UnitedHealth Group Incorporated
Q1 2008 Earnings Call Transcript

Published: 22 Apr 2008

[Operator:]

Good morning. My name is Dennis and I will be your conference facilitator today. At this time I would like to welcome everyone to the UnitedHealth Groups First Quarter 2008 Earnings Conference Call. (Operator Instructions) After the speakers remarks there will be a question-and-answer period. (Operator Instructions) For purposes of getting to as many participants as possible, we also ask those with questions to limit to one question per person. As a reminder, this conference is being recorded. This call and its contents are the property of UnitedHealth Group. Any use, copying, or distribution without written permission from UnitedHealth Group is strictly prohibited. Here is some important introductory information

[Stephen Hemsley:]

Good morning and thank you for joining us this morning. Our release today focuses on the first quarter results, but at the top of our call, I want to address the revision to our 2008 outlook. We have lowered our earning outlook for the rest of the year, reflecting what we feel will be near term pressures on revenue growth and related earnings and margin. We have been careful and measured in doing so. These projected reductions are caused by a number of concurrent events

[Operator:]

(Operator Instructions) We also remind you that for purposes of getting to as many participants as possible, we ask those with questions to limit to one question per person. We’ll pause for just a moment to compile the Q&A roster. Your first question will come from the line of Justin Lake with UBS.

[Justin Lake-UBS:]

Thanks good morning. A question first on the MCR for the business

[Stephen Hemsley:]

Justin, can you just reframe that? I want to make sure I’m understanding your question and I’m not sure I caught it.

[Justin Lake-UBS:]

Sure. When I look at the commercial risk MCR of 82-3, that’s 100 basis points above the UnitedHealth Group overall

[Stephen Hemsley:]

Yes, Mike do you want to respond to that?

[Mike Mikan:]

Well Justin, there’s a lot of ins and outs and we’ve discussed this before that it’s not just the government business that is the delta between the commercial medical care ratio and UnitedHealth Group. There is Optimum Health and there’s also the pharmacy business that reduces the cost ratio because we purchase, Prescription Solutions purchases drugs for the Ovation’s business as well; so it’s not just the government business and particularly it’s not just Ovations, but it also include the AmeriChoice business and the myriad of different products within ovations. So, if you’re asking with respect to one product line, we don’t get into that level of detail, but the public and senior market group medical care ratio is higher than the commercial medical care ratio in total.

[Justin Lake-UBS:]

Okay and just a quick question on medical costs. Can you walk us through the different components? You mentioned the inpatient being pressured and can you kind of specify that, what you’re seeing there and how close to that 7.5 number you’re running?

[Mike Mikan:]

Sure. It’s Mike again, Justin. As you recall last year we ended at the lower end of our original guidance between, we had originally guided at 7.5% plus or minus 50 basis points, we ended the year at the lower end of 7 to 7.5%. We guided for 2008 at 7.5% plus or minus 50 basis points. I broke out those details for you; I think Ken Burdick did as well at investor day. We would change those some, we are seeing some difference in mix and I’ll go through those, but, with respect to unit costs and utilization and aggregate, those remain the same. Roughly 5% for unit costs, roughly 2.5%, or so for utilization and mix and those components are positioned, we had been at, at the investor conference at I think 5% at the investor day. We are now estimating between 4-and 5% per position. On inpatient as a result of significant unit cost pressure, on the west coast as well as the east coast, we are now projecting inpatient trends at 11.5 to 12%, that’s up from 9.5 to 10.5%. Outpatient, which was at 78% is now at 6 to 7%, I think there’s some mix changing there and then pharmacy, which we had estimated at investor day at 78% we now forecast it at 6 to 7%. If you do the weighting of each one of those on the medical cost trend it remains consistent with our aggregate forecast that we had with 7.5% plus or minus 50 basis points.

[Justin Lake-UBS:]

Great. Thank you very much.

[Operator:]

Your next question will come from the line of Lee Cooperman with Omega Advisors.

[Lee Cooperman-Omega Advisors:]

Thank you. We’ve had this conversation in the past and I really think, Steve, you should add to your list of things you’ve got to do better is capital management. From 2004 to 2007 we have spent $15 billion buying back stock and if the opening this morning is any indication of on going value, the program, there has been really an enormous mistake and it’s particularly aggravating because it took place at a time when there was substantial insider selling, back to the corporation in effect. We’ve had this conversation before, but I’d like to know how well thought out is this buy-back philosophy to where you’re excluding a meaningful cash dividend completely? In other wards, when I look at the statistics, 80% of the S&P 500 pay dividend, 100% of Dow Jones Company’s pay a dividend. Where do you think your stock would be selling at if you took say half of your 355 to 360 in earnings and paid out a cash dividend, of the remaining half, half went to grow the business and half went basically to offset option dilution and if the shareholders made their decision. Now I myself have historically been a fan of stock repurchase, but only when one condition exists

[Stephen Hemsley:]

Well first of all, I appreciate your perspective and I believe I understand your perspective. Our approaches to capital have been consistent in terms of reinvesting in a way that we think is measured in our existing business. Dedicating capital where we see opportunities to strategically expand our business and we have seen and felt that share buy back provides the greatest shareholder value and we look at our business and assess what we consider to be the intrinsic value. I think we are influenced by the fact that we have not executed well and have not executed well over the last, I would say two years, and as result it has clearly been reflected in the share price. We continue to believe that the potential of this enterprise, executing near or to its potential, is extremely compelling and we are committed to that level of execution, and as a result share buy back appears to be the most compelling use of that capital. I take your point with respect to a dividend analysis and I can assure you that we look at that and evaluate that on a regular basis and evaluate it at the board level.

[Lee Cooperman-Omega Advisors:]

My only suggestion, since you’re taking an extreme position. I mean today you said you were going to do about a $4 billion buy back of I guess 10% or there about of the market cap. Why don’t you share the valuations thinking that the board and financial management of the company has gone through in reaching this decision and send all of us a little letter in discussing this decision, because you know we spent 3.4 billion in ’04. 2.6 billion in ’05, 2.3 billion in ’06, 6.6 billion in ’07, these are substantial numbers. This is the biggest investment decision the company has ever made and it’s been so far flawed. Now, I myself, I get intrigued when you really get under valued. My guess is you’re probably significantly under valued, but I’d like to kind of understand the thought process that management is going through to reach this determination. Because, the, you know, I suspect if we announced this morning that we were to pay $1.80 dividend, which is half the earnings and the other half would be to grow the business or off set option dilution, your stock wouldn’t be trading where we’re starting at today.

[Stephen Hemsley:]

I appreciate that solution. We’ll see if we can, in our next call perhaps, dedicate some time to that and I appreciate the [indiscernible] and that about our shareholders.

[Lee Cooperman-Omega Advisors:]

Thank you very much.

[Operator:]

Your next question will come from the line of Christina Arnold with Morgan Stanley.

[Christina Arnold-Morgan Stanley:]

Hi there. I’m really struggling with your assertion that you’re not seeing a change in forecasted medical trend. Because, if I look at your commercial loss ratio, you’re saying that you got better yields than a year ago and yet a year ago the commercial loss rates show benefited from 120 basis points positive development; so even excluding flu, your MORs up over 100 basis points; so that implies that costs have accelerated more than 100 basis points. Can you help me with that?

[Stephen Hemsley:]

I think that one of the major themes there is that we have gotten better yield realization this year as compared to last few, the issue is, are those yields sufficiently covering the level of projected medical costs and Mike can, I think, provide some color.

[Christina Arnold-Morgan Stanley:]

But how can the acceleration and premium yields not cover trend if trend isn’t rising or accelerating?

[Mike Mikan:]

Christina, let me clarify that as best I can. What we’ve said is, and I’ll go back to my earlier comment with Justin, last year we ended the year at 7 to 7.5% at the lower end of that range. This year we have been forecasting and remain to forecast at 7.5% plus or minus 50 basis points. If you try to tie in yield, last year, as we disclosed to you, is we missed trend by about 60 basis points. If you assume that we’re getting 50 basis points better on yields, but we’re still short by 30 to 40 basis points from yield to trend, that would imply that your medical costs have increased by 20 to 30 basis points, well within the range that we had given previously. So last year we ended at the lower end of the range and this year we’re well within the 7.5% plus or minus 50 basis points. There is flu that works into that as well, but 30 to 40 basis points is relative to what we expected trend to be, so flu is in there at 10 basis points and then there are some ins and outs, but nothing major beyond that.

[Christina Arnold-Morgan Stanley:]

So if you’re at the lower end of kind of 7 to 7.5%, lets call it 7%, I mean you’re saying trend could be as high as 7.5 plus or minus 50, trend could be as high as 8 so trend could be up 100 basis points, am I reading that right?

[Mike Mikan:]

Well the range is 7.5 plus or minus 50 basis points. The map I just walked you through would be somewhere around you know 30 to 40 basis points, if you take flu into consideration and some other items.

[Christina Arnold-Morgan Stanley:]

Okay, it’s just it seems to me that x flu, you’re running an 81-1, a year ago x positive development or x negative development in commercial you were at 80% even, so even x flu you’re up over 100 basis points with higher yield, so I guess I’m still struggling, but I’ll take it off line.

[Mike Mikan:]

I think we can take you through that map off line. I think that would be a more productive approach.

[Stephen Hemsley:]

Well Christina, let why don’t I just quickly, just give you some other guidance that we’ve given before. When you’re just for the development, both the favorable development from last year and subsequent development true ups for the first quarter, we estimated the loss ratio to be 80.5%. If you adjust for flu and you adjust for this pricing discrepancy that I just discussed, you would get in the range of what we booked the first quarter out of, at 81.5%; so, yes, I think between John, Brett and I, we can follow up with you on that.

[Christina Arnold-Morgan Stanley:]

Okay, thanks.

[Operator:]

Your next question comes from the line of Bill Georges with J.P. Morgan.

[William Georges of J.P. Morgan:]

If we could focus just for a second on your Medicare Advantage and the new guidance and maybe if you could start off just by helping us square the membership that you say which is 50,000 adds versus what CMS is reporting and I believe they talked about that being 19 and then, how realistic are your new guidance points given the fact that open enrollment has closed, so you no longer have access to the full 45+ million members. Is it realistic to think in the balance of the year, with a far smaller adjustable population, that you’re going to be able to hit those targets?

[Stephen Hemsley:]

I think Simon can respond to that.

[Simon:]

Yes, thanks Bill. So if you look at the CMS numbers, we do believe they reconcile and obviously the CMS monthly numbers are lagged by three or four weeks, so January they have us at -12, but in fact there was a cost trend number in there which got us flat. For February they were up 13, for March they were up or April up 9 getting us to a net of 27 and then we saw a ramp up in sales at the end of the open enrollment period to give us our estimated 50,000 equal first effectives. As for the rest of the year, we obviously aren’t able to sell unexpected replants in 34 markets and in those markets we think we have potentially six million seniors who are potentially available, able to join those on a special needs plan, so we don’t think we’re going to be out of runway for the rest of the year.

[William Georges of J.P. Morgan:]

Okay and if I could ask a quick follow up on your cash flow guidance. I think you’re prior guidance points were 7 billion, but if I recall that was a five-quarter look. The math that I’ve got is that you report about 2.2 billion in the fourth quarter, so that would imply that you’ve cut your share repurchase guidance from about 4.8 to 4 billion. Could you confirm that I’m getting that correct?

[Stephen Hemsley:]

You’re not talking about cash flow; you’re talking about projected share repurchases?

[William Georges of J.P. Morgan:]

Share repurchases in 2008, yes.

[Stephen Hemsley:]

Right, Mike?

[Mike Mikan:]

It’s about a billion-dollar reduction from that original forecast.

[William Georges of J.P. Morgan:]

Okay, great. Thank you very much.

[Operator:]

Your next question will come from the line of Cheryl Skolnick with CRT Capital Group

[Cheryl Skolnic-CRT Capital Group:]

Okay great, thank you very much. I guess the answer to the question is that you’ve reduced your outlook on repurchasing the stock, which I have to say, given the changes to the balance sheet and the cash flow of $280 million in the quarter is a good thing. But, I guess I have to go to a broader question. We’re confused about how you’re pricing your product. I really don’t understand what it means that your premium yield is ─I do understand in terms of the numbers that your premium yield was better than it was last year. It’s still not good enough to cover trend. I’m going back right to Christine’s question on this and I guess where I’m very confused is, is it that you expected, you priced for a cost trend say at the 7.5%, what you’re getting on premium yield is 7.3%? Is that the right way to look at this in terms of just putting it in simple English and simple numbers? Then the broader overall question is, with the increase in debt, with the lack of performance ─ which Steve, unfortunately you’ve had to preside over for the last couple of years, with changes in management, how do we get confidence that this is sort of the last time we’re going to hear the results are unacceptable? I just, the message gets more confusing, not less. Do you have the right team in place? Are you pricing the product correctly? Is the quality of earnings where it needs to be? Is the cash flow where it needs to be? That’s the general broader question, or are we looking at a period of prolonged readjustment before the company can get back on track?

[Mike Mikan:]

Okay, Cheryl, there is two questions there. I think the first one we can respond to quickly and than I’d like to respond to the second one.

[Cheryl Skolnic-CRT Capital Group:]

Thank you.

[Mike Mikan:]

Cheryl, to use your numbers, the way you’re looking at using the 7.5%, we are, of cost trend, if you were to use that number, we’re 30 to 40 basis points below that. Yes, as Steve noted on the call, we are falling short on premium yield by about $200 million or $1.50 to $2.00.That was roughly, call it, 50 basis points or $1.50 PMPM that we needed; so we would have liked to have gotten that in our pricing, but as a result of the competitive pricing dynamics, the market mix, all those things, we are again falling short by 230 to 40 basis points. That doesn’t mean the cost trend that we assumed changed, with the exception of flu and some other non-recurring items, but de minimus albeit, but nonetheless we are falling short again 30 to 40 basis points this year, compared to 60 basis points last year.

[John Penshorn:]

This is John Penshorn Cheryl. The difference between the 50 basis points that Mike just referred to and the 30 to 40 would be mix, including the HAS growth which Steve talked about.

[Cheryl Skolnic-CRT Capital Group:]

Got it, thank you.

[Mike Mikan:]

Cheryl, the second part of your question is clearly fair and I would tell you that I see perhaps things that aren’t reflected in the performance and I’ve talked, I think, in terms of changes that have been initiated, I would say over the last year, to address needs, I think, within our enterprise to position it for a long-term, consistent performance. Those are areas around a culture that focuses on organic growth and the innovation and the kind of service environment that is required to sustain it, an organization that has the kind of relationship orientation to work effectively with all the participants in the healthcare market place, so that it’s presence in that marketplace is welcomed and encouraged and I think we have made significant advances in that area. We continue to struggle with our capacities around growth. Growth in principally risk-based products, products that have extreme price sensitivity where we endeavor maintain an economic discipline about how we price that product and how we over see that product in terms of its attributes, so that we have some visibility with respect to the economics of that. That has been a challenge for us, it’s been a challenge across the marketplace and that growth issue and the inability to predict that growth, I think has been at the core of our issues and is clearly the core contributor to our guidance with respect to that. I would say that we have taken steps and we will continue to take steps. We will continue to try to find the right mix of leadership; we will continue to adjust our approaches so that we are more effective as an enterprise in delivering the kind of value that stimulates a consistent pattern of growth and growth that has reasonable economic return. And there are other things that can be done, but in the main of this business, to optimize this performance, it’s performance is far from its potential and I would say this team and its management are very , very focused on that and a number of good things are proceeding, but they are not reflected in our performance to date.

[Cheryl Skolnic-CRT Capital Group:]

Okay, perhaps I’ll be able to follow up offline with some additional questions, but in the interest of time I’ll let it go. Thank you.

[Operator:]

Your next question will come from the line of Tom Marsico with Marsico Capital.

[Tom Marsico with Marsico Capital:]

Hi, thank you for taking my question. In listening to the conversation today and the questions that have been brought up with some of the analysts and also with Mr. Cooperman, I think it’s very insightful to look at what’s happening to some of your businesses including the Pharmacy Solutions business. Today you announced that you signed the contract with Medco. Medco today is up 8%, it’s adding $2 billion worth of value to its market cap and it sells at 22 x earnings. I’d like to understand what you think the strategic relationship would be worth if UnitedHealthcare were to sell prescription solutions to Medco. Also, in light of that, looking at the Ingenix business, which I think is a terrific software business and also Optum Health, which has very specialized services, it seems like the value in those three businesses, which represents about roughly $20 billion worth of revenues is a dramatically higher multiple business, especially looking at the Medco business, than the way that the HMOs are trading. So, I think that, in my view as being a long-term shareholder for our clients, in looking at the valuation on United Healthcare, it seems to me that the parts are worth dramatically more than where the stock is trading now. Other HMO companies don’t have the product diversity that United Healthcare has and it seems to me that, when looking at the sum of the parts solution to what United Healthcare might be worth, is dramatically greater than where it’s trading at today; so your share repurchase program you’re almost looking at a 15% free cash flow yield and we’re going through a normal cycle, I think. I like the pricing discipline that you have in the PM business and I like the fact that you’re holding to making certain that you’re not pricing the product too low, because the cost trends have not changed, so I like the pricing discipline. And looking at what private equity’s paid for businesses in the medical arena, such as the private equity acquisition as HCA, it seems like the valuation, when the credit markets start to normalize, would find United Healthcare dramatically under valued. So, Steven, in light of signing the Medco contract and some of the other comments I’ve made as far as Ingenix is concerned, how do you look at these special businesses that are within United Healthcare, given the valuation on your company, and is it something that we should be talking to the board about as far as realizing the opportunity? I mean, I just , you know, the markets down 57 basis points today, Medco is up 8% adding $2 billion worth of value and we’re looking at the stock at United Healthcare down another 10% and I’m saying to myself, the cash flow valuation is very supportive and I’m just interested how you look at this?

[Stephen Hemsley:]

Well, we have had parts of this conversation before and I’m very familiar, I think, with the spectrum of value dynamics across our diversified portfolio and I can assure you that we look at that and assess that in terms of what I will call the long-term interest of shareholders and we do that, not just by ourselves, but we use external experts in terms of making those assessments and you are very correct in terms of seeing the distinctions in value across that spectrum. Taken together, if you think about the total health care marketplace, it meets its potential and the systemic fashion in which we think it is appropriate to address it. That diversification that has been cultivated in this company for more than ten years has been distinctive and it’s helped us grow in a variety of different domains. Much of the growth in these special businesses that you’re referring to has been stimulated and leveraged off the assets and capabilities of businesses that perhaps are not as vibrant at this moment. And I would also say that the view may be clouded by the lack of consistent execution to getting this portfolio of businesses to all perform to their potential. My sense is that the evolution of this enterprise, to that more complete business model has distinctive capacities in the marketplace and has distinctive value potential. That said, Tom we look at these pieces and will look at these pieces and assess whether we can accomplish those same elements, those same goals, without necessarily controlling those, and we look at that on a regular basis and assess whether the position and so forth would be appropriate to unlock value. In fact, we thought that unlocking value was appropriate at that time for long-term shareholders. I use the PBM as an example. Rx Solutions, we think, is a very high potential business its’ potential is far from fully realized. We are making investments in it and making sure that it flows and can be positioned to something that could be quite distinctive in the marketplace and I might look at the extension with Medco as a bridge to that ultimate kind of potential. So I think, for example, you could look at that as a piece in the strategy that might play exactly into what you’re suggesting. We’re looking at these across the spectrum, whether it’s Ingenix or Rx Solutions, Optum Health, AmeriChoice, across the board. I would offer one other element and that has been consistent for many years, is that a core element that has allowed us to cultivate these businesses the way they have, has been the competency around care access and clinically integrated care management, information, which is key to the, I think, success of all of the businesses and the leverage and use of technology and those are present in all those businesses, an important leverage point that one has to consider if these were ever to be separated. It is a point that our board does deliberate over and would always welcome your thinking and our discussions with you on that level.

[Tom Marsico with Marsico Capital:]

Okay, thank you very much Steve.

[Operator:]

Your next question will come from the line of Gregory Nersessian with Credit Suisse.

[Gregory Nersessian-Credit Suisse:]

Hi, good morning. I just wanted to get the commercial margin maybe from a different perspective. I guess it’s at a basic level, you know the commercial risk membership is declining, you know, even faster than we expected, while the MLR is going up. To us that would suggest that the absent mix changes of the UHC risk pool is deteriorating. I guess one is that the correct conclusion and two, if it is a factor, is it because you’re seeing this enrollment and maybe that this enrollment is coming from healthier groups or healthier members within your groups, or is it two because of these competitive pressures you’re mentioning? You know perhaps competitors are picking off your better risk membership through, maybe not irrational pricing, but maybe pricing to a lower margin, are any of those factors?

[Ken Burdick:]

Greg, this is Ken Burdick, let me respond to your question. I would say that the pricing pressure that Steve outlined in his opening remarks is intense, but I would describe it as rational. To your point we do see the strongest pressure in those markets where we compete against non profit players and we continue to focus on pricing our business to our forward look of costs and so well we are pleased that we are getting stronger net premium yields this year than last year, we remain displeased that we aren’t hitting our target of matching medical cost trends.

[Gregory Nersessian-Credit Suisse:]

On the disenrollment costs that you’re seeing, is there a way to characterize that as being healthier members being priced out of the insurance market altogether and just opting out or is there any conclusion you can draw around the relative risk of the membership that you’re losing, relative to the stuff that you’re keeping?

[Ken Burdick:]

You know, we look at that on a monthly basis, we do not see a degradation of the underlying demographics and the quality of the risk pool. What I can tell you to the earlier comment is that we are seeing a much higher level of in-group attrition, the enrollment declines due to the soft economy. So for example, in the first quarter of ’07 we saw 55,000 members within existing customers leave. For first quarter of ’08 we’re seeing double that amount, but we’re not seeing a substantial or any differentiation in the quality of the risk pool.

[Gregory Nersessian-Credit Suisse:]

Okay great. Then just a last quick one, is there any reserve release from Sierra included in the $200 million of DPRD in the quarter?

[Ken Burdick:]

No.

[John Penshorn:]

This is John Penshorn. Ken, could you clarify that attrition number you just provided. Is that risk based only or is that UnitedHealthcare only or what does that pertain to?

[Ken Burdick:]

That’s UnitedHealthcare only and its risk base.

[Gregory Nersessian-Credit Suisse:]

Okay thank you.

[Mike Mikan:]

We can take questions for about ten more minutes, so could we get the next one please?

[Operator:]

Yes sir. The next question is from the line of Thomas Carroll with Stifel Nicolaus.

[Thomas Carroll-Stifel Nicolaus & Company:]

Hey good morning, a quick one here. How much of your revision was related to fed rate action? Then secondly, could you provide us with some metrics that illustrate the flu season this year relative to others, be that admits per thousand or some type of script that would indicate magnitude of change, you know this year being a unique year in the flu season relative to others as we try to learn about this flu season?

[Mike Mikan:]

One of my, it’s Mike, Tom. Why don’t I, I’ll start with the second question and I’ll ask Bob Oberrender, our treasurer, to answer your first question.

[Mike Mikan:]

You know we’ve obviously been analyzing the flu season for a number of years. We always take a look at when the flu season occurs, what is the duration, what is the influenza like, patients as a percentage over the baseline; as you know, this year was a dramatic spike in the mid February time period. We generally estimate that the flu costs, across our book of business, somewhere around $150 million a year. We estimate that range to cost us for the first quarter in 2008 to be roughly $230 million, say 70 to 90 million, or I you want to put a core door around it, of incremental flu costs and each one of the ─ you know we manage the different diagnoses, but each book of business is different, whether it’s physician visits in the commercial business, inpatient stays in the Ovations business, its all across the board for the AmeriChoice business, so there isn’t one unique item, but we do manage it across each individual block. In an aggregate we estimate it to be around $80 million incremental.

[Thomas Carroll-Stifel Nicolaus & Company:]

Great.

[Robert Oberrender:]

And Tom, Bob Oberrender, with respect to investment income up to 200 basis point decrease, the fed action impacting rate impact on our investment income going forward and then the incremental part is some lower average balances as we trued up with CMS compared to the last year. So it’s about $260 million degradation off set by, as Steve indicated in the comments that he made in the opening, of about $150 million of estimated realized capital gains, of which we realized $53 million in the first quarter.

[Thomas Carroll-Stifel Nicolaus & Company:]

Okay, I can figure that out, thanks.

[Operator:]

Your next question will come from the line of Scott Fidel with Deutsche Bank.

[Scott Fidel-Deutsche Bank Securities:]

I’m just interested if you can give us an update on where enrollment stands currently in commercial for the Legacy Pacific area and AMS books, just in terms of thinking about, you know, how much more potential attrition risk is there before we essentially get to zero with that commercial business.

[Ken Burdick:]

Yes, this is Ken Burdick again. The Pacific Care losses for the first quarter of ’08 came in about 50,000 members higher than expected; we were planning on 200,000, it came in at 250,000. I would note that 130,000 of that is attributable to four large customers, where we were operating with very, very thin private margins. Over the remainder of the year we expect continued losses substantially subsiding 80 to 90,000 over the remaining three quarters of this year and our business is much better positioned now. We know that we have felt the effects of the very rapid transition that we implemented and the way we manage the business operationally, but the remaining customers are seeing the service improvement and the network stability, so we are going to continue to see a dramatic improvement in the losses.

[Scott Fidel-Deutsche Bank Securities:]

And Ken, just remind us, what is remaining at this point in terms of commercial membership from Pacific Care, what’s left in that block at this point?

[Ken Burdick:]

11.6 million members.

[Scott Fidel-Deutsche Bank Securities:]

Okay and then I just had a quick follow up in terms of on the Part D business and some of the comments you made around the cloche in the LAS business. Can you help us think about what you think pre-tax margin in Part D will look like this year? I know historically you’ve talked about targeting a 3 to 5% pre-tax margin of that business?

[Simon:]

Yes, Scott, this is Simon. Part D continues to be a successful and profitable business for us and the new benefit designs that we introduced for 2008 are generally performing well. We certainly have been successful in stimulating increases in generic male penetration as we planned. As Steve said, we are, however, how seeing higher than planned pharmacy trends, particularly for our low income Part D members and this is to some extent a spill over effect from last years low income benchmark bidding process. As to margins, obviously, as we’ve said for many years, we typically look to a minimum hurdle rate of 3 to 5% with an established government program, recognizing that returns can often be better for individual participants in programs who are high performing.

[Scott Fidel-Deutsche Bank Securities:]

Simon, is it fair to think a little bit lower than that long-term hurdle rate, but still profitable for Part D?

[Simon:]

It’s certainly still profitable, the Part D and that’s the basis in which we participate in all government programs.

[Stephen Hemsley:]

I think we’re going to half to wrap it up. I apologize we can’t get to all questions and we will have management available broadly for questions through the course of the day. I would like to, though, comment on something that occurred here this morning at 9

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. You may all disconnect and thank you for participating.