact on overall results. What we have learned and understand now is that when the payers get together, it is us and Blue Cross of (ph) Florida there is enough through-put and you do it in a non-proprietary fashion, it becomes a pretty effective tool in a doctor's office. It is the provider community, penetration is higher than with consumers. The consumers are on one of these rocket launch in terms of adoption. In terms of overall decision impact has been bigger and actually been quicker. So, I'm a big believer, there is a lot of people who don't believe doctors are going to adopt all this. Well, all the data is in and they do. It has been a real big productivity gain for the doctor's offices that use it. I can try (ph) out any number of testimonials from providers in Florida that would indicate exactly that. It is mixed, it is all segments. Our broker community has no reason to do anything on paper with us any longer so you see his (ph) option there picking up. It is every participant, every constituent all on a very rapidly increasing adoption trend line. So, providers have been biggest and fastest relative to the whole thing.

Great. How do you see the partnership model or open-platform model moving forward in other markets?

I am looking for other opportunities right now to take it to other states with basically the exact premise. I am not trying to get a committee together of 10 companies and get them to agree on anything. I think the platform is already built, availity (ph) has the technology. It is already in place, it already works, we are already putting business through it. Now I am just looking for other places to get another major payer where we would represent the same critical mass to move it forward. I think there will be opportunities there. It is the only real opportunity driven by payers, where you actually bring two things. One is, (inaudible) there you have people in the company that go to doctor's offices and generate the traction. And then just overall, critical mass so that as you have this agenda you get people's attention.

Great. I appreciate the additional insight. And then, one follow-up question that is more picky in terms of the dental membership. I am trying to revise my model. The numbers I have in the dental membership from last year don't fit to what you provide now. I know you sent that and additional revised dental schedule. Could you comment on the immaterial impact of the membership change?

I think it is immaterial. The big shift is we had large fully insured accounts that went to ASO. That is one of the things that made the difference. -

We also had a couple of accounts where they were paying a small PMPM for an access only type of thing into the network, which was residual from an acquisition some years ago. That business moved on and virtually no impact on the company. There is a couple odd-ball things in there relative to that. The members that are paying traditional rates and we think of as traditional dental member and not dropped.

Okay. I know you had sent out revised membership schedule, but that is not fitting with what I have now. Maybe I will get an updated schedule from you.

Thank you.

Your next question comes from Eric Veiel (ph) Deutsche Bank.

Thank you. Can you guys just quickly explain there is about nine percent sequential drop in the specialty premium revenue. Why that happened?

Basically the specialty premium follows small groups. The smaller groups. And there has been some turnover in those accounts. There is generally not a lot of profit associated with those because they are generally reinsured.

Specifically what type of product then is making up majority of that that is linked to small group?

Short-term disability and life insurance that is coupled with wide small-group policies.

Okay. If I recall from your comments earlier, I thought you said change in employment of members was 70/30?

Yes.

Okay. So, we would expect this line item would probably continue to show sort of flat line from here, is that fair to say?

Small group will grow slower than large group. But we are expecting small group to grow throughout the year. So, there is a number of things in play. The penetration of specialty products in small groups are put under pressure when the premiums are very high for the basic medical plans. So, employers drop things in the benefit package to keep the whole thing afloat. Those are the most susceptible type of offerings. Small group business is not going to shrink. It will not be directly related to that. You will see it flattening out.

Okay. Second question, the Medicaid enrollment looks like it was down sequentially, was there something specific to Puerto Rico market that cause that membership number to drop?

It bouncing around. If you went back to the fourth quarter it was up by the amount it was down in the first. It generally hangs around500,000 there. There is nothing unusual about that.

Okay. And then just the final question. If you guys could provide color on geographically, the enrollment changes. And maybe the way to look at this is since you had 200,000 adds which markets saw the strongest growth there and 190,000 drops which markets were the most impacted by that?

Generally proportionate. It is nothing new in the story though. The adds will be in market where we are a significant player, in a Houston, Tampa, South Florida, Cincinnati has had a really good run in the last 18 months. So, it's our key markets where the growth is. The drops, especially related to some of these slice accounts, can actually be in the key markets depending on where the employer is. Chicago is looking at a slice account or two that have gone away even though the market is strong for us. So, generally where we are strong, we grow. When you look at specific lines of business, slice versus not, this sort of thing, sometimes you have different results regardless of the positioning inside the market because of where the employer may be and wanting to go relative to consolidation and/or they may have us in a position where it is not a viable business for us and we have to walk away. I would generally say, as in the past, where we strongly grow, and where we are not big enough from a critical mass perspective, that is generally where declines come from.

Okay. Thank you.

Matthew Borsch (ph), Goldman Sachs.

Good morning. Just a question to follow-up on the medical cost trends and the medical loss ratio on the Commercial side, just so I understand. If I'm getting it right, the Commercial net loss ratio improvement was driven primarily by the calling of unprofitable accounts and you experienced some favorable utilization in the first quarter but you are not recognizing that as being sustainable for the full year. So, you are sticking with 12 to 14 percent, is that correct?

Mostly. 12 to 14 is correct. The calling is part of the story. You also have some admin gains there that are adding to profitability in the commercial space.

Right. Right, I was just focused on the improvement in the Commercial MLR and trying to understand if more of the medical cost trend slowdown turns out to be sustainable then you are estimating at this point, whether that could be upside to earnings going forward?

That would be good news, yes.

Great. On a different topic, the higher RSP activity that you are seeing on national accounts, do you have any sense of what is driving that or if you can't talk about specific competitors, maybe you know, where there is interest from national account employers? And I assume most are self-funded in moving away from current vendors?

There is a lot of frustration in all places, including national accounts, biggest companies, relative to medical costs. One, everybody in the marketplace looks around to see what alternatives exist relative to some solution in the cross-space. Every piece of business gets shopped. The second piece is if you get into the account space, the more competition, the better from the consulting community's perspective and from the employer's perspective. They are looking for alternatives to the current cast of suspect (ph) they deal with all the time because at the end of the day, service has not been a differentiator for anyone in the space historically. Medical costs continue to climb, whether they are self-funded or not doesn't matter. It is a combination of looking for alternatives, confidence in Humana growing as we spend more time with these people and let them see our capabilities. The service proposition is beginning to have helpful power for us relative to having them look at this. This is pretty good. So, customer service in and of itself today wouldn't win, but combined with other things is meaningful. So it is a number of things, the biggest driver is no one has delivered a real solution to the cost problem. So, every company and every consultant and every participant is looking for alternatives and gives us a great opportunity. It is a great opportunity for someone like Humana who is entering the marketplace for the first time. The marketplace is opening their arms to us and saying, "come talk to us." It is a nice opportunity.

Great. Thank you.

Your next question comes from Roberta Goodman (ph) of Merrill Lynch.

As you are looking at the medical cost trend that you reported on the Commercial, how the differences might play out between the components for the suite products versus the more traditional products?

Smart suite, we are seeing a couple of things happen. I will provide more clarity on this as we get deeper into the maturity of the data. With our own people and with the first handful of clients out there, we see a bit of a drop. As these things land, a bit of a drop in high-tech outpatient things. Inpatient utilization has dropped a bit. Doctor visits tend to go up, which is fine. Drug utilization has remained relatively stable in all of that. So, it's too early to get too excited about the particular pieces. That is at least so far how it is playing out.

Would your hypothesis be with the increased cost sharing that the portion of the utilization that has the greatest (inaudible) of demand would be the outpatient piece?

That is the way it looks today. I think we will see longer term effects on drugs, as well. I think you are going to see those pieces that are most elastic, which are going to be pharmacy and outpatient diagnostic and testing (ph) work - some hospital utilization. I am not going to argue, a lot of people in hospitals shouldn't be there, how long they stay can be affected by some cost sharing.

What about emergency room visits, did you get anything there?

Well, nothing I could share with you yet, Roberta. But that scenario where I believe and we are encouraging employers to be relatively aggressive. If you look at the number one disagreement we have with memberships it has to do largely with termination of whether something is emergency or not relative to benefits in that department. So we are suggesting to employers and have done it ourselves, build a benefit package where you can become indifferent to that and get people to think rationally. We raised the out-of-pocket cost sharing as aggressively as we can in the emergency rooms basically just to get ahead of that.

Where would that be on balance now?

Depends on the company. Outside of our own, I don't know off the top of my head. I think at least 50 to $100 per visit sort of differentiator. I think it should be bigger than that in the future.

Thanks.

Your next question comes from Ed Kroll (ph)of SG Cowen.

Good morning. I've got a couple of questions here. Back on the reserves and the favorable development being offset by current period accruals, could we expect roughly the same level of favorable development in the remainder -- remaining three quarters of '03?

The $1.37 and $1.43 range, they include no benefit, no impact, from favorable development.

Understood, but as far as your schedule goes on the change in the medical and other expense payable, you know, where you had 35 million of non-TRICARE favorable development, do you think you would have similar amounts a quarterly basis in that line of that schedule? For the other three quarters?

The answer is no, we always book to our best estimate, that is how the 35 really gets set. So, that is what it is today and we will continue to look at it as we go forward.

Okay. And then, on the MLR trend for the rest of the year, you have some seasonality in the second quarter, right? So, maybe that goes up slightly in Q2 and then as you get benefit or payment on the TRICARE business, the incremental business, maybe it comes back down in Q3 and Q4, is that sort of the way it should work out?

Generally that has been the historic pattern. Again, we continue to work our way through it. We have a number of things that different this year given the mix of government and Commercial and also what I said earlier about TRICARE BPAs and the run rate.

Okay. And then final thing. In this press release, March 31, '03, TRICARE enrollment, are those incremental lives included in there, the reservists, previous reservists that have been called up to active duty, are they in the enrollment numbers?

No, they are not. The reason for that is because we all think of the TRICARE business as being like the Commercial business. In terms of enrollment statistics, they come from the government and the beneficiary things come from the government. So as we get information, then we continue to refine our estimates. That is why sequentially not a lot of change in TRICARE membership.

Okay. Thank you.

Let me close here with a couple quick items. Just so there is no confusion, let me say it one more time. The guidance we have given for the year's earnings does not include the benefit of any prior period adjustments. With that, let me just close by saying I think it has been a really good quarter. We have grown earnings significantly and raised guidance (inaudible) a little bit. Our cash flow is strong and we raised our guidance there a little this quarter. Commercial results are significantly better. We are in fact seeing shift toward the Commercial earnings power inside the company. Our smart suite results continue to be very good and we are beginning to get quote volume and actual sales in that business. The big benefit is the maturity of the data (ph) which is now happening. I believe we will win the TRICARE contract for the south region and lastly, I want to thank all of the Humana associates on the call today for making this quarter and our continued progress possible. Thank you very much.

This concludes today's Humana conference call. You may now disconnect.