Humana Inc. (HUM) Q3 2012 Earnings Report, Transcript and Summary

Regina Nethery - Vice President of Investor Relations Michael B. McCallister - Chairman, Chief Executive Officer and Chairman of Executive Committee Bruce D. Broussard - President James H. Bloem - Chief Financial Officer, Senior Vice President and Treasurer James E. Murray - Chief Operating Officer and Executive Vice President

Joshua R. Raskin - Barclays Capital, Research Division Sarah James - Wedbush Securities Inc., Research Division Justin Lake - JP Morgan Chase & Co, Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Christine Arnold - Cowen and Company, LLC, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division David H. Windley - Jefferies & Company, Inc., Research Division Melissa McGinnis - Morgan Stanley, Research Division Matthew Coffina - Morningstar Inc., Research Division Scott J. Fidel - Deutsche Bank AG, Research Division Carl R. McDonald - Citigroup Inc, Research Division

Good morning, my name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to Humana's Third Quarter 2012 Conference Call. [Operator Instructions] It is now my pleasure to hand the program over to Ms. Regina Nethery, Humana's Vice President of Investor Relations.

Thank you. We appreciate you joining the call this morning, particularly when we know many of those listening have had some significant personal challenges in the aftermath of Hurricane Sandy. Please know that our thoughts and prayers are with each of you and your families. In a moment, Humana's senior management team will discuss our third quarter 2012 results, as well as our updated earnings outlook for 2012 and our financial guidance for 2013. Participating in today's prepared remarks will be Mike McCallister, our Chairman of the Board and Chief Executive Officer; Bruce Broussard, Humana's President; and Jim Bloem, Senior Vice President and Chief Financial Officer. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joining Mike, Bruce and Jim for the Q&A session will be Jim Murray, Executive Vice President and Chief Operating Officer; and Chris Todoroff, Senior Vice President and General Counsel. We encourage the investing public and media to listen in to both management's prepared remarks and the related Q&A with analysts. This call is being recorded for replay purposes. That replay will be available on the Investor Relations page of Humana's website, humana.com, later today. This call is also being simulcast via the Internet, along with the virtual slide presentation. For those of you have company firewall issues and cannot access the live presentation, an Adobe version of the slides has been posted to the Investor Relations section of Humana's website. Before we begin our discussion, I need to advise call participants of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in this morning's earnings press release, as well as in our filings with the Securities and Exchange Commission. Today's press release, our historical financial news releases and our filings with the SEC are all available on Humana's Investor Relations website. Additionally, any references made to earnings per share or EPS in today's call refer to diluted earnings per common share. With that, I'll turn the call over to Mike McCallister.

Good morning, everyone, and thank you for joining us. Today, Humana reported third quarter 2012 earnings per share of $2.62, which exceeded our expectations of $2 to $2.10. We also increased our earnings per share guidance for full year 2012 to a range of $7.25 to $7.35 from our previous range of $6.90 to $7.10 and provided our 2013 financial guidance, with EPS expected to be in the range of $7.60 to $7.80. In addition, consistent with the succession management plan we first shared with you a year ago, we announced this morning that our President, Bruce Broussard, will assume the additional role of Chief Executive Officer on January 1, 2013, while I will continue as Chairman of the Board. Humana's Board of Directors has been very pleased that the transition plan, originally outlined at the end of last year, has progressed in line with our expectations. Bruce has confirmed our Board of Directors' initial confidence in his ability to lead Humana successfully for many years to come. I'm pleased now to turn the call over to Bruce, who will provide you with our strategic and operational update for the quarter, as well as a look ahead to 2013.

Thank you, Mike. I'm pleased to have both the confidence of Humana's board and the support of our talented and dedicated leadership team as I assume the CEO responsibilities. As Mike noted, our third quarter results came in above our guidance. Our earnings per share of $2.62 compares to our previous forecast of $2 to $2.10. Given these results, we now anticipate full year earnings per share in the range of $7.25 to $7.35, an increase over our previous guidance that primarily reflects a favorable prior period development during the third quarter, our operational progress and change in timing of some expenditures between the third and fourth quarter. Our outlook for 2013 earnings per share is in the range of $7.60 to $7.80, which includes approximately $0.30 per share for investments to accelerate and expand the development of our integrated care delivery model, which I will discuss momentarily. Over the years, the integrated delivery model has demonstrated significant success through better outcomes, lower cost of care, higher member satisfaction and higher Star scores. The proof of this success is especially evident in our own experience with our CAC primary care operations in South Florida and our contractual relationships with organizations like HealthCare Partners, Metropolitan and MCCI. More recently, our Concentra primary care acquisitions and our MSO joint venture investments also have demonstrated the value of the integrated care model. In that context, we advance our integrated delivery systems strategy with our announcement this morning of 3 complementary transactions. First is the acquisition of Metropolitan and our investment in MCCI, 2 MSOs which currently coordinate medical care for approximately 135,000 of our Medicare and Medicaid beneficiaries in Florida and Texas. These organizations, as well as our own CAC medical centers and the 55 PCP providers acquired by Concentra during 2012 provide the platform upon which we build a comprehensive integrated delivery model. Upon the completion of Metropolitan's acquisition and MCCI investment, Humana will employ or have strategic investments in or MSO contracts with medical practices that include 2,300 physicians nationwide. As I referenced earlier, during 2013, we will continue to build on our integrated delivery strategy in 6 targeted markets with the acquisition of additional MSO assets and primary care physicians, resulting in an additional 300 to 400 physicians added to our organization. In addition to these targeted acquisitions, we plan to build approximately 15 primary and chronic care centers in the same 6 markets with MSO partners who have proven track record of success. In addition, our acquisition of Certify is another component of developing an integrated delivery model. Certify's HealthLogix solution provides 2-way sharing of relevant clinical information across disparate electronic health records, connecting providers and allowing them to share patient health information in real-time. This function, combined with electronic communication and analytics from Anvita and Care Hub to proactively identify gaps in care, enhancing our care coordination with our own affiliated and contracted providers. As I mentioned earlier, our 2000 (sic) [2013] guidance includes $75 million or $0.30 per share cost related to these investments. As we continue our transition towards becoming a well-being company by preventing, maintaining and restoring health through integrated care, we've identified in 8 must-haves in light of the changing -- facing the industry over the next 24 months. These must-haves are interrelated. Success in one will lead to success in another. Besides preparing us well for the 2014 health care reform, we believe they will stand us in good stead for years to come, regardless of government agenda. They include growing Medicare membership, expanding our risk-sharing primary care provider network, enhancing our chronic care capabilities, growing dual-eligible members and improving health care experience for our Humana members. Our must-haves support 2 primary components of our core value proposition: affordable quality health care and enhanced and simplified member experience. Quality of care for our members is a critical component for our members' health care experience. That's one reason we are so pleased to have made significant progress in our Star quality ratings, published by CMS last month. 3 notable milestones are: first, Humana was the highest average Star rating among national Medicare companies; second, among national health care -- national companies, Humana showed the most improvement in Star ratings year-over-year; and third, our Wisconsin plan is the first plan offered by a publicly traded company to achieve the highest rating of 5 stars. We now have approximately 40% of our members in plans rated 4 stars or above. We expect that the disciplined dedication of our clinical team and our company's overall focus on quality care will result in further progress as the year unfolds. Turning from the strategic to the tactical. A major focus for third quarter has been in implementing the clinical initiatives I've described for you in the second quarter call. Let me give you a brief update on our progress. Our first initiative is the early assessment of members to determine appropriate clinical program placement. We already have hired approximately 200 additional Humana care clinical professionals, expanding enrollment in these chronic care programs by 30,000 members. Second, increasing the number of clinical professionals located in our largest-volume hospitals who'll perform discharge planning activities. Approximately 100 nurses have been hired and are actively engaged in those activities. And third, increasing the number of in-home assessments performed by nurse practitioners, physicians and other partners. More than 20,000 of our 55,000 assessments have been performed to-date. By quickly assessing our members' health conditions and needs and guiding them to the appropriate care pathways, we believe we are able to improve their health status, increase their quality of life, enable aging with grace in their homes and reduce the cost of institutional health care, thus improving their health care experience. As we also discussed with you last quarter, our 2013 Medicare bids address several developing issues without compromising our competitive position. As we anticipated, the Medicare Advantage market will become more competitive in 2013 than it has been for the last few years. Nevertheless, we are -- believe our rational pricing approach for 2013 will result in net individual organic Medicare Advantage membership growth of approximately 125,000. In Group Medicare Advantage, we are forecasting growth of approximately 20,000 net new members. Combining our Individual and Group Medicare Advantage, our year-over-year organic growth will be approximately 6%. In the standalone prescription drug market, the Humana Walmart-Preferred Plan produced industry-leading membership growth in 2011 and 2012. Two of our competitors have introduced a new value-oriented preferred network plan for 2013, replicating our national premium strategy, which we expect to create more competitive pressures for our PDP offerings. In light of this, we are anticipating net growth of approximately 150,000 standalone PDP members in 2013. To conclude, this quarter, we've taken a large step in advancing our strategy of integrated delivery system, while successful addressing our second quarter challenges. As we look forward to 2013 and further implementation of health care reform, we believe capabilities, such as relationships with risk-sharing partners, integrated data processes and clinical analytics, combined with our national platform, will enable us to both assist the government, employers and individuals in addressing health care cost and improve member experience. In that context, we expect to bolster the development with our targeted acquisitions that contribute meaningfully to an integrated delivery model we are building. We look forward to seeing many of you at our Investor Day next week, where you'll be able to hear in more depth and in greater context about the initiatives I've just discussed. With that, I'll turn it over to Jim Bloem for a detailed analysis of our financial results and guidance.

Thanks, Bruce, and good morning, everyone. Looking first at the third quarter results. We're pleased with our earnings of $2.62 per share. As noted on the slide, the quarter benefited by $54 million or $0.21 per share from favorable prior year medical claims development. The majority of this favorable development was in our Retail Medicare Advantage business, with a lesser amount benefiting our Employer Group results. The other 2 items of note were our Medicare Part D expenses and our operating costs, both of which experienced a shift from the third quarter to the fourth quarter. First, with respect to our Medicare Part D business, we experienced lower claims cost in the third quarter, primarily as a result of drug utilization mix driving member cost-sharing higher than we previously estimated for the quarter. However, based on our resulting forecast for the fourth quarter, we now expect to see our members stay in the initial coverage stage slightly longer than previously estimated, which will offset a significant portion of the third quarter drug utilization mix benefit. Accordingly, we've improved our full year outlook modestly by $14 million or $0.06 per share as shown on the slide. Second, looking now at our operating costs. The shift from third to fourth quarter primarily was related to the timing of marketing expenditures in connection with our 2013 Medicare Open Enrollment campaign. The overall $11 million increase for the year, shown on this slide, is the net result of a $25 million increase in marketing expenses and a $14 million reduction in other operating costs. The additional $25 million for fourth quarter marketing spend was based on our October evaluation of our 2013 Medicare Advantage and PDP competitive positioning in all the geographies in which we operate. And finally, all of the other third quarter items, including the lower share count due to share repurchases, were net favorable versus the previous forecast. Notably absent is any further deterioration in the benefit ratio of new Medicare Advantage member cohorts. The new member cohort benefit ratios have stabilized as both described and forecasted in our second quarter earnings conference call. Turning now to next year. Our initial 2013 EPS guidance roll-forward is detailed in this morning's press release and on this slide. Let's look at each item in greater detail. Starting on the left, with the Retail Segment. We anticipate net pretax operating margin improvement of approximately $150 million. This net margin improvement reflects both the corrective actions included in our 2013 Medicare Advantage bids and the beneficial effects of continuing to build out our clinical programs. Each of these 2 factors was discussed in depth on last quarter's call and updated in Bruce's remarks today. However, there are 2 additional items that partially offset this Retail Segment improvement. First, we expect an uptick in our 2013 PDP benefit ratio due to our competitive positioning. And second, we plan to spend modest amounts in preparing for the 2014 health insurance exchanges for our HumanaOne Individual business. In summary, after subtracting these 2 items from our expected Medicare Advantage results, we anticipate a $150 million year-over-year Retail pretax income improvement. This amount and this improvement are expected to equate with our ongoing overall target margin of approximately 5%. Looking at the 2013 Retail Segment membership growth. Although we expect significant new Medicare Advantage organic growth of approximately 125,000 members, as well as an estimated 150,000 net new members in the standalone PDP, we've included a modest beneficial financial impact of $25 million in our initial 2013 earnings guidance. This conservatism is based on the observations and margin experiences that we discussed in depth on the second quarter call with respect to new Medicare Advantage members. Additionally, we anticipate a decrease of about 45,000 individual HumanaOne members in the second half of 2013, as January 2014 approaches and individuals discontinue shopping for coverage in the current marketplace, while awaiting the startup of health insurance exchanges. Turning next to the Employer Group Segment column. We continue to anticipate a small uptick in commercial claims trends toward their historical levels. In both our 2013 guidance and our 2013 pricing, we have anticipated an annual trend increase of about 150 basis points, plus or minus 50 basis points. This increase is the primary driver of the $90 million decrease in expected 2013 pretax income shown on the slide. These 2013 assumptions are comparable to the ones used in 2012 for our Employer Group earnings guidance at the same time last year. However, as estimated by our expected 2012 full year Employer Group results, commercial trend has not increased by as much as we originally anticipated through the first 9 months of 2012. Although we continue to expect a future trend increase, there remains some uncertainty as to the timing and the slope of that eventual trend increase. Suffice it to say, we believe that we've been prudent in both our 2013 commercial group pricing and pretax earnings guidance. Our Employer Group Medicare Advantage business remained stable, and we expect net growth of about 20,000 members, which is the driver of the net $10 million increase related to membership shown on the slide. This $10 million is netted down slightly for an expected loss of 65,000 members in our commercial and Medicare ASO membership. Looking now at our Health and Well-Being Segment. We expect pretax earnings to decline approximately $30 million to a range of $460 million to $510 million due to an anticipated $75 million or $0.30 per share of investments to continue to build our integrated care delivery infrastructure, as Bruce discussed. These investments include the following 6 types of expenditures: First, cash outlays of $300 million to $400 million to acquire physician practices and medical service organizations, primarily in 6 targeted geographies; second, first year operating losses incurred during the transition phase of these practices to risk-sharing partners; third, building new primary and chronic care centers through joint venture arrangements with our MSO partners; fourth, integration costs associated with consolidating to a common practice management platform; fifth, health care information technology costs associated with conductivity and electronic medical records; and finally, incremental local market infrastructure and marketing. We have added approximately 50 primary care physicians and clinicians, as well as opened a dozen joint venture centers over the past year. This experience, combined with today's announced transactions, validates to us that now is the time to significantly accelerate and expand this buildout. Excluding the $75 million of 2013 investment spending, the remaining businesses in the Health and Well-Being Segment are expected to grow their combined pretax income by $45 million, led by our strong pharmacy business and our expanding home care capabilities. Finally, with respect to next year, we see our Other Businesses improving slightly over the year, as the beneficial effects from the non-recurrence of the second quarter TRICARE litigation settlement is partially offset by the first full year of the new TRICARE contract in 2013. So in summary, when we put it all together, we see 2013 earnings per share within a range of $7.60 to $7.80, including the $0.30 per share of accelerated and expanding investments in our MSO and primary care capabilities, which will help us greatly over the long term in both positioning and profitability. Finally, let's take a closer look at our consolidated operating cost ratio changes over the past 2 years. The continued successful implementation of our company's strategy has had an effect on the multiyear comparability of our consolidated operating cost ratio, which this slide outlines. Here are the details. First, in 2012, our consolidated operating cost ratio is expected to increase by 20 basis points over 2011. This is primarily the result of the net revenue accounting change for the new TRICARE contact effective April 1, 2012. And it's offset by the progress we've made toward lowering the operating cost ratio in our core Retail and Employer Group Segments, as well as our Health and Well-Being Services Segment. Looking forward to 2013, we expect this Retail and Employer Group operating cost ratio progress to continue. However, the investment in our MSO operations and the growth in our pharmacy business in the Health and Well-Being Segment, as well as first full year of the TRICARE net revenue accounting change, will continue to increase our consolidated operating cost ratio by the estimated 30 basis points shown on this slide. Again, we're pleased with our results today and are confident of our prospects for the next year and beyond. Before turning the lines open for questions, I'd like to turn the call back over to Mike McCallister.

Thanks, Jim. Before opening the phone lines for questions, I'd like to add my full endorsement of the integrated care delivery strategy that Bruce set forth in his remarks. It takes advantage of industry trends, it plays to our historic strengthen in Medicare and it opens up new and promising revenue streams for the enterprise. By partnering with physicians and giving them the data assets they need to offer our members quality, cost-effective care, I believe over the next few years that we'll not only grow the company, we'll also contribute meaningfully to improving our nation's fragmented, inefficient health care system.

Operator, we're now ready to start the queue. So if you could queue up the first caller. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Josh Raskin with Barclays.

So first question, just on the acquisition/investments of MetCare and then MCII (sic) [MCCI]. Can you talk a little bit about the potential impact of minimum MLR regulations, as well as how you see their relationships with other health plans progressing, the Coventrys, Uniteds, WellCares of the world?

Yes, this is Jim Murray. The transactions that we talked about today and some of the investments that were spelled out are the right thing to do from a strategic perspective. And whatever happens down the road with respect to MLR requirements and rules and regulations, we'll deal with that as they come along. Some of the – the other question that I think that you asked is the relationship that we currently have through MetCare and MCCI, with those competitors that we do business with. And we're really pleased that the relationship exists. And I think folks from MetCare and MCCI are calling those competitors today to demonstrate that we would love to continue our relationship with them going forward. And that would be something that would be very important for us down the road.

Josh, in regards to that also, we today, with our CAC centers, actually have some relationships with those competitors today. And I think it has been fruitful for them as a result of our capability and operations. And I would see that continuing in the acquisitions that we're talking about.

So sounds like, Jim Murray, just to clarify that, you don't have a sense necessarily whether or not there'll be an impact from the minimum MLRs. I mean, I'm just wondering is that -- does MetCare become a separate subsidiary? Is that part of your Florida MLR that you report on a consolidated basis theoretically? Or how's that going to work?

Well, the current plan is for MetCare to be a separate subsidiary, and the results of our health plan business will flow up through Humana's results and MetCare's results will flow into our overall consolidated financial reporting. What happens ultimately with how the MLRs are required to be reported or included in our bids is something that has to be determined by CMS and we're waiting for guidance on all that.

Okay. And are they all -- is that all included in the 2013 guidance? I know you said modestly accretive in the press release.

The results of the acquisitions that we reported on today and the investments that we reported on are included in our 2013 guidance, net of any investments that we have to do to combine those into the company. But as we said, it's modestly accretive.

Your next question comes from the line of Sarah James with Wedbush.

You had an improvement in your Retail MLR. And I was hoping that you could talk about some of the drivers there, maybe parse out what was medical management on the new cohort versus what was the underlying trend.

Well, the amount -- there's been a stabilization of the second quarter when we talked about what the new member cohort are. So that those -- there is no change in what we had originally put forth there. We indicated in the second quarter that we had seen an increase in the MLR of the new cohorts. We had then projected that through the rest of the year. We've seen the real stabilization of that. So the improvement basically continues to be as the book continues to get better in the rest of the business, we indicated that we've had strong PDP results and that the rest of the business continues to perform just as we had originally envisioned it, both originally last year and in the second quarter.

This is Jim Murray again. The suggestion that I made earlier, obviously, MetCare has to close before it can be included in our guidance. When it does close, it would likely be modestly accretive as well as MCCI. So I apologize for that.

Okay. And then looking into next year, the retail MLR guidance is flat. So can you talk about some of the assumptions going into that on the cost side or the pricing side?

Well, again, as we mentioned about our 2013 bids, as we said in the second quarter, we're very pleased with those. And as we've seen things develop, that's continued to be the case. So what we've seen in terms of the overall MLR, we're returning to our overall objective of a 5% pretax operating margin. And again, we've also taken into account the competitive positioning that we learned about in October.

Your next question comes from the line of Justin Lake with JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: The first question was just around the investment spend that you talked about last quarter. I believe it was $46 million of investments that you would look to drive $200 million to $300 million of potential either lower costs or higher risk scores. Can you give us an update on how that's been trending, whether you feel like you're still on track to get that $200 million to $300 million? And how much of that is included in this 5% margin guidance?

Sure. This is Jim Murray again. As Bruce reviewed in his prepared remarks, there's a significant investment that we're making in clinical resources, both in our market offices, as well as with our Humana Cares chronically ill capability, where we telephone our chronically ill seniors to help stabilize them in their homes. And so there's a lot of momentum that is developing as respects those 2 initiatives. And we feel very good about how those are playing themselves out. I think you also asked about whether or not the beneficial impact of those initiatives are going to likely be included in our result. And obviously, they are. But I don't want to be flippant. But like Prego, there's a lot of things that are included in our guidance for next year. You've got secular trends of anywhere from 4% to 6% depending on upon how that all plays itself out. Our trend vendors, when we did our bids, it was anywhere from 2% to 4%. And the more work that we do around investing in clinical resources makes us feel better that we're going to be on the higher end of those trend vendors. We also have MRA activities that we're doing. The recalibration is included in all of that, as well as some beneficial impact from the good work that we do with Stars, sequestration. And so yes, the good work that we described on all these clinical investments is included in our guidance. But there's a lot of other things, and we just have worked over the years, as you all know, to try to be as conservative as possible and do as much as we can so that we can come out sometime during 2013 and tell you about a lot of good stuff that's developing. And so I don't want to be evasive. But there's so many things that go into our guidance for 2013. The more we do around investment, the better we feel. Justin Lake - JP Morgan Chase & Co, Research Division: Let me -- and maybe I could just ask it in a slightly more direct way, Jim. When you gave the bids, when you put in the bids, it was -- I think what you communicated was you felt like after what you saw in the second quarter, you were going to be -- you still had some good conservatism in the bids. And then this $200 million to $300 million was extra conservatism, call it, or more cushion to the bids. Has that changed? Or do you still feel the same way about your bids?

As you -- many of you after the call were wondering whether or not we really got stuff into our bids, and then when you saw how it all played itself out in October, when CMS released a lot of that, there was a lot of write-ups that, in fact, we had caught a lot of the stuff that we had identified in the second quarter. So I feel good about the fact that our bids addressed many of the issues. And as I said earlier, we are constantly trying to improve the cost structure of our programs because right now, as you know, there's funding cuts that are being played out and the amount that we're getting from CMS is not very significant. And so the more we can do to invest in clinical programs and do the good things that we talked about around our strategy of integrated care delivery models, the better I feel about our ability to achieve the guidance that we just shared with you a moment ago. So I feel very good about where we're at going into 2013. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And if I could just ask a second question on cash flow. Can you just give us your thoughts on -- I saw you said you were going to finance the deals with cash and debt. Can you give us a total amount on what you need to do there? And can you talk about whether just why this wouldn't be mostly debt, given your debt-to-cap? And also just throw us what you think you'll be able to dividend up in the second quarter of next year, given this plan, that'd be really helpful.

Okay. Well, Justin, well, obviously, right now, we're going to stay with cash and debt because we don't know when it's going to close. We don't know how it's going to relate to when the dividends will be dividend-ed up above. But you're right. Our debt-to-cap has fallen below 16%. And so you can expect that debt will be a significant part of what we do. We haven't quite finalized all our plans yet because we want to see how it closes. We have the other 2 acquisitions as well. And then we'll probably look to package that up at some point. But we also have $1 billion line that's still available to us, too, that's unused. Justin Lake - JP Morgan Chase & Co, Research Division: And what's the total number there, guys? What's the total number of spend for these 3 deals?

We didn't say. We did not disclose the terms on Certify and on MCCI. MetCare is $850 million.

Your next question comes from the line of Ralph Giacobbe with Credit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: Just in terms of the enrollment guidance for next year, sort of the assumption of, I think you said organic 6% or so compared to kind of the CMS estimate of 11% for overall MA. So I guess, just your thoughts on sort of being below kind of the average? And maybe talk about what you're seeing in the open enrollment season right now, whether that is or isn't impacting that estimate.

Sure. This is Jim Murray again. I'm not sure how CMS calculated what they calculated. We looked at a market-by-market evaluation of where we were relative to the competitors and how much we thought we could sell with the benefits in premiums as we filed them with the government. I will tell you that for 2013 that we're probably -- if we sold 480,000 in 2012, we're currently estimating selling about 450,000 this coming year. And we have a termination estimate that is somewhere around 320,000 versus the 260,000 that we are seeing for 2012. And so that's about 100,000 delta, which kind of comports with the growth that we're going to see this year of about 220,000 or thereabouts. In the first couple of weeks, we've been dealing with hurricanes and we've been dealing with presidential elections. But I feel pretty good about the guidance that we put out there, not only for our MAPD growth but also the PDP business. Lots of stuff will take place over the next couple of weeks, but I feel cautiously optimistic with the targets that we've established. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. That's helpful. And then just my second question, one of the must-haves -- and you've talked about growing the dual-eligible business. I guess, do you believe you sort of have the capabilities in place? Or should we expect sort of you to look at expanding that platform and/or incremental investment spend for the duals? And then is there anything in guidance for the Ohio duals for '13?

Well, as Jim was outlining, we really don't break out outside of membership growth relative to what's in there on the dual side. So I can't answer that question. In regards to our capabilities overall in the dual-eligible aspect, we feel today our relationship with CareSource and our current internal capabilities, along with our contracted capabilities, should serve us well for the coming years. As you articulated, we've had success in Ohio. We've had some success here in Kentucky. And we also are in active bidding progress in the other states there. And it doesn't give us any inclination that we will not be successful in the other states there. So we're going to continue on our strategy of internal build along with the partnership with CareSource.

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

Can you give us a sense of prior period development? Was there any prior period development related to prior quarters? And also, in your bid, you said that you assumed kind of a 4% to 6% trend. Where did that come in, in 2012? And what are you assuming in 2013 for the Medicare Advantage medical trend? And then the 2% to 4% trend vendor that you're assuming for '13, you said that you expect that to be kind of at the higher end. What was it in 2012? What was the trend vendor worth this year?

Let's start with -- what was it? Prior period development versus prior -- in the quarter versus the year. All of the prior period development was prior year.

So there was no prior quarter development?

Very tiny amount.

Yes. You asked some questions about the bids and secular trends. And we put out guidance at around 4% to 6%. And philosophically, I guess you could guess that we generally see around a 5% trend as we look way back. And so that's philosophically where we're seeing trends come in on a regular basis. And in terms of trend vendors and stepping back even a bit more, that -- we do many, many, many bids. And so we do market-based bids, and so the secular trends that we may use may be different in Omaha that they are in Florida. And the same goes with the trend vendors. A lot of the work that we do has to be market-based. I said earlier that our trend vendor work is somewhere between 2% and 4%. And we generally feel pretty good about the way that we achieve that. We have a whole team of actuaries that study our trend vendors. And we constantly are adding to those trend vendors and people are making sure that we're honest with ourselves. We've got to hit a track record of being -- of beating those going forward, and that's some of the dialogue that we had earlier in my remarks. So we'll see how that all plays out. But again, I feel very good going into 2013.

And where do you think the trend vendors came out in 2012?

I'm sorry, help me with that. I didn't...

Are you – I think it's like 2%, 4%, 5%, 1%?

The trend vendors are coming out pretty much right now that we're in November. So they'll play themselves out for the remainder of the year and we'll even see the trend vendors final themselves out in the first quarter of next year. So they're right on target right now. And I would guess that as we close out stuff in the first and second quarter of next year, we'll probably see some amount above next year. A little bit.

Okay. So you expect 2012 to evolve at something over 4%?

Well, again, I think 2% to 4% because -- or something in the middle, so...

Okay. All right. So you're looking for roughly an equivalent amount of trend vendors next year versus this?

Yes.

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

I wanted to go into the deal for Met Health today. I guess, you made some comments earlier about initiatives to invest more in physician groups. And I think I understand those investments a little bit better than I do the Met Health one because if you're going to buy physician groups in markets where trying to build out a network, that makes some sense to me, but to buy a physician group, where you're already -- they already are your network, trying to understand what the incremental value add to Humana was from doing that. Are you going to be able to expand them faster than they would on their own? Or were you afraid that their recent deal kind of expanding into different payors was going to dilute your influence on them? I mean, what was the rationale there? Because it seems different to me than what you're talking about into these other new markets?

Yes, really a combination a few things. First it is a platform organization for us in continuing to expand our MSO capabilities. And so we look at that as the ability to take it and grow it in other markets, as we actually have been successful with other relationships, where we've been able to make investments and then grow them in other markets. But this particular case, it allows us as take their platform and also operationalize it. And so we look at that being the most important reason for the acquisition. And so when we talk about 300 to 400 additional physicians, it will be built on that platform from an MSO point of view and using the Concentra platform from an ability to manage the physician side.

So then I guess, how do you guys think about owning versus contracting and networking? What are the benefits that you get? Obviously, you're putting capital out there to align with the physicians when you buy them. What are you getting when you do that, that you're not getting with just a pure capitation arrangement?

Well, a few things. I think, first, obviously, you now have another source of revenue as a result of that, so not only from an insurance point of view, but now also from an ability to earn on the MSO side. So there's an earnings aspect of that. The second aspect is also we are then able to have a platform that we can expand, where currently we do not have partners in those particular marketplaces. And as we look at an integrated care model long term, it has the most effect on cost of care, the quality of care, and in addition, from an experience point of view. And our objective is to grow that throughout the nation, and we want to align with partners and have the platform to be able to grow that. And that's what you see really behind the investments both in acquisition of MetCare but in addition, our investments in our joint ventures.

And then just to wrap this up, if I can. The other investments you talked about on the physician side, it sounded like there was some initial start-up losses as you moved from -- their business from maybe some future service towards a risk-based aspect of things. As far as Met Health goes, they're pretty much already kind of along that spectrum. So trying to think about your comment about modestly accretive next year, is there a ramp-up to that as well for that deal? Or is that growth going to be largely about you expanding them into new markets and using that as a platform for growth?

With MetCare, once it ultimately closes, there's integration costs as we've evaluated there; IT capabilities, putting their current duplicative IT capabilities together, will have some cost for us as an organization. We also detailed the acquisition of Certify, which is bringing together the various providers in the network that we establish. And some of the costs related to doing that relative to the MetCare acquisition is included in that. And so if you look at MetCare's profitability and you reduce some IT cost spend, some MSO capability spend that Bruce detailed, as well as putting together a lot of the asset, the transaction costs that we want to do with Certify and what-have-you, it comes out to a number that's modestly accretive going forward. But again, it has to close first.

But then those costs start to go away in '14, et cetera, and it would ramp up there?

Correct.

Your next question comes from Ana Gupte with Sanford Bernstein. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: So the first question is about your employer MLR. You've guided a 100 bps duration year-over-year. And I understand the Group Medicare product is -- usually have worst MLR. In terms of the commercial side of the book, what assumptions do you have in there for the pricing and the medical cost trend? Some of your competition are not talking and the channel checks would indicate that the excise tax is being loaded into pricing for commercial in '13. Are you baking that in? And are you planning to do that as well?

Actually, our assumptions with respect to commercial group, are very similar to what they were at this time last year and actually what they were this time 2 years ago. So you look at the 5 component of trend, those are really all in the same brackets that they've been in. And so we're thinking that probably have about a 5% trend this year. So 150 basis points takes us somewhere, plus or minus 50 basis points, takes us somewhere between 6% and 6.5%. And again, as I mentioned in my remarks, we haven't seen this eventual uptick in trend, but we still continue to price and guide for it.

As related to your excise tax question, it is our intent to build that into our pricing for not only our commercial business but also our Medicare business going forward. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: But continuing on that vein, on the Medicare business for 2014, your Star ratings came out very nicely for '12 and projected into '14. As you're thinking about loading the premium taxes, the impacts of the loss ratio floors, particularly the controversy in Florida and reform-related budget reductions, are your target margins for Medicare 5% on the medium and long term? Do you think you can do that?

Yes. And a lot of that 15% solution and now this new strategy that Bruce laid out relative to the integrated care delivery model will help us to continue to target that 5% going forward. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: And then you might have said this to Sarah's question earlier, but you had quite a bit of an uptick in 2Q. And you attributed it to aging Baby Boomers, possibly lower risk scores, maybe adverse selection, given your plan designs. So you have now 1 quarter of data. What specifically got better here for you from -- obviously, it wasn't pricing because you've already baked in your product for this year.

Yes. Since we reported out in the second quarter, there's been a lot of work that we've continued to do and we've had smaller ahas. We identified some distribution channel issues with one of our partners that was selling to a block of business that got us more than our fair share of risk. I will tell you that I'm not certain that there's a silver bullet. There's a lot of things that kind of came together. And I guess, I might call it a perfect storm. We were a little bit more aggressive than we had been in our 2012 bids. We had the new member growth that resulted from that. And as we've tried to detail last quarter, new members carry a higher medical expense ratio. So if you had more of those, it impacts you negatively. I also might suggest that some of the issue that we had was going into new geographies and not really having the clinical programs in place to address some of those that is why we're doing so much to build some of those clinical capabilities that Bruce detailed. The outpatient issue was pretty severe in the first quarter. We're seeing that slow down quite a bit in the second and third quarters. And then we also talked about that messaging issue, where we were messaging folks to do the preventative work, and that's playing itself out. And I think that will ultimately help us in the long term. So a lot of things came together to create what we reported in the second quarter. We're seeing some modulation of those as we go into the third and fourth. And I feel good about a lot of what we're building from a clinical perspective to deal with those in 2013. Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division: Then finally on 2013 itself, you had the 15% solution. There was a lot of confidence around that. You were pricing trend vendors into the product itself. I think you talked about NPV-based pricing on lifetime value of a member. Now given that you had some issues in that 15% solution and it's not yet fully reproducible, if you will, and you're shifting your mix into HMOs, are you planning to have a more conservative plan design? And is that what you have in 2013? So just tying it back to the 5% target for 2014 and beyond sustainable, has 2013 and your 5% guidance here baked in some conservatism?

Well, we'll see how it all ultimately plays itself out. We can tell you right now 5%. The one thing that I will tell is that our bids addressed the members that we had at that point in time. And the other positive thing that I shared with you in the second quarter but we need to see how this plays out is as it respects the new members that we're going to get this year, I believe our benefit designs are tighter than they had been in 2012. And so the new member targets that we shared with you last year, I think, are going to go down, which will also provide a positive going into 2013. But again, we'll see how this all plays out. There are so many variables and assumptions. But I feel very good about where we sit for us going into 2013, particularly with some of the clinical investment that we're making, and now this new investment in the integrated delivery model that we feel so good about.

Your next question comes from the line of Chris Rigg with Susquehanna.

I just wanted to come back to the description of the spending in the second quarter clinical infrastructure investments versus integrated care delivery model spending that you're talking about now. Was the $46 million at 2Q and the $75 million you're talking for 2013, are those sort of completely distinct discretionary spending items? Or are they broadly the same?

They're very different. The spend that we've made during 2012 is to support and buttress our ability to manage and care for folks in the markets that have acute events, as well as chronic events. Some of the spending that we detailed for this year related to the chronically ill. The investment that we're talking about for next year is to acquire primary care physicians and to build integrated care delivery models, which as we've explained in the past are so much better in terms of controlling variability and managing our members in a more holistic approach. And so totally different spending items.

Okay, great. And then – so the $46 million from the second half of this year, when I look at the EPS roll-forward for 2013, is that being normalized somewhere? Is it in the operating margins? Can you just give us some color on that?

Well, I think Jim answered the question before in terms of looking at where we've been and where we're going. In terms of that $46 million, we've pretty much stayed on the schedule that we've set for ourselves in terms of implementing and hiring the clinicians and doing the things it takes to take care of the acutely ill to get their scores correct. And so again, I feel like we've done with that what we've set out to do for that piece of it. Then as we go forward, we said ultimately, we do hope to get that ROI that was mentioned. We did say though that there's many things that go into 2013 guidance, and this is just but one of them.

Your next question comes from the line of Peter Costa with Wells Fargo.

My question relates to the Health and Well-Being Segment. You're projecting revenue growth of going from just north of $13 billion to just under $18 billion, looks like a lot of that is intercompany. You're doubling down sort of on your expenditures on the doc businesses with your purchase of MDF at a multiple that's higher than your current stock trades at, much higher. And we're not looking at business that's growing earnings year-to-year. Can you tell us when we're going to see the earnings growth in that business year-to-year?

Well, I think as Bruce indicated and as Jim indicated, these expenditures are really designed to give us broadened capability, to take the capabilities that these 2 entities have and to move them across all the places where we want to have the kind of network build and the kind of clinical capabilities that we want. So I think that, that's the real -- the real issue is in and of itself, it is going to be accretive, as we said modestly in the first year, and then it'll pick up as we go. But the real accretion and the real benefit from it comes from the fact that over time, we'll operationalize this in many different places, the capabilities that these 2, the 1, the joint venture, and the other, the acquisition, bring us.

In the schedule that you may be looking at, you may be noticing that the entire $75 million investment that we're detailing here today is included in the Health and Well-Being Segment. And all of that will be paid back within a 2-year timeframe. And so we feel very good about the payback that will create itself as a result of spending that $75 million. And when we said modestly accretive related to MCCI and MetCare, what impacts that negatively in the first year or so is a lot of integration cost, which ultimately as somebody asked or pointed out, go away, and so that will then begin to demonstrate itself in years '14 and '15. So we feel very good about the acquisitions that we're talking about.

I understand that. But with the business as a whole, first we had Concentra, and then we had integration costs on that. Now we've got MDF and integration costs on that. When are we going to see the business as a whole not have these integration cost drags going on the earnings so that we actually get, from a shareholder perspective, earnings per share growth from that business?

Okay. Well, Peter, I think that, again, when you take the capability plays that we got with both of these acquisitions, starting with Concentra, the many locations, the 350 locations and the ability to really move to more of a primary care physician acquisition strategy than they had, they represent very good value. Now you're right. We've reinvested the earnings that we've had from these acquisitions. So if we'd have done nothing but continue to do with them what they did without us before, then we would have some of that and we would've had some of the earnings that you're talking about already. But what we need to do as we go forward and why we've elected to do this as rapidly as we are and as quickly as we are is because we see that it's very important in gaining control of health care cost and improving our consumer experience that we get this done in the timeframe that's still really is around before 2014 and beyond. And that way, having those capabilities when that time period arises, will be of great strategic value and economic value to us.

Peter, I think just to maybe put it into some of the same context that Jim was referring to, we are balancing the need to continue to grow the organization, and from a shareholder point of view and provide the adequate return. I think as you look over the years, there has been pretty impressive growth in the organization. Has not been driven largely by just buying companies to get from size, we've been very oriented to focusing on how we can advance our strategic aspect while still growing organically. And when you look at the organization and where we're positioning itself, there are significant changes that are going on in health care over the coming years. And we believe that the acquisitions that we are doing today, not only position us in the short run from a financial point of view but position us in a long run of being able to be a leader in dealing with those changes, and most importantly, to be able to drive down the health care costs. And that we continue to focus on that. And these acquisitions that we've added here, the Concentra acquisition wrapped around a primary care aspect, our investments in Anvita and our investments in SeniorBridge are all examples of where we are focused on building a system that long term will deal with and have a competitive advantage as opposed to just short term relative to meeting accretion or dilution tests.

Okay. And then just one follow-up question regarding the margins in that business, even without the $75 million of extra spending. Can you talk about why the margin pressure is there without that relative to the revenue rise in that business? And I understand it's probably intercompany revenues. But please talk about the intercompany revenues and the transfer pricing effect of the margin pressure.

Well, the margins in the Health and Well-Being Segment, I think, will be better. The only thing that's holding them down, there's a little slide in my presentation at the end, where you can kind of look at that. But if you look at the 2-year totals of what we're looking at, you can see that we continue to drive down the operating cost ratios in the core businesses, the Retail and the Employer Group. And that's going down by 150 basis points as shown there. Now 140 basis points of that 150 basis points comes right back as we change the accounting for TRICARE. But then come back over to the Health and Well-Being, the only reason that has increased by 60 is the 75 spend. And to come back to your first question, when we decide how much we're going to pay for these, we look at the capability we're buying and what that cost versus what would be the time and the money and the cost of doing that on our own. And it's that speed that we think that justifies the higher premiums. And then continuing to work down the cost on the operating cost part and take that capability and use that to do that, to continue to drive that cost down, that's where we can improve our own multiple to get more in line with the multiples we pay for the things we buy. We're very careful about how much money we pay when we look at -- and we look at all of our alternatives to get these capabilities.

Just not to belabor this, but one more item. I think if you look at the PBM margins that exist out in the marketplace, that the margins there are pretty similar to what we're booking as a company. And right now, our Health and Well-Being Segment is comprised significantly of our PBM activities and operations. The Concentra platform was acquired a number of years ago to fill out this strategy that we're now laying out there. The margins that it's enjoying for its urgent care and occupational medicine business have been on the lower end. But we ultimately see as we're acquiring primary care physicians and putting them on the Concentra platform that the margins that they'll enjoy will begin to go up over time. And so I think you'll see some nice growth in the margins from our Health and Well-Being Segment, as we move more and more into this primary care and the delivery of care that Bruce laid out earlier.

And you can certainly see that in the dollar profit earned by Health and Well-Being.

Your next question comes from the line of David Windley with Jefferies. David H. Windley - Jefferies & Company, Inc., Research Division: On your commentary around prior year development, I'm wondering if that came from parts of your membership apart from the new member cohorts that you talked about at length on the 2Q. So said differently, does the prior year development change your thought process about those new cohort cost trends?

No, David, it doesn't. Again, prior year development came from generally the prior year. And again, we had -- as we indicated second quarter, we had some of these numbers, but that was a minority part, a very small part of what the prior year development was about. David H. Windley - Jefferies & Company, Inc., Research Division: Okay. So you had talked on 2Q I think, and maybe you said this and I couldn't hear it. But you had talked on 2Q not only about 2012 new members but also 2011 new members not performing very well. And I just wondered if the prior year development had anything to do with those 2011 new members. It sounds like no.

Yes. The 2011 new members that we detailed on the second quarter call have improved since we showed you the slide that we showed you on the second quarter. But it occurred as a result of this year's improvement. And so feel very good about how 2011 is starting to turn itself out, and now we look to 2012 to do the same. David H. Windley - Jefferies & Company, Inc., Research Division: Okay. And then in terms of your plan expansions, Jim, to Ana's – one of Ana's questions, you talked about not having some medical management capabilities in places, one of the reasons that perhaps that performance was not as good in new member cohorts. You also saw that, I believe, in PPO plans. So in 2013, you're growing your PPO plan number by something like 23%. Does the investment that you're putting in place today address that medical management need in those new plan markets? Or are you depending on benefit design to address the issue? Or if you could detail that for me, I'd appreciate it.

Yes. As I detailed earlier, a lot of the spend that we're making by hiring nurses in markets, as well as hiring nurses for Humana Cares allows us to address those new geographies that are included in 2013. And as well as the plan designs that I referenced earlier will also address the issue for 2013. So all of those coming together will help us with our 2013 results.

And your next question comes from the line of Melissa McGinnis with Morgan Stanley.

You recently announced entry into Region 3 of Kentucky, a state where Medicaid has proven pretty challenging this year. Can you talk about your comfort with the profitability in that region, especially given the financial arrangements you have with your partner? And then also given Centene's announced exit, do you have an appetite to expand more broadly across the state, longer term?

Sure. CareSource is responsible for the losses on the Kentucky relationship that we established up to some stop-loss level, which is fairly high. As it relates to some of the other things that are going on in Kentucky, you see a lot of bad results from some of our competitors, and obviously, some of the contractual content that would have to change before we would be interested. But we'd always be interested in moving into various parts of that business. But again, the contract would have to be amended. Apparently, the cost assumptions were probably inappropriate.

Okay, great. And then I know you talked a bit about the duals in response on earlier question. But these 6 key markets where you're making the investments in integrated care models, are they at all aligned with markets where you potentially see long-term opportunities with the duals?

Yes. One of the things that Bruce Broussard highlighted was investing in as many as 15 primary care or chronic care capabilities with a joint venture partner who specializes in focusing on the dual-eligible population. And so we feel very good about the opportunity there, particularly in these fixed markets.

Your next question comes from the line of Matthew Coffina with Morningstar.

It seems to me like you guys are pushing more into the vertically integrated model than any of your peers. And it also seems like that's a model that will work best when you have a high level of geographic concentration. So my question is, is this only a build strategy? Or at some point, do you also have to look to divest some assets, particularly geographically to focus on maybe fewer markets with more scale?

Well, first, your point is right is that we are oriented to a vertical integration wrapped around integrated care model. So that, we'll confirm. In regards to the markets, we are oriented to geographic concentration because we do find that, that geographic concentration allows us to invest in the markets and be able to achieve the most efficient health care delivery. In regards to divesting and your specific question around that, we are constantly looking at markets and figuring out if they are the most effective market for us to be in. And so you don't see a lot of assets that we would be selling. There might be times that we might exit a market, but that has less of a financial implication because we don't have a lot of assets in those marketplaces. It's more relative to just leaving the market there.

So is there any kind of characterization you could give us in terms of the percent of your current membership that could be viable within an integrated model? And then at the same time, maybe looking 5 or 10 years out, what percent of care delivery could potentially be delivered internally versus using third parties?

Right now, about more than 30% or so is in our relationships that we have and what we call risk-bearing relationships. We would see that being between 1/3 and 1/2 of our population would be in those members going forward. And so not only will we be growing the HMO product or the integrated care product, we will also be growing the PPO product. So we'll continue to support that product, but our primary focus will also be moving members into the integrated delivery system over time.

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

Just wanted to follow up on the assumption that you had for the loss in the individual One members in the back half of the year. It looks like you're assuming maybe around 10% of the individual book will come off ahead of 2014. You talked a little bit about some of the assumptions that you put into that, sort of how you're arriving at that type of contraction. And then what would you expect in 2014 with the legacy individual book? Would you expect that to then move down more significantly as the changes come up online?

Well, to start with, the 45,000 that we mentioned is basically, again, just talking about in the second half of the year, people begin to await the exchanges. And as you know, the individual business is more ratable, it comes during the year. So you'll get -- you have more and more people -- you have more people come in during the year as opposed to at the beginning or in the middle. So we wouldn't be in a position right now to tell you about 2014, but we think it's quite reasonable to assume that as 2014 approaches and the health insurance exchanges, the regulations come out and people know what they are that they'll start to be able to look at that in addition to the coverage they now have. So we think that fewer people will be buying coverage in the current marketplace and more will be looking for that January 1 start date.

Okay. And then just how much of that also would be influenced by pricing and what you'll need to do there on the individual book? Maybe there's been a lot of talk about sort of the group plans and how pricing could be impacted as the tax starts to roll through, throughout the course of '13. Maybe just spiking out individual as you think about things like the tax, and then also how the risk profile of the individual market can change as you see members potentially dropping out ahead of the exchanges and how you price for that.

The individual business for us is currently about a breakeven proposition. In terms of the revenues that we enjoy as a company, think it's less than $1 billion compared with $25 billion from the MA business. We see that there's an opportunity for the individual business in 2014 as we go into certain states where we think it makes good sense to do that. But in terms of how the individual business is going to move the dial at Humana, it's probably a smaller part of our overall thinking as an organization. We're cautiously optimistic that we're building the right mechanisms and what-have-you to compete on a selective basis in 2014 after we see how that all plays out. But it's not a significant area of focus for us as an organization going forward.

Your final question comes from the line of Carl McDonald with Citigroup.

So 3 weeks into open enrollment, be interested in what has surprised you the most from the competitors in both MA and PDP, whether it's benefit design, change in distribution. Anything else you'd highlight?

This is Jim Murray again. The only thing that I would say that has surprised us is the lower pricing on the PDP business by one of our competitors. Other than that, some of the -- each market stands on its own. You see some stuff in a particular market that is surprising in terms of the premium or the benefit design. Those all seem to balance themselves out on the MAPD business, and so that's why we feel reasonably confident with our 125,000 net growth number. So the only thing that I was a little surprised about was what happened on the PDP business. And we'll see how that plays itself out.

And then the second question, just on the cash at the parent, fell sequentially $760 million, between the dividend, the deals, repurchasing, get to about $485 million. Just be interested in what was the other $275 million change there.

Yes. Carl, I saw your question. And we normally put a little sentence in the press release that says, "The difference is working capital changes." And that's what it was this time. And principally, of that $270 million, it's about $230 million was income taxes. The parent pays the income taxes for all the subsidiaries, and then eventually gets reimbursed by them. So that's the difference.

That does conclude our question-and-answer session for today. I hand the program back over to Mr. Mike McCallister for closing remarks.

Thank you. Let me just remind everyone about the strategic decisions the company has made over the last dozen years. We were the company, I think, that best recognized the opportunity that Medicare Modernization Act meant in 2003 and has transformed our company. We're, I think, one of the early companies to really understand that this business was moving to retail and to consumers, especially in the Medicare space and potentially in the commercial space as well. We've got the strategic implications of an Affordable Care Act. We have a really rapidly evolving, real-time information environment. And you've seen an acquisition this morning from us that feeds into that. There is rapid provider consolidation throughout the country. And you've seen some action this morning down that path. But I think at the end of the day, the strategic implications in front of us here today, and I think what you should take away from this call and what you've heard this morning is that we are completely convinced that integrated health care, as far and as fast as we can take it is critical to the next chapter of what happens, especially in the Medicare business but potentially for the entire business. And so you're going to continue to see us work very quickly down that path. The future is about integrated health, it's about population health and it's about payment for quality. And I think Humana's set itself up today, in the midterm and in the long term to be able to deal with all of that. And with that, Bruce and I will thank you for joining us. I also want to thank the Humana associates that are on the call today for making both this quarter's results what they were and setting us up for a great future. Thank you very much.

This does conclude today's conference call. You may now disconnect.