Humana Inc (HUM) — Q1 2015 Earnings Call Transcript

Thank you, and good morning. In a moment, Humana's senior management team will discuss our first quarter results and our updated earnings outlook for 2015. Participating in today's prepared remarks will be Bruce Broussard, Humana's President and Chief Executive Officer, and Brian Kane, Senior Vice President and Chief Financial Officer. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joining Bruce and Brian for the Q&A session will be Jim Murray, Executive Vice President and Chief Operating Officer, and Christopher Todoroff, Senior Vice President and General Counsel. We encourage the investing public and media to listen to both management's prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. This call is also being simulcast via the Internet along with the virtual slide presentation. An Adobe version of today's slide deck has been posted to the Investor Relations section of Humana's website. Before we begin our discussion, I need to advise call participants of our cautionary statements. Certain matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's earnings press release as well as in our filings with the Securities and Exchange Commission. Today's press release, our historical financial news releases, and our filings with the SEC are all available on Humana's investor relations website. Call participants should also note that today's discussion and slide presentation include financial measures that are not in accordance with generally accepted accounting principles. Management's explanation for the use of these non-GAAP measures is included in today's slide presentation as well as a reconciliation of GAAP to non-GAAP financial measures. Finally, any references to earnings per share or EPS made during this morning's call refer to diluted earnings per common share. With that, I'll turn the call over to Bruce Broussard.

Good morning, everyone, and thank you for joining us. This morning, Humana announced first-quarter 2015 adjusted earnings per share of $2.47, up 5% from the first quarter of last year. Our pre-tax earnings of $744 million were a record high, and we believe this demonstrates the progress we continue to make as a company. We remain confident in our full-year guidance for adjusted earnings of $8.50 to $9 per share. Some of our significant achievements during the quarter included substantial membership growth in our Medicare Advantage standalone PDP and HumanaOne products, the recent launch of our population health technology business, Transcend Insights, the pending sale of our Concentra business, and completion of our $500 million accelerated share repurchase program. I'll begin with our Medicare Advantage growth. As we shared with you last quarter, we experienced another successful Medicare enrollment season for 2015. Individual Medicare Advantage membership as of March 31, 2015, was up 11% versus the end of the fourth quarter of 2014 and up 14% year-over-year. We continue to see the positive impact for our members of stability in our value proposition as well as high star quality ratings. A recent McKinsey study on the 2015 star ratings concludes that HMO plans perform best on an enrollment-weighted basis; approximately 56% of our individual members are in HMO plans compared to 53% a year ago. The study indicates that plans built around integrated delivery networks achieve higher average star ratings. CMS recently eliminated certain fixed thresholds for four-star ratings for the 2017 bonus year. These changes may create some pressure on our overall star ratings, but we believe we will sustain our solid competitive advantage. We expect to maintain high-quality ratings due to our successful integrated care delivery model, which includes data analytics to engage members in preventative measures and wellness programs that close clinical gaps in care. In summary, our projected 2015 net new membership gains of approximately 12%, including a voluntary retention rate of approximately 90%, are all helping to validate this belief. CMS has also recently released its final Medicare rates for 2016. While we are encouraged by the average rate increase for the first time in seven years, this average still lags fee-for-service medical cost trends. Additionally, CMS's transition to the new risk adjustment model will negatively impact certain of our markets that are leading the country in value-based reimbursement methods and holistically assisting members with multiple complex chronic conditions. As we prepare our Medicare bids for 2016, we will seek to minimize any disruption that rate changes may cause to Medicare beneficiaries while holding firm on our 4.5% to 5% pre-tax margin target. Our continuing investment in our clinical model is expected to provide some offsets to rate pressures. This varies, of course, from market to market. These investments were highlighted this month by Humana At Home's acquisition of Your Home Advantage, a leading provider of nurse practitioner in-home visits. Additionally, we believe our focus on the consumer experience and our proprietary market point distribution channel will be important elements in solidifying our relationship with our members as we face these rate challenges at the market level. Turning to our standalone PDP offerings, we also experienced significant growth for these products with membership up 10% since the end of 2014 and 14% compared to the first quarter of last year, primarily in our low-price point offerings. I will now spend some time on our investments in healthcare exchanges and state-based contracts. We're pleased that HumanaOne membership has continued to grow nicely. While we continue to project at least breakeven results for our HumanaOne business, our projected increased reliance on the 3Rs is driven primarily by results for the State of Georgia and our out-of-network provider usage, which we believe are isolated and addressable. Brian will discuss these factors in his remarks. Entering a new customer segment is never easy, but we believe healthcare exchanges are a leading example of the ongoing movement to the retail model where we've been effective in Medicare. We continue to be highly targeted in terms of where we will participate in healthcare exchanges, with a strong emphasis on current Medicare Advantage markets to enable customer migration as members' life situations change. Our expansions in the healthcare exchanges and our state-based contracts are deepening our partnership with local market providers as we develop local market scale through multiple product offerings. Our state-based Medicaid membership, which now includes members associated with dual demonstration programs, is up significantly, both sequentially and year-over-year. We continue to monitor the RFP pipeline and plan to pursue other state-based opportunities later in 2015. These opportunities would not be as viable if it weren't for our integrated care delivery model. Importantly, we continue to show progress in key integrated care delivery model metrics. Some examples include the number of individual Medicare Advantage members covered by value-based arrangements, now more than 54%. Membership in our Humana chronic care program is up 10% since the end of the year and 56% compared to the prior year. Adoption of mail-order pharmacy among our members continues to grow as we highlight this benefit more during the sales process and welcome calls. Individual Medicare Advantage mail-order penetration is now approaching 35%. We focus on reaching out to members with gaps in care and have sent over 4 million proactive messages to 2.5 million members to prevent gaps in care, resulting in a gap closure rate of more than 30%. As the leader in both the development and execution of value-based payment models and technology-driven population health management analytics, we support trends that encourage care coordination across all payers. In that context, this quarter, we launched Transcend Insights, leveraging the population health capabilities developed in our Medicare Advantage business. Our goal is to provide payer-agnostic tools to provider partners, allowing more members to be in value-based reimbursement models. As we've shared with you in the past, value-based arrangements have led to higher HEDIS scores, lower medical costs, and higher member satisfaction. Before closing, I want to discuss our recently announced sale of Concentra. As we've said in previous calls, we review our various businesses to ensure each earns its cost of capital and aligns with our integrated care delivery strategy. The Concentra acquisition was part of our multi-pronged approach to increase our risk management capabilities through primary care physicians. Our subsequent MSO acquisitions and joint ventures provided a more integrated primary care platform than Concentra. Although it did not ultimately fit strategically, we achieved an attractive price that resulted in a gain versus our initial investment. Brian will speak more to the details of this transaction in his remarks. We expect to close the transaction in the next few weeks. I want to thank all of our Concentra associates for their dedication to the consumer and to our company. Several of you have asked for an update on our PBM evaluation. That work continues, and we expect to provide a full debriefing on our analysis during the third quarter earnings call in November. In summary, we believe our robust organic membership and revenue growth, our proven superior clinical operating performance, and disciplined capital allocation provide a sustainable competitive advantage. Excluding the one-time gains we expect from the Concentra sale, we continue to anticipate our full-year adjusted earnings per share to be between $8.50 and $9 and look forward to providing updates as the year progresses. With that, I'll turn the call over to Brian for a more detailed discussion of our financials.

Thank you, Bruce, and good morning, everyone. As Bruce mentioned, the first quarter of 2015 produced strong results and continues to demonstrate the successful implementation of our integrated care delivery model. The attractiveness of our product offerings is resonating with our customers, as demonstrated by the continuing increases in our Medicare Advantage, standalone PDP, and exchange membership. Consequently, we have raised full-year membership expectations for both standalone PDP and HumanaOne. Standalone PDP is driven by higher retention that we see post the open enrollment period, primarily a result of fewer auto-enrollees being reassigned. I'll discuss the HumanaOne business shortly. With regard to our Medicare Advantage growth, early indications for our new members are positive as we evaluate individual market growth and performance. Additionally, the growth in our PBM and Humana At Home businesses remains unabated with more volume driven by membership growth and deeper engagement along with benefits from scale that drive results. First-quarter revenues for the healthcare services segment rose 26% versus the prior year, and pre-tax earnings are up 24% year-over-year. The quarter had several developments that will be the focus of my remarks today, including: the increase in our projected 3R receivables for the year, medical utilization and prior-period development, days and claims payable, and cash flows from operations, the earnings implications of the Concentra transaction, and capital allocation. Starting with our exchange business and the premium stabilization programs commonly referred to as the 3Rs, our conviction in our healthcare exchange strategy remains strong. We continue to focus on our key growth markets by offering high-value networks to drive affordability and access for our customers. We believe this strategy successfully establishes a new growth business while providing a compelling product that our members value. Over time, we believe HumanaOne will contribute meaningfully to our results and advance our objectives of local market presence and scale with providers while allowing us to offer a range of products that are relevant to our customers, regardless of their age or income circumstances. As with any startup business, we've encountered successes as well as challenges. In terms of successes, our ACA-compliant membership for HumanaOne is up 38% from the end of 2014, well ahead of our previous expectations. This was driven by better-than-forecasted sales and lower-than-anticipated attrition. Consequently, we've adjusted our aggregate HumanaOne guidance to reflect higher projected membership in the ACA-compliant business, which we also believe signifies our approach to the scale required for long-term success. We continue to forecast at least breakeven results in 2015, albeit with higher reliance on the 3Rs than we previously anticipated coming into 2015. As you've seen from our release, we've increased our net 2015 3R guidance range to $450 million to $550 million, with reinsurance accounting for approximately 75% and risk adjustment and risk corridors accounting for approximately 25% of the total. As we've discussed previously, there's an interplay between risk adjustment and risk corridors in that if we don't get the risk adjustment exactly right, the meaningful part of the balance, either positive or negative, is captured through the risk corridors. As we evaluate our financial performance to date, including runoff claims from 2014, the drivers of the increase in full-year receivables related to the 3Rs are quantifiable and addressable. The first two Bruce mentioned in his remarks are higher than anticipated out-of-network utilization and poor results in our Georgia market. The last driver of the higher receivables is simply a function of having more members than we previously expected. I'll start with out-of-network utilization. As the exchanges rolled out across the nation, we believed there would be a transitional period during which our members would get accustomed to our efficient network products. Consequently, we permitted out-of-network utilization for the small proportion of our members who did not stay in-network to avoid disruption, notwithstanding the product design that underpinned the affordability that our members seek. Our provider network team has thoroughly evaluated our networks in light of our membership levels by market, and we are satisfied with our level of network adequacy. As a consequence, we are implementing stricter enforcement of network utilization by working closely with non-network providers, as well as educating our members on the product. Higher levels of in-network utilization are anticipated to ensure continued affordability of our healthcare exchange offerings as well as align with our pricing assumptions for the remainder of the year and for 2016. After adjusting for the out-of-network usage, our markets across the country, including our largest HumanaOne market in Florida, are performing within expectations, with the notable exception of Georgia. One of the challenges we faced in 2013 and 2014 was the immaturity of the claims data we had available at the time we set our healthcare exchange pricing for the following year versus what we would have preferred, specifically more detail regarding statewide market conditions and health status based on significant exchange claims data. To address this, we juxtaposed the limited Georgia claims data we had against claims data nationally for states that we believe had similar utilization patterns and likely enrollee mixes to derive assumptions from the population health of each state and set our pricing. Recent actuarial claims data for Georgia now indicate that enrollees are skewing towards being a less healthy state population than we had believed when pricing. Consequently, we are accruing both a risk adjustment and risk corridor receivable. It's important to recall that this was the original intent behind the premium stabilization programs; namely, early year protection in this circumstance. We are, of course, incorporating our emerging experience into our actuarial assumptions and taking targeted actions through pricing and product design when filing our 2016 rates in the next few weeks to ensure Georgia's results will be back on track for 2016 without reliance on the risk corridors. As I mentioned, the remaining driver of the higher 3R balance relates to higher than projected growth of our ACA-compliant business. This will result in higher receivables than anticipated, primarily associated with reinsurance. Finally, regarding our 2014 3R accruals, we have decreased reinsurance by approximately $50 million and increased our risk corridors by around $40 million as an offset. As we have evaluated the run-out of our 2014 claims, fewer of our members than anticipated will hit the reinsurance attachment point, which is why we made this change. Turning to medical utilization, we're watching hospital inpatient admissions per thousand data for our Medicare Advantage business closely. We have seen some published data suggesting higher Medicare usage of inpatient services and have also witnessed an uptick in inpatient authorizations. For Medicare Advantage, we have projected a decline year-over-year in hospital admissions, and for the first quarter, we have seen that decline bear out. However, during the last weeks of the quarter and into April, we are seeing an elevated level of authorizations for hospital admissions, which, although still declining, are slightly higher than we had anticipated. Importantly, we have also seen data throughout the quarter suggesting our cost per admit is lower than forecast, implying lower severity conditions are driving the admissions. While it's too early to draw any conclusions from this fast-moving data, it is something we are closely monitoring as actual claims experience develops over the coming months. In our earlier press release, we noted a lower level of favorable prior-period development than in last year's first quarter. A significant portion of this lower prior-period development was unanticipated due to the prior-period development for the first quarter of 2014 being unusually high and due to claims processing changes involving the implementation of a front-end review for Medicare claims early in 2014. This enables us to improve the initial accuracy of claim payments, reducing overpayments recaptured later as part of prior-period development. PPD was also adversely affected by fourth-quarter flu claims that emerged in early 2015 across our lines of business. I will now turn to the balance sheet and operating cash flow. Starting with days and claims payable, or DCP, we revised the table to exclude reinsurance associated with the 3Rs. Given that reinsurance reduces benefits expense but does not impact the related benefits payable, it skews DCP trends over the three-year period of the program. Days and claims payable during the first quarter of 2015 declined by less than a day, driven primarily by the typical first-quarter increase in Part D claims associated with our Medicare Advantage business, included in the all other category of the DCP roll-forward table in our press release. Recall that our standalone PDP business is excluded from our DCP calculation. Much like our standalone PDP offerings, Medicare Advantage Part D benefit designs generally have the plan covering substantially all initial pharmacy claims but covering less of the benefit as the year progresses. While pharmacy expenses related to these members are in our DCP calculation, the payable related is relatively small due to rapid processing of pharmacy claims. Higher capitation and provider settlements also led to a slight decrease to DCP during the quarter; however, this was more than offset by an increase in unprocessed and processed claims inventories. Cash flow from operations is down versus the first quarter of 2014, as higher net income was more than offset by working capital items. Specifically, the increase in benefits payable, which accompanies growing membership, was smaller year-over-year due to the lower level of overall growth in average membership given the outsized growth we experienced in 2014. This pressured cash flow from operations on a comparative basis by about $250 million in the quarter. Working capital needs for our growing pharmacy business primarily accounted for the remainder of the delta in the first quarter cash flow. For the year, our operating cash flow guidance is largely unchanged, although we've now lowered our guidance around cash flow by approximately $200 million at the midpoint, primarily reflecting the increase in the 3R receivable that I discussed earlier as well as the pending sale of Concentra. Before closing, I will briefly touch on capital allocation and earnings guidance. As Bruce noted in his remarks, we announced the sale of our Concentra business this quarter. The timing of signing the definitive agreement triggered the need to recognize the gain on the establishment of a deferred tax asset, thus the $0.35 per share gain was included in our first-quarter GAAP results. We expect to close this transaction in the coming weeks, so we have included the full impact of the transaction in our earnings guidance, both from a GAAP and an adjusted perspective. For GAAP, we are including a total projected gain from the sale in the range of $1.35 to $1.45 per share, including the $0.35 tax gain. On an adjusted basis, excluding this one-time gain, we continue to forecast earnings per share in the range of $8.50 to $9 per share. The sale of Concentra is expected to generate approximately $1 billion in net proceeds after taxes and deal expenses. Before any anticipated use of these proceeds, the sale will result in $0.11 of 2015 EPS dilution. We continue to look for value-enhancing acquisitions such as the Your Home Advantage deal we recently announced that will advance our in-home capabilities and pursue additional share repurchase opportunistically. However, given where we are in the year, it is likely that a significant portion of this dilution will persist. Regarding share repurchases, we completed our $500 million accelerated share repurchase program this quarter. Additionally, holding true on our commitment to buy back $1 billion of stock by June of this year, we have entered into a 10b51 plan that we expect will meet that goal. You will note, however, that we have slightly raised our guidance for the average fully diluted share count, largely due to the higher-than-anticipated buyback price, which will have a modest negative EPS impact. Finally, our work on optimizing our portfolio continues to ensure that each of our businesses fits strategically and earns its cost of capital. More broadly, we are encouraged by our progress and prospects, all driven by execution around our integrated care delivery strategy. With that, we will open the lines for your questions. In fairness to those waiting in the queue, we ask that you limit yourself to one question. Operator, please introduce the first caller.

Hi. Thanks. Good morning. I want to talk a little bit about the utilization trends you guys are monitoring. I just want to understand what exactly is driving that? I think you mentioned in public data from some of the hospitals, but I assume you're going off of more internal data. So is there any specific lines of service or specific types of lives, geographies or new members? Do you have any color on where this utilization is coming from?

Good morning, Josh. We're seeing a slight uptick in admissions over the last few weeks and into April. There's no specific geography that we would point to. It's something that we continue to evaluate. Notably, the unit cost of these admits is lower, suggesting lower severity of claims, but our outpatient utilization seems to be down and pharmacy utilization is in line. So it's early to ascertain what this is telling us, but it's something we thought was important to communicate because we're watching it closely.

Josh, just to build on what Brian mentioned, we began to analyze a lot of the information relative to new members and what we call concurrent members. We're seeing that the new members that just joined our plans, which were significant, have better utilization than the concurrent members. This gives us comfort that there isn't an issue with any of the markets we grew in. There are some respiratory issues we're facing, so this indicates a longer extension of the flu; however, we feel confident about our direction as we progress.

Okay. That's helpful, Jim. And I guess just maybe help us understand the magnitude here. If you take a look at the uptick in outpatient utilization with lower outpatient RX in line and maybe it's just flu. I mean if this were to persist through April, May, June, is this enough to change guidance? Or is this just a pressure point and the reason we're still comfortable with a relatively wide range of EPS?

Josh, if this persists as we see it, it's not something that would impact guidance, but it's something we monitor closely; to the extent there was a continued uptick and a greater impact, that could change, but we're not seeing that right now.

Hi. Thanks. I'm going to shift over to the HumanaOne. I wanted to understand if your change in or lack of change in age distribution in that book of business in the slide that you presented to us last quarter, yet a fairly significant change in medals for your distribution, if that adverse selection had anything to do with your additional reliance on 3Rs?

It's something we continue to evaluate. We examine all of our medal tiers and try to understand where the utilization is coming from, particularly in Georgia, where we've seen issues. We will continue to evaluate our participation in the various medal tiers as we approach 2016, and our pricing will reflect the increased morbidity we are seeing in that block. The out-of-network utilization is an issue we believe we can address in the near term, so this will not be a recurring problem going forward.

And on the out-of-network, just to follow up on that, is that where you are essentially only lightly enforcing the existing policy or rule? Are you going to enforce it more stringently, or do you need to change the policy and is that possible inter-year?

I would say the former. We were lightly enforcing it as we came into this program with new products and new customers. Over the next few months, we will be enforcing the existing policy, which involves working with out-of-network providers and educating our customers on the product they bought. We strongly believe that our strategy allows customers to have very affordable and compelling products, and by educating them, we think we can manage that out-of-network utilization effectively.

Hello, everybody. I'm going to go back to the comments that Bruce made about there being some pressure from threshold eliminations on the STARS program. Can you give us more color on how significant that would be? Are we talking about something that would impact you potentially in 2017? Is that the right way to think about it, or would there be any reason it would affect earlier?

This is Jim Murray. It would be in 2017. We are in the process today and for the next several weeks of finalizing a lot of the work related to the benefit year 2017. The threshold elimination puts a little bit of pressure on the number of members in four-star or greater plans. However, we feel good about our positioning across the efforts related to the STARS program this year, and we believe we will be positively positioned relative to the competition.

It's important to keep in mind that it is a relative measurement. Our performance is predicated on industry performance as a whole, and our clinical capabilities have outperformed the industry in recent years. We remain confident that we will continue to outperform as these changes manifest.

Thanks. Good morning. I was hoping to follow up on your comments about some of the moving parts in guidance. It sounds like the Concentra deal is about an 11% headwind to earnings this year. You also mentioned impacts from share repurchases related to stock appreciation here. The guidance seems to indicate a potential drop in the tax rate, but I'm curious what other moving parts allowed you to maintain your guidance range versus where it was last quarter?

You outlined some major issues we are focused on. Concentra will pressure earnings by $0.11. With share repurchases and tax rates, it's probably around $0.04, leading to a $0.15 headwind for this quarterly call. However, we are comfortable reiterating our guidance of $8.50 to $9. Our performance will ultimately depend on how utilization trends unfold. Right now, we're optimistic about our current trends, but we are very focused on their development. Regarding the Concentra sale, it's a timing issue rather than a long-term business problem. This sale allows us to redeploy assets strategically at a good value, which we can use for stock buybacks or more accretive acquisitions in the future.

Thanks. If I could just squeeze one more in quickly. In the Healthcare Services segment, I hear a lot of moving parts related to Concentra and your Home Health acquisition. Can you talk about how those might offset each other, as well as membership growth that allowed you to maintain revenue guidance? It seems the only impact pre-tax results related to the pre-tax gains.

As you'll see in the Healthcare Services segment guidance, we've adjusted revenue numbers due to the divestiture of Concentra. Overall, this business is performing well, buoyed by our Medicare Advantage and PDP growth. We're also seeing increased engagement with our members from mail-order and improved analytics identifying patients that benefit from our in-home capabilities. Both are driving performance, so we're confident in our Healthcare Services pre-tax range.

Yes. If I could ask a question about the individual market, just with two parts. First, to what extent are you seeing inflow of new members coming into the exchanges? A peer company mentioned they are seeing less inflow than expected. Second, regarding Georgia, how do you plan to reprice in that market and avoid getting stuck in an adverse selection spiral?

Honestly, we expected inflow to remain consistent with our previous expectations, and feel positive overall regarding the membership. Regarding Georgia, we are very aware of the adverse selection risks when implementing higher premiums. Part of our approach will involve product design within the medal tiers we choose to participate in and evolving our pricing to reflect the underlying morbidity of that block.

Getting back to the individual business again, why do you think you're having problems in Georgia? Another competitor reported earnings earlier that has a number of low-priced silver plans in Georgia, and they did not seem to share the challenges your company is facing. Is it local market related, or is there some cost disadvantage you have in Georgia? How can you avoid this happening in another state down the road when risk corridors and reinsurance go away?

Peter, this is Jim. We wondered when you'd call in. Regarding Georgia, as Brian stated, we initially took our individual legacy business and compared it to our small group block, given that was a guaranteed-issue population. We thought that was a good approach, engaging in detailed evaluations across markets. While most markets turned out fine with that pricing philosophy, Georgia did not. Particularly, the platinum plans require documentable risk conditions for members, and in Georgia, we find that higher utilizers lack these documentable risk conditions, which limits our ability to acquire risk adjustments. We're evaluating how this impacts pricing for future products as we go forward. We now have a lot more actual claims information to set our pricing. From the prior years, we relied on models and estimates, but now that we have real claims data, we can price our business better moving forward, helping ensure profitability. This will be critical in terms of our rate-setting strategy.

That's helpful. Will you offer platinum plans next year?

We'll evaluate that market-by-market; for plans not making sense due to documented risk conditions, we will act accordingly.

Great. Thanks. I want to ask a bit about the Medicaid side of the business. The company seems to be aggressively pursuing RFPs, more than you have in the past. Can you talk about your view on what's changed in the last couple of years? You've pursued RFPs in various ways, such as outright or through joint ventures. How do you view the format these types of participation might take?

Our posture regarding what we pursue has not changed. We believe a partnership model in Medicaid remains effective across all states. We'll evaluate our participation in RFPs from states where we have existing membership, as that has consistently been our strategy. We're pleased with the results of our existing Medicaid members, which are meeting expectations and experiencing significant growth.

Thank you. I'd like to revisit the out-of-network utilization impacting the 3R boost. This seems to pertain mainly to new members transitioning onto exchange products, and there’s been some stricter network enforcement recently. Should I view this as a temporary pressure on 3Rs for this quarter, or will it persist throughout the year? How can you modify your benefit designs in 2016 to improve this situation?

This impact will primarily affect the 3Rs for this year based on our performance so far. Out-of-network benefits carry higher costs than anticipated, raising receivables. We're actively working with non-network providers regarding fees and collaborating with members to better educate them about their products. We strongly believe in high-value networks, and through provider and member education and potential adjustments in product design, we can navigate this issue effectively.

So, it's more about education and less about financial incentives?

With providers, there will be financial impacts to ensure appropriate reimbursement levels for non-participating providers. However, the out-of-network utilization involves a small group of members accessing those benefits. We may also consider higher out-of-pocket costs for members who go out of network as a possible adjustment for next year. It's a multifaceted approach that we believe can lead to effective solutions going forward.

Thanks. I want to stay on the individual business and while you're discussing Georgia specifically, I'm interested in how much you think you'll need to raise premiums broadly in the exchange business. If we look at your 3R accruals now and calculate that on your ACA compliant individual business, it equates to around 13% of revenue, and given that the 3R's risk corridors will go away over the next year or two, enlighten us on how much premium increases you'll likely need to implement to reflect that?

We prefer not to disclose specific numbers for competitive reasons. We remain cognizant of 3Rs when pricing for next year and recognize that there's one more year remaining with two of the 3Rs, so we'll price to ensure attractive returns in 2016 and beyond. We're mindful of market dynamics and the necessity for pricing adjustments to maintain profitability.

As Brian noted, while there are challenges in Georgia, most of our markets are performing well, and we are taking steps to ensure our pricing aligns with underlying conditions in the respective markets.

Thanks. Good morning. Switching topics a bit, you have reclassified segments, and within the group book you've seen enrollment declines. How committed are you to this business going forward? Are there any strategic reviews being contemplated for this segment? Additionally, on the PBM, can you clarify regarding the full debrief you expect during the 3Q call in November? Do you anticipate that will include a final decision on whether to keep the PBM or establish some outsourcing arrangement?

As for enrollment declines, we made a strategic decision to wind down our large group business over the next several years as we aren't national players in that space, but we focus on smaller case sizes. We performed well within that segment, and while we've recently experienced shrinkage due to aggressive competitors, we remain confident in our positioning. In the next few years, we'll continue to assess our group business and feel positive about its profitability. Regarding the PBM, we're continuing our evaluation, and we'll provide an update in the third quarter.

Thanks, good morning. I want to clarify regarding retail MLR. Is this the underlying Medicare MLR, excluding PYD, and is this some of the late quarter potential uptick you see? Is the deterioration tied to HumanaOne individual public exchange product, which is now more reliant on reinsurance?

We want to clarify that if you adjust for prior periods, the retail MLRs are actually down from prior quarters. This has been expected, with some related impacts tied to flu claims. However, our MLRs are aligning with our expectations on an incurred basis, which is why our breakeven or better performance targets for 2015 remain intact.

Did you see any improvement in your off-exchange ACA compliant type MLR?

We do not break out our ACA compliant off-exchange and on-exchange, however; once adjusted for the 3Rs, we believe our MLR is in line with expectations, which is part of why we stand by our forecast of breakeven or better performance for 2015.

On HumanaOne, you previously mentioned adverse selection. As you raise rates, are you experiencing further deterioration in that book due to relatively healthy members migrating elsewhere?

Regarding Georgia, we do not see it as adverse selection but rather an indicator of the population's overall health condition. We are pricing reflective of that, which may cause some members to move on, but we're focused on aligning pricing with risk to stabilize the book effectively.

Hey there. Thanks for taking the question. I'm trying to sort through what belongs in this year versus last year. Was there any net prior-period negative development in Q1 of this year related to previous years in any products?

The prior-period development was positive this quarter based on 2014 in prior results, but it was less positive than it was last year. A significant portion of the lower prior-period development was expected due to last year's unusually high PPD and due to claims processing changes involving the front-end review in Medicare. The overall favorable prior-period development reduced in comparison to last year; however, it remains positive, just less so than last year.

Looking at payables versus premiums, aside from excluding PDP, I noticed your payables versus premiums remained upside down in Q1. Could you explain why, if you're seeing increased utilization, you would expect to be booking more payables than premiums?

The comparison between premium and claims payable is not something we focus on, as there are moving pieces involved. Our admits are down year-over-year, and our trend vendors continue to reinforce lower admissions. Rather than read too deeply into these numbers, we should consider overall cash flow and balance sheet quality—both of which are showing improvement post-Concentra adjustments and as we address working capital timing issues.

We appreciate the support of our shareholders. We acknowledge this quarter was complicated due to the Concentra sale and some comparative changes. However, we view this as a quarter reinforcing our strategy surrounding our growth in retail and our integrated delivery model. In conclusion, we thank our 60,000 associates who make these results possible, and we appreciate shareholder support. Thank you, and we look forward to our further conversations later.