Filed by Cobalt Corporation
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934.
Subject Company: Cobalt Corporation
Commission File No.: 1-14177
This filing may be deemed to be solicitation material in respect of the
proposed merger of Cobalt Corporation with a wholly-owned subsidiary of
WellPoint Health Networks Inc. On July 1, 2003, WellPoint and Cobalt filed
preliminary materials with the SEC in connection with the proposed transaction,
including WellPoint's registration statement on Form S-4 (Reg. No. 333-106689).
These materials are not yet final and will be amended. Because they will contain
important information regarding the proposed merger, Cobalt shareholders are
urged to read the definitive versions of these materials as well as any other
relevant documents filed or that will be filed with the SEC. The preliminary
materials, the definitive versions of these materials when they become
available, and any other documents filed by Cobalt or WellPoint with the SEC may
be obtained free of charge at the SEC's Web site, www.sec.gov. Cobalt
shareholders will also receive information at an appropriate time on how to
obtain transaction-related documents for free from Cobalt. In addition,
information regarding the interests of Cobalt's directors and executive officers
will be included in the final proxy statement-prospectus. This filing does not
constitute an offer to sell or solicitation of an offer to buy any securities in
connection with the proposed transaction, which will only be made by means of an
appropriate prospectus.
* * *
The following is a transcript of a conference call held on July 23, 2003:
*** START ***
Operator: Ladies and gentlemen, thank you for standing by and welcome to
WellPoint Health Networks' and Cobalt Corporation's conference
call to discuss second quarter 2003 financial results. This call
is being recorded. During the course of the call, WellPoint's and
Cobalt's management may comment upon expected pricing or cost
trends or may make other projections or forward-looking
statements regarding the future financial performance of the
companies
Management cautions you that these forward-looking statements are
merely predictions based on current circumstances and that these
statements involve a number or risks and uncertainties that may
cause actual results to differ materially from those projected.
Factors that can cause actual results to differ are discussed in
WellPoint's and Cobalt's Form 10-K and other periodic filings
with the SEC.
This presentation may be deemed to be solicitation material with
respect to the proposed transaction between Cobalt Corporation
and WellPoint. In connection with the proposed transaction,
WellPoint has filed with the SEC a registration statement on Form
S-4 which contains a preliminary proxy statement-prospectus
regarding the proposed transaction. The information contained in
the preliminary proxy statement-prospectus is not complete and
may be changed. When it becomes available, the final proxy
statement-prospectus will be sent to the stockholders of Cobalt
seeking their approval of the proposed transaction.
Stockholders of Cobalt are encouraged to read the final proxy
statement-prospectus because it will contain important
information about the proposed transaction. The final proxy
statement-prospectus and all other documents filed or to be filed
by Cobalt or WellPoint with the SEC are or will be available for
free both on the SEC's website -- www.sec.gov-- and from Cobalt's
and WellPoint's respective corporate secretaries. Cobalt and its
directors and executive officers may be deemed to be participants
in the solicitation of proxies with respect to the proposed
transaction. Information regarding the interests of Cobalt's
directors and executive officers will be included in the final
proxy statement-prospectus.
At the conclusion of the speakers' remarks, we will be holding a
question and answer session. To ask a question, please press star
then the number one on your telephone keypad. If you would like
to withdraw your question, please press the pound key. Please
remember to limit your questions to two per person and indicate
to whom the question is directed.
I would like to turn the conference over to Mr. Leonard
Schaeffer, WellPoint's Chairman and Chief Executive Officer. Mr.
Schaeffer, please go ahead.
Leonard
Schaeffer: Good morning and thank you for joining us for a discussion of our
second quarter results.
We are very pleased today to conduct a joint conference call
featuring discussions of both WellPoint and Cobalt's results. In
June, WellPoint and Cobalt announced a definitive agreement to
merge. As the second quarter earnings of both these companies
show, this is a combination of two very strong organizations.
-1-
Joining us today from Milwaukee is Steve Bablitch, Chairman and
CEO of Cobalt, Mike Bernstein, President and COO, and Gail
Hanson, Cobalt's CFO.
I'll begin with a brief overview of WellPoint's operational
performance for the second quarter. David Colby, our CFO, will
discuss the financials. Then Steve and Gail will then present
Cobalt's results. We will extend the call somewhat to have plenty
of time for questions.
Our continued customer focus with emphasis on pricing discipline
and operational control has resulted in another strong quarter
for WellPoint. These results reflect our deliberate and ongoing
strategy of preserving operating margins.
We are pleased with our top line growth of 15% compared to the
second quarter of 2002. The growth was primarily driven by 5 to
7% member growth in California and Georgia, and pricing
discipline in all geographies.
With this growth, we have effectively managed our cost structure:
Our medical care ratio for the second quarter reflects in large
part our ability to price products to cover medical costs.
WellPoint's MCR of 81% was lower than last year's second quarter
and the first quarter of this year.
Our SG&A ratio of 16% in 2Q also was lower than the same period
last year as well as the first quarter of this year - we continue
to realize benefits from the more effective use of technology in
our business.
Excluding an extraordinary gain in last year's second quarter,
the diluted EPS for the second quarter increased 37%. As a result
of our second quarter performance, we are increasing our EPS
guidance for the second time this year, to the $5.60 to $5.65
range per diluted share from the previous guidance of $5.50.
Turning now to membership, strong sales in California, Georgia
and Missouri drove overall membership growth over the last 12
months.
Membership trends in the second quarter reflect our ability to
offer innovative products and to maintain disciplined pricing:
First, sales in the second quarter were strong - we are selling a
lot of new business.
Second, our pricing discipline allowed us to move marginal
business to our competitors.
Third, we have attracted some significant new accounts for the
second half of 2003 and for January of 2004.
I would like to give you some membership numbers that tie to
these points:
Second quarter sales were 472,000 members, consistent with last
year's second quarter, and as you know, 2002 was a great year for
member growth.
Partially offsetting our second quarter sales growth was a net
decline in membership in existing accounts of about 100,000,
primarily in northern California, the Midwest and Texas,
suggesting a continuing sluggish economy in those areas.
Turning to deliberate pricing actions on our part:
-2-
We implemented price increases in both our individual and small
group businesses in California during the second quarter. These
pricing actions caused our lapse rates to be about 35,000 members
higher in the second quarter than our average quarterly lapse
rates over the last two years.
In our key accounts segment of large group in California -
employers with between 51 and 250 employees - about 140
underperforming cases representing about 20,000 members received
substantial premium increases in the second quarter. We would
have preferred these accounts accepted these needed rate
increases and stayed with us; but our pricing discipline improved
the medical care ratio in this customer segment.
We also withdrew from CalOptima, the Medi-Cal program serving
residents of Orange County, California. This withdrawal accounted
for the reduction of about 15,000 members in the second quarter.
At HealthLink, two large ASO clients representing about 38,600
members went to competitors as a result of our pricing
discipline: However, HealthLink sold a significant amount of
workers' comp business during the first two quarters of this year
- 214,000 members versus 118,000 last year - and HealthLink is
meeting its financial plan for the year.
Finally, CalPERS conducted an audit of its eligibility systems
and concluded that its membership base for the ASO business that
we serve should be reduced by about 7,000 in the second quarter.
Two additional observations regarding our 2Q membership
performance: We grew our ISG business in every geography except
California. We expect our California ISG segment to resume growth
in the second half of this year, as two of our competitors have
announced price increases effective this summer.
Overall, our risk membership did not change sequentially - our
ASO membership declined by 73,000 members.
In terms of new business activity, we are off to a good start for
the third quarter in the special accounts segment of our large
group business in California - E-Bay and Trader Joe's are two new
"name" accounts we have attracted. We also have a long list of
potential customers we are working on for January 2004. So far,
our known sales for 1/1 in California include a total of about
100,000 new members related to an expanded relationship with
Wal-Mart and the City of Los Angeles and Kinko's as a new
customer.
In Georgia, our enhanced national account activities are paying
off. For January `04, new accounts won to date should add about
60,000 members. They include Kimberly Clark, BP Amoco, and an
expansion of an existing account, Home Depot.
Let me take a minute to talk about cost trends and pricing and
what we see occurring in our markets.
The rate of cost increases appear to have reached a plateau in
the low double-digit range. We continue to track cost trends very
carefully in our geographies and currently are not forecasting a
reduction in the rate of increase in cost trends.
However, this environment offers continued opportunity.
-3-
First, we will continue to do what we have always done - maintain
our pricing discipline. We will not adopt the short term strategy
of buying market share at the expense of profitability. Our
members depend on us to be able to finance healthcare when they
need it and we will be able to do that. Our historical
performance shows this approach is a good one.
When pricing became very aggressive around 1995-`96 in
California, our membership growth slowed as we maintained our
discipline and profitability. Over the next several years, our
membership grew significantly each year as competitors were
forced to significantly raise premiums to cover costs.
Second, with consolidation of the industry over the past eight
years, there are now fewer plans willing to buy market share.
And third, the top 10 insurers in the United States serve only
41% of the market. The "other" category is served by many smaller
players who are unlikely to do business or maintain this market
share over the long term. So we think there is plenty of
opportunity.
Now would like to turn the call over to David Colby who will
cover our financials. Dave?
David
Colby: Thank you Leonard and good morning. As Len said, we are very
pleased with our second quarter 2003 financial results. Our
continued focus on operations -- sales, underwriting, pricing and
expense management -- has resulted in yet another quarter where
WellPoint has met, or exceeded, analysts' expectations. As we
announced yesterday, we are increasing our 2003 guidance from
$5.50 to range of $5.60-$5.65 per diluted share.
Second quarter 2003 net income was $224.5 million or $1.49 per
diluted share, which was $0.10 higher than consensus estimates.
This second quarter 2003 earnings per share represented a 36.7%
increase over results for second quarter 2002 of $1.09 before
small extraordinary items.
I think the quality of our earnings is supported by:
First, our GAAP operating cash flow was $108 million which was
affected by $306 million of tax payments in the quarter compared
to tax expense of $150 million in that quarter and $38 million in
delayed payments from the Medi-Cal program received right after
quarter end in July.
Furthermore, cash and investments increased by $661 million
during the quarter. This level of operating cash flow supports
the high quality of our reported earnings.
And second, our balance sheet claim reserve estimates continue to
be based on WellPoint's consistent application of our historical
methodology which includes an assumption of moderately adverse
conditions.
Our days in claims payable increased by 0.1 days during the
quarter. This change can be explained by the following four
factors - first, higher accrual for pharmacy claims due to the
timing of bi-weekly payments in our PBM; second, a decrease in
average claims cycle times from the first quarter; third, the
payment of HMO physician incentive payments made in the second
quarter of 2003, but accrued in 2002. And then some various other
items, including slightly higher IBNR accruals. The six-
-4-
month medical claims payable rollforward schedule we provided
this quarter continues to show another year of positive
development in an amount consistent with 2002 levels.
Let me now briefly discuss key income statement and balance sheet
items.
First, continued year-over-year insured enrollment growth and
disciplined pricing resulted in healthy revenue growth. Our
second quarter 2003 revenue excluding investment income was
$4.876 billion. That is a 15.2% increase from the second quarter
of last year.
During the past year, we saw faster growth in our insured medical
membership. Our insured members were up 4.7%. Our non-risk
members were down 0.8%. And insured lives now represents 62.0% of
total enrollment.
As Leonard discussed, although membership was down by 73,000
lives during the quarter, it was not due to sales. During the
quarter WellPoint added 472,000 new members and many of the
lapsed members were in underperforming groups.
The medical care ratio in the second quarter of 2003 was 81.0%,
which was 75 basis points lower than first quarter of this year
and 56 basis points lower than the second quarter of last year.
The medical care ratio was slightly lower than expected due to
lapses in accounts with higher-than-average medical care ratios.
The selling, general and administrative expense ratio continues
to show good year-over-year improvement. For the second quarter
that ratio was down to 16.0% down from 16.7% in second quarter of
last year due to our improved productivity from e-Business and
technology initiatives. For example, over the last year our EDI
rates have increased from 60.7% to 63.9%. And our
auto-adjudication rates on a year-over-year basis increased from
45.1% to 53.0%. Also, we've been able to spread our fixed SG&A
over this larger membership base.
Over the past three years, since the second quarter of 2000,
WellPoint has reduced the SG&A expense ratio by 217 basis points.
Investment income was $64 million in the second quarter, which
included approximately $800,000 or $0.8 million net realized
gains in our investment portfolio.
While pre-tax income for the quarter increased year-over-year by
35%, investment income, which represented 17% of pre-tax income
in the quarter actually declined by $2.1 million from second
quarter of 2002. Accordingly, if you look at pre-tax income
excluding investment income, we were able to increase it
year-over-year by 46%.
Interest expense and other expenses, net primarily amortization
were $12.7 million and $4.6 million respectively in the second
quarter of 2003. Interest expense was very consistent with the
prior quarter. And our other expenses decreased in the second
quarter 2003 from the prior year primarily due to, as we
mentioned on our prior quarter call, prior-to-2003 results of our
captive general agency being reported on a net basis in Other
Expense.
-5-
In the first quarter of 2003 and going forward, results are being
shown on a gross basis with external revenue reported in
management services revenue, commissions reported in selling
expense and other costs in administrative expenses. The impact of
this change is a reduction in other expenses in second quarter
2003 versus last year of $4.4 million.
Also contributing to this decline were lower losses on disposal
of fixed assets of approximately $3 million.
The 2Q03 effective tax rate of 40.0% is consistent with recent
experience and prior guidance.
Let me turn to the balance sheet.
Again, due to solid financial performance and cash flow,
WellPoint continues to enjoy a financial position that allows it
to take advantage of future opportunities. At the end of the
second quarter, our debt-to-total capitalization was down to
20.9% -- down from 24.4% a year ago.
Cash flow was again strong for the second quarter despite higher
tax payments and the timing of receipt of certain payments from
the Medi-Cal program. Cash and investments increased $661 million
during the quarter to $7.9 billion.
However, if you exclude the following discretionary sort of
financing transactions, cash and investments would have increased
by $222 million. I'll break that down: First, we had an increase
in gross cash and investments on the balance sheet of $661
million. However you'll notice there was a decline in security
trades pending payable of $105 million, which really meant that
net cash and investments increased by $766 million during the
quarter. However, that's offset by the fact that in our other
current liabilities there was an increase in our securities
lending deposits of $544 million. If you take that away you would
get to net increase in cash and investments during the quarter of
$222 million.
GAAP operating cash flow for the quarter was $108 million, which
was negatively impacted by tax payments -- $306 million-- which
exceed the quarter's income tax expense by $156 million and $38
million in delayed payments from the Medi-Cal program received in
early July 2003.
We continue to feel comfortable with our balance sheet reserves
for medical claims. Medical claims payable were $2.5 billion at
June 30, 2003. Days in medical claims payable increased from 60.7
days to 60.8 days during the second quarter. The 0.1-day increase
is due to the following four factors:
First, the timing of our PBM bi-weekly pharmacy claims payment
should have increased days in claims payable by one half of a
day.
Second, we had a decrease in average claims cycle times. The time
from accrual to payment decreased about 0.9, so that would have
brought days in claims payable down.
And we did make our HMO provider incentive payments in second
quarter thought those were amounts that were accrued in 2002.
That would have brought days in claims payable one day.
-6-
And then we had some various other items, including slightly
higher IBNR accruals that increased days in claims payable by 1.5
days. The net being an increase of .1 days.
In our 2002 earnings report and in our 2002 Form 10-K, we
included an annual rollforward schedule of medical claims payable
to assist investors in understanding this accounting estimate.
With this second quarter earnings release, we are providing a
six-month rollforward schedule of medical claims payable for the
past three years. To refresh investors' memory, let me review
this schedule one more time.
First, the schedule starts with medical claims payable at the
beginning of the year plus the medical claims payable of acquired
companies as of their acquisition date.
The schedule then compares health care claims incurred, that is
those charged to the income statement, with health care claim
payments to reconcile ending medical claims payable, in this
case, payable as of June 30.
Using the following formula, you'll have the beginning + acquired
claims payable, you'll add to that balance any reserves that have
been established, i.e. that really means the income statement
benefit expense, less any claim payments equals the ending claims
payable balance.
For WellPoint, this schedule shows that in the last three years
the conservative claims estimate in the prior year has resulted
in positive development in the then current year. That is
significant for two reasons:
First, it does shows that during a period of time when our days
in claims payable had declined from 78.4 days at December 31,
2000, to 63.2 days at December 31, 2002, or 15.2 days in those
two years, the magnitude of conservatism in the medical claims
payable estimates through the first six months of development
increased from $234 million to $339 million.
Also since WellPoint uses a consistent reserving methodology each
quarter in accordance with general accepted accounting
principles, we currently expect there will likely be positive
development for the June 30, 2003 medical claims payable
estimate.
WellPoint's actuarial estimation methodology tends to be
conservative for the following reasons:
First, actuarial professional standards require an assumption for
moderately adverse conditions in computing the adequacy of claims
estimates.
Second, although WellPoint has been successful at accelerating
claims payment cycle times, our actuaries use historical "lag
triangles" or "completion factors," which would assume slower
payment times. While our actuaries use other techniques that
would factor in these faster payment times, those processes also
tend to be conservative.
And third, specific reserves are usually conservatively estimated
each year, for example, if a provider contests claims payment
amounts, we establish a reserve reflecting a conservative
estimate of what we expect to ultimately pay.
-7-
Turning to other items on the balance sheet, long-term debt
remained constant at March 31, 2003 levels (or $1.164 billion) as
excess cash flow was held in our investment portfolio.
In the second quarter of 2003, WellPoint did not buy back any
common shares as we prepare to complete the Cobalt transaction.
From the third quarter of `98 to today, WellPoint has used $1.16
billion in cash to purchase 28.3 million shares of our common
stock at an average price of $41.06.
While our first priority is to maintain financial flexibility, we
will periodically look at acquiring WellPoint stock based on that
stock price, future cash flow, alternative opportunities to
invest cash in acquisitions, such as the pending Cobalt
transaction and our commitment to maintain, or improve, our
current credit ratings.
In conclusion, the second quarter of 2003 was a strong quarter
for WellPoint where we exceeded First Call estimates and our
prior guidance by $0.10. This level of performance results from
our business fundamentals being strong.
Sales, underwriting and a favorable pricing environment resulted
in premium and management services revenue growth of over 15%.
Our pre-tax income margins, defined as pre-tax income as a % of
premiums and management services revenues, increased from 6.57%
in the second quarter of 2002 to 7.67% in the second quarter of
2003, a 110-basis point improvement year over year.
Our e-Business and technology investments have shown material
improvements in productivity and a lower S,G&A ratio and we
continue to generate strong cash flow.
Our prior guidance for 2003 earnings per share was approximately
$5.50. Since this quarter exceeded guidance by 10(cent) due to
strong fundamentals, we are now increasing our guidance for
fiscal year 2003 to approximately $5.60-$5.65 per diluted share.
On June 3, 2003, WellPoint signed a definitive agreement to merge
with Cobalt Corporation, which is the publicly-traded holding
company of Blue Cross & Blue Shield United of Wisconsin. When we
announced this transaction, we said our due diligence reviews
were impressed at the continued turn-around of Cobalt's financial
performance. As you can see, and will hear, Cobalt's second
quarter 2003 earnings release and guidance for 2003 demonstrates
this continued improvement.
Although Cobalt is currently expected to be neutral to
WellPoint's 2004 earnings per share due to merger integration
costs, we believe operating cash flow less CAPEX for this
transaction will provide an expected return in excess of our cost
of capital and therefore enhance the value of our company.
This discussion contains non-GAAP financial measures, as defined
in the rules of the Securities and Exchange Commission. As
required by the rules, a reconciliation of those measures to the
most directly comparable GAAP measures is available at our
website, which can be found at www.WellPoint.com. Also, an audio
link of the entire call will be made available on our website
following this call.
So right now I will turn it back over to Leonard Schaeffer to
introduce the executives from Cobalt Corporation.
-8-
Leonard
Schaeffer: Thank you, David. We are very pleased that Cobalt's chairman and
CEO Steve Bablitch is with us today. Steve and his team have done
an outstanding job orchestrating the turnaround at Cobalt and
building momentum for continued growth.
Congratulations on your earnings Steve, please take over the
call.
Steve
Bablitch: Thank you Leonard. Good morning and thanks everyone for joining
us to review Cobalt Corporation's second quarter results. With me
today are Gail Hanson, our Chief Financial Officer, and Mike
Bernstein, our President and Chief Operating Officer.
I will begin with an overview of our performance, and then Gail
Hanson will report financial results in greater detail. During
the joint question and answer session with WellPoint, Gail, Mike,
and I will be available to address your questions.
First, please let me note that the cautionary statement made by
the operator at the beginning of the call also applies to Cobalt
Corporation. You can refer more specifically to our press release
and SEC filings regarding our forward-looking statements.
Let me begin by saying that we are enthusiastic about the merger
with WellPoint, and committed to our shared vision for the
future. The transition is going smoothly, and there is an
optimistic outlook throughout the Company. We believe our
customers, shareholders, employees, agents, and the Wisconsin
community, will all benefit from the union of these two strong
organizations. Joining with WellPoint will enhance our ability to
reach the growth objectives we have established for Cobalt,
following the past two years of successful turnaround
initiatives. Additionally, we expect to accelerate market share
gains, achieve further economies of scale, and make greater
strides in financial performance.
Moving on to our second quarter earnings results, I'm very
pleased to report that it was an outstanding quarter for us. We
earned 37 cents per diluted share on net income of 16.1 million
dollars from continuing operations. On a pre-tax basis, income
from continuing operations before affiliates increased to 31.1
million dollars compared to 11.4 million dollars in the second
quarter of 2002.
These results were driven by a decreased medical care ratio and
improved efficiencies across the Company, resulting in a lower
sales, general and administrative expense ratio. For the second
quarter of 2003, the SG&A expense ratio was 10.3 percent,
compared to 11.1 percent for the second quarter of 2002. The
decline reflects cost reductions from closure of two regional
processing offices and disciplined containment of operating
costs.
For the sixth consecutive quarter, all four business segments -
insured medical, self-funded, specialty products, and government
services - reported a profit.
The cornerstone of our strategy has been to focus on core
businesses and leverage the strength of the Blue Cross and Blue
Shield brand. This focus, coupled with our strong underwriting
and prudent, yet competitive pricing, is driving our financial
performance.
A recent example of our success is the renewal of the City of
Milwaukee account, representing 18,000 members. By a unanimous
vote, Milwaukee's Common Council endorsed our CompcareBlue
proposal for 2004. This renewal was subject to a
9
competitive bidding process, and we attribute this win primarily
to our superior provider network and outstanding service.
At the end of the second quarter, membership was at 785,000
members, compared to 809,000 members at the end of first quarter
2003.
Three main factors drove this change: First, approximately 5,000
national account members transferred to our Blue Card program
during the quarter and are no longer included in Cobalt's
membership count. The Blue Card program is more profitable
because of its lower administrative cost.
Second, the challenging economy has forced some of our customers
in the large group segment to reduce work force. While we retain
these accounts, their employee downsizing has negatively impacted
our membership.
Finally, we lost a 5,000-member account to a niche insurer, which
bid at a level we considered to be unprofitable. It's important
to note here that we remain committed to rational pricing in a
competitive market.
Going forward, we are confident that membership will advance. As
evidence, we are seeing new business quote activity gain
momentum. Quote volume in 2003 is up 30 percent over fourth
quarter of 2002.
A key driver of this progress is the marketplace acceptance of
our new broker portal, which was launched in March 2003 and
accounted for 3 percent of our quote activity upon introduction.
As of June 2003, this online quote activity expanded to 14
percent of our total.
We remain committed to our strategy of focusing on the
independent broker community, which we view as a crucial avenue
to growing market share. This strategy is consistent with
WellPoint's philosophy.
I would like to close by noting that we have received very
positive comments regarding the merger with WellPoint from the
agent community. We are confident that the broader array of
products and tools that will result from the merger, together
with our ongoing efforts to improve our relationships with the
independent agent community, will stimulate new sales as we head
into 2004.
Now I will turn the call over to Gail Hanson, who will discuss
the company's financial performance for the second quarter in
more detail. Gail.
Gail
Hanson: Thank you Steve.
As Steve noted Cobalt's net income for the second quarter of 2003
was 16.1 million dollars or 37 cents per diluted share. Net
income for the second quarter of 2002 was 22.5 million dollars or
53 cents per diluted share. The results in these two periods are
not directly comparable due to a differential in income tax rates
and the significant impact of income from investment in
affiliates in the second quarter of 2002.
Income from continuing operations before income tax expense and
income from investment in affiliates is a more meaningful
comparison, and was 31.1 million dollars during the second
quarter of 2003, an increase of 173% over the comparable number
of 11.4 million dollars for the second quarter of 2002. A
reconciliation of the components comprising net income is
included in our press release.
10
Income tax expense for the second quarter of 2003 was 15.2
million dollars for an effective tax rate of 49%. The second
quarter 2003 tax expense includes 2 million dollars related to an
unfavorable court decision on litigation arising from the 1987
tax year. The other item impacting the effective tax rate for the
second quarter of 2003 was 2.2 million dollars of non-deductible
merger related expenses. Without these two items, the second
quarter effective tax rate would have been the statutory rate of
40%.
The second quarter 2002 income taxes of 1.1 million dollars
reflected benefit from the utilization of net operating loss
carry forwards resulting in a 10% effective tax rate.
I'd like to change gears and provide additional information on
the claim reserve discussion included in our press release.
Additionally, our quarterly highlights that are available on
Cobalt's website include a reserve development table for the
first six months of 2003.
As described in detail in our 10-K, our estimate of medical and
other benefits payable is intended to provide for future payment
of claims incurred, but not yet paid, under moderately adverse
conditions.
These estimates are adjusted each quarter as additional
information is obtained and claims are reported and paid.
If we experience no change or deviation in trends, claim patterns
or membership demographics, the favorable run-out of reserves
resulting from our moderately adverse condition assumption is
offset by a current period provision on the same basis. To the
extent that this does not occur, our policy is to disclose the
impact of the change in estimate on current period income.
The medical and other benefits payable, or claim reserve, at
December 31, 2002, was 219.6 million dollars. Based upon claim
payments made during the first half of 2003, this estimate
resulted in favorable development of 24.0 million dollars. We do
not expect any material change to this development during the
remainder of the year. While most of this favorable development
was re-established as part of our current claim reserve, 6.8
million dollars was released into pre-tax income during the
second quarter of 2003.
The 6.8 million dollar reserve release was primarily due to two
factors. First, fourth quarter 2002 claim expenses were better
than expected, as cost containment controls implemented during
2002 took hold more quickly than anticipated. Second, the
consolidation of our regional processing centers, which we
announced in November 2002, had less of an impact on the
timeliness of claim payments than was anticipated when year-end
reserve levels were established.
Days in medical claims payable, which include both incurred but
not reported claim reserves and claims that have been processed
but not yet paid, declined from 60.4 days as of March 31, 2003,
to 59.5 days as of June 30, 2003. This decline is attributable to
the 6.8 million dollar reserve release.
If we tax affect the reserve release, it brings the favorable
impact to 4.1 million dollars, this is basically offset by the
unfavorable impact of 2.2 million dollars in non-deductible
merger related expenses and the additional tax expense of 2
million dollars recorded in the quarter.
11
The insured medical care ratio for the second quarter of 2003 was
83.2%. Without the 6.8 million dollar favorable reserve release,
the medical care ratio for the quarter would have been 85.3%.
This demonstrates improvement from the medical care ratio of
87.2% for the second quarter of 2002 and 86.6% for the first
quarter of 2003.
Observed medical trend of 12% for the first six months of 2003 is
lower than originally anticipated for the year. Price increases
after buy downs are running at 14% for the first six months of
2003, with buy downs at just under 3%, in line with our
expectations.
Our specialty business continued to perform better than
anticipated, generating a combined ratio of 91.7% for the second
quarter of 2003, compared to a combined ratio of 97.2% in the
second quarter of 2002 and 93.1% for the first quarter of 2003.
Cash flow from operations for the first six months of 2003 was a
strong 57.5 million dollars compared to 1.7 million dollars for
the first six months of 2002. Our debt to total capitalization
ratio continued to improve, falling to 7.3% as of June 30, 2003,
significantly lower than the industry average.
I'd like now to turn the call back to Steve Bablitch.
Steve
Bablitch: Thank you, Gail.
I'd like to address our guidance for the remainder of 2003. Based
on the strength of second quarter 2003 results, we have increased
full-year 2003 guidance from $1.10 per diluted share to a range
of $1.30 to $1.35 per diluted share. This guidance reflects our
expectation that results for the second half of 2003 will be
stronger than earnings reported for the first six months of the
year.
With that, I'll turn the call back to Leonard Schaeffer for final
comments.
Leonard
Schaeffer: Thank you, Steve. And congratulations again to you and your team
for the excellent results for the second quarter.
Let me conclude with a few brief comments regarding Medicare
reform and an award we just received.
We are encouraged that Medicare reform is on the front burner in
Washington. As you know, WellPoint has not been a major player in
the existing Medicare+Choice program. We would be very
interested, however, in participating if more choice and
flexibility are offered to seniors, and as you've heard in past
discussions we've had on this topic, we believe that seniors
deserve the same kind of options that working people have. And
we'd be very happy to participate in those kinds of programs.
However, the devil is in the details and as the conference
committee in Washington works through the issues, we hope a
program can be structured for private market participation in an
economically feasible manner.
We believe it would be very difficult to underwrite a voluntary
standalone drug product, particularly if health plans and PBMs
are unable to use tools developed to help manage drug costs.
Ideally, drug benefits should be integrated into a broader
medical benefit plan.
We are working with the conferees and the Administration to help
resolve these issues in Washington. And we're hopeful that we'll
have a positive outcome.
12
Finally, I'm pleased to tell you that our PBM, the fourth largest
in the U.S., was just ranked highest in the industry by J.D.
Power and Associates for overall customer satisfaction.
In just 10 years, we have built an outstanding PBM business based
on clinical quality, cost efficiency and excellent customer
service. Joan Herman and Mike Nameth and their team have done an
excellent job of growing this business. I want to congratulate
them on this well-deserved recognition.
This completes the presentations that we had planned to make this
morning, so I'll now ask the operator to ask for your questions.
Operator: Ladies and Gentlemen, we will now open the call up for a question
and answer session. In order to ask a question, please press the
star key followed by the number 1 on your telephone keypad. To
withdraw your question, please press the pound key.
As a reminder, please limit your questions to two per person and
indicate to whom your question is directed. Thank you - one
moment please for your first question.
Your first question is from Charles Boorady with Salomon Smith
Barney.
Charles
Boorady: Thanks. Good morning. Question number one is for Steve Bablitch.
I'm just curious if you realized how strong your results were
going to be at the time you struck your merger agreement with
WellPoint.
Steve
Bablitch: You know, Charles, as we looked at the quarter and the year, I
think we gained more confidence. One of the things that we've
been over the last two years, year and a half especially since
the new management team took over is we've been very cautious in
how we view our results because of prior years poor performance.
So as we came into the second quarter, we were seeing better
results and gaining more confidence in the numbers, as we saw
those results.
So I think, when we came into the second quarter and in the end
of the second quarter, we were seeing pretty good results. But I
think, as it firmed up later into the second quarter, we were I
hesitate to say surprised, but I think our confidence levels grew
as we saw those numbers coming in closer to the end of the
quarter. So we felt very good about it at the beginning of the
process. But as we came to the end of the second quarter looking
at our numbers, our confidence levels were very good.
Charles
Boorady: And the second question would be for Dave Colby I guess. If you
can give components of the medical cost trend in terms of
inpatient, outpatient, physician, pharmacy, and if there's any
categories like cardiology, orthopedics, or others that really
stand out as having impacted the overall trend, that would be
helpful color too.
David
Colby: Charles, I think we would say that the trend has been, you know,
running relatively stable, as Leonard said, you know, really sort
of plateauing. And we would, you know, reiterate what we said at
the last call generally, that physician services is still
increasing in the mid single digits, hospital inpatient in the
mid to upper single digits, pharmacy costs in the low double
digits, and then all forms of outpatient, you know, in the mid
teens. And that is fairly consistent with what we've seen for a
couple of quarters now.
Operator: Your next question is from Josh Raskin with Lehman Brothers.
13
Joshua
Raskin: Hi. Thanks. Two questions - first is, you mentioned in the press
release but didn't really talk about it on the call, some impact
on the Medi-Cal program. I was wondering if you could just flesh
out what the rationale for the Orange County exit was and then if
we could get any sort of update - and I know obviously nothing's
been settled yet - in terms of outlook for rates for the end of
this year and into '04.
And then the second question is, you know, I know it's probably a
little early, but you had mentioned in your prepared remarks that
- again, another question for WellPoint really - the second half
'03 sales were looking pretty good and 1-1-04 was encouraging.
Can you give us any sort of sense of where you would expect
membership, you know, to be at the end of this year and then what
we should expect for 2004 to start the year?
Leonard
Schaeffer: Sure. In terms of the Medicaid program generally, but Medi-Cal
specifically in California, I think you'll recall on prior
conference calls we made very clear that the California program
varies by county. Each county has the right to adjust their
program based on what they think is the appropriate way of doing
business. And then we're very interested in participating in this
program when there is a competitive environment, and when there
is a local plan, and our plan, and the opportunities to meet in
the marketplace.
For a number of reasons the Orange County plan is now not being
operated quite the way that we think provides a good business
opportunity for us. We've been in discussions with them for quite
some time about that and, you know, determined finally to leave
the program this quarter.
I know I've made the point before that that is how we approach,
you know, the Medicaid program in general -- if we believe we can
add value. There've been a number of studies done in California
about quality of impact on patient health status. And clearly
there are cost savings associated with the programs we offer. As
long as we can offer those in an environment where we can compete
and it makes economic sense, we'll do it. When it doesn't, we
won't. And that's a decision we made in Orange County. But that
is Orange County-specific.
In terms of the California situation, you know, you have to be
aware that California has a Democratic governor and a Democratic
legislature and cutting Medicaid or cutting Medi-Cal is not on
their agenda. We don't have a state budget that has been passed.
But as you go back in history, you can get a sense of where
things are probably going.
At the beginning of 2003 we gave guidance for slightly less than
10% reductions in reimbursement. Governor Davis then proposed a
15% reduction. Both of the political parties in the legislature
rejected the governor's proposal but have not put any provider
rate reductions on the table. So we shouldn't see anywhere near
the magnitude that was proposed by the governor and probably
won't see what our assumption was.
It's more likely that there'll be some minor eligibility
requirement changes. But that is going to be offset we think by
the impact of legislation passed around the Bush tax plan, which
gives about a little over $2 billion to the State of California.
And half of that is earmarked for Medi-Cal.
14
So if anything, it's not going to be quite what we projected,
although we continue, you know, to be cautious and, as indicated
by the Orange County decision, make our decisions about continued
participation on a county by county basis.
David
Colby: In terms of overall, you know, enrollment, you know, growth, I
think last call we had, you know, given guidance for 2003 of
about 5% enrollment growth based on the second quarter. I think
we'd look more in the 3-1/2 to 4% enrollment growth
year-over-year. And then for, you know, 2004, you know - now is a
little early to, you know, give guidance, we usually do that at
the end of the year, beginning of 2004 - but, you know, we'd be
shooting for, you know, our target level of about 5%.
Leonard
Schaeffer: Okay. But Dave, could you just comment in terms of maybe the RFP
activity or what you've got, you know, through the middle of July
versus last year, et cetera?
David
Colby: As Leonard said, you know, there's some good activity and, you
know, we do have some visibility on the large accounts, although
obviously a lot of our accounts are smaller size and don't make
their decisions quite as early as the real jumbo accounts. But,
you know, even Steve Bablitch at Cobalt talked about the, you
know, increase in, you know, activity. And I think we are seeing
it.
Leonard
Schaeffer: Yeah, the issue this year is not sales. If you look at our sales,
we've done very, very well. You know, there are other issues that
impact this. And it's a combination of the economy and pricing
discipline.
I think I mentioned on the last conference call what we have seen
for the last couple of quarters is less on the actions on the
part of employers to reduce benefits. In other words, we haven't
seen the buy downs that we expected, but much more attention
being paid to total employment. And you're seeing that in what's
called "within-group growth." You're seeing that the economy is
not producing more jobs. You know, many of the people on the
phone are much more experts on than this than I am. But it's in
all the national press. What we're seeing is, you know, a slow
recovery, but not a big recovery in terms of jobs.
I think we'll continue, you know, to do well in terms of sales.
And we don't think it's a big issue for us this year or next.
Joshua
Raskin: That's helpful. Thank you.
Operator: Your next question is from John Szabo with CIBC World Markets.
John
Szabo: Good morning. Thanks. I have two questions, one for Leonard and
the other for Steve and his team. Leonard, I was wondering, could
you talk about the dynamic between small group and individual? I
think in the past you've seen, you know, the individual sales
tick up when small group declined. Has there been any change, and
are you feeling a little bit better about prospects for small
employers, particularly in California?
Leonard
Schaeffer: Well, you know, the small group market is the one that's impacted
most dramatically by changes in the economy. That's where most
jobs are created and that's where you see within group growth we
have - you know, when the economy is doing well.
It's going the other way right now. So we're seeing within group
declines. You know, several years ago, you know, a e-commerce
small company in northern California might start with 8 people
and a year later would have 11 or 12. We saw
15
the reverse of that actually late last year. So that's the issue
in the small group market.
We are feeling good about our individual business. And we are
seeing people go into - you know, taking individual coverage when
they lose the small group coverage and in some cases large group
coverage. So we think that dynamic will hold.
John
Szabo: So the in-group disenrollment, was it disproportionately slanted
toward small group then? Is that an accurate statement?
Leonard
Schaeffer: No, but against our historic experience, yes - I mean, we're
seeing it across the board. But this is a period of time when
small employers are reducing employment as opposed to, you know,
it going up by virtue of the economy.
We're also seeing I think in the small group area the desire to
maintain insurance coverage. This whole idea of security,
employment, financial, and benefits security, I think has become
very important to Americans after 9-11. So, you know, a small
employer sort of does the trade-off of do I want to keep my
benefits in place, or do I want to, you know, reduce total
employment. And what we're seeing is the desire to reduce - the
decision rather, not the desire, to reduce total employment.
John
Szabo: Okay, thanks. And I guess a question for Steve - you know, it
sounded pretty encouraging about the quote level on the
broker-distributed products. Could you talk a little bit about
the close ratio on that quote activity and sort of where do you
see that broker distribution channel as a percentage of your
total sales say in the next 12 to 18 months?
Steve
Bablitch: Okay, John. I think I'm going to turn to Mike Bernstein and let
him answer that question for you.
Mike
Bernstein: John, I think that our close ratio is hovering just about 5%,
which is actually disappointing. And we expect that to improve as
the agents are testing us now to try and develop some confidence
in how we're working. And we expect the testing to diminish and
the actual sales volume to increase.
You know, we're headed into the January 1st, '04 sales season. So
a lot of the large group activity is now postponed until '04. So
the sales growth that we expect to see the balance of this year
will be in the small and individual market. And we expect it to
be positive sales growth. It will be a large percentage of our
growth in the balance of the year because it is the vehicle for
growth at that time. And we're optimistic about our '04 growth
prospects.
Leonard
Schaeffer: John, one of the things that I think is going to occur across the
county is, as employers look at their total costs, they may be
decreasing contributions for dependent coverage. And that has an
impact within group change.
We had interesting experience here in California. One of the
guilds in the entertainment business just flat out decided that
they would not allow their members to buy coverage for the
member's spouse, if the member's spouse is employed and coverage
was offered at that spouse's employer. So we may see those kinds
of things coming up as well. And that has an impact on within
group change. Again the issue is to maintain the benefits for
people but to make sure that the appropriate employer is covering
those benefits.
16
John
Szabo: Okay, thanks.
Operator: Your next question is from Bill McKeever with UBS Securities,
LLC.
William
McKeever: Yes, I guess it's to Dave Colby on hospital costs. The hospital
utilization seems to be tied to the general economy. I'm
wondering if you believe that, as the economy recovers, could
that put upward pressure on the hospital costs again to get it
back in line with where you were last year?
David
Colby: You know, Bill, you know, we have not seen dramatic changes in
utilization levels. I mean, I think we do tend to deal with a,
you know, commercial, you know, population. And obviously, if we
deal with them, they're insured. So there's no change in
utilization because they don't have coverage in deferring things.
We don't deal with a high senior population that, you know, gets
hospitalized for, you know, flu outbreaks and, you know, things.
So our, you know, utilization side has been, you know, fairly
stable.
William
McKeever: Okay. And then my last question - on the SG&A side the
productivity improvements that you've seen, is that going to come
from just continued penetration of physicians and getting
hospitals to interact with you more electronically, or are there
any specific initiatives that you have underway that might begin
to have an impact and bear fruit later on?
David
Colby: You know, you go through our, you know, IT department we probably
have, you know, 100 or 200, you know, projects or initiatives all
of which, you know, have just a few basis points of, you know,
benefit. And it's, you know, really getting down into the, you
know, grimble of, you know, blocking and tackling from, you know,
getting higher EDI rates, higher auto adjudication rates, you
know, fewer customer calls, directing it more towards
self-service as a lower, you know, cost alternative to get
information and receive service. So, you know, we have a number
of initiatives working, you know, throughout the, you know,
organization to do. It's a very high priority for us.
William
McKeever: And then the calls that are going to the service center, are you
actually seeing a shift to more calls being handled over the
Internet versus a live person?
David
Colby: Well we are seeing, you know, pickups. It's always hard to trace,
you know, a Internet, you know, hit to a reduced phone call. But
certainly, if we look on the provider side our provider access
and the physicians and office staffs using physician access to
check eligibility, check status of claim, is up, which, you know,
should be representing a decline in call volume.
Leonard
Schaeffer: I think the way to look at it is we try to provide a smoother
channel for every type of communication. And that would be, you
know, someone who calls us, someone who writes us, someone who
e-mails us, people who send us tapes. All of those interactions
can be improved. And there are major activities aimed at
improving workflow inside the company as well as interaction with
people outside the company. And we are very aggressive about the
notion of controlling our admin costs because that is under our
direct control. And our members expect us to have, you know, the
minimal amount of administrative cost. So we continue to work on
it from just about every angle we can develop.
William
McKeever: Great. Thank you.
17
Operator: Your next question is from Matthew Borscht with Goldman Sachs.
Matthew
Borscht: Thanks. My question is for WellPoint. And I also have a follow
up.
The first question is on the enrollment and economy. And I'm
wondering how much of the enrollment weakness you estimate is
coming from a lower take up rate of employer sponsored insurance
by young and healthy members that may be looking at substantially
higher premium contributions. And to the extent you're seeing
that, are you concerned about the potential impact to the risk
pool?
Leonard
Schaeffer: No. We have not seen that. And we don't think that is the issue.
I think the issues for us are the combination of pricing
discipline, which we will maintain, where there is weakness in
the economy and a desire on behalf of employers to maintain
benefit coverage but reduce total cost, and they do that by
reducing the number of employees, and then some decisions that
we've made about, you know, where we want to continue to do
business. And this time around that had to do with the, you know,
Orange County.
But we don't see a meaningful change or any change frankly in the
uptake by young people. I don't think that is the issue.
In any case, our rates would reflect the characteristic of the
group. So...
Matthew
Borscht: Sure.
Leonard
Schaeffer: ...you know, if it does occur, we will price for it.
Matthew
Borscht: Got it. Okay. Thank you. And my other question is on a different
topic related to your outlook, for Dave Colby. And that's whether
you still see about a billion in operating cash flow for the full
year?
David
Colby: Oh yeah. I think that the second half of the year will be strong.
We won't have these one-time, you know, events. And you should
still see GAAP operating cash flow well in excess of $1 billion.
Matthew
Borscht: Great, Dave. Thank you.
Operator: Your next question is from Michael Baker with Raymond James.
Michael
Baker: Yes. My first question's for WellPoint. That would be I'm
interested in hearing what you're seeing on the PBM side as it
relates to, you know, I know there was a pick up in RFP activity
maybe on the win/loss side there particularly in light of the
award. And then I have a follow up.
David
Colby: We have, as we explained at our Day with WellPoint, we have a
number of irons in the hopper and they're, you know, moving down
to the final stages. You know, we haven't heard yea or nay yet,
but, you know, we are certainly optimistic.
Michael
Baker: And then, David, in terms of the follow up, can you give us a
sense of how buy downs are tracking relative to your
expectations?
David
Colby: Well again, you know, they are tracking, as Leonard said, you
know, we were a little bit, you know, surprised in the first
quarter at the magnitude not being, you know, quite as high as
what, you know, we had anticipated. And, you know, that is
continuing. And we'll have to see, you know, in the third quarter
when we bring on,
18
you know, some accounts, but it is a little bit surprising where
we had anticipated for the year a little bit over 300 basis
points of buy down, you know, we're getting, you know, just shy
of 200 basis points.
Leonard
Schaeffer: It's very important though in the sales process that we be able
to demonstrate that we can indeed, you know, offer approaches
that would reduce total cost. So in discussions with accounts
that's a critical factor. But the thing that surprised us a bit
was what I, you know, interpret as a desire to maintain benefits
at a slightly higher cost than we expected but then to be very
aggressive about the workforce.
Michael
Baker: Thank you very much.
Operator: The next question is from Christine Arnold with Morgan Stanley.
Christine
Arnold: I have two questions. The first is it looks like the yield came
down a little bit on the commercial book of business this quarter
relative to the last. And you said it was owing to buy downs.
Given the churn in the book, are you seeing new accounts coming
in at lower price point products so it's not technically a buy
down but you're attracting some accounts to some of your
innovative plans? Could you address the yield question? And then
I have a second.
David
Colby: I think the yield, Christine, has to do more with the mix as, you
know, Leonard, you know, discussed. You know, we had a lot of
sales, and then we brought on 472,000, you know, new members. And
then we, you know, either had some, you know, negative in group
change or lapsed quite a few. When we start looking at the cases
that were lapsed, generally they were underperforming groups that
were getting higher than average, you know, price increases. So
even though our underlying, you know, pricing and trends are very
consistent, it appears to, you know, come down in aggregate
because I think, you know, we're sort of getting whatever the
opposite of adverse selection is in terms of groups that are
joining us versus leaving us. And that's, you know, bringing
down, you know, the average price and then the average cost.
That's why, you know, the medical care ratio was a little bit
lower than expected too.
Christine
Arnold: So they left before they got big rate increases, but they started
out at a higher yield even before those changes.
David
Colby: These would have been higher, you know, price cases.
Christine
Arnold: Okay. And then my second point is to Leonard. Leonard, can you
expand on your comments on the Medicare drug bill? Are you saying
that a stand-alone drug benefit in, you know, kind of from your
perspective doesn't work? Are you saying that there are things
that need to be in place to make it work? Could you help us
understand the issues?
Leonard
Schaeffer: Well again, you know, the devil is in the details. But the
stand-alone benefit, you know, all by itself is a very difficult
one to have work out economically. You know, one thing we know
about seniors is that they are very, very focused and understand
very well their own costs, medical costs, in particular their
pharmacy costs.
So if there is a stand-alone pharmacy benefit put in place and if
it has a premium of X a month, what will happen is seniors whose
drug costs are over X will sign up. Seniors whose drug costs are
under X will not sign up and that is the definition of adverse
selection.
19
What we would prefer and what I think has been proposed by some
is an integrated benefit plan, you know, something that has more
of a PPO aspect of it. And by integrating the benefits you can
end up I believe with an affordable and a much-improved package.
The problem with Medicare simply from a technical insurance
perspective is it's a very, very old design. It's a major medical
design. There's a part A and there's a part B; there's no drug
benefit. And it doesn't have any incentives in it for the member
to - the beneficiary to control costs. And it doesn't have the
appropriate drug benefits.
So some time over the next X number of years it - we're going to
see, I think, a major redesign of Medicare from an old fashioned
major medical - what could best be described as acute medical
intervention model to what we need in this century, which is an
integrated benefit plan that focuses on continuing and chronic
conditions and the pharmaceutical treatment plan - treatment for
those continuing conditions. And you need a major redesign.
So long story short. We don't think that the stand-alone
prescription benefit is going to be viable. There are suggestions
on the table for, you know, trying to make it more viable and
we're interested in having those discussions but we'd much prefer
an integrated, new plan.
On a personal basis, I think what you'll see as the baby boomers
age, this will be revisited and revisited. And I would be shocked
if by, you know, 2013, which is when the big influence starts -
the big influx starts, we don't have as many Medicare options as
we have private options.
But it'll probably take the next decade to get there as baby
boomers indicate to their representatives in Congress that they
want to continue to have the kind of plans and programs that are
available to them today.
Christine
Arnold: Okay. Final question on RightCHOICE? I know you don't break it
out separately but can you give us a sense of accretion relative
to your expectations? I know that it beat out your expectations
for the full year in the first quarter. What - can you give us a
sense for your full-year expectations if not this quarter?
David
Colby: I mean, I - you know, I think it's fair to say that the
RightCHOICE entities, Blue Cross Blue Shield of Missouri and
HealthLink, are, you know, doing better than expectations just
like, you know, overall WellPoint's doing better. So I think they
are certainly carrying their weight in terms of performance.
Christine
Arnold: Thanks.
Operator: Your next question is from Ellen Wilson with Sanford Bernstein.
Ellen
Wilson: Yes, I was wondering if you could comment on the ASO part of your
business. Specifically it seems to me that this environment would
appear to be getting more competitive now versus the past. How is
it that your competitors are winning business? You know, sort of
specifically what are they are doing to take business from you or
to try to take business from you?
Leonard
Schaeffer: Well, I mean you have to ask them what they think they're doing
or what they're doing. I - all I can say is that, you know, our
strength is in the middle market and our
20
focus is on trying to help employers make the entire package
affordable. And in situations where the competition is purely on
the administrative costs and high volume jumbo accounts, you
know, that's not the focus that we have had historically.
And what we see in the jumbo account market is employers kind of
moving back and forth, sometimes thinking that if they can get a
low administrative per claim they want and then looking at their
overall costs and saying gee whiz, you know, we really need to
control total health care costs. The admin cost is just a small
percentage of it.
Now our admin costs have improved. We have, you know, through the
Blue system an opportunity to be involved with national accounts.
And we have taken that opportunity. But traditionally our focus
has not been on competing on admin costs per claim. Our focus has
been on trying to control overall costs.
And I think that's the difference. If you have a large employer
who's focused on, you know, a specific admin cost per claim,
there are other companies whose - who feel that is their market
and they're going after it and that's appropriate.
This has not been a big impact. I mean 73,000 members is not that
large an impact. But we are not going to as a company change our
strategy. I think at, you know, over time or in the long run,
controlling total costs really is the issue. And that's where our
focus will remain.
Ellen
Wilson: And so the HealthLink accounts lost were sort of more probably
than of an admin cost per claim kind of situation?
Leonard
Schaeffer: Right.
Ellen
Wilson: Okay and then one quick follow up. Did you have any competitor
plans leave your market through year to date? I know you have in
the past several years seen exits. Were there any exits in the
current period?
David
Colby: There were no significant exits this quarter although, you know,
some of the HealthLink decline was they do, you know, serve, you
know, smaller insurance companies that are pulling back in terms
of medical insurance.
Ellen
Wilson: Okay. And then is there anyone giving up, you know - giving up
meaningful share obviously other than Cigna, we know that. Are
you seeing players giving up meaningful shares or have people
kind of regained strength at this point?
David
Colby: Well, there's the, you know, public ones like, you know, Cigna
clearly, you know, having, you know, challenges. And, you know,
there are still a number handful of much smaller plans in
California that for example are having, you know, financial
difficulties. And the likelihood of them being around for the,
you know, next year or two is pretty small.
Operator: Your next question is from Eric Viel with Wachovia Securities.
Eric
Viel: Thank you. Just two questions. First, Dave, can you give us a
little bit more detail on in the California market, compare the
rate increase you guys just put through in ISG that you referred
to compared to the competitors' rate increases that you
mentioned, so that we can get a sense of order of magnitude on
those?
David
Colby: Well, I think, you know, the what we're, you know, saying is our
California rate increases, you know, have been, you know, a
little bit over 10%. Now it varies by
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product and rating area and it's always hard to compare, you
know, our exact rate increases to competitors' because we have
slightly different, you know, product designs.
But I believe what some of the competitor, you know, actions
you'll find that, you know, our plans on a relative benefit, you
know, basis, you know - you know, do look, you know - you know,
good and I think spreadsheet well for, you know, the agents and
brokers. So...
Leonard
Schaeffer: The issue is timing, you know, we are - in California, we're the
major player and what tends to happen is, you know, we're the
first mover. So we did what we had to do with our pricing
discipline in the second quarter. And then what typically happens
is later in the year others make their decisions, make their
changes, and assuming, you know, that past history continues, you
know, then we get back on a much more even playing field.
Eric
Viel: That's good, thanks....
Leonard
Schaeffer: But for the period of time where we have a rate increase in force
and others don't, you know, that's where there is a difference.
And we may be seeing some of that now.
But, you know, I've talked about this endlessly in previous
calls. We make our decisions about pricing based on what we think
the costs are - the costs trends. And what we think we need to
make sure we pay every claim on a timely and a complete basis.
And so, you know, we don't play games with the timing. And the
timing was right for a price increase and we did it. And we
believe that, you know, later on in the year others will make
their changes and we will see a positive impact on our membership
or on our sales growth.
Eric
Viel: Great. That's helpful. And then, Leonard, just to set - my second
question is for you. Can you give us some sense of the types of
discussions going on within the Blue Cross Blue Shield
Association as they relate to some of the recent conversions?
CareFirst has been talked to death but maybe if there was some
comments regarding North Carolina's decision to withdraw their
plans to convert. And what the general discussions are within the
Association on that topic?
Leonard
Schaeffer: Well, I don't know if I can speak to all the discussions going on
inside the Association but I can certainly give our point of
view. What is quite clear is what I think we've said for a very
long time and that is that the tax status and the affiliation of
the Blue plan is a local decision that is made by each local
board. And different plans have different views about how they
should operate and what's the most appropriate strategy.
What we're seeing I think is that the same is true in terms of
local regulators. And different regulators and different
legislatures have different points of view. Now some of that has
to do with the history in that state. And some states histories
are very different than other states.
I mean we have a situation, I think you've read some of the
articles that were published in Wisconsin, you know, great
support for the transaction - Wisconsin.
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The, you know, the governor, the legislature, I mean everybody is
exceedingly positive about it.
Because I think in that state, there's a foundation that was
created will benefit their two medical schools and that's seen as
something that is very positive. And because the Wisconsin plan
has behaved as a for profit company in a very, very responsible
manner so that's all viewed very positively.
Other states have other histories and there are other players in
those states. And what we're learning is everyone is a lesson,
you know, to be learned. I would point out though that
conversions take a long time. And Blue transactions take a long
time.
And I believe if you go back and listen to some of our calls
during the transaction involving the Georgia plan, you know, it
took two and half years to get that done. But it did get done and
it was extremely beneficial. The New York conversion took I think
over five years and it did get done.
So I think we're in a situation where each state will play out
based on how - what the local board and the local plan want to do
and then we'll see each state play out in terms of what the local
regulator wants to do.
But net-net these things take a long time. And we want to - our
company wants to respect the local decision-making process. And
we do respect that. And those plans that want to convert, you
know, we would be happy to be of assistance; those that don't,
that's fine with us. And we will be in compliance with whatever
the regulator requires in any state that we do business.
Operator: Your next question is from Scott Fidel with JP Morgan.
Scott
Fidel: Yes, hi, good morning. I had two questions for WellPoint. The
first is if you could just update us on your hospital contracting
for 2004 and whether you think you could maybe see some
improvement in unit pricing there?
Leonard
Schaeffer: Well, we've had a pretty good contracting season I guess is the
best way to put it. We haven't had, you know, any public issues
and that's the way we like it. I would say that we're quite
satisfied with the contracting and that we, you know, are big
believers in multi-year contracts. So we think we're in pretty
good shape.
I think there is - I want to choose my words carefully - I think
we're seeing a more rational environment for these discussions.
That is to say that our interactions with hospitals are becoming
more businesslike on both sides. There's less, you know, desire
to make these things public and - on the part of hospitals. And
we want to be seen and to treat our hospital colleagues with
respect and come up with contracts that make sense for them, make
sense for us. And that's where we believe we are.
David
Colby: I think some of our improvements to the, you know, claim process,
you know, are getting, you know, recognized.
Leonard
Schaeffer: Well, we have, you know, informal sort of anecdotal evidence that
these efforts have been very pleasing to many of the hospital
administrators in the state. And we want to continue to do that.
I don't want to rehash the days in claims payable issue but if
you can pay hospitals and clinicians accurately and quickly you
become their friend. And we want to pay
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hospitals and clinicians accurately and quickly because they're
doing important work for our members. And that seems to me to be
a very businesslike and appropriate approach. And as we do that I
think it will be beneficial on both the relationship and the
price side.
Scott
Fidel: Okay. That's helpful. And then my follow up just has to do with
Illinois and Texas. Can you talk about how performance is
tracking in those markets? And then also what your expectations
are for enrollment in those two markets and for the rest of 2003
and maybe looking out into '04?
Leonard
Schaeffer: Well, there are - as I mentioned, Texas has always been a
difficult place to do business for health plans. And there are
clearly some economic and pricing issues there but we will, you
know, continue to show pricing discipline.
David
Colby: You know, we're seeing good, you know, profitability increases in
those, you know, markets. You know, Illinois actually had
sequential improvement, you know, in membership. And some of the
decline in Texas was one of the large ASO accounts that
HealthLink lost was a regional insurance company in Texas.
And so that was the impact, you know, there. Obviously, you know,
those markets for UNICARE do not run, you know, the same margins
that we can run in California or Georgia.
And, you know, one of our opportunities going forward that we're
continually focused on is, you know, improving our, you know,
margins, you know, outside, you know, California, outside of
Georgia. And that's one of the growth opportunities.
Scott
Fidel: Uh-huh. And my understanding has been it's looked like the
pricing environment in Texas has firmed up pretty solidly this
year. Would you say that you're seeing that down there?
David
Colby: I think, you know, we saw that even beginning last year when we
closed the Methodist Care acquisition, you know, we had sort of,
you know, held that to see how the environment was.
And if you look at Texas marketplace, you know, there have been
an awful lot of plans, you know, go out of business there just
like in California. Particularly a lot of provider-sponsored
plans have all, you know, changed hands. And they tended to be
sometimes the less sophisticated, you know, plans.
The ones that are left now including Blue Cross Blue Shield
Texas, which is run by the Illinois plan, which is a very
disciplined, you know, organization, I think is making that a
good market.
Operator: Your next question is from Roberta Goodman with Merrill Lynch.
Roberta
Goodman: Thanks. I wanted to follow up on Eric's question. Leonard, you
referred to competitors who announced price increases recently.
And I was wondering if you could give us a sense of the magnitude
of those increases and whether these are major or minor
competitors in the California market.
Leonard
Schaeffer: I was referring to ISG competitors in California and their
increases are consistent with ours. I don't know that we've had
all of the increases that we expect announced
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yet but they are consistent with ours. And as I said it will, you
know, re-even if you will the playing field in California. Yes.
David
Colby: It's interesting, you know, those - that's a segment that moves.
I mean we've seen now just, you know, in July, you know,
applications are, you know, up from, you know, May and June
because of that so.
Roberta
Goodman: Okay were these - and were these major players in the market or
smaller players in the market?
David
Colby: Well, they're major players in the individual and small group
market.
Roberta
Goodman: Okay. Great.
Operator: Your next question is from Ed Kroll with SG Cowen.
Ed
Kroll: Good morning. I've got two quick ones. On the rollforward
schedule, when will you present that to us next?
David
Colby: At year-end.
Ed
Kroll: Okay. So we're on a every six-month...
David
Colby: Every six months I think we have enough development that it's
worthy of news.
Ed
Kroll: Okay and then my follow up is I wonder if you could give us an
update or is it too early on the - those generic coupons, the
universal generic coupon program you have in California?
David
Colby: I think that program has, you know - you know, worked, you know,
quite well for Alavert, you know, and moving, you know, off of
prescription, non-sedating antihistamines to over the counter,
you know, remedies. I think the latest numbers I saw was that our
number of prescriptions for non-sedating antihistamines were down
about 50%.
So that's good, you know. Pharmacy trend is still double digits
but at least it means that, you know, we're protecting the
benefit to afford, you know - you know, other, you know, more
important drugs.
Ed
Kroll: Okay. But as far as the coupons that are - you're sending to the
doctor's in California and that, you know, wouldn't matter which
health plan a consumer belongs to is that program off the ground,
do you have any commentary on how that's doing?
David
Colby: That begins in August.
Ed
Kroll: August. Thank you.
Operator: Ladies and gentlemen thank you for participating in today's
WellPoint Health Networks and Cobalt Corporation's second quarter
conference call.
You may now disconnect.
*** END ***
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