Charles Andrew Boorady - Crédit Suisse AG, Research Division
All right. Great. Good morning, everyone, and I'd like to welcome everyone again to the 20th Annual Credit Suisse Health Care Conference. Our next company, Aetna, is one of the leaders in the health benefit space and one of the most dynamic companies in terms of recent acquisitions they made and some of the vision of where they see healthcare going and how the company's aligned with that. It's my pleasure to have the Chairman, CEO and President, Mark Bertolini.
Mark T. Bertolini
Thanks, Charles. Good morning. Cautionary statement, if you'd like me to read it, I can, but I'm sure you've seen it before, so just take a quick look at that and if there's any questions I'd be happy to answer them now or actually turn it over to Tom Cowhey, our Head of Investor Relations. This is our value wheel as an organization. It's called The Aetna Way. It's how we align our employees. We put the people who use our services at the center of everything we do. I start every presentation that I do with this values wheel because it's important and defines us as a company and how we treat one another and how we treat our customers. Just a quick little tidbit. This value wheel was put in place in 2001 when we were losing $1 million a day. We just completed a social media experiment where we had all of our employees and some of our customers using the Jive Platform work through a new set of values for the organization. And the good news is not a lot of them changed and we'll roll that out with a new branding for the company near the end of this year.
So here's the agenda. We'll talk a little bit about our strategy execution. We'll talk about financial results conclusion and then we'll have a few minutes for asking questions at the end.
Here is how we think about our strategic positioning as we move into a new environment around health care reform. And the important line on the slide is the bottom one. We are targeting low-double digit operating EPS growth on average over time, and that is the big point on this slide. I would also note that we think of our business in 3 basic platforms: Advancing the core U.S. business; emerging business growth, which supports the core; and deploying capital to enhance shareholder value.
So as we talk about each of those, a few things. First, as we talked about in our call, advancing the core, we think the Medicare and Medicaid businesses are poised for continued growth, and I'll talk about those in a moment. National Accounts is now performing well and we've repositioned it for growth in 2013 and beyond, and I'll talk a little bit about that next as well. More importantly, in the middle are some of our emerging businesses, and often people have been confused about these as separate lines of businesses diversifying our revenue and earnings. The important point here is that these first leverage the core business and support the core business. And let me talk about the first one, accountable care solutions.
We have, and continue to get, more accountable care relationships in the market with large hospital systems and health systems. We have launched in both Southwest Virginia and in Missouri a set of products and services that include Medicare products, Medicaid products, small group and individual products supported by our technology and our intellectual property. Why is that important? It's important because it allows us an opportunity to recreate the HMO models of the 80s and the 90s as a new form of HMO going forward, particularly into the exchanges and healthcare reform.
We believe these models can produce much lower price points and affordability in the marketplace. Think of them as HMOs on steroids or narrow networks with a lot more technology supporting them. So when we talk about this business, it's not a new line of business. It's very much focused on leveraging our core business and providing us with a better platform in markets as we move into the exchanges. For example, Heartland Health in St. Joseph, Missouri and Carilion will be the products on the exchange when the exchange comes up, not necessarily Aetna.
We also believe that we are advancing new models of payment reform through those accountable care models and believe that this is the next step for Health Care Reform and moving Health Care Reform forward. On deploying capital, we had net subsidiary dividends in 2011 of $2.9 billion. We've completed $1.6 billion in acquisitions through October and we have repurchased over $1.2 billion worth of shares or 31 million shares through 9/30. So we believe on each of these aspects of our execution of our strategy we're doing very well.
Let's talk a little bit about Medicare. In 2005, we had 100,000 lives. Today, we have almost 1 million. Most importantly, down on the lower right, we have 275,000 group Medicare members and these are largely groups that we've converted from the 1.2 million retirees we have through our national accounts and other large employers. And the importance of that is that we understand the underlying utilization of those groups and can price them effectively and over time, a number of these groups have held their rates flat over a number of years and actually reduced their costs.
In addition, we have 125,000 individual Medicare lives that we continue to grow and we believe the ACL model that I talked about on the last slide is a great place to begin to grow these individual Medicare lives, because the cost structure and the affordability of the network is the most important aspect of making Medicare grow. If you think back to the private fee-for-service debacles a number of organizations had around Health Care costs prior to those going away, it was really the underlying Health Care cost, the underlying network that mattered in making those members profitable. We have 165,000 members that are now part of Aetna from the Genworth transaction, puts us in the MedSup business and gives us more degrees of freedom in attracting retirees into our programs. And then 425,000 PDP members where we've recently launched a new Aetna CVS Part D product as part of our relationship with CVS, that's competitively priced and available in 43 states and Washington, D.C.
So we project, for the first part of 2012, robust Medicare Advantage growth. And if you think about the national account growth shrinkage that we've talked about, approximately 500,000 members, it takes 50,000 Medicare members to overcome the profit impact, the margin impact, of 500,000 national account members.
Medicaid, we have had some recent procurements that we did not win, Louisiana being most noted. The other is Texas where we actually grew a little bit, but not as much as we thought. And the thing to note about our Medicaid business is that we believe we have a very strong integrated platform around managing medical, pharmacy and behavioral health resources for Medicare beneficiaries.
As a matter of fact, in Illinois, we have launched a dual eligible product, which is going quite well. And we see about 5 procurements over the next 2 years that we're actively involved in, both through expansion and rebid opportunities. And so since we've had acquired Schaller Anderson in July of 2007, we have grown Medicaid medical membership by 500,000 members, half of which are risk members. So we believe this is a strong platform. We believe it has a lot of opportunity and we believe that we have, in the rebid and expansion opportunities, good perspective growth.
Let me talk a little bit about national accounts. We've repositioned it. But what you should note and most important is the top line here. We have 8.8 million medical members in national accounts. And so if you look at our history of growth over time, that's where we were in 2007, 2008, and so we have lost some membership, but we have not lost the bulk of our membership and it continues to be a very important franchise for us. It's a customized, fully integrated product, which has done very, very well on employee engagement and improving wellness and reducing employer costs over time.
We have improved our discount position for 2013. We've been very aggressive in the hospital recontracting arena. If you saw MarketWatch last week, you would see that we have been noted for how hard we are pushing on pricing. We have reengineered, through an outside consulting firm, the cost reports of all the hospitals that are of significance to us, and we are now locking in with a complete data sheet on where we sit versus our competitors and starting our conversation about rate increases from that point on. So it's not a revenue discussion, it's really where are you and where are we vis-a-vis our competitors in the marketplace.
We also made an acquisition called PayFlex, which most people don't understand but we consider to be very, very powerful. PayFlex is a banking capability that allows us to interact with any bank on HRA and HSA accounts. It has as much business as we do in the HRA and HSA space and when we put the 2 together, which we're in the process of doing, makes us as large as anyone in this space managing those funds. More importantly, this platform gives us plenty of opportunities to connect it with our consumer platforms to do multi-pursing at the point of care to allow people to pay for their healthcare. And we won't spend a lot of time on that today, but we'll talk about it at our investor conferences. Where we're headed with our consumer digital platform and Medicity as we begin to wire not only the healthcare system, but we wire consumers into the healthcare system to facilitate access, improved quality and most importantly reduce costs.
And you can see here on the right, for the third year in a row, we have won J.D. Power's Outstanding Customer Service Experience for Aetna One platform.
To talk a little bit more about accountable care organizations. We have a set of capabilities that we have purchased to facilitate the development of networks that will reposition Aetna for a post reform world. That's why we made these acquisitions. For example, Medicity has 200,000 doctors in the 800 plus hospitals connected to it already. So it is a large platform. But Medicity is important because we can now connect applications to it and on September 27, we launched the first Health Care App Store in the industry called the iNexx App Store, which allows providers to download from this exchange to their desktop, applications that are both meaningful use and will facilitate the flow of their products.
In addition, this technology allows us to develop more apps, which we are going to do through the development community at large by giving away the software development kit to allow them to write apps that we can sell the providers through our platform. The importance here is not the revenue from selling applications, but more importantly how it facilitates, again, access, quality and affordability. And between those and our intellectual property, we will create what look like HMOs at the provider level, but these HMOs will be different from those from the '80s and the '90s, where we will have intellectual property and data that will allow providers to manage costs.
I and my first HMO back in the late '80s, used to send a green bar report about 6 inches thick with the patient's name, their Social Security number, their member number and their capitation amount. I'd slip the capitation check for all those members under the rubber band and drop it off at the provider's office. That was the extent of data available under the old capitated systems. With these capabilities, we create HMOs with providers as part owners of that opportunity to really drive down costs. So our goal is, is membership, picking up membership through these provider systems without having to sell members, improved medical cost structure across the system, of which we pay over $64 billion worth of healthcare, and then generate fee income as a third order opportunity.
As we look at our deploying capital over the last year, of the 1.6 billion in acquisitions we've done, again, looking at adding members, filling capability gaps and increasing service fee revenue, you can see Medicity checks the box on 2; Prodigy, which is a TPA and added over 500,000 members to our roles, checks all 3 boxes; as Genworth does the first 2; and PayFlex the last 2. So we look at each of these objectives as part of our acquisition strategy to again drive the core business to a better price point, making us more affordable and capable in the market. So we have a very -- in addition to that, we have a very well-structured integration process in our organization, which meets with me once a month to review each of these acquisitions on the integration track and they are all progressing to plan, if not ahead of plan.
Talk a little bit about our financial results. We had a great third quarter. Our operating EPS is $4.19 year-to-date, which includes $0.37 of prior year reserve development. We've had higher underwriting margin and we've had lower commercial medical members. And I think those of you that remember our 2009 quarterly conference calls, we said we would err on the side of margin over membership, and to some degree we have done that, but we have kept to that promise and continue to move forward on that basis. You can see our total MBR is at 79.3% versus the first 9 months of last year at 82%, and that our pretax margins are at 10.9%.
Now what you're seeing in 2011 in our pricing environment, because there are a lot of rumors running around in the marketplace today, is that we have seen the 2010 repricing impact, which rolls 12 months forward, roll off of our books in 2011, and we are now back in the market. Prior to that, for the latter half of 2009 and most of 2010, we were a pricing umbrella for the industry. But now we're back in the markets, where we should be, pricing to appropriate trend and appropriate target margins.
Here's our earnings guidance for 2012. We project that for this year, we'll be at $5 including the $0.37 prior year development, and we have projected at least $4.80 per share for next year as a starting point. Some of the things to think about from the 2011 to 2012, our prior year development is largely offset by our share repurchases. Our net investment income is more than offset by the accretion we have picked up from our CVS and Caremark deal and a couple of other considerations to think about. As we have priced this book, where we have a few pools in rebate status for the year, you have experienced-rated margins will change because every year we roll the prior year's experience into next year's rights using an appropriate margin. Our member mix and revenue growth will be different this year because of the robust growth in Medicare. And our administrative expenses, we've been making investments in the latter part of 2010 and throughout 2011 to ready ourselves for a more affordable product both on the medical cost side and on the administrative side for a post-reform world. And again, we have 2011 acquisitions rolling through our SG&A number. So this is the baseline for future growth and we will update this number at our Investor Conference on December 15 and throughout the year as appropriate.
So our conclusion is, is that our strategy creates competitive advantages for us in the marketplace. Execution is what it's really all about, because you can talk about it. But when you execute against it, that's when the proof is in the pudding and that we believe we can grow from our 2012 operating EPS baseline.
So with that, I'll take any questions the group has.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
[Operator Instructions] While waiting for a hand to go up, I'll just throw in on pricing, Mark, that we've heard, as you had raised price significantly to recapture lost margin a couple of years ago, that you were essentially priced out of some markets, including some key markets for you like the Northeast. You're now saying that you're going to be priced more competitively. Is there a risk that, that gets misinterpreted by Wall Street as Aetna aggressively pricing or might that look like aggressive pricing to your competitors, if people focus on the year-over-year change in price as opposed to the absolute level of price?
Mark T. Bertolini
Sure. I think if you have our competitors and we've done this in the past as well, where our competitors are out of the market because they had to reprice their book and all of a sudden they show up again and all of a sudden they're competitive. It appears aggressive versus where they were before. I mean, it's just the nature of the business. But if you look at where our PMPM revenues are, we're in the market where we should be. And so it's not necessarily a year-over-year trend issue, it's really where the PMPMs are.
Unknown Analyst -
I wonder if you could talk to longer term cost trend. I think everyone in the industry is acting as if the jury is still out on whether this is a secular or cyclical deceleration. And I guess that you're just going to look at the scenarios and say, what if we get another year of deceleration and cost trend, what will that mean for the way that you underwrite and the way that you start to compete?
Mark T. Bertolini
Sure. We will err on the side of members -- margin over membership. So we'll continue that strategy. And it's a very different sort of phenomenon when you're pricing into a downward trend market. And I would say the downward trend that we're seeing this year is different than what we saw in 2010. 2010 was really more about a very low-flu year and COBRA coming off the rolls. This year is actually we're seeing utilization across the board much lower. So when you're pricing into a decelerating trend, you're actually pricing 12 to 18 months ahead, depending on the type of business that you're pricing. And so your assumptions on the near-term trend is always higher than the actual trend, and we've taken the point of view that we believe normalized trend will return in 2012. So if you think about it, we're bridging over the dip in trend if indeed there continues to be a dip. And we've done a lot of analysis on where we think trend is going from a number of different perspectives and our delta from where we thought utilization was going to be and where it is, is about 30% things we are doing and about 70% which are externalities in the marketplace. And those externalities, we believe, are largely due to the economy. And the really rapid rise over the last 4 years of employee cost sharing on their benefits and on their premiums and a rapid decrease in personal wealth and personal disposable income. As we look out, we look for a few indicators. The indicators the way utilization usually returns is primary care visits, followed by pharmacy prescriptions, followed by lab tests and x-rays, followed by specialist visits, outpatient surgery and inpatient. It usually start to climb that way. In January and February, we saw primary care visits go up, but we did not see pharmacy prescriptions return. And it's been pretty much a flat to downward trend in a number of those indicators throughout the rest of the year. We've looked at a number of things like Google searches to anticipate where utilization is going to happen because there's actually some correlation, particularly with the flu, between Google searches and the onset of flu, and we've been looking at that. We've been talking to providers out there in the delivery system and we don't see anything right now that causes us to think that it's going to jump. But we're anticipating that will return to normalized levels in 2012. If it stays lower, again, we will err on the side of margin over membership.
Unknown Analyst -
Just a quick follow-up to that. So at what point do you start getting work competitively, by giving out membership.
Mark T. Bertolini
Well, I think we are more competitive right now. And actually in the third quarter, if you take out all the ins and outs of membership, we had fairly robust growth, good growth, what we consider a good baseline in the middle market, which is select and key accounts across. The higher-end, large-employer risk market. So we're seeing that return. I think small group and individuals are going to continue to be a tough market until people figure out a cost structure that allows them to be more competitive. And again, we'll err on the side of membership. But we believe for 2012, we have a ramp that will show some growth next year.
Unknown Analyst -
I had a question with respect to your Medicare business. You highlighted that as something you saw as a growth driver next year. And I'm just curious, kind of what's that based on? Is that based on the benefit package you put out relative to other competitive products or could you kind of give us a little bit more color around that. And then a follow-up to that is, do you see that as an opportunity to grow via M&A as well or is that all organic that you're thinking about?
Mark T. Bertolini
Sure. For -- the numbers I just talked about are organic and they're based on group business we know we've already sold and we're enrolling and our price position on PDP and Medicare Advantage in markets where we know we are focused for 2012. So it's based off of some very good leading indicators. How much? We'll know better in another 3 weeks. In our Investor Conference, we'll probably have a better glimpse at where we are with Medicare. Do we see M&A as an opportunity in Medicare? Definitely. And that all depends on willing buyer and willing seller.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Well, that concludes this session. Thank you very much, Mark Bertolini. We're going to have a half-hour of Q&A in the Sedona Room, which is to the right after exiting this room. Thanks.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!