Ladies and gentlemen, thank you for standing by. And welcome to the WellPoint Conference Call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session. Instructions will be given at that time. (Operator instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to the company’s management.

Good morning. And welcome to WellPoint’s Third Quarter 2014 Earnings Call. This is Doug Simpson, Vice President of Investor Relations. Presenting today are Joe Swedish, President and CEO; and Wayne DeVeydt, Executive VP and CFO. Joe will start with the discussion of our Q3 2014 financial results and the macro backdrop, and then Wayne will review the quarter’s financial highlights in more detail and update you on our 2014 outlook. Q&A will follow Wayne’s remarks. During the call this morning, we will reference certain non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available on our website at 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 today’s press release and in our quarterly and annual filings with the SEC. I will now turn the call over to Joe.

Thank you, Doug, and good morning. I’d like to begin reflecting on a solid third quarter, with membership and margins tracking well. We are pleased to report strong third quarter results of $2.36, which exceeded our initial expectations and builds upon the strength of our first six months and positions us for an improved EPS outlook for the full year. We grew by another 259,000 members in the third quarter, driven by contributions from the Medicaid, Local Group and National businesses. Through the third quarter, we have now added almost 1.9 million new members, served so far in 2014, representing a growth of 5.3% versus year end 2013. Our growth has been balanced in 2014, as we've added 699,000 Medicaid members through the third quarter, National has added 610,000 members and Local Group has added 438,000 members. With attrition in the third quarter as expected, our public exchange enrollment stands at 751,000 members at the end of the third quarter. What I’d like to do now is discuss the specifics in and around the third quarter results. We are pleased with our third quarter results, with solid contributions from both Commercial and Government division. Specifically in the third quarter, we reported earnings per share of $2.22 on a GAAP basis and $2.36 on an adjusted basis. Our GAAP EPS and adjusted EPS increase from the third quarter of 2013, driven by our growth in membership, improve medical loss ratio, administrative expense control and opportunistic capital deployment. Further supporting the quality of our earnings, we generated much stronger than expected operating cash flow of approximately $600 million in the quarter, bringing our year-to-date cash flow to approximately $3.1 billion. We have remained focused on our capital deployment strategies as well, repurchasing almost 5.1 million shares during the quarter for approximately $579…

Thank you, Joe and good morning. My comments today will focus on the key financial highlights from the third quarter of 2014. I’ll also provide an update on the 2014 outlook. On a GAAP basis, we reported earnings per share of $2.22 for the third quarter of 2014. These results included net costs of $0.14 per share, reflecting $0.17 per share of debt-extinguishment expense, partially offset by net investment gains of $0.03 per share. Excluding these items, our adjusted EPS totaled $2.36 for the quarter. These results were favorable to our initial expectation and as Joe noted, we are pleased with how 2014 has progressed so far. Medical enrollment grew by 259,000, or 0.7%, sequentially to approximately 37.5 million medical members as of September 30th. This reflected membership gains in our Medicaid large group and National businesses, partially offset by declines in our individual and small group businesses. Operating revenue was nearly $18.4 billion in the quarter, an increase of approximately $752 million or 4.3% versus the third quarter 2013. Reflecting enrollment growth in our commercial and government businesses, revenue growth versus Q3 2013 was adversely impacted by the previously discussed transition of the State of New York account from fully insured to self-funded on January 1st. The benefit expense ratio was 82.5% in the third quarter of 2014, a decrease of 240 basis points from the prior year quarter and favorable to our initial expectations. The decline reflected continued strong medical management and the impact of the premium revenue designed to help cover new healthcare reform fees, as well as changes in our earnings pattern we have discussed previously. We are pleased with gross margin performance on both of our businesses in the quarter and first nine months and we are improving our MLR outlook for the year, from…

Thanks, Wayne. With that, operator, please open the queue for questions.

(Operator Instructions) Your first question comes from the line of Tom Carroll from Stifel. Please go ahead.

Hey. Good morning. I wonder if you could just circle back quickly on the point on, Texas and maybe give us a bit more color on what may or may not be happening down there and if you have signed agreements and maybe when you expect to get them? And then just staying on the Medicaid topic, maybe touch on, do any markets stand out as being either more profitable or more costly than expected? And I guess, I'm thinking specifically Florida here in this instance. Thanks.

Good morning, Tom. This is Wayne. Appreciate the questions this morning. Let me first address Texas and then, I’ll address the more broader question on Medicaid. Starting with Texas, our previous outlook actually assumed that we would not collect the non-deductibility but did assume we would actually collect the tax. We still believe the tax will be collected and we believe it's a prudent part of sustainable model, just as we assume the non-deductibility should be collected. However, we do not believe we would've a contract signed by the end of this year and accordingly we’ve excluded that from our guidance now for the full year outlook. In addition to that, to your second question on Medicaid, we continue to see no issues in the Florida market versus our expectations. I call that market out specifically as I know there has been lot of questions there. I think our counties are uniquely different in position and we performed relative to our expectations, pretty much aligned with them. I will say though that many expansion states and the new lives coming through expansion are coming in generally with an overall cost structure better than we would have anticipated. And as a result, we are booking callers at this point back to ministates regarding those expectations.

Great. Thank you.

Your next question comes from the line of Justin Lake from JPMorgan. Please go ahead.

Thanks. Good morning. First question in terms of 2015, you blessed this range of $9.15 to $9.30, which is 4% to 6% EPS growth. Just hoping you can walk us through the headwinds and tailwind that we should keep in mind here to get this estimate given the solid topline growth you talk to and the typical share repurchase?

Good morning. This is Joe. Thanks for the question. Headwinds, tailwinds; on the headwinds perspective, maybe about four, five items that I can lay out for you include the industry fee going to definitely be up 40% and we clearly believe we will account for that accordingly. Second, as we’ve repeatedly said that we have seen and continue to see small group margin and membership compression. So we’re expecting certainly '15 to continue that path for the compression. The Medicare stars bonus cuts certainly impact us. Dual eligible population startups in year one of our engagement and the duals arena certainly provides for some agreement. We believe we will manage our way through effectively. And finally increasing hep C spend from new drugs that are coming online, we mapped out very clearly our hep C exposure. We believe that we’ve got a line of sight both on the cost impact, the volume impact estimates, as well as the clinical protocols that are necessary to effectively manage that. With respect to tailwinds, we believe that the enrollment growth in Medicaid certainly will continue strong, specifically related to the expansion states that we envisioned coming online. The one specific state that I can call out that definitely headwind for us -- excuse me -- tailwind for us is Tennessee because that contract is coming online shortly. Enrollment growth in the ACA engagement as well as our National business was quoted to you in our materials we just presented to you. The waterfall effect of lives added over the course of 2014 and finally the impact of our 2014 capital deployment strategies that I think have been very effectively executed and look forward to the impact that that will provide for us in '15.

Great. And then Wayne, you’ve talked to the company’s conservatism on reserves this year due to all the reform changes. Can you give us an update here and maybe talk to the drivers of the decline in claims payable from 2Q to 3Q? Thanks.

Sure, Justin. As you saw, our DCP went down about 0.8 days versus where we’re at previously in 2Q. One thing I think will be important for our investors to understand is why do we think maybe a more normalized DCP might look like? Our mix of business has changed quite a bit. And as we continue to ramp up and grow like we expect to do between now and 2018, you’re going to see a rising reserve balancing. And in theory, it will rise at a faster pace than paid, because those members are coming on sooner and then of course you pay claims in arrears. So we think of more normalized DCP for our business model is probably closer to 40 days and that would assume our high-single-digit margin for adverse deviation. Obviously, we’re currently posting a 44 days at this point. So I think you can get a feel for at least a level of conservatism that we think we're maintaining. We think that's prudent though. There are still a lot of moving parts around risk adjusters, around corridors, around MLR rebates once those settle up, and even risk callers in our Medicaid expansion states. And so the way I would look at that extra four days is not necessarily all conservatism that could potentially drop to the bottomline, but rather view it as conservatism against many risks that could go the wrong direction. And if they were to all move positive or some move positive, not all of that would drop to the bottomline, as some of that than would result in a payable back either through a caller, a corridor or an MLR rebate, but it would be upside to our current expectations.

Your next question comes from the line of A.J. Rice from UBS. Please go ahead.

Thanks. Hi, everybody. Maybe just ask you about the positioning for exchanges for next year, your thoughts on that. Obviously there's a projected growth in the underlying overall industry. You guys are expanding your geography and you’ve done pretty well this year. So in terms of expectations for membership growth, expectations for margin trend, can you give us at least some directional comment on that?

Yeah, A.J., good morning. First of all, just to underscore, we are going to continue to participate in each of our 14 markets in the public exchange arena. So virtually nothing is changing year-over-year in that regard. We certainly are going to build on what I would categorize is tremendous successes this past year relative to the analytics pricing and our marketing efforts that allowed us to accumulate the enrollment that we achieved. So going into the '15 timeframe with enrollments cracking up very, very soon, we are going to participate in 139 rating regions this year. And we believe that certainly there will be some adjustments with respect to how we approach the market, but generally speaking in terms of our pricing, our marketing efforts, et cetera I think it will look remarkably similar to the efforts that we employed in '14. Long story short, we really continue to feel strongly about the value proposition we are bringing to the market. And as you may know, CBO estimates indicate something like 5 million lives may come into the exchange environment. We believe given our share of the market this time around, we believe maybe we will capture like share in the new round. So again, I think we're well positioned and aggressively pursuing the markets we have already established ourselves in during the '14 selling season.

Okay, great. Maybe just a quick follow-up. Obviously in the last couple days, it’s been renewed discussion around the part of the middle market -- the lower end of the middle market 50 to 300 employee groups and that there is maybe some increased volatility both the utilization and churn there. Can you just comment a little bit, how big that is for you and if you're seeing anything that surprises you going on in that market?

Thanks, A.J. We’re not seeing anything that surprises us in that market. We’ve always held the very strong market share in that space. If you look at our growth in the Q3 timeframe, it's been a lot of ASO growth in our large National business and the Local Group business was a sizable win of one account. But when you get to that 50 to 300 range, I mean this is a space that we’re very familiar with. We view it as average margins and we feel like the competitive environment continues to be rational in general in that space. So no real surprises for us in that market at all. So I can’t really comment on any other questions that have come up other than that regarding us.

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

Hi, there. Could you update us on your small group expectations? It looks like you're losing many more membership than you expected. Have you re-launched those small group non-ACA products or you are going to be losing those early renewed a year ago and do you still think you lose about $300 million of the $400 million in profitability and is that $400 million still a good number ultimately?

Thanks, Christine. Small group definitely continues to achieve the level faster than we have updated. Even when we did our second quarter outlook, we assumed a much faster pace and it was slightly worst than that. It wasn’t too far of our expectations. But I think now that you’ve got exchanges up and running and functioning well, and that small group, of course, we have an opportunity to revaluate whether they choose to go to exchange for their employees. We think will become even probably a more prominent decision that they’ll make this quarter as the exchanges start to -- start the enrollment process. We have many products we’ve rolled out to try to retain a small group for a period of time. But as we always said as part of our five year strategy, we clearly believe that the important part was having a net or catchers made if you will to become in different on where that customer wanted to buy their product and whether that would be through small group or through the public exchange. So, I think, our goal is just to offer the most affordable product we can give to them. We do think that the majority of the $400 million headwind will still occur this year. It will between the $200 million and $300 million range and it will be closer to the $300 range in terms of op earnings impact and it will be $200 million range and we still anticipate over $100 million headwind for next year. Relative to the $400 million, is that still a good estimate or not. Based on everything we know today, it seems like a reasonable proxy still at this point. Margins are starting to become fungible between exchanges and small group as they start migrating off and our membership as you know is down a pretty meaningfully there. So, I think, we still feel the $400 million is a good number. Could it be a little bit north of that, possibly, but we also think that the enrollment pickup on the exchanges and the improvement that will happen there should offset that as margin start to expand.

Great. Thank you.

Yeah. This is Joe. Wayne, I believe, originally we are estimating something like a five-year migration to significantly reduced membership in small group and long story short, we’re not believing this is a two-year migration path and obviously, we’re managing to that reality as Wayne pointed out, hopefully, we’ll be shifting members from one of our books to another book and we’d be in different way they’d end up, albeit margin situation maybe different, but we believe, we can account for them effectively.

Your next question comes from the line of Ralph Giacobbe from Credit Suisse. Please go ahead.

Thanks. Good morning. Could you update us on where you stand at sort of the margin level that you’re booking on the exchange business at this point? And is there any difference around that cost trend and/or margin level, whether you're thinking about sort of on versus off exchange?

Hey, Ralph. Let me address first the cost trend in general margin levels and then come into on versus off. First, I would say, we still think we’re running margins in the 3% plus range at this point. I’d say the plus point now, because I think as we’re starting to get more data on risk adjusters and other items, those would imply that we’re in a net receivable position. That being said, I want to make sure that our investors understand that even though they would imply a net receivable position, we have recorded those balances both payables and receivables, but have booked 100% valuation against the net receivable position. Again, until we get more clarity, we’re not going to assume that. But to the extent that those data points do prove out between now and end of the year, going in early next year, we would be running 3% plus margins at that point. Again, very comfortable with our original goal that we’ve laid out of targeting 3% to 5% margins. It varies by market. No one market is the same. We have opportunities to improve margins in certain markets and in fact, I would argue we have opportunities in all markets to improve margins. But I think right now it’s important to recognize that the membership is very critical as we continue to absorb the tax and we will continue to try to balance those margins with the membership goals that we have in our five-year outlook. Relative to cost trend, probably the best way to look at it, Ralph, is versus our expectations. And so, clearly, we expected the cost trends on exchange business to be much higher than the cost trends that we would have on our non-exchange business and that is prove to be true. But relative to our expectations, it is prove to be less than we had expected though. So, again, and I would say, on both books of business trend in general is playing well. But probably the bigger item is just the SG&A continues to rise on those books, as we think investing in medical management, investing in marketing, as we go to market this fourth quarter, a really the critical initiatives. So we like our position too, because we’re able to grow while investing in the business and than we think overtime as we capture this membership, you will start to see the SG&A ramped down in the later years of our five-year strategy.

Okay. And then just on the, I guess, on the 3Rs, just to be clear, one clarification. Last quarter I thought, you had been booking or thinking you’re going to be in a payable position on the risk adjustment, so is that changed or am I sort of misremembering one? And then two, just on reinsurance piece, I guess, where do you expect to end the year and then what kind of benefit essentially would that have to MLR in 4Q, just based on that 1R?

Yeah. Ralph, first of all, yeah, in the second quarter we assumed we would be in a payable position for risk corridors not risk adjusters. However, that being said, we had a payable in 2Q and we continue to record a payable in Q3 for risk corridors. We had indicated in 2Q that for risk adjusters, we had data that imply to receivable. We chose not to book that receivable as we thought the data was immature. We’ve gotten better data now in Q3 that would still imply a receivable. We have booked that receivable along with the payables based on the data but then booked a 100% valuation allowance. Our outlook still does not assume upside, which at least the data to date would imply from the weekly study that we would be entitled to a net receivable but we’re still not booking one at this point.

Your next question comes from the line of Peter Costa from Wells Fargo. Please go ahead.

Just as a follow-up to that last question. Can you talk about what the timing will be in the fourth quarter and then into next year of finalizing, whether you should be in the receivable or payable situation, relative to the risk adjuster?

Hey Pete, how are you? Honestly, I really think its going to be challenging for anybody to know what the final settlements going to look like on the risk adjuster. Everybody is submitting their data today. You still have opportunities to code your data if it wasn't coded properly between now. And you -- in fact you have that other opportunity into early next year as well. So realistically, we think we really not going to know an answer, until closer to end of Q1, early Q2 of 2015 on where things really shakeout. Our intention though from this point is because we do have better data now and there is at least a point of view that the industry can begin to take as to book to what we’re getting not only on the receivable side but on the payable side. And then if we’re in net receivable position, which we continue to be after two quarters, this book of valuation allowance until we see ultimate settlements shakeout. We’ve seen the number of moving up between 2Q and Q3 in a variety of directions that we think booking an allowance is a very prudent thing to do until we see ultimate settlement. But I think ultimate settlement does not happen until 2Q of next year.

And so the follow-up staying on the exchange business, your price increases on the exchanges for 2015 were relatively modest yet, some of the second lowest cost silver plan price increases were lower than yours and that results in higher premiums, fairly, substantially for some of the lowest income people, in terms of the percentage increase for them for your plans. Do you expect some churn of your existing business? And if you do, how much or can you give us an idea of sort of what the relative rate increase is for some of the people on the lower end of the spectrum?

Pete, I think it's fair to say, we expect some degree of churn as we do with any book, especially, in the individual book where I’d say, highly competitive consumer-based shopping experience. That being said, we expect to be a net grower next year on our exchange book. I don’t know that we’ll maintain exactly the same market share because it is very much dependent upon the competitive environment. But we think what’s probably most important for the consumer is predictability and affordability. And so the volatility in our pricing we think is very limited versus maybe what we’ve seen in other fillings throughout this most recent period. One thing to keep in mind though is that our goal is to maintain affordability but price for a fair return for the value we bring to not only our member but to State and Federal Government. And when you look at with that lens, it’s important to recognize too that the data which support these rate increases and probably more importantly the ultimate impact to consumer is very dependent upon the product selection they’ve and the substitutes they have. And so I think as we continue to bring healthier lives into the book over time and as the book gets more medically managed over time, I think you’ll see price points begin to tighten even further and you are starting to see that in markets. And I think as the 3Rs start to where their course and for lack of better word, the training wheels come off, I think you’ll start to see pricing get even more rationale and markets where we don’t think it’s completely rationale yet.

Thank you.

Your next question is come from the line of Josh Raskin from Barclays. Please go ahead.

Hi thanks. Thanks. Wayne, I just want to clarify on the cash earnings. I think you said $222 million of amortization. I don't know if there is a tax impact, but is that something in the ballpark of $0.80?

Hey Josh. Yeah, that’s a pretax numbers, so you’ll need to tax adjusted, so you will be south of the $0.80.

Okay. So $0.50 or something like that.

Yes.

Okay. And then is there -- is amortization, is that trailing down in ‘15 as you get past Amerigroup? I don't know how many short-tail amortization buckets there were?

It is, Josh. We use an accelerated the amortization method. So it is trailing down. And if you go to our 10-K and our 10-Q which will be filled later this afternoon, you will have an opportunity to see the five-year average of what our amortization expense is and you’ll be able to see how it trails down.

Okay. Perfect. And then just moving to the individual book, the decline in the third quarter, I just want to make sure I got the moving pieces on that. Was that mostly declines as some of the individuals on exchanges were lapsing or was there more going on there and is that what's driving -- you guys had a pretty big drop in the fourth quarter membership expectation. Is that mostly individual as well?

Yeah. Thanks, Josh. Yeah, it’s basically what I’ll call historical normal lapses that we see during the third and fourth quarter. And that’s pretty much what we saw on the exchanges. Our sales assumptions are lining with what we expected which was not that many individuals that would have life event changes, many individuals are getting job, in some cases, moving from exchange into an employer-based coverage. But nothing unusual or unexpected and we expect that trend to continue going into Q4 within a ramp-up back in growth again starting January 1. We’ve also made an assumption in our ASO business, that we may see some in-group change, negative in-group change in Q4. I hope that proves to be conservative, but there has jut been a lot of volatility in employment levels and as we get into Q4, we’re not quite sure how that might shake out with the fourth quarter. So we chose to take a more conservative view at this point until we see more. But those are the two primary drivers of the reduction in membership that we’re assuming in Q4.

Your next question is comes from the line of Chris Rigg form Susquehanna. Please go ahead.

Good morning. Thanks for taking my question. I was hoping you could give us your latest thoughts on Medicare Advantage for 2015 and how you think enrollment will trend in that book next year?

Hi Chris. Good morning. I think at least our view at this point, we clearly have a headwind in 2015 due to the star ratings that were out there. And as Joe has indicated many times, our path to this turnaround is a multi-year path. And I will tell you basically we’ve seen for progress this year relative to future ratings, we are very encouraged with the strides we've made as a company. That being said, we would expect membership to be down slightly next year as we continue to refine our business, maintain zero dollar HMO plans in key markets where we want to get scale and leverage. But I do believe we can have optimum growth next year, because a lot of our strategies are started to play out and a lot of the investments we’re making this year which are impacting our Medicare margins, including SG&A investments and risk score adjustments that we are doing will then start to flip next year. So, I think you will see membership down next year. But you'll start to see operating earnings improvement really starting to occur next year and then start to ramp up in ‘16 and then really ramp up in ‘17 with the star improvements.

Great.

Chris, this is Joe. I just -- so I can maybe add a little bit more meat to it. I think quarter-over-quarter, we keep talking about our M&A focus and how we are trying to realign restructure, renew our M&A market presence. And I think that we’ve got some very key strategies that will be exercised in ’15, going into the subsequent years. We do want to underscore that we are going to achieve a lot of that through incremental investments. It's really important to note because as I’ve always said that we believe M&A is an important part of our portfolio going forward. We don't tend to back off of that. We are investing heavily in medical management, on medical cost management and I think that’s going to be a very robust contributor for us going forward. Managing the business locally, it’s really important to underscore and probably most critical is that we’ve created a more effective operating team. And we’ve got an entirely new executive infrastructure that is administering the growth dynamics in and around M&A. So we have big strategies. We've got kind of a focus of not, overreacting or reacting rationally in the market. And I think in the long view, we are certainly going to focus on performing in a more stable construct. And I think history would suggest and again, we’ve got specific strategies related to everyone of those points that I made. I’m pretty optimistic about our efforts going forward. I guess one key driver is stars ratings. And I think we’ve got a very significant plan of action there and we’re hopeful that, as we did experienced an uptick in our stars rating this year, most recently announced which we believe was materially in the right direction. We do believe that over time that we will achieve our goal to attain 51% of our members in four star plans. So put all that together, I think we've got a very, very significant opportunity ahead of us. And of course, a lot of that is being driven by our provider collaboration activities, which I think kind of undergird a lot of what we're doing, not just in M&A but in a variety of other domains in the company as well.

Got it. Great. Thanks a lot.

Your next question comes from the line of Dave Windley from Jefferies. Please go ahead.

Hi. Wanted to follow-up on some of your spending initiatives that you've mentioned and focusing, I guess on SG&A. SG&A was a little higher I think than the street and we were looking for this quarter and then it looks like, for your guidance, it actually drops down a little bit in the fourth quarter and that's I think countered to normal seasonality. So, I wondered if some of that spending was going into these investments in programs that you're talking about or was it related to something else?

Good morning, Dave. No, lot of the spending that you saw in 3Q really wasn’t to these initiatives. I would say that keep in mind, the duals really started rolling out and ramping up and so you're starting to get real run rate value there. But as we continue to have new RFP wins in Medicaid, as we continue to see lives expand. A lot of our initiatives around our exchanges beyond the marketing, there's a lot of other initiatives we are doing to build products, redefine how we go to market. And we are doing a lot of those sooner versus waiting right before open enrollment. So you are seeing a lot of that come through in Q3 and it’s important to recognize and on a year-over-year basis. Last year, you had three months of open enrolment. This year, you are only getting two months of open enrolment and so you don’t have quite the same marketing level of spend as you saw last year for the last three months as you only have two months. So there is a few things that influenced Q4. The important point, I think we want our investors to understand though is we are investing for growth. We are not cutting the growth. And I think that’s probably the most important point we want to make is that the SG&A is really a variable cost to us now. We’re using some of the fixed cost leverage though to shutdown systems and platforms. Joe has put forward a very clear initiative for IT and we will get to a unified enterprise and unified IT platform. And I think the real values of these investments, when you see G&A coming down, really is not until you start getting out to the ‘16, ‘17, ‘18 timeframe. So view us investing through ’14, view us investing through ‘15 and then begin to see how the leverage of that topline growth really comes to play in ‘16 and beyond.

Great. Thanks. And then my follow-up question is coming back to your broad bookings on 2015 and the headwinds and tailwinds that you gave Justin earlier. I guess the essence of the question, the simple question would be do you expect that you can grow op gain or operating earnings in 2015? In particular, like I'm thinking you gave Medicare STARS as a headwind, but you also talked about op gain growth for Medicare in 2015. So again, bottom line, do you think you grow operating earnings in 2015?

We do, Dave. And if you look at our five-year model we laid out in early March, we indicated an operating earnings growth of between $1.4 billion and $2.1 billion. If you look at where we started this year at being greater than $200 million, I think you can see through three quarters of results and now backing into the fourth quarter EPS number that we will be north of 10% of operating earnings growth. This year, we are $400 million of op gain growth. We would fully expect that trend would continue and in the later years as I said, we will begin to get some standard G&A leverage with that topline growth. So, yes, op gain, we expect to grow next year.

Again, I think reflecting back to our Investor Relations day and the outlook we provided you there, we’re still very committed to our outlook in terms of where we are going to land in ’18, strongly committed to that. At the moment, we don’t see anything that would kind of distract us from achieving the goals that we established at that time. Notwithstanding, there maybe some bumps along the way but in the main what we are seeing right now, we believe we still have clear line of sight to ‘18 outlook.

Your next question comes from line of Ana Gupte from Leerink Partners. Please go ahead.

Yes. Thanks. Good morning. I wanted to follow up on the individual off and on exchange question but the slightly different aspect of it. I think a couple of your competitors are now beginning to acknowledge that the public exchange is actually profitable, but their bearish outlook is largely because net across on and off exchange, they are seeing margin compression and even losses. So just wanted to understand relative to last year in 2013 what type of margin performance did you see into '14 and was that a tailwind or a headwind that differ geographically and then what is the expectation into '15?

Hi. Good morning, Ana. This is a good question. If you were to look at run rate margins last year versus expected run rate margins for this year, I would say year-over-year margins are very comparable on a run rate basis. However, what’s the primary difference, well, one is, this year you have a lot more members that are starting to migrate into the book and those are coming over. But probably more importantly was last year, we had all the build out activities though of exchanges which really did tap down margins for last year as we built out our strategies, put forward our marketing but had no revenue coming through. So on a year-over-year, margins have improved this year versus last year, but that's because of last year's investments not of because necessarily the underlying run rate. We clearly believe though and have expected in our pricing, there would be a volatility in the book and a lot of unknowns. And so, we don't believe margins are optimal at this point though and we think it is very similar to what you see in a Medicaid program. We think as we begin to the manage these lives and begin to put them through more managed care programs that over time we will actually see the underlying trends with the exchange business start to migrate more to a non-exchange individual business that we've seen historically, which did ultimately would reside in even higher margins over time. So we still think 3 to 5 is reasonable and our goal would be to eventually target closer to the five and the three.

On a follow-up basis then your competitors have even talked about forced attrition from off exchange to on exchange, will you do any of that, do you need to do that into '15?

Unfortunately I can't speak to what our competitors are actually talking about. I mean from our perspective, there isn’t a need of forced attrition and again I would simply say that the catcher’s mitt we built starting over two years ago was exactly to get to the point where we were indifferent to where the customer decided to buy and what mechanism and whether that was the buy through a public exchange, a private exchange, a broker or just online. Our goal was to build a mechanism. That said, we’d would like to catch them regardless of where they are at. A real issue for us is offering them that choice and then giving them the most affordable product. And so I will tell you that Joe's focus for this leadership team is to make sure that the choice and affordability stay paramount in that and that’s why the provider collaboration efforts that we’re driving because that influences the affordability more than anything.

And your final question today comes from the line of Matthew Borsch from Goldman Sachs. Please go ahead.

Yes. Hi, good morning. Maybe just give us an idea what you're putting through is the rate increase for 2015. I guess I'm really talking about off exchange in your commercial insured business. If you don't have a point estimate you can share it, are the rate increases that you’re putting through for 2015 generally higher than what you put in for 2014? Can you characterize that?

Matt, while we don’t give specific rate increases by market or product for competitive reasons, I can't tell you that we are assuming across the book that we will have a rising medical trend over the levels that we have today. There are many reasons to assume that. There is also arguments why others may say you shouldn't assume that, including an improving book over time. But the reality is we think hep c cost will continue to rise. And even if we were to exclude hep c cost, we still think the underlying core book is poised at some point to have trend and utilization move back to a more level place. So we’re comfortable with our 6.5% for this year, plus or minus 50 basis points in the bias to the low end, but we are pricing for a level higher than that as we go into next year for core medical trend.

Great. And Joe, if I could just -- one more, if you can just remind us on the Medicaid business where you stand with most of the states? I know Texas is a special situation, but are you now getting both in most cases the fee and the gross up or is it mostly just the fee?

Hi, Matt. Yeah, on that question, the answer is both, which is what’s very encouraging for us. We still believe we will get that in Texas. We believe it's part of a sustainable business model. We just have not included that in our outlook. The one thing I want to highlight though as we said in the prepared remarks is, we’ve got a $100 million -- just north of a $100million of items that we have arrangements with a couple states. They've been signed off with them in writing. Those arrangements now are with CMS and we are just waiting for a final signed contract. And they go retroactive to within the year. So we continue to include that in our outlook for the year. But I would tell you, we don't see a reason why we won't get there with all the states. We just think there maybe timing on those and we’ll call that out if that happens. But Texas, we feel like that’s going to be more next year now than it will be this year in terms of a signed contract. And that’s what we’re referring to when we talked about administrative items. It’s the timing of getting the final signed contract is when we record the revenue.

All right. Thank you, Wayne. Thanks for the questions, really robust discussion today. I know there are still folks in the queue and I’d like to suggest that if there are kind of lingering questions, both Doug and Wayne are available to take your calls later today and fill in some of the gaps that might have been created. But let me just underscore couple of closing points. First of all, we're very pleased with the substantial progress our company has made, not just in this quarter, but over the course of the entire year and I think, it's really important for me to underscore that perspective. This occurred in the year of remarkable change. Our game plan for 2014 is played out better than expected. I think we are very proud of that and in addition to the financial success we've enjoyed this year. I'm really pleased with our progress in driving toward performance-based culture within the company. The financial results for ‘13 and ’14, the foundation for growth that we've established, support our confidence that I hope you detect, that our structure, our leadership and our strategies are all pointed in the right direction. We do remained focus on execution, as well as the need to continue to invest in our future to drive greater healthcare quality and affordability, which I believe is a hallmark of our focus going forward. To recap, on the back of the strong third quarter today, we raised our enrollment, cash flow and EPS outlooks for 2014. We are targeting growth in 2015 and remain optimistic about our longer term opportunities across both our business segments. I want to thank all of our associates, who really performed remarkably well for their and given all their hard work that underpins our success as a company and our transformation into this performance-based culture that we now have embedded throughout the company. Thank you for joining us this morning and for your interest in the company. We look forward to speaking to you next quarter.