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WellPoint, Inc. (WLP)

June 11, 2013 1:40 pm ET

Executives

Jeffrey P. Fusile - Chief Financial Officer of Strategic Business Units & Centers of Enterprise Excellence and Senior Vice President of Strategic Business Units & Centers of Enterprise Excellence

Joseph R. Swedish - Chief Executive Officer and Director

Douglas Simpson

Unknown Analyst

[Audio Gap]

get started. And as I did in the last session, I'm just going to need to begin by reading the disclosure. We're required to make certain disclosures in public appearances about Goldman Sachs's relationships with companies that we discuss. The disclosures relate to investment banking relationships, compensation received of 1% or more ownership. I'm prepared to read disclosures for any issuer now or at the end of this call if anyone would like me to. However, these disclosures are available in our most recent reports available to you as clients on our firm portals. In addition, updates to those disclosures are available by ticker on the firm's public website, gs.com. In addition, disclosures applicable to research with respect to issuers, if any, mentions herein are available through your investment representative. And as always, views of non-Goldman Sachs personnel may not represent the company views.

All right. With that, I am delighted to welcome WellPoint back to our conference and the company's CEO, Joe Swedish. And also with the WellPoint management team, we have Doug Simpson, who heads Investor Relations. And Jeff, how do I pronounce your last...

Jeffrey P. Fusile

Fusile.

Unknown Analyst

Fusile. I'm sorry. Jeff Fusile from the management team as well. And I expect all 3 of them will participate to some degree.

Question-and-Answer Session

Unknown Analyst

But of course, let me start with you, Joe. And maybe step back a little bit and understand why did you choose to take the job when it was offered to you at WellPoint? And why do you think the board selected you, and your background for this role?

Joseph R. Swedish

Great. Again, thanks for having us here. Yet again, great venue, great conference. That's a 2-part question, and what I'd like to do is first address the question why I decided to leave a 40-year career from the provider sector and jumped over to arguably a radically different kind of construct. Just as you probably are well aware, the provider sector is going through a lot of turbulence now in terms of transformation in that space. In fact, I was intimately involved in a lot of the inquiry and strategic positioning of our large-scale health care delivery system, which had a national footprint. And we were very dialed into questions about the viability of exchanges, how would a provider enterprise like ours engage not just in the exchanges but in health care reform in a broad sense. So in a sense, having been a student of reform, I guess, put me in a very unique position relative to a lot of my colleagues. Arguably, we were fairly far advanced in a lot of our thinking about engagement in that space. Also for well over 3 years, I served in the board of Coventry Health, so I had a lot of insight about the sort of inside baseball moves and changes that were going on in the health plan space. So when I got the call, obviously, I went through my due diligence with the company and to get a better handle on -- if I were to make the leap, then what would I be leaping into. And this is what I observed: Number one, I think it's a company that's got some incredibly strong assets. Notably, it has a very rich history with respect to the -- its engagement in local markets, very strong relationships with the provider community. And I think that has been played out with some very strong contractual constructs that have been built over many, many years. That's not something that is a lightweight kind of asset proposition. Another strong characteristic of the company is the Blues brand. That is an amazing brand that can be very effectively leveraged in this period of transformation in our industry. The third aspect of the company that I really appreciated was the strength of the team. I spent a lot of time looking at the kind of the characteristics of the team, kind of the alignment of the team, and I felt that it had some very, very strong characteristics that I think will serve us well going into the future. And the final piece that was very attractive was the -- what I felt was a strong undervaluation of the company. It clearly was lagging its peers. I think with maybe some changes and maybe different kind of strategic engagements, et cetera, that I think a CEO can drive, there's actually no doubt in my mind that valuation would improve. With respect to the choice made by the board, my sense is, and we'll talk about maybe just a little deeper later on, is that I do bring a very strongly view of the provider landscape. In that regard, I believe there's a convergence going on here and now, where providers and payers are melding together so-called convergence of the 2 spaces, such that we, together, will be better positioned to be responsive to demand to the marketplace, especially in around exchanges, where we're building out new network configurations; arguably, narrow networks, where we're going to have price compete, become very consumer-centric, very dialed into data analytics. You put all that together, at least from my side of the professional journey that I've been on, I think the board felt I can bring some real value. And again, I'd underscore the point, provider collaboration, I think, is the secret sauce for organizations like ours going forward.

Unknown Analyst

Great. But if I could I'd like to just further build on that and really, since you've been the CEO and it's been a relatively short time period but it probably feels like forever to you, could you talk about the process of high-level review that you've done and some of the changes that you've made already as CEO, and maybe a little bit about where we're going in terms of the management alignment and strategy and whatever else you can catch on?

Joseph R. Swedish

Thank you. Part of my arrival back -- actually officially March 25, I spent a lot of time going through an inquiry with organizations and individuals that are very closely associated with the company, usual list of suspects, so to speak, investment banking, various consulting firms, leaders in the Blues community and a variety of other content-rich type individuals and organizations. What I found was that as an organization, we clearly had a lot of opportunity going forward in terms of stabilization, in terms of restructuring some of our strategic imperatives, in terms of the priorities related to those imperatives, some of the infrastructure considerations that were necessary to properly align us for the future. So in any event, I arrived and I establish sort of this 3-bucket approach, basically related to timing. In short order, 0 to 90 days. I think I'm in about my 80th day, somewhere in that range. I really want to dig deeply into leadership structure, looking at some of the high-level strategies, looking at leadership team, and those are few examples, but be able to start making some commitments very quickly in terms of stabilization in those spaces. As you know, just recently, we announced some new executive appointments, alignments and departures, and the departures have been minimal. I do want to acknowledge that my predecessor, John Cannon, had already started on a path of executive restructuring. And so we've been able to really effectively realign our span of control, as well as assignments, such that today we decreased the number of executive direct reports, from 9 to 7. But in doing so, we also created 2 divisional roles: One, the government business decision; the second, commercial specialty division. Under two, very seasoned executives that now have direct accountability. They are committed to and expected to execute with precision. And finally, we're going to do so with utmost transparency, given the kind of turbulence we're going through. I think that's critically necessary. Going forward, we're going to be spending a lot of time, deep dive into the financial condition of the company given kind of a lot of the changes that are occurring regarding the commitment landscape. I'm going to be doing a very deep dive in the IT space, especially recognizing that I always like to characterize IT as kind of the secret sauce to organization like ours going forward, particularly as it relates to not just piping and applications but more importantly, the data analytics. So we're going to try to figure out how to take that $1.3 billion spend operating expenses and convert it to a very clear value proposition, both to the operators at the health plan level, as well as ultimately to our members and customers, et cetera. And then going forward, probably carrying me to the end of the year, a lot of inquiry about our strategic imperatives, and obviously, that gets us engaged in deeper analysis of our exchange performance given that 2014 is right around the corner. We're going to learn a lot about pricing, enrollment, mechanics of operating in exchanges. Hopefully, we'll have a lot of clarity in that space and a variety of other strategic engagements, imperatives that I'll be digging into between now and then as well. So that kind of maybe slices and dices what I'm doing at the point of arrival, looking out maybe for the next 9 months or so.

Unknown Analyst

And maybe looking a little bit more broadly and building on some of the targets that were starting to get stacked before your arrival, the company has talked about 10% to 14% multiyear EPS growth as a goal and a target. And then underneath that, there had been some discussion going back to last year, back to before your arrival about some specific targets within that, below that level, for example, adding $600 million in EBITDA over 5 years in the senior business. How have you viewed those goals as you've inherited them, again, now only day 80 of your tenure?

Joseph R. Swedish

Right. Well, what I'd like to do is maybe break up the response into 2 pieces. I'm going to give my view from the date of arrival, maybe I can ask Jeff to comment on it from a more technical view. But very early on, I looked at that 5-year commitment to that compounded EPS growth rate, 10% to 14%. We looked at it very carefully. As you -- many of you know, I guess, it's componentized so that you got M&A, share repurchase, organic growth, et cetera. And really feel that's still a very valid commitment but -- by the organization. We're sticking to it. Exactly it how it might mix and match year-over-year, that's -- I think the journey will unfold and be able to tell the story year-over-year. But obviously, like this year, we've stayed strong in terms of share repurchase. We've already committed purchased 2% of the outstanding shares, about $340 million. We got $1.2 billion to go for the last 3 quarters. So again, we're still committed to that. Going forward, again, how that might mix and match based on facts and circumstances year-over-year, I think it remains to be seen. But again, I think we're fully committed to what we stated, and we're sticking with that plan. Jeff?

Jeffrey P. Fusile

Yes. I would say from our perspective, the -- that we'll break them down into the buckets, M&A, which we talked about in sort of the 2% to 3% range. The Amerigroup transaction was a big part of that. The synergies, the integration of that business is tracking along very well. We're very pleased with how that's going and couldn't be more excited about how that's coming together, both we're just integrating Amerigroup and also then baking into that the broader government business that Joe just described. From a capital deployment perspective, as Joe mentioned, we're on track with that. We've got another $1.2 billion for the current year, and we continue to -- a long legacy of good capital deployment, we'll continue that as we go forward. And then from the up-gain perspective, we're really encouraged about our position as we go forward. We look at the new markets and what's happening with exchanges. Obviously, there's a lot of nervous energy around exchange, but when I think about the up-gain and where we're tracking, we are hitting the marks that we want to hit in terms of our positioning relative to the market. We're playing in the right metal products from that perspective. We are very well prepared for the duals, a little frustrated with the delay but very well prepared for that market, the Medicaid opportunities in terms of both in-state expansion, which is terrific because you don't have necessarily the big ramp-up, which is a big benefit; and also the opportunity to participate in new states as that comes along; and then M&A to the extent that's out there but certainly, the expansion of the current states being strong. And then in the commercial business, we're seeing positive momentum on the sale side, so very encouraged about that, and we'll get into that probably in more detail.

Unknown Analyst

Okay, great. And maybe I'll sort of try to tie the next 2 questions together, but it's really a question about how you think about investing in your business and prioritizing a limited amount of money that you can devote to that in the context of the outlook for Medicare Advantage and the plan that had been previously laid out for a rapid expansion of the CareMore business.

Joseph R. Swedish

Yes. You may recall that I think we had committed about $150 million to the MA space. And as a result of the changes in reimbursement as well as risk modeling, we elected to maybe take a more prudent approach in terms of debt capital commitment. We're stepping back. We're looking at MA very carefully. We recognize that landscape has changed, as it sometimes does when you got federal reimbursement involved in this. We want to be very careful in terms of that deployment of capital, make sure it's channeled in the right direction. I just want to make it very clear, we're still committed to MA. It is an opportunity for us going forward, notwithstanding the 1 to 2 years of uncertainty that I think a lot of folks acknowledge is ahead of us. But we do believe we're reasonably well positioned. I do acknowledge from time to time that the last few years in the MA space for us has been sort of up and down. I use the word checkered, I think that's probably okay word. But the reality is that I think we have opportunity going forward given the deeply embedded nature of the company in so many markets that we have access to beneficiaries, and I think we'll take advantage of what we have to offer going forward. But again, we're going to spend time now -- between now and maybe closer to the end of the year better understanding the landscape that has changed and how we need to reposition ourselves, leveraging what we already know about MA but also bringing in the CareMore portfolio, so that then it supports the critical decision-making that's necessary for care of the frail elderly. So I think we've got a great portfolio and a great commitment in terms of realignment of the portfolio going forward. So I'm thinking we're going to be very prudent about the approach, but we're still in. We're going to remain in, and we do consider it a critical ingredient of our portfolio going forward. Jeff?

Jeffrey P. Fusile

Yes, I would agree. From a macro perspective, our singular goal is to make sure that the MA program at large from our perspective is more cost effective in markets that we participate in than the fee-for-service business.

Joseph R. Swedish

I was just going to say that if you think about the MA comments and the investment around that business in light of what came out with the rates, it's just part of the flexibility that Joe talked about with the initial construct. Looking out over the next 5 years, those things are going to flex year-to-year depending on conditions within that year. So just sort of a specific example of that.

Jeffrey P. Fusile

Yes, and I know a lot of people want to generalize this business but it's hard to do. It's really a county-by-county decision. In some of our markets, we are expanding our margins. In some of our markets, we are expanding our membership and always doing a little bit of both, but it's really a county-by-county exercise. I think we are very excited about where we're positioned. And we have a traditional PPO kind of orientation to our MA business and we're moving that to an MA -- or to an HMO orientation in certain markets, and that's proving to be pretty successful as well.

Unknown Analyst

Maybe if I could shift topics a little bit. And again, Joe, recognizing that you just barely recently plunged into all of this. But I am curious now that we're in the early stage of the selling season with your large employer customers, and I'm curious if you can characterize anything from the early stage of the selling season in terms of the appetite for change versus, well, we're going to stay in pack for now because there are so many other moving parts with the reform, even though the large employers are less impacted than some other segments. And if you can factor in the private exchanges maybe as being the new thing out there that some of the large employers are looking at and those private exchange maybe are the vehicle to, over time, long way to go, but to channel members if they choose into narrower provider-based service.

Joseph R. Swedish

Sure. First of all, regarding sales, obviously, there's not a lot we'll talk about there. And -- but what I can underscore is that we are seeing, in terms of the national large accounts, there's maybe a spirit of inquiry and maybe more of a deliberate approach, certainly not rushing in at the moment because of the uncertainty, so we're seeing somewhat of a slowdown in that respect. But I should underscore where we are involved. I really like how we're playing it out in terms of the results. What I can't comment on in terms of the public sales is that we just concluded negotiations with Universities of Colorado, Kentucky and Purdue University, having secured agreements with them. Those have been publicly announced by those universities. With respect to National Accounts, we'll have more to say on second quarter earnings call. So there's not a lot I can say in that regard, as you can expect. With respect to -- and I don't know, Doug or Jeff, you want to reference anything before I get into the private exchange with respect to national...

Jeffrey P. Fusile

None for me [ph].

Joseph R. Swedish

Regarding private exchanges, we are seeing movement there as you would expect. We are in dialogue with some organizations, some companies in and around that space. We do have 9 initiatives in play right now and we are working with some outside consulting endeavors to support the development of that. I think it's sort of a slow climb of that learning curve. Some have said it's growing fast but basically on a very small number. So how that plays out year-over-year remains to be seen. We do know there's a lot of inquiry. We're certainly right in the middle of it. How fast it will grow, I think, is just way too early to see the -- how that might play. Doug, Jeff?

Douglas Simpson

I think we're optimistic about some of the opportunities we see in National Accounts, and we expect to hopefully be able to offer a little bit more color on the second quarter call.

Jeffrey P. Fusile

I would agree to that.

Unknown Analyst

I'd like to come back to the exchanges. But before we do that, if I could maybe segue onto the Accountable Care Organizations or however we want to refer to them and get your sense, Joe, both from your tenure so far at WellPoint and also drawing on your long background in the provider community. Do you think these things are real? Everybody seems to be slapping a name on themselves, every health system out there. There's got to be clearly a lot of variation. How many of them are real and how many of them are attempts to aggregate to greater market power using the blessing of that construct?

Joseph R. Swedish

Yes. I think at kind of an overlay perspective, again, emphasize, you've seen 1 market, you've seen 1 market. And so called ACO in 1 market is going to perform differently and maybe constructed it in a different fashion, notwithstanding federal rules of engagement in terms of being a pioneer ACO, but they are different. I think a lot of my colleagues in the provider space would be very candid in saying that they view ACOs as their so-called -- as transitional models to something else. What it may be is anybody's yes. I think at its core, though, what the industry is transitioning to from the provider' side and also reflecting on that convergence that I talked about earlier that's going on, it's basically establishing shared risk models, where provider collaboration translates to partnering engagements that create a win-win proposition where the providers are actually rewarded for the value. Where unlike the '90s, where they would argue, they were in these arrangements but they didn't get the benefit of the value they created. I think there's a lot of desire and demand that they somehow pick up the value in order to replace a lot of the infrastructure changes they're going to have to create to sort of decamp the expense structure that they've built over many years, especially related to the declines in utilizations that we have witnessed and, I think, is the new norm in the industry. I think at its core, though, when you begin talking about -- and let me just qualify something, I hesitate to use Accountable Care Organization as a nomenclature, really as what accountable care construct that we're building. And when you talk about accountable care, I think large-scale provider systems are saying, "We're getting involved in population health management. We're going to do it in a shared risk environment. We'll do it with a partner that we trust." And I just really want to underscore trust because I really want to see how the engagement translates to a win-win as opposed to a traditional win-lose in a discounted fee arrangement or some such construct. So trust is incredibly important. So that's why I feel very well suited to engage in the market with my former colleagues and working with the company to figure out how to engage in effective dialogue that builds these win-win propositions. And again, come back to my first point, 1 market is 1 market. And you don't necessarily replicate a cookie-cutter kind of approach market over market over market. So I think that getting back to WellPoint's strength in terms of its configuration, its assets, we're very, very dialed into local conditions, relationships. We're going to respect that. We got our operators that have given the responsibility to make those local decisions but within the guardrails of what's necessary to effectively operate this large-scale company, where in fact, we're leveraging skill and scale of this large enterprise, 14 states. In terms of the Blues brand, 20 states, if you overlay the Amerigroup transaction in terms of our service tod the Medicaid beneficiaries.

Jeffrey P. Fusile

Yes. I would just add to that trust, not just in the relationships, which is paramount but also trust in the data . So the information you're sharing back and forth, you have to share early and often in a very transparent, very open way to build that trust, so people can see it. And then the models have to be reasonably flexible to ebb and flow. That's why I think we get a little bit frustrated with the rigidity of this model, ASCO [ph], and this model or that model. Really it's got to be a flexible model that allows things to ebb and flow as the market and the relationship moves along.

Unknown Analyst

Well, I want to make sure I can ask you on another important topic, which is the exchanges generally and, of course, specifically California, which has unveiled a lot of information now about where the carriers stand on pricing. Perhaps it's fair to characterize your position in California as it's been revealed as sort of middle of the pack in terms of the pricing and product positioning, if you would agree or disagree with that. And how do you feel about where you stand versus competitors as we go to the open enrollment? Hard to believe that it's only, what, 3 months away.

Joseph R. Swedish

Right, right. Well, I'll tell you what, I'm going to have Jeff speak to pricing, then we'll fell into competitive position, I'll come back with some color.

Jeffrey P. Fusile

I'll carry. Sounds good. Sure. So from a broad perspective, we are very pleased with where the pricing came out. Strategically, we had targeted to be competitive in silver and to be a little bit better protected in the gold and platinum products. It's essentially where we fell out. In the market there were a few people lower than us. We're not terribly surprised by that. And I trouble by that the brand carries a lot. And we -- 2 things that really give us a lot of comfort in the space, which is obviously dynamic in changing all the time. One is in most of our markets, the essential health benefit is a benefit we sell today, and we sell with our broader network and our richer product design that we really understand how that product performs in those markets that we participate in. And when you look at some of the things we've done now, if you narrow that network a little bit, if you make some product adjustments to that, you're trimming, you're creating affordability in those markets. At the same time, you're also planning for a lot of people coming into the market that might be higher acuity late and demand that kind of thing. And so from a rate perspective, especially in California and elsewhere to this point, we're very pleased with where we're positioned. The piece we don't know yet is who exactly is coming and from what populations in. We've got assumptions around that, that we feel very comfortable about and very well protected given the information we have to date, but that is a key piece of the puzzle that really isn't clear yet as who's coming and then what mass and then what categories of people. But we have done about -- research with about 60,000 consumers that really informed us on who buys what and why based on their financial affordability, based on the geography, based on competing products that we would be up against and a variety of different factors. And so that all informed our thinking in terms of where we want to be priced and how we would design those products to be very, very competitive in that market space. And then that information also informed us on, as you do simulations, what would the 3 Rs look like in those markets and how would you be mitigated from a risk perspective if that were the case or harm from a margin perspective if you're on the other end of the curve, and we feel very confident with that. And we don't expect the 3 Rs to save the day for anybody certainly is a mitigation factor or a median factor, depending on the size of the curve, and we feel really good about where we're positioned.

Joseph R. Swedish

I think Jeff covered it nicely. I might just add one element. I view it as kind of a 3-part equation. Price, we've talked about enrollment, we've talked about the other piece. What's not often talked about is mechanics of the exchanges. How will that IT infrastructure get configured and all the other parts and pieces that support the management of the exchanges either by the states? Here in California, they've made a big bet. They've invested a lot of money and they will tell you they're here to win. They got a lot of politically at risk. So I envision their mechanics are going to kind of evolve fairly quickly. If you go to the other side of the coin, which is the federal situation with 19 states operated by the federal government, we haven't heard word 1 about the IT infrastructure, how we're going to interface just -- and there are the fears that go with how well we can actually manage our engagement without an effective management construct coming out of the feds. So mechanics of the exchanges is probably as concerning to us as is enrollment. We believe we'll overcome it. '14 is definitely going to be a turbulent year for all of us, not just WellPoint. I think all of our peers will share in that exposure. But I like our chances, given the analytics we've gone through, the pricing position that we've realized. And so I think we're ready, and we're looking forward to hearing about the next insight, which is obviously about enrollment beginning October 1.

Unknown Analyst

Well, I'm going to need to start wrapping this up given where we are in time. If there are any questions from the audience, and it looks like there's one in the back there.

Unknown Analyst

On high deductible plans, what currently 2 -- just a couple of questions on that. Currently, what is your percentage of, in the commercial book, of what you'd define as high-deductible plans? And also what have you seen in terms of utilization trends under high-deductible plans kind of over the few years that, I guess, they've been popular?

Jeffrey P. Fusile

Sure. You know the exact percentage?

Joseph R. Swedish

Yes. We actually don't break out the specific contribution from high-deductible plans within our book, but it's been growing. And I think, obviously, if you think about benefit activity over the last couple of years, deductibles in general have been rising.

Jeffrey P. Fusile

And to your question about the curve, it does adjust the curve a little bit as fewer people are through their deductible, the more traditional times, and it kind of -- it keeps the curve a little more consistent than in past years.

Joseph R. Swedish

Within a year, obviously, you can skew the seasonality to the extent that deductibles rise to get more leverage in the fourth quarter than you would otherwise have.

Unknown Analyst

All right. With that, I think we'll wrap it up, and thank you very much for -- WellPoint for coming again this year. It was great to see you.

Joseph R. Swedish

Great, thank you. Thanks.

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Source: WellPoint Inc. Presents at Goldman Sachs 34th Annual Global Healthcare Conference, Jun-11-2013 10:40 AM
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