Humana Inc (HUM) 2007 Q3 法說會逐字稿

Good morning. My name is Marie and I will be your conference operator today. At this time, I would like to welcome everyone to the third-quarter 2007 earnings release 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 session. (OPERATOR INSTRUCTIONS) Thank you. Ms. Regina Nethery, Vice President of Investor Relations, you may begin your call now.

Thank you. Good morning and thank you for joining us. In this morning's call, Mike McCallister, Humana's President and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our third quarter as well as comment on our outlook for the remainder of 2007 and the full-year 2008. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts.

Joining Mike and Jim for the Q&A session will be Jim Murray, our Chief Operating Officer; Art Hipwell, Senior Vice President; and Kathy Pellegrino, Vice President and Acting General Counsel. We encourage the investing public and media to listen in to both management's prepared remarks and the related Q&A with analysts.

This call is being recorded for replay purposes. That replay will be available on Humana's website, www.Humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. For those of you who have company firewall issues and cannot access the live presentation, an Adobe version of the slides has been posted to the investor relations section of Humana's website.

Before we begin our discussion, 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. Investors are advised to read the detailed risk factors discussed in our most recent filings with the Securities and Exchange Commission. All of our SEC filings are available via the investor relations page of Humana's website as well as on the SEC's website.

Additionally, investors are advised to read Humana's third-quarter 2007 earnings press release issued this morning, October 29, 2007. This press release and other historical financial news releases are also available on our website.

Any references to earnings per share or EPS made in this morning's call refer to diluted earnings per common share. Finally, today's press release and this PowerPoint presentation and conference call include extensive discussion of 2008 guidance. Since Humana has an investor day only every other year, we have allocated more time for the prepared remarks this morning; but we will still allow ample time for your questions.

With that, I will turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. As we announced in our news release this morning, for the third quarter Humana again posted favorable results of $1.78 per diluted share, significantly above our previous guidance for the quarter of $1.45 to $1.50. EPS includes $0.25 per share associated with certain positive developments specifically related to 2006, which are not expected to recur in future periods. An additional $0.05 per share above our expectations was due to better than anticipated ongoing operational results in both our commercial operations and our stand-alone Medicare prescription drug plans, or PDPs. These letter developments are forecast to positively affect fourth-quarter 2007 and full-year 2008 results.

Excluding the $0.25 per share that is unique to 2006, our third-quarter earnings per share are up 61% over the $0.95 per share we earned in the third quarter of the prior year, with much of that increase coming from higher average Medicare membership year-over-year and continued growth in our Commercial Segment earnings.

In addition to these favorable financial results, we achieved a number of milestones since our last earnings call. In late September, we received approval from the Centers for Medicare and Medicaid Services, CMS, to resume marketing of our individual private pay for service plans in late September. We remain on track to achieve our 2007 membership targets and are well positioned for 2008.

During the quarter, we signed a definitive agreement to acquire KMG America, a group and voluntary insurance benefits and third-party administration company, with more than 1 million members. This acquisition broadens and diversifies our commercial portfolio and is forecast to be slightly accretive in 2008.

Additionally, we recently closed on our acquisition of CompBenefits, an Atlanta-based company with 2.3 million dental and 2.5 million vision members nationwide. It is also expected to be accretive in 2008.

In early October, we received pharmacy benefit management accreditation from URAC, the gold standard for independent expert validation that accompanies pharmacy management organizations, meets rigorous quality standards for consumer protection and empowerment.

Overseas, London-based Humana Europe was chosen by the United Kingdom's Department of Health to implement strategies at the local level to enhance patient experience, improve clinical outcomes, and reduce costs.

Finally, also in early October, Humana's new veterans health unit was awarded the Department of Veteran Affairs first-ever specialty network demonstration contract, known as Project HERO, for healthcare effectiveness through resource optimization.

Our selection over six competitors has strategic significance for 2008 and beyond. It positions Humana as the sole contractor that can offer its TRICARE network discounts to the VA in these test geographies. Further, it validates the 11-year success of our military line of business and suggests that as the VA turns increasingly to the private sector to meet veterans' long-term health needs, Humana will be an active partner.

Let me show you the VA demonstration in more depth. The four circled numbers on this slide represent the area that make up the initial Project HERO demonstration areas. Humana was successful in being awarded all four of these regions. As you can see, two of them, 8 and 16, have obvious synergies with our existing TRICARE South region.

The VA, like Medicare, represents a growing market in health benefits. To give you some sense of the scale of VA spending, the VA has requested $27 billion for medical services in its proposed budget for the upcoming fiscal year. While it's difficult to say what portion of this spending might ultimately be contracted to the private sector, Humana is well positioned to serve our nation's veterans, leveraging our existing government and commercial provider networks to bring Humana's proven techniques for lower cost and a superior health plan experience to hundreds of thousands of individuals.

Now, let's look to the future. We are again at a pivotal time for our industry, facing multiple calls to increase wellness, reduce crushing healthcare costs, and find ways to solve the needs of the uninsured. Recent high-profile union negotiations highlight just how difficult the issue of funding health benefits is.

But our efforts over the past 12 months have brought greater clarity on a variety of important topics, including where future growth in the industry will come from and further validation of the power of the consumer to improve wellness and reduce expenses. Thus I would like to spend a few moments discussing why we are convinced that Humana is one of the best-positioned companies to succeed in health benefits in 2008 and beyond.

In Medicare, we're forecasting net Medicare Advantage membership growth of approximately 20% for 2008. We will continue our evolution from the concentrated membership gains we achieved in 2006 and 2007 to more regular month-in month-out growth through age-ins, group Medicare, and special-needs plans. CMS has approved new plans and market expansions in many states. All of our multiple distribution channels -- Web, telephonic, company agent, independent agent, and alliance partners -- are well prepared for the beginning of the 2008 enrollment season on November 15, something I will discuss in more depth in a few moments.

In our Commercial Segment, we foresee continued pricing discipline and further expansion of our pretax margin. Our portfolio migration strategy has been successful and our book of business will approach its desired balance in 2008. ASO, Small Group, individual, and consumer plans continue to be our areas of strategic focus.

Next year, we will also see expanded contributions from KMG and CompBenefits' product offerings. These specialty company acquisitions are expected to increase our commercial margins over time as well as enhance our ability to appeal to broad and diverse sets of customers.

In TRICARE, while we still await the Department of Defense's release of a Request For Proposal for the next contract period, we anticipate success in maintaining our South region business. Bidding will undoubtedly be keen, but with our history of excellent service delivery and our knowledge of military families' health needs, we believe we are very well positioned to win.

TRICARE continues to be a good operational performer for the military community in the South region and a solid financial performer for our Company. 2008 will also see the start of the Project HERO demonstration contract on January 1. We expect that to slowly ramp up throughout the year, with some earnings accretion as the year progresses.

We believe each of the components of the operational momentum I have just described will result continued progress in our 2008 earnings. Earnings per share for 2008 are forecasted to be in the range of $5.30 to $5.50, up 10% to 16% when compared to 2007 EPS, or 16% to 22% excluding the $0.25 per share in the third quarter, items we do not anticipate to recur in future periods.

I will now take a closer look at our Medicare and Commercial business segments. Turning in more detail first to Medicare, three points stand out.

First, given the aging-in of baby boomers, Medicare continues to show that it is the best near-term opportunity for significant growth in our industry. We were Medicare leaders in the 1980s and the 1990s, and we're extending our leadership role in what I think of as the 21st century Medicare, a more sophisticated and organized program that drives better results and value.

Second, we continue to see Medicare as a solid example of how the insurance industry can work with government to improve consumers' health outcomes while reducing their expenses. Moreover, surveys continue to show senior satisfaction with Medicare Advantage and PDP offerings in the neighborhood of 90%.

Finally, our increased market penetration due to Medicare expansion has opened doors in enhancing our commercial provider networks, supplementing the advantages we have gained from intensive operational discipline in that segment as well.

Medicare, however, is not just a near-term growth opportunity. It will be a growth opportunity for many years to come. That opportunity stems from a number of long-term cost drivers that show no sign of slowing. Coupling these factors with the one at the top of the list, an aging population, increases the opportunity for those companies that can present and execute on a solution for the Medicare Trust Fund.

We believe -- and MedPAC has taken a similar view in its report to Congress -- that the current methodology for funding Medicare today is not sustainable over time. Not only are baby boomers aging into the Medicare program, people are living longer as well. There is simply no parallel phenomenon anywhere else in the health benefits universe today. As this chart shows, the pace of aging-in starts to accelerate dramatically in a few years.

As I said earlier, Medicare is an area that as time goes on bodes well for companies like Humana that have a strong head start and a wide variety of product offerings. Seniors are knowledgeable consumers and have varying needs, from the healthiest and most agile to the most vulnerable. Companies that have over time carefully researched and deeply understood Medicare beneficiaries' needs are the ones emerging as leaders, placing ever-greater distance between themselves and late-entrance competitors.

We have also rejected the one size fits all notion of the Medicare market, which is an important element of our long-term Medicare success. Moreover, initial outcomes research indicates that the tools and techniques that we have successfully developed for our commercial membership base could have positive implications for Medicare.

To understand why, it's important for us to recognize that Medicare is in a state of evolution. From its creation in 1965 to the MMA in 2003, Medicare only paid claims and policed fraud. Over time, as the preponderance of episodic diseases gave way through breakthrough surgical and pharmaceutical advances, to today's prevalence of far more costly long-term chronic conditions, the program has been forced to adjust.

21st-century Medicare, through the private sector's emphasis on well-being and chronic disease management rather than episodic sickness, includes a number of tools and techniques that have already shown their effectiveness in lowering cost and advancing wellness for employers and employees. These include care coordination, effective network contracting, catastrophic case management, health improvement and prevention programs, and data mining to understand and anticipate Medicare member needs.

Our overall strategy for success in the evolution of Medicare is simple but long-term in its implementation. After the passage of the 2003 Medicare Modernization Act, we set out to rapidly expand our Medicare membership by establishing relationships with Medicare beneficiaries before most of the competition.

Our members are entrusting us with a significant aspect of their lives. We want to nurture and sustain those relationships long into the future, through continuing to provide tools and techniques to help lower cost, through exemplary service, and through members who share their experience with others. We also note that to deliver real customer value, we need to support Medicare members in managing their health and well-being, which includes guiding them on user care wisely and pointing out ways they can save money.

We continue to build an infrastructure around our guidance proposition, which distinguishes the support our members receive versus original Medicare.

I have already referenced our focus on provider relationships; and we continue our successful product development to our network-based products. The strategy is designed to follow up our initial enrollment success with a strong focus and commitment to where we believe the future market exists.

Let me take you a little deeper into how we support our members' desire to improve their health status, what we will call their well-being. This slide illustrates care coordination, as but one example of the multiple ways consumer-focused techniques work for Medicare members.

Humana's Medicare clinical team deploys an effective combination of high tech, high touch support to keep people healthier while producing better outcomes and cost savings for members and for society. When adjusted for severity and demographics, 2006 data shows Humana private fee-for-service members experienced a 6% decrease in hospital visits and a 21% decrease in emergency room visits compared with original Medicare.

I highlight private fee-for-service statistics in part because private fee-for-service is sometimes characterized as a nonmanaged product. It's important to know that Humana's private pay for service members benefit from the vast majority of our programs to enhance well-being just as PPO and HMO members do. This is an aspect that we make part of the value proposition for all Medicare Advantage offerings.

Let's look at how we are performing with respect to achieving the goal of having Medicare beneficiaries use care more effectively. The recent study summarized on this slide, based on the latest available data, indicates our Medicare Advantage plans are showing a shift in healthcare utilization toward more preventive and home care, which reduces cost for the average Humana Medicare Advantage member.

It's clear that people appreciate this help. Members in our Medicare Advantage plans have the right to vote with their feet; yet they choose to stay. Less than 1% of members who leave our Medicare Advantage plans go back to original Medicare.

As for Medicare Advantage as a whole, a survey by America's Health Insurance Plans earlier this year reported a satisfaction rate of 90% for Medicare Advantage members nationwide.

When we look at how these programs impact chronically ill patients the results are even more impressive. Wellness dramatically improves. Visits to the doctor or to the hospital decrease. And the cost of the system is significantly reduced. Note in particular the rise in home health visits. Again, our goal is to pay closer attention to the member by investing in the appropriate infrastructure needed to allow all members access to clinical guidance tools and techniques, ensuring individuals get the best results both clinically and financially from the program.

As we prepare for the influx of age 65 Medicare beneficiaries who are familiar with network-based programs from their working lives, we have begun establishing and expanding our contractual relationships with hospitals, doctors, and other healthcare service providers. We are well positioned to serve members choosing these products, and we will continue to expand our geographic reach to serve more of them in the future.

We have been committed to the broad availability of PPO products and quickly established an expansive regional PPO network when that product was created as part of the MMA. In fact, 80% of our private pay-for-service members live in areas where they would have easy access to our PPO networks.

In terms of sales, we expect Medicare Advantage gross sales to rise significantly in 2008, increasingly driven by age-ins, employer group retiree sales, members choosing to upgrade, and not least our own growing understanding of how best to succeed in this retail environment.

We were pleased with the fast start we had in 2006. As other plans began to enter the market more fully in 2007, it brought competition around more aggressive plan benefits and premiums. We have evaluated our competitive position for 2008, and believe we are now in an environment of greater stability. This, together with our attractive 2008 benefit offerings, is expected to lead to higher gross sales and lower membership attrition.

Turning to membership growth, Medicare Advantage membership for 2008 is expected to experience net growth of approximately 200,000 to 250,000, almost double the number last year. This will be driven by a mix of market expansion, product expansion, and improved benefit design.

For example, in our HMO business we have opened new markets in Denver, Salt Lake City, Tucson, Dallas, and Alexandria, Louisiana. In our PPO product, additional membership and experience developed over the past year gave us the data we needed to validate a change in the benefit design to more closely match that offered in our private pay-for-service products. As you can see from this chart, over time our membership in PPO plans is projected to increase as the number of age-ins continue to grow and as our new plan benefits find traction in the market.

In our stand-alone PDP offerings we anticipate maintaining a leading membership position, even with the projected net decline in membership of about 300,000 from the current total of 3.5 million. It is worth noting that we may benefit greatly this year from a reconfiguration of the Medicare.gov website, where millions of seniors turn to guidance on plan selection. While in the last two years the plans were ranked according to premium cost, for 2008 the ranking is based on total projected out-of-pocket expenses, where Humana compares quite favorably with the competition.

In my frequent visits on Capitol Hill over the past few months, a number of important aspects of the Medicare debate have become clear. First, the Medicare Advantage funding cuts passed in the House version of the CHAMP Bill are not in sync with the benefits of Medicare beneficiaries. They do not want their benefits cuts; they like having options, particularly for rural, minority, and low-income beneficiaries. And their voices are getting through to members of Congress. Over the next few months, I am confident that Congress will listen to its constituents' voices.

Second, Humana continues to concentrate its effort on operational excellence to ensure we deliver value and improve services to numbers.

Third, mounting evidence indicates that Medicare Advantage with its inherent cost-saving attributes represents part of a long-term solution to Medicare's projected budgetary dilemma. Without some form of rationalization, the Medicare program is headed for bankruptcy.

Finally, coordinated care programs will have an increasingly favorable impact on the Trust Fund's solvency as they reduce unnecessary utilization and produce better health outcomes for seniors, as preliminary data shows.

I will turn now to our Commercial Segment. As our Medicare footprint has grown, we have expanded our commercial operations as well. Today, the Commercial Segment actively sells in more than 17 states and Puerto Rico. Recent expansion into Utah, Mississippi, Tennessee, Georgia, and Colorado, and other areas have leveraged our nationwide Medicare footprint to open new and attractive commercial opportunities. In some instances, Medicare has been directly responsible for these opportunities. In others, we have been able to undertake greenfield commercial expansions.

We have also begun negotiating with hospital systems in major non-Humana cities with a differentiated approach to entering new markets. In the course of these discussions, we have heard many systems say they derive no real benefit from offering different rates to different carriers and are seeking a win-win alternative. As a result, we are moving the discussion from contentious haggling over prices -- the traditional commodity basis for negotiations -- to exploring non-commodity partnerships based on value-added administrative services that Humana can now offer.

This represents an innovative approach to breaking down historical barriers to entry and ending anticonsumer, most favored nation discounting. We will keep you informed of the effort as it goes forward.

For 2008, we foresee continued pricing discipline, further expansion of our pretax margin, and more progress in our ongoing effort to migrate our book of business to a balanced and consumer-oriented membership portfolio.

ASO, Small Group, individual, and consumer plans continue to be our area of strategic focus. Over the past five years, our ASO block has grown from 22% of our commercial membership to comprise nearly half of our membership today. We believe the ASO business offers greater earnings consistency than large account fully-insured business, as well as driving important volume through the provider network.

Consumer plan membership has grown from a negligible percentage of our block in 2002 to more than 18% today. Consumer plans remain a differentiator for Humana in the marketplace, with proven savings results for our group and individual customers.

On October 1 we closed the acquisition of CompBenefits. The addition of CompBenefits creates a combined specialty products business with more than $700 million in annual revenue and more than 6 million covered members. The acquisition expands Humana's specialty product continuum by adding dental HMO product offerings in addition to an established vision product line.

Since our specialty offerings are becoming a major strategic direction for us, I will take a few moments to outline the significance of our KMG acquisition. The market trends box shows that voluntary benefits are a growth industry, both quantitatively, in terms of a forecasted 5% to 7% annual growth rate over the next few years, and qualitatively, based on employers' increasing willingness to offer these benefits. They are generally paid for by consumers, not employers; and as such fit well with our larger consumer strategy. They are an extension of our core health benefits portfolio and create deeper relationships with our members.

Finally, KMG brings Humana a management team with expertise in product design, pricing, underwriting, and marketing voluntary and supplemental products.

I would like to close with some thoughts I shared with you at our investor day in New York last fall. Our success over the last 12 months has only confirmed our commitment to the principles we shared then, which might be described as a roadmap for health benefits leadership in the 21st century. These elements of a successful strategy all revolve around the idea of thinking differently and embracing the difference.

For the sake of time, I won't read off each of these elements and what it will take to win. They are listed in the slide. However, we would argue that Humana's passion for the consumer and our zest for maximizing the power of data are two of the many elements of a winning health benefits company that our associates focus on daily.

This is something else you have seen before, but also worth revisiting. In a way, everything I have discussed with you today goes back to this diagram. Humana's commitment to consumerism, first set forth seven years ago, remains unchanged. The only thing that has changed is that for the four integrated circles above, there's far more populated with tools, capabilities, and programs than they were at the start.

We are thoroughly convinced, and a growing body of evidence bears it out, that given actionable information consumers are just as able to seek and find value in healthcare as they are in the rest of their purchasing lives. By offering guidance at all points in the choose, finance, and use equation, Humana empowers consumers to maximize their power as drivers of two-thirds of the US economy and make competent, successful, healthcare decisions for themselves and their families.

In summary, as we look at 2008 and beyond, we believe Humana is poised to continue its industry growth leadership. Strong execution based on keen understanding of consumers and a long-term strategy to meet the health cost and quality of life challenges our nation faces today are the keys to our continued success. We view government as an essential element in a multifaceted solution to the country's healthcare problems.

While political debate often creates waves on Wall Street, our strategic commitment to comprehensive consumerism and the ability that gives us to respond effectively to new circumstances position us well for ongoing success in today's changing environment. With that, I will turn the call over to Jim Bloem.

Thanks, Mike, and good morning, everyone. Today, I will review our third-quarter performance, provide color around our 2008 financial guidance, and comment on potential 2008 sources and uses of operating cash flows.

Let's begin with a brief review of our third-quarter performance. If we start with the $1.48 midpoint of the third-quarter EPS guidance issued at the time of our last earnings release, our non-GAAP earnings per share for this quarter was $0.05 per share or $13.5 million higher than that midpoint, primarily due to slightly better commercial and stand-alone PDP performance. We expect both these improvements to trend forward and have adjusted our 2007 EPS guidance accordingly.

Also, as Mike indicated, our third-quarter EPS of $1.78 included two items totaling $0.25 per share or $68.9 million which related to prior years. These items are not expected to recur in future periods.

The first and largest of these items arose from the 2006 Medicare Part D settlement. It was $0.20 per share or $54 million. Approximately half this amount primarily was due to lower state to plan claims than originally were indicated by CMS at the end of 2006. The other half primarily resulted from a higher percentage of state to plan and plan to plan claims ultimately being attributable to low income cost subsidies and reinsurance layers than originally was estimated. Because both these amounts relate to 2006, which was the initial year of the Part D Medicare benefit, we do not anticipate these amounts to recur in 2007 and beyond.

The second third-quarter item related to prior years arose from a settlement for 2004 through 2006 for a favorable development relative to the claims paying accuracy guarantee provision of the TRICARE contract. This component was $0.05 per share or $14.9 million.

Turning next to an update of our quarterly overall Medicare medical expense ratio, we're pleased to report that, excluding the 2006 Part D settlement that I just described, our overall Medicare MER is continuing to track in line with our previous projections of both the last 90 and 180 days.

Now let's go on to 2008. Looking first at our consolidated revenues, we are projecting 2008 revenues to be approximately 16% higher than those for 2007. This is based on our guidance midpoints.

This anticipated growth primarily is driven by continued increases in our Medicare membership. We anticipate that our overall 2008 Medicare MER well edge up slightly due in part to the impact of the favorable 2006 Part D settlement.

Additionally, as we have described many times in the past, we design our Medicare benefits to ensure that anticipated savings in our Government Segment SG&A ratio are in turn passed directly to our Medicare members in the form of enhanced benefit designs. This enables us to consistently target an operating margin of approximately 5% for our Medicare business in total.

Our Commercial Segment is also anticipated to perform well in 2008, with Commercial pretax earnings expected to increase by a mid to upper teens percentage. We also are pleased to note that we have increased our 2007 Commercial Segment pretax income guidance for the third time this year.

Turning next to our consolidated selling, general, and administrative expenses, we are pleased that between the beginning of the fourth quarter of 2006 and the end of the third quarter of 2007, our total dollar SG&A quarterly spend increased only 1.5%. Despite normal CPI levels of expense inflation including salaries and wages and benefits, this near constancy in total dollars each quarter was achieved through the significant productivity gains of Humana associates. In turn, this productivity together with increases in premiums, ASO fees, and other revenues drove down our consolidated SG&A ratio by 140 basis points over this same four-quarter period, from 14.7% to 13.3%.

Now, moving to the fourth quarter of 2007 and all of 2008, we expect the quarterly total SG&A dollar spend to increase versus the last four quarters for the following three reasons. First, higher 2008 Medicare marketing and advertising expenditures correlate to higher anticipated 2008 sales, in that the percentage increase in the marketing spend corresponds to the projected increase in Medicare Advantage gross sales.

Second, as our RightSource mail order pharmacy continues to expand, we expect increases in both related revenues and corresponding administrative spend. RightSource typically runs a higher SG&A expense ratio, which is similar to that of our ASO products.

Third, we expect to have a full or nearly full year of operations for both KMG America and CompBenefits. Specialty products also tend to have a higher SG&A expense ratio. We expect the RightSource expansion and the specialty business acquisitions, which again all run higher SG&A ratios than our medical businesses, to negatively impact our 2008 consolidated SG&A ratio by about 40 basis points. This will mask our continuing productivity gains. So consequently we are anticipating a 2008 SG&A expense ratio to be in the same range as it is for 2007; that is, 13.5% to 14%.

Next, we turn to the key variables affecting our 2008 quarterly earnings. This slide shows how Medicare Advantage, the stand-alone PDPs, Medicare marketing expenses, TRICARE, and our commercial results are expected to impact each quarter's earnings. To illustrate these impacts, we have used arrows to indicate a given variable's impact on a particular quarter's earnings.

While we are not forecasting our specific 2008 quarterly earnings today, preferring to wait until the fourth quarter and January sales projections firm up, this slide gives our current thinking on the degree to which each variable well affect next year's quarterly earnings pattern.

Turning finally to cash flows, our across the board operating performance continues to enable us to project solid cash flows for 2007 and 2008. As our total revenues have grown to about 2.5 times the 2001 level, we have continually enjoyed an average ratio of operating cash flow to net income of approximately 2 times. This high ratio of operating cash flow to net income results from the high growth rate we have experienced during this period and the nature of the working capital attributes of our business -- mainly the upfront collection of cash revenues and the concurrent estimation and accrual of medical expense claims.

As the green portion of the accompanying slide indicates, operating cash flows are expected to remain at 2 times net income in 2008 after giving effect to the CMS risk-share payables and other timing issues. Our 2007 cash flows from operations include a benefit of approximately -- our 2007 cash flow -- operating cash flows include a benefit of approximately $285 million associated with working capital timing issues.

The two biggest factors driving the 2007 timing benefit are claims payment cutoffs and HMO risk-share capitation accruals, which we earn in 2007 and are expected to be repaid in 2008. These capitation amounts have grown over the last few years, commensurate with the growth in the related businesses.

While it is possible that our 2008 cash flows could similarly benefit from working capital timing issues, or the accrual of a Part D risk-share payable in 2008, we don't foresee that at this point. Thus we have not assumed any timing benefit in our 2008 cash flow benefit projections.

In terms of how the 1.5 to $1.8 billion of anticipated operating cash flow is expected to be used in 2008, we offer the following three comments. First, capital expenditures are expected to be approximately $225 million, an amount similar to that expected for 2007.

Second, additional required capitalization of our operating subsidiaries, due to the continuation of the growth of our business, is initially expected to be $125 million. This amount compares with 275 to $300 million in 2007, and $722 million in 2006.

With respect to the remaining expected 2008 cash flows from operations, we will continue as always to review and analyze additional possible acquisitions and potential share repurchase programs, in light of our desire to continue to raise the value of Humana while maintaining our debt to total book capitalization ratio in the range of 25% to 30%.

In summary, then, as this slide shows we are well positioned for continued earnings growth in 2008 and beyond. With that, we will open up the phone lines for questions. We ask that you limit your questions to facilitate us getting to as many questions as possible today. Operator, would you please introduce the first caller?

Yes, sir. Matthew Borsch from Goldman Sachs.

Thank you. Good morning. Actually, Jim, if I could, begin just on the last subject you were talking about, in terms of the cash position and cash flow. Would it be possible to sort of just walk through the sources and uses of projected cash for 2008?

I'm trying to understand what your unregulated cash position is going to be, I think, at the beginning of the year; how much deployable cash you will generate during the year; and essentially how much you could potentially spend towards acquisitions or even share repurchase if you chose to go that route.

Well, first of all, a couple of things are into that variable that we have talked about generally between the two of us. The acquisition of KMG America and CompBenefits will occur in the fourth quarter, so we had fairly substantial cash balance in the parent company at the end of the third quarter. We won't end up the year that way.

Then as we move to 2008, generally speaking we are saying we are looking for an increase in income and those working capital items which I mentioned in my presentation. So, if you start with, let's say 1.5 to $1.8 billion of operating cash flow and you subtract out the two items I mentioned, then you are sort of down around maybe $1.250 billion to 1.3 billion. As the year progresses, we will get to see how that all works out.

We will have -- at the end of this year, we will be at the very top of that debt to total capitalization ratio that I mentioned, that we like to keep between 25.7 and 30 -- between 25 and 30. We were at 25.7 at the end of the third. We will probably go up to around 29 as we complete those acquisitions.

So then as we get into the year and discuss things with the DOI, we will be in a better position to answer your question with more precision. But suffice it to say when you compare 2006, 2007 with what 2008 looks like, we should be in much better position to have free cash and the ability to do additional acquisitions or look at share repurchase etc.

Great. Thank you, and if I could just ask one follow-up here on a different topic. On the expected growth in your PPO product next year, can you talk to how the benefits compare, PPO versus private fee-for-service, and how you think you're going to execute to get the kind of growth you are projecting on that product, perhaps for next year?

It sounds like that is kind of where you want to go beyond next year. Just related to that if you could just tell us -- I know it is not about network discounts, but are you generally getting PPO rates that are comparable to the Medicare fee schedule?

This is Jim Murray. The benefit design for the PPO versus the private fee-for-service, in a lot of the states that we are doing business are exactly the same. We try to replicate the private fee-for-service with the PPO.

In other states that we are doing business, we actually have a little bit better benefits, primarily in the maximum out-of-pocket. The sales force is educated on the beneficial effects of the product differences, very well versed in the value proposition. So we feel pretty comfortable that the growth in the PPO that we are demonstrating will play itself out this year.

Into the future, we think that the beneficial effect of the PPO with how we are going to network with the high-performance networks that we have talked with many of you on in the past will drive lower premiums and higher benefits relative to the private fee-for-service. Over time, as we have said many times in the past, we anticipate the PPO membership starting to accelerate into 2008, 2009 and then beyond. I don't -- I think that is most of --.

Well, yes, actually sorry; just one point there. You mentioned locations where the benefit is exactly the same as private fee-for-service. I guess I'm trying to understand in those locations why would a senior want to choose the PPO product, which has some elements of restrictiveness, versus private fee-for-service in those situations?

We have done a lot of research, and we feel -- because of some of the things that we have studied -- that the seniors are very comfortable with a PPO offering. To the extent that the sales force has an opportunity to discuss the value proposition being very similar, we think a discussion with a senior that suggests that into the future they are likely to continue to get better benefits from the PPO relative to the private fee-for-service, in trying to discuss with the senior the long-term beneficial effect of that offering, we think will make good sense for them.

Again, the research that we have done tells us that the seniors, because of the time they have spent in their working life with a PPO kind of offering, has made them very comfortable. They are not as afraid of a PPO as some of you may think.

Okay, I will leave it at that.

Josh Raskin from Lehman Brothers.

Thank you. Good morning. Question relates, I guess, to the margins, a little bit in '08 and more I think longer-term. First, just sort of technical question. The Medicare MLR increase in '08, is that mix shift issues towards more PPO and private fee-for-service? Or is there sort of an inherent overall increase that you guys are looking for?

Then longer-term, if you think about your margin expectations -- and Mike, you have talked about this consistent 5% government business margin over the long haul -- it looks like TRICARE is coming in a little bit next year and Commercial is still going to be sort of slightly lower than 4% or so.

So you back into a Medicare MLR, it's certainly over that 5% for '08. I am just curious if that is sort of a sustainable level, or if you think there is maybe potentially pressure in '09 and beyond.

This is Jim Murray again. It sounded like there were a lot of questions, and I have been writing furiously. So let me start and see where that takes us.

Okay.

I think the guidance that we have come out with for this year's MER for Medicare is around 83%; and for next year, we are saying 83% to 84%. I think if you looked at what we have reported this year, there was a beneficial effect related to a PDP item. So there is a little bit of noise there. This year has a favorable impact for that.

There's a lot of things that obviously go into MER estimation. There is something that the actuaries call the durational impact. You have seen from our membership guidance this year that we are going to grow quite a bit, so that will improve our MERs going forward.

For the book of business that we write this year, we have got a book of business that we bring into the year where the durational impact would likely make the MERs go up a tad.

Then there is a lot of the things that Mike talked about in terms of infrastructure and a lot of the things that we are doing with nurses and all the systems and procedures that would likely bring the MERs down. I am not trying to confuse; there's just a lot variables that going to the MER.

So I think in the final analysis, we are trying to be comfortable and conservative in our guidance for next year. Since this year is in the 83% range and next year is 83% to 84%, I think that you could -- there's a lot of variables and that ultimately plays itself out.

Maybe a more simple question --?

Josh, let me add to that. When I talk about 5%, we are targeting 5%. That is for the overall Medicare business. I mean, I only wish we could get it exactly right every single year. Depending on the progress relative to utilization management and care coordination, all the things we talk about, we could end up going one direction; we might have something go the other way.

At the end of the day, the basic principle has been that if we get more productivity out of SG&A and other things, we intend to put it back into benefits, because I think the long-term health of our relationship with our government is going to require that we do not expand margins beyond something considered reasonable. As I walk around Capitol Hill, I have never had anybody push back and say 5% is ripping off the taxpayers.

So it's like the spot I like to be in. There is a huge growth opportunity without margin expansion here, and that is the way we think about it. So as these parts move around, we are always going to target a 5% overall margin over the long term. Is it going to be exactly 5%? Probably not.

That's helpful. I guess maybe just a quick easier simpler question I guess for Jim. Apples-to-apples, if you look at your product for '07 versus '08 on the Medicare Advantage side, are you anticipating MER increases? Or -- and I know there was a whole bunch of moving parts there. If we exclude even the favorable development that you saw, I'm just trying to get a sense of, in terms of your benefit designs for '08, are they more generous or less generous vis-a-vis the premium you expect?

All the other things that I laid out there put to the side, our benefits that we are putting out this year are richer than they were this past year by a few basis -- less than a basis point is what the actuaries tell me. But they are richer benefits.

But then you have to think about all those other things that I walked you through. That is why there is the range of 83% to 84% that I think that we put out there.

I'm sorry, just sneak one quick one in. The accretion from KMG and from CompBenefits, are you going to quantify any updated expectations there?

What we did in this guidance was continue to incorporate the guidance that -- when we announced each acquisition. So in KMG's case, it was 4 to 5; and the in the case of CompBenefits, it was 5 to 8; so it is 9 to 13 overall.

Okay, but no change from those previous expectations?

Correct.

Perfect. Okay, thanks.

Just coming back to your Commercial part, too, if we got to that 4%, again that would be another year of improved Commercial MER. Also you have to remember on the TRICARE part, your question that you asked Jim, we also had a little special there that was (inaudible).

Thanks.

Charles Boorady from Citigroup Investment Research.

Thanks. Good morning. Jim, a follow-up on that cash flow question. Your operating cash flow of 1.5 to $1.8 billion next year, your adjusted enterprise value is only about 8 times that even though your growth rate has been quite high. I think there is a little bit of clarity lacking on what exactly is free of your cash flow.

You mentioned some of the moving parts including acquisitions, etc. But given that you have built your RBC up now from the ramp-up in enrollment growth, what do you think of as a sort of run rate of free cash flow, excluding any discretionary CapEx, so that we can think of valuation more from a free cash flow standpoint?

Well, first of all, if you look at the 8 times as you say, obviously what Mike has talked about on the political environment, all those things affect that multiple. But then looking at the specifics, again we will go through it as we go through the year, as we always do.

The way we look at the available cash is, once we have satisfied CapEx -- because we think that that is really what is necessary, generally speaking, to serve our customers and to continue -- we do some investing in CapEx that is sort of beyond that to get us to the next level of performance. But once we take that out of there and once we take the subsidiary thing which I mentioned is going to be much, much less than it was before, we would be looking at substantial amounts to look at for acquisitions.

Again, until we go to the DOI and until we go to the credit rating agencies with our full-year performance and particularly in the states -- in each of the states that we do business in -- it is very hard to give a qualification, other than to give the kind of range we gave for operating cash flow.

The one thing we want you to take away is that we are in a much more liquid position in terms of that than we have been at any time in the last three years.

Okay, we will leave it at substantial. But if you can quantify that at some point, it would be great.

My other question is on Medicare Advantage. I just wanted to understand what basis you had to build into your budgets a 20% enrollment growth, which is an acceleration from '07. So if you can talk about what the key drivers are, what is gross versus net. Compared with '07, do you expect better retention? What is upselling from PDPs? Any big group retirees that you expect? How much for [CTN1] versus the rest of the year, etc., just so we have more to hang our hat on there.

This is Jim Murray again, and I will give you some things to think about. For a number of years, we have talked about how we create relationships with all of the members that we serve. We have really focused on enhancing the experience that folks have had with us.

So this year, we anticipate that we're going to have about 100,000 folks who will convert from a PDP offering to an MAPD offering because we have talked through the value to them for that kind of an offering, and they have been given the choice, and they like that choice.

We think that there will be about 75,000 members that we gain from the group -- from what we generally call the group area. There is three pieces of that. There is the Commercial group with businesses; and we are seeing an uptick in interest in that. There is the Government business, the states and cities that have group retirees that are a part of their employment force; and we are seeing an uptick in that. Much of that will play itself out during the course of 2008, whereas the first one I talked about is primarily a January issue.

Then there is another area that is pretty interesting for us. There is a lot of pockets of retirees, and we would it call that more like the Taft-Hartley kind of opportunity. So there's three pieces that we're pursuing in that regard, and we are seeing some nice uptick in each of those that looks like they will play out at different times during the course of the year.

Mike already referenced the age-ins, and there is increasingly a lot of processes that we are developing to focus on the age-ins. We think we will get about 130 new sales from those folks this coming year.

Then, the advertising that we do that brings in folks to our call centers. We have the opportunity to set appointments with them and go out and talk with them about the value. That is about another 145,000.

So there's a lot of sources to the 450,000 net new sales that we are going to have this coming year. So we feel very good about that.

We also feel good that we are going to retain a lot of members. Last year, we warned that some of the folks that competed against us came out with some benefit designs that actually had us scratching our head, and we don't see as many of those this year. So we think we will retain more members than we have in the past.

So when you add all of that up, you come to the 200,00 to 250,000 net that Mike talked about, and we feel pretty comfortable about that guidance.

Thank you.

Bill Georges from JPMorgan.

Thanks. Good morning. You mentioned in the prepared remarks much, much better utilization statistics as measured by Humana versus what you call original Medicare. I am wondering if you could address what the drivers are there. Specifically, do you see a difference in utilization patterns between new members and members that you have had on your books for a period of time?

This is Mike. Let me give you an example and Jim can and add to it. I was meeting with some congressmen not too many days ago, and we talked about some of these things.

It is a combination of more sophisticated approaches and CRM sort of management of the population across a number of things. But some of it gets down to really basic blocking and tackling. One of the things we have learned over the years is that seniors get readmitted to hospitals pretty frequently when they get discharged. Remarkably, the things that pushes them back in the hospitals are not what they were in there foe originally.

They fail to follow doctors' orders after discharge. Their social setting at home is weak and they don't have people to help them. So you find real basic reasons why they end up bouncing back in hospitals. So we put in infrastructure that reaches out to people who are discharged. You get ahold of them. You talk to them. You help them through what they are supposed to be doing post discharge from hospitals.

And you have a remarkable impact on return to hospital rates, which is a pretty direct way to have a pretty significant impact. There's a number of things like this. So some it is pretty basic, some of it is more sophisticated. We have predictive modeling capability around predicting when people are likely to have an episode of some sort. That is distributed to an army of nurses out there who are prepared to reach out and try to get ahead of things.

So, again, it is a combination of basic things as well as some pretty interesting sophisticated things that have come out of our Commercial business development over the last six or seven years. Do you want to add to that?

Well, you did a good job.

Thanks.

The only thing I would add is -- Mike talked about the predictive model and the fact that we have drug benefits in our products different than some of our competitors. And when people are using the drugs, we are identifying the illnesses that they may have. So we are proactively going out and reaching out to those folks and trying to do some things around care coordination.

We also have the disease management programs, which are highlighted because of our studying of the data that Mike referenced earlier. Then one other thing that we do is we try to identify high utilizers, to try to understand what is causing them to use the system so much, and how we might be a part of their care coordination. So again, it is just a lot of blocking and tackling, as Mike said.

Our data systems will tell us when people are splitting pills. We don't want them splitting pills. We want them complying with the medications in the way that they were designed and things like that.

So again I think that it really goes back to the basic point. The old Medicare program is completely uncontrolled. It is a check writing machine. So to think that that is going to be effective is just silly.

So the whole premise is real straightforward. You get organized, you look at this thing, and you basically try to use the best value you can in actual clinical application. So that you end up with people using the system when they need it only, and clearly not bouncing in and out in an appropriate fashion. Which everybody on this call has either family or parents that have used the healthcare system, and you know just how discombobulated it is. So it's really just organization.

Do you see any differences between utilization among new members and members that you have had on your books for a period of time?

Yes, that, I may have confused earlier. That is what the actuaries tell me is called the durational impact. At first, when we get individuals into the program, they don't use it as much. As they are more comfortable and familiar with how the whole system works, they will use more; and they are -- also they are obviously aging. So there is some increased utilization as time goes on, but nothing significant.

The other thing that I would throw out real quickly is that when we first started our growth of the private fee-for-service offering there was a group of folks who had some real illnesses that joined right away, and so we had to sell through that for some of the disabled that we got at the beginning. But those folks are now a very small percentage of the total membership.

Okay, if I could ask just one last quick one. At a very high level, what do you see as sort of the long-term penetration for Medicare Advantage? Assuming we're at about 8% of the total market right now. I'm sorry 20%, 8 million members.

Well, it's hard to say. I mean if everything stays the way things are today, and the industry as well as Humana continues to roll out these offerings and these capabilities throughout the country, I think that penetration can be very, very high. Because this is just, frankly, a better deal for virtually everyone.

But again, we are introducing new products to people in communities where they haven't seen them before. They have to get -- and seniors as we have talked about many times tend to be very pretty sticky with where they are. So it is hard to predict as you look across the entire country and you think about rural communities, suburban versus urban and all those sort of things. It is hard to predict with great accuracy where that might go.

But if it is based on just value proposition, it is going to be very, very high.

Okay, great. Thank you.

Christine Arnold from Morgan Stanley.

Thank you and good morning. As we think about Medicare Advantage, how much are you able to better assess the health status of members and therefore get better risk premiums in year two versus year one for a private fee-for-service member?

I'm not sure I'm following your question, Christine. This is Jim.

Talking about risk adjustment?

Yes, the better coding for members. My understanding is that year two, you can kind of get 2% added to the rate because you're better able to identify the health status of the member and document that they have this thing, that thing, and the other thing going on.

I don't know any facts or figures as respects that. All we attempt to do is to identify an individual's illness. To the extent that the information that we get from the federal government tells us one thing as respects their illness, versus what we see by looking at medical records, we pass that information along. But we don't have any targets or --.

There is no correlation that we have ever seen that says that that is worth two in a subsequent year.

Okay. As I think about the -- here is I where I am going with us. I'm thinking you guys are going to get like a 4% increase kind of from statutes. You can get 1% or 2% from better coding of health status, which is going to get us to 5% or 6%. The nonurban docs are going to get zero, and so are the nonurban hospitals.

So on Medicare -- and you enhance benefits by less than 1%. So as I roll all this math in, it seems to me that the Medicare Advantage MLR is poised to improve next year. Is the logic wrong somewhere?

Well, again, I -- and I probably confused a lot of folks and your eyes were rolling in their heads. But there's so many variables that each year go into the MER -- there is the new business, there is the durational impact of the business that you brought into the year, there is the beneficial effect of the integration or the investment spending that we are doing on the utilization tools, there's are all kinds of things that go into the MER.

So I'm reluctant to tell you with any precision exactly what the MERs are going to do next year. I think we are in the ballpark, and that is built into our guidance.

Okay. Final question. Mike, it sounds like in your comments on Washington that you are less concerned about what is going to happen there and rate cuts, given seniors mobilizing. Can you just expand on that a bit?

Well, they are mobilizing. There's been a number of cases up there where they really have spoken out and gotten involved. I mean, you can't have this many million satisfied folks with attacks on a program and not have them respond. So yes, they are mobilized. They're actually not that difficult to mobilize. They do care. They are interested.

I said I think several months ago here that the grass-roots capability of the industry and our Company are way beyond where they were a decade ago when this last big debate happened. So yes, politically, it is a powerful group, ready to go, they can be mobilized, and they are willing to be mobilized.

So in some ways, with health, all that does is generate a pretty decent conversation at the end of the day. Because there are some real fundamental problems out there. Doctors are facing paying cuts on January 1. I will guarantee you, we will get thrown back in the scrum as people start talking about how to pay for all that.

So we are always going to -- we sort of adopt the idea that given how big Medicare is, and how fast it is growing, and everything else I have said about it, it is two things. It's an incredible business opportunity. But it always makes us a target for people that are looking to make changes in budgets up there.

So that is why over time the actual value proposition and our ability to help with the budget problem becomes very, very important. But in the meantime, it is important that this program have enough time to run its course through infrastructure development, application of all these tools.

So this debate goes from occasionally ludicrous up there, around just trying to figure out how to fund something next year, to some pretty interesting conversation about how to solve the Trust Fund problem. And we are in the middle of all of that.

But I would suggest that we will -- if a headline out of Washington that says they are looking at Medicare Advantage bothers you, you are probably in the wrong stocks. Because it is going to be something we live with the rest of our time here.

I think at this point, all I can tell you is we are important here. We are adding good value. The people that we are serving are very focused and very interested in this. I think the political conversation hopefully can be brought up to a level where people are actually looking a little further out, around whether the value we are bringing here is useful to the program. We think it is.

In the meantime, you have two kinds of combinations. The sophisticated, legitimate argument around what is good and what is bad. And then you have just a pure political conversation about how often the phones are going to ring if changes are made.

Okay, thank you.

Greg Nersessian from Credit Suisse.

Thank you. Good morning. My first question was on the Commercial business, actually. You continue to see very strong individual market growth. Not something necessarily specific to Humana; some of your competitors are seeing that as well. I was just wondering if you could talk about that.

Just first, generally, what has changed in the individual market that has made that more attractive; and where that penetration is coming from.

Then specific to Humana, what do you view as your change in your value proposition there that has made that business able to grow so much faster than it has in the past?

This is Jim Murray. We are growing very nicely in the individual space. As we have shared with you at investor conferences in the past, that is the line of business in our Commercial portfolio that is the most profitable. So that is obviously a good thing.

We also shared with you in the past that there is a lot of members that were in the Blue Cross family of companies -- for lack of a better way to say it -- and that was an area that we thought we could provide a better and different value proposition than some the Blues in states that we compete against.

We are coming out with a lot of really neat consumer offerings and a lot of products that are focusing on particular segments in the population. I don't think the Blues in some of the space that we do business have been as innovative as we have been. Some of our competitors are doing a pretty good job as well.

We have just come out with a new suite of products at Humana that are going very nicely. In addition to all of that background, there is obviously some likelihood that the group business is shedding some members as companies downsize and decide to get out of the insurance business; and the employees are buying some of the individual products.

I think it is a pretty neat area of business for us to focus on. That is one of the reasons that the KMG acquisition was attractive to us, because it is an individual sale. So we are really focused on that particular area of business, a direct sale to an individual.

Okay, great. That was very helpful. My second question was for Jim Bloem. I guess my reading of what you were saying is that the seasonality in the EPS next year as it pertains to the Government sector should be relatively consistent with 2007. I guess I would have thought with the widening of the risk orders that would have impacted the seasonality a little more.

Is that not right? What is offsetting that impact?

Actually your first proposition was right. Basically, we expect 2008 to be a lot closer to 2007 than 2007 obviously was to '06. So that is the main takeaway there.

Okay.

That has to do, obviously, with the timing of enrollments and all the things that happened in '06. So '07 has set a pattern that we think is going to be a much more recurring pattern going forward.

Well, maybe I just would jump in and say that as we have data that helps us estimate claims going forward, we wouldn't anticipate that there would be as much of the risk payment to or from the federal government. It is more closely aligned to our bid models.

Okay.

That is one of the things. But I think what Greg is talking about is the slide that has got the five key factors, and how the (multiple speakers) are going to build (multiple speakers).

That's helpful. It just seems that -- okay. So your experience allows you to predict the costs better which would eliminate the need for the risk share. You are not going to do break through those quarters as much, anyway?

Correct.

That's correct.

Okay, then just a last quick question. I guess, if your exposure in Florida both on Medicare and Medicaid, has there been any elevation in the level of interaction with local government agencies or regulatory oversight that you could speak to, that I guess might suggest that recent events there are anything but specific to the company involved, or reflect a broader regulatory -- heightened regulatory environment in that state?

This is Mike. I don't know what the issues are relative to that -- the answer that you're talking about at this point. I will tell you that when you are in this business, both from a state perspective and from a federal perspective, it is very crucial that you have a great infrastructure around compliance and good discipline about you how you sell in the marketplace. We put a lot of energy into that. We want to be in this thing for a long, long time, and so with our investments in training, education, ethics programs -- compliance across the entire Company is pretty significant.

It helps that we have been at it for 20-some years. I think I have said to some of you all as you have visited here off and on over the last couple years, one of my biggest concerns is that we had so many entrants into the business that I was a little worried about what was going to happen from a regulatory perspective as we got into this.

So I don't know what is going on there, and I wouldn't comment on it, other than we at Humana are doing everything we can to make sure that we dot all of the i's and cross all the t's on all these issues. It is not an issue for us.

Okay. Fair enough. Thank you.

Scott Fidel from Deutsche Bank.

Thanks. Good morning. First question just relative to your Commercial enrollment guidance to add 50,000 to 75,000 lives. Maybe a bit more detail on how you expect that to break out between group and individual, and then between ASO and risk.

This is Jim Murray again. I would guess that the -- 50% to 75% of the 50,000 to 75,000 -- I'm sorry -- would likely be in the individual space, with the other 25% coming from group business. I would guess that the split between self-funded or ASO business and fully insured would probably be about the same for that remaining 25%.

I don't think that there's going to be significant variation or growth in fully insured versus self-funded. I think it will stay pretty similar to what it currently is today.

But most of the 50,000 to 75,000 member growth would come from the individual space. We are really doing some neat things there.

Okay. Then just on Part D, your thoughts around margins and PMPM revenues, directionally, relative to this year; and maybe how you expect enrollment relative to the guidance to break down between the three primary product lines. You know, will there be any big movement in one of them like we saw with complete in 2007?

This is Jim again. That one is probably the toughest call that I would -- any of the questions that you all would ask, that one is the toughest for me to figure out. As you know, we had some problems with the cost related to the dual eligibles that we serve in the standard plans. There were a number of states where we went above the benchmarks and we will lose the duals. I think that the loss of the duals is just about equal to the membership loss that we have given guidance on.

Mike did reference earlier in his remarks that when you go to the Medicare.gov website, that on an overall value basis -- not just looking at premiums but looking at total out-of-pocket costs to the seniors -- that we look really, really good. Which I am encouraged about, because that says that the products that we are putting out there for the seniors bring them real value.

We're not trying to be real skinny on the formulary and the amount that the seniors have to pay when they go into the drugstore. So I feel very good about that, and it is not all about premiums.

So we are cautiously optimistic that the voluntaries that we are going to -- or that we have coming into the year, we are going to hold as we go into the next part of the year.

As it respects the different standard versus enhanced versus complete, I think we will lose the 200,000 or 300,000 duals which are in the standard. We might lose some complete members because we have done some things there in terms of the product and the benefit design. But I wouldn't expect a significant amount.

The only thing that I would suggest is that over the next couple of months or perhaps year, what we have got to do with CMS is to try to figure out how the companies like us are compensated for the duals, so that we don't have this merry-go-round that the seniors are on, where a company has the duals for a couple of years, and then has to give them up because their medical costs are not in line with the reimbursement for the government.

That is something that we all ought to focus on, so that we can make the experience with the seniors a lot better than it is going to be this year when they have to move to different plans.

Okay. If I could just slip another quick one in, just relative to KMG. Any guidance you can give us on when that comes on-board in 4Q, how that will hit the enrollment schedule in terms of some of the specialty lines?

Then also just on the $200 million in revs, from that, what the breakdown would be between premiums and fees.

We are targeting trying to get that transaction done hopefully by the end of November, but it might slip into the December-ish or towards the end of the year. They have a book of business that has a lot of voluntary and supplemental products. They also have a book of business that is stop loss. They like to lead -- they like to be, as they say, at the medical table; so that they can sell some of their voluntary offerings. So a lot of their premiums come from stop loss, but also from some -- the group life and group LTD, and voluntary life and voluntary LTD, and critical illness policies as well.

As I sit here right now, I frankly don't know the split on the fee-based versus premium-based revenues. I guess Regina can get you that after the call. Is that --? How does that work?

Scott, I will just have to follow back with you based on the publicly available information.

Yes, that's fine. Okay.

That is where I would go to get it.

Okay, thanks.

Justin Lake of UBS.

Thanks. Good morning. Two questions. One around the membership expectations for next year. Can you just give us an idea of what you are expecting for the total growth of Medicare Advantage? It looks like you are looking for your membership or your net adds to be nearly 2X what you did this year. Yet when you look at the overall Medicare Advantage market, it looks like it has been relatively flat as far as the absolute number of adds '07 versus '06.

Do you expect it to accelerate next year? Or are you just looking for your share of the market growth to increase? If so, if you are looking for your market share to increase, can you tell us what you expect those drivers to be? Who is going to be giving it up?

Well, Justin, what we are suggesting I think by the conversations we have had today, is that we are looking for a real balanced approach. In the past years and in 2006, basically everybody was new; so we were trying to get everybody into plans and then figure out what the appropriate choice for them is. As we work through it, now we have got a real balanced way to get members. That is why the guidance for membership in MA is higher, because we have the opportunity to again -- to continue to show our existing voluntary PDP members that there is real value in the healthcare and the total health benefit proposition.

Jim Murray went over the three different kinds of groups that we are working with. Those are sort of multiple-year sales. So you get a bigger opportunity, a cumulative opportunity that opens up this time goes on.

Then there is of course always the age-ins. We continue to be more effective with finding them and looking for them. And then again, for new members.

So what we think in terms of that, looking at that membership growth of say 200,000 to 250,000 versus the 130,000 we are saying this year, that is the ability really of the cumulative work we have done in the program to get a balanced set of places to go look for new members and show our value.

Justin, I would even go further than that. I would -- you need to disconnect your thinking relative to the commercial business, where it's all just about market share moving around among folks. This is a growing marketplace.

When you start thinking about employers moving people into Medicare Advantage, new regions, new locations being opened up, if we didn't take a single member from a competitor we would had very good growth in this product over the next few years.

Okay, maybe my last question would just be around, we talk a little bit about the legislative environment. When I talk to people down in Washington and I hear the word provider deeming a lot, and I'm a little bit uncertain about what that is and how it affects your business.

Can you just give us a little bit of an overview as to -- especially I guess it relates specifically to product fee-for-service. But can you talk about what provider deeming is? How important it is to your ability to offer plans, and what you think the changes might be, and how you would react to them. Thanks.

Let me start by saying that is one aspect of a number of variables we have discussed in terms of changes going forward. So I wouldn't get too caught up in the moment, because who knows what ultimately it is going to look like when it's all said and done. But I will explain it.

We don't technically have deeming today in our private fee-for-service and PPO products. It is not technically there. What we have is a situation where we are able to sell into a community, and the providers just agree to accept those people, and we pay them traditional Medicare payment rates for doing so. But there is no actual contract involved.

So some are describing the current world as deeming; I would say that it is not. We have had great success in virtually almost every market. We had a couple of hot spots when we first started, where providers in a committee were saying, we didn't want to take these patients, even though we were paying the same as our federal government. But that is largely behind us at this point. Providers in almost every place we are in today have long since gotten past whether they are going to take people and be paid by us for services to those folks.

So at the end of the day I am not so sure how meaningful this is going to be one way or another. It could potentially slow down geographic expansions to the extent that we had to start contracting with folks for private fee-for-service type of things. But at this point, I don't think we're anywhere near that being the answer at this point.

So as I look at our business, no matter what goes on I think relative to going forward, I don't think the existing business is going to be materially touched by this idea, even if it has some traction. And I think it is too early to know whether it does.

This is Regina. I just wanted to follow back on Scott Fidel's question on the revenue, on the premium versus as ASO fee split on KMG. Most of the revenues are associated, probably 80% to 90% are associated with premium revenues as opposed to ASO fees. Next question, please.

Carl McDonald from CIBC.

Great, thank you. On the Medicare enrollment growth, just wanted to clarify how much you think is going to come in the first quarter versus maybe some of the group stuff that is more back-end weighted.

This is Jim Murray again. I would anticipate that probably 60% would come in the 11/15 through 3/31 time frame.

Okay. Then second, going back to the durational impact, how much of that is due to just differences in demographics? Do you have any data in terms of maybe what your average age of a Medicare member is in your current population, versus the average age of the new members that you signed up this year?

I don't have that at my fingertips. Perhaps the next time we do a quarterly call we can give you that kind of background. But frankly, I don't know the different states that we do business, how our different age plays out in those different states.

If not specifics, do you have any sort of general sense how much of it is sort of age-related versus just people of any age just needing to get used to the benefits?

I would have said it is the latter rather than the former. A person gets a year older each year, and as they get more comfortable with the benefits, they seem to use them a little bit more. I don't think it is a significant; but it is something that we focus on to make sure that we think about that when we are creating our benefit designs year after year.

One thing that I find that people have a misconception about is that they think that there is different age that the -- let's say, 65 to 75, 75 to 85, and over 85 are different in the different plans. We have found that they are not.

The demographics related to the PPO versus the private fee-for-service versus the HMO all seem pretty similar for us. There is no age that goes to the private fee-for-service versus any of the other products. It all seems pretty fairly distributed.

Okay, so you are saying there is no difference in demographics between the products; but obviously very different, big differences in terms of medical expenses between the different age groups?

As people get older they obviously spend more in terms of --.

Right, okay. Great. All right, thank you.

Peter Costa from FTN Midwest Securities.

Hi, everybody. Just want to reconcile one thing. The difference between the quotes and the net on Medicare Advantage adds for 2007 and 2008 seems fairly similar. So I imagine you're predicting fairly similar disenrollments, that being the difference for both years. Yet you have talked about fewer plans doing questionable things in 2008 versus 2007.

Are you factoring in something more for somebody being more aggressive in their marketing or perhaps somebody's brand being better? Perhaps like United coming back on, being a little stronger in 2008 than they were in 2007.

Well, you are looking at the gross number of turns as opposed to the percentage. We're obviously a lot bigger this year than we were last year. So as a function of the percentage of our existing block that is going to persist, I think we are doing better year-over-year.

Okay, thanks.

Matt Perry from Wachovia Capital Markets.

Hi, good morning. Just wanted to go back a little bit on the discussion of cash flow. I can understand it is early, even a few months before we begin '08, so the absolute detail around free cash available at year-end '08 is a little bit lacking.

But I would like to understand maybe your philosophy on using that cash. Because it seems like this will be the first time coming up in '08 in the last several years you might have substantial cash that you could deploy. So should we think of, in the absence of M&A, that some of that cash should be used for share buybacks?

Again, that is sort of the hierarchy that we have always talked about. As I mentioned before, we haven't really talked about it since 2004 because all the cash that we have generated has been used really to either do acquisitions or further capitalize the operating subsidiaries, or CapEx. That is sort of the rotation.

First thing we make sure is everything is capitalized. Then we look at what kind of CapEx we can spend and how that will raise the value of the firm. We are always looking at potential acquisitions. We are shown a lot of things. We have talked to you about a couple of them today that in the specialty areas are going to make a big difference in our Company for the years to come. So we always look for things that can continue to raise the value of Humana.

Then if those are exhausted, and we had that situation, let's say, in '03 and early '04, then we do share repurchase. That is sort of the last use of cash or the last priority. We measured the other ones against that continually as well. So we are always looking at really a ranking of the returns that we get from the different activities.

Okay, that's helpful. Then, I apologize if I missed this; and if I did, I can just catch it off-line. But the TRICARE margin looks like it is expected to go down 100 basis points or more in '08. Can you just talk about that?

This is Jim Murray again. Remember that we had a non- or a onetime item this past year that we described earlier today. We won't have that next year. So when you strip that out, I think that is probably most of the difference.

Okay, I guess I was just looking at your initial guidance for '07 was a 3% to 4% margin and now it is down for '08 to 2.5% to 3.5%. So we even kind of excluding that item it looks like it might be going down.

It does include that item. Then there is also the issue that in option period four the amount of base margin we expect to collect, based on our targeted medical expense, is a little bit less than -- it will be a little bit less as we finish the option period four, which will get done in early 2008, than it was in 2007.

Okay, that is helpful. All right. Thanks a lot.

Well, let me close today by basically summarizing I think in three bullets what has happened here. We had a very, very good quarter. We are on target with everything we have told you for '07.

Our Medicare strategy which is differentiated in this market, and we are pleased with that, is playing out as predicted. We are very excited about where '08 is shaping up for us across all of our lines of business.

I will repeat it again. Consumerism in this business is relevant and is a differentiator, and you can see it beginning to play out virtually across all of our product lines.

With that, I would like to thank all the associates that are on this call for the great work you are doing that makes all this possible. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.