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Health Net, Inc. (NYSE:HNT)

Q3 2011 Earnings Call

November 2, 2011 11:00 am ET

Executives

Angie McCabe - VP, IR

Jay Gellert - CEO

Analysts

Christine Arnold - Cowen

Matt Borsch - Goldman Sachs

Josh Raskin - Barclays Capital

Tom Carroll - Stifel

Charles Boorady - Crédit Suisse

Ana Gupte - Sanford Bernstein

John Rex - JPMorgan

Dan Schibel - Geoffrey's

Carl Mcdonald - Citigroup

Peter Costa - Wells Fargo Securities

Doug Simpson - Morgan Stanley

Sarah James - Wedbush

Operator

Good morning, everyone, and welcome to this Health Net, Incorporated Third Quarter 2011 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead, ma'am.

Angie McCabe

Thank you, Kristen. Good morning and thank you all for joining for a discussion of Health Net's third quarter 2011 results. During this call, we will make forward-looking statements are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC, as well as the cautionary statements in our press release issued in advance of this call.

In today's call, we will refer to adjusted days claims payable, which excludes reserves from health plan services expenses related to the company's capitation, provider and other claim settlements and Medicare stand-alone Prescription Drug Plan payables and cost. This adjusted metric is not being presented in accordance with Generally Accepted Accounting Principles or GAAP. Please refer to today's press release, which is available on the company's website, for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure days claims payable.

With that, I will now turn the call over to Jay Gellert, Health Net's CEO.

Jay Gellert

Thank you, Angie, and good morning everyone. This morning I want to review our third quarter performance, touch on our revised 2011 guidance and then close with some brief high level comments about 2012.

We are very pleased with our third quarter performance. Let me briefly review how we did comparing the third quarter of this year with the third quarter of 2010. On a GAAP basis, we earned $0.70 per diluted share versus $0.64 last year. For the combined western region and government contract segments, earning per diluted share climbed approximately 15%, $0.85.

Margin expansion has been a hallmark of our recent progress and the third quarter was another step forward. Our overall pretax margin climbed 90 basis points reaching 4.4% in the third quarter of 2011, and we are on track for solid performance for the full year. The key driver of our earnings gain and margin improvement was improved commercial performance. The commercial gross margin per member per month rose 17% and the commercial MLR improved by 150 basis points, the spread between yields and cost was a 190 basis points.

We continue to benefit from disciplined pricing, favorable product and geographic mix changes, and low utilization trends. We did not see any evidence of utilization uptick in the quarter.

Commercial enrollment was basically flat but our Tailored Network products enrollment rose by 45% year-over-year and it now accounts for 31.2% of commercial enrollment. We believe these products are important part of our future success. They provide customers with cost effective options in a difficult economic environment and increasingly providers are seeing the value of participating in them. Overall, commercial new sales were strong in the quarter. In group losses continue to moderate, there are some pockets of stiffer price competition though nothing is extraordinary.

Medicaid continues to perform well. Third quarter '11 enrollment climbed approximately 10.3% from the third quarter of 2010. We are adding approximately 7000 members in month from the SPG program. Due to our limited experience with this new block of members we are taking a conservative outlook for now.

Medicare performance was as expected during the quarter. There is MLR pressure, but that's been true all year; it’s a consequence of not being able to add new members in 2011. That will change for '12, now that we are actively marketing the program. We expect to add new members next year and we substantially boosted the Medicare marketing spend to support this effort. Part of the sequential uptick in G&A from the second quarter of '11 to the third quarter of '11 is a result of this.

Let me now turn to the cash flow statement and balance sheet. As expected operating cash flow was especially strong in this quarter. We received $104 million in TRICARE contract transaction payments, $66 million in net Medicare risk adjustment payments, and our October CMS payment of $293 million, the fourth such monthly payment in the quarter. We continue to expect that operating cash flow for the full year will be equal to net income plus D&A.

Reserves were down by $28 million sequentially. This was due to $35 million in supplemental capitation payments to medical groups related to Medicare risk adjusted payments, which we received in the quarter. Days claims payable declined three-tenths of a day sequentially. There was negligible positive prior period reserve development in the quarter and they did not impact P&L.

On October 24, we entered into a new $600 million revolving credit agreement. We are pleased that we have been able to accomplish this well ahead of the scheduled exploration of the previous revolver.

Let me now review our stock purchase progress. Our strong cash continues to support our stock buyback efforts. We repurchased 5.2 million shares for approximately $126 million in the third quarter of '11. Through the first nine months of 2011, we bought back 11 million shares or approximately 11.6% of the diluted outstanding share as of the end of last year. That’s obviously well above our stated annual goal of buying back between 3% and 5% of the outstanding share.

We continue to believe that buying back stock is one of the best uses of our available capital. With the progress on buybacks and our strong operating performance, we have raised guidance for the Combined Western Region and Government Contract segment. We now expect full year 2011 EPS for these segments to be between $3.08 and $3.10. This guidance does not include the impact of any fourth quarter share repurchases.

Let me close by touching on our 2012 outlook. We are presently working to finalize our 2012 plan, but we can say this. First, as many of you know, we faced a significant challenge in overcoming the $80 million to $90 million reduction in pretax contribution from our Government Contract segment in 2012. Nonetheless, we currently expect pretax income in 2012 for the Combined Western Region and Government Contract segment to be roughly in line with 2011.

Earnings per diluted share for the Combined Western Region and Government Contract segment should rise by approximately 7% to 10%, due to the effect of our stock buybacks in 2011. Our current view is that further commercial expansion improved Medicare performance, and G&A reduction will compensate for the government contracts change. We will have more detail when we issue our annual guidance release in mid December.

With that, let me close by thanking all of our associates. Our progress is a direct result of there efforts day in and day out. There dedication to our members are the fuel that drives its organization. Angie, lets now open up for Q&A.

Angie McCabe

Thank you, Jay. Kristen, we would now like to open the lines for Q&A.

Question-and-Answer Session

Operator

Yes, ma'am. (Operator instructions). Your first question is from the line of Christine Arnold with Cowen.

Christine Arnold - Cowen

I am good. A couple of questions AB-97 is that going to impact 2012 Medicaid payments and you are talking about growth in Medicare Advantage. Are you still thinking now that you have seen the competitors offering those will be consistent with prior years when you were marketing Medicare Managed?

Jay Gellert

With regard to Medicare Advantage, we believe we will see about 8% to 10% growth in 2012. That is consistent with our previous experience. With regard to AB-97, we have included the best knowledge we have about it in our guidance for the rest of '11 and in our guidance for '12.

Christine Arnold - Cowen

What does that mean, do you expect payment cuts to go through or you are still expecting a 2% to 3% payment increase. I haven’t been able to triangulate what payment is approved to Medicate payments in California?

Jay Gellert

Well, CMS has approved reductions in payments for adult physician services, not for children, and they also approved a series of other cuts for the fiscal year 2011, 2012 for the state. We are presently in process of determining how that interacts with the capitation system, but we do expect a reduction from the 2% to 3% level, as a result of what CMS has done.

Christine Arnold - Cowen

Will be negative or is it just too soon to know.

Jay Gellert

I think that we are still going through it, but we factored in our best knowledge in the guidance that I have given.

Christine Arnold - Cowen

Okay. And then, FCDs, my favorite topic there, how is that going?

Jay Gellert

It’s going pretty well. I think we have seen, if anything, experiences a little better than we thought. As you know though, we have been very conservative in our booking and until we are sure where they land particularly during the transition year we will stay that way.

Christine Arnold - Cowen

It’s a 100% MLR where you are booking it now?

Jay Gellert

Yes.

Operator

Your next question is from the line of Matt Borsch with Goldman Sachs.

Matt Borsch - Goldman Sachs

Yes, thank you. Could you just give us a little more granularity of what you are seeing on the utilization and also in terms of your unit rate negotiations with providers, particularly on the hospital side? I am just curious how much of an uptick you have seen in utilization from what was an exceptionally low level for last year?

Jay Gellert

We have not seen any up tick as of yet. We have seen a stabilization. We have not seen continued reduction, but we are not seeing any increase to this point in time.

In terms of provider negotiations what I think we find encouraging, exciting, positive is a lot more interest, as I said in my initial remarks, in developing special value network relationships. So I think we’re seeing reasonably sound negotiations for the broad network, but a dramatic increase in the interest in other alternative networks. I believe that the provider community has, particularly in California, has come to the conclusion we’ve cross the Rubicon from being in open access insurance and we’ve moved really towards managed delivery systems as the key to dealing with both the commercial and government market.

Matt Borsch - Goldman Sachs

I think I know your interest here but do you see yourselves ahead of the competition in the local market with your network configuration products, but are you seeing some of the competitors start to do a lot on that front as well?

Jay Gellert

Well, let me answer in kind of three ways. First of all, California is ahead of the country by a significant degree because really what we’re seeing is the country is adopting the California model. We believe that because we are a network managed care company that we actually have, sure do have more capitation than anyone other than the integrated delivery systems like Kaiser's. So, we are further ahead in the regard. We also believe we have a much higher percentage of our business in these kind of products. We are seeing virtually everyone else move in this direction which we think is encouraging because to some degree we believe he open access PPL is probably going to be like the indemnity of twenty years ago. That we are all going to be just like we were all once (inaudible) we are all going to be in managed care and in value networks within the next three to four years. And that the fact that others moving in to this segments only exacerbates, it increases our opportunity.

Operator

The next question is from the line of Josh Raskin with Barclays Capital.

Josh Raskin - Barclays Capital

Hi, thanks. Jay, I appreciate the yearly 2012 outlook. On the commercial side, could you just give us maybe directionally where you think membership will be, and then do you think gross margin dollars in the commercial book will be up next year?

Jay Gellert

First of all, I’d rather not get into kind of detailed gross margin guidance, but we’re encouraged about the commercial gross margin picture. Let me leave it that way.

In terms of the membership side, we could see some slight reduction. There are a couple of large accounts that went to ASO but we think towards the end of the year we’ll see some uptake and some small group and mid market.

Josh Raskin - Barclays Capital

When you say the large accounts (inaudible) does that mean you lost them or is that --

Jay Gellert

Yeah, we lost them.

Josh Raskin - Barclays Capital

Okay, that’s helpful. And then could you just run through the capitation numbers on Medicare and Medicaid. What percent of your total cost are capitated and global CAP for those two segments?

Jay Gellert

I can. In terms of Medicare Advantage approximately 40% of our total costs are capitated, and in terms of the Medicaid program and the Healthy Families programs it’s about 45%.

Josh Raskin - Barclays Capital

Okay, and that global CAP including the hospitals?

Jay Gellert

That’s the percentage of total costs. So some of it is just outpatient CAP, some of it is hospital cap. It is the percent of out total medical expense dollars that are capitated.

Josh Raskin - Barclays Capital

And do you know, Jay, how much of your hospital costs are capitated?

Jay Gellert

In terms of the Medicare advantage program probably about 25%, and in terms of SHP it's probably much closer to the average amount.

Operator

Your next question is from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck - Bank of America

Okay thank you. Can you just give a little more color on the Medicare margins in the quarter, I guess the increase was a little bit surprising, the pick up in the PDT which was pick up over 1000 basis points.

Jay Gellert

Is that year-over-year?

Kevin Fischbeck - Bank of America

Yes.

Unidentified Company Speaker

Yeah, it's we indicated.

Jay Gellert

The effect of no new members and it has lead to a higher MLR in our program. We’re thinking that with market opportunities we’ll see and next year we’ll be able to resolve a good portion of that, but it is the direct result of having no new additions to our mix.

Kevin Fischbeck - Bank of America

To me, that makes a lot of sense on the MA side but sort of the less (inaudible) why it would be a sell on the PDP side. You see the same dynamic going on there?

Jay Gellert

Yeah, we have actually seen the same dynamic on the PDP side. So I think that if anything we’re seeing a more pronounced abatement on the MA side and the PDP side is fact a little stickier which is probably we would have predicted the opposite too. But it’s not what our actual experience is.

Kevin Fischbeck - Bank of America

Okay and then do you look at any investment gains in the quarter. You strike that out last quarter but I didn’t see that this quarter.

Jay Gellert

Yeah, I think we booked a relatively small amount but the overall net investment income was down about $10 million quarter-to-quarter.

Kevin Fischbeck - Bank of America

It is as good run rate going forward?

Jay Gellert

I think that’s a good run like going forward.

Kevin Fischbeck - Bank of America

Okay, then last question here I guess this might be a question for your guidance but when we think about 2012 cash flow and dividends from the subs, I guess your guidance at the _ was in 225 or so, net cash from subs. Just directionally so the number in 2012 be higher since 2011 net income is higher than 2010?

Jay Gellert

Yeah, likely will be and we will give you the details when we give our guidance in the middle of December. But it will track that line of thinking.

Kevin Fischbeck - Bank of America

And then just aside from interest expense any other proper uses do you think of from doing that analysis?

Jay Gellert

I think that we stood consistently that we have relatively small amount of CapEx. We have some interest payments, but other than that we do not see other pressing needs for the cash.

Operator

Your next question if from the line of Tom Carroll with Stifel.

Tom Carroll - Stifel

Hi good morning. Just a clarification on the $27.7 million sequential decline in reserves that you mentioned in the press release, could you clarify how much of that, if any, supported the P&L this quarter?

Jay Gellert

None supported the P&L. It was almost entirely really the result of paying out obligations related to receiving the risk adjusted payment.

Tom Carroll - Stifel

Okay that what I just wanted to update on. And then could you maybe just give cost trend update between your narrow network products and your non-narrow network products and how that’s tracking this year?

Jay Gellert

We’re seeing, as I said, utilization reductions in growth. We’re having a lesser unit cost experience in the narrow networks. So I say that the trends are about equal but probably the narrow networks 1% or2% less.

Operator

Our nest question is from the line of Charles Boorady with Crédit Suisse.

Charles Boorady - Crédit Suisse

Thanks, good morning, just a clarification on the AB 97 question. You said that you’ve factored in your best knowledge on what you think will happen. I'm wondering what your best knowledge is on that. What specifically what percent cut or what you accrued for in terms of an expected cut in the quarter?

Jay Gellert

We’re still analyzing and we’re still talking to the state, but we felt comfortable that we’ve adequately covered it in guidance and both for '11 and '12. Not at the point yet where I want to really want to be explicit because I think then if we haven’t completed discussions of various components, will have to change it. Let me give you an example. None of us clearly understand how that the children’s exclusions works. I stated busy doing a lot of other stuff, we’ll get around to figuring that out but we’ve taken a fairly conservative approach to some of those things and intend to learn more over the next month or two.

Charles Boorady - Crédit Suisse

I got you. And then, in terms of the provider payments and how that works when you got captivated in other arrangements with providers that may be tied of the fee schedule. If there is a rector active cut back to July one, do you eat the difference for the period of retroactivity or can you go back to the providers and call back any payments that were hired and issued it?

Jay Gellert

Well, first of all, some of our arrangements are related to the premium. In those cases we would retroactively adjust with these. In some other cases we have provision in the contract to deal with this, at others we are basically coming on not being able to collect the money.

Charles Boorady - Crédit Suisse

Got it, okay. And then just finally on the (inaudible), you said things are going pretty well there and you are experiencing a little is better then you thought in terms of the cost trends. Is that suggesting that your loss ratio is going to be, coming down below the 100% that you have been conservatively booking at number of way expecting it will be in your guidance for next year?

Jay Gellert

Well, the issue we face is that in this transition there are instances where there are bills going to different places and we've all said until we got to the end of the year we wouldn’t be confident making any adjustment in our assumption. And so, basically, where we are I think that we've kept our existing assumptions through the transition year, we had some other assumptions that are more consistent with the overall Medicaid program after that, but I think we will be able to be much more explicit when we give our guidance in December.

Operator

Your next question is from line of Ana Gupte with Sanford Bernstein.

Ana Gupte - Sanford Bernstein

My questions were about Medicare Advantage, again the first question is about the lower trend that's being reported by some of the other players on Medicare and I was looking for your perspective, Jay, on is this more driven by providers and there's are they down quoting because of fraud and abuse worries, is it more about the economy and the fixed income, or is it US payers who are shifting to lower cost side of service? And then how sustainable do you think this lower trend will be and would you likely benefit through it despite your capitated arrangements?

Jay Gellert

Let me start with the last and work forward. We have about 40% of MA capitated so 60% isn’t, and so our anticipation is that – that lower trends would be reflected there.

Secondly, as I answered to Kevin, I think we are beginning to see some encouraging MA numbers despite the lack of enrollment. In that, we never had this experience before. We are taken our time and looking at these data and making sure we are comfortable, but I think we are beginning to see some of the trends and they you are articulated.

Third, my sense is that – that we seen down tick in utilization across the board that some of it is cyclical and some of it is sustainable. I don’t think that anyone who really knows which is which and when it changes. But I think so I think we are all at least we are moving fairly conservatively in that regard. I think our numbers would have been better if we have had a new members, so I think that the experience were beginning to see is at least mirroring some of our competitors.

Long-term, I think that Medicare Advantage program, some of the business and the trends will be sustainable, but I think it could be slightly disrupted or changed when the duals are moved. I think that – that's a change in the methodology that I don’t think anyone really fully understands or thought out. So I think a portion of the utilization savings are on billing. I think that we are beginning to see some of them despite lack of new members that we think there will be good opportunities in Medicare Advantage going forward. And we think that the dual issue will become kind of significant in the whole context how its managed, how it’s structured, what people do with it.

Ana Gupte - Sanford Bernstein

Okay. Thank you that's hopeful. Then you’d mentioned, Jay, about 7% to 10% I think expectation on MA in terms of enrollment. Is this from any early read into the selling season? And then given you were saying your book kind of getting stale, if you will, and the point has some issues, how seniors picking plans, how is the purchase decision relative to the premium versus the deductible narrow network offerings HMO, PPO, you have kind of quite a few benefits trend designs in various counties in California.

Jay Gellert

Well, first of all I – the reading I gave which I think was eight to ten it was seven to ten on EPS and eight to ten on MA. But that’s based on the selling feedback we're getting from our people related to where we stand vis-à-vis others in the market. So I think those people are the pretty good at handicapping what would happen once they had an opportunity to see the competitive position. We believe that the growth will be more focused on HMO product. We are a skeptical of the PPO product, we don’t have a desire to replace WellPoint and replace InSignia. So, I think we are really more focused on the HMO product. We think that’s particularly true in an environment that has such a strong HMO base. And so, with the exception Oregon where it is a different kind of market, , we expect our growth will come in the HMO market. We have some exciting opportunities we think in Arizona, and so we look forward to pretty good selling season and increasingly moving back to kind of our core strength which is HMO.

Ana Gupte - Sanford Bernstein

Okay and then thanks. One final question on group Medicare, are you seeing any price line at all manifesting itself, and if it does is Kaiser in a better place or WellPoint, or do you have a shot at it?

Jay Gellert

Well I think that what we are seeing is a lot of interest as we move towards ’13 and new designs in the large group community. I think that ’12 has been kind of a you know, less active year but we are already involved in a lot of discussions both in terms of group Medicare various kinds of new products that I think we think are going to be are going to really be good opportunities so I don’t I think we are in a really strong position in that segment because I think we have done a lot of innovative things and are continuing to do such.

Operator

Your next question is from the line of John Rex from JPMorgan.

John Rex - JPMorgan

Thanks guys. A couple of things here. So first it relates to your ‘12 outlook, what do you anticipate in terms of cost trend in ’12 coming of kind of the implied 3.5% to 4% that you are talking about for ’11 where you see right now so on the commercial book?

Jay Gellert

Oh, yeah, I think that the after buy down look at it. We are still kind of tabulating the buy downs and the like, but the overall trend is relatively constant with one critical exception. The ’11 trend was inflated by the addition of the PPACA benefits and so we don’t expect that to recur. That isn’t going to recur. So, I think that’s probably the most significant difference for us. We also think will get few other elements of trends improvement from provider arrangements, from some medical management, from new approaches to pharmaceuticals. So, I would say those are the two drivers of trend down. We are remaining fairly conservative on the potential for utilization uptick but I'd say overall that that’s kind of the way we are looking at the commercial market.

John Rex - JPMorgan

Do you have a sizing though for so how much -- if we take all those elements together how much that would be in terms of acceleration over there what are the reported 2011 level so that would be a 100 basis points or 200 basis points if you take in all in?

Jay Gellert

Yeah, I -- Angie and David told me that I can’t go any further without risking bodily injury but I think the PPACA ran about a 110 and that the others will be added on top of it and will be more specific when we talk to you in December.

John Rex - JPMorgan

Okay and then I think about so your commercial yields premium have come down that in the last three quarters so and you talk about the new release, talk about the cost backdrop, but could you kind of breakout how much of this is the cost backdrop and how much is this is mix shift in your own book or is it predominantly cost backdrop?

Jay Gellert

No, I'd say its about half and half. We are seeing, as I said, when we originally guided we didn’t anticipate a 45% increase in the value network. We didn’t anticipate some of the growth we are seeing in Arizona where it’s a lower cost, lower price set of products. We didn’t see anticipate some of the increases in some of the value products that we have built so that represents about a half and then I say the other half is utilization experience and even some improved unit cost experience we didn’t anticipate it.

John Rex - JPMorgan

Okay, and then I jus want to circle back to the comment you just made in the prior interchange on the potential disruptive impact on Medicare Advantages as dual, it dual coming to managed care so are you showing specifically there to the impact on the US PCC if duals came out of the fee for service base, the traditional base?

Jay Gellert

I think its that you know if we are increasingly sensing that there will be a fairly significant push to move the duals into managed care. I think we feel, based on our experience with the SPDs, that there are some viable opportunities; it hasn’t been a disruptive from experience. And exactly how to be treated I was going to saying -- I was just saying is unclear. I don’t think anyone specified yet how that would factor in that the overall process. And so, I was just raising that as kind of an issue that we all need more information on so that we could have we can intelligently answer the long term question on MA.

Operator

Your next question is from the line of David Windley with Geoffrey

Dan Schibel - Geoffrey's

Good morning, its Dan Schibel filling for Dave. Couple of questions, first one is really you are just talking about thinking about some of your upsides for next year. Obviously, you talked a little bit of PDP and when I quantify just what happen here is like looks like $0.10 (inaudible) from this quarter, but just wanted to get a sense of what are you guys thinking about PDP MLRs as they evolve next year? Is there upside to return to a more normal historical levels or how do you think about that?

The other question I have was on either announcement from in Arizona about introducing excel care, just curious how about the efforts there as well in Oregon to press that out and how much outside to driving number membership growth we could think about from those areas?

Jay Gellert

Well, first of all, we have a unique headwind which is $80 million to $90 million related to the TRICARE, and we also have the headwind related to AB-97. That said, I think we are very optimistic about our commercial opportunities, we are very optimistic about our Medicare Advantage opportunities. Probably there are some opportunities in Part D but I view them as less significant than what we are seeing in those other two areas. As well as some opportunities to do even some what fewest things on the Medicaid side. So, to me, I think we will get some pick up from party, but that’s probably forced to the other three things we listed there and that would really rely on the other three things to effectively go forward into 2012.

So, we think there is a lot of strength in those other things. Going back to that, I think the question I think was asked about Part D, I would say where we see some opportunities but we're probably less bullish on that versus the other elements of the portfolio.

I think that we are getting more and more of the view that the fact that what we have seen in Oregon and Arizona leads us to believe that what we are seeing in California is going to go national. The Arizona product has been a very positive experience for us; it’s a good provider relationship, a clarity in terms of the marketplace; same thing in Oregon.

So, I think growth opportunities, but in all of these things, one of the key things you learn when you do these, is you don’t want to go so fast that you have unforeseen events on the provider or your own end side. This is a long term, this is like the future. So, our view is make sure that we were working through and that the expectations of the provider, the expectations of ourselves are met. There is nothing worse than bringing in a lot of bad business to disrupt the way you do it.

So I would say, that you give this growth opportunities in 2012, we would be able to talk about it. But as we look at these, we want to make sure that they are sustainable things and is there, because they are going to be the core of the business going forward.

Operator

Your next question is from the line of Carl Mcdonald with Citigroup.

Carl Mcdonald - Citigroup

And back to the Medicare question in where WellPoint's PPO members are going to end up. If I look at a specific county like Sacramento, seniors are going to have a choice between early -- WellPoint seniors are going to have a choice between WellPoint’s product with $130 premium, your local PPO with no premium. Everything else in the market is an HMO. So if I’m one of WellPoint seniors why wouldn’t I choose your plans? Maybe you can just sort of contrast this, is there a major difference in provider network, other benefit design?

Jay Gellert

Yeah, the fact is that when we looked at the membership that’s the only county where we have an offering, where there are WellPoint members and the number of people, there wasn’t very significant. Actually I think there’s some very positive HMO offerings in that market. And my sense is that members who’ve gone from InSignia to WellPoint will not likely to go to a third PPO that you’ll probably want to land in something that they believe have a long-term sustainability. We really factored that in but it’s relatively small, it’s only 6% of the WellPoint members and we don’t have an analogous situation anywhere else.

Carl Mcdonald - Citigroup

Related question, I know you have only got about 900 PPO members today but just theoretically if we were to see your PPO membership go from 900 to say 10,000 next year, is that a good or a bad thing relative to that and sort of rough guidance you gave for next year?

Jay Gellert

I think that we’ve taken into consideration our maximum “exposure” in that one county because we have to find some new people which I don’t think we will. I think we’re comfortable that’s not going to be all that significant for us and we’ve thought of it but yeah, we don’t have a product for the other 94,000.

Operator

Your next question is from the line of Peter Costa with Wells Fargo Securities.

Peter Costa - Wells Fargo Securities

Can you talked about products in terms of your success in selling those into 2012, the new accounts picking them up and things like that?

Jay Gellert

Yeah. We’re beginning to see the strength of the product moving into the mid-markets and small group segments in a lot of our areas. The first real attempts were targeted at large group. We now have I think, we’ll see pick up again in small groups and mid-markets in a lot of geographies where we haven’t previously had products Arizona, Oregon, parts of California. We also think that there’ll be some very significant place in 2013 in the large group of markets but we haven’t seen as much movement there.

We’ve seen people are getting more and more data on the early adaptors and particularly looking at what’s the second year experience and I think that going to be very, very encouraging for people who are considering the product. I think that when we look at the second year experience it will show pretty compellingly that one is the product people like; two, people are jumping in the second opportunity; and three, that the value and the scope of providers and the quality of service and all that is outpacing what was even expected.

Peter Costa - Wells Fargo Securities

Can you talk bout the northeast operations, and when are we going to finally see that wind down in terms of no longer having the cash (inaudible) that’s been there. If you would get a few more remaining payments there are to you in that business.

Jay Gellert

Well basically, the business is run down. There are still a few residual claims. We now have to shut down the real estate and the computer systems and those kinds of things. We still are waiting for an $80 million TNE payment and about a $40 million membership payment which we now have got. We still have $80 million coming in, and we’re still on track to meet our guidance to 510 to 530 as a net of the deal even after basically the final residual cost which will hit us in 2012 which we’ll talk about in the context of our guidance.

Peter Costa - Wells Fargo Securities

Okay, and the $40 million payment that you got, you already have that or you got that this quarter?

Jay Gellert

We have that but we don’t have the $80 million.

Peter Costa - Wells Fargo Securities

Okay and that’s reflected in the third quarter.

Jay Gellert

Yeah that’s in the third quarter in the balance sheet and financing. Its in operating guidance --

Unidentified Company Speaker

Financing.

Jay Gellert

Financing, it’s in the financing line. I knew that TNE was in the financing line. I just checked that and so it’s already reflected there.

Operator

The next question is from the line of Doug Simpson with Morgan Stanley.

Doug Simpson - Morgan Stanley

Good morning every one. How are you doing? Jay could you just talk a little bit about where your G&A spend is now? Some of the initiatives you know update us on where you feel you are with respect to progress on the initiatives this year? And then as we look to next year what’s left to do there? And I just be curious to the context of the question is as everybody migrates to minimum of four lines across their business, you guys run a little bit of different position there. Increasingly people are trying to compete on the G&A line as a point of differentiation and obviously scale helps there. So just how do you think about that line and try to better level your cost structure, thinking out to the next year or two?

Jay Gellert

Let me first deal with the present and then I’ll kind of say meander in the future. In terms of the present I think we have met the goals that we have set on the G&A work that Jim Woys has led has been a key part, a lot of success and being able to look forward to ’12 with an overcome the issues we talked about both in terms of TRICARE and in terms of the elimination of overhead contribution from the Northeast. So, I think we have actually been able to accomplish what we set out to do there.

Now going forward, we are looking at some, I think interesting options that will allow us to be competitive with people of scale. And we think that by Investor Day that we'll be able to talk about I think some very interesting G&A approaches that will allow us to continue to be very competitive in that realm. So I kind of as compared to six months ago I am more confident that we will be able to compete head to head related to G&A costs and that, if anything, the fact that we are more focused may make it easier rather than harder to be able to hit G&A numbers.

Doug Simpson - Morgan Stanley

Okay, and then maybe just one specific one on the TRICARE book as the old contract runs out so you are comfortable with managing down operating cost there, how do you feel your visibility on that piece?

Jay Gellert

Our TRICARE team has met every commitment they have ever made and I am highly confident that they will continue. I think that they are state of the art in terms of operating that business, and I think that they will have additional opportunities going forward. And so, I feel very, very good about the transition they made, about how flawlessly they executed, about how well they are serving their customer, and about how they will be able to be even better partners going forward as their customers face some of the very difficult issues related to the federal budget.

Doug Simpson - Morgan Stanley

Okay, and then just to make sure I heard you correctly I think you said 7% to 10% EPS growth next year and that would be of about 3.08 to 3.10 basis, is that right?

Jay Gellert

Yeah, I but it maybe a little bit higher potentially a lower will get to that but it's off what our base is in 2011 and its it doesn’t anticipate significant additional share purchases in 2012.

Operator

Your final question is from the line of Sarah James with Wedbush.

Sarah James - Wedbush

Thank you. Some of your peers have mentioned seeing some pockets of increased pricing competition in California. I was wondering if you are seeing this and if your tailored products are at all isolated to this and that they target a very specific type of customer?

Jay Gellert

We are seeing pockets of somewhat volatile pricing I think it’s what I would say. And, that’s not unusual quite frankly. I don’t think we are seeing anything extraordinary in that regard. So, I think the people who are not as focused on California may have a view that there are elements of volatility. My sense is that people are pricing the utilization and that in a couple instances we have seen people pursue large accounts that are not that profitable aggressively. I think we are comfortably have an yield that we are not finding people follow us, which always is not the first low price that causes pricing problems its couple of others follow. And we are not seeing that much of that.

Sarah James - Wedbush

Okay. And on your earlier comments on the larger accounts that move to ASO provider, what was the size of those accounts?

Jay Gellert

We will size them in when we give our guidance, but there were couple in the 10,000 range.

Sarah James - Wedbush

Okay. And last, if you could just give us an idea of the impact of having a full Medicare marketing period is having on SG&A?

Jay Gellert

Well, a portion of our SG&A increases related to that, I would say to some degree that it’s probably going to cost us more to restart after the sanctions then it will be on an ongoing basis. So, I think it’s hard to exactly estimate that, but I feel see that probably we'll be better able to talk about that in December, when we've actually seen the experience, but I do see it having some of the effect on us.

Operator

There are no further questions at this time. I would like to turn to the call back to Angie McCabe for any closing remark.

Angie McCabe

All right. Well, we would like to thank everybody for joining us this morning, and we will take your calls later today, bye.

Operator

This concludes today’s conference call. Thank you for your participation. You may not disconnect.

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