Joseph R. Swedish - Chief Executive Officer and Director
Albert J. Rice - UBS Investment Bank, Research Division
WellPoint, Inc. (WLP) UBS Global Healthcare Conference May 20, 2013 11:00 AM ET
Albert J. Rice - UBS Investment Bank, Research Division
Okay, I think we're going to go ahead and get started with our next presentation. I'm A.J. Rice, the Health Care Services analyst here at UBS. Welcome to our Health Care Conference. Next up in this room is WellPoint. WellPoint's the largest player by enrollment in the commercial and Medicaid health plan marketplace, operating under the Blue Cross/Blue Shield banner. Joe Swedish, our presenter, joined WellPoint as the company's CEO in March after a long and illustrious career in the health care provider segment. In fact, I first encountered Joe in the 1990s when he served as President of the Greater Orlando market for HCA, and Joe's career has seen numerous successes, both in the for-profit and nonprofit world. Just prior to joining WellPoint, Joe was CEO of Trinity Health Corporation, a nonprofit system that operated some 47 hospitals across 10 states. With this being one of Joe's first health care conferences as the new CEO for WellPoint, we're pleased to welcome him; Wayne Deveydt, the company's CFO; and Doug Simpson, the Vice President of IR, to the UBS Health Care Conference. Joe, we look forward to your comments.
Joseph R. Swedish
Thank you, A.J. Good morning. Thank you, all, for being with us today. I just want to correct A.J. This is my first investor's conference, so it's really exciting to be here today and take advantage of this opportunity to present to all of you this morning. I do appreciate the interest in WellPoint and our story. And during my roughly 30 -- 25 to 30 minutes with you, I'll offer some insights into my experience with the company thus far and where my current focus lies in the near term, as well as a little bit perspective in the longer term.
However, before we get started, I need to highlight the Safe Harbor provisions. Our presentation will include some forward-looking statements, and there are factors that could cause actual results to differ materially from these forward-looking statements. We advise listeners to review the risk factors discussed in our most recent quarterly and annual filings with the SEC. We'll be also referencing certain non-GAAP measures and reconciliations of those measures to the comparable GAAP measures which are included at the end of the presentation.
Let me just do this here. We are encouraged by our performance in terms of our recent operating momentum, as shown by our first quarter report after which we modestly raised our outlook for the balance of 2013. I also want to point out that my priorities and areas of focus are broad at the moment, after having been with the organization for 60 days. And the reasons for my optimism about WellPoint's prospects, that we move forward into 2014 and beyond, are very real and very, very robust.
We have a, what I think is a very solid start, given our first quarter's performance for '13. We feel very good about that performance, and the reasons are -- consist of a variety of perspectives. Our Commercial results benefited in the quarter from lower-than-expected medical cost, we kept administrative expenses under control, we had favorable below the line performance, and we meaningfully exceeded our operating gain and EPS targets for the quarter. Membership remains a challenging area, but is trending better than we originally planned, particularly in the self-funded businesses. We are increasingly optimistic about our future enrollment growth prospects. Given the momentum, we are gaining in the National Accounts and large group markets, as well as on the fully insured side of our business, with coming Medicaid expansion and Individual membership opportunities through these exchanges. We do again believe we're well-positioned for medical expansion, as well as related to the individuals engaging in the exchange marketplace.
As we said on our earnings call, we did not incorporate the full level of outperformance we achieved in the first quarter into our outlook for the balance of 2013. We achieved, in the first quarter, what I thought was remarkable performance, but notwithstanding this, I'm still in the process of reviewing the businesses and want to retain a prudent stance in light of what we expect to be a fluid market over the medium term. Potential swing factors later in 2013 include cost trends for medical, investment levels and the timing of initiatives such as exchanges and government program expansion. That said, we now closed the month of April and remain comfortable with our outlook for EPS -- adjusted EPS of at least $7.80 and operating cash flow of at least $2.7 billion for the full year 2013.
In the 2 months I've been with the company, I've spent much of my time meeting with current executives and some former business leaders, a variety of advisors, as well as a variety of interests that have been closely associated with the organization, so that I could capture a better understanding of our structure, the drivers of our performance and the intersection of those 2 factors. I've made my decisions around executive leadership team and plan to share those details with you very soon, possibly later today.
With this initial immersion that I have experienced in the 60-day window that I've just gone through and the reorganization of senior roles now behind me, my next area of focus will be financial performance, investments in our ongoing businesses, information systems and technology and the appropriate level of infrastructure alignment. I think it is reasonable to say that I will be back to you with incremental detail by the time of our second quarter call in July. I would also stress that this is going to be an ongoing process, and I will obviously not have all the questions answered in the first 3 to 4 months. The outcome of this review should be foundational, understanding that I can use this to steer the company over time, and as the business evolves, so likely will my thoughts.
I can characterize my view into 3 areas, one, performance, two, product, three, pricing. Specific to performance, I can further segment that down into examining some of the infrastructure characteristics of the company, such as consumer relations management, underwriting, medical management and claims. A lot of that vectors toward IT. I'll be spending a lot of time digging into our IT infrastructure. I believe it is the secret sauce, the ability of this company to perform very well going into the future. We have engaged in a lot of innovative activity in that space, not a lot of that is known. For instance, we are engaging consumers through a Google relationship, and live -- what's called Live Health [ph]. It is a partnership with Google, and it really is kind of targeting the consumer interface for care coordination in a very innovative and meaningful manner that I think will benefit us tremendously.
I'm sure you can imagine that the exchanges have been occupying a fair amount of our energy as we look forward to 2014 and beyond, and especially given the fact that the Individual and small group book, it's a #1 market share proposition for us in many markets and a large number of lives covered. So as we look forward, my overarching belief is that affordability and access will be paramount issues facing the industry over the next decade. This will be driven, in large part, by the coming regulatory changes which we believe will bring about 6 million people into the commercial risk markets across our 14 Blue states over time. This presents the first real opportunity for commercial risk membership growth that most of us have seen in well over a decade.
I'm certain that there will be differing levels of success across our markets in 2014. I do believe this will be a transition year in many regards, as the implementation of the Affordable Care Act proceeds. I do believe we will learn a lot that factors into playing in this field in 2015 and beyond. I am also confident that our longer-term posture, but also -- of our longer-term posture, but also recognize that competitive markets and industry conditions can vary from time to time due to many, many characteristics.
While we believe there are some advantages to be gained by being at the forefront of the exchange opportunities, we view this process as a marathon, not a sprint. And our research-based strategy is based on a view that over time, our brand advantage and our cost advantage should be highly successful. Our local depth, combined with national scale, places us in a unique position to drive the most efficient cost structure for the benefit of our members. And our research has shown that the Blue brand name will continue to resonate well on the exchanges. At this point, we feel good about our network contracting and our ability to design attractive product offerings. We expect to get a lot more information on rates and exchange structure over the next few months, as the curtain gets pulled back on exchange formation. As we have said previously, we are moving ahead with the intent to play in all 14 of our Blue states, but will continue to monitor developments in each local market and adjust as the process unfolds through the remainder of the year. This timeline is moving very quickly and the rollout is fast approaching. Our sense at this point is that the government is committed on an on-time rollout. But we believe employers are likely to take a much more measured pace in evaluating changes, which translates to their ultimate engagement in the exchanges. This seems to be pointing toward a multiyear phase-in of the business volume onto the exchanges.
Beyond exchanges, let me just comment that we see substantial growth opportunities in both Medicaid and the dual eligible populations. The Amerigroup acquisition, as an example, is tracking well thus far. In fact, we do subscribe to the belief that accretion will be in the mid-teens EPS over the balance of the year. We believe that the geographic position for Amerigroup, our familiarity with government partnerships and our clinical expertise positions us well for growth in these areas. We currently operate Medicaid programs in 20 states, and expect the majority of states to participate in the eligibility expansion slated for 1/1/14. We also had some recent contract wins in California and Florida, and are actively reviewing other new potential opportunities in additional markets.
On the duals perspective, we were selected to participate in 3 California counties, with these programs now scheduled to begin in January. We're working with the state to ensure adequate funding for our services to this vulnerable population. There are also some other key states currently considering dual eligible managed care expansion for the coming years, although the timing of these opportunities still remain a bit uncertain. I would point out that we feel well-positioned to serve dual eligibles in these markets, given our Medicaid footprint, our Medicare experience and our ability to serve highly acute populations through both our CareMore and Amerigroup capabilities.
I mentioned CareMore on the previous slide, so let me give a few moments to CareMore's position in our portfolio and the Medicare business on a broader basis. The backdrop here remains influx on the heels of the final rule that was announced in April, which is creating funding challenges for all Medicare Advantage plans, but will disproportionately impact those serving the frailest and most chronically ill seniors. As many of you know, this has historically been a focus of CareMore and they have done an excellent job improving the quality of care delivered to their members, as demonstrated by vastly improved clinical scores and meaningfully lower readmission rates relative to traditional fee-for-service Medicare. One of the insights that I captured as I look at CareMore as kind of a new part of our portfolio, which represents about 10% of our Medicare book, they have a hospitalization rate that's 24% below the national Medicare average based on their models of care that they've created. I believe it's truly a replicable model and I think it's intellectual property that will certainly benefit our organization tremendously going forward.
We continue to believe there is real opportunity to help the nation deal more efficiently with its aging population, but we need to ensure that we have adequate funding for the care that is required. We previously indicated that Medicare Advantage is an investment opportunity for our company. With around $150 million planned investments in our 2013 outlook, related primarily to improvement initiatives in our Blue/MA businesses and the expansion of the CareMore model, these investments are currently under review as we continue to assess our MA strategies in conjunction with our June bid submissions.
CareMore currently represents about 10% of our Medicare Advantage enrollment and we operate 41 facilities across 5 states, with 11 of these having been open for less than a year. As we have described in the past, the facilities typically take about 18 months to break even, which -- this does represent a drag on our 2013 results. Historically, the facilities have driven strong returns after reaching critical mass. The outlook is now less clear in light of the risk model changes, though we certainly expect some of our most mature and efficient CareMore facilities to continue providing quality and value to its members. All this being said, we continue to believe there is an opportunity to increase Medicare membership volume and improve our Medicare Advantage margins over time, particularly as we increasingly emphasize HMO products in our Blue-branded service areas, which represent 90% of our enrollment. We also continue to have a robust Medicare Supplement business, which serves as a nice complement and a modest hedge to our Medicare Advantage portfolio, should MA enrollment become pressured in the future.
Let me now move to a more -- to a topic of provider collaboration and payment reform in general. I've spoken the provider collaboration as one of the key elements of my arrival at the company. I've looked at it very carefully, continue to work very carefully with our executive team. And the realities that we've come upon, is that providers are critical partners in our efforts to provide the most attractive and affordable coverage options to our customers. I can share with you that much of my experience as an integrated health system executive revolve around reimbursement and payment dynamics to align with care and outcome goals. I believe there has been a fundamental shift in the relative importance of health care cost efficiency, and I would be surprised if this is eased going forward. Given the fiscal strains across government and employer markets, we expect to continue to see interest in partnerships that drive out waste and inefficiency in the system. We envision increasing the opportunity to engage and develop partnerships with thoughtful and progressive providers of care. Let me emphasize that this collaboration can take many forms and may differ from market to market, and we have a suite of value-based network and product solutions with degrees of incentive alignments and enablement for our physicians, hospitals and health systems.
In the physician arena, for example, we are advancing our patient-centered primary care program which provides PCPs with tools and information to help them deliver higher-quality and more consumer-centric care to our members. We're a great believer that there's a convergence of opportunities where consumer engagement is going to get accelerated. We have got to take on an increasing role of engagement with those consumers and with our provider markets in order to build a win-win scenario for consumers. We are going to be rewarding physicians when they improve the health of patients and the affordability of care is advanced, using both a fixed member payment and a shared savings model. We currently have more than 10,000 physicians participating in this program, covering more than 1 million members, with the goal of at least doubling this participation rate by the end of the year. We have also formed Accountable Care Organizations with 29 health systems and have more than 1,600 facilities participating in our Blue Distinction program, or as I think is more well known by the term of Centers for Excellence, focusing on specialty care.
We will continue to engage in a variety of ways with leading providers that are focused on addressing cost efficiencies and challenges, and willing -- and those -- and working with those that are willing to align with our products and networks.
As the health care system continues to evolve over the next decade, there will be winners, there will be losers, and those that realize the need for change will not just survive, but they will thrive. Given our local market presence and the deep experience we have with nearly all providers in the communities we serve, I believe we are extremely well-positioned to drive greater efficiency and affordability across our markets.
So as we prepare for the coming marketplace changes, I do want to reiterate that capital deployment remains a key priority for the company. This has been an area of strong performance for several years now, and I do expect this to continue. During the first quarter, we repurchased 5.5 million shares or nearly 2% of the shares we had outstanding at year end 2012 for $340 million, and we expect to utilize another $1.2 billion for repurchases over the next 3 quarters. We also pay a dividend with an annualized yield of approximately 2%, which is currently the highest in our sector.
I believe we have the financial capacity to make the requisite investments in our business to drive future growth and performance, while continuing to provide a strong and consistent return to shareholders through these mechanisms as we move forward.
So in closing, I would like to emphasize my belief that we are very well-positioned to drive greater affordability for consumers. I recognize the uncertainty around 2014. We, as a company, are very mindful of that uncertainty and the valid questions that many of you have regarding timing and impact of exchanges and Medicare Advantage reimbursement. Stepping back, however, I believe we can position this company in a way that leverages our brand, local density and national scale to accelerate earnings growth over the next 5 years. I believe we have the assets to capitalize on a number of market opportunities and the capacity to continue deploying capital to our shareholders. I am encouraged by the momentum that I've witnessed since I have arrived 60 days ago. We have an enterprise that I think is focused on the success characteristics that are necessary to effectively compete in this new environment, and I like our chances to win in the new marketplace.
I want to thank you again for your interest in our company, and the opportunity that I have had to present to you today. And I look forward to speaking with many of you later today, and with that, I'll turn it back over to A.J.
Albert J. Rice - UBS Investment Bank, Research Division
Thanks a lot, Joe. I think we will move now to the breakout session. That's in Carnegie West, almost directly across the hall, and management will be happy to take some questions there.
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