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Executives

Regina Nethery - Vice President Investor Relations

Mike McCallister - President and Chief Executive Officer

Jim Bloem - Senior Vice President and Chief Financial Officer

Jim Murray - Chief Operating Officer

Art Hipwell - Senior Vice President

Kathy Pellegrino - Vice President and Acting General Counsel

Analysts

Joshua Raskin - Lehman Brothers

Matthew Borsch - Goldman Sachs

Charles Boorady - Citi Investment Research

William Georges - J.P. Morgan

Justin Lake - UBS Investment Research

Christine Arnold - Morgan Stanley

Greg Nersessian - Credit Suisse

Scott Fidel - Deutsche Bank

John Rex - Bear Stearns

Carl McDonald - Oppenheimer & Co., Inc.

Peter Costa - FTN Midwest

Matt Perry - Wachovia Capital Markets

Doug Simpson - Merrill Lynch

Humana Inc. (HUM) Q1 2008 Earnings Call April 28, 2008 9:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is [Lori] and I'll be your conference operator today. At this time I would like to welcome everyone to the Humana first quarter 2008 earnings release conference call. (Operator Instructions)

At this time I'll turn the conference over to the Vice President of Investor Relations, Ms. Regina Nethery. Ms. Nethery, please go ahead.

Regina Nethery

Good morning and thank you for joining us. In this morning's call, Mike McCallister, Humana's President and Chief Executive Officer, and Jim Bloem, Senior Vice President and Chief Financial Officer, will briefly discuss highlights from our first quarter 2008 results as well as comment on our earnings outlook. Following these prepared remarks, we will open up the lines for a question-and-answer session with industry analysts. Joining Mike and Jim for the Q&A session will be Jim Murray, our Chief Operating Officer, Art Hipwell, Senior Vice President, and Kathy Pellegrino, Vice President and Acting General Counsel. We encourage the investing public and media to listen in to both management's prepared remarks and the related Q&A with analysts.

This call is being recorded for replay purposes. That replay will be available on Humana's website, www.Humana.com, later today. This call is also being simulcast via the Internet along with a virtual slide presentation. For those of you who have company firewall issues and cannot access the live presentation, an Adobe version of the slides has been posted to the Investor Relations section of Humana's website.

Before we begin our discussion I need to remind each of you of our cautionary statement. Certain of the matters discussed in this conference call are forward-looking and involve a number of risks and uncertainties. Actual results could differ materially. Investors are advised to read the detailed risk factors discussed in our most recent filings with the Securities and Exchange Commission. All of our SEC filings are available via the Investor Relations page of Humana's website as well as on the SEC's website.

Additionally, investors are advised to read Humana's first quarter 2008 earnings press release issued this morning, April 28, 2008. This press release and other historical financial news releases are also available on our website.

Finally, any references to earnings per share or EPS made in this mornings call refer to diluted earnings per common share.

With that, I'll turn the call over to Mike McCallister.

Mike McCallister

Good morning, everyone, and thank you for joining us. This morning we reported first quarter 2008 earnings of $0.47 per share, a penny more than the high point of our most recent guidance of $0.44 to $0.46. This represents a 12% increase over the $0.42 per share we earned in the first quarter of 2007.

Two important points stand out from the quarter's activity. First, except for the stand-alone PDP issues we discussed with you last month, our 2008 income components are forecast to be in line or better than those we originally shared with you at the time of our third quarter 2007 call in October of last year.

And second, we reached 68% of our full year Medicare Advantage net new membership growth target by April 1, in line with our forecasted additions by that date. Based on that and on additional sales activity we were seeing in April, we remain confident we will net up between 200,000 and 250,000 new Medicare Advantage members in 2008.

Let's now look in more depth at our Medicare and Commercial business environments.

Turning first to the Medicare environment, we are pleased that the final 2009 Medicare rates announced on April 7 are adequate to continue to develop products for Medicare beneficiaries with more value than they receive from traditional Medicare. As we've said many times in the past, we will adjust benefits to keep Medicare cost trends in line with net premium increases.

As I mentioned a moment ago, our year-to-date Medicare Advantage net growth is on target, with PPO products continuing to gain popularity. Our Medicare PPO products experienced net membership growth of 73,000 in the first four months of this year versus virtually no growth in those products during the first four months of 2007.

In addition, we continue to round out our Medicare product spectrum through a multi-state rollout of Medigap plans. We've been approved to sell Medigap policies in 46 states, plus Puerto Rico and Washington, D.C., and expect to be licensed in another two states by the end of this year.

With respect to the Medicare political environment, it's no secret that Congress must raise additional revenues to offset any changes it makes to avert a cut in physician reimbursement that's scheduled to go into effect July 1. We don't believe it is prudent to cut benefits to seniors to increase reimbursement to physicians. Any cut to Medicare Advantage rates is essentially a cut in benefits to enrolled seniors, so I expect the debate to be robust. Members of Congress continue to hear from their constituents, who recognize the value of their Medicare Advantage plans.

In parallel with our membership growth over the past few years has been the progress we've made in cost reduction and quality improvement through our many clinical and care coordination programs designed expressly for Medicare Advantage members. All of these customized programs are tailored to improve wellness and well-being for seniors and those with disabilities. Medicare members who participate in them consistently report high levels of satisfaction, and all are absent from traditional Medicare, which basically acts as a claims paying mechanism with neither cost controls nor quality enhancing tools and techniques.

I'll now take a moment to discuss a few of these programs in more depth, including one example of the positive health results they produced. In future calls, I'll highlight other programs and their results.

Our guidance approach to wellness and well-being follows a continuum that begins with a health risk assessment or HRA. A health risk assessment is a critical tool in both setting up baseline for member health status but also providing early indications where clinical coordination can begin to have immediate impact. Without the HRA, health and coordination would by necessity need to wait for claims development to provide insight. Additionally, the HRA captures important information not embedded in our claims data. The result is speed and productivity for members and Humana in deriving the best results from the many clinical programs in our arsenal.

As this slide shows, we've had a significant rise in HRA participation in early 2008 due to a recently inaugurated rewards program that encourages our members to participate. We've already nearly doubled the 2007 participation rate by new members with a goal of steadily increasing participation.

Let me give you an example of how we apply this HRA data. As you know, a high percentage of people with Medicare suffer with chronic illness. We make available to eligible members appropriate disease management programs to help ensure that they're maximizing their opportunities to manage chronic disease. Our experience shows that participation in these voluntary programs improves members' mobility, their sense of well-being and their quality of life while at the same time reducing costs.

As you can see from this slide, enrollment in disease management programs is trending up nicely. In the first quarter of 2008 we exceeded 50% participation for the first time across all products. Our long-term goal is to drive full participation across all products, including the newer PPO and Private Fee for Service offerings.

We can already see the positive impact of better clinical coordination through a number of important measures. The dual benefit is greater wellness for our members and lower cost for the health care system as a whole. One of these measures is the readmission rate to hospitals within 30 days of discharge of patients. Post hospital care after an initial hospitalization often through disease management programs is critical to reducing the chance of a patient being readmitted for the same disease. As the chart shows, care coordination and care management have a dramatic positive effect on hospital readmission rates for Medicare members.

The takeaway from these examples is that while still early in our application of clinical coordination across new products and new members throughout the nation, we grow ever more confident in our ability to drive savings while achieving better outcomes for seniors. This supports the argument that the private sector is an important part of the answer to the nation's need to better manage the Medicare program.

Before leaving Medicare, let me briefly update you on our announcement from last month. Our current stand-alone PDP benefit expense estimates for the first quarter and for full year 2008 are in line with the guidance we provided on March 12. We do not see any other business metrics that would adversely impact our current view of stand-alone PDP for the balance of 2008.

As we said we would, we've moved swiftly and effectively to correct our Medicare prescription drug plan bid process in plenty of time for the June filing deadline for 2009 plans. The structure and process for developing bids has been thoroughly revamped and bid process oversight, both within the company and from outside experts, has been significantly strengthened.

I'll remind you that because Medicare resets every year, this is a onetime situation, the impact of which will end on December 31 with PDP profitability back on track in 2009. We are fully committed to restoring PDP profitability to appropriate levels regardless of whether this results in a smaller PDP membership in the future.

Moreover, no other part of our business - specifically Medicare Advantage - is affected. Medicare continues to be a strong driver for us, and we firmly believe that our 2009 results will continue the growth trajectory we saw developing based on our 2007 results and our previously projected 2008 expectations.

Another key development within the quarter was in our Military Service business. On March 24, the Department of Defense issued its long-awaited formal Request for Proposal for T3, the next contracts for TRICARE medical benefits nationwide. Responses to the RFP are due on May 27 and we will participate. Since current contracts expire in 2009 and the RFP doesn’t call for the new ones to start until 2010, we expect DOD to extend our current contract for one year.

In our Commercial segment we anticipate extending our record of steady pre-tax earnings growth this year. We have the best balanced membership portfolio in our history and benefit expense trends are in check. Pricing discipline is strong, and as the bar chart shows, our 2007 acquisitions of KMG and CompBenefits have broadened our capabilities in the voluntary benefits dental and vision markets consistent with employers' growing desire for benefit providers who offer full-service solutions.

At the same time, medical membership within the Commercial segment continues to show steady but targeted growth. In fact, we're raising our expectation for total Commercial medical membership growth to between 90,000 and 120,000 members in 2008 driven by individual and small group sales and retention improvement.

Let me highlight the growth we've experienced over the past few years in the small group and individual and how they're related.

It's a commonly understood phenomenon that the percentage of small businesses that provide health coverage to their employees is dropping. However an offsetting trend is that most job creation in the United States is by small companies. As a result, the small business market remains relatively healthy and growing. Concurrently, the individual market continues to grow as a result of the dynamics of the small business market segment. The good news for Humana is that we have strong capabilities in both segments and that there are synergies between the two relative to distribution channels, broker support, online tools, communications, marketing and service support. This slide illustrates how we've grown our individual and small group products over the past four years, taking advantage of the market dynamics I discussed a moment ago.

Before concluding, let me update you on Availity, the industry leading venture we co-founded that's helping drive down our claims cycle time as we discussed in our news release this morning. As we receive claims faster and pay them faster, the 120,000 doctors and hospitals in all 50 states who participate in Availity are experiencing better support and service. Launched in Florida as a joint venture with Blue Cross Blue Shield in 2002, this single-source administrative portal for providers expects to process more than 525 million transactions this year. It also now has partnerships with virtually all major health benefits carriers. In Texas, the focus of major recent expansion, Availity is scheduled to process 115 million transactions this year, up significantly from 2007.

Availity is an excellent example where appropriate cooperation among competitors can bring significant improvement in process speed across many claims and service functions while self-funding the roll out through efficiency for payers and providers alike. Ultimately, Availity helps to lead the way toward the creation of a real-time national health information highway to the benefit of doctors and hospitals, consumers and the health system.

In closing, this morning we are raising the earnings per share guidance we shared with you on March 12 to reflect changes in estimates for both our tax rate and share count. As we said in our call on March 12, the root cause PDP bid process issues that produced our revised 2008 guidance are both plainly visible and easily fixed, and much progress has been made in the month and a half since then on fixing them.

Since stand-alone PDP represents only 11% of our revenues and all remaining parts of our business are hitting their revenue and earnings goals smartly, we anticipate an on-target performance for the rest of the year and a resumed earnings growth trajectory for 2009 and beyond.

With that, I'll turn the call over to Jim Bloem.

Jim Bloem

Thanks, Mike, and good morning, everyone. Let's start with our first quarter earnings results of $0.47 per share, which exceeded the upper end of our expectations by $0.01.

The penny was due to a lowering of our tax rate to 35.3%. This lower tax rate is a consequence of the stand-alone PDP issues we disclosed on March 12 since tax-exempt investment income is now expected to be a higher percentage of our total reported pre-tax income in each quarter and for the full year.

In addition, the approximately 1.5 million shares repurchased in late March had little effect on the first quarter's diluted share count, but the resulting reduction of ninetenths of 1% of the previously outstanding diluted shares is now reflected in our full year share count guidance along with the reduced dilutive effect of outstanding stock options due to our lower share price.

Also occurring in the first quarter we want you to note that the negative first quarter earnings impact of the PDP issues disclosed on March 12 were as we had expected.

Finally, an improvement in our claims cycle time impacted both our days in claims payable and operating cash flows.

As usual, we've detailed the component causes of these changes in both the text and statistical pages of this morning's press release. In a few minutes I will review those items in further detail as well as their expected impact on the full year operating cash flow guidance.

Next let's look at the expected 2008 overall Medicare benefits ratio. As this slide shows, the benefits ratio progression through the year continues to be driven by our Part D benefits. As members progress through the various stages of their benefits we expect the impact of the stand-alone PDP issues to both lessen and track closer to the original benefit ratio pattern we projected when we released our first quarter 2007 results on February 4.

It's important to note that the difference between the red line, which shows our 2008 estimates at the time of the first quarter call, and the purple line, which shows our current estimate, that difference is attributable to PDP issues we outlined for you in mid-March. Our projection for the total Medicare benefits ratio for the full year remains in the same 85% to 86% range that we shared with you at that time.

Turning now to benefits payable, our prior period development relative to our year end reserve estimates was right in line with our expectation. This affirms our commitment to consistency and conservatism in both our actuarial assumptions and reserving policies. Additionally, this fact also confirms the cost trend assumptions used in pricing both our 2008 Medicare and Commercial lines of business are aligned with our currently observed trend run rate.

Our view of this year's flu season is that although it was worse than last year, it's well within the normal range of variation that we experience from quarter to quarter, and it doesn't change our outlook for the full year.

With respect to our stand-alone PDP business, the claims experience that we have observed since our last announcement, which includes both the last half of March and most of the month of April, remains consistent with our March 12 estimates.

Now let's take a more detailed look at our days in claims payable, which fell 3.3 days in the first quarter. As most of you know, we believe it's important to analyze the reasons for any directional change in days in claims payable before drawing premature or [inaudible] conclusions such as an increase in days in claims payable always is good and a decrease in days in claims payable always in bad.

As indicated in this morning's press release, a number of factors are contributing to the improvement of our claims cycle time. As noted in the slide, transitioning our Medicare Private Fee for Service business to an internal platform impacted our days in claims payable for the quarter by 1.7 days. I'll elaborate more on this in the next slide, but before then a second factor impacting our days in claims payable calculation is the Part D expense quarterly pattern.

As you are probably aware, we exclude stand-alone PDP business from our days in claims payable computations because of its low level of associated IBNR. However, since we include all of our MAPD expenses, the days in claims payable computation is influenced by the Part D expenses for our MAPD business. Since these prescription drug benefits generally decline over the course of the calendar year as the impact of the coverage gap comes into play, the denominator in the days in claims payable computation declines with each sequential quarter, everything else being equal. Then each year, as we transition from the fourth quarter to the first quarter, the denominator resets, i.e., it increases due to higher drug costs, and that results in a noticeable reduction in days in claims payable. This year the impact of this item was to lower days in claims payable by 1.5 days while last year it reduced this metric by 1.3 days.

The third major days in claims payable factor highlighted in this morning's press release was the growth in our Medicare PPO business. Since our PPO providers generally submit claims faster than nonnetwork providers, growth in network base membership shortens the time between when a claim is incurred and our receipt of the bill from the provider. This is what we refer to as the claim receipt cycle time. Any shortening of this cycle tends to expedite cash payments to providers and thus lower the days in claims.

Returning now to the improvement in our claims cycle times, we have seen a fairly steady decline in our claim receipt cycle time since the end of 2005. This improvement is shown by the green line on the slide. The blue line shows that the reduction in claim receipt cycle time generally correlates with an increase in the percentage of business administered on internal platforms. This is especially true recently.

Now in addition to the recent growth in Medicare PPO products and membership that I mentioned a few moments ago, the connectivity of our provider networks across all of our products has been improving during the same period. That said, the most significant factor still affecting the change in days in claims payable this quarter is the continued migration of our Private Fee for Service business to our internal claims processing platform. When we began the tremendous ramp up for the Medicare Private Fee for Service business back in 2005, we outsourced our claim processing function to a Medicare fiscal intermediary. This was in order to help ensure a successful experience for both our members and providers during this initial period of tremendous and rapid growth.

However, we did not consider this outsourcing of claims processing to be a long-term solution, and immediately we began the steps necessary to administer those claims internally. Early last year we began a slow but steady migration of outsourced Private Fee for Service business to our internal platform. That migration, coupled with the improvements in the speed of our in-house processing as demonstrated by our March 31 days in claims on hand of 4.4 days being the lowest since the second quarter of 2005, that migration results in the Private Fee for Service claims being processed significantly faster, driving down the days in claims payable again by 1.7 days in this quarter.

We expect to have all of our Medicare claims processing in house by the end of this year, and that will provide the beneficial effects of lower administrative costs, better connectivity between our commercial guidance model, improved provider network connectivity, and expedited data for insight and analysis.

I realize that I've focused quite a bit of my time thus far on the reduction in our days in claims payable. We believe that improving the claims cycle time metric is both favorable and necessary as we further improve our high service levels and increase transparency to help benefit cost and delivery. All of this furthers consumer engagement in all of our products and segments, and further, this strategy gives us significantly improved relationships with providers across the country.

Turning now to operating cash flows, our improved claims cycle metrics are also anticipated to affect the full year operating cash flows, so let's begin by briefly analyzing the first quarter. This slide shows the major factors affecting both this year's and last year's first quarter cash flows from operations. As you can see from the slide, last year nearly $445 million of operating cash flows was aided by three factors which totaled $180 million. Those factors did not recur this year.

Additionally, this year's very modest $4 million of operating cash flows was burdened by three factors totaling $270 million, and those factors did not occur last year.

When you consider that the sum of net income plus non-cash expense add-backs in each quarter were roughly equal, these six factors show that Humana's operating cash flow generation capability remains strong.

Now moving on to our expectation, then, for full year 2008 operating cash flows, the only factor from the first quarter that's anticipated to have a significant additional impact in the remaining quarters is that continued migration of the Medicare Private Fee for Service claims to our internal platform. Accordingly, we've adjusted our expectations for full year cash flow from operations.

Now given that the other first quarter operating cash flow factors I described should not recur in the remaining quarters and given the fact that the first quarter, as usual, is our lowest in terms of projected net income, we're confident that we can meet our 2008 targeted operating cash flows of $1 billion to $1.2 billion.

Again, the difference between the midpoint of this revised guidance range and our actual 2007 operating cash flows roughly reflects the difference in net income expected in 2008 and reported in 2007.

Before I conclude, let's briefly review our investments and debt.

Despite the continued volatility in the credit markets, we continue to experience solid investment performance due to our twin strategies of variable interest rates on both our debt and investments and secondly, rigorous adherence to high credit quality investment standards. The principal attributes of these standards are listed on the slide.

These two strategies enable us to maintain our 2008 net investment income range of $270 million to $295 million despite significant short-term interest rate reductions and continued credit quality concerns across the fixed income sector since the beginning of this year.

To summarize, then, except for the PDP issues we disclosed on March 12 - and we realize that this is a very big exception - we're pleased with our first quarter financial results and comfortable with our full year 2008 guidance.

We expect to continue to make financial progress in all of the lines of business as we progress through the remainder of the year by doing those things that have enabled our progress over the last five years. Some of those things are continued investment, underwriting discipline, utilizing technology, offering products which meet consumer needs across the health care spectrum. We intend to do all of this in a way which we expect will continue to further earnings and operating cash flow growth while engaging and satisfying all of our constituents.

With that, we'll open the lines for your questions. We ask that you limit yourself to two questions in fairness to those waiting in the queue.

Operator, will you please introduce the first caller?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Josh Raskin with Lehman Brothers.

Joshua Raskin - Lehman Brothers

Hi. Thanks. Good morning. Jim, not to belabor the cash flow question but I guess if I look at the cash flow statement, it looked like the outflows were in changes in receivables, other assets and other liabilities. And I guess I would have expected it more on the medical payables if you guys were accelerating the time. So could you just help us understand just from a cash flow statement perspective how to think about it?

Jim Bloem

Again, I think that the slide that I had that compared both first quarters, that is, the first quarter of this year and the first quarter of last year, really I think hits on what those differences are that are sort of lumped together in the cash flow statement. So again, if you go through them, most of what I said talked about the importance of improved claims cycle times, and that was $115 million in this quarter. And then there was leap year and then the timing of vendor payments, which was just the opposite in 2007 as it was in 2008.

In terms of that claims cycle time, I'd like to also say that we think that we're rounding the corner around 50% of being completed with that, and that was roughly about $150 million, as the slide says, so that's why the cash flow from operations guidance for the year was clipped by $200 to $300 because the full year effect of that would be  I'd say the midpoint would be $250.

Joshua Raskin - Lehman Brothers

I guess I'm just kind of confused when I think about the actual cash flow statement. How would you expect that to sort of manifest, I guess, in the future in terms of which line item would we expect to see that?

Jim Bloem

Well, one of the big improvements will be that we're going to earn - the first quarter is where we always report the lowest net income, so that's going to improve significantly as we move forward. And that's really driven by the improvement in the business and getting more of those Medicare Advantage members that we're adding into our revenue flow. So that will, again, that will expand the benefit payable as well.

But again, that's the kind of pattern we have every year. What I was trying to do is explain sort of why the difference between $445 and $4 million and then how does that $4 million get to a billion and $1.2 billion at the end of the year.

Joshua Raskin - Lehman Brothers

Right, right. I got that. Maybe I'll just follow up offline with some of the numbers, but just a second question on the Commercial growth. You know, we were surprised by the strength on the risk side, and I know Mike had mentioned the individual and then the small group. But maybe just a little bit more on the geographies and what sort of products are growing? That'd be helpful.

Jim Murray

This is Jim Murray. The individual business for us is doing very well. Those of you who have come in in the last couple of quarters, we've talked about some new products that we've introduced where individuals can make selections based upon a menu. We've also done some things to make it easier for the brokers that we do business to do business with us. We've talked in the past about how important it is for us to try to create a differentiated value proposition rather than allowing ourselves to become commoditized, and we recognize that there's some price that folks will leave. But we've tried to keep our pricing relatively close to the competition, but recognizing and really pushing some of the other value that we bring.

The markets that we feel like the Commercial individual business is doing extremely well would be states like Florida, Texas, Colorado, Utah, Georgia, Illinois, and in some of those you can tell that we compete with notforprofit Blues, in some we compete with for-profit Blues. And I guess from 50,000 feet what I would suggest is that some of the tools that we've been building over the years to differentiate ourselves from a consumer perspective seem to be playing well against some of the Blue plans that we compete against. It doesn't appear like they have done as much to create the kinds of tools and services that we have as a company, and so we think that there's an opportunity to take some membership away from some of the Blues that have been in this business for a long period of time and haven't done a lot of the things that we've done.

We're also doing pretty well on the small group side. We had a nice January in small group, and that looks nice in the quarter. I can't point to a particular market. I would say Texas is doing nicely for us. Missouri is doing well for us; Kentucky and Ohio. Generally speaking, the small group growth is system wide. And again, focusing significantly on how to differentiate ourselves so that we don't position ourselves as a price competitor.

Joshua Raskin - Lehman Brothers

That's extremely helpful. Thank you.

Operator

We'll take our next question from Matthew Borsch with Goldman Sachs.

Matthew Borsch - Goldman Sachs

Yes. Good morning. I'm just taking a look at the reserve development. And so you had $196 million nonTRICARE this quarter, and that I guess was about 80% of what you captured for the full year in 2007. But if I recall correctly, in 2007 in the third quarter you had $0.25 of that number that was - that you treated as essentially nonrecurring. It just seems like it's a pretty big prior period development number, and I'm wondering if that's in the range of what you would expect to be recurring?

Mike McCallister

Yeah, we think that it is. The third quarter of last year number was really quite a small number. Of that $0.25, I believe it was only a nickel. I believe it was $15 million. So the way we look at it is this is really - what we're seeing in TRICARE is in line with what we think will eventually play out.

TRICARE is always negotiating with the government. There are always things that are still outstanding that come out of prior periods, and those are reflected in there as well.

Matthew Borsch - Goldman Sachs

Okay. And just to follow up on the cash flow topic, I'm not sure if you covered this but I realize you cited the migration from the external claims platform as a big reason - as I understand it, that was a reason behind the change in cash flow outlook relative to what you had suggested on March 11 when you lowered the earnings outlook. I'm just wondering, though, what's really changed between today and March 11 that would lead you to lower the cash flow outlook based on what you know now versus six weeks ago.

Jim Bloem

As we work through this, it's basically a question of how fast it occurred, and it occurs somewhat faster than we had anticipated. Like I said before, we had - just to ground everybody - this was about $115 million of the difference. We think that we're about 45% to 50% of the way. And we hadn't really factored that into the March 12 because what March 12 was designed to do was to show you what was the effect of the error we made on these things.

And then all the other things we only look at on a quarterly basis, so we weren't refreshing all the aspects of guidance. We were only refreshing those to the extent that they were impacted by the change that we announced on March 12.

The fact is as we are moving faster along than we originally anticipated with respect to the transition of Private Fee for Service to an external platform and now we're allowing for that in our guidance, we'll be done by the end of the year. As I said, we're just approaching 50%, let's say, so the 200 to 300 is sort of in the middle of twice what we've done in the first quarter.

Matthew Borsch - Goldman Sachs

Okay, thank you.

Operator

We'll take our next question from Charles Boorady with Citi.

Charles Boorady - Citi Investment Research

Thanks. Good morning. Can you give us a roll forward with the ins and outs on the cash at the parent corp in '08? How much cash you ended '07 with, what's going to be generated in the parent and dividended out from the subs, and what you expect to pay out?

Jim Bloem

Charles, we had 535 at the end of the - 12/31 was 7. We're still in discussions with the various state DOIs about the dividends for this coming year, so generally we were going to give the answer to that in next quarter's call after that's all completed and we've had a chance to settle in with them on the appropriate level of surplus and then what's available for dividends to the parent.

And again, that's all based on what we did last year.

Charles Boorady - Citi Investment Research

Any rough estimates you can leave us with, what you hope to be able to dividend out?

Jim Bloem

Well, at this point I prefer to just wait another 90 days until we finish it up. Things are going as we anticipated and, again, I think that it's really best now, because we're in discussions with several of them, several of the bigger ones, that we would just refrain from that at this point, and then we'll let you know next time.

Charles Boorady - Citi Investment Research

Okay. Can I ask if you could clarify the comments Mike made on 2009, just as you're going through the planning process for '09, are you excluding from '08 as a one-timer the Part D issue? So are you thinking about 2009 as growing from an '08 pro forma without the Part D losses?

Jim Bloem

We're looking on a trajectory basis basically along those lines. Again, we have to - in order to really firm that up, that's our goal - in order to really firm that up and then be able to talk about that concretely, we need to go through the rest of bid preparation, the bids need to be submitted and then vetted by CMS, and then we need to kind of see how everybody else bid, and then we'll really know about whether our strategy has gotten us to that. But that definitely is our intention.

Mike McCallister

Charles, let me add to that. It's Mike. You know, I've been telling people as I travel around if you look at our original midpoint with our '08 guidance - I think it was 545, something in that area - and as we think about it going forward, I mean, I think we're going to be looking to grow from that original point. We have to do some work, as Jim said, to kind of decide how much that growth is going to be because part of it's going to be - clearly we won't have the drag of the PDP in '07, but then we have to decide what that business will look like as we finish the bid process. So I think there's some moving parts here.

But our mental model is this is a onetime event and that we'll be back on the trajectory we were on before. And we'll have to decide whether the '09 number is going to be what we might have originally thought or whether it's going to be different. But we're certainly not going to be incrementally moving from the point you're looking at today for '08.

Charles Boorady - Citi Investment Research

Thanks.

Operator

We'll take our next question from Bill Georges with J.P. Morgan.

William Georges - J.P. Morgan

Thanks. Good morning. I'm wondering if you could just address some of the moving parts around your Commercial medical loss ratio. You referenced lower yields, I guess, as a result of mix shift, but the MLR also came in much lower than historical levels, so could you sort of give us your thoughts there, and where does it go going forward? Should we expect it to normalize?

Jim Murray

Sure. Sure, this is Jim Murray again.

One of the things that are part of all of that is the mix shift that you just referenced from larger, fully insured business, which had been our history, towards more individual and small business. The targeted medical expense ratios in individual and small group are significantly different than they are for larger, fully insured books of business. So that's a very big dynamic. So the more we grow in individual and small business as a percentage of the total, our medical expense ratio will improve.

The other thing that we've got going on this quarter that significantly impacts us is the acquisition of CompBenefits in last year's fourth quarter, which has a very favorable medical expense ratio in the dental and vision space, and also the acquisition of KMG in Specialty lines, which also have better than our existing book of business medical expense ratios. So all of those factors coming together have created the medical expense ratio that you see there today.

There's also a seasonal pattern that existed in the first quarter relative to the high deductible health plans which wears off as the year progresses, particularly in the fourth quarter. But we're pleased with the direction that we're going in our medical expense ratio, and as we get our overall block of business more aligned to the risk mix that we talk about when you all come in, I think that you'll be very pleased with what you see going forward.

William Georges - J.P. Morgan

Okay, that's helpful. And a question about the shift in your Medicare Advantage book towards more PPO. How do you think about that and how should we, in turn, think about that as you migrate members off of the Private Fee for Service books?

Mike McCallister

This is Mike. You know, we've said for a long time that we think the Private Fee for Service is a transitional product over a number of years to help spread private sector offerings across the country and to introduce the idea to people. And I think that's been very successful.

I think long term. That's the reason I teed up a couple of clinical things today in my comments and will continue to do so. Long term, the future of Medicare Advantage is going to be managing and coordinating care for these people because we have to find cost savings. And part of that is going to be to get them into PPO products over time so that they bring in that last component of cost management which is the network itself.

So we've been a pretty aggressive player when it comes to developing PPO capabilities. We've been working on networks for several years, and now we're seeing the products becoming attractive to people and some people are moving and buying straight into PPO as opposed to going to Private Fee for Service first out.

So it's part of the long-term strategy. I think that the PPO is the future, not the Private Fee for Service, and we've been preparing for it and now we're beginning to see early indications that the transition is going to occur.

William Georges - J.P. Morgan

Should we expect to see growth rates, though, sort of flip flop, then, between the Private Fee for Service and the PPO membership?

Mike McCallister

It depends on payment rates and if they change based on product design. What happens in Congress will dictate some of that. I think we let the market dictate that for us at this point. I'm indifferent to whether someone picks a Private Fee for Service for a PPO product at this point, but over time I think the growth rate could change dramatically depending on the overall context.

William Georges - J.P. Morgan

Okay, thank you.

Operator

We'll take our next question from Justin Lake with UBS.

Justin Lake - UBS Investment Research

Thanks. Good morning. Just first, a question on PDP and as it relates to fixing the issues for 2009. I guess the most interesting one is the mix issue. You've spoken to that. I think it was about $120 million. And I think one of your larger competitors has also mentioned it, you know, the mix of duals as being - pressuring their margins as well. So given the fact that CMS put out some new regs in regards to calculating the benchmarks and how they're going to allocate duals next year, can you talk about what the pressures are going to be for you to kind of weigh membership versus margins in that retail kind of basic benefit plan, where you have both the LIS and the retail members considering you need to, both yourselves and United, are going to be looking at price hard due to mix and they're going to be allocating them based on weighting, membership weighting?

Jim Murray

Sure. This is Jim Murray. As you might expect, this past month and the next month we're doing quite a bit of analysis in terms of the dynamics that you just described trying to really understand the cost structure of the various kinds of business that we have. We're also evaluating where we think the benchmarks are going to go, not only given the change that CMS announced recently but also what the dynamics of the industry are and what we're hearing in terms of what some of the competitors are feeling in terms of cost pressures here.

So, you know, not really willing to talk about our strategy, but I would guess that there'll be an upward bias to the benchmark. And as we said on March 12, we're going to price our products commensurate with where we think our business mix is going to fall out, and we're doing some things to study our premium levels and what might likely happen and persistency related to the various blocks of business that we have to try to figure out the membership that we'll have after we deliver the premiums that we think are sufficient to return to the levels that we were going to be at in '08 and hopefully in '09.

So lots of moving parts but, as you might expect, lots of study. I would guess that there'll be an upward bias, as you said, to the benchmarks this year after a couple of years of a downward shift in the benchmarks.

Justin Lake - UBS Investment Research

Okay. And then, just in regards to Medicare Advantage enrollment growth, can you talk us through - kind of coming into the year, I think you had given three or four different categories where you had been looking to add membership on a gross basis. And I think you most recently updated us that the employer side was a little bit lighter than expected and you were making it up in other areas. Can you give us an idea of where you are now versus what you expected as far as gross additions, and specifically can you highlight how PDP upselling is working out for 2008?

Thanks.

Jim Murray

Sure. Again, this is Jim Murray. We had talked a year or so ago or during the course of 2007 about the various categories that we anticipated getting membership from, and what I think we talked about the last time was the fact that the group opportunity for us wasn't playing out as we had anticipated and so we moved some things around in terms of getting our career agents to make up that shortfall. And I think what I said at the time was that going forward for all of our guidance to you and for our setting of budgets internally, what I would prefer to do is to set targets based upon what we think the career and delegated and affinity relationships could provide, and to the extent that we get any group business, that it would be totally upside.

We're doing a lot of work in the group space. We've got lots of folks who are talking to a lot of customers, small companies that have retirees, large companies, government agencies, welfare funds and what have you, and we're creating a lot of good relationships but, you know, what I would like to do is rather than just fish I'd like to catch some, but I don't want to count on that until they come in.

All of the other pieces that we talked about in terms of upselling and the career folks and the affinities and delegated agents are all doing extremely well, as is demonstrated by our reconfirming that we're going to somewhere between our guidance that we talked about. But the group is one that we just want to be much more comfortable with and when we start to see some positive sales there, then we'll report those as upside.

Justin Lake - UBS Investment Research

Okay, what was the upselling target for this year? Can you just remind me?

Jim Murray

We hoped to get somewhere between 80,000 and 100,000 members from the PDP opportunity.

Justin Lake - UBS Investment Research

And you're on target for that?

Jim Murray

Yes.

Justin Lake - UBS Investment Research

Thank you very much.

Operator

We'll take our next question from Christine Arnold with Morgan Stanley.

Christine Arnold - Morgan Stanley

Hi, there. A couple administrative things and then a conceptual question. Did you have any realized capital gains in the quarter? Investment income looked pretty solid.

Jim Bloem

Yeah, none out of the ordinary. Generally the first quarter we do some rebalancing of the portfolio and in the normal [trade] that goes with that. Because interest rates have come down, there were some but it's not anything greater than it was at the same time last year.

Christine Arnold - Morgan Stanley

It was $7.5 million in the fourth quarter. Was it higher or lower than that?

Jim Bloem

It was about that. I think it was $8 or $9.

Christine Arnold - Morgan Stanley

Okay. And then the [inaudible] looked really positive. Was there net prior period development helping any of the business lines, in particular Commercial, this quarter?

Jim Bloem

No.

Christine Arnold - Morgan Stanley

Okay. And then, finally, could you talk a little bit about your Medicare Advantage yield? I would have expected kind of risk scores from membership you added last year to improve the yield, and yet the yield on Medicare Advantage was kind of 1%, 1.5%. Might you be seeing improved risk scores later in the year as you true up some new membership last year? How do we think about the Medicare Advantage yield we saw this quarter?

Mike McCallister

Christine, the problem with talking about an overall yield is the mix of membership and where we're selling. If we looked at a specific state or region, then we could have a discussion around mix. We feel very good about where our mix is coming in if you look at it on a state-by-state basis. But again, some of the areas that we're growing in, the gross premium that we get from the government is below where we had members in the past and so it's difficult to look at it in total.

Christine Arnold - Morgan Stanley

Well, this is a good run rate, where we are first quarter?

Mike McCallister

I didn't hear that question.

Christine Arnold - Morgan Stanley

I'm sorry. This is a good run rate, what we're seeing this quarter?

Mike McCallister

Yes.

Christine Arnold - Morgan Stanley

Okay. Thank you.

Operator

Our next question comes from Greg Nersessian with Credit Suisse.

Greg Nersessian - Credit Suisse

Hey, good morning. The first question is just a quick clarification. All the enrollment guidance for the year is organic, correct? Doesn't that include the OSF?

Jim Bloem

That's correct.

Greg Nersessian - Credit Suisse

Okay, great. And then the 29,000 jump in April in terms of the MA enrollment, could you characterize it? It doesn't sound like that was a retiree account. Was that just age-ins or was there some SNIP membership in there?

Jim Murray

No, just normal sales. Not a significant number of groups.

Greg Nersessian - Credit Suisse

Okay, great. And then could you just touch on your target Commercial SG&A ratio? I guess your mix of business has shifted in there to individual and more Specialty products driving that up. Is there a target you could speak to over time in terms of where you hope to get your Commercial SG&A ratio or is this a good run rate?

Mike McCallister

Well, again, I think it's a good run rate. And as Jim mentioned when we talked about the benefit ratio in Commercial, the corollary of that or what follows from that is the better benefit ratios in the newer products that we've added and in the mix of business that we're continuing to seek, those have higher selling costs associated with them and they have a higher SG&A ratio. And we've said that, basically, that that would add 40 basis points to the consolidated this year, and you saw that 40 basis points in the first quarter. So we think that the run rate's pretty good, and again, it's just reflective of the mix. The good news is, though, is again, there's a very positive result in Commercial because of these adds.

Greg Nersessian - Credit Suisse

Okay, so do you think that the Commercial pre-tax margin is going to - it was a little bit higher than the 6% target in the quarter, but obviously you spoke to the seasonality from the high deductible plans - I mean, when we think about that for the full year, are you expecting something approximating 6%?

Jim Bloem

It comes down just as that answer suggested because again, we continue, as we indicated in the press release, to have more consumer, more Smart plans, more high deductible early in the year. So we're seeing right now the highest margin basically that we'll probably see all year because of that. And then that will recede during the year to come in closer to that.

Jim Murray

Those of you who have come in in the past year or so, we've talked about the fact that we've targeted something closer to the 6% range for 2009 full year, and then based upon where the competitors are versus where we're at at that point, trying to figure out how high we can go. But we're pleased with our continuing progress over the last several years.

Greg Nersessian - Credit Suisse

Okay, great, and then the last quick one. There was a drop in the securities lending payable balance sheet account. What is that exactly, and could you describe what the drop in that was a function of?

Jim Bloem

Well, it's a function of how much securities lending occurs, and here's what you get with that: There's a 2% additional collateral when you lend out securities. The cash portion is there, so generally speaking the volatility that was in the prior quarter at the end of the year, that volatility went down. That led to less. There's a comparable liability to the asset, so whatever it is it doesn't really affect the balance sheet.

Greg Nersessian - Credit Suisse

Okay. And no impact on the cash flow statement or the income statement either?

Jim Bloem

No, because again, there's on each side and it goes in financing cash flows as opposed to operating, which is what we've been talking about.

Greg Nersessian - Credit Suisse

Okay. Thank you.

Operator

Next question comes from Scott Fidel with Deutsche Bank.

Scott Fidel - Deutsche Bank

Thanks. First question, do you have a same-store Commercial MLR for the quarter or if you can spike out just how much the acquisitions reduced the Commercial MLR by?

Jim Murray

This is Jim Murray. I don't think we have that off the top of our head.

Jim Bloem

Once we integrate acquisition, I mean, in the fourth quarter we kind of said well, we had each of these companies for a small amount of time, basically the month of December. But then once they come we just put that in with all the other business that we have in Commercial, and it gets subject kind of to the rule that we look at all Commercial as a whole. And we don't disclose, really, what each of the pieces are.

Jim Murray

If I was going to guess, you know, the revenues on the books of business that we acquired are probably less than a half a billion dollars, so I wouldn't anticipate that it's a significant impact, although it's probably some part of the increase. But I'm sorry we can't be more clear about that.

Scott Fidel - Deutsche Bank

Oh, that's okay. And a follow up to just get your views around sort of secular medical cost trends at this point. And it looks like all the component guidance for costs are stable sequentially and just given, you know, the ongoing debate right now in the industry on whether cost trends are rising or not, I just would be interested in your views on that in the Commercial market. And then maybe also if you can highlight how your variation in claims trends might be looking across the three primary MA products, Private Fee HMO, PPO, and whether you're seeing any variance in them or whether they're all sort of tracking in line with expectations.

Jim Murray

Okay, this is Jim Murray again. We're seeing really stable medical cost trends. Over the last several years we've done a lot to try to focus on the various elements of medical spend, and again, over the last several years, we've been flat to slightly down. We don't see any piece of that accelerating in any way, shape or form. And so it may well be that we've just focused on it a little bit more than our competitors or it may well be that the industry is more flattish than some of the debate that I read about when I read some of your write-ups.

As it relates to the MA, as you might expect, because of the growth of the PPO business, the early returns on that are hard to figure out relative to the Private Fee for Service. Obviously, our HMO business, which is about a half a million members, the medical spend there is very, very solid. PPO looks like it's going to be where we had anticipated. We're in the process of studying that as we're doing our bids in May and June.

But generally speaking, we're pretty pleased with the medical trends on our MA business. We're seeing some nice stability. You all have talked in the past about the duration effect, and there's also an effect when you enter a state or a location at first. The disability population is the first to join, but you sell through that, you get a much more stable base of business. So we're finding out a lot about our medical trends on MA, and we feel very good with what's happening.

And Mike shared with you some of the things that we'll see positive implications of in the future as we manage this book of business much more so than the Medicare Fee for Service world does. So, again, pretty pleased with what we see developing.

Scott Fidel - Deutsche Bank

Got it. And just quickly, on the 1Q MA enrollment, does that include the acquired United book in Vegas? And just, if you could remind us, if so, how many lives that netted out to?

Jim Murray

No, it doesn't include it, and I think it's 28,000 lives.

Scott Fidel - Deutsche Bank

So that would be in 2Q?

Jim Murray

That's the goal.

Scott Fidel - Deutsche Bank

Okay. Thank you.

Operator

We'll take our next question from John Rex with Bear Stearns.

John Rex - Bear Stearns

Yeah, thanks. I'm wondering if you could just give us some kind of order of magnitude differential in what you saw for flu impact in the 1Q versus last year, realizing you said it was definitely within the realm of what you had anticipated. But can you help us understand how different it was versus last year, a much more mild season versus this year's much more severe season?

Jim Bloem

Yeah, it was between $25 and $30 million total across all product lines. And most of it obviously was in the Medicare, but again, we think that that amount is really within our normal guidance and within the normal range of fluctuation that we observe on these things from quarter to quarter because there's always something in every quarter.

Jim Murray

Some years the flu is bad, and some years the flu is good. This year was a little worse than it was in the prior two years, but for us it wasn't something that threw us off track in terms of our guidance.

John Rex - Bear Stearns

Okay. And so when you said $25 or $30 million, that would be $25 to $30 million incremental from what you had realized last year or $25 to $30 million all in?

Jim Bloem

$25 to $30 million over last year.

John Rex - Bear Stearns

Over last year. Okay, great. And then just back on the trend components, there's been some commentary about rising unit price pressures on the hospital side. You guys specifically note that you haven't seen that in the guidance you give, but have you seen any kind of shift in the marketplace out there at all and maybe kind of where you are from a contracting standpoint for the year with the hospital side?

Jim Murray

Again, this is Jim Murray. We've talked in the past about the relationships that we tried to develop with a lot of the hospital systems trying to partner with them to figure out how we can assist them and be more administratively a partner and help them with some of the bad - I think I read in the Wall Street Journal this morning about hospitals with bad debt concerns, and that's one of the things that we try to help them focus on.

And so we don't have an approach to go to war with hospital systems and enter into significant negotiations which can end up ugly. Our approach is working with them, trying to get the best rate in a particular location or at least equal to the best rate by being a good partner with them. So we're not seeing a significant pushback from the systems that we do business with. And so I don't see anything shifting in terms of our relationships or the negotiation process throughout the areas that we do business.

Jim Bloem

And speeding up the claims payment. Those are the kinds of things that really help us with providers, including hospitals.

John Rex - Bear Stearns

Have you noticed any change in kind of the discount differentials between best in class in the market and where you're coming in at generally over the past year?

Mike McCallister

Well, it's - this is Mike - it's shifting and it's shifting slowly, but I think it's an important trend. Jim mentioned earlier that we were growing our individual business and small group business in places like Utah, Colorado and Georgia - where I think I've mentioned this to you a number of times in the past - where we're seeing exactly that, the hospital systems that have, you know, they've all consolidated into situations where if they're not in a monopoly they're in an oligopoly at best. In some of these communities, they've taken a much more strategic view of their relationships with payers and they're narrowing those payment rates to the point that the hospital deals are no longer a barrier to entry, and in those particular states that's exactly what's occurred. We have market-leading pricing in the hospital world in all three of those states and those are relatively small markets for us, but they're growing nicely.

So I think we're going to see more of that. If you step back and you ask yourself if you were the hospital CEO, why would you advantage one payer over another, and the answer is there's no reason to do such a thing. So I think we're going to see more of it, and I think those prices are going to continue to get more narrow. Then I think the payers are going to have to compete on some other basis than their ability to get a better price from someone.

John Rex - Bear Stearns

Great. And this is the last thing. Early '08 view - I'm sorry, '09 view - that you've provided in terms of the indication there, does that envision essentially flat Medicare Advantage margins also over [rate] so it's X'ing out Part D?

Jim Bloem

Well, you know, we've said since the beginning we target our entire Medicare book of business at a 5% operating margin, and we will continue to do that and we will do that as we sit and think about '09 as well. Again, we think that's a reasonable margin for that kind of business, working with a giant government partner. And we think it's sustainable and supportable, and there's such a huge growth in the market that it's fine to have that margin. So as we look into '09 and plan for it, we're going to be targeting again somewhere in that neighborhood for Medicare in total.

John Rex - Bear Stearns

Great. Thank you.

Operator

We'll take our next question from Carl McDonald with Oppenheimer.

Carl McDonald - Oppenheimer & Co., Inc.

Thanks. I'd be interested in the PPO growth you saw in Medicare this year. Was any of that switching from Private Fee for Service or was that all new members choosing the PPO product?

Jim Murray

This is Jim Murray. It was a mix of both of those. One of the things that you might expect we're attempting to do is to create benefit structures and premium structures where we'll shift folks from Private Fee for Service into PPO. And so there has been an effort on our behalf to try to begin to give people more and better choices in the PPO space because that's ultimately where we think we need to be in terms of our membership, you know, three or so years out.

So there has been some migration because of that, but also from just sales of folks who may have had a Medicare supplement or were in the fee for service world. That's also a big part of that number as well.

Carl McDonald - Oppenheimer & Co., Inc.

Any way to quantify that in terms of is it 50/50 or is it still, you know, 75% new members and 25% switching?

Jim Murray

I could guess, but I'm reluctant to do that. I don't want to give you a bad signal.

Carl McDonald - Oppenheimer & Co., Inc.

Okay. Then clearly the net Medicare enrollment growth looks like it's coming in on track. Can you give us some commentary around what the gross adds and the attrition has looked like in the first quarter relative to last year?

Jim Murray

Well, I think the guidance talks to where we think we are as of April 1, I believe. Is that correct, Jim?

Jim Bloem

Right. And that's 153,000. And last year I think we were at around 134 - well, 134,300. So we're up about 13%, 14%.

Jim Murray

Is that what you were specifically asking?

Carl McDonald - Oppenheimer & Co., Inc.

Well, I was just looking for - we can see what the net numbers are based on the first quarter and the guidance. I was just looking for what the gross additions had looked like through, say, the first four months of the year and what attrition.

Jim Murray

I don't think they're significantly different than we had suggested when we gave you the four components other than the group piece. But we don't have that specifically right here.

Carl McDonald - Oppenheimer & Co., Inc.

Thanks.

Operator

We'll take our next question from Peter Costa with FTN Midwest Securities.

Peter Costa - FTN Midwest

Thanks. Can you describe what you expect to go on with your days in claims payable going forward? You know, if you're about halfway there on your systems conversion, does that imply DCP should drop another two days by the end of this year, all other things being equal?

And then a question on your group Medicare product. You know, part of selling that is having a Commercial product for the 55 to 65-year-olds. Can you describe what you have there and what you're doing to develop a product there?

Jim Bloem

Yeah, I'll take the first one with respect to where we think days in claims payable are going to go. If nothing else changed, Peter, that would probably be right. You know, you'd have another 1.5 to 2 day hit. But, you know, there'll be a lot of other moving parts in there, too, so I don't - which, you know, there's so many variable, it's very hard to say that that would be it.

But you would be correct in terms of how much we've done so far and if you just basically doubled that, that's about where you'd end up for the year.

Jim Murray

On your question on the 50 to 64-year-old population, it's funny you should mention that. I have a 2:00 meeting today on just that subject.

We're in the process of working with our folks in the individual space to try to create a product and an opportunity for us to sell folks in the 60 to 64 initially to see how that goes, and we're also starting to figure out different channels that can bring us some of those memberships.

So I can't report right now exactly where we're at, but we're in the process of creating some initiatives to focus on that because you raise an extremely good point on getting in front of these folks, particularly as they are beginning to age in and there's - as you know, the baby boomers aging is a significant opportunity which we are very, very focused on - so we're going to spend some time over the next year or so getting our products and services in line to start to capture that more than we have in the past.

Mike McCallister

Pete, this is Mike. Let me take you to 50,000 feet for just a second. There should be no misunderstandings out there that as we continue to execute on electronic connectivity across the system - both for Humana and everyone else  and we move further and further toward real-time transactions and that's the end game, we're looking for total real-time environments here. The more we succeed in doing that, the more this particular metric is going to drop on the back of performance.

And the net-net of all that is terrific in terms of the economic impact and the net on the business and the brand from the standpoint of eliminating all the administrative nonsense that goes on in this industry is big. And so we're going to continue to invest. That's the reason I keep teeing up Availity for you all, to keep it in front of you, because that in particular, execution of that strategy, will bring this down by virtue of getting greater and greater real-time transaction environments.

And if HSAs and the things that are necessary to make the consumer world work properly are going to ever meet their potential, then we have to have real-time transactions, and that's what this is all about.

Peter Costa - FTN Midwest

Great. Thank you.

Operator

Our next question comes from Matt Perry with Wachovia Capital.

Matt Perry - Wachovia Capital Markets

Hi. Good morning. Just wanted to clarify something on Medicare Advantage margins in the first quarter. The press release seemed to indicate that, you know, maybe underwriting margins had improved versus 1Q '07. Can you talk a little bit about that and whether that's more a mix change in terms of which products are growing, or is it kind of a same-store improvement in medical loss ratios and if that's the case, does it kind of go back to the things Mike highlighted from the slides - disease management and HRAs?

Jim Bloem

Well, Matt, we don't break out, again, the individual benefit ratios on each of the two products, the stand-alone and the MA, but we did say that obviously because of everything that's happened we didn't have a very good quarter in PDP, so obviously the difference, a large share of the difference, is in the MA product and it did enjoy an improvement over last year in terms of its pre-tax.

Matt Perry - Wachovia Capital Markets

Okay. And secondly, you know, share buybacks, you bought back a small number of shares in the quarter and you have, I think, $150 million repurchase authority out there. Is that something you've kind of revisited since lowering the outlook last month, you know, with the Board, or is that on the table to revisit at some point in the future?

Jim Bloem

We will - basically, once the quarter ended, we were locked out until today, but we won't probably revisit that until later in the year after we finish up given the fact that we made a nice set of buys between the time we made the announcement after we were clear to do that to the end of the quarter. We made a nice set of buys. And then now and again we'll go and look at our sources and uses of funds for the rest of the year and we were going to talk about that in the next call in terms of what kind of parent cash did we get in terms of the dividend, from the dividending of operating sub profits of last year, and those types of things.

So that's kind of where we are on that. We're going to continue to - we've made a nice opening on it, and now we'll look at the rest of our capital sources and uses for the year and decide what we're going to do. And we'll talk more about that in the next call.

Matt Perry - Wachovia Capital Markets

Okay.

Mike McCallister

But we will not withdraw the authorization.

Jim Bloem

That's right.

Matt Perry - Wachovia Capital Markets

And you are comfortable running it up - I mean, you've said the range for debt to cap is 25 to 30 and you're kind of at 30 now, but you're comfortable at that level, right?

Jim Bloem

Yes, we are. We're actually at 28.3 at the end of the quarter, and we are comfortable with that, with that guidance. We're very committed to our investment grade ratings.

Matt Perry - Wachovia Capital Markets

Okay. Thank you.

Operator

We'll take today's last question from Doug Simpson with Merrill Lynch.

Doug Simpson - Merrill Lynch

Hi. Most of my questions have been answered already but, Mike, I was just wondering, you had the Complete plan issue a year back and then this year you had the PDP benefit design issue, just maybe from a qualitative perspective, give us some comfort or the way you're thinking about 2009 and what's really different this year and how are you confident that you're not going to have another issue as we look toward 2009.

Mike McCallister

Well, it's a fair question, but I think the first thing you have to do is you have to separate the two issues. We talked about this I think quite a bit on the call in March. You know, we were entering an entire new world when we went into the PDP business back in the very first year, and there was a lot to learn in terms of how seniors were going to choose and whether they were going to finance their drug use or whether they were going to buy insurance and protect themselves and those sort of things. And we learned an awful lot in the first year, and we learned through the Complete plan experience that they weren't going to buy insurance. They were really financing and doing cash flow analysis on their drugs. So that's a separate sort of incident, although at the time it was painful. But if you recall, the overall performance of the PDP that year was actually pretty good. So I separate the two in my own mind.

This year was really quite specific in terms of a mistake being made, so then the question is, if you think about '09, how do you prevent that from occurring, because that's a totally different issue. We think we know how seniors at this point are going to buy and how they're going to choose and the things they're looking for, and that they are not all the same. We know all that. So I think we're in a pretty good position as we make the process work better to get to the right result for '09. I'm very confident we will. We actually got the Complete plan straightened out pretty quickly in '07.

So I don't think this was a difficult thing to figure out at this point. I don't think it's a very difficult thing to fix. We have to do some homework around how market share might move under any number of scenarios, but I think Jim is right - the benchmark is likely to be moving up. We'll have to take that into consideration.

But I think it is challenging to do a bidding process like this where everybody is an individual consumer and everyone is free to move around every year. So I don't want to understate the complexity of it, but I feel very comfortable we'll be in good shape for '09. I think the real question mark is how big is the business going to be at that time. We'll work through that here in the next few months.

Doug Simpson - Merrill Lynch

Okay. Thank you.

Operator

At this time there are no further questions. I'd like to turn the conference back over to Mike McCallister for any additional or closing comments.

Mike McCallister

Well, thanks again for joining us this morning. Let me just summarize by saying we are prepared to make sure that our PDP business is in the right position going forward. In Medicare Advantage, I think we will have some noise this summer as we talk about the physician payment schedules and how to fund all that, and I'm sure Medicare Advantage will be part of those conversations.

I think longer term nothing's really changed politically at this point. We will, I think, be a part of the Medicare solution over the long term because of the clinical coordination and the things we're beginning to do to actually help with long-term costs in Medicare.

Our product spectrum in Commercial continues to expand and improve our margins and our performance. We continue to be excited about the opportunity to apply technology and we've had some great results there in recent quarters.

And then lastly I want to thank the Humana associates that are on the call for everything they've done to continue to put our company in a great spot for the future.

So with that, we'll end the call. Thank you very much.

Operator

Thank you very much, ladies and gentlemen, for joining today's Humana first quarter 2008 earnings release conference call. This concludes your conference. You may now disconnect.

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Source: Humana Inc. Q1 2008 Earnings Call Transcript
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