Humana Inc (HUM) 2008 Q4 法說會逐字稿

Good morning, my name is Stephanie and I will be your conference operator today. At this time I would like to welcome ever to the quarter four 2008 earnings release conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (Caller Instructions). Thank you, Ms. Regina Nethery, Vive President of Investor Relations, you may begin your conference.

Good morning and thank you for joining us. In a moment Mike McCallister, Humana's President and Chief Executive Officer, and Jim Bloem, Senior Vive President and Chief Financial Officer, will briefly discuss highlights from our fourth 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 into 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 Web site, Humana.com, later today. This call is also being simulcast via the Internet along with virtual slide presentation. For those of you who have Company firewall issues and cannot access the live presentation, an adobe version of the slide has been posted to the investor section of Humana's Web site. Before we begin our discussion I need to cover a few other items.

First 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. Investor 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 Web site as well as on the SEC's Web site.

Additionally investors are advised to read the Humana's fourth quarter 2008 earnings press release issued this morning, February 2nd, 2009. This press release and other historical financial news releases are also available on our Web site. Second, this morning's call and slide presentation include references to non-GAAP financial measures. The Company believes these non-GAAP measures when presented in conjunction with comparable GAAP measures are useful to both management and its investors in analyzing the Company's ongoing business and operating performance. Since the non-GAAP judgments relate to items that were primarily not related to the underwriting or servicing of our products.

Internally management uses non-GAAP, this non-GAAP information as indicative of business performance as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to but not as a substitute for or superior to financial measures prepared in accordance with GAAP. This slide shows the reconciliation of GAAP to non-GAAP financial measures used in conjunction with this presentation. 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.

Good morning and thank you for joining us. This morning we reported earnings per share for the fourth quarter of $1.03, and $3.83 for the year. These results are in line with the quarterly guidance we issued in October of $1 to $1.10 per share and a guidance of $3.80 to $3.90 for the full year that we also issued at that time. While 2008 certainly had its challenges we fully believe those issues are behind us. Though the economic environment continues to be volatile, we feel confident that our businesses are well-positioned to succeed.

Looking to 2009 we are once again reaffirming our EPS guidance of $5.90 to $6.10 for the full year, which we shared with you in our third quarter 2008 earnings release. This EPS guidance returns Humana to the trajectory of earnings growth we had been experiencing prior to 2008. With 2008 now behind us we are even more keenly focused on our prospects for 2009 and the future. We continue to view 2009 positively with opportunities across each of our businesses not only to grow, but to continue implementing strategic consumer oriented solutions that proactively address many of the healthcare industry's our country is facing. Let me begin with our Medicare business.

Looking first at our stands alone PDP offerings as expected, we lost a significant number of these members on January 1st. The magnitude of the member loss was greater than we had previously anticipated but we are confident that our premium and product designs for each of our stand alone PDP offerings will return these products to profitability in 2009. As you can see from this chart the PDP membership attrition was primarily driven by our product design and prices against the benchmark with over 40% of the decline a result of losing many low income seniors, some of who were redesigned to plans below the benchmark while some others opted not to pay the incremental premium to stay in our plan.

Turning now to Medicare advantage. We are pleased with results we are seeing thus far with two months let in the enrollment season. In spite of a very competitive environment with many of our competitors offering zero premium private fee for service products, we were able to sell 112,000 network based products to new members and 172,000 new members in total. We were able to transition 65,000 private fee for service members to network based products.

We changed the industry paradigm by introducing member premiums something we believe is an essential element to the future operating model. Approximately 60% of our Medicare advantage membership are already using our network based products. Our 2009 premiums and benefit design for all products are representative of our estimate of likely medical cost. And finally because of all the above as well as our focus on medical care management opportunities we believe we are uniquely position to thrive in future enrollment periods.

As we've said in the past we believe seniors understand value very well and that our achieving 60% of our Medicare advantage membership using network work based products again reinforces that point. Seniors are very comfortable with PPO's and HMS's, product they have come to know in their work places. The 65,000 Human private fee for service members, who chose to move to one of our network plans on January 1st are indicative of the satisfaction of our membership and is particularly meaningful given the change we introduced by implementing member premiums.

Before addressing our growth prospects in Medicare advantage beyond this year let me put to rest a concern that some of you expressed about the possible risk profile of our membership given nearly all of our 2009 products include a member premium. As you know, our payments from CMS are adjusted for the risk score of individuals members. What you may not realize is how much the CMS risk adjusted revenue has historically matched the overall risk portfolio of our Medicare advantage membership. As we have said in the past there is only minor variation in the benefit ratio of our Medicare advantage products. So again with payments adjusted for risk as long as the combination of premium and benefit design adequately reflects expected cost our offerings will produce the results we anticipated when we filed our bids with CMS.

We have spoke Ken a off of long-term Medicare opportunity so let's spend a few moments looking beyond 2009. With rates for 2010 due out April 6th we were already looking to next year as well as 2011. In meetings with investors there seems to be a general consensus of questions around, one, will seniors go back to original Medicare when private fee for service going away? Two, if Medicare advantage payment rates are adjusted downward will we be able to offer enough benefits to make the products attractive to seniors? And three, will our network offerings be expansive enough to attract seniors accustomed to private fee for service?

I'll responds to do first two questions together as they're related. CMS data shows that less than 1% of the seniors that leave our Medicare advantaged offerings return to original Medicare, with or without a Medigap policy. Simply the Medicare advantage value propositions is too good. Our products stack up very well against original Medicare even when it's combined with a medigap policy. And with continued progress in our medical care management model we fully expect a value we can deliver to seniors to be compelling in 2011 and beyond since medical spending efficiency provides room for better benefit coverage, lower premiums or importantly an ability to adjust to changing government payment rates.

As for our network offerings the work of our provider contracting team is already showing returns in terms of the growth in our network based planned membership as referenced earlier. Clearly demonstrating seniors willingness to move into network offerings. The combination of the medical care management model, administrative productivity and strong networks help us ensure we have a viable Medicare advantage offering for many years to come.

Why are we confident about the continued viability of our Medicare advantage products? Again through disciplined execution around provider network contracting and our medical care management model we can mitigate medical cost trends allowing plenty of head room for incremental benefits for seniors. This coupled with ensuring that seniors have good coverage are provided guidance around their choices and are financially incented to make sound choices can represent a real solution to Medicare crisis that confront us as taxpayers.

At our investor day in November we shared with you detail regarding ways in which we expect to achieve an initial cost mitigation goal of 15% below original Medicare. Today I'm like to highlight a few these elements of our medical care management model. These are illustrative of how we engage seniors to try and get ahead of episodic events and work to evaluate seniors health holistically. We are making significant head way in engaging seniors before an episodic event with over 60% of our new Medicare advantage members completing a health risk assessment. As a result of having prepared this assessment 18% were identified as candidates for our integrated medical and behavioral health program and 8% were referred to our medical case management program.

I've spoken frequently about the power of integration so let's spend a moment talking about our integrated medical and behavioral health program. With a coast of less than $1 per member per month for it's participants, this program has generated a savings of approximately $1.50 to $2 per member per month. More importantly most of the members are experiencing for the first time how much better their health and wellness can be in an organized system. This program along with a multitude of others reinforce our confidence that we achieve our target of savings and outer comes versus original Medicare. Achieving these savings is a win win solution. The members win in terms of the value and care they receive and the government wins because over time it offers a solution to the Medicare financial crisis we all face.

In terms of the network activity I mentioned earlier this chart shows that approximately 80% of our private fee for service members live where a Humana PPO product is available today. That number holds true even with our membership attrition in private fee for service in 2009. With the continuing expansion of our networks we anticipate that 94% of our current private fee for service members would have a PPO available to them by 2011.

But of course a potential member has a final key question before joining a Medicare advantage PPO. Is my doctor in the network? Importantly the approximately 75% of the claims we pay for our private fee for service members are paid to doctors that are already part of our PPO network without. Our network build out work has remained robust in the past year and will continue as we close in on 2011. Thus as our networks expand so will the percentage of claims that we pay to network doctors for private fee for service members making it easy for the member to join or stay with Humana. Again nearly 60% of our members have already chosen our network products.

As I mentioned before we are working to drive efficiency in both medical and administrative spending. Our approach has been reinvest these saving to further build out our capabilities. As a result our medical care model gets increasingly better and more broadly applied to our business every year. These improved processes in turn lead to enhanced value for our seniors as we simultaneously mitigate medical cost trend and produce better health outcomes.

This slide shows some of the administrative process improvements to which I'm referring. These examples are but a few of the many administrative cost opportunities that collectively can make a real difference in lowering cost. Process improvement start by having associates who are engaged in their day-to-day activities and as we say here, bring their A game to work. Associates who enjoy what they are doing translate to customers. In this case, senior customers who understand the value of our products and services. Engaged associates also facilitate the operational improvements shown on this slide which as I said earlier produce savings that we are able invest in more valuable offerings for the customers we serve.

The work we are doing is critical to our Company and our stakeholders. It benefits our members young and old. It benefits employers, it benefits the government. They need our help. We see the challenges of our healthcare system as opportunities. It's clear governments role in healthcare will grow while at the same time the healthcare market will grow at a multiple of the overall economy. Obviously this is a defining time for our Company and our industry.

The expressed willingness of the new administration to adopt sweeping change, it's eagerness to take on fundamental problems not just in healthcare but across the board and today's fiscal pressures mean that this may be our best chance to achieve meaningful improvement in healthcare for the United States. As the administration works towards healthcare reform Humana is prepared to play a major positive rolling bring to bear the elements on this slide.

I've spend a lot of time on our Medicare operations this morning, but let me also provide brief updates on our military services and commercial businesses. As previously disclosed we submitted a bid on a south region for the next round of TRICARE contracts. While we have no definitive date for the related award announcement we anticipate that a decision is likely is sometime before June of this year when the transition period for the new contract is set to begin. However a specific date is not set in stone and the Department of Defense may decide to take longer than that before reaching a determination.

In the interim we have signed agreements with the Department of Defense for additional option periods with the first extending through March 2010 and two more six-month period extensions to follow. All to be exercised at the discretion of the Department of Defense.

Turning to our commercial business. The good news there is that the operating results for each of our medical lines of business are on track. We continue to anticipate membership being relatively flat this year with gains in strategic areas such as small group and individual and losses in large group and mid market accounts netting out by year end.

Pricing continues to be generally rational with some pockets of outlier activity and we don't see anything that would cause a major shift in medical cost trends. We are also excited about the opportunity to see some of our newly action acquired supplemental and voluntary product lines grow. With the exception of the impact upon the segments net investment income, our commercial business thus far has seen only minimal disruption with respect to the country's economic turmoil.

In summary with 2008 now behind us we are confident in our prospects for 2009. Our Medicare advantage business is on target with a substantial number of members choosing PPO's well ahead of 2011. Our segment specific focus in the commercial business continues to drive improving earnings and our belief that aligning with the interest of consumers provides the best opportunities for our business has never been stronger.

With that I'll turn the call over to Jim Bloem.

Thanks, Mike, and good morning everyone. Let's start with our fourth quarter results.

As Mike mentioned we are pleased to report that the operating performance of each of our business segments was in line with our prior expectations. We did incur approximately $10 million or $0.04 per share of other than temporary impairments in our investment portfolio. This was a factor in our reported earnings being slightly below the mid-point of our previous guidance of $1 to $1.10 per share.

Moving on to 2009, I will focus my remarks on the following six items. First, three fairly minor changes in our 2009 earnings per share guidance points which have occurred since November. Taken together they don't affect our previously announced 2009 EPS guidance range of $5.90 to $6.10. Second, the anticipated quarterly progression of our expected 2009 overall Medicare benefit ratio. Third, the outlook for our commercial segment operations. Fourth, our expectations for 2009 quarterly earnings seasonality. Fifth, our investment portfolio and the income. And, finally, our capital and liquidity as we begin 2009.

Turning first to 2009 earnings per share, we are pleased to reiterate our previous guidance of $5.90 to $6.10. While the fundamental operating performance of our business segments has not changed, we have had three noteworthy changes in our guidance components since November. In total these three items essentially net each other out. First we've reduced our forecasts for investment income by approximately $45 million versus our last forecast. I'll elaborate on this change of approximately $0.17 per share in a few minutes.

Second we expect a favorable resolution of a contingent tax matter in the first quarter 2009. This will result in an effective tax rate of 28% to 30% for the first quarter which in turn lowers our anticipated full year tax rate by approximately 100 basis points or $0.10 per share versus the prior forecast. And finally we now anticipate the recognition of approximately $15 million in revenue associated with a three-year CMS demonstration project called Green Ribbon Health. Green Ribbon Health studied the impact of disease management programs on a defined senior population. The nature of our range many with CMS required Humana to expense costs as incurred while deferring any potential revenue. The exact amount of any amount of revenue to be recognized was contingent on the specific outcomes attained. Based on the final out come data we expect to recognize approximately $15 million or $0.06 earnings per share of previously deferred revenue during the third quarter.

Now I'll comment on our expectations for 2009 operating results for our two business segments. Turning first to Medicare we expect improvement in our pretax operating margin, as a result of our correction of the stand alone PDP error that impacted our earnings throughout 2008 as is shown on this slide. As we've discussed many times the declining slope of the overall Medicare benefit ratio as the calendar year progresses generally is driven by planned designs associated with Medicare Part D benefits. We've analyzed our 2008 claims experience for the approximately 924,000 members that left our PDP plans in January and we are comfortable that we did not incur any overall materially adverse selection. Additionally to confirm this observation we've examined prescription drug claims incurred in the first 26 days of January and are comfortable that run rate, that the run rates that are being incurred this year are in line with our forecasting models.

On the Medicare advantage side we expect to achieve our target margins since we are very comfortable with our pricing discipline and benefit designs around these combined medical and drug plans. Additionally as we continue to realize improvements around our medical care management model as illustrated by some of the initiatives that Mike just described we continue to gain further assurance that we can deliver our pre-tax operating margin target as well as competitively position ourselves favorably for future years.

Turning next to the commercial segment we anticipate 2009 pre-tax earnings in the range of $270 million to $290 million. Now , this is an approximately $30 million lower than our previous guidance due to the reduction in expected investment income. Not into the operating performance of the commercial segment. Otherwise our commercial segment lines of business continue to perform well.

The performance continues to be driven by the following five factors. First our consumer focus strategy. Second, our sustained pricing and underwriting discipline. Third, our continuous benefit expense trends analysis and forecasting. Fourth, our integrated guidance solution and our medical care management model and, finally, we have a well-balanced membership portfolio.

2008 marked another year of delivering benefit expense ratios in line with pricing expectations. We continue to experience stable cost trends in the 6% to 7% range on a same store basis with net trends in the 3% to 4% range. As we've discussed before, these lower net cost trends reflect the effects of changes in business mix including increasing membership in our low cost and our lower cost networks and our relative business mix between fully insured group sizes. With respect to secular cost trend components, that is the annualized trends before benefit buy downs, there were no surprises during 2008. We saw in-patient utilization trends come in a bit favorable versus our expectations for 2008 and we expect a relatively flat trend in 2009.

For both in-patient and out-patient hospital rates we experience add trend in the mid to upper single digits for 2008 and expect roughly the same for this year. Physician cost trends averaged in the mid single digits in line with our forecast. And finally as expected prescription drug trends were in the mid to high single digits. Based on our ongoing deep dive analysis of benefit expense trends factors we don't foresee any significant changes to the components of our cost trends as we move in 2009. We continually assess cost trends in order to ensure that we keep our pricing where it needs to be.

Now let's pull together each of the items that I've just covered and combine them with some of our other regularly discussed seasonality factors such as the timing of the Medicare selling season and the ongoing growth of commercial membership and high deductible health plans. The result of this synthesis which is summarized on the slide is an implied 2009 quarterly earnings pattern that is back half weighted just as had been the case since the initial Medicare Part D roll-out in 2006. However, for 2009 the pattern is not as heavily back weighted as in the past due to the just described expected first quarter tax rate benefit combined with a growing, the continuing growth in high deductible health plans at our commercial business.

Since high deductible health plans tends to have a benefit ratio that behaves inversely to the PDP driven overall Medicare benefit ratio patent the relative weighting of the first and second half of this year's earnings are closer this year. So accordingly our first quarter earnings per share guidance of $1.10 to $1.20 represents approximately 20% of our expected full years earnings which is a bit higher than what we've seen in the last few years.

Turning next to our investments, our $7.2 billion portfolio continues to benefit from broad diversification, appropriate duration and high credit quality. With $10 million or $0.04 per share of additional impairments recorded in the fourth quarter, our total investment write downs for 2008 were $119.5 million or 1.7% of the average portfolio balance for the year. The $10 million of fourth quarter impairment consisted of 12 securities from 11 issuers. Just as in the third quarter you can get further detail on our portfolio composition from our recently added statistical page, S. 13, of this morning's press release.

At December 31, 2008, we had approximately $232 million of total net unrealized investment losses. That was 9.4% lower than the $254 million we had at September 30. As of January 28, 2009, our total net unrealized losses were approximately $202 million. Based on continuing dislocations in the credit markets both in the fourth quarter and through January, we have lowered our expected 2009 investment income from a range of $370 million to $385 million to a range of $325 million to $345 million. This approximately $45 million decrease in investment income represents roughly 55 basis points on an approximate $8 billion of 2009 average invested balance. The 55 basis points decline in expected investment yield results from the following.

First, the effect of the Federal reserves establishment and continuation of an zero to 25 basis points targeted Federal funds rate since mid-December. The new target represents a 75 to 100 basis points decline from its October 29 announced target. Second, continued weakness in the economy, which is reflected by a widely held consensus of economists is now expected to last throughout 2009 rather than just in the first half. Now the second factor as long as reflected in fewer new debt issuances having made our -- which meet our investment guidelines for short duration, adequate liquidity and high credit quality. This fact is requiring to us maintain higher cash and cash equivalent balances than we originally anticipated all at historically low yields which again by widely held consensus are not expected to change materially for the year.

Turning to capital -- turning last to capital and liquidity as demonstrated by the following four-points we continue to both have and conserve ample capital and liquidity in these uncertain times. First cash flow from operations were $1 billion in 2008 and we are reaffirming our 2009 guidance of $1.2 billion to $1.4 billion. The primary driver of the year over year increase is the expected increase in net income this year.

Second, we have $750 million of remaining availability under our $1 billion revolving credit agreement after having completed the cash acquisition of Cariten Healthcare for $253 million in the fourth quarter. Our bank facility remains effective until July 2011. Third, our debt to total capital ratio at December 31st was 30.3% at the top end of our 25% to 30% target range. As previously disclosed we expect to repay the Cariten acquisition draw during the first half of 2009 which together with anticipated net income will both restore the revolver to its full availability and return the debt to total capital ratio within our targeted range.

Finally we continue to carry significant levels of aggregate statutory surplus and capital at our state regulated operating subsidiaries. While the exact amounts will not be available until the second quarter, after the state -- individual state reports are filed and discussed with the respective departments of insurance in the credit rating agencies, we remain -- we maintain our expectation that we should be able to dividend $500 million from the subsidiaries to the parent versus $296 million in 2008. In addition we expect capital contributions to the operating subsidiaries to be less than the $243 million in 2008. As usual we will update these amounts in our 2009 -- in our second quarter 2009 earnings conference call in early August after the process is complete.

So in conclusion we are pleased with how 2008 played out although it certainly did not meet our expectations of a year ago. The continued lessons learned and processes developed both in 2008 and in prior years give us confidence in reiterated earnings guidance we are giving today. As we enter 2009 the operating discipline and financial strength of Humana has never been greater.

With that we will open the phone lines for questions. We request that each caller ask only two questions in fairness to those still waiting in the queue. Operator, will you please introduce the first

Yes. The first question is from Josh Raskin from Barclays Capital. Your line is open.

Hi, thanks, good morning. My question relates to the migration of the private fee for services lives into the PPO and to some extent the HMO networks. And maybe Mike if you could help us understand the difference in cost structures I guess in terms of your -- specifically around medical and admin costs for those various products, sort of where do they lineup for Humana currently versus the traditional fee for service sort of benchmarks?

This is Jim Murray. I guess the way that I would think about it is that for the private fee for service the cost structure is probably 5% to 10% below the regional PPO and the local PPO is probably another 5% or so percent difference from that.

The way I kind of try to think about it is that the premiums on the regional PPO will likely one day be about $100 to $150. The local PPO will be $50 to $100 the HMO will be somewhere around $0 to $50 some time in the future and that kind of gives you a sense for the different values that can be achieved. So if I were a senior and I was looking at some of the different offerings, the private fee for service I'm probably saving $20 to $30 per member per month by moving from a private fee for service into a regional or a local plan.

Okay. So then it sounds like when you said eventually the local PPO's will still be something in the ballpark of plus $50, PMP more expensive than the HMO, is that a fair way to look at it?

Yes.

Okay. That's helpful. And then --

Josh, there's another thing I think we should thinking about. Now is the time to really move people in PPOs because the payment rates are such that it gives us more flexibility in terms of product offerings and the level of benefits and all the things that there's issues over time relative to how do you get people to switch. One is benefits, one is premium, whether their doctors are in, all the thing , all that stuff is in play. I think it's, I think it's smart to go now and to really emphasize the PPO's and that's what we've done.

And we've taken advantage of where we are from a payment perspective to begin that process now as opposed to waiting for 2011. Now, I've said many times that 2011 people will sit down and make a value judgment about what they want to have and I'm pretty comfortable they are going to make the right call. And the rest of them however many are still left will probably move to a PPO, we will expect them to, or an HMO but I think the timing is now to be moving to PPO's and that's what we tried to do

That makes sense and then I guess a follow up on that. The 65,000 net switch that you guys transitioned out out of your old private fee for service into network based products, one can I assume they were all into PPO's and then two, how did that 65,000 come in versus your expectation?

This is Jim again. Generally most all of those moved in PPO's. Some did go to HMO's and that was significantly above our expectations. The, in total we sold 258,000 gross members. And included in that were 86,000 plan to plan changes as we call it, members selecting our different options. And the strong majority of those were into network based plans.

So we are really excited about that because it was a really good movement towards the next couple of years of moving most all of our private fee for service members into network based options. So we feel like we've got an incredible start on that process.

So, Jim, I'm sorry just so I understand the 65 was well above your expectations?

Yes.

Okay. Thanks.

The next question is from Greg Nersessian from Credit Suisse. Your line is open.

Thanks, good morning, just first question again on the private fee for service. Just wondering from a competitive standpoint are you seeing any new competitors entering any of your private fee for service markets with network based options that you hadn't seen before? And then also how has the contracting behavior, the provider contracting behavior been relative to your expectations from competitors? Are they contracting rationally or do you see some aggressively on their point?

I'm assuming you're referring to Medicare contracting so I'll answer your first

Yes.

One of the phenomenon that is we had this January as we've said in the past is that some of our competition has significantly expanded thorough premium private fee for service offerings in many of the markets that we operate in and that has significantly impacted our growth for January of this year.

In terms of whether we see those competitors creating new network based options, we are not seeing significant growth from our competitors in network based options. We are seeing one or two of our competitors growing private fee for service, but we are not seeing significant growth in PPO's or HMOs from the competition.

I'll take the contracting piece, Greg. I don't anticipate at the end of the day when it comes to contracting for Medicare business that any of the payors are going to be treated materially different. I mean we decided from the very beginning that we were going to have to make this work paying providers at least what the government was paying them. You weren't going to be able to make this work unless you could find medical or spending efficiency somewhere else in the actual clinical care.

So and -- my experience so far with the hospitals is that they are very willing to do business with us at the level the government pays them but to do better than that is unlikely. So, I think it's about speed and execution and relationships when it comes to hospital contracting. And whether they trust you to be a good partner in terms of being at least as good as the government of better in terms of payment, speed and accuracy and that sort of thing. And we've had good experience there, so that's why the networks have built out as effectively as they have.

Okay. Great. And then if I could ask a quick follow up for Jim. Just given the drop in the PDP enrollment how do you think that might impact the DCP and then also the seasonality of the cash flow next year? Should we expect an uptick in the DCP next year?

No, I think that basically what we've said before the big thing in the cash flow as we said is really the income. It's still very early to the look at everything and there would be no change that we could perceive based on the days in claims payable.

Okay. So same range?

Yes.

This is Regina just to clarify the days in claims payable calculation that we disclose does not include PDP stand alone.

Oh, that's right. Okay, thank you.

This is Jim, just to clarify, the profitability of the PDP is going to improve over last year so I would anticipate that that will improve our cash flows.

So far as reflected in income. That a range is still based -- our range is still based on the change in income only.

Thanks.

Next question, Charles Boorady from Citi. Your line is open.

Thanks, good morning, approximately what percent of the roughly 180,000 heavy drug users that you pointed to in '08 is causing the shortfall in your part D profitability are still enrolled in one of your plans this year?

We don't have the exact percentage Charles but we did loss some number of those members. We had anticipated keeping some of them and as we look at the PDP results in the main because we shrunk more than we thought we were going to shrink obviously our underwriting results because of the less revenue have decreased. But some of the conservatism that we built into some of our assumptions around the risk mix of business that we were going to keep seem to be playing out better than we anticipated. So in the main our underwriting results overall for the PDP look to be pretty solid. And as Jim said in his remarks and introductions we look at the claim payments in the month of January and we feel very good about how those are coming in relative to our projections and our ultimate view for 2009's profitability on the PDP.

Alright. And what are some specific things that you are doing or looking at this year that you did not do last year to try to identify any potential shortfall so that we get an earlier read than we did in '08 on the risk of your book?

Every day I look at the claim payments relative to the PDP membership. We are looking at the risk mix of the PDP membership. We are looking at the utilization of our right source facility, that's our mail order facility. We looking at our generic dispensing rate. On the MA. side we are looking at daily receipt information, we are looking at utilization information. We are studying the tapes that we get in from CMS as to the risk mix of the business that we sold and lost. And so we are doing quite a bit to get ourselves comfortable with the guidance that we've put out there today.

To be clear these are things that you were doing this year that you were not doing last year, Jim?

We are doing them much more vigorously and identifying new opportunities to evaluate data that makes us feel much more comfortable than we did at this point last year.

So last year was sort of early March, what point this year do you think will you get to the same degree of confidence in your guidance for this year?

As respects to the PDP and M A, it's today.

Alright, great. Thank you.

Next question, Justin Lake from UBS. Your line is open.

Thanks, good morning. Just a couple questions on the commercial side. One the MLR in the quarter was a little bit higher and I know you pointed to the greater seasonality from selling high deductible plans. I'm just curious if you can give us some -- given we didn't see that last year in the numbers can you give us some color around how much more high deductible membership you have this year than last year as a percentage?

Yes, the percentage is about 65%. And we did have some last year if you look at how last year went through the year we did allude to it in terms of the being a factor but now it's 11% of the total fully insured book, it's like I said it's up 65%, it's around 225,000.

The way I, this is Jim Murray, the way I look at the overall commercial results I look to the full years medical expense ratio and it improved this year versus last. And the other thing that I look to is some of the discussion that we've had in prior quarters and in New York when we were there in terms of this year being a year where we are focusing on improving our margins and delivering rate increases that are designed to do that. So I feel very good about how we are starting 2009 in terms of our commercial opportunities.

That's helpful. And then on the topline for the commercial business you, it looks like you left a membership relatively dissimilar to your third quarter guidance but took down your topline. Is that just buy downs or is there anything else that you are seeing out there that you might be able to share with us?

Actually when we saw what the membership came in and composition of that in terms of ASO and some of our smaller group and individual and we are thinking for the year we put all those together then really explains the change in the amounts.

Is there anything you can talk to as far as the impact of the economy on your membership for next year?

This is Jim Murray again. I've read some of our competitors investor call write-ups and I guess as I think about us we are different in terms of our make up. We don't have as many national accounts as some of our competitors. And I think a lot of the layoff news that we read about every day is somewhat focused on the larger companies. And to the extent that some of those larger companies are laying off folks I think they are going and starting their own businesses.

And so although it would be naive of me to think that we are not going to see some implications to the economic crisis in our membership base, I don't think we are getting hit as significantly as some of the competition. Particularly with some of the lines that we focus on, the individual where some folks are going to need some coverage. And so I would expect that we will see some pick up as a result of that in the small group business. So although again it would be naive to think that we are going to go without any issues related to it I think we are a little bit different constructed than some of the competition.

Justin, you go back we've been talking for a couple years about the synergy between small group and individual, this is a place in this kind of economic period where that's actually going to be quite important. Because there will be pressure on not only the big companies but everyone. Smaller employers have been dropping coverage for years and it could accelerate to some extent. But we haven't seen any evidence of it yet. But it could happen. And the beauty of it by having the individual business there and having enough maturity and experience with it to actually take advantage of picking up that business as things change I think is going to turn out to be good for us.

But we haven't seen a lot of impact yet. As Jim says it's inevitable that things will tighten up a little bit. But when you look at the implication of the growing uninsured and unemployed and you spread it across the entire industry the particular impact on any particular Company would have to get awful bad before you would see a material impact on a single Company.

That's helpful. Thanks for the color.

Next question is from Scott Fidel from Deutsche Bank. Your line is open.

Thanks. First question ,it looks like you boosted your other revenue guidance by around $30 million, just any particular factors you can sight around that?

Again, as Jim mentioned we are continuing to focus on our right source, our mail order pharmacy and I think that generally more transactions, more emphasis for that, for the commercial business is generally what made that change. We also have $15 million as I mentioned in Green Ribbon Health. I mentioned that in my remarks. That's deferred revenue and that's where it shows up when it will come in in the third quarter.

And then just a follow up around cost trends. It looks like you tweak down your in-patient utilization trend just a smidge to flattish, but also increased at the same time your out-patient utilization view also just slightly. So just wondering was there a mix shift that your seeing that's driving just that change at the margin or any other variables that you can discuss?

The other thing that I throw out is we had some initiatives around utilization opportunities. We've hired some nurses, more nurses than we had in the past to focus on a project that we call [Everest Tier] and we think that's beginning to pay some dividends. And there is some increase in out-patient utilization that is more difficult to get at but in terms of the offset, the in-patient savings that we are seeing significantly outweight the out-patient increases that we are seeing so we like that.

If I could just sneak one last quick one in just on the CMS demo on the MHS payment in the third quarter will that be a non-recurring payment in terms of you only expect that in the third quarter or are there opportunities in 2010 to generate additional revenue from CMS off of that?

Not with that particular project. So it will be the third of '09 only.

The, that's a true statement. The one thing that I would throw out is that because we had the opportunity to participate in that program, we've internalized those resources and they are a part of the initiative that we talked about when we were in New York in terms of getting our medical spend 15% below Medicare. We are very pleased with some of the progress that we are making with that program. We now call that Humana Cares which focuses on the top 22,000 folks that need complex care management. And so our participation in that program will serve us well going forward.

We've been participating in all these Medicare pilot projects over the last ten years. Some of them, we've learned a lot from, some of them have worked and some of them haven't. Some of them we like what we saw because it was a project targeted at the absolute sickest most frail seniors in the population. And so as Jim says we like what we saw. The pilot is over, the project is over but we've internalized the good learnings we've had from that and it is already part of our clinical model.

The next question is from Carl McDonald from Oppenheimer, your line is open.

Thank you. Wanted to spend a minute on the attrition in Medicare advantage. So you said previously that the private fee for service attrition was higher than you anticipated. Do you have any incite into the kind of membership you are losing? Is it mostly the $0 premium fee for service members that are going to similar plans at competitors?

Yes. We've looked at the losses by state and where our value propositions stacked up. And I can point to a number of states where our products last year were $0 premium and we took the premiums up anywhere from $18 to $48 per member per month. And the competition in those states is at a $0 premium still and that's where the lie on share of our losses came from.

At this point have you done any analysis in terms of looking at the 2008 profitability of the members you lost in January versus how the profitability of the overall Medicare book?

Mike referenced in his remarks that we slice and dice our membership in terms of trying to figure out medical cost spend by the different categories. And generally speaking when we look at the different categories because of the risk premium that CMS pays us our membership is fairly evenly distributed. There are a couple of categories that we refer to as LIS, and disabled, where the medical expense ratio is higher but still acceptable. And we are pretty pleased with where we are at today relative to our membership complement this year compared with last year as respects -- all that analysis that we've done.

Great. Thank you.

The next question is from John Rex from JPMorgan. Your line is open.

Thanks, I just, additional question on MA. and the growth sales and adds. So just want to be clear, you said it was about 160,000 gross losses. Is that correct, in total on the MA book? And then can you just maybe compare kind of the churn in the book '09, Jan '09 over Jan '08 in terms of magnitude? And then following in on kind of the risk profile, the average risk score of a member leaving versus the average risk score kind of against your total book or the members that you are picking up?

I will throw out some numbers and hopefully it will hit all of your questions. We had what I refer to earlier as 258,000 gross sales. I say that because our market point representatives our career agency force sat across the table with all of our existing members and talked about the different opportunities and value that existed in all of our products. So we sold in our mind 258,000 gross new or sales.

Included in that and I'm not trying to confuse you were 86,000 what we call plan to plan changes where generally a private fee for service member chose to go into a network based option which left us with net new sales of 172,000. So new sales to members who weren't part of our book before. The lion's share, 65% of those were into network based options. We were really excited about that. Most of the new sales, 65% of them chose network based plans. And then the terms that I think you referenced were around 162,000 after you take out the plan to plan changes.

And again to the risk score we are really not impacted or, we really frankly don't care about what a risk score is because we get revenue from the government that adjusts for the changing risk score. And so again as I said earlier and Mike made comment to in his remarks the revenue that we get for each of our Medicare members is fairly adequate to cover the costs for that membership. And so the medical expense ratio is for the various members that we get are generally in the same ballpark. And so we are not too concerned about what the risk scores are period to period.

I talked a little bit about the membership that we refer to as LIS, low income subsidy or disabled where the medical expenses ratios are slightly higher, but not significantly higher. But again as we sit here today we are pleased with our mix risk and we feel very good about the guidance that we have just provided.

I mean is it fair to surmise the risk scores of the incoming members are on average higher than the risk scores of the members that you lost?

Generally in the same ballpark as they were in 2008.

Sorry -- I'm not sure -- so what does that mean, so the risk scores of the members you lost were the same as the risk scores of members you gained or they were higher or lower?

Our book of membership as we are here at January 31st, end up year or end of the selling period are just about the same as the risk scores for the membership that we had at the end of the year.

Okay. And no difference between the members that were lost, the 160,000 members that were lost and 170,000 members that were added in terms of risk score?

No.

And then so I mean what we are just trying to get there was no adverse selection in your mind and again I understand the risk --

That is absolutely correct.

I just want to do clarify that. Okay. Then and just part D PMP's look like they were up in the quarter, were there risk adjust or premiums received and if so can you quantify how much?

I don't have that information at my fingertips, but I think the answer is correct.

Yes. There were some but again looking at in totality for the year if I'm not mistaken everything is in line.

Okay. Any just, any kind of gut sense on how much was received in the Q on the part D risk assessors?

Well, these are accruals and they are not payments themselves but again I think again I think that just reflective of how the year turned out for the program.

Alright. Thanks.

The next question is from Anna Gupte from Sanford C. Bernstein. Your line is open.

Thanks, good morning, my question is about your network contracting rates. I think you mentioned it is in the mid to upper single digits and you are seeing no change from this year going into the next year whereas some of your competitors are talking about upward pressure on unit cost, severity spikes and so on with the economy.

So I was wondering if you are expecting to see any change or are seeing any change and if not why not? And the second part to the question is you've mentioned hospital contracting and ancillary contracting changes as one of the ways to bring your trend down. Do you see that at risk in any way with what's going on with the hospitals and bad debt and the economy?

Let me start with the first question. It's important to kind of look at these companies all differently when it comes to what's happening with hospital negotiations and contracting. Because what happens is often a function of where you're starting from and where you are relative to others in the marketplace. If you follow what I've been saying for about the last four or five years there is a movement among hospitals to give payors to a single rate or something as close to that as they can achieve because they have no rational for differentiating among payors. Because all of these networks are so big that the idea of moving business around has sort of fallen away.

That's the 100,000-foot view of the world. So the implications are if you have the lowest priced networks in a community against others that are paying those same providers more, you are going to be under more pressure to have price increases as they are. Now it's going to vary by market, by payer, by circumstance, situation so I think the -- my only point is to try to compare exactly Company to Company is probably a little dangerous in this evolving environment.

Okay, thanks. One follow up on one of your slides you had privacy members at risk and networks citing the build out in the Northeast and California, is that moving more slowly than in the other areas where you've got all the blue and looks like you are doing well on network build out?

Those, Anna, are areas that we haven't really emphasized. The yellow on that, on that sheet are basically where we are at risk because we have multiple, there are multiple competitive offerings in those areas. And if you look at where we've been concentrating the program and concentrating all of our efforts over time the states where that yellow appears are not strong states for us. The states where the gray appears is just a fact of there's just a dirth of private fee for service or competitive offerings period. And again what we are having proud of is the dark blue.

There's two ways tow look at that chart, the map. One is how protected is the business we have today which says do have do you have a PPO ready for 2011 and a network that will support it? And the answer from that map is yes. Then the question is given that map is there growth opportunities in Medicare after 2011 in the movement to full network product offerings? And if you look at the total -- I don't have it off the top of my head -- but the total Medicare population in all those blue states that are highlighted is quite large.

So the reason we are not focused on the other states is that frankly we don't see that as a big opportunity for us. We may eventually find our way there and in fact we have people that are interested in us being there. But we are dealing with this midterm question of can we be ready for 2011? Yes. Is there growth after we do that? Yes. And we intend to be a fully national players in all of those locations eventually, but it's just not a high priority right now.

Okay. Thank you.

And the next question is from Matt Perry from Wachovia. Your line is open.

Hi, good morning. Want to do get into a little more detail on the members you were able to move from private fee for service to PPO. First I wasn't quite sure if the number you cited, the 65,000 was simply from the open enrollment period or does that also include some switches in January?

And then how do you think about the potential to switch more members in January, February and March or do you think it's mostly just going to happen during open enrollment? And then you also said it was above your expectations. I'd like to know what did you learn as your agents talked and sat down with these members, when they switched, why was it and what have you learned that might even help you next year move more members over?

This is Jim Murray. The numbers that we site were there through January 31st.

January 31st effective.

January 31st effective.

January 1 effective.

Right, and when we sat down with the folks in and chatted with them what we learned was that the relationship that we have developed over the last number of years that they've been a member of ours, has served us well in terms of their desire to work with to us try to find products that give them additional value. We feel very good about the fact that we had an over the kitchen table conversation with these folks and 65,000 of the private fee for service members chose to go into some of our network based products. Which tell us us that as we move through the remainder of our private fee for service members over the next several years, that a similar kind of event and result can happen which is something that we've said for a period of time that folks who are comfortable and familiar with PPO's and HMO's are very well to go in that direction if value exists.

The one thing that I would throw out that we have also learned is that the financial situation that we fine ourselves in as a country somewhat impacted some of the activities that took place towards the end of the year. And in part had something to do with some of the members choosing to go to some of our competitor plans because of the zero premium dynamic that existed. And that was unfortunate in terms timing for us. But lots of learning that we are going to apply and we feel good about what might happen in the OEP with similar kinds of results. As we have these across the table conversations.

So we feel very good about our first step towards moving folks into network based options. Lots of learnings and things that we are going to do to try to continue that process over the next couple of years.

And if just squeeze one more in, do you think over the long-term the PPO is even a slightly higher margin or moderately margin than the private fee for service will -- has been?

As we said time and time again our target for these products is a 5% margin. And to the extent that they provide additional opportunities for us to enhance benefits or lower premiums we are going to take that and we are going to keep reconciling to the 5% margin that we set out there. We think that's the right answer. We think that guilty more people into the program and we think that provides the solution that the government is looking for to this crisis that confront us.

Thanks.

The final question is from Matthew Borsch from Goldman Sachs. Your line is open.

Yes, hi, good morning. I'm just wondering if you can give us a little bit more information on the commercial enrollment outlook. Specifically I think you said that net for the year you expect total commercial enrollment to be flat. Can you break out what you expect fee based versus fully insured and if you have any view of where you think small group is going versus how much growth you expect in individuals?

Sure. One of the dynamics that we are dealing with is we lost an 80,000 member network based ASO account in January. Not much fee from a network rental arrangement, but it does count in our membership and so that's something that we are over coming for the remainder of the year. So we start January with a reduction.

In terms of the different lines of businesses that we think about, individual we think we'll have a nice solid year. We see some pretty solid growth coming from our individual book of business. Small group we've delivered some rate increases that we think were called for and in the environment that we were operating in over the last year or so we think there was an opportunity to increase our premiums on the small group block. And so we see that kind of flattish for the year.

Large group which we define as 300 to 3,000 is generally probably going to be flattish. And as I referenced earlier our national accounts business starts the year in a little bit of a hole. Obviously national accounts business renews in January and so nothing much will happen for the remainder of the year there. So that's why we've guided to flattish. When you add all those pieces together I think the individual maybe a little bit from the large group will offset the losses that we've seen in national accounts and will end the year flat. But as I said earlier focusing on delivering some premium increases that are going to be targeted at increasing our margins.

I guess I just, seems a little bit difficult to reconcile that with what's happening in the economic environment. And I heard your remarks earlier it's just that I would think you would be -- that those segments where you are flat would have to reflect some market share gain. But I realize you are talking about putting through some price increases that maybe if I'm reading on the margins are perhaps above the market. So can you just help me to understand that a little bit better?

Well I can just speak to what we've seen over the last several months. And as we've delivered on what I just described I'm talking about what we've historically seen for the last quarter in terms of growth activities and where that's taking us for the remainder of the year. And to the extent that the economic situation begins to significantly impact the small group market, then I would change what I'm saying right now. But based upon the last several months we've seen some relatively solid individual growth; our small group membership has been flattish.

Large group is flat to slightly up and the national accounts that I described in January we saw the loss of the one large account. So when I look at what we've historically seen and what I'm hearing from the marketplace I don't anticipate any significant changes. Although to the extent that the economy and some of what's going on there continues to hit some of lines of business that I just referenced there had may be some changes that we haven't seen of yet.

Okay.

In addition to that, too, we continue to focus on controlling your own trend and showing people how they can really, how they can really mitigate these increases by their own behavior and by good guidance from us in our clinical programs. And so we think that's also a differentiator between us and the other people that I'm sure your question is alluding to.

Okay. Got it. Thank you.

Okay. Well, thank you for joining us this morning. I'd like to just review iterate we think the fourth quarter of '08 was a real good quarter for us. 2008 had its challenges, very narrowly focused really in the PDP space which are behind us. 2009 is going to have us return to I think the best earnings growth rate in this industry.

I think 2009 is also a very big year in terms of getting clarity around the long-term nature of the Medicare advantage program as we play through the politics and the decisions that have to be made around how the private second is going to play here in the Medicare space. I'm very comfortable that at the end of the day we have a wonderful opportunity. The government does need us. Many there do know that.

Our consumer products continue to be attractive. It's the best margin, the highest retention rates we have in our book and we are glad to continue to see them grow. And lastly I want to thank all the Humana associates that are on the call for their great work that made this possible and make 2009 such a bright opportunity for us. So, thank you very much.

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