Humana Inc.
Q3 2009 Earnings Call Transcript

Published: 2 Nov 2009

[Operator:]

At this time I would like to welcome everyone to the Humana third quarter 2009 earnings release conference call. (Operator Instructions). Ms. Regina Nethery, Vice President of Investor Relations, you may begin your conference.

[Regina C. Nethery:]

Good morning and thank you for joining us. In a moment Mike McCallister, Humana’s President and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our third quarter 2009 results as well as comment on our earnings outlook. Following these prepared remarks we will open up the lines for a question-and-answer session with industry analysts. Joining Mike and Jim for the Q&A session will be Jim Murray, our Chief Operating Officer, and Chris Todoroff, Senior Vice President and General Counsel. We encourage the investing public and media to listen in to both management’s prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana’s website, humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. For those of you who have company firewall issues and cannot access the live presentation, an Adobe version of the slides has been posted to the Investor Relations section of Humana’s website. Before we begin our discussion, I need to cover a few other items. First, our cautionary statement

[Michael B. McCallister:]

Good morning everyone and thank you for joining us. This morning I will discuss our third quarters, put additional context around our earnings guidance for 2010 included in today’s news release, and comment on the national political environment. Jim Bloem will then provide more color around financial performance moving into 2010. Turning first to our third quarter results; this morning we reported third quarter ’09 earnings of $1.78 per share, in line with our prior expectations and guidance. The quarter’s results are a significant improvement over the $1.09 per share earned last year in the third quarter, even adjusting for a charge of $0.40 per share in the third quarter ’08 results associated with unusual volatility in the financial and credit markets. Our government segment continued to perform well in the third quarter, particularly in our Medicare business. Our commercial segment faced continuing challenges from the economic recession with resulting rising unemployment as well as continued impact from a highly competitive environment and the H1N1 virus. Nevertheless, the positive momentum in the government segment is offsetting the less favorable results in the commercial segment, allowing us to reaffirm our 2009 guidance of approximately $6.15 per share. Turning to 2010, it is important to note at the offset that our guidance issued this morning of $5.05 to $5.25 per share does not include any allowance for what may or may not ultimately happen with health reform, and includes only $0.00 to $0.10 in earnings per share from our Tricare business which we believe is the most conservative assumption we can make at this point. It does however reflect the anticipated impact of the number of significant factors that are more predictable

[James H. Bloem:]

Thanks Mike and good morning everyone. I am pleased to report earnings per share of $1.78 for the quarter even though some of the components our earnings were a little different than we originally expected. This morning I’ll primarily focus my remarks on our business segments beginning with the commercial segment. Before we start though I’d like to note that we expect 2009 consolidated revenues to be in line with our previous guidance with growth of approximately 6% more anticipated for 2010. Turning first then to the commercial segment; our 2009 commercial pre-tax income is expected to be approximately $8 million lower at the mid point than our previous guidance, primarily due to several of the same issues which also have been cited by our competitors and which are pervasive in the current economy. We continue to experience a difficult commercial operating environment with unemployment, competition, and the H1N1 virus currently cumulatively weighing heavily on our commercial results. During the first and second quarter calls we discussed the following factors which adversely affected our commercial results. First, a decline in medical membership, primarily the result of some of the younger and healthier workers of groups we insure dropping or losing coverage as a result of fewer hours worked or broad-based layoffs. Second, as a result of fewer younger members, there has been a deterioration in the remaining risk pool. Third, medical spending increases during the run-up towards layoffs or driven by fear of layoffs. And finally, aggressive provider billing practices such as with the emergency room coding situation. During the last 90 days we did not experience any improvement in any of these factors. Additionally, we would note the following four observations

[Operator:]

(Operator Instructions). Your first question comes from the line of Matthew Borsch - Goldman Sachs.

[Matthew Borsch:]

I was wondering if you could comment a little bit more about the 2010 outlook on Medicare Advantage and what you expect to see, directionally at least, in terms of the member distribution by product; do you think private fee for service is going to continue to shrink with members transitioning to network PPO; if you can size any of that, that would be great.

[James E. Murray:]

In 2009, our network membership is about 62% of the total. We think that will go up to somewhere above 70%, maybe between 70% and 75%. We do anticipate that our private fee for service membership will shrink from where it is this year, probably around 75,000 to 100,000 less private fee for service members next year, and that those members would likely go into some of our network based options. We talked a lot in the past about the product continuum and working around Medicare supplement, private fee for service, PPO, and HMO, and we’ve done a really good job, we believe, of properly setting up those product continuums to incentivize folks to shift to the network options that would be best for them in the long run.

[Matthew Borsch:]

A followup on a different front; on the commercial pricing, what are you seeing from competitors right now, and do you think trends have improved in a way that helps you for 2010 or maybe not?

[James E. Murray:]

We talked in the past about the situation in Texas with the not-for-profit Blue Plan there. That seems to be continuing. In other parts of the United States, there is a for-profit competitor that’s a little bit aggressive right now. I think the reports this last week would, in my mind, begin to get people to think that the aggressiveness that we’re seeing and the reactions ought to start to dissipate, and I would anticipate that from here going forward that we should begin to see some more pricing reasonableness, but we hate to do anything on hope around here. So, we’re going to plan for the most conservative and hopefully it will play itself out in the next couple of months or quarters.

[Operator:]

Your next question comes from the line of Charles Boorady - Citi.

[Charles Boorady:]

My first question on MA for 2010; what do you estimate the average increase in member-paid premiums will be next year or an average member paid premium if you have that, and what is your plan for retaining some of the low-risk lives, maybe attracted to switch to a zero premium offering of a competitor?

[James H. Bloem:]

Across the entire book of business, I think the premium is going up a little under $20 in general for Medicare Advantage members. I would remind you, Charles, on the risk piece of it, that risk mix issue is not as important in Medicare because of the risk adjustment payment methodology; so, it’s something you pay attention to; at the end of the day, I would argue reasonably accurately paid based on the risk of these folks, so that business of losing healthy based on pricing is not as big a concern as it might be in another line of business.

[Charles Boorady:]

My second question on G&A saves, if you can walk us throughout a couple of very big round numbers of $100 million and the $200 million and what made you to reduce the $200 million goal to $100 and what specifically could actually make the difference between getting to $200 million and is there a couple of big programs that you’re thinking of doing or not doing, or is it really just executing a little bit better on everything in your plan?

[James H. Bloem:]

It’s made up of a lot of things, but let me start with the number; there’s nothing magical about the $100 or the $200 million; we’re starting with the $200 million target, I can tell you that I have numbers around here that are bigger, we’re just entering into this really aggressive review of our company as a result of multiple years of growth; no one in our sector has growth like we have and it happened very fast, and at one point in 2006 and early 2007, we really had to jump through hooks to respond to the growth, and you can sit back and you can say with that kind of growth there’s no way that all those decisions were made to drive great efficiency and effectiveness and also we get smarter and smarter over time by understanding what’s going on with these customers; I’ll give you a perfect example, every quarter we understand more and more about how seniors interact with us and how various communication devices and things produce phone calls or the lack therefore; so, it’s a constant fine-tuning but we also know we have opportunities to restructure some of our operational organization; it’s a combination of a lot of things, a lot better execution driven off better understanding of what these consumers need and what we can do for them and I’ve shown you all many times for example, the smart summary statement. We get better and better at knowing what to put in that and what not to put in that to produce a different result with our customers; we know what produces phone calls, we know what does not, so, it’s a combination of productivity gains around better understanding, process improvement throughout the whole system, and some restructuring and reorganizational opportunities that are in front of us; so, it’s a mixed bag, but the number we put out there in front of us is quite achievable and the other reason we didn’t put the whole thing into 2010 is just some question about when the actual time might occur.

[Operator:]

Your next question comes from the line of Joshua Raskin - Barclays Capital.

[Joshua Raskin:]

Just one quick followup on the SG&A; I understand that some of its timing, now that you’re being conservative and that you will be after $200 million in terms of the run rate savings, but still looking at an SG&A ratio I would have expected especially in light of all the growth to start moderating a little bit more quickly; so, is there just more variable costs than we think in the business or the top-line leverage, when do you expect to get some more leverage on the ratio?

[James H. Bloem:]

Well you’re seeing the beginning of it now; that’s the number we have in front of you. I think we will just continue to put forward; like I said, we have numbers around here that are bigger than that in terms of potential; so, I don’t fundamentally disagree with your directional question; we have a bigger opportunity and we will pursue it, but we have a lot to do around here, this is one thing we will get after; you’re going to see the early results of that this year and there will be news to come.

[Joshua Raskin:]

Just risk adjuster questions, any risk adjustment settlements paid from CMS in the last quarter that related to prior year and prior quarters?

[Michael B. McCallister:]

No.

[Operator:]

Your next question comes from the line of Thomas Carroll - Stifel Nicolaus & Company, Inc.

[Thomas Carroll:]

As I think about your comments about your longer term Medicare Advantage margins, should we interpret your comments as maybe a softening of that 5% pre-tax goal or is it just not the case at all?

[James E. Murray:]

When we talk about the 5%, its how we look at the business as we’re bidding it into the future, but it’s important to remember that we’re constantly trying to drive efficiency and effectiveness and how many times have you heard us talk about the insufficiency and the waste and the fraud and all the nonsense that goes on in Medicare, that’s not something that you can take out instantly or quickly or easily but is what we work on all the time; so, when we bid our business for the following year, we sit down and say, what do we have, what do we think it looks like, and where is the business going, we build our bids around an overall 5% target, but then we continue to work and as we get progress and as we have efficiency and effectiveness and as we gain ground on rationalizing the business, that’s upside to that 5% and you saw it happen this year, when we bid 2009, we started at 5 and it’s actually a little bit better than that through the good work it was around here.

[Thomas Carroll:]

As a followup, remind us as to what percent of your declining private fee for service book is choosing another Humana product?

[James E. Murray:]

In 2009, about 90,000 folks switched from our private fee for service to one of our network based plan; we anticipate that same kind of movement in 2010 or more.

[Operator:]

Your next question comes from the line of Justin Lake - UBS Investment Research.

[Justin Lake:]

First, a quick question on how you’re viewing the potential Medicare Advantage reimbursement changes and reforms, would like to get your view on this and it seems like there is either going to be a change to fee for service rates, more competitive bidding, and just want your view on those two potential changes and how you would view them from your business standpoint especially if you could talk about HMO versus PPO?

[Michael B. McCallister:]

What we have in front of us is uncertain, but I will bucket it into two buckets; one is moving things in-house to the traditional Medicare cost, we have competitive bidding in the senate, this is one of those cases where the devil will ultimately be in the details and so its hard to respond to where the same might end up but I will say and I’ve been saying that for a long time, that over time these payments rates would be adjusting and so we’ve been raising and working as hard as we can to get networks built for clinical capabilities because it’s all about managing this business, not insuring this business for us; so that has not changed and we’re moving as quickly as we can; we talked to you about the 15% solution and we think over the long-term that companies like Humana need to deliver savings to the federal government, those savings are going to ultimately result in those payments to us being no more at some point than they would be paying to the traditional provider community; so, those things have not changed and I think we continue to provide feedback and modeling capabilities to those that are trying to figure out the best way to do this. The issues are the same, rural versus urban; the adjustment to 100% rates goes one direction, competitive bidding goes another direction and it has varying impacts on communities around the country; so, I think we’re very much in the middle of a conversation around the impact across the country and there’s 11 million people in this program, and depending on how this is done, there’s the potential for a great deal of damage to the benefits and premiums; so, I think there’s news to come on that, but as a company, we have been preparing for these rates to come down. It’s really a function of timing as much as anything else because we’re doing quite well building out capabilities, and prior question was around margin; that good work we did this year is one of the reasons the margin was a little higher than we had originally anticipated for ’09, that will continue on, and the more that we do and the more success we have, the better we are able to deal with whatever changes comes; I think it’s a little too early to react to any specifics.

[Justin Lake:]

Is there one that’s better or worse for your book of business in your view, private fee for service or competitive bidding?

[Michael B. McCallister:]

I don’t know that I would go there, Justin; there are things about both the differing impacts on our company; we’re pretty broad-based, so when I talk about rural versus urban whichever way you go, you’ll hit a piece of it a different way, so, I don’t know that I can pick my poison there?

[Operator:]

Your next question comes from the line of Scott Fidel - Deutsche Bank Securities.

[Scott Fidel:]

First question, if you have any updated intelligence on how the negotiations are proceeding around the industry tax that would start in 2010 and then also if you’ve just received any feedback on any different formula that they might use for the Medicare business relative to the commercial business?

[Michael B. McCallister:]

Not sure I understood the second question, Scott?

[Scott Fidel:]

Are they going to use market share based approach or premium based approach, and any understanding on whether they would look at Medicare premiums any differently or whether it would just be a cross-off net premiums written for the industry tax?

[Michael B. McCallister:]

Basically, we’ve not received anymore information; I think there’s still the same difference of opinion among whoever you ask whether or not Medicare or Medicaid and the excise tax, so there hasn’t really been a lot of development there; it’s kind of hard to find a rationale for including Medicare but we’ll have to see how that plays out; I don’t think that was the initial intent, and because we’re looking at Medicare as being adjusted under a whole different channel and all of a sudden we’re going to have premiums, taxes on Medicare; I don’t believe that was the intent but I know that the conversation up there is now around whether it is going to be included or not; so, there’s one impact you can passively be certain of and that is that as we start taxing these benefits and start taxing these companies, it’s going to be pass-on to our customers, and whether we get it done in 2010 or 2011, it’s going to happen, and of course 2010 a lot of those business is already big in terms of pricing and so it could have an impact, but at the end of the day, the question from a political perspective is do you in fact want to cause health insurance premiums to rise by taxing the system.

[Scott Fidel:]

Just a followup on the medical cost trend view for 2010, looks like you’re assuming stable at 7%, 8%, that is a bit lower than what we’re seeing some of the peers issue guidance at around 9%; just interested, you guys have had a different cost trend over the last year to your peers, but can you highlight some of the variance that you think between your trend and peers and also what you’re building in for benefit buy-downs relative to 2010?

[Michael B. McCallister:]

Generally speaking we’ve always had a slightly less trend than the rest of the industry; so, we’re going to 7% to 8%, but we’ve been in this 7% range before; basically as you look at how the things are driving that secular trend, the hospital rates, there are still things in the provider billing practices that are there, and then as we’ve talked about still cost shifting going on too from regulatory authorities, a potential going forward, and then there’s been a leveling off we think for 2010, there’ll be more of a leveling off in the generic dispensing rates which for us has helped us have that lower trend that I mentioned initially.

[Scott Fidel:]

And on the buy-downs?

[Michael B. McCallister:]

Buy-downs generally speaking we don’t see a lot different than we’ve seen in prior years, 2.5%, 3%.

[Operator:]

Your next question comes from the line of Kevin Fischbeck - Bank of America-Merrill Lynch.

[Kevin Fischbeck:]

You talked a lot about how you feel like the guidance is somewhat conservative but you haven’t talked a lot about the cash component of this, can you remind us how much cash at the parent level and what would kind of get you to put that cash to use; the press release talked about how the financial environmental slowed down the share repurchase this year, is that still the issue, a little clarity about what will cause you to put that cash to use, is it share repurchase or is it acquisitions?

[James E. Murray:]

First of all, the cash at the parent at the end of the third quarter was $693 million, that’s up from about $665 million, but generally speaking, the change this year beginning the year at 250, we paid debt of 250, we took dividends of 775 and we put 100 back into the subsidiaries; so, again, that’s going to be the patter for the rest of the year; as we look at as to the uses of cash basically, we are looking at what healthcare reform, we’re uncertain as to what that will mean for us from a cash position; the cash at parent is one of the highest numbers we’ve had in the last 10 years; but as we look at things, we continue to look at acquisitions, we look at a lot of different things, obviously we never comment on overlooking at it, but they are out there; but I think right now, cash conservation is the fairly good conservative strategy given the fact that we are in an uncertain environment as we’ve mentioned on the commercial side and in the economy in general, but also, really with respect to healthcare reform.

[Michael B. McCallister:]

I would follow that up by saying I think all the companies in this industry are going to confront a complete review of the world as we know here in a few months as this thing gets clear and so there’s going to be a significant strategic implications to companies and will all be effective somewhat different depending on where we are and the kind of businesses we’re in, but I think at this point in time, the smart thing is to hold to keep your powder dry and assess where we are, and we may need to actually go a direction to respond to all that when it is all set and done, so, I think right now it’s a time to be cautious and conservative.

[Kevin Fischbeck:]

One quick question on TriCare, based upon the guidance before around margins, TriCare contributed about $0.35 to $0.40 to earnings annually and you’re talking about the cost here about $0.43 in 2010 and reconciliation in my chart is about $0.24 implying about $0.19 hit in Q4 from losing the contract, is that $0.10 from actual operations and $0.09 in wind-down cost, what is in that Q4 implied hit?

[James H. Bloem:]

It’s actually what we’ve been saying all along; if you look at the TriCare revenues, there are $3.5 billion would put about a little over 3% margin on there and you’ll come up with 115 that’s on the fly; what we’ve said is looking at the contribution though if we are not successful in retaining the contract, then we have certain wind-down costs, the impairment of goodwill and other things which we’ve estimated to be between $50 and $75 million; so for the coming year 2010, we’re saying that we keep the contract through 930 and then we also take into account those costs that’s why we get a net EPS contribution of between $0.00 and $0.10 a share, and looking at from the way you are looking at it and you would say that we have 50 to 100 because we had for three quarters of a year 50 to75 of those charges given those zero to $25 million of pre-tax.

[Operator:]

Your next question comes from the line of Justin Lake - UBS Investment Research.

[Justin Lake:]

My followup was on the margin side for the 5% Medicare Advantage or Medicare margins, just thinking about clearly you’re doing a lot better this year than you thought when you reported last quarter both from a margin perspective and it would appear better than what you’ve planned, so when will that run rate carry over to next year and therefore if you bid the 5% maybe you would actually be trending towards the 5.5%, 6% run rate for next year?

[James E. Murray:]

Lots of factors go into the Medicare margin that we talked about; the group business has a lower margin than the overall individual that we bid separately; the PDP as Jim indicated is moderating down from where it had been, and we just think it’s prudent as a company that if we bid the 5%, and remember that we do that in April which is before some of what we see happening; we just think it’s prudent to go back to that original bid amount and then let the result of our good work play out as it is seen in our financial statements.

[Operator:]

Your next question comes from the line of Gregory Nersessian - Credit Suisse.

[Gregory Nersessian:]

First question on overall reaction by our Medicare Advantage customers, maybe not just yours but industry wide to the benefit cuts and the premium hikes, is the level of discontent amongst seniors, in line with your expectations, is it worse, is it less severe than you thought it might be; any color there in terms of how they’re responding to those changes?

[James H. Bloem:]

It’s developing and it’s early; one of the things we learned about seniors is that as this whole process rolls out, there’s a growing thing that occurs here, and so people don’t jump in and start studying this the first minute the data is available, but they will as they start really thinking about their choices that they have to make and it happens reasonably quickly because this only lasts for a few weeks, but I think we’re going to see a pretty significant reaction; there’s no question, if we have any doubts in Washington, what happens when we cut payments, we’re going to see it right here; we have our payments going down this year because of some assumptions that CMS made around next year’s cost trends; we don’t agree with those things, but they definitely affected our rates and so we appropriately responded by changing benefits and premiums; we raised our premiums on average a little less than $20 and there’s been some benefit changes as a result; so, here’s the direct cause and effect evidence of what happens when we take actions relative to this program and so, I think that as the noise starts building, they will make their voice heard in Washington and I think it’s going to be a stage-setter relative to an ongoing conversation about what happens with this program; the timing is going to be interesting because we’re going to be in the middle of debating the future of Medicare Advantage right when this occurs; so, in many ways from educational perspective, it couldn’t be at a better time.

[Gregory Nersessian:]

This was very helpful; and then just a couple of clarifying points; what was the green ribbon contribution this year, and then secondly, you’ve got DNA moving higher next year, Jim, but the CapEx has been coming down; wondering what’s in there to get your DNA higher?

[James H. Bloem:]

The green ribbon contribution is $20 million, again this was a demonstration project that we worked on for several years and have expensed everything; we had it in our guidance and we mentioned it a year ago; we respect the DNA depreciation and amortization; generally speaking, the amortization is on a quick table and the CapEx has come down but we basically have a few years lag; the average use for life of most of our equipment and most of the software and technology things we do is between 5 and 7 years; there’s been a fairly steady capital expenditures at that level; so, that’s why it still continues to go up and then we’ll receive back down as we come down to the 175 to 200 for next year that we’ve signified in the guidance.

[Operator:]

Your next question comes from the line of Carl McDonald - Oppenheimer & Co.

[Carl McDonald:]

Do you think that the benefit design changes that you made in 2010, at least from a high level, it looks like you did offset most of the negative spread from the pricing and the affected cost trend next year, and looking at the Medicare margin guidance for next year would suggest that wasn’t the case, so am I misreading the benefit design changes or again going back to that 5% expectation for next year really just a place holder because that’s what the initial bid expectation was?

[James H. Bloem:]

When we did the work around our bids in April and again filed them in June, the data that was available to us suggested that the 5% was a reasonable target; we do a pretty thoughtful job of summarizing through a bid model all of the margins that are created by the premium and benefit design changes that we make and that model told us at that time that the margins for that business would be around 5%, and so again, we wanted it to run itself out as we do some of the work that Mike talked about earlier in terms of clinical programs and contracting and some of the work that we do on the Medicare risk adjustment so that we get paid for the risk that we assume, we’ll let that flow into our earnings and we’ll report that at that time.

[Carl McDonald:]

Second question on the TriCare write-down, is that going to be a fourth quarter event after you find out whether you’ve retained the contract or not or is the timing of the recognition there not related to that?

[Michael B. McCallister:]

Carl, no, it’s not a fourth quarter event; we don’t really anticipate it this year and that’s why we put it in the next year.

[Carl McDonald:]

Sorry, fourth quarter of 2010?

[Michael B. McCallister:]

It could be there but we don’t know yet because we don’t know all the details and the implications of the GAO decision. The way that the calculation works with respect to the impairment of goodwill for example, you take a look at the net present value of the remaining cash flows in the light of the contract and compare that with the carrying value of goodwill on your books, and when that falls out of balance, that is the carrying value is more than what the supporting cash flow are, that’s the period in which we’ll recognize it. So, as we get more clarity as to how long we’ll keep the contract and what the terms of the contract will be, we’ll be able to better gauge and will be able to better evaluate what quarter of 2010 that occurs in.

[Operator:]

Your next question comes from the line of Ana Gupte - Sanford C. Bernstein & Co.

[Ana Gupte:]

Another followup question on the preservation of 5% margin long term, and I was wondering what lessons have you learned from your 2010 experience with regard to premium shifting and buy-downs and in terms of the demand elasticity, do you see that there is more capacity to shift premiums to seniors as you continue to see cuts in 2012 all the way through 2014, and then in terms of buy-downs, have you reached your asymptotic limit on the buy-downs or can you do more and continue to gain share if you will?

[Michael B. McCallister:]

Firstly, it’s going to vary by location around the country because in some places there is more headroom than others depending on how long we’ve been there, the scale of our business, how much penetration we have relative to our clinical work, and those sort of things. So the answer is yes, in many places there is continued to room to adjust benefits down. In terms of the balance between benefits and premiums though, that’s done with a fair amount of research that’s been focused on trying to find out what the right balance is, is there an inflection point where premium becomes more important than benefit changes or vice versa, and we’ve put a lot of energy into understanding how seniors respond to those two changing dynamics and we try to hit a sweet spot. The challenge is always we never now exactly what our competition is going to do or whether they’re working off the same set of understandings as we are. So we’re always subject to the competitive market place, but we try to hit a smart sweet spot between premiums and benefit cuts. And I think at the end of the day, Humana is not going to win or lose based on that. That’s important to get that right. It comes back to if we’re not managing costs down, none of it is going to matter because you do run out of room at some point. We keep coming back to this 15% solution subject. You’re going to hear that from us until you’re sick of it because that is the absolute key to having us and the individual Medicare folks having a future with this private sector alternative. We have to get better, we have to get more efficient. The good news is that there are incredible opportunities in a lot of ways in this system, and we’re seeing good traction, and so we’ll just keep it up.

[Ana Gupte:]

The second question is more near term on commercial membership. Can you break down how that works between individual and small group, and on individual, do you see that when the stimulus subsidy of COBRA rolls off, potentially the individual membership you could have some upside, in other words, to your forecast?

[James E. Murray:]

The individual membership is around 350,000. Small group membership under 50 which is what’s being discussed through healthcare reform is around 590, and about 900,000 other fully insured total of about 1.8 to 1.9 million. Can you repeat your message around the individual?

[Ana Gupte:]

Typically, you do pretty well in individual. Assuming the COBRA subsidy rolls off which I’m assuming is pressuring individual market growth, would you see any upside to your 2010 forecast, or is that already taken into account with a fairly optimistic viewpoint and then the small group is really pressuring your membership downward?

[James E. Murray:]

To your point the individual membership is growing nicely. We like our model, and we believe that the broker community that works closely with us likes our model relative to the competition. I would anticipate depending upon what happens with COBRA that what we’re going to trying to focus on more than that particular issue is making sure that we catch some of our small group members that are choosing to drop coverage, and we’re working really closely to coordinate the efforts of our small group salesforce and our individual salesforce to make sure that more and more folks are made aware of our individual offerings so that we can catch more of that as opposed to them just falling into the marketplace. So that’s really where our good focus is right now. To be brutally honest, we haven’t been as good at that as we should’ve been this year, but we’re going to get a lot better at it going forward.

[Operator:]

Your next question comes from the line of Peter Costa - FTN Equity Capital Markets.

[Peter Costa:]

In terms of the gains and losses of members in Medicare Advantage, you talked about net individuals of 20,000 to 60,000 growth. What’s the absolute number of adds versus the absolute drops?

[Michael B. McCallister:]

We’re anticipating on the individual piece that the sales will be somewhere between 460 and 480, and the terms would be 420 to 440. We really have to focus on the terms. We’ve used a historical number to develop that, and we’re doing a lot of work here to message our membership to let them know what to expect to give them some alternatives for other products that make good sense for them, and we’re really taking an aggressive approach to being very transparent with the membership with the goal of making that number go down, but for purposes of this projection, we’ve used some historical numbers to develop it.

[Peter Costa:]

Is there a geographically specifically place where that exists where those terms are? Have you looked at regions where you’ve gotten out of products and things like that? Is that where it’s stronger or how do you develop that number exactly?

[James E. Murray:]

All of our folks who are in the field rigorously review all of the competitive environment in our product design to decide where we’re going to put our direct marketing dollars. They look at what competitors are likely to do, for example, the Coventry and Wellpoint and WellCare getting out of the private-fee-for-service business. We’re looking at where our benefit designs don’t look so hot relative to the competition, and we aggregate all of that good knowledge up to these totals that I just shared with you.

[Peter Costa:]

Can you give me some clarity on the Tricare contract as to when you’ll have some view as to whether that’s going to be rebid, or exactly what’s going to happen there? What’s the timeframe on what’s going to happen there?

[Christopher Todoroff:]

We really don’t have enough detail yet to even assess that. A lot depends on how the TMA will choose to proceed once the full GAO decision is released.

[Peter Costa:]

When do you expect the full decision to be released?

[Christopher Todoroff:]

We’ll probably know a fair bit more this week, but that doesn’t mean that we’ll be in a position to really materially assess things. Again, a lot depends on how the TMA chooses to proceed once the GAO puts out all of its findings.

[Regina C. Nethery:]

The TMA, for those who are unaware, is Tricare Management Authority that’s part of the Department of Defense.

[Operator:]

Your next question comes from the line of Matthew Perry - Wells Fargo Securities.

[Matthew Perry:]

I have a question on the PDP margin. You talked about moderating PDP margin in 2010. Can you delve into that a little deeper? I see mostly your member premiums have gone up. Do you just expect cost trends to go at a faster rate, or is there something else there?

[James E. Murray:]

You’ll all recall the 2008 situation that we attempted to correct in 2009, and frankly the results came out better than we had anticipated, and so we purposely try to take our member premiums up only slightly in 2010 with the hope that the membership would become more stable and we’d actually begin regrow the PDP membership, which is something that we’re very interested in doing, and so yes, we anticipate that the trends would go up slightly more than the premiums that we’ve put in place.

[Matthew Perry:]

On investment income, does your 2010 guidance anticipate a change in interest rates, and if so, by how much, and then secondly would you expect to reauthorize the share repurchase after it expires at the end of this year?

[Michael B. McCallister:]

For the first one, we expect that the investment income increase of about $30 to $35 million that we have there is all on the balances. The interest rates are going to make any real meaningful difference. With respect to the share repurchase authorization, that’s a matter for the board of directors, and I’m sure they’ll be talking about that when they get together in December.

[Operator:]

Your next question comes from the line of Doug Simpson - Morgan Stanley.

[Doug Simpson:]

Am I doing the math wrong here? If I take the commercial segment and improve the MLR by 150 basis points, that gives me about $0.30 versus the $0.11 delta that you show on that one mapping chart. And then if we look at Medicare and we assume 150 basis point margin pressure, that gives you a downside of $1.25 on a year over year basis versus the $0.43. It looks like to get to that $1.50 decline, you would need to put basically all $100 million of those cuts against Medicare? Am I doing that math right, and what explains that delta?

[James H. Bloem:]

I think the first thing I would say is in general we’re not in the business of commenting on people’s models, but what I heard you say was 100 basis point improvement in the commercial, and I said, again, there is that aspect of the guidance, but still with the range, a total of 100 change would be probably too big a change given all the uncertainties that we’ve set out at this time of the year. That’s why we have a wide range on our commercial pre-tax guidance. We have a $50 million range on that.

[Doug Simpson:]

The Medicare variance was the bigger of the two.

[James H. Bloem:]

The Medicare variance basically works its way through the mix of membership. As we’ve talked about, we’ve got PDP memberships. We’ve got demonstration in PDP, and we’ve got lots of different mixes there too, so you wouldn’t be able to do that, but generally administrative cut, which is really what your question is focused on, is around a 55-45 to 60-40 split, and it would be in favor of government.

[Doug Simpson:]

So it sounds like the delta between this math and the numbers you mapped, it’s things like member month timing and mix shift. Is that fair?

[James H. Bloem:]

That’s correct.

[Operator:]

That concludes today’s Q&A session. I would now like to turn the call back over to Mike McCallister

[Michael B. McCallister:]

Thanks again for joining us this morning. I would conclude by saying that I think this was a good quarter in an environment of uncertainty. I think it’s good news that we’re going to finish the year where we thought we were going to although the moving parts have changed a little bit. We’re actually pretty optimistic about going into 2010. We do have our challenges with Tricare and the other issues we talked about this morning, but I think the company is a position to respond well to the environment. We’ve worked hard to get to a point with our Medicare business where we really understand what it’s doing, where it’s going, and how to grow it and how to interact with seniors. We’ll continue to be involved in the political conversation. Our members will continue to be involved because we’ll inform them about how things are changing, and then lastly, I’d like to thank all the associates who are on the call for making all this possible, and also for participating in the political process as our Humana associates have stepped up in a big way to be a part of the conversation and debate. With that, I’ll close the call this morning. Thanks for being with us.