Humana Inc (HUM) 2009 Q4 法說會逐字稿

Good morning. My name is Courtney and I will be your conference operator today. At this time, I would like to welcome everyone to the Humana's fourth-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. Ms. Regina Nethery, you may begin your conference.

Good morning and thank you for joining us. (inaudible) Mike McAllister, Humana's President and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our fourth-quarter 2009 results, as well as comment on our earnings outlook.

Following these prepared remarks, we will open up the lines to 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.

Second, investors are advised to read Humana's fourth-quarter 2009 earnings press release issued this morning. This press release and other historical financial news releases are also available on our Investor Relations site. 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'll turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. Today, Humana reported earnings per share of $1.48 for the fourth quarter, bringing our earnings for the full year 2009 to $6.15 per share, in line with our most recent guidance.

In the fourth quarter and throughout the year, favorable performance in our Government segment, particularly in Medicare, outweighed the negative effects of the general economy, the competitive environment, and the H1N1 virus on our Commercial business. Humana Military Healthcare services remained a solid contributor, as it has for more than a decade.

I will make brief remarks about our government and commercial business performance in 2009 and then spend the majority of my time on our outlook for 2010 before turning the call over to Jim Bloem.

I will start with our Government segment. We were pleased to close 2009 with an appreciable gain in net new Medicare Advantage enrollment. Ending membership rose from just over 1.4 million at December 31 of last year to approximately 1.5 million at December 31, 2009, a net gain of nearly 73,000 members.

We also saw a significant shift toward network product enrollment as we continued to increase the size and scope of our Medicare provider networks throughout the year. Membership in our Medicare Advantage network products grew by 28% in 2009 versus that for 2008. These favorable outcomes were achieved despite becoming the first major company to incorporate member premiums across our private fee-for-service benefit designs.

For 2010, we again structured premiums and benefits to conform to the changing payment environment. However, we are increasingly realizing the beneficial effect of our progress on our 15% Solution, which helps mitigate the effect of this changing environment and allows our value proposition to remain strong. Initial results from the 2010 selling season show higher Medicare Advantage membership retention ahead of previous expectations. I will discuss this in more detail when I turn to 2010 in a few moments.

To update you on TRICARE, we were notified by the TMA in December of its intent to exercise option periods extending the Company's South Region contract through March 31, 2011. The TMA also notified the Government accountability office of its intent to take corrective action with respect to the GAO's October decision that supported Humana Military's protest of the South Region contract award to another carrier. We cannot determine what actions TMA will take and whether it would change the award of the contract.

As a result, our 2010 guidance appropriately includes anticipated charges resulting from the ultimate loss of this contract. In the meantime, we continue to deliver outstanding service under the current contract as we await action by the TMA on the GAO ruling.

With respect to our Commercial segment, the ongoing pressures associated with the general economy, the competitive environment, as well as the effects of the H1N1 virus resulted in a downturn in our results for 2009 versus the prior year. Without revisiting the related details that we reviewed in last quarter's call, we believe that effective monitoring of medical cost data allowed us to begin raising premiums early enough in 2009 to get ahead of these issues for 2010.

Positive developments within our Commercial segment this past year include growth in our individual and specialty benefits businesses. HumanaOne individual membership grew 13% during 2009 and now totals more than 367,000 members. Specialty benefits membership also grew this past year, totaling approximately 7.2 million members at the end of 2009, 7% more than at the end of 2008.

Now let's turn to 2010, beginning with an update on our Medicare Advantage enrollment. Medicare Advantage plan membership grew approximately 220,000 on a net basis this past month, bringing our January 2010 enrollment to 1.729 million. Importantly, we also saw the continued growth in members opting for network-based products. 71% of our fully insured Medicare Advantage (inaudible) enrollment choosing coordinated care plans.

Besides the individuals who are joining our plans, employer groups are beginning to see the benefits of Medicare Advantage as a solution to their retiree healthcare coverage needs. Our breadth of product offerings nationally positions us well to grow in the group Medicare market. With sales on target and attrition coming in lower than we previously projected, we are now anticipating overall net Medicare Advantage membership gains, individual and group, of between 240,000 and 260,000 in 2010.

Standalone PDP sales are generally in line with what we expected, but attrition is higher than forecast. Consequently, we are lowering our membership expectations there and we're now projecting PDP membership to be down 50,000 to 100,000 in the prior year.

Turning to our 15% Solution, as we look to the future, we believe we've taken the appropriate operational steps to succeed long term. Serving the Medicare population through Medicare Advantage and PDP is operationally complex and not for the faint of heart. Humana's depth and breadth of experience with these products will, we believe, make us one on a very short list of successful national competitors because of our relentless and long-term focus on three operating principles -- the consumer at the center, our 15% Solution, and being nimble and smart about benefit and premium design to ensure we preserve our economic value proposition for Medicare beneficiaries.

That, combined with both the demographic growth associated with the aging baby boomers and our capabilities in what is essentially a retail environment, strengthens our belief in the long-term viability of Medicare for our Company.

Administrative cost savings is another important enterprisewide initiative that positions us favorably for the future across all our businesses. As this slide demonstrates, in recent years, our administrative costs grew at nearly the same pace as our rapid revenue expansion, providing many opportunities to now realize significant efficiencies. On the whole, we're taking a deliberate, strategic, long-term approach to creating the efficient and agile infrastructure we will need to position us well for the future.

It still remains too early to tell what kind, if any, of healthcare reform will be enacted in Washington. Rather than focusing on possible outcomes and their potential implications, we are concentrating instead, as we have for the past decade, on initiatives that will continue to position us well regardless of the political environment. They are consumer-focused products driving productivity and medical spending, robust actionable data, and constant innovation to engage our members actively in improving their health and well-being.

In closing, we have this morning raised our EPS guidance for 2010 to a range of $5.15 to $5.35 per share from the $5.05 to $5.25 range we disclosed in our third-quarter call, driven primarily by the extension of our South Region TRICARE contract.

With our proven ability to appeal to senior customers while successfully managing the regulatory environment over more than 20 years, we intend to grow membership in Medicare while enhancing our coordinated care model to keep increasing the value we offer our members. This, together with our anticipation of improved Commercial segment results associated with contributions from our ancillary and specialty businesses, SG&A expense reduction, as well as pricing actions taken in 2009, give us confidence in the 2010 financial projections we've shared with you today. With that, I'll turn the call over to Jim Bloem.

Thanks, Mike, and good morning, everyone. Let's begin with a brief recap of our fourth-quarter results. As Mike mentioned earlier, Humana reported fourth-quarter earnings per share that matched our most recent guidance. However, the components of our fourth-quarter earnings were a little different than we previously anticipated with the Government segment coming in slightly more favorable and the Commercial segment coming in less favorable. We will discuss each segment in detail in a moment.

Also, just as a reminder, the fourth quarter of 2008 included higher PDP claims expenses and approximately $0.04 per share of other than temporary investment impairments.

Turning first then to the Commercial segment, the principal overperformance in the fourth quarter was in our standalone PDP business. As we have mentioned on several occasions throughout the year, this line of business performed very well in the first nine months and the fourth quarter continued that pattern. As we now transition to 2010, we expect our strong 2009 PDP results to continue into 2010.

Although our January 1 standalone PDP membership is down, we anticipate further membership gains associated with the CMS demonstration contract during the remainder of the current quarter. We also continue to expect that we will meet or exceed our target operating margin percent on this PDP productline in 2010. Furthermore, our review of prescription drug utilization levels for January indicates that our current drug claim run rate and metrics are in line with this forecast.

The fourth quarter was also another solid quarter for our Medicare Advantage offerings as well. Now that we have a significant view of our newly added Medicare Advantage membership, we can say that we are pleased with our enrollment in each of the various Medicare Advantage product offerings -- the HMO, the PPO, and the private fee-for-service. These Medicare Advantage enrollment gains continue to validate our ability to design benefits and establish member premiums that are reflective of both underlying medical cost and CMS payment rates.

To sum up, we remain confident in our expectations that our book of Medicare Advantage and standalone PDP offerings will deliver results that are at least in line with our initial expectations again in 2010.

With respect to the military services business, the additional fourth-quarter earnings associated with retaining our TRICARE contract through the full year 2010 is the primary driver for today's increase in our 2010 earnings per share guidance. For now, we continue to anticipate recording charges of between $50 million and $75 million in the second half of 2010 related to the assumed termination of the current TRICARE contract on March 31, 2011.

As a reminder, the principal portion of these charges relates to approximately $50 million of goodwill. The test for impairment of which is based on our updated analysis of the projected cash flows associated with our military services business. We will continue to keep you apprised of the status of the TRICARE contract as new information becomes available.

Turning now to the Commercial segment, our free cash results for the quarter were approximately $16 million below our previous guidance or about $0.06 per share. The primary driver of this guidance shortfall generally was not related to issues that we've discussed throughout 2009 such as the economy, the competitive environment, or the flu. Instead, the fourth-quarter shortfall primarily was due to incurring expenses that are associated with realigning our cost structure in order to improve our run rate profitability. We expect these expenses to make us more cost-competitive going forward and do not expect them to recur in a material way in 2010.

So turning to 2010, we continue to expect commercial pretax earnings in the range of $125 million to $175 million, which we described in our initial guidance last quarter as the stabilization of this segment of our business. Our specialty and ancillary businesses continued to perform well and are expected to be key drivers of our anticipated improved dollar and margin commercial pretax profitability in 2010 versus 2009.

Additionally, our 2010 commercial pretax income should benefit from administrative cost reductions, which I will speak more about in a minute. Further with respect to our Commercial business, we believe that we have addressed the economic and other issues that impacted our 2009 underwriting results and fully considered them in our 2010 guidance. We also have made what we believe to be prudent assumptions with respect to both general economic conditions and medical cost pressures going forward.

Accordingly, our 2010 Commercial pretax guidance does not rely on improvements in the general economy or in cost trends in order to fully benefit our fully insured medical product [platforms].

So as we close out what was a challenging and disappointing year in the Commercial segment, we look forward to improved results in 2010 with the following four factors playing a significant role in the turnaround. First, continued growth in our ancillary businesses such as RightSource and LifeSynch, our mail-order prescription drug and behavioral health businesses respectively. Second, a leaner administrative cost structure. Third, improving and growing specialty businesses such as dental, vision, and voluntary benefit products. And finally, pricing actions taken during 2009 on our medical businesses.

Moving next to our administrative costs, we made significant progress during the quarter with respect to the first $100 million of our administrative cost-reduction goal. These reductions are fully incorporated into our 2010 departmental budgets and as noted in the press release are included in our 2010 earnings guidance.

As you can see from the slide, the proportionality of each class of expense reduction remains approximately as previously expected. So as we look beyond the first $100 million, which is what this effort is really about, we have good visibility into the future benefits we expect to realize from the alignment of our cost structure for the future.

As an organization, we are fully engaged and committed to making Humana competitive for the long term and we are highly confident that we can achieve significant run rate administrative expense reductions from which we will benefit as described in 2010 and to a greater extent in future years.

Now as we do each year, let's look next at the expected earnings -- the quarterly earnings pattern of our 2010 earnings. This slide shows the timing of the items that are expected to significantly impact our results from quarter to quarter. These impact items include our regularly discussed seasonality factors such as, for example, the timing of the Medicare selling season and the quarterly effects of our PDP benefit designs, as well as the ongoing growth and migration of the commercial membership into high deductible health plans.

New this year is the impact of any second-half 2010 TRICARE charges, which I discussed previously should we lose the South Region contract effective in early 2001. Other than those potential TRICARE charges, we do not anticipate any significant differences from our 2009 earnings pattern in 2010. Accordingly, our first-quarter 2010 earnings per share guidance of $1.10 to $1.20 is consistent with our full-year 2010 guidance when compared to the comparable periods in 2009.

Turning now to cash flows from operations, this slide indicates that operating cash flows exceeded $1.4 billion in 2009 versus approximately $1 billion in 2008. 2010 cash flows are expected to be in the range of $1.1 billion to $1.3 billion with the principal difference from 2009 accounted for by the anticipated change in our net income. It is also important to note that the majority of any potential charges associated with the TRICARE contract would be non-cash.

Lastly, with respect to capital deployment of liquidity, we continue to both have and conserve ample capital liquidity as uncertainty around health insurance reform requirements and the general terms and conditions of credit availability continues. We also continue to carry significant levels of aggregate excess statutory capital and surplus in our state-regulated operating subsidiaries.

Cash and investments held at the parent were approximately $665 million at December 31, 2009. As in prior years, 2010 dividends from the subsidiaries to the parent are expected to be declared and paid after the individual state reports are filed and discussed with the various departments of insurance, as well as the credit rating agencies. This process is usually completed by June 30 and we expect to discuss the results in our second-quarter 2010 earnings conference call in early August.

Finally, we continue to have full availability under our $1 billion revolving bank credit agreement as additional liquidity for potential business needs and opportunities. This facility remains effective until July of 2011.

So to conclude, we are very pleased with our overall results of 2009. We are confident that our updated 2010 guidance of $5.15 to $5.35 in earnings per share reflects our organizational expertise, as well as our continued discipline and intentional approach to the current operating environment.

As we begin 2010, we believe that we are both well-positioned to help our members with their healthcare challenges, as well as financially strong and liquid. Accordingly, we expect to be able to continue to provide both strong satisfaction to our members and solid operating results to our owners. With that, we will open the phone lines for questions. 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) Justin Lake, UBS.

Thanks. First question just on the SG&A, you mentioned $200 million last fall. Obviously, you've gotten off to a good start there and you've lowered the high end of your SG&A range to 13.5%. I am just curious, how much of that $200 million now is kind of baked into 2010 numbers?

The answer is still as the answer was in the third quarter, $100 million. Again, the manifestation of that that we are showing today is we have taken the SG&A ratio down 25 basis points to the midpoint.

Okay, so if the answer is the same as it was last quarter, why did you take down the SG&A? Is there something else in there?

Because now as we have gone through -- before, it was a goal. Now it has been implemented and it's in everybody's budget.

Got it, so as it continues to be implemented throughout the year, we could expect to potentially see that number come down?

You will always see us as we make progress going forward. Now we are spending the rest of this year thinking about the run rate for 2011 and beyond as far as administrative cost reduction is concerned.

Right, and then just lastly, on the expected rates to come out, the advance notice on February 19, I am just curious what you are looking at as far as your estimate of where you think that rate might come out and your thoughts on the potential for a multiyear doc fix. Thanks.

Let me start with the rate that's coming up, Justin. I don't think anyone really knows at this point. I guess the point I would make is it's probably not a very relevant piece of information because we have a lot of moving parts and the doc fix, which is the second part of your question, is a big piece of that.

I mean at this point, we've said all along that the doctor's fees would be fixed and as you know, we are in the middle of a two-month extension, which doesn't really fix anything, but it is really indicative of how politically people look at the problem. So I think we're going to see -- no one reasonably believes that doctors are going to see significant cuts in their fees on either side of the aisle.

So at the end of the day, we know this is going to happen. They have to just find the right political structure and the timing and whatever they need to do to make that happen and they have been buying themselves time by kicking the can here and so we'll see how it plays out. I think the timing of all that will be important to those rates and I think at the end of the day, we're going to have to be focused on the end rate as opposed to what happens on February 19 because of everything that is happening.

Great, thank you very much.

Matthew Borsch, Goldman Sachs.

Yes, good morning. I'm just wondering if you could give us an update on the Commercial competitive environment. What are you seeing in terms of the intensity of price competition, maybe how that's changed over the past year or two, and if you can give us any granularity by region, that would be great?

Sure, this is Jim. We've talked in the past about regions of the country that our cost or price competitive. I would say that in the region that we've talked about most in the past year, Texas, we are seeing some mitigation of some of the competitor actions. Other parts of the country though seem to take the place of a Texas. I would point to an area like a Florida where we are seeing some unusual pricing from one of the competitors there.

I guess the message that I would say is that there is always going to be an [abhorrent] competitor and I think that the competitive marketplace in the Commercial lines of business is very, very difficult and more toward the commodity kind of an environment and so that's how we are beginning to step back and evaluate this line of business and manage accordingly. It's difficult to create a value proposition in a place that your competitor can do one thing one day and something completely the opposite the next.

And so what we're focusing on is the areas of the country that make good sense for us, we are stepping back and reorganizing our Commercial business. We are identifying geographies and products that make the most sense for us in parts of the United States, and that's how we're going to go to market going forward. We feel very good about what we are thinking about for 2010 and beyond.

Just a final question, could you elaborate a little bit more on the lower-than-expected PDP drug plan enrollment? Is that related to how your products compare to what's being offered by competitors? Is that across the board or is there a particular competitor or competitors that have aggressive designs relative to yours this year?

Matt, this is Mike. In simplest terms, we think our prices are a little too high generally in that space. And we've said all along and we have seen it over the years and you've watched it, this is a pretty dynamic market in the PDP space and people move pretty quickly. There's incredible transparency around positioning of products and prices and all that sort of thing. So at the end of the day, I think we just got our price a little high and we are suffering some marketshare loss as a result of that. So we will get a chance to relook at that in the fall, or actually in June and we will do it again. It's just the way the market works here.

Okay, makes sense. Thank you.

(Operator Instructions) Charles Boorady, Citi.

Thanks, good morning. My questions are around Medicare Advantage, just past the January hump here. Wondering if you could characterize the lives gained versus lost, the gross adds and attrition in terms of risk score, any other measures of selection bias. And also for 2010, just what you are expecting the average PMPM premium yield to be and what portion of that is member paid in 2010?

Charles, this is Jim Murray. We've obviously looked at a lot of early metrics and data to get a sense for what was taking place in January because we knew that you would ask this question.

I'm becoming predictable.

As respects to the PDP, we have obviously looked at cost per script. We looked at member cost share and we looked at utilization statistics like generic use rates, use of the RightSource pharmacy, 90 day at retail. We looked at a lot of things and we feel, as Jim Bloem said a moment ago, extremely comfortable with what we are seeing in the month of January.

As it relates to the MA, we've looked at the risk scores and we feel good about the risk scores that are coming in. Now I say that because you asked the question because you would like our risk scores to be lower. I look at our lower risk scores as an opportunity because we want to be paid for the risks that we are assuming and we think that the risk scores are lower because they aren't properly reflective of the risks that we're assuming. So we will be working on those over the course of the next year or so.

We have also looked at claims payments and inventories, claim receipts and again, as Jim Bloem said here a moment ago, we feel very good about what we are seeing developing with the MA. We also got, as you know, the large groups and we wanted to make very comfortable and sure of what we are seeing there. We looked at their risk scores. We looked at their claims utilization statistics for the first month and we feel very good about their performance. And so on this January 31 with the data that's available to us, we feel pretty good coming into 2010.

Okay, great. Just one follow-up. I asked about the member paid premium as well, Jim. Do you happen to know for your average MA life, how much they are paying per month this year versus last?

Last year, I think it was $40 PMPM and this year, it's $50.

High $50s.

High $50s.

Thank you.

Josh Raskin, Barclays Capital.

Thanks, good morning. A question around some of the Medicare Advantage growth coming a little bit better I guess than expected for January. Could you help us understand sort of where these members are coming from in terms of how many of them maybe were in private fee-for-service plans historically, and I'm talking more about your network growth right now, how many -- were they previously Humana private fee-for-service or other private fee-for-service? Are any of these upsales from PDP? Are any of these sort of member switches? How much are agents? Just any sort of color on that would be great.

Sure, this is Jim Murray again. There's a mixed bag. We look at our competitive mix or our value proposition in the marketplaces that we go to business in and I would tell you that, coming into this year, we knew that there were a few competitors who were exiting the private fee-for-service business and where they have had historically strong membership, we are seeing some nice results there. There is a market or two where our value proposition doesn't look as good relative to the competition and as you might expect, we are not doing as well there as we had been in the past.

In terms of the PDP and private fee-for-service conversions, they are doing fine. They are not as fulsome as they had been in the past because as our private fee-for-service membership shrinks, we can't convert as many as we had in the past. That goes to some extent on the PDP. Our membership there is more stable and since we have had the conversations with a lot of those PDP members, the amount that we are going to get from PDP conversions hasn't been as high as it has been in the past, so that's an area of focus for us for the remainder of 2010.

But frankly if I were to step back, I would say probably the improvement is a result of two things -- the competitors exiting the marketplace in some areas and also our marketpoint reps doing a wonderful job meeting ahead of time with the members that are part of their network, explaining to them what's going to happen, the members premium changes that we've made, the value propositions, and creating a real relationship with the members that are a part of their book of business and that has helped our persistency for those members, and we will do that more and more and that's why we think that we've got an advantage over others.

Josh, I said for a long time I think the real opportunity in Medicare Advantage for growth long term is going to be retention, and I think we are just beginning to see early indications that some of the newer and different things we're doing around retention are beginning to have some traction. So we are pretty pleased with the progress there, but there's still a lot of opportunity.

Got you. That's helpful. Second question is sort of a follow-up. I think Charles had asked similar questions. What's the total dollar, including -- I understand your member premiums, it sounds like they went from $40 up to mid or I guess high $50s, but total, total dollar PMPM that you are getting in terms of revenue reimbursement in the MA for 2010, what's the expectation?

Charles, this is Regina. I don't have that right in front of me, but we can compute it off the membership guidance and the revenue guidance in the press release. So I will get back with you.

Okay, I guess what I'm coming at is, if I do that math, I am coming up with a number pretty significantly better than what the preliminary final rates for last year were. So I am just trying to parse out how much of that is coming in from you guys versus increase in risk scores or something like that.

Again, I have this now back in front and it's about $900 PMPM in total, including the member premiums.

Okay, thanks.

Kevin Fischbeck, Bank of America.

Okay, great. Thanks. I think you mentioned that there were some extra costs in Q4 in your SG&A related to the cost-cutting issues for 2010. I didn't hear a number. Do you have the size of the costs?

Yes, the number was $16 million.

And that was mostly in Commercial?

Yes, it was in Commercial, [long] Commercial. That is why when we are pointing forward on the Commercial business, we are saying that our previous guidance we said we would earn approximately $120 million and that's basically the difference between the $104 million -- the $16 million is the difference between the $104 million we reported and $120 million. So as you look forward to 2010, we have confidence that we're going to hit near the midpoint of the $125 million to $175 million guidance based on specialty and ancillary and the cost reductions in pricing that have been mentioned.

Okay, makes sense. And I guess the second question would be, as far as the cash at corporate on your balance sheet, what is your thought process about putting that to work? I guess previously I would have thought that healthcare reform would've been a catalyst to help you guys make a decision about how you want to deploy that capital. To the extent that reform is delayed or falls apart, how do you think about where and when to put that cash to use?

This is Mike. The issues and the variables you just outlined are the reasons we are conservative. We don't know where healthcare reform goes next and I don't know if anyone does so we need to be prepared for wherever it may turn. Other than that, I would go back and say nothing has fundamentally shifted. The Company is at an interesting point in its history and we have strategic considerations around which products we're going to focus on, which markets we are going to be in and all those things are things we've been working on for some months in terms of sketching out our future. So we will put this capital to work. We are not going to sit on it long term, but I think it's a time right now to be reasonably conservative and that's going to be our approach.

Okay, great. Thanks.

Christine Arnold, Cowen & Company.

I'm trying to kind of impute what you guys have done on Medicare Advantage. If we take kind of a $40 premium and it goes to kind of up $18, that's 2% of the price cost spread that's kind of a negative 10% that you've covered with member premiums. Could you talk about how much you think you covered with benefit designs and how much you think you will cover with increased risk scores and other factors?

Christine, this is Jim Murray. One of the things that Mike pointed out in his remarks that is increasingly more important than some of the things that you've referenced is what we are referring to as the 15% Solution. When we are able to focus on driving our costs 15% below where the Medicare fee-for-service program is, that creates real opportunity for us to mitigate our premium, our required premium increases and benefit design changes. And we're beginning to see some nice traction in that regard and so that's been very, very helpful for us not only for what we did for 2009, but increasingly for 2010. And as we look to 2011, we are very happy with the trajectory that we've got in terms of what we are able to do around the network-based products and what we can do from a cost-savings perspective. And so a lot of the things that we've talked about in the past, we really want to change the discussion towards a focus on the 15% Solution because that is what we think adds real long-term viability to us as a company.

So how much do you think you can bring costs down in 2010?

Depending upon the type of product design, be it private fee-for-service versus PPO versus HMO, we are seeing 5% to 7% improvement already on the private fee-for-service and that number goes increasingly up above the 15% that we've talked about, particularly around the HMO designs. And so just like there's a product continuum that we've got as a company, the savings potential that we've got is kind of a savings continuum if you will, the more obviously for the higher managed products.

Let me add to that, let me just make it perfectly clear. Long term in Medicare, it will not be possible to be successful with a pure insurance mindset. You can't do enough in premiums and benefits over time given what's likely to happen in Medicare Advantage around the payment rates over time to make it actually work. You have to drive -- and I'm going to be using these words constantly, they are not traditional medical type words -- but productivity and efficiency. Every dollar we find there relieves the pressure on the other things I just described. And so it's going to be a combination of being smart and nimble as we indicated relative to insurance things and hitting the market with the right combination, but the long-term viability of the business is built on management and execution around productivity and efficiency. Without that, it isn't going to work.

So are you going to drive are you saying more than 5% to 7% in cost reduction with the HMO and PPO product, which is the majority of your enrollment?

I am not going to speak to 2010 specifically, but I will tell you it is going to have to be bigger than that and it's going to have to be across all these products over time. That's why we target 15%. We believe 15% is the actual number.

Okay, thank you.

This is Regina. I need to clarify one answer I gave earlier. The $900 PMPM premium on Medicare includes ASO members. So if you look at just the fully insured, it's probably closer to $917 or thereabouts. Next question, please.

Scott Fidel, Deutsche Bank.

Thanks. It looks like you ticked up your medical cost trend view just a bit to 8% from 7% to 8%, but the cost components are all the same. So can you talk about what factors are driving the modestly higher cost trend view?

Yes, there's no difference in the way I recall. I think we've just basically stayed -- each of those components, as you pointed out, have stayed the same and we have probably just come up from the high 7%s to 8%. But I don't see it as any material change from what we said before.

Okay, just in the Commercial business, can you talk about the profitability in the individual segments relative to group at this point? We are seeing the individual enrollment continuing to increase, but so is the MLR. So is it really just that the group results are being pressured or are you seeing some impact too on the individual side?

This is Jim Murray. As we've talked in the past, the target that we have had on the individual is higher than the small group, which is higher than the large group. Because of what has happened with the economy, I would say that there is more pressure on some of their group business than we've seen in the past. And that has driven some of the margin compression that we felt as an organization.

However, we have had some things that occurred relative to the flu and what have you that have impacted all of our lines of business. But generally speaking, the individual block has a target margin of somewhere around 5% to 6%. The small group is more like 4% to 5% and large group is probably more like 3% to 4%, 2% to 4%, something in that range. And the competitive environment is making those a little bit tighter than they have been in the past.

Okay, then just quickly, just what's driving the boost in the other revenue? Is that the ancillary products? I think it's up around $75 million at the midpoint.

Right, it's up $75 million at the midpoint and that's basically a more refined estimate around what's going to happen in our mail-order pharmacy business. The expenses that follow that don't change the overall total both either on the commercial side, which is where those results end up, or in total for the EPS.

Ana Gupte, Sanford C. Bernstein.

Thanks, good morning. My question is about your Commercial book and the premium yields and the medical cost trends for the fourth quarter, they improved sequentially, but continued to be negative. I was wondering what your outlook is for your medical loss ratio into 2010 and what gives you confidence that you will be able to bring pricing in line with costs. Is it pricing? Is it H1N1 that you think might be better than expectations? What's your outlook for COBRA? As you are seeing the risk profile on your commercial book evolve, do you see that turning more balanced with a potentially improving economy?

Well, with respect to the MER guidance, you can see that it is very close to where we ended up last year at the midpoint. I think were 80.6 in commercial for 2009 and we're saying between 80 and 81 for 2010. So those are very close. Again, citing the pricing, the things that we have done before.

We also -- you also mentioned a couple things that we think are somewhat unique to 2009, which were the flu and the COBRA. The COBRA subsidy is probably going to wear off early in the year and then it will continue. That will normalize and we think that the H1N1 has passed us as well. So we don't see the MER for the guidance changing very much from what 2009 was. It was, again, around 80.5.

Okay, thank you. On the PDP membership, you mentioned the $500 million contract. Is your membership guidance including that or excluding that? What type of margins are you anticipating on this contract?

Our guidance says that we have not received all the members yet. When we look at the 1.780 million that we have now, we said that we would probably gain by implication another 50 to 100 members through that contract. The margins on that contract are probably a little bit less than the overall targeted margins, but again it is a demonstration contract where people -- we are the concierge of low-income seniors who become eligible based on their income for the subsidies. They come to us and then they go on off into their auto-assigned places. So that's generally the story on the contract.

Final question, on the days claims payable, the end-of-year number has been trending down from '07 and '08 onward. Can you give us some color on that and the outlook for that?

I'm sorry, could you repeat the question?

Why is that days in claims payable went down?

Oh, okay. There are basically three good reasons for that. One is our process claims inventories are down substantially, indicating again receipt cycle time being less and the fact that we are paying faster. The other two are timing initiatives with respect to the cut-off and with respect to pharmacy and an acquisition that we did in '08. So it's a four-day reduction. Half of it was the faster receipt cycle time and the lower claims inventories.

John Rex, JPMorgan.

Thanks, and I apologize if I missed this, but could you give us the specific gross numeric adds and losses in MA that worked down to your net number and also the specific number of PFFS lives that were converted to network-based products as of Jan?

This is Jim Murray. I am going to exclude what we refer to as plan-to-plan changes because I think that's the number you really want and for the AEP, it was around $370,000 sales in terms of around 150. Then for the full year, we're estimating sales of around $620,000 in terms of around 370 I think to the midpoint.

And that would include the group sales.

That includes the group sales of about $190,000.

And then on PFFS conversions?

I think that is -- and I said this earlier, because our private fee-for-service membership is shrinking as we want it to, we're going to get less conversion than we have in the past. In the past, we've gotten 90,000 conversions and I think we're targeting around 70,000 now, but we will try to make that number as high as possible.

PDP to MA?

This is just PFFS to MA, so targeting around 70,000 you said?

Correct.

Great. Then just back one thing just on that other revenue line, just so I understand a little better, understanding it's not driving earnings, but with PDP membership having swung so much the other direction commercially, why are revenues in that line going up 30%? I'm just trying to understand what would drive a 30% increase even with lower membership in something like a PDP plan?

I think you sort of pointed out, it didn't affect earnings and I think what we did is we really didn't have a very good estimate when we did it the first time. We have a better estimate today, so that's basically the main reason.

So rising from where you've been I guess, also just maybe even thinking about it then from the '09 run rate, what would be the impact?

Higher Medicare Advantage membership because, again, we are going up -- we raised it 40 again today and we are up 220 in January.

Remember that most of our MA membership has a drug benefit.

Right, okay, and you are not offset by -- that does -- that's not offset by what is going on in Part D then?

No.

Why would that be the case? I guess I'm struggling with -- you are down a few hundred -- Part D is down also from where you were last year by a reasonable amount. I am just trying -- so it's just the -- your all-in Medicare membership, if I took Medicare Advantage and Part D together, and you think about kind of where that membership base is running this year versus 2009?

Help me -- this is Jim Murray. I apologize for not getting you a quicker answer, but if you could step back and say what is the real question that you are asking so that we can --

I guess I want to understand what drives the other revenue line, so you said it's scripts. It's mostly the mail-order, and so when that is kind of rising pretty significantly still on membership, but when you take all in kind of the membership that would be [tagged] to this --

Have you counted the ASO contract for 30,000 Medicare members that we have gotten this past year as well?

So you'd be getting some on that, too?

Yes, there's 30,000 Medicare members that is being accounted for as a self-funded account, which would be included in that line as well. Then there's the growth in the RightSource, not only from the membership that we have, but also our existing block of Medicare business. We are constantly trying to increase what flows through the RightSource subsidiary and as that increases, that other revenue line increases. So we're sitting here struggling trying to figure out exactly the dollarization of that and perhaps, Regina could help out on a --

No, that's all right. I just thought if there was a quick answer. Thank you.

The original estimate though was not very much higher than 2009's result of 240. I think some of the difference you are looking for is in the weakness of the original [item].

Carl McDonald, Oppenheimer.

Thanks. In the Commercial business, recognizing it was a difficult year, it looks like your earnings were down over 50%, which is a lot worse than what we are hearing from the peers. Is there anything that stands out that would be specific to you guys versus the rest of the industry?

This is Jim Murray again. I would quickly point out that our earnings are lower than the others as a starting point. And so when you say that we -- our earnings were down 50%, that's because the dollar amount of our earnings was a much smaller amount than any of our competitors. And so if you would look at the amount that any of the competitors are down relative to where we are down, and you'd look at our MERs versus their MERs and our admin versus theirs, I'm not sure that you would come to the same 50% down question, so I'll just point that out to you.

But I would say that as we look at what our MER statistics are versus the competition and we look at the economy impact and the flu impact and the competitive environment, I would suggest that we are not down significantly more than any of the competition. And so I just think it's a matter of us having a lower earnings from our Commercial base and that base got chewed up a little bit as our MER deteriorated 100 basis points or 200 basis points. But again, the base was lower than any of the larger national competitors that we are compared against.

Even with the expected improvement that you are looking at for 2010, I think that still works out to a margin of less than 2%. Do you think there is a need to take a deeper look at the scale and potentially reorganizing it with geographies or the products that you are in on the Commercial business?

This is Mike. The answer is of course, yes. Are we happy with that margin? No. We are also in the same game with everybody else and everyone else has had problems this year in the Commercial space. I would quickly say thank goodness we were diversified into a number of government lines of business, which [had] the Company perform very well in '09 by the way. But I will tell you, that's exactly what we have been up to for about seven, eight, nine months, is looking at all of our lines of business, Jim referenced it earlier, with a focus on our Commercial space and deciding exactly where we can or cannot compete and where there are scale implications, what the meaning -- how they affect us.

In terms of the total Company, we have plenty of scale across IT investments and that sort of thing because of our other lines of business. But in the Commercial space, geography has always been important. The underlying cost of services through networks can define your competitiveness no matter what else you are doing. So that's the sort of thing we have to look at. What products are we going to be in? What geographies should we be in? That's exactly what we have been doing and we will work to refine where we compete in the Commercial space over the longer term.

What you're hearing from us I hope is sort of a leaning into the idea that the closer we can get to the individual consumer around businesses where we're directly selling to them, whether it be the dental business, other lines of business where we have voluntary products, which we have been working on, Medicare, all those places where we can get close to the consumer is where we are most interested. So am I waking up every day trying to figure out how to deal with a multilocation large employer on a fully insured basis, absolutely not and we will not be.

Matt Perry, Wells Fargo.

Good morning. A question on cash flow for Jim. Can you remind us what your contributions to the subs were in 2009 and what you expect for 2010 subcontribution? I know you don't necessarily maybe want to discuss details on how much you could dividend up from the subs in 2010, but if we look at net income maybe correlating with those dividends, should it be higher than you were able to dividend up this year -- sorry -- in 2009?

First of all, with respect to the contributions, they were $135 million and I would say that's probably a good number to think about as we talk about 2010. Dividends last year at $775 million, we won't complete the statutory filings until the end of February and that will give me a much better idea of where we will be on that. But I do expect, based on the aggregate excess surpluses that we have, that we will do very fine to get the dividends because, again, we've had a very good year in terms of income and we've got very appropriate levels of surplus (inaudible). I just can't -- it's just not an appropriate time to give you a number on that, but we do feel good about where we are and where we think we should end up given where we were let's say at the end of the third quarter.

Okay, and then second question maybe for Mike, I think you have given us a lot of kind of big picture long-term thoughts on this call both on the Commercial business and on how you can maintain your Medicare product. If I can ask you to think out maybe and connect the dots, if we look out three to five years, do you think the revenue and earnings base of the Company is kind of flat versus where it is in 2010 or up or down?

Well, I'm not going to get into any projections that are that far out. I will say that my view of the Medicare business is that it remains a growth opportunity for us. I think we will be one of the few that actually remain committed to it and actually can succeed there. I think whatever happens in Washington at the end of the day, I think there going to be private-sector alternative in Medicare and we are positioned well to do our part there.

So I think as an underlying view of the Company, I think our growth engine and our earnings engine has been our government line of business and I think they're likely to remain a huge component at what we do long term. Our question is, and strategically we are asking it every day, is what else can we wrap around this? What other lines of business do we want to be in? Where can we be close to the consumer? I think our strategic questions are going to be what can the Company look like three to five years down the road with that focus as opposed to looking backwards at a more traditional commercial insurance environment.

I think the thing we have going for us, which is the most powerful, is the baby boomer generation, the clock is a powerful thing. It's unstoppable. These people are going to turn 65. They're going to fall under the responsibility of the US government for much of their medical spending and the US government historically has shown no ability to control that. They're going to have to turn to the private sector under some scenario and ask for our help. Whether it is the way we are currently paid or not, we will have to determine that over time. They need us because they can't afford the current commitments to seniors.

If I could just squeeze in one clarification, the fact that healthcare reform may or may not actually happen, that doesn't change your long-term view that Medicare Advantage reimbursement is going to be reduced, does it?

Not really. We've always said that, over the long term, that, at the end of the day, the government needs to get value from us, as well as the individual consumer. So our mental model from the very beginning was that these rates would ultimately work their way back to at least where the old program was and that is the way we've built our business. That is why we started building networks years ago. That is why we are not all that frightened by 2011 and private fee-for-service going away because that's always been our preparatory work. And so that's why I remain reasonably comfortable. As long as I am trying to outperform the old Medicare program, which is at the core what this is all about, that's something I am willing to do because the old Medicare program is a mess. It's a perfect storm for inflation and if that's the standard against which we have to operate, then I think we'll be fine.

Doug Simpson, Morgan Stanley.

Good morning. A lot of my questions have been answered. Mike, maybe just quickly sort of building on that point you were just talking about, can you just give us some color given your presence in the Medicare side of the business, what is -- when you are having inpatient pricing discussions and you're sort of looking out a year, do you think the hospitals are focused on the migration issue you just talked to from the 64-year-old on a commercial plan aging into the Medicare program? How much of that is at the forefront or at least on the radar as they are thinking about pricing with you guys looking out a year or two on the Commercial side I mean?

Let's just face it, it's easy to predict what's going to happen. If you are a hospital and you have this baby boom dynamic working out, you have more people going into Medicare where you are being underpaid for your services, you have to raise your prices to other payers, which means there's going to be more and more pressure on the commercial side of the business from hospitals for higher prices to offset the implications of the aging population.

Now it doesn't happen real fast and doesn't happen overnight, so I think they'll be able to manage all that, but I think that there's no question that the pressure -- there's going to be growing pressure on the commercial business for hospital pricing because the hospitals have no choice.

Okay, Jim, maybe I could just ask just to clarify. I don't think you gave a number for the dividends expected midyear. You are waiting approval from the states. Is that -- I can't remember if you've given us this number in the past at this point in the year. Is there anything new or different or is it just you want to wait and see exactly where that shakes out?

No, it's the same process. We put together the filings and then we go see the states and the credit rating agencies (technical difficulty). Generally it's all wrapped up by June 30 and we tell you in the second-quarter call in August how we came out. But again, I feel good because we have had a very good year and we were starting with very good capitalization.

Okay, so as a baseline, we could probably use this year's experience for modeling purposes?

I would -- that's what I'd bet. It didn't go all the way to that. I went to -- we had a very -- we had a great pick-up this year in getting $775 million, which is only $296 million in 2008. So again, there were a number of factors that played into that, including the 2008 results, which weren't that good. Plus the fact that we -- but again plus the fact that we had to put a lot of capital into the subs in 2008 and we lowered that to $135 million. The capitalization is good. We feel like the year is good, so we should have a good year as we go out.

Okay, great. Thank you.

You have no further questions at this time.

Okay, well, let me just close by saying we put to bed '09. It was a good year for the Company and I think in the environment we operated in, I think that's something to be proud of. We remain positioned well when it comes to Medicare, both short term and long term, and are prepared to deal with whatever scenarios are presented to us relative to healthcare reform should there be any. And I'm very optimistic around how 2010 looks and the guidance we have given you today. So with that, I'll thank all the Humana associates that are on this call for making the performance we've shared with these folks this morning possible and look forward to talking to you again in the second quarter -- first quarter -- report the first quarter, yes, that's what I meant. Thank you. See you.

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