Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Shawn M. Guertin - Chief Financial Officer, Chief Enterprise Risk Officer and Senior Vice President

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

Joseph M. Zubretsky - Senior Executive Vice President of National Businesses

Dijuana K. Lewis - Executive Vice President of Consumer Products and Enterprise Marketing

Karen S. Rohan - Executive Vice President and Head of Local and Regional Businesses

Francis S. Soistman - Executive Vice President of Government Services Segment

Charles E. Saunders - Head of Strategic Diversification

Analysts

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Ana Gupte - Leerink Swann LLC, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Scott J. Fidel - Deutsche Bank AG, Research Division

Aetna, Inc. (AET) 2013 Investor Conference December 12, 2013 8:45 AM ET

Shawn M. Guertin

All right, good morning, everyone. For those of you who don't know me, I am Shawn Guertin, the CFO of Aetna. I certainly see many familiar faces in the room, and that's always good to see.

Before we jump into the meat of the day, there's a few housekeeping things that I wanted to cover. The first one is I would direct your attention to our cautionary statement. We will obviously be making forward-looking statements today. These are based on management projections and also management's assessment of the various risk factors impacting the company and our industry. Actual results, obviously, could differ materially from these projections. And for a complete description of those risk factors, I direct you to our current SEC filings.

The second is the agenda for the day. Mark is going to start off. I think you'll find that he has a very clear and exciting vision for the future of the company, and he'll spend some time on our differentiated strategy that we think will get us there.

That will be followed by a quick break. And then we'll have 4 presentations from 4 senior leaders on critical growth initiatives for the company. Following that, we'll have a Q&A session with all 4 of those leaders. So I'd ask that you hold your questions until then.

We'll then break for lunch. And we have a very good cross-section of Aetna management here for you to interact with. The one comment I would make about lunch is any questions that are material in nature really need to be asked in the main Q&A sections of today for FD purposes. And if you ask those questions at lunch, we will not be able to answer them in that forum.

I will follow lunch and talk a little bit more about the growth drivers and spend some time, obviously, on the 2014 from a financial perspective. We'll follow that with another Q&A session with Mark and I, and then Mark will wrap up the day.

The other item is some disclosure changes that we plan on making for 2014. I think you all probably have seen our 8-K, which we filed yesterday, describing these changes. The first is our definition of operating earnings. And operating earnings per share will now exclude the amortization of other acquired intangible assets. We've been reporting a number called adjusted operating EPS for the better part of the year now, and you'll hear some people refer to this as cash EPS. This will become our definition for 2014. Many of you have heard me talk about the incredible cash generation power in this business, and we think this measure is much more representative of the earnings capacity of our business.

Just to ensure that everybody's grounded in the impact of that, had we done that this year, it would have added $0.40 to our 2013 EPS. And the comparative number for that next year is $0.43. So just keep those 2 numbers in mind as we go through the day.

The second change is we're going to transition to reporting a government MBR. Frankly, the financial results and the MBRs for these businesses are converging. The programs themselves, to some extent, are converging in light of the growth in dual eligible programs, and this will be the basis for importing going forward on our government MBR.

So before I turn it over to Mark, I'd like to make some introductory -- a bit of an introductory comment.

There's a fairly well-known quote from Winston Churchill that goes something like "A pessimist sees the difficulty in every opportunity, and an optimist sees the opportunity in every difficulty." I can't think of a quote that's more apropos for where we are as a company and where we are as an industry today. Even though my job often requires me to be a skeptic and a pessimist of sorts, I have to tell you I'm very much an optimist when it comes to the future of this company.

At a recent investor conference, I was actually asked multiple times, "What do you think investors will look back on in a couple of years and really kick themselves over?" I really didn't have to think about it very long because I think the fog of 2014 and all of the change in 2014 is masking the incredible growth opportunities that are before this company and, frankly, this industry.

I can't remember a time in my 25-plus years in this business when we've had multiple growth opportunities, any one of which could be big enough to move the needle for a $50 billion company. So there is a lot of potential growth on the horizon, and I think that's something to really keep in mind when you try to think beyond the challenges of 2014.

But to take advantage of that growth, it's not going to be based on yesterday's sort of playbook, okay? It is going to be based on the companies who have the strategic vision, the business assets and the talent to fundamentally change how we manufacture our product, distribute our product and deliver that product to the consumer. So when you leave today, I hope there are 3 things that are apparent to you. Today, we're executing as well as anybody in the marketplace. Whether that be our leading EPS growth rate amongst our peer group, our leading Medicare Stars ratings amongst national players, winning multiple dual eligible bids, we are focused on execution and we're winning in the marketplace.

And while 2014 has its challenges, it is something that we can navigate through. We have a lot of things that can help fuel us through the next couple of years. And then beyond that, there are certainly very large growth opportunities. And last, that we are a company that has the strategic vision, the business assets and the people talents to seize these opportunities.

So with that, to talk about that strategic vision, let me bring Mark Bertolini up on the stage, the Chairman, CEO and President of Aetna.

Mark T. Bertolini

Hi. Good morning. You awake out there?

A couple of things. Let me talk a little bit about why Aetna and why you should be enthusiastic as we are about where we're headed in the future.

10 [ph] years ago, I walked up to this stage with a cane and a bracer on my neck after hitting a tree and breaking my neck. That was hard. This is not. This is complex. It's a changing environment. There are a lot of things up in the air. But when you're surrounded by very good people with good insights and a plan to execute against, it's complex, but it can be done. And so my view is, is that this really is an opportunity. It's time that we will separate out those who can figure it out and move ahead and those who can't and will fall by the wayside, which presents even more opportunity for us as we move forward.

What do I worry about at night? Well, we have a big Medicare gap to fill. But we have a couple of tailwinds that support us in that: we have the issues we had this year that will support us in solving that gap; we've had a very good open enrollment period, annual enrollment period, which just completed that will give us tailwind; and we have a very detailed plan that has been under execution for the better part of the last 4, 5 months that Fran will share with you in some detail. So we think Medicare is a great opportunity for this company and a growth opportunity.

Secondly, taxes and fees, the thing that everybody worries about. Let me make a proposition to all of you. Here's how you want to think about taxes and fees. You've got to get them in the baseline and then -- for in future years, the pain isn't nearly as bad as it was this year. As a matter of fact, it's very incremental. We believe that we have it all in the baseline for 2014. How? Well, there are 2 ways you solve for these taxes and fees. One is you price for it, and we will detail some of that later. And the other is you solve for it. We knew that going in, that not everyone will give us our taxes and fees. There were some markets where you can't, like Medicare. But if you can price for it or you can solve for it and it's in the baseline, it's behind you. And people will reiterate throughout the day that it's there.

And then the third, Coventry. And we believe that's going very well.

So those are the 3 things that I spend my time with and my attention to -- with, and I can tell you they're all opportunities moving forward. In spite of what some our competitors say or how they feel, we believe these are true opportunities moving ahead.

Let's talk a little bit about our organization. Here's our Aetna value. Well [ph], you've seen it before. Why is it important to us? I'll go to the lower left corner, inspiration. Three years ago, we put together a project management office to take on the Affordable Care Act and to, number one, make sure we were compliant with the law, but, number two and more importantly, to find the ponies in all of that stuff. And we believe we've found the ponies. And those ponies are helping drive forward our opportunities that will make this company and, we believe, this industry, a different, very different, animal than the animal you're dealing with today. So it's all about the people in our organization who look at the whole Affordable Care Act as a huge moment to change where our company is headed, where our industry is headed and we believe can have a worldwide impact with the kind of assets we've developed and approaches to solving the health care problem, which vexes every economy around the world.

Here's the management team. They're all here today. You'll see them and more folks at lunch. It's a very high-quality team, I think the best in the industry. We are focused very much in turning this current time into a huge opportunity for all of you but, more importantly, for the people we serve and the 52,000 employees that are part of Aetna today.

So let's talk about where we've been. 18% is our 3-year EPS growth CAGR. It's the highest among diversified managed care peers. 130% is our 3-year total shareholder returns, higher than our diversified managed care peers. And $52 billion is our annualized revenues when you pro forma them for Coventry, which is the third largest national managed care organization but, more importantly, presents a huge opportunity for growth in the future.

Now I know that some of you have sort of question whether or not our minimum revenue for next year is big enough. I will tell you that is in an at least number. And as we go through the annual enrollment period with Medicare, as we close out some of our private exchange involvement with National Accounts; as we look at the renewals, the retention in our Small Group but, more importantly, our middle market in key accounts business, we believe that the number we've put on the page for all of you is a minimum number for next year. It's the bottom of the range.

So here is our thesis that we shared with you last year, Commercial Insured, Commercial ASC and fee Group Insurance business is all doing well. Our yields are good. Our margins are good, they're improving. And our business is growing. This is the basis upon which we can grow the rest of the business.

Secondly, Government Services. And you'll hear from Fran and others later today our business is growing. Medicaid, number one, a number of implementations across the country in dual eligibles and expansion of Medicaid; the number that was released earlier this week by the government about expansion of Medicaid. We don't yet see that all coming through because we don't have visibility into it. That's another opportunity. And Medicare, our annual enrollment period, was a strong annual enrollment period. And we feel good about where that growth came from, where it didn't and the changes we made to our portfolio to turn around the issues that we had last year.

Our next-generation networks power our public exchange involvement. So the networks we have underlying our products in the marketplace, and I'll share some of that with you later, are very important to our success in the exchange market, both public and private. And then we brought on this year Dijuana Lewis, who's new to our team, to help us with the whole front end of the business as we think about how we build private exchanges, how we connect those to our Accountable Care virtual integration businesses and dramatically change the way this industry operates, getting out of the middle and facilitating the interchange between a community of providers and the community they serve.

And then finally, the Coventry acquisition has been a gift in a number of ways: strengthened our Medicaid platform, which now gives us referenceability in the marketplace; give us great capital, have to move through this very difficult time in health care reform; but more importantly, it's helping us smooth out the changes as we move from the old operating model of a large national, largely centralized organization to a local market-facing organization that's dealing with retail -- more and more retail customers at the local market level. So all of these in our investment thesis are working well.

I'll point out in the upper right Small Group and Individual, the thing that has a great level of consternation across the marketplace, does not materially change in our business for 2014 and beyond in the near term. We have not increased our exposure, but we have put down an option to play in the marketplace and to learn because we believe, and I'll share a number with you later, public exchanges will be much larger in the marketplace in the long term. They are not going away. They are here to stay. We need to figure out on how to play in them, and this option that we've put down this year is our way to learn and to find opportunity in the public exchange market going forward.

So let's talk a little bit -- let's go off to 2020, and then we'll bring it all the way back to the next 3 years where I'll conclude my comments before I turn it over to Joe so he can give you a view of how we see the next 3 years emerging. But I think it's important to talk about where we think this marketplace is going so that you can understand we have sort of 2 tasks in front of us. We've got to execute against the business plans that generate the result that you expect from all of us. But more importantly, we have to invest in the future at the same time. And that ability to live in both worlds is very important in times of change.

So we believe in the future, that with virtual integration with the provider system, that we'll become like the Intel Inside of the provider system through virtual integration, connecting with them in ways that allows them to do a bigger piece of what we do today. Why is that important? Because that's the way we got to -- changing their revenue model, that's the way we got to -- changing the shape of the curve and help their cost trend.

Secondly, we believe that the marketplace is going to retail. And I'll show you some statistics in a moment. And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.

And finally, when you connect those 2, that retail experience with this virtually integrated health care delivery system through technology, you get a much lower cost platform to be able to interact in the marketplace to drive a more stable cost structure over time, and, it is our belief, that if we do that well, to move it to more of a fully insured market over time. And I know you have a lot of questions about that, and I'll address those in a moment.

So health care is primed for disruption. I've done some work with Craig Christianson [ph] lately. You've heard him before. And what's happened with the Affordable Care Act is that it has -- broke open the black box of managed care. How the business works has been exposed and regulated in far finer ways than it has in the past.

And what does that cause you to do? Well, you have 2 choices. You can admit you're a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away, till you're out of business, or you keep cutting costs, cutting price and hope you're the last standing. Think of the steel industry in the United States.

The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you're no longer a commodity. And that's the choice we have made.

We believe that we have the opportunity to enable the provider network to handle risk, to change the way the provider system works. And we have the opportunity to drive a retail market in health care. We believe it's close. And instead of waiting for it, we want to drive it. So let me share a few thoughts about that.

You've seen this before. It's how do you change from one current system to the other. So in the purchasing decision that's currently employer sponsored, we believe in the future. It will not be about employer-sponsored insurance, it will be about who is providing the subsidy to the individual who's buying a health care policy. And we believe that subsidy will come in 1 of 3 places: it'll be the employer providing a subsidy, the government providing a subsidy or people paying for all of it out of pocket.

The second is, is that when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.

Third is that the distribution channel is going to change, and I think pretty dramatically over time. That'll be more of a retail marketplace, not the model we have today. And then to make all of that work, those top 3 work, the complexity of what we do have to change because of the simpler it is, the easier it is to understand value and the more lucrative it is for people to buy it. And currently, the system is labyrinthian in its thinking and the way we work. Just take a look at Healthcare.gov. And those people can't figure it out, and so we have to make it a lot simpler.

And then in the future, it'll be about value-based health care. Because people are looking for value, they're going to pay based on value all the way through to the system, the health care system that they're using.

Health care premiums are growing at 4x the rate of inflation and wages. You've seen the chart before. I've showed you it before. And employers are passing half of the increase in medical premiums off to their employees. When you incorporate out-of-pocket cost changes with the amount of premium employees are paying, employees, consumers are now paying 41% of the health care dollar in the United States. We are not far from them paying more than their employers. That's a huge change.

Secondly, they're using more and more technology. They're looking for value. They're trying to make decisions about how they're going to manage their health care, what providers to use, what kind of services to use, whether or not they're relevant. More and more are asking their doctor, do I need to do this? Oh, by the way, how much does it cost? And we believe a lot of that has had an impact on the way trend has behaved over the last 3, 4 years.

Now here's a point where I'd like to make a very specific point about the shift from self-funding to fully insured. In the past, whenever we've had a conversation with all of you, we talk about trend. That trend number incorporates the employer's trend. We have never, in this room, talked about the employer and the employee trend. As you know, based on the shift that is going to employees, the employee trend has been raising ahead at a much higher rate than employer trend has in the past.

So when we talk about going from self-funded to fully insured, we can't just talk about the employer's cost. We have to talk about the employer and the employee costs. And what we're starting to see in some of the retail exchanges emerging is that when the individuals are given the money, they tend to buy on value. And moving from self-funded to fully insured is not this 8% to 10% mystical solve that you all have out there as a way of making employers willing to go from self-insured to fully insured, because they put it in the hands of their employees and those employees are making a fundamentally different economic decision if it were just the employer by themselves. They buy on value. They buy something that fits them versus the 1 or 2 plans their employer offers. And so that shift by putting it in the hands of the employees is a fundamentally different economic formula than the one we've all got in our head when we say, gees, you got to solve for 8% to 10% in order to go from self-insured to fully insured because the employer has got to be to make this cost. No, the employees trend has been going much higher, and they can view it in a fundamentally different way when the money is in their hands. And we think that is a miss on all of our parts when thinking about how this industry goes from self-funded to fully insured over time.

And by the way, I don't know if you all saw that CBO is investigating whether or not the employer deductibility of insurance, what that looks like relative to some of the fiscal discussions we have going on in Washington. There's a study under way. So that happens, and that even -- that kind of shift even occurs more quickly.

So with that in mind, we believe that the retail marketplace, whether it's fully insured or self-funded, the retail marketplace grows to 75 million by 2020. This is individuals with either an employer or of government subsidy or their own money in their hands making a decision about how they buy their health care. And we believe this is a relatively conservative estimate.

And here's how we see it breaking out: we believe there will be 9% uninsured; that there'll be 15% in government fee-for-service, Medicaid and Medicare; and then the retail market will be individual private and public exchanges, Individual MA, Medical Supplement, managed Medicaid, 46%; and there'll be 30% remaining in the commercial employer-sponsored market but with largely, probably, employees making a greater part of the decision given their out-of-pocket. So we think this is what causes the shift to the retail marketplace over time, absent any regulatory changes.

And we want to facilitate this change versus waiting for it to happen. We want to be driving this change by offering employers options to be able to move here. And the simple biggest thing we have to demonstrate is a durable economic formula over time that allows them to shift the burden to their employees but the employees make a decision about how they spend their health care dollar, buy on value, and step away from that role in making decisions on what health plans their employees should have.

So how do we do that? Well, first, we have to have a provider system that has stable cost. So here are some of the things we see around value-based contracting. In 3 years, 78% of physician practices are expected to have meaningful value-based revenue. 49% of facility revenue is projected to be derived from value-based payments. And 40% of health plans predict that value-based models will support the majority of their business. When you roll that altogether into the formula and you extrapolate that out by 2020, approximately 50% of health care dollars could be paid through value-based payment models, driving a fundamentally different incentive in the health care system. That is one of the prerequisites.

Now I've made the comment publicly that if Medicare and the private sector, private health plans, were willing to make the current investment to move to some sort of significant value-based contracting, we can accelerate this much more quickly. The last time Medicare did this was in 1983 when they went to DRGs. And if you look at the math of inpatient days, prior to 1983 and after 1983 you see a dramatic decline in inpatient days since 1983 as a result of the change in the reimbursement model. So to the degree CMS and the private sector health plans agree to work together, we have an opportunity to accelerate the shift. I think that is an important part of what drives the ability to move to durable economics and then ultimately moving to a retail marketplace on a fully insured basis.

CMS, every time they make a decision, impacts the rest of this industry. They're like the blocking fullback going through the line, and we're like tailbacks following them. Every time they fix the SGR, we reduce our physician fee schedules because we don't have to make up for what we thought the SGR was going to generate. Every time they do Never Events. We do Never Events. Readmissions, we do readmissions. And so as that starts to happen, the real opportunity for us is to coordinate and cooperate as payers across the industry to move to a global payment kind of model.

So how is our strategy differentiated? This is my favorite chart. I've been coached to say this is a mouse, not a rat, moving through the maze of health care. This is how people feel. And so if you're a consumer, if you're one of those people trying to navigate the health care system, you're looking in a system that was originally built in 1945 for -- with the Hilbert and ACT and a whole bunch of other programs to create a health care system that takes care of people and to employ people after they came back from the war. And it hasn't changed much since then. Yes, we've added ICD-9 and maybe ICD-10, we've done DRGs, but the system hasn't changed a whole lot.

And so this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together. I would argue that hospitals have no business being in the lab or x-ray business once you're on the global payment. And a lot of them now are starting to outsource that capability because they can't do it at a cost structure that makes it worth their while if they're living within a budget.

And so a whole host of these activities start to short themselves out to the place where the best value can be provided. But more importantly, that value is not just based on the underlying cost, it's based on the quality of service and convenience to the person who's purchasing it, and that is a consumer. And that's changing.

So our view is that health care should be built around the individual. It should power their life. And so all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.

And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country. As we begin to bill [ph] private exchanges as white-label distribution channels under the front-end of ACOs, virtually integrated provider models that now allow them to go to their community and do one of the more absurd underwriting tactics sign up the people that are on their patient roster. Why does that make sense? Because if they can get paid for the risk and they keep what they are able to improve in the way of quality and outcome, then they win. They capture their market. We actually allow people to keep what they have because it's about their doctor and their hospital, not about their health plan. And we think that's the model of the future, and we believe that's one that we can take across the world as governments as a payer, as a provider of subsidy begins to understand how do we impact the costs that threaten every single economy that we work in around the world. China, India, the Middle East are all threatened by the potential of what the disease burden of diabetes and the aging of their population presents to them as they have an emerging middle class that is now looking for a safety net to provide them that opportunity to live a healthier life and to create personal disposable income, by the way, particularly in China, to be able to create a domestic economy. Those are all very important parts of the structure of what's going on around the world outside the United States.

In the United States, we've got a crowding out the ability for the people to spend personal disposable income on other things. And you saw that recently in an announcement from Walmart about the concern around the Affordable Care Act on sales in their stores as people tried to figure out how to pay their health care bills.

So this is our vision, a healthier world. And we have these 3 key points: align economic incentives between payers and providers; a simpler, more transparent consumer experience where quality is defined as convenience for the majority of health care consumers; and technology that helps facilitate and create that health care community.

So here is our revenue model, and Joe's going to be up next to talk a little bit about how we think about this process going forward, how we're doing across the country and I want to share a few pieces with you. So first, we think about how do we establish risk sharing arrangements. We launch low-cost, narrow network products. This is what's powering our public exchanges around the country today. And with an increased volume back to the provider facilities because the first thing for them is, how do I live in both revenue worlds? How do I bridge from getting to a margin associated with managing more effectively from a system where I could pay every time I ring the bell? And that is an important part of the transition for them but more particularly for their physicians.

That improves quality of care and lower cost of technology. There's a- 5 to 7-year capital reallocation model inside the health care system. As providers look at, should I replace the MRI, should I build more beds or should I add more services, and as they start to see the value of improving quality and doing the right thing for the patient and they see the impact on margin, then they start to rethink their capital structure because their debt service is one of the biggest burdens they have on their P&L. And then we enhance profit through risk sharing arrangements, and then we continue to expand those arrangements. And so our idea is that this is a virtuous cycle, a flywheel if you will, that once they get used to the model, and we start with Medicare in a lot of situations, they will continue to feed their ability to take risk, not only with us, but with our competitors, with the government, anybody else who's paying them in the system.

And as you know, our class put out a study earlier in the year that showed that Aetna is the most transformational ACO payer partner. We continue to have a lot of interest, we've got our team working full bore on all of these opportunities, we've hit our targets for the year. We now have branded health plans, Innovation Health Plans in Virginia, with the Inova Health System as an important branded health plan out there. And we think this is the model of the future, doesn't have to be Aetna, we just want to power it. We want to have part of the risk associated with it.

And let me show you what it looks like in Virgina. We have a state of employee Virginia account, 200,000 potential lives. We entered the Medicare -- Medicaid market in Virginia with MajestaCare, which was the hospital system going to the state and say, we needed to take risk. We didn't have to go through procurement, we've launched the Inova joint venture and we're up and running. And we have the Bon Secours System, we have Carilion and we have Inova. And between all of those, we have launched new small group of individual products in the marketplace, but most importantly, that model is now powering our approach to the State of Virginia employees.

So we're still in the enrollment period. We think this is a huge opportunity to demonstrate that in a state, we can take this model and make it work. It's a private version in a lot of ways of what we're doing with public exchanges around the country in other markets, but a version of what we think can be the kind of system we would have in the future, all powered by Aetna.

And I think an important part of our difference is the technology platform. Enabling the provider system is not sticking a nurse in the doctor's office. It's not paying them if they do better. It's really fundamentally changing the way they think about how the health-care system works. And that requires information, not just data. I think I described to you last year, I used to do capitation in the earlier life with my green bar reports, the 2 rubber bands and a check underneath it, that all I have was the patient name, their member ID, their Social Security number and a check amount. And that was data, it was not good information. And that's why in the 90s, the capitation system blew up.

This technology in a stack does a couple of things. First, it gives providers the information they need to understand how they can control the costs, more importantly, where the leakage is so they can keep people on the system and manage their care more effectively. Three, draw people into the system, that's iTriage. And then Aetna mobile people gives people a platform to put all of their tools together on a consumer basis so we can start to impact how they think about the health care system and how they use it, how we can impact trend. Most often we give this away, most of the time. Why? Because every 50 basis points in trend means $480 million of underwriting profit or margin. And so the opportunity for us is to change the shape of the curve to drive more retail and to build a better opportunity for individuals to control their health care cost. That means durable economics over time.

So I'll just give you a quick example. This is Mary, who separates her shoulder, gets an x-ray. She ignores the discharge instructions that are on paper, she takes pain medication and really doesn't get well again. We think that if she does the right research with iTriage, she goes and gets a radiology confirmation of her separated shoulder, she gets discharge instructions on her phone and she's got her follow-up schedule and her appointments all in the palm of her hand. It's about creating convenience. It's about making it simple. We've tried the carrot in the stick. And if the consequences are immediate, they work. If they're longer run, it's harder to make them work. And the only way to make it work for longer-term consequences of health care behavior is to make it simpler to do now. And the technology facilitates that. That's how we get at that opportunity, that's how we engage people, that's how we bend the cost curves.

George Santayana, "Those who cannot remember the past are condemned to repeat it." Why do I have this slide here? Because of this next set. How many people in here remember METS and MEWAs? Probably too young. We have Christine, that figures. But there are things called METS and MEWAs back in the 80s. I blew up a number of METS myself personally. Multiple employer trust. What you do as you sign up a bunch of small employers into insured vehicle into a single pool. But the only way you make more money is you grow it. And to grow, you have to relax your underwriting criteria. But when you relax your underwriting criteria, the bad risk comes in. And the good risk, because it's pool rated, leaves. And your rates start to rise pretty dramatically and that blows up.

And actually in a lot of states, multiple employer trusts were made illegal back in the mid-90s because they created bankruptcies and people didn't get their health care coverage. That's what a lot of these aggregation models look like for a private exchange that are occurring in the marketplace today. It's just a buying experience, it's an aggregation of lives. And what happens when your aggregate lives, particularly if there's a membership fee, is that you want to grow. And when you grow, the experience of the group changes. When the experience of the group changes, it starts to fall apart.

And so we believe that multiple employee welfare arrangements, which were a response to multiple employer trust back in the '80s and '90s are the way we think about private exchanges in the future. Multiple employer welfare associations have targeted demographic groups that have similar issues and needs that can be addressed not only through their buying experience but also through the way that network is structured and the care management programs are structured. And we think this is a fundamentally different model up around private exchanges. And that's why we think that the buying experience of a private exchange needs to be connected to a network experience that's focused on improving the health of that population. That's what creates durable economics over time.

And so MEWA still exist, as matter of fact, there's 1 in Detroit that I've created back in 1992 that still runs, around doctors offices and their practices. And we think these models are sustainable. We also believe that in the retail marketplace, there's going to be a cacophony of private exchanges. Everybody is building a private exchange, the consultants are building the private exchanges, brokers are building private exchanges, carriers are building private exchanges, my mother is creating a private exchange. Everybody wants a private exchange. That's going to look a lot like online travel did back in the 90s, in early 2000, it's going to be a lot, it's going to be noisy.

But that's part of the process of sorting out the system. And who does that? The consumer who has to shop there. They figure it out pretty quickly. And by shopping and using the system, they gravitate toward where the best value is and those other exchanges go away over time. And we think that's how this is going to sort of plays out. So we will play in multi-carrier marketplaces and we've actually got some good results coming out of one of those that we're participating in now, and then we're going to create our own Aetna marketplace, which will also have other carriers on it. But in some cases, it will be just us.

So this is difficult notion to grasp, but I hope you could all sort of think of this a little differently. You have to take your health plan hat off and you have to put your health plan model over to the side for a moment to think about this. If you have a health system that's approaching its community, sign up individuals to be part of its health plan, the carrier doesn't matter anymore. Multi carrier is extraneous as a concept. It's really about, are you able to offer a breadth of plan designs, a breadth of care management capability, wellness, et cetera, a product set that provides value to consumers to want to purchase in that place.

The only reason people talk about multi-carriers, they want to keep the carriers on this by bidding against each other to get access to market share. But when you turn it around and you base it off of a system that's got the incentives to control cost in the marketplace, that multi-carrier distinction goes away. And actually it becomes a competitive threat to every carrier in the marketplace. That's why we believe this marketplace, whether it's Aetna, whether it's Banner, whether it's Inova, is really more about having an offering that provides value to consumers versus whether or not their carrier is in it. It's not about us. It's about the relationship between the consumer and their health care system. And if they can keep that, we become less relevant. And so what does our role need to be? We need to facilitate the system, we need to provide them with technology, we need to help them assume risk, and we need to connect them to market.

That's when I talk about disrupting the health care industry in changing the way we think about health care and reinventing the model. So our marketplace will integrate the best that our brand has to offer. We will have our networks in ACO and consumer tools and big data analytics, we'll have population health management, we'll have the best of all retail marketplaces and the best of all public exchanges. And the inner change that will occur as people go through life cycle changes at the local market, if they may be working for a small employer and lose their job and need individual coverage that they can't afford to go to Medicaid.

Who is to say there isn't Medicaid private exchanges? Who's to say that the connection between those will be a seamless experience that says, "We know you've lost your job or you're moving out of your job, here's your individual coverage policy." We know you can't afford it, here is your subsidy opportunities from your employer -- from your government, and here's the kind of programs you can buy inside of that. And that network experience becomes the glue that holds it together, that network brand, not a place they buy it in or the people they buy it from. And the ability to move seamlessly through the health care system is what we think changes about the retail opportunity, when people are getting a subsidy from the government, getting a subsidy from their employer or pulling their own money out of pocket. That really changes the buying experience and who they are connected to in the future. And we think that works across all populations.

As we're watching Medicare enrollment, we're seeing that people who are retiring now are much more ready to come into our type of value as a product than people who are over 75. And that penetration is faster and harder and deeper in the Medicare Advantage and has been in the past. That same experience is going to occur here when these retail marketplaces occur up. They're going to want to stay with their system, the people who know them, not necessarily the benefit plan that they have before.

So the only constant is change and change brings opportunity. So I'll shift a little bit to the charts and what's happening now. The political environment, the conditions we're experiencing, what's going on in the local marketplace. I mean, obviously, the economic conditions are tight. We still have some gridlock in the government. We'll see how the vote goes, and we have everybody offering opinion on how they're going to vote. We'll see how they vote when they actually put the budget up in front of them. Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015, if we get it fixed right, it will be a new start, and 5 years from now, nobody will remember it. I think it's just going to continue. I'm saying public exchanges are here to stay.

And the midterm elections are going to have a big impact, but I don't think we're going to repeal the Affordable Care Act. I think we're going to change it, we're going to make it better, because it's now starting to get metastatic to the system in the way we're all changing and the way the system's evolving. And while its intention wasn't to have that all happen, it's happening anyway, because the private sector is reacting to it.

So here is our 2013 membership and EBITDA, it's 3% in the individual market, I just want to remind everybody, 3%. That's less than 1% of our EBITDA. 3% of our revenue less than 1% of our EBITDA. We are not increasing our exposure through our involvement in the private exchange -- public exchanges in 2014, particularly given the level of enrollment we have so far. So this should not be moving our stock price. It should not, unless you're in it for 5 years, then you can worry about what it is out in the 5th year. But if we haven't learned by then, I won't be here to talk to you about it anyway. So this is the exposure, I just want to remind everybody of this.

How do we participate? Well, we haven't had a competitive cost structure, so we're using our ACOs or narrow networks in all these markets. In a lot of cases, we went in the markets where we could make that kind of decision with a narrow network where there were fewer hospital systems. If you get a good deal, then we could attract people into those products. We need a stable regulatory environment, not happening quite right yet. It's still a little lumpy with some of the changes we're making. They haven't killed the system yet but we're reacting to them. And you'll -- we'll have plenty of time to ask questions about how we think about that moving forward. But we need a stable regulatory environment, that was our supposition going on.

We need to offer value to customers. If we could not provide a valuable product that people will be interested in buying, that we could support, that would achieve our target returns on capital, we didn't do it. So probably one of the public relations mistakes we made early on in the process is we applied to a lot of markets. Because we wanted to see. It was like sort of shopping on a private exchange. We want to see all the stuff that was out there. Then we started withdrawing from markets, as we said we would, and that became news. But these are the criteria that we went through that I was personally involved in, in choosing to participate in these marketplaces.

So here's our footprint in the individual business across the United States. It covers about 80% of the individual public exchange marketplace, this is our individual business today. We are in 30% of the individual marketplace with our exchange participation. Okay, 30%, so the footprint gets a lot smaller. And when you actually look at -- my slide stopped moving, there were go, where we believe we have competitive offerings, it's in 15% of the markets, half. So we go from 80% of the individual marketplaces to 30% where we're participating on exchanges, public exchanges, to 15% of the place where we actually think we'll see some market share.

Now we planned, generally, to lose a certain amount of membership based on where the exchange is were and gain about the same amount of membership in our public exchange participation. We know we've gained so far, at least in people who are interested, not necessarily with bona fide check-carrying members. We don't know what we've lost yet and we're out with our early renewal options in the marketplace.

We have chose, given that it's 3% of our business and less than 1% of our EBITDA, not to go to all the states where we participate to file plans and get rates for keeping what people had before. We were offering early renewals for people to renew into plans that fit the requirements. Okay, so we have not. And we have talked to the insurance commissioners, and those insurance commissioners have agreed with us. And if we were to go to all those states, refile all those plans, refile all those rates and do it in time for December 23, we will have paid attention to nothing else, like recovering our taxes and fees, like closing the Medicare funding gap, like the other 97% of our revenue. So that was our decision and how we participated.

So in the long term, public exchanges will survive. We believe there will be 25 million members on public exchanges and $75 billion in premium. That's a CBO estimate. We think that's legitimate, so it's not a the marketplace we can ignore. And we are participating to play in a retail market, which includes public exchanges and private exchanges. We believe that's the model of the future. We want to drive our retail market in the future and so our participation is important.

So we will continue to grow. Why? Because we're a diversified company and we now have options to grow. As Shawn mentioned earlier, we have many opportunities, the glass is definitely half-full if not more. And we believe we can fill the rest of it up. And because of that, we see 2014, 2015 and 2016 emerging like this: 2014 is we're committed to growing operating earnings and operating EPS. And $53 billion is the bottom, the minimum of our revenue expectations. We believe it will be a difficult year in collecting fees and taxes and solving the Medicare Advantage pressures. We have that in front of us, we've been executing against it. I'm on top of it as is everybody on our management team. Fran and his team are executing against it, our field force is executing against recovering those fees and taxes, and we knew what we need to do, it's just a matter of getting it done. And it's not all done yet so we're not declaring victory. We have a lot of work to do.

And I'll remind you, we have the highest 4-year compound growth rate amongst our peers. 2015, all the ACA fees and taxes are in the baseline, different game. We either price for them or we solve for them. There will be some additional Medicare Advantage rate pressures in the ACA but won't be as big if solved because of the taxes and fees, we'll be returning to more growth. And the Coventry accretion and synergies will accelerate and so, we'll share some of you numbers for you, but they actually accelerate off of the numbers we have in 2014.

And then in 2016, it's a completely different game. The ACA pressures abate, hopefully we'll be over some of the kludginess of what's going on today, longer-term revenue growth opportunities begin to mature and we'll return to longer-term operating EPS growth dynamics. So we think the next couple of years is like hard work.

But if you spend, and I think I've said this to this group before, if you spend a month watching our management processes inside the organization, you just realize how much complexity we deal with anyway. And actually what the Affordable Care Act has done, what public exchanges have done, what Coventry has done, as I said last year, this caused us to focus on those fewer things instead of all of the complexity. And those fewer things are going to make the difference in 2014, set it up for 2015 and 2016 beyond.

And here are some of the growth measures that generate some real opportunity for us. For every million members that go from self-insured to fully-insured, it's $4 billion more in revenue. And 4x to 5x margin, dollars of margin. Public exchanges for every million members, $3 billion of revenue. Medicare Advantage, every 500,000 members, $5.5 billion of revenue. Every 100,000 of dual eligibles, which we've won a number of large contracts, $3.5 billion of revenue. So you look at these sensitivity analysis around the top line, when you add in trend, when you add in the full year of Coventry pro forma for 2014, when you look at the opportunities we have with Healthagen, we have with international, where we're making some investments, just for the company in Europe, and the opportunity with the capital structure we have to do more M&A, we believe that we can go from 2013 to 2020 all the way up to $100 billion in revenue. We believe we can more than double our revenue.

And if you go back and play with the numbers a little bit, you can see that it doesn't take a lot to drive some of that top line to get there. And by the way, these are built off of 2013 prices. So it doesn't -- and when you put them -- I'm sorry, we got the price trend in there, but this is built off of the 2013 base.

So we've changed just a little bit. Last year, we had operating earnings up the base at 4%, it's now 5%. And we have capital, deploying capital effectively at 5% versus 6%. In large part, because we need the capital to support the growth we're getting. We have to set up our risk-based capital. And so that growth will support, will reduce the deployment of capital impact on our EPS over time. And we believe if we continue with Coventry, enhancing the short time operating EPS growth, we believe that we can still target low-double digit operating EPS growth on average over time.

So with that, we will take a break for 15 minutes. We'll come back here at 10:15, 10:15 to pickup with Joe Zubretsky. Thanks.

[Break]

Shawn M. Guertin

All right. We're going to go ahead and get started again. We've finished our furniture rearranging up here. I'm going to ask everybody to take their seats. As you heard in Mark's presentation, an absolutely critical enabler for success in the future is changing the payer provider paradigm, getting those incentives aligned. Aetna was really the first company to really herald this shift back at its Investor Day in 2010.

So our next speaker is Joe Zubretsky. He will discuss the leadership role we've been playing in this area and the progress that we've made to date. Joe doesn't need an introduction to most of you. He is currently the Senior Executive Vice President of our National Businesses, which includes Healthagen and our Accountable Care Solutions unit. I can assure all of you that the tireless energy and key focus of that Joe brought to his role as CFO, he is bringing to this critical initiative. Joe?

Joseph M. Zubretsky

Thank you, everybody. We are going to talk about provider collaboration. And Aetna is driving -- being a driving force in this business to create growth for the company.

The first thing I would say is that provider collaboration in the business we've created is truly changing the vocabulary of managed care. The words that are on screen today, you're going to hear many of them. And these are words you've never heard before in managed care. Episodic acute care converting to patient population health, how one manages both the supply side and the demand side of health care economies, converting from volume to value. And, in our view, the only way to create durable economics is to help the health care delivery system transform its business model.

So today, you're going to hear a lot about this. And the way we're going to take you through it, we've organized our discussion in this way: Many of you have asked, do they really want to do this? What's the catalyst, the impetus for providers' willingness to change? So we're going to spend a few minutes talking about those types of disruptive forces that are causing providers to think much differently about their revenue model.

Secondly, we're going to talk about virtual integration versus vertical integration and the collection of assets Aetna has acquired and built to enable providers to change their business model. That in and of itself is the Aetna differentiated story.

Third, we're going to take you through the economic model to show you how patient-centered medical homes, provider collaborations and accountable care organizations create durable, sustainable economics that we can then package into the core business and deliver to the marketplace to make our products more affordable, to make the health-care system more accessible and to drive growth to the company.

So with that said, why are the providers interested in doing this, not only interested, the intense motivation to change is driven by this simple chart. The cost shift that we all know exist, $30 billion of hospital payment shortfalls in Medicare and Medicaid. The fact that Medicare and Medicaid reimburse the low cost, which means commercial rates have to reimburse way above cost in order to squeak out a 3% margin is the catalyst for change. They no longer can take that cost shift and put it into commercial rates and have the market accept it.

So providers face 2 options. One, they're not really good at and they've largely done. And that is to ring out as much administrative cost as possible by vertically integrating, by buying facilities, medical groups or consolidating with other systems or creating this informal networks of integrated delivery systems, trying to ring out operating cost. But you know something, a couple of basis points of SG&A doesn't solve the problem I just described, but this does. They now understand that by forming communities, health care communities, with physicians, ancillary and ambulatory facilities and acute care facilities and engaging in virtual integration themselves, they can change their revenue model, be reimbursed on the basis of value and not volume and completely change the game.

And lastly, the takeaway point in this page is critical. Every CEO that we've spoken to has concluded one thing, that in order for them to sustain their existence and be a viable enterprise, they need to participate in the underwriting cash flows that are part of the health care value chain. We do not view that as a risk, we view that as a huge opportunity to align incentives and take risk with them. This is what's facing providers today, this is what's causing it to happen.

The consolidation is still occurring. And the point on this page have led us to conclude that aiming our product line in our business at the large sophisticated integrated delivery systems and freestanding hospitals is the way to go. Because the hospitals are rolling up the docs. We thought about rolling up physician practices. We thought about buying bricks-and-mortar, vertical integration. Our view is, let the hospitals deploy their capital, monetizing the value of physician contracts and physician practices, let them create the communities and we'll contract with the hospitals.

So consolidation is occurring, physician and physician practices have largely been rolled up by the hospitals. This creates a really, really elegant and simple platform where we could aim more product line and our strategy at the hospital systems. And it's a target-rich environment. For the first year we're at this, we had all we could do to just answer the phone, who wanted to do one and where did they want to do it because the assets we had built, the reputation we were gaining in the marketplace, created a lot of excitement.

Where it's right, where the environment exist we wanted these to work really well is as follows: First, where patient market share is not fragmented, where it's more or less concentrated. Why? In order for these to work really nicely, having 30%, 40% and 50% market share aggregated in the ratio delivered to the insurance marketplace is about right. So in Chicago, where it's very fragmented, you need 6, 8 or 10 ACO deals to make it work. But in Dallas and Houston, you may only need 1, 2 or 3. Concentration of patient market share is what make these work really well.

Second, and this is a bit of a euphemism because you know who generally is the dominant payer in the locality. The hospitals are really, really sick and tired of that one-way negotiation, it happens every year with the dominant player in the marketplace, which is generally a Blue Cross plan. They have finally realized that the diffusion of market share and not relying on one distribution source for 75% of their patients is a great idea, it's called risk management. So where they do have concentration of payers, they want to diffuse that concentration among many payers and it beautiful -- beautifully align with our ACO strategy to diffuse some of that market share and create another payer -- another meaningful payer in the market.

Hospital and physicians, critical, without the physicians referring inside the ACL, this doesn't work. If they own them, it's better than if they're aligned with them. We can make it work in both cases. And lastly, where Aetna has a significant presence, where we can take ACO relationship into the marketplace and have people say, "I get it." Banner partnering with Aetna, what a great product this is, let's go.

As I said before, we decided years ago that we were not going to buy brick-and-mortar facilities and we were not going to monetize the net present value of future income for a physician or physician group. I think that model has been tried, I think it has failed. And if anybody think that just because you own a physician's contract, you can tell them what to do and how to behave, you're wrong. Instead, what we decided to do was to deploy our capital, purchasing the capabilities to allow them to change their behavior rather than buying their contract and telling them to change their behavior.

So our differentiated solution allows us to then convert from volume-based reimbursement to value. The big difference being that, that can only happen if they change their business model. This is not just about signing a risk contract. This is about enabling them to convert from episodic acute care to patient population health. Episodic acute care, when you show up, I'll patch you up and send your home. Patient population health, I know everything there is to know about everybody in this room, you're part of my medical community, you're part of the medical home. I have the electronic connectivity to know how you're interacting with the system and I will get you in here when you need to be and I'll send you when you don't. The shift from episodic acute care to patient population health, it's a fundamental change, not just from the revenue model, but in the business and the clinical model of the facility. You've heard the story before shifting from volume to value.

There's a lot of plants that's purchased by hospitals and hospital systems. And I'm telling you right now, if they bill the bed, they're going to fill it and if they buy a machine, they're going to run it. In this model, all the moral hazards, the perverse incentives, the overutilized and overprescribed go away. Not only will it create a more efficient model, but it will alleviate those huge capital needs that hospitals have to constantly replenish their plant.

Can imagine a day where we don't have a clinical resources working for Aetna to deny a day, to perform a concurrent review to make sure the length of stay is appropriate. Why? Because the provider system itself is incented to do just that. The shift from episodic acute care to patient population health allows the hospital system to convert from volume-based reimbursement to value-based reimbursement. Now I'm going to spend a minute on this page because if there's one page in here that will frame the discussion that we have with hospital CEOs and CFOs, it's this page. It's a little busy, let me take you through it.

You're running a business, and the business has this profile: You've got a 3% pre-tax margin, 80% of your costs are fixed and the rates on 50% of your revenue are going down 5 percentage points a year. Dramatic. This is called a predicament. But that's what's going on. Fixed-cost business, thin margins, revenue raised being pushed down by both states and federal governments. So we show up and say, we can solve this. If you go into an accountable care model with us, here is what Aetna will do. The first thing we're going to do when we create this community on health in this patient population paradigm, is we are going to drive all the unnecessary utilization out of your system.

First thing, the CEO and CFO say, wait a minute, that's going to the wrong direction. I've already got pressure with the cost shift that's going on. And now you're telling me you're going to drive all the unnecessary utilization out of the system? Yes, we will. But here is what's going to happen. The next thing it happens, we'll share some of that back with you, the next and that will happen is we can get rid of all the redundant clinical resources that take care of patients and either have it embedded in the facility setting or embedded in the payer setting creating huge SG&A savings.

But you're still not back to par. Let Aetna be your new patient aggregator. You know how to take care of patients, we know how to find them. And these profit pools, the membership pools, as Mike described earlier, are changing dramatically. Private exchanges, employer-sponsored insurance, public exchanges, Medicaid, pre-65 retirees, post-Medicare Advantage, fee-for-service, all of these different mechanisms have huge reimbursement implications to the provider community. Let Aetna go into the marketplace and aggregate new members and bring them to you in this much more efficient model: Driving necessary utilization out, share some of that savings back with you, huge operating cost improvements, Aetna is your patient aggregator. And that's what creates the beautiful partnership of providers exercising their clinical muscles and Aetna exercising its marketplace muscles.

What has that led us to do. What that has led us to do is redefine the business of provider contracting. We're not in that business anymore. We're in the business of Supply Chain Management. And the most complex, arcane, Byzantine supply chain ever designed is the healthcare delivery system. Allow us to go into the system and organize it in a series of contracts, whether it's a physician group or sophisticated delivery system based on their level of sophistication, how transformative they want to make their business model and their appetite for risk, and we will enter into many types of arrangements from simple quality bonuses and gain share all the way to the more actuarially difficult and artful bundled payment approaches and global capitation. The sweet spot of which is pure risk share. And that's the anchor. That is the linchpin for our PCMH product, our provider collaboration product and our ACO product.

Ultimately, we see the market going to procedure-based bundles. Ultimately, I think you'll see it to go back to global cap like it did in the '90s, right now it's that risk here, and that model is the linchpin of our business. Here are the numbers. We have 112 Medicare provider collaborations. We have over 100 patient center medical homes, which more or less is the commercial version of the provider collaboration. We pay a care coordination fee, embedded the right amount of clinical talent in the provider setting, but the key is the advanced technologies to understand the risks in that population to ward off the onset of chronic disease before it happens, to stem the tide of admissions, readmissions, emergency room visits and all of the things that we know happen that drive up trend. Our 3 products provide the collaboration, PCMHs and the flagship accountable care solutions, of which we now have 32 more ready to be signed and over 200 in the pipeline. We are executing very well across our supply chain product spectrum.

I won't dwell on this because Mark talked about it before. What allows us to do this is over $1 billion of hard investment represented on this page. It's the power of these individual assets, Medicity being the industry's leading health information exchange, creating secure access to information in real-time for providers to react to. Our ActiveHealth purchase back in 2005 I believe it was, which has now been completely repurposed. ActiveHealth continues to sell its product line at the plant sponsors but we've repurposed the asset to make it available and accessible in a provider setting, the best clinical decision support tool in the market. iTriage to engage that member, because without an engaged member, none of this works. And of course, the Aetna assets to round all of these out. The key is not the power of the individual assets. We figured out a way to integrate them, truly integrate them in a technology stack that creates not a suite of technology products that a provider buys, but a solution. We don't sell products into a provider, we provide a solution. A risk management population health solution powered by the Healthagen assets. Very, very powerful.

As Mark said, you can believe me or you can look at the independent sources. Class obviously, is the consumer reports for health information technology. They believe that Aetna's assets, Aetna's collection of technology and business process assets to managed populations is the best in the industry -- in the payer industry. What does it do? Think about what this industry has struggled to do. Succeeded somewhat, but still continues to struggle to do with all of the aspects of healthcare that put upward pressure on-trend. And theres some examples here. How have we struggled to get providers to operate at the top of their license. What does that mean? Specialists don't need to do everything they do, primary care physicians don't need to do everything they do. Why haven't we used nurse practitioners, physician assistants in mini-clinics in order to take the pressure off the higher license cost of some of the advanced degrees that we have out there.

Getting a facility to operate at the top of the license so they don't view the mini clinic as arrival but as a partner, a low-cost partner or Quest and LabCorp as a low-cost lab option. They view that today as a rival, we need to think about that as part of the community that drives out cost. So operating at the top of license, absolutely critical. Obviously, a couple of aspects at healthcare that have really plagued the industry, devices and specialty drugs. When you're in an ACO, there is no incentive to mark up a drug, bid up the spread, pocket the difference and move on. The goal would be to get the patient the right treatment, at the right cost and use a lower-cost generic chemical compound before you start experimenting with specialty pharmacy drugs. All the incentives built around that have created the emergence of the advanced trends in these care categories are arrested in an ACO model.

How do we create durable economics? And what does that mean? As we said, we have changed the supply and demand equation. Gone are the days when I get more members and go argue for a better rate, gone are the days when a hospital consolidates and said now I have more beds, I want a better rate. All that happens is it bids up the cost of health care and the patient is no better off. Durable economics comes from creating efficiency and creating a clinical model that works better for the patient.

Our ACO model is designed so that the product we put into the market powered by the ACO has an 8 to 15 percentage point advantage over the best product in the market, small group, individual, middle market, self-insured, Medicare, Medicaid, 8% to 15% differential. And we do that first by designing a product around the ACO, a multi-tier product with ACO Tier 1, a high-performance network Tier 2, so on and so forth, creating the right steerage mechanism to make sure patients are incented to and want to stay inside the ACO to give us the fee-for-service rate out of the gate to drive that membership growth. And third, the clinical administrative efficiencies really take the pressure off the SG&A line. The approach is designed to create a product that is advantaged 8 to 15 percentage points better than the next price in the market. And we have great examples of the discounts that were given to us to allow that to happen, in some cases, 20, 25, and 30 points better than we had on the pure fee-for-service basis.

Here are the numbers, this is what we show to our customers, that you can save about $1,600 over a period of 3 years. It's a little subtle here but you can see that you start with a lower cost then it trends up at a much lower rate. We think we can not only lower the cost out of the gate, but actually take about 1 percentage point off whatever trend is. Lower-cost starting point, lower trend, $1,600 a year in savings per member.

But not only you're going to have a better cost structure out of the gate, think of what risk and loss share -- or risk gain and loss share actually is. Invariably, something goes wrong. And if that happens, that risk, the risk of not hitting that target budget is shared with the provider. So whoever is at risk, the health plans, the self-insured plan sponsor, gets the benefit, not only by the lower rate out-of-the-box. But the fact that the model flexes up and down and you're not at risk if something goes wrong and you don't achieve the target as aggressive as it is. Lower rate out-of-the-box gain and loss share value per customer.

We tell our sales people that if you sell this as purely a low-cost network option, you won't be with us very long because it's not what it is. The clinical aspects of this model are as important as the financial aspects. This member is now part of the medical community, they're part of a medical home. They have 24/7, 365 coverage, and their primary care, their concierge, understands everything there is to know about that patient. And not only that, but then we engage them with the tools that Dijuana is going to talk about in a few minutes. Without an engaged member, these models don't work. Members need to be engaged, because engaged members make more prudent decisions with transparent information and only use the system when they need to do. So the member engagement side, the consumer engagement side of this equation is as important as the clinical side of the equation.

You've asked this many times, this is not an HMO. An HMO had a gatekeeper, that gatekeeper was sitting as a payer. That HMO shifted the risk, but it didn't share the risk. And there was no information to back it, that green bar paper that Mark referred to earlier, that's real, that happened. The veracity and velocity of information, the fact that the provider is their own gatekeeper, and the intense clinical focus of the ACO is a completely new model and is completely anathema to the HMO model of the mid 1990s.

So how does this help us grow the core business? We believe that this is going to be a huge catalyst for growth. The way it works is we develop an ACO, that ACO produces that 8 to 15 point advantage, we package that into every insurance product we have existing in the market or launch new products off the back of that ACO, Medicare, Medicaid, small group, individual, exchange or non-exchange, self-insured, fully insured. We package it into the marketplace and grow membership, which is why when we report to you how well these are doing, it's simple. How much membership did they create? We have 32, 32 under LOI, they're all over the country and you've heard about our success in Virginia, the Banner relationship in Phoenix is fantastic. We just launched 3 of them in the middle and western part of Pennsylvania to open that market up. This is working, this is the map and I can talk about it offline with you.

Here's how we take it to market. First, it's about the full sale. You need to have an ACO. They all are different. Now, they only have a chassis of technology and business process. But they're all different. We have certain ACOs that have bought the full technology stack, others have bought discrete products. We have some that have bought none of the technology. We have joint ventures with providers who insisted on being in the insurance business. We're doing MSSP and Pioneer share, Medicare share savings programs with providers. And we're approaching every provider that owns a health plan and say, if you insist on being in health plan business, let us let power it, let us be the Intel inside your health plan, which then gives us the ability to launch newly branded products, Aetna Whole Health, provider-branded products. We're using the hospital patient roles to mine information to find new patients and members. We're going to use our retail marketplaces, as we said before, and you'll hear again, the power of an ACO powering a private exchange and a public exchange product is quite powerful.

We insist on getting the Hospital employees as national account members. We have 650,000 today of our national account members are hospital employees. And the really exciting part is to bring this product to our self-insured customer base. There's 8.5 million members sitting on Aetna's books in our large plant sponsor business that are anxious to get their hand on the cost structure that this can create, very, very powerful. So here are the numbers. We have 30 last -- we had 30 at the end of this year. We'll have 60 of these at the end of next year. We have 550,000 members running through our ACO agreements now that will grow to 850,000 next year by doing all the things I've said on the prior page. New products, existing products, self-insured, fully insured, right to the gamut of the product line, it's all being -- it's all producing significant growth for the company.

In 2015 -- by 2017, we expect to triple our penetration in value-based contracting, which is patient center medical home, collaborations and ACOs to 45% of our total medical cost spend, about 1/3 each. So that's our goal. 45% of our cost structure going through some form of value-based contracting by the end of 2017, be quite powerful and should give us a huge cost advantage to generate some of that premium and revenue growth that Mark talked about before. We're in the supply chain management business, that's what we do and it's creating huge value.

Providers know they need to change, they want to change, and we have the assets that we can install to allow them to change. Best-in-class cost structure is what this is all about. The fees we get from technology sales are interesting, they're high margin, they're unregulated, but the power here is in a sustainable cost structure on a value base that we can get into new products in the market, sell and growth, and we're doing all of this under our Accountable Care Solutions brand, powered by our technology assets housed in Healthagen. Again, all of the purpose of creating the growth curves that we referred to earlier.

So thanks for listening to all that. I'll be up here later for Q&A. I'll turn it back to Shawn. Thank you.

Shawn M. Guertin

All right. Thanks, Joe. Moving on, our next presenter is Dijuana Lewis. As Mark mentioned, Dijuana joined our company in October, and I know she is not a stranger to many of you. Previously, she served as President and CEO of WellPoint's Comprehensive Health Solutions business unit. Most recently before joining Aetna, she was the Senior Vice President of health care solutions for Wal-Mart.

As you know, we have a differentiated view of sorts about the pace of change to this new retail marketplaces, and it's critical that we're able to draw new high-powered talent to just drive on this issue and ensure focus on that issue. At Aetna, Dijuana is the Executive Vice President of our consumer products and enterprise marketing area, and what does that mean? She's the one who is going to be focused each and every day of taking Aetna from a B2B company and making it a B2C company. Dijuana?

Dijuana K. Lewis

Thanks, Shawn. Good morning. I am Dijuana Lewis and I'm going to talk with you today about Aetna's new retail marketplace and consumerism. We really believe that Aetna is a leader in becoming a consumer-driven organization. And as Mark said, the healthcare system was built to deliver healthcare. It was not built to deliver a simple shopping experience for consumers. That's the transition that we are making, that's the transition that we've been talking with you about earlier today, and I will continue that conversation.

First, we look at the changing landscape. What is important to both employers and consumers is that we make that shift, is that we make it simple, we make it easy to use and we keep the cost low. So 1 in 5 Americans is expected to select insurance through a public exchange in 2017. Private exchange volume is expected to equal that, and actually outpace that in 2018. Obviously, the Accountable Care Act and the advent of exchanges has changed a number of things, right? Product tradings, mandates, et cetera. Exchanges and specifically the Aetna marketplace is going to change how consumers select their health care and how they navigate through it. Again, think retail, think travel, all of this powered by technology.

So again, controlling health care cost will always be a top priority. Joe talked about the ACO development we've done. We're moving to the value-based contracting versus fee-for-service. We are leading the way in that ACO development. It's very exciting because it is sort of the kingpin of what we're trying to do here. So if we combine a great retail shopping experience, powered by ACO partnerships, and add the consumer technology piece to it to simplify the process through mobile apps designed specifically for consumers, we're going to have a very powerful end game.

So on this slide, what we're trying to say is that defined contribution is not a new concept, right? If we look at contribution -- defined contribution with retirement plans, starting in 1975 at 26% and moving to 68% in 2010. That was sort of like an evolution. We believe that the movement to retail marketplaces will be more of a revolution. Just to give you an example, Amazon sales in 1996 were $16 million. In 2012, Amazon sales were $61 billion. Clearly, consumers like to shop online. Clearly, consumers like to do it on their own time, in the privacy of their home or where ever they choose. This is not a new concept. We really believe that moving to consumerism -- we're there everywhere else, right, in most all other industries. So we're just lagging a bit, but we're going to get there. We also think that health care subsidies will shift the purchasing power, clearly, to consumers, and this will also promote moving to a defined contribution.

So how do we move to a defined contribution? Well, one of the biggest questions that we get from employers is how can we move to a defined contribution and have sustainable, manageable trend. How does that happen? To make defined contribution work, we need to do 3 things well: We need to engage employees through planned designs, CDHP and certainly the technology tools. We need to deliver cost savings. Again, Joe talked with you about how powerful our ACO partnerships are. And then we need to deliver, bring it all together, if you will, in this third bucket of efficiencies. Lower cost administer, a streamlined process, lower cost of distribution, all using big data to help us get there.

The retail marketplaces will address both employers' and consumers' needs. We're going to talk about employers' needs with this slide. So as we think about cost savings, what it has been is really some price differentials based on competition and some limited care management programs. Sustainable cost over time will be managed through population health management. And if we think about it, today, most exchanges really are one dimensional in nature. If we look to the future, we're going to have a fully integrated program with one-stop shopping. Again, always thinking about customer service and what does it look like when you're on the other side of it. And then most carriers, today, we all offer products, tools, capabilities, we all do that, right? The question is, who can integrate them the best. Who has the best tools? And who can personalize and tailor the experience? That's who the winner will be.

So now let's talk about marketplaces through the consumers' eyes. Obviously, the shopping and service experience has to totally change. If we have to empower the consumer with guided selling online with tools they can understand and let them do it when they choose and where they choose. Greater value will come through benefit maximization. Well, what does that mean? That means that consumers can select the care that they need for themselves, right? They do not need to buy care that they will never use. That's one of the biggest complaints with the public exchange comments coming out. It's people want to pay for what they need. And so how does that benefit us? We will be paid appropriately then for the right risk, because we know what the risk is. And so population health management, combined with great consumer tools and technology and just focusing on outcomes, again, will drive us to a consumer-driven market.

So part 1 of our strategy. We are actively participating in most major third party exchanges. Currently, we're participating in 4 national marketplaces, 9 local and regional marketplaces and 9 Medicare marketplaces. What this does for us is offer us access to consumers that we might not have otherwise had access to, and it certainly provide an opportunity for short-term growth. We've done extremely well in the exchanges that we participated with.

Part 2 of our strategy, and Mark touched on this, is Aetna developing our own proprietary marketplace. We will assert active employees with group benefits, pre- and post-65 retirees with group benefits and we'll have the Aetna retail store for the individual shopper. And so what we're looking to do is to take the best of Aetna, take the best of the retail marketplace and take the best of public exchanges and offer that as our marketplace solution.

So the best of Aetna, what does that represent? Well, it represents network innovation, clearly, Joe talked about that, population health management, consumer tools that are extremely powerful and data analytics. The best of the private marketplace, we offer defined contribution, retail shopping and a streamlined experience. And then the best of the public exchanges, we offer access to broad individual products and subsidies.

So the point here is that Aetna will offer solutions for all constituents, regardless of their needs. Versatility. We really take pride in the way we've structured our marketplace, and that is providing versatility to the employer. Because not all employers are not going to immediately move to a marketplace. Some will, but some will not. And so what this is designed to do is to say you can move the lever, employers, based on where you are in your evolution. You can go with funding in terms of a defined benefit or a defined contribution. You can look at it from a product perspective, again, we'll offer group products, we'll offer individual products. From a shopping experience, consumers will choose their benefits. And carrier choice, our customers can choose an Aetna-only marketplace or an Aetna-preferred network and product with other carriers. We are positioned to meet all of our customers' needs.

The power of the marketplace. The Aetna marketplace actually just went live and is being sold for 2015, 01/01/2015. Very excited about that. And you look at some of the brands over to the left side, those are assets that Aetna has been accumulating over the past several years to come together to provide a very powerful multi-carrier solution. These solutions can be moved across all carriers, not just Aetna. So we're really proud of the ability that this is going to bring to us. These technologies are all powered by state-of-the-art applications and realtime data. And we believe they truly differentiators in the marketplace.

And the message of this slide, again, is that we can cut across multi-carriers.

The mobile experience. Really, really proud of our mobile consumer experience. We've got a number of applications that really are state-of-the-art. iTriage has brought us a number of very, very innovative applications that are very consumer-focused such as, consumers can check symptoms online, they can find physicians, they can look for appointments online, they can book appointments realtime online. They can find out what the waiting time is online. They can use our payment estimator tool to determine the cost. They can determine what they need to pay off that cost. And then we'll give them options as to how they can pay their portion of the cost. We have a personalized health and wellness app, and it actually will allow input from other health applications. So it's all in one spot. You can get prescription information, whether it's cost, drug interaction or even a drug substitute. It's all there. So while we've had many of these applications out into the marketplace, what we're doing now is pulling them all together so that 1/1/15, we will have one Aetna mobile experience where you can go to one place and get all of these things done. Again, think Amazon, think retail, think travel, we are putting that into the healthcare space.

So the marketplace opportunity, it is tremendous. There are 90 million estimated members in commercial self-funded plans in 2013. I mentioned to you that we've done extremely well on the third-party private exchanges. For every member we've lost, we picked up 1.3. And it's tracking to a 67% fully insured rate. So 67% of them right now are tracking to be fully insured. That represents 4 to 5x profit contribution, just for moving from ASO self-insured to fully insured.

Now Aetna believes and we expect, we fully expect, to get our fair share. But let's say we just get 5% of that 90 million, that represents $18 billion in revenue. What if we get 10%? That represents $38 billion in revenues. 15% represents $55 billion in revenues. Clearly, this is a tremendous opportunity. We think we are market-leading, we are super excited about it, and we believe that we will have the best tools with the -- powered by the best provider relationships for a truly consumer shopping experience. Thank you.

Shawn M. Guertin

Great. Thank you, Dijuana. I hope all of you can see, and it's one of the reasons why we've kept the Q&A with everyone together, how deeply interrelated, actually, all of these different things are with each other and the ultimate success of each of these initiatives.

Our next speaker is Karen Rohan. Karen is the Executive Vice President, running our local and regional businesses, basically our health plan operations. And she also heads up the Coventry integration. She is a veteran now of Aetna. She joined the company about a year ago and before that, she was the President at Magellan, where I know many of you knew her. And before that, she had various senior leadership roles at Cigna.

One of the things that's exciting to me and really positive to me about the Coventry acquisition, especially, given some of the industry history around acquisition and integration, is almost all the questions and almost all the discussions are about upside and how well it's going. And I can assure you that, that is a no small part due to Karen's leadership so far and that she has been critical to our current success in this area and our future success as well.

So with that, Karen.

Karen S. Rohan

Thank you, Shawn. Good morning, everyone. It's really nice to be with all of you, and thank you, all, for joining us today. Last year, when I spoke to you about the Coventry acquisition, the biggest question on your mind was, "When are you going to close that transaction?" I'm delighted to be here just 7 months after we've closed to talk about 3 critical things: First, I'm going to remind you why we thought and continue to think that the acquisition was built financially and strategically compelling for us; second, I'm going to give you an update on the integration activities; and third, I'll walk you through in specific detail how we achieved our overall synergies.

Compelling and attractive. When we combined these 2 companies, we delivered $52 billion of annualized revenues. On top of that, we'll deliver $4.3 billion of EBITDA and we'll generate $2.7 billion of parent cash flow. We purchased the company for several reasons, but I'm going to talk about 3 of those reasons today. First, the complementary set of assets; second, the expanded capabilities that we have in the government services space; and how we broadened our geographic profile.

Let's take a look at the complementary set of assets. Think about this slide as 2 different roadways. And we combined those complementary assets, we're going to have a 4-lane highway to drive accelerated growth. At Aetna, we had a very strong National Accounts franchise, while Coventry was distinguished in the individual and small group markets. In Medicare, Aetna was focused on group Medicare, while Coventry was focused on individual Medicare or retail. In Medicaid, Aetna's business was primarily ASC, while Coventry was focused on insured. So if you think about the government space, it expanded our capabilities in government services, and Fran will talk about that in more detail in just a few moments.

And finally, we expanded our geographic footprint. Let's take a look at the map. We've increased medical membership by 4 million members. We've expanded our presence in the top -- in 2 of the top Aetna 10 marketplaces, Pennsylvania and Florida, and I've denoted it in green just in case you forgot your geographies from the fourth grade. And we've opened up geographies where Aetna had not been historically had a strong presence. In particular, we're much stronger in the Mid-America region of the country. And we deepened our presence in the Southeast region of the country.

You're probably asking, "What was your long-term thinking when you combined these 2 companies?" We consciously made decisions to combine the best practices and capabilities of both companies to ensure the long-term success of this business. Let me explain. Aetna has very strong multi-site capabilities; Coventry did not. Aetna has a very strong suite of specialty products; Coventry did not. Aetna, as you just heard from Dijuana, has innovative provider and consumer tools; Coventry did not. We saw the sweet spot of Coventry as their low-cost focus, their deep local market presence and insight into local market capabilities, and they had a very strong focus in government execution. So what's the good news? The good news is in just 7 months, we're already benefiting from the combined strengths of these 2 companies. Let me give you 2 examples. First, had we not combined these companies, we would not have been able to sell contracts in the State of Illinois retirees or to a Pittsburgh energy company. The result, top line revenue growth. The second great example is that we're having tremendous success already in cross-selling our specialty products. So far, we've had over 100 cross-sales today. The result, top line revenue growth.

I've just shared with you the rationale for the Coventry acquisition. Now let me shift to our integration efforts. We have a philosophical approach to ensure the long-term success of this transaction. Let's take a look. We wanted to maintain business continuity. We've laid out the long-term foundation for growth. It was imperative that we retain critical employees. We want to grow our customer base. And we wanted to manage the impacts of healthcare reform. And we've had very strong success so far.

Let's look at the numbers. We've been able to retain key talent across both companies. And today, you'll have the opportunity to meet some of the key leaders from both those companies as you interact with them at lunch. We've improved our client retention rate since we closed this transaction. We've also been able to maintain our client service levels.

It's important to understand in 2013, we were focused on integration, but that changes in 2014 to migration. So what does migration mean? Migration is about moving to a common set of enterprise platforms. In 2014, we will have one common general ledger system. We will have one common payroll and benefit system. And we'll begin converting all of our customers to one common set of technology platforms. Migration is critical to deliver the long-term synergies.

So let's take a look at what those synergies look like. In 2013, we delivered $50 million of synergies. We did that through the elimination of corporate overlap and to put that to functions. As we move to 2014, we'll deliver an incremental $150 million of synergies. We'll achieve this through medical cost and network savings, through operational streamlining and through vendor re-contracting. In 2015, we'll deliver another $200 million of synergies. And we'll get there through the migration efforts that will drive the IT rationalization, continued operational streamlining and continued medical and network synergies. We are confident in our ability to deliver these synergies. As you can see from this slide, these synergies will drive meaningful accretion in our EPS by 2015.

I'm going to close now, but I want you to leave with 3 messages regarding the Coventry acquisition: First, the Coventry acquisition remains both strategically and financially attractive to us; second, in 2013, we completed the task of integration and will be changing to migration in 2014; third, we are confident in our ability to deliver our synergies and EPS accretion.

Thank you. With that, I'll turn it over to Shawn.

Shawn M. Guertin

Thanks, Karen. The final presentation of the 4 this morning is going to come from Fran Soistman. Fran heads up our Government Services business unit. And as you've seen, this has been and will continue to be a real true growth engine for the top line of this company.

Fran brings a wealth of experience from his prior lives to his current role at Aetna. A year ago, he was the Co-Founder of Jessamine Healthcare, a GTCR-backed entity that was looking for healthcare investments. Before that, he had a long career at Coventry where he held a number of key leadership positions, including running the Government business there as well.

I think Fran's impact is already being felt by the early successes that we're seeing. We have had very strong growth on the top line, in both Medicare and Medicaid. We have made significant improvement and moved into our leadership position in terms of our Medicare star ratings. And we've won multiple dual eligible procurements.

So once you meet Fran here, I think you'll understand why we've been successful and why we have momentum in this business and why we'll continue to be successful in this business. Fran?

Francis S. Soistman

Thanks, Shawn. Good morning, everyone. I do consider the privilege to be leading the Government Services business at such a challenging time yet exciting time. There is a lot going on. My intention this morning is to share with you the reasons why I believe that Aetna Government Services is well positioned to capitalize on the many opportunities that lie ahead and be a growth engine for the company.

So for starters, we have a clear vision. Mark articulated that this morning, and my colleagues have supplemented that. We have effective and experienced leadership, some of which came from the Coventry acquisition, incredible new depths of capabilities. We have the organizational capacity to meet the growth needs in the short and the long term. We have strategies and capabilities that we believe differentiate us from our competitors. And we have the discipline to execute to achieve the desired results.

11 15 and 9, these are not last night's Pick 3 lottery numbers. These numbers represent winning opportunities for Aetna and, certainly, the industry at large. So let's talk through these incredible demographics that we're experiencing. First, 11,000. Symbolizes the number of baby boomers aging into Medicare eligibility every day. So by the end of the decade, we'll grow from 51 million Medicare eligibles to nearly 65 million, and that growth trajectory continues out to 2030. The Affordable Care Act adds up to 15 million new Medicaid beneficiary eligibles in 2014 alone. We will be participating in 8 of the 16 states where we do business in Medicaid with the ACA expansion. 9 million signifies the number of dual eligible Medicare Medicaid population. These are both comprised of 7 million of fully dual and 2 million partially dual. These are beneficiaries who use a disproportionate share of the Medicare Medicaid dollars. They're a very fragile population. So we believe that we can grow if we get our fair share, but our intent is to go beyond that.

This chart really goes from interesting to, use Karen's word, compelling. What happened with the Coventry transaction in 2013 is very evident by just what you see here. But what's also important to point out, I don't want to get lost in the $15 billion that came, as a result of the Coventry acquisition, is that both Coventry and Aetna achieved some meaningful organic growth in 2013 across all of our Government Services businesses. As we look ahead to 2014 and anticipate growth of another $4 billion, large part of that is driven by the annualized effect of the Coventry transaction, but as Mark indicated, we've had a very successful 2014 individual Medicare AEP season. We've also continued to experience good Medicare Advantage group growth. We've won 3 very important Medicaid dual demonstrations, which I'll share a little bit more about momentarily. We'll be participating in the Medicaid ACA expansion in 8 of our markets. And our Medicare Supplement business, which has had incredible inertia, continues in 2014 and beyond.

So let's talk about our strong Medicare portfolio. Karen talked about the complementary nature of our business, the Coventry and the Aetna. It is important to reinforce that 95% of Coventry's Medicare Advantage business was individual, where Aetna's size was about 70% group. You bring these 2 organizations together, and now you have a much more balanced membership distribution. But we also maintained our leadership role in the Medicare Advantage group business. Our PDP, our prescription drug plans, continue to evolve in 2014, with the set expectation -- I need to share with you that we took the necessary action to fix the Value Plus Part D product that we've talked about throughout the year in terms of the performance challenges that we experienced. So we do expect to see the enrollment on Part D to drop come 1/1/14, but that was planned. We also expect to return to growth mode in 2015.

Last, but certainly not least, is Medicare Supplement. Since we acquired the Genworth Medical Supplement business back in 2011, we have more than doubled membership and revenue. We've also made some important back-office operational improvements to create new-found capacity for continued growth and accelerated growth. We have a very, very solid leadership team there.

So no matter how the market evolves with respect to retiree, physicians, Aetna is well positioned to grow. Medicare has been a big part of the growth story and will continue to be in 2014. I referenced the growth that we experienced on the Medicare side when Aetna was about 30% organic growth, which is a combination of individual and group, and Coventry experienced about 8% organic growth. So now, we're focused on 2014 and beyond. Karen referenced some groups that we won in 2014 that we wouldn't have been able to win, either Aetna or Coventry, had we done it alone. And we have a very limited window of opportunity to capitalize on opportunities. So when I think about what lies ahead, both on the latter end of 2014 to the extent that there are group opportunities there, but certainly, for 1/1/15, we're going to have a full sales cycle next year that we didn't have in '13 to respond to RFPs to really show our new combined capabilities, and I think that bodes well for growth. So our focus is to grow with the right products in the right market.

Stars. Stars has been a differentiator. And this is not about shame or self-promotion. We're obviously very pleased with the improvement that we achieved. This is another area where we complement one another. We quickly learned that Coventry had a very firm commitment to Stars' performance. They had a lot of talent, leadership devoted to this, they were disciplined, and they achieved outstanding results as did Aetna. And the beauty of this is that we didn't have to lose any ground by bringing these organizations together, to bring one organization along; we're both there. So that bodes well for the future. We've increased our depth of knowledge and expertise. We've identified best practices, either on that Aetna side that were not necessarily utilized from the Coventry side, and vice versa. So again, it sets the stage for our ability to take the 62% of our membership in 4-plus stars, even higher. That's what we're certainly focused on. It required an investment, and it's an investment that was worth making because what it does, it certainly allows us to be more competitive, but it also sends a very important message to our group and individual customers, that we get quality results and we have high customer satisfaction. That is very important for new sales and for retaining our current customer base. So we'll continue to invest in Stars to make sure that we are appealing in the future.

Okay. I'm going to take you back to April. You all remember that day in April when the call letter came out. And on one hand, we sort of breathed the sigh of relief in terms of what CMS did on the SGR issue, but then as we drill down into the changes, we discovered some rather interesting and challenging headwinds. And admittedly, we all took a deep breath and thought about what we have to do here? So we had about 400 to 500 basis points of great pressures alone, coupled with 250 basis points or so of the ACA tax -- or ACA fees and tax associated with that.

So what do we do? We've got to work. We've got busy. We have multiple levers, and this chart indicates some of the more meaningful levers that we can affect. First and foremost, how we approach care management. Joe did a great job this morning articulating our strategy and how we evolve our approach to networks, in particular ACOs, and provide a collaboration. The goal is to drive and steer more and more of our membership into provider collaboration. The collaboration is the key word. These do not happen by simply entering into a contract. They require organizations to work together. We share information and data with providers to demonstrate how they can make an impact and improve the outcome to the patients they manage, the members we serve. This also helps us with Stars performance as well. So those provider collaborations are critical today, even more critical in the future. But we also have to get after other areas of opportunities, whether it's reducing our admissions, unnecessary utilization, readmission rates, dealing with the very difficult issues of advanced illness and end-of-life and everything in between. That's mission-critical. That's what we do everyday. That's what our company is all about.

Plan design. This covers kind of a gamut of different things I want to touch on. First and foremost, we can control what geographies we choose to offer our Medicare Advantage products. We made an important decision not to act too swiftly in exiting a large number of counties. In fact, we exited fewer than 4 counties, combined Aetna and Coventry, because we really believe that we have to exhaust all other options before you pull that trigger. Secondly, we looked at what products were being offered in all of our markets. In most cases, we could retain those products and make plan design changes, increase the cost share or change the out-of-pocket limitations and so forth. In other markets, we had to take a little more drastic action. We had to take a product out and replace it with an alternative product, which undoubtedly creates some disruption, but it allows us to stay in the market to continue to evolve our cost structure and continue to find ways to solve those challenges.

Provider re-contracting. It's always a work in progress. We identified where the greatest opportunities were, and they were particularly those providers that we were paying above 100% of Medicare fee-for-service.

And certainly, the most controllable ball is SG&A. And again, the combined organizations, the synergies that we realized, the opportunities to identify some efficiencies were moved on, and we will continue to do that throughout the next year or 2.

So we've operated under the premise of Medicare Advantage. We'll move to a parity with Medicare fee-for-service over a period of time. So our strategy has been about positioning the company to operate profitably at parity. So how do you do that? It's much similar to the same levers that I walked you through in terms of what we did to address the headwinds for 2014. So again, it bears repeating, Stars, critically important, opportunities to take our 62% in 4 plus -- 62% of our members in 4-star rated plans, even higher.

Our network contracting, again, we've covered what we do in terms of value-based contract and how to evolve, how we work with our provider collaborations through gain share and pay-for-performance incentive arrangements to get the right results.

But we're also looking at, for 2015, the introduction of some new narrow networks for Medicare Advantage. We have 4 narrow network-based products with Coventry. They're working. We believe that there's opportunities in the Aetna markets to do the same thing. So they will be introduced in 2015 and beyond.

Improving our cost structure, again, Karen talked about the synergies of the combined organization and how we will work from integration to migration. As we continue to get to that point, new savings opportunities will materialize.

And then medical management. As I said, this is mission-critical. The way we go about identifying the population is a greatest risk, using predictive modeling so that we can really target our resources where the greatest needs are. And that continues to evolve. That is a daily activity among thousands of employees in our company.

We'll also grow through expanding our footprint. And it was important to share this chart with you because we had to file for our expansion for 2014 prior to closing. So we didn't have an opportunity of coordinating our efforts. So I'm sure you're doing the math there and saying, 183 plus 402 does not equal 439. And you're right, it doesn't. This represents -- the 539 represents unique counties. We have overlaps in certain counties, and we'll reconcile that over the next 2 years.

The most important takeaway here, though, is not the number of counties. It's the number of Medicare eligibles we reach through those counties. So today, we nearly touched half of the Medicare eligibles, just over 23 million. Now when you couple that with our national capabilities on the group side, we can actually reach 2/3 of the Medicare eligibles. So as we prepare for 2015, which we are working on now, believe it or not, we have identified where there are opportunities to expand. Again, it's all strategic. We don't expand for the sake of expansion. We stand to follow the strategic opportunity. One example of that is our group business. As Dijuana shared with you in her presentation on the retail marketplace, there are already some first movers. We need to make sure that we've got the footprint to protect our existing group contract -- group relationships. But we also want to seize opportunities with new groups that move to the retail marketplace. So we will grow strategically in 2015.

So as this transformation occurs with the retail marketplace, it's really occurring first with retirees. We're seeing it already. They're moving to a defined contribution. It does reduce their administrative burden. We see this as really an opportunity. Dijuana gave you the math on the Commercial side in terms of the number of lives they convert from self-funded to fully insured. Multiply her number by 5, that's the equation on the Medicare side. So it's a significant opportunity, not a threat.

We also know that the geographical expansion has to support this and we, as we continue to develop our proprietary capabilities, we have 9 very important high-profile exchange relationships that we're in today. We've continued to look at our product portfolio to make sure it matches up well with what is happening in the marketplace and particularly having products that are unique to the retail marketplace.

So let me transition from Medicare to Medicaid. A very important part of our story, the government services story. With the business combination of Coventry and Aetna, it does change our configuration. Karen shared the numbers of what it did in terms of bringing in fully insured Medicaid members. We now operate in 16 states, as designated by the blue shaded colors, Mark referenced our 3 dual demonstration wins in Illinois, Ohio and Michigan. Let me give you a proper context, though, for these wins. These occur in 2014. They're staged at over various times. Those effective dates are still very much a fluid process. But they're not statewide. They're very, very defined geographical regions. So we are not overextending ourselves by any means.

The red dots signify the states where we will be participating in the Medicaid ACA expansion. So what differentiates Aetna from our competitors in the Medicaid space? Something significantly important. We treat the whole person. We have an integrated model. We bring the physical health component with the behavioral health and also support it with social and cultural resources. We are very much a community-based focused approach to managing the Medicaid population. The behavioral component cannot be understated. About 60% of the Medicaid population has one or more behavioral health conditions. So what's the significance to that? It drives the physical health cost. There's a correlation between behavioral health and inpatient utilization and ER utilization, just to name 2.

So by managing these together, as opposed to independently, we can affect a better outcome. We identify the high-risk, vulnerable members that need the attention. We engage them early in the process. They generally need intensive and extensive case management support. We identify the root cause. This is what's really key: it's not a band aid approach. We really drilled down to understand why is this happening. You almost have to be a detective at this. You have to take the data. You have to convert it into information, and then you sit down with your subject matter experts to really understand why is this happening and what are our options to bring about a change. When you figure that out, you see utilization drop, and you see the cost drop. So this is critical to our success in the Medicaid business. This is not a theory. This has been in practice for many years, utilizing our special needs program. It was scored independently by CMS and received nearly 97 points out of a possible 100. So it is road tested. It works. We continue to evolve it, and we're rolling this model out in all of our new Coventry markets.

This pyramid is important to spend a moment on as well. Because we serve a vast population in the Medicaid business, we've -- ranging from children and the children's health insurance program to temporary assistance for needy family with single mom, the aged, blind and disabled, to the long-term services and support population and now, to the duals. We have to have capabilities to meet all of those different needs. The bottom of the pyramid are generally the more healthy of the Medicaid population. We don't have to provide extensive nursing resources for that population. It's working with more of the social and cultural challenges, but also emphasizing wellness opportunity.

Where we really focus our resources is at the top of the pyramid. We're about 3% to 5% of the population in Medicaid drives about 50% of the cost. And this is where technology plays a very important role. The sooner we identify that population, the sooner we intervene, the more effective the outcome. So we're all about moving with a great sense of urgency and involving the right people, working with the community, working with the patients, working with our members and working with their families. Because often times, there are multiple co-morbidities, but there are also a lot of social and cultural issues that have complexity. So we have to work this together.

This slide may look like a little more shameless self-promotion, but it's not intended to be that. It's simply to demonstrate the momentum that we have already established that I believe will continue to build throughout '14 and '15. We do have the Ohio, the Illinois and the Michigan Medicaid demonstration duals.

We -- earlier in the year, we were awarded the opportunity of serving the Regional Behavioral Health Authority, Maricopa County. As you know, Magellan has been exercising its legal options over the last several months. It continues to do so. While they're doing that, we continue to collaborate with the Arizona Department of Administration in health to talk about implementation, and we anticipate that we will implement towards the end of the first quarter or early part of the second quarter as this continues to play out in court. And last but not -- certainly not least, Florida, where we were fortunate to win the LTC program. We've already launched 3 of the 4 regions that we won and anxious to do more of this business next year. So again, the takeaway is momentum. We've demonstrated to states that we have these capabilities. The higher the acuity of the population, the greater the value that Aetna brings to our stake customers.

So to wrap up, my intention was to demonstrate that we can be the growth engine, and we will be the growth engine. We have the leadership experience, expertise across all of our government services business with a well-positioned business platform and the organizational capacity that support the growth. The demographics speak for themselves. Extraordinarily favorable. We have a very robust portfolio of Medicare products, strong individual products, good footprint, right population, leading Medicare Advantage group business, our MedSup business performing extremely well with incredible inertia. We repositioned our PDP product to restore growth in 2015 and beyond. We're focused on the private marketplace. We'll continue to evolve our strategies as those opportunities begin to materialize. A leading player in Medicare Stars rating that we'll continue to evolve. We have the strategies and the capabilities to be successful and we're very focused on executing.

So with that, I say thank you for your time and attention, and I'll turn the program back over to Shawn.

Shawn M. Guertin

All right. I will invite the 4 speakers. Fran, you can stay up. All right. I know you've all been chomping at the bit through all of these presentations to ask questions. Now you notice that this is what happens to the CFO after the annual planning process. They make him stand up and they don't even bring him a seat. So this is the revenge towards the annual planning process here. So, okay, I believe Tom and we have a few people with mic. So let me start over here with Tom Carroll.

Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division

So a question on the ACA taxes and fees, and I like how you've characterized the price-for-it or solve-for-it initiatives into next year, which are effectively keeping kind of your outlook flat year-over-year. But once you go through all the puts and takes, all the price for, all the solve for, I guess, can you quantify for us on whatever basis you choose pretax, post-tax EPS, kind of what the final impact is that's keeping your outlook kind of where it is today?

Mark T. Bertolini

It's a hard thing to quantify with precision and part of that is -- and take Commercial. We can put it into the price. We know we put it into the price. But if I then negotiate 150 basis points out of the price, did I get the tax or did I just not get an opportunity? So I think when I -- we talked about this, we looked at it by product. I feel pretty good that we're getting the lion's share of it on Commercial when we looked at what's happening there. I think it's much more challenging, though, on Medicare. As you mentioned, that is not in the rate. We were limited by TBC limits as to how much we could even put in member premium. So we really have to solve for that. And at the end of the day, I would say sort of the casualty in Medicare because we really weren't able to improve margins in Medicare year-over-year. The combination of that in the Medicare Advantage rate cut has largely left us in the same margin position. And as you all know, we had some margin issues there. We were able to fix those, but the pressure of all of these other forces has really sort of compressed that for another year. On Medicaid, I would say I feel a little better about where we've been on that. It is certainly nominally in all of the rates, but to a different degree, sometimes, the tax grows up within there. Sometimes, it's not. But there's so many other levers that can be pulled in the Medicaid rate renewal. So again, it's all about margin preservation. And clearly, that has had an impact on sort of our Medicaid margins year-over-year. So I think there's a slide in my section, when you break the billion dollars of expense out, there's about $700 million attributable to Commercial. And then there's about $275 million, $250 million, plus or minus, attributable to the government programs. And like I said, I feel good about what we're getting in Commercial, but I think there is some real pressure in both the government programs. So that will sort of set a boundary around it. And again, I'm not trying to be evasive. It's just a -- with all the things going into the rates, it's -- I can say I got the tax, but if my margin goes backwards, did I really recover the tax or not? So let's go to the next question. Let's go over here. Josh?

Joshua R. Raskin - Barclays Capital, Research Division

[indiscernible] So Joe, you talked about the [indiscernible] provider strategy [indiscernible]. So the question is around your behavior strategy you need for providers [indiscernible]. So my question -- I understand that individuals move to lower-cost products and your strategy is getting you that 8% [ph] savings, but I understand that individuals also want -- for Atena's network, they also want choice. So do you think your members that are choosing these products [indiscernible], they understand the issues around your network? Do you think that there's a link to that why [indiscernible] so they figure out ways to [indiscernible]?

Joseph M. Zubretsky

Yes, I think they do understand. And the big difference between a true ACO and a narrow tiered network is the clinical experience. So it's not on forcing them to go to a certain hospital and not others. They want to go to this facility because the clinical experience a 24/7, 365 coverage. There are other options. As you said, we're creating tiers, where the ACO might be tier 1. Our high-performance network wrapped around that may be tier 2, and maybe the Aetna broadened network is tier 3, which product design incenting the right type of steerage and leakage, but the clinical experience and the fact that they're part of the Patient-Centered Medical Home is the biggest difference between an ACO and the old -- tier out all the high-cost providers and create a little-cost network, and they understand that. And we're selling it on that basis. As I said before, selling this on the basis of the clinical excellence is as critical as selling it on the basis of financial performance.

Albert J. Rice - UBS Investment Bank, Research Division

A.J. Rice from UBS. Let me just ask you about -- a little bit more about the public exchange strategy. So if you're addressing 30% of the exchange market, but 15% is where you're competitive, why would you have 15% where you're not competitive? What was the rationale for -- is that something you learned as you've gotten through the process or did you intentionally go in and be less competitive at 15% of the market? And then also I know you're talking about there's an option or something what you've learned over the next year. What are some key things that you'd -- you think you'll learn in the next 12 months being on those exchanges you're on?

Mark T. Bertolini

I'll let Karen fill in some of the blanks. I would say there certainly were some markets where we consciously aired on the side of caution because we wanted to participate, but maybe we didn't feel as strongly about our cost structure. But as a general rule, I think one of the reasons we sort of had a wider shot pattern was you can't predict what other people are going to do. And so I would tell you I think while we would've thought we put out competitive prices, we recognized the reality that when other people do, you're not going to win everywhere. You're going to hit it everywhere. In terms of what we intent to learn, obviously, one of the very big things on my mind is we need to understand the profile of these members, what kinds of health conditions they're bringing in and, as Fran alluded to, what the best kind of medical care management model really is. Does this end up looking more like a Medicaid plus kind of population? And that's the model that Fran described is more apropos. And this may change over time. And obviously, there's all the logistical thing. Karen, I don't know if there's anything you would add.

Karen S. Rohan

No, I would just echo. Obviously, with the competitiveness, we didn't know what others would do when we priced our products based on what the products and what the networks were in those particular markets and relative to what we want to learn. Clearly, we want to learn the differences in the demographics, the profiles of the individuals, the purchasing and buying behaviors of those individuals as we think about 2015 and beyond.

Mark T. Bertolini

Matt. He's back to the corner there.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

My question is on the ACO. So 30-plus, this year and then doubling that into next year. I just want to understand how you deal with the sort of chicken-and-egg problem with these providers in a sense that I don't know how much of their volume is on value-based or risk-based or both, and how much is your volume incentive fee-for-service, because the challenge is always that you try to get your -- their attention, but if you only have 10% on value and 90% is still the old way, it's going to be tough. How do you bridge that gap?

Mark T. Bertolini

Well, Matt, it's clearly growing. It is a growing phenomenon. If you read the credit rating reports on the hospital systems, the amount of value-based revenue is growing quite rapidly. So this is a phenomenon they have to deal with. The chicken-and-egg phenomenon in the market, our view is everybody's going to go and everybody's going to have some form of -- every hospital system's going to have an ACO. Our view is we want to power 2/3 of that. And our solution is going to be payor-agnostic. It has to be payor-agnostic because a hospital can only have one set of clinical protocols, one set of clinical programs. It has to operate its business in one way. And so if we can do the land grab, plant our flag in 2/3 of these institutions and then open up that contract to other membership and let United, WellPoint and CIGNA run their membership through and we share off the gains, then we can win by being ubiquitous, payor-agnostic, even though other hospitals in that market may have an ACO.

Mark T. Bertolini

Where is the microphone. Justin [ph]?

Unknown Attendee

[indiscernible]

Mark T. Bertolini

Yes, it really depends on what kind of discount they need to give us in order to be competitive in that market. The first piece is the avoidance of leakage and creation of steerage. And although these systems stay they have solved that issue, they have not. And so for an existing patient, we can keep that patient in the ACO system. 10% more or 20% more of the time they win with no new patients. It's just by the avoidance of steerage and linkage. Then we take that rate into the market and, as I said, we grow it. It depends on the system, but our view is these ACOs work with minimum 20,000, 25,000 members, up to 50,000. If we have that much density, then these things work really well. They can give us that rate, offset it with the shared savings and make that revenue model, that I shared with you earlier, work. So the right number is an ACO having a minimum 25,000 members at its ultimate run rate is about the right number.

Unknown Attendee

[indiscernible]

Mark T. Bertolini

It is. We have figured out we have a financial technology to share the gains or losses back with our self-insured plan sponsors. You do it to the claim. Why? It's very easy. Our self-insured plan sponsors are very, very excited about it. So the answer is yes. We can do this on a self-insured and a fully insured basis.

Unknown Attendee

[indiscernible].

Mark T. Bertolini

When we say the -- well they're not really -- I mean, they're not yet sharing in the revenue. Now having said that, the real excitement is on Medicare. Every hospital system will tell you that, particularly in the Pioneer and the Medicare Shared Savings Program, after they squeezed all of the savings out, 3 years now, what do you do? I've got this Medicare fee-for-service patient and there's no more gain share left. Convert them to Medicare Advantage. Let us go out in the market and find them. And you can share in the risk-adjusted revenue and the stars bonuses. That's what they're really excited about. I think the revenue sharing is really exciting 2, 3 years from now on risk-adjusted revenue and star ratings for the Medicare program.

David, looks like you have the mic over here.

Unknown Attendee

I wanted to ask another question on the ACO, and particularly, on moving your medical spend from 15% to 45%. So I believe your ratio strategy at least started targeting providers where you didn't have substantial market share. So I'm wondering getting to that 15% to 45%, is that going to come exclusively from gaining market share or are you now rotating the ACO strategy into more of your base, where some of your medical spend's already being spent?

Mark T. Bertolini

That's a great question. It's both. It's both. We do, we have established some ACOs where we had a white space. It's a real attractive way for our provider system to say, "Blue Cross Blue Shield has 80% market share. Come on in, and let's try to get 10 or 20 points to that market share into Aetna." So we do have some of these in white space. We have a deal with Aurora up in Wisconsin, where we really have little membership. The real excitement, and I had it on the page earlier, was a strategy we call purchasing coalitions. Forget about whether we have an ACO. If I can go into a marketplace with the distribution reach we have in national accounts, with our relationships with all of the top-tier brokers and consultants, we're going to go to national account plan sponsors that have 10,000 employees in a distribution center, another plan sponsor that has 10,000 members in a call center in Dallas, Houston, Memphis, Seattle, all these places form purchasing coalitions and go form an ACO around the purchasing coalition. So we started on the supply side of the equation building ACOs. Now we're going to the demand side of the equation, going into the marketplace, form a coalition to go drive an ACO. It's a much different approach, but the self-insured plan sponsors are absolutely excited over this strategy. So the answer is both, and that number you saw up there does include us converting some of our existing national account plan membership to an ACO strategy.

Unknown Attendee

So a question on the rapid growth in the government business. Obviously, step 1 is winning the contracts and then step 2 is making them profitable. We've seen a lot of other companies take down 2014 guidance because a huge SG&A investment has to be done before the revenue runs through. How do you think about the profitability of all these contracts whether it's duals, long-term care, behavioral into 2014 and how that ramps to 2015?

Mark T. Bertolini

The way we think about it is there is a ramp-up period. I don't think it necessarily results in losing money. I think that the markets are certainly going to be thin. But we looked at that -- we looked at it over a longer-term horizon and -- which is why we really focused on some very defined geographical areas, so we can leverage our sort of our national capabilities, as well as build out the necessary local infrastructure so we can do that buildout pretty economically.

Unknown Attendee

Question on the private exchanges and on that number you gave us, the 1.3x, where you're pulling in more members into the private exchange, has been you're losing. And can you maybe flesh that out and give us some absolute numbers in terms of what you're projecting for private exchange enrollment in 2014? And then just relative to pricing on the fully insured business in the private exchanges, how are you approaching that in the product design to avoid any risk of adverse selection if we think about sort of the old slice market, where, clearly, a lot of plans did struggle with that. How do you price avoid that, and do you feel comfortable about things like risk adjustment that Aon Hewitt has and their exchange will help mitigate the risks of adverse selection like we saw historically in Slice business?

Shawn M. Guertin

I'll just take the adverse selection one and then I'll talk about what we're seeing and Joe can certainly fill in the blanks as well. The first thing I would say, obviously, is people often ask this question like it's a new phenomenon. But as you pointed out, many of these large employers have multiple plan options from high to low today. So the dynamic of up and down is something we deal with today. But we definitely think very consciously about our network offering and our plan design offering and we do go through that thought process. I think one of the nice things about the Aon Hewitt exchange is there is an intent to pay you for your risk via risk adjustment, and that is certainly a feature that we and third-party exchanges that we find attractive.

Joseph M. Zubretsky

On the membership outlook front, the numbers Dijuana showed were correct. But I would say, right now, in our membership, we're not giving membership forecast net-net, but it suggests about exchanges. We may lose something like 90,000 members in our ASC book of business that has gone from a Slice account with Aetna into the exchanges. We're going to pick up 120,000, so net of 30. But 67% of that or 120,000 is fully insured, with a 5:1 contribution margin ratio difference. So net-net, it's a revenue pickup and a contribution margin pickup. It's an early forecast, but we actually think that's what the outlook is for one in '14.

Christine Arnold - Cowen and Company, LLC, Research Division

Two quick questions. One, Small Group, it looks like we're not going to lose much enrollment to shop exchanges and even public exchanges aren't working, but how are you feeling about margins and early renewal take up within the Small Group, but going in to next year? And then on Medicare, actually, Shawn, I understand that you're saying Medicare Advantage margins are going to be stable year-over-year?

Shawn M. Guertin

Yes, they're more or less flat as we look at them. And again, that is coming off a year when I would've liked, I think, in a more normal year, we would have been able to improve margins by fixing some other things, but yes.

Christine Arnold - Cowen and Company, LLC, Research Division

When we met recently, you said that you had about half of what you needed to do done. Are you feeling like we're still like some squishiness you could do better, where is kind of the give and take there?

Mark T. Bertolini

Fran, you want to talk about the triage plan and the things we're doing and where we are in that?

Francis S. Soistman

We've been working all year long on identifying opportunities to affect the better outcome on, particularly, the Aetna individual Medicare Advantage business, and we've made some great strides. We're working partnership with Karen's organization on the local contracting in particular. But, as I referenced earlier, a lot of this is geared towards the medical management side. We already reflected in our bids for '14 in the products that were sold the benefit changes, whether it was through cost sharing or premium adjustments or what have you. So that's all sort of already scored. So I think we're making very good progress.

Shawn M. Guertin

And the one I'll -- I want to go back to your Small Group question. The one element of squish, to use your technical term, is -- some of this is medical management programs. And while we have affected those and identified those and put the resources in place, certainly one of the squish elements I'd like to see is, are they having the effect that we've quantified as part of the solution? Obviously -- and that's one of the trickier things on that list to sort of see at the beginning until we actually go live. I think, to your point, I don't know what employer would even be contemplating dumping into any exchange giving the current state of affairs. So that is certainly not something on our radar list even as it pertains to Small Group. And Karen, you want to talk about early renewal or any of the other dynamics in the Small Group marketplace that we're seeing going into '14?

Karen S. Rohan

Yes, Christine, as we mentioned with new ren, we had an early renewal strategy that we employed, and we've had recently good success with that early renewal strategy on Small Group. And as Shawn had mentioned, they don't really have another place to go. We won't know all the Small Group activity for a little while now because we're in the throes of the early renewal strategy and then it takes a little time to kind of tally the sticks on the Small Group numbers. We're not expecting it to deteriorate in '14.

Unknown Attendee

Just wanted to ask on -- back on the ACO, can you help us understand maybe what the success rate has been and maybe how long it takes to sort of get somebody to buy in? And then second, just trying to understand the risk around in ACO. So if you're in a market that has an ACO and you're involved, is it either providers in or they're out in terms of in/out of network? So how do you protect yourself in that realm or is that not the way to think about it? You can have an ACO network that's still -- they're still in the network, but just not in the ACO?

Mark T. Bertolini

Can you repeat the first part of your question? I have trouble hearing.

Unknown Attendee

Sure, just the success rate in terms of...

Mark T. Bertolini

I'm setting them up with the hospital success rate in launching products?

Unknown Attendee

With the hospitals.

Mark T. Bertolini

With the hospitals. Every hospital system knows they need to do this, every single one of them. The issue they're confronted with is the chart I showed. How do I get from point A to point B and stay revenue-neutral? And you want to know something? A level of anxiety they have is exactly commensurate with how much debt they have on their balance sheet because when you're operating at 3% margins and we can't service your debt, you're going to have a problem if I drive all the necessary utilization out of the system before the membership shows up through market share gains. And so everybody knows they need to do it. The sales cycle is long. I would say it's about 6 months to sell one, and add another 6 months to install the technology stack to get them to change. Another 6 months to launch products, and that's when membership in revenue starts to flow. Think of it as an 18-month sales cycle from "I'm interested and I want one" to "There's an Aetna whole health product in the marketplace." Ana?

Ana Gupte - Leerink Swann LLC, Research Division

I just wanted to explore your membership guidance and if there's any degree of conservatism there. As you go into 2014, are you seeing an opportunity because smaller plans are walking away and the market's concentrating? For example, in Medicare, when you talked about 539 counties, is that just the agents or is that not a tailwind for you?

Shawn M. Guertin

I would say on the membership guidance from a Commercial perspective, I certainly don't feel there's conservatism or upside there. I think with everything going on, there's just been less volume in the overall markets. So I think the Commercial numbers are there. The one comment I would make, and both Mark and Fran alluded to this, is that when we prepared the deck that you see today, when the numbers you see for Medicare, we were obviously in the throes of AEP when we did that. That has concluded now, and we're getting sort of our final sales numbers in. And we had some really strong momentum at the end of the AEP. So recognizing the fact that, at this point, there are still terminations to come in and those come later, if there is a biased upward in any of those numbers, I believe it would be in the Medicare number based on what we saw as AEP closed out.

Unknown Attendee

Just a question on the ACO, sort of the economics of this buildout. When we think about the earnings impact over the near term, is the growth in the business actually a drag over the short term for the next 2 to 3 years or is it in your actual positive contribution to add in this bottom line?

Mark T. Bertolini

I'd answer that question two ways. First, when it comes to the contribution margin of the insurance products are sold, that's net new membership and net new revenue. That's a positive. We had to build a team. We have a 350-member team in our Accountable Care Solutions business that's responsible for installing these. Over time, what you're going to be able to do as you're building value-based networks, you're going to reduce the level of spend on your traditional network spend. That has not happened yet. So there's a little bit of a cost bubble on new network and old network. Over time, as we build our.

Accountable Care Solutions business, we'll be able to take down the traditional network business spend. That has not happened yet. So on the SG&A line, probably slight upside in the future. But on the underwriting margin side, it's all net new.

Unknown Attendee

Is there sort of a breakeven membership number or a breakeven agreement partnership number to think about where you reach sort of that normalization?

Charles E. Saunders

I mean, there is, but we haven't really shared that with the investment community. But our view is if we can get 45% of our spend through value-based contracts, 1/3 of which is Accountable Care Solutions, then we have one big and every dollar of that spend is worth it.

Unknown Attendee

Can you talk about moving from 15% value-based spend to 45% next year? Can you give us an idea of, within that, how much is at ACO level versus how much is at the other end of the spectrum? And then as we think about that, you mentioned specific savings assumptions for ACOs for the first 3 years, but how does that look at the other end of the spectrum for the first couple of years?

Mark T. Bertolini

To clarify, 15% moving to 45% by the end of 2017, not next year. And 1/3 of that 45% are in ACOs, roughly 1/3 in Medicare collaborations and another 1/3 in commercial-based Patient-Centered Medical Homes.

Unknown Attendee

So through 2017, should we think about each of those stepping up or is it going to be more towards ACOs at the very end of that time period or...

Mark T. Bertolini

I mean, how that phases over time, I can't recall from the projections. Think of them as all growing ratably over a period of time. I don't have an exact projection for you. The 8 to 15 points is real, and the way that works is a hospital system says, "In order to drive membership growth, which I need to make that model work, I need to give you a rate that's 25 points better than the rate you had yesterday." I'm only spending 40% of the dollars. So that equates to an 8% to 15% cost advantage in the marketplace. With that kind of cost advantage, I can grow membership, restock those beds for them so they can stay revenue-neutral.

Shawn M. Guertin

Okay, we have time for 1 or 2 more questions, if they exist out there. Okay, so with that, thank you. We will now break for lunch. Please try to be back here as close to 1:00 as possible so that we can start up again.

[Break]

Shawn M. Guertin

All right folks, if we can get seated, we'll go ahead and start the afternoon. Okay, good. I hope you all enjoyed lunch and had a chance to interact with the many senior managers who are here from the company. As I mentioned at the outset, I'm going to talk a little bit about the different levers that we have in front of us for growth and obviously spend a good chunk of time on how that's looking for 2014 and try to give you bit more of an understanding of what's happening below the surface.

I think it's always useful to start this discussion with what I would call our blueprint for growing this business, much of which you have heard of pieces today, but I think it's a good way to see it all come together.

The first and the foundational element is that we believe that having a diversified portfolio can able -- can enable predictable growth in both earnings and revenue. And I'll spend a little bit more time on that in a slide or 2. But in order to sustain that growth, it's absolutely critical that we can create durable economics. And as you heard in Joe's section, the next-generation network activity is absolutely critical to doing that. When you think about private exchanges, it's not just the buying experience. That's not the sustainable element. It's the durable economic benefit of the product that's being bought through that process. So that is really going to sustain growth.

So these are the 2 foundational elements. And then we see growth in 3 major channels: our Large Group Commercial business is the biggest single piece that we have of earnings, and that can continue to grow in a very steady fashion by growing our Commercial ASC business, by growing our Commercial Insured business with trends and as you heard, there's an optionality inside that, if you will, that if we're correct and the movement from self-insured to fully insured really gains momentum, there's a tremendous internal opportunity potentially in there as well. So we feel very confident that we can profitably grow that business. You heard the government story, it's a great story. We're winning in the marketplace. We're growing on all fronts. This has been a tremendous growth engine and will continue to be in 2014 and the future.

In Small Group and Individual, or a relatively small part of our overall pie today, there's some real optionality there as well, as you saw on Dijuana's slide about how big a public exchange marketplace could be in the future. So we really have some potential upside. Wrapping around all of this is the fact that we have a highly accretive acquisition that will help fuel us through the next couple of years, 2014 to 2015, which we all knew would be very challenging years in this business. As you heard Karen mentioned, in addition to the accretion, we're starting to see the revenue synergy, if you will, come out of this. Whether it's specialty sales or just core business sales, this is really starting to add a lot of value.

So that's our -- that's how we think about growth, and I think that's a very compelling story in terms of how we can grow this company going forward. As I mentioned, this all starts with a diversified -- a belief in the diversified portfolio. We always -- we talk about this often as sort of profit protection. And actually, 2013 was a great example of that. Despite the fact that we had some pressure in 2 specific business areas in 2013, we were able to raise guidance 3x, and we're still on track to deliver our commitment to you for the full year.

It also does provide some stability in earnings. When you look at this chart, and I'm not even going to try to tell you the colors because I'm colorblind. So -- but if you look at the Large Group pieces there, the 39%, the 24% and the 5%, about 70% of our EBITDA in 2013 is essentially Large Group-driven. And so that is much more insulated from the effects of health care reform and I think a much more stable profit source going forward. But we don't often talk about this as a growth mechanism. And when you think about why you have any portfolio, it's so that if you were -- if something really takes off, you're there. And you can ride that wave. We don't have all of our chips just stacked on private exchange or just stacked on Medicaid. We really have virtually every growth -- major growth opportunity that's in front of us covered. So that we can take advantage on the ones that we're right on that really take off. And so, again, we tend to think about this as a profit stabilizer, but I actually look at this as a way to ensure you're ready to take advantage of the growth opportunity.

But all this is nice, so this is nice talk unless you can deliver on it, and it is all about execution. And as I say, the proof is in the pudding, and I think over the last 3 years, we have sort of shown that proof with the leading EPS growth rate amongst our peers. And even at our at-least statement for 2014, we would still be in that lead position. So we are executing at a very high level. I would also point out that over this period and inclusive, again, of 2014 at the at-least level, this is in excess of our long-term guidance to all of you of double-digit earnings per share growth.

I thought instead of marching just through the numbers that I talk about 2014, sort of with the construct of how we're thinking about operating the business from a financial perspective and the goals that we have for each of these, I'm absolutely convinced, obviously, that the consistent and unwavering focus on these financial levers will lead to continued success for this company.

It all starts with revenue growth. I believe over the long term, with the opportunities that you've heard today that we can grow revenues at double-digit rates. And in fact, in 2014, we're doing that. Now in fairness, a good deal of that growth is from the effect of Coventry, and it's inorganic. But again, that is part of our long-term thinking and always has been about this business.

What drives, obviously, revenue is membership mix. So let me spend some time on this, and we've talked about some of these pieces. This continues to be a story of government growth being a real growth engine for the company. And there are some things on this page that actually don't look like growth, but there's really a lot of growth under the covers. We're positioned for a very strong result in Medicare. I alluded to this before in the Q&A session. I've actually, since February, when the preliminary rate notice came out, I think I've been more bullish than most that we would continue to grow membership. I think people constantly underestimate the power of the demographics, the generational move of people into Medicare who are used to managed care. So I've always been confident that we would be able to grow membership. Obviously, the margin management aspect of Medicare is what I've been concerned about, and we're seeing this. And just to be clear, as I alluded to before, if there is a bias in this chart for something I think we could do better on based on what we've seen come out -- coming out of the AEP, it is our Medicare Advantage number. This is obviously the basis for the guidance that we're providing you today, but there might be some bias for the upside there. Again, I would point out that terminations probably aren't fully mature yet, and we need to see that. And that will be sort of the final piece, and we need to know that.

We're also growing in our Commercial ASC business. You can see here, this is a result of our Middle Market and our Public & Labor segments, sort of the real bread and butter of the ASC sort of Large Group marketplace. Public & Labor, in particular, that segment is performing extremely well from a growth perspective.

I do want to talk a little bit about the Medicaid number on here. Medicaid, the membership is down 100,000. That is the result of us exiting a self-insured arrangement in California, where we will lose 125,000 members. That was a very low-value contract for us, so it has no real financial impact. But we will lose those memberships and then we will get some growth in the insured product as a result of the ACA expansion.

But Medicaid is not becoming a membership story anymore. It's really about revenue. And notwithstanding what's happening here, we are growing Medicaid revenue significantly in 2014. We're going to be approaching $6 billion of revenue. $1 billion of that is from Coventry and $1 billion of that is organic. And this is coming from the high-acuity populations, the duals, the long-term care. Very little membership counts, but very high revenue volumes. So again, as we think about Medicaid going forward, when we think about growth, you really have to think about the revenue.

And the other negative number on the page is commercial risk. We expect to be down 150,000 members in the first quarter. And I think this is a bit of a testament to our discipline on pricing, which we've been holding the line for a couple of years and that we've been able -- we've been willing to tolerate sort of membership being flat or shrinking a little bit because we think taking a prudent position going into 2014 and 2015 is the right way to play this. It also is reflective of what's going on in the individual market. With the disruption in that market with the exchanges coming online, our exit from the California Individual market, we'd expect our Individual membership could be down 100,000 members in the first quarter, plus or minus. And that's really what's driving the bulk of that number. So net-net, membership is flat, but there -- underneath this, there are some really strong stories, particularly in government.

Notwithstanding the fact that we're losing 150,000 Commercial members, we are projecting Commercial revenue to increase. Again, roughly half of this is as a result of Coventry. But we continue to price this business to our forward projections in medical cost trend, which obviously lists the top line. And we're also pricing it to collect the ACA taxes and fees that we discussed, which also serves to increase the top line. And certainly, while it's not happening in 2014, again, when you think about this dynamic, if we can continue to grow revenue even in the face of low membership growth or even if going backwards and hold margins, we can continue to grow earnings out of this block of business.

Fran alluded to this, government is projected to have a very strong revenue year going from $15 million upwards of $19 million and with maybe a bias to the upside based on what we talked about just now on membership. Again, this is a real success story. We're really gaining momentum in this space. And this is a pretty good outcome. When you consider the fact that the Medicare rates got cut by 400 or 500 basis points to boot that we're able to continue to grow revenue. And again, it speaks to the strength of the underlying membership growth that's behind us. I alluded to the Medicaid story, a very strong story with significant organic growth in 2014.

But as I often remind everyone, this growth, growth for growth's sake isn't very helpful. That growth has to be done in a disciplined fashion. It has to produce stable underwriting margins. And that's obviously an area we focus on a lot. And the Commercial business, the Commercial risk business still makes up about 50% of EBITDA. So on these issues, as goes Commercial, so goes this issue. And it all starts with pricing to trend. You absolutely have to price to your forward trend in this business. So let me spend a little bit of time on this slide. Let me start with 2013. You can see we are articulating trend, 5.5% to 6%. That range on our Q3 earnings call was 5.5% to 6.5%. But I'll tell you that our point estimate at that time wasn't the lower half of the range. So fundamentally, we're not viewing that trend is even better than we thought a couple of months back. It fundamentally is the same. We're just a bit deeper into the year. And it seems more apparent that it will land in the lower half of the range.

Much like we did in 2013, we are making a preemptive strike of sorts and assuming that we have an increasing trend of 75 to 100 basis points. And you can see that's how we get up to the 6% to 7%. 75% plus of our Commercial business has been priced with this assumption in place. Ultimately, where we think we would see this, if it manifests itself, is in the outpatient category, and that's the one category here that we've changed since our third quarter call and that we now would see that trending in the high single-digit range as opposed to mid- to high-single digits. So again, we need -- this is the assumption you need to make, especially going into this period of time, 2014 and 2015. And it is factored into our forward pricing.

So the -- the so-what of all this, obviously, is what it all that does to the Commercial MBR. We talked about some of these things on the call, and we're now going to be a bit more specific here. We are starting off with our 2013 guidance of 80% to 81%. Just like on trend, we anticipate that we would be in the low end of that guidance range when we close out the year. I actually think most of you are already there, looking at a lot of the sell side models. And so I don't think this is news. And again, fundamentally, we don't really feel any different about the Commercial business. It just is a bit clearer that we are going to be in the bottom half of this range.

There's really 3 adjustments in the first step here, and they're sort of reset adjustments of sort. The first is really the absence of a benefit that we had in 2013 that we don't expect to have in 2014, and that was the onetime benefit we got from the early collection of ACA taxes and fees. As you know, we don't, as a matter of course, guide for prior-year developments. So we're also taking that out and resetting for that. And the last piece is the natural outgrowth of our Large Group pricing process, where these customers are experience-rated. And in essence, you give the favorable experience back to them. So all of those things serve to reset from the low end of 80% to 81%, to 81.5% to 82.5%. If you think about that 82% as a midpoint, that's sort of a natural settling point for a block of business as it's constructed today. And I do want to go back at the end and talk a little bit about that experience rating move.

Then as we factor in the full effect of the taxes and fees into our Commercial pricing, that serves to bring the MBR back down for 2014. So that lands us at 79% to 80% for 2014. I think it's really important to pause here and think about something. And that is how much we're pushing on price in the Commercial business. 75 to 100 basis points of a trend increase, that's really a preemptive move right now, all of the taxes and fees in a single pricing cycle. The ACA-mandated benefits are coming on in some segments. There is an incredible amount of pricing pressure on the Commercial customer right now.

And why that's significant, and we talked a little bit about this in the past, is that maybe in a normal year, when I went back to that experience-rated customer, I might have tried to price a little firmer maybe and hold some of that gain back.

With the ACA taxes and fees, you really didn't have that opportunity. You were already sort of redlining your pricing with all of your customers. And yes, everyone else was largely doing it, but there's certainly is an absolute rate increase element here that really does creep in when you do this. So again, the real effects in my mind of the taxes and fees are the pervasive effects that it might have had in other areas where you might have been able to do something and hold something back, and frankly, you just weren't able to do that with all of the pricing pressure in the system.

We talked a bit about this in the Q&A session. This is about offsetting the taxes and fees. And again, it's worth talking about how we did that. The $700 million I alluded to on commercial, that largely goes into pricing, but there's a lot of other things going in there. And I feel pretty good about how we've have done there. Medicare, it's not in the benchmark rates. You can put a little of it in the member premium, but not a lot. You are largely solving for this through your plan of benefits or reducing your cost structure. And you put this together with the 500-basis-point or so rate cut, and that was a really, really tall order to try to bridge that gap. And so a great deal of pressure, I think, was exerted in Medicare as a result of the health insurer fee. And Medicaid is a bit of both, as I mentioned. It's showing up in the rates, but it's all about preserving your margin, and so the solution was on both fronts and again, undoubtedly, our Medicaid margins are pressured by having to recover this particular expense.

The important takeaway on this is the one -- the point that Mark made a couple of times, this was a big headwind this year, but it's in our baseline now. And when we think about 2015 and beyond, this is a headwind that really should abate.

It's worth digressing just a little bit to make sure everybody understands the income statement impact of all of these things because they are going to have an effect on a lot of the elements and the metrics that you're all used to looking at. Obviously, to the extent that we recover this through revenue, it's going to inflate premiums. Obviously, when premiums go up, that will deflate the health MBR. And you saw that in my commercial bridge.

The inclusion of the revenue to recover it, but also the inclusion of the expense, is actually going to increase the SG&A ratio. And in fact, you'll see in a slide or 2 that that's creating about 140 basis points of pressure on our SG&A ratio in 2014. The fact that the health insurer fee portion of this, as opposed to the reinsurance contribution, is not tax-deductible. The grossed up sort of falls down into your pretax operating margin, and so that number is a bit inflated due to that in 2014, roughly 40 basis points or so.

And the most pronounced effect, again, is from the same issue; the fact that the health insurer fee is not tax deductible, it's the effect on the tax rate, and our tax rate will go up about 600 basis points next year. And again, this is just all about the size of that health insurer fee in relationship to your pretax earnings. So we will move from a, call it, roughly 35% up into the low 40s for our tax rate next year.

The third sort of lever we always try to pull is driving continued cost efficiencies. This is a key component of our financial game plan. It's a key component to achieving the Coventry acquisition. And honestly, it is the 1 lever we have for 2014 that's in our control, and we are trying to pull that lever as hard as we can for 2014. We've done really well here over the last few years. You can see how we've really worked this SG&A ratio down. I think it's useful to understand how we attack this, where we -- obviously when we grow, we try to ensure we get fixed cost leverage, so we try to only allow the variable expenses associated with that business to creep into the system. We regularly challenge the organization that have productivity improvements that fully offset inflation. We challenge the corporate areas -- corporate overhead areas that have 0 growth. And obviously, we challenge our people to meet or beat the Coventry synergy targets. Again, this is a critical lever for 2014, and you can see, we're actually trying to manage SG&A flat on a dollar basis, on a pro-forma basis, despite the growth you heard. Fran talked about in duals and RBHA, and things like that's. This is hard work, this just doesn't happen. And this takes a lot of focus and a lot of commitment to deliver on this.

Obviously, when you do those things well, we believe that the consistent execution here will lead to achieving our target margins. And over the last few years, we've certainly done that, 8% in 2013. Obviously, both of these numbers are very consistent with our long-term target of high single-digit pretax margins. And while -- again, while the number for '14 is down a little bit, I don't -- I actually look at that as a very strong accomplishment. Again, when you consider that our growth is disproportionately coming from government programs, which has a lower margin, and we're trying to fund $1 billion of taxes and fees in 1 pricing cycle, the fact that we are there is a very, very strong outcome.

But we're not done even with the dollars of earnings. Capital deployment is a big part of this business, and I think one of the things that makes this business very attractive from an investment profile; very important to be part of our ongoing plan to continue to be a leader in aggressively and innovatively deploying capital to create shareholder value.

I think about this that we're trying to do 4 things here, and our track record is excellent on all fronts. The first is we want to maintain solid investment-grade ratings. We have largely done that through the Coventry acquisition, and I'll spend a little bit more time on that in a slide or 2. The second is we want to fuel organic growth and fund the organic growth. This is absolutely our highest and best return on capital. As you can see here, we usually get 20% plus returns on our statutory capital. We want to drive 5%-plus EPS growth via share repurchase or M&A. You can see we've made a significant commitment to share repurchase over the last 4 years. And when you look at the returns on that, it's well in excess of our equity cost of capital. From an M&A perspective, obviously, the long-term returns on Coventry are quite attractive as well, so we're doing very well there.

And the final piece to have a meaningful and increasing dividend. We were an early mover in this space, and as you saw, we've recently increased the dividend 13%, going from $0.80 to $0.90 a year.

In terms of the specifics, you see them here for 2014. Again, another strong year. Again, I think speaking to the cash generation that exist in this business, this as a year where we're going to delever to meet our rating agency commitments. We're going to increase the dividend, as I mentioned, we've already done, and we still have $1.2 billion to deploy to share repurchase. So again, the cash that's real testament to really the cash generation power of the business. Just to sort of highlight our focus on this area, there's a number here that just doesn't jump out. And that is, yes, you can see from 2013, 2014, we're trying to improve the core liquidity we need at the parent, from $200 million to $100 million. We used to be at $100 million when it was at in the stand-alone. When we did the Coventry acquisition, we let that come up a little bit until we could get some of our mechanisms in place. And I've challenged the group to get that back down to 100 even though we're a big company. Again, in and of itself, not a huge issue, but frankly something that really speaks to sort of our focus on being capital and cash efficient.

And as I mentioned, one of our goals here is to make sure we maintain solid investment-grade ratings. To do that, we need to fund our growth at these RBC levels, and we also need to deliver on this debt-to-cap commitments. And you can see on the third line here, this is the debt that we will have to repay to deliver on that. We've already paid off the $550 million of commercial paper. We did that about a quarter early at the end of Q3. And then there are 2 tranches of Coventry notes coming up in '14 and '15 that we will take out as well, to get to our ultimate target of 35%. Again, even with all this, throwing off more than $1 billion for share repurchase in each of the next 2 years.

So obviously, when we look all that, the goal at the end of this is to have the revenue growth, get the leverage, get the results and drive operating EPS growth. We talked a little bit that 2014 is a challenging year. And I will say again, we're absolutely committed to doing what it takes to grow EPS and grow operating earnings, but the challenges here are very real and they are quite sizable. And it's worth putting some numbers to these challenges in talking about the impact on 2014.

The first 2 lines, really, are those 3 sort of reset items that I talked to you about in the commercial bridge, right? That's the experience rating, the prior year development, the onetime benefit of taxes and fees. You can see here how we're pulling that SG&A lever hard in trying to get the fixed cost leverage, and that, by the way, is an addition to getting the Coventry synergies. The capital deployment, the Coventry accretion being better than we initially projected are adding things back.

When you look at the last number, it's a pretty small number. And in general, you might think there's not much going on here, but this is where a lot of the action is. The underlying business is getting better. The products that we had issues with, in 2013, are getting better. But the cumulative effect, again, of having to recover the taxes and fees and the Medicare Advantage rate cut is really offsetting a lot of this. And a lot of this just isn't sort of floating up to the surface. So there's a lot of action under here, but again, those 2 items are creating pressure in 2014.

I will just point out for clarity, again, that the 2013 starting point is basically our -- the midpoint of our $5.80 to $5.90 range that we reaffirmed with the $0.40 of accretion -- or $0.40 of amortization, rather, added to that.

Oh, I've gotten a lot of questions about this since we made our comments on the call, in terms of what's going on and why we feel that there's less, maybe, probability of an upside and certainly the magnitude of any upside might be more muted. So why do we think that? To think this through, you have to think about where do we really get this upside generally? Well, it comes from underwriting margin. And underwriting margin comes from 2 places: Your premium and your medical costs. It seems very unlikely, with the Medicare Advantage rate cut, with the pricing pressure that we -- of trying to get all these things through the commercial pipe, that we would be able to outperform a lot on this sort of revenue yield line. So that one seems less likely.

The medical cost one, though, is a bit of a wildcard. As I mentioned, we're projecting, just like we did this year, that trend will increase next year. There's a chance that, that won't happen. And that is one of the potential upsides in sort of, frankly, on an omnipresent upside, downside item in this business. But the environment we're in is a little bit different now than where we were maybe a year or so ago. A year or so ago, we were in a declining sort of slightly declining trend environment, and you saw that with the PYD that people were throwing off. It feels like most of this year, we've been much more in an environment of stability as opposed to sort of continuing decreases. So again, while that increase may not happen, it just doesn't feel like the probability of having a good guy on sort of the medical cost line is as great as it was on a declining trend environment. And it feels like if there is one, the magnitude could potentially be smaller as well.

So here's our complete array of guidance elements that we usually provide you. When we think about the long term, we've known for a long time that 2014 and 2015 were going to be challenging years for the industry. In fact, it wasn't all that long ago when I was having conversations with a lot of you about whether EPS would go backwards in a meaningful way in 2014. I feel really good about how we're positioned and how we're performing going into what is absolutely an unprecedented period in this industry. We're executing at a very high level, producing industry-leading EPS growth that exceeds our long-term targets. Our pricing discipline and our commitment to SG&A has us going into this with very healthy operating margins. And we have the benefit of a highly-accretive acquisition to help fuel us through the next couple of years. We have a diversified portfolio of businesses that gives us exposure to almost all of the potential growth opportunities as they emerge.

I want to reiterate again, we're absolutely committed to doing what it takes -- doing everything we can to grow operating earnings and EPS in 2014. But at this early juncture, it's only prudent, given the degree of change, to recognize the challenges because they are sizable and they are very real.

As you look beyond 2014 into 2015, there will certainly be some headwinds in 2015, especially in Medicare, but some of the 2014 headwinds should abate. The pressure exerted in 2014 from the ACA taxes and fees should certainly lessen, as the initial impact of that has now been reflected in our 2014 baseline. So as I sit here today, I think 2015 has the potential to be a better year than 2014, and it could be a year where the operating earnings from the core business return to growth. Even modest growth from our core business, when you combine that with share repurchase in excess of $1 billion, and you put on at least $0.40 of incremental Coventry accretion, paints a very attractive outlook for the future of Aetna.

With that, I'll invite Mark to the stage, and we will have our last Q&A session.

Question-and-Answer Session

Carl R. McDonald - Citigroup Inc, Research Division

First question was how much of the assumed 50- to 100-basis-point increase in utilization is health reform related versus assumption of an uptick in the underlying utilization?

Shawn M. Guertin

It's a small piece of that overall increase. The majority of that increase is more of this assumed uptick in overall utilization. Again, it's not a big part of our business, so it has a lessened effect.

Carl R. McDonald - Citigroup Inc, Research Division

And then second question is, the assumption on the Medicaid margin next year, you said it's going to be down. Any magnitude you want to put around that?

Shawn M. Guertin

No, it is going to be directionally down. And again, the pressure from the ACA taxes and fees. As you have talked about, the Kentucky Medicaid businesses performed quite well this year. It will be hard to hold all of that favorability into next year as well.

Mark T. Bertolini

The implementation.

Shawn M. Guertin

As it was asked about before, certainly the implementations of our new business, which we haven't called out here, also pressuring that number.

Carl R. McDonald - Citigroup Inc, Research Division

And then last question is, when you talk about a flat Medicare margin and a down Medicaid margin, are those pretax or after tax numbers in '14?

Shawn M. Guertin

The -- and I'll be a little bit clear on this, when I was talking earlier about the Medicare margin, the numbers I always had in my head were pretax numbers, and they are roughly flat, plus or minus. On an after-tax basis, that's a little bit down on Medicare. And on Medicaid, actually, they're both down. You've got a mic?

Unknown Attendee

Yes, I've got a mic. So slightly more conceptual question, longer term, Mark, going back to your prepared remarks about being relatively agnostic to how the system develops and being the intel Inside in regard to towering these more modern networks. I guess what I'm trying to square is the concept of somewhat dis-intermediating yourself in some of these situations, and yet still getting from sub-$50 million to -- or excuse me, billion to $100 billion in revenue. If you're participating less, how do you do that?

Mark T. Bertolini

I don't think we're participating less, we're actually participating more. So if we are sharing risk with a provider, we share the risk with any carrier they use our technology for. So the opportunity to gain more share instead of having to sell numbers, gives us more opportunity on the risk side. The revenue numbers we're showing are Aetna revenue numbers for members, but -- and that includes whatever we sell through those provider networks. Justin?

Unknown Attendee

Just a couple of questions here. First, Mark, in your slide, you had a breakdown of profitability from 70% of the business being in stable -- stable earnings businesses, 20% growth, 10% opportunity. If I kind of fast-forward 3 to 5 years, how do you see that breaking down at that point?

Mark T. Bertolini

It really depends, Justin, on the pace of retail marketplaces and private exchanges, where I think we could see some acceleration in the growth, and more of a value kind of a marketplace. It's not well formed, but let me give you a glimpse to the kind of things we're looking at. With this sort of wild west, the private exchanges emerging, when you begin to move into a retail marketplace and price at a retail level, price soon enough, and should be, divorced from the underlying cost of the product, which is a foreign concept for our industry, right? Your underlying medical cost, plus your factors, plus your profit margin, except the profit margin equals yours price, and that's what you put on the marketplace. In these exchanges, the opportunity for us to have a ladder of pricing across the shelf space, if you will, that drives people to certain distribution channels, I would argue that we will never give our very best price on a multi-carrier non-Aetna exchange. And so we will be pricing a different from our cost, so that -- depending on how quickly that kind of market emerges and where we get our cost structure, you can conceivably see very different margin picture by that time.

Unknown Attendee

So is it reasonable to say then that $100 billion aspirational number 2020 includes is almost coinciding with that part of exchange outlook?

Mark T. Bertolini

Well, it's not totally reliant because you've got -- if you were to play with that sensitivity analysis -- let's say the self-insured market is $90 million and it goes to $9 million. Let's say just 10% of it goes, that's a $36 billion market opportunity. If we have 20% of it, that's $7 billion. So if you go through that analysis, you could -- I think, the government businesses will drive revenue higher, faster than the private exchange, and we're not -- and we're particularly, when we put this out together, we were not particularly relying on a wholesale change in self funding to fully insured. We just think it's a market we should drive and create the opportunity for because the first people into that are going to be able to move quickly to this divorcing price from cost structure that could be an advantage for us.

Unknown Attendee

Okay. And it's a quick question for Shawn. In your remarks you indicated you did like to hold on to some of that margin expansion you had this year on the commercial side, but because of these such factors, you couldn't. If we are in the same place and the same room next year and you have this upside to margin, do you expect to hold on to some of it and have margin expansion in 2015?

Shawn M. Guertin

Obviously, it's impossible to predict. But actually, if you think about last year as a good example, last year, we didn't reset all the way back to 82%, we actually came up to about 81.5% as a center point. And I think that maybe is a sensitivity analysis sort of that when we tried to throw that switch, what we can potentially accomplish.

Unknown Attendee

Couple of questions for you. First, just on the tax, as you guys call it. The impact on minimum MLRs, I'm just curious, obviously, you're pricing for, are you allowed to include that in sort of a medical expense, or are you expecting higher rebates next year?

Shawn M. Guertin

No, it's a deductible sort of tax item, I believe, in the calculation.

Unknown Attendee

It comes after your premium?

Shawn M. Guertin

Yes. It gets treated like tax does.

Unknown Attendee

Got you. The second question, just on the utilization side. Can you just give us some of the drivers, specifically, of what exactly is driving that? And then I'm also curious if -- have fees gotten to a point where that's on your radar in terms of potential impact on cost trend?

Shawn M. Guertin

Again, I would tell you on the utilization side, it is a bit of a forward assumption we're making, and a bit of a preemptive assumption again at that. We believe most of that will show up in outpatient because frankly, that has been where the movement of services has been. Inpatient continues to be flat to down, and you can just see more and more going into the outpatient setting. The other place I would have suggest to go is exactly where you went with your second question, and that is pharma, and specialty pharma in particular. I would certainly say it's the 1 item that is certainly as a broad category on our radar in particularly some of the changes around HPSA, is something that we're looking at very carefully.

Mark T. Bertolini

Again, I remind the group that the way we think about pricing is that if we miss on the high side of if the price too high, that's more margin that comes to bottom line. We may not get all the membership we wanted, but I'll make that tradeoff any day. To the degree we price too low and we keep betting on low trends, then we miss, it's very hard to recover in this environment from that. And so our view is, is let's just make sure we've got -- in 2013, we have been bumping along bottom and trend, all year long. And so the feeling is, is when does it pop up? The economy is recovering a little bit. We've got these new people coming into the system that may encourage more utilization across the whole system, so it just wasn't worth the risk to make assumptions that our trend is going to stay [indiscernible].

Unknown Attendee

And then last question, just the CEO and CFO a very large and player group, I'm curious on your perspectives of your employee base and the future of private exchanges, is there a potential there?

Mark T. Bertolini

Well, actually that's a good question. Last year, our trend was minus 7.5% on our employee population because we focus on our employee population, put wellness programs together for them, and we really paid attention to what our underlying cost were using data, focus on a specific group of people. Now it helps us that the economy has been bad, and turnover has been very low, so you have a steady-state population that you're going to work with. But we view that as sort of an idea, an example of what a MEWA kind of private exchange could look like, somebody you can focus on a regular basis. I'm not going to get any predictions about -- or I'm not going to tell all of you before we tell our employees that we're going to push them into a private exchange. What I can tell you, that we usually try things with our employees before we try them on the external market place.

Shawn M. Guertin

There is a concept there, Josh, that a thing people overlook when they -- if you are an employer, and you think about putting your people into a private exchange. I -- honestly, I'm not really sure it's in the employees best interest to sort of hopscotch from CIGNA to Aetna to United. And to contrast that with Mark's point, I think we see the benefit that we can get by having a consistency of approach to employees over a longer period of time. And I actually think that is one of the really compelling reasons why our proprietary exchange is a very good idea.

Mark T. Bertolini

And let me go at this issue one last time on this difference between employer cost -- self-funded versus fully insured. Even if the employer contributes what they contributed last year into the fund, and then says to the employee, "You contribute whatever you contributed last year," which is an enormous [ph] amount by the way, most employees don't know, and you wrap that up together in a budget, and now I, as an employee, control all of it, there is no real comparator, unless the employee goes back and there's a lot of hallmark about what they spent last year. And so this whole notion that there is just a very definite calculation that you can do that says this makes sense, it doesn't, the employer could very well say, "I contributed $2,500 for that employee last year, I'm doing the same. Now they get to contribute everything they had, plus what I did, and here's the marketplace, go choose your plan," the employees -- I mean, we run the company. I do not have any interest in sitting down, I was on healthcare.gov with a friend the other day and [indiscernible]. I have no interest figuring that stuff out, the math is just too crazy. And so I just don't think -- I think people look at it a point time and say, "How much do I got? Here's what's available, I'll buy those" -- buying behavior on the part of consumers. They do not shop for health care like they shop for a book on Amazon.com or technology at Best Buy. They're just trying to get through it as quick as they can without having to worry about it.

Unknown Attendee

So looking specifically at your membership, I guess, I was a little surprised by the Medicaid number of net 25,000 gain. I would have thought, with the -- the expansion would have a little higher than that, can you, maybe, break out what percentage of is expansion versus duals or fees. And is there any opportunities later in the year for that number to continue to grow as pension lives working throughout the year?

Shawn M. Guertin

Yes, that really is the issue that you touch on at the end. There's probably about 25,000 in there in the first quarter, plus or minus, attributable to the ACA expansion, which by the way isn't happening in every 1 of our markets. As Fran alluded, it's about half of our market, but some of those dates are staggered through the year. So I think the answer to your final question is, yes, there is the potential for some pickup during the year at some later effective dates.

Mark T. Bertolini

And RBHA is not in there.

Shawn M. Guertin

Right.

Unknown Attendee

Thinking about government growth going forward, right, the 22% of EBITDA today, over the next 5 years -- I mean, with the accelerated growth in Medicaid and Medicare, how much -- what percent of EBITDA could that get to, and maybe offset by, obviously, private exchanges or other moving parts?

Mark T. Bertolini

That would guidance we wouldn't want to give right now, but nice try. It will be an important number.

Unknown Executive

Over here, Scott.

Scott J. Fidel - Deutsche Bank AG, Research Division

I had 2 questions. The first, just on the view of trend for that to lift by 75 to 100 bps, can you, maybe, break out or tease out how you're thinking about it between small group and large group, just given that there's a lot more going on with ACA in small group. And then just second, Shawn, just interested in individual and obviously not a large part of the business, but interested if you can, maybe, give us your expected mix of enrollment between on and off exchange?

Shawn M. Guertin

On the first one, you're right, there probably is a bit more push on the small employer market for a couple of reasons. One is just they tend to have leaner plans and there's a leveraging effect on the leaner plans, it's usually bigger than the large and pure plans, and then second is some of the ACA mandates coming in. I think the real question there is sort of how much of that ACA mandate will be bought out, again through sort of benefit plan buydowns, which we expect probably will go up somewhat, as a direct result of that. It's really hard for me to speculate right now, given the state of what's going on in enrollment, to sort of to look at that next. I would go back to -- we, very consciously from a risk management perspective, did not want to increase our overall exposure to individual, and I don't really feel that that's at risk today with the way things are going.

Mark T. Bertolini

I would also say that our comments last year about where we thought rates were going to head in individual and small group were pretty right on in the end analysis. And a big chunk of that, whether you want to call or not, was part of the underlying benefits and rules that went into place because of the Affordable Care Act may drove the pricing that was pretty darn close to where we expected it to be and what you're are seeing on the public exchanges if you go and look today on average.

Unknown Attendee

Can you tell us why is it -- you've talked all day about growth and all the opportunities for growth. You've hit us over the head with all the growth opportunity.

Shawn M. Guertin

Good work.

Unknown Attendee

Yet, when we look at your revenue guidance, it's only really up $1 billion from the pro forma number with Coventry. The headwinds that we see in 2014 are mostly not revenue headwinds, so how do you expect to get to double your revenues by 2020 when you're -- you've got such a slow start here going forward? Can you kind of go through that?

Shawn M. Guertin

Well, again, many of the growth opportunities that we talked about today are multi-year in nature before they fully mature. And one of the reasons we wanted to do that is -- what I alluded to at the beginning, there almost is a fog around 2014 that people can't seem to see through when they think about the longer haul. Not all of those are there today, but, again, think about what's going on; Medicare Advantage rates coming down 500 basis points, right? That's a big drag sort of on the revenue line. We're not growing our Commercial Insured business because -- pricing all of these through. We're continuing to stake out a cautious sort of pricing posture. We are growing a fair amount, actually, in Medicaid as a result of a lot of the growth we talked about, and we're certainly growing our fee business going forward. So it is -- a lot of the commentary today, I think, is about the future, but I think there are a lot of things, actually that did push down on the revenue line in 2014. And I will also point out that consistent with having an at least EPS statement, the number that's in there at $53 billion is also an at least, number.

Unknown Attendee

Can you go through with us -- you're clearly ahead on the Medicare advantage enrollments. You gave a sort of guidance of 80,000 increased membership in Medicare advantage over the -- I guess over the course of first quarter. Can you tell us what your gross number is in your projections and your net number?

Unknown Attendee

Just to be clear, the 80,000 that was on the table includes 25,000 of MedSup, so the MA number inside that is 55,000. I don't have the gross in that sort of -- right at the top of mind right now, I'd be speculating.

Mark T. Bertolini

But the AP result we have seen...

Shawn M. Guertin

Certainly better than that.

Mark T. Bertolini

Is not in those numbers

Shawn M. Guertin

Yes. And certainly the AP result, we had -- the number of sales that we actually are seeing, that's leading to the bios, is certainly in excess of the number of sales that were behind that number.

Unknown Attendee

First of, maybe when thinking about -- you introduced the concept of some revenue synergies with Coventry today. One thing specifically I like to ask is, when -- this year, you'll be able to join -- you'll be able to integrate the approach to bid with the Coventry and with -- is there any synergy that comes from doing that that's worth talking about? And maybe broadly, speak a little about the revenue synergy opportunity.

Mark T. Bertolini

I think on the Medicare, you should notice the number of counties where we have overlaps. We're going to have multiple products in the marketplace, which allows us to sort of pilot some ideas in those marketplaces because we have to rationalize those for a couple of years. So we're going to take advantage of that opportunity wherever we can. But when we look at the overall population now, I think when you look at the overall pool, we have a much better way of approaching the marketplace with a much larger population and Medicare individual than we had in prior years, and that makes a big difference. And in that footprint -- new footprint, now combining the group market, gives us an opportunity to go after groups in a fundamentally-different way than we did in the past. Groups that we might not have passed the test to be able to go in with the group Medicare Advantage product test.

Shawn M. Guertin

And there's a number of things some of which we alluded to today, certainly under provider contracting side, we really are continuing to work on sort of the synergy that we can get out of having a bigger, perhaps, overlapped footprint. We've certainly taken, as Fran mentioned, the best of both companies on stars. We've also taken the best of both companies in terms of approaching revenue management as well. So I think there's a number of synergystic things that are coming out of the combination.

Unknown Attendee

Maybe just one other question on different area. You guys have been part of a lot of the discussions down in DC about how do we fix what's been the trouble launch. And I feel like administrations relying on the industry to help a lot. As you think about the issues that are on the table, the tax, the risk corridors, even MA, and what the call letter is going to look like, can you say that you're sort of were getting any positive notion that the -- what the industries served up here is going to be rewarded in any of these other areas?

Mark T. Bertolini

Well, I must say the relationship is far better than what it was before the issues around the public exchanges arose. And then I think we've come to an accommodation, although we're not holding [indiscernible] around the table together, I think we've had a very strong focus on working together as an industry, with the administration, to make this right. Because ultimately if we don't, this starts to fall on our shoulders, right? The big moment of truth is 12:01 a.m on January 1, when a mother is standing in a pharmacy, with the baby in her arms, trying to get her script filled. And so getting that information right so that we don't have these events, which ultimately end up in our lap if we don't do them well, is very important for all of us to get it done right. Absent shutting it down and starting over, which isn't going to happen, we've got to be able to get these things right. I think the dialogue between the administration, particularly CMS and the industry, is much better. And we're in constant contact with one another about how we can improve it. We have our very best teams, Aetna is one of the alpha testers of the federal marketplace. We have our best people helping them work through all the bugs and the fixes. We're coming up with workaround solutions in case things aren't ready. So there's a lot of that cooperation going on now where in the past that was pretty much hands off, but once the stuff really hit the fan, there's a lot of engagement. And I think at that level, the relationships are much better; very, very good and strong. We haven't done the [indiscernible] health job, so therefore you should help us that kind of routine. I think that's for another day about how we can make this all work better. But I think right now, it's about avoiding this January 1 issue. And then the next moment of truth actually is the middle of May, 2014. We have to file for 2015. And given where we are, that could be a difficult situation.

Unknown Executive

[indiscernible]

Unknown Attendee

Yes, just one more question on the retail marketplaces. You talked a lot about self to fully insured, didn't hear anything about pharmacy, dental, vision, and is there any advantage or economic applied to bunding? Just within a fully-insured model, it either mitigates the margin pressure or adds to your dollar profit for life?

Mark T. Bertolini

Okay. I absolutely think there is opportunity there to sell some of the non-medical products, for example, in an exchange environment. So I absolutely do view that as an opportunity for us in the future.

Unknown Attendee

And then you're looking at your Aetna only, Aetna carrier marketplace, have you had any conversations with sort of MetLife or Pru or any of the other providers on marketing on your exchange relative to Tower's or anybody else that's multi carrier?

Mark T. Bertolini

We are participating in multicarrier exchanges. We do have some association relationships we're working on with some of our specialty products. We just launched a deal with Grandparents.com for MedSup. I mean, we're doing a lot of that sort of thing that's going to create opportunity. So again, once you start pushing retail, it's pretty easy to get engaged in a lot. I think we've been doing a measured approach. We are engaging in a lot of activities, and it's all lines of business.

Christine Arnold - Cowen and Company, LLC, Research Division

I may have missed this, but as - did you say how much of the HIF you expect not to collect in Medicaid in your guidance, but margins will be down?

Mark T. Bertolini

No, we were not specific with that. Again, it's a very difficult question to answer, just given the fungibility of the rates.

Christine Arnold - Cowen and Company, LLC, Research Division

If you were to collect it all, would margins still be down?

Mark T. Bertolini

I wouldn't want to speculate on that.

Mark T. Bertolini

I mean, it's a state-by-state thing, Christine, and they will admit that they need to put them in the rates from a standpoint of being financially solvent from a solvency test, but then you have all those discussion around these other factors that are in the rate. And it's a bit like playing 5-card Monte, and you're trying to figure out where the dollars are. But ultimately, this is our best view of what things are, what could happen, but we're hoping, based on the way we've set the financials, that it's all in the baseline, so next year we're not facing this issue.

Unknown Attendee

I just wanted to go back. If I understood the public -- I mean, the private exchange conversation, you were saying that you've thought you'd lose 90,000 ASL customers, and picked up 120-or-so-thousand risk. If you look at your guidance for membership, it looks like that made even bigger swings than what the commentary you indicated where risk is down so much, even if you're picking up 120,000 lives, ASO was up, even though you're losing other 90,000. Is there another -- is there something else kind of going in there or it's probably bigger than what I...

Mark T. Bertolini

Well, the 120,000, personally, 2/3 of that is risk.

Unknown Analyst

Okay, 2/3.

Mark T. Bertolini

Okay, 1/3 of it is self-funded.

Unknown Attendee

Okay. So that's still an 80...

Shawn M. Guertin

Yes. I mean, there's lots of other moving parts in the -- in sort of the spectrum of our Commercial Insured business. That's just 1 piece that is actually going up. And again, on our Commercial Insured business, we've consciously staked out, I think, a cautious pricing posture, and have been willing to tolerate some membership decline in that segment going into the next year or so.

Unknown Analyst

And then on Medicare membership number or, I guess -- or the Medicaid where are the duals in your membership numbers?

Shawn M. Guertin

Duals are in Medicaid.

Unknown Attendee

Medicaid.

Shawn M. Guertin

And again, there is no real -- none of the new dual contracts are coming online. That was just first quarter, and so they're not in there, but the dual numbers in absolute sense are quite small from a membership perspective in comparison to the other numbers anyway. So they wouldn't nearly move that line to the extent they actually moved the revenue line.

Unknown Attendee

Okay. And then just last question, maybe going back to what Allan is talking about. Do the exchanges look at you now as a threat? I mean, as you start opening your own exchange at 2015, does that change the dynamic at all? Or do the exchanges still feel like having you on is going to be [indiscernible] the content of your that you thought that probably your best price would be on your own exchange.

Mark T. Bertolini

The private exchanges, I think everybody wants everybody on until it all starts to settle out. And I think that's where we're going to start to see changes. So this is going to be very much a noisy evolution over the next few years, but I don't think anybody is turning us away because we're participating in other exchanges, including our own.

Unknown Executive

[indiscernible]

Unknown Attendee

Can you just give us your perspective on 2015 MA? I know it's hard -- you can't predict the core trend that's going to be in the 45-day notice. But when we think about stars, phasedown of fee-for-service, incremental industry tax and then further changes to the risk model, what is that sort of baseline you had down for '15 before the core trend adjustment?

Shawn M. Guertin

Again, I wouldn't want to speculate like you're not, but let me make a couple of comments on what you said, the Stars in particular. Our leading performance here has largely kept us from avoiding a negative. In other words, it's not a pickup for us in a material way on the revenue line, it is actually avoided revenue falling, as sort of the demo expires. Now we also get some benefits on the part A, B rebate, but, again, I think -- I would certainly expect today that it's going to be a negative yield number again. And as you mentioned, there's a small -- a relatively small incremental hit, push, in the following year. So again, I expect it will be a challenging year for Medicare Advantage, again, in 2015.

Mark T. Bertolini

At a strategic level when we responded to the February letter, between February and April of this year, a number of the CEOs got together to have a conversation with CMS that said, we know where you want to go, we want to get you there, but we want to do it in a planful way, started a very different conversation that resulted in the April result, versus where we were in February. And depending on where you were as a company, that was either good or bad, more better for some than others. And I think this year, we're already engaging at that level to begin this conversation, so it is not as much of a fire drill as it was the last time out, so that conversation is going to begin soon.

Unknown Attendee

Just one quick follow-up -- change question. On risk corridor payments -- or if you receive risk corridor payments, will you pay income taxes on those receipts?

Shawn M. Guertin

I believe so to the extent that, that would leave us in a gain position, I guess, I would assume so. We can double check, but I don't know why we wouldn't. Yes?

Unknown Attendee

So for 2015, you talked about $1 billion in repurchases, $0.40 from Coventry that's been out there for a while, and at least flat core, so that gets me to about 11% EPS growth. But I would argue you're in year 2 of exchanges and a lot of dual contracts that, maybe, margins get a little bit better, so maybe EPS growth is above 11%. So want to understand, am I thinking about that right that, that 2015 is above your long-term guidance for earnings growth?

Shawn M. Guertin

Again, at this early juncture, I wouldn't want to go that far. But again, I think you are thinking, though, about it correctly from the sense that some of the big headwinds that we're confronting are going to get better. And we have some things in the form of the Coventry accretion that are really going to help us and, in fact, accelerate in 2015. What happens to the underlying business, obviously, is still the thing that's difficult to see, so I wouldn't want to go there -- go as far as you are, but I think you're thinking about it sort of correctly and consistent with how I was talking about it.

Unknown Attendee

And as I think about the baseline of growth here, the revenue numbers that you guys gave were about an 11.4% CAGR to get to the $100 billion. And then the bottom line growth was a 5%-plus and then another 5%-plus, so is that just conservatism and so 10%-plus on the bottom line versus 11.4% on the top line just being very conservative or is there anything I should be reading into that, that's different?

Shawn M. Guertin

I wouldn't read too much into difference, right, in that. While I really do believe that we can hit that aspirational goal, that's what it is, it's an aspirational goal, the construct of the 5% and 5% is sort of our long-term earnings model. And, again, that reflects our thinking today.

Mark T. Bertolini

And I think if you look at the history, it's been better than that.

Shawn M. Guertin

Right.

Unknown Attendee

I was wondering if you could update us on how the PBM relationship is tracking relative to kind of expectations that you guys had? And then whether or not you are working in conjunction with them on anything unique or different in the specialty pharmacy area?

Mark T. Bertolini

You, go ahead.

Shawn M. Guertin

We're actually quite pleased with our relationship with CVS Caremark. Certainly, as we've mentioned in the past, it's produced the financial benefits that we saw at the outset. We are well into the conversion to their platform for our commercial business, and that has gone, gone very well. So that is a very good relationship for us, and we're quite satisfied with where that is. Obviously, when it comes to things like specialty pharmacy and some of the other cost management things, those are the kinds of things that we really do want to partner with them, and sort of get the best of what they see and what they do in terms of the most effective ways to deal with some of these cost issues.

Mark T. Bertolini

But our first priority is to get the business moved over.

Unknown Attendee

Shawn, I think historically you've said that growth of 1 million members would drive 50 basis points of SG&A leverage. You plan to double revenues by 2020, but membership won't grow that quickly. You're taking on a higher PMPM live [indiscernible] transitions then to risk. So is there a comparable measure you could offer around how much revenue growth might drive how much SG&A leverage?

Shawn M. Guertin

Yes.

Mark T. Bertolini

[

Let me tackle that issue. I think we have to have a fundamental reset of our cost structure over the next 5 years in order to be competitive in a retail marketplace, so I would not try and draw a line from where we are to some sort of percent of SG&A as a percent of revenue because I think the model is going to change enough. If we get to this ultimate point where we have ACOs or private exchanges bolt-on in front of them, our cost structure and the things we do as a company is going to be fundamentally different. And so, I think, we have more work to do on that yet. But short of projecting our current cost structure, the things we do today on a revenue base that looks out to 2020, I think is a step too far, right now.

Are we good? Okay. All right. Good. Shawn, thank you, everybody. I have 2 slides. Growth is built off of the strategy. And I think the strategy needs to be differentiated, and I think from the team today and from my earlier comments, I think we have a strategy that's differentiated. A lot of work to do, but within our sight. Growth obviously drives results, and as you know, and as Shawn pointed out, our CAGR is 13% year-over-year, EPS that's higher than any of our diversified managed care MCO peers. And we believe that targeting low double-digit operating EPS growth on average over time.

One last comment. Today is December 12, 2013. It is the 150th anniversary of Edvard Munch's birth. He died 1944. He is best known for this painting. Come on, Reg, give it to me. You all know it. So for those -- you may all feel like you want to scream because of all that's going on, we don't feel that way. We have a line of sight into how to make this business work. We have the plans to put it in place. We believe it's an opportunity, not a difficulty. And we will do well, so we appreciate your confidence with us as an investor, and look forward to your continued engagement with us as a team. Thank you. There's Edvard Munch.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Aetna's CEO Hosts 2013 Investor Conference (Transcript)
This Transcript
All Transcripts