Humana Inc (HUM) 2011 Q2 法說會逐字稿

Good morning. My name is Ryan and I will be your conference operator today. At this time I would like to welcome everyone to Humana's second-quarter 2011 earnings release conference call. All lines have been placed on mute in order to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. Ms. Nethery, you may begin your conference.

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 second-quarter 2011 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 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. This morning Humana reported second-quarter earnings of $2.71 per share, an increase of 35% over the $2.00 per share we earned in the second quarter of 2010.

Looking ahead to the remainder of the year, we raised our full-year EPS guidance to a range of $7.50 to $7.60 per share from the previous range of $6.70 to $6.90. This increase primarily reflects lower projected benefit-expense ratios in our Retail and Employer Group segments.

These are partially offset by new reinvestment spending in Medicare sales and marketing and related Medicare reinvestments designed to improve the Company's Star ratings processes and the clinical initiatives that make up our 15 Percent Solution.

The essence of this is that we believe the second quarter's favorable results, along with our planned additional investment spending, positions us well for further growth, a mid-year approach similar to last year's at this time, which as you know, proved successful.

With the 2012 Medicare annual election period just around the corner, my remarks this morning will focus primarily on opportunities to expand our 2012 Medicare Advantage and Medicare PDP membership a little more aggressively than we thought possible 90 days ago. As we have shared with you over the past several years, we work constantly to research and understand seniors' changing needs and craft a value proposition that is differentiating and compelling.

This value proposition includes, among other proprietary elements, integrated care, performance-driven metrics for care providers, and actionable information for the members themselves. One of the things we have learned about seniors that doesn't change from year to year is their desire for stable benefits and premiums.

For 2012 as has been the case for the past few years, we have been fortunate enough to be able to build such stability into our offerings, a genuine competitive advantage. On top of that, the results we announced this morning bode well for an excellent 2011 and give us the latitude to accelerate the kind of investments likely to produce an even better 2012.

To illustrate, I will describe two of these reinvestments in a little more detail. First, with Medicare Advantage payment rates tied to Stars quality scores beginning in 2012, we plan to reinvest heavily in improving our Stars processes, procedures, and infrastructure to position us for further improvements in Stars metrics.

Humana believes deeply in paying for performance, the essence of the Stars program. Solid and growing evidence in terms of better health outcomes and lower costs indicates that paying for performance injects necessary productivity and accountability into a dysfunctional healthcare system that has been characterized for years by too little of both.

Second, our innovative Humana Cares program that focuses on members with multiple chronic conditions currently helps more than 100,000 people. Armed with data which tells us we can help more people, while it also makes good business sense to expand our reach, we intend to do so.

As I have discussed with you in past earnings calls, these seniors have improved their health and well-being while using fewer health resources through the guidance of Humana Cares' nurses, other medical professionals, and a network of community service agencies. By spending more to build out this program, we anticipate offering Humana Cares to an additional 25,000 members.

Although specific reinvestment plans are already being formulated, we will have the ability, if necessary, to modulate our plans as the competitive landscape becomes clear in early October. As always, we anticipate our Medicare growth coming from a variety of sources, including an increasing number of agents -- still a long-term opportunity -- and group Medicare accounts. Again, as always, we will share with you in our third-quarter call preliminary membership growth projections for both Medicare Advantage and PDP.

Before closing I want to touch briefly on two recent strategic milestones. First, our partnership with Readers' Digest, which we announced in May, is moving along nicely. This alliance is similar to our successful partnership with Walmart in an important way. It links Humana to a powerful, national, well-recognized consumer brand that resonates powerfully with seniors.

Readers' Digest brings two vital strategic elements to the relationship, a vast senior database that reaches 80% of all Medicare-eligibles and nearly 90 years of expertise publishing easily-understood health and wellness information that seniors worldwide have come to trust. Humana and Reader's Digest will be developing a series of cobranded Medicare products from Humana that we expect will debut later this year.

Second, last month we launched HumanaVitality, our joint venture with Discovery Holdings of South Africa, the global leader in integrated science-based wellness, rewards, and loyalty programs. The groundbreaking HumanaVitality initiative, available now to all our commercial members, unites a number of strategic principles that we have emphasized for the past decade and which are responsible in large measure for our success during that time -- consumerism, actionable information, data, guidance, innovation, customized incentives based on actuarially sound models, and the idea of making healthy things fun and fun things healthy.

Going forward we believe HumanaVitality will become an increasingly vital component of our dream of helping people achieve lifelong well-being through long-term personalized relationships involving a wide variety of health-enhancing Humana products and services.

With that, I will turn the call over to Jim Bloem for a detailed analysis of our financial results.

Thanks, Mike, and good morning, everyone. Looking first at the quarter, we were pleased with our earnings of $2.71 per share. As indicated on the slide, the primary reason for the substantial improvement over the midpoint of our previous earnings per share guidance was attributable to operations, which contributed $0.51 per share of the $0.66 per share increase.

Approximately 85% or $0.44 per share of this better-than-expected operating performance was driven by lower benefit expense ratios for both our Medicare Advantage and PDP businesses, thanks largely to our 15 Percent Solution. The remainder was primarily attributable to the continued moderate medical cost trend environment in the Employer Group segment.

We will review each of the three financial reporting segments in a minute, but before we do let's briefly look at the three nonoperating items which in the aggregate comprise $0.15 per share of our $0.66 per share better than previously anticipated second-quarter earnings.

First, prior-period favorable medical claims reserve development added $55 million or $0.21 per share to our second-quarter results. $33 million or $0.13 per share of this amount was attributable to prior years, while $22 million or $0.08 per share related to the first quarter of this year. We will further break down the prior-period development by segment shortly.

Second, we also booked a second-quarter expense of $23 million or $0.08 per share in connection with the limited-income newly-eligible transition, or LI-NET, program. This adjustment results from a retrospective review of our contract with CMS and reflects the amount of gain-sharing that we expect to pay CMS based on our solid operating metrics in performance to date.

Third and finally, second-quarter share repurchases and a slightly lower tax rate together added $0.02 per share to our previously forecasted second-quarter earnings per share.

Turning next to our financial reporting segments, we have increased our 2011 full-year Retail segment pretax income forecast by approximately $80 million. To break this full-year Retail segment improvement further down, approximately $120 million relates to the better-than-expected second-quarter operating performance of our Medicare Advantage and PDP businesses. An additional $38 million is from favorable prior-period development, principally from Medicare Advantage.

The remaining $22 million reflects the operational progress that is expected to continue into the second half of this year, net of the strategic Medicare investment spending that Mike described in his remarks. Based on our experience over the last five years, we strongly believe these investments will further benefit us both in the short and long terms.

Turning next to the Employer Group segment, we have increased our full-year 2011 forecast by about $57 million. Approximately $20 million of the better-than-anticipated second-quarter total operating performance improvement was due to the continuing low utilization of medical services by commercial group members, with another $17 million coming from favorable prior-period development in the Employer Group segment.

The remaining $20 million of additional increase in Employer Group pretax income guidance reflects our improved forecast for the second half of the year, based on OUR favorable first-half results. As I mentioned we continue to experience a moderate medical cost trend environment, with levels of utilization lower than historical norms. For pricing purposes we continue to expect that trend levels ultimately will revert to more normal levels.

Moving next to the Health and Well-Being Services segment, we have lowered our forecast for the year by approximately $35 million. There are two things to note here.

First, approximately $15 million of the $35 million is related to our RightSource pharmacy business, which has experienced greater-than-expected price erosion from generic drugs due to, among other reasons, the recent availability of multisource alternatives. While this price erosion both reduces our revenue and pretax income forecasts for the Health and Well-Being Services segment, there is an offsetting benefit in our Retail and Employer Group segment forecasts. Accordingly, on a consolidated basis, our full-year 2011 earnings expectations are not adversely affected by these lower generic prices.

Second, as Mike described, we plan to further invest $20 million in Humana Cares, HumanaVitality, and other clinical infrastructure that play a significant role in our 15 Percent Solution. Again, based on our multiyear experience we believe that further investments of this type will continue to generate long-term value for our Medicare members, the Medicare Trust funds, and our shareholders.

Finally, consolidating these segment details, we have increased our pretax guidance range for the year by approximately $180 million or $0.75 per share, including $0.08 per share for year-to-date share repurchases and a slightly lower tax rate.

Accordingly, this morning's increased full-year EPS guidance range represents a growth rate of 16% to 17% over last year, a clear demonstration of the operating effectiveness that our associates strive for every day.

With that, we will open the phone lines for questions. We ask that callers limit themselves to two questions in fairness to those still waiting in the queue. Operator, will you please introduce the first caller?

(Operator Instructions) Matt Borsch, Goldman Sachs.

Good morning. If you could just talk to us a little bit about the Medicare Advantage age-ins and how you are doing, given that I guess this year represents the first cohort of baby boomers. I am just particularly interested if you see a change in the attitudes as evidenced by enrollment towards Medicare Advantage versus traditional Medicare.

This is Jim Murray. We like to think about growth from a lot of different channels and opportunities. The age-in growth is doing well for us.

The one thing that I would point out, though, is that because of the economy of late I would suggest that age-in opportunity is probably a timing issue for us and others in the business. More people are staying in the workforce past age 65. So although with the baby boomers and the aging-in that we have shared with you in the past, there appears to be a bit of a timing item, respect to people coming into the Medicare program.

But overall as you can tell from today's report, we feel very good about all of our growth prospects including group Medicare and other forms of enrollment opportunities.

Yes, okay, great. That makes sense. On the commercial front can you just give us a quick take on where you see things in terms of competitive pricing at this stage?

Sure, as we have talked about in the past, there appears to be more competition in the over-100 case size. We would point to our HumanaOne and our small group blocks of business that are growing nicely; and large group for us is an area that we haven't been growing of late.

There isn't one particular competitor that seems overly aggressive. It just seems like, because there is more of an opportunity for companies to negotiate in those case sizes, it looks like that is an area where it is a dogfight day in and day out. We feel very good about our overall commercial book of business, but the large group, over-100 case size, seems to be an area that is more competitive than others.

All right. I'm good for now. Thank you.

Charles Boorady, Credit Suisse.

Thanks. Good morning. Can you speak specifically to the Medicare components of medical trend?

Sure. This is Jim again. The Medicare for us, as we have told you time after time, we generally assume about a 5% secular trend for Medicare. Then when we do our bids we build in what we call trend-benders, which really represents our anticipation of the improvement on the 15 Percent Solution.

And as the year plays itself out -- and we have done this now for three or so years in the past -- we see improvements on our margins because our 15 Percent Solution is being effective. And that seems to be the case again this year.

So specifically, can you talk to which initiatives may have had a meaningful impact? Or was it more a combination of many different initiatives that bent the cost curve in the Medicare Advantage business?

We have shared the 15 Percent Solution with you in the past. It includes a number of different elements.

It includes identifying the right providers to be a part of our networks going forward. It includes the Humana Cares, which Mike referenced earlier and the ROIs that we are beginning to see on that.

It includes nurses in the field doing case management work for folks who are in the hospitals or skilled nursing facilities. It's negotiating of contracts with ancillary providers. It is a culmination of a lot of different things that we feel pretty good about our focus on.

Charles, this is Mike. I have been saying for the last couple of years that I was really beginning to see an emerging better capability around the integrated clinical activities across all the things that we do. And I think we continue to see that.

So I think it will continue to get better. The lack of value for money in Medicare and the way the old program works is so awful that it just sets up a great opportunity for us to rationalize and get better value for the members, for us, and everyone else. It just -- I have never been more optimistic than I am today around our ability to continue to get more traction there.

You have talked about the duals being one of the areas with the greatest opportunity, $300 billion a year on 9 million lives. In light of the budget deficit reduction talks going on, do you have any sense for what to expect for duals moving into Medicare Advantage versus Medicaid HMOs? And anything you are doing as a Company to prepare for migration of the duals?

Boy, if they are really on their game in Washington, they will try to find a way to get all of these people into some form of managed care. Because we have a lot of these dual-eligibles today that came largely through the Medicare Advantage door, and we can see what is going on there. It's just -- everything I said in my previous comment is just exacerbated when you're talking about dual-eligibles.

So a big opportunity to get better care for these people and to save a lot of money in the process. So I think at the end of the day as they get serious about this they are going to have to take a look at these people and see how they are going to get them into managed care.

We are interested in that. We have been at it for a while, and we are watching carefully as to whether that is going to go through the Medicaid door or the Medicare Advantage door. And our intention is to be prepared for either, so I expect us to have a growing membership over time in dual-eligibles.

Thank you.

Justin Lake, UBS.

Thanks, good morning. Just wanted to, I think, given we are past the June deadline for bids, just your early thoughts on 2012, your 2012 Medicare bids. Given medical costs appear to be higher here, what are you thinking for that, versus that typical 5% margin you assume in Medicare, on how 2012 might shape up?

First of all, I disagree with the cost being higher statement you made, Justin.

Cost being better. I apologize if I said higher.

So now that we are straight -- I would characterize our bidding as -- and I had it in my comments. We were fortunate based on everything that has been going on that we could be pretty stable with our benefits and our premiums for next year across most of the country. So I think we are positioned perfectly for what next year can bring to us from a growth perspective.

Having said that, we never know exactly where we are going to be until we see all of our competitors' specifics come October. But barring something wildly unusual in the marketplace, I would expect 2012 to be a good growth year for Medicare, both Medicare Advantage and PDP.

Great. Then just quickly on capital deployment -- and it was great to see you get off to a strong start with the share repurchase. Can you tell us whether you think this is a good run rate to assume, this $200 million a quarter, for purchases going forward? And whether there is any thought as to including some level of share repurchases in forward guidance as most of your peers do?

Yes, generally, Justin, we don't do either one. Basically we look at it opportunistically. We look at all the things we are looking at in the pipeline for capital expenditures, for M&A, whatever else that we are working on. And then we also look at what is going on in the market with respect to the stock.

So it is better for us to have a very discretionary program like we have in the past and continue to do that. I think that serves our shareholders and helps us, again, balance all the ways we can deploy capital, including the ways that add to the business.

I would add to that that we don't consider share purchases to be a strategy. So we tend to be opportunistic with it.

We have committed to doing it over the next two years. You know what the number is. We will do that. But the timing of that would be opportunistic in nature for us.

Got it. Great.

Josh Raskin, Barclays.

Good morning. Just wanted to talk a little bit more about the specific investments that you are making in the Health and Well-Being segment. You guys talked about the good position that you're in allowing you to accelerate some of these costs. So maybe just some specifics on what you are doing additionally in that 15 Percent Solution.

Then as you talked about the Star bonuses, maybe where you are today versus where you want to be in the future.

This is Jim Murray. I will give all of what the investments that Jim referenced in his remarks, and I won't talk about any dollars, but generally speaking what we are attempting to invest in, in the third and the fourth quarter.

You can break those investments into three buckets. The buckets would be growth; the second bucket would be Stars and quality initiatives; and then the final would be clinical infrastructure.

From a growth perspective, we were pretty successful last year with some brand spend that we did right before the AEP. We anticipate accelerating that based upon what Mike talked about a moment ago, with what we saw when we were able to finalize our bids.

We are also focusing on direct-to-consumer spending and accelerating that up to the lifetime value calculations that we do.

Because of what we are going to do there, we anticipate that we are going to need more market point reps throughout the United States, somewhere between 300 and 400 in pockets that we think have opportunity for us. Then as you grow that membership above where we had anticipated, we are obviously going to need service folks to service the new membership. So that would be the category on growth.

Under Stars and quality, preventative messaging; accelerating some of what we are doing to get folks to take better care of themselves around the HEDIS measures is where we are going to spend some dollars.

Many of you know that the bonuses are in significant part based upon service metrics. So doing some things to add folks in our service infrastructure to drive some of those better results so that we can improve our bonuses and quality.

This next category is an area -- HRA, welcome call, reengineering, and risk adjustment FTEs. We see a real opportunity to do some reengineering around our initial contact with our new members, identifying risk adjustment information and also finding out more about the folks in terms of what we can do to intercede in preventative measures. We are doing some reengineering work there and we are going to invest.

Then finally in the Stars and quality area, EMR investment. You may have seen some press releases that we have done here recently with companies like Allscripts and athenahealth and others where we are trying to get a lot more information in electronic medical records going forward, in line with what the government is doing. We think there is a real opportunity there.

Finally in the clinical area, the CAREHUB, something that we have talked about with all of you in the past. Our clinical messaging system and workflow system, more rules engine and accelerating IT spend there. Mike talked about hiring more Humana Care nurses throughout the United States. Field nurses throughout the United States in areas where we anticipate growing.

And then finally we did some work here recently to in-source all of our DM programs, and we're going to accelerate that because we are seeing some nice results there. So that is all the investments that we are anticipating for the third and the fourth quarter. Lots of focus going forward.

Great. Got you. Very (multiple speakers). Then just one quick follow-up on the bids for 2012. I think, Mike, you said you are expecting good growth in the PDP side. I was just curious.

You guys have seen some really strong growth there. Any region specifically where you had to make some changes in your bidding, and any anticipated regions that could see a slowdown in the growth?

Well, it would be hard to grow as fast as we just grew, because we introduced a whole new product in our relationship with Walmart. (multiple speakers) That is kind of an unusual event.

But I would argue nothing dramatic around the country relative to the offerings or geographies. That is kind of my whole point; things are pretty green-light here and we are going to have a lot of stability.

And that's going to be really strong in terms of retention and lowering the churn. So all of that gives us a fair amount of confidence in what next year is going to look like.

Okay, perfect. Thanks.

Kevin Fischbeck, Bank of America.

Okay, thank you. I guess I wanted to clarify a point that you made about how the quarter today bodes well for a good 2011 and accelerate the kind of investments to produce an even better 2012. Is that a comment about enrollment or a comment about earnings being better in 2012 versus 2011?

Well, they tend to go together.

Well, you guys are likely to beat your 5% margin. When you talk about a 5% target margin next year, just that could be the delta between the two. But you feel good about the earnings being up next year?

I was primarily talking about enrollment, but they do tend to go together. We do reset our margin each year in the bidding (technical difficulty). We do that.

And then fortunately we continue working on it. We are working already on what next year's trend is going to look like as we sit here.

So the bids were put in there at 5% overall. We have said that. We do it that way. And then we go about trying to do better than that.

So far in each year we have been able to do that. So we are not going to guide to earnings or specific enrollment today; but my growth number comments were more toward enrollment than anything else. They do tend to run together, though.

Okay, all right. That sounds good. I guess maybe then just going back to the trend comment, obviously everyone expects trends gets back to normal because that is what normal is.

But are you actually seeing any evidence at this point that trend has started to accelerate versus where it was in Q1?

Your -- with that last question it is more commercial than it is Medicare. We have said for a long time that Medicare seems to be different than commercial because it doesn't appear like the economy is negatively impacting secular trends for Medicare.

But for commercial we continue to do well relative to where we had thought the trends were going to be. We haven't seen any evidence yet that the trends are starting to uptick.

But in terms of our pricing, we constantly always make sure that we price with secular trends in mind, because this is a temporary situation, we believe, and we want to be priced appropriately if it were to return back to the previous levels.

So your view on the better performance on Medicare MLR is not really some sort of industrywide phenomenon. It is more execution on the 15 Percent Solution?

That is what we believe, yes.

Okay, great. Thanks.

Tom Carroll, Stifel Nicolaus.

Hey, good morning. More specifically on your new PDP product, the low-priced Humana Walmart item that you introduced this year. Could you provide maybe some more color on what changes, if any, you have made for the product in 2012? It has been very successful.

Then just secondly, in your slide deck you provided today your second-half operating improvement expectations are much less than first half. So I am just looking for perhaps what is the primary driver of that conservative view. Maybe it is all the investment items you just spoke about, but if you could chat about that. Thanks.

I will start with the Walmart answer. You know, it falls into my broader category of earlier statements that the stability in benefits and prices is where we are with that. So no drama there, but we will have another year where the relationship matures and people grow more comfortable with it. So I think it is going to continue to be a good growth opportunity.

And the second part of that was --?

Why the difference in earnings for the second-half?

And again, you indicated in investments and that is correct.

Thank you.

Chris Rigg, Susquehanna.

Thanks, guys. So, clearly, upbeat comments about product design for next year. I guess I am just trying to get a sense for -- are you -- is there any reason to believe why we shouldn't see enrollment gains at least equal to what we have seen so far in 2011? Or do you think 2011's number growth is running above what we should expect normally in Medicare Advantage side?

Well, we are not going to get specific; but when I use the term strong growth, it wouldn't be consistent with a reduction in membership growth for next year. So I think directionally, we can get comfortable that it will be a good year.

Okay. Then I guess there is just more of them. I think last quarter you had said -- is there still a $0.10 earnings headwind in your numbers related to Penn Treaty?

Yes, there is and it's in the fourth quarter.

Okay. All right. Thanks a lot.

Christine Arnold, Cowen.

Two quick questions. First on group Medicare, could you highlight for us how that is going? I think a lot of the government agencies do a lot of that midyear, July to October. Then also corporations tend to move I think in January. How is that going for you? And compare it, if you wouldn't mind, to this time last year?

Then with respect to Medicare, am I understanding your comments correctly that you expect growth in MA and PDP to be greater in 2012 than 2011? Or are you just saying you expect strong growth?

So I will take the first part. This is Jim. We are in the process, as you reference, of bidding on a number of group Medicare opportunities, both government and businesses. I would suggest that the pipeline that we see this year is better than the pipeline that existed last year.

There seems to be more of an interest in taking company or organization's retirees to an MA program. I think those larger customers are beginning to get a sense that there is a longevity to the program and they feel more comfortable putting their retirees with companies like us.

We are seeing the uplift in the pipeline I think as a result of that. As to the growth I am going to let Mike handle that one again.

Let me try it one more time for those of you who did not ask me this question. I mean, always remember that we are not going to see what our competition has done until October. So when we talk directionally today about where we are going with growth next year, we are trying to connect a couple things for you.

One is we are spending some serious investments in the latter part of this year to prepare for an environment based on what we have done ourselves that looks quite good. So that is what we are talking about here today. If we all turn our cards over in October, and we have had competitors do crazy things, then things can change. That is why we are not guiding you to anything specific today.

But when we do it in the third-quarter call, we will be able to get quite specific; and we have a history of being pretty accurate with these projections. So I feel pretty good about what we are going to be able to do then.

But I am just signaling today that, barring something unusual, we should have a good '12 in Medicare. And that is why we are willing to spend the money we are preparing to spend in the latter part of this year to prepare for it. It is a nice opportunity.

Right. Then on the group side, is it you independently getting these group accounts? Or is it the CIGNA relationship you think firing off here?

The CIGNA relationship is a part of some of the cases that we're bidding on, but more I would suggest are us without the CIGNA relationship.

Okay, thank you.

Sarah James, Wedbush.

Thank you. I wanted to speak a little bit more about your provider strategy. First, of the 3 million members that live near a Concentra clinic, how many at one point could be served by a captive clinic, and over what time period could you see that happening?

Then second if you could touch on your strategy for expanding the number of clinics, where could the number be in two to five years? Are you thinking about that as more organic or M&A? And would they also be located in worksites, or are you considering standalone facilities?

Yes, I will start and I will let Jim fill in the holes. Again, we don't look at our Concentra delivery assets as some sort of a broad geographic national solution to network needs and that sort of thing. What we have is a nice opportunity to be opportunistic about situations relative to geographies and the need for urgent care centers.

We are working through a detailed strategy at this point around how to approach each market with a combination of Concentra capabilities, risk-sharing relationships where they can be done, medical home models. I mean, I think we are in an era right now where this whole idea of how primary care networks and physician networks more generally are going to be built is a work in progress because of all the dynamics in the marketplace with doctors getting together and hospitals buying doctors' practices and all of that.

So again, I will come back to -- we bought the capability to respond to a number of needs in the marketplace relative to doctors. We have a big opportunity in Medicare Advantage, which we constantly talk about; and I think we are going to over time get very good at integrating what Concentra can do in that business.

To the extent we are looking at acquiring things, I don't expect things of this scale to be a part of that because they don't really exist out there. So I think it will be much more opportunistic and probably market by market.

But it is probably -- it's not probably, it is going to be an ongoing strategy of the Company to continue to grow the capability to respond to doctor needs market by market.

Yes, the only thing that I would add to what Mike said -- and he I think was identifying the different relationships that we'll have market by market. Some of them will be with outsiders who are willing to accept risk; and some will be with our own Concentra assets and our focus on creating rich arrangements and incentives and quality delivery in a lot of markets.

The one thing that I would add real quickly is we also see an opportunity to merge the Concentra worksite capability with some of the Health and Wellness assets that we have here at Humana. Mike referenced earlier in his remarks the Vitality program. And then many of you know that we already have the LifeSynch and Hummingbird assets that are focused on Health and Wellness. So we see that as a tremendous growth opportunity in our commercial lines of business, and we are also pursuing that with the Concentra acquisition. So we are excited about that as well.

Great. It looks like SG&A was guided up about $91 million to $92 million. How much of this increase is marketing versus Star ratings?

Where do you stand with Star ratings as of today? I think as of the last release you had about 581,000 in a 3.5 Star and about 300,000 in the three-Star segment.

Right, well let's do the Star ratings first. We had 2.74 last year; we have 3.11 is our average or overall Star rating. Again, as Jim mentioned, one of the aspects of the spending that you are mentioning is going to attempt to enhance that.

So as we look forward -- looking forward to how much of the spending there really is, you're right. By looking at the admin ratio or the operating loss ratio, there is just around 100. But if you go back through the different ranges that we provided with respect to the improvement in MER or benefit ratio in both the commercial and more importantly in the Medicare part, you can see then that what falls out of there is a total spend number that is probably in the range of 180.

So the range of all of the spending again -- and Jim said we weren't going to get into that and we can't at this point because we haven't seen what the competitors are doing. But we have given you a good description of what we are spending the money on. So I would use that range of 100 to 180 in looking at the total investment spend for the year.

Thank you.

Peter Costa, Wells Fargo Securities.

Hi, guys. Can you tell me in your Medicare Advantage membership, how many members did you drop this year due to nonpayment of premiums and things like that?

I don't have that exact figure.

Peter, it is going to generally be the difference -- or it's going to be the primary difference between where we are now and what we have projected for the year.

So those drops haven't taken place yet as of the --?

(multiple speakers) They would be in the third quarter.

They would show up in the third quarter?

Yes.

Okay.

Right, you can see that is pretty tight, that the increase in guidance that we have given and where we are is pretty consistent to where we are right now.

Does that mean you no longer expect to drop as many as you were before?

That's what I was just going to say. It hasn't turned out to be as much as we had originally thought as we started the year.

Okay. Then can you tell us if there has been any update in terms of the RADV audits, in terms of the timing of when that is going to come out?

Also, with such a strong quarter did you think about taking a reserve for some of these audit charges that may end up showing up?

No to the second part, because we can't take a reserve for an uncertainty, especially one as big as this. So in terms of uncertainty I would argue that we don't know any more than we have known all along.

I have heard all the rumors and things out there, and some of you all have talked about things and written things. At the end of the day at this point we have no real news.

I will say what I have been saying all along. I expect integrity in the process. I think it will come out in a way that makes sense because otherwise there is going to be a huge disruption; and I don't think anybody is interested in that.

So the process has been well underway for some time. It has been very quiet. And at this point I don't think there is any news.

The timing of it to me is totally uncertain. CMS can take as long as they like; and until they tell us something, nothing has changed.

Okay, thank you.

Scott Fidel, Deutsche Bank.

Thanks. Wondering if you had any preliminary views on how the commercial and national accounts and large group ASO selling season is shaping up for 2012 in terms of any known wins or losses?

Well, for us as a Company, our commercial membership is more in the individual, small, and midsized cases. We have a few large accounts, but we are not a national accounts player like some of the other folks.

So we don't rise and fall on that stuff. We like to focus on more transactional kinds of case sizes. That is our bread and butter.

Okay. Then just interested in terms of what the 2011 guidance now incorporates in terms of the Medicare operating margin. Clearly, MLR doing better here; but you are reinvesting. So assuming you are somewhere north of the 5%, but what specifically is built-in at this point?

It's around 6%, Scott. Again, looking at the reinvestment, that is again our same procedure and process that we follow every year to put that money back in -- the money over 5%, to put that back into our benefits premiums.

Got it. Then just what is your new view on commercial medical cost trend for the year?

We see secular trend being right now in the neighborhood of 5.5% to 6.5%, so let's say 6%. When we talk about what we thought more normal would be we would say that would be like 6.5% or 7.5%; or let's say 7%.

So, where we are continuing again to price, as I mentioned earlier and in my remarks, we are continuing to believe and to conduct ourselves in the market as if we are going back to a more normal secular trend.

Next question.

John Rex, JPMorgan.

Thank you. So want to do something similar though, about focusing on the Medicare books. I think you talk about how you start each year with an assumption of 5% secular trends. But could you level-set us now, kind of where you view for your Medicare book is for trend in '11?

Then give us the four major buckets where trend would be running this year? Similar to like what you would have done for commercial for you guys in the past.

Well, we would still see Medicare trend, as Jim mentioned earlier -- and I think I want to make sure that everybody goes away with this -- would still be in the 4% to 5% range that we have traditionally and always said and based all of our assumptions going forward. So we don't see really a lot of change from that.

There has been a lot of different discussions in the marketplace even over the last week or so about that. But we haven't seen really anything that we haven't talked about since the first of the year that would take us away from that 4% to 5% range.

Again, that is sort of the range we have always had in the past. But again, we have worked hard to improve the 5% operating margin. Those are the things that keep the trend down for us.

Right, so I guess what you are saying is that is where you still see secular trend. But your realized trend would appear to be running far below that because of the trend-benders that you have put in.

So what I was trying to understand is, with the trend-benders, where are you seeing your '11 trend running right now? I was particularly interested in getting to the buckets so we can see where you are having the most impact.

Well, we are reluctant to get into the nits and gnats of the buckets. But I would guess that if we started with a secular trend of around 5%, the trend-benders that we are talking about could improve our trend picture on a net basis by as many as 200 basis points. But again, that is not what we are seeing in terms of secular trend.

I want to be very, very careful that people don't think that secular trend is coming down in the Medicare business. It appears like for us and others that 4% to 5% is what the Medicare program runs year after year.

Then we do things that we have talked about in the past around 15 Percent Solutions that we think that brings our net trend down. We ultimately then put those into benefits and premiums, so that the stability that Mike talked about earlier is maintained. We are really happy to earn a 5% margin in our Medicare book of business.

Maybe one example I could get is -- so where would your bed days per thousand be running this year for your Medicare book versus a year ago? Up, down, flat, and magnitude?

We are reluctant to get into that level of specificity. We are doing things with nurses, as Mike talked about with Humana Cares and putting nurses in the field; and those are all paying a nice dividend. But we don't want to get into discussions around what our bed days are. Then we are going to go into what our skilled nursing facility days are. That would just become a slippery slope.

But you wouldn't -- you dissuade me from thinking that your trend is running more like zero right now. Your actual trend.

I don't believe it is running zero.

Zero? It is not running zero. What we would say is we have talked a lot about the 15 Percent Solution and the four components of that. You know, the identification, the HRAs, those types of things; then working into the guidance for both members and our providers; and working over -- again and Jim went over this, so I'm going to go over it quite fast. Then what do with the providers, the hospitals, the doctors.

That is the biggest piece. If you look at the proportions of those, we have always said the identification piece is 1% to 2%. What we do on the clinical things are 3% to 4%. 6% to 7% of the 15 Percent Solution comes out of what we do with providers, both the ancillary, the physicians, and the hospitals. Then there is finally another 1% or 2% that we work on, that fraud prevention, making sure that we are not being overcharged and things like that.

If you take those proportions of the 15 Percent Solution you will see that those contribute in the same proportions that they always have.

That would be another way that I would try to characterize it. And I am not the finance guy here, but let me just add, this is one of the reasons we spend a lot of our time focusing on the 5% margin. Because we have so many moving components that affect the behavior of individuals, we have progress in various areas where we are putting in new clinical applications and work, that at the end of the day secular trend runs 4% to 5% and we target a 5% margin. And those are the two key numbers we work with.

But actual trend is going to be affected by an awful lot of other things, so it is a little overly simple to try to focus on that beyond what the secular trend is.

Okay, thank you.

Next question, please.

Ana Gupte, Sanford Bernstein.

Yes, hi. Thanks. Good morning. So back to the SG&A question, what I was wondering is what is baked into your current guidance as far as SG&A ratio for the second half of the year and the full-year of 2011?

Then going forward, as you contemplate your changing mix of business into the Health and Well-Being segment and the breakdown of Retail and Employer, as you are phasing down your investments in Star and 15 Percent Solution and RightSourceRx, and also putting in some SG&A reduction initiatives, how much improvement would you expect to see in the base case and the bulk case for 2012? And then maybe 2013 investment, things start to really get to the steady-state?

Well, I would say that it is difficult to get to a steady-state because of a couple of things. One is, for example this year we are showing -- and we just raised in this morning's guidance -- 25 basis points on the operating cost ratio from last year. When you look at this year against last year, that is actually quite an improvement because last year we didn't own Concentra except for the last 15 days of the year. So that is one of the ways that we do reinvestment.

Likewise as we talked about this morning, now we are talking about accelerating different initiatives. Jim did a very good job of enumerating each one of those things.

Those are the things that we reinvest back into. So it keeps the operating ratio in a way that comports with how we are doing in the rest of the business and what the opportunity is to better serve our members and to have ROIs that really help.

So it isn't a matter of we get over a core group of spending and then we get to a more normalized lower level in a subsequent year that gives us a better return. Rather, what we do is we try to get rid of everything that is not useful, see what we can do with those proceeds to again increase the ROI, and more to the point being part of -- again not so much the 15 Percent Solution, because that is medical -- but again freeing up money and things that help that 15 Percent Solution through the spending.

So you don't have in your target to get the organization behind any reduction initiative? Do you have a target SG&A ratio of 13% long-term, or some kind of stretch goal that you are working toward?

Well, because of what I said, because you're always looking at new reinvestment opportunities, it is very hard to do that. What we like to do is what I said before, is to show progress on the base of expenses in prior periods so that we can reinvest that money. Not necessarily lowering the ratio, but also showing that again you get better ROIs and, more to the point, it helps the 15 Percent Solution.

That is over complicated, but as we grow and we feel feeling very good about our prospects for 2012, that will also create a scale opportunity for us as an organization. So that is another key element of where we see ourselves going forward.

This is never going to fit your models very well, Ana. Because as we grow Medicare, we push SG&A down on a percentage basis. As we grow our Health and Well-Being businesses we pull it up. So the varying success levels against targets that we have out there in those two lines of business will dictate ultimately what that looks for.

I will tell you that there is an ongoing permanent effort here to bring SG&A in this Company down and get to the right level of spending. And it happens every day, every month. And they have had a great run over the last couple of years getting to some pretty serious savings, which have allowed us to put some of that money back into other things, so it is a moving target.

Yes, fair enough. It is a big tailwind to get whatever, 10,000 a year on Medicare. So related to that then, just segueing into the next question, so there is some disclosure that that might be as much as 2% provider cuts in Medicare with this enforcement mechanism on the debt ceiling. I was looking for some perspective on how you see yourself playing that in Medicare Advantage in terms of -- in contracting would you seek narrow networks and bring your costs down? Or is there a vision where you potentially in the mid, medium, to long term could even have a better network than Medicare perhaps if the providers start to restrict access to original Medicare? And that way you can drive your penetration.

So I was wondering about a network breadth versus a cost strategy.

Well, I won't spend much time on the debt thing that's going on because, first of all, it's not even final. But having said that, directionally I don't think it changes anything one way or the other.

We are moving as far and as fast and as hard as we can to get the highest level of productivity and value for money across the country, and we are having some pretty good success doing that.

As to the last part of that, where doctors might be more interested in participating in Medicare Advantage as opposed to the traditional program, we are actually already seeing that in pockets around the country. To the extent that physicians get connected to us, start getting good data and getting a better infrastructure and capability to do better for these people at lower cost, they benefit from that. Whether it is our medical home model, or whether it is the risk-sharing relationships we have or any other number of approaches to relationships with them.

I think there is a really good chance that physicians are going to look forward and say -- this is where we need to be because it makes more sense than being subject to ongoing fee cuts every couple of years as part of some budget out of Washington which just continues to put pressure on their ability to survive. So I can point to a number of places around the country where that dynamic is already in play.

So that actually bodes well for us. The data assets we have continue to get better and better in terms of understanding which providers are more productive, are more efficient, are hitting ETA scores, are hitting the things that drive Star metrics. All that capability continues to improve. So I continue consider the future of our relationship with providers to be very powerful for a number of reasons, and the economics are just one.

Great. Thank you.

David Windley, Jefferies.

Hi, thanks for taking the questions. So your EPS guidance range -- or guidance arrays, excuse me, is about a dime higher than what you exceeded estimates in the second quarter. I wondered if that dime -- the upside of that dime is driven by benefit ratio exclusively; or is there also some membership benefit to that as well.

Generally speaking, it falls out of the benefit ratio that we have increased this morning. In Medicare we raised it 150 basis points, and in the Employer Group 50.

Okay. Second question then is on your comments around investing in the Humana Cares program. Is it possible to give us some sense of quantification about the cost savings, cost benefit, that you can drive in that incremental 25,000 members? Perhaps comparing their cost PMPMs to folks that are already in the program.

Well, we have said from the beginning that we do a lot of work on return on investments on all these sort of investments. Obviously when you take the most fragile first 25,000 or 40,000 or whatever the number is, your ROI is going to be a lot higher because there is a lot more going on with these people.

The further we expand this, the lower those returns are going to be. It is just constantly titrating the right level of investment versus what we think it will do for the results.

So we are not ready to get specific; but I can tell you if there is a point where we can have that sort of an approach to the next 20,000 people, but we are not there yet. We feel like we get good return for our investment. But also we can have pretty significant impact on these people, the people's well-being and their health status.

So it's a combination of all those things. We are not there yet. I am not sure we have a number out there that says we stop at a certain point, because we continue to get better at it over time. But there are declining returns, the more people you add to it.

Understood. Mike, what is the cycle time? You get these people in the program; how long does it take before you start to see a meaningful improvement?

Well, some of it happens pretty quickly. It just kind of depends on their status.

Some of these folks have two or three chronic illnesses and are in significantly different states of wellness. It is just a question of -- I'm thinking we start at the top, we get the sickest ones; and we just work our way down.

But it is not long term. Actually it can have pretty significant impact with these people pretty quickly by intervening and getting ahead of what is going on with their various chronic illnesses. So it is relatively quick.

I was hoping to sneak in one more. From a standpoint of share of wallet, your specialty membership has grown pretty significantly. I wondered if you could comment on some of the drivers.

Sure. The specialty membership is growing in two buckets. First, the individual; we are seeing a lot of nice growth on individual dental and vision. Significant growth there.

Then on the group side we are seeing a nice cross-selling of dental, vision, and workplace voluntary offerings. We acquired a couple of companies a couple of years ago, and it appears like us being able to put all of our benefit packages together and create a unified solution to employers is starting to catch some momentum.

So we are pleased about that. Thanks for noticing that.

Next question, please.

Carl McDonald, Citigroup.

Great. Thanks. Be interested in your expectations for the upcoming Star ratings this fall. Given the timing of when you made the investments, just how long it takes to move some of those metrics, should we anticipate a more modest improvement this fall with really a bigger improvement coming in fall of 2012? Or can things happen a little bit quicker than that?

This is Jim Murray. First, let me say without hesitation that we ultimately want to get 5 Stars on every plan that we do business in. I will say that with the program change that occurred, some of what we are getting paid for now happened in periods when we weren't as focused on this.

We are very good at execution at Humana and we will ultimately do significantly better. We think we are going to get some modest improvement this next go-around. But you can see from the level of investment spend that we talked about earlier that this is a real area of focus for us because it can provide additional benefits for the seniors that we serve. And that is what we think is the most important thing that we do.

Let me add to that. Let me just level-set everyone on this subject. I have tried to do it as I visited with you all over the last year or so.

Humana is one of the few companies -- well, maybe the only one -- that has gone nationwide with a full array of product designs. So I would argue these Star awards are best achieved in really tightly well-managed systems. If you look at our membership and the number of PPO members we have across the country, on one level that is wonderful because it is a new benefit and it's a great thing for the seniors; and we have been able to manage that quite well. It's a little harder there to get the Star ratings up, because you don't have the same tight-knit physician environment and we have to do a little more work.

I am with Jim. I think we are going to get to 5 everywhere. But we don't look like other people when it comes to the makeup of our membership. So therefore I see this whole Star opportunity as all upside.

I am happy with the progress we have made so far. I think we are going to continue to make very good progress here. But we are going to look different than others for a long time because of being national in scale and having multiple product offerings.

On the commercial business, be interested if you have seen any uptick in interest from employers, say 100 to 500 lives, in terms of converting from the risk product to the ASO product, relative to what you have seen in prior years.

This is Jim. I don't think that there is a significant uptick. Periodically, people always -- or companies will always evaluate whether they want to take the risk of going to a self-funded kind of an offering. I don't think we are seeing anything that would suggest that there is a big shift going on in the marketplace.

Okay. Thank you.

Doug Simpson, Morgan Stanley.

Hey, good morning, everyone. Was just wondering, as we are thinking about trend and the comments that have been -- and the commentary in the call this morning, what are some of the better forward-trend indicators that we should be looking at as the canary in the coal mine for trend? Just how do we think about that?

What is -- what have you learned from previous upturns in the past that may carry over to this time?

This is Jim Murray. I am assuming you are talking about commercial trends as opposed to Medicare trend?

Yes, that's fair.

Okay, so what we look at every day are days per thousand admissions. We also have pretty much of an early-warning system in terms of pharmacy spend. We get pharmacy spend information on a daily basis, and we can generally see when pharmacy costs are accelerating, that it may be a harbinger of an uptick.

But again we haven't seen anything that would suggest that that is occurring as we sit here today.

I would even go further to say I think that (technical difficulty) we're talking about are giving you indications that it has already begun. We have got a pretty good radar around what is happening at the moment.

It doesn't really help you all that much to tell you what is going to happen six, eight, nine months down the road. (technical difficulty) remain pretty conservative in terms of how we think about that, because that is where people have missed it, is being able to pick it out six months from now. Because we are pricing things today for medical costs 18 months into the future.

So I think it is important remain conservative until we can ultimately determine whether this is a permanent state. I don't think it is. So I think we have got the right approach at this time. But in terms of seeing it when it occurs, we can absolutely do that; but that is not quick enough.

Okay. Then maybe just to switch on to the Medicare side just to confirm the comments earlier around provider reimbursement stability. Is that -- can we assume that with the 2012 bids you would be baking in a doc fix into the way you are thinking about underlying trend in that book next year?

That's correct.

Okay. Then any color you can give us on thinking about potentially PDP conversions into MAPD offerings? Specifically thinking about the Walmart members you have this year, what does that opportunity look like heading into 2012?

Obviously for us we think it's going to be better because of the growth that we have seen with the Walmart plan. The one thing that I would suggest is that we also have a Walmart MA offering out there as well, which we think will allow more of a conversion rate than we might have otherwise expected.

We generally this past year and the year before, because our PDP membership was shrinking, we were seeing 25 to 30 folks shift from PDP to MA. One of our programs this year will be to have our market point reps specifically speak to some of the Walmart PDP folks to talk to them about the benefits of an MA approach and do a needs analysis with those folks.

So we expect that we will see an uptick in that. And that is all baked into some of the growth discussion that we had earlier today.

Okay, and that was 25% to 30%?

25,000 to 30,000 members per year this past year and last year. That is in part because our PDP membership had been shrinking; and now we are happy that we have got an additional 800 to 850 for this year.

Okay. Great. That's helpful. Thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Let me wrap it up by saying we had a good quarter. We think '11 is going to be very good and we have guided to do this morning.

Directionally for '12 we like where we are from a Medicare perspective, as we have shared with you; and we will have more specificity on the third-quarter call once we see what everyone has done.

I think we see good progression on our clinical integration work and our data analytical work. So we are very optimistic about where our business is going.

As usual I would like to thank all the Humana associates that are on the call today for making these results possible. With that, thank you for joining us.

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