Humana Inc (HUM) 2010 Q4 法說會逐字稿

Good morning. My name is Steve, and I will be your conference operator today. At this time I would like to welcome everyone to the Humana fourth-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'm going to turn the call over to 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 Chairman of the Board and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our fourth-quarter 2010 and full-year 2010 results as well as comment on our earnings outlook for 2011.

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 filings with the Securities and Exchange Commission.

Today's press release, our historical financial news releases, and our filings with the SEC are all available on Humana's Investor Relations website. Finally, any references made to earnings per share or EPS in this morning's call refer to diluted earnings per common share.

With that, I will turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. Today Humana announced fourth-quarter earnings of $0.63 per share, in line with our most recent guidance. Our underlying operating results were very strong during the quarter. Excluding the $1.02 per share in incremental fourth-quarter expenses highlighted in this morning's press release, this quarter's results were actually up compared to the fourth quarter of 2009.

Our full-year 2010 earnings per share of $6.47, in line with our previous guidance, reflects the strength of our businesses and was driven our Medicare membership growth, our disciplined pricing, continued focus on our 15% solution, our administrative cost-reduction initiatives, and the benefit of unusually low medical cost trends. The fourth-quarter expenses that were not included in our prior guidance were the strengthening of our long-term care reserves, a contribution to The Humana Foundation, and transaction costs associated with our acquisition of Concentra in December.

Additionally, the quarter included incremental investment spending for the 2011 Medicare enrollment season that we have discussed in previous calls. Jim Bloem will provide more color around each of these items in his remarks.

In the just-completed Medicare enrollment season, our net sales for both Medicare Advantage and standalone PDP offerings were better than we had previously projected, and our commercial operations continue to improve as well. Accordingly, we have raised our 2011 EPS guidance this morning to a range of $5.70 to $5.90 from our previous range of $5.45 to $5.65.

My remarks today will focus primarily on the 2011 Medicare open enrollment season, our continued progress in improving seniors' health outcomes through our Medicare clinical initiatives, and our strategic acquisition of Concentra at the end of 2010. But first I will briefly touch on a topic of interest to many of you, the Risk Adjustment Data Validation, or RADV, Medicare audits.

Just this past week CMS issued a statement that it was thoroughly evaluating all comments received on its proposed methodology; and based on that input it anticipates making changes before issuing the final RADV audit methodology. As we noted in our comment letter to them on this matter, we believe the proposed methodology is incorrect. We hope CMS's statement is indicative of substantive changes forthcoming to ensure Medicare Advantage payment models are actuarially sound.

A lack of substantive changes to the proposed methodology would, we believe, jeopardize the program itself and disrupt coverage for the 12 million seniors in Medicare Advantage plans across the nation. For their part, seniors continue to depend on the value proposition our Medicare plans offer, as evidenced by our recent sales results.

Starting with Medicare Advantage, while we had previously projected 2011 to grow by 60,000 to 65,000 net new members, we now estimate net growth of 90,000 to 110,000 members. Both gross sales and member retention exceeded our expectations.

By developing robust networks in multiple areas of the country over the past few years, we have made it possible for many of our private fee-for-service members to transition automatically and seamlessly to network-based products. Further, for the 115,000 Humana private fee for service members who needed to actively enroll in an HMO or PPO offering for 2011, we experienced a higher than forecast number who chose network offerings during the 2011 enrollment season.

As for standalone PDP offerings, our innovative Humana-Walmart Plan drew a great deal of interest and sales significantly exceeded our expectations. We have recently evaluated the geographic distribution of the membership in this nationwide premium plan, as well as pharmacy claims data through the first month of the year. These are in line with our expectations for the Humana-Walmart offering.

Gross PDP sales, particularly for the Humana-Walmart Plan, together with an increase in auto-assign membership resulted in us raising guidance for standalone PDP membership growth to a range of 525,000 to 575,000 net new members during 2011 versus our previous guidance of an increase of 325,000 to 375,000.

It should be noted that our Medicare sales results were achieved against the background of our annual Medicare margin reset overall. As in the past, we believe it to be prudent policy to target a 5% margin longer term. Hence, to the extent we exceed our longer-term goal, we in turn pass that incremental margin back to our Medicare members in the form of lower premiums and/or richer benefits.

Just as importantly, we will continue to strive diligently in the interest of our members to improve outcomes while lowering costs for them, for the Company, and for the country. It is no exaggeration to say for the country. Whatever else it might have done or will do, last year's health-insurance reform debate put the spotlight on the fact that the nation's rising healthcare cost, especially in Medicare, and the growing incidence of expensive and largely preventable chronic diseases, such as diabetes, is unsustainable.

Unless consumers are engaged in their health and unless companies like ours with a track record of success in consumer engagement continue to offer attractive programs that make healthy things fun and fun things healthy, and at lower costs, the crisis will soon be upon us. We are doing what we can to mitigate such a crisis and, for own members, seeing very good results.

On the most basic level, favorable comparisons versus traditional fee-for-service Medicare in such important measures as hospital admissions, readmissions, and emergency room use, which I have shared with you in the past, are the result of an integrated program of member and physician focused services that simply does not exist in original Medicare. We believe that the consequence is better health outcomes and quality of life for our members, along with lower costs compared with seniors in traditional Medicare.

The program begins with health risk assessments of new members and follows that up, where warranted, with proactive outreach for clinical guidance. This outreach can be in the form of personal nurses, disease management programs, integrated medical and behavioral health, and/or hands-on assistance with feeding, bathing, and other key components of daily living.

There are also a wide variety of healthy living, healthy eating options available to members including the SilverSneakers fitness program, Well Dine for nutrition, health and wellness classes, and a variety of plan-based and community-based support services for our most at-risk members through Humana Cares. As it evolves, our clinical program is increasingly aligned with CMS's Star rating system in anticipation of coming changes in the Medicare Advantage revenue model.

Such alignment has already yielded progress. From 2010 to 2011, Humana's Star rating summary score improved from 2.74 to 3.1 stars, a 13.1% increase. For the 30 Humana plans rated in both years, 17 plans improved their Star ratings, 13 remained constant, and none experienced a decrease.

As you probably know, Star ratings are comprised of service metrics as well as clinical ones. To give you a sense of the progress we are making on the clinical side, certain clinical measures such as rheumatoid arthritis management and controlling blood pressure improved by at least 15% year over year.

It is worth noting that for every Star measure, Humana tracks data on which members are compliant and which are not, and follows that up with a focused outreach effort. Last year in our Florida HMO, for example, we conducted more than 9,000 colon cancer screenings, 5,000 glaucoma screenings, and 2,000 kidney function tests for diabetics after analyzing member compliance data. Once again, in comparison, none of this proactive health support is available to members of traditional Medicare.

Looking ahead, we anticipate further improvements in Star ratings through the implementation later this year of automated personalized member messaging. Clinical standards will enable us to identify Medicare Advantage members who could benefit from our programs, according to evidence-based care guidelines, and we will customize messaging through a variety of channels -- telephonic, electronic, and one-to-one conversations with clinical experts.

Beyond Medicare, making a difference at the level of individual health is one of the reasons we acquired Concentra late last year. As I have said on several recent calls, Humana is progressively expanding its strategy to embrace the concept of lifelong well-being. The Concentra model is a good stepping stone in this overall strategy.

Through its affiliated clinicians, Concentra delivers occupational medicine, urgent care, physical therapy, and wellness services to workers and the general public from more than 300 medical centers in 42 states. The geographic fit with Humana is ideal; nearly 3 million Humana medical members live near a Concentra center.

Concentra is the respected market leader, with more than 14% of work-related injuries in the US treated at a Concentra center. And it has relationships or formal accounts with more than 100,000 employers. We expect Concentra to support our commercial business immediately while we simultaneously proceed with plans to expand the availability of these services to our Medicare members, all while being accretive to our 2011 financial results.

We will continue to look for acquisition opportunities like Concentra as part of evaluating the most prudent near-term use of capital to ensure long-term value appreciation for our shareholders.

In summary, Humana completed in the fourth quarter a very solid 2010 which we believe positions us well for 2011. The 2011 Medicare selling season in November and December surpassed our expectations, and we continue to advance our ability to improve the quality of life and health outcomes of our members while achieving ever-higher value for money in the Medicare program. With that I will turn the call over to Jim Bloem.

Thanks, Mike, and good morning, everyone. I'd like to begin by summarizing our 2010 financial performance, followed by a discussion of today's increase in our full-year 2011 earnings per share guidance range. As indicated on the slide, our 2010 earnings per share of $6.47 came within our previous guidance range of $6.40 to $6.50. However, the $6.47 per share includes four noteworthy items which arose since the time of our Investor Day on November 18. Since three out of the four were unusual expenses, we are pleased with our fourth-quarter operating performance.

Let's quickly review the four post-November 18 items in order of their size. First, as discussed in this morning's press release, we strengthened the reserves for our closed block of long-term care policies in the amount of $138.9 million or $0.52 per share. This block of 35,000 policies was acquired in connection with our acquisition of KMG America in late 2007. No policies in this block have been sold since 2005.

This reserve strengthening occurred as part of our annual year-end review of these long-duration liabilities. In this year's review we revised our original acquisition assumptions with respect to three things -- first, the amount and frequency of regulatory allowed premium rate increases; second, annual claims and claims management expense levels; and third, expected rates of investment returns over the 30-plus-year expected life of these liabilities.

These revised assumptions were based on our experience over the last three years with respect to premiums and expenses, as well as the current outlook for long-term interest rates.

Second, on the positive side, we experienced greater than anticipated favorable development of prior year's medical claims in the amount of $37.8 million or $0.14 per share during the quarter. This brought the full-year benefit of better-than-expected prior year's medical claims development to $231.2 million or $0.86 per share.

Finally, we incurred two other significant expenses during the quarter that were not included in our previous guidance on November 18. First, a $35 million or $0.13 per share contribution to The Humana Foundation; and second, $15 million or $0.08 per share of transactions costs associated with the closing of the Concentra acquisition.

With respect to The Humana Foundation, we believe the Company's philanthropic efforts are an important part of its mission. We have not been able to make a contribution of this scale since at least the year 2000, and we were pleased to be afforded that opportunity during the fourth quarter.

Our remaining fourth-quarter results of $165 million pretax or $0.61 per share compares favorably with our previous guidance. This better-than-expected operating performance consisted of approximately $90 million from the Commercial Segment and $75 million from our Government Segment.

With respect to our Commercial Segment operations, we continue to benefit from the unusually low medical cost trends experienced by the entire health insurance sector during 2010. Of the $90 million of Commercial operating over-performance in the fourth quarter, a little less than one-third was favorable development from the first nine months of the year, with most of the remainder reflected in the continuing run rate cost trend improvement.

Our Government Segment operations benefited from another strong quarter of performance in our MAPD business, primarily driven by cost trend improvements arising out of a continued success of our 15% solution.

Turning now to full-year Government Segment results, our 2010 Government Segment pretax income increased by approximately $150 million versus 2009. As noted on the slide, there are four items that are included in this $150 million net improvement.

First, we benefited in the Government Segment from $182.4 million of greater-than-anticipated prior year's favorable medical claims development in 2010. Second, we incurred about $77 million of additional SG&A expenses associated with the Humana-Walmart PDP plan launch, which was $40 million, and with the change in the 2011 Medicare Advantage enrollment period, which was $37 million.

With respect to the Medicare enrollment season, 2010 was unique in that we incurred first-quarter marketing and selling expenses associated with the 2010 enrollment season and then also absorbed what we would normally have spent in the first quarter of 2011 into the fourth quarter of 2010, because of the mandated shortening of the enrollment period for 2011.

Third, the portion of The Humana Foundation contribution that was attributable to the Government Segment was $26 million. Finally then, the remaining pretax improvement of approximately $70 million results primarily from the growth of our Medicare Advantage membership, our SG&A cost efficiencies, and the benefits of scale that come with being a larger competitor.

You will recall that we discussed on Investor Day that we reset our overall Medicare pretax margin to 5% for 2011 and continue to pursue the beneficial effects related to the 15% solution. We also continue to expect to record between $50 million and $75 million of charges in the fourth quarter of 2011 related to the assumed termination of the current TRICARE contract on March 31, 2012. Approximately $50 million of these charges relate to goodwill, and the remainder relate to the transition of the contract. These are the same assumptions that we originally used with respect to 2010.

Moving on to our full-year 2010 Commercial Segment results, while we benefited from much lower than expected medical cost trends as well as some greater than expected favorable development prior year's medical claims, we also incurred some significant expense items. Most notably, the new health insurance reform law mandated a $147.5 million writedown of deferred acquisition costs on our individual major medical block of business in the second quarter, as well as the previously described long-term care reserve strengthening during the fourth quarter.

With respect to the medical cost trends, for pricing purposes we have assumed a return to historical levels for 2011, which is reflected in our guidance for this year.

Turning next to our 2011 earnings per share update, we have raised our full-year earnings per share guidance by $0.25 to reflect the impact of two items. First, higher membership in both our Medicare Advantage and standalone PDPs. This increase in Medicare membership represents about $0.15 per share.

Second, we are reflecting some of the 2010 lower Commercial medical cost trends, which will result in a lower medical cost base which will benefit 2011. This $0.10 per share increase primarily relates to our large group business, which is much less encumbered by the new health insurance reform minimums for medical loss ratios than are our small group and individual blocks of business. Accordingly, we have also increased our 2011 Commercial Segment pretax income forecast by approximately $50 million to reflect this large group cost trend improvement as well as the inclusion of Concentra's expected accretion of $0.10 per share, announced at the time of its acquisition in December.

Moving next to selling, general, and administrative costs, we expect that our solid progress in 2010 will continue into 2011. As mentioned in our third-quarter earnings conference call, we achieved our $100 million of cost savings in 2010 and have entered 2011 with a $200 million run rate savings goal that we set for ourselves at this time last year.

Our cross-functional administrative cost committee has developed processes which assure that these administrative cost-reduction efforts are not just one-time events, but rather an ongoing source of both improved cost competitiveness and savings funded initiatives, which allow us to continue to transform Humana to both meet the requirements of health insurance reform and also to implement the corporate strategy we outlined in detail on Investor Day. Our current 2011 SG&A ratio forecast, which includes all Concentra expenses, shows how we expect the payback of our cost reduction and savings reinvestments to lower our core administrative expenses, as represented by the blue bar on the slide.

Turning next to our expected 2011 quarterly earnings pattern, this slide shows the timing of the major items that we expect will impact our earnings from quarter to quarter this year. These items include our annually discussed seasonality factors such as, for example, the quarterly effects of our PDP benefit designs and the ongoing migration of our Commercial membership into high-deductible health plans.

The only change in this slide from last year is the elimination of the Medicare selling season for the early part of the year. As previously discussed, this elimination results in concentration of our Medicare marketing and selling expenses for the entire 2012 selling season into the fourth quarter of 2011. Thus, other than the timing of the expenses associated with the fourth-quarter Medicare selling season, we do not anticipate any significant 2011 differences from our 2010 quarterly earnings pattern. Accordingly, our first-quarter 2011 earnings per share guidance range of $1.15 per share to $1.20 per share is approximately 20% of our current full-year EPS guidance range, which is consistent with each of the last two years.

Turning last to operating cash flows and capital deployment, our capital deployment efforts remain focused on effectiveness building capital expenditures, potential acquisitions and strategic investments, as well as continuing to repurchase our shares. Based on record 2010 operating cash flows, we were able to do all three to an increasing extent in 2010 versus 2009, as outlined in this morning's press release.

Our 2011 guidance range for operating cash flows was increased by $200 million today to reflect the increase in our Medicare membership, the improved Commercial Segment pretax outlook, and the Concentra acquisition. This morning's increases in our 2011 guidance points for capital expenditures as well as depreciation and amortization expenses primarily are due to the inclusion of the 2011 Concentra capital budget and asset ledgers, respectively.

As we move further into 2011, we continue to believe that having and conserving ample capital and liquidity provides us with the financial flexibility needed to compete effectively in the new environment as it continues to unfold. So to conclude, we are pleased with our financial and operating results for both the fourth quarter and for the full year 2010. Our increased 2011 full-year earnings guidance range of $5.70 to $5.90 per share reflects our organizational competence and confidence, as well as our disciplined and intentional approach to the current operating environment.

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

(Operator Instructions) Josh Raskin, Barclays.

Hi, thanks. Good morning. Just a question, I guess Jim, just staying on that line of reasoning around the 2011 guidance. I guess your 2010 was I guess basically in line with your estimates from a couple months ago but that includes $0.52 from the reserve boost for the long-term care and then the Foundation of $0.13, and Concentra of $0.08. I guess even if you took out the favorable development of $0.14, I am still getting a net improvement of $0.59.

So I guess I'm looking at guidance up $0.25, but then the core operating in the fourth quarter alone is $0.59. So I am just curious; what is the disconnect?

Was there fundamental -- was it just some of the upside can't come back next year because of MLR minimums on the Commercial side? Or what is the difference there?

There's two principal differences. Again, this is what we talked about at Investor Day too, so it's a good question. As both Mike and I said, we reset our Medicare margin to 5% every year. And then, as Mike pointed out, we use -- when we do better than that, and the organization works very hard all year to improve on that and again give better outcomes at lower cost to our members. But as we improve on that, then when we go to next year we take that and put that back into the benefits and premiums, particularly in light of what has happened in the last couple years with respect to reimbursement. So that has made us very competitive.

Then also on the idea of -- just to get to the other part of your question. The Commercial side, as you know, this is the year where the 80% minimum MLR kicks in for small group and individual. So basically the only real improvement we get to show there comes from the larger groups. So those are the two things that sort of help us but also really -- you don't really get to start all over again where you left off the prior year.

I guess, Jim, on the Medicare margin -- I understand you guys put your bids in eight, nine months ago, I guess the first week in June. So if you are seeing better improvement in the fourth quarter, are you saying you're going to augment benefits in 2011 as we go? You are just going to -- you can still do that now? Is that the idea?

No. It just has to do with again -- when we do it back in June, again, looking at where we were for 2010 with an economic 10% problem of basically a 5% rate cut and a 5% trend, and not having -- and having the legislation having froze us out of early increases, that we priced according to that 5% margin; and then we did better.

So now as we get into '11 we have got a competitive price offering. And as the year goes by we will continue to look at and report whatever happens to us vis-a-vis that target 5% operating margin.

I think this is one month into the year, and as we see claim payments and other clinical measures support what we saw in the fourth quarter, then we would obviously anticipate it and report it at that time. But we're going to wait until we see the favorable claim payments play themselves out a little bit further into 2011.

Got you, Jim. So that makes sense, just more prudence. And then hopefully this counts as a second question; but any expectations for the 45-day notice next week? Where do you guys think 2012 reimbursement will start at?

Well, we have seen a couple of writeups by folks on the phone that would suggest that the range is somewhere between a negative 2 and a positive 1.5. As we have looked through those documents, I can't find anything that I would take umbrage with. I think that that would probably be a reasonable guesstimate as to where that will turn out.

Okay. Do you think the RADV stuff gets included?

No, I don't believe so.

Okay.

Remember, Josh, we always go last.

Right. I know.

John Rex, JPMorgan.

Thanks. Over the course of the reporting period, a few of the companies have noted they have made some -- as it relates to RADV -- some accruals for repayment during the 4Q. So I think you guys have early-on said you don't view it as estimable right now, so you wouldn't be doing that. Was there anything in your 4Q?

This is Mike. No, we have nothing in there for that.

Okay, so still until you get a methodology I suppose your point of view would be you couldn't put down an accrual?

I don't know how you could, frankly. I think we are far from understanding where this methodology is going to come out. CMS's note last week, you know, confirms the fact it is a work underway. So until we know specifics of how it's going to work, it is not appropriate to be setting aside reserves.

Okay, great. Then can you talk through the gross adds and losses in the Medicare Advantage book?

Sure, this is Jim Murray. Just a few points. We sold a total of about 500,000 gross sales which includes plan-to-plan changes. So our MarketPOINT organization led by Patrick O'Toole did an incredible job in a short period of time.

Were you to strip out the plan-to-plan changes of around 200,000, you would come up with net sales of around 290,000 which was an incredibly good result, against what we thought was going to be around 270,000. So we exceeded our sales targets by around 20,000.

In addition to the sales results, we also enjoyed some good retention. We had terminations of around 163,000 net against a target of around 210,000. So about 50,000 or 47,000 favorable retention against our goals.

Some of that came from what we refer to as true terminations, and some against the better job we did on selling members that we reported to you prior, that were in private fee-for-service exit states. We did a much better job of selling those folks.

The other thing that I would point out is that that 200,000 plan-to-plan sales that we made, 80,000 were in the 115,000 that we reported to you that we would have to resell, which was a really good result. In addition to that, about 120,000 were from conversions into network-based options, further demonstrating the point that we have been talking about for a long time -- that people are more willing to buy network plans than had been thought of in the past.

So we feel very, very good about what has happened in this AEP, and we look forward to 2011.

Great. Just the last point that you had answered previously, just on the 45-day notice. So ex- the 45-day notice, have you estimated the impacts in '12 just from the transition to the new reform rules? So as we start phasing those in, what kind of increment you would expect on that?

Yes, this is Jim Murray again. Included in the 1.5 to negative 2 that we talked about earlier there were some guesstimates as to what the implications would be for the health reform phase-in. So if you use that as a starting point -- and I am just going to talk from 100,000 feet. Let's pretend the range is a negative 2 to a positive 2, okay? So that is the money we would receive from the government.

What is not included is our MRA work that we do and we talk about with you regularly. Some of the reports that we have read anticipate that there is a negative 2 in that range that I talked about earlier related to risk factor changes. So if you assume that our MRA work offsets that -- which we have said for a long time that that is a zero-sum game. So minus 2 to a positive 2; then you would add 2 percentage points for MRA.

Then we talked with you for a long time about the 15% solution, so let's identify or estimate that anywhere from a 2% to a 4% improvement because of what we do, that we call trend-benders, that goes to support that 15% solution.

Then against all of that you have to step back and think about what trend really is. We believe and we have told you for a long period of time that we think trend is anywhere from 4% to 5% year after year. So if you take all of those ranges that I have given you, you come up to about a negative 2 to a positive 3; and we feel very good about our ability to manage within that kind of an environment, to continue to provide an economic benefit to the members that we serve, and feel very good about our prospects for our 2012 bid season.

Let me just add to that, John. We talk about this and I am not sure how much credibility you all give it, but this idea of getting better value for money and better clinical results is actually a very big deal in all this. Because you've heard me say for the last decade what a mess the traditional Medicare program is, and how uncoordinated it is, and what an opportunity there is to clean all that up. Get better treatment for people, get it better organized, and get better cost.

That is what keeps us really in a nice position. This is not just a pure insurance model here. This is all about healthcare, clinical organization, and clinical integration, and improving productivity. And across every metric we measure relative to our membership, from the sickest to the walking healthy, things are continuing to get better. And that is really what props up everything here.

Next question, please.

Justin Lake, UBS.

Thanks. Good morning. First question, just a follow-up on the RADV commentary. Your 10-Q has a great risk statement that gives a lot of clarity on the issues you see with these RADV audits. Specifically it talks to the potential of not only taking a reserve if and when CMS comes out with a final methodology, but also talks to the potential for accruing or changing the way you accrue for risk scores in the current year depending on how the methodology comes out.

Can you talk to us about how that, from an accounting standpoint, would work? What are the two or three factors we should be focused on as far as that methodology, as to whether you would need to change your accruals and potentially change your revenue recognition for this in the current year, not just taking a reserve for 2007?

Right, well, I think that the primary thing -- and again we appreciate your reference to the risk factor because it's been out there for a long time, and we think that it adequately describes where we are right now. But with respect to the methodology itself, we believe that the methodology is incorrect and flawed and actuarially invalid.

So until that situation changes, to me there would not be a reason to accrue. Mike made that comment just a few moments ago. I think that is the principal reason why it is inappropriate at this time.

In addition, CMS put out the notice that we have all referenced that they are looking at this carefully and they are understanding better now what the comments are. So we will wait to see what that is.

But in the meantime we think that the risk factor disclosure that we have made that you have referenced is very important for everybody to understand, and that this is a very important issue for our industry. So as we move forward we will take a look at the facts and circumstances as they develop to decide what we are going to do.

One of the other things that you mentioned that is also important is that this is really a revenue recognition issue and not so much a contingent liability. The accounting rules that govern revenue recognition are different than those that surround contingencies and losses. So anyway, I will not stop here.

Jim, maybe you can just specifically carve that out for us. I really want to understand the 2011 impact rather than the audit impact on 2007. So CMS comes to you and says -- we want $1 back for 2007 from this risk score audits. Is that going to change the way you accrue for risk or revenue in 2011 as well, meaning you will have to lower your revenue guidance for 2011 and increase your MLR?

If ultimately, and I say ultimately, these matters were definitively to come out the way the original December 21 notice was, then after the final judgment and after the final consideration by everybody, including the agency and the courts and everybody else, then you might get to that situation. But again we're going to watch this very carefully as it evolves.

Right now we are believe we are appropriate -- we have discussed it appropriately in the risk factor and we have appropriately not accrued anything or reduced revenue for 2011 for this.

Let me just say this one more time. The proposed methodology they have out there is absolutely actuarially wrong. It is incorrect, and therefore we are not sitting around here wringing our hands at this point, because at the end of the day we think we end up in a different place.

No, that makes perfect sense. And Jim, just one last point of clarification, as far as your -- if CMS comes out with this methodology and says we are not changing it, you wouldn't change your accruals until after it's been vetted by the courts?

Yes, I believe that would be the appropriate thing. Because then again we would have all the redress avenues that we have for the incorrect methodology that Mike just mentioned.

Okay, I will throw my -- just ask my second question quickly around Medicare Advantage membership. Can you talk about -- this aging into the population is obviously going to be very significant over the next couple of years -- or the next decade or two I should say. I am just trying to understand the Medicare penetration overall of the 45 million, 46 million that are out there is somewhere in the 20%, 25% range.

I am just curious. Have you seen or can you talk to what the takeup rate is of the 65-year-old population as they age-in each year? Is it materially different than that 20% to 25% of the overall population?

This is Jim Murray. I believe that we have done analysis in the past, but I would have to go and dust that off. That would suggest that when people do turn age 65 here lately they are at a bigger percentage than the current market shares that we are seeing, and that is because people are more used to a network-based PPO kind of an option, which is what we are providing them. And we are seeing an increase in share as time goes on.

I think the other thing to remember is until recently there really were not really any national players in this business. So there were huge swathes of the United States that had no Medicare Advantage even being offered.

So we have got two things going on. People are seeing these products for the first time as Humana and others are expanding across the country. And then they are having to deal with their experience or lack thereof with network plans and that sort of thing.

So whatever the data would tell you today, I am not sure it says much about the future. I think these plans are going to continue to grow because they do have a very high value proposition.

Next question, please.

Sarah James, Wedbush.

Thank you. I had -- my first question was on Concentra. It looked like in the slide that there was a 225 basis point G&A boost from the expenses, which works out to be about $832 million on the midpoint of your revenue guidance. And prior guidance was for about $800 million of Concentra revenue.

So I was just wondering if there are some one-time G&A pieces in there or non-Concentra items contributing to the 225 basis point move, and then what the long-term margin on that business looks like.

Sarah, you have pretty well I think accurately recapped what it is. You can see that the other revenues guidance went up by [8 50] and these expenses probably by [8 25]; and that 25 to 27 difference is the $0.10 EPS that the accretion is based on.

When we look at 2011, we are going to have integration expenses. We are looking at different ways, as Mike said, to take what Concentra does and move it to -- from our Commercial populations and toward our Medicare and our Humana membership. So those will be the expenses that sort of weigh down '11 with respect to Concentra. But we are very optimistic over time that this type of business fits both strategically and financially.

And all of Concentra's expenses are included in administrative costs, including the physician salaries.

Correct. I mentioned that in the script.

Okay. That makes sense. Then I guess on the enrollment guidance, it looked like the January numbers you reported were a little bit above where guidance was. So I was just wondering if there are some factors leading to your conservatism, or if that guidance could then come up to at least the January numbers or above?

This is Jim Murray again. We are currently sitting at around a net 130,000 member increase; and I think we have guided to the midpoint being around 100,000.

We are being prudent. We have looked at some of the members that have stuck with us. They didn't term. And we have looked at some of the premiums that those folks have been -- delivered. We talked earlier that generally speaking our premiums that we have delivered across the entire block stayed about the same, and that is one of the reasons why we were successful in this open enrollment period.

But certain parts of the United States, certain geographies did get some premium increases. So we are prudently looking at those geographies and stepping back and wondering whether or not those folks are going to be able to pay those premiums. As time goes on and we see whether or not they are able to pay those premium increases, that 100,000 could move closer to the 130,000; but time will tell.

Got it. Thank you.

Next question, please.

Charles Boorady, Credit Suisse.

Thanks, good morning. On Medicare Advantage enrollment, are you able to tell yet what percent of your gross new adds were agents versus share gains? Do you have any sense for roughly what percent of the agents are moving into Medicare Advantage?

That's difficult to tell with this AEP enrollment gain. What we will be able to do better is, as the rest of the year plays itself out, we will see how the agents are as a percentage to the earlier question that was asked. We can't tell whether or not an individual who has joined us at this time was with a plan prior.

Got it. Are you able to know their age I suppose to see if they have recently turned 65?

Sure. We haven't pulled that together yet, but we can pull that together fairly easily. That's a --

Got it. On the Star ratings, do you have a goal for ultimately reaching 4 Stars or some certain level of Stars, and over what time frame?

And can you talk about whether your opportunity is really mostly on the clinical side or on the admin side for what you would need to improve to get to a higher average Star rating?

This is Mike, Charles. The goal is pretty straightforward. It is 5 Stars everywhere.

Having said that, we have a lot of different product designs and some are more tightly managed than others. So we are always going to have varying degrees of performance against this.

I think the clinical -- it may seem counterintuitive on it, but I think the clinical side may be easier to handle than the other side. Because the clinical is going to be something we are going to have data on and understand exactly what is happening with these people, and have an ability through messaging and other techniques to get better quality and hit those Stars.

The service side to me, frankly, I think they ought to eliminate those Stars anyway. I think a lot of that stuff is not really powerful in terms of measuring how well this program works. But they are what they are for the time being until changed; we will work to make those better as well.

But to the extent you are dependent upon downstream providers for customer service implications, that gets a little trickier. So I think we will have varying performance all over the country. It will depend on the type of structure of the plan. It will depend on the concentration of membership we have. So we will have a lot of moving parts.

But you will see us progressively improve across the entire book of business we have over time. And I think we're going to have our fair share of very highly rated plans over time.

5 is a theoretical goal, I understand that. But just to get a rough sense of time frame, Mike, are you thinking -- is it two years, three years, four years, to get to 4-Star average? And then how long to get to 5?

Again, I think the clinical side we can probably measure it and be a little more predictable around. We're not talking a six- or seven-year journey here. Our people realize they need to be on this. We need to figure out how to improve these scores, and we will move as quickly as we can.

Should we expect to see any special investments, more downstream risk sharing or anything else as you strive to achieve that goal?

All of those things. We are looking for providers that are interested in working closely, being driven by metrics. Some will want to take some risk sharing, some will not. It is not critical they go either way.

But the more tightly integrated you have -- and if they have any kind of risk sharing relationship with us they tend to be much more focused on the quality of healthcare as well as things like service metrics and this sort of thing. So as far as we can move down the path as fast as we can with any provider that is interested in doing better, seeking better value for money, providing a higher level of service, and participating in the improved payment methodology that results from all that, we are ready.

So we're looking nationwide as we speak right now, and there is a lot of interest out there.

Next question, please.

Doug Simpson, Morgan Stanley.

Good morning, everyone. Just walking through the one G&A slide, just trying to come at this a little bit of a different way, if we think about it being 13.8% in '09, coming down to 13.2% in 2010, and then if you strip out Concentra you're at, call it the midpoint, 12.5%. If we were to look ahead into 2012, just trying to wrap all the comments you have made including potentially the investments to support the Star ratings and the MA book, how would you see that core G&A tracking, looking out 12 months from now?

And then maybe just on the Concentra side, the 225 you are showing this year. It sounded like there were maybe some one-time type stuff in there for 2011. So just trying to get at how that progresses this year and what the run rate might look like coming into 2012?

Well, as you have pointed out, we try to make this -- we try to divide this into two things, and that is what the slide is trying to get at. What is the core rate? What is the SG&A ratio on the core expenses?

Again, we are transforming the Company, so we are not only getting more cost competitive but we're using some of those savings to reinvest in the other things we need for our corporate strategy. So there's two things we are always looking at.

So it makes it hard kind of to look at it from the standpoint of, well, what is it going to be in 2012? I think if you look on the blue bar on those slides, the dark blue portion, you can see that the trend is clearly down; and that is really what we're about.

Now, we need to reinvest. We need to get to it to do the strategy that we talked about, we need to do that reinvesting.

As far as Concentra is concerned, we just have acquired that and we are looking to see all the different things that can be done with that. There will be some investment in there.

The investments that we're going to make in 2011 that cause that sort of 225 comes from the fact, as was mentioned before, all the Concentra expenses are in there. And we have to do the integration, really; we have to bring the two organizations closer together and figure out how we can really get the synergies that we think are available to us through Concentra.

I would add that trying to figure out SG&A is going to be a little difficult for you all over time as our business mix continues to shift. Things like Concentra is a good example.

But what we know internally here is that admin has to be very, very low in this new MLR world we are going to live in across all these products. So higher productivity internal is what we are focused on.

To the extent the mix changes some, it may be harder for you to see on a consolidated basis, but we are all over the idea that scale matters; our IT investments have to be smart; and our SG&A internally in our core businesses has to be very low.

That's helpful. Maybe just some color on the Concentra deal and how you see this fitting in longer-term, I guess on two fronts. One just in general, with provider contracting in the markets that have overlap. And then secondly how do you see this positioning you with respect to, call it the employers in the 1,000 to 2,000 employee count? How do you envision structuring products, leveraging the Concentra assets?

There's a number of possibilities. I will go back to what we said when we bought Concentra. This was about acquiring a platform with good management and a basic position capability to locate offices, staff them, build metrics around performance, hire and recruit and retain, and that sort of thing. So you can take our Company and you can start looking at all sorts of spots where the ability to do that will be meaningful.

But it's important to note that it's going to vary dramatically by location. In some cases we may only have a few of these; in some cases they may be concentrated. In some cases they may be the core of an insurance product. In some cases they may strictly be a relationship with employers across wellness and well-being and this sort of thing -- work site clinics.

So we look at the company from a number of perspectives, and we think strategically it fits into a lot of little corners of what we do. We like the idea of having them be a key component in our Medicare strategy long-term because the primary care piece is critical in Medicare. And I think we've got a situation here where we have the capability to really have a tool that can be used in a lot of different ways.

So it is not a simplistic view of it. In the meantime, it is a well-run company that is contributing to our EPS.

Next question, please.

Tom Carroll, Stifel Nicolaus.

Good morning. Just want to follow back up on some of the enrollment numbers that we talked about. So it's really two things. I guess first of all, what kind of disenrollment are you expecting? I think it goes back to Sarah's question on your increase year to date on MA versus your guidance, so there is a 30,000 roughly person difference there.

I guess, does that mean you expect 30,000 folks to disenroll? What kind of disenrollment behavior have you seen year-to-date?

This is Jim Murray again. The 30,000 that we referenced earlier was our stepping back, looking at what happened during the AEP and the pockets of members that stuck with us and the premium levels that we deliver to them, and us stepping back and saying -- is it likely for these folks to continue to pay these premiums? What would prudence tell you in terms of establishing a target?

That delta was the 30,000 that we have come up with. To the extent that as we go throughout the course of the year, those folks are paying the premiums that were a part of their plan benefits for 2011, it is possible that that 100,000 midpoint would go closer to the 130,000.

For the remainder of this year, except for that, we would hope that our age-in opportunities would offset the terminations that occur as folks die and choose to leave the program. So we would think, other than that 30,000, that we would be generally flat for the remainder of the year.

As I said in my earlier remarks we are very, very pleased with our persistency that we saw during the AEP. We did a lot of work to message folks in terms of those that were getting premium increases, any kind of benefit changes, messaging them about the possibility that we wanted to move them from a private fee-for-service offering to a network-based option. Lots of connections, lots of relationships, and we were pleased with how we ended up in terms of keeping significantly more members than we had anticipated.

Thank you for your follow-up on that. My second question, do you have a sense of maybe how much did your Walmart arrangement contribute to your strong MA gains this year? So in terms of people having conversations about the Part D product, how much of that do you get a sense of translated into full-blown MA sales?

We have not connected the dots exactly, but I will tell you the opportunity to be in 3,000 Walmart locations throughout the United States and having an opportunity to talk with seniors in terms of their needs and talk to them about not only the Walmart plan, but also whether or not there's other kinds of products that would better suit their needs, likely contributed nicely to the improved enrollment that we experienced. There is probably a really direct correlation to that, and we really enjoy the relationship that we have developed with Walmart. We look to do more with them in the future.

Will you be sitting down with Walmart to do a debrief on how things went this year?

Not only on how the Prescription Drug Plan worked, but a lot of other good ideas that they and us are developing as a partnership.

Great, thank you.

Next question, please.

Christine Arnold, Cowen and Company.

I just wanted to probe your guidance a little bit with respect to the Medicare book. You are saying that your guidance incorporates a 5% Medicare margin. True?

True.

Okay. And you did better than that in 2010. True?

True; and '09.

I'm sorry?

And '09.

And '09, okay.

And '08.

Right. Okay, so I guess what I'm getting at here is you have historically taken that which you have done better and tried to incorporate it in benefits and premiums; and yet you have still done better. Can you tell me in 2010 if my 83.8% Medicare MLR is reasonable?

Well, again, I think you have the basic thing because we have done, as Jim mentioned, we have done it year after year. We start with 5% and then we work very hard as an organization to improve. And we have been successful in doing that the last few years. But we still end up with having to start all over again.

Now what helps us to do that as Mike and as we have said at Investor Day and really all through the last three or four years, the 15% solution is the reason that -- that is one of the primary reasons that enables us to do that.

Because we continue to deliver better outcomes at lower cost to those who are the most chronically ill and have the greatest morbidities among our membership. So that is the primary reason that we are able to go.

When we get to this time of year, as Jim mentioned earlier too, with only six weeks gone in the year it is hard to really say -- well, now it is time to raise that up. We wait until we see that; and then we say -- this is where we are. And this is the pattern that we have done every year.

Let me add to that. We are heading to an 85% MLR world in Medicare. When you are there, the way you win and the way you grow and the way you have better value for people in the program is through cost management and low admin. You plow your margin above 5% back in those things every year.

And this is going to be a top-line growth story for a very long time for Humana. I think the winners are going to be those who get better value for money and turn it right around and give it back. We are positioned pretty well in that in an 85% MLR world we don't have to go much further than where we are right now to be there.

Right. And my ballpark that you did about 100 basis points better than the 5% and that is what you are plowing into benefits and premiums?

Well, the math is simple. We ran something just north of 6%, and so we move it back to 5%, and I said at the beginning we have no intention of running 5% in 2011, but that is the math as we sit here. So we are very working very hard today with everything I've talked about from a clinical perspective to get better value, more productivity. And whatever that works out for '11, so be it; we will plow that back in, in '12, and grow the top line again.

Okay, thank you.

Next question, please.

Chris Rigg, Susquehanna.

Good morning. Thanks for taking my questions. I was wondering if you could give us an update on the longer-term status of the TRICARE contract and where that process stands at this point.

Well, the government has come back to us and negotiated two six-month extensions. We wish we knew more about when they are going to make their final decision. The folks in the TRICARE organization tell me that the government could take as long as up to May before there is an issue with the terms of the timing.

We are hopeful that smarter heads prevail and we are successfully put back into the program. But time will tell, and I can't tell you much more than that. It is frustrating, but that is all we know.

Got you, okay. Then I was hoping if you could help me better understand what determines the contribution to The Humana Foundation.

Then on top of that, was there anything in the Walmart expenses in the fourth quarter that would be ongoing rather than nonrecurring? And I will leave it at that.

This is Mike McCallister. On The Foundation we try every year to put something in there as part of our overall social responsibility agenda. In five of the last 10 years we didn't put anything in; in the other five, we put something in. So what you are looking at is a bit of a catch-up over time.

We think it is a key component of what we do as a Company and we want to be good citizens everywhere we do business. We do it both directly from the Company as well as through The Foundation, so you are seeing a number that is a bit of a catch-up over basically a decade.

On your Walmart question, there was some amount of continuing cost related to telesales operations and advertising programs that we thought would be similar year-over-year. The amount that Jim highlighted in his remarks is totally related to incremental costs that we don't think will recur next year.

Okay. Thanks a lot.

Next question, please.

Ana Gupte, Sanford Bernstein.

Thanks, a couple questions. The first one is on the Part D book, and you have enrolled 500,000-plus members. As you were looking at the health risk profile of these people across low income subsidy, retail, enrolled in Walmart or otherwise, are you seeing anything that gives you pause relative to your expectations actuarially from early claims experience? And is there any possible upside and/or downside to your margins with this new formulary design?

This is Jim Murray. I expected this question. We looked at risk scores and they are very good.

We have looked at scripts, PMPM; they look good. We looked at generic dispensing rate; it looks good.

We looked at member risk share. We had that problem a couple years ago that I won't ever bring up again on member risk share. That looks good.

Mail utilization, that is one of the reasons why we wanted to do this program with our RightSource and the mail that we could do as a result of this program; that looks strong and the allowed costs look very good. So we are very, very pleased with the way the Walmart plan looks in its first six weeks.

Thanks. It looks like more upside than downside, if anything. Okay.

So then on Medicare Advantage, you mentioned that your group sales went pretty well. Is this a shared margin with CIGNA for 2011?

No, no, no. We didn't say that. We didn't have any significant group sales we reported. So we are not expecting things to come out of our CIGNA relationship probably till next year.

Okay. I thought I saw something in your press release. All right. I'm sorry; I'm mistaken.

Then moving -- switching gears, I was looking at the components on MA rates going forward 2012 and beyond. There was a letter from MedPAC I believe to Donald Berwick on the $1.3 billion demo project and how that was not budgeted for.

So as you are having conversations and consulting with them, do you see that piece at risk? Are you including that potential in the 2012 rate?

I think that it is included in there in that range that Jim mentioned, from minus 2 to plus 2. It is one of those myriad of factors that really goes into what they believe the trend piece is. But again, I think it is a relatively small piece of that.

But again we will wait and see when it comes out in terms of what the final is. We want to make sure that we are talking about the preliminary rate book here. As every year we have our own bid-ask as to what is going to be in there, but again we still have the days afterwards to think about it and to comment on it.

Then when it becomes final in April, then we go to work. So it is still a long ways away in terms of whatever these numbers turn out to be.

This is Regina. We are running really long on the call and we have still got a few more people in the queue, so we're going to ask that you limit it to one question at this point. We will take as many as we can before we have to conclude the call. So next question, please.

Scott Fidel, Deutsche Bank.

Thanks. My question is just relative to the commercial MLR guidance. It looked like that ticked up by around 50 basis points from the guidance you had issued in November at the Investor Day. But it doesn't sound like you have changed any of your views on med cost trends. So maybe if you can just talk to the change in the commercial MLR guidance.

Again, I think what we have looked at is the large group piece; because remember we have the 80% in our small group and our individual. Those are a large part.

We have also signaled that given the large group piece there is a smaller number of members. As we approach the 80 -- and so we have ticked by 50 basis points, as you point out from when we did it last time. So again, it is all a matter of the mix.

We want to tell you that we have given some weight to the low trend we had last year and how it's going to affect this year. But again that basically follows mostly to the large group. And that is why it's a $0.10 piece.

Next question, please.

Kevin Fischbeck, Bank of America.

Okay, thank you. I was wondering if you could maybe help provide a cash flow bridge to the parent for 2011. If you didn't do any buyback or acquisitions, where do you think the cash balance might end at the year-end?

Generally we give a very strong indication of that in our second-quarter call which would be in August; and that would be after we have visited all the states, extracted dividends in conjunction with consultations with them, and also visited the credit rating agencies. I would say this qualitatively -- we had an excellent year this year, as we have talked about all morning. And so we would expect the dividends to be higher than the $750 million we took last year.

Next question, please.

David Windley, Jefferies.

On the SG&A ratio it looks like ex- the Concentra that is down I think 50 basis points. I was wondering if I am looking at that apples-to-apples and what the drivers were of that.

Again, you are looking at it apples-to-apples. Again the 50 basis points again looks at, as we crossed over the threshold from November 18, went over year-end, we now have all our budgets in place, that is where the 50 basis points is.

Next question, please.

Carl McDonald, Citigroup.

Thanks. Recognizing we're only a few weeks into the year, anything you can point to at this point that would suggest that cost trends are accelerating relative to the trends you saw in 2010?

This is Jim Murray. It's very early in the year, so very difficult to make any predictions based upon the claim payments that we have seen. Nothing significantly favorable or significantly negative.

Thank you.

Thank you. We have got time for one last question, please.

Peter Costa, Wells Fargo Securities.

Thank you. I want to take another shot at the question of converting to the PPACA rates. What portion -- maybe you can answer a couple specific components of it. What portion of your business will be under a two-year conversion as opposed to a longer conversion?

Then secondly, what portion or what percentage difference would there be between the PPACA rate and your bid-plus-rebate payment that you got in 2010 if it was to convert 100%?

Well, I can answer the first question. I'm not sure what the second question was specifically. The year phase-in is -- two years is 34%, four years is 39%, and six year is 27%. But I need help with some acronyms and specifically what you are asking with your second question.

Okay. The rate under PPACA that has the variation from 95% of fee for service to 115%, if we were to take the average for your book of business as to what that rate would be, compared to what you were paid on an average payment from the government in terms of -- it's not the benchmark, but what your payment was in 2010?

So the old payment versus fee-for-service versus what we think the new payment under fee -- versus fee-for-service would be post health insurance reform?

Yes, if you had 100% of your business convert.

You know, I'm not as smart as a lot of people so I need remedial training. Can you help me with exactly what --?

Peter, this is Regina. I take it you are asking about where MedPAC -- I believe it does -- does the study that says for instance in 2010, assuming the doc-fix had happened we were like 113% of fee-for-service; if they had done the doc-fix properly we would have been 107%. Is that where you are headed?

Correct.

Okay. I don't --

Well, I can just talk about my broad feelings as respects any kind of what is referred to as an overpayment. When a lot of folks were here for Investor Day we shared with you a slide that demonstrated that trends, as they restate over time, typically run in the 4% and 7% range. So I would use 5%.

As many of you know, over the last two or so years we have gotten either a flat or a negative trend estimate. So if it were me I would say those were reductions from this theoretical overpayment. Then when you layer in the doc-fix, which I have been told is valued somewhere around 4% -- when you put all those pieces together I would proffer, but this is me, that we are nowhere near being overpaid the amount that we are hearing that there is an overpayment out there.

So over time it is our strong belief that as trends restate to their proper levels that that will self-correct itself as time goes on. And that it has been very good management for us to get through the last several years not getting the trend increases that were appropriate. So I think we are really close to the 100% of Medicare fee-for-service that is designed by the healthcare reform.

Now I know I didn't answer your question.

But I think that is as near it as we can get for you today, Peter. Go ahead, Mike.

Okay, let me just close. Thanks for joining us this morning. We had a good quarter and we are pretty excited about where we are for 2011, especially relative to our Medicare results during the AEP.

So we're positioned well. We're happy with that. I want to thank the Humana associates that are on the call for making this all possible, and with that we will say goodbye.

Have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.