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CIGNA Corporation (NYSE:CI)

Barclays Global Healthcare Conference

March 12, 2013 1:00 pm ET

Executives

Herbert A. Fritch - President of Healthspring

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

All right. Good afternoon, I'm sorry, welcome back. Hopefully, Judd [ph], got you guys in a good mood for a while and the show is entertaining. So up next, we're excited we've got Cigna. I'm particularly excited that we've got Herb Fritch back. Herb has presented at this conference, I'm going to guess, 6 or 7 times or maybe even more. Ted has actually been here -- been to more conferences than Herb has. So we've got a long tenure and now we've got them together. This will be a particularly interesting presentation because I think what we're going to talk about is very topical. It's coming up in all the sessions.

Before we start, we're going to do the audience participation questions real quick I'm going to ask you to do them particularly quickly because we don't want to waste too much time with this. So maybe we'll tee up the first question. Everyone's got your handheld, so get ready.

Are we getting there? There we go. Health reform, simple question. Health reform for Cigna, would that be a positive or a negative in 2014? Starting at very negative all the way -- gotten very positive. Let us know what you think.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. More of a neutral, which I think is probably consistent with what people expect. Maybe Herb standing up here skewed a little bit. Other than me, the great music I'm still enjoying you dancers. So number 2, contracted rates on exchanges. So from Cigna's perspective, do you think that they're going to be able to attain what we would call Medicaid rate, Medicaid-like rates on the exchange, number 1, all the way down to commercial like rates on 5? Or where in between do you think it will?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Somewhere in the middle, maybe a slight bias to commercial. Interesting. Number 3, utilization trends in 2013. Here we're thinking broadly beyond just a HealthSpring unit, just beyond Medicaid, and broadly speaking, for all of the commercial and Medicare book for Cigna. Big increase, 1, big decrease, and 5, where do you guys think that winds up?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. I get that -- so no one sees significant movements either way, but a little bit more bias to the increase. Number 4, what would like to see the company do in terms of deployment of capital? So you got five choices here, M&A, repurchases, dividends, paying down debt and then investing in the core business. 1, 2, 3, 4, 5. Those are your choices, go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Repurchases and dividends, I would guess. And then still a bit of everything else though. So that's interesting. We'll get that back to Ralph, I'm sure, when we get this published. And then next question, do you think the company's real earnings, and let's call that earnings per share, in 2014, yes or no?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Mostly yeses, that's not surprising either. And I think we got two more. Do you currently own shares in Cigna. Yes or no?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Alright. So almost split, a little bit more to the no side. And then last question her more around sentiment. Where's your current bias on the stock, positive, neutral or negative?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow, there you go. This may be the most positive I've seen in any of the presentations we've done today. So still a long way to go through the lunch on Thursday but we'll aggregate all this data and get in a report. So we've got our 3 minutes on the air. I appreciate those responses. Herb, why don't we start with what everyone's talking about, the 45-day notice? If possible, maybe just give us some overview thoughts around what the preliminary rates are going to do and the specific impact, as you see it, on Cigna's Medicare business.

Herbert A. Fritch

Well, if you believe the notice, I think we're, like a lot of them, what's been published in the industry, thinking it's high single-digits downward when you add all the cumulative impact in, along with the potential for coding adjustments and this total cost of benefits limitation that changes a little bit of the dynamic in terms of potentially allowing you to pass it all -- all of the change through to the beneficiaries.

Question-and-Answer Session

Joshua R. Raskin - Barclays Capital, Research Division

Okay. What was the biggest area of surprise for you in the 45-day notice?

Herbert A. Fritch

I think the biggest area was the national average growth rate being down 2.8% instead of slightly positive.

Joshua R. Raskin - Barclays Capital, Research Division

I'm not going to belabor the point. We're probably going to talk about more in the break out, and I'm sure people have lots of specific questions around that. So maybe we should take a step back. HealthSpring was a very successful standalone company. You built it up from sort of the provider roots and grown to a bunch of different markets when Cigna ultimately approached you. The proxy indicated that there were more than 1 parties that had interest. So I'm curious, from your perspective, Herb, what was so attractive about partnering with Cigna going forward, why did you think they were the ones that would be best, would be in the best interest of HealthSpring, long term?

Herbert A. Fritch

Well, I think I really believe in the way we engage positions as being a better way as you move from volume-based payments to value-based payments. It's the biggest lever that we've drawn upon to create value and create value through the Medicare Advantage products. And Cigna really not only talked about and embraced, needed a Medicare strategy, but they really embraced the physician engagement piece and clearly said that we really don't want to change the model. We want to let you operate and do what you do and do more of it and spread it to new markets, try and figure out how to take advantage of those relationships on the commercial side. And they've been -- they've lived up to that. David pretty much has been pretty true to everything he said. We've -- they've allowed us to operate and continued to do that and try to find ways to allow us to have a little bigger platform to do the same thing.

Joshua R. Raskin - Barclays Capital, Research Division

From a coastal perspective, is the integration, do you think, been moving the organizations closer together or do you still feel like there's this autonomous sort of innovative Medicare Advantage spirit still lives within the unit broadly within the overall Cigna umbrella?

Herbert A. Fritch

Really, a little bit of both. I mean, I think it's been a nice balance. They've allowed us to keep the HealthSpring team together, operate on Nashville, continue to grow it. But at the same time, there've been a lot of opportunities to try to interact with the provider and network side on the Commercial business at a high level, and our executive leadership team interact on a policy level then bring some new ideas and really welcome that. And so it's been really good on both sides, I think.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. There's a lot of preoccupation around what's going to happen to enrollment in 2014 in the overall Medicare Advantage industry. Before we sort of, I mean, contemplate that, can take a step back? If you look sort of since 2004 the comp and annual growth has been double digits. Last couple of years have literally been 10%, if you think we'll get there again this year. I don't think there's been a year since '04 that we've seen below 5% growth. So clearly there some attractiveness. What, broadly speaking, drives that growth in Medicare Advantage today?

Herbert A. Fritch

I think in a lot of markets, we've kind of made a transition where Medicare Advantage is now pretty much a standard alternative that people have accepted. I think for years, we delivered a lot of better value, but there was a fear on senior's part of managed care in general. It's kind of fear the unknown almost and I think that's going away in a lot of markets. We're kind of the mainstream option that people look at. When they look at them, look at their options, Medical Advantage generally offers significantly better value. And right now, there's a range of alternatives available in most markets in terms of network restrictions. There are some pretty wide open networks, relatively few restrictions, we tend to operate at the other end of the spectrum and people have a lot of good choices.

Joshua R. Raskin - Barclays Capital, Research Division

And you talked about these open-end products [indiscernible] and HealthSpring resisted that, the temptations over time. Cigna had 1 year, I guess, where there was a little bit of interest in the prior fee-for-service. That seemed to be no harm, no foul, short term, any of that type of thing. So when you get slightly enough areas, there's pressure on rates, going forward. Should we think more about pressure on some of those open-ended products relative to the HMO line product? Is it going to be more product driven and geography driven in terms of membership?

Herbert A. Fritch

I think it's both. But clearly I think it is product-driven to a great degree that at least -- but now we've had that feeling for a long time and part of it was we started the company in the tail end of the BBA era. And there really were no open-ended products and no PPO products and what was surviving at that point in time anywhere was the more managed HMO type models and that's kind of -- we assumed that at the end of the day at some point, rates have to come down and you have to save money relative to Medicare fee-for-service and as that day approached, the more restricted models were the better way to get to there.

Joshua R. Raskin - Barclays Capital, Research Division

[indiscernible] You guys have a very integrated model. It's been suggested that that's particularly helpful in some of the reimbursement, the revenue management side of Medicare Advantage. Can you talk little bit about the Star bonus program? You guys have had a lot of success, especially locally here, but still I think over all, below 4 stars, there's some discussion around peeling back the demonstration and needing to get a 4. So how do we think about the progress? How do you guys focus on those specific targets?

Herbert A. Fritch

Well, there's a lot of resource and effort put into it. At the end of the day though, what you're fundamentally talking about is changing the business operations of the primary care physician's office to focus on a totally different set of metrics and incentives than they have in fee-for-service, and it's extremely helpful. Here in Miami, the Leons only do business -- the only patients they see are Medicare Advantage patients. So it's not easy, but it's at least a lot more practical to change those business operating models to focus on the right kinds of incentives. In most network models, you have a range of offices. You might have thousands of primary care doctors in some of these networks, some of whom only have 5% or 10% of their business in Medicare Advantage. And it's a lot more challenging to get the kinds of changes it takes. The other thing for us that's been a challenge -- we've actually made pretty good progress on the Part C side. A couple of years ago, CMS changed the measures and more heavily weighted a lot of Part B measures on the pharmacy side. And we've been slower than I'd like to react to that. I hope we're focused and have the right tools in place to improve our scores on Part D, but that's really been more of what's kept us below 4 stars in a lot of our markets.

Joshua R. Raskin - Barclays Capital, Research Division

And did the physicians participate -- I guess, there's 2 questions in this on both positive and negative. To the extent you get improved reimbursement because coding is better, risk scores go up, and/or bonus stars goes up, did the physicians participate in that upside as a percentage of the capitation. And then if we do see some pressure on rates in 2014, do they also participate in absorbing some of the cost pressures as well?

Herbert A. Fritch

Yes, they do. We have a variety of incentive mechanisms, but usually at least one of them is shared savings model based on medical budget that's a percent of premium. So to the extent premiums go up, the medical budget goes up and they'd share in a portion of that savings. We also have programs that, really, our bonus payments tied strictly to the compliance with evidence-based guidelines, which dovetails a lot with star measures. And so irrespective of how costs are controlled, if compliance of evidence based care goes up, they're paid some bonuses.

Joshua R. Raskin - Barclays Capital, Research Division

As if there weren't enough moving parts for '14, you've also got the minimum MLR implementation coming next year as well and I guess maybe the silver lining on the MA rates is we also get concerned about the minimum MLRs. But you guys have shown very strong loss ratios historically. I know there's a difference between GAAP versus NAIC or [indiscernible], et cetera, but is there a level of concern or any of your markets right now, areas where you think you've got to make some adjustments in your June bids to comply with that? Or do you think based on what you're seeing from the preliminary rates, we can kind of put that issue to bed?

Herbert A. Fritch

No. I think the rates kind of solve any issues with minimum MLR. It'll be an advantage to have run at loss ratios, but that was a concern because you can keep some stability in the benefits or a little more stability than you otherwise would. But that should be a minimal factor at this point.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. You know, 1 thing that's interesting, and it's a broader Cigna question, is that the company -- so David Cordani spoke about this in the yesterday, has talked about using the HealthSpring model as, maybe not a springboard, but certainly a model of which they're going to try and replicate, even on a commercial side, particularly on the ACOs. I don't know how it involved you are with that, Herb, but maybe you can give us your perspectives on does the model translate, is this something that you guys think you could start doing in populations outside of Medicare Advantage?

Herbert A. Fritch

Oh, I think the model can translate the hurdle not just for Cigna but for the industry right now is the vast majority of commercial products are open access products. And I think if you're going to hold position accountable and going to ask them to participate in the risk, it's very difficult to do if the member can sell prefer and go outside the network potentially or outside a smaller group of providers. I think ultimately, especially with the exchanges and other things, I think some of those areas might be ripe for more network-based HMO type products and then I think the risk sharing that we do translates directly. Cigna's Collaborative Accountable Care models on the commercial side, they're moving trying to align incentives, but it's on an Open Access Plus a lot like the Medicare ACO demonstrations in Accountable Care Act and I think you're pretty limited to relatively small upside only incentives, better than none, and certainly have the right intentions, but I think in the case of Medicare or in the case of commercial payers, the employers, they really have to accept even as an option maybe going back to more network-based kind of restrictive network products to maximize the use of incentive alignment.

Joshua R. Raskin - Barclays Capital, Research Division

The other part of the question would have been -- is in terms of growth opportunities bringing HealthSpring in is that it sounds like there's an expectation of accelerating the geographic expansion of HealthSpring in Medicare Advantage. Let's put the 45-day notice aside for a second, but as you guys think strategically, you guys average about 1 new market a year, it takes a little while to get the critical mass, et cetera. And I think, at the Investor Day, you guys talked about more like 2 to 3 markets, which seems like a big difference in my opinion. And I understand there's a different level of capital commitment and things like that, but I didn't think capital was really the limiting factor in the expansion. So what is it that allows you to accelerate that geographic expansion? And maybe you could help us understand which markets are most attractive, just from -- not necessarily naming the market, but from a characteristics perspective?

Herbert A. Fritch

Well I think Cigna is one -- one of their components of strategy is called Go Deep. And so we're really looking at taking a list of markets that have been big markets from a commercial perspective and try to add some Medicare capabilities, hopefully there's some synergies with name recognition or retiree populations, maybe translating agents that had Cigna coverage into Medicare Advantage. And certainly on the provider side, the more products, the more lives, the more impact you can have. So that's really the way we've looked at it. On a stand-alone basis, we've -- it's an investment in a new market and it takes 2, 3 years to get to critical mass and breakeven. We opted to limit that and really look more for M&A opportunities and felt maybe it was a better use of capital to acquire critical mass and then change the delivery system and the operating model. And I still think we're looking at those opportunities within Cigna, too. But we've really expanded the expansion resources and the amount of resource put to new market development and we expect we'll open at least 2 to 3 new markets in '14.

Joshua R. Raskin - Barclays Capital, Research Division

And as you evaluate those markets, just getting back to the characteristics, is it better to see high levels of penetration? Because MAs accepted or low levels. Historically, you guys are kind of low-level, less competition. And then do you think about reimbursement rates relative to pay-per-service costs a day? Because that's going to be a much bigger issue when PPACA is fully phased in.

Herbert A. Fritch

The main criteria -- in our early days, there were a lot of under-penetrated markets and we took that as a huge factor in where we decided to go. Today, I don't know that there are almost any under-penetrated markets. They're all at funny competition and you usually see penetration levels in most urban markets, at least 25%, often in the 30s. So today, it was more based on where Cigna had a big commercial presence. And we really didn't look at the other factors nearly as much.

Joshua R. Raskin - Barclays Capital, Research Division

So one of the things we noticed over a decade-long plus with HealthSpring was that you tended to grow slightly lower than the market. They're slightly slower than the market in this hyper-growth period, 2006, when everyone and their brother is joining MA and its private fee-for-service center. And then if I think about post-BBA, when you guys really got your Star year growth, which were not only positive but they were significantly positive, and market exits were actually helpful. So I know no one wants to see the pressure on the 45-day notice -- on the rates that we're seeing on the 45 day notice. But from a longer-term strategic perspective, is this an opportunity for you to gain share and/or maybe start looking at M&A again?

Herbert A. Fritch

We certainly hope so. I mean, I've said this for 10 years at the conference that we've kind of positioned the company to be a survivor in a very sustainable model. We didn't jump in the private fee-for-service in some of what was -- what's proven to be kind of short-term, high-growth opportunities that we didn't take advantage of. But we would hope that this point, it's going to be harder to have products that are as attractive to lure people out of fee-for-service, but at the same time, most of the people in Medicare Advantage really like Medicare Advantage and if their plan does drop out, at least based on what we saw in the BBA era, we do think there are opportunities to pick up chunks of market share that way and hopefully have some net growth out of it.

Joshua R. Raskin - Barclays Capital, Research Division

Perfect. Just last question and now we're right at 25 past the hour, but just a dual opportunity, it seems like that's stated and that may be just because some of the states have delayed it and it does seems top of mind today. But as you think about dual opportunity, is that a great group of members that you see working particularly well in your model?

Herbert A. Fritch

Oh, I think definitely they are. I think the question is, will we be able to access, only it's a state-by-state decision. We have some in Texas and have an award in Illinois that hasn't gone effective, but we still think they will be. That said, I think a lot of the funding is still dependent on how the federal government reimburses Medicare Advantage and it's yet to be seen, the impact of how rate dips will impact that whole market.

Joshua R. Raskin - Barclays Capital, Research Division

Perfect. So I appreciate the comments. Apologize for going over by a minute or 2 here. Herb and team, Ted and Will are going to be available for Q&A in the breakout session, which is in Point Sienna 3. My teammate, Jack, he is going to walk you guys over there.

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