Humana Inc (HUM) 2010 Q1 法說會逐字稿

Good morning. My name is Andrea and I will be your conference operator today. At this time, I would like to welcome everyone to the Humana first-quarter 2010 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). I would now like to turn the call over to our host, Ms. Regina Nethery, Vice President of Investor Relations. Please go ahead.

Good morning and thank you for joining us. In a moment, Mike McCallister, Humana's President and Chief Executive Officer and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our first-quarter 2010 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 this morning's press release, as well as in our most recent filings with the Securities and Exchange Commission.

Today's press release and other historical financial news releases are available on our Investor Relations website. All of our SEC filings are also available via the Investor Relations page of Humana's website, as well as on the SEC's 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. Today, I will comment briefly on our first-quarter results and then speak to why we believe the change brings opportunity. In our case, an opportunity to grow, not only in existing areas like Medicare Advantage despite the challenges of the new reform law, but also in new products and services around our strategy of helping all consumers achieve lifelong well-being.

We have long operated in a challenging environment and believe our focus on the consumer has been the driver of our success in Medicare Advantage. Going forward, this same focus exemplified in our perfect service initiative, our member guidance and our wellness programs will remain in Medicare Advantage and will be increasingly evident on our commercial products. Well-being includes our health insurance business, but also embraces emerging opportunities in consumer rewards, financial protection products, aging in place for seniors and other areas you will hear more about throughout the year.

Let me begin by offering a summary of the first quarter's results and operational highlights from our Commercial and Government segments. Today, Humana reported earnings per share of $1.52 for the first quarter, an increase of $0.30 over the prior year's first-quarter results of $1.22 per share. This quarter's results are significantly higher than our previous forecast of $1.10 to $1.20, reflecting both higher-than-anticipated favorable prior period reserve development and a higher effective tax rate. Were it not for these items, our results would have been near the top end of our previous guidance. Jim will elaborate more on the quarter in a few moments as part of his comments.

Moving now to our business operations; let's start with our Commercial segment. First, we have raised our 2010 Commercial pretax guidance to $150 million to $175 million, primarily the result of favorable prior period development of $14 million. Additionally, we saw favorable progress on three important fronts -- a leaner administrative cost structure, accelerated growth in our ancillary and specialty businesses and the beneficial effects of taking premium actions in 2009.

At March 31, 2010, our specialty membership stood at 7.2 million compared to 6.5 million specialty members at March 31, 2009, an increase of 11% year-over-year. Overall commercial medical membership at the end of the quarter was 3.3 million compared to 3.5 million a year ago, reflecting the general economy.

Turning now to our Government segment; I will start with our TRICARE business. Our Humana military associates continue to deliver exceptional service to our TRICARE beneficiaries. Relative to our contract, there has been no further word from the Department of Defense since the end of December. It was then that the DoD notified us it would be taking action in response to our protest being upheld by the Government Accountability Office, that we still don't know the type of action to be taken. Until we hear otherwise, we continue to anticipate that this contract will end on March 31, 2011.

Moving to our Medicare business, we experienced a successful open enrollment period for Medicare Advantage and followed that up with the execution of an alliance with CIGNA this month, which we believe provides meaningful opportunity for expanding our group Medicare presence going forward.

Progress around our 15% Solution helped drive the higher-than-anticipated favorable prior period development we recognized in earnings this quarter. As we have said in the past, we believe our 15% Solution allows the economic value we deliver to seniors to remain strong during periods of reduced government funding. We believe members continue to choose our plans due to the better value proposition they provide compared to their alternatives.

Further, our network plans, which have the most compelling value proposition, continued to gain in popularity with approximately 72% of our April 2010 fully insured membership in network-based products. This speaks to the work our network and product development teams have done over the past several years to ensure our members have an offering that includes an ample and effective provider network.

Many of those on this call have asked about our risk of transitioning our 480,000 private fee-for-service members throughout the US as we look to 2011. We believe this same network provider development team has done a great job of positioning us well by developing the provider networks required to protect our private fee-for-service plans in nearly all of the country.

By the start of 2011, we expect to offer network-based products to approximately 90% of our current private fee-for-service membership. Approximately half of the remaining 10% reside in counties unaffected in 2011 while the remaining 5%, or 22,000 members, will be at risk. These members will return to traditional Medicare, but will need a Medigap and Part D plan, both unavailable from Humana. We anticipate keeping many of these members in other lines of business. Our positioning for 2011 is a testament to our ability to strategically plan for changes and then execute on the course of action necessary to succeed in spite of a volatile environment.

You have heard me say on previous calls that we have been preparing for health reform over several years. Now let me go into detail on how we have prepared in one of the most important parts of our business, Medicare Advantage.

Over time, we anticipate Humana will be on a short list of national footprint participants in Medicare Advantage that have the requisite size and scale to adjust to a changed payment environment. Beyond our size, our breadth and depth of operational experience has been a key element to our many years of Medicare success. Most of which were marked by payment volatility.

Our team is highly experienced from the middle-management to senior executive level. It is this longevity and effectiveness that has shown its mettle in successfully overcoming a variety of challenges while more than tripling the size of the Company through largely organic growth over the last 10 years.

Our 15% Solution, which represents our commitment to provide coverage and services to our Medicare Advantage members at a cost 15% less than what it costs traditional Medicare with better quality, is the best way to illustrate our preparation. The signature element of our 15% Solution is our ability to engage the member. As this slide shows, we are able to achieve significant results by focusing our engagement programs most heavily on the 5% of our membership responsible for 40% of our cost.

This is why working closely with a small number of members produces disproportionately positive results. For example, Humana Cares is our complex care management program, which combines home visits, telephonic support and importantly, community resources for our most vulnerable Medicare members. It significantly reduces costly hospital admissions and other costs and quality benefits.

The program is expected to double its enrollment and cover nearly 50,000 members by year's end. Historically, Humana Cares has produced savings of $4 for every $1 invested in infrastructure. When you consider that the costliest 50,000 Medicare Advantage members account for over $3.5 billion in annual medical costs, it is clear why we are confident in the 15% Solution.

Similarly, other programs like Integrated Medical and Behavioral Health, Medication Therapy Management and disease-specific programs are also expected to experience significant enrollment gains this year. By year's end, we project approximately 200,000 of our Medicare members, or between 10% and 11%, will be enrolled in care management programs that have historically produced returns from $2 to $8 for every $1 invested.

Most importantly, our clinical care infrastructure development continues as planned, helping to drive us closer to seamless integration of clinical and administrative services for our members. We use data analytics to target the members most in need of the programs like those I just described. These analytics then combine with Care Hub, our clinical integration guidance system, utilization management processes and supporting care programs, which include important integration with community resources, resulting in improved health metrics, which in turn lower utilization (technical difficulty) member and the Company.

Now let me show you how all this comes together. Many of the analysts on this call have asked how our membership breaks down in terms of the Medicare fee-for-service cost quartiles spelled out in the new health insurance law. As you'll see from this slide, we expect to receive payment rates between 95% and 100% of traditional fee-for-service rates or approximately 64% of our current membership under the new payment structure.

Notably, as the pie charts on slide 9 shows, over 70% of our members are already at least 10% below traditional Medicare cost. Given this good progress, we believe the takeaway is that we are very well-positioned to have our costs at least 15% below the traditional Medicare program's cost by 2014.

A broader perspective and a backward glance also yield the observation that Humana has successfully mastered several other periods of Medicare payment restraints, most notably by making strategic market-by-market decisions in the wake of the Balanced Budget Act of 1997. We balanced annual reductions in our Medicare benefit ratio with a sustained value proposition, thus leaving us poised to take maximum advantage of the Medicare Modernization Act when it passed in 2003.

In summary, we have successfully anticipated the new Medicare Advantage payment environment and we are aiming to focus on Medicare beneficiaries by adding and expanding provider networks, increased product offerings and developing member focus coordinated care services that distinguish Medicare Advantage from traditional Medicare.

With our singular focus on delivering to seniors we serve with a value above the traditional Medicare program and with the coming age wave of baby boomers turning 65, we believe our Medicare business will not only remain solid, but will continue to grow.

Together with stabilization in our commercial operations and growth in ancillary and specialty products, and a strong balance sheet, we anticipate continued success in 2011 and beyond. As our results this quarter and our guidance for the remainder of 2010 indicate, we are ready for the post-reform world, a world where we believe, one, margins will be under pressure in light of the medical expense ratio requirements; two, only major competitors will have the long-term scale and strength to thrive in an atmosphere of margin compression; three, our enhanced well-being strategy will open doors to new markets and revenue sources, as well as adjacent business opportunities producing a larger company less reliant on underwriting profits; four, a relentless focus on cost saving on both the medical and the administrative side will keep us more than competitive; and five, significant opportunities do remain.

Change brings both challenges and opportunities. The challenges of the new insurance market reforms are substantial, but we feel we have demonstrated our ability to overcome substantial challenges before and we are confident we will be able to do it again. With that, I will turn the call over to Jim Bloem.

Thanks, Mike and good morning, everyone. Today, we reported $1.52 in earnings per share for the first quarter and raised our full-year earnings per share guidance to a range of $5.55 to $5.65.

Let's start by reviewing the three primary drivers of today's changes in earnings per share both for the quarter and for the full year. First and foremost, we experienced higher than anticipated favorable claims development from prior years' estimates. As we have discussed in the past, our reserving practice is to consistently recognize the best point estimate within a level of confidence required by actuarial standards.

When we recognize a release of claim reserves that is not in the ordinary course of business, we disclose the amount. For the first quarter, we estimate that amount to be $100 million, or $0.37 a share. The reserve table on page S-11 of this morning's press release shows approximately $308 million of favorable development since December 31, 2009. This is a greater amount than we had expected. Again, about $100 million of this amount is not expected to recur in future periods and accordingly, in the first -- it benefited the first quarter by $0.37 a share.

There were several factors that resulted in the better-than-anticipated reserve development. The primary factor was claims processing improvements, particularly in Medicare private fee-for-service where we continually are focused on eliminating waste and provider overbilling. Additionally, but to a lesser extent, fourth-quarter 2009 utilization played out slightly better than originally estimated for both our Medicare and commercial businesses.

Looking back at 2009, after giving effect to the claims runout, we see both Medicare and commercial medical cost trends being about 20 basis points better than previously estimated. Not a huge change, but moving in the right direction. Accordingly, we haven't projected forward much of these minor cost trend improvements since it is still early in the year.

After favorable claims development, the second item impacting our 2010 first-quarter earnings per share both in the quarter and for the full year was the increase in our effective income tax rate. The increase primarily is caused by the non-deductibility of certain items as a result of the new tax reform law. We now expect an effective income tax rate of between 37% and 37.5% for the full year, an increase of about 125 basis points at the midpoint from our previous estimate. This increase unfavorably impacted the quarter by about $0.04 per share and the full-year forecast by about $0.10 a share.

Third and lastly, we had a few other items that improved incrementally, driving a $0.04 per share of higher-than-expected earnings in the first quarter and $0.08 per share for the full year. No single item was all that significant, but two that I will mention are the increase in Medicare Advantage membership, which is tracking slightly ahead of plan and increased investment income where we modestly increased the related forecast.

Turning now to selling, general and administrative expenses, we continued to realign both our cost structure and organizational competencies for the future. In February, we announced 2500 position eliminations by the end of this year with a net workforce reduction of 1400 positions after giving effect to another 1100 positions we are adding to support growth areas of the Company.

The position eliminations are occurring primarily through attrition, process efficiencies and outsourcing. As you can see from the slide, our full-time equivalent positions, or FTEs, have been tracking down for over a year. While difficult for our associates, we continue to simultaneously create employment opportunities to help us prepare for the future.

Moving toward the first milestone on a continuing journey to achieve a leaner administrative cost structure, we remain comfortable with both the $100 million of savings we have reflected in our 2010 earnings per share guidance and the at least $200 million of run rate savings to be achieved by the beginning of 2011.

Turning next to operating cash flows, we enjoyed strong first-quarter operating cash flows of $755 million, which differed from the relatively weak cash flows we experienced in the first quarter of each of the last two years. As the slide indicates, there are four factors associated with this year's $709 million of improved first-quarter cash flows.

The largest contributor to the stronger operating cash flows was the addition of over 200,000 more Medicare Advantage members since the end of the year than in the first quarter of 2009. For this increase in Medicare Advantage membership, we received the full quarter's premium revenues, but due to initial claims payment lag that normally occurs from the date services are rendered to when the resultant claims are paid, we did not pay a full quarter's level of medical claims.

Additionally, 2009's first quarter was unfavorably impacted by significantly greater PDP membership losses and the corresponding claims runoff. The total of these two items was $338 million of the $709 million difference.

Another item favorably impacting our cash flows was the temporary increase in claims inventories of approximately $160 million. This increase also primarily resulted from the growth in Medicare Advantage membership and the accompanying provider learning curve, which occurs when a member switches from traditional Medicare to Medicare Advantage.

Lastly, the remainder of the increase in the year-over-year cash flows improvement resulting from a combination of an increase in net income, income tax differences and normal working capital fluctuations.

Looking out to the full year now, we have increased our cash flows from operations guidance range to $1.2 billion to $1.4 billion due to the increased visibility into the remainder of the year and our increased full-year earnings guidance.

Finally, with respect to capital deployment and liquidity, we continue to both have and conserve ample liquidity and capital. This enhances our ability to continue to compete effectively in the environment that we are now approaching.

We also 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 $730 million at March 31, 2010. As in prior years, 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 and credit rating agencies. Those discussions are going well and are anticipated to be completed by June 30. We expect to discuss the results in our second-quarter earnings conference call in early August.

To conclude, we are pleased with both our overall and operating results for the first quarter of 2010. We are confident that our updated 2010 guidance range of $5.55 to $5.65 in earnings per share reflects our organizational experience, as well as our continued discipline and intentional approach to the current and coming operating environment.

As we move into the middle of 2010, we believe that we are both able to help our members face the uncertainty that comes with the coming changes in our healthcare system, as well as financially strong and liquid. Accordingly, we're well-positioned for continued success in providing 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 color ask only two questions in fairness for those still waiting in the queue. Operator, will you please introduce the first caller?

Matthew Borsch, Goldman Sachs.

Yes, thank you. Wondering if you could just remind us what the tax rate, higher tax rate issue relates to? I know you said health reform and maybe I missed it, but what component specifically is that driven by?

Matthew, the principal reason is the fact that executive compensation under the new law is limited to $500,000 per year for years beginning January 1, 2013. However, it is on all amounts that are earned after 12/31/2009. So accordingly, in this quarter, we had to do a catch-up and for this year, we will then be going forward on the equity grants that are outstanding and that are expected to be exercised during 2013 and beyond.

You remember that the compensation of $500,000 also includes the proceeds of such exercises or the vesting of such grants. So basically, the health insurance industry is going to be taxed much like those companies who received TARP funds.

I got it. Okay. Thank you. And also on the topic of health reform, but on a different angle, as we try to look ahead to the yet-to-be-published regulations on minimum medical cost ratios, is it fair to break down your commercial risk membership as approximately a million members in the small group under 100 and individual category and the remainder being what would be defined as large group? Can you just -- any thoughts you can offer in terms of your current ratio, sort of 80 to 81 for this year and the same last year, how that might break out at all between the group sizes or how you expect to tackle this regulation, which admittedly we don't know exactly how it is going to apply?

This is Jim Murray. The numbers that you referenced are pretty close, about 370,000 individual members and around 625 to 650 small group, 2K to 100K sizes. The MERs that we experienced from those different lines of business, as you might expect, vary. When we look at the small group medical expense ratio being 80% in the regulations, we feel pretty comfortable that that will be fairly insignificant in terms of exposure for us. We are running fairly close to that number now.

The large group issue is one that we feel very comfortable with. The area that we are going to have some issue with with the 80% is on our individual business. That runs below that. But right now, obviously, the guidance that we are getting in terms of how the MERs are going to be calculated is yet to be determined. We don't know whether it is going to be based upon states or legal subsidiaries or consolidated and we don't know how expenses and revenues are going to be included in that. So there is lots of stuff that has to come out over the next several weeks and months, but we are doing lots of things to prepare ourselves for that and try to come up with tactics to operate in that kind of an environment.

Let me follow that up though -- I might as well preempt a couple questions I am sure we are going to get. We have not changed any business practices yet relative to the individual business because of that MLR requirement. We are in the process of accessing exactly what that is going to look like. We have a fair amount of flexibility. I can tell you directionally it is going to require getting your admin expenses very, very low. So that brings up all sorts of questions around scale and distribution models and all those sort of things, which are still under review. We have not changed anything relative to that marketplace yet.

But just one last follow-up, when you say you think you are probably okay on the small group and (technical difficulty), am I correct that that assumes, of course, that -- or am I correct that that assumes that it is going to be -- that regulation will be defined as a consolidated entity? Wouldn't it be more complicated if it is defined at the state or insurance subsidiary level?

Yes, when I referenced that for small group and large group, I was actually thinking it would be defined at a much more granular level. There is obviously some states where we have some issues, but we don't think that the impact is significant for small group and large group business.

Okay.

But you are right; the smaller the unit, the more variability there is going to be in all this.

Right. All right, thank you.

(Operator Instructions). Josh Raskin, Barclays Capital.

Hi, thanks. Good morning. Very helpful I think the breakout that you guys gave around the costs relative to fee-for-service for your book of business. I guess is there a way to look at that by product as opposed to by county? So your HMOs versus your PPOs, where would you determine your cost structure versus a traditional fee-for-service program?

Well, I will start and Jim will probably jump in here. I mean, at the end of the day, directionally, the HMO is always the most cost-effective model. Now it happens to be that, as you look at some of those pie charts, the HMO overlay with the lower paid locations is pretty good. So it doesn't line up to poorly relative to how we are paid versus the type of products we have.

I think the opportunity and the challenge longer term, and this is where we are going to try to outperform everyone else in this business, is to bring as much of that really disciplined integrated medical management into the other productlines over time that we have in the HMOs.

The second piece of that is to continue the HMO capabilities, so we have got a lot of new locations and states and counties going forward where we are going to be really pushing the idea of HMO management. So in some ways, this is a little bit back to the future relative to Medicare managed care. I think we are going to see more HMO, but I think there is still an opportunity to provide a great deal of clinical management and productivity in those other productlines.

I guess, Mike, I was looking at your 15% Solution, so just with the understanding that you guys are moving towards that benchmark. You showed a slide that said 744,000 lives were already sort of attaining that solution, 15% or better relative to fee-for-service. Another 500,000 were somewhere between 10% and 15% below fee-for-service and then there are sort of 479,000 that have progress to go that are less than 10%. Is it simply, okay, 480,000, that's kind of the private fee-for-service, that is where you have got a lot of room to go and then sort of the breakout between the HMOs and the PPOs is where I am curious relative to that necessity to get down to that 15% Solution?

This is Jim Murray. As you might expect, and just to reiterate exactly what Mike said, we obviously do much better with the HMO model and I will reiterate what he said about that would likely be the model of the future in terms of a low-cost structure. You can rest assured that, on a regular basis, we study not only county, but also how we are doing in each of the three productlines.

Private fee-for-service is doing the least in terms of a solution towards the 15% Solution, but as we sit here today, we are extremely positive about what we have been able to accomplish, not only in the HMO, but also in the PPO because, as we have told you in the past, our long-stated goal is to migrate all of our private fee-for-service members into the network-based options, which include PPO and HMO. And we feel very, very good about where we stand relative to our PPO progress towards the 15% Solution. And we think that over time as we get closer to some of the changes that are going to take place in 2014 with the minimum MERs and our 15% Solution, we feel very good about how we are positioned with both our PPO and our HMO offerings.

Strategically, I would go to even a different place. I mean you could make the case for Humana, maybe not for the industry, that the requirement for networks is a positive because it does two things. It nudges the customers toward a network product, which over time will be more cost-effective and it nudges some of our competition to the side. So I think the fact that we have spent several years getting ready for the network requirement is going to turn out to be a really good thing.

Okay. Just one quick follow-up on the inventories. Just what is causing the increase in the inventories to sort of levels we haven't seen before? And any comment on customer service metrics that you have seen while this has occurred?

No, customer service is fine and the inventories are a temporary increase due to the fact that there was a provider lag basically with new group members who came from other places into our place into Humana. And those claims didn't really come in until the end of -- well, mid or end of March and so therefore, the inventories increased by 160 to 5.6 days versus 4.2 days. So that is all temporary and it is reversing itself.

To your question on customer service, a lot of our claims that come in go first past 80% to 90%. So although we got the claims in in the latter part of March, we were able to move a lot of them out. And at the end of the year, we found -- or the end of the quarter, we found ourselves with a temporary increase, which resolved itself in the month of April.

Okay, perfect. Thanks.

Christine Arnold, Cowen.

Good morning. Thanks for all the detail and also for breaking out the prior period (technical difficulty). That was helpful. As we look at Medicare, you grew about 200,000 Medicare Advantage members. Can you give us a sense for how many members are new when we account for the churn? And then you mentioned that you have got this inventory. You've probably worked through a lot of it. Can you just give us a sense for your line of sight on where those trends are coming in for those new members in light of whatever churn you might have seen?

For the first quarter, excluding plan-to-plan changes, individual sales were around 240,000 new members exclusive of the group, which was 190 and terminations were around 200,000. All of those numbers are very close to where we were last year at this time. And as we look forward, we feel pretty good about what we see in terms of the rest of the year. We refer to that as the ROY and our ability to add some nice membership over the remainder of the year.

One of the things that we constantly do here is study claim payments and claim inventories and utilization and claim receipts information and so we have, as you might expect, studied the heck out of all of that information to get ourselves comfortable that the new members that we receive this year don't look any different than our existing base of membership. We feel very good about the risk profile of the membership that we receive. That includes the new groups that we put on the books. We have done lots of analyses and studied utilization trends and scripts per thousand and days per thousand and feel very good about what we are seeing develop in the first quarter.

And Mike, last quarter, you mentioned that you kind of thought the commercial business was looking kind of commodity-like and I kind of sensed you were thinking about changing your commercial strategy. You said you were going to be examining different geographies and products. Could you just elaborate on what you meant?

Well, it's -- I think there are a few things we can look at from the reform bill that I think give us some look into the future. I mean to the extent these exchanges get up and running and become a viable marketplace, I think the individual business is going to get larger. I think there will be employers dropping coverage and sending people to the exchanges of all sizes.

So I think it is important for us to get focused on how do we participate in that market when it really becomes effective. Now it is several years away, but I think the individual market is something that is going to be very interesting going forward and despite whatever short-term challenges may come from MLR requirements, I think it is the place to be long term and I think we are positioned well to deal with all that.

So I like -- I have said it forever. I like retail direct-to-consumer business. That is why I like Medicare and it is why I like some of the specialty products, voluntary products, individual health insurance. So Humana has been sort of moving in that direction for a while and I don't see anything in the reform bill that would do anything but say we need to get bigger and better and more aggressive about it.

So I think the large group fully insured business is always a challenge. Now it is possible that the individual health insurance products could become commoditized even more than they are already. It's possible, but that is why it is important that we have a broader relationship with the individual. We use the term share of wallet a lot around here these days and we are going to get good at making sure we execute on that idea.

So having as many customers as possible in a direct relationship is key and then finding ways to have a much broader relationship with them is the second big component of that is the way we think about it.

Thank you.

Scott Fidel, Deutsche Bank.

Thanks, good morning. First question, just looks like the CMS Office of the Actuary put out a new estimate on health reform just recently and projected that MA enrollment could decline by around 50% due to the reform law. So definitely interested in your thoughts just on the long-term projections around MA enrollment and how you're thinking about how the market adjusts relative to that forecast from the CMS actuary.

Well, two things. Most of those projections rarely ever become accurate when we have looked back at the results, but everybody has their work to do. I would say that I doubt, and I'm pretty confident that there hasn't been a lot of consideration given to the kind of work we just described this morning around getting productivity and better cost-effectiveness out of all this, which could materially change the long-term nature of the membership numbers here. And so as an individual company, I don't get very excited about those sort of projections because I think there is going to be significant differences in performance inside of the industry among participants.

Clearly, I think the business will get pressured by the law. We have said all along we expect consolidation and a lot of smaller players to disappear. We watched it happen during the BBA in the '90s. So when times get difficult, people depart. I expect that to happen again. I have no way of really knowing the accuracy of membership projections at that level over that period of time, but I doubt that they have taken into account the kind of productivity and the good work that is going to be done to make this a very healthy long-term program.

Okay. And then just had a follow-up question maybe for Jim just on the balance sheet and as you review the health reform law. Just any other changes or adjustments that you think you might need to make because of reform? And one thing I was just thinking about is any type of changes to valuations of goodwill just as you review the impact of certain markets because of health reform?

Scott, not at this time. We believe that there is still a lot of detail, as Mike and Jim mentioned, to come out of the health reform law. So we will be looking at those as they come out, but we test the balance sheet each quarter to look at intangibles, to look at goodwill and things like that. Right now, we feel that, aside from the TRICARE goodwill, which we have mentioned the last three quarters, we are in good shape. But again, as things become available and more knowledge becomes applicable, then we will continue to look at our carrying values in light of that knowledge.

Okay, thank you.

Kevin Fischbeck, Bank of America-Merrill Lynch.

Great, thank you. Those charts in the slide deck were very helpful about the 15% Solution and also the breakout of where your rates are going to be. I guess what I would like to see is maybe a combination or an overlay of those two slides because if you are 5% below fee-for-service in a place where you're going to be getting 95% of fee-for-service, that is different than 5% below fee-for-service where you're going to be getting 115% of fee-for-service rates. Is there any color there? I mean I assume that the numbers match up pretty well that you are farthest below fee-for-service in the rates -- in a place where you're getting rates below, but any color there about how those two charts might overlap?

I doubt that we are ever going to get very granular with that kind of information because I think it is too useful to our competition. I know why you would ask it because we look at the same exact thing. I mean that is the ultimate question for us. These broad-based numbers are interesting, but you have got to get down to the unit level and the county level and this sort of thing to really know where we are. And just all I can tell you is we do that. This is what we do and this is how we lay out products and prices and approaches and tactics. I am not going to get too granular with it, but what you're asking for is the way we think about it and the way we do it.

(inaudible)

Yes, okay. And then I guess if you could maybe talk a little bit about the agreement with CIGNA. Just -- generally just talk about kind of why you entered into it, what you are getting out of it and then maybe how we should think about when we might expect to see some membership benefits from that agreement?

Well, there are several big things that have been occurring. I mean we have talked in the past about the fact that there was a big opportunity in the employer space. It appeared that the employers were going to sit on the sidelines until we had clarity around the future of Medicare Advantage so they didn't have to go through more than one disruption with their people. I think that is behind us because we have the bill, we know what we have now. We can assess our ability to meet their needs. So that is one piece.

The second piece is that Humana, as you all know, is not a major player in what I would call the large -- the large, large company space. Currently, our partner -- and obviously our partner is. So this was kind of a nice opportunity where two things came together. The timing around clarity is there, plus we get to marry up two companies that do not really compete in this space head-on to the benefit of both of us. So I think we now have an entree that is better than it otherwise would have been into that large space. And I think the large companies are now ready to take a serious look at their opportunity here. And that is both from -- I have been spending some time with some of these people and they have been hesitant to jump in until they knew what the future looked like and we now know that.

Okay. So when should we think about this potential (inaudible) impact? Is it a 2011 event?

There is likely to be some then. It is a little too early to know. I mean we have only been looking at this for a month, or at least the impact of the bill. And big companies are always hard to predict because they tend to be real inertia-bound and slow to move. They have been like that on everything forever. So it is a little hard to say, but I would be shocked if we don't see some movement in 2011 from getting a lot of doors opened up.

Okay. And then just one quick clarification. The guidance for the PDP membership, down that 220 from the prior year. I assume that is off of the 12/31 number?

Yes, it is. Yes, it is.

So that is another 200,000 from where we are now? I guess --

We are down 10.8 right now and the difference really is -- a large part of the difference is a plan that we have taken over at the -- from assistance that CMS asked us to do. And those members kind of go in and out. There's about 130,000 of those and they are expected to leave later in the year.

Okay. So then you are looking for a core number of another 70,000 or so?

That's correct.

Okay, great. Thanks.

John Rex, JPMorgan.

Thanks, just first on the Medicare Advantage PMPM. So it looked like those were up year-over-year in the queue Q and so I assume a lot of that was member mix. Can you break out for us what kind of was the all-in impact if you look kind of at a same member, same-store basis on what premiums would have done? So thinking about the rate reduction that occurred for 2010?

Well, it is up -- it is up, John, as you point out maybe $11 or $12 PMPM, but some of that has to do -- the mix is a big part of it because we have got a lot of group members, as Jim mentioned and group members have a little bit higher PMPM. And I think -- so that is part of the reason. And so when you look at the mix, it is -- I am not sure exactly how you would come back to the same store. I would say that the 5% rate reduction that we have has a much bigger impact if you would exclude what I mentioned about the group rates.

This is Jim Murray. The 5% reduction obviously would have a big impact on the same-store membership. There might be some offset from risk revenue that we receive, but it wouldn't be all that significant. So I would suggest that same-store the overall revenue is likely down unless there was some geographic growth, which I don't recall offhand.

But it wasn't (multiple speakers). Sorry go ahead.

There was one other thing. There was obviously a higher member premium this year too.

Yes, and that's what I was kind of thinking about. Like so how much offset on the member premium, when you kind of look at that same member metric, so your 5% was effectively what? And then I guess -- and the point -- I was just trying to also see if there was an unusually high risk-adjuster impact also that we had in the quarter?

Generally speaking, I think we believe that our average premium went from about $40 PMPM to $50. That is usually worth about one percentage point, $10 PMPM. So that would have offset a portion of the 5% and I don't recall offhand what the MRA improvement would have been, but I would have thought it would be probably similar to that $10 PMPM that we got from the member premium. So still a reduction on a same-store basis.

Okay. And then I guess when you were talking about the lower med costs and the late quarters in '09 developing better, I think as you prioritized it, you put the claims processing improvements as first as driving the better result. So I guess just understanding a bit better there, so are you saying that you are just catching more inappropriate coding. So in the past, this wasn't getting caught and now you have kind of changed the processes, so you're catching it? I just wanted to understand that a little better.

Yes, there's a couple things, John, that are like that. One is the DRG coding validation. That was a part of it. And also making system improvements that made recoveries easier. We also took a look at things like overnight admissions or admissions for observation and checking how they were billed. Were they billed as impatient or more appropriately as outpatient? And so those were the types of things and you are right, that is the biggest share. I mentioned that -- and as you mentioned, the 2009 trends did favor the state as well, but not nearly as much.

So as Jim went through a lot of those, we characterize those in all of the releases as claims payment improvement practices. But frankly what we think of on a day-to-day basis is that is a part of our 15% Solution and we are operationalizing that in all the markets that we do business.

And when I think about that, so if there was kind of some significant improvements there, so was that going back -- was the benefit that you derived in the 1Q this year, then going back throughout all of '09 as you challenged prior assumptions there or was that still kind of typically like we would expect very much weighted to just the last quarter or so in '09?

It was more weighted toward the back half of the year, but it did go back. It did go back through the entire year.

So there is more -- I mean normally when I expect the prior period development is -- say it is 80% coming from the 4Q or something like that in this case, but can you characterize for me how much of that was actually coming from the first half of '09 because of the improvement in made claims processes?

I think it is best said the way you said it, that the father back you go, the less impact it had, but it did go all the way back. But most of it -- again, as I mentioned in my remarks, the fourth quarter was really what we looked at and had the biggest impact.

And is there still -- I mean as you look at it, how do we assess kind of how much room is left on that also? So how much kind of one-time and how much -- I suppose you're going to say it is an ongoing process, we never stop, but I am trying to figure out how we size it?

Yes, that is correct; you actually answered the question. It is an ongoing process that we do every quarter and there is a lot of integrity in the process, and there is a lot of consistency in the process.

The other factor that we have to consider when we are talking about this is the utilization that we anticipated that was going to take place in the fourth quarter that didn't come through. And so what we have thought about here is what we would rather do is see how the rest of this year or the next couple of quarters of this year play out before we claim that it is a run rate improvement and obviously we would report that as we play the rest of the year out.

Okay. And this is the last thing, a quick one. I apologize if I missed this. On the commercial member attrition, the change in outlook, what was driving that primarily?

We lost a large ASO account. We will loose it on July 1, about 130,000 members.

Besides that, nothing else has changed with our commercial guidance.

Ana Gupte, Sanford Bernstein.

Hi, thanks. Good morning. The first question I had is on capital deployment towards share buybacks or M&A and how you are thinking about that. And particularly on the M&A side, do you see a focus on bringing your commercial business up to scale or will you just be the largest Medicare Advantage player and make your push toward that? And then finally, any interest in getting into the Medicaid space in later reforms?

Well, I will start with the last, Medicaid. I stopped saying never to that about a year and a half ago. The challenges are still there. It is not at the top of my priorities. I realize that market is going to grow. Some people are getting excited about it.

But as you watch state budgets and if you think of the implications of the money that came out of Washington to prop up that program this year and when that is going to end, I have to believe that what I have said all along is still true, that state budgets are challenged and they spent all their money on education and Medicaid and it's kind of hard to find a positive scenario there.

So I am not all that excited about it still. I've said all along if we ever do it, it will be big because we are going to need a platform and infrastructure and people that really know that business and will -- news at 11.

Relative to the Company, I think the Company has always been big in Medicare. As you all know, it has gotten very large and Medicare. I think we will always be quite large in Medicare. And I think beyond that, I think we are going to have to continue to assess the marketplace.

I mean right now, we have less of a focus on national accounts and large group coverage than we have had in the past. We are very focused on the smaller end of the market, with particular interest in the individual market, as I said earlier. I think it is going to be important. I don't see a huge transformative commercial health insurance play in our future. I mean, you never can say never to that either, but that is not what I am thinking.

I am thinking ancillary product lines, voluntary products, finding a number of ways to get close to all these individual customers we have, and again, to have a broader share of wallet with these people.

So I think big Medicare and big other, and the other is what we're working on deciding exactly what that should be. And that could involve some buildout of things. It could involve vertical integration of some of our spending in our Medicare business and others, and it could involve acquiring companies that are just maybe not what you would normally expect. So a little bit of all of that.

And on these small companies that may likely get shaken out, if you will, on the individual side and on Medicare Advantage, is the expectation that you'd actually engage in dollar transactions or would they just -- likely some of them just fold and the membership then accrues two players like yourself?

I think it will be both. There are some good, well-run small Medicare players around the country and I think if they are smart, they will find a -- they need to find a new home for that business given what this thing looks like now. Others are weak and I think we will just take that business in the marketplace through just straight up competition with them, so I expect both.

Then finally on the selling season, which is compressed, you have this captive broker model. Would, in the light of this compressed selling season, would you be able to leverage that salesforce adequately in the MA space? Would you need to perhaps cut it down some or do you have any plans to leverage it across these other broader individual efforts that you are going to -- the PDP model?

You hit it on the last one. We feel very bullish about the ability to have the MarketPOINT agency sell many other products all around what Mike talked about earlier with our focus on the individual. That is lower on the list, but certainly on the list and our desire to get into this space is to -- because we feel like we have a really good asset with our MarketPOINT agency and having them sit across the table from folks who are not only over 65, but also under 65 and talk about all the products and services that we can bring to bear is something that we think is pretty impactful. And although the 45-day period that is going to happen in 2011 is a little bit on the short side, we feel like we can move quickly to get folks focused on other lines of business and so that is the silver lining in that change, frankly.

If I could sneak one last in just related to that, what percentage of the share of wallet do you think that would bring you? You talked about that being the big opportunity for you. So can you size that for us a little?

Not today. At this point, I think we're still trying to figure out exactly how big that is and the reason -- I don't mean to sound coy. The reason is you have to totally rethink the marketplace as soon as you look at the individual. Then you have to ask yourself how far from your core business are you willing to go and the further you go out, the bigger the opportunity is, at least in numbers, but the harder it is to execute on. So there is always a balance between the two. But we see ourselves as a financial services company in healthcare largely. So you can start thinking about what boundaries that might produce if you have a relationship with an individual and we have seen some examples where we have already done some of it.

We have talked in the past about the development of our pharmacy capabilities. That is an expansion of our relationship with people that has gone quite well and so we continue to look -- so it is not just all new products and things like that. Some of it is just recapturing some of the economic power that exists from our business and doing that. We bought a behavioral health company. We started the pharmacy business. Those sort of things are there too.

So that is something that is always going to be a work in progress because obviously, at the end of the day, we might like to make it as big as we can as long as we don't overextend ourselves.

Justin Lake, UBS.

Thanks, good morning. Just a couple questions here. First, Mike, clearly there is a lot of focus on selling costs in the business right now given the introduction of MLR minimums. And you mentioned the importance of getting your SG&A as low as possible. So I was wondering, can you talk to where you see individual and small group commissions in the market at present and where they might go over time?

Well, I am going to be standing in front of a large group of agents here in a few weeks. It will be interesting what the questions look like there. Clearly, there is going to be pressure on commissions; there is just no question about it. There is not room in the economic model for the commission system as we know it today to continue to exist. We have flexibility in our (inaudible) when we need to or want to. So the flexibility is there. We just have to figure out some sort of a transition from where we are to where we are going to end up and then ultimately you end up with these exchanges and we are still trying to access exactly what that means to the agent community.

So I'll say to you what I say to them when they ask me the same question and I get it from every one of them when I see them is what about our future. And I said your future is about your own value proposition with your customers. They are in sort of the same situation. Most of them have multiple business relationships with these people, not just healthcare.

So where healthcare is going to fit in that, I do not know. Whether we can work with everybody we have historically, I don't know yet. My guess is that there is going to be a lot of pressure in that space to get those commissions down and we will do what we need to do. And I think we are going to end up working with agents on some level for a long time. I just don't think it is going to look like what it does today and it is going to be the key component of getting the SG&A down because in the individual market it is a material piece.

Absolutely. Makes sense. The last question is the reform legislation appears to allocate the potential bonus payments and rebates you are getting now depending on your plan quality scores. So I am wondering if you could talk about how this metric is calculated because it is my impression that it is basically curbed by CMS so that only a certain amount of plans can actually make it into the highest quartile, which might make that difficult to achieve no matter how much the industry puts -- emphasis the industry puts on improving this. So I just wonder if that is correct and any color you can give me here would be helpful. Thanks.

Sure. This is Jim Murray. We are studying a lot of what is out there with respect to the quality and how it is going to be administered like the MER, lots of questions around that. There is 33 measures that we are going to be evaluated on. Of those 33, 20 are graded on a curve while 13 are on a straight average.

What we need to get our arms around is how this is going to be operationalized. Is it going to be on a state basis, again, like we talked earlier? Is it going to be on a contract basis? Is it going to be in total? We need to get some more guidance on that as you might expect because we believe that quality bonuses will be an important part of the value proposition that we ultimately provide to the seniors that we serve. We are all over this and we are starting to get our arms around how to improve our scores and also to really create some opportunity from the quality bonuses that are spelled out.

Great. That was helpful.

Doug Simpson, Morgan Stanley.

Hi, a lot of my questions have been asked, but maybe just a bigger picture question. Just given some of the rhetoric around rate increases across the country and we have all seen the headlines over the last couple of weeks, what are your expectations or what should we be expecting to see from some of the less financially strong players in the market? I mean could we see withdrawals from some markets on the risk side over the next year or two? And just given leverage in the business, it is hard to underwrite risk business if you are not earning a decent margin on that business. And just sort of any sense of timing as to how that may play out or how you guys are thinking about that?

Well, first of all, let me start by saying I don't think it matters whether you are a for-profit or a nonprofit entity. I think we all have to operate under the assumption that there will be integrity in the regulatory process in evaluating the solvency of companies. Ironically, it's the obligation of the regulators to ensure solvency of firms like ours in all of these states and that has been their historical job. I don't know much about the specifics of the circumstances we have seen in the media at this point and without having the detail, I wouldn't have a real strong point of view about those individual situations. But I can say that over time, we assume that what is required to have strong solvent companies to provide insurance to people in these states will be done.

The other part of it is, it is always better to be big and strong and have the robust balance sheet behind you and all those sort of things. So I would just say all of these little challenges of all sorts really put pressure on smaller players and it is not just small in terms of total, it could be a small player in a state. So is it possible that some are going to have to fold up their tent and go? Absolutely.

So I would hope that regulators and others that are trying to make political hay out of this would understand the implications from a competitive perspective of forcing people out of the marketplace because I don't think that is the intent, but it certainly could be the unintended consequences of the process falling apart.

Right. And just along those lines, I mean obviously there was a lot of heated rhetoric over the last 12 months, but with the vote in and the bill having passed, do you have any sense that -- is there a recognition that the plans are obviously very important to the success of expanding access for people, which was (technical difficulty) this bill. Do you sense that, behind this scene, the implementation moves forward, there will be something of a coming together or an understanding of that dynamic a little bit more than we have seen in the discussion over the last 12 months?

Well, I can understand if you are reading the papers why you would think that wouldn't happen, but I would say it is in everyone's best interest for this to work well both from a national policy perspective and from the standpoint of those that are participating in the industry. So I think we will do everything we can to successfully implement what the law of the land is. Now we don't know exactly what it is completely because a lot of the stuff is going to be done from a regulatory perspective.

So whatever it is, once the law is determined and the regulations are on the books, then we will work and I think the industry will work very hard to make sure they are fully implemented and we comply. And I think over time some of the realities of the unintended consequences and the difficulty of this will become apparent both to those who are writing regulations and to those of us in the industry. And I think at the end of the day, we will hope that the process brings a reasonable result.

Okay, thanks.

This concludes the question-and-answer session of the call. So please continue with closing remarks.

Well, thanks again for joining us this morning. I want to thank all the Humana associates that are on the call for making this success possible. We now have health insurance market reform, at least the first stage of it behind us and some clarity around what our jobs are. We fully expect to execute on both the challenges and the opportunities that are embedded in all of that. We are coming off of a wonderful '09 and the beginning of a decent 2010 here and we are quite proud of it and we expect to meet the guidance we have given you this morning. So thanks for joining us and we will be chatting in the future.

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