Humana Inc (HUM) 2009 Q3 法說會逐字稿

Good morning. My name is Louisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Humana third- 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) Thank you.

Regina Nethery, Vice 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 Vice President and Chief Financial Officer, will briefly discuss highlights from our third-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 session with industry analysts.

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

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

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

Additionally, investors are advised to read Humana's third-quarter 2009 earnings press release issued this morning. This press release and other historical financial news releases are our also available on our Investor Relations website. Finally, any references made to earnings-per-share or EPS 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, everyone, and thank you for joining us. This morning I will discuss our third-quarter results, put additional context around our earnings guidance for 2010 included in today's news release, and comment on the national political environment. Jim Bloem will then provide more color around our financial performance moving into 2010.

Turning first to our third-quarter results. This morning we reported third-quarter '09 earnings of $1.78 per share, in line with our prior expectations and guidance. The quarter's results are a significant improvement over the $1.09 per share earned last year in the third quarter, even adjusting for a charge of $0.40 per share in the third quarter '08 results associated with unusual volatility in the financial and credit markets.

While our Government segment continued to perform well in the third quarter, particularly in our Medicare business, our Commercial segment faced continuing challenges from the economic recession and resulting rising unemployment, as well as continued impact from a highly competitive environment and the H1N1 virus.

Nevertheless, the positive momentum in the Government segment is offsetting the less favorable results in the Commercial segment, allowing us to reaffirm our 2009 guidance of approximately $6.15 per share.

Turning to 2010, it is important to note at the outset that our guidance issued this morning of $5.05 to $5.25 per share does not include any allowance for what may or may not ultimately happen with health reform, and includes only $0.00 to $0.10 in earnings-per-share from our TRICARE business, which we believe is the most conservative assumption we can make at this point.

It does, however, reflect the anticipated impact of a number of significant factors that are more predictable. One, savings from administrative cost reductions; two, projected increases in Medicare Advantage membership; three, a lower overall Medicare operating margin; and four, stabilization of our Commercial segment results.

I will begin my discussion of these four points by touching briefly on our previously disclosed target of administrative cost reductions of at least $200 million in 2010. In more than doubling our revenue since 2005, we have had to quickly ramp up our infrastructure to meet the demands of this growth as it was occurring. Now we are taking advantage of the opportunity to find efficiencies and eliminate duplication as we adjust to a changed environment.

Our goal is not just to slash costs but to strategically restructure our organization to position us to maintain a reduced level of spending beyond 2010. We continue to actively pursue the full $200 million in administrative expense reductions and are only including approximately half of that amount in our guidance this morning as a matter of prudence, since certain of the strategic changes we anticipate making are still in the early stages of development. We will update you our continued progress with these initiatives throughout 2010.

Turning to anticipated Medicare Advantage membership gains, with plan designs and premiums across the sector now public, we are in general pleased with how our products stack up against those offered by our competitors, particularly when Medicare beneficiaries look closely at projected out-of-pocket costs and supplemental benefits. Consequently, we anticipate net growth of 20,000 to 60,000 members in our Medicare Advantage individual offerings in 2010.

Further, as we discussed in last quarter's earnings call, 2010 will show a substantial increase in our group Medicare membership. In addition to the 100,000 life group account win we shared with you in last quarter's call, in the third quarter we added three major new group Medicare accounts, all with January 2010 effective dates. Navistar, with 29,000 retiree lives, will become a self-funded group Medicare account. We also added the West Virginia Public Employees account with 34,000 members, and the United Auto Workers VEBA account in Kentucky, Ohio and Wisconsin, totaling approximately 10,000 members.

Combining these individual and group successes, we anticipate total Medicare Advantage membership to increase by approximately 180,000 to 240,000 members in 2010.

With respect to our targeted combined Medicare Advantage margins, we have long been public with the fact that we strategically target approximately 5% for this business. We believe it is the right thing to do from a long-term perspective, as it allows us to decrease out-of-pocket costs and enhance benefits for our Medicare members, making the program more attractive and driving growth.

Included in our 2010 expectations, our moderating margins from our PDP business, lower margins on the new group Medicare business I just discussed, and the target margin we historically use in the bidding process for our individual Medicare Advantage members. However, as we have discussed with you on multiple occasions and in many earnings calls, our goal is to increasingly engage our members with our clinical guidance programs. And as a result, our Medicare margins have the potential to improve during the year. We believe it prudent to exclude this potential improvement from today's 2010 guidance points.

Turning now to the change in our expectations for the Commercial segment earnings moving into next year. In spite of the difficult external environment, due primarily to the economic recession, high unemployment and the continuation of a highly-competitive environment, we are confident that a number of factors will help stabilize Commercial segment results in 2010.

Let me highlight two of these. First, as I mentioned earlier, we are keenly focused on 2010 administrative cost reductions. Second, we believe that the pricing actions we began implementing earlier this year will gain traction in 2010. Consequently, we are projecting our back Commercial segment pretax earnings for 2010 to stabilize in the range of $125 million to $175 million.

While this is admittedly a wide range, we expect to tighten it as the year progresses and we gain more visibility on the success of the steps we have taken to address the issues that have been pressuring our commercial results.

As mentioned previously, the final factor which should have a significant impact on 2010 is the assumed loss of the TRICARE contract in the fall of next year. While we were pleased that the GAO has upheld our TRICARE protest, we are awaiting further detail as to the protest findings and next steps. In the absence of anything definitive at this point, it is still too early to tell whether there will ultimately be any change in the award of the contract.

Our guidance, therefore, conservatively assumes that we will only retain the contract through September of 2010, and includes all wind-down costs. Our conversations with the government indicate that this is the minimum period we would keep it even under transition to another carrier.

Before turning the call over to Jim Bloem, let me spend a few moments talking about the current political environment. Humana and our industry continue to work diligently for comprehensive bipartisan healthcare reform this year. Our commitment to health reform done right emphasizes the privacy of guaranteeing coverage for all Americans, with everyone participating in the system, while reining in out-of-control costs that are increasingly unsustainable for individuals and business.

We are committed to doing our part to make coverage more affordable for those in need. Our industry is actively presenting solid, data-driven studies that are garnering attention across a number of fronts in Washington. We don't anticipate those efforts will subside in 2010, no matter what the version of healthcare reform is or is not enacted this year.

Just as we strive for continual improvement in our day-to-day operational activities, we also strive for continued improvement in how our country addresses the challenges associated with our current healthcare system.

To sum up, 2009 is playing out well, though it does include some challenges. Nevertheless, as we head towards a new year, we are confident in our ability to achieve the EPS guidance range for 2010 we shared with you this morning. We recognize the importance of assessing the long-term impact of operational decisions and the need to ensure a lean cost structure, solid day-to-day execution, and an ongoing commitment to consumerism and innovation so that we provide value to all Humana stakeholders.

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

Thanks, Mike, and good morning, everyone. We're pleased to report earnings per share of $1.78 for the quarter, even though some of the components of our earnings were a little different than we originally expected. This morning I will primarily focus my remarks on our business segments, beginning with the Commercial segment.

Before we start, though, I would like to note that we expect 2009 consolidated revenues to be in line with our previous guidance, with growth of approximately 6% more anticipated for 2010.

Turning first then to the Commercial segment, our 2009 Commercial pretax income is expected to be approximately $80 million lower at the midpoint than our previous guidance, primarily due to several of the same issues which also have been cited by our competitors and which are pervasive in the current economy.

We continue to experience a difficult commercial operating environment, with unemployment, competition and the H1N1 virus currently cumulatively weighting heavily on our Commercial results. During this first and second-quarter calls, we discussed the following factors which adversely affected our Commercial results. First, a decline in medical membership, primarily the result of some of the younger and healthier workers of groups we insure dropping or losing coverage as a result of fewer hours worked or broad-based layoffs.

Second, as a result of fewer younger members, there has been a deterioration in the remaining risk pool. Third, medical spending increases during the run-up periods to layoffs were driven by fear of layoffs. And finally, aggressive provider billing practices such as with the emergency room coding situation. During the last 90 days, we did not experience any improvement in any of these factors.

Additionally, we would note the following four observations. First, the impact of the H1N1 virus on our 2009 commercial results is expected to be greater than previously estimated, due to an acceleration of its estimated peak season from early 2010 into the fourth quarter this year.

Second, due to the economy, we continue to see pressure on membership growth in all of our small business product lines. Third, also in today's economic climate, we are seeing members acting frugally prior to meeting their plan deductibles, but then more aggressively as they seek to maximize their benefits once their deductibles are met. And finally, we also are noting a modest increase in COBRA membership.

Together, all of these items necessitated the revision of our 2010 pretax income guidance. I wouldn't single out any one of these as being the primary driver, but rather the cumulative effect of all of these factors have caused lower Commercial results which we are sharing with you today.

The good news is that we have already begun to address or take into account each of these factors and as a result, we are anticipating stabilization in our Commercial segment pretax income for 2010. In a few minutes when I discuss 2010, I will elaborate on why we have confidence in this expected result.

Turning next to the Government segment. We are pleased to report that all of our government lines of business continued to perform well. We have experienced success in both medical and administrative costs through various clinical, operational and administrative expense reduction initiatives. As you might expect, most of the improvement in our Government segment is in our Medicare business. Both our Medicare Advantage and standalone prescription drug plans are tracking better than both our plan and our previous guidance.

Importantly, our Medicare Advantage membership also is higher than we previously expected. Finally, we also had a modest improvement in our TRICARE results for the third quarter. All in then, these Government segment improvements were enough to offset our lower commercial performance, resulting in our 2009 consolidated earnings per share guidance of approximately $6.15.

Turning now to administrative costs. As Mike said in his remarks, we continue to actively pursue our previously announced target of $200 million in selling, general and administrative cost reductions. As we said last quarter, these reductions will occur through numerous initiatives which are now underway and generally consist of the following types of actions. Continued process redesign and outsourcing, increased efficiencies associated with technology investments, procurement savings and outside services reductions, and a series of other initiatives designed to ensure we keep our cost structure lean while carefully guarding our commitment to and record of quality member and provider service.

Some of these actions are fairly straightforward to implement, while others are more complex in terms of their implantation requirements and timing. For this reason, the 2010 guidance that we share with you today conservatively includes the anticipated realization of only $100 million of administrative cost reductions.

We are confident that our actions will yield at least $100 million of savings during 2010, with our full-year run rate administrative costs reflecting the entire $200 million as we move into 2011. We look forward to sharing our progress on both actual savings and the run rate improvement as we move through 2010.

Moving finally now to 2010, this slide analyzes the difference between our expected 2009 earnings-per-share of approximately $6.15 and the midpoint of our 2010 earnings per share guidance range of $5.05 to $5.25, that midpoint being $5.15.

Let's look more closely at each of the principal reconciling items shown. First with respect to TRICARE, we now anticipate keeping the contract for the first nine months of 2010. We also have completed our analyses with respect to possible write-downs and charges associated with the potential loss of that business. Consequently, we expect the 2010 net earnings per share contribution from TRICARE to be between approximately breakeven and $0.10 per share on an all-in basis.

We are pleased that the GAO upheld our protest, and we will further evaluate our 2010 earnings per share guidance as the implications of the GAO decision become clear.

Second, with respect to Green Ribbon, you may recall from our fourth-quarter 2008 call that we had forecast a second-half 2009 recognition of revenues associated with the now concluded CMS demonstration project, for which we previously had recognized all the related expense.

Third, with respect to the Medicare margin reset that Mike described, there are three points to consider in evaluating the $115 million pretax shown on the slide for 2010. Number one, as most of you are aware, we made significant pricing and plan design changes for our 2009 standalone prescription drug plans in order to correct our unfortunate 2008 bid error.

Though as a result, we shed a substantial number of PDP members on January 1, 2009, these actions are playing out more favorably than we expected. Accordingly, for 2010 we expect to return to a more traditional PDP growth and profitability mode, with more competitive levels of pricing.

Number two, even as our Medicare Advantage operations are exceeding expectations for 2009, our 2010 guidance resets these margins to the approximate bid margin levels. This is both prudent and consistent, and it is how we always prepare our annual plans and give initial guidance at this time of the year. And three, our Medicare Advantage results -- our 2009 Medicare Advantage results are attributable to many things which we have mentioned regularly through the past year and employ every year to improve our results.

These efforts generate better health outcomes while lowering overall healthcare costs, and they include our clinical care coordination model, our wellness incentives, our disciplined and effective work in network contracting and fraud detection, and our continued implementation of selling, general and administrative efficiencies. We expect that these efforts will continue to improve health outcomes and lower costs in 2010 as well.

Finally, with respect to our 2010 Commercial pretax income guidance range, we are being cautious given all the uncertainties that we have outlined today, including the current economic climate and particularly the unemployment outlook, the magnitude and timing of the H1N1 virus, and the current competitive environment. However, we are confident that we will stabilize our Commercial pretax earnings next year, as indicated by our guidance range of $125 million to 175 million. This $30 million improvement at the midpoint is the result of pricing actions, both implemented earlier this year and currently still being implemented, as well as SG&A reductions and improved investment income.

So to conclude, we are pleased with our third-quarter performance and the resulting 2009 earnings-per-share guidance of approximately $6.15, which remains consistent with our previous guidance. Also, as outlined above, we believe our 2010 earnings per share guidance range of $5.05 to $5.25 accurately reflects our organizational experience, competence and discipline applied to the current operating environment.

We are well positioned to help our members and the nation face the healthcare challenges of 2010 and beyond, as well as to continue to provide our owners with solid operating returns.

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

(Operator Instructions). Matthew Borsch, Goldman Sachs.

Yes, I was wondering if you could comment a little bit more about the 2010 outlook on Medicare Advantage and what you expect to see in terms of, directionally at least, in terms of the member distribution byproduct? And do you think private fee-for-service is going to continue to shrink with members transitioning to network PPO? If you can size any of that, that would be great.

This is Jim Murray. In 2009, our network membership is about 62% of the total. We think that will go up to somewhere above 70%, maybe between 70% and 75%. We do anticipate that our private fee-for-service membership will shrink from where it is this year, probably around 75,000 to 100,000 less private fee-for-service members next year, and that those members would likely go into some of our network-based options.

We have talked a lot in the past about the product continuum and working around Medicare supplement, the private fee-for-service, PPO and HMO, and we have done a really good job we believe of properly setting up those product continuums to incentivize folks to shift to the network options that will be best for them in the long run.

Got it. If I could ask a question, just a follow-up on a different front on the commercial pricing. What are you seeing from competitors right now, and do you think trends have improved in a way that helps you for 2010 or maybe not?

This is Jim Murray again. We've talked in the past about the situation in Texas with the not-for-profit Blue plan there. That seems to be continuing. In other parts of the United States, there is a for-profit competitor that is a little bit aggressive right now. I think that the reports this last week would, in my mind, begin to get people to think that the aggressiveness that we are seeing and the reactions ought to start to dissipate. And I would anticipate that from here going forward that we should begin to see some more pricing reasonableness, but we hate to do anything on hope around here. So we are going to plan for the most conservative and, hopefully, it will play itself out in the next couple of months or quarters.

Great. Thank you.

Charles Boorady, Citi.

Thanks, good morning. My first question on MA. for 2010; what do you estimate the average increase in member paid premiums will be next year, or an average member paid premium if you have that? And what is your plan for retaining some of the low-risk lives who may be attracted to switch to a zero premium offering of a competitor?

Well, across the entire book of business, I think the premium is going up a little under $20 in general for Medicare Advantage members. I would remind you, Charles, on the risk piece of it, that risk mix issue is not as important in Medicare because of the risk-adjusted payment methodology.

So I mean it is something you pay attention to, but at the end of the day we are, I would argue, reasonably accurately paid based on the risk of these folks. So that business of losing healthy based on pricing is not as big a concern as it might be in another line of business.

Got it. Then my second question on G&A saves, if you could just kind of just walk us through. You threw out a couple of very big round numbers, the $100 million and the $200 million, and just what led you to reduce the $200 million goal to $100 million and what specifically could actually make the difference between getting to $200 million or not?

Is there a couple of big programs that you are thinking of doing or not doing, or is it really just executing a little bit better on everything in your plan?

It's made up of a lot of things, but let me start with the number. There is nothing magical about the $100 million or the $200 million. I mean, we are starting with a $200 million target. I can tell you that I have numbers around here that are bigger, that we are just entering into this really, I would argue, aggressive review of our company as a result of multiple years of growth. I mean, no one in our sector has grown like we have, and it happened very fast. And at one point in 2006 and early '07, we were really having to jump through hoops to respond to the growth.

And you can sit back and you can say with that kind of growth, there is no way that all those decisions were made to drive great efficiency and effectiveness. And also we get smarter and smarter over time by understanding what is going on with these customers.

I'll give you a perfect example. Every quarter, we understand more and more about how seniors interact with us and how various communication devices and things produce phone calls or the lack thereof. So it is kind of a constant fine-tuning, but we also know we have opportunities to drive -- restructure some of our operational organization. But it is a combination of a lot of things, a lot better execution driven off of better understanding of what these consumers need and what we can do for them.

Now I have shown you all many times, for example, the SmartSummary statement. We get better and better at knowing what to put in that and what not to put in that to produce a different result with our customers. We know what produces phone calls, we know what does not. So it is a combination of productivity gains around better understanding, process improvement across the whole system, and some restructuring and reorganizational opportunities that are in front of us.

So it is a mixed bag, but I think the number we've put out there in front of us is quite achievable. And the only reason we didn't put the whole thing into 2010 is just some question about when the actual timing might occur.

Got it, thanks.

Josh Raskin, Barclays Capital.

Hi, thanks. Just one quick follow-up, I guess, on the SG&A. You know, I understand that some of it is timing. It sounds like you are being conservative and that you will be at the $200 million in terms of a run rate savings. But still looking at an SG&A ratio that I guess I would have expected, especially in light of all the growth, to start sort of moderating a little bit more quickly.

So is there just more variable costs than we think in the business, or just when do you expect, again, with sort of top-line leverage, when do you expect to get some more leverage on the ratio?

Well, you are seeing the beginning of it now. I mean, that is the number we have in front of you. I think we will just continue to push forward. Like I said, we have numbers around here that are bigger than that in terms of potential. So I don't fundamentally disagree with your directional question.

We have a bigger opportunity and we will pursue it, but we have a lot to do around here. This is one thing. We will get after it. You're going to see the early results of that this year, and there will be news to come.

Okay, that's helpful. And then just risk adjuster question. Any risk adjustment settlements paid from CMS in the last quarter that related to prior year, not necessarily prior quarters?

No.

Okay, thanks.

Tom Carroll, Stifel Nicolaus.

Hey, good morning. Just as I think about your comments about your longer-term Medicare Advantage margins, should we interpret your comments as maybe a softening of that 5% pretax goal, or is that just not the case at all?

I mean when we talk about the 5%, it is how we look at the business as we're bidding it into the future. But it is important to remember that we are constantly trying to drive efficiency and effectiveness. I mean how many times have you heard us talk about the inefficiency and the waste and the fraud and all the nonsense that goes on in Medicare.

That is not something you can take out instantly or quickly or easily, but it is what we work on all the time. So when we bid our business for the following year, we sit down and say, all right, what do we have, what do we think trend looks like, and where is the business going. We have built our bids around an overall 5% target, but then we continue to work.

And as we get progress and as we have efficiency and effectiveness and as we gain ground on rationalizing the business, that is upside to that 5%, and you saw it happen this year. When we bid 2009, we started at 5%, and it is actually a little bit better than that through the good work that was done around here.

Good deal. And then as a follow-up, what percent -- or remind us of what percent of your declining private fee-for-service book is choosing another Humana product?

This is Jim Murray. In 2009, about 90,000 folks switched from our private fee-for-service to one of our network-based plans. We anticipate that same kind of movement in 2010, or more.

Thank you.

Justin Lake, UBS.

Thanks, good morning. First, a quick question on how you are viewing the potential Medicare Advantage reimbursement changes in reform. I basically just would like to get your view on -- it seems like there is either going to be a change closer to fee-for-service rates or competitive bidding. And just want your view on those two potential changes and how you would view them from your business standpoint, especially if you could talk about them on HMO versus PPO, let's say.

Well, I mean what we have in front of us is uncertain, but we have two -- I will just bucket into two buckets. One is moving things in-house to the traditional Medicare costs. We have competitive bidding in the Senate. This is one of those cases where the devil will ultimately be in the details, and so it is kind of hard to respond to where this thing might end up.

What I will say, because I have been saying it for a long time, is we have always assumed around here that over time, these payment rates would be adjusting. So we have been racing and working as hard as we can to get networks built, to build clinical capabilities, because it is all about managing this business, not insuring this business for us. So that has not changed, and so we are moving as quickly as we can.

We have talked to you about the 15% solution, and we think over the long term that companies like Humana need to deliver savings to the federal government. Those savings are going to have to bring those -- ultimately result in those payments to us being no more at some point than they would be paying to the traditional provider community.

So those things have not changed, and I think we continue to provide feedback and modeling capabilities to those that are trying to figure out the best way to do this. The issues are the same, rural versus urban. The adjustment to 100% rates goes one direction, competitive bidding goes another direction. And it has varying impacts on communities around the country.

So I think we are very much in the middle of a political conversation around the impact of seniors across the country. There is 11 million people in this program, and depending on how this is done, there is the potential for a great deal of damage to the benefits and premiums these people have grown accustomed to.

So I think there is news to come on that, but as a company we have been preparing for these rates to come down. We have said all along it is really a function of timing as much as anything else, because we are doing quite well actually building out capabilities. And the prior question was around margin. Well, that good work we did this year is one of the reasons the margin was a little higher than we had originally anticipated for '09.

That will continue on, and the more that we do and the more success we have, the better we are able to deal with whatever changes come. And again, I think it is a little too early to react to any specifics.

All right. Is there one that is better or worse for your book of business, in your view? You would rather see it go to fee-for-service or competitive bidding?

I don't know that I would go there, Justin. There is things about both that have differing impacts on our company. We are pretty broad-based. So when I talk about rural versus urban, whichever way you go, you are hitting a piece of it a different way. So I don't know that I can pick my poison there.

Okay. And then just a question on --.

Scott Fidel, Deutsche Bank.

Hi. First question, just if you have any updated intelligence on how negotiations are proceeding around the industry tax that would start in 2010. And then also if you have just received any feedback on any different formula that they might use for the Medicare business relative to the commercial business.

I'm not sure I understood that second question, Scott.

Just if they are going to use a marketshare-based approach or premium-based approach, and any understanding on whether they would look at Medicare premiums any differently or whether it would just be across all net premiums written for the industry tax.

Well, basically, we have not received any more information. I think there is still the same sort of difference of opinion among whoever you ask of whether or not Medicare and Medicaid are in or not in the excise tax. So there hasn't really been a lot of developments there.

It's kind of hard to find a rationale for including Medicare, but we will have to see how that plays out. I don't think that was the initial intent. Because we're looking at Medicare as being adjusted under a whole different channel, and all of a sudden we are going to have premium taxes on Medicare. I don't believe that was the intent, but I know that the conversation up there is now around whether it is going to be included or not.

So there is one impact you can absolutely be certain of, and that is that as we start taxing these benefits and start taxing these companies, it is going to be passed on through our customers. And whether we get it done in 2010 or 2011, it is going to happen.

Now, of course, 2010, a lot of that business is already baked in terms of pricing and all that, so it could have an impact. But at the end of the day, the question from a political perspective is do you, in fact, want to cause health insurance premiums to rise by taxing the system.

Okay. And then just a follow-up just on the medical cost trend view for 2010. It looks like you're assuming stable at 7%, 8%. That is a bit lower than what we are seeing some of the peers issue guidance at, around 9%. So just interested, I mean you guys have had a different cost trend over the last year or two than peers. But maybe if you can highlight some of the variances you think between your trend and peers, and then also what you are building in for benefit buydowns relative to 2010.

Generally speaking, we have always had a slightly less trend than the rest of the industry. So we are going to 7% to 8%, but we have been sort of in the 7%-ish range before. Basically, as you look at the things that are driving that secular trend, the hospital rates, there's still things in the provider billing practices that are there.

And then as we have talked about, still cost shifting going on too from regulatory authorities and potential going forward. And then there has been a leveling off, we think for 2010, there will be more of a leveling off in the generic dispensing range, which for us has helped us have that lower trend that I mentioned initially.

And on the buydowns?

The buydowns, generally speaking, we don't see a lot different than we have seen in prior years -- 2.5%, 3%.

Okay, thank you.

Kevin Fischbeck, Bank of America-Merrill Lynch.

Okay. Thank you, good morning. You talked a lot about how you feel like the guidance is somewhat conservative, but you haven't talked a lot about I guess the cash component of this. Can you remind us how much cash is at the parent level, and what would kind of get you to put that cash to use?

I guess in the press release, you talked about how the financial environment slowed down the share repurchase this year. Is that still the issue, or are you just waiting for healthcare reform? Can you give a little clarity about what caused you to put that cash to use, and is it share repo or is it acquisitions?

A couple of questions in there. First of all, the cash at the parent at the end of the third quarter was $693 million. That is up from about $665 million. But generally speaking, the change this year, beginning of the year at $250 million, we paid off debt of $250 million. We took dividends of $775 million and we put $100 million back into the subsidiaries. So again, that is going to be the pattern for the rest of the year.

As we look as to the uses of cash basically, we are looking at healthcare reform, and we are uncertain as to what that will mean for us from a cash position. The cash at parent is one of the highest numbers we have had in the last 10 years. But as we look at things, we continue to look at acquisitions. We look at a lot of different things.

Obviously, we never comment on what we are looking at, but they are out there. But I think right now, cash conservation is a fairly good conservative strategy, given the fact that we are in an uncertain environment as we've mentioned on the Commercial side, and as the economy in general, but also really with respect to healthcare reform.

I would follow that up by saying I think all the companies in this industry are going to confront sort of a complete review of the world as we know it here in a few months, as this thing gets clearer. So there's going to be significant strategic implications to companies, and we'll all be affected somewhat differently, depending on where we are and the kind of businesses we are in.

But I think at this point in time, the smart thing is to keep your powder dry, do what we need to in Washington to get to a reasonable spot, and then assess where we are. And we may need cash to go a direction to respond to all that when it is all said and done. So I think right now, it is a time to be cautious and conservative.

That makes sense. Then just one quick question on TRICARE. Based upon the guidance before around margins, I was looking for TRICARE to contribute about $0.35 to $0.40 to earnings annually, and you are talking about the costs here about $0.43 in 2010. And the reconciliation, I guess, at the midpoint you are talking about a $50 million to $75 million charge would be about $0.24, implying about a $0.19 hit in Q4 from losing the contract. Is that kind of $0.10 from actual operations and $0.09 of wind-down costs, or what is in that kind of Q4 implied hit?

Yes, it is actually what we have been saying all along. If you look at the TRICARE revenues, they are $3.5 billion. We've put a little over a 3% margin on that, and you come up with the $115 million that is on the slide. What we have said is looking at the contribution, though, if we are not successful in retaining the contract, then we have certain wind-down costs, the impairment of goodwill and other things, which we have estimated to be between $50 million and $75 million.

So that is why we are saying for the coming year 2010, we are saying that we keep the contract through 9/30 and then we also take into account those costs. That is why we get a net EPS contribution of between $0.00 and $.10 a share, which basically takes us to looking at it. From the way you were looking at it then, you would say we'd have $50 million to $100 million. Because we had it for three-quarters of a year, $50 million to $75 million of those charges gives us zero to $25 million of pretax.

Okay, thanks.

Justin Lake, UBS.

Thanks for letting me back in for my second question here.

Yes, sorry. I don't know what happened there, Justin.

Don't worry about it. My follow-up was on the margin side for the 5% Medicare Advantage or Medicare margins. I am just thinking about, clearly you are doing a lot better this year than you thought when you reported last quarter from a margin perspective. And it would appear better than what you applied at bid.

So wouldn't that run rate carry over to next year and, therefore, if you bid the 5%, maybe you would actually be trending towards the 5.5%, 6% run rate for next year?

This is Jim Murray. Lots of factors go into the Medicare margin that we talked about. You know, the group business has a lower margin than the overall individual that we bid separately. The PDP, as Jim indicated, is moderating down from where it had been. And we just think it is prudent as a company that if we bid the 5%, then we -- remember that we do that in April, which is before some of what we see happening. We just think it is prudent to go back to that original bid amount, and then let the result of our good work play out as it is seen in our financial statements.

Okay. Thanks again for letting me back in the call, appreciate it.

No problem. Thanks.

Greg Nersessian, Credit Suisse.

Thanks, good morning. First question just on the overall reaction by your Medicare Advantage customers, maybe not just yours but industrywide to the benefit cuts and the premium hikes. Is the level of discontent amongst seniors sort of in line with your expectations; is it worse? Is it less severe than you thought it might be? Any color there in terms of how they are responding to those changes.

It is developing and it is early. One of the things we've learned about the seniors is that as this whole sort of fall process rolls out, there is sort of a growing thing that occurs here. So people don't jump in and start studying this the first minute the data is available, but they will as they start really thinking about their choices that they have to make. And it happens reasonably quickly because this only lasts for a few weeks, but I think we are going to see a pretty significant reaction.

I mean, there is no question if we have any doubts in Washington what happens when we cut payments, we are going to see it right here. We have our payments going down this year because of some assumptions that CMS made around next year's cost trends. We don't agree with those things, but they've definitely affected our rates. So we appropriately responded by changing benefits and premiums. I have already indicated that we have raised our premiums on average a little less than $20, and there has been some benefit changes as a result.

So here is the direct cause and effect evidence of what happens when we take actions relative to this program. So I think that as the noise starts building, those folks will make their voice heard in Washington, and I think it is going to be a stage setter relative to an ongoing conversation about what happens with this program.

The timing is going to be interesting because we are going to be in the middle of debating the future of Medicare Advantage right when this occurs. So, you know, in many ways from an educational perspective, it couldn't be at a better time.

Great. That's very helpful. Then just a couple of clarifying points. One, what was the Green Ribbon contribution this year? And then secondly, you have got D&A moving higher next year, Jim, but the CapEx has been coming down. I am wondering what is in there to get your D&A higher.

We will start with -- well, let's do Green Ribbon a minute. The Green Ribbon contribution is $20 million. And again, this was a demonstration project that we worked on for several years and have expensed everything. We had it in our guidance and we mentioned it a year ago.

With respect to D&A, depreciation and amortization, generally speaking the amortization is on a quick table. And the D&A -- the CapEx has come down, but we basically have a few years lag. The average useful life of most of our equipment and most of the software and technology things we do is between five and seven years. There has been fairly steady capital expenditures at that level, so that is why it still continues to go up and then it will recede back down as we come down to the $175 million, $200 million, with the $200 million for next year that we have specified in the guidance.

Great, thanks.

Carl McDonald, Oppenheimer.

Thanks. , looking at the benefit design changes that you made in 2010, at least from a high level it looks like you did offset most of the negative spread from the pricing and the expected cost trend next year. And yet looking at the Medicare margin guidance for next year would suggest that wasn't the case.

So am I misreading the benefit design changes or, again, does it go back to that 5% expectation for next year really just a placeholder because that is what the initial bid expectation

Well, again, when we did the work around our bids in April, and again filed them in June, the data that was available to us suggested that the 5% was a reasonable target. You know, we haven't -- we do a pretty thoughtful job of summarizing through a bid model all of the margins that are created by the premium and benefit design changes that we make. And that model told us at the time that the margins for that business would be around 5%.

So, again, we want to let that run itself out. As we do some of the work that Mike talked about earlier, in terms of our clinical programs and contracting and some of the work we do on the Medicare risk adjustment so that we get paid for the risk that we assume, we will let that flow into our earnings and we will report it at that time.

Second question on the TRICARE write-down. Is that going to be a fourth-quarter event after you find out whether you retain the contractor or not, or is the timing of the recognition there not related to the protest?

Carl, no, it's not a fourth-quarter event. We don't really anticipate it this year and that is why we've put it into next year.

Excuse me, sorry, fourth quarter of 2010.

It could be there, but we don't know yet because we don't know all the details and the implications of the GAO decision. The way that the calculation works with respect to the impairment of goodwill, for example, you take a look at the net present value of the remaining cash flows and the life of the contract, and compare that with the carrying value of goodwill on your books. And when that falls out of balance, that is that the carrying value is more than what the supporting cash flows are, that is the period in which we will recognize it.

So as we get more clarity as to how long we will keep the contract and what the tenets of the contract, we will be able to better gauge and we will be able to better evaluate what quarter of 2010 that occurs in.

Thank you.

Ana Gupta, Sanford Bernstein.

Hi, thanks. Good morning. Another follow-up question on the preservation of that 5% margin long-term. And I was wondering what lessons have you learned from your 2010 experience with regard to premium shifting and buydowns? In terms of the demand elasticity, do you see that there is more capacity to shift premiums to seniors, so as you continue to seek cuts in 2012 all the way through 2014?

And then in terms of buydowns, have you reached your sort of asymptotic limit on the buydowns, or can you do more -- still preserve the visible sweeteners on fitness and vision and dental and continue to gain share, if you will?

First, it is going to vary by location around the country. Because in some places there is more headroom than others, depending on how long we have been there, the scale of our business, how much penetration we have relative to our clinical work and those sort of things. So the answer is yes, in many, many places there is continued room to adjust benefits down.

In terms of the balance between benefits and premiums, though, that is done with a fair amount of research that has been focused on trying to find out what the right balance is. Is there an inflection point where premium becomes more important than benefit changes, or vice versa? And we put a lot of energy into understanding how seniors respond to those two changing dynamics, and we try to hit a sweet spot.

Now, the challenge is always we never know exactly what our competition is going to do and whether they are working off of the same set of understandings that we are. So we are always subject to the competitive marketplace, but we try to hit a smart sweet spot between premiums and benefit cuts.

And I think at the end of the day, it is not going to be -- Humana is not going to win or lose based on that. That is important to get that right. It comes back to if we are not managing costs down, none of it is going to matter because you do run out of room at some point.

It goes back to -- I keep coming back to this 15% solution subject. You are going to hear that from us until you're sick of it, because that is the absolute key to us having us and the individual Medicare folks having a future with this private-sector alternative. We have to get better. We have to get more efficient.

The good news is there are incredible opportunities in a lot of ways in this system, and we are seeing good traction. So we'll just keep it up.

Okay, thanks. The second question is more near-term on commercial membership. Can you break down how that works between individual and small group? And on individual, do you see that when the stimulus subsidized COBRA rolls off potentially the individual membership, you could have some upside, in other words, to your forecast?

The individual membership is around 360,000. Small group membership under 50, which is what is being discussed through healthcare reform, is around 590,000. And about 900,000 other fully insured members for a fully insured total of about 1.8 to 1.9 million.

I apologize -- this is Jim Murray -- can you repeat your message around the individual?

Assume individual, typically you do pretty well in individual. Assuming the COBRA subsidy rolls off, which I am assuming is pressuring individual market growth, would you see any upside to your 2010 forecast? Or is that already taking into account a fairly optimistic viewpoint, and then the small group is really pressuring your membership downward?

To your point, the individual membership is growing nicely. We like our model and we believe that the broker community that works closely with us likes our model relative to the competition. I would anticipate that depending upon what happens with the COBRA that what we are going to try to focus on more than that particular issue is making sure that we catch some of our small group members that are choosing to drop coverage.

And we are working really closely to coordinate the efforts of our small-group salesforce and our individual salesforce to make sure that more and more folks are made aware of our individual offerings, so that we can catch more of those as opposed to them just falling into the marketplace.

So that is really where our good focus is right now. You know, to be brutally honest, we haven't been as good at that as we should have been this year, but we're going to get a lot better at it going forward.

Okay, that's helpful. Thank you.

Peter Costa, FTN Equity Capital Markets.

Hi, just a couple of details. In terms of the gains and losses of members in Medicare Advantage, you talked about net individuals of 20,000 to 60,000 growth. What is the net adds when you look at the absolute number of adds versus the absolute drops?

We are anticipating on the individual piece that the sales will be somewhere between 460, 480, and the terms would be 420 to 440. We really have to focus on the terms. We have used a historical number to develop that, and we are doing a lot of work here to message our membership to let them know what to expect, to give them some alternatives for other products that make good sense for them.

And we are really taking an aggressive approach to being very transparent with the membership with the goal of making that number go down. But for purposes of this projection, we have used some historical numbers to develop it.

Okay. Is there a geographically specific place where that exists, where those terms are? Like have you looked at regions where you have gotten out of products and things like that; is that where it is stronger, or how do you develop that number exactly?

This is Jim Murray again. All of our folks who are in the field rigorously review all of the competitive environment and our product designs to decide where we are going to put our direct marketing dollars. They look at what competitors are likely to do. For examples, Coventry and WellPoint and Wellcare getting out of the private fee-for-service business has informed us.

We are looking at where our benefit designs don't look so hot relative to the competition, and we aggregate all of that good knowledge up to these totals that I just shared with you.

Okay, so very bottoms up. Can you give me an idea, some clarity on the TRICARE contract, when you will have some news as to when that is going to be rebid or exactly what is going to happen there? What's sort of the timeframe on what is going to happen there?

Well, we really don't have enough detail yet to even assess that. A lot depends on how the TMA will choose to proceed once the full GAO decision is released.

That was our general counsel, Chris Todoroff.

Okay. And when do you expect the full decision to be released?

We will probably know a fair bit more this week, but that doesn't mean that we will be in a position to really materially assess things. Again, a lot depends on sort of how the TMA chooses to proceed once the GAO puts out all of its findings.

And the TMA, for those who aren't aware, is TRICARE Management Authority. That is part of the Department of Defense.

Okay, thank you very much.

Matt Perry, Wells Fargo.

Hi, good morning. First, a question on the PDP margin. You talked about moderating PDP margin in 2010. Can you delve into that a little deeper? I see mostly your prices or your member premiums have gone up. Do you just expect cost trends to go at a faster rate, or is there something else there?

This is Jim Murray again. You will all recall the 2008 situation that we attempted to correct in 2009, and frankly, the results came out better than we had anticipated. So we purposely tried to take our member premiums up only slightly in 2010, with the hope that the membership would become more stable and we would actually begin to regrow the PDP membership, which is something that we are very, very interested in doing. So yes, we anticipate that the trends would go up slightly more than the premiums that we put in place.

Okay, and then just two quick follow-ups. First on investment income, does your 2010 guidance anticipates a change in interest rates, and if so, by how much? And then second, would you expect to kind of reauthorize the share repurchase after it expires at the end of this year?

For the first one, we expect that the investment income increase of about $30 million to $35 million that we have there is all on the balances. The interest rates are not going to make any real meaningful difference.

And with respect to the share repurchase authorization, that is a matter for the board of directors, and I am sure they will be talking about that when they get together in December.

Okay, thanks.

Doug Simpson, Morgan Stanley.

Good morning, everyone. Most of my questions have been answered, but I just had. Am I doing the math wrong here? If I take the Commercial segment and improve the MLR by 100 bps, that gives me about $0.30 versus the $0.11 delta that you show on that one mapping chart.

And then if we look at Medicare and we assume 150 basis point margin improvement there, we get about $1.25 -- excuse me, 150 basis points margin pressure gives you downside about $1.25 on a year-over-year basis versus the $0.43. And it looks like to get to that 150 decline, you would need to put basically all $100 million of those cuts against Medicare. Am I doing the math right, and what explains that delta?

I think the first thing I would say is generally, we are not in the business of commenting on people's models. But what I heard you say was 100 basis point improvement in the Commercial. And I said, again, there is that aspect of the guidance, but still within the range, a total 100 change would be probably too big a change given all the uncertainties that we have said and that we have set out at this time of the year.

Okay.

That is why we have a very wide range on our commercial pretext guidance. We have a $50 million range on that.

Okay. And then the Medicare (technical difficulty).

I'm sorry, go ahead.

No, just that the Medicare variance was the bigger of the two.

The Medicare variance basically works its way through the mix of membership as we have talked about. We have got PDP memberships, we've got demonstration and PDP. We've got lots of different mixes there too, so you wouldn't be able to do that. But generally, admin cuts, which is really what your question is focused on, is around a 55/45, 60/40 split between the two, and it would be in favor of government.

Okay. So it sounds like the delta between this math and the numbers you mapped, it is things like member month timing and mix shift; is that there?

That is correct.

Okay, thank you.

That concludes today's Q&A session. I would now like to turn the call back over to you, Mike McCallister.

Well, thanks again for joining us this morning. I would conclude by saying that I think this was a good quarter in an environment of uncertainty. I think it is good news that we are going to finish the year where we thought we were going to, although the moving parts have changed a little bit.

We are actually pretty optimistic about going into 2010. We do have our challenges with TRICARE and the other issues we talked about this morning, but I think the Company is in a position to respond well to the environment. We have worked hard to get to a point with our Medicare business where we really understand what it is doing, where it is going and how to grow it, and how to interact with seniors.

We will continue to be involved in the political conversation. Our members will continue to be involved because we will inform them about how things are changing. And then lastly, I'd like to thank all the associates that are on the call for making this all possible, and also for participating in the political process as our Humana associates have stepped up in a big way to be a part of the conversation and the debate.

So with that, I will close the call this morning. Thanks for being with us.

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