Humana Inc (HUM) 2008 Q2 法說會逐字稿

Good morning, my name is Mindy and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2008 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. (Operator Instructions)

I would now like to turn the call over to Regina Nethery, Vice President of Investor Relations.

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 second-quarter 2008 results, as well as comment on our earnings outlook. 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, and Chris Todoroff, Senior Vice President and 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 statements. 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 second-quarter 2008 earnings press release issued this morning, August 4, 2008. This press release and other historical financial news releases are also available on our website.

Finally, any references to earnings per share or EPS made in this morning's call refer to diluted earnings per common share. With that, I will turn the call over to Mike McCallister.

Thank you for joining us this morning. Before beginning our call, I would like to take a moment to thank Art Hipwell, who retires from Humana today, for his numerous years of service. He has been invaluable and will be personally missed.

We are pleased to have Chris Todoroff here with us today, and I hope you will join me in welcoming him to the Humana team. Chris is a dynamic leader and will, I'm sure, be a tremendous addition to our team as General Counsel.

I am pleased to report that for the second quarter we were ahead of our EPS guidance; and for the first half of 2008, despite the problem with our PDP plan, we are up slightly year-over-year. The improved quarterly result primarily reflects the fact that our PDP issue is playing out better than anticipated. We now expect to be at the lower end of the $330 million to $390 million pretax earnings impact for the year that we first described in March.

Second-quarter results also reflected year-over-year progression in our Commercial and Medicare Advantage businesses. As a result of our PDP outcome year to date, we are raising our EPS guidance for the year, while again reiterating the fact that the PDP situation comes to an end on December 31, leaving us nicely positioned for a strong 2009.

Let's review a few of the more significant recent events for Humana and discuss our operating results in more detail.

First, our Medicare bids for 2009 plans, both Medicare Advantage and PDP, were filed on June 2. Both our bid development and bid review processes were enhanced to help ensure we do not face a repeat of the PDP issues we experienced as part of last year's bidding process. We will be watching competitors' plan designs closely when that information becomes available in the fall, but we're comfortable that plan design changes we filed for 2009 are both adequate and appropriate.

Tom Liston, our new Senior Vice President of Senior Products, and Steve Brueckner, who's retiring from that leadership position, are working jointly to help ensure a smooth transition for that critical leadership post.

Our Medicare advantage enrollment is on track with our guidance for the year, although excluding acquisitions, it is now trending toward the lower half of our expected range due to the combined effect of the lower group sales we discussed last quarter and slightly higher terminations in more recent months associated with members moving to other carriers' special-needs plans during the lock-in period.

Turning to our military services business unit, at the end of June our team filed its bid for T3, the competitive bidding process for the next iteration of TRICARE contracts with the Department of Defense. We believe our South Region bid clearly reflects the value proposition we bring to the table for military beneficiaries and retirees in terms of service and access, while providing a cost-effective means for the Department of Defense to provide such benefits.

Our relationship with the DOD is strong, but we expect to win this contract on the quality of our proposal, with our long-term performance serving as an assurance of our capacity to execute. This favorable track record is important in the bid process, as recent DOD award decisions demonstrate the power of incumbency.

On the acquisition front, we completed two acquisitions and announced our intent to acquire Metcare during the second quarter. Additionally, this morning we announced our intent to purchase Cariten Healthcare in Tennessee. As with our other recent acquisitions, we expect to benefit from expanded provider arrangements and an additional book of business that is well positioned for future growth.

Finally, turning briefly to capital deployment, which Jim Bloom will cover more fully in his remarks, our Board of Directors has increased the Company's share repurchase authorization, indicating its continued confidence in our business.

With respect to the wider business environment, the headline event was the recent passage of the Medicare Bill H.R. 6331. The most impactful element for our sector will be the elimination of provider deeming for private fee-for-service programs across much of the nation in 2011. But to properly assess its probable impact on Humana, I will start with some context.

As we've discussed with you over the last few years, we have always assumed the future of Medicare Advantage would be built on network-based products. So while we were an early mover in private fee-for-service beginning in 2004, we have also been an early mover in both product design and network development across our broad geographic footprint. Though we believe H.R. 6331 stabilizes physician payments unfairly, by cutting benefits to our nation's seniors, we are prepared to operate and grow successfully in this changing environment and believe that by 2011 we will be even better positioned.

The next series of slides further demonstrates why Humana is well positioned to successfully address the strategic and operational impacts of this law. It is important to note that counties in the United States with less than two network plan choices will be exempt from the requirement that private fee-for-service plans must add provider networks. Those counties across the nation that are expected to be exempt are shown in white on this map from our trade group, America's Health Insurance Plans, or AHIP.

This exemption effectively preserves the choice of a private plan in most of the US and also means the growth opportunity for Humana remains national in scope, a point I will come back to in a minute.

When you look at our PPO network coverage, the picture brightens further. Currently, 82% of Humana's private fee-for-service enrollees reside in geographies where a Humana PPO plan is offered. We've always believed private fee-for-service to be a transitional product. As people age into Medicare, we are saying that they increasingly select PPO plans, the kind of coverage they are used to in the workplace -- and the most popular workplace option in survey after survey.

When you look ahead to 2011 and consider our current membership in terms of both our existing network offerings and deeming-exempt locations, it is better still. As you can see, we expect only 6% of our current private fee-for-service membership will fall outside of a PPO offering or deeming-exempt geography.

So with three open enrollment periods ahead of us before the new law takes effect, we already have the products built and licensed, the networks in place, and our clinical capabilities in our Medicare PPOs continue to expand and mature. In essence, then, we are well prepared to preserve what we have; but more importantly, we are also prepared to grow.

With the spectacular growth of Medicare Advantage resulting in approximately 10 million highly satisfied seniors now enrolled nationwide, what remains good news is that where Humana has PPO offerings, low penetration levels present significant opportunity for us over the long term. Also, while employers have not yet fully embraced group Medicare PPO programs, we believe over the long term our PPO footprint, the variety of our Medicare product offerings, and the popularity of our senior value proposition will appeal to employers and retirees as the best answer for group Medicare.

Of course Medicare Advantage is not only popular with seniors; it is also good for the nation. We have long made the case that the private sector's partnership with government through Medicare Advantage brings a dual benefit -- cost savings over time for the financially strapped Medicare program, as well as better benefits and better health outcomes for Medicare beneficiaries. This comes from the power of care coordination, an essential component of Medicare Advantage that is absent from original Medicare.

Taking hospital inpatient days per 1,000 members and admissions per 1,000 members as but two among many examples, this slide shows the dramatic beneficial effect that care coordination -- which at Humana includes such programs as personal nurse and disease management -- has on member wellness and cost.

But this slide is only a small part of a much bigger story. Through our many care coordination programs and services, Humana is making progress toward our goal of a more effective healthcare environment for seniors, which over time is expected to achieve Medicare Advantage annualized costs well below traditional Medicare on a sustainable basis. Results-oriented clinical management, quality doctors who are cost aware -- but not cost-driven -- on behalf of their patients, and comprehensive consumer education initiatives all play a role in this growing success.

With the Medicare program facing fiscal catastrophe in a relatively short period of time, and with none of these measures available outside Medicare Advantage, the societal need for these efforts will only become more urgent. The current payment rates make possible the buildout of these capabilities to the benefit of seniors now and for our nation over time.

Turning now to our Commercial business, this segment, once a problem area, now consistently adds value to the bottom line. It continues to demonstrate year-over-year earnings growth and did so again in the second quarter.

In addition, we are not experiencing pricing problems in the market due to discipline in targeting specific accounts and lines of business to pursue. We have an extremely well-balanced medical membership portfolio and our benefit expense trends remain unchanged.

In particular, our commercial business has already benefited from the specialty product acquisitions we made in the fourth quarter of 2007. These products tend to be higher margin and help us remain competitive in our commercial offerings as employers increasingly turn to companies like ours that have the ability to offer comprehensive solutions.

Our continuing success in this segment is also built on the expansion of our geographic footprint and industry-leading tools and service to the agent broker community.

In conclusion, our ability to raise EPS guidance for the year today was due largely to our PDP issue playing out better than expected. Favorable trends in our commercial lines and Medicare Advantage businesses also helped ensure the continued progress we expected there. Our analysis of H.R. 6331 yields the conclusion that our network development efforts in Medicare, combined with the two-year transition before major provisions take effect, mean that the measures impact is manageable. And there will probably be some upside competitively as other carriers scramble to respond.

But the quarter's standout takeaway is that we performed effectively across all our business lines; and as we look to 2009, and putting our PDP issue behind us on December 31 of this year, we are pleased with our prospects.

With that, let me turn the call over to Jim Bloem for a detailed update on our financial results.

Thanks, Mike, and good morning, everyone. This morning, I will cover the following five topics. First, our second-quarter segment revenues; second, the current expectation for both the 2008 overall Medicare benefits ratio and commercial segment profitability; third, a comparison of the first-half and anticipated second-half operating cash flows; fourth, our investment income and portfolio; and finally, our 2005 through 2008 capital deployment history, with a view to 2009 subsidiary dividend capacity.

Let's start with second-quarter revenues, where each segment continued to report solid double-digit growth over the second quarter of 2007. Commercial revenues grew by over $293 million or 17.7%, primarily due to our fourth-quarter 2007 specialty acquisitions and a 3.5% or 120,800 increase in our year-over-year organic medical membership.

Government revenues increased by nearly $631 million or 13.2%, on the strength of a 17.2% or 194,700 growth in average Medicare Advantage membership, as well as a 6.3% increase in Medicare Advantage premium per member per month. Solid membership and revenue growth in each segment continued to provide us with balanced consolidated pretax growth.

Moving next to the expected 2008 overall Medicare benefits ratio, as Mike described, our better than expected second-quarter EPS results and today's increase in full-year 2008 EPS guidance primarily reflect the fact that the adverse effect of our PDP issue is now expected to be near the lower end of the $330 million to 390 million pretax range that we first described in March.

Of course, as the slide shows, the PDP issue still makes our 2008 expected overall Medicare benefits ratio higher in all quarters versus 2007, although today's better news allows us to lower the 2008 expected benefits ratio range by 50 basis points to between 85 and 85.5.

Accordingly, we have also increased our 2008 Medicare operating margin guidance by 50 basis points to approximately 3.5%.

Turning briefly to our Commercial segment, we are pleased with our progress there to date as well. Our first-half pretax income of approximately $203 million represents a nearly 40% increase when compared to the prior year to date. The benefits ratio for the first half of the year shows a 110 basis point improvement in year-over-year. This improvement is driven primarily by the acquired specialty businesses, combined with stable cost trends and disciplined underwriting around our commercial medical business.

Looking now to the remainder of the year, we are quite comfortable with reiterating our commercial pretax guidance of $280 million to $300 million, and would further add that we see the full-year 2008 Commercial benefits ratio improving by 50 to 100 basis points over 2007.

Turning next to cash flows from operations, we are reaffirming our full-year guidance of $1 billion to $1.2 billion, based on the expected second-half component ranges shown on the slide. Higher expected second-half net income due to the normal PDP quarterly earnings pattern, as well as significant collections of accounts receivable, including Medicare receivables, combine to drive our second-half cash flows to an anticipated range of between approximately $900 million and $1.1 billion.

Also as mentioned in the press release, we collected over $257 million in Medicare receivables in July.

Our first-half comparison of 2008 versus 2007 operating cash flows was weak, due to the improved claims cycle times discussed in the first quarter, which continued into the second quarter. Just as we mentioned on April 28, we believe improved claims cycle times strengthen our relationship with both providers and consumers.

As we look to the second half of this year, the comparison with the second half of 2007 strengthens significantly due to the amount of the prior-year Medicare risk share repayment. In 2007, the Medicare risk share repayment totaled $726 million; and in 2008 it is expected to be approximately $80 million.

Turning now to investment income and our portfolio, the second-quarter investment income fell $9.1 million sequentially, primarily due to, first, a 50 basis point drop in portfolio yield; and, second, a $1.2 million impairment charge recorded on seven of our over 1,200 securities.

The lower portfolio investment yield primarily reflects the 100 basis point drop in the federal funds rate since March 18. Our portfolio continues to perform well, benefiting from high credit quality and relatively short duration. That said, in order to be a well-diversified $6.3 billion fixed income portfolio, one can expect to have various types of securities and issuers which have attracted negative media attention of late.

With that fact in mind, the following is a June 30, 2008, compilation of the four types, amounts, and issuers that we closely monitor.

First, subprime mortgages. As discussed in the February call, we retain $4 million of AAA-rated subprime securities from three issuers.

Second, Alt-A mortgages. We also retain $7 million of AAA-rated Alt-A mortgage securities from four issuers.

Third, auction rate securities. We hold $95.5 million of primarily AAA-rated securities after a $5 million mark to market in the second quarter. These securities comprise 36 issues from 21 issuers.

Lastly, Fannie Mae and Freddie Mac preferred shares. We hold $17 million in three A-rated securities. Now these securities were rated AA at June 30, 2008.

But for each of these four classes, all of the above-mentioned securities is current on both principal and interest; and we expect that to continue to be the case. Combined, they are 1.9% of the total portfolio. Most of these securities, with the exception of the Fannie and Freddie preferreds, have had their ratings reaffirmed within the last 180 days.

The Fannie and Freddie preferreds will probably be reevaluated -- and favorably reevaluated -- in light of the Federal Housing and Economic Recovery Act of 2008, which was signed by the President last week.

So once again, our high credit quality, our short duration, and our ability to hold securities to maturity continues to serve us well. They have enabled us to guide to 2008 full-year investment income of $345 million to $355 million, up 11.4% at the midpoint from the $314 million that we received in 2007.

Now turning finally to the subject of capital deployment, I would like to briefly review our sources and uses of cash for the four-year period 2005 through 2008. This period is relevant since it covers the years from the 2005 ramp-ups of Medicare Advantage and Part D through the initial three years of these programs.

These programs represent and these changes represent the most significant changes to Medicare since its enactment in 1965. By both designing products which meet the needs of seniors and then deploying capital to build infrastructure, as well as to recruit and retain the people necessary to implement these changes, we have been able to double our revenues and nearly triple our net income over this important four-year period. During this time, we have been able to generate $4.7 billion of cash and raise through debt offerings an additional $1.350 billion.

So the combined cash total of just over $6 billion enabled us to successfully meet the changes contained in the Medicare Modernization Act, while continuing to grow our other lines of business. As the left side of the slide shows, the major categories of the $6.1 billion of cash disbursements over the same period are divided up into four or five groups. The computer (technical difficulty) net difference as a reduction of approximately $50 million in parent cash.

The point here is not to precisely predict the change in parent cash, but rather to indicate the near equality of the cumulative cash sources and uses over this important four-year period. As again the pie chart on the left shows, that is really history. What we are really here to talk about is the future.

So as we progress toward 2009, we should be well positioned to continue to generate, and to a lesser extent borrow, in amounts which are consistent with our investment-grade credit ratings, the funds which will continue to enable us to increase the value of Humana.

Our capital deployment strategies going forward will continue to primarily involve capital expenditures and acquisitions and now, also, the return of discretionary capital through share repurchases.

Now, as an additional source of cash, looking forward we anticipate that the cash required to fund operating subsidiaries will continue to decline. In 2006, required funding reached $724 million. Last year it was $307 million, and this year we expect to be required to fund $175 million or about 25% of the 2006 amount. We believe this year's $175 million to be more representative of the amounts that will be required going forward.

In contrast to these 2005 through 2008 required subsidiary funding amounts, our capability to dividend capital from our operating subsidiary should continue to increase after this year's reduction, due to the PDP issue that we have talked about so many times and announced in March. Dividends to Humana from the dozen or so of our major operating subsidiaries were $248 million in 2006; they rose to $377 million in 2007; and they were $296 million this year.

We expect to be able to dividend approximately $500 million in 2009, and this would represent a one-third increase over the $377 million that we dividended in 2007, which was the first year back that we were not adversely affected by this year's PDP issue.

So briefly, to summarize, we see balanced membership revenue and pretax growth in each of our segments. Our Commercial segment's Medicare benefit ratio continues to improve, both in the first half of this year and as reflected in our expectation for the full year.

We anticipate second-half operating cash flows, which allow us to reaffirm -- we anticipate strong second-half operating cash flows, which allow us to reaffirm our full-year guidance of $1 billion to $1.2 billion.

High credit quality and short duration continue to provide us with a liquidity and strength of our balance sheet in these volatile credit times. Finally, our four-year capital deployment for Medicare is now largely complete, signaling a higher capacity for 2009 dividends to the parent from our operating subsidiaries. Higher subsidiary dividends will enable us to deploy more of our capital to continue to raise the value of our Company.

With that, we will open the lines for your questions. We ask that you limit yourself to two questions in fairness to those who are waiting in the queue. Operator, would you please introduce the first caller?

Matthew Borsch from Goldman Sachs.

Yes, good morning. Could you just talk us through where your outlook on the Medicare drug plan business improved? What were the specific drivers where your assumptions proved to be somewhat conservative?

And what is the likelihood that we might see further improvement against your assessment as we move through the balance of this year?

While Matthew, as you would guess, everything is around utilization. That is the biggest estimate in the calculation. When we were back in March, we basically had -- we actually didn't have two months behind us. So we were looking at such things as what could adversely develop more than what we had thought.

We think that we have captured it very clearly and that the utilization really is the reason that things are better. So I don't know, Jim, if you want to add anything to that. I think --?

Sure, in addition to Jim's point about utilization, we are seeing continuing improvement in our generic dispensing rates. Also, I think there was probably some risk share money that we received that on the PDP we don't accrue for. So all of those elements added together to create the improvement that we reported on today.

Great. Thank you, Jim and Jim. If I could ask another question on the outlook, as you think about 2009, and I recognize that you haven't provided guidance yet. But you've talked earlier about conceptually 2009 being based off of -- a growth rate based off of the midpoint of your old 2008 guidance, which was $5.45. You know, is that still the framework for your thinking? Has there been any evolution in the way that you are looking at that, since we got the last update from you?

Matt, this is Mike. No, there is no change there. We have said all along that we will get a little more granular about it once we get a chance to look at everyone else's Medicare products and pricing and that sort of thing. Because again, Medicare Advantage is a key component of what '09 is going to look like.

We are pretty comfortable that we have taken care of the PDP issue. So no, I think that still stands. We had one issue, as we have talked about many times; and it produced a reduction in this year over what was previously a pretty good growth rate. As we look into '09, it is a one-time event, it lasts throughout the year, and it ends on January 1, and so there is no reason to expect us to retrace to a lower starting point.

So I stand by that $5.45 as sort of a kickoff point relative to '09, that we will share more detail around that at the third-quarter call.

Great, thank you.

Charles Boorady from Citigroup Investment Research.

Thanks, good morning. First question, on deeming. How will you be able to assess the willingness of providers to contract with you for coordinated care or network-based products in the markets where you now rely on deeming?

Charles, I think one takeaway this morning was we are not really all that reliant upon deeming. Now, we have to get people to ultimately shift to a PPO product. But in terms of the provider side of it, we have already I think at this point come to the conclusion that providers are going to be willing to work with us in most parts of the country.

I mean, as I have described the network strategy in the past, it is not built upon getting better deals from them than Medicare paid them. So you got to ask yourself -- why would they not want to work with us if we are willing to pay them as well and faster than the Medicare program?

And if they do that, the only thing they are doing is keeping a private choice opportunity away from the seniors in their community. So at the end of the day, I think the providers will be working with us across most of the nation. There may be some isolated spots where they are recalcitrant; but our experience tells us that is not going to be the case. That it can be done, it is hard work, you have to burn shoe leather, people have to go out and do it, it takes time. But they will work with us.

Okay. On prior period developments that went up a bit this quarter, can you characterize what contributed to that? I want to confirm TRICARE is no longer included in that number.

And then if you could just tell us what was Commercial versus Medicare.

Well, generally speaking, as we mentioned briefly in the press release, on the Commercial side, we did have a prior period development between $10 million and $15 million when you looked at -- compared to last year. If you take 2007, there was about a 130 basis point difference between the first quarter and the second quarter of commercial MER. That was due to the fact that we had a lot of high deductible plans that we added, a lot of HSA-type plans that we added; and those were new to us last year.

This year, we have basically -- so that we had a very favorable development. This year, we started out really knowing what the incurred would be for those types of plans. We had quite a few of those plans. And again, now it really swelled to 470, that difference.

But when we look at the first half, and that is really what we would like you to focus on, the first-half 110 basis point improvement, that basically will tell you what we think is going to happen in the year. As we have said, or as I said in my remarks, we're expecting a 50 to 100 basis point improvement this year, year-over-year, for the full-year commercial MER.

Yes, I think just to restate some of what Jim has already said is that last year's first quarter was better than we had anticipated because of the high deductible health plans and the HSAs. And some of that favorable development that occurred in the first quarter of last year rolled into the second quarter, and we reported it as such, and that is why it is more appropriate to look at our first-half versus first-half.

We feel very good about the progression of MER this year and going forward, because now we have a good feeling for how the folks utilize those plans.

Is there a same-store Commercial MER that you can give us without the specialty products that had a downward impact on it?

The specialty products are new this time. They added about 5% to our commercial pretax total. So you can see they are in the improvement.

But as I mentioned, the improvement is approaching 40%, so they have an effect but they have a relatively small effect as we begin to ramp those up and work goes into our business.

So the main thing really is on a same-store basis -- if you go back to what Jim said and what I said about the 110 basis point improvement, looking at it from the first-half standpoint and what you can expect for the year -- that is the way we believe that you get the apples-to-apples you need going forward.

Got it. Thank you.

Josh Raskin from Lehman Brothers.

Thanks, good morning. First question, just on the risk adjusters. I heard, Jim, I think mention that there was a true-up in the risk adjusters on the PDP side, it sounded like. I was under the impression you were accruing everything. But maybe the magnitude of -- I guess I don't know, one time or nonacrrued risk adjusters?

First of all, just to be really clear, on the MA we do accrue the risk adjuster, because we have -- the risk share, really what we are saying. We do do that because we understand what the Part A and Part D is for each of the people -- each of the people that we have for the risk adjuster. We understand that for MA PD.

But in the PDP, we wait for the remittances that we get from CMS, because we don't have that information, so we don't really know what the risk adjuster is for those people. So in that case, again it is more aligned with what we have received and what we have got knowledge of receiving in the second quarter.

So, that is one of the -- that is the primary reason for the improvement in the PDP that we mentioned going out to the lower end of the $330 million to $390 million range. Then we just took that, the part of it that applied to the -- in the first half; and flipped that over and also improved the second half.

Okay. So PDP, that is not a -- you actually got your reconciliation from CMS. But on the MA side, then, Jim, there was no 2007 final reconciliation in the second quarter? There was nothing materially different versus what you had accrued? Is that what you are saying?

No, our accruals are right on, so we are very happy. We are very happy with how that reconciliation turned out.

Perfect. Then just in terms of the 2009 bids, without getting into sort of absolute bids, I'm just curious what the target margins for your -- I think you guys -- I don't think you will talk about products, but I think you talked about the overall Medicare book. So I'm just curious what the target margin was for 2009, all-in Medicare.

The same 5% that we have talked about over the number of years. Remember, if it is better than that, then we enrich benefits; and if it's less than that, then we take a look at benefits.

Okay. So we should expect, excluding PDP losses this year, I guess if we just do apples-to-apples it looks like you guys are bidding to get back down to the 5% for next year.

Yes, that's correct. That is always our goal. Again, as we said, we raised it 50 basis points today based on the improvement in the first part of your question.

Okay, thanks.

Greg Nersessian from Credit Suisse.

Thanks. Good morning. Just a quick question on PDP. Any color you can give us on enrollment next year based on your bids so far?

Probably not until we see the other competitors' offerings. We obviously, as Mike said earlier in his remarks, we feel pretty comfortable that we have addressed the problems that plagued us this year. But until we see what other folks have done, it is really difficult to identify or estimate the amount of gains or losses that we would have on that.

So there aren't any significant geographies or product types that you have discontinued altogether?

Well, we put in our bids, and the way this works is that the rest of the industry puts in their bids, and then they develop what is called a benchmark. Depending upon how that benchmark turns out for everybody and where we are at relative to that, that tells us whether there is geographies where we may lose some of what are called dual-eligible members or auto-allocated members. We don't know the answer to that yet.

But there aren't geographies that you decided not to bid on that you are in currently?

No, not at all.

Okay. Then just a couple of quick questions. Do you have any idea of who or how many other bidders there were in the South Region of TRICARE?

Then also if you could give us a little color, there is a Medicaid -- it looks like there is a Medicaid contract you are losing. Is that the ASO contract?

We have no idea how many TRICARE bidders are. We won't find that out until the contract is awarded; and then I think the government gives you an opportunity to understand all aspects of the bidding process.

The ASO contract that we lost is in Puerto Rico. It's the Metro North contract that we got about two years ago. There was some repricing of that this past year, and we felt we were pretty tight on what we had bid in the prior years, and we weren't willing to do anything different. So that was awarded to another competitor on the island.

Puerto Rico, the entire Puerto Rico business is not material to our results. So this small component of the Puerto Rico business is less material.

When does that -- when do you actually lose that membership?

I think on 1/1.

Okay.

I am wrong. It's November 1; I apologize.

Okay, thank you.

(Operator Instructions) Scott Fidel from Deutsche Bank.

Thanks. Good morning. First question if you can just talk a little bit about your initial expectations for medical cost trends in 2009.

I know most of the competitors are talking about pricing for a bit of an upward drift there, maybe 50 basis points or so. Just interested in your initial views on that and how you plan on positioning pricing as well for '09.

Sure. This is Jim Murray. As we have shared with you on prior calls, we have a committee of folks that get together every Friday and we work on medical cost trends for both our commercial and government business, and put initiatives in place to monitor and control those costs.

I can't speak for the rest of the industry. We feel very good about where medical trends are, and we don't anticipate anything negative occurring in the future.

A drift up -- I think as you referred to it -- we don't see that. Obviously there are hospital systems that periodically will want to get some rates that are bigger than they have gotten in the past. But we negotiate with them and we work through issues with them, and we haven't found anything significant in the last several months or several years that has negatively impacted us.

So as we look forward to 2009, we don't see anything significantly different. Perhaps we are in a different position than the competitors who are talking about that. But as it respects us, I feel actually pretty good about what we see going forward.

Okay, so your view is stable trends heading into '09?

Yes.

Okay. Then just a second question. Just interested in some thoughts around the group Medicare products. Obviously just for the industry overall, not a lot of pickup there yet. Obviously, there has been a lot of political uncertainty. Just interested in your thoughts on maybe what gets this market started.

Or do you think that, with the Dems potentially coming online, that could leave employers hesitant? Just given that that would equate to, you know, additional reimbursement uncertainty over the next few years.

I think there is no question that the political noise has kept employers largely on the sidelines. There has been a lot of movement of public entities toward group Medicare, because of GASB -- that is correct, isn't it?

Correct, correct, yes.

But having said that, I think that we are going to have an interesting time here next year as the political situation sort of settles in. I think once we understand the long-term nature of the private sector's involvement in this program, which I have said many times I think will be significant and in fact growing, I think once that gets clearer, I think employers are going to be a little more comfortable in sitting down and trying to figure out exactly how these programs work for them.

There is a lot of interest and there has been. I have heard competitors talk about their pipelines being full and all that. Yes, there is a lot of interest. The phone is ringing off the hook.

But at the end of the day, we have also said this in the Commercial business in a large space, there is a fair amount of inertia in the employer space, and I think that is what is at play still.

Being the quasi-salesman with a finance background, it is hard to say that I am a sales guy, but I would quickly point out that with our complement of PPOs and HMOs, and something unique to us, where we have embraced the regional PPOs a little bit more than some of our competitors have, I would argue that we offer a pretty unique opportunity for groups that are looking for some cost savings.

So I continue to be very -- I'm not going to say bullish, but -- because we have struggled through this past year. But I feel very good about the value proposition that we can offer to a lot of the employers who, again, are looking for some alternatives.

Let me just reinforce that one more time. I mean, what Jim is basically saying is that employers have been hesitant to rely on private fee for service as a retirement solution because of uncertainty around that and the noise associated with it.

Clearly, in our opinion, there is a long-term opportunity in the network environment across much of the country. That represents a pretty good footprint for large employers who have people at many locations. So I think we are at a slightly different spot than others who are completely dependent upon PFFS for the retiree group.

But again I think it's a combination of political noise quieting down; them coming to understand how the PPO can work. It will be up to us to execute around a sales distribution strategy.

So I am with Jim. I am relatively optimistic long-term about the employer group. But it is just pretty inertia-bound at the moment.

Fine. If I could just slip in one quick last one, just on commercial MLR. Your thoughts around seasonality of that in 3Q versus 4Q. I know last year it was pretty much flat 3Q versus 4Q. But will you maybe have some mix or deductible type differences this year?

We think that last year will be pretty indicative. By the time we got to the second half of the year we understood.

You are obviously, Scott, you are very familiar with the pattern as it goes through the year. So it is generally declining as we go.

The MER goes up.

Yes, the MER goes up, I'm sorry. Yes. The MER goes up -- the profitability to clients.

You might reference him back to the first half change over last year and where you see the rest of the year coming; and that would be an indicator of what we see happening in the back half.

Right, and again, as I mentioned a few minutes ago, we see a 50 to 100 basis point improvement based on the 110 that we see in the first half. So.

Got it, thank you.

Justin Lake from UBS.

Thanks, good morning. First question, just on Part D revisions, I just want to make sure I understand specifically what the changes are around. You quantify them pretty well.

Just one, of that, of the improvement in Part D, how much of that came, did you say, from higher risk score payments than you expected? And then how much of it was on actual utilization improvement?

Then, within that utilization improvement, can you give us an idea of how much that occurred within the enhanced product versus the problem you identify within the duals?

We laid out three separate items that caused the improvement. One was the utilization in the slowdown that Jim referenced. I added that the generic dispensing rate is improving.

And then there is the risk score. I would estimate that each of those played about a one-third role in the improvement that we are seeing.

You have to remember the improvement is measured off something that we did with about 45 days' worth of data. So now that we are safely through half the year, I spend less time wondering about how are we off that initial estimate. That is important, because we gave that and it was the best we could do at the time. But when you look at, again, the risk share payment not being accrued, and the possibility at that time for further adverse development based on the little sample size we have of the 45 days, that really explains the $330 million to $390 million and now, as we work through it, staying toward the lower end of that.

It doesn't -- it neither surprises me nor does it really confound me, given what we had to work with when we did the original bid -- or the original estimate, I'm sorry.

Sure, that makes sense. Just between the enhanced product, was any of the improvement in the enhanced parts, or was it all on the basic plan?

This is Jim Murray. I would guess that it was probably 50-50 between standard and enhanced, a little bit on the complete as well, but not a significant amount.

Correct.

That's helpful. Then my second question is just around -- Jim, I think you mentioned that there was a $257 million receivable collected in July for Medicare. What does that relate to?

That generally relates to the MRA payment basically. They let us know at the end of the second quarter, but we collected it in early July. It's really one of the big explainers around the cash flow that I mentioned. That is really why we bring to your attention.

Sure. The MRA payments, is that just the end year for '08, or is that the '07 and '08?

It is the '08.

So that is just the '08. So if I look at that $257 million from a risk score standpoint, can you give us an idea of how much of that was Part D versus Medicare Advantage?

Generally, we said that the biggest part, again, is the part we don't accrue, which has to do with Part D. Then the other part, the payment comes through.

So when you look at what is the difference between what we told you before and what we have now, it is obviously the part that relates to Part D.

Oh no, I am just looking at the absolute dollars. So of that $257 million, how much of that relates -- is that mostly Medicare Advantage?

It's mostly Medicare Advantage. The PDP is just something based upon the Medicare fee-for-service world and what is happening with those individuals. There is nothing there -- it is not a very significant portion of the $200 million or so that Jim referenced.

Okay. The reason I ask is just you look at the $257 million, if it is mostly Medicare Advantage, and there is about $2.5 billion in '08, and there is $2.5 billion of premiums, it would look like the risk scores went up almost 10%, if you just divide those two numbers.

I'm just curious to see if there is -- what is driving that. Is it a sicker population? I mean, if I am correct, is it a sicker population? Is it better, continued improvements in coding? And kind of how you look at that book going forward.

It's all of those items added together. The population of the folks that we get is whatever it is; and at times we see that it is not as -- the risk scores are going up as you reference. But there is also a work that we are doing around the coding infrastructure.

I don't know where you got your number from, but it is just a part of our day-to-day operations. We think we are very good about identifying risk scores and conditions.

One of the things that we feel very comfortable about is that we are trying to get the risk score payments for the risks that we are assuming from the federal government.

Okay. I got that number by dividing the $257 million into your year-to-date Medicare Advantage premiums. But we can take that off-line.

Okay, great.

Carl McDonald from Oppenheimer.

Thank you. I was wondering if you have any data you can share on how the PPO network today compares to private fee-for-service. If you look at private fee-for-service and say the network is essentially 100% of the market, what would a comparable or an average PPO network look like in relationship to that?

Then also from a unit cost perspective, if you are paying docs 100% of fee-for-service in the private fee-for-service program, what is a comparable reimbursement rate today for PPO?

Let me address your second question first, because I am not sure -- I am trying to make sure I understand the first part. But we pay Medicare allowable generally. That is our principle and that is our philosophy. There may be a system or two throughout all of where we do business where we have given a little bit more or a little bit less. But generally, we pay at Medicare allowable, which is equal to what the hospitals and doctors get from the federal government.

On your first question, I think what you are asking is how large is our PPO network relative to the network that exists for the seniors to use if they were in a fee-for-service.

Or in your private fee-for-service; I would assume they were roughly comparable.

Yes, I would guess that we are probably 75% of the existing population of hospitals and doctors in a particular area. But again that is a broad generalization across all of the markets that we serve. Obviously, it is better in some locations and worse in others.

But generally speaking, I would estimate that it is probably 75% of the choice that the seniors could otherwise have, were they in a private fee-for-service plan.

I think it is fair to basically say that our strategy and philosophy around the completion of those networks over the next couple years is that we are going to end up generally around 75% in most communities.

We are not looking to get to 100%. It is not the right way to do this. So we are not out chasing, contracting every doctor and every hospital and every community. That is not the strategy.

So when we get to somewhere in that 75% range, we think we are going to adequately meet the market relative to having a good product offering as well as a good broad array of physicians primarily as choices, even more so than hospitals.

All right. The second question was just on the 2009 guidance, just to confirm. You are expecting to give it on the third quarter as opposed to Investor Day?

Correct.

Thank you.

Can I address a question that I think got asked a moment ago?

This is the Justin Lake?

Justin, yes. Justin, we have looked at our Medicare Advantage revenues year to date. We have taken the number of $260 million which was our MRA payment. And actually the percentages that we are calculating -- that is why I said I am not sure I knew where you got your number from -- is not the 10%, but more like 3%.

So I just wanted to clarify that for everybody online, rather than doing that one on one.

Next question, please.

Peter Costa from FTN Midwest.

Sort of as a follow-up to the last one, can you tell us exactly how many doctors that you use today are in your network, your PPO networks?

I know 82% of the geographies. But what percentage of the doctors that are being utilized are currently networked into your PPO products? And then how do you expect to roll that out in terms of migrating membership or getting people to switch into the PPOs?

Are you going to start trying to do that right away? Or do you think that will all wait till the last year?

As we answered with the last caller, across the system we would estimate that 75% of the providers throughout, again, our system are in our PPO that also exist in our private fee-for-service.

Generally speaking, doctors are easier to contract with than hospitals unless the doctors are associated with a hospital that may not want to contract with us. So frankly we feel very good about our ability to contract with doctors throughout the United States to be a part of our PPO plans.

As Mike referenced a while back on the call, there are some hospital systems in very select parts of the United States that heretofore have held out for monies above 100% of Medicare allowable. And we are just not there yet.

The second part of your question had to do with migration of folks from the private fee-for-service to our network-based plans. This past year, about 12,000 folks shifted from a private fee-for-service to PPO plan because our career sales force walked them through the choices that they had and those folks felt better about our PPO plans as opposed to the private fee-for-service offerings that they had available. That is number one.

Number two, the one thing that we shared with you a long, long time ago was that we created two private fee-for-service plans this past year, with the expressed intent to try to get people to begin to think about PPO-like offerings. So that it would be easier to migrate them to those kinds of plans over the future.

This past year, we have what we call Plan A and Plan B. For years we have been offering Plan A, which has some doctor payments that are copayments, but a lot of benefits that were more coinsurance based.

In this past year, we produced Plan B, which is all copayment based, which looks very similar to our PPO plans. This past year, about 100,000 folks shifted from our Plan A private fee-for-service offerings to our Plan B private fee-for-service offerings.

So that tells us that people like copayment-based plans. And since our PPOs are all copayment-based plans, we feel very good about the prospects for continuing to migrate them into PPO plans going forward.

So again, on the experiment that we shared with you a number of quarters ago, and it seemed to have worked out very well for us this past year.

Then, Peter, if you back out the acquisition piece that we -- that are generally all network product, and just looked at what we attracted on our own, what Jim said is very true. You can see that we have made very large strides this year in attracting people who we contact to buy these products to pick a network product.

In general, will there be a premium paid by the senior either this year or -- I'm sorry, in 2009 or 2010 that is higher for the private fee-for-service product versus the PPO-type product?

Obviously, we don't want to share any secrets until the Medicare website is produced with all of our competitives. But one of the things we have our regional folks sit back and do is to try to create a product continuum which includes our private fee-for-service, our regional PPOs, our local PPOs, and our HMOs. And try to set up a very logical benefit choice for the seniors to make with, again, the thought in mind that there is a continuum, and there's different folks out there that like different things.

One of the things we have done is we have studied our seniors and we identified those types of seniors who like particular kinds of benefit offerings. We try to identify what appeals to all those seniors. We have created products and we have taught our captive or our career sales force how to attract and discuss some of those benefit offerings with those folks based upon their attitudes. So a lot of work in that regard.

Our ethnographic work basically has told us that this is not a homogenous crowd. And we have been building products and offerings to appeal to a broad group of different segments.

I believe I failed to say when I first asked the question, the doctors that I was referring to was the primary care doctors. Is that actually 75% of primary care doctors, or is that --?

Yes.

Okay, thank you.

Doug Simpson from Merrill Lynch.

A lot of my questions have been answered. But if you could, just taking a step back, with the stumble this year on the PDP and then the Complete plan a couple years ago, just what have you learned from that? How has that factored into '09? How do you have confidence that you won't have a hiccup in some form or fashion going forward?

This is Jim Murray. As you might expect, I have learned quite a bit.

We all have.

What we have learned is that the seniors are extremely budget and shopper conscious. Some of the things that we did this past year was we made ourselves more attractive because of some of our benefit offerings. So we have learned a lot in terms of what the seniors are able and willing to do to try and find a bargain. It changed our thinking about the nature of this business.

So we have learned a lot in terms of how we have to match competitive offerings and find ourselves on the competitive spectrum with our offerings. We have also studied, as you might expect, a lot of the cost infrastructure as respects generic dispensing rates and use of mail order. We understand a lot more about the hydraulics of all of that and what -- the impact that those have on trend development.

So we have learned quite a bit, and we feel very good because of what we have learned on how our (technical difficulty) this coming year address a lot of the situation that we confronted on March 12 of this past year.

I would add it has been fascinating to watch the conversation around PDPs in particular over the last few years. Because we all remember all the noise and all the criticisms that these seniors would never figure it out, it is way too complicated, they are not capable of understanding how to make choices, and it all needs to be simple, and we want to treat them as a homogenous crowd. We have heard all of that noise.

At the end of the day, we can tell you after three years of this, they are very good at finding the best value for them. They work at it. And you better make sure that in a transparent environment, when they are shopping and doing the things Jim has described, that you have positioned yourself properly to get appropriate mix of risk and that you have built your products and you have priced them accordingly.

It's been fascinating to watch what is truly the consumer retail business, one decision at a time, play out in a bidding environment. It has been interesting. It has been painful at times, but I think we have learned an awful lot about consumers in general and seniors in particular.

Okay. Then maybe just on the M&A front, been a number of recent deals. Can you just talk a little bit about valuation expectations from buyers relative to what you are seeing in the market either 12 or 24 months ago?

Then just wrap around that maybe comments about the competitive landscape shifting as others look to prepare for changes to deeming in 2011; and just to what extent maybe that creates further opportunities.

Well, there are plenty of other opportunities out there. I think that the first part of your question about the valuation, I think people are becoming more and more aware of the valuation generally of the five or six largest companies and then how that pertains to their valuation.

Given the fact that there still would appear to be a fair amount of consolidation that is left to be done in the industry, you need the scale, you need a lot of things to get by to build the capital, to do -- to be able to provide the service and to be able to have the kinds of things that we have developed, for example, in the Medicare and with respect to the deeming, as you mentioned before, and the new law that just was passed last month.

So generally, I think these kinds of increasing challenges give smaller plans, provider-owned plans, other people who own plans generally the impetus to take a real look at the economics of the plan, the relationship of the plan with other entities they might own.

Again looking at those valuations, we think that they are correcting and getting in line with the correction that has occurred in our industry overall.

Okay, great. Thank you.

Matt Perry from Wachovia Capital Markets.

Good morning. Thinking about the deeming change in 2011, how are you thinking about how you will consider or how you will measure success in transitioning private fee-for-service members over to network products?

Do you have a timeline for how that process will occur over the next three open enrollment seasons?

Let me start and Jim can build on it. I would argue that -- I talked about it in my own comments. We'd like to the extent possible protect the business we have. You saw from this morning's information that but for a very small sliver of the pie we showed you, we actually have a wonderful opportunity to have these people stay with us.

My view of it longer term has always been, when we get through with these changes to the program, which have been inevitable I think, do we still have a growth opportunity going forward after that? That is why I spent a little bit of time this morning talking about that.

So we will continue to build out and mature networks and this sort of thing. We have got a lot of people applied to it and have had them out there for a couple years, to build out and be in a position to offer the most attractive possible PPO option to everybody we do business with.

We will continue to network in places where we currently don't have PPOs. So I think by the time we reach January of 2011, we feel like we are going to be very well positioned to keep what we have.

Now I also mentioned there's places around the country where there's just not enough folks there to really make all that work all that useful. So there will be some that we will not deliver a PPO to, but not many.

I think the good news is, as we build out the PPO networks to support the existing business, that in and of itself represents a long-term platform for growth because that work will have been accomplished. Our competitors will be hustling to catch up. So I think we will be out there in front of everyone again with this new product array, which is the PPO, being the primary driver.

So to me, it is a question of how much of our existing business will transfer, and I think it's going to be a lot.

And then, do you have an opportunity to grow, for growth after that, based on building out those networks and those products being attractive? The answer to that is yes, I think there is a big upside still.

Then secondly, when you talk about the environment for Medicare Advantage changing -- and I would think that maybe your thinking would include a reduction in the benchmarks to get them closer to fee-for-service at some point over the next couple years. If the benchmarks go down to 100% of private fee-for-service, would you still target a 5% margin?

And if you did target a 5% margin, how can we think about the potential growth? I guess the ultimate question is -- can you get a 5% margin and growth under that environment?

That is our intent. We believe that is possible. But it really gets -- several things have to drive that.

First of all, I don't know what's going to happen with rates. Here is what I do know, what rate cuts mean. Rate cuts in the short and midterm definitely mean benefit cuts to seniors. There is no question about that. So nobody should be confused.

Having said that, over the long term, every quarter you will notice we tease out some clinical activities to give you some sense of where the opportunities are to actually more effectively coordinated the care. So you've got the efficiency and productivity we are seeking inside of the program, which gives more room for either richer benefits or more sustainable benefits as people attack this program.

In any case I think at the end of the day we have to be as efficient as possible. So we are targeting driving a lot of efficiency and effectiveness around everything from administration to clinical coordination. We know there is a big upside on the clinical coordination of the senior population.

We have been working with this population for 20-plus years. You can even take it back further; we used to be a hospital company and saw it from the provider's side for many years. So we understand what Medicare looks like and the way the utilization plays out. We understand how big of an opportunity there is in just blocking and tackling coordination, because it is a mess in the traditional program.

So we have a big opportunity there. The quicker and more mature we get our clinical coordination efforts and we bring in data mining and connectivity and all those other things that are evolving in this business, the longer this program has to be wildly successful for us -- no matter what happens in Washington. That is the way we think about it. That is the way we are building out. That is how we are spending our money.

We plan to be in this for a very long time. To the extent that the private sector is involved in this, there is huge upside from where we are today. You have 10 million people in Medicare Advantage approximately; you've got 40-some million over the age of 65. That number is going to get bigger and bigger. You have seen that chart many times.

So this market, this is the growing market in health insurance in the United States, period. We are glad to be where we are. We're positioned beautifully for it. And we think through efficiency and productivity and all of the things we have been investing in that we have both a short-, midterm and long-term opportunity. But it's not simple insurance work; it is managing cost and coordinating care.

This is Jim. The only thing that I would add to what Mike said is that geographically obviously there are certain locations in the United States where people live and reimbursement rates are such that we think we can make amounts above that target that we have talked about.

But there is obviously a lot of places in the United States where there aren't as many people. Critical mass is not as strong. And with a lack of critical mass comes our inability to put a lot of the resources that we otherwise would put in an MSA that there is critical mass and good revenues to provide some savings opportunities.

So when you think about all of the regions in the United States added together, some are going to be higher than the target that we have and some would be lower. I think we feel pretty comfortable that they could average the 5% that we have been pretty consistent about.

If I could just squeeze in one final one. In your current HMO and PPO businesses, if you were to offer -- or ultimately, how much would it cost you to provide the equivalent kind of A and B benefit to private fee-for-service? I mean, 100% of the fee-for-service payment, 90%, 80%? Where do you think that falls out?

Again, it differs by the markets that we are discussing. Some markets we do very well; and others it gets a little bit closer to the 100%. It is all market-driven.

If you look around the United States and you see the payment ranks for the different counties, you can get a sense for what I am talking about.

Okay, thank you.

John Rex from JPMorgan.

Thanks, just firstly a quick question on overall trend. A few other health plans have noted something about acuity creep or higher number of catastrophic claims. Just wondering if you are seeing anything, any indications of that in your books, or any kind of indications of also that potentially being about coding practices. And kind of how you have analyzed that.

Yes, in our commercial book of business it is mostly per diem reimbursement. But there was a change that was made this past year in the way that hospitals code for DRGs. So we have a market where we are seeing some of the coding creep that you have heard referenced earlier. We think that there is opportunity to fix that based upon the nature of our contracts.

We are obviously also evaluating the heck out of it as it relates to our private fee-for-service business, because as you know, that is all paid on a DRG basis.

So we spotted this a while ago. We are already in corrective actions, and we feel pretty confident that we will get it under control.

It is not widespread.

On the Commercial side, it is obviously not widespread. On Medicare, we are seeing a little bit of it, but not a lot.

You think that is mostly related to the MS-DRG?

Yes.

Is that just -- in terms of addressing that in that book, is that just -- do you have to increase the audits, (multiple speakers) reviews and audits?

Yes, and we have to have price protection language in our contracts; and we do. So.

Okay, and nothing though fundamentally in terms of what you think, in terms of just actual acuity creeping? More so coding practices?

No.

Okay.

Not that we are seeing.

Okay, great. Then longer term, you think about your Part D business, over time, do you think -- can the auto-assignees and the retail base coexist in the same plan? Or you kind of continue to try to separate those two? I guess can they coexist profitably in the same plan is my question.

This is Jim Murray. You might address that question to CMS. You know, we have done a lot of studying and we have a lot of data around costs and what have you. There's different utilization patterns between the two populations, I will tell you that.

Right, okay. I'm assuming your plan design initiatives for '08 would have seemed to try to -- it looked like you were trying to address that and potentially kind of creating a retail plan that might be more attractive without undermining the duals. I guess that is the one area you are addressing. But it seems kind of like ultimately it is tough to keep them in the same plans as they are today. Is that true?

You know, Mike has talked a long period of time about the enhanced plan and what we have done around benefit designs around the enhanced plan. We feel very good about the way the enhanced plan is running for us.

But as is chronicled we have struggled a little bit with our standard plan. As you pointed out, it has duals. It also has low income subsidy members in it. And it has some voluntary members in there. We have struggled, frankly, with how they can coexist in the same plan.

All right, okay, thank you.

Okay, let me wrap this up. I think we can say this was a good quarter for Humana. We are pretty pleased with where we are across all of our businesses.

We spent a fair amount of time this morning talking about our PPO preparation around the Medicaid business. I think I would characterize our position as good. I think we are a competitively in a really good position. I think we will see our competitors attempt to move to the network environment, and we will deal with that as it progresses.

I want to remind everyone that our Investor Day is on November 20 in New York City. We look forward to seeing all of you there.

Thank you for joining us today, and I want to thank the Humana associates that are on this call for making this good quarter possible. Thank you very much.

This concludes today's Q2 2008 earnings release conference call. You may now disconnect your lines.