Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint 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. Please go ahead.

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; and Brian Sassi, Executive Vice President of Strategy and Marketing and President of our Consumer Business are available to participate in the Q&A session. During this call, we will reference certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available on our company website at www.wellpoint.com. We will also be making some forward-looking statements on this call. 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 our press release this morning 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. Today, we're pleased to report strong results for the first quarter of 2011. Earnings per share totaled $2.44 on a GAAP basis and included net investment gains of $0.09 per share. Earnings per share in the first quarter of 2010 totaled $1.96 per share, including net investment gains of $0.04 per share, partially offset by an intangible asset impairment charge of $0.03 per share. Excluding the items noted in each period, our adjusted EPS was $2.35 for the first quarter of 2011, representing growth of 21% over adjusted EPS of $1.95 in the same period of last year. At our February Investor Conference, we told you that 2011 would be a rebasing year from which we expected to grow. We now believe that our full year 2011 results will be better than we originally anticipated. Our first quarter results exceeded our forecast primarily due to lower-than-expected medical costs in the Commercial business. We also achieved a higher level of membership growth than we had anticipated during the quarter. Based on these positive results, today, we're increasing our year end 2011 membership expectation by 500,000 members to 33.9 million, and also raising our full year earnings guidance to at least $6.70 per share, including $0.10 per share of net investment gain. Our medical enrollment grew organically by 875,000 members or almost 3% in the first quarter and totaled approximately 34.2 million as of March 31, 2011. We estimate that approximately 1/3 of this increase is related to the change, in dependent benefit coverage to age 26. Our enrollment growth was led by the National business, where we added 727,000 members, including 486,000 National Control Account members and 241,000 BlueCard health members. We're pleased with our disciplined growth in the National business, which continues to be…

Thank you, Angela, and good morning. We're off to a good start this year, and this is a testament to the strong value proposition we create in our efforts to hold down the rate of rising health care costs, while improving quality and our commitment to continue to improve by building a better WellPoint. Premium income was $13.7 billion in the first quarter, a decrease of $226 million or 2% in the prior year quarter. Premium revenue declined as a result of the conversion of 2 large groups to self-funding arrangements during 2010 and the decline in commercially fully insured membership we experienced last year due to the economy, partially offset by rate increases designed to cover cost trends and an increase in Senior, FEP and State Sponsored membership. Administrative fees were $962 million in the quarter, an increase of $35 million or 4% in the first quarter of last year. This was driven by growth in self-funded memberships. Our self-funded enrollment at March 31, 2011, was higher than we originally planned and was positively impacted by the age 26 policy change. As Angela mentioned, we have increased our outlook for year-end 2011 memberships to reflect our favorable results to date. While we're anticipating modest attrition in our enrollment over the last 3 quarters of 2011, due to our cautious view of the economy, we do expect higher overall memberships for the year. We have also increased our guidance for full year 2011 operating revenue to $59.9 billion. This is being driven by our increased membership expectation, although I would note that a portion of the higher membership expectation relates to the age 26 policy change. For many self-funded cases, these individuals are being added to existing family policies, and therefore, we are not generating additional revenue in those situations.…

Operator, please open the queue for questions.

[Operator Instructions] Your first question comes from the line of John Rex from JPMorgan. John Rex - JP Morgan Chase & Co: I was wondering if you could give us a little more detail on what you're seeing in utilization trends and maybe spiking it up, focusing on hospital and doc in the Commercial and Government Program categories? And any kind of difference you're seeing there in terms of the actual number of units consumed?

Great, John. Thanks. We will. In fact, you know what we'll do is we'll go through with you a little bit about trends in the Commercial segment versus the Consumer segment because there's a little bit of a difference in the different business segments. But as we reported, we have seen a trend in the first quarter that was lower than the trend that we expected. But both in pricing and in terms of our view of trend going forward, we expect it to go -- to rebound and to increase and be in the level that 7.5 plus or minus 50 bps. So let me turn it to Brian to talk a little bit about the utilization that he's seeing. We've seen differences, in particular, in Senior and in the Commercial population. And then go to Ken, who can talk about the experience we're seeing in Commercial.

Hey, John, this is Brian. In the senior population, we saw an elevated flu season in 2011 when compared to 2010. Specifically, we monitor kind of what's going on with flu season for all of our population, specifically for seniors. And if you look at the publicly available CBC data for the 2011 flu season, hospitalizations per 100,000 seniors is about 60 versus 2010, which is about 25. So we've had a fairly significant uptick. It's -- last year was kind of depressed, in terms of kind of a lower season, but this year, we're seeing some utilization uptick particularly there in Q1. Ken?

And John, on the Commercial side, it ran very well, as you can see by the numbers. But in general, we did have some impact, positive and favorable impact because of storms. But as we project our costs going forward both on a unit cost basis and on a utilization basis, we do anticipate that it will return back and we'll have the rebound that we've been discussing. The flu did go up slightly, not as much as Senior, but we did see the flu go up. And we do know that our access, as Wayne mentioned in the opening comments, will have a rebound because of the discount advantage we had with DSI last year will not be as great year-over-year.

So when we roll this up on an enterprise basis -- Wayne, do you want to go through the elements?

Yes, so John, when you look at it on a consolidated level, when we look at overall trend, the trend is still going to be what we think right now, somewhat more biased to the lower end of that range that we guided to originally. Again, as Brian said, in what we saw for the company as a whole for flu was just slightly over our expectation. But it's actually bifurcated the components between Commercial and say, Senior, State Sponsored. We saw a little more elevated than normal in Senior, a little less than normal in Commercial. So that gives you a little bit of background. But whether that will repeat in Senior remains to be seen. But we've taken a cautious outlook there, we've taken a cautious outlook on the commercial. And then finally, for State Sponsored, while very much in line, in fact, slightly better than expectations in the quarter, because of some of the drug changes we've seem like Makena and others that do affect really the birth population and mothers, in particular, we've taken a cautious outlook there because that drug is going from an average cost of around $400 per pregnancy to as high as $15,000 per pregnancy. Now clearly, there's a lot of initiatives to try to manage and control that, but it gives you an idea of why you can actually see trend rebound in the State Sponsored, maybe more than you had anticipated in the first quarter. John Rex - JP Morgan Chase & Co: So on the Commercial side, were bed days negative in the 1Q year-over-year, bed days per thousand?

Yes, John.

Yes, on the Commercial side, the admits were down. The days were slightly up, and we're managing that very carefully. John Rex - JP Morgan Chase & Co: So you sort of said, days were slightly up so acuity was a little higher?

That's right. John Rex - JP Morgan Chase & Co: And then did you see any change -- you mentioned weather as being a factor. So did you corroborate that by seeing -- in March did you start seeing a return to kind of somewhat more normalized levels?

No, I think it's important to think about we're pretty geographically diverse. So weather in some of our geography had a bigger impact in those first 2 months clearly than in others. So we're conscious of that. But as we look at the trend going forward and the kind of the slope of the trend going forward, we think it's appropriate to be cautious about expecting a rebound on the trend.

Your next question comes from the line of Charles Boorady from Credit Suisse. Charles Boorady - Crédit Suisse AG: Can you talk about the outlook for State Sponsored RFP activity? And specifically, the potential for any partnerships with other Blue plans that I understand are looking to get into the State Sponsored business for strategic reasons ahead of 2014?

Charles, I'm going to let Brian speak to that. We have, as part of our strategy, prioritized State Sponsored business as an opportunity for growth. It's because we really bring value in terms of the cost-efficient solutions to a Medicaid program, particularly those Medicaid programs where states where they haven't really had full penetration around Medicaid. So they're different in different states, and we're being very careful about the states that we choose to participate in. And as you described, a Blue partnership, we have one in South Carolina and there are other opportunities. So Brian, why don't you speak to that specifically?

Charles, as we've talked about on prior calls, over the last really 18 months, we've really beefed up our capabilities in terms of being responsive and preparing ourselves for the RFP pipeline that we currently have in front of us. So we're actively working on a number of RFPs. We've prioritized our 14 Blue states first. And then secondarily, we have been in discussions with a number of other Blue plans about potentially entering into a partnership arrangement relative to supporting their entry into State Sponsored. With that said, there are a number of opportunities. We're evaluating each of them. We need to make sure that they make sense from a financial standpoint, and we do plan to be aggressive in those markets where it makes financial sense for us to answer, either on a direct basis or in partnership with another group plan. Charles Boorady - Crédit Suisse AG: Brian, have you sized up the opportunities as we look out over the next couple of years? There's a pretty big pipeline, nationally. But in the states that you've targeted, your 14 Blue states, and then states where you think you could potentially develop a relationship to partner with another Blue plan? Can you just order of magnitude for us how big that opportunity is?

It is a sizable opportunity. It is kind of a moving target. We have kind of evaluated kind of each of the states geographically. We've identified kind of where they are in terms of a RFP process. Some states are not in managed care now that are thinking about going into managed care. So we have prioritized each of those states. We've also taken a look at and had discussions with a number of different Blue plans and kind of prioritized those potential opportunities. In order of magnitude, there is the opportunity to significantly grow that membership. But again, that is going to be somewhat tempered by kind of what's going on in each of the states and does it make financial sense to enter those markets.

Brian spoke to it in the beginning. But in 2010, we migrated all of our State Sponsored business into a destination platform that gives us really an opportunity for over scale. So one of our variables though is really almost a consultative kind of relationship with both the States through the RFP processes, as well as if we have a Blue partner and make sure that they're prepared for the Medicaid influx that we would be prepared from the risk perspective understanding the population. Those are the variables that we're really having those discussions. You see the timing change, Charles, sometimes in terms of when the state is ready to make those commitments. And so we're going to take those in due course so that we can continue this execution that we've created this platform for. Charles Boorady - Crédit Suisse AG: Can you just -- it sounds like you're not going to put a real -- give us a real number to hang our hats on yet. We can estimate that from the RFPs we've seen so far, but maybe if you could just speak to the level of interest that you're seeing among your fellow Blue plans in other states? You've mostly avoided State Sponsored businesses in the past. Is my information correct that they are indeed interested and their strategies are evolving to prioritize that business now ahead of 2014?

Yes, I would say, Charles, your intelligence is accurate. I think -- as you know, the majority of Blue plans do not operate in the Managed Medicare business. And so they are looking for opportunities to partner with plans and primarily interested in talking to us, given our long history and success in this market. So there is a fair amount of interest. And again, you need to carefully assess each of the markets and the opportunities there. We obviously are going to pursue those opportunities that have the capability to be a win-win partnership between us and the other Blue plans.

You're touching on an important issue, too, which is our relationship with other Blue plans and the value of the Blue Cross and Blue Shield system. We've seen the benefit of really good collaboration through the Blue Cross system in the National Accounts market. And we're creating and driving solutions that are system wide. So Anthem Care Comparison, which is our transparency tool that will show you the variation in cost and quality data about these 59 common procedures is a -- now, it's not just a WellPoint Solution, it is the system solutions. So other Blue plans are adopting it in 100-plus markets across all the different Blue states. But the opportunity for scale for each of us as individual companies and as a system, makes so much sense. We're seeing a lot of positive collaboration around systems that we co-own, around processes for improvement. So we think that and the State Sponsored opportunities are really strong for us over a long period of time.

Yes, and just to add a little more color, Charles, I think with the RFP process, it's really an iterative process. We know that the pipeline is large. But really, the devil's in the details. The RFPs need to get released. We need to understand the terms of the RFPs. The rates can get released at different points in time. So we do have various checkpoints in our process to continually evaluate: Does the situation in a given geography continue to make sense as we get more clarity relative to the specifics around each arrangement.

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

Wayne, maybe just to make sure I heard you correctly about the 2 -- was it $2.3 billion, you said, for year end 2011 targeted cash level?

Yes, Doug. That's correct. So if we execute at least on the current buyback that we have authorization for, that would give us the excess capital still at the parent. Obviously, we like that position for purposes of M&A. And in the event that we cannot find M&A that is more accretive than our cost of capital or buyback programs it gives us an opportunity to revisit that with the board later this year. So that is additional capital that we would expect to have at the parent still.

And that's obviously well above the $1 billion you've historically talked about. I mean, is it -- in your mind, is there sort of a trigger that you say, "Okay, we've sort of surveyed the landscape and we have a sense for what the opportunities are, so now it makes more sense to go back to the $1 billion?" I mean, how do you think about balancing sort of your available credit versus the excess cash at the parent?

The interesting thing, Doug, is obviously, with our debt to cap being at the lower end of our range, we have significant capacity there. We could borrow in excess of $4 billion for acquisitions. So we would like over time try to move, at least to the midpoint, if not at the higher end of that range over time. So I think clearly, we evaluate the opportunities. We look at liquidity in total, so not just what cash at the parent is, but what we have access to the capital markets with. So we will revisit with our board this year later our position. We do revisit this regularly at each of our board meetings. And I think our board has definitely shown our shareholders its desire to return capital to shareholders if we cannot find an even more appropriate use for M&A or other.

And then the G&A ratio in the quarter obviously improved. What -- can you just talk us through sort of specific areas that you're targeting over the next 12 months on the G&A front? And then just, is there anything in 2011 that you would characterize as sort of onetime investment spending in nature, preparing for a reform? Just how do we think about that G&A trajectory?

I think you got to almost step back a couple of years and look at the opportunity we have with WellPoint, having brought 14 Blue Cross plans together. And we say what we did a couple of years ago actually has made investments in our infrastructure, and that positions us well. And then we've really focused on execution and integration. And so one of the opportunities as we brought together the pieces of what are now called Enterprise Business Services we brought our IT, our service function, our product management, we have an opportunity to further create integration and state substantial G&A. Also think about the automation opportunities. All of us want more of a self-service relationship with anyone that we do business with. And so we see a significant opportunity to do that. Now when we look at our systems going forward, as we have described, we do have opportunities for additional consolidation. We have more systems now than we will have in the future. And one of the things we are investing in is ICD-10. So you will see that in terms of our SG&A, but we're using ICD-10 in and the need to comply with that as some of an impetus for us to get these well-executed consolidations under way and executed before ICD-10 compliance is required. So I think our opportunity is sizable in terms of SG&A. We are making critical investments along the way, so we're making investments in ICD-10. We're making investments in self-service and automation, and we're seeing the benefit of that as we go.

And I forget, have you cited the ICD-10 spend in '11?

Doug, we've said that between now and 2013, we'll be in the several $100 million-plus range. Obviously, a significant portion of this year and next year because by October 2013, we have to be ready. So even with the G&A cuts that you've seen so far in the efficiencies we're evolving, we are covering the ICD-10 investments this year. To Angela's point, though, just keep in mind those aren't onetime, they're going to repeat next year, they're going to repeat in 2013. Now hopefully, we'll all benefit from that come 2014, but I'm sure there'll be a new regulation that we have to implement, but we'll see.

Your next question from the line of Justin Lake from UBS.

Wayne, first question just quickly to follow up on the guidance. So you guided up $0.40. You beat by $0.60 and then you actually took up some of the -- or improved some of the below-the-line items. So it looks to me like there was $0.20, $0.25 of EPS here or a little more than $100 million of operating, gained moderation in guidance implied in the remaining 3 quarters of 2011 versus your previous plans? I'm just wondering if you could kind of walk us through those components and where you kind of see the changes and the conservatism there?

Justin, let me speak to that first, and then I'll turn it over to Wayne. I think it's appropriate at this point for us to take a cautious outlook for a number of reasons. You'll see in the membership forecast, I think some cautiousness about employment level. So while we have, through the recession, have the ability to retain Group, in the past, we had seen in Group declines because of employment levels. So as we look forward in our forecast, I think we've taken a cautious outlook in terms of what that means. We also described -- we've seen better-than-expected trend experience in the first quarter. But we are expecting a rebound. Now we think we've priced appropriately for that rebound, but we're cautious about our outlook. As you described, we reflected some of the global line, and I'll let Wayne speak to that more specifically. But at this point, we think it's appropriate and cautious for us to have upped the guidance in the way we did.

Yes, Justin. To Angela's point and I think clearly, it's evident that our cautious view is that the rebound will, in fact, occur, and that we'll see that for the next 9 months of the year. Obviously, if that doesn't occur, that would generate upside to our expectations. But right now, we're taking that approach relative to some of our businesses, some of the cautious view there relates back to some of these drugs. And as I mentioned when you think about Makena alone and the impact on the expecting mothers within our State Sponsored business, that would be quite significant. Clearly, we will take a number of initiatives to try to drive that cost down, same as some of the MS drugs we've seen out there, we're going to take a number of initiatives. But to take a cautious view and go ahead and bake in expectations, without initiatives, is what we've done. So I think it's a prudent view at this point. It's still early in the year, but cautious at this point. In terms of below the line, we have run rate a number of that. But I think it's clear that if things were to continue as they did in the quarter, we can potentially do better there as well. And we have not assumed in here any additional authorization from our board for any other capital deployment at this point either.

And then secondly, I don't think it's a secret that your cash earnings, ex amortization, are significantly above the GAAP numbers. And the headwind here for you, looking versus your peers is meaningfully greater. Just given there's been a migration of companies in the health care sector -- in other health care sectors, to focusing on cash earnings from a reporting basis. I'm just curious whether you consider making the switch yourselves.

I mean we've thought about it, Justin. Obviously, all the data points are there. Obviously, the reasons we buy back our shares so aggressively is we think it's really what matters in the businesses, the cash earnings not the GAAP accounting. And so, it's something we could switch to. But clearly, the data's all there to allow investors to see that, but it is something we've been evaluating.

Is there anything that keeps you from doing it, Wayne?

No.

Your next question comes from the line of Christine Arnold from Cowen and Company.

With respect to the medical trend, it looked like you saw an increase in acuity in Commercial. Is this consistent with what you had been seeing? And can you give us some sense for what leading indicators you're watching to see if Medical trend will uptick, and how real time your data is?

That's a great question, Christine. I would say a couple of things. Over the last couple of years, we have really improved our level of transparency into the data and into the trend. And we are specifically very focused on making the data more real time. Over the last couple of years, we have migrated from multiple data warehouses into a single data warehouse called, EDWard, that is actually available on a daily basis in terms of trend. So we are looking at a number of leading indicators, some of which correlate better to actual trends than others. So we can look instantly, basically, at the RX trend. And as Wayne has alluded to here a couple of times, we're seeing some uptick there. And that is a leading indicator for us in terms of overall trend because it is so real time. We look at admits. We look at preops. We look at a number of different indicators in terms of our expectations about trend. Obviously, we've been cautious because we saw trend come in better than we expected in the first quarter. When we do look at issues like the fact that days are slightly up, acuity is slightly up, we make sure our medical management efforts are attendant to those realities that we see. So we think that contributes overall. We have to have more specific initiatives when it comes to that in terms of how to deal with each of those cases relates to more specific initiatives. But I would say, we're doing a good job at the medical management side of it as well and seeing those indicators. I don't know if we have more specificity on that, Wayne?

The only thing I would add, Angela, is Christine, clearly, when admits per 1,000 are down, but we start to see days per 1,000 actually go up slightly, it does cause us to continue to evaluate certain procedures and its historical trends to see if maybe more normalized procedures are getting longer stays and digging in as to the why's behind us. Obviously, in a lot of cases, there's always very legitimate and reasonable reasons. But in some cases, it does put up a red flag as to why what appear to be typical procedures that have shorter stays are now getting longer. And so in those cases, we're going to dig in deeper, and it's a provider-by-provider basis. And we're going to understand it and make sure we represent our members the way we're supposed to and ensure that they're not overpaying for stays that aren't necessary. So I would say that clearly, we've got our typical medical management. But at the same time, you do have to look at some procedures even a little more detail than you did in the past, just relative to the historical expectations.

Any change to California loss protections?

No, we're still going to lose money on the Individual book in California, but we have substantially mitigated those losses compared to last year.

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

First question, just if you have an update on whether you're still assuming a $300 million impact from the MLR rebate accrual or whether you've revised that at all? And then just, Wayne, if you could tell us, which balance sheet account you've decided to actually establish the rebate accrual in?

Let me speak to this accrual question and the $300 million that we were very clear about. When we talked about that last year for 2011, we said if we didn't do anything, we would have a $300 million accrual. Now part of looking at that rebate -- and you have to look at it on a very detailed level. So you have to look by legal entity, by state, by market, by business and understand where it is we had an expected rebate. Because we have an opportunity and have had an opportunity to strategically then price in those very specific places, anticipating a rebate and taking advantage of it strategically to get good business in those geographies at the right price. As a result of that, the accrual for 2011 won't be at that magnitude because we'll use it most effectively and hope we can use it going forward effectively in pricing and see it in terms of overall membership. So Wayne, do you want to get more specific than that to the second question?

Scott, I would say that right now, for the purpose of PL's [ph] reduction of premium in the offset is currently in unearned income, because we believe that's revenue that we ultimately will not be able to retain that's why we've recorded it. As Angela indicated, while that was our original estimate and we've made certain decisions strategically around how to address that $300 million, clearly trend is coming in better than expected. So relative to our original forecast, we are actually accruing more rebates right now than we had originally planned for at this point. But we will strategically evaluate that throughout the year, on how best to deploy those relates to the members where they belong.

And let me be clear about pricing. We think pricing is rational in the marketplace. You can see in specific segments, in specific states, where people were experiencing a lower-than-minimum medical loss ratio. And the pricing reflects that, ours does, as well as the competition's.

So just to size the number. So if we have, I guess, the positive element of the proactive actions that you've taken to limit the rebate exposure, but then you have the offset in terms of med cost coming in more favorable. Where would you specifically estimate, I guess, sort of where that adds up to? Does it sound like more about $250 million now or do the offset of the more favorable trends keep that more at $300 million area?

Scott, it's a little hard to peg a number for a couple of reasons. One is there are still definitions being evaluated right now. I mean literally still being evaluated, what should be included or not included at the federal level. And so with those definitions, that could change it quite dramatically. Two is depending what trend ultimately does, it could swing it up or down. So I don't think our original expectations regarding the 2010 are really an outlier, though. I think that, to the extent that the lower utilization would persist like we saw last year, I think we would still be in that similar range. But all in all, I think it's higher than expected at this point, but that's primarily due to lower-than-expected utilization in the first quarter.

And then just a follow-up question just on, if you can talk about how in group membership, I guess, separate that from the policy change for age 26 that progressed in the quarter relative to your expectations? And it sounds like your macro input at this point still assumes really no improvement in unemployment. I just want to confirm that just given that you are assuming attrition for the rest of the year.

I think it's important for Ken to go over the commercial membership as well. We've tried to address it in some of our remarks about really understanding where we are because we're feeling good about where our Commercial membership is. Ken, you want to speak to that?

Scott, overall, we feel very good about the execution on our National, Local and on our Specialty strategies, as well as you can see by the numbers. National grew by 6.2%, or $727,000. Local, what we felt really good about is while it's only up $4,000, it was up $89,000 in Blue and $84,000 offset because of our non-Blue business and some actions we were finalizing with those businesses. Age 26 was about 1/3 of it. And going into our plan, we expected some age 26, we knew there would be some changes. But it did come in slightly more membership. That's not necessarily good membership, and that's tied into our financials going forward. It's good overall, but it's covered on our fully insured pricing and on our ASO business there was a bit more than we had anticipated. The in-group change is flattening. We still assume that the economy will impact us going forward, and we have been losing business on in-group change, offsetting it with sales and better retention. But we anticipate that we'll continue to have in-group change losses moderating by the last quarter and hopefully, turning better in 2012.

Scott, the one thing I want to emphasize here because you may hear a lot of different discussion points within the industry on this. But it's important to recognize that a lot of slice business, we won this year. And so, that typically shows up at in-group change. But you have to pull the slice business up first because that really, to us, is a new sale. And then, the age 26 is going to make in-group look very positive, and we think that's a little misleading as well, so we pulled that out. When you bifurcate those 2 components out of it, in-group change is down slightly, so we're not really seeing the benefits yet of a recovering economy or employment at this point. And so we've gone ahead and taken a cautious view and assumed that, that trend will continue for the next 9 months. Obviously, if that doesn't, that won't improve as well.

Your next question comes from the line of Josh Raskin from Barclays.

I wanted to stick with the membership trends. Just -- it came in a little bit there -- obviously, a lot better than we were thinking, even better than you guys were thinking. I think I understand the in-group dynamics and the age 26 stuff. But I guess the question really is, where is this membership coming from? What sort of competitors are you taking this share from? And then, was any of this a result of sort of a rebate strategy and in terms of selective pricing changes or anything like that. Do the rebates have anything to do with the membership gain?

Let me speak to this, and then I'll let Ken be more specific because the rebate strategy pricing is very specific, very granular analyses around what geography and what legal entity we're in. And it reflected the value of the existing medical loss ratio versus the mandatory minimum medical loss ratio. But let me say broadly, and I think we've seen it in all of our books of business, which is, I think as people have gone through the recession, there's a return to real value, and we are a value organization. We deliver to our customers this compelling value proposition. We have the deepest discounts, the broadest network. We still have lots of choice with value. I think as we go longer term, we're going to have to have payment innovation and narrower networks in certain places. But we deliver the greatest value and choice in the marketplace and, we're seeing that as being what the customer really wants and needs and delivers to their employees if they're an employer group or individuals seek in terms of the experience they have. So Ken, why don't you be more specific about where you're seeing it's coming from?

Josh, I'll try to address both National and Local. On a National basis, we did experience a lot of growth. And I would say, our customers are looking for good financial value with our discounts, strong clinical programs and good solid service. We're generally seeing one other carrier win along with us and 2 others who probably -- at least in our states, that were winning far more than our fair share. And we're pricing very disciplined, but it is reflective of the financial value we bring to our clients through our discounts. On the Local basis, it does vary by market, but you do -- we need to remember that a couple of carriers went out of business in the first quarter and/or sold themselves to others. That created some opportunity, but we're basically winning in those areas, both from provider-owned groups as well as our fair share from other National carriers. And again, it's based on a value proposition that we feel as we've been executing on, and we've been able to demonstrate our value to our clients and to our brokers.

And Josh, the one thing I want to highlight is that if you adjust for the municipal conversions, again we had 2 very large municipal accounts last year that were fully insured that went to ASO this year. And those are really cost-plus accounts and destroyed our PMPM. And you bifurcate the age 26, which again has no revenue, but has no claims either on the ASO. And if you had claims, it gets passed back on. Our revenues on a PMPM basis are actually up on our National books. So I want to be really clear. We are winning based on the value we bring. We're actually getting a premium for that value.

And then just so -- just so I understand, I did not hear anything about rebate strategy. So it didn't sound like there was a reduction in price to avoid rebate payments that help the specific markets that wasn't really a factor. Is that fair?

Well, I think it's fair to say, though, that we had a combined strategy. We had a commission strategy, which we've been very vocal about. We thought it was important that the brokers, who are an important part of our distribution network, not have shared responsibility, but not get impacted too much in year one. It was also a strategy of, if you had planned for certain rebates and you knew they were going to be significant, it was better to push that through in pricing today versus to wait to the new year. And so we did some of that. And I think, Josh, when you look at the Commercial margins, you can see they had actually expanded. So I think the strategy's working, as planned, getting both the membership, as well as growing good membership.

And I'm sorry just a quick one on Penn Treaty that came up on the United call. I know you guys have put it in your K and Q, previously. But it doesn't sound like you've made an accrual or not forecasting one going forward?

Yes, I think we need to be really clear about the Penn Treaty situation. So Wayne, you want to take people through both the history that we've described and where it is now?

Yes. Josh, I appreciate you raising this question because I want to make sure that this molehill doesn't become a mountain in people's understanding. Let me first emphasize that while Penn Treaty is headquartered in the State of Pennsylvania, if Penn Treaty is declared insolvent -- and that's a big if. They're in the courts for a reason because parties see the world differently. And currently, they're in rehabilitation, which could very well continue. If they continue on rehabilitation, there'll be no assessments. They just run the course as they normally do. If they are declared insolvent, companies will be assessed, not based on state of domicile, but based on where Penn Treaty's business was written, which basically means that pretty much, as long as you're in any state in the union, you're probably going to get some degree of assessment. And the more states you're in, the larger the assessment you may get. That being said, it is probably going to have close to a 0 cash flow impact over time on anybody because assessments generally: one, you get premium tax credits when you are actually assessed the cash. So while you may take an accounting charge, if they're declared insolvent, you actually don't have a cash charge until they actually ask for the cash, which could be up to 20 years. And when they do ask for the cash, you generally get a premium tax credit in most states that year, which means you have no cash flow impact. In addition, under the MLR rules, assessments currently are part of the MLR calculation, which means there are actually reduced rebates as well. So we're not as concerned about the Penn Treaty. We've raised it because it may have an accounting impact, if declared insolvent. But I think from a pure cash flow perspective and long-term cash flow perspective, we just don't really see it as a big issue right now.

Your next question comes from the line of Matthew Borsch from Goldman Sachs.

Yes, you've referred to the 2012 National Account opportunity. Can you -- and that you see or you believe employers are continuing to offer fewer carrier choices. What else are you seeing in terms of employer demand interest in say, narrow networks, the intensity of competition relative to prior years? Can you just elaborate on how the season is shaping up?

Yes, I'm going to let Ken speak to that, Matt. But I think it's important to know one of the things that I think the team is doing exceptionally well is this consultative conversation about total cost of care and admin as a separate component. Our value proposition is so compelling as an organization and as a Blue system. I think that, that is the conversation that we're having with, not only the procurement people in large National Accounts, but with their CFOs and sometimes their CEOs as well. And the ability that, for them to consolidate with one or fewer carriers, which we've experienced over the last couple of years, creates for them, as well admin savings in administering those benefits in their large organizations. Then I think we've done a really good job partnering with these National Account customers and delivering and executing on our promises in terms of delivering those savings to them. So Ken, you want to speak to 2012?

Yes. Matt, as you know, we had a strong, real strong 2011. 2012 right now, I would say is going to be very active. In fact, 2011, a lot of clients seemed to be holding off because they were seeing how health care reform was going to impact their programs, and there wasn't as much bid activity. We just won a very good fair share of what was out there. 2012 is going to be more active for all of us. That's both on new business as well as some of our business bidding and us retaining it, meaning just a lot are going to RFP. We feel very good about 2012 going in. There's significant opportunity. There is -- the trends that you asked for, there are a couple of very large cases looking at carrier consolidation. Like Angela had mentioned, we won a very large telecommunications firm a year ago. And together with them, we very, very successfully mitigate a trend with our programs of consolidation and the programs we've put in place. What we're seeing this year is not as much narrow network requests, very focused on clinical programs and engagement. And we have an integrated healthcare program, which we have close to 1 million members on. In our National Account area, it is a higher cost program, but it does -- all of the early results look very good on mitigating trend. And that is where the focus seems to be, consolidation and very focused on clinical programs.

In those programs, I think what we've really achieved and been able to show is additional engagement with the members. So we've had these programs around, and we've seen real results in terms of the way we've approached the member, the way we engage the member and experience that they have in health care is changed by that.

If I could just ask a related question. The prevailing rate level of rate increase on the risk side, would you say that it is lower or higher than a year ago? And I'm referring sort of both to your own and generally, where it is in the market. I realize its all over the place, but with the mix of factors, can you give us any generalization?

Let me speak again to it, generally, and we'll see if we can be more specific. I think it's pretty consistent. We think it's been very rational. It's been rational from an enterprise perspective and from a competitive perspective. It's very similar to what we were experiencing last year. I think the buy down experience is also very similar to what we've been experiencing. So to those questions earlier about, are people going to narrow network? No, we think they will over a longer-term period, and that we don't need to deliver those over a longer term. We'll need to continue to execute on these innovations. We know affordability is the challenge, and we can't sustain and shouldn't ask our customers to sustain these ongoing increases in health care costs. We need to show more value for that. So we think it's a very similar -- the market's reasonable. The long-term goal is to address affordability and make sure that any increases in these costs are really value-oriented increases. So are they really changing the delivery system in a way that considerably improves the value?

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

Obviously, the Commercial margins were better than we expected this quarter. How do you view the current level of Commercial margin? Do you think that, that's sustainable going forward? Or do you feel like going forward you have to give some of that back in better pricing? We're hearing a lot of questions about the 2012 pricing cycle. I know it's sort of early, but how do you feel about sustainability of Commercial margins?

Let me speak to it generally. One of our goals really is to make sure that the margins reflect the value that we're creating. We also know we have responsibility in terms of our G&A, which we are very serious about in terms of managing G&A and creating value in terms of overall margin contribution, but more importantly, affordability. We think that's incredibly important. So I would say it's difficult to say because you have to look at state-by-state, line of business, be very granular in your view in terms of where margins are today and where they might be. But once we've priced to the MLR, we think there's some stability there.

The thing I would add, Kevin, is one of the things we hope is differentiating us is that, while trend helps improve margins, if it comes in lower than expected, you're really pricing for what you really expect. And so we don't think that organizations should be banking on that, right? To us, the real value that we're going to get from margin expansion is by driving total value to get top line membership growth, which we're getting and more importantly, then doing it while leveraging the G&A, which we're doing. So from our perspective, could these margins over time be sustained? The answer is absolutely yes. As long as we keep executing what we're doing, which is keeping our G&A not only under control, but driving it down while driving top line.

And then just coming back to the previous question about membership in kind of the 2012 selling season. Clearly, a focus on Medical Engagement and the Consumer buy in, and it sounds like it's a trend going into next year. I would just feel like -- although, clearly, you guys are able to do that, when you start competing on things like that, that's just a little bit softer, in some ways, harder to prove exactly where the cost savings are coming from. Do you feel like that any way hurts your ability to grow membership going forward? Because I would think that, in an environment like, it seems like we've seen over the last year where it's focused on provider discounts, your scale just clearly blows away everyone else. And it is a clear value proposition. Would you just start going to softer things, like Consumer Engagement. It seems like everyone can make an argument if they do that. How do you really differentiate your product in that environment? Or is it just a matter of hey, we still have the lowest cost per unit, and we can medically manage on top of that?

I want to speak to that because I think the competitors tried historically to say that they could differentiate around medical management to the point of mitigating our discount advantage. And they can't do that now because our medical management efforts, our engagement levels are all equal to our better than the competition in various programs. And so they're unable to differentiate themselves relative to our discount advantage. And I think we're continuing to execute well on those. I think the data supports that. I do think it's our job to do that and to prove that. And our analytics are there to do that. So Ken, are you seeing that in the marketplace as well?

I am. And Kevin, I would like to, because just to reaffirm something you stated and I didn't say earlier is discounts are still king. And the decisions that are being made, I was using the foundation going in as discount. And it's a direct attribution of what savings we can provide. We've gone through with all major consulting houses to -- in identifying what methodologies should be used in determining in-network utilization and discounts combined. And right now, the proof is in winning in the market. Now the clinical programs in addition are a must have. You need to have the discounts first, and you need to be very competitive with your clinical programs and engagements. We've significantly improved our programs over the last couple of years and feels that we can display our results. The one large firm, I told you before with the consolidation, just has wonderful results and is a videotaped reference for us to other clients. We've proven that we can save money for our clients.

I would say our reputation in the marketplace is that we prove it, and then we talk about it before others might talk about it. And then maybe or maybe prove it or not. So I think our conservatism comes through in that sales engagement, and we are delivering, and we are proving it in the conversations and in the results that we're delivering to the accounts.

Your next question comes from the line of Tom Carroll from Stifel.

Just one quick one here. If we isolate just the enrollment from the age 26 change, how does their MLR or cost trends compare to the average of the Commercial book? And are there any observations you would make about it in terms of the types of claims you're seeing flow from this new group?

Wayne, do you want to speak to that?

Yes, Tom. First of all, the claims experience is very low from this group. I mean the majority of these lives are healthy lives. If you look at the current unemployment levels out there, the majority of the unemployments in the 23 to 26 years that are coming out of college, and their parents are just adding them to their policy. We have history on many of these individuals because they were covered under their parents' policy before, now they've come in. The important thing to recognize, too, is that a lot of that age 26 that we saw is really in FEP, which is cost plus program. It's in National Accounts and large Local Group ASOs. So ultimately, there's really no dollar impact on a claims basis to us. Relative to fully insured, we actually believe we appropriately priced for it. And I think you can see that in the results as well that we did appropriately price for it. But in general, it usually is a lower MLR. Relative to fully insured, we already assumed that in our numbers and in how they're calculating our rebates. So I think the MLRs for the Commercial are fairly good. But to the extent that experience comes in better, you could have a higher rebate.

I do think we keep in mind, though, that even with the age 26 dependent, that those who have significant health care needs will be the first to sign up for the dependent coverage because otherwise, some of their choices would be outside of their family policy. So we did anticipate that level of utilization in the pricing that we put in for fully insured. And then as Wayne described and as often people commonly think, other, too, are younger dependents are getting on their parents' policies to make sure that they have the security that, not only they, but their parents want them to have.

Unique thing about this population is it's generally extreme. So if you get added, you're either very, very sick or ill with chronic conditions and couldn't get coverage and you've been added to your parents' policy, or you're extremely healthy and your parents are just putting the financial security around you in case something happens.

And your final question today, comes from the line of David -- Dave Windley from Jefferies & Company. David Windley - Jefferies & Company, Inc.: Follow-up question on membership. You're assuming attrition over the balance of the year. You've also talked about RFPs in State Sponsored. I guess I'm wondering if you could drill in with a little bit more granularity about your expectations by book of business and where -- if you're assuming kind of that gross amount of attrition from just Commercial or if you're expecting more than that out of Commercial and are assuming some gains in some other books of business?

Ken, do you want to talk a little bit more about what -- the cautious outlook we've taken around Commercial?

Yes, Dave. I think good separation is -- it's a good question because by line of business, our National will actually go down between now and year end, primarily because there's not a lot of RFP activity. There is a lot of impacts with the economy and outsourcing. And National, normally, reduces on a monthly basis, and we make up for it during the RFP processes. So we'll see National go down some, not due to competitors, but because of natural attrition that occurs during the part of the years that are not RFP season. So Local, we are being cautious in assuming that will go down some. That is because of the economy and the impact of again, a jobless recovery at this point. We're starting to see some economic indicators that are improving, but we're not putting that. We've not seen the jobs improve yet, and we've not put that into our assumption. And Brian, do you want to?

Sure. With respect to your question on the Medicaid RFPs, the vast majority, almost all of that activity is forward focused for some time in 2012. So it shouldn't have an impact on our outlook for the remainder of the year. With that said, certainly, the economy, what's going on in the economy, the recovery of the economy, there is an adverse membership impact relative to Medicaid ranks grow as the economy is declining. In terms of Senior, with the selling season, obviously, a lot of the uptake is in Q1. But we do have -- we have revved up our agent membership expectations. We are seeing growth in our MedSup book for the first time in 4 years. We saw a nice uptick 13,000 of our 73,000 net membership gain was attributed to MedSup. We're seeing some continued good uptick in agent, and we have that expectations throughout the rest of the year. David Windley - Jefferies & Company, Inc.: And a quick follow up then. Do you have line of sight to any additional conversions of fully insured accounts to Self-funded?

Dave, that's a good question, and Ken can speak to it specifically because frankly, less conversion has occurred than we may have anticipated. So Ken?

We do anticipate over time that there'll be conversion in smaller group business to ASO. That is not accelerated while there are products out there and there is some activity in that area. It's been actually a smaller transition than we've expected, although we have products coming out in the smaller group ASO. To be active in that market would be appropriate, stop loss coverages and others to help our margins. On the large group, we do not have a major group at this point that's out to bid with the transitioning from fully insured to ASO. Now that could come up at any point. But usually, these municipalities are other fully insured business that may explore that based on state taxes or other items that may increase to the fully insured business. We've not -- we do not have any active business right now that -- major business that's in a transition mode.

Thank you for that question, Dave, and thank you, all for your question. In closing, I want to reiterate that we're pleased with our first quarter performance, and we're optimistic about the balance of 2011 and beyond. We expect continued success by delivering on our mission to improve the lives of the people we serve and the health of our community. We're confident that as we execute and fulfill this mission, we will deliver excellent overall healthcare value. As we focus on our members and the communities in which they live, we increase the opportunities for our associates and we enhance value for our shareholders. Simply said, when we take care of our customers, we take care of our shareholders. I want to thank everybody for participating on our call today. Operator, would you please provide the replay instructions? Thanks.

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