Oct 24, 2007
Executives
Jamie S. Miller - Sr.
VP and Chief Accounting Officer Angela F. Braly - President and CEO Wayne S.
DeVeydt - EVP and CFO
Analysts
Matthew Borsch - Goldman Sachs Charles Boorady - Citigroup Joshua Raskin - Lehman Brothers Scott Fidel - Deutsche Bank William Georges - J. P.
Morgan Christine Arnold - Morgan Stanley Justin Lake - UBS John Rex - Bear Stearns & Co. Doug Simpson - Merrill Lynch Carl McDonald - CIBC World Markets Greg Nersessian - Credit Suisse Michael Baker - Raymond James Brian Wright - Jefferies and Company Thomas Carroll - Stifel Nicolaus Wayne Cooperman - Cobalt Capital Management
Operator
Ladies and gentlemen, thank you for standing by and welcome to the WellPoint Conference Call. At this time, all lines are in a listen-only mode.
Later there will be a question-and-answer session and instructions will be given at that time. [Operator Instructions].
As a reminder, this call is being recorded. I'd now like to turn the conference over to the Company's management.
Jamie S. Miller - Senior Vice President and Chief Accounting Officer
Good morning and welcome to Wellpoint Third quarter earnings conference call. I am Jamie Miller, Chief Accounting Officer and Executive responsible for Investor Relation.
And with me this morning are Angela Braly, our President and Chief Executive Officer and Wayne DeVeydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with and overview of our third quarter accomplishments and then Wayne will offer a detailed review of our third quarter financial performance and current year guidance which will be followed by a question-and-answer session.
We will be making some forward-looking statements on this call, listeners are cautioned are that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint. These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review the risks factors discussed in our press release this morning and other periodic filings we make with the SEC. I will now turn the call over to Angela Braly.
Angela F. Braly - President and Chief Executive Officer
Good morning and thank you, Jamie. We are very pleased to report another quarter of record earnings per share.
In the third quarter, WellPoint reported net income of $1.45 per diluted share which included $0.01 in net realized investment gain. These results are inline with our prior guidance and we continue to have met or exceeded our EPS guidance every quarter, since our IPO in 2001.
As a reminder, net income in the third quarter of 2006 was $1.29 per diluted share which included $0.04 per share in tax benefits due to a change in state tax apportionment factors and $0.01 per share in net realized investment gain. Operating revenue was $15 billion in third quarter 2007, an increase of $745 million or 5.2% from the third quarter of 2006.
The increase resulted primarily from disciplined pricing and local group business and growth in state sponsored and Medicare Advantage membership. Medical enrolment totaled 34.8 million members at September 30, 2007.
An increase of 615,000 members from 34.2 million reported at September 30, 2006. The increase was driven by our national business which added 511,000 members and our state sponsored business which grew by 336,000 members.
Growth from the prior year and state sponsored business excludes the impact of the change in our 50% ownership interest in a joint venture in Puerto Rico to a smaller percentage ownership in the joint venture parent company. Accordingly, we no longer include the 222,000 members related to this investment in our reported enrollment.
This growth was partially offset by a decline in individual business. Overall pricing remains rational and we expect even stronger overall membership growth in 2008 with at least 1 million net new members.
We have had another excellent national account selling season as employers continue to recognize the superior value proposition we bring to the marketplace. In total, we expect to add more new national account control members in 2008 than in 2007.
We do expect to see some in-group membership declines in mortgage related and automobile sectors as a result of employee reductions. However, given our strong selling results our second net membership growth should still be a little higher for national account control members than it was in 2007.
The timing of our membership additions next year will be somewhat different that in the past, as one our known wins is a group with more than a 100,000 members that will be effective July 1, 2008. National accounts have been a significant driver of our membership growth for several years and we are pleased that this will continue next year.
The national account market remains competitive with rational pricing. We also expect further membership growth in our State Sponsored Business.
From our recently announced strategic alliance with Blue Cross, Blue Shield of South Carolina, we expect to add more than 50,000 dedicated members in that state. In Indiana, we will be one of three plans that will offer coverage to 140,000 adults who earn too much to qualify for Medicaid but less than twice the federal poverty level.
This innovative program is being subsidized by an increase in Indiana's cigarette tax. On the commercial side, last month we announced an agreement with M-Plan, an Indiana based provider on HMO whereby they will endorse us as the insurer of choice for their members and employer groups as they exit the commercial HMO business.
M-Plan made a strategic decision to exit the commercial business due to the future investments business needed to grow and expand their business. They are recommending Anthem Blue Cross Blue Shield in Indiana to their current employer group.
M-Plan currently insures about 125,000 lives in its commercial business. We'll re-underwrite this business at our rate and will pay M-Plan a commission if the group purchases an Anthem Blue Cross Blue Shield benefit plan.
While not all of these members will choose an Anthem plan, we currently expect that more than 50,000 will. We were also recently awarded the New Hampshire State Employee Account that will add about 39,000 self-funded members in 2008.
With these known wins, we're very confident about continued membership growth in 2008. We also have a number of initiatives designed to further increase our growth.
Effective this month, our suite of innovative consumer driven health products is now available to all individual, small, and large group UniCare customers. It's being marketed under the brand name Solara.
We've seen exceptional growth in our Lumenos consumer-directed health products in our Blue States with membership at September 30, 2007 of 1.3 million members, a 58% increase in the last twelve months. We expect nice growth in UniCare Solara products as well.
We are also positioned for additional growth in our senior business in 2008. During the third quarter of 2007, we learned that at least one of our bids was under the benchmark in each region for Medicare Part D.
This means we should see continued growth in our Part D membership for 2008 as fewer sponsors will have plans below the benchmark, and we will therefore gain some of their auto assigned members. We are confident that we have appropriately priced our Part D products to match the benefits offered.
Since this program's inception we have priced responsibly to deliver an appropriate financial return, while earning and keeping the trust of our consumers. A primary driver of that trust is consistent, affordable, and sustainable pricing and product.
We are optimistic that our portfolio of Part D products will be attractive and competitive in the marketplace for both auto-assigned and non-auto-assigned seniors. In terms of Medicare Advantage, we are seeing increased interest from employer groups.
The city of Columbus, Georgia recently announced that it was switching from a self-insured plan to Medicare Advantage plan administered by Blue Cross Blue Shield in Georgia. We think our Medicare Advantage program offers wonderful value and will continue to grow.
As a company, we not only have the ability to add more business, but we have the expertise and the discipline to do it in a profitable manner. The benefit expense ratio was 81.8% in the third quarter of 2007, an increase of 50 basis points from 81.3% in the prior year quarter.
The increase was driven by an increase in the specialty, senior, and safe sponsored business reporting segments. This increase was partially offset by a reduction in the commercial and consumer business, benefit expense ratio from the third quarter of 2006, reflecting our commitment to disciplined pricing.
The results from our commercial and consumer business segment are significant, given that it represents approximately 70% of consolidated operating revenue. The third quarter of 2007 benefit expense ratio for senior business was higher than anticipated, primarily due to the CMS reconciliation of 2006 Medicare Part D claims activity.
This process resulted in an amount due to CMS for Medicare Part D risk sharing that was higher than our original projections. Accordingly, we recorded a charge in the third quarter that increased the consolidated benefit expense ratio by approximately 40 basis points.
This charge related to claims activity for 2006 and 2007. We're continuing to reconcile the 2006 plan year with CMS to recover amounts that we believe we're entitled to receive.
Higher claims experienced in state-sponsored operations also increased the overall benefit expense ratio from third quarter of 2006. I'd like to now take a few minutes to discuss the status of Medicaid rates in California and Connecticut.
Under the new California regulations, the rates need to be actuarially sound with a margin for profit. Earlier this month, we received Medi-Cal rate increases for eight counties in California that averaged 8.3% on a combined basis.
We are in active discussion with the State to finalize these terms. We except to continue to serve our Medi-Cal members in most if not all of our counties.
There are two additional counties in California for which we received rate increases early this year that are on a different contract timeline. We'll separately negotiate rates for these two counties that will be effective January 1, 2008.
And in 11 counties, we operated a sub-contractor for the Medi-Cal program. As a result, we're unable to finalize our negotiations with the primary contractor until that primary contractor finalizes its negotiations with the State of California.
This process may take a few months to complete. We're making progress in our Connecticut Medicaid rate negotiations as well.
We expect to reach final resolution with the State this quarter, and anticipate adequate rate increases to be retroactive to July 1, 2007. In addition to negotiating new rates in California and Connecticut, we continue to increase our cost of care initiatives across our State sponsored business.
We are moving members from fee for service providers to lower cost capitated medical group. We are re-contracting our networks and creating new pay for performance models to increase quality and lower cost.
Some of these strategies included... includes increasing medical management staffing, to pulling additional data reporting, and increasing the use of analytical tools such as predictive modeling.
Also we have Medicaid formularies that offer a higher mix of generics which result in quality care at a lower cost and we are focusing more efforts on high risk and high cost numbers. I now want to turn to some of our sustainable advantages and how we are going to use these to successfully compete in the marketplace.
I believe that the ultimate managed care winners will be those organizations that can truly manage and optimize medical costs. Blue Cross Blue Shield plans have the best provider networks in the country with over 95% of the hospitals and 85% of physicians and the deepest discounts available so we have a very strong base for success.
Coupling these networks with award winning transparency tool will allow our customers to select the most efficient providers and take appropriate responsibility for their healthcare. We are committed to being a leader in bringing meaningful transparency to the healthcare system.
Transparency is not an end in itself but is instead a means to build consumer engagement that is essential to positively impacting patient and provider decisions and ultimately healthcare costs and outcomes. We're expanding our successful Care Comparison transparency tool into additional markets in Georgia, Maine, and New Hampshire later this year.
Earlier this week many of you saw our announcement about an industry leading partnership with Zagat Survey to launch a new online survey tool that will allow our members to share their provider experiences with others. Partnering with the trusted brand like Zagat Survey, supports our strategy of delivering the most comprehensive information to our members in an accessible, easy to understand format, and builds on our enterprise wide transparency strategy to provide our members with data and tools that will help them make it more...
take a more active role and make more important decisions in their heath and healthcare spending. We also recently received a transparency in pharmaceutical purchasing solutions certification from the HR Policy Association or HRPA.
Effective January 1, 2008 the certification will enable WellPoint NextRx to offer PBM services to members of the HRPA pharmaceutical purchasing coalition which is made up of more than 55 of the nation's largest employers. Now, before I turn the call over to Wayne for a detailed financial review of the third quarter, I want to discuss our recently announced changes to the organization and our management team.
On October 2nd, we announced our plans to position our organization for continued growth. The company will be re-aligned around two new strategic business units, a commercial business unit and a consumer business unit.
In addition, the new comprehensive health solutions business unit brings together the Company's resources focused on optimizing the quality of healthcare and the cost of care management. Our IT operations and government services unit remains unchanged.
This simplified customer focused structure builds on the strength of our commercial and consumer businesses and will create additional opportunities for cross-selling medical and specialty products. These changes also emphasize our comprehensive approach to improving the quality, transparency, and cost of healthcare for all of our customers.
We have very accomplished and experienced leaders for each of these units. Ken Goulet has been appointed President and CEO of the Commercial Business Unit.
Ken has more than 26 years of health insurance industry experience in management, sales, operations, strategy, and plan execution. In his previous role, Ken was President of our company's highly successful national accounts business.
Joan Herman has been appointed President and CEO of the Consumer Business Unit. Joan has nearly 25 years of experience in the health insurance industry and served as President and CEO for WellPoint Specialty, Senior, and State Sponsored businesses.
Joan has announced her plans to retire from WellPoint in mid 2008 and we expect her successor to be in place by that time. Dijuana Lewis has been appointed President and CEO of the new Comprehensive Health Solutions Business Unit, which includes provider relation, care and disease management, and our pharmacy benefit management company NextRx and its specialty pharmacy PrecisionRx Specialty Solutions.
Dijuana has more than 20 years of wide ranging health insurance industry experience including 10 years leading cost of care and quality initiatives in multiple States. In her previous role Dijuana was President of Local Group business.
We've also hired Brad Fluegel to be our Chief Strategy and Public Affairs Officer. Brad will be responsible for long-term strategic planning, government affairs, corporate communications, and WellPoint's strategic social responsibility program and reports directly to me.
He has held a variety of senior consulting and executive leadership roles within the managed care industry, including former Vice President of the enterprise strategy at Aetna, CEO of Reden & Anders and a Principal at Towers Perrin. Mark Boxer continues in his role as Leader of IT Operations and Government Solutions.
During the quarter, we also announced that Dennis Casey will be the President of UniCare. Dennis has 30 years experience, 26 years with our company, and is one of the architects of success for our Anthem Blue Cross Blue Shield plan in Indiana.
We have great confidence in Dennis's ability to continue that success for UniCare. UniCare operates in all 50 states and offers a full range of health insurance products, dental, vision, life, disability, and student health plans.
I am proud and excited to be working with my team as we move into 2008, and I am confident that we will continue our success. I'll now turn the call over to Wayne DeVeydt who will discuss our third quarter financial statement, medical cost trend, and provide guidance for the rest of the year in more detail.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Thank you, Angela and good morning to all of those on the call. We are very pleased with our financial results this quarter of $1.45 in earnings per share, that includes $0.01 per share in net realized investment gains.
Premium revenue was $13.9 billion in the third quarter of '07, an increase of $725 million or 5.5% over the third quarter of '06 due to disciplined pricing, our local group business and growth in state-sponsored and senior business. Administrative fees were $912 million in the third quarter of '07, an increase of $21 million or 2.3% over the third quarter of '06, due primarily to growth in our national accounts business, including Blue Card and local group.
Self-funded membership increased by 634,000 members and included 86,000 members who switched from our fully insured plans to self-funded. As Angela noted, in the third quarter, our benefit expense ratio was 81.8%.
For the full year, we now expect the benefit expense ratio to be 82% slightly higher than our previous guidance, due to the CMS Part D reconciliation process for 2006 and related items in 2007. We continue to price our business so that expected premium yield exceeds total cost trend, where total cost trend includes medical cost and selling, general and administrative expenses.
We remain very disciplined in our underwriting approach and do not target business that we believe is priced below our profitability targets. Based upon medical cost trends in the third quarter, we continue to believe that our 2007 medical cost trend estimate of less than 8% is appropriate.
Inpatient trend is in the mid-single digit range, and is almost all related to unit cost increases. Unit cost pressure continues throughout the country.
However, due to our re-contracting efforts, unit cost trend is slightly lower than it was earlier in the year. Yield made Non Intensive Care Unit or NICU States are very expensive, and we are expanding our successful initiatives, providing clinical management for NICU episodes.
Out-patients services trend is in the upper single-digit range and is all unit cost driven. Emergency room cost, surgery, and radiology continue to be the main drivers of outpatient cost trend.
As we implement Phase 2 of radiology cost management that addresses privileging and network optimization, we expect to favorably impact radiology trends. Virginia recently experienced favorable utilization trend, due in part to our radiology initiatives.
Physician trend is in the mid-single digit range and is almost equally driven by cost and utilization. Pharmacy trend is in upper single digit range and is 2/3rds unit cost and 1/3rd utilization-driven.
Specialty drug costs continue to increase and we announced last week the opening of our PrecisionRx Specialty Solutions Pharmacy in Indianapolis. Specialty medications allow people with complex medical conditions to lead better lives.
However, these medications are very expensive. We have built a technologically-advanced specialty pharmacy staff with certified pharmacy technicians, registered nurses, and clinical pharmacists to better manage both the quality and the cost of care for our members.
PrecisionRx handles over 1000 drugs for 14 diseases including hemophilia, multiple sclerosis, rheumatoid arthritis, psoriasis, Hepatitis C and cancer. Moving to the SG&A expense ratio, it was 14.6% in the third quarter of 2007, a decrease of 90 basis points from 15.5% in the third quarter of 2006.
We are very pleased that in absolute dollars G&A spending in the third quarter of '07 was lower than the third quarter of '06, even though we have added more than 700,000 new medical members in 2007. Management remains focused on optimizing administrative spending.
Organizational changes helped continue to drive these savings. The ratio improved year-over-year as we continue to control spending and spread administrative expensive across a growing revenue base.
We expect the SG&A ratio to increase in the fourth quarter as our spending increases for 2008 enrollment and we continue to make investments today to further improve our competitive advantage. We are increasing our spending of 2008 enrollment to take advantage of a number of growth opportunities, such as those presented by the M-Plan endorsement in Indiana, South Carolina Medicaid, and our senior business.
One example of an investment in improved service while reducing costs is our new online employer access portal for large groups in California, Colorado, Nevada, Georgia, and UniCare. This new application allows benefit administrators to conduct self-service transactions including enrollment, billing, eligibility enquiry and reporting in one seamless secure online portal.
And for our small groups in California, we recently launched a new online tool to support quoting and enrollment. This new tool is a key component of our e-distribution strategy and will streamline the administration process for our small groups and provide seamless integration with our backend systems such as underwriting and membership.
Moving now to net investment income, it was $258 million in the third quarter of 2007, and increased $35 million or 15.7% from the third quarter of '06 due to our strong cash flow and higher interest rates. Our effective tax rate was 36.7% in the third quarter of 2007, which was 130 basis point higher that 35.4% in the third quarter of 2006 but as a reminder, the effective tax rate was lower in the third quarter of 2006 due to a change in Company's state tax apportionment factors.
We continue to expect our full year 2007 effective tax rate to be 36.8%. Turning to our reportable segments, the Commercial and Consumer Business or CCB is our largest segment and continues to have strong financial results.
Operating revenue in the third quarter of '07 was $10.6 billion, an increase of $346 million or 3.4% from the third quarter of '06 lead by disciplined pricing. Operating gains for the CCB segment was $1.1 billion in the third quarter of 2007, an increase of 17.5% compared to $936 million in the third quarter of 2006.
Improved performance in the CCB segment resulted from disciplined pricing at our local group business. Our commercial medical membership has increased by more than 400,000 members over the last 12 months.
While we have seen some membership attrition in our non-Blue state, we continue to increase our membership in our Blue states. The CCB financial results demonstrate our commitment to pricing with discipline as the benefit expense ratio in our CCB business improved by 40 basis points from the prior year.
Specialty Senior and State Sponsored Business or 4SB operating revenues in third quarter of '07 was $3.4 billion, an increase of $461 million or 15.8% from the third quarter of '06, primarily due to growth in State Sponsored and Medicare Advantage businesses. Operating gain for 4SB segment totaled $224 million in the third quarter of 2007, a decrease of 21.2% compared to $284 million in the third quarter of 2006.
The decrease from prior year was primarily attributable to higher than expected cost reported in the quarter, as a result of the accrual for CMS Medicare Part D 2006 and 2007 risk sharing payments. Our other segment operating revenues in the third quarter of '07 was 1 billion, a decrease of $62 million or 5.7% from the third quarter of '06, primarily due to higher inter-segment eliminations reflecting additional PBM sales to our CCB segment.
Operating loss for the other segment was $26 million in the third quarter of 2007, which compares to an operating loss of $30 million in the third quarter of 2006. The change resulted primarily from increased corporate expenses.
Now moving to the balance sheet, current assets were $13.7 billion at September 30, 2007, an increase of $2.1 billion from year end 2006 due to increased cash and investments. Total assets were $52.9 billion at 9/30/2007 up $1.3 billion from year end.
Medical claims payable were $5.8 billion at the end of the third quarter, an increase of $495 million from year end 2006. Our days in claims payable, as of June 30, 2007 was 46.8 days, an increase of 1.3 days from 45.5 days as of June 30, 2007 due to lower benefit expense per day, which was one day increase.
We had 0.4 day increase due to provider settlement accruals, 0.1 day increase due to timing of PBM claim payments, and that was partially offset by 0.3 day decrease which is reduction in claims cycle time, the length of time between the date of service and claim payments and all other items netted to 1.1 day increase. We have included in our press release, a reconciliation and roll follower of our medical claims payable reserves.
This disclosure is comparable to the reconciliation provided in our second quarter 2007 press release. We report prior redundancies in order to demonstrate the adequacy and consistency of prior year reserves.
For the nine month ended September 30, 2007; we had significant positive prior year reserve development of $336 million. This compares with $577 million for the nine months ended September 30, 2006.
We continue to establish our reserves in a consistent and conservative manner. Long-term debt was $8.4 billion at September 30, 2007, $1.9 billion increase from year-end 2006.
During the third quarter we received $500 million from the issuance of 15 years of coupon bonds through a private placement on favorable terms. Our debt to Cap ratio at September 30, 2007 was 26.9% up from 22.2% at year end 2006 and is in our targeted range of 25% to 30%.
For the nine months ended September 30, 2007; operating cash flow totaled $3.2 billion or 1.3 times net income. As expected, in the third quarter we received only two CMS monthly payments of approximately $539 million each.
For the quarter, operating cash flow was 0.6 times net income. Had we received 3 monthly CMS payments during the quarter, operating cash flow would have been 1.2 times of net income.
As of September 30, 2007 we had $2 billion of cash investments at the parent holding company and we expect a dividend in addition of $1.3 billion from subsidiaries during the remainder of 2007. During the third quarter of 2007 we repurchased 30.1 million shares of common stock for $2.4 billion bringing our year-to-date totals to 54.4 million shares for $4.3 billion.
Month-to-date through October 17, 2007 we repurchased an additional 4 million shares for $317 million and our remaining Board approved share repurchase authorization was 307 million. Consistent with past practice, we will periodically revisit out capital plan with the Board.
Turning to our 2007 guidance, we now expect net income of $5.56 per share, representing growth of 15% over 2006. Our year end medical enrollment is now expected to be approximately 34.9 million members with fully insured membership now expected to be 17.3 million and self funded membership expected to be 17.6 million.
Operating revenue is now expected to total approximately $60.2 billion. As I noted earlier, we now expect the benefit expense ratio to be approximately 82% and our SG&A expenses ratio is expected to be approximately 14.7%.
At this point, we expect full year 2007 operating cash flow of $4.2 billion or 1.2 times net income. This is lower than our previous guidance due to lower than anticipated fully insured enrollment and additional risk sharing payments to CMS due to the Part D claims reconciliation process.
Weighted average shares outstanding are expected to be 605.6 million for the full year of 2007. The Company continues to expect net income of $1.50 per share in the fourth quarter of '07.
For 2008, we remain committed to our earnings per share growth target of at least 15%. We are currently finalizing our 2008 plan and we will share our 2008 guidance in greater detail during Investor Day on December 11, 2007 at our California Health and Longevity Institute in Westlake Village, California.
If you've not yet registered for this conference, please contact our Investor Relations Department to do so, as space is limited. I will now turn the call over to Angela to lead the question-and-answer session.
Angela F. Braly - President and Chief Executive Officer
Thank you Wayne, operator, please open the call up for questions. Question And Answer
Operator
Certainly will, and ladies and gentlemen we will now begin the question and answer session. [Operator Instructions].
Now due to limited time and fairness to other listeners, we do ask that you please limit yourself to one question and one related follow-up per turn. Our first question in this morning comes from the line of Matthew Borsch with Goldman Sachs, please go ahead.
Matthew Borsch - Goldman Sachs
Yes, good morning and I am wondering if you could just talk a little bit about the trend in the commercial fully insured business. I think if I am running the numbers right, I think you are down about 400,000 commercial fully insured members for the first nine months of this year.
Is that... can you just highlight for us again the key triggers there and I heard you that there were some, I guess you said 86,000 lives that switched this quarter to ASO maybe you could just elaborate on whether that was a couple of large accounts or something that you see on a continuing basis.
I am just asking of course, because it has an impact on the revenue and I think if we were to loose another 400,000 next year that would make for a tougher, tougher from an operating leverage standpoint.
Angela F. Braly - President and Chief Executive Officer
Let me address that generally and then I will turn it over to Wayne to address more of the specifics. But I think it is important as you know that that 44,000 of this decline actually converted from fully insured to ASO.
So we retain the accounts. But they chose to self fund.
The remaining, we look total as the sequential decline of 141,000; if you look at the remaining 97,000, almost 70% of that occurred in our non-Blue branded market. So we still believe that we are competitive because we're disciplined around price.
We think we have the best networks to offer, and we're obviously very competitive on our administrative cost. So Wayne, you want to address any of those other issues specifically?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes. And Matt, to your comment, as Angela addressed the sequential decline, and obviously on a full-year basis we're seeing about 86,000 of those members.
Well, we are retaining the members that are converting, but clearly in the fully insured market it's very competitive today and I think the important thing is that we are refocusing our efforts on part of our non-Blue branded strategy and are putting Dennis Casey over that unit and to work forward on a new strategy in '08, which I think we will really see the value in '09 from that. In our Blue markets we're doing quite well but again we are not going to buy membership, and I think if you look at commercial segment you will see that that we are holding that true and our margins are expanding.
So it's clearly a competitive environment, it's a challenging environment, and we have seen trends where there's been conversions from fully insured to ASO, but we remain disciplined in our Blue states.
Matthew Borsch - Goldman Sachs
And if I could just ask one more on the question of enrollment timing, I guess there has been some speculation that your commercial... total commercial enrollment risk in ASO might be down going into January 1 versus year-end 2007, can you just comment on that directionally?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I am not expecting it to be down at this point, Matt.
Matthew Borsch - Goldman Sachs
Okay, great, fantastic. Thank you.
Operator
And the next question then comes from the line of Charles Boorady with Citi. Please go ahead.
Charles Boorady - Citigroup
Thanks. Good morning.
I have a question, then a follow up. First, in terms of just understanding the run rate of your earnings in this quarter, I recognize the CMS charge should be accounted for but it relates mostly to '06.
So is the $1.50 really the right sort of run rate to think about in terms of modeling going forward, or were there other offsets in the quarter?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Charles, it's a very good question. The majority of the other Part D does relate to the '06 CMS reconciliation.
There's a small amount that we did book related to 2007, under the premise that we've always been conservative and consistent in our methodology. I want to emphasize here on the Medicare Part D, we are still pursuing reconciliations on that with CMS and as it relates to '07 while we have recorded a small reserve associated with that, the time frame for selling that goes out into '08.
From a run rate perspective, we are using some of those dollars in the fourth quarter though, to help us with our '08 membership. We've got a number of national account wins and so we are ramping up spending in the fourth quarter to support that.
With us expanding in the South Carolina Medicaid we have some ramp up in the fourth quarter to support that as well, but you definitely hit it on the head and again had we not had that charge, we would have had a very, very great quarter.
Charles Boorady - Citigroup
And the mention that you just made Angela in your prepared remarks regarding the ongoing reconciliation with CMS, how should we... including for amounts related to '06 though, how should we think about those going forward, were they fully reserved for us as part of the 40 bip hit this quarter, and if you're successful in this process with CMS, could we see a future positive adjustment or are you contesting something that could potentially be another negative adjustment going forward?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes, Charles, it's a good question. I would tell you that, we could have positive adjustments, but I would view those positive adjustments not as run rate, no different in this charge here.
I think the important point to recognize on the '06 reconciliations, what we are talking about is the excess profit margins that we share with the government. So in this case it's not necessarily a run rate item as much it is settling up on what that excess amount actually is.
So even if we get some favorable settlement on it, I would not view the favorable settlement as being run rate either just as I wouldn't view this unfavorable charge in the quarter as being run rate.
Charles Boorady - Citigroup
Okay, great, thank you.
Operator
Thanks. And our next question then comes from the line of Josh Raskin with Lehman Brothers.
Please go ahead.
Joshua Raskin - Lehman Brothers
Thanks, two questions. One, I just want to make sure that I heard you right, Wayne, that you said the inpatient trend was improving.
I didn't know if that was just utilization or if there was actually unit cost improvement there? And then also if you could just let us know what was the driver of the higher corporate expense?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes, Josh, the inpatient trend mark is still up. It has improved slightly over where we were at earlier in the year so from that perspective we think some of our contract is paying off and utilization remains flat.
So while it's up we have seen it actually slightly decline and that's why on the cost side again utilization remains flat. So we feel pretty good there.
In terms of the higher corporate expenses, it's really just a potpourri of items. Some of it is our through ups on our pension benefits that we have and of course those are items that when we allocate certain components not all components get allocated so it's no one particular driver in particular at this point in time.
It's just really a potpourri of small items.
Joshua Raskin - Lehman Brothers
And then just to sneak one in the... you've been talking about this reconciliation with CMS is taking a charge in the quarter, if that was an income statement item right, that was above the line that didn't go through, I guess why calling it a charge I guess is the question?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I'm sorry, yes, it's a double-line item and it ran through revenue. Because this was a settlement on premiums, so this is actually going through revenue.
Joshua Raskin - Lehman Brothers
Okay, perfect, thanks.
Operator
Thank you. And we have a question now from the line of Scott Fidel with Deutsche Bank.
Please go ahead.
Scott Fidel - Deutsche Bank
Thanks. First, Wayne can you just actually specify how much the hit to revenue was from the CMS reconciliation?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Hi Scott. Right now as we talked about it, it's about 40 basis points.
The reason we haven't specifically called out the numbers is because we are still working on settlements with CMS on this and so we are trying not to publicly negotiate on what we believe we are entitled to at this point in time around that process. But I think you would be able to probably back into it fairly easy based on that.
Scott Fidel - Deutsche Bank
Okay. And just a follow up, just if you can talk about your cost trend expectations for 2008, are you still thinking in that slightly less than 8% or are there any factors you think can drive that higher or lower?
Just thinking United, they said on their call maybe some public policy ch0anges that could have an impact, and are you thinking about that as well?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Clearly, we always think about pricing and insuring that we cover total trend, to be able to cost to care and SG&A. Scott we are in the process of finalizing our '08 plan, our Board seemed to discuss it.
I would prefer to wait until we got approval from our Board to provide that details that are out there.
Scott Fidel - Deutsche Bank
Okay. If I could just sneak up one more follow up in and just thinking about the outlook for the specialty businesses and how much given that 1 million lives of growth you expect next year, how much of penetration opportunity do you see in that for the PBM and the behavioral business?
Angela F. Braly - President and Chief Executive Officer
Let me talk about that a little bit, because that's part of the reason that we made this organizational change. We are bringing the specialty businesses into the commercial business that would be led by Ken Goulet, which I think, will really create some great opportunities for us to talk about a truly integrated solution.
We are seeing the impact of that, for example in our PBM we are seeing a higher penetration in the PBM than we have ever in the past. Our 360 degree health solution, our comprehensive health solutions, unit is delivering that, and we are seeing 90% of our national accounts are taking our disease management and wellness programs.
Scott Fidel - Deutsche Bank
Thank you.
Operator
Thanks, and the next question comes from line of Bill Georges with J. P.
Morgan. Please go ahead
William Georges - J. P. Morgan
Thanks, good morning. Talking about the California and Connecticut rate increases, I guess you have specifically said that you got an increase of 8.3% in California, how does that square with your expectations?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Hey Bill, it's a great question. I need to separate the response though into a couple of buckets.
Remember there were nine counties in which we were trying to get resolution on in rate increases. So for eight of the counties right now we have 8.3% on the table, I would tell you for many of the counties, it is right in line with our expectation of where we want it to be, for a few of the counties we are still working with the state right now to finalize the terms.
There is one county though right now that is hard for me to say, how it aligns, we just don't have the rates on because of the subcontractor arrangement. So that's probably the biggest unknown right now for us is where that one is.
But in terms of the other eight right now, they are combining to 8.3% combined return and I do expect that their terms finalize very near terms.
William Georges - J. P. Morgan
And what portion of that increase accrues directly to you versus going towards a provider rate increase?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Well, our provider rates have already been locked and loaded, and I don't believe there's any changes to those structures. So from this perspective, the majority of this accrues to us.
William Georges - J. P. Morgan
Okay. And then just regarding your SG&A improvements, can you talk about to what extent is that a delay of discretionary spending versus planned improvements in your SG&A?
Angela F. Braly - President and Chief Executive Officer
Let me try to address that generally. Last November we organized as an enterprise to really leverage what we think are our key strengths, our differentiating characteristics which is the ability to really scale across the enterprise and I think the SG&A improvements are a direct reflection of that organizational structure and our ability to really scale across the enterprise.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I would say Bill, that there was no delays in spending this quarter.
William Georges - J. P. Morgan
Okay. Alright, great.
Thanks very much.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thanks and our next question then comes from the line of Christine Arnold with Morgan Stanley. Please go ahead.
Christine Arnold - Morgan Stanley
Hi there. I'd like to probe the enrolment guidance a little bit.
Could you talk about whether you expect at risk commercial enrolment to be up or down next year? Are you expecting to continue to call from some of the UniCare enrolment or should we see kind of the end of that and net enrolment growth on the average commercial side?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Hi Christine. That's a good question.
While, we are finalizing our '08 plan, I think it's fair to say that we will see some growth in UniCare, but in some ways we are also trying to rebuild the strategy so... but we do expect and we will provide more details in '08 guidance, so we will have growth in our commercial for insured group next year.
Christine Arnold - Morgan Stanley
That's again on 1/1 or do we take a step down and then grow?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Again, we will provide more details at our IR day because we have got a number of initiatives that we are putting forward in front of the Board to stimulate some of the growth but I think at this point it's fair to say that we will comment a little more evenly throughout the year but again we will provide more details at our IR day.
Christine Arnold - Morgan Stanley
And stability in the MLR is probably a reasonable expectation on the commercial side.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Absolutely.
Christine Arnold - Morgan Stanley
Yes, thank you.
Operator
Thanks, and our next question comes from the line of Justin Lake with UBS. Please go ahead.
Justin Lake - UBS
Thanks, just a quick follow-up on the UniCare business. Can you give us an idea as far as sizing that from membership and premium standpoint just to let us know what the potential is here?
Angela F. Braly - President and Chief Executive Officer
We have 1.7 million members in UniCare.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
And Justin if you compare that 1.7 to when we brought the two entities together, that number was closer to 2.2 million so you can really see where we share a number of our lives over the last 2.5 year or so. It really has been in the non-Blue branded aspects of our business.
I think it's fair to say that this is an area where we know we can improve. It's an area where we know there is a great growth opportunity out there and its one of the reasons we put Dennis over this unit.
Dennis has led us to number one market share in Indiana and great margins, and we think he will do an exceptional job on UniCare as well, but to do that we really do need to get in '08 as an opportunity to build out a strategy to see success in '09.
Justin Lake - UBS
And the predominance of those numbers are full risk, right?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
They are about 50-50.
Justin Lake - UBS
Okay. And just a quick follow up on the SG&A side.
With regards to this year, obviously you have seen a pretty dramatic improvement in SG&A. I think you saw the results are pretty big bifurcation as far as growth in the commercial versus the government which I always think of as lower SG&A margin.
Can you give us an idea of maybe, bifurcate that, the SG&A improvement, how much of that's been mix, versus actual decline. I mean if we were to look for instance at the commercial book at the consumer business, it looks like you are, it looks like you were down, you improved margins there by 120 basis points.
40 basis points of acknowledged MLR, so that made me believe that the SG&A is 80 basis points better in the consumer business this quarter.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes, Justin. It's a good question.
I apologize, I don't know, whether I can have that break down now, but I will follow-up on that. What I can say though is that, it's more than just mix when you consider the fact that on an absolute dollar basis, our overall SG&A spend is down about $24 million, when compare us in the third quarter of '07 versus '06, while adding 700,000 lives.
So while mix is part of it, it's not all that reliable. We are just getting it done, day in and day out and be more efficient.
Justin Lake - UBS
Absolutely, I am just curious as to how much more room might be there if this is kind -- if that 80 basis points of change that we saw in this third quarter which you kind of identified for us is kind of a good run rate to think of for '08; maybe it's a little early to answer that?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
It is a little bit early to answer that. And we will have to get you some more details on that as well, but we will provide more granularity around IR Day.
As we said, we have been focusing on a goal of reducing our SG&A by another 150 to 200 basis points, over the next three to five years, but again there is going to be a lot of shifts that we will need to talk about. As you know the AIM acquisition is a great acquisition for us and it drives a lot of value in our cost of care, but it's also administrative in nature and so we'll provide more details at IR day, look around the components.
Justin Lake - UBS
Great, appreciate the color.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Thanks Justin.
Operator
Thanks and we have a question then from the line of John Rex with Bear Stearns. Please go ahead.
John Rex - Bear Stearns & Co.
Thank you, two quick questions. First of all, can you tell us for your, '08 earnings how much share repurchase you contemplate in getting at that number.
Angela F. Braly - President and Chief Executive Officer
Yes, but we'll talk a little bit more about that on Investor Day.
John Rex - Bear Stearns & Co.
I mean would it be... would it...
directionally would it be fair to assume that you do assume additional share repurchase over what you have accomplished through present?
Angela F. Braly - President and Chief Executive Officer
You know John, we obviously believe that we're using our capital effectively and we are going to continue to review that with the Board and we will be doing that over the next month. So we'll be prepared for Investor Day.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I think it's fair to assume John that we expect very strong cash flow next year, no different than we have had this year and we've got $2 billion in cash and investments at the parent and another $1.3, given up in the quarter. So we need to find an effective use for that and we are going to be reviewing that with our Board as part of our '08 plan.
John Rex - Bear Stearns & Co.
Okay and then looking at the Medicaid booking, for the... what percent of your California membership would the eight counties represent of your California Medi-Cal membership?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
It's -- I have to get you the exact figures, it's a decent size of the nine counties that we have been talking about meaning well in excess of 50% of that. So at this point John, any other comments right now, we expect to move forward satisfactory as well.
So it's hard to break it down into all the pieces at this point. Again we are trying to make sure we don't publicly negotiate on the few counties.
John Rex - Bear Stearns & Co.
But the eight counties, is it more than 50% of your total California membership?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
No, not of total California.
John Rex - Bear Stearns & Co.
Of total California Medi-Cal, it's sort of...
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Right, but there's a couple of sizable counties that have normal renewal dates of January 1 that we are still negotiating right now, just starting that negotiation.
John Rex - Bear Stearns & Co.
Okay, so it's just kind of a smaller percentage of your total of membership base for the number you are talking about then?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Correct.
John Rex - Bear Stearns & Co.
Okay and in Connecticut.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Just off of 50%, so it's not dramatically softer there.
John Rex - Bear Stearns & Co.
Okay and did you anticipate any retroactivity in Connecticut, in Medicaid, this quarter, that is did you accrue any retroactivity?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Though we anticipated it but we did not accrue for it.
John Rex - Bear Stearns & Co.
Okay, great. Thank you.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
So we get it in writing, we are not going to go ahead on this.
John Rex - Bear Stearns & Co.
Great. Thanks.
Operator
Thank you and we have a question then from the line of Douglas Simpson with Merrill Lynch. Please go ahead.
Doug Simpson - Merrill Lynch
Hi, good morning. Just talking about the other $200 million reduction in the operating cash flow outlook for this year, I know you commented it was both, this Part D reconciliation and part of this total risk enrolment, can you give us any more granularity just which was the bigger of the two?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I would say for this year that it's closer to the 50-50 on the split. It's not at all associated with the Part D, because Part D is substantially less than that.
But there is a cash outflow. Let me clarify Doug, that is probably not a perfect 50-50.
We have been normal code we already had up with Part D which was big then. So the majority of those are around our membership mix at this point in the quarter.
Doug Simpson - Merrill Lynch
Okay and then just on the PD reconciliation with the benefit of hindsight and just in terms of processes and controls, this is a rolling process, how comfortable are you guys having nailed now and going forward, this just won't be an issue in future periods?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I think that it's a very good question and I want to spend a few minutes on this topic because I think its one that everybody would want to know. Recognizing the 2006 was the first year of Medicare Part D and was the year in which we were the facilitating role just as we are in 2007.
Its important to recognize that because of that facilitated enrollment process, there was not a process but plans to settle with one another, established until late fourth quarter of '06 that continued in to '07. So for us to be able to submit our prescription drug event or PDE format, this really was what I would call kind of one time very unusual event because it was difficult for us to settle upon '06 until we could settle up with other plans and lot of closure and conclusions were there.
I don't expect to have similar levels like this in '08 as we settle out '07 but I do want to make sure everybody knows that we applied consistent and conservative approach in determining our '07 reserve but it substantially less than we settled in '06, again because we've cleaner membership data, much sooner than we did a year ago.
Angela F. Braly - President and Chief Executive Officer
You know, I think this product obviously is evolving both on the CMS side and for the plans and we're getting better and better at the processes that we can execute against going forward but there always will be this risk sharing reconciliation. So that part of the process that we think we understand well now.
Doug Simpson - Merrill Lynch
Okay, thank you.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
And Doug, just what I want to put in perspective with you, look at the similar process in '06 we had it settled with other plans and receivables that were owed to us, versus how that stream lined in '07. That receivable balance this year is about 90% less than it was a year ago at this time, so clearly as this program gets rolled out and processes get established, it gets a lot easier.
Doug Simpson - Merrill Lynch
Okay, thanks.
Operator
Thank you andwe have a question then from the line of Carl McDonald with CIBC. Please go ahead
Carl McDonald - CIBC World Markets
Great, thank you, if we adjust for the PDP charge, you had $0.06 up side roughly relative to your guidance, can you size that for us in terms of how much came from Commercial, Medicare, Specialty?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Our commercial has done quite well, I think most of it's in the commercial book.
Carl McDonald - CIBC World Markets
Okay, and secondly on the go forward table, it looks like the stable development for the year is actually down 20 million sequentially, so can you walk through the moving pieces driving that?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes Carl, its about 20 million that its down, and its really again relates to '06 and its really it's what I would call a fine line true ups on individual lines. So it's not anyone product or anyone customer type, but its really just attributable policy in final development that will come through related to '06.
I really don't expect it to move much more at this point.
Carl McDonald - CIBC World Markets
Got it, thank you.
Operator
Thanks. And your next question then comes from the line of Greg Nersessian with Credit Suisse.
Please go ahead.
Greg Nersessian - Credit Suisse
Hey, good morning. Most of my questions have been answered.
I just wanted to follow up on Josh's question from earlier about the inpatient cost. I think you mentioned that they were mid single digits earlier in the year and I think you said high single digits, is it your sense that that is a WellPoint specific phenomenon or is it something that you would characterize as more of an industry-wide phenomenon and I guess as you think about that going forward, how might that or might that not impact pricing yields going forward in the level of competition?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I am not so sure that, I think all of this might be experiencing more utilization being flat. I haven't really heard anybody say that that there is an industry issue of utilization picking up.
So that may be more of an industry issue. In terms of our unit cost again, while we are still seeing increases, I think we are improving on that and I can't speak for our competitors, but what I can say is I am very proud of the contracting efforts that our team has put forward and holding the line for our members.
So, again I don't know how that compares to others, but for us I think we are doing the right thing.
Greg Nersessian - Credit Suisse
And to the extent of that inpatient cost results and the lower overall trends, the expectations, I know you're not talking about yield going into '08, but the other expectation would be that you will be pricing again in line with whatever your trends, anticipated trends next year will be?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
We'll price to cover total cost of care and SG&A.
Greg Nersessian - Credit Suisse
Alright. Okay.
Thank you.
Operator
Thanks. And we have a question now from the line of Michael Baker with Raymond James.
Please go ahead.
Michael Baker - Raymond James
I was just looking for some general commentary on the M&A outlook. Last year it appeared as though it was more cost-focused versus some previous deals, is there any shift towards maybe more cost focus, cost containment-type deals versus revenue-enhancing?
Angela F. Braly - President and Chief Executive Officer
I think our M&A strategy continues. We would look carefully at any Blue transactions, we would look at non-Blue business in the core.
But Aim was a great transaction for us, it made great sense from the cost-of-care perspective, but they are really in their essence a technology company. They have been focused on radiology management, but we are going to focus also on cardiology, on orthopedics, so they really do bring a capability to us that we think is very, very strong.
On the other side though the M-Plan endorsement transaction is a reflection of what we think is just part of the cycle of the business which is a very attractive option and we think by doing an endorsement deal with M-Plan as opposed to some type of acquisition, we are really getting the benefit to our membership growth.
Michael Baker - Raymond James
Thanks.
Operator
Thank you. And we have a question now from the line of Brian Wright with Jefferies and Company.
Please go ahead.
Brian Wright - Jefferies and Company
Thank. Good morning.
Can you speak to the operating cash flow growth outlook next year?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Again we are finalizing '08 plan now and I will be presenting it to our Board in the very near term and we will provide more details. But I still would expect that operating cash flow will support the quality of earnings we have and we will exceed net income at this point in time.
Brian Wright - Jefferies and Company
Maybe similar kind of levels 1.3 to 1.2?
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
I think again we are finalizing it, but I think we will see comparable levels but at this point we are still finalizing it.
Brian Wright - Jefferies and Company
Okay. Thank you.
Operator
Thanks. And we have a question then from the line of Tom Carroll with Stifel Nicolaus.
Pease go ahead.
Thomas Carroll - Stifel Nicolaus
Hi. Good morning.
There's been a lot of talk this morning about enrollment numbers and I wanted to continue that conversation. As I think about it, in '07 your expectation was for 1.4 million new enrollees which is ultimately coming in at around 800,000 and in '08 we are suggesting greater than 1 million and it sounds like you are very comfortable with that.
And Angela thanks for that commentary in your prepared remarks about it but could you maybe provide a little more comment on that and maybe from the perspective of what could go wrong, maybe what happened in '07, I mean how, what's the chances of seeing that translate into '08 enrollment growth?
Angela F. Braly - President and Chief Executive Officer
Let me address that. Because of this 1 million net new members at this point of the year we are certain about a fair amount of this growth.
So we know in the national account areas that we expect our growth to be slightly higher as in this year and because of this large win that we have for July 1 effective date it is going to be shifted to mid year with that group. We know we have the Medicaid contract with our partnership with Blue Cross Blue Shied at South Carolina and we expect 50,000 members and that's fully implemented.
The Indiana Health and Family Program, we think we counted our fair, what we think would be a third of the total program size so that's about 47,000 members. And then while M-Plan has more members than needed, we expect about 50,000 commercialized and in the State of New Hampshire it's 39,000.
So to the point of what's different in this year, I think this is a practically almost half of that number of what we expect next year. We are going to stay disciplined around pricing but also really think we have the winning product suite for the market price and that we are continue to grow and we are going to deliver more value and in a very disciplined way and we think it will produce membership growth.
Thomas Carroll - Stifel Nicolaus
Just as a follow up. I guess you were certainly comfortable going into '07 with your numbers and had I thought fairly certain outlooks on the various enrolment buckets.
As we look at '07 perhaps maybe your commercial business attrition which is higher than you expected, is that fair to say?
Angela F. Braly - President and Chief Executive Officer
Well, I think in UniCare, it certainly was and we are confident that we are going to get our arms around that with Dennis, and it will help us focus on that in UniCare as well.
Thomas Carroll - Stifel Nicolaus
Great, I am just trying to think about what is different going into '08 that wasn't there in '07, so thanks.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Yes. And Tom, one thing I'd like to just emphasize is keep in mind that when you look at where we fall short this year, almost half of that guidance we provide is falling short in our non-Blue branded business and we have always said we are not going to buy membership and we do think we have opportunities to expand that book, we think we have better way to focus on it, and I think Dennis is going to do the right things.
We had talked more about a million net new lives, we are getting to the point of more large numbers, and adding 5% membership becomes quite difficult when considering we've almost 35 million lives. But nonetheless, we think we can still add over a million lives next year, and we think we have got a great insight into that already.
Thomas Carroll - Stifel Nicolaus
Okay, good point. Thanks.
Wayne S. DeVeydt - Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thanks. And our last question this morning comes from the line of Wayne Cooperman with Cobalt Capital.
Please go ahead.
Wayne Cooperman - Cobalt Capital Management
Oh boy, thanks, actually my question was answered thank you.
Operator
Thank you. Then I'd like to turn the conference back over to Angela Braly with the company's closing comments.
Angela F. Braly - President and Chief Executive Officer
Thank you for your questions. In summary, we had a good quarter and are pleased with our performance to date.
Our commercial and consumer business is having a very good year with the operating margin expanding by 60 basis points year-to-date through September 30, 2007. We met our earnings guidance for the quarter despite higher than expected costs, as a result of the accrual for CMS, Medicare Part D, 2006 and 2007 risk sharing, and we remain optimistic about our future.
As Wayne noted, we will hold our annual Investor Day at our California House in Longevity Institute in West Lake Village, California on December 11, 2007. We are looking forward to seeing many of you there and for those who cannot be there in person, it will be webcast.
I want to thank you for your interest this morning and have a great day.
Operator
Thank you. And ladies and gentlemen, this conference will be available for replay starting today, Wednesday, October 24th at 1:45 PM Eastern Time and it will be available through Tuesday, November 6th at midnight Eastern Time.
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