Elevance Health Inc. (ELV) Q1 2012 Earnings Report, Transcript and Summary

Michael Kleinman - Vice President of Investor Relations and Acting Vice President of Internal Audit, Ethics & Compliance Angela F. Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee Wayne S. Deveydt - Chief Financial Officer and Executive Vice President Ken R. Goulet - Executive Vice President, Chief Executive Officer of Commercial Business Unit and President of Commercial Business Unit

Joshua R. Raskin - Barclays Capital, Research Division Charles Andrew Boorady - Crédit Suisse AG, Research Division Douglas Simpson - Morgan Stanley, Research Division Christine Arnold - Cowen and Company, LLC, Research Division Scott J. Fidel - Deutsche Bank AG, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division David H. Windley - Jefferies & Company, Inc., Research Division Michael J. Baker - Raymond James & Associates, Inc., Research Division Peter H. Costa - Wells Fargo Securities, LLC, Research Division Carl R. McDonald - Citigroup Inc, Research Division

Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management.

Good morning, and welcome to WellPoint's First Quarter Earnings Conference Call. I'm Michael Kleinman, Vice President of Investor Relations. With me this morning are Angela Braly, our Chair, President and Chief Executive Officer; and Wayne Deveydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with an overview of our first quarter results, actions and accomplishments. Wayne will then offer a detailed review of our financial performance, capital management and current guidance, which will be followed by a question-and-answer session. Ken Goulet, Executive Vice President and President of our Commercial Business, is available to participate in the Q&A session. During this call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP are included in today's press release and available on our company website at www.wellpoint.com. We will be making some forward-looking statements on this call. The listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC. I will now turn the call over to Angela.

Thank you, Michael, and good morning. Earnings per share in the first quarter of 2012 totaled $2.53, which included net investment gains of $0.19 per share. Earnings per share in the first quarter of 2011 were $2.44 and included net investment gains of $0.09 per share. Excluding the net investment gains in each period, our adjusted EPS was $2.34 in the first quarter of 2012, which exceeded our expectation and was just slightly below the $2.35 we reported in the prior year quarter. Our first quarter results were driven by improved performance in the Senior business and continued strong operating results in our Commercial segment. We also executed well in the capital management areas of our company and achieved better-than-expected below-the-line results. Based on our first quarter performance, we are raising our full year 2012 GAAP earnings per share guidance to at least $7.84, which includes $0.19 per share of net investment gains. Excluding the net investment gains, we are increasing our full year adjusted EPS guidance to at least $7.65. Medical enrollment declined by 578,000 during the first quarter and totaled approximately 33.7 million members as of March 31, 2012. The decline occurred in the Commercial segment and reflected our strategic product repositioning in the New York small group and National Accounts markets. Our commercial enrollment was also impacted by continued in-group membership attrition during the quarter, and by competitive situations in certain local group markets. While the overall competitive environment remains rational, we have lowered our year-end 2012 fully insured membership expectation as we maintain pricing discipline. Operating margins in the Commercial segment are in line with our expectations, and we continue to be well positioned for future success in this marketplace. We have won several sizable customers that will become effective later this year, and although it is still early in the 2013 National Accounts selling season, our value proposition continues to be market-leading. We currently expect to grow national membership next year. In the Senior business, we grew membership during the first quarter as a result of our geographic expansion into new Medicare Advantage service areas. As expected, this new business more than offset the membership declines in California related to the regional PPO product. Our Senior business operating gain increased in the first quarter, and we continue to expect additional enrollment growth in this business over the balance of 2012. We're also very excited to welcome Raja Rajamannar to WellPoint as our Executive Vice President of Senior Business and Chief Transformation Officer. Raja's extensive experience in global business management, marketing, product development and consumer engagement will be a great asset to our company, especially at a time when consumers are taking a more active role in the selection and management of their health care options. Our Senior business has underperformed in recent years, and under Raja's disciplined leadership, we have detailed action plans and expect to make investments to position this business for strong future growth and performance. Raja's expertise will also help us expand in other areas. In the State Sponsored business, membership remained flat in the first quarter, while the operating performance deteriorated, as we anticipated it would, due to higher medical costs and state budgetary pressures. We continue to expect that state fiscal conditions in California and other markets are likely to pressure reimbursement related to state-funded programs for the foreseeable future. As we continue to evaluate the important future growth opportunities in the Medicaid marketplace, we're balancing state fiscal constraints with our desire to partner with states in a long-term sustainable manner that recognizes the quality and efficiency we can provide to government programs and their beneficiaries. We believe we are well positioned to meet the needs of the dual eligible population in California and in other markets, due in large part to the combination of our CareMore comprehensive care model and our extensive history in Medicaid and Medicare. We expect to participate in Los Angeles County's dual eligible demonstration through a subcontracting relationship with L.A. Care beginning in 2013. The CareMore delivery model gives us unique and market-leading capabilities to reduce costs and improve health outcomes for individuals participating in this emerging program. We look forward to serving this population and are hopeful that California's program will be expanded to include 2 additional counties in which we are a Medi-Cal provider and also operate or soon will be opening CareMore facilities. In total, we now have 29 CareMore care centers in operation across California, Arizona and Nevada, and we're on track to open at least 12 additional centers, including 7 in new states by January 1, 2013. Our benefit expense ratio was 83.3% in the first quarter of 2012 and was in line with our expectations. We continue to expect the underlying Local Group medical cost trend will be relatively stable, in the range of 7% plus or minus 50 basis points for the full year of 2012. Unit cost increases, including an increase in the acuity of services, continue to be the predominant driver of overall medical cost trends. We are anticipating lower increases in unit cost trends this year, which reflects our successful hospital contracting initiatives, as well as the impact of certain generic drug introductions. We also continue to expect that inpatient and professional utilization will rise this year and are pricing our business accordingly. During the first quarter, we continued to advance our strategic initiative to create the best health care value in our industry. Most significantly, we announced an innovative patient-centered primary care program, or PC2, that we expect will fundamentally change our relationship with primary care physicians. Primary care is the foundation of health care delivery and care coordination, and we believe it can and should be the foundation of our members' health. Therefore, we will be significantly increasing our investment in the primary care that our members will receive. Primary care physicians who are committed to expanding access, coordinating care and being accountable for the quality of care and the health outcomes of their patients will be able to get paid more than they do today for delivering quality care to our customers. Our deep market share positions us to have a meaningful impact on primary care decision-making, which will support our efforts to drive improved quality and reduce costs throughout the rest of the delivery system. We're committed to helping participating physicians achieve these goals by moving away from volume to value-based payment, sharing meaningful and actionable information and providing tools and practice transformation support, including support for physician-led care management. This PC2 program will incorporate best practices from our multiple medical home pilots, which have been proven to make a meaningful difference in patient quality, outcome and cost. We plan to begin implementing this program in select markets during the third quarter of this year, with a goal of expanding it across our entire primary care network by the end of 2014. Over time, we believe this collaboration, in addition to our complementary value-based payment program such as our bundled payment initiative, will substantially improve quality and member health while reducing overall medical cost trends. Recognizing that the evolution towards the patient-centered care model and the consolidation of the provider delivery system will continue, we will continue to support our current 6 Accountable Care Organization, or ACO, projects and will leverage these growing capabilities in the provider community by launching similar arrangements with other advance patient-centered practices and organizations in 2012. Between our PC2 program and the expansion of our relationships with ACOs, we expect to have value-based, patient-centered care models in place, with over 100 practices and organizations by the end of 2012. We are supplementing our initiative to improve health care cost and quality, with a disciplined focus on our administrative expenses. We continued to execute very well in this area during the first quarter, achieving favorable results compared to our plan for selling, general and administrative expense in total dollars and on a per-member-per-month basis. Our SG&A expense increased by 4% from the prior year period, which reflects the inclusion of CareMore this quarter and the investments we're making to expand these capabilities to new markets. Our SG&A costs were also higher in the first quarter than we anticipate for each of the next 3 quarters, as we implemented a national branding campaign earlier this year. We continue to forecast an improvement in our SG&A ratio for the full year of 2012 and believe our continuous improvement culture and drive to be the low-cost leader will enhance our long-term competitive advantages. As we are improving our underlying cost structure, we're also improving service to our members and business partners. In the first quarter, we exceeded our performance target for nearly every key claims inventory metric, with the overall inventory levels ending March approximately 14% lower than a year ago. We achieved our member touch point measure goals for the quarter and continued to execute on our information technology strategy. We're also improving our customers' experience through initiatives such as our Care Comparison transparency tool. Care Comparison is a first-to-market innovative comparison tool that discloses real price ranges for 102 specific health care procedures and services. All costs are expressed as a bundle of care, meaning all facility-specific charges that are typically a standard part of a procedure or treatment, including inpatient, outpatient and diagnostic tests such as radiology, are included in the cost ranges displayed in the tool. Care Comparison also includes facility-specific measures of quality, including measures such as procedure volume, mortality and complication rates, average length of stay and compliance with patient safety standards. The Care Comparison tool is designed to provide consumers with an easy-to-use cost and quality comparison to promote informed decision-making and has been implemented in all 14 of our Blue markets. It was also adopted as a national cost transparency solution for all Blue plans nationwide, serving approximately 100 million members. In summary, our commercial and individual businesses are continuing to perform well, and we have made important progress to focus on and improve the results in our Senior business. We are moving forward with our initiatives to create a lower-cost operating model, both in terms of medical cost and SG&A expense, with best-in-class service for our customers. And we believe this strategy will drive long-term growth and success as the health care system evolves over time. I'll now turn the call over to Wayne to discuss our first quarter results and updated outlook in more detail. Wayne?

Thank you, Angela, and good morning. Premium income was $14.1 billion in the first quarter, an increase of $454 million or over 3% from the prior year period, due in part to the inclusion of CareMore business in 2012. Excluding CareMore, premium revenue increased by $200 million or 1.5%. We experienced growth in senior membership, partially offset by a decline in fully insured Local Group enrollment. Premium revenue was modestly below our expectations for the quarter as the membership transitioned away from some of our small group products in New York, occurred more rapidly than we anticipated. While this situation resulted in more revenue, our earnings have been and will continue to be favorably impacted. Also, as Angela noted, the competitive pricing environment remains rational overall, but our Local Group membership was impacted during the quarter from what we expect to be some short-term competitive situations in select markets. We have lowered our full year 2012 operating revenue guidance to $61.2 billion for these factors. Administrative fees were $996 million in the quarter, an increase of $34 million or 3.5% from the first quarter of last year. This reflects our strategic decision to obtain pricing in line with the significant value we provide to our ASO customers, which drove higher administrative fee revenue despite a reduction in self-funded membership. The benefit expense ratio for the first quarter of 2012 was 83.3%, in line with our forecast and an increase of 120 basis points from 82.1% in the same period of last year. The increase was driven by the Local Group and State Sponsored businesses and was partially offset by an improvement in Senior. In Local Group, we anticipated that the ratio would rise this quarter due in part to our continued adjustment to minimum medical loss ratio requirements throughout 2011. We also had a difficult comparison to the first quarter of 2011, which was historically strong for Local Group business and benefited from lower-than-anticipated medical costs. Our state-sponsored benefit expense ratio increased from the prior year quarter due to higher medical costs and the impact of state budgetary pressures. In Senior, our performance improved this quarter due to the actions we have taken to improve results in the Medicare Advantage business. Overall, we are comfortable with our first quarter performance and have slightly lowered our guidance for the full year benefit expense ratio to 85.1%. We expect a favorable comparison next quarter due to the reserve strengthening that occurred in the Local Group and Senior businesses during the second quarter of 2011. For the rolling 12-months ended March 31, 2012, underlying Local Group medical cost trend was in line with our expectation. Inpatient trend is currently in the high-single digit range and is unit-cost driven. Admissions per 1,000 members are down slightly, while the average length of stay increased, although the impact of higher acuity appears to be moderating. Outpatient trend is in the high-single digit range and is 75% unit-cost driven and 25% utilization. Physician services trend is in the mid-single digit range and is 80% unit cost and 20% utilization-related. And the pharmacy trend is currently in the high-single digit range and is expected to improve over the balance of this year due to generic drug introductions. Pharmacy trend is currently approximately 80% unit cost and 20% utilization-driven. We continue to estimate that underlying Local Group medicals cost trend will be in the range of 7%, plus or minus 50 basis points for the full year of 2012. Turning to our reportable segments. Our Commercial segment operating revenue was $8.5 billion in the first quarter of 2012, slightly below the first quarter of 2011 as the decline in fully insured Local Group membership was mostly offset by premium increases designed to cover cost trends. Commercial operating gain was $992 million in the first quarter of 2012, a decrease of $133 million or 12% from the prior year quarter. The decrease was driven by the Local Group business, as the first quarter 2011 benefited from lower-than-anticipated medical costs. Despite the decline in first quarter operating gain, our commercial operating margins remain strong and was 11.7% in the quarter, and we continue to project solid growth in commercial operating gain for the full year of 2012. Our Consumer segment operating revenue totaled approximately $4.8 billion in the first quarter of 2012, increasing by $516 million or 12% from the first quarter of 2011. This was driven primarily by the inclusion of CareMore in 2012 results and our organic membership growth from the expansions in new Medicare Advantage service area. Operating gain for the Consumer segment was approximately $218 million in the first quarter of 2012, an increase of $12 million or nearly 6% compared with the same period of last year. The increase was driven by the Senior business and reflected our actions to improve results in our Medicare Advantage product. The improvement in Senior was partially offset by a deterioration in state-sponsored performance due to higher medical costs and the impact of state budgetary pressure. Net investment income totaled $169 million in the first quarter of 2012, down $16 million or approximately 9% from $185 million in the first quarter of 2011. The decline was driven primarily by lower overall investment balances and lower investment yields in the current year quarter and also reflected a reduction in income from certain alternative investments. Interest expense was $109 million in the first quarter of 2012, up $3 million or 3% from the first quarter of 2011 due to higher average debt balances in the current year quarter, partially offset by lower short-term rates. We recognized net investment gains during the quarter, totaling $96 million pretax, consisting of net realized gains from the sale of securities totaling $107 million, partially offset by $11 million of other-than-temporary impairments. As of March 31, 2012, the portfolio's net unrealized gain position was approximately $1.1 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $753 million and $356 million, respectively. Our effective tax rate was 34.6% in the first quarter, 50 basis points lower than in the same period of last year. We continue to expect our full year tax rate to be approximately 35%. Moving to claims liabilities. Medical claims payable totaled $5.4 billion as of March 31, 2012, a decrease of $86 million or 1.6% from December 31, 2011, as our fully insured enrollment declined by 2.1%. Consistent with our historical practice, we have not included a reconciliation and roll forward of the medical claims payable balance in our first quarter press release, but we plan to do so in the second quarter. Our year-end 2011 reserve balance has developed favorably and in line with our expectations during the first 3 months of 2012, and we continue to believe our reserves are appropriately stated. As of March 31, 2012, days in claims payable or DCP totaled 41.8 days, an increase of 1.2 days from 40.6 days at December 31, 2011. The increase reflected lower benefit expense per day in the first quarter of 2012, partially offset by the decrease in medical claims payable. Claims receipt cycle times increased, primarily as a result of the HIPAA 5010 migration. Turning now to cash flow and capital deployment. In the first quarter of 2012, operating cash flow totaled $1.2 billion or 1.4x net income. Our first quarter cash flow was impacted both positively and negatively by the timing of payments in certain government contracts. We received our April 2012 monthly payment from CMS early at the end of March, which increased our first quarter operating cash flow by approximately $520 million. We also experienced delays in certain payments, primarily from the state of California, related to our participation in the Medi-Cal and Healthy Family programs. This unfavorably impacted first quarter cash flow by approximately $160 million. We received a majority of these payments in April and expect the remainder by the end of the second quarter. Most of these timing-related payment issues were anticipated, and our first quarter operating cash flow of $1.2 billion was slightly favorable to our plan. When considered along with the 1.2-day increase in DCP and continued low claim inventory levels, we believe this supports the quality of our first quarter performance. We are utilizing our capital to reinvest in our businesses and enhance returns for our shareholders. During the first quarter, we utilized $680 million to repurchase 10.2 million shares or 3% of the shares outstanding at year-end 2011 on the open market. We also used $96 million to pay our quarterly dividend. We ended the first quarter with approximately $1.8 billion of cash and investments for the parent company and available for general corporate use. Over the next 3 quarters, we expect to receive approximately $1.9 billion of ordinary dividends from our subsidiaries. We expect to utilize at least $2.1 billion for share repurchases and dividends, and we currently expect to end 2012 with approximately $1.6 billion at the parent company. Our debt-to-total-capital ratio was 28.7% at March 31, 2012, down 90 basis points from 29.6% at December 31, 2011. We are in the lower end of our targeted range of 25% to 35% and continue to have significant financial flexibility. We do have an $800 million senior note maturing in August that we expect to refinance in the near future. We are in a strong capital position, and we will continue making strategic investments on our businesses and effectively utilizing our capital to drive long-term value for our customers and our shareholders. Moving now to our updated outlook. We are raising our full year 2012 earnings per share guidance. Specifically, we now expect that net income will be at least $7.84 per share, including net investment gains of $0.19 per share from the first quarter of 2012. Excluding the net investment gains, our adjusted EPS is now expected to be at least $7.65. Year-end medical enrollment is now expected to be approximately 33.6 million, consisting of approximately 20.2 million self-funded members and 13.4 million fully insured members. Operating revenue is now expected to be $61.2 billion. The benefit expense ratio is expected to be 85.1%, and the SG&A expense ratio is now expected to be 13.9%. We continue to expect that operating cash flow will be at least $2.9 billion. I will now turn the conference call back over to Angela to lead the question-and-answer session.

Operator, please open the queue for questions.

[Operator Instructions] And our first question will come from Josh Raskin from Barclays.

Just a first question, maybe for Wayne, just on the MLR increase of 120 basis points. Is there a way to break down some of the component drivers of that? How much of that was sort of Medicare under recruit, I guess, last year? Was some of that due to leap year? Maybe how much was State Sponsored and any other factors in there?

Yes, Josh. I mean, obviously, there's a lot of moving parts. You highlighted basically all of them, which is, clearly, the leap year influences it. Two, was that we know that in the senior book, that we had to strengthen that book further. And so that's clearly part of what we saw happening as well in the quarter. The State Sponsored did impact it. It's not material, but if you think about most of our contracts in California being the largest of our State Sponsored, those renew in October of the previous year. And so what you're getting in the first quarter this year is that lower rate environment that's reflected in there versus the first quarter of last year as well. So it's -- what I can tell you though, Josh, is that relative to our overall expectations, all the moving parts came in pretty much where we expected them to be in total for the year. So we weren't disappointed with how they played out at this point in time, and the actual runoff of our reserves at 12/31 are coming in at the higher end of our margin for adverse deviation as we wanted. So feeling pretty good about that as we see some stability there in the book.

Is it fair to say, Wayne, if, I guess, say, 1/3 of the impact -- 1/3 of the 120 bps is leap year, 1/3 is Senior and 1/3 is all others, including State Sponsored? Is that fair?

Josh, to be honest, I haven't looked at it at the level of how much of a percentage is 1/3, 1/3, 1/3. I don't think it's an irrational view though to look at it as those being the primary factors that affected it, and that's a pretty good proxy for maybe how they would have fallen out. But again, to be fair, I haven't actually quantified and said, "Is this an equal 1/3 of the delta?" But I would say, relative to the big 3, those are the big 3.

Okay. And then just a follow-up of that State Sponsored comment. You talked about higher cost trends. I think we're familiar with the idea of the budgetary pressures, but are you indicating a change, some sort of inflection in medical cost? And maybe you could help us understand what markets and what drove some of those cost increases in State Sponsored?

I wouldn't say so much a change as much as we had expected to see trends start to rebound a bit. And as we mentioned, the admissions per day are still slightly down. We saw the extended stay actually slightly longer. We are seeing acuity down slightly. So when we talk about trending up slightly, it's all relative to the starting point. And just having a 7 plus or minus 50 basis -- or 7.5 plus or minus 50 basis point trend inherently says the trend is moving up. So what I would say though, Josh, is relative to expectations and relative to pricing, things are coming in pretty much as expected in our markets. So no real surprises with that rising trend. It's nothing that we haven't communicated previously and then, I would say, the broader industry has communicated as well.

I'm sorry, Wayne. I was alluding to the Medicaid trend. You guys talked about State Sponsored cost trends.

Oh, I'm sorry, Josh. Yes. Relative to Medicaid trends specifically, we saw some slightly higher trends in a few of our states. But I wouldn't call them any major outliers at all, and they were all fairly minor in the big scheme of things. So no, we're not seeing really huge spikes anywhere. At the same time, we have a few markets where we got a little more membership that was awarded to us. And in those markets, when you get new members, it's not unusual to expect a slightly higher trend until you get them medically managed along the way. But nothing really too crazy. I'd say MLR is expected in those markets.

[Operator Instructions] And our next question is from Charles Boorady from Crédit Suisse. Charles Andrew Boorady - Crédit Suisse AG, Research Division: I would like to hear more about CareMore. You're obviously making a big investment in clinics, and those clinics should become a profitable business on their own. But also, the use of those clinics should improve your loss ratios in the markets that they serve. So I'm wondering, for CareMore, can you give us a sense of sort of what is the profitability like of the already-seasoned clinics? And then what are the startup losses that you're incurring, that you're expensing and capitalizing on growing new clinics that are not yet fully seasoned?

So Charles, I'll let Wayne speak to some of the specifics around the profitability and the rollout expenses for CareMore. But it serves a number of purposes. Clearly, it has the capability to address the Senior market, particularly intense care management needs and special needs plans. And so it's a capability that's core, not only to serving the senior population but also, we believe it uniquely positions us to serve the dual eligible market. And so as we look at our opportunities around dual, you really have to have the capabilities to manage very intensely care managed populations and work with community organizations. And so carefully, we don't call them clinics. We call them neighborhood care centers, because CareMore is centered in the community and addresses through pretty important care management capabilities, a more efficient way to deliver quality health care to those members. So Wayne, do you want to speak about CareMore itself in terms of profitability and the cost of the rollout?

Yes. Thanks, Angela. Charles, when we look at the 29 clinics we have today, and they're obviously all in different maturity schedules in terms of some being newer and some being much more mature models. But what we're seeing, pretty much on average across the entire book, is that it takes about 18 months for the clinic to get to scale, that gets to breakeven. And then after that, they're driving roughly a 30% IRR. So very, very pleased with what I'll call the normal maturation schedule. Those that were scheduled to improve this year have improved. Those that have opened up are coming out of the gate the way we expected them. So that's all very good. What I would highlight, though, is this is a multi-year build out for our company. And so this year alone, we are spending more than $40 million on integration and expansion, and we don't expect that to slow down. As Angela mentioned, with the dual opportunity out there, we see the CareMore model as kind of the third leg to an important stool, which is you need to have Medicaid, you need to have Medicare, but you really need a high touch point care management model for the consumer that we're serving here. And so I think, if anything, we're going to try to even accelerate more expansion of the CareMore model into more markets to really take advantage of what we think uniquely differentiates us on the dual opportunity. Charles Andrew Boorady - Crédit Suisse AG, Research Division: In California, where you'll be getting some duals in 2013, roughly what is the size of new revenues from duals you'll be getting? And how well prepared will you be with the neighborhood care centers and other clogs on the ground, as I call them, to help manage those highly complex lives?

Well, let me speak to the readiness in terms of CareMore's footprint in California and specifically in L.A. County where the dual eligible demonstration project is going forward. We feel like we're really well positioned for the -- with the care centers in L.A. County, and we are doing some of the growth or rollout in California as well. There are also 2 other counties that we hope in -- essentially the next round of consideration in California for the dual project that we're really well positioned in 2 other counties that we have an expectation for growth there as well. What was the first part of the question, too, Charles? Charles Andrew Boorady - Crédit Suisse AG, Research Division: Yes, just the rough revenues that you expect from those duals and your preparedness. And then I know you're not going to give 2013 guidance, but a lot of these new businesses turn out to be unprofitable year 1 as you're investing in taking on the new lives, and there's a period of time before you can start to really manage their care lower. So just trying to piece together how that all will play out next year.

And I think what's important and you should know is a lot of -- we are making investments in 2012, which will be reflected in the Senior and the Medicaid segment for the growth opportunity, both in senior and in the duals, beginning in '13. Because of the intensity of the population within the dual eligibles, the premiums, which are a compilation of Medicaid and Medicare premiums, could be in the PMPM range, $2,500 PMPM in year 1. And so it's akin to what we experienced today in CareMore for the special needs plan members and some of the duals that we are really taking care of within CareMore today.

Charles, the other thing I would add is really, as you highlighted, there's really 2 types of investments, though, that happen when you first roll out a program like this. One is in the core infrastructure. You need to medically manage and support this consumer base. And then two is just, because this consumer base is now moving to managed care, you initially have losses early on. But then as you get them to more of a managed care environment, you transcend to a more profitable position. And one thing we like about the demonstration project in California is that where they are rolling it out, that first kind of major cost, meaning the actual infrastructure cost, we already have established in L.A. and at CareMore. It's already built, it's already there. So we don't have to bear that cost. We will have to bear the cost of migrating and integrating and really supporting this consumer base well. Relative to Santa Clara County, we already have operations for CareMore there as well, which is the other county we bid on that we're hopeful will get approved this year. And relative to Alameda, we already had baked into our plans to build out a CareMore facility there. So those core costs are already baked into our current guidance and assumptions. But nonetheless, the real costs that we'll bear then for the first year run-up will be the cost of actually migrating to a managed care population.

When we think about taking CareMore capabilities to other states where we have the Blue brand in particular, we're evaluating what both the senior opportunities are there, as well as the dual eligible opportunities in other states. And we're really marrying the capabilities that we have in CareMore now to the capabilities that we have and the brand that we have and the relationship we have with consumers in these other states.

And our next question is from the line of Doug Simpson from Morgan Stanley.

Angela, I have a broader question, just sort of aside from Q1 results. If we step back and think about some of the execution challenges over the last 2 years relative to peers, it seems like everyone's just trying to get a handle to understand your level of satisfaction with operations and how this might drive your thinking around strategy longer term, perhaps investments in people. Obviously there's been a fair amount of turnover among the senior operating ranks as we think back over the last few years. And I guess we're all just trying to understand what you see as perhaps the underlying challenge that's driven some of the operating volatility in the last few years. And do you see it more as a -- is it a technology issue? A people issue? Distribution? How do you see it? And as you look forward, how do you plan to improve the consistency of execution? Do you think there is an incremental investment that's needed in some senior operational leadership? Or where do you think the push points are to really get the consistency of execution up to where we'd all like it to be?

I think that's the really important question, one, that I've been thinking a lot about. It's reflected obviously in some of the changes we made, but we're really pleased to have Raja Rajamannar joining us and very focused on execution and delivery in the Senior segment. When we look back, we had a couple of very strong years in Senior performance. And as we look into the pricing that resulted in the performance we had in '11, I think, in many respects, we had a desire to grow that business and grow fairly aggressively. And when we look at the pricing and product, we do think that in '12, we looked carefully at what our experience had been through '11 and got very intent on looking at the capabilities to make those moves within the confines of the Senior pricing kind of limitations where we couldn't do that. We also exited, for example, the northern California market. So in terms of the broader question though, we've done a couple of things. One is we moved the actuarial function into finance with Wayne, who I think has done a great job of bringing those 2 elements together and creating a pricing discipline and redundancy, frankly, around the pricing areas. We're also very focused on execution overall, and we made some -- actually, I put someone in a position of really focusing on driving execution throughout the organization, Gloria McCarthy, who's an experienced operator, who was the COO for Empire Blue Cross, Blue Shield for many years and has been really instrumental in a lot of execution success we've had across the company. And so where the intersections of our company are, she's driving through and making sure there's follow-through and delivering -- I really feel great about our team. Today, we've got folks who are very focused on where the future is. We're transforming ourselves to be a consumer company. No matter what happens in terms of the regulatory environment, we need to really not try to just build on the base of how we've served a group customer, but really transform ourself to be focused on the consumer and deliver product and capabilities that are doing that. From a service, a pure service point of view, we continue to improve our service capabilities, our inventories, the stability and the improvements in our service metrics. Our customer satisfaction continue to improve. And we have been doing that while we have been migrating systems quietly under the radar. We've moved really over the last 1.5 years, 1 million members on -- National Account members. We're shutting down systems. So the purely operational execution actually has been going well for the last 2-plus years. So I think as we focus on -- and we have this additional pricing discipline for each of our segments, and I think we're improving there, and we have the right processes in place to continue to improve. If we look at, for example, the Senior pricing year-over-year, this year, we feel like there's much more stability in terms of the overall inventory. We have fewer age claims. We have better transparency. Frankly, we have better analytics into predictive modeling. We're going to continue to make investments though, in places that we think need to continue to be improved and enhanced. Like enhancing our risk coding revenue enhancement opportunity, continuously looking at cost/care capabilities and what CareMore has brought to us are some new insights. We're really looking carefully at product design just to create the discipline around product design, but also to really make sure it is rooted in the insights we have from the consumer and what's important there within the parameters of the regulatory environment. So we're obviously very thoughtful about these issues, have taken a number of actions and are accountable to deliver.

Doug, one thing I want to add, too, is that the Senior business, as Angela mentioned, is really a long-term turnaround for us. And so we've seen the value of some of that in the current year. But we're going to need to make even more investments this year and the next year to really get to where we think is a competitive position that takes advantage of our market share and our brand. And so one of the things we're trying to leverage is Raja's leadership and expertise as well and the lessons learned from that group. So I don't want folks to assume though that this is the fix this year. In fact, we're far from being where we ultimately want to be. We are taking our strides in it. But it's important to recognize that we may choose to make even more investments this year that we think really drive long-term value for us in the long term. And couple that with the investments we're making in the duals this year and the investments where the exchange is coming out. So really, '14 ends up looking like being really what I'll call a broader lift year as we get the value of exchanges. Starting in '13 but then -- or starting in '14, getting the value out in '15. But dual starting in '13 and getting a lift. But as the pace of duals rolls out, even those investments are going to have to ramp up across the country. And so some of that value in EBITDA will come in more back-end loaded, because you're covering up the EBITDA value you're getting from the first year rollout with the new investments for the second and third year rollout.

Our next question is from the line of Christine Arnold from Cowen & Company.

A couple of things. One, could you help me think about your reserves? What's on the balance sheet for exited businesses? And did you say you increased your Senior reserves again this quarter?

Do you want to talk about that?

Yes. Christine, for exited businesses, we have put up reserves for both the California PPO product that we exited. Those reserves have panned out to be fairly close to our anticipation on that. We did put up for the small group in New York, some additional reserves for that run out as well, as well as areas that we knew we had benefit design changes where sometimes you get a little bit of a run on the bank when those changes occurred. I'd say everything there has panned out to either be at/or expected reserve or better at this point in time. Our total reserves at 12/31 are really coming in at the high end of our range as we had anticipated. With 3 months of run out, that's good visibility, with inventories being 14% lower. Now we drove inventories down really aggressively this quarter because, as you know, for rebate purposes, you have the benefit of 12 months plus 3 months of run out. And so it was really important for us to get our rebate accounting as tight as we could get it. But all that being said, Christine, no, we did not strengthen reserves in the quarter. Our reserves are maintained at, we believe, the similar strong levels that we saw similar to year end. So we still think we're in the upper end of our range of margin for adverse deviation. And 3 months of run out is showing it as such.

And how should we be thinking about the California ballot initiative? Looks like they have 350,000 signatures, which is about half what they're targeting. How are you thinking about the potential risk there?

Well, we don't know for sure that they're going to get all of the signatures by the deadline or not. We really think it's a redundant process and that potentially, it could cause further delay in terms -- if the prior approval authority is effected and implemented. The federal government has already said that what California has now is an effective rate review procedure. And so we will continue to deliver with the kind of transparency around pricing and our expectations around trend. And frankly, it's never easy, but those relationships are, I think, very straightforward. And we'll continue to make sure people understand the sustainability of the product in the marketplace is critical no matter what happens. But I don't think we yet know if they're going to get it, and we shall see. There's a number of other initiatives on the ballot as well.

For Angela, what's the deadline? And did you say there could be authority to reverse prior approvals?

No. What I was saying is -- what my understanding is this -- the deadline is May 4. And my point here is what they are seeking is prior approval authority, which we think is redundant and unnecessary in light of what we think has already been declared by the federal government as being an effective rate review procedure. So we don't have an expectation they would go backward, Christine.

Our next question is from the line of Scott Fidel from Deutsche Bank.

Interested in how you're thinking about the MOR rebate accruals in the case that reform does get struck down. Just some interesting timing dynamics given that the first tranche of rebates for 2011 won't actually be paid out until July. And if under the scenario that reform was struck down in June, how would you think about that from an accounting perspective and from a cash flow perspective?

Well, let me say, right now, we are operating as if the ACA is the law of the land, and we're going to continue to execute and prepare ourselves for the experience of the future, which we think is very consumer-focused and oriented. In terms of our rebate accruals, I think we have been very precise and created processes to be as precise as possible in terms of what the rebate accruals would be. We obviously took that into account in terms of how we priced products. So our rebate accruals are, we think, where they should be on a relative basis. We don't want to declare where that would take us in terms of July, and we would carefully consider the circumstances at that time.

Okay. And then just a quick follow-up. Just interested in your thoughts on -- there's been recently a series of public sector losses by some of the nonprofit Blues to some of the National MCOs, particularly United and CIGNA. And just interested first in terms of how you might see the landscape shifting competitively around that public sector market and whether you're seeing a sort of similar inroads against some of your public sector clients from those companies, and how the Blues are planning on responding to what seems to be a pretty concerted effort to uproot some of the traditional sort of strong share positions the Blues have had in that marketplace?

Well, let me first speak to our efforts. And Ken, maybe you can speak to that as well. We think we have strong relationships in a few state. We don't have the state accounts in each of our 14 Blue states. And where we think there are good opportunities to do that, we either have them or are pursuing them as well. So Ken, do you want to speak to what you're seeing elsewhere?

Yes, Scott. Thanks for the question. I'll just say that a state makes a decision on a variety of factors, including network, total health management, service, innovation and others. While there have been some inroads across the states, have not been our states and we're pretty comfortable with the value proposition that we provide. We need to continue to evolve to meet customer needs. And we have been, as you can hear earlier in today's conversation regarding PC2 and the approach we bring value to our clients. We actually have a couple of opportunities that we see in the next 2 to 3 years, 2 large states that we want to get ourselves better in our area, and we're going to do everything we can to win them. So very comfortable with our positioning. And yes, it is a competitive market. In certain states, there have been progress made, but we feel comfortable with our value proposition.

Well, and let me go back to that broader Blue question because clearly, some folks are aiming to disrupt that. What we have seen, and we've seen it over time, too, in our national account segment, which is sometimes, the competitors promise things to be on the "if-come". If you come, we will build a different network or something and produce savings. And our new National Account customers that have been with us, some big ones that have been with us over the last year, joined us over the last year or two, are telling us what tremendous savings they are receiving as a result of moving away from the competition to us. And the strengths of our, really, our value proposition are quite obvious. So sometimes, these things turn and people understand the difference, which -- we continue to sell against, those kind of promise of the future versus the reality of where we are today. On the broader Blue question, I would say there's a lot of focused efforts at the Blue Cross system level in terms of competition and collaboration and working together and creating more consistency. And I think you can see that around a couple of things. One, around Care Comparison, the tool that is -- one that was created here at WellPoint but then became the broader tool and a real focus on transparency and making sure that all Blue plans have the capabilities and the transparency tools that the customers are seeking pretty consistently; the medical policy areas are much more consistent than they were in the past; we're working together on Bloom, a potential private exchange market for the future; and then there's a lot of collaboration among Blue plans, really in what we always call the coalition of the willing. Rather than always having a system-wide effort, we see some more innovative approaches by a few plans coming together, adopting an approach and working together and then scaling that approach over the broader Blue Cross network. So the momentum is positive, and I think that these couple of accounts are going to just create more momentum for people to think about ways to work together.

[Operator Instructions] And our next question is from the line of Matt Borsch from Goldman Sachs.

Yes. I was hoping that you could talk a little bit more about the competitive situations on the Commercial side that you referenced. And just interested in any detail you can give on what segments you're seeing that in, if it's more risk, more ASO. And maybe geographically, if there's anything you can tell us there?

All right. Ken, you want to speak to those areas?

Yes, I do, and I think I'll clarify our numbers a little bit, just to reconfirm something we started discussing last March and then in June. We did go backwards in membership this quarter, but there was some very strategic repositioning. We stated a while ago, after a very successful 2011 National Account year, that we are going to reposition several clients and make sure that they were carrying their full share. We had actually good National Account growth ourself this year on new business. We had over 27 case -- excuse me, over 55 cases added, substantial business or new; 27 over 5,000 lives each. So we won a very good amount of business. But the repositioning in National was a one-year phenomenon that we told you about last March. And on the local New York, we made a very significant product positioning change that didn't occur a little faster than we expected. But that's okay and actually a good thing for us from a shareholder perspective. It is a little bit more competitive. There are some pockets. But in general, our markets are rational. We're finding that there are some competitive pockets, which we still feel are MOR related in certain areas and that is a multi-year phenomenon. But we feel, in general, it's not really changed. So our numbers look a little distorted because of our strategic decision, but the markets are remaining very rational.

And our next question is from Kevin Fischbeck from Bank of America Merrill Lynch.

Just wanted to go back to the MA side of things and, I guess, some of the commentary was a little bit confusing to me. In the comments, you indicated that the Senior business is one of the reasons why the Consumer business grew earnings year-over-year. But then in response to Josh's question earlier, you mentioned that is one of the reasons why MLR was up year-over-year. So can you talk a little bit about how to reconcile those 2 things? And then just kind of talk a little bit about where we are in the comps around what happened last year as far as exiting California. Do you still feel good about the 150 number? And last year, you kind of mentioned that the Other business was a little bit weak. Just give a little more color about where we are and how good you feel about the MA business at this point?

So a couple of comments. And thanks, Kevin, for the opportunity to clarify some of this. Keep in mind that while Senior improved in the quarter, obviously, it makes sense to say, "Well, then how can MLR be up?" But this is the first quarter that you have CareMore in the model as well. CareMore being a SNF model and so, as a result, you have much higher MLR. So from a mix perspective, you can actually have a higher MLR but still be performing better than expected. And that is in fact the phenomenon that is happening within our book. Relative to the at least 150, obviously, we have that designated in expectations by quarter. We did exceed that in our expectations for the first quarter. However, what I want to remind folks is, with Raja here and the other initiatives we're taking, we are evaluating whether we should make further investments in Senior this year as well to drive even longer-term value versus more of what I'll call a kind of an ankle bite approach to get a little bit improvement each year. And so we're going to evaluate that, and we're going to make those decisions later. But again, relative to first quarter expectations, we are more positive than that. But we don't want to make short-term decisions to the detriment of the future.

Our next question is from the line of Tom Carroll from Stifel. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Yes, just also a follow-up on CareMore. What states, other than California, are you targeting for duals? Angela, I think you mentioned 7 states. I wonder if you could list those for us? And then secondly, on cost trends, you made some comments about admits and acuity, but what were hospital days in the quarter relative to first quarter last year?

Okay. So let me speak a little bit in terms of the CareMore growth potential and how it relates to the dual eligible opportunity. We continue to build out California, but we, for competitive reasons, don't want to declare the other states in which we're going to grow the CareMore capability. As we acquired CareMore, they had, though, crossed state lines. So they had gone both to Nevada and Arizona, created neighborhood care centers, created the network and the RAP network that they have that helps the service, the member that they work with. We are taking them to some states where we are Blue, where we think there's a unique opportunity to marry their capabilities with the brand and grow, where we anticipate there will be dual eligible opportunities in the future as well. So right now, for competitive reasons, we want not to have that declaration overall. Wayne, do want to speak to the trend question specifically?

Yes, just -- as we commented early on in the call, though, our admits per 1,000 are down slightly. But in a vacuum, it sounds good. But we have to look obviously at the length of stay as well. And we are seeing the length of stay be up slightly on acuity, but the dollar value of that acuity is moderating versus a year ago. So in essence, it's kind of 3 moving parts. Overall, admits are down; length of stay is still remaining longer than what we've seen historically; but the actual cost is moderating. So basically, inpatient unit costs are up, but utilization is down a bit. And so all in, it's aligned with our expectations. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So relatively flat?

Yes.

Let me reinforce in terms of trend. Trend is coming in where we thought it would. It is where we thought it would be for pricing purposes. So there's a little up and down here and there, but we are doing a good job at contracting. And we think we're doing a good job at managing the care that's being delivered as well. But it's right where we thought it would be. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So Angela, on the state question, is it fair to assume that you're mostly targeting your Blue franchise markets?

Yes.

Our next question is from the line of Chris Rigg from Susquehanna.

Can you just help us better understand the change in the revenue outlook from your previous guidance to today? I know you brought down enrollment by 100,000, but it seems like there may be some other moving parts. If you could just give us a little more detail there, that would be great.

Okay. I'm going to have Wayne answer that, but I want to go back to the prior question too. We are targeting our Blue states. We think over a long-term perspective though, and the collaboration that we have with other Blue plans gives us an opportunity, frankly, to offer through other Blue plans the capabilities that we have at CareMore. I think that's a longer-term perspective, and we're going to stay focused on where we have the brand and where we see the future dual opportunity. So Wayne, do you want to address the revenue question?

Yes, the -- we've lowered overall revenue guidance by about $900 million, and the primary driver of that was really just the decline in fully insured membership. But part of that is driven by the fact that the small group in New York actually exited sooner than expected which is, as Ken had mentioned, a positive thing for us in terms of our product repositioning in the state but, at the same time, when it leaves sooner than expected. You're going to get lower revenues but ultimately, you're going to get lower claims as well. And so a substantial portion of that is really just the repositioning. When we look at other areas of our business, though, we actually have our ASO actually slightly improving as the year goes versus our original expectation. So it's really just a volume issue at this point and a timing issue relative to volume on the fully insured, but nothing more than that. And that's actually the same reason for the SG&A percentage going up, is that the actual dollars that we planned to take out for year, we're still on track for, and we're actually on track to do a little bit more than that. But the ratio is actually being affected by the revenue coming down.

Our next question is from the line of Ana Gupte from Sanford Bernstein. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: I wanted some more color on your MLR guidance. You've now brought it down by 20 bps. And just going back to 4Q reporting, based on your disclosures, I think it appears it was about 15 bps of a headwind from the AB 97. There was about a 30 bp tailwind from Medicare, but there was an implied Commercial MLR deterioration of 35 bps. And so what has possibly changed, assuming that's roughly in the ballpark to get you to the 20 bps better guidance?

Yes, Ana. A couple of things I want to highlight is that we are still forecasting that AB 97 will be pushed through in some capacity. So we have not adjusted our guidance for that at this point in time. We did see some slightly better improvement though, relative to the small group in New York. Again, as we mentioned, with that being repositioned sooner, we are going to get a slight benefit in MLR. It does benefit EBITDA a little bit, but not a lot. It's more about timing. Again, as we get lower revenue, we're also getting lower claims. But that does position us there. That's part of the driver. And some of it is just our longer-term outlook based on what we saw, with trends being relatively consistent with expectations, but not really rebounding much more than we had expected. And so there's some belief, too, that we may see some improvement there. But we're really not forecasting much. Most of it is just -- is timing on this small group and really a lot of just small pieces in a variety of areas. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: And just following up on that then, on Commercial, I think United saw some favorable true-up on MLR rebates. Is that in your guidance? Is that potential upside? Or did you not see any at all?

No, we have been truing up our rebates all throughout last year as HHS continued to provide more clarity. So from our perspective, we thought our number was fairly stated, and we weren't really surprised by -- I mean, to us, all the regulations have been pretty much clarified throughout last year by December. So we had ours trued up to be accurate as best as we could assume. So we have no rebate releases in our first quarter or are we expecting any short of the law changing. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: And then on the 30 bps on Medicare, is it possible that there -- is that conservative you think? Is that -- because that was only in California. Would you see some other pricing reaction in other parts outside California as, again, a potential source of upside?

No. At this point, Ana, I wouldn't. Because, again, I think we have a multi-year fix. And because of that, we were limited in product design changes and other changes. And so for that reason, I think that what we had assumed would occur. We did the maximum that we were entitled to do, and we're seeing that come through as expected. So I'm not really anticipating what I would call further upside in Medicare. I'm expecting it to be very much aligned with our expectations at this point, albeit it's a little bit higher. And obviously, more interested in how we invest more in that business for the long term. So not expecting much upside there.

Our next question is from the line of David Windley from Jefferies. David H. Windley - Jefferies & Company, Inc., Research Division: I wanted to come back to the duals and particularly, California. I wondered how much visibility you have on premium PMPM rates there? I've heard quite a wide range of numbers thrown out. You mentioned, Angela, on the call earlier, $2,500. So visibility on PMPM rate, visibility on included populations and how that might break out? And then if you can give us any color on how you would anticipate sharing economics with L.A. Care and L.A. County?

Well, let me speak to the rates because there are really 2 cohorts that get different rates in the dual California mix, as we understand it. One is really for the SNF population, which is different than the rate you would get from kind of an other dual. And so it's not clear based on either the demonstration or what the department in California has announced about how those rates will be blended. So our estimate at $2,500 on a PMPM basis is essentially a blended expectation. In terms of -- we've had a long-standing relationship with L.A. Care, and we'll be working with them to understand what the subcontracting relationship is. We think we have a very compelling case for enrollment in CareMore, given its facilities in L.A. And they were quite impressive in terms of the presentation for the other 2 counties that we're hoping to be -- would be the next round of that. So they're essentially going to be allocated enrollment. So we're going to just continue to work with both L.A. Care and the state to reflect those kind of market-leading capabilities and make sure that we get that share of the population that we think will be well served by that, by the neighborhood care center model and the CareMore capabilities that really extend beyond its care center capabilities. They really do a lot that relates to the inpatient care as well. And they have a model of extensiveness that help manage and coordinate care in those settings as well. So it is an evolving process and one that we're seeing very close to both the department and L.A. Care on. David H. Windley - Jefferies & Company, Inc., Research Division: That's helpful. If I can just ask on the same topic, kind of same issue, quite a wide range of thoughts around margin on this business. Do you -- does WellPoint have a thought? Is it more Medicaid looking, more Medicare looking, or some other number on the margin?

Well, when you look at it combined, the obvious -- the majority of the PMPM you're looking at is essentially the equivalent of Medicare payment. Now the way we are managing it, because the contracting authorities for it are the Medicaid authorities and the state, so you're interfacing with them. So when we think about it though, we think it's almost more akin to the SNF net population that CareMore takes care of. And even in some cases, more than that so to speak, very community-based relationships with local community organizations. So it's an interesting blend. We had community-focused initiatives in Medicaid, and CareMore has had community-focused initiatives. And so it's a unique blend, but the majority of the premium looks like it comes from the Medicare payment stream.

Your next question is from the line of Michael Baker from Raymond James. Michael J. Baker - Raymond James & Associates, Inc., Research Division: Previously, you had one senior executive responsible for both the Medicare and Medicaid businesses. Now it seems like that's split out. And I'm just wondering, in light of the dual opportunity, how you plan effective coordination of the effort?

Yes, that's a great question. Let me -- and it's something that we'll continue to think about as this opportunity evolves. What we ask is that Pam Kehaly, who reports to Ken Goulet and is our Plan President in California, that she lead our Medicaid businesses. And she's doing -- and it makes sense for a lot of reasons. One is she's the Plan President in California. California is the state in which we have had historically our largest Medicaid business, which is Medi-Cal. And Pam has the capability and the relationships there to evaluate the dual opportunities in particular and create a growth plan for us overall. So we will continue. And so it's just an interesting place for all of these things to come together and for us to really focus on how the consumer is served through this market. So when -- as this evolves and we look at broader markets and places, we'll continue to evaluate whether Medicaid and Medicare should come together in a more specific way. In terms of operating right now, we're making sure that there's absolute transparency and coordination. As I said, Medicaid is -- essentially the front end of Medicaid is with a state regulator. And California is the first place to really see this evolve, demonstration project. And the back-end care is the Medicare capabilities that we bring through CareMore. So it's a fair question and one that we'll continue to analyze. We're really pleased with Pam's leadership and the relationship that she has now. And Ken's staying very involved.

Our next question is from the line of Peter Costa from Wells Fargo Securities.

I'd like to explore a little bit more about the slow claim receipts and what you think that's doing to your recognition of medical costs in the quarter? If the -- I assume it's not doctors wanting to be paid slower, so I assume it's them not being compliant with HIPAA 5010. Can you talk a little bit more about what your awareness is of the claims that haven't come in yet and sort of how you know exactly what's out there still?

Yes. We've had very intense efforts around 5010, and we make sure, in terms of any claims, that in the EDI process, don't come through as we expected, that we reach out. And we're really analyzing the reach out, making sure that the providers are either 5010-compliant and understand it. Or as we see issues, we're really reaching out to them proactively to address those issues. So while the incurred-to-receipt cycle time increased, the receipt-to-paid cycle time declined. So we continue to get the transparency that we think we need. And the stability in the inventory for us is really important to the actuaries, and they're feeling quite comfortable with what they're seeing in terms of overall inventory stability.

Pete, as we've seen in the past though, whether it be the HIPAA 5010 or other issues where providers are required to change to a new identifier, this is not unusual. And so one of the things we prepared for was not only from an actuarial standpoint on where we picked completion factors. But more importantly, we built a SWAT team whose sole job over the last 3 months was that when a claim got rejected, because we knew it wasn't complying with HIPAA 5010. There was an immediate reach out, and so the vast majority of claims were reprocessed within 24 hours of the reject. So that is the discipline we're putting on it. Now that being said, 3 months later, you'd like to assume that most of them are in. But we're not assuming that in our completion picks at this point in time from an actuarial perspective. But there's both the operational group that we've put around it, and then, of course, there's the completion factor pick. But in terms of our own internal, as Angela highlighted, our paid cycle times are actually faster. It's really the HIPAA 5010 receipt time from the providers.

So around our continuous improvement efforts, we're really trying to avoid reworks. So we want to be proactive with the providers because we don't want them to resubmit and have duplication and efforts. So we did a number of things around one-one. We really improved our implementation around new accounts and renewals. A lot of times, accounts want to wait until the last minute, see what happens and change their benefits. So we really worked with them to make sure that our implementation with them went really well. We're also really working to make sure our contract -- contract on the provider side come in without any kind of efforts to do rework or retrospective changes. So those are hitting our expectation. So despite 5010, we think this is the best one-one implementation cycle we've ever had.

Is there a type of provider or geography where the slow claims have been more significant?

No, not really. In terms of -- we've always found that there are providers at different levels of sophistication. And so sometimes the larger systems have better preparedness for 5010 and had been better prepared for ICD-9 to 10 and how that's going to go forward. So we think it's more a level of sophistication and technological capability and not specific to geography.

And our last question this morning comes from the line of Carl McDonald from Citigroup.

So looking at your cost trends, over the last decade, you've been fairly close to whatever the industry average looks like, generally within 20, 50 basis points for every year. In the last couple of years, there's been a much wider disparity between your trend and sort of the 5.5% to 6% that some of your competitors have seen. So be interested if you have any view on why that difference has emerged? And then second part would be if you started to see that be an issue in any of the negotiations with employers, particularly considering since the PMPM for the Blues, generally on an absolute basis, is already higher than what some of the other companies are offering.

First, I think it's really important to make sure that you're looking at an apple and an apple. Because each of the trend descriptions can be different. And so, for example, what we use is we focus on our Local Group fully insured business, which is a very large, very steady block of business. Others sometimes include their individual business. Sometimes, others even include their specialty business, which may have a much more lower trend, so it brings the overall perception of that number down. What we look at and what we talk to customers about is the overall cost of care. We think we have a definite advantage, both in terms of the depth of the discount arrangements we have, the management of the utilization we have and then the SG&A that we have. And so trend is always relative to your starting point as well, and we think that we're delivering the overall value proposition in the marketplace. And we're winning accounts with discipline, frankly, as Ken described, so that we are getting appropriately compensated for the value proposition that we deliver. Okay. With that -- that was our final question. So in closing, let me say that we expect continued success by delivering on our mission to improve the lives of the people we serve and the health of our communities while creating a more affordable operating model. We're confident that as we execute and fulfill these objectives, we will continue to deliver excellent overall health care value. I want to thank everyone for participating on our call this morning and ask the operator to provide the call replay instruction.

Thank you. And ladies and gentlemen, this conference will be available for replay after 11:00 today through May 9. You may access the AT&T Teleconference service replay system at any time by dialing 1 (800) 475-6701 and entering the access code 226533. International participants can dial (320) 365-3844. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.