Humana Inc (HUM) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Lori and I will be your conference operator today. At this time I would like to welcome everyone to the Humana first quarter 2009 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

At this time, it is my pleasure to turn the conference over to the Vice President of Investor Relations, Regina Nethery. Please go ahead.

Good morning and thank you for joining us. In a moment, 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 first quarter 2009 results as well as comment on our earnings outlook. Following these prepared remarks we will open up the lines for a question-and-answer 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 the Investor Relations page of Humana's Web site, 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 Web site.

Before we begin our discussion, I need to cover some 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.

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 Web site as well as on the SEC's Web site. Additionally, investors are advised to read Humana's first quarter 2009 earnings press release issued this morning, April 27th, 2009. This press release and other historical financial news releases are also available on our Investor Relations Web site.

Any references made to earnings per share or EPS in this morning's call refer to diluted earnings per common share.

Finally, one point of clarification on this morning's press release. On page nine, the government segment benefit ratio guidance point is that to the entire segment so includes Medicare, Medicaid and military services. The Medicare benefit ratio guidance point below it is that for Medicare Advantage and standalone PDP combined. With that I will turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. Today Humana reported first quarter earnings of $1.22 per share, $0.07 above the midpoint of the guidance $1.10 to $1.20 we shared with you in our fourth quarter 2008 earnings release, and significantly higher than the $0.47 per share we earned in the first quarter of last year. These favorable results were due primarily to year-over-year improved performance in our Medicare prescription drug plans as we effectively addressed the issues we encountered in 2008.

Additionally, the quarter saw solid operating performance in both of our business segments, Government and Commercial, which we anticipate to continue throughout 2009. Consequently we also announced today an increase in our full-year 2009 EPS guidance, now at $6.10 to $6.20 per share, up from our previous guidance of $5.90 to $6.10.

Given that our 2008 results were adversely impacted by the PDP event and not indicative of the strength of our operations, we are watching the two year compounded annual growth rate as a more relevant measure of how we are adding shareholder value. Based upon our updated guidance this morning, the two year CAGR using the midpoint of that guidance is 12%.

In the next few minutes I will offer comments on the specific performance and outlook of our Government and Commercial segments and give you an update on how we are making measurable progress in reducing costs and improving health outcomes for Medicare beneficiaries through clinical initiatives associated with our Medicare Advantage offerings. I will also update you on a significant customer service milestone we achieved in the first quarter, the launch of a major Humana initiative in conjunction with 20 members of Congress designed to reduce childhood obesity, and on the continued development and uptake of Availity, our groundbreaking provider portal that is fast becoming a national model for IT connectivity in healthcare.

Let's begin with our Government segment. As many of you are aware, the Centers for Medicare and Medicaid Services announced the final 2010 Medicare Advantage rates on April 6 with an effective rate decrease for the sector of 4% to 5%. We will have to address this rate change by increasing member premiums, reducing benefits or some combination thereof, as we file our bids for 2010. At the same time, we will continue to pursue our successful cost reduction and outcomes enhancing strategies, including care coordination and disease management to help mitigate the adverse effects of this rate reduction on our Medicare Advantage members.

Since our 2010 bids are due the first Monday in June, work is already underway to make strategic changes designed to not only keep our plans competitive versus the combination of original Medicare with the Medigap policy but also to be well positioned against the competition within our sector.

With our knowledge of senior consumer behavior, together with our product design and actuarial depth, we believe we can effectively design products that address the shortfall in rates while still providing a solid value proposition for seniors. Nevertheless, Humana and the industry, in conjunction with congressional leaders, continue to work for further consideration of the doc fix, since we believe the related CMS technical adjustment for 2010 will cause the nation's seniors to experience significant disruption to their benefit structures, only to have much if not all of that reverse back in 2011.

Specifically, we have been working with a bipartisan group of US senators who recently sent a letter to CMS expressing their concern about the Medicare payment cuts for 2010 along with a letter of concern from the chairman and ranking member of the senate finance committee. Among other reasons, the senators are concerned because of the continued inclusion in the rates of a scheduled 21% reduction in what physicians are paid to treat Medicare beneficiaries. As those senators pointed out in their letter, it is very unlikely that Congress would ever allow these lower physician payments to take effect.

In past years, Congress has always enacted a doc fix and we believe it will again this year. In fact, the senate's budget resolution includes a provision with the goal of protecting Medicare Advantage enrollees from premium increases in benefit reductions in their Medicare Advantage plans, as a result of CMS not taking into account the likelihood that Congress will address the physician payment formula. If Congress does act to address this issue in a timely fashion, CMS has acknowledged they will work with Congress to consider options for addressing this part of the 2010 Medicare payment rates.

Additionally, the senators' concerns are shared with more than 800,000 Medicare Advantage members who belong to an industry-wide grassroots coalition. These seniors are calling, writing and meeting with members of Congress across the country. They also participated in numerous Medicare Advantage community meetings during the recent congressional recess.

So, how might our products look in 2010? While we are still in the midst of our annual market by market, product by product benefit design review, this slide gives an indication of what seniors in Des Moines, Iowa, for example, might see if we change only member premiums in 2010. As you will note, the value when compared to the purchase of a Medigap policy is still quite clear.

Turning to Medicare Advantage membership for 2009, we expect the addition of approximately 50,000 net new Medicare Advantage members this year. Sales of our network based plans continue to be strong with 61% of our membership now in either PPO or HMO products, including 87,000 of our private fee-for-service members who chose to move into one of those network products for this year.

With over 80% of our private fee-for-service members already in areas served by network products, a percent we expect to increase as we further build out networks, we are well positioned for the changes scheduled for 2011 that will have the effect of triggering the replacement of private fee-for-service products with PPO and HMO network-based products for most of the nation.

I said earlier that Humana continues to make progress reducing costs and improving health outcomes for Medicare Advantage beneficiaries. This work has positive implications not just for our members but for the Medicare program as a whole. As we pointed out many times, original Medicare, which lacks any sort of cost controls and functions essentially as a claims paying factory, is headed rapidly for insolvency.

By contrast, Medicare Advantage features care coordination, case management, disease management, predictive modeling, comprehensive wellness services, transplant coordination and more, all of which have the measurable effect of lowering costs. Many in Congress understand the capabilities being rolled out through Medicare Advantage are critical to the viability of the program and must be applied to the total Medicare population over time.

This rollout is currently being financed through the payment methodology for Medicare Advantage plans. Many know the good work done by MA plans must be fostered by health reform and not lost in the misguided concept of returning to growing reliance on an out of control old Medicare program. We continue to make measurable progress against Humana's initial goal of having medical costs 15% below traditional Medicare.

The next couple of slides illustrate a few of the opportunities. The positive effect of coordinated care on the cost of inpatient acute admissions, including readmissions, and emergency room visits are graphically shown in this comparison of utilization for original Medicare versus that in our Medicare Advantage plans. Savings of nearly $345 per beneficiary on inpatient admissions and $30 per member on emergency room visits add up quickly when you are serving millions of seniors. This translated to savings of $301 million for inpatient acute admissions and $26 million for emergency room visits related to the seniors served by Humana plans.

Another important aspect of our Medicare cost reduction efforts is finding, assessing and contracting with efficient physician. Thus the cost of physician services in Humana Medicare Advantage plans is driven lower as the network focuses on only the most efficient providers. Importantly, this is accomplished while offering a robust network to our members.

At a time when the new Administration will be required very soon to seek a long term answer to the Medicare funding problem, we are ready to help with the proven cost and care solution that members love. Satisfaction rates for Medicare Advantage plans are well over 80% with only 1% to 2% of seniors leaving Medicare Advantage to go back to original Medicare. Further evidence of the value proposition. We believe that we may also have some opportunity to pick up market share as participants exit the market when the product becomes more operationally challenging for them.

The combination of our Medicare cost management model, administrative productivity and strong networks position us to have a viable Medicare Advantage offering for many years to come. At the same time, we are also strengthening our Medicare supplement product portfolio to round out our comprehensive menu of product options for seniors.

Our view of Medicare has not changed nor have the facts. Healthcare provided through the old Medicare program is wasteful, not coordinated and unaffordable for many seniors. The Medicare trust fund will be insolvent in the not too distant future. We must, as a country, ensure the long term viability of the program.

Seniors aging into the program seek value and are more accustomed to coordinated care plans. Coordinated care can and does have a positive impact on health and wellness, and lowers medical cost. The depth and breadth of our Medicare operations teams will continue to position us well in this dynamic environment.

Now, turning to our other Government business TRICARE. We continue to anticipate that the Department of Defense will make its TRICARE award announcement for the T3 five year contracts sometime in the second quarter. This announcement would involve all three regions, South where we are the incumbent bidder, as well as the North and West regions.

In the interim, as you know, 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 extension periods to be exercised at the discretion of the Department of Defense.

Turning to our Commercial segment, we have been closely monitoring the impact the volatile economy is having on our Commercial segment operations. Reductions in force have caused corresponding membership losses in our small group business to be substantially higher than we previously expected, even while the employer remains our customer. However, our solid reputation in the individual business through HumanaOne is resulting in some of these members enrolling in our individual plans.

On a full-year basis we expect our commercial membership to be down 150,000 to 175,000 versus the end of 2008 reflecting both the loss of a few larger ASO accounts we reported last quarter as well as the impact of in group attrition I just mentioned.

With investment income also expected to be lower than we previously anticipated, a topic Jim Bloem will discuss in his remarks, we now expect commercial pretax income to be in the range of $225 million to $235 million. I do want to note, however, that our 2000 commercial segment earnings are still anticipated to increase 10% to 15% over the prior year despite lower net investment income for 2009.

Before closing, let me update you on three developments that extend Humana's industry leadership and service, health and wellness and health IT connectivity. Each gets at the heart of supplying solutions to the biggest health policy programs facing our nation, cost. The growing numbers of Americans with preventable chronic conditions and the lack of IT connectivity.

First customer service. In recent polling by JD Power, Humana has become the top rated health plan in a number of regions around our geographic footprint. These results are a testament to the growing effectiveness of our company wide Perfect Service initiative which emphasizes engaging our members proactively and seeking to anticipate and then exceed their individual expectations.

Second, health and wellness initiatives around childhood obesity. This fast growing epidemic accounts for $14 billion in direct medical expenses each year. Obesity is one of five preventable chronic diseases that when taken together consumes 70% of the nation's healthcare bill. Now we are doing something about it.

With the US Capitol as a backdrop, the Humana Foundation on March 31st held a news conference to launch the American Horsepower Challenge in conjunction with 20 members of Congress, 10 democrats and 10 republicans. 2,000 elementary and middle school children in districts represented by the congressmen will compete in a unique exercise video game designed to attack the epidemic of childhood obesity. This innovative exer-gaming approach translates actual physical activity, steps walked, measured by a computerized pedometer, into an online race among schools in the same congressional district and among the districts. The 20 members of Congress are serving as honorary participants in the challenge, and their own step will be counted in their states or districts total.

In a Louisville, Kentucky pilot program, students burned over 470,000 calories and worked nearly 13.5 million steps, the equivalent of approximately 6,400 miles. Some important behavior changes were noted in these student, specifically 62% exercised at lunch, 45% started eating healthier, and 53% exercised with their family. The program is consistent with Humana's long-held belief that supplying consumers with actionable information empowers them to take control over their own health. What Horsepower Challenge represents is the convergence of that actionable information gathered in a unique way through technology and the knowledge that kids are big consumers of gaming. The result is a contemporary approach to wellness through measurable behavior change.

Finally, health information technology, commonly referred to as HIT, the Obama Administration has committed $19 billion in stimulus funds to foster healthcare IT and activity demonstrating the importance it places on such initiatives. We are proud to say that our Availity joint venture is playing an increasingly important role, serving as a model for the long-held dream of a robust nationwide interoperable healthcare IT network.

Since it pioneered multipayer IT connectivity for providers in Florida eight years ago, Availity has expanded its reach and serves more than 50,000 doctors' office, 1,000 hospitals and 1,000 health plans nationwide. Active in all 50 states, Availity has enhanced its capabilities to include the creation of payer based health records and real time claims adjudication.

The Availity venue is now used by all of the major health plans, public and private, for profit and not for profit. With one of our more sizable competitors recently buying into the joint venture that Humana and Blue Cross Blue Shield of Florida began in 2001. The administrative simplicity for the provider community Availity provides is unmatched and we believe will continue to result in higher transaction volume going through this portal.

In addition, Availity was recently selected as a vendor of choice by the Virginia Health Exchange Network, an association of health plans and health systems in that state. And Availity has contracted with a Florida agency for healthcare administration to implement a new demonstration product that will give physicians and patients access to Medicaid claims based electronic health records, as well.

For 2009, Availity is expected to handle more than 600 million transactions, or approximately 10% of the total transaction volume in the US. In addition, the ongoing expansion of the network's realtime health information exchange now includes eprescribing in Texas and Florida with more States scheduled to be added later this year.

Why does this matter? For years we have discussed with you the power of actionable information at the consumer and provider level. Availity is essentially the realtime highway for the delivery of that information. The result is speed, accuracy, higher quality and of course lower costs. That has been the clear impact on the rest of the economy as information technology has spread, and will be in healthcare too. As you can see, Humana is active on many fronts and we expect the remainder of 2009 to extend the success we had in the first quarter with our full year EPS now projected to be in the range of $6.10 to $6.20.

Despite the uncertainties of politics and the global economy, we believe Humana is particularly well positioned for success in future years as well. Our direct to consumer approach to sales and our emphasis on the power of the consumer to choose, finance and use health benefits with confidence positions us well in an economic climate where the impact of rising healthcare costs reflected in insurance premiums will grow ever more stark.

The flexibility and resiliency we have shown over our 48 years history in anticipating and adapting to change, now deeply a part of the DNA of both our Company leadership and just as importantly our associates, is already bearing fruit as we continue to incorporate the adjustments the future will demand. Consistent with our legacy of successfully transforming ourselves through a number of businesses with health always at the center, we are now strategically broadening our scope beyond health benefits. We're supporting the health of individuals and communities.

Over the next few years our emphasis increasingly will be on providing opportunities for our members to improve their health in ways that are measurable that offer rewards, that take advantage of new media tools like exer-games and social networks that help sustain the planet and are just plain fun. If we can help people get and stay healthy over time they will save money and the system will prosper. In the meantime, the operational discipline that produced our first quarter results bodes well for our own ability to continue to succeed.

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

Thanks, Mike. Good morning, everyone. Let's begin by recapping our first quarter results. As Mike mentioned, we are pleased to report that our earnings per share exceeded the midpoint of our expectations for the first quarter by $0.07. The primary driver was our Medicare operating performance as both the Medicare Advantage and the standalone PDP businesses performed very well. As noted in the slide, the quarter also included $0.03 per share of adverse impact from the lower than anticipated investment income due to circumstances I will discuss in a few minutes.

My comments this morning will focus on the three most noteworthy factors impacting both our first quarter results and our increased full year EPS guidance range. These three items are, first, better than expected Medicare performance; second, reduced investment income due to lower interest rate expectations; and third, decreased small group commercial membership. I will detail each of these factors in the next several slides, but first let's look at our full-year anticipated earnings per share.

As Mike mentioned, we are pleased to raise our 2009 EPS guidance from a range of $5.90 to $6.10 to a range of $6.10 to $6.20, an increase of $0.15 using the midpoints. The following three factors enable us to confidently raise our full-year EPS guidance.

First, the primary reason is our improved outlook for Medicare which builds on our first quarter Medicare performance. That's reflected in both higher than previously expected revenues per member, and lower than expected benefit expenses. Second, slightly offsetting the full year Medicare improvement is a projected decrease in commercial small group membership as the year progresses. Third, we also now anticipate our full-year 2009 investment income will be lower than our previous guidance by $55 million, or $0.20 a share.

Let's review each of these changes and expectations in greater detail starting with the changes to our Medicare forecast. This morning we lowered our expected 2009 overall Medicare benefit ratio by about 75 basis points at the midpoint. That ratio is now expected to be in the range of 82.5% to 83.5%.

As I mentioned, we are seeing improvements in both the benefit expense and the premium components of the overall benefit ratio for Medicare. Changes in the benefit expense expectations primarily relate to the standalone PDP expenses while changes in our premium expectations primarily relate to Medicare Advantage.

As we continually have monitored our PDP claims expenses, we have been pleased to note each of our three plans has performed better than expected with the standard plan doing particularly well. Higher uses of generics across all three plans has helped drive these lower than forecasted expenses.

Now with respect to Medicare Advantage premiums, much of the improvement stems from higher risk adjusted premiums. In last quarter's call, we mentioned that the risk scores of the members that we acquired for 2009 were not significantly different than those for 2008. That fact has not changed.

Rather though, the primary driver of changes in risk scores is an improvement in provider documentation for those Medicare Advantage members that we have had over a longer period of time. Note that the longer the members tenure with us, the more likely it is that the risk score accurately reflects the member's health status.

CMS uses March as one of its two cutoff months for analyzing member risk score data to adjust plan premiums later in the year. Accordingly, we also update our risk adjustment premium accrual analyses using the provider data submitted to CMS by the cutoff date. Based on that work, we adjusted our risk adjustment premium accruals to ensure that revenue was recorded properly. Consequently, our first quarter results include these updated accruals, as does our forecast for the remainder of 2009.

Turning next to the Commercial segment, this morning we lowered our full-year commercial pretax income guidance by approximately $50 million. As shown on the slide, about $35 million or 70% of this reduction consists of our lowered outlook for investment income which I will detail a moment. The other issue impacting the Commercial business is our revised outlook for small group membership which we now see as declining by 90,000 to 110,000 by the end of this year.

As Mike mentioned, it has become clear that the prolonged recession is having a more significant adverse impact on smaller employers than we previously estimated. Virtually all of the $15 million detailed on the operations line on the slide can be attributed to lower expected small group membership.

Finally, our secular trend components, which as usual are detailed in this morning's press release, continue to track with our expectations. In the aggregate, we expect secular trends of 6% to 7%. However, if you include the impact of benefit buy downs, growth in high deductible health plans, the migration of groups to more cost effective networks, and other business mix changes, the trend increases by another 3% Resulting in net trends of 3% to 4% which are in line with those we shared with you in last quarter's call and release.

Now with respect to investment income, the first quarter investment income was $69.5 million versus $90 million in the first quarter of 2008. That's a decrease of $20.5 million or 22.8%. Despite our roughly $750 million or 10.7% year-over-year increase in the average invested balance, we continue to struggle with investment returns for the following three reasons.

First, continued extremely low cash and cash equivalent yields. Second, our relative scarcity of fixed income investments which meet our investment criteria. This results in a greater than desired portion of our average invested balance remaining in cash and cash equivalents. And third, the Federal Reserve's March 18 announced commitment to purchase $1.15 trillion of US Government securities with maturities of between two and 10 years by the end of September.

It is important to note that each of these reasons reflects a lower general level of interest rates rather than any specific credit issues. The first two reasons caused our first quarter investment income to be $8 million or $0.03 per share, less than we expected 90 days ago with an additional $11 million or $0.04 per share reduction expected over the remaining nine months of this year. The third reason, which is termed by the Fed as quantitative easing, is expected to lower our investment income by an additional $36 million, $0.13 per share, over the last three quarters of the year.

As a result, the yields on the two to ten portion of the yield curve have tightened up by 50 to 60 basis points. Accordingly, today we have reduced our 2009 investment income guidance range by a total of $55 million or $0.20 per share to $270 million to $290 million.

Our $7.4 billion investment portfolio continues to benefit from broad diversification and appropriate duration, ample liquidity and high credit quality. At March 31st, we had approximately $230 million of net unrealized losses on investments which is the same amount we had at December 31st. As of April 23rd, our total net unrealized losses decreased to approximately $165 million. The $65 million or 28% improvement over March 31st reflects, among other things, the Fed's quantitative easing that I mentioned a few minutes ago.

Now, as was the case in the last two quarters you can get further detail on our portfolio composition from the statistical pages of this morning's press release. Turning to the balance sheet, our days and claims payable declined 4.8 days when compared to the fourth quarter of last year. This slide, which is again taken from the statistical pages of this morning's press release, highlights the key items which impact the change, and compares them with the first quarter of 2008.

In short, none of the decline was indicative of reserve releases or any changes in our consistent reserving practices. A summary of the major components of the decline are as follows. 1.9 days of the 4.8 days relate to timing. Specifically, the cutoff for our pharmacy payment and process claims out the door.

Second, another 0.7 days relates to the faster processing of claims inventories. Note that our days claims on hand were 4.2 at the end of the quarter, a near-record low. That reduction in days claims on hand was accomplished even while we continued to add more membership volume to our core Medicare processing platform, along with rolling the Metcare and Order of St. Francis Medicare membership acquired in 2008 to our core platform on January 1st.

Finally, another two days were the result of an increase in the expense component of the days and claims payable computation while the liability itself remained flat. This mismatch occurred twice in the first quarter days and claims payable computation.

The first of these expense versus liability mismatches occurs annually for the Part D component of our MAPD benefit. Since Part D deductibles reset on January 1st and are front end loaded in terms of the plans responsibility, the first quarter expense is higher than the fourth quarter's expense.

You will note that we also experienced this same effect in days and claims payable in the first quarter of 2008, and as well in the first quarter of 2007. In the first quarter of 2009, this resulted in a sequential decline in days and claims payable of 1.1 of those two days, the last two days I just mentioned.

The second expense versus liability mismatch in the first quarter days and claims payable computation occurred this quarter in connection with our Cariten acquisition. The expenses associated with Cariten members increased simply due to the timing of the acquisition which was on November 1st of 2008.

This timing resulted in only two months of expense in the fourth quarter while a full three months was of course in the first quarter of '09. That resulted in a sequential decline in claims payable of 0.9 days. The remaining 0.2 days of the decline reflects normal fluctuation in the days and claims payable metric. Again, we remain comfortable that our reserve levels are conservative and appropriate.

Turning last to capital and liquidity, as demonstrated by the following four points we continue to both have and prudently conserve ample capital and liquidity in these continuing uncertain times. First, we are reaffirming our 2009 cash flows from operations guidance range of $1.2 billion to $1.4 billion. The primary driver for the full year increase over 2008 is the expected increase in 2009 net income. As was the case in 2008, we expect most of the total 2009 operating cash flows to occur in the second half of the year.

Second, we continue to retain $750 million of availability under our $1 billion revolving bank credit agreement. Our bank credit facility remains effective until July 2011 after which the earliest issue of our senior notes matures in June of 2016.

Third, our March 31st, 2009 debt to total capitalization ratio was 29.3%, and our target range remains in the 25% to 30% range. And finally, we continued to carry significant levels of aggregate excess statutory capital and surplus in our state regulated operating subsidiaries.

We are pleased to note that last week all of our parent and subsidiary credit ratings were affirmed with a stable outlook by Standard and Poor's. Our parent Company rating is BBB. Our continued expectation is that we will be able to dividend at least $500 million from the subsidiaries to the parent in 2009 versus the $296 million that we dividended in 2008.

In addition, we expect capital contributions to the operating subsidiaries to be less than the $243 million that we contributed in 2008. As usual, we will update these amounts with our second quarter earnings conference call in early August after our discussions with the respective state departments of insurance and all of the credit rating agencies are completed.

So to conclude we are very pleased with our first quarter performance and the resulting increase in our full-year earnings per share guidance of $6.10 to $6.20. We continue to build on our organizational experience and new processes to improve the operating performance of both our business segments. As we move toward mid year 2009, the operating discipline and financial strength of Humana have 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 caller.

(Operator Instructions). Our first question today comes from Tom Carroll with Stifel Nicolaus.

Good morning. Two part question on Medicare, really as it relates to your private fee-for-service to network product transition. First, private fee declines have been fully offset by increases in network products. Is there any correlation between your current private fee for service enrollment switching over to -- so Humana private fee to a Humana PPO type product? Can you give us some kind of metric on that?

And secondly, how do you think about this transition in 2010 and then maybe just high level commentary on 2011. Is there going be a big push to make the transition in 2010 or is that going to be left really more to 2011? Thanks.

This is Jim Murray. The net plan to plan changes that we experienced this past open enrollment period were around 67,000 members. We purposely tried to create a product continuum.

It is 87,000.

87,000. We purposely tried to create a product continuum that encourages folks to go from the private fee-for-service to the network-based options, be it regional PPO, local PPO or HMOs. We saw some good movement this past open enrollment period, and we anticipate we will see increasing levels of movement in 2010 and 2011. We feel very well positioned for the CMS rule regarding the elimination of the private fee-for-service on January 1st and we're very pleased with how this is all beginning to set up for us.

So increasing levels in 2010. Maybe it is too early to say right now in terms of your strategy, in terms of bidding for next year, but is it going to be more so in 2010 than 2011?

I would anticipate that 2010 would be slightly higher than 2011. 2011, as I sit here now, we are obviously in the process of going through the market by market evaluation of what our benefits and premiums are going to look like.

My goal and our goal will be to try to get as much done in 2010 as possible with 2011 being the finalization of that process. Again, we saw some nice movement this past open enrollment period. And we will, as we create our product continuums market by market, that will be a major goal.

Very helpful. Thank you.

Our next question will come from Charles Boorady with Citi.

Thanks. Good morning. I'm wondering how much of the impact in your Medicare Advantage loss ratio expected improvement this year is coming from the revenue benefit of the risk score issue you discussed versus an improvement in underlying cost trends or other factors?

Charles, I mentioned two things. I mentioned the PDP and that was lowering benefit expenses and of course your question again suggesting the Medicare risk adjustment. The two things together were probably about $0.10 in the first quarter, and they're about a 3 to 2 ratio. So, again, we kind of expect that to play out through the year.

Okay. And your underlying cost trend assumptions, though, are they unchanged versus what you thought?

Yes.

Okay. Got it. And then in terms of looking out to 2010, you mentioned the 4% to 5% cut that you hope to have mitigated but assuming it goes through. If we were to assume it goes through and trying to assess what the impact will be in 2010. Do you have any information that you can share with us to help us make our own estimates of what the impact would be?

For example, maybe the sensitivity of your MA demand growth this year in light of your imposing new member paid premiums this year, and how sticky the enrollment was and whether that's an experience that you can look at to assess the expected enrollment impact in 2010 presuming you have to put through additional member increases or cut benefits then?

This is Jim Murray again. As I mentioned to the earlier questioner, we are in the process of going market by market evaluating benefit designs and premiums that we'll likely put into place. There is a premium level or benefit cut level that we are trying to align around and trying to evaluate how many members we would likely have moving on to other -- back into the Medicare program or perhaps to competitors.

We feel very confident that the offerings that we have evaluated so far are going to be competitive. And they're going to provide the members with a substantial value proposition.

So, we are not prepared right now, obviously, because we are bidding against ourselves, if you will. We will know more in October when we see what some of our competitors do. But we are cautiously optimistic that when we get done, our benefit plans are going to be very, very competitive. And we feel again cautiously optimistic that next year we will see some growth.

You imposed a first-time premium this year and seem to hang on to a preponderance of your lives. Do you have any data on people who might have left because of the premium you imposed versus the percent you kept?

Help me with what you are specifically looking for?

Essentially how did members respond when you imposed a monthly premium on them.

The membership -- we broke it into the different premium increases and we saw a persistency issue at some level of premium increase. We believe that there is a premium level that people begin to evaluate their choices. And that is one of the reasons that I mentioned earlier we are going to look at that particular premium level and evaluate what we want to do with benefit cuts and premium increases, given what we saw last year about that specific premium level where again it looks like people look around a little bit more than other increases.

Charles, this is Mike. Let me add to that. There are some things we did learn relative to premiums. And what we do know is that we can sell a product with a premium to seniors with our distribution capability because there is a value proposition there they can sell.

What we had happen, as you know, we had people out there with 0 premium products. We sold a lot. We had some churn because of the 0 premium competitors, and we don't know what people are going to do next year. I would find it incredible that anybody would be out there with a 0 premium product in 2010. So we are going to be premium against premium here as opposed to the stark reality of a premium versus nothing.

So I think overall we have to feel pretty good about where this is going come out.

We're going to need to move on. We have a number of people in the queue, Charles. Thank you very much.

Our next question will come from Joshua Raskin with Barclays Capital.

Hi, thanks, good morning. I guess two questions. One, Mike you have talked for years and years and years about a targeted 5% Medicare, overall Medicare margin. Obviously things are going slightly better than that. So I am curious, as you think about 2010, one of the components you are not talking about in terms of changes would be potential margin change, i.e., getting back to that 5%. I am curious if that's in the plan as well.

And then just a quick follow up for Jim. The favorable development, obviously a big number, $169 million, but it was actually down a little bit on the year-over-year basis, and based on what was recognized last year in the first quarter I would have thought it might have been up this year. Anything in that favorable development that could spike out?

Why don't I start with the second one? Again, we used our same conservative reserving methodology that we always use. Again it is based on all of the actuarial information we have.

We continue to think that people overthink this. So we give them all of the information that is in the press release regarding how it works. And you have picked up on the piece of the development to date.

I would go back and say that we have, again, booked to a constant level of margin, we have continued that margin. Again we feel very good about our reserves and we look at -- by the time we get to the end of the year, again, there has been a lot of consistency in the last couple of years and I think we will see that again this year.

To your first question, the goal we have each and every year is to increase our profitability year-over-year. So as we are evaluating on a market by market basis we are trying to determine what we think the competitive landscape looks like market by market. And in making decisions around a specific market level, contract level plans that we have.

And in some of those it makes sense perhaps to attempt to grow membership. In others it looks like it is more appropriate to maintain the higher margins. So when we put all of that together, the end goal for us as a company is to make more money year-over-year, as you might expect. So it is a very, very evolving process and we feel very good about where we sit right now.

I will just add to that, Josh. I have said 5% for a long time. That is still where we work. We go into this whole process every year with the idea that for our entire Medicare book of business. We think about 5% as where it ought to be. There's a lot of moving parts associated with that, we have to look at the total company. As Jim said, there's huge variation based on location and geography and where we think we are relative to medical cost management and a lot of different things.

I think we generally though are staying in that range. It has been a little higher, it's been a little lower. Last year it was lower, right now it's a little higher, but we always go into it with 5% in mind.

As some of you know, we struggled to make 4% last year.

Right. Fair enough. I was just asking, you guys have a little bit extra margin. You have already added premium. You seem relative to your competitors probably in a better shape for next year.

So I was just curious is the goal to maintain that membership or is the goal, as Jim just talked about or Jim Murray talked about, just increasing the profits every year?

The goal is to increase profits year-over-year, and as you might expect, a 1% margin change up or down has some pretty significant implications on the number of members you have to gain. So we evaluate that pretty in depth. And again lots of moving parts but, again, as we sit here right now we feel cautiously optimistic about how things are playing out so far.

The percentage margin is one thing but the dollar margin, as Jim said, the dollars that we earn -- that's the part we are trying to move up. The 5% is a year-over-year long-term moving average.

Okay. Thanks.

Our next question will come from Matthew Borsch with Goldman Sachs.

Good morning, guys. A question about the potential fix or expected fix to the physician SGR. What do you think about the time frame in terms of when that would need to get done in order to still be able to roll through something to the 2010 rates potentially? Is there a time frame you think that this has to get done by?

We have provided -- Mike and Heidi Margulis, our Senior VP of Government Relations -- some dates that would make the most sense. We would love to see something done before the finalization, the CMS finalization of rates in August. If it happens later than that, we will obviously stand ready to do whatever it takes.

That fix is worth $25 of benefits and premiums. And from my point of view it saves some significant disruption in the senior population and it is something that a lot of people in Washington ought to be focusing on. And so we will do whatever it takes to get it in time and we would ask that the folks in Washington feel the same.

We put a lot of energy as we have gone through building each of these benefit and premium proposals. And there's thousands of them -- over a thousand of them that have to go in. And prepare ourselves for scenarios around what would happen should we get a late change to this so that we can quickly react.

So we are prepared. Congress will do what it is going to do and we can't drive the time line. We'll have to see how that plays out. I know there's significant pressure up there to get something done about this because it is kind of an outrageous concept that we're going to put the seniors through all this next year and then turn around and reverse it, by formula in the following year. So it's a lot of wasted energy.

If I can ask on your slide presentation on page 7 you showed the PPO product compared to Med Supp Plan F with standalone PDP. Is that -- it sort of is never going to be completely apples to apples but is that pretty close? In other words that sort of implies that the product is providing effectively about $60 a month in additional value? If I am reading this correctly? Would that be inclusive of the 4% to 5% rate cut that's on the books for now?

Yes. The questions, the answer to all of your questions is yes.

Okay. All right. I'm good for now. Thank you.

And remember that's the PPO, the HMO obviously has significantly more value than that.

Next question, please.

We will take our next question from Justin Lake with UBS.

Thanks. Good morning. A couple of questions. First, you gave some color around the PMP MA Care Advantage premiums you reported. Can you give us a little more color just on the break down. It was up 10% year-over-year, that's a big number. Just curious how much of that is one-time catch up on those risk adjustors versus what we can expect to continue as the year-over-year increase in yields going forward?

Actually it is very little. You are right that the Medicare per member per month, Medicare Advantage premium is up 10% but that's driven by a lot of factors. The one I mentioned that changed the guidance was a very small change. Here is the kinds of things, and I am sure you know a lot of these. If you think about us they particularly apply.

First of all you have the base rate you get from CMS. Then as we have talked about, we are one of the few companies that added a premium this year for 2009. So that increased it. Then we did a number of acquisitions in the last three quarters of 2008, gave us a lot more members. And then we also got mix of business issues. Again, we have got HMO, private fee-for-service, PPOs. And then the geography of where things are changed, and finally the demographic mix; the age, the gender of our members, et cetera. So, all of those things go into that 9.9 increase in the premium per member per month.

And the amount that made the guidance change, again the guidance really went up $0.15. And as I said that has got the investment income reduction in it, and the commercial reduction in small group membership. But again it just takes a very small change in that MRA to produce the changes we would get today.

Okay. Great. And then the second question, I just want to follow up on Josh's question on the 5% target. Mike specifically you went through a lot of time last year on this call, on the first quarter call, going through the steps you were taking to get the 4% margin back to 5%. If we fast forward to 2010, are you going to be talking to us about getting 6% back to 5% and what you will be doing there?

Even to take that a step further, if we don't get a change in these rates, is there any possibility that Humana would be willing to accept lower than even that 5% margin target for 2010 in order to maximize their benefit designs with the expectation that rates will bounce back in 2011 and you'll kind of smooth it out?

First of all, let me tell you how we think about this. We start with the entire company and ask ourselves what can all of our product lines produce, where are our earnings, what do we think is a reasonable growth potential off of those earnings? And then we start looking at all of our products, including new case Medicare and try to find a way to continue to grow the Company.

So, none of these things are etched in stone. If I could find a way to significantly grow earnings on the back of a 3% margin, would I do it? Of course I would. So it is all about working with a number of moving pieces.

We generally shoot at this 5% number for Medicare because it has fitting how it works our Company for a while. As we get further into the year, we will think about that. And as we know more where we're going to stand against competitors as we see what we think we can do with all these various proposals and bids, all of that's going to come together. We intend to grow earnings next year, and whether it is going to be 5% or 5.5% or 4.8%, at this point it is too early to say.

Great. Thanks for the color.

Our next question will come from Greg Nersessian with Credit Suisse.

Good morning. I just had a question on the Commercial business. Last quarter you pretty much brushed off the potential impact of the slowing economy on your Commercial group membership, and obviously you have changed your view on that point. I was wondering what specifically did you see change since you reported the fourth quarter numbers that's caused you to change that view. And then perhaps if you can help us understand how the seasonality might change this year in your high deductible health plan products from the impact of the slowing economy.

This is Jim Murray. I was the person who brushed it off, as you so aptly put it and I own that. Here is what happened from the time we talked last until today. We did a number of things. One of the things I talked with you about last time we spoke was that we were going to increase our pricing on our particularly our small group business. And we did that. That was one thing that went into the membership issue.

Another thing we did was we chose for the -- small group is made up of 2 to 25, 26 to 50, and 51 to 99 case sizes. For the 51 to 99, we weren't pleased with where our medical expense ratios were running. So we changed our underwriting approach for an employer question approach to an employee question approach trying to understand more about the particular pieces of risk in those groups that we were looking at. And that went over well in probably 60% of our markets. In 40% of our markets, the competitors didn't follow suit. So that caused a little disruption, more so than we had anticipated.

And finally, when we last talked, we have a thing here called other group movement, which is the net-net effect of layoffs and individuals deciding to drop coverage. For all of 2008, that other group movement for the small group block was averaging around 1,500 to 2,000 members per month. When January hit, the number was closer to 6,000. And we thought, okay January has got a little bit higher enrollment activity than other months. But unfortunately for us that stayed around 5,000 to 6,000 in February and March.

So all of those three pieces added together caused the change in the way that I looked at our Commercial membership. We're obviously identifying a number of fixes to get after it, and it is specifically a small group issue. We did talk about some ASO cases that left us, and that was okay because some of what happened there was competitive situations that we weren't willing to accept.

So we have got some things that we are doing on the small group side to get after it around new product, new consumerism product in the second half of the year that we are going to roll out.

When we roll out products we do market visits and we call them road shows. So we will get in front of a lot of brokers. We are going to expand some of our value propositions, some of what we call underwriting days where we have underwriters meet face to face with brokers. We are doing some things around bonus programs.

So we anticipate that towards the tail end of the year, the small group losses that I just referenced will start to mitigate but we have tried to be conservative with our reductions.

As it relates to the question you asked regarding the high deductible health plans, we saw some benefit for that in the first quarter and will likely see some negative in the fourth quarter. But overall, some of the pricing that we did that I referenced at the beginning of my response is driving the improvement in the medical expense ratio for the overall Commercial block up 100 basis points or perhaps even a little bit more so.

We are pleased with the way the Commercial profitability is starting to be positioned for the year. And this small group enrollment issue is something that, as you might expect, has my attention.

Sorry that we weren't as on top of this as we should have been when we had our call the last time but we are all over it now.

Great. Thank you very much.

Our next question will come from Christine Arnold with Cowen.

Good morning. Thank you. Medicare Advantage, could you give us a sense for the churn that you ultimately saw in the first quarter, gross losses. And then, how much of that increase, PM-PM of I think you said 9.9% was owing to risk adjustors that you either have received first quarter or expect to receive later in the year? And finally, can you talk about the loss ratio. Given the churn how confident are you that you are seeing the underlying trends and what kind of metrics do you look at there? Thanks.

Let me start with the last two. We are very confident that we have seen, that we continue to watch weekly and daily the trends and everything. So we know that the expenses that we are booking are the expenses that are actually being incurred. As far as how much of the 9.9% is risk adjuster, again it is really very, very, it is not a very large amount because think about what I said before. We introduced a member premium. We got the base rate from CMS, we've got the acquisitions that we did. And then everything else that really goes in terms of the lines of businesses, how we expanded the network product over the private fee-for-service. So not a very big number. A couple of followups to your questions. On a gross basis, our sales were 367,000 which includes about 114,000 in plan to plan changes. So net MAPD sales were around 254,000. Our market agency had an absolutely incredible year and we appreciate all the good work that they do.

One of things I would follow up with some of Jim's remarks on is that as he said in his remarks, the risk scores for the new members that we've got were very similar to the risk members we got last year and the risk members we got the year before that. And the improved risk scores are for our persisting members where we are getting paid the amount that we should be based upon the risks that we are assuming. And so this isn't an issue about any kind of surprises in the new membership we received. The increase here is a function of the documentation and again being paid for the risks that we are assuming. And as you might expect, lofts of metrics around here at Humana, and we look at claims almost on a daily basis, particularly the drug claims, and we are very pleased with what we are seeing, not only in the PDP but also the MAPD claims.

Okay. And final question, cash deployment, why so little repurchase with all this cash and the shares where they are?

We have adopted a philosophy for the last year now since the recession began, 15, 16 months ago that we are going to be prudently, have a bias toward conserving cash just because, again, as we said, look at investment income, the ability to issue debt, things like that. We have a very solid financial position, as I mentioned. Our credit facility doesn't expire until 2011, and the first of our senior notes not until 2016, but we are being very cautious about the use of cash right now. Even though, you are right, it would be wildly accretive to do, it is still a matter of, a lot of companies that have done that, not in our sector necessarily but everywhere, that have used up their cash for this have regretted doing it. So we would like to see further evidence of stability in the credit markets and in the cash markets, for that matter, before we continue repurchasing.

Thank you.

Our next question comes from Scott Fidel with Deutsche Bank.

Thanks. Can you give us your initial impressions on this new swine flu outbreak and do you know if any of initial 20 cases in the US have been Humana members? And just help us get a sense of what type of impact on the business it could have if this continues to spread around the US?

This is Jim Murray. I read about the swine flu over the end for the very first time. We have a lot of folks who are looking through to assess the issues but, frankly, it is early in the process.

I would say there's homework that gets done around subjects like this whether it be this one or any other pandemic issue out there. And in fact natural disasters. So it is not like we have never thought about this. We have folks that have spent a lot of time with plans and preparations for these kinds of things. But it is way too early to have any idea whether this is going to have any impact on us or any of our members.

Just a followup on health reform and maybe now with it looking like there will be a reconciliation provision included, thoughts around timing, will it probably be potentially now not until the fall until we have a good sense of this? And just your update, what you are hearing around, the conversation around the public plan, and how that could be framed and whether that, the chance of that actually coming out including something like Medicare rates as compared to more commercial competition?

Yes. It's a little hard to say at this point even though you are starting to see more clarity about what people are thinking the process might look like. I would say the devil is still going to be in the details around all of this. I will tell you that the public plan option, which is nothing but a Government run health plan, is a real lightning rod and could disrupt everything. It will be interesting to see how committed some folks are to such an idea.

Our industry has done a nice from preparing for this both from the standpoint of having real positive solid policy positions that we put forward that are really structurally different and surprising to some folks up there. And we will see. We have got a good grassroots capability that will be applied when and if and where necessary. So I think we are prepared to argue the points, and the policies, as well as play the politics if it is necessary to get to the right place. But I think a lot of time left here before we have anything to really work with.

Thanks.

Our next question comes from John Rex with JPMorgan.

Thanks. Just back a minute towards thinking about managing through the 2010, and assuming that we don't get any benefit from the physician fee fix in the rates, how willing are you to be the smoother for the senior as you go from 2010, 2011? So think of the business over that two year cycle. You kept saying if we can take lower margins along mid earnings growth. Would you be willing to take no earnings growth to be that smoother as long as you can see your way to the fact that in 2011, this gets fixed and gets back into the rates?

Well, John, what we can never count on is a long term thing from the standpoint of the political side of this. That idea is clearly one that is on the table. We look at that sort of thing all the time and I think we owe it to ourselves to do that because we have said all along we plan on being on Medicare over the long term, we think it is a long term business opportunity, even with some of the clouds that are out there. And so yes we have to think about that but I would also say that it is nothing to say it would automatically, there's no guarantee it would go the other way in 2011 because someone may step in and intervene in that formulary process. So the formula would say it comes back in 2011. But where the real judgment call is whether you trust it will actually happen.

These are all what we get paid to think about and try to make decisions around. I can tell you our bias going is we anticipate growing the Company's earnings every single year. And as we look at 2010 we plan to do it again. We will have to think through it.

Quickly to throw in that there are other lines of business that are a part of our ability to make money. So those are parts of the levers that we constantly evaluate. It isn't just MA we do here at Humana.

But do you think it is completely infeasible, say you got there and you had confidence on the 2011, is it completely infeasible to think about 2010 as being flat to modestly down earnings growth or earnings year?

It is way to early to talk about that. Again, the principles we operate on here are grow the earnings. We still have that as our bias. We have work to do on all of this Medicare bid work. We have to see what our competitors have done in October before we'll have a good view of it, no matter which way we go. We are in this period because of the way this business, the Medicare Advantage business, with the bid and the timing around it. We put our cards on the table and we don't know how they're going to play until we turn them all over in October and then we have a really good view of the following year. Generally we have done a decent job of being able to look at that have a good view and going forward and have a pretty good view of it. I don't see anything different at this point.

But you wouldn't dismiss it out of hand, that's a possibility at least?

We have an obligation to think about what's best in the long term and best for the Company long term. Clearly that can be one of the decisions. I am not here to tell you it is. We'd be irresponsible, I think, not to think past just one year.

Sure. Can you just remind us in longer term again, when you look at a Medicare member, what kind of differential do you think you have to have longer term, what kind of differential does a senior need to perceive in terms of value in MA versus being in the traditional plan? How much extra benefit do you think is the break point, especially to get new seniors to enroll in MA? Is it 10% do you think roughly when you look at your membership and success there?

We know that seniors fall into various segments. Some are going to be motivated by a different inflection point around that than others are. So there's no single way to think about that. Some are more focused on benefits versus premiums. So I think it is overly simplistic to think of this as a homogenous crowd because they're not. So we put a lot of work into trying to find out where those inflection points are among the various segments to try to get the right balance between premiums and benefits to appeal to as broad a population as we possibly can because we think we can meet all of them at some point with some product array. But there's no single way to think about that.

I guess what I was thinking, when you think about their all-in cost, so all-in cost, in traditional versus regular, do you assume that seniors would still enroll if you couldn't score any kind of cost save between MA and private Medicare?

If it was a perfectly flat environment we would have a less compelling of a value proposition but we do have some things just beyond the benefits. We have the simplicity of having a single insurer with an umbrella coverage that covers everything from Part A, Part B, C and D. All of that is valuable. We have better information flows than a traditional Medicare lineup with Medigap. If any of you have had parents that have been sick and you have all of these separated plans it is a nightmare just to do the paperwork. The value proposition goes beyond just the benefits and the premiums, but those are obviously the most powerful ones.

Great. Thank you.

Our next question will come from Carl McDonald with Oppenheimer.

Thank you. Assuming status quo in the Medicare rates for 2010, do you anticipate from an industry perspective enrollment will be flat, up or down relative to the million plus lives that have been added the past couple of years?

Based upon where everything is being discussed now, I would anticipate that there would continue to be some growth. As we talked earlier, when you array us in our products against a traditional program and a Medigap policy to go with that and a PDP product to go on top of that, the value proposition is there for the seniors, and I think seniors are beginning to increasingly understand that. I think the 10 million that we talked about the last time we were together in New York has now gotten closer to 11 million folks who are in MA programs.

So I continue to believe that there's value there for the seniors and it is a part of us and the rest of the competitors in the industry to share with folks. This discussion is all about, has been all about premium levels. There's other value propositions that come with Humana, and so that is one of the things we constantly focus on is those other value propositions, rather than getting into a conversation around commoditization.

I'd comment further. I was looking at a schedule the other day that outlined the market share of Medigap versus Medicare Advantage over the last few years and Medicare Advantage has really been capturing market share from Medigap markets. That's one of the reasons we teased out the Des Moines comparisons this morning because that is one of the primary competitor to Medicare Advantage. And you can see that even with happens in 2010, in that particular market, even if you put all of that new issue intro premium we are still way below Medigap in terms of premium. So there's a long way to run before Medicare Advantage is not competitive against Medigap because, you have to remember, Medigap keeps going up, as well. And, Carl, also the age-ins are very familiar with managed care type products as opposed to the old indemnity products. So as 2.7, 2.8 members come in next year, age into being 65 that also helps.

One more thing, and not only to address this most recent question but some of those we got before, Mike showed a slide, I believe, that demonstrates what we're focusing on, on the 15% solution. And we are not, nobody has talked or asked about that. And that is a big part of how we think about this and the ability over the next couple of years to drive to that 15% solution. We have got 500 contractors throughout the United States who are putting networks together that have a significant amount of savings associated with them. We have been spending significantly around some of the things that are shown on that slide around disease management programs, behavioral linkages with medical nurses in particular markets. All of those things are beginning to come together, and we are really seeing some increasing opportunities on that 15% solution. So that has got to be a part of this whole thinking. It isn't just about this negative 5% decrease. It is about, what are we doing in addition to that to get after the whole value prop.

Okay. Thank you.

Our next question will come from Peter Costa with FTN Equity Capital.

Can you give us an idea of what your days claims payable is going to do going forward? In the last few years it has risen through the year. Do you expect that to continue? If you look at your explanations for the decline this quarter, you would think it would go up at least a couple days. Is that the right way to think about it or how should I be looking at that?

Somewhere in between those two because, again, if you think about the reasons that we enumerated to give that it came down, those are all really good reasons, in terms of operationally. Pay claims faster, we do those things, received cycle time is less. We are working very hard to continue to put in those operational improvements, and get people paid accurately and quickly. So again, I would say somewhere in between. We still again are very pleased. What we try to do is not really drive for a day figure but just do the best we can operationally and then see where it comes out and tell you why it is different than last time.

Okay. And then back to the swine flu question, what sort of things are you going to be doing in terms of monitoring and how fast will you know whether people are prophylactically prescribing things like Tamiflu and Relenza and things like that?

This is Jim Murray. We were talking about it before the call and I am sure I will get an update from the folks who are evaluating just exactly what we are seeing in that regard, and I can't, until I get an opportunity to get off of this call and go and talk with those follows, I really can't update you. If we see anything that is significant we will obviously advise accordingly.

Obviously we have good visibility into prescriptions for such things as that. We will know pretty quickly.

Okay. Thanks.

Our next question comes from Ana Gupte with Sanford Bernstein.

Thanks. Good morning. I had two specific questions related to reform. The first one was around the Medicare provider payment reform debate that is ongoing in Congress. And if you could elaborate on how you as a leading Medicare plan are participating, if you are, in that debate, particularly around the advanced medical home, raising PCP pricing and the expenses of specialists. And do you see that changing the distribution of your HMO and PPO offerings, or any benefit to that 15% or long term trend moderation solution?

This is Mike. I guess I would say that those are all fine ideas they're pursuing. I would be somewhat doubtful about the ability to execute on those in any kind of way that would have a material impact on the marketplace. One of the great ironies, we talk about this whole Medicare reform and changing physician payment methodology and pay for performance and this endless list of things that people talk about, it is remarkable, I'm in Washington and frequently I will stop a meeting and I'll say, "You know what you just described with all of this? A managed care plan." At which point you could drop a pen because nobody wants to think about it like that.

We do all of the types of things that are being suggested as some sort of a solution, and we are I think better organized because of the way we're structured, the way we're paid. So from a pure competitive perspective, I don't find much fear in all of this at all. I think the execution difficulties surrounding some of these ideas is huge, given my 30 years of this. So I think Humana's positioned well and I think Medicare Advantage is positioned well. So I think it is interesting, it's probably good for the country for those people to pursue these sort of things for the non Medicare Advantage membership. But I don't think it affects our business.

Okay. Thanks. The second question is around the individual market and you have a very, very strong individual and consumer franchise. If any of these universal access proposals come into play, do you see any potential underwriting margin compression even if there were an individual mandate, do you see that being offset over the long term because the role of brokers and broker commissions may change in a different clearinghouse state model?

That will determine how that clearinghouse model actually works, I believe, as much as anything else. One proposal is that it is more of a clearinghouse for information. Others would like it to have a lot more direct control over the marketplace. Some would like to have the agents and brokers squeezed out of the business. Others are not targeting that.

So again this is one of those where, depending on the details, all of what you described is quite possible. And I don't know at this point whether the individual market would even be the place where that connector would have the most impact because their decision may be to do it different and you may end up in an effort where you're expanding Medicaid and doing other things to get people that are uninsured in the marketplace. So again we as an industry, as a company, have very specific proposals about how to set this up so that it works. And we will be part of the conversation throughout the summer. I think at the end of the day we will have a solid point of view because we understand the implications of these various choices.

Thanks.

Our final question today comes from Matt Perry with Wachovia Capital.

Hi, good morning. A couple of questions for you. First going back to share buy backs, it seems prudent to me that you're building capital on the balance sheet and you have said that volatility in the market is one of the reasons why you are not buying back shares. I guess can you talk a little bit more about how that thought process works between management and the board? What signs would you need to see maybe to think about buying back shares? And then how much does healthcare reform and the significant uncertainty of what might happen if a bill is passed, how much does that inform your opinion on share buybacks?

Well, that latter one does but before we get to that one, normally in the first half of the year, given where the credit markets are which you already understand that part of the discussion, but then there's also the part where we show, with each of the states we do business in, we have 34 operating subsidiaries, what we did last year and what our plans are for this year and what's the appropriate amount of capital we think should be kept there. So we have those discussions and then we also have meetings with the credit rating agencies regarding what the parent ratings are and then what the claims paying ability of the subs are. We are still in that and generally every year in the second quarter call we begin to talk about that, the results of that. And that will inform, to use your term, some of what is available. Then we still have, again we have talked about it all morning about the uncertainty of health reform and the other things. And the credit markets. So we want to continue to be prudent about it. And those will be the things.

So first step would be let's see how the discussions go with the state, how much is dividendable. How much needs to be retained, how much needs to be contributed. Let's then look at what the rating agencies say about the claims paying ability of each of the subs and our parent ratings. And then, again, we will look overall as to what we see going forward. That's kind of how the board, the board is active, the board does act. Everyone realizes that it would be quite accretive to do it. But again conservation of capital right now is what we are doing. We will update you next time.

Okay. And then a separate question, maybe for Mike, another health care reform question. I think there's a lot of varying opinions on what a public plan would mean to the health insurance industry. What is your take having spent a lot of time in DC? Do you subscribe to the belief that any public plan, even if it is set up at first to be a level playing field, would eventually morph into something that would pay Medicare rates and crowd out the private sector, or is there a viable way to set up a public plan that just promotes competition?

I don't think it matters how much how it starts. I think we know how it ends, and all we have to do is look at our Medicare program and we know what happens. That has been around for 40-some years. Where are we today in Medicare which is providing healthcare to people? In the same way that we do, we're financing it, and you have a government that does price setting with providers therefore producing a cost shift to the private sector which this year is in excess of $80 billion. So the rationale that that somehow is a competitive and effective and efficient program is just outrageous. My suggestion would be, if it starts even -- and frankly don't know that it would but if it starts as a level playing field, I think over time it would deteriorate to where they would go back to price setting and doing what they need to for their own budgetary reasons.

So I think we have so fashion this market so that the private sector -- and our industry has proposals on the table to do this -- and solve the fundamental problems that are screaming out for this supposed public need for this plan. I think we can solve the problem so that we don't have to have a public option under any scenario. Because I think it is a slippery slope to a nationalized health care program. So we will be a part of that conversation, we'll make proposals, we can solve this problem without going down that path. And the idea it will be a leveling playing field to me is a goof. It won't be.

Thanks for that perspective.

Okay. I'll just wrap it up real quick. I think we had a really good quarter. I'm really pleased that all of our Medicare projections we made last year for this year are playing out as predicted. Our Medicare Advantage business is solid. We are benefiting from it, the consumers, the seniors are benefiting from it I think it continues to be quite solid, and I think based on what we are looking at in 2010 and beyond, we have issues to deal with relative to changes but I think it remains a good business that we are positive about.

Lastly I want to thank the Humana associates on this call today for making all of this possible. With that, thank you for joining us.

Thank you very much, ladies and gentlemen, for joining today's Humana conference call. This concludes your conference. You may now disconnect.