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Aetna, Inc. (AET)

December 12, 2012 9:00 am ET

Executives

Thomas F. Cowhey - Vice President of Investor Relations

Mark T. Bertolini - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Investment & Finance Committee

Joseph M. Zubretsky - Chief Financial Officer, Chief Enterprise Risk Officer and Senior Executive Vice President

Frank G. McCauley - Executive Vice President of Commercial Business

Kristi Ann Matus - Executive Vice President of Government Services

Karen S. Rohan - Executive Vice President and Head of Specialty Products

Charles Kennedy - Head of Aetna Aligned Care Solutions

Gary Thomas

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Sarah James - Wedbush Securities Inc., Research Division

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Melissa McGinnis - Morgan Stanley, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Joseph D. France - Cantor Fitzgerald & Co., Research Division

Thomas F. Cowhey

Good morning. For those of you that -- are we live on the webcast? Excellent. For those of you that don't know me, I'm Tom Cowhey, I'm the Vice President of Investor Relations for Aetna. I want to thank you all for joining us today, either live here at the Pier or on the webcast at home. All the materials should be up that we have available here should be available online for those of you that are listening to the webcast.

A couple of notes before we get into our presentation. First, there is a cautionary statement. You should look at the risk factors that are contained in our SEC filings periodically to understand risk factors that may impact some of the things that we're going to talk about here today then that may cause actual results to differ materially from past results. You can also read this at your leisure.

Agenda, I'm up here quickly and then I'm going to quickly turn it over to Mark Bertolini, who is going to walk us through Aetna strategy; Joe Zubretsky is going to talk about strategic execution across our business lines and how Aetna will grow; and then we're going to go to a panel where we've got 3 of our executive committee members and operators who are going to answer your questions from the audience for about 40 minutes.

We're going to take a quick break at that point and we're going to get to our next generation's networks performance -- presentation. We're going to have Charles Kennedy and Gary Thomas come up and talk to you a little bit, give you some background on our Accountable Care Solutions business, how we expect it to perform, how some of these partnerships work.

And from there, we're going to move into lunch. Lunch is at the far end in a different room and your table assignments are on the back. You have an Aetna manager at your table who is going to introduce themselves and be able to answer your questions about their specific business during the lunch hour.

When we come back, Joe is going to start his backup. We're going to talk through the financial outlook and our capital plan; and then Mark and Joe are going to be available for questions before we conclude.

So we're very, very excited about the day. We hope that you all are, too. Thanks, again, for joining us. And with that, I'll turn it over to Mark Bertolini.

Mark T. Bertolini

You can hold your applause. Good morning. Thanks for coming. Hope you're all awake out there. I'm sure you're up last night reading the 8-K and the cautionary statements, all of the other sorts of things.

We want to share with you today some data that substantiates our position that Aetna is a good investment, and why each of those aspects of that investment are important for all of you to know well. So I will do a light touch on the number of the items, and then Joe is going to take a deep dive into each one as he goes through his presentation after mine.

This is the Aetna Way. You've all seen it before. This is our values, this is an organization, this is how we think as a company. And one of the things I want you to take away from this presentation today is that we see shift occurring in the marketplace about who we serve. And it's going to be very dramatic change over the next 3 years away from employers-sponsored buying to consumer buying. And with exchanges coming up both private and public, we believe that the people we serve are going to change from an employer to a consumer. Secondly, we see more opportunity internationally versus domestically in the future as well. So I'll talk about each of those as we go forward here.

Here is the team. They're all here today. We have a couple of new faces this year: Kristi Matus in Government Services; and Karen Rohan, who is running our Specialty Businesses. The rest of the team is -- and Deanna Fidler, who's taking over Human Resources. So this is the new team and they're all here today, plus more of our team that you'll meet at lunch time. And so take an opportunity to introduce yourselves to them, they're important part of who we are and we'll meet more of them today and hear more from them today so that you'll see the depth we have in our team. We believe this is the best team in the industry.

So how will we grow? These are 6 points we want you to take away from the day. Our diversified portfolio of businesses can enable predicable growth. Why? Because we're headed into a very uncertain time. We're not making one big bet on any big business. We're making bets on a few and giving us optionality and opportunity in multiple businesses as we go through these next 3 or 4 years. I would argue that our business, its diversification, its size, as soon as we could finish the Coventry acquisition with $50 billion in revenue, $4.3 billion in EBITDA and $2.2 billion in free cash flow, plus our high single digit margins, positions us well to go into this fight and come out a winner on the other side. You all know the uncertainty in this marketplace, and we believe the diversified portfolio that we have, while not perfectly matching the market, is the best bet going into this very difficult environment for the next few years.

What you'll see later, if you haven't already looked back, is that are large group business can profitably grow. Just alone on the increasing trend each year, this business is a growth opportunity in the top line and the bottom line for our company. You will notice in some slides that I will show you and that Joe will show you that our exposure to small group and individual is a lot smaller than you thought it was, and that our growth opportunity is really coming in large group and in our government franchise. So diversified portfolio with large group insured business that can grow profitably in ASC, as well as a government franchise that we believe is a growth engine and can organically grow in good competition with the marketplace.

Our small group and individual markets are an opportunity, consider it an option to play. They're not as big as you all thought they were, they're not contributing as much profit as you all thought they were, but they're an important aspect of who we are as a company and give us optionality as we go through this very difficult and changing environment.

The core of our business is around medical costs, 80% to 85% of overall costs are Health Care, and we believe our Accountable Care Solutions is a huge opportunity for us to manage medical costs and to maintain our high single-digit margins. So today, we're going to give you also a look at how this business works, and where you will see it in top line and in medical costs, and ultimately, showing up in the bottom line of our business.

And then finally, people keep telling us they didn't see Coventry as a strategic acquisition. But we believe it is strategic. We think it's strategically and financially attractive, and we'll share more information with you. The synergies are highly achievable and we believe this business gives us an opportunity, again, in the government franchise and in the optionality of small group and individual.

So here is our shareholder value creation model. Advance the core business, 4%-plus growth per year, and that's through effective Health Care networks, our Accountable Care Solutions model and affordable products. Now talk -- when we get to our strategy section about how we think about affordability and simplicity in the future, particularly as we head into a consumer marketplace. The emerging businesses that we are growing enhance the core. They're transforming our network model, and they're engaging consumers as they look at buying Health Care on their own in a new marketplace, and then deploying capital effectively. We believe we deploy our capital more effective than anyone else in this business. And so we see 6-plus percent growth out of that through shareholder dividend, investment in organic growth, disciplined M&A and share repurchases. All of this leads to a continued commitment to target low double-digit operating EPS growth on average over time.

So why you invest in Aetna? First, our strategy is differentiated. We believe that we could create competitive advantages and drive profitable growth, which will well position us with our diversified portfolio to generate those results over time consistently. And those results, when we include the guidance we gave you yesterday in the 8-K, will show from 2010 through 2013 projected operating EPS CAGR of 13.6%, which is higher than any of our diversified MCO peers. Continued consistent performance.

So you've got the 8-K yesterday. At least $5.40 per share next year, 9% revenue growth, medical costs at 6.5-plus or minus 50 basis points and growth of about 200,000 members throughout the year. All of that without considering that Coventry close and consolidation.

So let me just remind you what we see in the environment today and why we believe that drives our strategy. So let's go through this rather quickly and share with you a bit of our view about changing environment. So we believe that unsustainable Health Care growth, the inefficiency that drives the system and contributes to Health Care costs, coupled with increased consumer involvement, provider consolidation and Health Care information technology, make these strategic pillars what drives our business going forward.

So first, next-generation networks. We have to change the relationship with providers. We have to change the way the system runs and its payment reform, ACOs, a lot of things that we've been doing, but this is the critical linchpin to how we drive this business going forward.

Consumer engagement. More and more consumers are going to be buying their Health Care even if the employer-sponsored insurance system continues. If it survives the ACA, if it survives the fiscal cliff, consumers are still going to have a lot of opportunity to buy their own health care, not just on public exchanges but also on private exchanges, which will create marketplaces for individuals to have more choice and to make their own choices.

Next-generation platforms is really about reinventing the business model. So we have, for a number of years, made what we do more efficient. That has limited shelf-life. So what we need to do in a new environment is we need to think differently about what we run and what is important to our business, and ultimately, what is valued by the people who will buy our products and services. So that means some of the things we do today, we will no longer do, because it doesn't make sense for us to do them. And I think there's a lot of opportunity across the industry in this space, but also with partners around the industry to change what we do inside the organization and what are -- toward what our customers value, making the products simpler and more affordable.

And then finally, the Coventry acquisition gives us the market heft, but, more importantly, the capital scale to survive this big shift in the marketplace that will occur over the next few years and come through the other end of that with the ability to write checks, continue to consolidate the industry and to grow our business.

So let's talk a little bit about health care premiums versus wages. You all know these numbers, 172% increase in Health Care premiums since 1999, only 40% -- 47% increase in earnings, workers earnings, and 38% overall inflation. This is unsustainable, and it's about the cost of the system not the insurance vehicle itself. And so we have to get at those costs if we're going to make a difference.

There is $750 billion a year in waste, this is Institute of Medicine 2009 data. If you update that today, it's about $800 billion, $810 billion. Why does that matter? Well, if we just get at that in some manageable way, if we were able to solve that problem, we solve half the nation's debt over the next decade, $8 trillion. If we solve just half of it, we pay for what Bowles-Simpson is reported to pay, $4 trillion. And if we get at just 20% of it, 20% of the waste in the system, we pay for the Affordable Care Act. So this is where the beat is, this is where the opportunity is in getting up at $750 billion. So when you look at where these costs lay out, unnecessary services, inflated prices and inefficient care delivery, that's all about the ACOs. Fraud, prevention of failures, it's all about quality, and excessive administrative costs relate to that platform discussion I just had with you about what we do and how the system works.

So let's talk about the consumers. They're paying for half the increase in medical premiums over the last 6 years. The cost increase has been $6,228 on average per person, per year, and they picked up half of that, 48% of it, $2,900. And that trend will continue. And where you saw these numbers 2 years ago when we first put this on the page, they've now gotten closer. And over time, the consumer will be paying as much for their health care as their employers through premium, contributions and benefit costs. That puts a fundamentally different face on the customer for us.

And then meanwhile, on the physician side of the business and hospital side of the business, the industry continues to consolidate. We're running into this more and more as we do our accountable care organization work across the country. Everybody's competing for the new thing. And as a result, providers, physicians particularly, are now seeking the support of the institutions they work with. And so you can see here from 2002 all the way to last year, 2011, hospital owned practices are 70%. And by 2013, only 1 in 3 physicians will truly be independent. This trend continues. And when you think about hospitals acquiring physicians and health plans acquiring physicians, this is going to be a very capital-intensive, high-cost competitive place in the market, and we believe our approach to change in the way we work with physicians and hospitals, virtual integration, is a far less capital intensive and more conductive opportunity to take advantage of the shift in the marketplace.

And then mobile technology. The CarePass system, the platform that we've developed, and I'll share a slide with you on that in a moment, is now one of the most downloaded health apps on the Internet. But even more importantly, what we've now been able to do is through CarePass and iTriage, we can connect all of your data from all of your applications that are connected to the platform in one place. So it shares. If you put it into your fit bed, it will share across all the applications that knew that information. So this is a whole new space, more and more people are using it, and over 50% of people were using the mobile device to access something about health care over the next 3 to 5 years.

Why is this important? Well, as we've looked at how we've changed consumer behavior, we have to make it simpler. The carrot and the stick works sometimes, and they work for simple, repeatable tasks, with near-term consequences. But the further away the consequences, the more difficult the connection between behavior and those consequences, the more you just need to make it simple to do. And so the CarePass platform is about creating that simplicity. If we can get them to use it, we can begin to educate, maybe begin to change the way they use the Health Care system. And I'll share some of those tools with you in a minute.

So let's talk a little bit about our strategy to create shareholder value. Next-generation networks is really about transforming the network model. We believe we have a huge head start here in a number of ways and a model that we believe will be very powerful in the future. And not only having a fundamentally different relationship with providers and our organization, but in changing the way the providers use the Health Care system -- work in the Health Care system today. And I think this new network model put us in a fundamentally different place as an organization in the Health Care system than our competitors, because we're going to be in the middle of all of it. We're going to be supporting their change. And with the Medicity system now having 28.7% of the market as a health information exchange, far in excess of anybody else, theirs is 6% or 7%, we now have a strong foothold in grabbing real estate around fundamentally changing the way the system works.

Consumer engagement is really about putting the consumer at the center of their own health care decision-making, and we've developed lots of tools. And these tools make it easier, and they're coordinated and they work together. We're piloting this year what we're calling our clinical capacity exchange where people will be able to buy in on the spot market, access the services that they need on their own time, at their pace, where they want to get it, when they want it. So think about it as a shopping experience while you're doing something else, getting your access to Health Care when you want it versus having the system -- having you to work around the system.

Next-generation platforms, we believe, enable access and affordability. And this is, again, restructuring our business. We're going to get cost out and we're going to be an affordable alternative in the consumer marketplace where people want it to be simple and where they want it to be cheaper. We can't run the business the way we run it today. A lot of the things that we do today are in no longer necessary or valuable to the end buyer. We need to find ways to work with other parties to make that more efficient behind the scenes because it's not valuable. And that will allow us to put a more affordable product in the marketplace. And then we believe, of course, the Coventry acquisition is strategically compelling, financially attractive and has manageable risks.

So let me talk about each of these. Here's the high-level about how our programs work with the Accountable Care organizations. Joe is going to take you another level deeper. And then you'll hear later from Charles Kennedy and from Gary about how we are going to actually make the numbers work, and how you will be able to see those numbers when we're reporting our results.

So first, what we do is we enter into a collaborative risk sharing arrangement with providers. And that can be anywhere from where we take all the risks, where a lot of them are 50/50, we're sharing up and down, and, actually, we have one system over in Wisconsin taking 80% of the risk on their own.

We receive best-in-market provider unit costs. We're seeing discounts approaching 25% off of that's providers list prices or the prices we have with them to get into these arrangements. Why? Because they get it. And I'll talk a little bit here in the future about the cost shift, that they see the cost shift going away. Their inability to play in the cost shift is quickly coming to a halt, and so they want to play the game differently.

And so we're getting best-in-market providing unit cost, which we then put new insurance products in the marketplace. And these products are 10% to 15% below our competition, while maintaining our high-single-digit margins. So it allows us to grow membership faster at the margins that we have targeted for those markets. And so you will see some of that math later. And you'll see the growth we've already seen this year in 2012, and what we project for the next year in the way of revenues and membership related to this product, these product capabilities.

The CarePass platform was started on June 5, 2012. We did 2 things. We put, first, iTriage up, which is our own asset. And then, we gave the software development kit and the associated program interface, the APIs, away to a developer site, which we now run, that allows developers to connect apps to CarePass. Why? Because it becomes a destination. It's a platform. Why? Because it shares data. So that when you use one application it shares the data across all the applications that are connected to CarePass. Why? It makes it simpler to use for consumers when they have it in their hand.

And so, in the first few months, we have all of these apps. They are now connected. And as of last month, additional apps, and they're growing every day. And they cover everything from my own insurance information and my own identity to my doctor visits, to fitness and to nutrition. And we see more and more of these apps being developed. We are holding hackathons, we're giving away prizes, $100,000 to people who work on just medication compliance and that were connecting these apps to CarePass platform. And then, for now, a lot of this is free to our members and to people who are not our members, anybody who downloads iTriage. But CarePass is for Aetna. And this is free for them to use. Why? Because for every 50 basis points we see a reduction in trend, we see $320 million in savings for our customers and for Aetna. So this is really about driving to a better cost trend and getting people engaged in their own health.

So our next generation of platforms, as we move from employers into consumers, are very much focused on working -- moving away from people who, quite frankly, relish the complexity. We have our own dialogue with benefit managers, who are all very important because we understand how these things work. And because they're cost-conscious, there's a lot of negotiation to consumers who really want it to be simple and who want it to be affordable from a standpoint of having superior value. And this shift is important. And this shift causes us to run our business very differently than we have in the past because consumers will not put up with the complexity that we have today. And occasionally, from time to time, I go out and test our own platforms, and I can see why some customers don't buy from some of our sites because they're too complex. They need to be a lot simpler. And so this shift requires us to change the way we do the business face-to-face with our customers, but also most importantly, in the backroom and how we run the business. And that we'll reshape our organization the way we think about the business. It's not about doing what we do today more efficiently. It's really about reconsidering what we do and why we do it.

So over the next few years, you'll hear updates on what we're doing to reengineer our business platforms to meet consumer needs. We have big goals for this opportunity because it drives affordability for our customers. And at a minimum, as we always have, and we are, committed to achieving productivity improvements to offset inflation. But that's just Jacks are better to open.

The Coventry acquisition, $50 billion in pro forma revenues, $4.3 billion in pro forma EBITDA and $2.4 billion pro forma parent cash flow, we believe is strategically compelling and financially attractive. It gives us the heft and the capability to compete in an ever-changing marketplace, and an opportunity as we come through 2014 to use our diversified portfolio, to not only survive but win. But on the other end of it, to be a net consolidator of the industry as it begins to change because people will not make it through. And we think that's a huge opportunity for us.

Advancing the core. Here is our portfolio. Not what a lot of you thought it was. And you can see that our Commercial ACS and Fee business and Large Group Insured make up a lion's share of our profitability and our revenue. Small group and individual, 16% of revenue, and only 7% of EBITDA. We think this is optionality, good optionality to have. Still earning money, but it doesn't have the kind of returns on it that are Large Group Insured and Commercially ANC and Fee businesses have. And we see huge opportunity in those top 2 businesses, because as private exchanges start to evolve, what you're going to see are large self-funded employers move to an insured market, different than a lot of the trend that you all think of.

So we see this ASC to insured shift occurring as employers, large employers, start to engage in private exchanges. And we participate in a number of them. And we will give you some of that information later, and Frank will be able to talk about it in his presentation. But a lot of the attitude around here has been to avoid the premium tax. What we're going to do is we're going to see employers go from insured to self-funded. We are then going from a group marketplace to consumer marketplace, we're going to see people go from self-funded to insured. And the way they'll manage the premium tax is there'll be just a small piece of them moving their benefits to where they believe are appropriate, moving to find contribution, the premium tax will be a small price to pay to get to that kind of model. And that allows us, given the capabilities we have, to compete in the marketplace more effectively.

Medicare, Medicaid, we think are growth opportunities. There's a lot of concern about Medicare, and you'll hear some more from Kristi later about how we think about Medicare. And as whether or not we believe this a sustainable market, we do. We think it's a huge opportunity for us. Medicaid is a growth market. We'll show you a little bit about duals. Every duals competition we've competed in, we've won. We have the capabilities and we have the opportunity.

In group insurance, we think it's a good, stable market and an interesting complementary product to overall product mix. So we believe this diversified portfolio mitigates perform risk and also positions us well in high-growth businesses. And then when we bring our friends on board from Coventry, you'll see the mix is dramatically different, except that we pick up more in Medicare and Medicaid. But the overall exposure to small group and individual is still not huge, as you all imagined, and we believe good price to pay for optionality to compete in that marketplace going forward, in the right markets, with the right rules. And Frank will be able to talk to you about the kind of markets and the number of markets we're considering participating in the future.

So Commercial ASC, improving our discount position, we've had a reasonably good fall this year going into 2013, we had a lot of momentum, we had enhanced cross-sell capabilities and we see more and more of that opportunity as Karen begins to work with the rest of the organization to improve our cross-sell across the company.

Large group insured is more focusing on targeted customers. And also in International, we've had great expansion in International around large group insured.

Small group and individual, again, optionality. It's really going to be about affordability, simplicity and brand preference. In the markets we compete in, we believe we have an opportunity to win.

Medicare, there's group Medicare Advantage conversions which are now occurring, both in our own book of business but also through exchanges like Extend Health in the marketplace. We think that's a continued opportunity. Individual Medicare Advantage targeting, which will only be enhanced with our Coventry opportunity and Medicare supplement, which is growing dramatically in the first year of our owning it, and fills out our product mix along with Medicare PDP to have a great opportunity in Medicare.

And then Medicaid, the ACA expansion, new state procurements and the dual eligible opportunity. And we see a lot of opportunity in dual eligible. It will be slow going, so there's a lot of dual eligibles standing with their enrollment cards behind the ridge line somewhere waiting for a bell to go off to throw their money at us. It's going to take time. And it will be bumpy and states will delay their implementations and pull back on their budgets. But we believe this is definitely an opportunity for those that are prepared to be able to compete. And Joe, I believe, will have some data for you on our Avalere program and how that worked and what we saw in our results in managing duals in Arizona for a long period of time.

Coventry, increased membership and diversification, 22 million combined medical members. Increased government program presence. It will bring our revenue up to 30%, not quite where the market is but we believe appropriate, and 22% of our pro forma EBITDA. And we believe it complements the rest of our Medicare portfolios. It gives us a stronger presence in Individual Medicare Advantage. And by the way, those are our markets with HMOs and not PPOs. As well as a stronger presence in PDP to roll -- to around out our Medicare Advantage group and our insured -- and our PDP business.

And then enhanced capabilities in 2014 and beyond. Coventry has a very strong ethic around putting affordable products in the marketplace. They've been able to compete well. And so we're not going to lose that in Aetna as we bring this team on board. So their operating model, their platforms, the way they think about competing in the marketplace are very important for us to pull into our organization and make part of our DNA. So we're working very carefully. Karen Rohan is managing day to day our integration and making sure we're getting the best of breed from both organizations in being able to compete and learn from Coventry and their team about how they're managing these very low-cost markets, value-based networks and affordable and simple product. And we believe, obviously, it is financially attractive. There is modest accretion in 2013 depending on when it closes. $0.45 in 2014 and $0.90 in 2015. We believe that's highly accretive. And with high ROC -- ROCs in low double digits and high teens for our ROE in 2015 on a rolling basis afterwards.

So we think this is a very good acquisition for us. It gave us what we wanted. It's business that we understand well from an execution standpoint. The synergies we believe are highly achievable. We do not, as a matter of course in our M&A work, consider revenue and cross-sell synergies as part of our numbers. So those are all upside. And you all know that Coventry doesn't have specialty product mix, so that's an opportunity for us. And so we believe that our synergies are highly achievable and leaves a lot of room for upside on the revenue and cross-sell. And obviously, the capital management, we use very little equity. We're able to borrow a lot of cash at 2.36%, almost insane to be able to borrow at that rate to fund this acquisition. And that money has already in the bank, we'll release the shares as we get near close. And we are continually committed to lower our debt-to-capital ratio to 35% 2 years post closing.

Our emerging business's growth is built off of a very fundamental model. This model here is what the managed care industry has been fighting for the last, call it 42 years. Back in the '70s, we hadn't done any medical plans. And when I started my first HMO in Detroit in 1983, my friends told me I was crazy because these indemnity companies with 98% of market and all those cash are going to crush us, but there are no more indemnity plans left. We went to strong-form HMOs, we went to open access plans, consumer-directed health plans. We've tried it all, but we believe the only fundamental way of getting the underlying cost is aligned integrated care. And that's why we believe our Accountable Care Solutions business is the right business to be investing in. It's really about these drivers from a provider standpoint. Currently, the change in reimbursement mix for providers is dramatic. Medicare and Medicaid are over 55% of provider revenues and not paying anywhere near what they believe their appropriate costs are.

The federal rate -- the federal government is pulling back on rates through the Accountable Care Act, $716 billion in Medicare reductions. State budget deficits are driving Medicare -- Medicaid reimbursement even lower, which are hugely negative for providers. And as they look at the mix between Medicare and Medicaid and Commercial, while Medicare is near breakeven, Medicaid is deeply underwater, Commercial business margins are now over 40% above their costs. And they know this game is over. And the only way you change it is to launch products in the marketplace across the spectrum and eliminate the cost shift.

You build reimbursement and premiums in the marketplace that match their cost structure and ours. They lower their prices, and we are able to compete in the marketplace without the cost shift. And we think that's a game changer for the longer term.

We believe that virtual integration is better than vertical integration. I've been in 3 different companies that have tried the vertical integration piece. There's one thing I can tell you for sure, we don't know how to manage doctors and hospitals. You can hire people to do it, but it's a fundamentally different business. It's capital intensive. It's going to be competitive. You have to enforce change. You can't scale it, you can't build hospitals everywhere, and it's got a lower return profile. Where we believe virtual integration, where we enter into risk-sharing arrangements with providers and let them do what they do is a far less capital intensive. It increases our flexibility, which we can scale over a broader geography and has strong returns on capital. And so we believe that virtual integration is a far better approach than vertical integration, and we believe that's the model that will win in the long-term. And that's through all of our population management tools.

So the environment we're now competing in is really around population management. Medicity, 28.7% of the market. INexx, which is a grid technology platform for building and downloading apps to desktops, started with 4 doctors in Michigan 2 years ago. It has now over 9,000 practices in 24 states across all specialties comprising 25,000 doctors. It's growing rapidly every day. And we believe this kind of platform for downloading technology like Active Health, and iTriage and CarePass on both the consumer and the provider side will connect people in different ways and allow us to get a more efficient system, get more compliance and to drive the waste and inefficiency out of the systems associated with that $750 billion.

And along with our capabilities in health plan products and services, we can then put together a total mix for the provider that fundamentally changes our relationship with health plans and puts them in a different spot in the marketplace and allows them to compete to win. The first step is to share. The next step, as they replenish their capital, is to replenish it differently and create a very different model in the marketplace to meet the needs of the population based on the demography, the disease burden and the trends in the marketplace.

So we now have 15 signed ACS relationships. We've already launched over 100 new products in Commercial, Medicare and Medicaid; and we are in addressable market today of over 12 million members.

We have 200 deals in the pipeline covering 60% of the U.S. population. And so we believe that this is a model that can scale. It can scale quickly and with the technology I just show you, create a very different cost structure for us and for our providers as we compete in the marketplace.

And then we've talked about this many times, and we believe we are a leader in effective capital management. We've had 25% plus return on incremental capital. We committed to deploy over $9 billion in capital over the last 2 years, and we've repurchased 33% of our outstanding shares over the last 5 years. So we've done a great job, along with our dividend, in managing, effectively managing our capital.

So my conclusion is this, we are well positioned with a diversified portfolio. We are focused on execution because reform is an opportunity. We have the assets we need to compete. We have the optionality we need to ride out any risk that occurs in the market as we move forward. And given our guidance from yesterday, we believe we'll end this year at $5.10 per share; next year, $5.40 at least, which will give us a 13.6% CAGR since 2010; and we believe that we can continue to commit to low double-digit operating EPS growth on average over time.

So with that, I'll turn it over to Joe. Joe?

Joseph M. Zubretsky

Good morning -- this mic on? Yes. Good morning, everybody. My objective in this morning's session is to put a point on 6 dimensions of our strategy upon which we need to execute in order to deliver our 2013 plan and our long-term, sustainable earnings per share growth rate of low double digit over time -- on average over time. And we need, as a management team, and we encourage our investors to focus on 6 dimensions of execution.

First is the diversified nature of the operating assets we hold, which do 2 things: allows us to harvest a higher value per member than our competition and gives us the breadth and depth of capabilities across many market segments to produce sustainable, profitable growth, and it's only diversification that can deliver on that sustainability promise.

Two, our large group, particularly our Commercial insured business and our ACS business, is the flagship of the enterprise. It doesn't produce headlines, but it produces cash flow, sustainable EBITDA generation and a tremendous stability to the operating asset to the operating portfolio.

Third, with nearly $15 billion of pro forma revenue after the Coventry acquisition, we believe our government engine, our government business, both Medicare and Medicaid, can and will continue to produce profitable growth.

Four, our small group and individual business is large enough to be important, but it's not a franchise bet to enter the exchanges. We're entering cautiously, we're allocating capital in a very disciplined way, and we'll show you that we think that we can produce sustainable profitable growth in that business, but we'll also show you some numbers that demonstrate that it doesn't dominate the business portfolio.

Five, Accountable Care Solutions, virtual integration rather than vertical integration, is the way to transform the supply chain, 85% of the price of our product to winning and competitive advantage for our company, to produce more competitively priced products upon which to grow.

And lastly, the Coventry acquisition, we think, is a winning transaction. We bought it right, we financed it smart, and we'll integrate it and run it well.

6 dimensions of our portfolio, 6 dimensions of our strategy that we need to execute upon to deliver the '13 plan and our long-term low double-digit earnings per share growth rate.

So let's drill down into each one of them one at a time. And as I said at the top of the comments, the diversified nature of our business does 2 things. One, it helps us maximize the net present value of a member because we can have that member for life; and two, diversification truly is the only risk management strategy that's ever worked. And as markets go in and out of favor, as certain segments grow faster than others, a balanced portfolio allows us to deliver earnings in a sustainable, predictable way. And Coventry only enhances the diversified nature of the portfolio.

Customers move in and out of products based on life events, whether they're employed or unemployed, whether employed by a small employer or a large employer, whether they're moving in and out of Medicaid in the exchanges as their incomes grow or shrink, whatever the life event that causes a customer to change the insurance policy that delivers their health care services, it is only a company with a wide portfolio of businesses that can capture that customer and hold onto them for life, increasing the net present value of a member to Aetna. A diversified portfolio delivers on that facet of our strategy.

Second, we all know that geographies, customer segments and markets, some grow faster than others at times, some go into softer pricing cycles. But if you look at the diversified nature of this portfolio, 150 million Americans still going to buy their insurance in the workplace. The exchange-based insured market, which will grow under the ACA, the government space, our emerging businesses and our fee-based businesses enhanced by the Coventry acquisition, which adds to worker's compensation asset in girth to all the other segments I talked about, again, giving us a wide, deep portfolio of businesses that leverages the core capabilities of the company, which are to pool and manage risks, service our customers, develop networks, and distribute and sell. Leveraging those core capabilities across -- packaging those capabilities across many different customer segments in a way that appeals to the buying preferences in these markets, and it's only diversification that can deliver on the sustainability promise.

We have good geographic diversification. You can see this business, the Aetna legacy company, the stronghold of our business, Mid-Atlantic, the Northeast, Florida and Georgia being strong, Texas and California over 1 million members, and you could see what the Coventry acquisition does. We typically have not excelled or been strong in the bread basket. Nebraska, Kansas and Oklahoma, it gives us Utah, and it really does create a bigger, wider and deeper footprint up and down the Mid-Atlantic. So geographic diversification is important, and we think the Coventry acquisition, combined with Aetna, gives us good geographic reach and good diversification across the United States.

This is a picture of our revenue base. Aetna standalone, 2012 numbers, and the EBITDA generation of the company at $3.4 billion. And going from left to right around the wheel, you'll see that these large group insured business is the major franchise, delivering 43% of the EBITDA of the company. Our Commercial ASC and fee-based businesses, less capital intensive, fantastic cash flows, produced 25% of the EBITDA. We love the Group Insurance business. It's impervious to the impacts of health care reform. It's complementary in serving needs of a benefit manager inside the workplace and has consistently represented about 7% of the portfolio for the last few years.

You can see that our government programs generate 18% of the EBITDA of the company, slightly over 20% of the revenue. That will increase to 30% of revenue pro forma for Coventry. And we believe that's a good enough base, a wide enough base to produce growth over the foreseeable future.

And lastly, you'll see that at 7% of EBITDA, the small group and individual business, those businesses that will be most affected by health care reform represent only 7% of the portfolio, meaningful, but not a franchise event if those markets don't work under ACA post 2014.

This is one of my favorite charts because -- I think Mark showed it before, but I'm going to highlight 2 numbers for you.

When we have $35 billion of revenue and $15 billion of it can grow at 5%, and $6 billion of it can grow at 14%, to produce our 6% revenue growth rate in 2012, we believe that can continue for the foreseeable future. We are looking at good growth in 2013 from our fee-based businesses, yields are strong. Our large group insured business will continue to grow. We're approaching the small group and individual market in a very cautious way as we move into the exchanges, not trying to grow it at any rapid pace. In Medicare, a triple plus sign in 2013 mostly due to our Teachers' Retirement System account, Texas account, which will produce nearly $1 billion of revenue growth in and of itself. And you can see up and down the list, producing 9% revenue growth in 2013 over 2012. Revenue growth prospects are strong.

We love where we are from a margin perspective. A little bit of -- historically, you could see that kind of we hit our peak in 2008. The industry went into the great inflection of 2009, but you can see how quickly and resiliently we've repriced the book of business to get back to high single-digit margins. In fact, producing a double-digit margin in 2011, and now, margins have nestled back into that very comfortable high single-digit range that represents our target at our current mix.

We believe that entering this uncertain economy, and entering 2014, we, as a company, would rather be operating at high single digits and growing at the rate we're growing rather than operating at mid to low single digits and growing at a faster rate, this is a good place to be in this environment.

As I said before, the flagship of our company is our large group businesses, and they can profitably grow. If you can consistently demonstrate the ability to price to medical cost trend and medical cost trend continues to be mid to high single digits, there is an inherent growth rate in this book of business irrespective of whether you're growing membership, and we'll demonstrate that in the middle -- in a minute. ACOs are critical to this business. We believe that the cost structure we'll bring to our middle market and large group business will help it grow faster than the market in the near future.

And lastly, this marketplace is largely unaffected by Health Care Reform. We are not dealing with guaranteed issue, we're not dealing with a cost pool that's hard to understand. And the broker loyalty and the persistency of this book of business is fabulous. It's always better to hold onto a member that you've obtained in the past rather than trying to win a new one. Broker loyalty and the persistency of this book of business creates huge value for our company.

So there it is. Our ACS franchise representing 25% of EBITDA of the company. We do business with 2/3 of the Fortune 100. Fee yields in this business has been strong. We've been able to reduce our cost structure, fee yields have been strong, and the sale of high margin ancillary products into this book of business while softening during the recession are coming back. Capital requirements are de minimis. The cash flows of this business are unregulated and fantastic. And the ability to take our full suite of products, behavioral, pharmacy, dental, and group products, to this portfolio can create significant value.

The majority of our ancillary products are sales to our health care customers, but our health care book of business is largely underpenetrated by those products, the upside is quite incredible.

We are not idealized. We do believe that total net effective cost is the winning strategy for a plan sponsor. We believed it before, we continue to believe it. However, when a certain segment of the market says in tough economic times, I'm going for unit cost, then we crank up our network, contracting engine, and go get discounts. You can see what this chart shows is, over time, we've improved our #1 position, or our position within 2 discount points at the top of the market in 2012 and in 2013. We have not abandoned our total net effective cost strategy. We believe, long-term, it wins, but in the meantime, we have done a better job of contracting the unit cost discounts to appeal to a debt sector of the economy and the market that attaches high value to unit costs.

We had many discussions with all of you over the years about clients that leave, in and out of ASC and risk business, and how that -- when a company wants to save on -- given the margin that they're paying for a full risk product, as they get bigger and can take some of the volatility, how they might move from risk to ASC. We've been dealing with that phenomenon for decades. And it's never actually crimped our growth rate. We would posit, however, that the opposite is more true in this environment. That there's more conversion opportunity from ASC to risk for 2 reasons. One is the Medicare Advantage phenomenon. There are over 1.1 million lives in our Commercial and government sector ASC business that are in fee-for-service Medicare programs and lapped in some way.

The TRS conversion from ASC to risk at $1,000 PMPM is testimony to the value we can create for the plan sponsor if we can convert this membership. The contribution margin differential on that conversion is 10x to 12x.

On the right side of the page, we're showing you private exchanges. Interesting. Is it a phenomenon? Perhaps. It's certainly not a fad. We think it's happening. It will probably happen with increasing speed. We are participating on certain of the private exchanges. But when companies move to define contribution in a private exchange, they're likely to convert from an ASC type of arrangement to a full risk arrangement. Again, creating lift to the revenue growth rate of 4x to 5x on the contribution margin line. The conversion of ASC customers in a private exchange to risk membership, even if we don't retain all the membership, can be an increase to the contribution margin line, which is the cash flow engine that drives the company. Very important point, and we think there's very good visibility for the conversion of ASC business to pool this business.

Our Commercial Insured business represents 43% of the EBITDA of the company across our middle market and public and labor segments. We've always operated it at very strong operating margins. And the thing I like to talk about in this book of business is it's not just about sales and distribution effectiveness, it's about broker loyalty and stickiness. Customers on this size do not like to change their health plan. If you can continually deliver value, you can have that customer for many years, which reduces your effective cost of distribution, which gives you better visibility into the risk profile of the book of business to make your predictions more actuarially precise, business rolls off fantastic cash flows, has modest capital requirements, and is a very, very stable engine that drives much of the cash flow generation of our company.

As I said before, I hope I'm not criticized for stating the obvious, but it is rather obvious that if you have the discipline and the foresight to price to medical trend and the raw material of your product inflates at 5% to 7% a year, there is an inherent growth rate in this book of business that is as good as any in any industry.

Here's the 2012 numbers where we didn't grow membership but we grew revenue at 5% in this book of business, and our underwriting profits grew at 3% as we gave a little bit of that favorable experience back to our customers because it's an experienced weighted book of business. Our large group business can grow morally off of pricing to trend and leveraging trends that are likely to be in the mid-single-digit range over the foreseeable future.

So the outlook for Large Group Commercial is very sound. It is the premier franchise of the company. 2/3 of the EBITDA is generated from this book of business. And again, persistency and consistency. It delivers every single year, year-in, year-out. It is likely to be so in the foreseeable future.

Our government franchise, which will be over $15 billion strong pro forma for Coventry, is a growth engine. Our Medicaid and Medicare businesses have the size, the breadth and depth of capabilities that have delivered growth in the past 3 or 4 years and will continue to deliver growth during our forecast period.

Let's take Medicare. Even though we had the stall on the growth line due to the sanctions in '11 and '12, our compound annual growth rate from '09 to '13 was 8.4%, and from '11 to '13, 19.5%. And of course, there's a boost of about $1 billion in that $8 billion number due to the Teachers' Retirement System of Texas. But we have grown Medicare even despite the sanctions and will continue to grow it.

Our toolkit of products that deliver to the market is very strong. And last year, was recently enhanced by the addition of Genworth's Medicare Supplement business to the portfolio. Our Individual Medicare Advantage business is very successful with 137,000 members, but it's really the group franchise that's the hallmark of our company. We leverage our national account distribution reach, our government and labor distribution reach in order to deliver solutions to customers that were previously self-insured. And as I said, there is over 1 million members in ASC arrangements in our current book of business that are waiting for a conversion if we can prove the value proposition, that's over $14 billion of annualized effective run rate revenue. The Genworth's Medicare Supplement business was the asset we wanted, we were patient, we waited for and we bought it right. It's growing at over 25% since we bought it. It's hit all of its numbers. It's a fabulous asset in the portfolio. It serves as a hedge against Medicare Advantage. As certain individuals may opt for A+, B+ up, we at least have an offering to offer that marketplace. And certainly, our PDP business has been successful, nearly 0.5 million members. But it's really the Coventry acquisition, which gives us a greater reach. They have done better on the individual line than we have. We'll add 250,000 members on the individual line. And combined, we'll have the top 5 PDP plan in the nation. They've done a great job. They have nearly 1.5 million members, if the numbers serves me correct, in the PDP business. So the franchise, the product portfolio is very complete from our Medicare business point of view.

Over the past 5 years, every year, we have the annual conversation about the sustainability of Medicare as a business. You've seen all these things before. The pressures are rates moving into parity with fee to service. We have minimum MLRs coming up in 2014, and of course, the health insurance fee, which we have to pass through somehow into the product line.

Minimum MLR should not be an issue for us or the industry as we're already operating in the mid-80s, and when you add the allowances that our allowed in Commercial, this should not be an issue. Our health insurance fee will be passed through in the form of premium and product adjustments to make sure we maintain the value proposition for the customer and maintain the margin for our shareholders.

On the left side of the page, we continue to work the network hard, medical management still produces significant gains in this portfolio, and yes, we do plan to achieve, for the majority of our plans, 4-star rating in 2015 in order to attract a star bonus to keep us competitive. We've done a good job this year of eliminating a lot of our low scoring plans, pulled up our average to north of 3.5 and we're well on our way in investing the money every single year to the SG&A line to make sure that the majority of our plans are 4-star or better in 2015.

So the Medicare outlook is really, really strong. We love the group business. Coventry adds good capability in the PDP and the individual business. The group opportunity, the conversion opportunity is sizable, as I said, $14 billion of revenue opportunity and Coventry is just an enhancement to the portfolio.

The Schaller Anderson acquisition of 2007 has been hugely successful. Since we bought the company, you could see the membership numbers on the left side of the page at 1.5x, a 10% compound annual growth rate, and the revenues at 2.3x at 23% compound annual revenue growth rate. It's done very well, it's met all of its expectations from an acquisition point of view. The question that's been asked, and it's a legitimate one is, yes, but was it a footprint? Was it a capability now large enough to serve as the breadth of this opportunity, which in the past 5 years has become larger? We believe that not only did we buy it right, we've doubled its size and now it was adding $3 billion in 10 states in the Coventry acquisition. Yes, we do have the Medicaid asset to grow and be profitable as the Medicaid business is likely to grow here over the forecast period.

Here's our footprint, and you could see with Coventry, our footprint covers over 30% of all the dual eligibles in the United States, which gives us a great access to the dual eligible population.

As Mark mentioned in his remarks, we have the proven capability. The Avalere study on the Arizona Mercy Care Plan, you could read the statistics, shows that when you manage medical cost in an expert way, when you have the behavioral capability, you can deliver the pharmacy services, can managed care from the acute care setting to the community setting to the home, which is the way these programs work, you can win. And rather than just talking about it and how big the opportunity is, we went out into the marketplace and are now 2 for 2 in our dual eligible bids: Ohio, where we scored first or second in 6 or 7 regions; and Illinois, still unclear as to when these plans will incept. But when they do, our fair share projection has these programs in combination producing over $0.5 billion of annualized revenue, that's not the 2013 impact, but $0.5 billion in annualized revenue. A great testament to Aetna's capabilities in the dual eligible business.

We like the Medicaid space. It's likely to grow, probably by 10 million members at least by 2015. States will put these costs into managed programs. The budget pressures in state governments are huge. There's still less than half of Medicaid enrollees are part of a managed care organizations. The number is 70% to 80% for duals. And if it's not -- if it's going managed, it's going now, because the pressure on state budgets are huge. And so our strategy is to gain market share, bid where we can to win, they're going to produce low single-digit margins, but as state budget pressures ease, there's likely to be upside to that margin outlook.

That's the government story.

Small group and individual. We think this is a growth opportunity for the company. As I said before, the profit pools are changing. You probably have your own studies and consultative studies that had been produced. But you can see here, individuals are likely to grow by at least 26% by the end of 2015, and so it's an attractive marketplace from a membership perspective.

We think we have the geographies identified correctly. We're going to participate in about 15. It's about having the right products at the right cost structure, narrow networks, low-cost networks. It's about attracting the right membership for the risk profile you're priced for, and giving customers a simple pathway to execute a transaction and interact with the product. We have the right geographies. We think we have the right cost structure and products, and, with the new tools we've created, a customer and consumer experience that is likely to win on the public exchanges.

Now there's been a lot of speculation about this whole potential shift from the micro end of small group to individual. And the hypothesis was, "Geez, if you're really producing huge profits in small group and small-group employers dump in to the exchanges, even if you keep the member, there is a huge contribution margin give-up."

Now you can see by this chart, at our target margins, if we hold the member, there is a small give-up, but it's not significant. It is not significant. Our target margins in our small-group business, at $4.3 billion of revenue, are between 5% and 6% and about 3% to 4% in the individual line of business. We do plan to keep our fair share of small groups that dump into the exchanges, we have calculations that demonstrate that we are able to. And yes, maybe there's a small contribution margin give-up, but it's not significant.

We think this is a great marketplace looking forward. We're approaching it cautiously and allocating capital in a very cautious way. What is guaranteed issue going to cost? What is increasing the level of benefits to capture minimum essential benefits and the minimum actuarial value going to cost? What are the regulators going to allow for rates when you file them? And lastly, how are the 3Rs actually going to work? When the regulations come out for risk adjustors, corridors and catastrophic risk insurance, the speculation is, and our models show that, that offsets much of the risk one would take in entering this market. We're just not perfectly clear or certain that about that yet. So we're entering it cautiously. And if and when we determine that this is a great market place where you can earn far in excess of your cost of capital, we'll turn on the capital spigot more broadly. And in fact, if we decide we can't, we'll pull back on the capital allocation and only participate where we can win. Small group and individual, in our view, is not a risk, it is an opportunity.

Accountable Care. We've tried many ways to describe this, and the fact that we've, perhaps, confused some people, it's our fault. I mean our job is to communicate effectively with you all about our strategy and there seems to be some confusion. Hopefully, today, in about an hour, when Gary, the COO of the business; and Charles Kennedy, the CEO of the business come up here, it will be very clear how we operationalize this strategy to produce growth for Aetna.

As the CFO of the company, I tried to think of some kind of analogy I would use in order to bring this strategy to life. And the only one I could -- two I could think of is if I was the CFO of Ford Motor Company and told you that we just entered into agreements with steel producers to forward buy our steel at a price 10% below GM for the next 10 years, you'd understand what that does for our company. If I was the CFO of Walmart or a big-box retailer and said that I'm working with our supply chain, the consumer goods manufacturers can make them more lean so they can manufacture the products more effectively and sell to me on an exclusive basis, you'd probably get that, too. That's what this is. This is managing the 85% of our product, that represent cost of goods sold, by moving into the supply chain, and rather than arguing with it, to help it become more effective. And we're going to show you how we've invested in the tools and the capabilities, not to deploy goodwill capital to buy their contract and tell them what to do because it doesn't work, but to invest in the capabilities that when installed, enable them to engage in behavior change, effectively reducing the cost of our product.

Many of our competitors have talked about provider collaboration, all of them have. We are operating across the entire spectrum in provider collaborations, which are really embedded risk case managers, patient-centered medical homes driving at the primary care physician. But our ACO business is able to install these capabilities in very sophisticated and large integrated delivery systems. We are operating on the right side of the page where many of our competitors have only operated on the left side of the page. And as hospitals roll up the docs, be 70% in 3 or 4 years time, we will be able to control, engage with the provider in population health management, which will drive down the overall cost of care and make our products more affordable. The providers are looking for dispersion of revenue. They do not like the fact that most of their revenue, in states where it's dominated by 1 payer, come from 1 source. They're looking for dispersion of revenue.

They are also dealing with the cost shift, and the marketplace is saying, "No more can you take that cost shift from Medicare and Medicaid and put it into commercial rates." So they know they need to move from volume-based to value-based reimbursement, from episodic acute care management to patient population management. That's their goal. Their goal is to drive out all of the unnecessary utilization out of their beds but maintain revenue neutrality by restocking the beds with people that need to be there, and you can only do that with population management business model. That's what we're creating and providing them. Our members and employers love it because we take that contract and we package it into insurance products and deliver them into the marketplace at more effective prices than our competition. And of course, Aetna is then able to grow membership. Everybody wins. The providers have changed their business model, members and employers get a better customer experience, more effective pricing and Aetna grows membership.

Mark showed this chart before, it bears repeating. We installed these technology tools in a very integrated way to completely revolutionize the provider business model.

In most cases, they are so convinced over the savings that will emerge is they take our contract, which may have been priced at 5 to 10 points disadvantage to the best in market, and give us a price that's 5 to 10 points better than the best in the market, a 20-point swing. We repackaged that contract into a suite of products, either branded Aetna, Aetna Whole Health or sometimes even branded with the provider's brand and we launch them into the marketplace using Aetna's distribution engine, and that allows us to grow membership and produce profit.

This is the first time we're showing you the number for 2012. In -- by -- at the end of 2012, we now have 125,000 medical members in ACO arrangements that we developed in the last year. You can see that many of them are the hospital employees themselves, which gives us a new national account. Many of them are in other ASC arrangements. The real juice here is going to be Medicare because the providers are really excited about launching Medicare Advantage products off the back of these relationships. And over time, as our Medicare collaborations grow, the portion of revenues that come from Medicare will increase. So here's the revenue, the insurance revenue, that was generated from our ACO arrangements.

It's interesting to collect the fees for our technology. We're monetizing the value of the Active Health and Medicity, but the real punch here is producing insurance revenue and insurance contribution margin, $150 million of revenue alone in 2012.

Here's the number just broken down by new membership and converted. Now the other question we've been getting is, why would you launch this in a market where you already have members? And if it's a lower priced product, perhaps you're giving something up on the contribution margin line, because how can delivering -- the answer is how can delivering a better priced product from your customer be a bad thing? Because if you don't do it, somebody else will. And so over half of our membership is new-new, 70,000, the other half were converted Aetna members from our Aetna product to a more effectively priced Aetna Whole Health product. And you could see our projection for 2013 is to have 375,000 members, again, on many of which are new and many of which are converted.

As you build your investment thesis and look out in how this all might work, there's a lag time in how these arrangements work. The sales cycle is very long. These are very complex installations. And so we have 15 deals in 2012, 15 ACO deals. They produced $125 million of insurance revenue on products that were filed, launched and sold. But the real impact of those 15 deals will be in 2013. Think of 2013 as the full annual run rate of membership and revenue from the 15 deals we've already signed. Likewise, if we're successful in getting 15 more in 2013 and have a total of 30, the sort of the exponential effect of that in membership for 2014 and revenue in 2014 is significant. And we just kind of showed you a grayed out bar in 2015 to keep the theme going, that the more of these we can install, the 1-year lag effect, the building membership in revenue is significant. And the moral of this story, on this page, is this is demonstration of the significance of this strategy to our growth story.

As I said before, we think we bought Coventry right and financed it smart, and we will integrate it well. It's a fabulous asset. Here's the pro forma revenue of the company, $50 billion. It gives us a bigger reach in government programs. It does not over-balance us in small group and individual as maybe some suspected. It gives us 10 states in Medicaid, 4 new ones, which again, gives us greater access to dual eligible populations. And the financial returns are rather significant. We've talked about how it helps us advance the core business, because basically, it is up-and-down our core, 4 million medical members, 1.5 million PDP members. It makes us solid, number 4, in many of these categories from a membership perspective. And as Mark said before, 2 things we will not lose as we integrate this are their obsession with low cost and delivery of efficiently priced products and local market execution. This company operates really well and drives local, they are very good at that. And as we integrate this asset, we will maintain their local market discipline and their cost structure. We believe that we can take our ACO business to places where Coventry has membership. We do not factor that into the synergy value of the transaction, but they've been very good at narrow networks, high performance networks, sharing out high-cost providers. If we can bring ACO technology to the Midwest, to Utah, to the Mid-Atlantic where they're strong, there could be more synergy value created.

Karen Rohan is leading the day-to-day integration team at a very collaborative effort with great access. The team is fully assembled and is very engaged in developing day 1 readiness integration plans across every single business. There's 21 work streams. We're focusing on the operating model, how do we plan to run it, and manage, delegate a decision authority. We're in the middle of rationalizing the number of operating platforms both companies have and thinking about planning along those lines. And we're certainly laser-focused on identifying and retaining the top talent of that company, their managers are very good. So we're very, very positive. It's been a positive experience working on the integration to date.

As we're preparing to close in mid-2013, a couple of updates. As you know, the shareholders of Coventry did approve the transaction on November 21. All the state regulatory filings have been made. We have a large team of external and internal legal resources working on that. And we have 6 out of the 21 state change of control approvals received, 6 out of 21, and that will pick up the pace here over the next month or 2.

From the antitrust and Department of Justice perspective, second request received, and we continue to work with the DOJ on making sure we're responsive to the question they've asked. I would say that the regulatory issues, we continue to view them as manageable. Nothing has occurred in the regulatory process that was out of bounds of a range of our expectations of how much work this will be and how quickly we could get it done as planned.

So I'm up to the end of my time. 6 things the management team and investors need to understand to believe we can execute on our 2013 plan and our long-term growth rate of double-digit -- low-double-digit operating risk per share over time. The diversified nature of the portfolio, sustainable predictable profitability, and the value per member should be higher in our company. The large group business does not make headlines, it just produces cash flow and EBITDA. The government franchise, pro forma for Coventry, $15 billion, is an engine that can produce significant growth over our forecast period. Small group and individual, not a risk but just a major opportunity. Accountable care solutions is the transformational network model of the future and we are uniquely positioned to deliver on that. And lastly, the Coventry acquisition is very financially attractive, strategically important and the integration is going well.

So with that, I appreciate you taking the time to listen, and we're going to kick it over to Tom and our panel of our operating executives. So thank you very much.

Thomas F. Cowhey

Excellent. Thank you, all, and thank you, Joe. I am very pleased to introduce 3 of our senior members of our Executive Committee. They are here. We're going to ask each of them to introduce themselves and to give a little bit of their background and a little bit on the businesses that they run. And then we're going to open it up to the floor for questions. We've got, roughly, 40 minutes in total, and we'll have people that are on either side of the room with the microphones. Frank, if you want to perhaps, kick it off, and then we'll go to Kristi and Karen.

Frank G. McCauley

Sure. I'm Frank McCauley, Head of the Commercial Business segment inside the enterprise, think about it as everything from our individual business up through National Accounts. I have -- this is going in my 20th year with the company and have spent a lot of time in a lot of different geographies and a lot of different businesses inside of Aetna. 3 thoughts I want to leave you with somewhat very similar to Mark and Joe. The first is that we feel good about our margin profile inside of our Commercial segment, and more importantly, sustainability of that as we look forward. As you know, we've been extremely disciplined in our pricing strategy and approach in the market. We have considered to make incredible strides inside of our discount improvement and our ACO strategy, which has quite in fact resulted in significantly improving our price point position in a number of our key markets, as Joe noted, in some areas, 15 to 20 points lower in the market.

The positive impact of that is twofold, one on new business. In a number of the new markets we've launched our ACO products and networks, we're actually driving about 38% new business volume into those arrangements. It also has a very positive impact on retention inside of our businesses, and then also the ability to again sustain our margin profile over time. The net impact of that you'll see going into '13 is the stabilization of our National Account, our block of business. As you know, that business has been down about 1.2 million members over the last 3-year period, so it is a major turnaround going into '13 and poises us for growth going into '14. And then we see consistent growth inside of both our Middle Market and our Public & Labor franchises inside the Commercial.

I think the second message point is that reform is manageable for us and actually is -- can be much of an opportunity as both Mark and Joe noted, our diversified portfolio and large group gives us simply minor impact in that segment of market.

We have worked a lot to reposition our Small Group business, a tremendous focus on simplifying our products, going into narrow gated networks, driving towards administrative inside of those segments. And then we've taken a very, I would call it, cautious and measured approach inside of our individual voluntary opportunity and the public exchanges. One in very targeted markets in which we participate, as Joe noted, about 15 markets today. Looking at where we have the best underlying competitive position, brand position, best regulatory environment sustained long term. And then we've been very disciplined in our pricing strategy as we prepare for that as well in both how we handled the HIT and the RC inside of that. So I think we're well-positioned for, again, as Mark described, the optionality inside of that business.

And then lastly, I'll say there's 3 areas of meaningful growth as we look forward inside of Commercial. One, that Joe touched on, which is Medicare, which I would say emerging out of sanctions, but the momentum and demand there is quite strong, as evidenced by what we saw with our conversion to Texas Retirement System. But also as we look ahead for 2014, there's a lot of momentum in the market to move with that product.

Second, I would say, again, our ACO narrow-gated network as we continue to roll those out. We have launched 24 new either ACOs or narrow-gated networks in the market. And again, on average achieving 15% to 20% lower price points. A good example of a win there is the state of Maine, which was a statewide ACO, which is about 33,000 new ASC members into our portfolio.

And then the third area, I think, continued growth for us and opportunities is private exchanges. We play a lot in that market today with a number of private exchanges that exist there. But it does present both an earnings opportunity for us and growth and also in membership. Earnings, as Mark noted, as individuals who convert from ASC to fully insured in that arena. But then also, for us, it's a new channel of distribution for our Commercial products and services.

So in general, we feel good inside of our Commercial segment. We're positioned well to effectively manage Reform and have a lot of opportunities to look ahead.

Thomas F. Cowhey

Thanks, Frank.

Kristi Ann Matus

Good morning. This is Kristi Matus, and I lead the Government Services Group at Aetna. I joined Aetna in March of this year when that segment was formed to respond to the unique needs and opportunities within the government sector.

Within government, Medicare is a significant growth engine for Aetna. As demonstrated by the fact that we will bring on 130,000 new Medicare Advantage lives in first quarter of 2013, led by the win with TRS that adds 85,000 lives and over $1 billion of revenue on its own.

In addition to that, we expect to add 20% growth to our Medicare Supplement -- or MedSup line that we acquired through Genworth. We have seen very positive results coming in through open enrollment and expect strong results there.

In Medicaid, we have a very strong history of performance, as Joe talked about. We managed over 1.2 million lives, 2/3 of which are in administrative services only. That gives us a really good leverage to capital in terms of how we earn returns. Very low-capital intensity and good profitability for the company.

As Joe mentioned, we've been recognized for very strong performance in managing high-acuity populations, which has resulted in 2 significant wins in Ohio and Illinois for duals next year. 100% success on every case that we bid on in duals.

Finally, the acquisition of Coventry makes us significantly stronger from a government perspective. It adds diversification to our Medicare block. Right now we are primarily grouped, post-Coventry, we will be about 50-50 group and individual. In addition to that, Coventry brings us a leading PDP product that adds to the strength of our core Medicare offering.

Within Medicaid, we will add 4 states, as previously mentioned, but we will also triple the risk membership that we manage within the Medicaid portfolio.

All of these things together we believe positions us very, very strongly to response in about $650 billion of liability at state security for OPEB. We are very strongly positioned for the future, we are growing Medicare and we are very strong in Medicaid.

Karen S. Rohan

Good morning. It's nice to see a lot of familiar faces. And for those of you don't know me, I'm Karen Rohan. I've been at Aetna for almost 6 months now, and prior to that I spent the last 3 years at Magellan Health Services.

This morning I'm going to comment on the Coventry integration. As Mark and Joe indicated, the transaction is strategically compelling. It's financially attractive, and we believe that the integration risk is manageable.

Relative to the strategic rationale, as you know, and as Mark and Joe indicated, it really does strengthen our core businesses. It gives us capabilities in the Small Group and Individual market. And as we've mentioned, that is an opportunity for us. It also, as Kristi just mentioned, enhances our footprint in our government businesses, adding additional states in Medicaid, as well as complementing our existing group Medicare business with a strong individual Medicare business. And I'll talk about as well with the synergies, it will allow us to promote operational efficiencies.

As Joe and Mark indicated, from a financial perspective, we'll be a $50 billion company, with $4 billion of EBITDA. And we'll have EPS modest accretion in 2013, which will increase over time. And then finally, relative to the integration risk, we -- each of the businesses that we have acquired we know well, and we believe the risk is very manageable. We have a clear line of sight to the $400 million of synergies, and we also believe there could be potential upside as well.

And then finally, as Joe mentioned, we have an integration team with the combined companies. 21 teams across the -- both companies, actively engaged in Day 1 readiness. We are working very closely with the Coventry team and we are also, obviously, working within the legal guidelines that we build our integration plan.

So we're very excited about this opportunity. We are looking forward to working with the talented group from Coventry. And with that, I'll turn it back to Tom.

Question-and-Answer Session

Thomas F. Cowhey

.

Fantastic. We're actually going to open it up now to questions. And I'd like to ask everyone to limit themselves to one question, given the amount of time that we have. Why don't we start down here in the front. We'll start with Josh and we'll move to Kevin.

Joshua R. Raskin - Barclays Capital, Research Division

I guess, first question, I don't know if it was for, maybe, Mark or Joe as well, but maybe for Frank. Didn't talk much about the potential for employer dumping as a potential disruptor, being that you guys talked about the large group market as your sort of bread and butter behind that, and I'd be curious to get your perspective there. And then I don't know if it's cheating with a second question or part of that, but in the exchanges, do you think brand matters and do you think customer service matters?

Frank G. McCauley

Okay. To the first question, I don't think you're going to see as much dumping as may be projected out there in the market today. I think certain sectors of the market may be impacted by that, in particular, the service sector, food service or retail, in general. I think even if you look at some of the large private exchanges that are coming up in the market, there is not a lot of tremendous participation in them yet. So I don't think it would be at the level that had might been predicted early on, so that's one. Second, relative to the exchange opportunity, I think brand absolutely does matter. And being -- consumers being able to identify and feel good about the particular company they're going to interact with there. And we've spent a lot of time thinking about that as we've chosen the market in which we're going to participate in, in the exchange. We look at our current competitive position, our market level and density, with the segments of the market in which we're going to participate, but brand and our presence here, does matter and make a difference. On the customer service side, I would say it's more about ease of administration in interacting with your consumer in the way that they want to interact with you for your product and services. So we have spent a tremendous amount of time over the last 3-year period thinking about our E.U. service capabilities, both taken from a shopping experience perspective, but also on the back-end administrative perspective. And I gave you one example of that, 2 years ago, we had less than 10% of our Small Groups, actually interacting with us through e-service capabilities. Today, 82% of our Small Groups, we either e-bill or they pay us via electronic format, much different than we saw in the past. That adds a lot of value, it cuts a lot of cost out of the system, but it's also administratively a lot easier for those who participate for exchanges coming through that channel.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I wanted to see if you could answer the 2 questions that most people have about the Accountable Care Solutions model. I mean, the first one is, how defensible is it? How easy is it? Can someone else come in a year later and replicate what you've done with your providers? And then two, going back to Joe's question, what are you giving up in response to this? Because from a provider perspective, what you're saying is, "On my existing business, I'm going to give you a 20% rate cut," which falls right through the bottom line. And just -- I'm not sure if you can necessarily promise enough volume in return for that, because when you think about the margin on new volume, I mean, twice as much revenue to replace what you're getting. And as far as the rate cut, is the rate production really this -- is it apples-to-apples or are they on the risk share side, are they making some of that back and so they don't view that as, really, a 15%, 20% cost reduction?

Thomas F. Cowhey

Let me actually start on that. I think it's worth reminding you that we are going to have a presentation after the break on Accountable Care Solutions, particularly. And you'll also have an opportunity to ask that same question of Charles and of Gary. But I think part of the proof is in the pudding on this one and that we're getting it, right? There are systems out there that are doing this today. But perhaps, I don't know if you have any high level comments you want to make on that?

Frank G. McCauley

Sure. I'll let Gary and Charles go deep on the financial, with respect to the second part of your question. But I will say that it is differentiating, and I would say we are far out in front of anybody in the market, with the number that we have launched and the relative impact it's had in the markets in which we're participating. I don't see anybody else out there launching ACOs, and then launching new products and services in the market that is 15% to 20% below the current price point there. And again, as I noted in several of those markets, it's driving about 38% of our new business volume, so it's quite material. The other beauty of this arrangement, in my view, is that you get the initial lift of getting lower unit cost in the market at the outset, but over time, as your care management and disease management programs kick in, that gives you additional cost savings as you look out in a multiple-year period. So it's not just a onetime pickup, it actually benefits over a long period of time. But quite powerful and very important to our growth strategy.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Yes, I have a question on Small Group. Your EBITDA contribution is fairly low compared to your membership. Can you tell us more about, is this medical loss ratio or is it SG&A? And how does that compare with Coventry? And then sort of a follow-up on that is, if you do see dumping from Small Group and individuals into these public exchanges, do you feel your 15 target markets are adequate to recapture all that?

Frank G. McCauley

Okay. I'd say, on the question on Small Group, I think about it like this. Small Group of individuals is a very highly competitive market. So at the end of the day, you would never run margins as you would in the large group market, number one. Number two, we have invested a fair amount of dollars in technology preparing for exchanges, which hold down those EBITDA margins a little bit here in the near term. You could also think about that as it gives you a little bit more room as you're heading to exchanges in some of the volatility that may occur there as well. When we think about Small Group there, we want to get to the lowest net price point in the market across our value chain, which is why we rationalize our products set down dramatically. We have launched a lot of new narrow-gated networks, which go with the largest premium cost element there. And then we focus heavily on our e-service capabilities to get to the low net cost inside of the market. So we feel good about our position there as we look forward to the future. I think relative to Small Group, something in the exchange, are 15 markets actually represent about 65% to 70% of the total market opportunity out there, and it's very aligned to where we actually have Small Groups today. In fact, every one of our targeted markets, we participate in both Individual and Small Group today. So we think there's a good transition into that with our Aetna products.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

[indiscernible]

Frank G. McCauley

Pardon me?

Thomas F. Cowhey

You know, Ana, it's hard for us to answer your question specifically about the Coventry deal. We've given you, obviously, some directional guidance on how to think about that today to try to be helpful. But those are questions that are better asked from a different team. I think we're going to go to Justin, and then let's go to Scott.

Justin Lake - JP Morgan Chase & Co, Research Division

First, just a quick follow-up to Ana's question on the individual Small Group. Frank, can you go into a little more detail on why Individual and Small Group is that much more competitive, where you're able to earn, it looks like 2x the margins in Large Group, despite the experience rating in Large Group. And then the follow-up -- the question I had was more on the ACOs, in the deck, you talk about them growing to $2.5 billion. Should we expect that to be a company-type margin in terms of that high single-digit margin on that ACO revenue?

Frank G. McCauley

Okay. I'll go back at the Small Group again. It's just the nature of the market at a small end. People are buying more than ever just on price. At the large end, people buy more on value. And so they value more integrated care management, disease management, things like iTriage and all the components we bring to market. So it's why you tend to have a greater value buyer there and you have a larger margin in that particular arena. Again, at the low end of the market, it's very difficult as a small employer today and cost rules. And so it's very important that you get down to the lowest price point in the market. I would also say, again, in the near-term, some of our investments hold down those margins a little bit as we are preparing for the exchange environments we look forward. I'll save, again, the ACO question for Charles and Gary, which will go into it in a little bit greater depth.

Charles Kennedy

Yes. I don't believe that we'll be providing margin guidance on that specific line item of our projection today.

Scott J. Fidel - Deutsche Bank AG, Research Division

Question on the Coventry integration, and as you think about branding between -- particularly in the Commercial market, between Aetna and then Coventry. Coventry has traditionally had more of the local branding approach in their commercial business and how are you thinking about sort of integrating that? Are you thinking about keeping the local Coventry brand in place or trying to move all to one sort of Aetna brand? And then a second question just on specialty penetration, and Joe had mentioned the significant revenue opportunity that could come from that. Have you modeled that at all in terms of what the revenue opportunity would be if you were able to convert Coventry's membership on to Aetna specialty products in terms of thinking about your existing penetration rates across the Aetna book of business?

Karen S. Rohan

So on the brand, we're in the process of looking out their brand capabilities and ours, so we'll make those brand calls in a lot of the local market. Aetna will have a stronger brand. And as we've been talking with the Coventry team, they're excited about the Aetna brand. So likely, we'll be moving to a full Aetna brand, but we'll evaluate that as we move forward with our planning activities. We have been looking at the penetration opportunities, relative to the book of business. We're excited about those opportunities, but I'm not prepared to give you revenue estimates at this point.

Thomas F. Cowhey

Christine?

Christine Arnold - Cowen and Company, LLC, Research Division

I'm intrigued by your commentary that you think ASO is going to move to ensure, traditionally, the impediment with employers, is, I think, trying to comply with all the different state mandates, autism here, infertility there. And also the cash flow implications of going from ASO, I pay after someone gets care to ensure that I pay before, which is a cash flow drain for employers. So can you guys comment on, a, are those the traditional impediments; and b -- or are there others? And b, how do we get beyond those if we're going to convert to fully insured?

Frank G. McCauley

I think it's more about the Large Group market in certain sectors. Christine [indiscernible] a defined contribution-type presence. And to Mark's point, outside of the tax per fee issue, there's not a lot of large impediments that will stop them from doing that. So if you look at, as an example, the largest one that's emerging here would be Hewitt, and the type of makeup of employers in that tends to be in the retail and the service sector. And they really want to think about the benefits differently as they move ahead to the future. They also want to get best-of-breed at each local market for their employee base. And so the exchange opportunity gives them the ability to do that. So as they move into that space, and some of these are very large employers, for us, it is moving them from ASC to a fully-insured product, which from a net profit perspective, is actually quite a positive change for us.

Thomas F. Cowhey

I think Matt, and then we'll go to Sarah.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Just a question on Medicare. From the figures you disclosed, it looks like you're EBITDA margin on the Medicare business overall is a little over 8%. Can you comment on the sustainability of that level of margin as you go into the changes from health Reform?

Karen S. Rohan

Sure. We know and understand that there are going to be pressures on the revenue side because of what's coming with Reform. At the same time, what we intend to do is what we've been doing all along, which is manage our medical cost, manage our SG&A, and then most of the revenue enhancement opportunities that will come through risk adjustment and other vehicles like STAR and keep our product both competitive overall and maintain a suitable margin. So we know it's out there, but we're preparing in advance to stay competitive and to keep our margins healthy.

Thomas F. Cowhey

Great. I think Sarah's got the mic.

Sarah James - Wedbush Securities Inc., Research Division

So Joe indicated a willingness to pull out of the exchanges if the return wasn't sufficient. So I just was hoping you could talk a little bit about what your internal return hurdle is for the exchanges and over what time you think it's reasonable to get there. And then if exchanges were to begin in 2014, are you looking at them as the earnings headwind or tailwind for the first year?

Frank G. McCauley

So I'll let Joe commentary on the capital requirement there. I would say a couple of things. One is, we've already exited about 10 to 12 Small Group individual markets as we've made our choices on where to play in the exchange environment. And again, we go through a fairly rigorous process in determining our underlying value proposition and long-term viability in the market. Everything, again, from our brand position, our targeted segments and their presence in that market, our unit cost position and the level of density of competitors in that market. Since we've chosen this market now, which we'll watch going forward, is how does the regulatory environment evolve there? And assuming we can get what we need in our rate filings and to be sustainable in that market, we will continue to participate in that market long-term. Today, if we could not do that, we would make the choice that we would not participate in that. I think we feel good about our targeted 15% stake today. They all have fairly reasonable regulatory environments there, and we have a good presence and have a good rapport with the insurance department there. So I think we are in pretty good shape around that. I think once you get started in exchanges and you watch to see how the first year progresses and exactly how the 3Rs works, then you make a different determination on that. At the end of the day, we've been very clear and very disciplined. If we cannot net the return we need on a weighted average just to cost to capital, we will exit the market and we'll move on to a new area of focus. So I think, for us, that's what it's all about, the discipline to do that. But I'm confident in the markets in which we've chosen that we will have long-term sustainability, that we have a good market presence today.

Thomas F. Cowhey

Next, we'll go to Peter.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Sort of following up on that. Can you describe your expectation on the flow of membership on the exchanges, how fast that's going to come on board? And then also talk about the need to be a big player, the exchanges early on. Do you think you need to be a big player early on? And if others think they do, do you think that they will use the 3R's as a method to say, "We can underprice and grow very quickly than somebody who's a strong incumbent?"

Frank G. McCauley

So a couple thoughts. I think today, most of the exchange volume will come through the individual voluntary exchange. I don't think you're seeing much come through the shop exchange whatsoever. In fact, there's really no value for an employer to purchase products through the shop exchange. So if you look at individual, it's probably going to be anywhere -- the estimates are at 20 million to 24 million people may come into the market. About 70% to 80% of that will be subsidized in nature relative to that population. For us, we're taking a, again, I would just say, a measured approach as we enter those markets. And we would like to see good consistent growth, but we're not trying to buy market share, we're not trying to capitalize on the near-term because we view it as a long-term opportunity over a much longer period of time. I think the other piece is, today, there's probably going to be, maybe, 6 to 8 really state exchanges up and the rest will be the federally-funded exchanges, and so is additional state exchanges coming over time. I think that presents greater opportunity as well in a more graduated approach there. What competitors do, I'm not going to comment on that, but I would just say that we're going to take a very cautious measured approach, and we're not going to bank on underpricing the market to be able to maintain with the 3R's.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

It's important to know what the competitors are going to do relative to how you price. If you're going to be -- if you're going to come on trying to steal share early on, I mean, they could theoretically take the healthy members away from you, leaving you stuck with sicker members on the exchanges or in your core book today. So you need to comment and tell me a little bit more about what you think the competitors are going to do.

Frank G. McCauley

Theoretically, you could say that, although, I would say, for the most part, we see rational pricing today, and I think you'll see rational pricing in the future. Will there be -- maybe a few new competitors or entries into the market that may do things that are outside the market, it certainly is possible. I think the bigger issue inside of exchange is, have you looked at the underlying market and have you segmented it to those consumers that actually add the greatest long-term value proposition to you? So as we positioned our business, we took a look at our current book of business. We looked at the long-term value of each member inside of that book and characterized it in different segments of the market. We then overlaid the impact of reforms and what we thought those consumers would do in that market. And then we designed everything we're doing around our products, our network construct, our administrative capabilities, and how we go to market to them to attract and retain them in our book of business. I wouldn't say it's perfect in any way, shape or form, but it is very targeted in understanding what consumers we believe give us the greatest value, and how we want to attract or retain them in our overall operating model.

Thomas F. Cowhey

Thanks. Melissa?

Melissa McGinnis - Morgan Stanley, Research Division

I was interested in the chart about your relative discount rates in the 30 National Accounts market, given the pressures in that business over the last couple of years. And I guess, from 2011 to 2012, it looks like you used all 6 additional markets where you came into what you would consider a competitive cost structure, but the National Accounts membership trend sort of just stabilize which, of course, is better than declining. Next year, you're seeing just a change of 2. What gives you confidence that this time next year we'll be hearing the International Accounts business is back growing year-over-year as we enter into 2014?

Frank G. McCauley

I would say it's the pace of our improvement efforts and our discount for the program, which are actually ahead of our expectation, and we see that continuing going into '13. That's number one. Number two, we made improvement in a number of very key markets which are very important to our underlying membership base inside the National Account, which allowed us to stabilize that book and essentially poise ourselves for growth as we look forward. And then when you looked at the trajectory or glide path of the new ACO agreements coming out in '13, and where they align by market and then align to our underlying membership base, it adds a lot of additional opportunity for us as well. Outside of that, I would also say it's not just about discounts. What we've done with our iTriage and CarePass, as Mark noted, resonates extremely well in the large-end and high-end sector of the market. And so we've done a lot to improve our underlying value proposition, as well as continuing to improve our Care Management and fees management. And I would say, in general, we've seen several accounts come back to us, but understand it's not just about in-line discounts, but it's the total value we bring to the market.

Thomas F. Cowhey

Great. Let's go to Ralph, and then to Chris.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Can you maybe talk about how you see the timing of the shift from ASO sort of back to risk? And in the meantime, I guess, how comfortable are you with the ability to sort of pass through the industry tax? And then any pushback to this point in your discussions with employers?

Frank G. McCauley

Okay. With our rate filings and how we handled the taxes, we've actually been very successful in that and had no filings to date rejected on that. And we feel good about our positioning, again, based on where we are and our rapport with the insurance commissioners and all of that. What was your first question? I apologize.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Timing and the shift.

Frank G. McCauley

Timing and the shift. I would say, in general, we would see the private change market probably evolving into maybe 10% to 15% of the Large Group market over a 3- to 5-year period, may transition to some type of product exchange. What that means is the majority of the Large Group market will maintain as it is today, but certain segments and sectors of the market, as I've noted before, may accelerate greater into that over that time period.

Thomas F. Cowhey

Great. Chris?

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

With regard to the exchanges, you talk about having the right products and low unit -- low cost networks. And I guess, I was wondering, are these networks already in existence? Are these narrow networks that you're currently selling to your Commercial members? And two, in order to sort of generate your target margins and return on capital, what type of unit cost savings do you need to achieve the profit metric?

Frank G. McCauley

So we're building narrow-gated networks all the time. And we've launched a number in '12, we're launching another number in '13 and additional one in '14. I would put the ACO launches in that same category as well. How I think about some of the narrow-gated networks for exchanges is that we're contracting that at a rate normally between Medicare and Medicaid for the exchange population. And from a providers perspective, today, that -- most of that care is uncomplicated. So for them, that's actually a pick up, but for us, it's actually a substantially lower rate than our average Commercial contracting today. All of that leads to a lower-priced product and price point in the market which can, again, be very beneficial to the in-line consumer.

Thomas F. Cowhey

Do we have any further questions? I'm sorry, Carl, we've got you in the back. It's hard to see from here.

Carl R. McDonald - Citigroup Inc, Research Division

Was interested in the profitability of Individual and Small Group historically. So if you had given us that same data for 2010, 2011, would we have seen the same statistic in terms of margins being -- or profitability, I should say, being 1/2 of the revenue? Or have exchange investments, other factors, depressed the profitability in 2012 relative to where it's been?

Frank G. McCauley

I would say, in general, it's been fairly consistent over time. Although I will say we have invested more in that last 18-month period in technology and exchange build-out, which puts a little bit of drag on that. But at the end of the day, again, the Small Group individual market will always run at a lower underlying margin than the Large Group market, just due to the nature of the market, the competitiveness of the market, and there's more players in that market. They have many more local market players than just national players that compete there. So it always drives to a slightly lower margin in between the large group market.

Thomas F. Cowhey

Carl, I think, Frank made this point earlier, but it's just important. As you think about this, you're thinking about the base, even if the base is depressed, think about it relative to the earnings power of the enterprise and what the guidance looks like as you -- and or what the enterprise is going to look like in '13 as it enters '14. In some ways, it's not as relevant what some of the pieces are as what the starting point is and where you think the ultimate ending point might be.

I think we have time for one more. Let's go down here.

Unknown Analyst

Kristi, I was wondering if you could give us a sense of the Care Management model you're deploying as it relates to the duals, and how you see that as a differentiated marketplace?

Kristi Ann Matus

I think the best example would be what we're doing in Arizona. We managed 16,000 dual eligibles in Arizona today. The Care management model is very local for us, and it involves care in the individual's home. Joe shared the statistics before, but significant results, as supported by an Avalere study, 43% pure days in the hospital; 31% pure in-patient hospital care days. So what we really do in Arizona is we focus on the Aged, Blind and Disabled populations and long-term support services. And it really centers around keeping people in their home and providing care at the local level.

Thomas F. Cowhey

Well, unless -- I think we probably have time for one more. It's very hard to see who else up here. If not, I think -- way back.

No. I think what we're going to do is we're just going to head to the break. So we're going to take about a 20-minute break right now. And when we come back, we will start up with Accountable Care Solutions with Charles Kennedy and Gary Thomas. Thank you.

[Break]

Thomas F. Cowhey

If I could ask everybody to take their seats, we're going to get started back up. Well, not to cut into any more additional time, we are very excited that we've got 2 of the senior members of our Accountable Care Solutions team here, Charles Kennedy, who's the CEO; and Gary Thomas, who's the Chief Operating Officer. We're going to spend a little bit of time going through some prepared remarks on the ACS topic. Charles is going to give you a little bit of an overview on the why this happens, and why we think that we're best positioned to make this a successful enterprise. And then Gary's going to work you through a little bit more of the specifics. And then we're going to have some time left over at the end for Q&A, once again, from the audience.

So with that, I'll welcome up Charles Kennedy.

Charles Kennedy

Good morning, everyone. I'm going to talk to you a little bit about our overall ACO strategy, why we think it's so exciting, and why we think the time is right now for these changes to occur in the industry. Because when you look at what's going on in the Health Care industry, right now, fundamental change is occurring. 70% of all physician practices are going to be owned by hospitals in 2013. That's a fundamental shift. 1/3 of all physicians and 2/3 of all hospitals have electronic platforms in place, as measured by Meaningful Use government stimulus payments. But most importantly, this drives the change within the industry. If you look at the top graph, what it's showing you is operating margin. And think of 100% as breakeven. And what we've seen in the past is that the delivery system would lose money on a governmental program, and they would make money on the private programs. This is the traditional cost shift. There's a problem with that model, though, it's breaking. When you look underneath, and you look at the volume of patients that hospitals are seeing, they are seeing their commercial volumes go down and their governmental programs go up. This is breaking their traditional business model, and making them receptive to other models that we are proposing. We believe that Accountable Care is an effective business model for these organizations as they go through this change.

If you look at the past volume, right, the old business model, the more you made -- the more you did, the more you made. If you look at the new business model, it's a very different thing. A delivery system, the doctors and hospitals come together to take accountability for a population of patients, their health care needs. This accountability, this change in model, requires differences in how you become successful. In the new model, the more effective the care you deliver, the more effective that care is, and the more efficiently you deliver it, is your recipe for success. That is a fundamental change in how delivery systems provide care, and it is that fundamental change, which we are taking advantage of. It's a change in business process. We need to do things differently. It's a change in the workflow. It's a change in culture. And most importantly, it's a change in technology. Let me give you an example. In the fee-for-volume world, the traditional world, you look at the technology that was deployed, electronic medical record, what did they do? They were documentation engines. The reason they were documentation engines was that they supported the old model, the more care you can document, the better you were reimbursed. In the new model though, what kind of technology do you need to deliver care efficiently and effectively? Well, we've been assembling that technology. We've been integrating that technology. And let me walk you through that. Medicity and iNexx. Medicity and iNexx, the recently acquired Medicity, was that it was the industry's leading health information exchange. It gave us an asset which enabled us to connect to a wide variety of clinical source systems. Why is that important? Because to do a managed Care more efficiently and effectively, you have to know what's going on with the patient in terms of the care management across all of the physicians and other individuals involved in the care of the patient. So clinical connectivity is absolutely foundational to having a technology that will allow you to manage patients efficiently and effectively.

Once you've connected to all those clinical source systems though, what do you do with it? You create a mountain of data where you need advanced algorithms, you need analytics, you need clinical informatics, which allows you to sort through that information, clinical data and claim data, and identify opportunities to improve efficiency and improve effectiveness. And once you see those opportunities, you need to share that information with everybody involved in the care of patient, the doctor, the nurse, the care coach, the patient themselves.

So the combination of our Medicity, iNexx, and Active Health infrastructures give us the foundation to be able to do that, and we feel that's unique in the industry.

The other thing you have to be able to do is you have to be able to engage the patient. Why? Because chronic disease accounts for $0.60 to $0.70 on the dollar of health care spend. And where is chronic disease managed? In the home, right? So we have to engage the consumer and give them information so that they can better manage chronic disease, if you're going to be successful in managing a population of patients.

Now one question I get frequently is, isn't ACO just wound over managed care? And let me give you one of the reasons that there's such a difference. In the 1990s, when we had managed care, what did we do? We had to get people modeled, right? And in order to manage care, you made someone go to a primary care physician in order to get access to the larger care system. We controlled supply through a gatekeeper. But it was frustrating, it was bureaucratic and people didn't like it.

In the new model, we use technology to be able to make the right thing to do, meaning, accessing care efficiently and effectively, the most convenient thing to do, right? And that's what our iTriage capability is about. It simply, and I would encourage any of you who have a smartphone, go to the App Store and download it. It allows you to put in a few symptoms, get an idea of where your care should be delivered, so you will have a list of areas for you to get care from. It will also know which areas you should go to, based on your benefit design, and it will even allow you to set up an appointment within that system so that literally, with a few clicks on your smartphone, you can get access to the exact right doctor who can take Care of your problem efficiently and effectively, but most importantly, from the consumers' perspective, conveniently.

Now as we've built out this model, we've collaborated with hospitals, medical groups, IPAs, what we call the organizers of care. And in doing so, we didn't just collaborate with anyone. We went to a very disciplined and analytic process to identify the characteristics of a delivery system that would make for a successful ACO. What's their market share? What's their patient volume? What kinds of capabilities do they already have in place? We've analyzed donations, hospitals medical groups, IPAs, We've identified the organizations that we think offer the best opportunity for success in this new model, and we've proactively gone out and begun to engage with them in how to build ACOs.

Our activity right now today covers 60% of the U.S. population, so we're on a rapid path towards success, not just with contracted ACOs, but we have a pipeline of over 200 organizations who are interested with us in working through this transition. So we feel very confident, and we're very excited about the future opportunity for this model.

And when you think about ACOs, one of the problems with ACOs is that if you've seen one ACO, people say you've seen one ACO. And what we mean by that is, there's so much heterogeneity in the industry in the use of the term. You'll see some of our competitors talk about ACOs, and really, all they mean is that they've done a gain share contract with the delivery system. We mean something much more than that, starting with our provider collaborations.

We have over 65 Medicare provider collaborations. Why is that important? Well, Medicare is one of the populations we like to start with in working with the delivery systems and going down this path to our new business model because there's such a financial opportunity there, number one; and number two, we have a track record of unequaled success.

Within those 65 Medicare provider collaborations, everyone is producing savings. And if you want a very detailed analysis of the performance, I would encourage you to look at the Health Affairs article that we published in September of 2012, which detail the performance that we can offer through these types of arrangements.

In that study, you will see, in great detail documented, 50% reduction in the use of the hospital and hospital admission; and you will see 16% to 33% reduction in total cost of care, as compared to other Medicare Advantage members who are not in this program. This is really exciting success, and we are the only organization in the industry that has had that kind of track record and that kind of published results.

If you look at our activities in patient-centered medical homes, we have over 300,000 members currently in patient-centered medical homes. Single payer, meaning Aetna members, but also multi-payer as well and Medicaid as well. And so we're building out that capability, and that can be especially useful where we have areas of the country where perhaps they're not ready to form an ACO, or perhaps for certain reasons, we don't want to form an ACO in that area of the country. So patients at our medical homes offers us a way to create economic opportunity in many markets.

And then finally, the full-fledged Accountable Care Solutions infrastructure and solutions. This is changes in the contracting, as I talked about, from volume to value. This is collaboration around the technology that I shared with you, and this is collaborations around care management programs to make it successful. And the response is overwhelming. We have 15 signed deals in operation and growing every day. We have 30 letters of intent where we're exchanging contracts and getting ready to close an actual deal, and we have over 200 organizations in the pipeline waiting for an opportunity to work with us. So we're very excited about the future.

So in summary, let me just say that Accountable Care Solutions, we believe, offers a path to the future. It offers Aetna an opportunity for revenue growth, membership growth and marketplace differentiation. And you're going to see this new strategy. We believe our strategy is the most comprehensive in the industry, and the most transformational in the industry. And you will see the fruits of this strategy begin to show up within traditional value metrics of Aetna.

And to walk you through the economics and how those -- that value is going to show up, let me introduce Gary Thomas, my COO. We work together very closely in making this strategy a reality. Gary?

Gary Thomas

Thank you, Charles. First let me say it's actually an honor to be here today. I have been in the industry for 20 years, half on the provider side and half on the payor side, all of that here at Aetna. And I do think that with Accountable Care, if you looked at the stages of development from health care from back in the '80s or '70s where Mark started and you look at it today, we are in the cusp of truly being able to transform health care, based on the capability and technology that Charles just reviewed.

I'm going to start by describing the health care delivery system's path to sustainability. I don't think that many people today would argue that the current fee for service model is sustainable. It just simply isn't. If you're part of it, you know it. If you're paying the premiums, you know it. Statistics that were shared earlier by Mark that premiums have increased 172% since 1999. That's 3x the rate of inflation. So that is a force of change from a consumer perspective to drive and to use the technology.

From a provider perspective, this slide tells a very, very important story. It's also the driving force behind the pipeline that Charles just had up there, where you have 200 active negotiations with ACOs.

The first part on the left-hand side of this chart, the current model, that blue bar represents a robust $3 billion to $5 billion health system today, earning between 3% -- 3% to 5% operating margin.

If you look at the impact, the impact alone from rate pressures between now and the next 5 years, you can see that, that health system, without engaging in any change, is going to go from profitable to unprofitable.

Today, 55%, actually it's more than this today, but approximately 55% of the population is either in Medicare or Medicaid. And if you look at the ACA and you look at the rate cuts associated with the ACA, they're worth $716 billion.

So the Accountable Care, the green bar to the right-hand side of that, represents the path to sustainability. So from an ACO enabled by technology, care management and incentives, aligned incentives, these are the steps and this was kind of the financial story. And this is -- providers believe this, and this why they're partnering with us and our capabilities.

So the first bar, the red bar, would be reductions in unnecessary or redundant utilization. This is achieved by leveraging the technology, providing the technology at the point of care, embedding our care management programs, changing the workflows. Ultimately, you can see if you just did that alone, it doesn't work. You look at the shared savings component, you can see that through aligned incentives, based on achieving these targets and quality and cost, we can actually align our shared savings, which actually makes up part of the gap, but not the entire gap.

From an operating cost improvement standpoint, operating costs are lowered in this model through workflow redesign, supply chain management and low utilization, overall services. But that last part of the right-hand side, which represents new growth, is critically important.

It's through these first 3 steps that we are able to design and develop insurance products at a lower price point. Through those lower price point insurance products, we're able to drive market share. That market share fills the void that we create from an unnecessary utilization part. There's no doubt in this model there will be winners and there will be losers. The objective here is first mover advantage, the right partnership, driving price point differentiation and share back to the system, critically important.

So you've seen this slide before. These are the Accountable Care Solution goals. I just want to elaborate on a couple of things. So, first step, enter the market, technology, care management deployment, receive best-in-market unit prices. We do that through 3 scenarios: unit price, lower medical cost targets and shared savings. Initially, through the higher dependency on unit price. But as you get traction through your workflows and your care management, that increases. And it actually decreases your dependence on unit price. It's very important from a provider perspective. Then we partner with these insurance products, and then we're actually very well-positioned to drive growth.

So let's look at, one, you've seen this slide earlier, so I won't elaborate from going to '12 to '13. You can see the blue bars represent new ACS membership, increasing 75,000. We have converted or attributed membership.

A couple of points here. The conversion opportunity is huge. $1.1 million ASC Commercial members, this is inclusive of the TRS so we can leverage and build our ACOs around these opportunities in a way that creates a unique value proposition for the employer group and unique interest.

This model was a key component towards TRS sales, so is ACS, as well as Medicare collaboration.

So let me talk to you a little bit about, how do we actually drive growth, and why is it beyond just the price point that we have differentiation in our ability to drive growth. 4 steps. When you have a partner and you have the #1 health system aligned with you in an insurance product, you're able to partner with that provider to identify best fit employers. Employers that are significant size, significant geographic alignment. And generally, your ACO partner is, in many cases, the largest employer in that particular marketplace.

So you use that, and you tap into business-to-business relationships, and the impact is pretty strong. You -- then, you do joint and co-marketing, you launch that in the marketplaces. It actually increases the credibility of the brand, and it signifies alignment of the community.

And then, three, the approach that solidifies it all is an approach that we use, which is an employer roundtable approach. So we bring all parties together to talk about the capabilities, the interests, the commitment, the ability to drive sustainable price point differentiation, and it's very powerful. It's magnetic, and it actually brings the employers and improves our conversion rate.

And then lastly, we establish preferred producer relationships with our distribution partners. And we identify distribution partners that have shared goals and commitments around Accountable Care and sustainability. Those are the 4 key drivers, from a distribution perspective, that provides a strong trajectory on growth.

The employee value proposition, as we've reinforced time and time again, 10 to 15 points of savings, health care employees, and an acknowledgment that all parties have skin in the game, meaning that less likelihood for disruption on the fee for service basis.

A couple of prove points. Just to let you know, does this really work? What's it look like today? Banner's Small Group product offering entered the market this year on January 1. Since its launch, it's become our top-selling product on a 2:1 margin basis. That currently accounts for 38% of our small group Arizona sales, and it's only one county. Arizona's a pretty big state.

Similarly, we launched our individual product on 10/1 of this year, and already, it accounts for 33% of our Aetna state-line sales. So there's interest, the proof points are there, it's a significant opportunity for us.

Okay. My next topic here is to talk about how ACOs reduce variability and the aligned incentives. It's a pretty simple slide. We install our populations reduced medical. And then Aetna providers share risk around a medical cost target. That particular piece produces variability from an earnings perspective.

The next important piece to understand is how do we align the behavior in order to make sure that we drive towards those targets and potentially even exceed these targets? So we put the products in the market to provider share in upside. Like I said before, we have a dependency on discounts at first, and then that dependency starts to decline as care management ramps up. The shared savings is reinvested back into the provider, so net-net, the reimbursement is higher. That is the incentive that aligns the behavior to deliver the result. I'm going to show you a little example.

So in this particular example, the very first line represents pre-ACO medical costs of $300. Underneath the little dotted box, you have $270. So out of the gate, there's that 10% we've been talking about.

When you look to the right, you can see that in a situation where medical costs come in lower, you can see that will beef the profit margin, or beef the profits higher. It goes from $30 to $35. To the right, you see the pretax profit going to $25.

I think there are 3 key points in this slide. One is that medical cost is below premarket, ACO rates in every one of these scenarios. Two, aligned incentives with our providers push better outcomes to the right. So ultimately, the incentive is to push to the right, which is the higher pretax margin. And then downside risk is shared with our ACO partner, which stabilizes earnings. So those are the 3 key points.

So how are we making out? Progress is good, progress is stable. Here's a list of ACO partners that we've launched products. To-date, we've launched over 100 products. We have a lot of work ahead of us and a lot of interest in our pipeline to continue to expand on this traction.

Now lastly, this is an area that we have projected meaningful consolidated results for 2013. But ACO does not only offer us an opportunity to grow our core business, they open up the opportunity to create new profit pools. And these capabilities that we have, if you think about a question earlier on was, How is that going to differentiate? Well, we're differentiating it in one big way. We bring payor agnostic capabilities into the marketplace. And because of that, we have an opportunity to manage, with our ACO partners, other payer populations, Pioneer, MSSP, other managed care organizations, self-insured clients.

Through that, our capabilities are used to manage the populations to achieve the targets, and then our opportunity is to share in that upside earnings. And our risk is limited to the fees that they invest. So that's how we out live in the new profit pools, embedded in emerging opportunity.

So with that, I'm going to hand it back over to you, Tom, to facilitate some Q&A.

Thomas F. Cowhey

Thanks, Gary. I think we've got about 15 minutes now for questions. The mics are available, and I'd like to open it up. I see the first hand from Joseph.

Joseph D. France - Cantor Fitzgerald & Co., Research Division

Great. So if we can go back to their -- I think, Tom, you said you weren't going to talk about what the margins were going to be on the business going forward. But is there anything you can -- without giving point-specific numbers, can you give us any relativity to how this looks versus piece of existing business? So a large group moves over to an ACO, those large group margins are 9%. Is it -- do we see a degradation of the higher revenues, or how does that work?

Thomas F. Cowhey

I think, in general, what we'll see is margins consistent with what you've seen in the past. And there are margins, when it comes to membership, that will be consistent with what you'd expect in those segments. I think if you looked at some of the technology services that we're providing as well, those margins are generally higher, and those margins will be consistent as well.

Gary Thomas

And in terms of the revenue growth, you have that $2.5 billion number that was talked about previously for '15. Is that all incremental revenue? Or is some portion of that revenue you had already moving into the partnerships?

Charles Kennedy

I'll take that. That's all revenue moving into the partnerships. And so you can see, from what we've given you with respect to 2013 membership, that some of that is, obviously, new membership, and so additive to our growth rate. Some of that is conversion, although it is additive to both profit and to revenue when you think about something like TRS, which was an existing customer that we converted to a Medicare product, partially on the basis of some of the strength of our provider collaboration capabilities.

Thomas F. Cowhey

Let's go to Ana, and then to...

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Yes, the question is about -- this is just from Commercial, did you show anything around Medicare? Because that's where the big savings lie, right? And that's, what you indicated, was the first place to value.

Gary Thomas

The numbers that we represented were a combination of Commercial and Medicare. So Medicare was embedded into that. And I would completely agree with you, that the Medicare opportunity is real, on our existing business as well as the support growth for the future. And actually the initiative aligns very well with star ratings initiatives and from a member retention perspective. That $1.1 million ASC conversion opportunity that we have within our existing opportunity, which I pointed out, was a Medicare comment. And so it's included in the numbers and is representative of a huge opportunity for us.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

And that includes your membership transition in both Medicare and Commercial? It's lumped together?

Frank G. McCauley

Yes. Medicare is very important to us because not only the magnitude of the savings opportunity, but it also allows us to fix a problem with the delivery system. They, in inference, are our customers in many ways in this new model, and when we can put on the table the amount of savings that are possible to be generated from Medicare, it helps us win those discounts that we shared with you earlier, because net-net it creates a very compelling financial opportunity for that delivery system.

Unknown Analyst

Okay. So I guess going back to the slide on Page 98, where you kind of walked through the margins today, and then the different components that are getting some margins higher. I didn't see in there, necessarily, a red column for the rate cut that you're getting upfront on there. There's a negative rate impact or that seems to be what you're saying -- I think it's because you're just saying that rates are coming down generally, not because of you're getting a 10%, 20% discount. So is there another negative analysis here in that argument? Or how does that work?

Charles Kennedy

No. There isn't an incremental impact associated with the rate reduction. Ultimately, that first bar in the current model is representative -- the rate reduction from ACA or any rate reduction that a provider would see through a partnership.

Unknown Analyst

So we'd be adding an extra negative...

Charles Kennedy

There's no additional add to this waterfall that comes up.

Frank G. McCauley

So the way to think about this is this is a composite from a delivery systems perspective. And so when we launch a new product, the number of members in that new product are so small that, that rate discount is basically meaningless on this graph. As we grow membership volume in that product line, the efficiencies that we're working on the delivery system with begin to kick in, and that begins to create a net-net upside through the shared savings methodology.

Unknown Analyst

But the rate discount is meaningless on your existing membership and that possible system is probably going to see that commercial membership from someone else who is going to be paying, also, a rate higher, too. I guess as I think about -- or I guess, it seems like that the hospital still is not losing something because they're agreeing to a below-market rate to agree with you. That person would have come in somewhere else at that market rate.

Charles Kennedy

If I'm understanding your question, if you take a rate reduction, you take the shared savings, the operational efficiency, and you factor it into a product. Our partner and provider is anticipating that we will be successful in partnership to drive growth. So therefore, it goes back to, even if they are being paid slightly less, there trying to do it and anticipate that they're going to take a larger share of the marketplace. So you got to look at design, as well as the rate cut in tandem. And another important fact is, a lot of the ACOs that we've actually stood up, to Charles's point, our market share is relatively small. So to the extent that they are giving us that cut, it's really no initial cut. So you take that plus any incremental medical management savings and efficiency goals, they view it as a net-net also.

Unknown Analyst

And just to wrap up with a rate cut question that I'll ask, an add on. Is there similar rate negotiation on the Medicaid and the Medicare side, too? Or is the savings there purely on utilization?

Charles Kennedy

Depending on the particular market where that current rate structure is, there could be.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just wanted to come back to Slide 102 that shows the risk sharing example. Can you help us better understand that? Because there's no revenue premium side for you, guys. And I guess, I think, the spirit of an ACO is ultimately to drive down the inflation in the system and lower cost for the end buyer. Here, it seems like the example is that the revenue is the same. Is that the wrong way to think about this slide? Because if revenue actually does come down, meaning, you're charging people, you actually earn a $30 increment -- $30 in incremental profit in the base case, or is it something lower than that?

Charles Kennedy

I think there's a couple of ways to think about this, and this is a better way -- this is a better question for, perhaps, Mark and Joe to answer at the Q&A at the end of the day. But if you've got a $30 differential on your PMPM medical costs, you have a decision to make based on what is competitive in that particular marketplace and what your target margins are and the growth that you believe you can drive. And so it's a balanced equation at the end of the day that we need to go through. But I think that's a better question for the later Q&A.

Thomas F. Cowhey

I think we have Scott down here.

Scott J. Fidel - Deutsche Bank AG, Research Division

Can you maybe just -- within the markets where you've set one of these up, can you give us a sense of either a percentage or a number of providers -- maybe a percentage I guess of providers that have actually signed up and those that sort of don't, what their apprehension is? And then, sort of the second part, I think, this is similar to what Kevin said. If 100% of providers within a market sign up for this strategy, for that provider, is it sort of a 0-sum game where they have to be net losers?

Charles Kennedy

Let me take the second question first. We all know that cost is going to get addressed, and this is a strategy, this is an approach to deal with it. As we begin to take utilization out of the system through reductions and hospital admissions and other strategies, you're going to need less capacity. That capacity is going to take -- get taken out of the system, not in a smooth linear line, but rather, you may have a delivery system down the street that may end up shutting down, that is a possibility. And so there will absolutely be, as we said earlier, winners and losers. Our intent is to identify the organizations with the greatest likelihood of success, partner with them, ensure they win, create a relationship where we have the preferred relationship with them, and then we become very tightly associated with the winner of that particular region. So we do expect that there will be winners and losers.

Gary Thomas

I'll just add on, not all providers can be part of the ACO. An ACO is a narrow network, in fact, probably the most narrow network. And it's not as if there's a sign-up list to join. We specifically target the ACO partner based on a series of parameters. And then based on that, we look at the overall Aetna network, and we add to it to ensure that we have end-to-end care delivery to meet the needs of that market place.

Frank G. McCauley

Regarding your first question, I'll add on a bit as well. Many of our initial customers were more integrated delivery network. Some of them are hospitals for both physician practices, so already, there's a physician base that we can leverage that comes with the relationship. And in other circumstances, the hospital is actually committed to building a provider network in collaboration with us. So we actually use all 3 strategies to get physicians, hospitals, aligned into a Care system and then bring efficiencies within the resulting system.

Thomas F. Cowhey

Christine?

Christine Arnold - Cowen and Company, LLC, Research Division

Publicly traded hospitals and then some [indiscernible] these arrangements, and to-date, not included any of the [indiscernible] include all your hospitals...

Thomas F. Cowhey

Let me just repeat that, in case people couldn't hear. So, I think, Christine, you're asking where the publicly-traded systems in evaluating these types of opportunities.

Charles Kennedy

So the publicly-traded systems, we have had active dialogue with many of them. Many of them are in our pipeline, that pipeline of 200 organizations. We do have some relationships that will be coming live in the not-too-distant future. And so I would say that they have been, perhaps, a little slower in engaging, but we do see them in the pipeline, and we do expect that there will be active participants in this new model.

Christine Arnold - Cowen and Company, LLC, Research Division

[Indiscernible]

Thomas F. Cowhey

Christine, I'm going to take that one. It's going to vary by the arrangement. And so I think that's probably a better question that we could talk about at the end of the day as we get into the overall financial model. I think we've got, probably, time for one, maybe two more. I see Matt.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

The competitive advantage aspect of these arrangements, what prevents CIGNA and United and others from moving as far along as you have in the ACS arrangements, and catching up or surpassing where you are?

Frank G. McCauley

Sure. Well, first of all, our strategy is, literally, a reinvention of the relationship between a plan and a provider. That's not easy to do, and it's not easily replicated. So the first thing is, this is hard to do. We've learned a lot. Secondly, there's tremendous first-mover advantage. Once you get in and you form this relationship, it's very difficult for them to just say, "Oh, I'm going to do the same thing with CIGNA or United or somebody else." So we believe that us being first to the marketplace will be signs of capabilities, the broader and deeper capabilities, gives us an advantage. Third, once you're involved with them at this level of collaboration where you're jointly working around contracting strategies, jointly working around workflow redesigns, jointly working around technology, you become so embedded within that organization that it's very difficult for them, and it's very costly for them to simply up and exit from that deeper relationship and go do something else with a CIGNA or some other organization. And then finally, I think, once that level of trust -- once that relationship has been built up, they're a little less motivated to do that. And we think that we will have -- we won't necessarily have like right of first refusal or something like that, but the relationship will create a flavor of that.

Thomas F. Cowhey

If I could just add one point. Our solution is paragnostic. It's very differentiated and unique. Providers aren't looking for multiple solutions for multiple populations, and when we stand out, they recognize that we have that all-payor capability.

Charles Kennedy

That's a very good point. I mean, when we work with them, we are redesigning with them a way to take care of guys -- that is not 10 ways, and it is through that redesign strategy that really allows us to take care of not just our members, but CIGNA members, all kinds of different members, Medicare. That's the all-payor strategy. And so that's very unique in the industry, and we're very excited about it.

Thomas F. Cowhey

Great. Well, I think that's going to ramp up our Q&A for this part of the session. It is lunch time. For those of us here, if you look on the back of your card, you should have a table number. Tables are for our tables numbered in the Cotillion room, which is down the end of the hall, and down the steps. We will have an Aetna manager at the tables who will be happy to talk in a little bit more detail about some of their specific businesses. And then we'll start it back up after lunch with Joe and our financial guidance.

Thank you, all, very much.

[Break]

Thomas F. Cowhey

If everyone could please take their seats, we'll get started in a minute. I hope that everyone's found the lunch both good but also informative. I've heard a lot of feedback from folks so far. And hopefully, you were able to interact with some of our senior managers across various different business lines. But up next, we've got Joe to present our financial outlook and capital plan. And then Joe and Mark will take -- open Q&A from the audience, followed by a conclusion.

With that, I'll turn it over to Joe Zubretsky.

Joseph M. Zubretsky

Thanks, Tom, and good afternoon, everyone. We're going to take a very quick, but thorough spin through the financial plan and the capital plan. The management team really believes this plan reflects the discipline with which we manage the business in the past, and we'll continue to do so. It strikes the right balance between membership growth, leveraging trend, revenue growth and producing a margin well in excess of our cost of capital and managing capital in a really provocative way that we've done so in the past 5 years. We do believe that our company is the best in capital management in the sector, and we'll show you some pages that demonstrate that.

So first, the membership outlook for the year. Our 2012 projection for full year and the 2012 membership is 18.2 million members, and we expect to end the first quarter of '13 with the same number of members at 18.2 million. We do plan to grow in the second and third and fourth quarters of next year to produce 200,000 members to end the year at 18.4 million.

Now you can see the bridge from the end of the year for the first quarter. One noteworthy item is that a large proportion of the Commercial ASC decline is the conversion of that Texas Retirement System account from Commercial ASC to Medicare. It represents about 85,000 members of that 175,000 member increase to the Medicare line.

You can see that Commercial Insured does decline in the first quarter, but there's some good international growth, particularly in our Middle Eastern operation and Far East operation, offset by some U.S. Commercial decline.

Medicaid should be flat, but we're going to grow revenue later in the year due to the dual wins. So we'll come out of the first quarter at a projected 18.2 million members, but we do plan to grow in the balance of the year.

We're going to grow revenue yet again. As I made the point this morning, if you have the discipline to price the medical cost trend and medical cost trend is in mid- to high-single digit, you can grow revenue and maintain your margins. We grew at 6% this year. We plan to grow 9% next year. Clearly, that $1 billion Texas Retirement System account is a huge catalyst to our growth rate. There will be a pickup due to the dual wins if they incept in the second and third quarter of this year and some nice growth in Commercial Insured, not because we're projecting robust membership growth because we will price to our 6.5% trend that we are projecting. That revenue growth will accelerate in 2013 to 9% year-over-year.

Next, reflective of the discipline with which we manage the business and reflecting the experience rated nature of our large group Commercial business and our Group Medicare business, the medical benefit ratios will be slightly higher in 2013 than 2012. You can see on the Commercial line, we're projecting to be at 81.5%, plus or minus 50 basis points, and we previously said we'd be at the low end of the 81% to 81.5% range for 2012. A little bit of that give up -- or most of that give up, which showed a little bit of compression, is due to the experience rated nature of the large group business.

Now the Medicare line really has done well this year. We've been operating in the mid- to low 80s on the MBR line. Our projection for the full year is mid-80s. We believe that will perform next year in the mid- to high 80% range, mostly due to the renegotiation of rate renewals with our large Group Medicare Advantage customers. The business did really well this year, and we're not going to let that business go to a competitor because it's still earning far in excess of the target margin, so we're going to retain that business at a higher MBR than we produced this year, perhaps to the tune of 300 to 400 basis points. Now when you add all that up, Medicare being a higher mix as a percentage of revenue, also put the dampening effect on our medical benefit ratio for the full year. That's the MBR story for 2013.

Next, embedded in that medical benefit ratio is a 2013 trend outlook of 6.5%, plus or minus 50 basis points, which is exactly what the 2012 trend was over 2011. However, a slightly different mix of how we get there. As we previously reported to you, core utilization has increased year-over-year, which is projected to increase year-over-year by 50 basis points. That has not changed. 50 basis point increase in core utilization is embedded in the pricing trends, included in the prices of our product. That is projected to be offset by one artifact, the lack of leap year, which picks up 30 basis points, and a slight adjustment to other factors that contribute to the overall trend line. So think of core utilization increasing by 50 basis points, offset by a slight decline due to the lack of one utilization day, which represents leap year 2012. You can see the cost categories on the right side of the page, not producing materially different results than they did this year. And as I said before, buy-downs, the employers buying down the benefit levels will bring that trend level down. The 50 basis points of core utilization trend going into pricing, key point.

We continue to manage our administrative costs to improve the margin profile of the business. As I have said many, many times, if we can grow again, we can produce the fixed cost leverage that had us operating in the mid-17% range on the SG&A line as a percentage of revenue a few years ago. This year, we're projecting to produce an SG&A ratio of approximately 19%. We always have to deal with core inflation, but we're going to offset the impact of inflation with productivity and fixed cost leverage.

Product mix, the fact that Medicare is now representing a higher percentage of our mix of revenue, brings down the overall rate by 60 basis points. So an 18% to an 18.5% SG&A ratio will continue to offset the impact of inflation with productivity gains and revenue mix, which is a good thing because Medicare is growing more rapidly is a positive influence on the overall SG&A rate. Our SG&A dollars will be up next year due to the growth of Medicare, but the percentage of revenue will be down. Again, positive impact on margins.

Next, the margin outlook for the year, 8%, plus or minus 25 basis points. And you can see that if you look across the waterfall, that increased Medicare mix puts pressure on our margins. The experience rated margin pressure puts pressure on the margins, but the SG&A leverage is a positive influence. Increased Medicare mix and experience rated margin pressure compressing our margins, but nearly completely offset by SG&A leverage, getting to 8%, plus or minus 25 basis points, where this year, we expect to be in the 8.5% to 9% range.

As I said this morning, we like where we are from a margin perspective, and I'm going to talk about operating leverage now. I made the point this morning, but I want to make it again. In an uncertain economic time, with health care reform taxes coming up in 2014, we believe growing at the rate we're growing and producing high-single-digit margin is a comfortable place to be all because of operating leverage.

If you think about the random statistical variation in any book of business as being 50 basis points, maybe even 100 basis points, then you're better off operating at 10% margins than 5% as 100 basis point miss is 10% rather than 20%. And we think the concept of operating leverage and the fact that we've taken on less operating leverage than many of our competitors is not fully appreciated and understood. So we really focus on operating leverage, and we like operating at our current mix in high-single-digit territory going into 2013 and '14.

Net investment income has been a drag since I've gotten here. We are producing $750 million of net investment income at yields of 5.5% to 6% back in 2007 when I arrived. That number is going to be more like $500 million this year. We will never compromise our disciplined deployment of capital to our investment portfolio to manage the total return with a net investment income bias, never move out on the duration curve and never move up the credit curve. We like the risk profile of the business. We'll let the rate flow. And over the next couple of years, I think you're going to see net investment income be a drag on our ability to grow operating earnings because we're going to let the new money rates pull the yields down. We're not going to do any unnatural acts to invest in alternative investment vehicles to juice the yield to offset this impact.

Next, the margins we're producing produce great returns on capital. Whether you look at our return on capital measure, which is agnostic to the leverage ratio we keep or return on equity, which includes the impact of leverage, operating at 12% ROICs and 15% ROEs, we believe, shows the discipline of margin maintenance and the discipline of capital deployment. So our 8% margin, plus or minus 25, for next year can produce 12% ROIC, 15% ROE. And we estimate our weighted average cost of capital as between -- being between 8% and 9%.

The bridge for EPS. We talked about this in words back in our third quarter earnings call. Now we're giving you the numbers. Our guidance for 2012 remains at $5.10. You can see the drag of that investment income I spoke of. Our 2011 acquisitions, which I'll talk about in a minute, continue to produce increased accretion as we projected they would. We have an artifact in the earnings projection for next year, where we'll be collecting reform-related taxes in advance of our ability to accrue them. It's just the way the accounting conventions work. They're going to include it in the price of our products, so we're collecting it in advance of 2014. But we're only able to account for the taxes in 2014. So a $0.15 pickup to EPS in 2013.

Our share repurchase program this year is producing a share count, but if you just project forward, can produce and will produce a 30% -- a $0.30 pickup. And the last item is an amalgam of a series of operating items, most notably an increase in operating margin dollars because we're growing revenues at 9% at our target margins, offset by increased SG&A as we continue to invest and continue to grow Medicare more rapidly than the Commercial business. All in all, gives us great deal of confidence in saying that our earnings per share for next year will be at least $5.40.

There's the guidance page. You can read it up and down, but we've given you all the guidance metrics at this early stage of the year. And obviously, if you had any questions about those, I'd be happy to answer them when we get to Q&A.

We've worked hard over the past few years on working the balance sheet really hard. I mean, I've always used this business as being a cash flow, EBITDA-generated business that operates inside this insurance company wrapper. And if you could take technologies and protocols that are common in the traditional insurance world and deploy them inside a health care company, because we're in that insurance construct, it can create great value for shareholders, and that's what we've done. In the last couple of years, you'll recall we introduced a market-based dividend. We continue to invest in organic growth, which I'm going to show you in a moment, is the highest and best use of excess cash flow. There's no question that at our target margins, given the modest capital requirements of the insurance business we write, that organic growth is the highest and best use of excess cash flow.

We deployed -- will deploy over $9 billion of our capital for M&A transactions, $1.6 billion in the class of 2011 and now in excess of $7 billion when we close on Coventry. And I'll give you a report card of how those acquisitions have done.

We continue to repurchase shares. We think that over the last few years, they have been undervalued and a good investment. And we've pulled in about 33% of our weighted average shares here over the past few years.

And we introduced to the marketplace a really revolutionary new capital structure called our Vitality Re program, which effectively converts the equity cost of capital to fixed income cost of capital to the tune of $450 million of notional value. So there's our market dividend. We increased it to $0.20 a quarter, $0.80 annually. You can see the acquired yields and the acquired payout ratios.

During the pending transaction, the size of Coventry, you continue with your deployment of capital under the current program. When we close on Coventry, and have confidence that we understand NewCo cash flows, capital requirements and cash generation, we'll revisit the dividend we paid. But we expect to pay this $0.20 dividend per quarter after we issue the 50 million shares to Coventry shareholders. For every dollar of premium we write today, we hold about $0.20 of regulatory capital against that premium. And at margins of 8% pretax, you can compute the return on that incremental capital deployed. It is the highest and best use of capital. And you will see that in our projection of excess cash flow for next year, which is obviously down year-over-year, it's only down because we've chosen to retain that capital in our regulatory subs to grow revenues at 9% and produce incremental 30% returns. Again, the highest and best use of capital because we're leveraging our goodwill and only have to add regulatory capital to fund growth. It's a phenomenon in this business, we think, is not widely understood and appreciated but has -- the business has fantastic cash flow and capital characteristics.

Our acquisition strategy has been prudent. It does look like we acquired a lot in 2011, but we go through various rigorous set of screens. Properties have to be strategically compelling and financially attractive in order for us to action. We are very, very disciplined. In fact, the class of 2011 is really, really contributing to the overall portfolio. All the things that Charles, Kennedy and Gary talked about this morning wouldn't be possible without Medicity. It's the engine that's driving the entire ACO infrastructure.

Prodigy is offering our self-insured customers a very low-cost, stripped-down ASC option that our cost structure couldn't produce. The Genworth Medicare Supplement business is a hedge on Medicare Advantage and has grown at 25% since we bought it. And PayFlex is really creating stickiness with our National Accounts customer base because not only can we be the administrative solution, we can be the fun administration solution. It is the best in the industry. And as I showed you before, because the integration costs are wearing off, the synergies are ramping up, the accretion is starting to build. The class of 2011 has been successful. And of course, I'll talk about Coventry in a minute.

The Coventry transaction is strategically compelling, financially attractive and we financed it right. Mark talked about these numbers before, we'll be $50 billion in pro forma revenues, $4.3 billion in EBITDA and pro forma of about $2.4 billion of excess cash flow available to the parent company. We're projecting accretion in the first full year of ownership, which is likely to be 2014, $0.45, growing to $0.90 over the 2015 period. And we'll talk about the synergies in a minute. We showed this chart to you before. It's not changed. Synergies build over time. Property becomes more accretive. We'll record transaction-related expenses below the line. We'll record integration expenses likely to be $250 million to $300 million over the next 2 to 3 years, below the line. And as I said, accretive slightly in 2013, building to $0.90 accretion in 2015.

What gives us high confidence in the synergies is the line of sight we have for them. Administrative overhead overlap is really easy to identify. Clear line of sight to that. Fixed cost leverage, taking 4 million medical members on to a new platform. We have to add no fixed costs, only variable costs, is literally accelerating the fixed cost leverage that we're trying to produce organically. For every 1% of membership I grow, I can reduce my SG&A ratio by 50 basis points or so. We're getting that in one transaction. 4 million members on to the administrative infrastructure, which then reduces the reliance on fixed costs, only adding variable cost. It gives us great line of sight. And our combined IT budget being $1.5 billion, we see very good opportunities to rationalize that spend. $400 million on a pretax basis by the end of 2015, we have very clear line of sight to generating that.

We did not account for other synergies. And I think with various conversations this morning on the stage, we've alluded to some of these. We both have fabulous PBM contracts, ours with CVS Caremark and theirs with Medco Express. And over time, particularly when these contracts come due for renewal, '15, '16 and '17, there will be opportunities to now take a combined $15 billion of pharmacy spend and have a stronger negotiating position, with either one of those parties or others.

We talked about the revenue synergies. They have historically not invested in ancillary products. Group visibility, voluntary products, dental, vision, behavioral, they have not invested in those products we have. And we can take our downmarket, ancillary products to their marketplace and cross-sell at penetration rates that we currently enjoy in our own book of business.

And lastly, we do plan to take our capital deployment strategies, particularly something like Vitality Re, to the Coventry capital base. They are not accounted for that in the synergy value we projected.

We've shown you this before, the transaction has been financed. We did a very successful bond offering on November 7, closed it a few days later. We borrowed 5s, 10s and 30s, the 10 real market was very deep. We financed $2 billion, the rest of it will be funded with our A-2, P-2 commercial paper. The combined pretax rate of the financing is 2.3%, and we just think that was great execution by our capital markets team, which is here today to finance this transaction well, we could see the sources and uses up and down the line here.

Pro forma. We think this brings us just greater access to capital, reduces our cost of capital, certainly more diversification and breadth and depth and size, should reduce volatility and give you a lower cost of capital. But we do plan to maintain our leverage ratio, which, out of the gate, will be 40%, and bring it down to 35% in 2 years' time. We're currently operating at 30%. So we have agreed with the ratings agencies to operate at the ratings they're now giving us, 5 points higher on the leverage line than we've operated today. And we also plan to come out of the gate at 285% risk-based capital and have a target of 275% over time, when you know today we're operating at 300%. And this gives us more access -- excess capital, and we still believe we will maintain, and plan to maintain, strong investment grade ratings, which gives us access to the capital markets when we need to.

This chart is really, really important because I even got a couple of comments today, "Gee, your excess cash flows appear to be down year-over-year. That's troubling." Well, it would be if they were down for reasons like we weren't producing it. But if you look on the left side of each one of these charts, in each of last year, 2012, and the projected year, 2013, we're producing approximately $1.75 billion of operating earnings. None of those operating earnings get trapped in the regulated subs. GAAP earnings, legal stat earnings, and we can harvest those cash flows right up to the parent.

In 2012, we did a Vitality Re transaction. We worked working capital really hard, so we created $600 million additional excess capital, which we're not repeating in '13, number one. You won't be able to find it, but we do not project working capital improvements and/or new Vitality Re transactions.

Because we grew in 2012 by 6%, we reserved $350 million of our free excess cash flow in our regulated subs. Because we're growing revenues at 9% next year, we have to increase that reserve, that capital reserve to $650 million.

And I think if I click here -- nope, it doesn't come up. Oh, there it is right there, at the bottom of the page, that $650 million, if we hit our target margins, is producing a 25% plus return on statutory capital. We want us to grow at these rates because the capital requirements, even to the $650 million, are producing significant incremental returns, which drive ROIC and drive ROE over time. A fantastic capital story as far as we're concerned.

Here's the sources and uses. It just takes you up and down the line of the numbers as I just showed you. The subsidiary dividends will be down because of the capital reserve. The Coventry financing; the projected shareholder dividend, which is higher year-over-year for obvious reasons; interest expense, higher year-over-year. Those are our fixed charges. Again, a fabulous capital story. We still plan to hold $100 million of core liquidity. We will end this year with over $2 billion of liquidity at the parent company because, obviously, we prefunded and prefinanced the Coventry acquisition with negative carry because those funds are invested at very low rates, is included in our transaction expenses, which are going to be below the operating line, just want to bear that in mind. That all results in us projecting to repurchase $1.4 billion this year and have available next year approximately $500 million to deploy for M&A, share repurchase or other corporate uses.

Recent history has shown that we are able to deliver on our long-term growth rate. The sustainable growth rate of low-single-digit earnings per share of growth rate on average over time. If you look at the operating EPS line from '10 to '13 at 13.6% and if we pro forma out the drag of the amortization from the acquisitions we did and look at operating -- cash operating EPS, slightly higher at 14%, we've been able to deliver on the double-digit operating earnings per share growth over time and gives us a lot of confidence that we'll be able to continue to do so.

Having said that, we all know there are some challenges that this industry and Aetna needs to manage through in order to continue to say that. One in particular would be the industry fees and taxes. Everybody is aware that the industry was levied a health insurance fee and the collection of the reinsurance contribution to fund the catastrophic risk reinsurance on the exchanges. We plan to and fully intend to load the full cost of those taxes into the rates we charge customers starting in '13, to build for '14. And we intend to recover at least 90% of those taxes in one pricing cycle. Now it's a competitive marketplace out there. You'll never know where you get it all, so it puts a little pressure on the outlook for '14, but we are starting to do that now. Negotiations and discussions with customers have gone well, we understand it. And the regulators, who receive the filings for individual Small Group rates, get it. It's an additional cost to doing business. Thanks to the federal government taxing us, we have to include it in rates in order to have actual really sound rates.

So a few challenges ahead of us in '14. The exchange that we talked about this morning, maintaining the margins at Medicare Advantage is already a challenge, but we've proven that we can do it. And certainly funding the Medicaid expansion gives us an opportunity to grow rapidly in 2014 and beyond. So some challenges as we look forward to '14, but we still have a lot of confidence in the low-double-digit operating earnings per share growth rate over time.

Two points I want to make here. Long-term, we do believe we can grow after-tax operating earnings by 4%. Many of you have recognized that's not yet -- or is not included in our projection for next year. Our operating earnings are relatively flat.

Our emerging business growth, particularly ACOs, are going to drive membership growth in the core business. And with the cash flow generation that I showed you, that usually adds between 5 and 7 percentage points of EPS growth just by deploying capital to repurchase shares even at a slightly increasing share price. So the model works. This projection, now that we're standing here at the end of 2012, is a 5-year projection. This is our projection for a 5-year period and does include an outlook for 2014 even though that's bound to be a challenging year.

But again, we're not giving you annual installments of our growth rate. We're saying that on average over time, we should be able to grow earnings per share by 10% over a 5-year period and including the impact of 2014 and a dampening effect of 2014 margins are likely to produce, very important point.

So that's the financial story and the capital plan. Management has a lot of confidence in our ability to deliver these numbers. I will update you accordingly, and I -- and we believe the financial plan and the capital plan are very sound and have a high degree of confidence that we can produce these results.

So thanks for listening, and I think Mark's going to join me on stage now.

Thomas F. Cowhey

Thanks, Joe. We're now going to conduct our final open Q&A of the day. We have Mark and Joe. So who would like to start? I see Ralph, and then...

Ralph Giacobbe - Crédit Suisse AG, Research Division

Great. Maybe, Joe, can you talk about -- I think in the past, you've talked about investments to sort of prepare for exchanges and reform. I'm assuming that's maybe built into the guidance that you provided. Can you give us any sense of the dollar amount of spend there? Is it onetime in nature? And exactly what does it entail?

Joseph M. Zubretsky

Sure. In 2012 and '13, what I'll call all reform-related expense spending, exchange building, ICD-10, all of those reformulated and regulatory-type compliance spending had deferring about $200 million of cash, which equated to about $100 million of pretax operating earnings drag in each of '12 and '13. That spending will continue into '14, but at a rate of about half. $200 million of cash, $100 million of earnings drag, ICD-10, other reform compliance activities, build-out of exchanges.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And then my second question. Mark, I think you started out sort of saying have you see more opportunity internationally than domestically, I believe you said. So international, I know, is not a big overall component of the business today, so maybe help us understand sort of where you want to go, how big the opportunity, how aggressive we should expect you to be, and just timing around all that.

Mark T. Bertolini

Yes, our revenue currently internationally is over $1 billion, with about high-single digit operating margins. So it's a reasonably good profile. It's largely a large group-insured business, with some private medical insurance in-country are currently being developed in the Middle East and in China through joint venture relationships with in-country life and health insurance companies. State-owned entities in China and in -- or in Kuwait, Jordan, Qatar, Abu Dhabi, Dubai and Saudi Arabia and the Middle East. We also are, though, developing -- taking the Accountable Care Solutions business internationally. And so we see that as a greenfield opportunity to, first of all, test some of our models. But more importantly, to create models that are better representative of well run systems in the future because they don't have much to begin with. So in the Middle East, we've done a joint venture with the Olayan Group to begin to develop this technology platform for the health systems they're developing in the Kingdom in Abu Dhabi and Dubai and in Qatar. And then in China, we're working with Tianjin province, particularly the Binhai area, in doing the same kind of thing around population management and technology embedment. So it starts with technology, starts with patient population management, helps build a more effective system and then we bring PMI, or private medical insurance, into that as a supplement for the government-run business. So it's a longer-term play, but we think one that would generate access to more population in those markets, particularly the middle class as they emerge.

Thomas F. Cowhey

Josh?

Joshua R. Raskin - Barclays Capital, Research Division

The question is broadly, a couple of questions I guess, embedded in this around minimum MLRs. So first one, any impact from Coventry? Is that helpful in any way? Second question, how do you think about the impact on your long-term 10% growth rate? Is there an impact? Is there some point in which the minimum MLR has become the problem? And then the third point, which is the ACS strategy. Is there a mechanism by which you're paying providers for services, et cetera, that would be helpful in the calculation you can [indiscernible]?

Mark T. Bertolini

So I'll give a general, and Joe, maybe can confirm some of the details behind each of those questions. I think generally, minimum MLRs have been much ado about nothing. It's another way of managing risk and looking at risk inside the business. And it hasn't hurt us as an organization. And as a matter of fact, I believe that it creates rate stability over time. Because the market has to behave a certain way. It also, in the instance where we talked about the potential for others to behave badly and the exchanges, prevents people from underpricing too dramatically to get share because you can't reprice, you can't price up later through rate review to get it. So I think it creates some stability in the marketplace in a more rational pricing environment. And so I would say that while everybody was nervous about it and worried about it, I think what we have found is that the industry got its head around it, was able to manage some minimum MLRs. Now we've got another shot with Medicare coming up, which will give us a similar opportunity to prove again that we can figure this out. But I think it's a lot less worrisome than when we initially dealt with it in the beginning. Joe?

Joseph M. Zubretsky

I would say, yes, Coventry, you're not going to talk specifically about Coventry. But I think you can assume that 2011 was -- if there was any impact here, that was it. Because the rules were out after the rate of the business, so everybody had to deal with it in '11. It's in the market now. And so it's just not a big phenomenon when we're out in the market competing for a piece of business. Here's what I would say about any acquisition, to the extent your risk pools are larger and more statistically credible, it makes it easier to manage risk pools. So the fact that you're integrating 4 million medical members out of our 18 million, I think, just makes the business easier to manage statistically. And the Medicare MLRs is just not an issue, we don't think, for the industry. If you add the 400 to 500 basis points of formula allowance on top of the mid-80s number that you're producing in your financial statement, it's just not going to be an issue if it's managed at a level that's pretty high on the aggregate scale.

Mark T. Bertolini

And then the ACO impact is largely going to be dependent on the nature of the relationship. So is it a capitative relationship, are we doing fee-for-service inside the model. So that's all going to matter. And so it depends on the nature of the risk-sharing relationship we have with the provider.

Thomas F. Cowhey

We go to Ana, and then to Justin.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

In the earlier part of your presentation, I thought there was sort of an implicit viewpoint that ASC goes to private exchanges, but large Group remains more intact and then less said about small Group. Is this based on actual survey data or broker feedback? And because on the distribution side of the business, there's probably more incentive alignment for ASC to go fully insured through private exchanges? Or is this something else that makes you believe that?

Mark T. Bertolini

Well, I think, first of all, what we're doing is we are reacting to all the literature that's out there. And everybody, as you know, everybody has a point of view on how much business is going to move through the exchanges. So we triangulate a bit on what we see, what we hear from our own customers. I think on the large and the ASC market, I think it's, again, as Frank mentioned earlier, very specific to certain industry verticals like retail, like restaurants, like hotels, where these employers are going to do a few things. I met with one large employer who told me that he was moving all of his employees to 30 hours a week. And so you can see people starting to play with the rules around Health Care Reform and where individuals may have jobs at multiple companies within the same industry, and that is portal ground for private exchange. Which then through a defining contribution program moves people out of the ASC market and into the insured market. And so I think that's the nature which you're going to do to see, is some of that behavior. But it's not a wholesale SCHIP in the ASO marketplace, but it's going to be in certain industry verticals where people are trying to manage their costs and don't want to bear the burden of all of this reform.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

And related to that then, I think, there was, Joe, you put out a growth model for large group, which is 40-plus percent of your EBITDA. And I think a piece of it was medical costs trends. So with ACOs and all of you and your competition are talking about, given cost moderation and so on, why do you believe that mid-single-digits medical cost trend will prevail for the foreseeable future? It seems to be contradictory, right?

Mark T. Bertolini

Contradictory to what?

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

To the notion that it seems like delivery system modernization is ongoing, and all of you are moderating spend, though you would think so, looking at ACOs and everything else.

Mark T. Bertolini

Yes. And I wouldn't want to bet on that, right? So we're going to price to what we believe an appropriate trend is, and when we see the trend start to move we'll react to it. But we're not going to price in front of the idea, until we actually see it. I mean, the most important thing, as Joe showed you, so we price discipline to high single-digit margins and keep what we have. Deploying that capital is far better than chasing after a lot more membership and margins. So we believe in what we're doing with ACS. But when we see the trends moderate, when we see the actual discount in pricing, we can put into our total cost, we'd price for that, but not before.

Thomas F. Cowhey

Great. Justin?

Justin Lake - JP Morgan Chase & Co, Research Division

The first question, Mark, just on capital allocation and your thoughts on M&A. The -- do you feel like your ACS capabilities are where they need to be? Or do you see yourself having to step out and make more acquisitions, deploy more capital there versus you talk about consolidation and plan consolidation and buying more plan-related assets. Can you kind of walk us through that, you think, over the next couple of years?

Mark T. Bertolini

Well, I think the ACS opportunity creates some interesting M&A. Hospital-owned health plans, for example, where hospital systems are moving into an ACS relationship with us and say, "I don't know that I need this anymore." And so we can find opportunity to gather membership and put them into a different model. So I think you get both in the ACS model as you start restructuring the delivery system. I think there's more M&A opportunity in there that could look more like consolidation than it has before. So I think that's a huge opportunity. I think big consolidation is going to be the result of the traffic we actually see coming through Health Care Reform as people don't manage it properly and can't continue. I think that's when we've got to be ready with our capital to be able to go after those assets that we believe are appropriate. And then so I would say in 2013, not a whole lot. Maybe in this ACS part of the world, 2014 is going to be all hands on deck to make sure we steer through the storm. And then I think it's time to take an assessment of where the rest of the industry is.

Justin Lake - JP Morgan Chase & Co, Research Division

So from a technology perspective, nothing there, probably?

Mark T. Bertolini

Well, we don't know what we don't know is going on in the technology space. I think we looked at 400-some assets this last year in the technology space. So there's a lot going on out there. So we've got to be active.

Joseph M. Zubretsky

I would just -- I want to put a point to what Mark said that's really important. There was a slide this morning that showed the virtues of vertical integration and virtual integration. We believe that we have deployed the amount of capital and the amount of goodwill we spent on the technology assets that serve as the chassis for ACOs, that we can ubiquitously spread across the country. If you look at what it cost to buy a physician practice or a hospital group, and map that against how many of those you need to buy to truly impact your cost structure, we believe that our strategy is far more capital efficient than any vertically integration strategy, where you're buying and monetizing the equity value of the physician contract. Ours is far more capital efficient, the goodwill is largely deployed. There might be a technology asset or two we need here and there, but we spent over $1 billion of active health iTriage in Medicity when we feel we had the chassis.

Justin Lake - JP Morgan Chase & Co, Research Division

Great. And then my follow-up on the 2013 guidance. Joe, you guided to $1.75 billion of operating earnings. That's flat year-over-year versus 2012 with this initial guidance despite 9% revenue growth, and I think you kind of laid out the headwinds in terms of the experience rating, especially Medicare Advantage. As we think ahead to 2014, I know there's a lot of structural stuff going on, but is there any other headwinds we should think about in terms of margins that have to reset, or is this a reasonable jumping off point where we won't see those -- that slide won't include any reset experience rating next year?

Joseph M. Zubretsky

No, I think that, whatever they laid out, is 2013 is a very representative year on what the profile of our company looks like at our current business mix. So I think it's a good year off of which to project anything that would happen in '14.

Thomas F. Cowhey

Great. Let's go to Scott.

Scott J. Fidel - Deutsche Bank AG, Research Division

Your thoughts on how average premiums and the exchanges and the shop exchanges could look relative to the existing ISG market. I think I heard Frank mention earlier that small employers may not see much value in the exchanges. So interested if we can interpret that in terms of what the pricing is? And then just the second question, Joe, maybe if you could just talk about group insurance and some guidance on what you think about revenue growth and margins and group for next year?

Mark T. Bertolini

So premium rates shock for 2014, absent subsidies and everything else, is going to be in the neighborhood of 20% to 50%. And when you see some markets are going to grow -- subsegments in some markets grow as high as 100%. And we've done all that math, we've shared it with all the regulators, we've shared it with all of the people in Washington that need to see it. And I think it's a big concern. So I think as we go through this fiscal cliff discussion, you may see some interesting ways to try and address that rate shock issue. And so I think we're thinking hard about the kinds of risk models we can develop and how to work within private exchanges and public exchanges to manage that. But just one piece alone, more than half of the U.S. public is in a plan and it's at 50% or lower actuarial benefit. If you go up to 60%, as required by law, you've got a huge bump already. And so that's the piece that I think you'll see interesting conversations around. And this is the reason why you're seeing such pressure between the states and the Federal Government on exchanges. Whose exchange do you want to show that price increase on? And surely, the federal government doesn't want to show that. So I think this is going to be a big debate. And as Frank mentioned earlier, we're starting to see -- we're putting these things through, and the rate increases, and we're getting them through the regulators. So I think that is going to be the big story for 2014 as these rates start going to the market, probably the latter part of this year, 2013.

Joseph M. Zubretsky

Scott, you asked about group? Group Insurance? Group Insurance, a nice little edge and plan of business for us. It goes about $1.8 billion in revenue, and this year it produced $150 million to $160 million of after-tax profits. That's a separate reporting segment so far there in the Ks and the Qs. We are going to grow that next year, but in the way that we really like to see it grow. The top line is going to grow due to cross-sell into our health care book of business, some very large national accounts. But very cautious and a very disciplined way. And we're not projecting at profit growth because in this economy, you never project margins to expand in an economy like this. So very cautious, top line would grow, we're looking here at kind of a flattish output to earnings, and if it comes in better it'll be upside.

Thomas F. Cowhey

Let's take Chris, the Christine, then Kevin.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. I just wanted to come back to the question I asked in the last session. We don't have to put back the Slide 1 or 2, but it's with regard to the profitability and the Accountable Care Solutions. Are you literally saying that it's $30 more profitable, or are there some revenue impact that needs to be included in that analysis?

Joseph M. Zubretsky

We're actually going to put up the slides because we knew you were going to ask the question, because I think that this is a really, really important point.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

1 or 2.

Joseph M. Zubretsky

Whatever range that we have in the hospital, let's say, have the equivalent of averaging $300 PMPM in cost, whatever the -- the DRG, per diem, it doesn't matter, it was $300. They are so confident in our ability to produce savings that obligate, in signing of the ACO, they give us a 10 percentage point advantage, which probably is best to better than the top competitor in the market. The point we're trying to make, and perhaps the chart didn't make it well enough, is we get to make a decision what to do with that $30. We could put into pricing to try to grow membership or we can drop it through. Truth be told, it's probably a combination of both. So the point is, you can't be worse off having a cost structure that's $30 better, 10% better than it was the day before. But we get to make the choice of whether to drive membership growth to a more competitively priced product, drop it through the margin, or a combination of both. The other point on this page is, off of that 10% reduction, you're now 10 percentage points better off, when we're wrong about that, up or down, only half of that hits the Aetna P&L. And so not only does it give you a more competitive cost structure out of the gate, grow membership, drop it through to margin, it gives you less variability on your financial results because you are sharing in the upside and the downside of this provider.

Thomas F. Cowhey

Christine?

Christine Arnold - Cowen and Company, LLC, Research Division

Increasing your exposure a bit in Medicaid with Coventry, how are you thinking about the premium tax and the ability to recover for the impact of some states?

Mark T. Bertolini

We are not very -- we are not incredibly hopeful. I think that the way to think about it from the state perspective would be that we can rely on the financial viability of the product in the marketplace and the insurance commissioner's responsibility to ensure a financially viable product. But given the state pressures we're seeing from state budgets, that's going to be tough push. So we're going to have to implement better provider contracting, we're going to have to give better medical management. And with the dual's exposure, we'll have much bigger premium to play with and to be able to manage that.

Christine Arnold - Cowen and Company, LLC, Research Division

Can you build it in to the Ohio and Illinois pricing? Because they haven't negotiated that yet.

Joseph M. Zubretsky

We're not going to talk specifically about the pricing of those 2 contracts. Sorry.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

2 kind of follow-ups. I do have one on that question. You mentioned before that 90%, you said you get 90% of the industry fee through one pricing cycle, that was just purely on the commercial book, is that right?

Mark T. Bertolini

No, that was all in.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Oh, across Medicare and Medicaid even?

Mark T. Bertolini

Across the health insurance fee, and of the reinsurance contribution, across all books of business, whether explicitly priced or implicitly priced.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

So then that comment there about the Medicaid side, part of that...

Mark T. Bertolini

We're going -- every rate sheet we put in front of a regulator will have to prove the health insurance fee included. So you get the margin lead or not, is really the issue.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. This one is on -- you addressed this question before about 2014 to 2013, the industry fee of $0.15 benefit this year, it shouldn't be the same amount of benefit next year, right? You will -- the initial fee will grow next year, so you don't have to reprice that in, but the rate of growth won't be the same in 2014, so wouldn't that be a drag?

Mark T. Bertolini

Yes, you have to process -- what you have to process is the fee going from $8 billion to $11 billion, and then the lag effect of that. And so you can see that until it hits $13 billion and then inflates with health care inflation, then it shouldn't be a drag at all. But in the first couple of years, because it's increasing and because you're pricing in advance of it, it has these weird accounting impacts. But you're not able to account for the fee until it's actually incurred.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

But if it is a $0.15 growth year-over-year, it won't be a $0.15 growth, it would be -- now you're paying a tax, so it kind of wipes out the $0.15 price for next year, and it will be a $0.05 benefit or something.

Mark T. Bertolini

Tom -- I'd include that, but Tom has got a very good model that he's worked through on how all of this works. And you have to actually go through quarter by quarter and map out how much of it you're collecting this year in pricing to see the year-over-year impact. He even created a very, very detailed, and quite accurate, model on what it looks like for '13 and '14.

Joseph M. Zubretsky

Your point is that 0 to 8 is more than 8 to 11, which has much -- quite an impact, but not as much.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

And then last question on the duals. You mentioned the duals were in your revenue assumption, to some degree that you kind of assume that they happen in Q2 and Q3, is that right?

Mark T. Bertolini

We believe they'll incept in 2013. We also know that contracts get delayed for various reasons, so we are very cautious and prudent with how much dual revenue we put in the 9% growth rate.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. Do you have any thoughts about margin or how the ramps up? Is that -- are you kind of assuming 100% MLR-type, really high, high-90s, and how do you think about that?

Joseph M. Zubretsky

I would address the question -- generally speaking on these contracts, as you know, the build in the anticipated savings into the capitated rates. So until the medical management programs and all things we're doing to actually drive our costs produce the savings, the profits tend to be lower early and higher later. And you'll see that kind of flow from these new contracts.

Thomas F. Cowhey

Great. Let's go to Carl.

Carl R. McDonald - Citigroup Inc, Research Division

First question I had is on the -- whether the interest -- my microphone?

Thomas F. Cowhey

No. Can we get Carl a microphone that works?

Carl R. McDonald - Citigroup Inc, Research Division

Working now?

Thomas F. Cowhey

Yes, you're fine.

Carl R. McDonald - Citigroup Inc, Research Division

So the incremental interest expense associated with the Coventry transaction, is that included in the $5.40 guidance for next year? And if so, how much?

Joseph M. Zubretsky

The answer is the portion of the -- the negative carry on the interest expense versus the meager, or the investment earnings we're earning, that happened before closing, below the line, but after closing, the interest expense is included in the forecast.

Carl R. McDonald - Citigroup Inc, Research Division

And then second question for Mark. You just mentioned, in relation to the fiscal cliff, the potential there might be some reform related changes. And I think the 2 biggest things that could impact the deficit, wouldn't it be delay in health reform; the second would be to dramatically alter the level of subsidies that are given on the exchanges. So just interested in whether you think either or both of those are potential outcomes during the negotiation?

Mark T. Bertolini

I think they're on the table. And I think that my involvement in those sets of discussions over the last 1.5 years have been aimed at getting at these issues in a broader framework. Because nobody wants to talk about the Health Care Reform after it gets passed, right? And that was last year. But they will talk about it as it relates to how it's impacting the nation's debt. And so I think those are all on the table. The level of subsidy, how quickly we start moving into exchanges, what populations, Medicaid expansion, all of the things are on the table as part of the fiscal cliff conversation. We won't have answers to those as part of the initial down payment on the fiscal cliff, which is avoiding going over, but we will get those throughout next year as we move into implementation or reform.

Thomas F. Cowhey

Should we go to Melissa?

Melissa McGinnis - Morgan Stanley, Research Division

So a follow-up on Christine's question. How are you thinking about the competitive disadvantage created by the favorable treatment nonprofits received and the calculation of the industry tax, particularly in markets like Medicaid where there's already such skinny margins?

Joseph M. Zubretsky

There is a delta there. Keep in mind that you have to be cautious about the definition of non-for-profit, mostly across this year's plans of paying the tax, but because they have a lower rate of federal tax, there's a slight pickup they're getting closely with hats up for tax purposes. So we have to put $1.50 in rate for every $1 we pay in tax, there may be $1.37. So there's a slight benefit there. But we've been dealing with non-for-profit, with policy this year, plans for years, and we don't think it will give us that -- we don't think that factor alone will be disruptive in the marketplace.

Melissa McGinnis - Morgan Stanley, Research Division

Great. And then one unrelated follow-up. I'm thinking about your $500 million in share repurchase that are built into your capital plan for 2013. Are there any considerations we should make about the pacing of that, whether it should be evenly spread through the year, or there are some change in pacing because of having to manage cash and leverage levels ahead of the Coventry transaction? And then also, once that deal closes, how should we think about you immediately harvesting the cash from Coventry towards any incremental capital deployment?

Joseph M. Zubretsky

We don't give any forecast as to when we will repurchase shares. Our model sort of assumes a reasonable pace at an increasing share price, that's just the way we model it. You'd have to create your own scenarios. With respect to the parent company cash flow of Coventry, which is projected to be somewhere between $900 million and $1 billion from the close of that -- and effectively, it's being used to finance the transaction. So as we start to reduce our debt levels from 40% debt to total cap, as our capital base grows, they have some -- 2 tranches of debt coming due in the first 2 years. And so that cash flow will be used to retire our 2 debt tranches, to get down to the 35% level within a 2-year period. It's actually a very, very convenient -- we have the cash, and there's 2 near-term tranches coming due, which will get us to that 35%.

Thomas F. Cowhey

I guess we're taking -- there's a follow-up from Ana. And then we time for maybe 1 or 2 more, if there are any more.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

And so this is more in the near term. Joe, can you talk about the sources of upside for that $5.40? And to what extent Commercial pricing might be one of them? And then specifically alluding to the 3Rs with insurance rate review seems to be now aligned on and off exchange. Is that likely to harden the pricing environment, and how you're all thinking about it?

Joseph M. Zubretsky

Well, with respect to the $5.40, which is our '13 projection, the 3Rs...

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Yes, but the notion being that in 2014, if they start to put pressure on your pricing -- off exchange, will insurance take more pricing in '13 in advance of this? And just this final...

Joseph M. Zubretsky

Well, Martine [ph] commented on what we've seen in the cycle. We have seen very rational behavior in the marketplace. We haven't seen companies race to get market share and price on the lean side of what's responsible in order to gain market share. I think people, all market participants, are going into this exchange environment the same way we are. Optimistic that it proves to be a profitable profit for a guarded against how the 3Rs work and when you're going to get the rates. And so we're not seeing that dynamic alone put any pressure into the 2013 outlook. I'm not sure I have anything to add.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Other than Coventry, in that "at least" notion, of at least $5.40, what else is driving the "at least"?

Joseph M. Zubretsky

Just our confidence level, we wanted to give you a floor. And I think the way to look it, are we willing to "at least," is we believe there's more likely to be upside to that number than downside.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

And on Coventry, finally, you said cost synergies were included. Is this SG&A and all potential medical cost synergies?

Mark T. Bertolini

No, just -- the guidance metrics we have given you do not include any of the impacts of the closing of Coventry. And...

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

No, in the Coventry synergy guidance, the $0.45 -- so this is separate to the $5.40?

Mark T. Bertolini

The synergy is in that number.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Everything, medical cost...

Joseph M. Zubretsky

And specifically, if you look at that pie chart and you go back to even the transcript that -- when we first announced the transaction, we talked about that last sliver, that 15%, representing some modest medical management synergies, some PBM synergies as we look to consolidate formularies and things like that, that's mostly -- most of the synergies are the rest of that pie.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

So all cost synergies are in there, not -- there's no...

Joseph M. Zubretsky

The early synergies that will be realized will be on the SG&A line, that's the way to think about it.

Mark T. Bertolini

The $400 million is a reasonable estimate for what we believe we can achieve in 2014.

Thomas F. Cowhey

I think that's it. Thank you, Mark. Thank you, Joe. And were going to turn it over to Mark to conclude.

Mark T. Bertolini

Great. Well, just take a trip down memory lane for the -- from the morning and just point out a few things. We believe these conditions in the marketplace, an unsustainable health care cost growth curve, inefficiency in the health care system, the consumers increased enrollment, provider consolidation, and the rush of health information technology makes Aetna's 4 strategic pillars the driving force behind our growth from here on out.

We think these 6 aspects that both Joe and I talked about, we believe our diversified portfolio is appropriate. We believe the Large Group business can grow profitably, that the government franchise is a growth engine, and that Small Group and Individual, as you found out today, is not as big a piece of the pie, but a huge optionality for us as we go forward.

Gary and Charles talked about Accountable Care Solutions. I think we hit that number. We hit it well. I'd just add one piece. When our competitors come in behind us to use this technology, we get our share of that risk, too. So it's important to understand that the agnostic -- paragnostic nature of our technology does not require the system to put in another -- the provider to put in another set of capabilities, they use our capabilities, and whatever portion they share, they share with the other provider, we get our same share that we have with them on our deal. So we start to get a piece of all the business that comes through.

And then finally, we believe Coventry is strategically and financially attractive, and that we will execute well against achieving at least the $400 million in synergies.

So that leads to our long-term model. Coventry supports all of these, advance the core business 4-plus percent growth, emerging business growth supports that, and our deployment of capital gets to 6 plus. So low double-digit operating EPS growth on average over time. The bottom line is, is that our strategy is driving growth. Our growth, when executed well, will generate results that get us to CAGR of 13.6% from 2010 through 2013, which is higher than any of our peers. And as we talked here last year, and our P/E is lower than any of our peers.

And so we believe that this value proposition deserves better recognition and treatment in the marketplace.

That's it. So thank you very much.

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