Humana Inc (HUM) 2010 Q3 法說會逐字稿

Good morning. My name is Sara and I will be your conference operator today. At this time I would like to welcome everyone to the Humana third-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 Ms. Regina Nethery, Vice President of Investor Relations. Please go ahead.

Good morning and thanks for joining us. In a moment Mike McCallister, Humana's Chairman of the Board and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our third-quarter 2010 results as well as comments on our earnings outlook for 2010. 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 and 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 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 McAllister.

Good morning, everyone, and thank you for joining us. Today Humana announced third-quarter earnings of $2.32 per share which compares to $1.78 per share in the year-ago quarter. This favorable result was achieved because of strong operating performance in both our Government and Commercial segments.

We have updated our 2010 earnings per share guidance range to $6.40 to $6.50 compared to our previous forecast of $5.65 to $5.75 based on this operating performance and on the anticipated extension of our TRICARE contract. Jim Bloem will discuss this TRICARE development in the course of his remarks.

My comments this morning will be brief due to our upcoming Investor Day on November 18 where I will be joined by key Humana leaders for in-depth discussions of our operations and outlook. We will also disclose 2011 guidance at that time. Today I will spend just a few minutes highlighting our strategy and how our operating progress is positioning us for the long-term success before turning the call over to Jim.

I will start with Medicare. Our long-standing focus on Medicare as a one-to-one retail business combined with our emphasis on disciplined and innovative approaches to managing trend and coordinating care has served us well and is proving to be well suited for the post reform world. Humana's holistic approach to our members is the lynch pin of our ongoing 15% Solution, the results of which were evident in our third-quarter operating results.

The 15% Solution involves providing better benefits to our Medicare Advantage members at a cost 15% less than the cost of baseline benefits under traditional Medicare with higher quality and better outcomes than original Medicare. Delivering on this solution requires integrating many different functions on a large scale, starting with building efficient provider networks and then coordinating targeted clinical interventions to address high-cost situations that can be managed more efficiently to produce lower costs and better results. This is becoming increasingly important in Medicare Advantage as payment rates continue to move toward parity with traditional Medicare.

One important message of how this approach has positioned us well in relation to our competitors became apparent when industry-wide 2011 Medicare member premiums were announced at the end of September. Despite the economic challenge of Medicare Advantage payment rates being held flat with 2010, success of our 15% Solution meant that Humana's 2011 member premiums for both Medicare Advantage and our existing PDP business went up only modestly.

Separately, our innovative co-branded PDP offering with Wal-Mart has, for the first time since the PDP program was launched in 2006, one price and one benefit structure nationwide. This makes it easy to understand, a key element for retail consumers. Further, it has the lowest premium of any PDP plan in all 50 states and Washington, DC.

This advantage coupled with the linkage of two leading brands with high favorability among seniors, we believe, is generating meaningful positive awareness of the new product that has been helped by comprehensive marketing campaigns from both companies prior to the opening of the annual election period on November 15. Together we are introducing a positive disruption to the standalone PDP market this year.

The 2011 Medicare Advantage competitive environment reflects its own style of disruption. To be more specific, between competitor market exits, some private fee-for-service market exits of our own, the introduction of network-based products to many of our existing private fee-for-service members, and the selling season has been shortened by 90 days makes estimating net membership growth a bit more complicated than in prior years. Having said that, our preliminary estimates indicate we will still grow next year with our individual Medicare Advantage membership likely increasing somewhere in the range of that for 2010.

Now let's turn to our Commercial segment. Our Commercial strategy involves using the retail strengths we have honed in Medicare to capture opportunities in the individual market once the volatility from reform settles down. In the near term we expect a very challenging transition period. We will keep a close eye on the evolution of exchanges and other reform-related developments while forecasting minimum net membership growth.

Longer term, as the individual market expands, McKinsey estimates it will grow from $23 million to $40 million in the next six years because of reform. We believe we will be well positioned. We anticipate offering not just individual health insurance or traditional ancillaries like dental, vision, and voluntary, but also new products related to consumers overall well-being.

Our goal is to create lifetime relationships with our individual customers offering a variety of products and services based on incentives, rewards, and loyalty. At the same time we will manage for profitability our group medical business and expand our specialty business into sections of the country where we have the scale and network position necessary to compete and win.

When we meet with you at our Investor Day on November 18 we look forward to sharing more details as to why we believe we are well positioned in the near term for our Medicare Advantage and PDP businesses and longer term for our commercial business. The number of consumer-oriented programs launched or under development and with the success of our one-to-one retail approach to membership growth solidly aligned with the continued expansion of Medicare and potential retail opportunities in the individual market Humana faces the post-reform future with confidence.

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

Thanks, Mike, and good morning, everyone. I would like to begin by detailing the factors that contributed to our better-than-expected performance this quarter, as well as how they drove today's increase in our full-year 2010 earnings per share guidance.

As indicated on this first slide, there were four items that boosted this quarter's earnings per share, the last three of which pertain to our 2010 operations. With respect to the non-2010 item, we experienced an additional $56 million or $0.21 per share of higher-than-expected favorable medical claims development from prior years during the quarter. This amount is in addition to the prior-year favorable development experience in the first half of this year, bringing the full year benefit of this better-than-expected favorable prior-year medical claims development to approximately $194 million or $0.72 per share.

Beneficial effect by segment of the $56 million of prior-year development recorded in the third quarter was approximately $41 million in the Government segment and $15 million in the Commercial segment.

Moving on to the three 2010 operating items. First, we experienced approximately $28 million or $0.10 per share of greater-than-anticipated favorable development related to the medical cost estimates recorded in the first half of this year with approximately 80% of that amount attributable to the Government segment and 20% to the Commercial segment. Much of this favorable development continued to be due to both a lower level of healthcare services utilization and a lower severity level of services performed.

For our Medicare business this lower-than-expected utilization continues to be driven by the continued effectiveness of our 15% Solution and the group accounts we gained at the beginning of this year. For our Commercial segment the utilization declines are across all medical lines of business.

Second, in addition to the beneficial effects of lower utilization, we also continued to benefit from both pricing discipline, as evidenced by our premium per member per month members, and our administrative cost reduction initiatives which are on track to achieve our goal of $100 million in savings this year with a $200 million savings rate, run rate for 2011. While our fourth-quarter projections include the benefits of these cost reduction initiatives, they are more than offset by the shorter Medicare selling season which this year compresses all of our marketing expenses into the fourth quarter.

Finally, as we disclosed in early October, Humana Military Healthcare Services was notified by the TRICARE management activity, or TMA, that it intends to negotiate with HMHS for a one-year extension of our administration of the TRICARE program in TMA's South region. While the extension is still subject to negotiation, we know longer plan to record a write-off of TRICARE goodwill in the fourth quarter. That, together with timing issues that resulted in a $0.06 per share acceleration of TRICARE earnings from the fourth quarter into the third quarter, increased our full-year 2010 TRICARE earnings expectations by about $0.25 per share.

Returning for a moment to Commercial medical cost trends, we have reduced our estimated 2010 full-year secular trend to a range of 4% to 5% in order to give effect to the unusually low levels of medical services utilization that we, as well as the entire industry, are experiencing this year. We continue to see low utilization levels for most all medical services versus historical levels.

Additionally, as mentioned above, the mix of services we are experiencing continued to be less severe than in recent years. Accordingly, we have raised our 2010 commercial pretax outlook by $105 million today. So looking at the full-year 2010 we are experiencing a commercial cost trend that is roughly 3% lower than we anticipated at the beginning of the year, which in turn has been reflected in the increased pretax earnings guidance we have issued as we have progressed through this year.

Although we are not issuing 2011 guidance until Investor Day, we would expect that medical cost trends in the Commercial segment will revert closer to historical levels and we have priced accordingly.

Turning last to operating cash flows and capital deployment. We continue to generate strong operating cash flows during the third quarter with a $1.210 billion versus $940 million in the third quarter of 2009. This brought our 2010 year-to-date total operating cash flows to $2.290 billion versus $1.150 billion in the same period a year ago.

The year-to-date cash flows from operations improved in tandem with our operating results as well as the corresponding favorable changes in working capital items, particularly medical claims payable as well as expense accruals.

Given the increased fourth-quarter administrative expense spending that I referenced a minute ago together with our annual fourth-quarter cash settlements with CMS, we don't expect an increase in our operating cash flows for the remainder of the year. Consequently our 2010 full-year operating cash flows are now expected to be in the range of $2.1 billion to $2.3 billion versus $1.4 billion in 2009. As always, we continue to evaluate varying opportunities to ensure shareholders receive the benefit of our increasing parent cash flow, [parent] cash balance.

We were pleased to repurchase an additional $50 million of our shares this quarter. This brings our year-to-date share repurchases to $100 million for just under 2 million shares.

Our capital deployment efforts remain focused on effectiveness building capital expenditures, potential acquisitions and strategic investments, as well as continuing to repurchase our shares. Having and conserving ample capital and liquidity provide us the financial flexibility that we need in order to compete effectively in the new environment as it continues to unfold.

So to conclude, we are pleased with both our financial results and our operational progress during the third quarter. We are confident that our updated 2010 earnings guidance range of $6.40 to $6.50 per share reflects our organizational experience and competency as well as our continued discipline and intentional approach to the current and coming operating environment.

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

(Operator Instructions) Joshua Raskin, Barclays.

Thanks. Good morning. I guess a question just a little bit about the PDP strategy for 2011, particularly in light of the repositioning that we saw for 2010. I know you have said in the past that not every product in every region has to be a 5% target but it's sort of part of that overall goal, but maybe you could help us with the Wal-Mart product, the national product.

What are some of the key factors that you guys put in when coming up with that pricing? Maybe talk a little about administrative leverage or ability to convert to MA long term. How should we think about that product?

This is Jim Murray. If you think about average premium for our existing PDP membership, it's around $40 and the Walmart premium, as you all know, is about $15.

Factors that we evaluated with our actuaries and with the folks from Walmart included us being willing to take a reduced profit from our existing PDP membership. We got better rates from Walmart, as you might expect, that our base in our regular PDP membership. We are assuming that we will have a much-increased generic dispensing rate from our existing block of business.

There is some amount of risk sharing that Walmart was willing to take with us that is baked into that. Some of those favorable things are offset by our anticipation that our rebates would drop because of the increase in the generic drugs that people will take. And if you think about our existing block of business, there is a certain amount of risk element in, although we are anticipating a slightly better risk profile and so there was some beneficial effect of that.

When you put all those factors together we were able to get to the $15 national premium, which we are very pleased about. That as we work with Walmart they were very desirous of having one national premium and we felt very comfortable that we could do that.

And as I Mike has shared with many of you as he has gone around to the various investor meetings, what we think is that having a relationship with the senior population is going to benefit us long term. Additional products and services can be used in that existing membership base. The $15 does produce a nice profit for us going forward and we just think it's an opportunity to grow our relationship with a significant number of seniors this year.

Okay. So you said maybe a lower profit percentage but still a nice profit for you guys?

That is correct.

Okay, that is fair. And then just second question, the 15% Solution and continue to see the progress there. There is a lot of different phases and timings depending on county and membership. Can you help us understand, when do you feel like you really need to be there? When do you need to be at that full 15% Solution for your membership based on the reimbursement transition that we are going to see over the next about six years or so?

This is Jim Murray again. As you will hear when you are all here in November, we are very pleased with the progress that we are making on the 15% Solution. We monitor that regularly.

It was helpful for us, as Mike said in his remarks, to be able to produce premiums and benefit levels this year which we think will favorably impact the persistency that we have experienced with our MA block this past year. As we look forward we anticipate that by 2014 we could be in really good shape as respect to the 15% Solution, and so for us it's a journey.

We expect improvement each and every year, which will help us to keep our premiums low until 2014, and we would hope that by 2014 the 15% or more Solution is in place in a lot of the places that we do business. We are very pleased with the progress we are making.

Josh, this concept of managing care and organizing care has been around for a long time. I have been saying for about the last year and a half that I am really becoming comfortable that we are starting to see traction as we integrate all of this, because it is a different approach than historically what we would have thought of in the managed care world. We are dealing with better data sets, better customer relationship management capabilities. We have learned a lot with the work we have done with the most fragile folks we take care of.

It has just been interesting now that we are beginning to connect better information flows, better data, a very focused ROI approach to deciding where we are going to spend our money, where we are going to work. It looks pretty good in terms of being able to squeeze out what I have been talking about forever, which is a huge amount of waste and nonsense in the Medicare program.

Got you. And I am sorry to sneak one in but can you give us an update on your risk score -- on your bonus, your stars from CMS?

Yes, we have got the scores on about 42 Humana plans. We are not doing as well as we would like. We look at the process and the methodology. We are working with the government to try to create something that we think would be a better measure of quality. We think there should be more weighting towards clinical evaluations as opposed to some of the other measures that are currently part of the process.

Now that it's a part of our payment methodology, rest assured that Humana will become very good at quality. But, again, we would really like to have a discussion with folks in Washington about a better approach towards quality and what quality can ultimately become for the seniors that we serve.

Next question, please.

Matthew Borsch, Goldman Sachs.

Yes, if I could maybe I could ask a couple of questions on the Commercial side of the business. I am curious what you are seeing in terms of the trend on your individual non-employer book going into next year and the extent to which HHS granting some leeway for states to phase in the MLR rules is critical on that product from your perspective.

I will start. Well, we don't -- barring some changes in terms of the implementation of the MLRs, next year is not going to be a good year for our individual book of business. We have said before we are fortunate that it's not any bigger than it is.

But it's -- the 80% just doesn't work in the short term. The administration knows that, we know that, and the insurance commissioners know that across the country so that is why you are seeing so much noise around people trying to think about exceptions to that, deferral of it and delay of it and transition of it.

It is very disruptive to the individual market and while it's something that we are not happy with in terms of the impact on Humana, it's not a huge impact to us. And I think at the end of the day that as we get further into it they are going to realize that this is going to, at a minimum, need to be transitioned, if not put off completely. But news at 11 on that.

Okay. And maybe more on the group side of the business. Are you seeing a pickup in interest in self-funding? I know it has been out there but is that, has that increased the higher end of your -- maybe in the middle market and certainly in the large group?

As you know, the self-funding has escaped the boundaries of healthcare reform. There is no minimum MERs for self-funding, there is no exchanges, and there is no premium tax. So we look to self-funding as an opportunity for us and we are looking at ways to think about whether we want to go to smaller case sizes on a self-funded kind of basis.

But, frankly, we are not seeing any strong movement towards self-funding in the last several months, but are always looking to see whether we are seeing changes in the way that companies buy our products. But haven't seen anything of that of late.

Clearly, health reform will push people in that direction over time.

Great. Thank you.

Justin Lake, UBS.

Thanks, good morning. Just a first question on Medicare Advantage membership. I think you mentioned that you expect to -- the individual membership to be similar to what you had this year. Can you break that down for us again and also any commentary on the corporate market for 2011?

Sure, this is Jim Murray. We have gotten into some discussions and relationships with large, mostly government, accounts. We don't have any for January of this year. As I step back and try to figure out why that is the case, it appears like the governments that we do business with run in packs, if you will.

The first group that we were able to sell for January of this past year I would characterize it as very progressive in terms of their thinking and solutions, and so we were very pleased that we were able to write so many this year. We are having conversations with others. I would suggest that there might be some opportunity to sell some larger cases during the course of 2011, not January, and perhaps more towards January of 2012.

What we are trying to do is to demonstrate to these folks that we have seen great success with some of the large cases that we wrote in January of this year. We will share some of that with you when you are here in November.

As respects our individual sales, there is lots of rhetoric about the number of private fee-for-service exits. Just to kind of summarize a lot of that, I would suggest that there is probably 700,000 private fee-for-service members where their current carrier is changing. And of that, we are about 100 or so of those directionally, which leaves about 600,000 members that are held by our competitors.

Of that 600,000 our competitors have products that would cover 250,000 of those individuals and so we will see the success that our competitors might have on selling them from a private fee-for-service to a network-based offerings. So that is something that has to play itself out.

Outside of our footprint is another 100,000 so that leaves about 250,000 folks that are in our footprint and don't have competitor offerings that we have to deal with. And so as the leader of the market point organization shared with me, we will sell as many of those as we possibly can and so that is what we were really targeted on.

Other things that are impacting this open enrollment period is the shorter selling season, so that negatively impacts us to some extent. Offsetting that is the usability of our premiums and benefits, and we are looking to see that our persistency improves because of that. So there are really a lot of variables that we are trying to evaluate when we give guidance.

When you are here in November we will share a lot of that information with you, but at this point we are comfortable saying we will sell as many individual members next year as we did this past year.

I would add that in the large group Medicare space I don't know that that is going to play out to be a January event every year. This is the type of business where they can change during the year and we have seen some of that in the past, so the timing might be a little bit different on it.

Great, thanks for all the color there. One other question, just on the commercial business. Without getting into specifics, and it seems like there is, like you mentioned, some headwinds on the individual side, can you kind of just give us directionally how you think of our commercial operating profit next year and maybe any offsets you might be able to put in place via commission changes?

Well, we will definitely be looking at commissions and we are looking at administrative costs. There is a lot of things that we can do to soften the impact from all of this and we are doing all of them. Want to add to that?

I think the only thing I would add it as this past year we and others in our industry have enjoyed a very good utilization season. We are not anticipating that will recur next year because we want to be careful, so our pricing envisions that our trends will go back to normal levels and the windfall that we received this past year might not recur. So that would be one of the things that I would put out there as you are trying to figure out our earnings from our commercial block of business next year as something that will impact us.

The other thing is the individual business. It's a good thing that it's only 2% of our total revenue, but the MER changing from where it's running today to 80% as a negative.

Got it. Thanks for all the detail.

Chris Rigg, Susquehanna.

Good morning, everyone. Just a quick question; could you provide any color on any areas of specific utilization declines and, if possible, give us a sense of any differences you have seen in the Commercial versus the Government side of the business?

Well, as I mentioned in terms of the trend, you have seen basically, and as Jim has just mentioned, that basically we have seen trends drop 3%. Generally speaking, the most improvement we have seen is in the severity area. The rates continued to be -- there tends to be good competition and good pressure on the rates, but the severity that is of the services performed has been the larger component of the decline.

Okay. And then just a quick follow-up. On the G&A savings you are expecting for this year, I think you had talked about previously of $100 million and $200 million long term. Can you give us an update as to where that savings plan stands at this point? Thanks a lot.

Well, we are very pleased with the progress that we have made so far. We know that we have the $100 million realized and we have the run rate of $200 million that we are working our way to get in terms of the run rate. We are very assured that we are going to see that for 2011.

When we look at our overall spending though, part of what we said with our administrative cost reductions is that they would be also accompanied by sort of reconfiguring our competencies to get more in line with what the competitive realities are going to be and what the law is going to require. So when we look at it in an overall sense you can't really see it on the income statement, although we are very pleased with third-quarter results and year-to-date results, but when you look at our SG&A ratio that is where I think you can see the real impact of it.

If you remove the DAC write-off that we made in the second quarter, you will put 40 basis points off of what we are saying for the year of between 13.5% and 14% so that takes us into the 13.25% range. And we think that is very good progress given what we have needed to invest in to become compliant and to become effectively competitive in light of the environment.

Thanks again.

Charles Boorady, Credit Suisse.

Good morning. I want to understand the expectations a little bit better for the narrowing of the marketing window and to what extent does a shorter window really hurt you in the enrollment process, and any initial read you have on that and whether you have taken that into consideration in the preliminary outlook for 2011 enrollment that you shared at the beginning of the call.

Sure, the narrowing of the window for selling is about, we think, 65,000 less sales that we would make. Offsetting that to some extent, however, is the fact that when you narrow the selling window you also narrow the termination window. And so we think those are somewhat offsetting but time will play that out for us.

And when you -- you have pulled forward the expense, are you going to be spending about the same amount of money in total or will you we be able to reduce the actual total annual spend as a result of the shorter window?

When we pull it forward we have a couple of things that we mentioned were going to be spending in the fourth quarter. Last time we mentioned the $75 million or $0.28 a share, but we didn't ascribe it to Walmart because we hadn't announced Walmart. Well, that is what it is.

But then there is the non-Walmart part. And, again, because of the acceleration and because of wanting to make sure that we get ourselves into making expenditures that help us grow profitably but also give us multiple years of savings and also reduce our medical costs, those are increasing our fourth-quarter spending a lot. Again, coming back to your question then, I think that that does pull a lot of it into the fourth quarter in terms of what we are going to be looking at next year.

I would agree with that. Just a little bit of color, from a short-term perspective the shortening of the selling season impacts our career selling organization but we are really excited with a lot of the focus that we have got on other kinds of products throughout the course of a year. And I would suggest that over time, and this will be a journey, that as our selling organization creates relationships with folks around other kinds of products and services that Humana will offer on a retail basis that the need to do the amount of marketing spend in the last part of a year will begin to diminish.

And so that is kind of how we see this playing out. But short-term, as Jim said, it was probably the same amount as last year plus a little bit more for Walmart.

So 2010 you have a double whammy because you spent the beginning of this in the first quarter and now you are spending a full year's worth in the fourth quarter?

Correct.

On an ongoing basis next year and beyond, will the total annual spend be about the same or more or less?

That is not determined until we actually sort of see where we sit from a competitive position, so we always have a number out there that we have in mind but that moves every year. We have been doing this for several years now based on what we learn relative to our competitive posture.

I will get back in queue. Thanks.

Scott Fidel, Deutsche Bank.

First, just a quick question on the MA sales relative to the 2010 guidance for the 250,000 to 260,000 adds. How would that break out between individual versus group sales?

The group sales for 2010 was about 198,000 so the rest is [730] in total. There is plan-to-plan changes of 150,000.

Okay. And then just you gave some good initial color just on sales expectations for MA in 2011. Can you maybe walk through the same exercise, just around preliminary views on commercial group enrollment for 2011?

I think we will do a lot of that in November, if that is all right with you.

Okay. Then maybe I will just a different question. Just on the change on your guidance for inpatient and outpatient rates, you are now looking at low to mid single digits which looks to be very favorable. How does that really break out between improvements, let's say, in the severity adjustments as compared to the base rates? Are you seeing base rates actually coming down to that level or is it really just that you are seeing a much more favorable dynamic around severity?

It's the second one, Scott; the severity is the main driver. There are a lot of pressure on rates but the severity is what is driving the reduction in trend.

Got it. So where would you maybe qualify your base rates within that at this point?

We think that the guidance we gave is pretty close on rates, but again you saw that from last quarter it's like a two notch drop. So within that range, again, we still believe that severity is the most, but now that the utilization is down and the number of episodes is down there is pressure on the rates too.

Okay, thanks.

Kevin Fischbeck, Bank of America.

Okay, thank you. Good morning. I guess I wasn't clear on this earnings guidance chart with the Q4 guidance where you take $0.06 out of the ex-TRICARE earnings. What is that related to?

What we had had before was we had said in the fourth quarter, because of the contract we were going to remove, we were write-off goodwill. We are not going to do that. In addition to that we had some transition costs in there, which were about $0.06, that went along with exiting the contract and that stayed in there.

Then one more -- there is another $0.06 and that is the $0.06 that comes with the improvement in TRICARE's performance overall for the year. So again that is why we basically said that looking at TRICARE for the year now we are saying $0.25 a share is the improvement from when we talked 90 days ago to today.

So even though that $0.06 write-off was related to TRICARE good will you called it improving operating performance ex-TRICARE?

It was basically with the TRICARE write-off came additional costs to transition out of the contract because the goodwill write-off is a matter of matching up cash flows with the carrying value of goodwill, but then there also was originally in there some transition costs. But the improvement was basically a forwarding on the operating side of what we would probably have in the fourth quarter into the third quarter.

Okay. And then I guess on the cash flow statement, the cash balance at the corporate year seems, I don't know. To me it seems like it's burning a hole in your pocket.

How do you think about deploying that cash? How can you -- is there a timeline for thinking about how much cash you need at corporate, how quickly you want to deploy that capital, and whether there is a situation where you say over some timeline if I don't see an acquisition then share repurchase makes more sense?

First let me say, it's not burning a hole in our pocket; make that clear. So nothing has really fundamentally changed. Obviously, we had great cash flow for the quarter. We are positioned beautifully to do what we need to do strategically. We continue to look at things constantly in terms of the types of things we have shared with you in the past around our base businesses as well as some peripheral types of things.

So we are continuing to do our work, trying to find the best use of that cash; we will continue to do that. You saw that we, in fact, bought a few shares this last quarter to kind of keep our toe in the water there and we will do so going forward when it makes sense.

So nothing has fundamentally changed. I just think it's a pretty high-class problem to have right now given some of the inflection points we are looking at relative to health insurance reform and that sort of thing. So I like where we are.

Is there like a time though before you think things might kind of shakeout or any data points in particular that you are looking forward to that kind of gauge when things might change and allow you to deploy that capital?

Well, we can never drive the timing of these things but I would expect some things to occur over the next year or so. We have got a lot of irons in the fire but nothing to report today.

Okay, great. Thank you.

John Rex, JPMorgan.

Thanks. I wanted to follow up on your comments on severity and severity coming in better. So typically when we have thought about the economic impact of lower utilization it has been kind of more potentially primary care elective procedures have come out. In fact, we think from the hospital reports at least we have seen case mix index rising so as lower acuity care isn't occurring you have seen the overall severity increase for most of the hospitals.

So it seems like you are kind of seeing something different and I just wanted to get a little more color about what you see going on in terms of suppressed utilization that it's biasing away from what you would think would be more emergent stuff to more primary care.

I think that last comment is really what it is, personally. When we look at it -- slightly shorter stays, less intensive procedures, more monitoring around the care that is given. Again, as an industry, and particularly us as a company, and this comes back to the administrative spend we talked about before, we are getting better at figuring out what the appropriate care is and making sure that the people who really need that care get it. And, again, continuing to bargain for rates.

And so we put the baseline rate with the severity and talked about them together but said it was mostly severity.

Are you seeing something different? Again, I come back to I am seeing case mix index rise across all the hospitals because lower acuity stuff is not happening and so you are seeing kind of the opposite. I am just wondering if maybe you are breaking it out different when you are talking about severity actually coming down where we have seen it been going up everywhere else.

It could be. Again, the way we think of severity again has to do it with when you look at a particular procedure and you compare that procedure to the prior year and prior periods it seems to us that there is less and there is less complexity in the cases. Again, as an industry and us as a company, making very sure that the appropriate care has been given and being given to the patient.

And the underlying trend there being kind of similar between your government program books and your commercial books in terms of this (inaudible) also?

Actually not so much. There -- again, in terms of the Medicare, as Mike has mentioned and as we have talked at length and you will see when you come later this month, the 15% Solution has a lot to do with how care is administered at how we help coordinate care and integrate care for our better cost -- for lower cost, for better quality, for better outcomes.

So that part we can look at. What I was speaking more of and when I talk more about these trends I am talking more about what the Commercial looks like.

Okay. And then not to jump too far to your point later on this month, but you have kind of actually laid out in a way a couple of the maybe headwinds and tailwinds to getting some operating earnings growth next year. I wonder if you could just go through that just frame up just broadly, I know you are not giving us earnings numbers until a few weeks from now, but probably going to see the big blockers are to achieving operating earnings growth next year.

I think the best thing to do really, John, would be to wait until you come here because it is a story that takes a long time to tell. That is why we are going to devote half a day to it. We will be issuing the guidance ahead on the same day as that so we will have a great deal of time to grow through each of those factors.

The ones that we have mentioned today, though, are the major ones. And, again, there is a lot of nuances and there will be a lot more questions, I think, if we get into a summary and go on with that. We would much rather have everyone plan on coming for the half day on November 18.

Would your expectation be that you should be able to achieve some operating earnings growth next year?

Well, we will get into that on the 18th. Let me just -- you have heard the big items here. Medicare Advantage is going to grow. We have got an interesting opportunity with the PDP product with Wal-Mart; that is likely to grow. We have got some challenges on the individual business relative to the MLRs. And I think beyond those major headlines today I think we will just wait until the 18th to get into that.

Okay, thanks.

Ana Gupte, Sanford Bernstein.

Thanks, good morning. Just going back to the Medicare Part D bids, I think your margins are somewhere in the high singles as I understand. Can you tell us a little more quantitatively what your expectations are in the base case for the margins with this new product design? And then in terms of downside risk to those margins, either if the new membership trades down and you have lower co-pays or the health risk is less predictable, can you point to some elements of the formulary design and how you are managing risk around that?

We prefer not to talk about the profitability of any of our individual products. We have a nice margin on our PDP that fits in our 5% framework that we have talked with you about before. What we are anticipating with Wal-Mart also fits in that 5% framework.

We have done all kinds of scenarios to identify the best case and the worst case in terms of risk selections and we feel comfortable with the $15 pricing that we have put out there. The formulary is tighter than our existing PDP formulary. We think it's a good formulary. The government has to improve it. We think it fits nicely with the overall Walmart program and we feel comfortable that the $15 and the structure of the benefit program will allow us to produce a profit that, again, fits within the 5% framework that we have talked with you about many times.

Okay, thanks. Switching gears then to Medicare Advantage, there has been a couple of transactions -- one is the HealthSpring and Bravo, and then Munich Re I think recently picked up Windsor Health with Sterling Life. Would it be fair to say that your strategy seems to be more growth through organic approaches and you feel comfortable that you don't need to engage in transactions?

And then can you give us some color on how you see the competitive landscape evolving across yourself and United, Kaiser, the commercial players, and then possibly the smaller guys consolidating more actively?

Well, I think the future of Medicare Advantage is consolidation. The requirements that we are going to be dealing with, whether it's MLR or the cost of healthcare, we call it a 15% Solution. All those things are going to require investments, a lot of focus and execution, and it's going to be difficult for smaller players to hang in there.

So I think longer term you are going to see a couple of national players; you have named the other one. I think some of the smaller plants will ultimately do what these folks have been doing which is sellout. We look at those things whenever they pop up, if we are given the opportunity. So we are not opposed to doing acquisitions; we have done them in the past in Medicare. If we can find a good plan that has got a decent infrastructure and physician community then we would be most interested in it.

Having said that, we have an awful lot of confidence and I think we have displayed over the last few years that we have the ability to grow organically. As more moving parts are thrown into this, which is what we have with health insurance reform, I think that is actually an opportunity for us as the dust settles to do quite well in Medicare. So we remain very focused on it. We will buy it if it makes sense. We will grow at organically under all circumstances. I think the future is pretty bright as long as there is good execution around the 15% Solution.

Great, thank you.

Peter Costa, Wells Fargo Securities.

Good morning, everyone. Can you talk a little bit about the CIGNA joint venture and how the marketing of that is going at this point?

We are underway with it. We have said from the beginning this is probably more of a 2012 type of thing than it is a 2011. We have been working to get our act together together and I think we are well down the road.

I think there is big opportunities out there. There is about 11 million people that are getting retiree healthcare and I think that represents a nice future opportunity for us as we fine-tune our relationship with them and our ability to get to these employers and show them the value proposition. I can tell you the value proposition looks very, very good when you sit down with these employers. It's just a question of how inertia bound are they; what is their real interest relative to their retirees. I think it's a nice opportunity, just one of many inside of this Medicare space.

Still on track but not really adding to January group Medicare business?

No, I would look to 2012 before you start seeing traction there.

We are seeing some small sales so the relationship is starting to develop and we have got some small successes. But, again, 2012 looks like where we are headed.

Okay. Then just one more piece of clarity on the $0.06 of negative operating performance in the fourth quarter. Is any of that incremental marketing spend on top of the $0.28 that you talked about last quarter for added spend in the fourth quarter?

Yes, it is. I alluded to it earlier but I didn't quantify it. But, yes, it is in terms of -- we have, because of the shortened selling season and because of all of the non-Walmart pieces, again these are the kinds of things that help us grow membership, not in Walmart but in the other places, help us lower medical costs.

We talked earlier about Humana Cares and how we are working hard to get our the five, the top 5% of our most chronically ill people into more integrated care. We are working hard on that and also the kinds of things that give us multiple-year administrative cost savings. Those are the kinds of things that are in the fourth quarter that are not Walmart.

So is it all that -- that $0.06 is all added to the $0.28 that is like $0.34 now of incremental marketing and advertising spend or is there something else in there?

It's all in there but it's not explained by that totally. There is probably about $30 million to $40 million of additional things for the things that I mentioned.

Okay, thanks.

Carl McDonald, Citigroup.

Just wanted to see if you have a sense of how the transition from private fee-for-service to the new network products are going. Since the seniors have to opt out of it is there any sort of milestones that you can look to or is it simply just hoping to not get the notification that they are opting out?

Well, one of the things we say around here is that people can vote with their feet. Currently our PPO membership has grown from a year-end of 352,000 up to 646,000 so I would suggest that that is a pretty solid demonstration that folks are comfortable with the networks that we have assembled.

I think as time goes on, and Mike has shared this with a lot of you in the past, the baby boomers have grown up being comfortable with PPO kinds of products. As we create relationships with the seniors that we serve I think they get to know Humana and appreciate what Humana does and are willing to accept some network as opposed to the indemnity kinds of things that came with the private fee-for-service offering.

Thank you.

Doug Simpson, Morgan Stanley.

Just one first sort of housekeeping question. They $0.14 that you broke out for reserve strengthening for individual at Q2, is that still in your Q4 expectation?

Yes, it is.

Okay. So that is already, that was included in the $0.61?

Correct.

Okay. And then a lot of discussion around trend and the comment that it's obviously coming in lighter than expectation. Can you comment [to the] expected to ramp over time?

Just in helping us to think about the timing and the way that would impact the numbers, if we think about what you have seen this year and the changing benefit designs, do you expect a bigger ramp in Q4 and then a subsequent bigger dip in Q1 if we hold Blue constant which obviously could be a swing factor? Just thinking out the next six months how this may present itself in the numbers.

I don't think those things can actually be known. We are in the middle of an economic situation that this country hasn't seen in decades so we were seeing last year in 2009 some ramp up of healthcare expenses. We think people were moving all their spending forward as they were worried about losing their jobs. And I think we have seen the whiplash on the other direction this year, but there is really no way to know exactly why it's doing what it's doing.

So as you look forward I think the smartest thing for us to do is not assume the level of news we have today going forward, because this industry -- and I have been around a long time -- has been through this before where for some reason expenses have softened up and people start adjusting prices. They always miss the bottom of that when it goes back up again.

So we are going to be cautious here. We are going to assume that we will get back to more normal rates in the future and that is just our ongoing assumption at this point. It's going to take an awful lot more data and time for us to get comfortable that we have seen any sort of permanent change.

But as you slice and dice the different benefit offerings across your book is there any intelligence to be gained from that as to how much of it is going to be sticky and persist longer term and how much of it is sort of a factor just the exogenous factors you are talking about?

I don't know that we have anything that would give us great insight into that right now.

Okay. And then maybe just thinking about the commission changes that we may see, the logistics around that, how should we think about that flowing into the market with respect to both timing and mechanism? How is that going to be communicated, just that process? How do you see that playing out?

Yes, this is Jim Murray again. It's kind of interesting. It looks like everybody is going to wait for everybody else to do something with respect to commissions and we are in that camp.

We have seen two companies' commission structures come out and most of the commission changes, frankly, are impacting the individual business. The small group, we have done a lot of studying around that and trying to figure at what we need to do, but, frankly, small group for us hasn't been impacted by healthcare reform as individual. So I think what will happen is that sometime in January everybody is going to lay their cards down and we will try to react accordingly.

We have seen, again, two other companies' programs and we feel very good about what we have got coming out. One of the things that we will share with the brokers that serve us is that we are making available lots of other kinds of products and services trying to make it easier for the brokers to do business with us. And so to the extent that we reduce our commission levels, hopefully, they can make up some of that by participating in our other programs.

And so I think we have got a nice rollout planned. We are waiting for a lot of other folks so you will see us rolling out a lot of information in January. We have got a nice tactical plan around that and we feel reasonably comfortable that we will be in good shape. A lot of what has to happen over the next several years is we have got to move to other distribution channels. We are in the process of doing that and I think others will do that over time as well.

And should we think about the timing on that as lining up with the way it plays out with respect to phase-in periods to the extent they are granted?

Sure.

Okay, thanks.

Joe France, Gleacher & Company.

Just a quick question. Jim, in your August guidance you had $0.14 of incremental policy reserve for individual major policy claims. Is that still in the guidance? What is it and is that a fourth-quarter item?

Yes, it is. It's still in the guidance and again there was some in the third and some in the fourth; equal amounts of each, $0.07 and $0.07, if you would be looking for the $0.14. It has to do with again strengthening the reserves in the individual business, basically helping it move to the near 80%, let's say, required minimum MER threshold requirement.

Thanks, Jim.

(Operator Instructions) Dave Windley, Jefferies & Co.

Thanks for taking the questions. Mike, in your prepared remarks you talked about managing the commercial group business for profitability. I wondered if those comments implied any more aggressive moves going into 2011 around that business. Any change in strategy or trajectory there?

I don't know of anything significant but I was referring to a couple things. One is we are not going to price to the current cost levels and as a result we may lose some business if we have competitors that, in fact, are willing to cast their fate with that. So we are just not going to chase that.

We have been in this posture for quite a while. This company has done very, very well on the back of Medicare and some other things. We haven't had the same sort of pressure to have commercial do what I think others have had to do and I think we are still in that spot. So we can be smart, we can be cautious, and our success is not going to be driven by dramatic, organic, commercial business. So we can be cautious and that is what we are going to do.

Okay, thank you. Jim Bloem, on the guidance I wanted to make sure I am understanding the fourth-quarter impact. It looks like to me if I take all the midpoints that the -- the amount that you are not flowing through this quarter's upside to fourth quarter is about $0.11. Looks like $0.06 of that is TRICARE.

Have you touched on the other $0.05? Is that the marketing spend that you mentioned to Peter or am I calculating this wrong or is it something else?

It's basically that marketing spend that is close to the amount. There always are a number of variables, pluses and minuses, but the biggest factor would be that what I would call the non-Walmart investment spend to get ready for 2011.

Okay, great. Thank you.

Sarah James, Wedbush.

Thank you. I am trying to put together some of the pieces surrounding your pricing and cost trend assumptions.

You mentioned this morning that 2010 benefited from care management coordination and giving the appropriate levels of care and how this positively impacted your bed days per procedure or total expenditures per procedure. Then you also mentioned in 2011 that you expect trends to return to normalized levels, which is up about 200 or 300 basis points or so. So can you just conceptually walk us through some of the pieces of how you get back up to that level next year?

Sarah, again when we talk about that 300 basis points, that is really a commercial -- and we are looking at the trend and the trends that are mentioned in the guidance that in the Commercial part of the business. Again, as Mike and Jim have said, that is the smaller part of the business. That is basically about 10% of our pretax.

The other part is a Medicare part. That is where we talk about the 15% Solution and that is where we talk about how we give, as I mentioned before, the appropriate care to those patients who most need it. And that part, again, has helped us and it has helped explain, again, how we can continue to keep premiums and benefits level in a year where again we have had a 10% challenge in 2010 and we are now saying that overall as a company we probably, our earnings will be the best that they have been.

We also face the 2011 situation where we have in Medicare a 5% trend and we are not getting any increase in rates. Again, we feel good about that. We will talk to you more about that on the 18th.

But, again, think about those two things, one commercial and the other Medicare, and then that is how we respond to -- and what has generated the improved performance that we have talked about today.

Let me just follow up with that and say it one more time. We don't have anything in front of us that says expenses are going to go up in the Commercial business next year, all we have is experience. We have seen a strange 2009 relative to utilization and we have clearly seen a strange 2010. So we are in sort of an odd spot right now in terms of trying to predict what medical expenses are going to look like next year.

All I have said is, in order to be conservative about our outlook and not get ourselves in some sort of a bind we are assuming more normalized numbers for next year. But I don't have anything in front of me right now that from a data perspective that would say that is going to happen.

And then on your Part D strategy, I just wanted to understand a little bit more about these seniors purchasing decision in light of the positive disruption that you are creating in the market this year. I know you mentioned that your analysis showed decreasing confusion in seniors through a nationwide price would be an important factor in selling the product. And one of your competitors shared some of their analysis showing that on their book seniors preferred a zero deductible and I know that differs from your strategy this year with Walmart with the low premium and your $110 deductible.

So I know I was wondering if you could just give us any color on your analysis, maybe showing if you have found seniors would prefer the lower premium or anything else driving their purchase decision.

You were breaking up at the end of that; I didn't get the end it.

Sure. I was asking if you could share any of your analysis around the seniors' purchasing decision. If it showed that they would prefer the lower premium over the zero deductible or anything else that would be driving their purchase decision.

Well, no, I am not going to get specific but I will tell you we have studied seniors' buying patterns extensively and we know that they segment into different groups. To think that they are a homogenous group would be wrong; they are not.

And so certain people are attracted to certain product designs, that is why we have more than one product on the street. Some are focused on the benefits specifically and some are focused on the premiums. Knowing who they are and how to approach them is sort of the secret sauce around here in terms of being able to sell.

So we know that this Walmart offering is going to appeal to a pretty wide swath of the folks because of its low premium and the way it's structured and the fact that the brands attached to it are quite strong. All of that matters; we have studied it and we continue to do it. We want to get better and better over time in knowing how to reach the market.

We have learned a lot in just the last four years. In an area where you are going to have pretty short selling you had better be very good at this. We think it's a critical component of how we operate our Medicare businesses, understand how to approach these people.

Maybe we have tripped a couple of times as we have learned this business, as some of you know, but right now I feel pretty good that this particular product is very focused on a pretty wide swath of the population. But it's built on the back of our understanding of what people want.

Thank you.

Tom Carroll, Stifel Nicolaus.

Good morning. Just a quick last second clarification. On your MA growth comments were you speaking from a net expectations perspective? I missed that.

On a net basis, Tom?

Yes, it was net.

Thank you.

There are no further questions in queue.

Okay, terrific. Well, thanks for joining us this morning. We have a lot of work ahead of us. We have a lot of people in this company implementing our health insurance reform bill and we are fully engaged in doing that.

We are pleased with the quarter. The year looks good. We are excited about what Medicare is going to do for us in January. We look forward to seeing all of you later this month and I would like to thank all the Humana associates that are on the call for making this great performance possible. Thank you very much.

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