Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint second quarter conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management. Please go ahead.

Good morning, and welcome to WellPoint's Second Quarter Earnings Conference Call. I'm Michael Kleinman, Vice President and Chief of Staff. 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 second quarter results, and then we'll discuss our revised full year 2012 outlook. Wayne will then offer a detailed review of our financial performance, capital management and updated guidance, which will be followed by a question-and-answer session. Ken Goulet, Executive Vice President and President of our Commercial Business, and Raja Rajamannar, Executive Vice President of our Senior Business and Chief Transformation Officer, are available to participate in the Q&A session. During this call, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP are included in today's press release and available on our company website at www.wellpoint.com. We will be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC. I will now turn the call over to Angela.

Thank you, Michael, and good morning. I'm going to start by discussing the quarter and some of the dynamics in the marketplace that have contributed to our decision to reduce our full year 2012 earnings guidance. I'll then turn the call over to Wayne for a more detailed discussion of our results, medical cost trends and the changes to our outlook. Earnings per share in the second quarter of 2012 totaled $1.94, which included net costs of $0.10 per share. These net costs included expenses related to a litigation settlement and the closing of our 1-800 CONTACTS acquisition, partially offset by net investment gain. Earnings per share in the second quarter of 2011 were $1.89 and included net investment gains of $0.06 per share. Excluding the items in each period, adjusted net income was $2.04 per share in the second quarter of 2012, an increase of 11.5% compared with adjusted net income of $1.82 per share in the prior year quarter. While our second quarter EPS results improved from the prior year and are ahead of our plan through the first 6 months, the combination of lower enrollment and slightly higher medical cost trends are driving a reduction in our full year 2012 outlook. We're disappointed with the need to lower our guidance, but believe it's the right action to take, given the challenging marketplace we see, our commitment to maintaining pricing discipline and our intention to continue investing for the strong future growth opportunities ahead of us. We now expect full year 2012 net income to be in the range of $7.30 to $7.40 per share. This represents a reduction of $0.25 to $0.35 per share or approximately 4% at the midpoint of the range from the guidance we gave on our first quarter earnings call for full year…

Thank you, Angela, and good morning. I'm going to review the results as we usually do and then move on to the outlook in light of the issues raised by Angela. Premium income was $14.2 billion in the second quarter, an increase of $247 million or nearly 2% from the prior year period. This was due primarily to growth in our Senior membership, including CareMore, and premium rate increases designed to cover overall cost trends. Premium revenue was modestly below our expectations for the quarter, which reflected lower fully insured membership resulting predominantly from a more intense overall competitive environment. As we've said in the past, we do not sacrifice appropriate business decisions for short-term membership gains, and we believe this strategy is in the best long-term interest of our company. Administrative fees were $978 million in the quarter, an increase of $20 million or 2% from the second quarter of last year. This reflects our strategic decision to obtain pricing in line with the significant value we provide to our ASO customers, which drove higher administrative fee revenue despite a reduction in self-funded membership. The benefit expense ratio for the second quarter of 2012 was 85.4%, which represented a decrease of 30 basis points from 85.7% in the same period of last year. This was driven by the Senior and Local Group businesses and was partially offset by an increase in State Sponsored. In Senior, we anticipated that the ratio would decline this quarter due to the product changes we implemented in certain markets for 2012. In addition, CareMore's benefit expense ratio is lower than our historical company average and therefore helped improved the overall benefit expense ratio. In Local Group, the decline in the ratio is driven primarily by changes in prior period reserve development. We experienced favorable…

Operator, please open the queue for questions.

[Operator Instructions] Your first question comes from the line of Justin Lake from JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: Let me start off with a couple of numbers questions. Wayne, you talked to costs trends being a little bit higher, but I didn't see really any change in the actual components. Can you walk us through what you saw in the quarter, maybe break down April, May and June, what you specifically saw in physician and outpatient? And also, maybe you can just walk us through the 2013 headwinds and tailwinds once you do that.

Justin, I think Wayne is going to do that for you, but keep in mind -- I know there's a lot of focus on the trends, but as we tried to emphasize in our remarks, this is driven primarily through membership, which Ken can break down for you too. But we'll give you the -- more detail on trends.

Yes, thanks, Angela. So, Justin, to Angela's comment relative to medical trend, in the first 6 months of the year -- let me start first with our guidance, which was originally 7 plus or minus 50 basis points, and we're maintaining that guidance. When we generally provide a guidance range, we're usually using the midpoint as our premise for putting the brackets around the plus or minus 50 basis points.

And on that, Justin, we have to remember that our trend number relative to others in the industry might be an apple and an orange. We use a group trend, fully insured group trend. Others combine other segments in their trend. And trend always relate to where you're starting from as well, so an apples-to-apples comparison is not appropriate. But go ahead.

So relative to that expectation, we still believe we'll be in the 7 plus or minus 50, but our bias is towards the upper half of that range, not to the high end but towards the upper half of that range. And the reason for that bias is, and we've taken that bias in our outlook for the year, was that in the first 6 months of the year, we really saw expectations aligned with our trend expectations that we had planned for and priced for, with the exception of the month of May. And in the month of May, we saw higher-than-anticipated cost both in physician visits and outpatients. And I would size that at around $50 million or so is what we saw, higher than our expectation. We did not see that repeat in June, so said differently, we not only saw that elevated level return back to more normal levels, but we didn't see it improve, meaning that while we got back to our expectation in June, we did not recover May. What we've decided to do though with our guidance change is because it's predominantly an enrollment issue, we thought it would be prudent though to at least consider the fact that June could repeat in the back half of the year -- I'm sorry, May could repeat in the back half of the year. We have no evidence of that at this point in time, but we think it's a prudent thing to at least look at our trend from a forecast perspective and give you as much transparency around why we're making the decisions we're making. So if that doesn't repeat, then obviously we could perform better, but for now, we think it's prudent to take a cautious outlook. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, great. And those '13 headwinds, tailwinds, Wayne?

Yes, I think the thing I would say right now, Justin, is we're obviously not in a position to give guidance yet for '13. We've made a number of investments though in our Senior business that we expect will create tailwinds for us next year. We're obviously making a number of investments though to prepare ourselves for the exchanges that are coming in 2014. And so I see more investment dollars going into '13, incremental to probably what we're doing this year for exchanges, that are going to be important, and we're going to continue to be building out for the dual expansions. So from a headwind-tailwind, Justin, it's a little bit premature at this point to provide those, but I would say nothing beyond what you and others are fully aware of, which is the dual-expansion preparation for the ACA. And in a number of our businesses, we do expect to see regular ongoing improvement, including Medicaid and Senior.

But importantly, we expect that the Amerigroup deal will have closed, and that creates a diversity in our revenues and opportunities and help secure some of the dual opportunities as well. And we continue to be committed to returning capital to shareholders. So even with our Amerigroup announcement, we plan to continue to provide the kind of share buybacks that we've committed to you in connection with that announcement. Justin Lake - JP Morgan Chase & Co, Research Division: Great. And I just have -- my follow-up is on strategy. And first, Angela, I just wanted to confirm something. Is it fair to assume that the board was aware that the company was off its financial plan when they voted to approve the Amerigroup deal?

Justin, let me say this about where the board is and the strategy. I think it's important to know that we were beating plan for the first 6 months of the year. And what we are doing in terms of providing guidance is -- we do think we're the first company that sees these changes in the marketplace, and we tend to be the first one to tell Wall Street about them. And so what we're doing here is being proactive. We think we have had very consistent performance in our inventories, our auto-adjudication rates, and so our analysis of what is in trend and in our experience is important. And we think we've seen changes that affected our disciplined pricing posture and we've stayed disciplined, which we are seeing in the enrollment numbers. So throughout the first 6 months of the year, we're always very transparent with our board in terms of where we are and what we think our prospects are. As I said, we meet -- we met our plan for both the first and the second quarter. In fact, for the first half of the year, we're exceeding our plan. The strategy for Amerigroup was not a knee-jerk reaction either. The strategy is to diversify our revenue stream through a number of things, one is being in a position to service not only seniors but frail seniors through CareMore. We're strengthening and expanding our Senior business. We're moving into Medicaid through the acquisition of Amerigroup and giving us an opportunity uniquely in the marketplace between Amerigroup and CareMore coming together to serve dual eligibles. We're growing unregulated businesses like 1-800 CONTACTS, where we have a right to win it [ph] because it's what the consumer will need and associate with health care in the future. And we're preparing for exchanges. So the board is very involved in our strategy and understands where we are really throughout every period. Justin Lake - JP Morgan Chase & Co, Research Division: Got it. So this is less a performance issue and more conservatism in your mind, in the way you see it, in your discussions with the board, that they're content that the performance has been in line with their expectations and they are excited about the strategy.

I think it's clear that they're excited about the strategy, no doubt about it. And being the first company to see the changes and then take the posture of pricing -- to do that is important, it's important to us and it's important to them as well. And they've been very supportive throughout this process and throughout the process of the CareMore, 1-800 and Amerigroup acquisitions as well.

[Operator Instructions] Your next question comes from the line of Scott Fidel from Deutsche Bank.

First question, just one, I was hoping you could drill a bit more into the pricing environment in Commercial and talk about, first, is the pressure that you're seeing in those 3 markets that you cited, is that being driven more by the for-profits or by the nonprofits? And then maybe just give us a little more detail on California, specifically, and then on Georgia, since I think this is the first time that I've heard you guys mention Georgia. I know you had talked about California and Virginia previously, but I think this is the first time I'm hearing Georgia.

So, Ken, why don't you break down the enrollment?

Yes. Well -- and I'll start off, Scott. I would say we have continued disciplined pricing, and the market in general is remaining disciplined. There are differences this year as last with rebate positions, MORs, the -- but we use a forecasted medical cost and make our decisions off that. There is some more pressure in the market to indicate it. To answer specifically, in Virginia, there was pressure throughout both mainly large group, with both some for-profit and not-for-profit. The not-for-profit, which made an impact, really have changed -- from what we can see in the data we have, has changed their pricing. And usually we wait things out, we make sensible decisions and over time, it works for our business model. In California, there is an impact from one not-for profit. It is the one area where we compete with another Blue, and there's slightly higher pressure in that from the other Blue. And then in Georgia is a mix of both for-profit, not-for-profit. But it really is -- and we'll find when the filings come out in the next -- in this quarter, we'll find how much is directly related to MORs and which are not. But we feel pretty comfortable it's rational pricing, but impacted by MORs and rebates.

Okay. And then my follow-up question, wanted to get your response to the CBO report that came out yesterday, where they updated some of the ACA forecasts for the coverage expansion post the SCOTUS decision. And particularly, they took down their view on the Medicaid expansion by around 6 million lives, but added around 3 million lives to their view on growth in the exchanges. And I wanted your thoughts on how they're seeing it sort of post-SCOTUS and whether you agree with that assessment?

Well, let me say in the context of the discussion we had post the Amerigroup announcement and our view of the Medicaid business, we think there's organic growth opportunities in the Medicaid business independent of the Medicaid expansion. Because when you look at the penetration of managed care into Medicaid, it's woefully low compared to the commercial market, for example. And so as markets -- and comments were made yesterday in response to the CBO comments that as state budgets are more constrained, it may in fact create more organic Medicaid growth opportunity. We were appropriately cautious when we looked at the Medicaid expansion opportunities post-SCOTUS and took that into account in terms of our model. And then we also believe we're uniquely well-positioned when -- as the pilot programs go forward in terms of dual eligibles, and not only because of Amerigroup, but because of the unique capabilities we have through CareMore, CareMore's position in California, where the pilots are cautiously but going forward and in the places in which CareMore is already established. And that, combined with the footprint that the Amerigroup transaction creates for us, we think those are critical things. The least of which is when you think about the future of exchanges and having people move in and out from the exchange to Medicaid, we think having a position in both of those markets will be critical for the future. So long story short, Scott, to say, our model we think, is a good one and was not impacted by what the CBO said yesterday.

Okay. And then on the exchanges, do you think that the growth could be as substantial as CBO is forecasting? Clearly that's an area where there's a lot of uncertainty about, sort of, "if they build it, will they all come", or will there be less enrollment in the exchanges than some of these folks are modeling?

We are looking at 2 things in terms of a long-term plan. We're looking at our expectations about what the uninsured may do relative to the exchanges and the subsidy levels and the way in which the regulations come forward to further define what the requirements are for coverage. That's still pretty important. But as we've done our studies, we have looked at the potential for being effective in the exchanges. And we think we're differentiating in that way in that the brand is very powerful. We can design networks and products that will meet affordability points for the customer going forward. So at the same time, we're looking at the employer market and making sure that they have a number of alternatives. Some may choose that their employees would participate in public exchanges, but we also have an opportunity for them to go in private exchanges. So we think there's a number of paths that the uninsured and these who might be eligible for subsidization in exchanges or through their employer can access private exchanges. And so I think it's difficult to say what -- we'll talk about it a little bit more later when we do the 5-year plan and bring that forward in terms of a longer term picture, in terms of what, numerically, what we're thinking about membership in the exchange.

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

I guess, Wayne, maybe you had to kind of alluded it to in answering one of the questions earlier that you could kind of walk us through the breakout of how much of this earnings cut is really from membership versus the cost trend numbers. Because when I think about, relatively speaking, of the membership losses in the context that you've outlined, I think you are already assuming some membership losses, it's hard for me to get to a guidance cut that is in the range of what you've done here. It feels to me like it's more cost trend, but I think Angela had indicated it was really more as a result of membership. So can you reconcile kind of how much is trend and pricing and how much is membership?

Can you go through that?

Yes. So, Kevin, while we're not giving the specifics of it, because, again, these are estimates and forecasts, it's pretty easy though to do a membership run rate on fully insured. And that's the key, right, you have to look at the fully insured piece versus the ASO piece. So we're adding 100,000 member lives that's ASO in August, but that's not going to contribute to the PMPM profits that a fully insured member does. So when you're looking at it on a fully insured basis, you can easily get to the $10 million to $15 million op gain impact per month from volume. And so if you look at it from that perspective, the vast majority of this change in guidance is a volume change. And what we've done is the delta is simply, depending on what math you use, the delta is really just us taking a cautious view on trend for the back half of the year.

And I guess you're saying that you're ahead of plan for 1H, but you cut guidance, I guess, for the second half of the year, by $0.30, I guess, $0.10 of that is due to the Amerigroup financing. But what's the reason that we shouldn't be taking that annualized $0.40 number, I guess, heading into the 2013 estimate? What else is there the second half of the year?

Well, I think the big thing is that in the first half of the year, we had to make some decisions around certain administrative costs to cut to help us achieve our plan. Clearly, we had the volume mishap in the second quarter as well as for the remainder of the year. So we took some initiative there where we thought that cuts in G&A were appropriate and were efficient ways of using shareholder dollars. But our concern is that for the back half of the year, we don't see the volume returning to a positive situation. And for that reason, we had to evaluate whether we would cut further or make the key investments that we think are needed. And our choice was to make those key investments, with the expansion of duals in California and our additional counties being selected now and with the opportunities to continue to improve our Senior business over a multiyear period. And so I think the primary difference is that we could have made additional cuts to benefit the short term and maintain guidance, but we did not believe that was the prudent thing to do for the long term.

Yes. To be very explicit about that, we continue to have a run rate finding $200 million plus of SG&A savings. What we have done this year is we have reinvested or self-funded essentially investments to do the things that are strategic for the long term. So we're rolling out CareMore in Virginia and New York, for example, and other -- more in California. We're strengthening our Senior business. We've done a number of home visits with our senior members in some geographies. And we're preparing ourselves for the exchanges and have done a lot of consumer research that relates to that. So we're going to continue to -- we have an initiative called Build a Better WellPoint. We are continuing to find efficiencies and use the scale, particularly for the core business, as we reinvest in the capabilities that were going to support the more diverse revenue stream in the future.

I guess basically you're talking about this guidance cut in the context of lower membership, and your plan to hold the line in what is becoming a more intense pricing environment. That lower membership theoretically should be going forward as well. So the question is, what can you do on G&A? What gives you -- are there any other initiatives over time to offset that? But this -- what you're reducing your earnings for this year should flow through into next year based upon where the pricing competitive environment is right now?

Yes, Kevin, I think that's a fair comment that clearly if we lost a member on July 1, we only get 6 months of detriment this year and next year you get the incremental 6 months from the first half of the year. Probably, the one thing to keep in mind, though, is that we have a number of things, obviously, that we believe will help us improve our membership outlook for next year. Our Senior business is clearly moving in the right direction and will be a continued tailwind for, we believe, multiple years, over the next 5 years. And Amerigroup is going to give us a new growth trajectory that will begin to help offset some of this short-term membership decline losses. As Ken said, we're starting to see strengthening in pricing. The question is how will that come about on 1/1 renewals, and that's what really starts to matter is the 1/1 of '13, because a big part of the business comes due on that date. So depending on pricing starting to strengthen in the back half of the year, it may be less of a headwind for the membership that we lose throughout this year going into next year.

Your next question comes from the line of Melissa McGinnis from Morgan Stanley.

I guess, first, I'm just looking at your Consumer Business year-to-year, I would have expected kind of the $177 million op gain reported last year going to $211 million. Just been thinking about headwinds and tailwinds year-to-year with, like, MA issues last year and then the contribution of CareMore, I would have thought that would have been an easier comp than it ended up. So can you just help me bridge those 2 numbers? And what's the headwind there? Is it Medicaid? Is it Individual? Or is that just the reinvestment that you're making in the Senior business?

Well, Melissa -- Wayne, do you want to go through it? We are we making reinvestments in our business. And as you point out, Consumers, Senior plus Individual is in there as well as Medicaid. So, Wayne?

Yes. So, Melissa, 2 things I would point to, both related to Medicaid. The first one is we had clearly anticipated that Medicaid would be a headwind going into this year versus last year's 2Q. Many of the state rates went effective October 1 or July 1 of last year, so now what you're getting in this 2Q is the first full year impact versus the prior year. The second one on Medicaid though is that we have rates in California. And it's our policy -- we've always taken a very conservative posture that until the rates are officially signed into contract and we get the check that we don't generally record them. And in this case, it's always been our history to have a delay in getting rates in California, it's not unusual, that are retroactive. We've got verbal commitments on those rates, but we don't have the signed contract yet. But that did impact our quarter -- for the first 6 months actually by almost $25 million of revenue that we still fully anticipate getting. But usually by this time, we have it. We still don't have it as of June 30. And so that was the second item that did impact both our quarter as well as the comps.

Okay. But still kind of like -- you provided a really helpful bridge, I thought, on your Q4 of '11 call to help us kind of understand, like, magnitude of, like, the MA roll, and you can't provide sort of any further quantification of, like, "Oh, we got this sort of tailwind from Medicare Advantage," getting right at Medicaid, maybe the moving parts a little bit?

No, Melissa, I'm not trying to avoid the question as much as -- we just don't run our business in 3-month increments. And so from our perspective, I can tell you that our Medicaid and -- was still slightly ahead of our plans, but we had it being in a tailwind for the year. Now, it's ahead of plan for the year because we're going to get this money retro, but for the quarter, Medicaid was going to be a headwind for us and was a bigger headwind because we did not get the revenue retroactive. We're expecting that though on our full year forecast, which would still put us ahead of plan. I can tell you that our Senior business for the first 6 months of the year and the quarter was slightly ahead of our plan. So things are aligning with expectations. On the Individual business, which falls into the consumer, the same items saw in the Commercial book in the month of May also we saw in Individual. That trend does not differentiate between the individual consumer or the employer-based consumer. So that is in the quarter though, what we saw in the month of May, that is in our forecast.

Okay, great. And then I guess just something more about kind of strategy and looking into '13. With some of the challenges that we saw last year on the Senior product and then the negative earnings revision today, I think there's questions in the marketplace about the visibility into sort of your underlying trends across business segments. What gives you comfort going forward that you have enough visibility to sort of get positioned for 2014 implementation, take on a $4.9 billion deal with Medicaid, with that new business, and then also move into an ancillary business with the 1-800 CONTACTS deal?

Well, I would challenge that kind of assumption or result. This is about really having good transparency and seeing we have had 36 months of very consistent inventory levels, great stability, great improvement -- in fact, auto adjudications are way up. And I think it's the ability to see that and use that in the forecasting and in the pricing to look forward and make announcements like we did today, which, while unfortunate, I think they're a reflection of some of the challenges in the industry. In terms of the strategy going forward though, I think it's clear that a revenue base that is more diverse will be strong. And one example, while we didn't break every element down, as you were asking in your prior question, CareMore is outperforming its plan today and it's rolling out in new geographies, and it's continuing to deliver this differentiated experience for seniors and well -- and is working very diligently to prepare for the dual eligibles. So that integration is going well. I think we have every expectation that 1-800 CONTACTS is going to continue to create this revenue source that is less regulated, higher margins, faster growing and in a place where our customers have identified that they benefit by the vision, insurance and relationship with 1-800 CONTACTS and glasses.com. The Amerigroup team, we're very excited they're bringing a great new team to us. They have Medicaid expertise and strength, and so we see that as just all a win-win situation. So I think this is -- that's not to say that we're not going to be -- have a period of time where we're preparing for the future, including exchanges. And you ask how do we know? We have done very significant research around the consumer and their approach to the exchanges. And I said earlier that they like the brand and they will move to the brand as we think about the exchange opportunities in the future.

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

I'm wondering if you could just comment on the costs trend side and where you saw the higher physician and outpatient utilization, particularly in May. Is that -- does that have any material geographic variation that you can point to, number one. And number two is that, what about by-products? Is that something you sort of see across commercial Medicare and Medicaid, or can you differentiate a little bit?

Wayne, do you have detail on that?

Yes, Matt, we didn't really see it materially different across geographies. That wasn't anything that was really concerning or alarming to us. Our Medicaid, again, had it not been for the revenues, things have pretty much been in line with expectations. So it wasn't really affecting Medicaid as much as it was the Commercial and the Individual book. That's really where we saw that, was on the Commercial and Individual book. So again, not so much on the Medicaid or even the Medicare for that matter. It was pretty much Commercial and Individual, and it was pretty much across all our markets.

And where you -- you referenced that you may be seeing some hopeful signs of pricing pressure easing off a bit. Is that -- is there any geographic variation on that?

Yes, Ken, do you want to speak to that?

Matt, those were specific to those geographies. Again, there's pricing pressure in certain geographies that occur for a short period of time and MOR related. So yes, those are geographic related, and we have seen a subsiding in -- specifically in those markets. Again, it's relatively rational, but MOR and rebate-related.

Okay. And last one if I could. As you look ahead to the National Account, well, we're in National Account selling season, what are you seeing in terms of the number of employers relative to prior years that appear to be going out for bid, and how you think you stand? Obviously, it's very preliminary, but at this early point looking ahead to that?

Yes, Matt, good question, and it is early. But right now, I would say we've seen less going out to bid, and I think it's because a number of groups are waiting to build strategies around 2014 and beyond and putting more of their focus on that. And of the largest ones that went to bid, including one of ours, they stuck, meaning they didn't move, so there was greater persistency. Again, as I believe some of the larger groups are going to wait and build it into longer term strategies. However, as we did going into this year, going into next year, we have several very nice sales already. We're going to wait and see how it all develops. I think you'll recall -- and a part of our membership change going into this year was, and we began stating it in around second quarter of last year, was that very specific intention to purge some cases that were not carrying their weight or specific on fees. We do not have that phenomenon going into that. That's already been taken care of. So our persistency will be higher, but I believe they'll be across all carriers, less movement as larger groups seem to be less to bid and more are sticking with their current carriers.

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

My first question relates to premium yield and my second to payables versus premiums. The premium yield in Commercial looked like it was roughly half what you had last year full year and about 1/3 of last year's second quarter, so about a 3.3% Commercial premium yield. Can you help me understand why the premium yield is coming down? I know you're exiting New York. Can you put some numbers around why the premium yields would be so low in Commercial?

Can you do that?

Yes, Christine, I'd have to look at your calculation to be fair. I'm not really sure how it's coming up. What I can tell you is on our active versus canceled, where we actually look at those members that are staying with us versus those members that are leaving us, we continue to have a positive spread. In fact, on a PMPM basis, when you look at kind of a PMPM absolute dollar basis, our active retention numbers are up almost 25% of where they were a year ago. So said differently, our gross underwriting margins on those that are staying with us are that much higher. So my assumption is it's got to be a mix on how it's being calculated. But without being able to sit down in more detail and look at that with you, I really can't answer that. And buy downs have been similar to last year, so I don't think buy downs are really a driver of that. So again, I'd have to see more of the details on that.

Okay. Well, we're going to have to follow up on that. And then on the payables versus premiums, it looks like both first and second quarters they're a little bit upside down. And it looks like in your roll forward, you're assuming that you're paying 79.3% of current year medical claims as a portion of incurred medical claims. So 79.3% now versus 78.5% a year ago. But you're assuming that you're paying claims about a percentage point faster. Obviously, if you are, things are fine. If you're not, then you're upside down on payables versus premiums. Can you help us -- you say your auto-adjudication rate was up. Can you give us some numbers that give us comfort that the reserves are in fact adequate given these assumptions?

Yes, so a couple of things, Christine, at least from the data that we track. First, let me talk about cycle times. Cycle times have been in a narrow range of 40 plus or minus 2 days for 34 of the last 36 months. So there's real consistency in cycle times. The other thing I would highlight is our electronic submission rates. Now a lot of providers when HIPAA 5010 started -- we started this with them last year and then had been building up to that to make sure that they were submitting electronically. But our EDI rate from the docs to us are actually over 90%, so we're getting the vast majority of claims now very real time. And then of course our auto-adjudges are at an all-time high, at 84%. We track our inventories, our average inventories. We generally try to target 5 days work on hand, we are below that, which would be kind of our best-in-class watermark that we like to be at. We're below that across the board. We're not seeing any issues from a cash flow perspective, anything of that sort. And it's our intentions -- and our guidance reflects maintaining those conservative reserve levels. So beyond that, I can't really point to anything different other than to say that we don't have an inventory issue. We don't have a volume issue. We don't have a visibility issue here. We have a volume issue on membership, and that's the primary driver.

But, I mean, as a follow-up, you've said that your admissions per thousand were down slightly last quarter's conference call. Did you say that your admissions are up this quarter? Is that a change or am I mis-remembering, misreading or mishearing?

Let me go back to that prior question and then Wayne can address that one. Admissions per -- I mean, inventories per thousand are down 12% since this time year-over-year. So we have accelerated our claim cycle and we feel very comfortable about that. You want to talk about admits versus the...

And can you give me a dollar value on that so I can adjust the payables?

No, I don't know it.

Christine, on the in-patient though, the admissions per thousand members and average length of stay are only slightly higher. And we say slightly, we're really talking basis points, not points, things of that sort. So it's really tight still.

And your final question today comes from the line of Chris Rigg from Susquehanna.

I just wanted to go back to the June 15 guidance reduction. You took it down by $0.23. You cited the Ormond litigation. And the number that you're showing today is only $0.10 pretax. Can you reconcile the difference to that $0.23 reduction 1.5 months ago to the $0.10 reduction today, or the $0.10 impact you're highlighting today?

Wayne, can you do that?

Yes, Chris. So a couple of things. Keep in mind, the Ormond settlement was for $90 million. It is not tax deductible and neither are legal expenses tax deductible. So if you go to the roll-forward schedule we put in our press release, we are showing all amounts pretax. And then for the tax implication of that line item, it's in the line item referred to as taxes, so you have to actually look at that line with it. It's important to recognize, we had reserves on Ormond, so that's why you're only seeing $0.10 on the pretax number because we did have reserves, but even those reserves are not tax deductible. So in essence, what I'll call kind of an above the line op gain impact was roughly $0.10, and then all the rest came through as a net impact to us on the -- below the line from a tax perspective. And we've outlined that on the reserve -- on the roll-forward schedule that's supplemented with the press release.

Okay. And then I just wanted to clarify the commentary on the call about the additional $110 million of development spending. Was that in the prior guidance? Or is that new spending that you're highlighting today for the second half of 2012?

It's new spending of which some is being self-funded and some is reflected in our desire to not amend our guidance further.

Okay. And so is that all being expensed or will some of that be capitalized?

That's an expense number.

So that's about a $0.20-ish headwind, is that the right way to think about that in the back half the year that wasn't in the previous outlook?

Yes, but again, some of that we're going to self-fund through G&A and some of that is reflected in our guidance.

Okay. Well, in closing, while we're disappointed by the revision of our 2012 outlook, we're confident that we're taking the right steps to fulfill our long-term goals and objectives. As we think back, it's clear, we're the first company to see changes in the marketplace and the first to tell Wall Street about them. We believe our 36 months of consistent and stable inventories gives us insight, which has resulted in disciplined pricing. Consistency in the market is critical, and we believe it's been the right thing to do for our company and our customers. I want to thank everyone for being on our call today. Please provide the call replay instructions now, operator. Thank you.

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