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Executives

Angie McCabe - Vice President of Investor Relations

Jay M. Gellert - Chief Executive Officer, President and Director

Joseph C. Capezza - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Brian Wright

Christine Arnold - Cowen and Company, LLC, Research Division

Health Net (HNT) Q1 2012 Earnings Call May 3, 2012 11:30 AM ET

Operator

Good morning, everyone, and welcome to this Health Net, Inc. First Quarter 2012 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.

Angie McCabe

Thank you, Tanya. Thank you for joining us for a discussion of Health Net's first quarter 2012 results.

During this call, we will make forward-looking statements that 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. 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.

I will now turn the call over to Jay Gellert, Health Net CEO.

Jay M. Gellert

Thank you, Angie. I want to get directly to the issues impacting our first quarter and our revised guidance for 2012. After that, I'll spend just a few moments on other factors influencing the first quarter, and then open it up to your questions.

As you've seen in our release, we recorded $67 million in adverse medical claims development from prior periods in the first quarter of 2012. The adverse development was due to an underestimate of our incurred but not reported claims liability at year-end 2011. As we indicated, it was the result of an unanticipated flattening of our commercial medical claims trend, coupled with a larger-than-expected impact from the implementation of HIPAA 5010, the new claims coding system mandated by the federal government.

We did not have similar trend expectations in Medicare and Medicaid. As a result, we had adequate reserves in those lines.

In late March, we saw substantial uptick in claims for 2011 service date coming from our intermediaries. The level was above our expectation. It led to slower claims completion factors than anticipated. This led to the unanticipated increase in commercial development.

We believe that the 5010 issues have now been essentially resolved. We have seen the daily claims submissions have settled down to a reasonable and expected level. The $67 million of adverse development impacts our run rate for 2012. In addition, we recognized the $67 million in prior development in the first quarter. Therefore, we have adjusted the low end of our guidance to reflect the $134 million pretax impact of the adverse development and the run rate impact.

As a result of prior period development booked in the first quarter and the higher commercial health care cost run rate entering 2012, we now expect commercial health care costs to be higher than our premium yields on a reported basis by 200 to 220 basis points.

In giving this guidance, we additionally took into account, first, our premium yields are coming in higher than previous guidance by about 50-basis-points, as we continue to hold the line on pricing. The pricing trend assumptions we had used were primarily based on claims experienced through the first half of 2011. They are basically unchanged even when we look at the fourth quarter of '11 with the prior period development included. We are still confident that our pricing adequately reflects underlying run rate medical claims trends. Second, as we've earlier indicated, we have a new pharmacy agreement with CVS Caremark that will improve our pharmacy trend. And third, negotiated provider unit costs are coming in slightly below expectations.

We are working on several other initiatives aimed at improving our results throughout the remainder of 2012. We are introducing new tailored network products in the second quarter. We are renegotiating provider contracts to improve unit cost trends. And there are many other contracting medical management expense and revenue initiatives.

Now, let me discuss the impact the prior period development has on past and projected trends. We saw decelerating commercial trends throughout '11. With the $67 million of prior period development now reflected, we see that our medical cost trends through the second half of '11 have essentially leveled out at a slightly lower level than the trends in the first half of last year. We have indicated in prior presentations that our 2012 outlook of trend assumed stable underlying utilization trends. The resulting trends through the fourth quarter of 2011, after including the prior period development, are consistent with that outlook. To date, our first quarter 2012 claims experience also supports stable underlying utilization trends.

Now let's turn to other activities in the quarter. We continue to grow our tailored network products. Overall commercial enrollment declined a bit more than expected due to a few large group account losses. We believe these losses are due primarily to our continued pricing discipline.

MA enrollment growth was above planned, and we've revised our guidance up as a result. We are on track to achieve an 80- to 100-basis-point improvement in MA MCR this year, consistent with our prior guidance.

The Medicaid business is stable, while enrollment continues to grow from the SPD population.

Government Contracts produced pretax income in the first quarter of 2012 of approximately $22 million, down $36 million from the first quarter last year as expected. We expect to see improvement in quarterly pretax income for the balance of the year due to improved incentive performance and contract efficiencies.

G&A was lower by 20 basis points year-over-year as our cost reduction efforts continued to gain traction.

Cash flow had a number of timing issues this quarter. We expected to be at least equal to net income plus depreciation and amortization for the full year.

Coupled with $140 million we received in early April, when the sale of our standalone PDP business closed, we expect to have ample capital resources to deploy for the rest of the year. I note, we did not purchase stock in the first quarter, as we were awaiting the cash proceeds from the PDP sale.

Let me now share some thoughts concerning the status of our dual eligible effort. We are very pleased to be chosen for the demonstration pilots in Los Angeles and San Diego Counties. The opportunities here are substantial, but we are still very early in the process. We don't have final CMS approval rates and contract terms, contract implementation timelines and a host of other important details. We know there will be a lot of work for us through the rest of this year. We expect the material incremental G&A costs to prepare for implementation, but it's too early to estimate them in any meaningful detail. I also note, our guidance does not include any such '12 costs.

Let me close by saying that we are deeply disappointed in the first quarter results. All of us know that we now have to execute consistently through '12 to regain your trust. That's our focus now and will be for the rest of the year.

Thank you, and let me now begin Q&A. Operator, please queue up people for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Borsch with the Goldman Sachs.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Jay, just on the environment, interested in both the cost trend side and pricing side, and it seems that it's really the commercial side of the business where there are issues. You mentioned, several times, price discipline generally and in connection with the loss of the 3 large accounts coming into this year. How much of that reflects what you're seeing in the market environment, California? Or, I don't know, maybe more broadly, what are you seeing?

Jay M. Gellert

Presently, I believe we're seeing some pricing in the market that is a little bit below the trends we see. I think it's not across the board or tremendously widespread, but I do think there's some elements of aggressive pricing in the market.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Okay, fair enough. And I guess also on the broader landscape, we had noticed that the -- to the extent they're meaningful, the California DMHC reports showing some pretty big drops in earnings results in towards the back part of last year amongst some of your competitors. Now I guess you can't see into their books. But do you have any inference that the trends that you're seeing are represented more broadly in the market?

Jay M. Gellert

It's very hard to tell. I think we're comfortable that we've been able to figure out what's going on for us and be able to re-guide in a way that we're comfortable with, given all the market conditions at present. I don't really have good insight into other companies.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Okay, fair enough. And lastly, can you step back and give us your picture of how trend has developed sort of over the last few years. The mosaics that we sort of put together is that the trend dropped sharply in 2010 and then rose modestly from that trough in 2011. And a number of companies are saying it's ticked up another notch, but not to a large degree in 2012. How closely does that comport with the view that you now have?

Jay M. Gellert

I think the timeline is consistent with what we're seeing, probably a little delayed in California. And I think that we are seeing a stabilization of utilization trends. And we've factored in some additional trend growth in some places, but then it's not a dramatic upward shift at this point in time.

Operator

Your next question comes from the line of Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

Just on the HIPAA 5010, I'm just trying to figure out, what -- how much of the development was specifically related to that? Is it possible to know that number?

Jay M. Gellert

I think it's hard to know the number. In our case, we receive no claims directly. We receive all of our claims through clearinghouses. It is clear that we weren't expecting a faster completion factor than historically, so it definitely is a result of the slowed completion factor. And a significant portion of that is related to HIPAA 5010.

Joshua R. Raskin - Barclays Capital, Research Division

Do you say more than half of the $67 million?

Jay M. Gellert

Yes.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. The PDP sale, is that part of the dilution -- part of the reduction in guidance?

Jay M. Gellert

No, it's not. We've made -- the reduction in guidance is entirely the result of including the commercial prior period development, and then adjusting from a lower rate going into 2012 on the commercial side.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And then, I guess just last question, Jay. Taking a step back, you guys have sold your PDP operations. You sold your Northeast. You guys have done a good job of monetizing non-core assets. Now at some point, have you thought about stepping back and thinking more broadly about strategic alternatives?

Jay M. Gellert

I think that we're presently in the process of implementing the dual demonstration project. But I think we -- we're always thinking about the longer-term here, and that's why I think it's an important thing to do.

Operator

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

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I want to get a little bit more color on exactly when you kind of noticed that this trend had started to spike, and were you able to start to reprice that business or when do you think you would have your business price for the more normalized view of trend.

Jay M. Gellert

As I earlier indicated, our pricing was premised on no continued deceleration of trend. So when we built all of our pricing, it assumed the flattening. When you look at the 4-quarter data with these, with all the prior period developments, you will see a flattening for the entire period. So we priced consistent with our -- with what turned out to be our experience. We thought we were building on some margin in that, but we actually priced consistent with what went on. As I indicated, we actually came up with our actual pricing being about 50 basis points higher than we guided to in the first quarter. And so I think we're comfortable that our pricing, on a going forward basis, has been consistent with the actual experience.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

So I guess, it's just not clear to me then. So then if you're saying you're pricing to where you think you should be pricing, the 1.8% kind of margin, it's in your guidance right now. That's the kind of the way we should think about the profitability levels going forward?

Jay M. Gellert

Well, the first quarter includes the PPIA. On the -- on a actual reported basis for the coming year, we're anticipating a commercial MLR of -- for this last 3 quarters of 85 -- let me get the exact number here, of 85.6, which reflects, with the exception of leap year, our experience in the first quarter.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. I think like the 1.8% margin is kind of what you guys did from 2008 to 2010, but you're saying 1.8-plus percent, I guess tripping up the development is kind of the way to think about the base earnings at this point.

Jay M. Gellert

I don't know the 1.8% you're referring to, so I'm -- are you talking about commercial? Or what are you...

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

I'm talking about overall margin.

Jay M. Gellert

Our overall margin, I have to look at that. I was focusing on the commercial. No, actually, our -- the overall PTI margin we're anticipating for the last 3 quarters is about 3.5%, 3.6%.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Pretax?

Jay M. Gellert

Yes.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. All right. And then if you could just talk a little bit, it sounded like the SPD business is coming in online. I just wanted to confirm that and see if that experience has any -- has given you any indication of how the dual eligibles might start to track up?

Jay M. Gellert

The SPD business is -- we booked it 100%. It's coming in close to that at this point in time when we take into consideration all the issues we've talked about, a little bit less than that, in fact. I think the key to the duals, which I spoke about earlier in my call, is just making sure that the rates are adequate. We are very comfortable, based on our experience, that we can bring down the utilization and provide a very solid program. But the key in the dual analysis will be the rates which we anticipate seeing in the coming quarter.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Okay. And I appreciate the difficulty in kind of forecasting start-up costs related to duals. But is there some frame of reference or rule of thumb when we think about new product launches that start-up cost might be at the percentage of revenue opportunity? Or just to kind of give ballpark in reference?

Jay M. Gellert

Yes. It's hard to give a ballpark until the second quarter, probably, because we have to understand the transition process, the schedule and a lot of things like that. So I think we'd be much better off deferring coming to a conclusion on that for another quarter, but it will be something that we can then articulate.

Operator

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

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

I wanted to get some more clarity around whether you're sure the issues are fully recognized at this point. Perhaps you can help us by understanding the time from the data service to the date you paid the claim. Has that -- I assume that widened out while you were having the problem, has that gotten back to where it was exactly sort of third quarter or so, or where are we standing on that?

Jay M. Gellert

It's come back to significant degree. And we've factored in the actual experience to which it's come back. So we saw some quickening in April of our payment cycles. And then in the guidance we gave, we factored in the other issues.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Okay. My understanding is that the HIPAA 5010 was supposed to be implemented January of this year, but really enforcement doesn't happen until later this year. So how do you know that it's not going to happen again to you by the second quarter or so for continuing right now?

Jay M. Gellert

Well, in April, we were 99% 5010 compliance in the claims submitted. And we've spoken in the last couple of weeks with all of the intermediaries and sub-intermediaries and made provision for what they've set. But we've seen a dramatic increase in the 5010 compliance in the month of April.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Okay. And was there a particular clearinghouse that you had an issue with or that was slower than the others? Or was it across the board?

Jay M. Gellert

We had certain ones that were, but I don't really have the specifics of that.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Okay. And then just a couple of modeling things. In the quarter, you had an investment gain, how much was that in the quarter?

Joseph C. Capezza

A little over $12 million.

Jay M. Gellert

Yes. Our investment income really tracked last year's experience, and is consistent with the guidance we earlier gave.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

Okay. So the gain was $12 million, sort of the amount[ph] what you talked about before, that you'd have?

Jay M. Gellert

Yes.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

And then the increase in guidance for the GAAP EPS, I presume that's the gain from the selling of the Part D business. Is there anything else in there? And what's the timing on that?

Jay M. Gellert

The transaction closed April 1.

Peter H. Costa - Wells Fargo Securities, LLC, Research Division

And so that's the -- it's only the gain that's in there?

Jay M. Gellert

Yes.

Operator

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

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

So Jay, I was just trying to understand that your mix of business being so capitated and I'm certainly -- don't get the HIPAA thing entirely. But would that not have mitigated some of those issues because you have a capitated business mix?

Jay M. Gellert

On the one hand, you have the issue of capitation. On the other hand, you have the fact that we don't receive claims directly. We receive all of our claims through the clearinghouse. Secondly, we've not been reporting prior-period positive development in the past, so we've not had that factor. And then, thirdly, I think part of the issue is the concentration of our business mix is a little bit more vulnerable to certain specific instances having a greater effect on our business.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

And how much of this is [indiscernible] is it all of the $67 million within commercial? Was there nothing at all in Medicare? I mean, you booked this margin expansion in Medicare, is that taking into account, anything from HIPAA? Because other than you, only Humana has flagged HIPAA 5010 as an issue, and theirs is probably mostly Medicare.

Jay M. Gellert

As I indicated, because we hadn't had new members in 2011, we didn't expect a deceleration in Medicare. So we have the full 5010 impact in our guidance, but it doesn't require of any kind of an IBNR restatement, because we actually -- we're assuming more negative results in Medicare.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

So you'd already booked that in there, and so that's the reason, but you did have some negative development that that was already part of it?

Jay M. Gellert

We had -- as I indicated before, we had assumed a flattening, I mean, a decelerating trend on the commercial side. In terms of Medicare, we were assuming higher trends than we actually experienced without the 5010 event because of the fact we hadn't had new members, so they countered each other, but fully in the guidance.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Got it. And then on the commercial side, with this, your spread is now negative 220, and just maybe you said this in your formal remarks. But with $67 million, it seems just a dramatic reversal of trend deal spread. And now you're expecting more issues on either the same HIPAA thing or something else going forward?

Jay M. Gellert

No. What we indicated was that our guidance is that way because it includes both the PPIA from 2011 and the rebasing of the starting point for 2012. So in reality, if you wanted to look at the run rate, you'd push the $67 million back into last year, and then you'd be able to do the run rate comparison. But because of the doubling up in 2012, that's why you have the negative reported spread versus 2011.

Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division

Okay. So the baseline you're seeing -- you're rebasing the baseline from last year?

Jay M. Gellert

We are rebasing the baseline in order to be sure that we've captured all of this that's going on.

Operator

Your next question comes from the line of Charles Boorady with Crédit Suisse.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

I think we understand what went wrong now, Jay. And I'm wondering if you could talk to us a little bit about how something like this goes wrong, just sort of risk management. And we knew, you knew, the industry knew the 5010 issue was coming and that it would typically result in delays. So where in the organization did the communications break down, or did the estimation errors take place? And how, with the benefit of hindsight now, how could you have better anticipated this? And what will change so that we can count on having more anticipation of issues like this that may come up in the future with the actual ICD-10 conversion and other changes taking place?

Jay M. Gellert

That's a very valid and fair question. First, let me speak to how it happened, and then let me speak to the remedies. We thought we had put adequate provision in. In retrospect, I think that the deceleration basically stopped about mid-year, and we continued to see it in terms of our claims experience. And I think that our view was that based on what we were seeing -- and I'll even give you an example. In January, we thought very -- number's very consistent with the actual experience that we were booking to. Even in February, we saw confirmatory experience. So I think, obviously, with ICD-10 or any other change in the system, 2 things will happen in terms of what we'll do: one is, we'll be much tighter about making sure that we've checked, I guess, every nook and cranny of what could go on; and secondly, we'll be very cautious to book deceleration until we actually see it and when there's a change in time. I think to the point you were making, the key thing that we have to do is do those things because we've not had as much prior-period positive development in our history to kind of compensate for those events.

Charles Andrew Boorady - Crédit Suisse AG, Research Division

Okay. Let me add here just a couple other related things that I wonder if you looked at or thought about at the time or how you think about differently going forward. I mean, number one, if your trend appears to be meaningfully below the trend of your competitors, does that -- was that a potential missed flag? And then secondly, could you have gotten information from the clearinghouses on or from directly from providers in your network on just the kinds of delays that are being seen in getting the claims through your organization?

Jay M. Gellert

I think you raise good points, which we will follow up. It seemed to be more of a sub-clearinghouse issue than a clearinghouse issue, but I think we've really gone through that in a lot of detail. I think that we really did price conservatively but accepted the real trend experience we saw, and it's a lesson that we have to learn, and a very painful one.

Operator

Your next question comes from the line of Chris Rigg with Susquehanna.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I guess I just want to understand, first, on the acceleration in the commercial enrollment decline. Maybe I missed it, but can you explain why that's happening?

Jay M. Gellert

Yes. We lost some large groups to which we talked about earlier on. At this point in time, we saw, as I indicated to Matt, in certain large groups some aggressive pricing and given the circumstances we have will be -- and the significant opportunities we're going to have in terms of the duals and everything else. We're going to be conservative in our pricing and not follow aggressive pricing where it doesn't founded.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. But at this point, is that just sort of an estimate of what second half renewals may look like in your renewals? Or is this in hand right now, the 79% decline?

Jay M. Gellert

I think it's in hand, and I think it's being conservative about success in terms of renewal network, the small group and some of those kinds of things to compensate for a couple of large group issues which we've articulated. So I think that in some instances, we're seeing some pricing that doesn't reflect that the deceleration has ended. And we would -- if that began to become evident, I think it would help us in terms of some of these numbers.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just to confirm, the PDP sale had no impact on the guidance reduction.

Jay M. Gellert

That's correct.

Operator

Your next question comes from the line of Carl McDonald with Citigroup.

Carl R. McDonald - Citigroup Inc, Research Division

Just wanted to circle back on some of the other questions, just in terms of the explanation for why this is a much bigger issue for you relative to others. So the first point you're making is that you get all your claims directly from clearinghouses. So your point there is essentially that if you had gotten claims directly, like health plans do in some other markets, that would have given you an early warning sign that you didn't have?

Jay M. Gellert

Yes.

Carl R. McDonald - Citigroup Inc, Research Division

Okay. And then second point you're making is that because you haven't had any favorable development, your view is that some companies that historically had favorable development realized the new building format was an issue and that might explain why development was either lower or nonexistent this quarter versus prior periods?

Jay M. Gellert

I guess I would just say, I think there are some instances that lower development, and I think that if you have historically had positive development, the diminution doesn't have the negative effect it had on us, and ends up producing the amount of positive development.

Carl R. McDonald - Citigroup Inc, Research Division

And then coming into the year, you had been pricing and assuming that you'd see 50 basis points, give or take, of commercial margin expansion. So knowing what you know now, to achieve that 50 basis points of expansion, how would you have priced coming into 2012? And so recognize the comments that you see some stable trend and that's been the case. But what would you have to do to get the same kind of margin expansion you were looking for?

Jay M. Gellert

Well, I think that basically, when you combine the revenue experience we have and the unit cost experience we have and the pharma improvement we're going to have in Q3 and Q4, that we would end up in pretty much the same margin situation on a run rate basis, that is -- but that we would have to price up for the jump off point. So the jump off point is about a 1% effect. And so that would have been the effect we would have it priced to in order to get the margin we expected. The trend experience is basically the same as we expected.

Operator

Your next question comes from the line of Brian Wright with Monness, Crespi, and Hardt.

Brian Wright

I was just hoping to kind of-- housecleaning to reconcile the $67 million in adverse development to the reserve roll forward that shows $25 million. Is the $67 million all commercial, and then you probably had like $45 million of favorable development in Medicare? Is that the way to look at it? Or can you help us out with that?

Jay M. Gellert

Yes. The $45 million reflects the replacement of the margin in Q1 and the diminution of the margin in Q4. So in actuality, the only reduction is the one we've talked about.

Brian Wright

So you were expecting $45 million in favorable development. You got something less than that and that was -- or sorry, you are citing some level of development and this is the difference, is the $67 million.

Jay M. Gellert

We were expecting that we would be $67 million better due to the provision for adverse development moving into Q1.

Brian Wright

Okay. And then secondly, on the duals, did the -- what you're seeing in the commercial business impact your overall appetite when it comes to how much you do LA County in-house versus externally?

Jay M. Gellert

No. But we're very comfortable with our state health experience. And we're actually comfortable with our commercial MLRs. I think it's just this issue of deceleration in the second half of the year that we anticipate that didn't incur.

Operator

Your next question comes from Christine Arnold with Cowen & Company.

Christine Arnold - Cowen and Company, LLC, Research Division

First question, how much of your business on the commercial side renews in January?

Jay M. Gellert

I think about 40% to 50%.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. So if I look at the situation here, it looks like excluding the prior period negative development, the commercial MLR was 86.9, which is up 100 basis points year-over-year. And the reason you're not expecting the MLR to be up 100 basis points year-over-year for the rest of the year is because of the repricing of the rest of the book. Is that what you're saying?

Jay M. Gellert

No. It's for 3 reasons. One is the leap year issue. The second, as I indicated before, with the completion of the PDP deal, we have a new pharma arrangement with CVS Caremark that is the primary difference, quite honestly, between our first quarter experience and our second, third and fourth quarter experience. So we are expecting virtually the same experience, some slightly seasonally adjusted, but with the benefit of probably about 100 bp improvement due to the pharma agreement. So that's the -- we factored in, as I indicated earlier, the higher revenue, the slight improvement in unit costs. But the primary difference between Q1 and the rest of the year is the pharma agreement and the different experience in terms of number of days in the first quarter versus the prior year.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. And then, did you change your rebate accruals at all this quarter? Or is the PMPM revenue in commercial a good run rate number?

Jay M. Gellert

Good.

Christine Arnold - Cowen and Company, LLC, Research Division

Okay. And then capital availability in light of the duals, how much capital should we think of as available for repurchase? I [indiscernible] what you know, which at this point isn't much, [indiscernible] the structure of some duals? And how much risk you're going to be taking versus providers versus partners?

Jay M. Gellert

Yes. I think we're -- didn't learn that I think in the next couple of months or some -- there's some issues going on in terms of that. So I don't think that, that will be a barrier to repurchase. As we indicated, though, before we'd be repurchasing less than in prior periods because of those capital needs.

Operator

There are no further questions at this time. Ms. McCabe, do you have any closing remarks?

Angie McCabe

No. We'd just like to thank everyone for joining us for the call this morning. Thanks a lot.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Health Net's CEO Discusses Q1 2012 Results - Earnings Call Transcript
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