Michael Kleinman - Staff Vice President of Investor Relations
Brian Sassi - Executive Vice President, Chief Executive Officer of Consumer Business Unit and President of Consumer Business Unit
Ken Goulet - Chief Executive Officer of Commercial Business Unit and President of Commercial Business Unit
Angela Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Wayne Deveydt - Chief Financial Officer, Head of Investor Relations and Executive Vice President
Joshua Raskin - Barclays Capital
Justin Lake - UBS Investment Bank
Carl McDonald - Citigroup Inc
Matthew Borsch - Goldman Sachs Group Inc.
Scott Fidel - Deutsche Bank AG
Charles Boorady - Crédit Suisse AG
John Rex - JP Morgan Chase & Co
Doug Simpson - Morgan Stanley
WellPoint (WLP) Q3 2010 Earnings Call November 3, 2010 7:30 AM ET
Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint Conference Call. [Operator Instructions] I would now like to turn the conference over to the company's management.
Good morning, and welcome to WellPoint's third quarter earnings conference call. I'm Michael Kleinman, Vice President of Investor Relations. With me this morning are Angela Braly, our Chair, President and Chief Executive Officer; and Wayne Deveydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with an overview of our third quarter results, actions and accomplishments. Wayne will then offer a detailed review of our third quarter financial performance capital management and current guidance which will be followed by a question-and-answer session.
Ken Goulet, Executive Vice President and President of our Commercial Business; and Brian Sassi, Executive Vice President and President of our Consumer Business, are available to participate in the Q&A session.
During this call, we will reference certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available on the Investor Information page of our company website at www.wellpoint.com. We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our press release this morning and in our quarterly and annual filings with the SEC.
I will now turn the call over to Angela.
Thank you, Michael, and good morning. Today, we are pleased to report strong results for the third quarter of 2010. Earnings per share totaled $1.84 on a GAAP basis which included net investment gains of approximately $0.10 per share. Earnings per share in the third quarter of 2009 totaled $1.53 and included $0.03 per share of its net investment gains and an impairment charge of $0.28 per share. Excluding the items noted in each period, our adjusted EPS was $1.74 for the third quarter of 2010 compared to adjusted EPS of $1.78 in the same period of last year. Our quarterly performance exceeded our forecast, primarily due to higher than anticipated favorable reserve development and disciplined administrative expense control. Based on our third quarter results, we've increased our full year 2010 GAAP EPS guidance to at least $6.60, which includes year-to-date net investment gains of approximately $0.18 per share and an impairment charge from the first quarter totaling $0.03 per share.
On an adjusted basis, or excluding the items noted, we've raised our full year EPS guidance by $0.20 to at least $6.45. Medical enrollment was stable in the third quarter, totaling 33.5 million members as of September 30, 2010. While we experienced minor interest attrition during this quarter, the level of attrition moderated. And we ended the quarter with approximately 200,000 more members than we expected. Both fully insured and self-funded enrollment results were better than our prior forecast. The unfavorable employment trends which have impacted our commercial business over the past two years appeared to be stabilizing, and we therefore raised our year-end 2010 medical enrollment outlook by 200,000 to 33.3 million members.
We continue to provide excellent value for our customers in this difficult economy as evidenced by the positive membership results we have achieved this year in our Blue branded businesses. As we've discussed previously, we made a strategic decision at the end of 2009 to exit the commercial marketplace in Texas and Illinois, which is driven a year-to-date reduction of 527,000 members in our non-Blue commercial and individual enrollment. This decline in non-Blue membership has net growth of 330,000 members, or 1%, that we've experienced in our Blue branded and government-funded.
Specifically, Blue branded commercial and individual membership has grown by 208,000 members, despite unemployment rate that remains near 10% across our 14 Blue states. Enrollment in the Federal Employees Program has increased by 62,000 and we've grown by 41,000 and 19,000 members, respectively in our senior and State Sponsored program through September 30, 2010. We expect the success in attracting customers in our core businesses will continue as we move forward and currently project that overall membership will increase slightly in 2011. While we do not expect meaningful increase in employment next year, which likely will continue to place pressure on for the moment, we are expecting additional market share gains in national accounts and modest growth in the State Sponsored and Senior Businesses.
We just completed another very strong year of sales in national accounts. Our broad and cost-effective provider network, which includes 80% of our nation's physician and more than 90% of our hospitals, continues to distinguish WellPoint in this marketplace. We supplement the strong provider network with leading disease and care management programs, innovative health and wellness initiatives, excellent customer service and competitively low administrative costs, resulting in the value proposition that we believe is second to none in the industry. We expect net additions of more than 300,000 National Account members effective January 1, 2011, which will make 2011 the 10th consecutive year that our national enrollment will have grown significantly.
In the State Sponsored business, we began providing services through additional beneficiaries of Wisconsin's managed care programs this September. And we will be facing a new membership through 2011. We also expect growth from the Medi-Cal SPD or seniors and persons with disabilities program next year and likely growth in some of our other existing state programs, given the current state of the economy. State Sponsored business represents a significant membership growth opportunity for WellPoint with an estimated 20 million individuals expected to enroll in Medicaid or related state programs over the next decade as a result of changes in eligibility levels for those programs.
Additional states are also evaluating the benefits of managed care to bring to underpenetrated areas within the Medicaid program, including the aged line and disabled population. WellPoint is one of the nation's largest Medicaid managed care plans, with 1.8 million members across 10 states. And we will continue to participate in these programs where we can provide long-term value for the beneficiaries while obtaining actuary sound rates.
We also expect enrollment growth in the Senior business in 2011, which will be the first year that Medicare advances private fees for service product need to meet specified network requirements. Given our core strength and success in network-based products, we expect to capitalize on this shift in the marketplace over time. We're currently marketing products with 2011 and believe we are well positioned for the open enrollment period that begins later this month. 2011 will also mark the beginning of the baby boomer age into Medicare, a demographic shift that should create significant long-term revenue growth opportunities for our industry.
We plan to continue investing in our senior business and addressing this important and growing segment of the population through a balanced portfolio of Medicare Advantage, Medicare supplement and Medicare Part D product. Our benefit expense ratio was 83.8% in the third quarter of 2010, an increase of 170 basis points from the same period of last year, which was driven by the senior and individual businesses. The senior benefit expense ratio increased primarily due to the reduction and federal reimbursement rates for the Medicare Advantage program in 2010. The ratio for individual business increased primarily as a result of the delay in implementing rate increases in California. The increases in senior and individual were partially offset by the improvement in the benefit expense ratio for Local Group business.
We implemented pricing actions in the California Individual business, effective October 1, 2010. We will incur losses of approximately $150 million in the California Individual business during 2010 due to the delay in necessary rate increases. In the years ahead, we expect that appropriate rate increases will be approved and obtained in order to maintain a sustainable market for individual members. We're currently pricing all of our business based on specific benefits being offered in considering both the bearing competitive dynamics across our markets and the evolving regulatory framework.
As we all know, premiums reflect rising medical costs. We're working diligently on behalf of our customers to help restrain the rate of increase in medical costs while optimizing the quality of care delivered. Inpatient and outpatient hospital costs together comprise nearly half of our medical expenses, and they are the most significant driver of the underlying cost increases our members are experiencing.
Approximately 1/3 of our hospital contracts renew each year. And to date, we successfully completed over 80% of our scheduled 2010 renewal. These new contracts have yielded positive results for our customers as we preserve the broad choice of leading provider systems to which our members have been accustomed while also negotiating new cost increases that are lower than those achieved in 2009.
As we recontract with our provider system partners, we're developing payment reform models that support and reward the delivery of high-quality cost-effective care. One such model is our patient centered medical home initiative that we expanded to the New York City area during the third quarter. We implemented our first patient center medical home pilot in Colorado during May of 2009. And it's shown improved results in helping patients manage disease.
The initiative in New York City includes hundreds of physicians to practice care in a variety of settings from small individual practices to large medical groups to academic practices affiliated with the hospital. The project includes an updated pay for performance program that rewards physicians for meeting high quality of care standards and holding down costs in a number of ways, including reducing unnecessary hospital admissions and emergency room visits. We'll be studying the results of this program over the next two years through our healthcare research subsidiary.
We're also driving value through our care management program, and our ability to deliver innovative program has helped improve member care is being nationally recognized. Last month, three of our care management programs received accolades from Durac an independent organization well known as a leader in promoting health care quality and risk accreditation, education and measurement programs. Our benefits-based incentives and returnee outcome program which was conducted in partnership with the Commonwealth of Virginia received a particularly high honor for demonstrating the impact incentive enhanced and increase participation in a maternity management program and improving maternal and infant health.
We were also recently awarded three 2010 Best of Blue Clinical Innovation Awards for the Blue Cross Blue Shield Association for its clinical distinction program that was developed in collaboration with Harvard Medical School. These awards recognize plans that demonstrate innovation, efficiency and potential for scale and included the quality health first pay for performance program. This program serves as our quality reporting tool for primary care physicians in the Indiana service area. And we received a top honor for this innovative and successful approach to improving access to high-quality states and affordable health care for consumers.
Through programs like this, we're helping our members to get the right care at the right time to improve outcomes and lower costs. There is a responsibility amongst all participants within the healthcare systems to become more efficient and effective in order to minimize future cost increases. This includes a stringent focus on administrative expense improvement within our own organization.
Our SG&A expense ratio was 14.6% in the third quarter of 2010, declining by 30 basis points from the prior-year quarter. We lowered total SG&A expense by $170 million or 70.5% over this time period. While our SG&A expenses are down in part due to sale of NextRx at the end of last year, we have also absorbed more than $100 million of cost so far during 2010 related to health care reform and regulatory compliance. We have been able to meaningfully reduce our SG&A costs due to the process improvement initiatives we have implemented throughout the organization, and we've achieved this success while continuing to improve service and deliver new and innovative solutions for our members.
Last year, we introduced the companywide continuous improvement program that we call Building a Better WellPoint. This program encompasses focused initiative to improved performance and efficiency and a number of functional areas including claims processing and cost and effectiveness, information technology delivery and support, utilization management, clinical review and certain finance function. We have trained associates from each area into continuous improvement skills, and this effort is becoming further ingrained within our culture.
While WellPoint SG&A expense ratio is currently at its industry leading low levels, we recognize the need to build upon our success and further improve our cost structure for 2011 and over the long-term. To fully capitalize on this opportunity, we recently announced the formation of a new organization within WellPoint calls, Enterprise Business Services. This organization will encompass five core businesses important functions including: information technology, information management, sourcing, service operation and operational excellence. The organization is being led by Lori Beer, who most recently served as our Chief Information Officer. Lori's team will oversee our evolution to a higher performing, more affordable operating model and continue to lead our implementation with healthcare reform requirement.
We believe this team will deliver improved service performance, enhance consumer experiences and incremental cost savings by focusing on our priorities and excelling in execution. A key component of the strategy relates to our efforts to continue to streamline our information technology framework by migrating to fewer core claims processing systems. We successfully moved 290,000 State Sponsored members to our preferred system over the last few months, and we currently have a majority of our medical membership on one of our three core systems.
We will be eliminating one claim system in the fourth quarter this year and we anticipate retiring four more by the end of 2011. We will also continue to streamline other non-core systems as we create standard enterprise capabilities to achieve further scale over our total membership. Our execution skills and migrating to new platforms continue to improve and have resulted in successful transitions with minimal customer abrasions.
While we remain focused on enhancing our competitive position through continued cost structure improvement, we're investing strategically for the future. The industry changes coming as a result of healthcare reform previously mandated regulations such as ICD-10 coding requirement and constantly evolving customer demand are requiring an increasing level of investment on behalf of health plans each year.
In 2010 alone, we projected our health care reform and regulatory compliance related expenses will exceed $150 million. This spending is incremental to our ongoing portfolio of strategic projects that we expect to drive future growth and enhance performance for our customers and shareholders. For example, some important investment milestones we enhanced just in the past few months include: furthering our investment into the consumer aspect of healthcare by launching an enhanced and redesigned consumer website and a new online store of our senior products; over three quarters of 1 million members have registered on the new consumer website and our online store has already processed thousands of applications, even prior to the Medicare open enrollment during next week.
We continue to ensure a continued smooth migration of pharmacy services from next direct to express. rep systems with 14 million or 90% of members now transitioned. We're also supporting the efforts to promote the adaption of meaningful use of health information technology, including a commitment of financing from raw, critical hospitals serving underserved communities. And we're investing in our brand name through advertising in key geographies into our new website thinkwellpoint.com, which is keeping our constituents and top leaders informed and up-to-date with work and the value we add to the healthcare system.
With the nation's largest membership base, we're able to make key strategic investments and implement regulatory mandate in a cost effective and customer focused manner. We expect these expenditures to create further differentiation for WellPoint in the marketplace and drive higher enrollment in our product and services over time.
Looking ahead, we'll be refining our business strategy for 2011 and beyond. This includes a detailed evaluation of our capital allocation practices to ensure we have appropriate alignment with our operational objectives as we move into the post-reform environment. rebutting investing internally to support future growth, recognizing that the risk and opportunities within our various businesses will be impacted by yet undefined regulatory guidance, where as down capital position today and value to financial flexibility we have within an industry that is likely to undergo further consolidation in the years ahead. We also plan to return capital to shareholders and our board of directors recently approved an additional $500 million share repurchase authorization. We will continue to review capital allocation strategies with our board as we finalize our future business plans.
In summary, I am pleased with our operating performance in 2010, which has exceeded the expectations we have coming into the year in most areas of the company. We're seeing signs of stabilization in our Local Group enrollment trends, and we expect continued membership growth in the National Senior business line. We're implementing process improvements that are delivering superior service levels while driving administrative cost savings, and we will be expanding these programs as we move forward while investing in key strategic areas. We're implementing the initial aspects of health care reform throughout the organization and positioning WellPoint for continued success in 2011 and over the long-term. I'll now turn the call over to Wayne to discuss our third quarter results, capital management and current guidance in more detail. Wayne?
Thank you, Angela, and good morning. Premium income was $13.4 billion in the quarter, a decrease of $704 million or 5% in the third quarter of 2009. Approximately half of this decline related to the conversion of large municipal accounts to a self-funded arrangement in the second quarter of 2010. The remaining reduction was primarily attributable to lower fully insured membership, resulting from economic condition and the strategic transfer of UniCare business in Texas and Illinois.
While premiums declined from the prior-year quarter, the increase by $110 million or nearly 1% on a sequential basis as the attrition in our fully insured membership has moderated. This represented the first sequential increase in premium revenue since the fourth quarter of 2008. The administrative fees were $963 million in the third quarter, down just $6 million or less than 1% in the same period of last year. This was due primarily to a reduction in certain PBM related revenues earned in 2009, which offset an increase in our commercial ASO fee revenue.
Other revenue, which historically consisted almost entirely of revenue associated with the sale of male order drug by NextRx declined by $163 million from the third quarter of last year, reflecting the sale of NextRx in December 2009. The benefit expense ratio for the third quarter of 2010 was 83.8%, an increase of 170 basis points from the third quarter of 2009. This was driven by an increase in the benefit expense ratios for the Senior and Individual businesses, partially offset by a decline in the ratio of the Local Group business.
In the third quarter of 2010, we recognize an estimated $110 million of higher than anticipated favorable prior year reserve development, which is comparable to the estimated $112 million of higher than anticipated reserve development that was recognized in the third quarter of 2009. Therefore, the comparison to the prior-year's quarter's benefit expense ratio was not impacted by changes in net favorable prior year reserve development. We now expect that our benefit expense ratio will be approximately 83.7% for the full year of 2010. This is lower than our prior forecast primarily to the level of positive reserve development we experienced during the third quarter. We expect the benefit expense ratio to increase sequentially in the fourth quarter due primarily to the seasonality of our commercial and individual product design.
Additionally, while we experienced higher-than-expected favorable development during the third quarter, our guidance assumes that we do not have additional net favorable reserve releases in the fourth quarter. We currently project the underlying Local Group medical cost trends will be in the range of 7% plus or minus 50 basis points for the full year of 2010. Medical trend continues to be driven predominantly by unit cost increases, while underlying utilization has been lower than expected in 2010.
Inpatient hospital trends is in a low double digit range and is almost entirely unit cost driven. Current unit cost trends are not sustainable especially for hospital services, and we are working to lower cost trends we negotiated with hospitals and health system. We continue to have success with the majority of the systems we partnered with. We remain committed to altering our networks as needed to address the handful of providers that do not comprehend the cost pressure space by our customers. We're also enhancing our reviews of certain procedures such as spinal fusion. We applied evidence-based critical criteria to mode access to appropriate procedures that provide quality outcomes for our members.
Outpatient trend is now in the high single-digit range and is 85% unit cost driven and 15% utilization driven. Utilization of cardiac imaging procedures has increased in recent years, contributing to higher outpatient diagnostic cost. Our American Imaging Management subsidiary recently infused a program to ensure this diagnostic procedure is appropriately utilized.
In addition, to address emergency room utilization, we recently launched a new online tool that improves the consumer's ability to search for nearby alternatives to the emergency room. Such as retail clinics, urgent care centers and physician offices that take unscheduled walk-in patients. The average cost from your visit is in one of our state, it's $441 compared with $98 for urgent care centers and $52 for clinics inside stores.
Physician services trends is in the mid- single-digit range and a 55% unit cost driven and 45% utilization driven. We believe that improved care coordination can improve patient satisfaction and reduce cost of care. We will continue to explore opportunities to develop new payment models that will award greater coordination of care, including patient centered medical homes, accountable care organizations, federal payments and enhanced fee for service programs including pay per performance. Pharmacy trend is now in the mid-single-digit range and the 75% unit cost related and 25% utilization driven. We expect our contractual relationship with Express Group will help pull down future cost increases for our customers prescription drugs.
Overall, medical cost trends are running below our original expectations for 2010, which we tribute to a variety of factors including the less intense flu season, stabilizing cobalt costs, our hospital contracting and medical management initiatives and a generally weak economy. Our full year 2010 medical cost term projection includes an expectation for seasonally higher utilization during the fourth quarter, although this could be impacted by the severity of the fall flu season and the economy.
We currently expect underlying medical trends to increase in 2011 and we are reflecting this assumption in our pricing. As Angela noted, we are making pricing decisions that reflect competitive dynamic as well as the regulatory uncertainties that remain in the marketplace. The majority of our fully insured enrollments that renew from January 1 is Large Group business, which is a market that we expect to be less impacted by medical loss ratio requirements than the individual and small group markets. We will continue to evaluate our individual and small group pricing and competitive strategies as regulations are promulgated concerning the MLR requirements taking effect next year to ensure our compliance with the laws and regulations.
Turning to our reportable segment, commercial operating revenue was $8.5 billion in the third quarter of 2010, a $799 million or 9% reduction in the third quarter of '09. This was driven by the municipal account conversion in the second quarter of 2010 as well as fully insured membership declines through the economy and member transition. Operating gain was $761 million in the third quarter of 2010, an increase of $133 million or 21% in the prior-year quarter. The increase was driven by operating improvements in the Local Group business and included an estimated $75 million higher than anticipated favorable reserve development recognized in the current year quarter. Approximately $64 million of higher-than-anticipated favorable development was recognized in the Commercial segment during the third quarter of last year.
Our Consumer segment operating revenue totaled approximately $4 billion in the third quarter of 2010 declining by 51 million or 1% in the third quarter of '09. This was due to the decline of Medicare Part D auto sign membership for 2010, lower individual enrollment and a change in the providers and pharmacy benefits in the Indiana Medicaid program of 2010 partially offset by growth in the Medicare Advantage program.
Operating gain for the Consumer business segment was $262 million in the third quarter of 2010, a decrease of $258 million or 50% compared to the same period of last year. The decline in operating gains was driven by lower performance and the senior individual businesses results of Medicare Advantage products designed primarily as a result of the reduction of federal reimbursement rates and lower risk course settlement revenue in 2010.
Individual business performance decreased due to the delayed implementing the rate increases in California and a recognition of a premium credit issued to certain policy holders in Colorado during the fourth quarter of 2010. We recognize an estimated $35 million of higher-than-anticipated reserve development in the Consumer segment and the third quarter of 2010. There was approximately $48 million in the same period of 2009.
Operating gain in the other segment totaled $17 million from the third quarter of 2010 which represented a decline of $116 million for the third quarter of 2009 due to the sale of NextRx. Net investment income totaled $205 million in the third quarter, up $9 million or 4% from 3Q '09 due primarily to a $25 million dividend associated with the cost metric investment in Puerto Rico. This was partially offset by lower yields earned on short term and fixed maturity investments in 2010.
Interest expense was $106 million in the third quarter of 2010, down $4 million or 4% due to lower average debt balances and lower short-term rates on floating rate debt in the current year quarter. We issued $1 billion of senior notes during the third quarter and retired approximately $400 million of term debt that was scheduled to mature in 2011. We also successfully negotiated new $2 billion three-year credit facility at the end of September. We recognized net investment gains during the quarter totaling $58 million pretax, consisting of net realized gains from sales of securities totaling just over $61 million, partially offset by $3 milliion of other than temporary impairments.
As of September 30, 2010, the portfolio's net unrealized gain position was $1.2 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $970 million and $251 million, respectively. Medical claims payable totaled just under $5 billion as of September 30, 2010, a decrease of $494 million or 9% in December 31, 2009, primarily due to the conversion of certain market accounts and or self-funding arrangements and a favorable prior year reserve development we have experienced this year. Included in our press release is a reconciliation of the medical claims payable balance. This disclosure is comparable to the reconciliation provided in our fourth quarter 2009 press release.
We report prior-year redundancies in order to demonstrate the adequacy of our prior-year reserves. Medical claims reserves established at December 31, 2009, continue to develop favorably. And for the nine months ended September 30, 2010, we have significant positive prior year reserve development of $705 million. This is slightly lower than the $752 million of favorable development we experienced in the same period of 2009.
In the third quarter of 2010, we recognized an estimated $110 million of higher-than-anticipated reserve development that was not re-established in our September 30, 2010, balance sheet. On a year-to-date basis, we estimate that we have recognized $210 million prior than anticipated development. We continue to believe our balance sheet is conservatively stated, and it is possible that additional could be released during the fourth quarter of 2010. However, this potential has not been reflected in our current financial guidance, and if it does materialize, we will separately identify it for the investment community.
As of September 30, 2010, days and claims payable was 40.7 days, a decrease of 1.4 days from 42.1 days at June 30, 2010. Approximately 0.9 days of a reduction related to higher-than-anticipated favorable reserve development. While 0.5 days of the decline was driven by the conversion of certain large group accounts self-funding arrangements.
Turning now to cash flow and capital deployment. For the nine months ended September 30, 2010, operating cash flow totaled $830 million. This result was impacted significantly by $1.2 billion of tax payments we made during the first quarter related to the 2009 sale of NextRx. Operating cash flow totaled $897 for the third quarter of 2010 or 1.2x net income. Our claims inventories are relatively flat, indicating higher earnings quality in the quarter.
We continue to utilize our capital to reinvest in our businesses and enhance deterrence for our shareholders. During the first three quarters of 2010, we repurchased nearly 59 million shares of our common stock or over 13% of the shares we had outstanding at 12/31/'09 for approximately $3.3 billion. As of September 30, 2010, we had approximately $539 million of board approved repurchase authorization remaining and our share repurchase authority was increased by an additional $500 million last week. We expect to complete more than $4 billion of share repurchases in 2010, representing a significant return of capital to our stockholders following the sale of next direct last year.
As of September 30, 2010, we had $2.9 billion of cash and investments of the parent company and available for general corporate use. We expect to receive at least $1.1 billion of ordinary dividends from our subsidiaries during the fourth quarter of 2010. We now have authorization for approximately 1 billion share repurchases available for deployment in the fourth quarter so we can market in three conditions. We have other projected net use of parent cash in the quarter totaling $200 million, which includes over $100 million for contributions to our pension plan. This will leave us with an estimated $2.8 billion of cash and investments at the parent at year-end 2010. Please recall that others projected year-end balance, we plan to utilize $700 million for debt repayments in January 2011.
Our debt to total capital ratio ended September at 27% of 60 basis points from 26.4% at June 30, 2010, due to our lower debt issuance. We remain near the low end of our targeted range of 25% to 35% and continue to have significant financial flexibility which we value in light of the current economy and the changing our benefits marketplace. We are currently evaluating our capital strategy in conjunction with the development of our 2011 and longer-term business plans. We expect to continue returning capital to our shareholders and will provide more information about our plans in the near future.
In terms of our updated outlook for 2010, we grace our full year guidance for membership in earnings per share based on overall performance. Specifically, net income is now expected to be at leased 650 per share including net investment gains of approximately $0.18 per share recorded in the first three quarters of 2010, partially offset by the first quarter intangible asset impairment charge of $0.03 per share. This outlook includes no net investment gains or losses or as an impairment charges beyond those reported during the first three quarters of 2010. On an adjusted basis or excluding the non-investment gains, any intangible asset impairment charge, we now expect net income to be at least $6.45 per share for full year 2010.
We now expect the year-end medical enrollment would be 33.3 million, consisting of 19.6 million self-funded members and 13.7 million fully insured members. We continue to expect operating revenue to reach approximately $58 billion for the full year 2010. The benefit expense ratio is now expected to be approximately 83.7%.
The SG&A expense ratio is now expected to be approximately 14.9%. Operating cash flow is expected to exceed $1.2 billion, and this includes the unfavorable impact of the $1.2 billion of first quarter tax payments for NextRx. Our full year effective tax rate is projected to be approximately 35.1% and our diluted share count is now expected to be approximately 418 million shares for the full year.
With respect to our current view of 2011, while it is too early to provide earnings per share guidance due to the need to further clarity in health care reform regulations, we can discuss the major headwinds and sealants we are evaluating to refining our business plans. The most significant headwind is that minimum and ally requirement which is not been finalized the Department of services or HHS. Detour carbon some negatively impact our operating again. We've also recognized an estimated $210 million of hide anticipated Federal Reserve development this year and do not expect to recur in 2011. Additionally, State Sponsored business has been a solid performer this year, Weber, federal manager provisions are scheduled to decline next year and considering the fiscal situation in many states, this good place pressure on the funding for certain income programs. Opera we also expect lower than investment income in 2011 given the continued low interest rate environment and the anticipated non- occurrence of the dividend we received this quarter from our Puerto Rico investment. We continue to be the economy as a net neutral for next year and it has leveled off to that expecting significant improvement next year. into detail transfers and foremost we'll been slower certain distribution and administrative cost next year and are currently starting savings offset at least a portion of the operating gain impact they expect in other areas. And California, we implemented premium increases in the individual market for 2010. This should include our results in the California mutual business and we expect that appropriate rate increases will be approved in the future sustainable market for individual members in California. And the senior market, we currently expect a modest figure membership in 2011 on a steady margin despite the changes in service program. Were also protecting another strong year of growth into National Accounts business and finally, we had a diluted share for the lower 2011 given this year. As you can see, there a number of positive and negative items currently affecting our outlook for 2011. to provide more information about our strategy for 2011 and longer term doing our conference call to be scheduled after HHS end of our fourth quarter 2010 earnings call scheduled for January 26, 2011. I will now turn the conference call back over to Angela to lead the question-and-answer session.
Operator, please open the queue for questions.
[Operator Instructions] We'll our first question comes the line of John Rex with JPMorgan.
John Rex - JP Morgan Chase & Co
A little more focus on the 11 and particularly were thinking about that costs in the lower costs are great this year and what you're building in 211 for expectation for full-year cost trend and what components might look different particularly, Angela you mentioned if you could size for lower unit costs that you're getting from hospitals.
With respect to 2011, we are expecting a little bit of a rebound in the trend in 2011. We are expecting more normal flu season, we expect some rebound in our pharmacy costs, we had an improvement from our initial year of Express Scripts. We expect scripts to have discounted continue to repeat but not necessarily incrementally were going to work with them obviously very diligently and programs to further penetrate around military and generic rates continue to improve. We also know though these impacts on health care reform that could add to costs throughout the delivery systems. That's going to be offset somewhat by the COBRA having rolled off a little bit that will expect less COBRA and 2011. So we are taking of this potential for a rebound in to our pricing and being disciplined you believe anything the market is being disciplined and rational in terms of pricing over all and of course you can predict impact of the large definitions at this point.
John Rex - JP Morgan Chase & Co
So 7% this year, is it fair to say you're thinking something 8% next year?
Yes, John. At this point we don't want to give guidance in 2011 but I don't think it's unreasonable to assume that.
Our next question is from Justin Lake with UBS Investment Bank.
Justin Lake - UBS Investment Bank
In terms of the results in the quarter and year-to-date, number of your peers have already reported this fact out a significant amount of development in both of the recorders as well as the second quarter. It doesn't appear that you've seen that same benefit, given that he talked your costume being down 100 basis points of the versus your initial guidance. I'm just wondering if you have any thoughts on why it hasn't happened.
One of the things that see me is regarding a development. We have continued to reserve this is consistent than conservative level of high single-digit exclusive margin. So we are not adjusted that as of 930 and so for that reason, what they been spiking up to date has been all that's been above and beyond what I would call the consistent conservative level. Clearly as he mentioned in our previous comments that we are not reflected any further adjustments that could occur which would be entering into the fourth quarter within our guidance I would anticipate that there will be an adjustment the difference will be most likely in the fourth quarter versus what we see in the first nine months. The second comment I want to make is to continue to 1% decline in trend, I think it's a reasonable assumption to assume that you would see an equal amount of positive impact to the bottom line. And will recognize at the commercial trend only with the vast majority of that almost 2/3 of that being offset by California alone and the loss is now up in the 150 level and if you recall we assumed that we will make money in California which will not be an unreasonable assumption. It's in the low single digits. . .
That's the California individual market, specifically.
So when you consider the profits that is eating up the majority of the improvement that we've seen in the commercial book.
Justin Lake - UBS Investment Bank
You laid out in these headwinds, tailwinds. And they don't want to talk about 2011 guidance but as far as the rationale thinking about of down flat are there any thought process has to SG&A fronts as being offsetting a portion of the MLR? I know you don't have the rigs out yet, but the is there any early view as to whether you may be able to grow operating income or even grow for EPS in 2011 given the headwinds?
For the reasons you stated, you can't really get into 2011 at this point and they don't have the MLR but what we can tell you about is what we are doing, which is to the overall SG&A would be very disciplined are being very customer focused. We understand our customers have an affordability challenge and we have to address that both in reducing our DNA and our focus we want to partner with brokers and agency and consultancy have meaningful relationships year but we also have a working with them on share responsibility, which I think will be important in terms of the whole system working more efficiently and that will obviously be happening in 2011 and beyond.
Your next question is from Doug Simpson with Morgan Stanley.
Doug Simpson - Morgan Stanley
Benching in your comments in the balance sheet, it's as if you guys are thinking through that right now and you'll come back to us, what specifically -- obviously we have the MLR rules were all rating for clarity of that, what would you like to see before thinking about taking leverage up to something at the start of the center of the historical range that you talked about?
Thanks, Doug. From a leverage perspective we have more than enough Apple pants right now so leverage up the don't see a lot of value in that we are enjoying the lower interest rate that we're seeing from that perspective although it organization on the investment income side I think right now we do expect that to be more consolidation in the industry. This will be a very cost cause the program to implement healthcare reform and rethink skill is going to matter and so I think they like having that available for sizable acquisition if one becomes available or even small acquisitions as they become available but I don't see it will necessarily level up but we have more clarity around these final rules and regulations and what impact they will have on consolidation in the industry.
Doug Simpson - Morgan Stanley
If we think about ending the year with a $2.8 billion number assuming you want to keep $1 billion at the parent that leads to $1.8 billion of dried powder and if you look at the last couple of years of free cash flow you run generally two-point I billion dollars talk to provide billion dollars. What should we be thinking about that cash doing next year? Maybe give us your thoughts on potential for dividend and just how much would you put it on the buy backs? How comfortable are you think that's a pretty big cash balance to just be sitting there.
I think your numbers are right on. You're probably need to keep about $1 billion at the parent as part of our liquidity framework to enable us to pay both short term and 12 months of principal interest so the services as he said about $1.8 billion, will recognize around $700 million that will go away in January that's coming due so are paying back down in January. It does relieve us roughly $1 billion. We'll be visiting with our board later this quarter. Our 2011 plans and part of evaluating that additional billion dollars along with 2011 cash though we expect to generate and we are exploring a number of capital the private alternatives.
Our next question is from Joss rash can from Mark Gates capital.
Joshua Raskin - Barclays Capital
On the MLR during an individual rate in that got pushed back and then the MLR compression. Could you quantify on the year-to-date this is what that's been in the MLR and maybe remind us around the regulations in California? If you could put through focal rate increases periodically so when is the next entry could put through another rate increase? I understand that you just got one last one here.
Via, you want to take that one?
In terms of California, current legislation is that carriers can only take a rate increase minimum of every six months, so we have a 10-1 rate increase of nearly as we could get would be for 1/20/'11. And then in terms of quantification from a loss ratio, I don't have that in hand but we view as you mentioned you have $150 million impact.
Joshua Raskin - Barclays Capital
That's the full year impact?
Right. that's the full year impact in the important part to recognize those as we have an effective October was a budget vast majority of that 150 is what you're seeing for the first nine months of the year develop the runs through the back half of the year and a member that's just the laws. It assumes that were planning not to make any we did low single-digit margins of actual total impact exceeds the 200 million mark.
Charles Boorady - Crédit Suisse AG
And then Medicare?
Could you repeat your question?
Joshua Raskin - Barclays Capital
Just verification what the impact of MLR on M&A is.
The 2010 impact is very low single-digit impact.
From a dollar perspective, Joshua looking at $100 million payment and that's panning out as expected.
Next question is from Charles Boorady from Credit Suisse.
Charles Boorady - Crédit Suisse AG
On your guidance point in headwinds in tailwinds, can you give us the same rundown for the fourth quarter in particularly your assumptions in a medical transfer 4Q and how you quantify it expectations for the flu and the roll-off as well as higher deductible health plan options?
For fourth quarter, couple of items. One is we are assuming a normal flu season for the quarter was obvious he recognized the first nine months of not affected normal flu season but all that being said, we believe it's better to plan for normal flu season despite what you've seen in the first nine months. In addition, we do believe that the seasonality will increase quite a bit both in the commercial and individual products because my death have continued to grow in the last couple of years so historical MLR patterns are not reflected I guess if you've seen in the most recent periods if you think was a little more seasonality and again we assume that a bit more than normal seasonality to the extent that trends continue like this in the first nine months that will be slightly better-than-expected result than what reforecasting at this point in time. And then in terms of other programs, there really is a minimus impact and fourth quarters to get at Assumption baked in but it's not that big of a headwind.
Charles Boorady - Crédit Suisse AG
Go up onto our wondering if you could share with us any emerging trends or responses of the association to reform and also now with elections being a day behind us, in terms of things like that conversion to seeing blues more like we are less likely to convert. And we expect to see shared services you talked in the past about how your administrative efficiencies could serve well the interest of other Blue plans by expanding insurance services? We haven't seen a lot of that today. Any other chance he could share with us in the association plans?
The blues have really come together more over the last couple of years. And we are focused with them on a lot of consistency. We tend to assess our National Account market and is a reflection of our ability to create a seamless network and seamless service as an example of that in our Anthem Care Comparison tool which is our transparency tool and shows our members procedures what the relative cost is in the hospitals in your geography where they are episodes of cost and give us an quality data and that was adopted by cost association as transparency tool that's now being rolled out across not only our Blue plans but all the other Blue plans as well and this idea of shared services you haven't heard much about it -week-old the number of our systems across the Blue Cross association there a number of Blue plans on the resulting core system that we're going to end we have more than the majority of our memberships on and so the Israel scale beyond WellPoint that into the boot in terms of other opportunity. In terms of continuing the opportunity for consolidation, we believe particularly given the need for scale, size and scale is a real opportunity for growth and value and we think over time, there will be a unique opportunity for WellPoint to have further consolidation with the blues. There are a lot of factors to go into whether or not a Blue plan is really ready for that are at its appropriate under the circumstances and we think we can parse it in a variety of ways.
Charles Boorady - Crédit Suisse AG
You haven't had an investor day for a while. Heavyset debate?
We may do something a little sooner depending of an final regulations, but right now are planning for it in January and tentatively on the 21st so we may Investor Relations this into.
Our next question is from Scott Fidel with Deutsche Bank.
Scott Fidel - Deutsche Bank AG
In the California ADD expansion and if you have an estimate for how much an homage he think he might be able to adapt and some details that they develop so far around estimated yields on that membership and how you think margins will look at the type of business.
I'll turn it over to Bryant but I have to say that our business has really been a great job of both operation of the McGrady our systems really preparing for both futures I think we are executing well. I have to take on the populations in a variety of different ways.
I think you are aware the puppet nation in California is based on how the state is changing the programs of the current participants of the state as they load DSP the population and managed care will be getting our fair share. Were anticipating that fair share to come in probably in the middle of the year in the 20,000 member range, and I think at this point it's really good view.
Scott Fidel - Deutsche Bank AG
And so, maybe you could give us an update on the Connecticut rate situation and just whether you expect there will be any delays in implementing the rates that you had approved but obviously Blumenthal had some challenges to those. May be just an update on Connecticut.
Brianne have some more specific on Connecticut but we expect in this environment is regulatory scrutiny and were really very focused on being transparent about what our rate increases are and whether that's through here or whatever, talking about what traits are necessary, our California experience is a reflection of rising medical costs and other variables in the pool of insured really can impact the needs for these rate increases so Brianne the audit, Connecticut?
A lot of the noise had to do with some of the filing center effective 923 in Connecticut. Those were approved and those have been implemented. We are in the process of filing our 2011 rates and preparing for public hearing process that's been previously announced. Is not unusual in Connecticut who went through the process last year and are prepared to go through it again this year.
Next we'll go to Matthew Borsch with garden sacks.
Matthew Borsch - Goldman Sachs Group Inc.
Could you characterize the commercial pricing at your setting for 2011 is about the same or a bit higher than it was the year ago going into 2010?
You want to talk about the commercial marketplace?
Marketplace itself is rational across the board last quarter we identified at and have become more rational for some of our competitors. That was a benefit for us going into 2011 we are expecting medical costs to increase and over all our rate increases are about the same is likely higher than a year-ago and part of that is related to the benefit changes that we have in place related to be patented including the anticipated medical cost rebound as well.
Matthew Borsch - Goldman Sachs Group Inc.
What gives you confidence, if you have that, that the prior period reserve development won't recur in 2011? I realize that's a conservative assumption but how do you think about that.
I think it's us and with our past practices to the extent you have additional conservatism that involves and develops who will spec that out. One of our goals is to try to get through as just kind of run rate as we see in a underlying book some of the benefits we had in our stabilization higher rates is enabling us to get a better view than we had over the last couple of years. That's one of the reasons why you're seeing so much prior period involvement come through. I do anticipate that we may have more in the fourth quarter but until we see more around October, November, December, is a difficult to pull that out naturally spike it out at this point in time is why we have consistently not included that in that guidance. I think it's important for us to get as close on a regular consistent margin that you put in development month and in Martha at think the only way for investors to really understand what's happening in the core run rate. So if we do better next year will spec it out but forgetting to a point where were pretty tightened at margin. The numbers are coming in pretty close to that each month though.
Our last question is the line of Carl McDonald with Citigroup.
Carl McDonald - Citigroup Inc
One of the big headwinds that you had for 2010 was the drop in the commercial risk enrollment. You didn't spec it out for a headwind so it isn't right to assume you're expecting a commercial risk business to be relatively stable next year?
Can, you want to take that?
The commercial stayed have stabilized going to this year so year-over-year there is still a slight headwind year-over-year because of losses earlier this year but it is moderated and it should be something that we can overcome through all the other sugars have available to us.
Carl, I think were doing fine in the marketplace. 10 and his team have been very disciplined so we think in this environment we have opportunities but as were looking at unemployment overall we've seen a level lost at some point but we're expecting it to be fairly flat in 2011, not a significant increase. Hopefully we'll do better than that but that's our expectations right now.
I'll turn the call back to Angela Braly with the company's closing comments.
Thank you. Thank you all for your questions. In closing, I would like to reiterate that we are performing well in most areas of the company, and we will remain confident in the future. We're working diligently to implement the initial requirements of healthcare reform while continuing to deliver strong value and excellent service to our customers. We're also taking actions to make the organization even more operationally efficient and effective, while investing for future growth and the incremental differentiation in the marketplace. We believe we're well positioned to drive increased value for our current and future customers and our shareholders. I want to thank everybody for participating on this call this morning. Operator, please provide the call replay instructions.
Ladies and gentlemen, this conference is available for replay. It starts today at 10:00 a.m. Eastern Time and will last until November 17 at midnight. You may access the replay at anytime by dialing (800)475-6701 or (320)365-3844. The access code is 123547. That does conclude your conference for today. Thank you for your participation. You may now disconnect.
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