Jul 27, 2011
Executives
Brian Sassi - Executive Vice President of Strategy and Marketing, Chief Executive Officer of Consumer Business Unit and President of Consumer Business Unit Michael Kleinman - Vice President of Investor Relations and Acting Vice President of Internal Audit, Ethics & Compliance Ken Goulet - Executive Vice President, Chief Executive Officer of Commercial Business Unit and President of Commercial Business Unit Wayne Deveydt - Chief Financial Officer and Executive Vice President Angela Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Analysts
Joshua Raskin - Barclays Capital Michael Baker - Raymond James & Associates, Inc. Justin Lake - UBS Investment Bank Carl McDonald - Citigroup Inc Matthew Borsch - Goldman Sachs Group Inc.
Scott Fidel - Deutsche Bank AG David Windley - Jefferies & Company, Inc. Thomas Carroll - Stifel, Nicolaus & Co., Inc.
John Rex - JP Morgan Chase & Co Kevin Fischbeck - BofA Merrill Lynch Christine Arnold - Cowen and Company, LLC Doug Simpson - Morgan Stanley
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the WellPoint conference call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to company's management.
Michael Kleinman
Good morning, and welcome to WellPoint's Second Quarter Earnings Conference Call. I'm Michael Kleinman, Vice President of Investor Relations.
With me this morning are Angela Braly, our Chair, President and Chief Executive Officer; and Wayne Deveydt, Executive Vice President and Chief Financial Officer. Angela will begin this morning's call with an overview of our second quarter results, actions and accomplishments.
Wayne will then offer a detailed review of our financial performance, capital management and current guidance, which will be followed by a question-and-answer session. Ken Goulet, Executive Vice President and President of our Commercial Business; and Brian Sassi, Executive Vice President of Strategy and Marketing and President of our Consumer Business are available to participate in the Q&A session.
During this call, we will reference certain non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable measures calculated in accordance with GAAP is available on our company website at www.wellpoint.com.
We will also be making some forward-looking statements on this call. Listeners are cautioned 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 risk factors discussed in our press release this morning and in our quarterly and annual filings with the SEC.
I will now turn the call over to Angela.
Angela Braly
Thank you, Michael, and good morning. Today, we are pleased to report second quarter 2011 earnings per share of $1.89, which included net investment gains of $0.06 per share.
Earnings per share in the second quarter of 2010 totaled $1.71 per share and included net investment gains of $0.04 per share. Excluding the net investment gains in each period, our adjusted EPS was $1.83 for the second quarter of 2011, an increase of 9.6% compared with adjusted EPS of $1.67 in the same period of last year.
Our second quarter results exceeded our forecast and reflected the significant administrative cost savings that we've been able to achieve through our continuous improvement and efficiency initiative. Our performance continues to be strong in our Commercial segment and in the capital management areas of the company, while we are experiencing lower than expected results in our Senior business this year.
Based on our second quarter results, today, we are raising our full year 2011 earnings per share guidance to a range of $6.90 to $7.10 on a GAAP basis, which includes $0.15 per share of net investment gains realized during the first half of the year. On an adjusted basis or excluding the net investment gain, our full year EPS guidance equates to a range of $6.75 to $6.95.
Our medical enrollment totaled nearly 34.2 million members as of June 30, 2011. Membership was stable on a sequential basis in the quarter as we've achieved organic membership gains in our State Sponsored and Senior programs, which were substantially offset by in-group membership attrition in the Commercial segment.
While we have experienced negative and group change during 2011, it has been much lower than the in-group losses we experienced in 2010. Unfortunately, the economy remains challenging and we expect to continue experiencing modest attrition throughout the second half of this year.
We currently anticipate ending 2011 with 33.9 million members. As we look ahead to 2012, while we're not projecting an economic rebound, we are optimistic that the headwind of negative in-group membership change will further abate.
We also expect to maintain our leadership position in the National Accounts marketplace. The current National Accounts selling season has been very active, with many large customers conducting formal RFPs including several of our existing accounts.
The marketplace continues to be significantly focused on the ability of health plans to deliver competitive medical costs and we continue to be very well positioned in this area. We already have a number of new sales for January 1, 2012.
We're remaining disciplined in our National Accounts pricing for both new business and renewals, and as a result, we expect to lose some targeted accounts that are currently unprofitable. Overall, we expect our National Accounts membership to remain stable next year and our National Account operating margin to expand.
Operating revenue totaled approximately $14.9 billion in the second quarter of 2011, an increase of $681 million or nearly 5% from the second quarter of 2010. This was driven by premium increases designed to cover overall cost trends and membership growth in the Senior business and in the federal employee program.
These increases in revenue were partially offset by a decline in fully insured Commercial membership. Overall, the marketplace is competitive, but generally rational, and most competitors appear to be adjusting to minimum medical loss ratio requirements as we expected they would.
Our benefit expense ratio was 85.7% in the second quarter of 2011, an increase of 280 basis points from 82.9% in the second quarter of 2010. The increase was driven by higher benefit expense in the Senior business and lower prior period reserve development.
Medical costs in the Senior business have been significantly higher than we expected in 2011 due to higher membership growth and adverse selection in certain Medicare Advantage products. This issue is particularly impacting us in Northern California, where one of our PPO products has attracted more seniors with a higher risk profile than we anticipated, due in part to a competitor's exiting from the market.
The higher than expected costs we're incurring in Medicare Advantage this year are being partially offset by increased fiscal revenue and we are addressing this issue through our Medicare Advantage bid for 2012. In the second quarter of 2010, we recognized an estimated $100 million of higher than anticipated, favorable prior year reserve development, while we modestly strengthened reserves in the second quarter of 2011.
Our Local Group benefit expense ratio increased from the second quarter of 2010 due primarily to changes in prior period reserve development. Our Commercial benefit expense ratio was stable on a year-to-date basis as the impact of lower prior period reserve development was offset by lower than expected underlying medical cost trend during the first 6 months of 2011.
We continue to project that underlying medical cost trend in our Local Group business will be at the lower end of our 7.5%, plus or minus 50 basis points range for the full year of 2011. Utilization has remained lower than we anticipated.
We're experiencing an increase in the intensity of services and continue to anticipate that medical trend will increase during the remainder of 2011, and we continue to price our business accordingly. Providing access to affordable quality healthcare for our members is our highest priority.
We recently announced a new approach to reimbursing hospital partners that will shift payment reimbursement from the current system to one that rewards value by linking rate increases to hospital improvements in safety, quality, patient care and outcome. Moving forward, our approach to hospital reimbursement will ensure that rate increases are tied to demonstrated improvements in quality, safety and service, and we will reward hospitals that perform highly on 51 nationally accepted indicators of treatment quality.
Our formula for measuring quality of care is based 55% on health outcome, 35% on patient safety measures and 10% on patient satisfaction. It includes indicators such as effective treatment of heart attacks and pneumonia, and whether a safety checklist was followed and how satisfied the hospital patients are with their treatment.
We've already completed more than 200 hospital contract negotiations thus far in 2011, and we're having success with many agreeing to lower rate increases than they had received in prior years, or where an appropriate increase is made, is based on quality performance scores. We'll continue to work closely with our hospital and physician partners to develop sustainable solutions that reward value, promote safety and provide fair reimbursement, while improving the quality and affordability of care for our member.
As we announced during the quarter, our future efforts in this area will be led by Dr. Harlan Levine, who recently joined WellPoint as Executive Vice President of Comprehensive Health Solutions.
Dr. Levine brings a unique combination of business and clinical experience to WellPoint, making him ideally suited to lead our healthcare value effort into the future.
He will be responsible for clinical program development; provider engagement and contracting; quality and outcome evaluation; care management; pharmacy management with Express Scripts; and the work of our HealthCore medical research subsidiary. We are very pleased to have Dr.
Levine joining our executive team. I'd also like to thank Dr.
Sam Nussbaum, our Executive Vice President and Chief Medical Officer, for his invaluable leadership of Comprehensive Health Solutions over the last 9 months. Sam will continue to play a vital role for WellPoint by overseeing corporate medical and pharmacy policy, serving as a key spokesperson and policy advocate for the company in many external forums, and helping us build out our international and healthy care solutions future growth strategies.
We intend to capitalize on new opportunities for growth in the changing healthcare marketplace by investing strategically in our core insurance businesses, expanding with purpose into new complementary areas, and developing new products and services that positively impact the way customers access care in the future. Consistent with these objectives, during the second quarter, we announced the acquisition of CareMore Health Group, a focused healthcare delivery program that includes Medicare advantage plans and care centers designed to deliver proactive, integrated and individualized health care to seniors.
We believe the senior market will be a growth area for WellPoint, and we believe CareMore's leading program and services are providing Medicare recipients quality care through a hands-on approach to care coordination and intensive treatment of chronic conditions. This model enhances the ability to create better health outcomes for seniors by engaging members on the front end of our relationship through comprehensive health screenings and enhanced preventive care.
It also improves the ability to document metrics related to Medicare advantage risk adjustment payment and leads to higher quality star rating that will be an increasingly important part of the Medicare program in the future. We're excited about welcoming the CareMore team to WellPoint and expanding this model care to new senior markets across the country.
We recently received antitrust clearance for this transaction and continue to expect that it will close by the end of this year. We've also prioritized the State Sponsored market as a growth area for our company.
We've added 82,000 members to our State Sponsored program so far this year, and there is a robust pipeline of new business potential in this marketplace. Our goal is to be a valued partner for state, seeking cost-efficient solutions to maintain Medicaid programs and ensure high quality of care for beneficiaries over the long term.
Our managed care programs have enhanced healthcare quality for Medicaid recipients, while reducing program costs in several states. And we must ensure that any new programs we enter will appropriately recognize the value we can bring to the healthcare system.
While our State Sponsored performance has been in line with our expectations through the first 6 months of the year, we've lowered our full year outlook for this business, as we continue to see state budgetary pressures and expect reductions in reimbursement levels and more stringent program requirements. Longer-term, we remain optimistic about the membership and revenue growth outlook for State Sponsored business.
We continue to believe there are opportunities to grow profitably within our 14 Blue states and outside them, including potentially as a partner to some of our fellow Blue Cross Blue Shield plans that traditionally have not participated extensively in the Medicaid business. As one of the nation's largest Medicaid managed care plan, we have significant infrastructure and expertise that can be leveraged effectively by other plans similar to how we're currently working with Blue Cross Blue Shield of South Carolina to serve members in that state's Medicaid program.
We'll continue to discuss how the upcoming Medicaid expansion may impact other Blue plans and how we could design and implement programs at an at risk or ASO basis to serve this population. As we strive for future growth and continue to serve new customers, we remain committed to our objective of excelling at day-to-day execution and continuously improving present organization.
We have invested significantly in our company-wide efficiency and process improvement initiatives over the last few years, and our efforts are paying off. Year-to-date, through June, we have reduced our selling, general and administrative expenses by $241 million or over 5%, and our SG&A ratio has declined by 110 basis points to 13.8%.
We accomplished this while growing membership by 694,000 or 2.1% over the past 12 months and maintaining a very high level of service to our customers. In fact, we're seeing stabilization or improvement in a number of service-related areas such as our Commercial claim inventory level, which remain low and generally consistent with the levels we're tracking 1 year ago.
Our EDI rate or the percentage of claims we receive electronically has exceeded 90% every month this year, and our auto-adjudication rate or the percentage of clients who process without manual intervention is approximately 80%. Our member call satisfaction scores continue to exceed our goal, as over 70% of the service calls we receive are being resolved the first time.
And we continue to foster increased usage of our website, both with our provider and our members. We remain committed to growth, continuous improvement, providing high-quality products and services to our members and creating the best healthcare value in our industry.
By executing on these strategies, we now expect to achieve higher results in 2011 and believe that we can grow from these levels in the years ahead. We continue to anticipate that our business model will support earnings per share growth of at least 10% on an annualized basis over the next few years.
We expect to continue attracting new customers through our unique assets and capabilities, which include the industry's most recognizable brand name, deepest local market connections and the most comprehensive and cost-effective provider network. These are differentiated assets that are driving success in today's environment and positioning us to continue leading in the marketplaces of the future.
We also expect to realize greater administrative savings and efficiencies in the years ahead, as we continue to execute on our plans to standardize products, systems and processes across our company. Most importantly, we will remain relentlessly focused on optimizing the cost and quality of healthcare in our community because we know that as we create greater value for our current and future customers, we will drive increased value for our shareholders.
I'll now turn the call over to Wayne to discuss our financial results and updated outlook in more detail. Wayne?
Wayne Deveydt
Thank you, Angela, and good morning. Premium income was $13.9 billion in the second quarter, an increase of $657 million or 5% from the prior year quarter.
This reflected premium increases designed to cover overall cost trend and membership growth in the Senior and FEP businesses, partially offset by a decline in fully insured Commercial membership. Administrative fees were $958 million in the quarter, an increase of $35 million or 4% from the second quarter of last year, driven by growth in self-funded membership.
As of June 30, 2011, approximately 60% of our medical enrollment was self-funded and 40% was fully insured compared with 58% and 42%, respectively, as of June 30, 2010. Overall membership was slightly higher than we expected at June 30, 2011, although we expect modest in-group attrition to continue over the last 6 months of the year.
We currently anticipate that we'll end 2011 with 33.9 million members and that full year operating revenue will be just under $60 billion. The benefit expense ratio for the second quarter of 2011 was 85.7%, an increase of 280 basis points from the same period of 2010.
As Angela described, this increase was driven by higher benefit expense in the Senior business and lower prior period reserve development. We now expect the benefit expense ratio to be in the range of 85.1% to 85.3% for the full year of 2011, which is an increase from our prior guidance, primarily due to the Senior business.
We continue to anticipate the underlying Local Group medical cost trend will be at the lower end of our 7.5%, plus or minus 50 basis points range, for the full year of 2011. For the rolling 12 months ended June 30, 2011, medical trend continued at lower than expected levels.
Inpatient trend is currently in the high-single digit range. Our patient trend is in the mid- to high-single digit range, physician services trend is in the low- to mid-single digit range and pharmacy trend is also in the low- to mid-single digit range.
Unit cost increases continue to drive overall medical cost trend as utilization has been stable to declining in all categories, except pharmacy, which is modestly higher. We are experiencing higher acuity of services in certain areas as evidenced by the fact that our -- excuse me, our in-patient admissions per thousand members are down, but the average length of stay has increased.
We continued to implement new programs and strategies designed to optimize medical costs and quality for our customers. We're also making significant progress reducing our SG&A expenses, while continuing to provide excellent customer service.
Our SG&A expense ratio is 13.5% in the second quarter of 2011, a decrease of 170 basis points from the second quarter of 2010. We reduced our SG&A expenses by $144 million or almost 7% in the prior year quarter while serving 694,000 more members and growing operating revenue by nearly 5%.
The reduction in SG&A expense was driven by execution of our ongoing efficiency and continuous improvement initiatives and lower incentive compensation expense. Turning to our reportable segments.
Commercial operating revenue was $8.6 billion in the second quarter of 2011 or $184 million or 2% increase from the second quarter of 2010. This reflected premium increases designed to cover overall cost trends partially offset by a decline in Commercial fully insured membership.
Commercial segment operating gain was $747 million in the second quarter of 2011, in line with our forecast and up slightly from the prior year period. The benefit expense ratio for Local Group business increased from the second quarter of 2010, primarily due to lower prior period reserve development.
An estimated $40 million of higher than anticipated favorable prior year reserve development was recognized in the Commercial segment during the second quarter of 2010, while we modestly strengthened reserves in the second quarter of 2011. This change in reserve development was offset by lower than anticipated underlying medical cost trend in the second quarter of 2011 and a reduction in selling, general and administrative expense.
For the 6 months ended June 30, 2011, operating gain in the Commercial segment totaled approximately $1.9 billion, an increase of $148 million or almost 9% in the prior year period, while operating margin expanded by 110 basis points. This improvement was driven by a reduction in the year-to-date SG&A expense ratio.
The Commercial benefit expense ratio was stable with the prior year-to-date period as the impact of lower prior period reserve development was offset by lower than expected underlying medical cost trends during the first 6 months of 2011. Our Consumer segment operating revenue totaled approximately $4.4 billion in the second quarter of 2011, increasing by $361 million or 9% from the second quarter of 2010.
This was driven by premium increases designed to cover overall cost trends and membership growth in Senior. Operating gain for the Consumer segment was $177 million in the quarter, a decrease of $124 million or 41% compared with the second quarter of last year.
This was driven by the higher than expected medical costs in the Senior business and also reflected a lower level of prior period reserve development in the current year quarter. An estimated $60 million of higher than anticipated favorable year reserve development was recognized during the second quarter of 2010, while we modestly strengthened reserves in the second quarter of 2011.
For the 6 months ended June 30, 2011, operating gain in the Consumer segment was $383 million, a decrease of $244 million or 39%. The lower operating gain in our Senior business during 2011 has massed solid performance in our State Sponsored and individual businesses through the first 6 months of the year.
Operating gain in the Other segment was $22 million in the second quarter of 2011 compared with $11 million in the second quarter of 2010. This was driven by lower administrative expenses in the FEP business and at the corporate level.
Net investment income totaled $188 million in the second quarter of 2011, down $15 million or 7% from the second quarter of 2010, due primarily to lower interest rates of fixed maturity investments. Investment income has continued to run favorable to our expectations through the second quarter, we're raising our full year guidance for net investment income to $720 million.
Interest expense was $104 million in the second quarter of 2011, up $3 million or 3% from the second quarter of 2010, due primarily the higher average debt balances in the current year quarter. Based on our updated capital plan, we've lowered our full year 2011 forecast for interest expense to $435 million.
We recognized net investment gains during the second quarter of 2011 totaling $33 million, pretax, consistent with net realized gains from sales of securities totaling $41 million, partially offset by $8 million of other than temporary impairments. As of June 30, 2011, the portfolio's net unrealized gain position was approximately $1.1 billion, consisting of net unrealized gains on fixed maturity and equity securities totaling $628 million and $436 million, respectively.
Our effective income tax rate was lower than we anticipated in the second quarter of 2011, due primarily to the final settlement of prior year tax liabilities. We expect our effective tax rate to be just under 34% for the full year of 2011.
Turning now to our earnings quality metrics. Overall, earnings quality was higher in the quarter and included operating cash flow of $772 million or 1.1x net income despite making 2 federal income tax payments in the quarter.
We also had sequential increases in our medical claims payable balance and the days in claims payable metric. Medical claims payable totaled $5.3 billion as of June 30 2011, an increase of $271 million or 5% from March 31, 2011.
Medical claims payables increased by $489 million or 10% from the year end 2010. Included in our press release is a reconciliation of all the medical claims payable balance.
This disclosure is comparable to the reconciliation provided in our fourth quarter 2010 press release. We report prior year redundancies in order to demonstrate the adequacy of prior year reserves.
Medical claims reserves established at December 31, 2010, developed favorably and we experienced positive prior year reserve development of $222 million during the 6 months ended June 30, 2011. As we anticipated, this amount is significantly lower than the $718 million of positive prior year development we recognized during 2010 which reflects the following items.
In 2010, our pretax income benefited from $315 million of favorable reserve releases which did not recur during the first 6 months of 2011. In 2010, we also experienced $146 million of favorable development from refunding business that did not recur during the first 6 months of 2011.
However, this enures to the benefit of our customers and does not impact our net earnings. And our fully insured membership declined by 1.7 million members or 11% during 2010.
We believe our medical claim reserves are conservatively and appropriately stated as of June 30, 2011. Days in claims payable or DCP was 40.8 days as of June 30 2011, an increase of 0.2 days from 40.6 days at March 31, 2011.
The increase in DCP was driven primarily by reserve strengthening and to a lesser extent by provider settlement activity, partially offset by changes in the timing of pharmacy claim payments. DCP as of June 30, 2011 was 1.5 days higher than at December 31, 2010.
During the first 6 months of 2011, we generated operating cash flow of nearly $1.9 billion or 1.2x net income. In the second quarter, we utilized $715 million to repurchase 9.5 million shares of our common stock, bringing our year-to-date repurchase activity of 20.8 million shares or 5.5% of the shares we had outstanding as of December 31, 2010, for approximately $1.5 billion.
We also used $91 million to pay our cash dividend in the quarter. And yesterday, the board approved a third quarter dividend of $0.25 per share.
We ended the second quarter with $2.3 billion of cash and investments at the parent company and available for general corporate use. We expect to receive approximately $1.5 billion of ordinary dividend from our subsidiary during the second half of the year.
We have approximately $500 million of interest and other payments scheduled during the second half of the year, and we anticipate using approximately $900 million for share repurchases under our remaining board-approved authorization of the shareholders' dividends. We currently expect to end 2011 with approximately $2.4 billion at the parent company.
These projections do not yet contemplate the financing of our pending CareMore acquisition, which is on target to close by year end. Although we have sufficient cash on hand and available through our credit agreement, we may fund this transaction through commercial paper or the long-term debt market.
Our debt to total capital ratio was 26.8% at June 30, 2011, a decrease of 50 basis points from 27.3% at March 31, 2011. We remain near the low end of our targeted range of 25% to 35% and continue to have a significant financial flexibility, which we value in light of the current health benefits marketplace.
We're in a strong capital position and we will continue making strategic investments in our businesses and effectively utilizing our capital to drive long-term value for our customers and our shareholders. Moving now to our updated outlook.
We are increasing our full year 2011 guidance for earnings per share and operating cash flow based on the continued strong performance in our Commercial segment and in the capital management areas of the company, which are offsetting higher than expected medical costs in the Senior business. Specifically, we now expect that net income will be in the range of $6.90 to $7.10 per share, including net investment gains of $0.15 per share.
This outlook includes no investment gains or losses beyond those recorded during the first 6 months of 2011. On an adjusted basis, or excluding the net investment gains, our EPS guidance equates to a range of $6.75 to $6.95.
Year end medical enrollment is expected to be 33.9 million, consisting of 13.6 million fully insured members and 20.3 million self-funded members. Operating revenue is expected to be approximately $59.9 billion.
The benefit expense ratio is now expected to be in the range of 85.1% to 85.3%. And the SG&A expense ratio is now expected to be 14%, with operating cash flow now expected to be approximately $2.8 billion.
We are currently in the detailed planning process for 2012. Although it's too early to provide specific guidance for next year, we currently expect earnings per share growth in 2012.
Some of the tailwinds we see heading into next year include the following. We expect financial improvement in the Senior business as we modify our Medicare Advantage products and pricing.
We expect Commercial fully insured pricing to be generally commensurate with medical cost trend, and we anticipate fewer in-group membership losses related to the economy. We also expect margin expansion in the National business.
We expect additional benefits from our continued focus on SG&A efficiency and continuous improvement, and our repurchase activity will result in a lower diluted share count. In terms of headwinds, we currently expect that State Sponsored business may be pressured due to state fiscal situation and related changes in certain markets.
And if interest rates remain low, our investment income may be impacted as we will be reinvesting maturing securities at lower rates. Overall, we're optimistic about business projects in 2012 and beyond.
And I will now turn the conference call back over to Angela to lead the question-and-answer session.
Angela Braly
Operator, please open the queue for questions.
Operator
[Operator Instructions] And our first question comes from the line of Justin Lake from UBS.
Justin Lake - UBS Investment Bank
My first question is on the Medicare side. Can you talk about the full year impact of what the Medicare mispricing resulted in?
And can you give us some additional color on what type of product or geographies the issues might have been seen in? And then, if we take -- once we've identified that impact to run rate earnings, can you tell us whether or not you caught the issue in time to reflect the higher costs fully in your bids?
And if so, can we assume the full impact gets fixed for '12?
Angela Braly
Justin, let me speak to that. First, we're obviously disappointed with our performance in Senior.
If you look at all the other areas of the company, we feel like we're really executing things, disciplined there and our continuous improvement, efficiency initiatives are getting the right results and great customer service, but we're disappointed about the performance in Senior. Let me address a couple of your questions then I'll turn it over to Brian to give more detail.
The full year impact is $0.30 on an EPS basis. Yes, we did see this before the bids were due.
Unfortunately, we can't speak in detail about the bid process for 2012 as the CMS regulations don’t allow us to do that. But we did see this performance deteriorate prior to the bidding process.
We think we have clarity around it. So I'll turn it over to Brian, who can get specific about the products where we saw this.
Brian Sassi
Okay. Thanks, Angela.
Justin, let me just add a little more color and frame the issue. Beginning at the end of Q1, we started to see some increased morbidity in our Medicare advantage program.
Specifically, we've isolated the vast majority of the issue, and in Northern California, it impacts our regional PPO product. And looking at kind of April results and doing deep dives into it, we further isolated our issue to the new member cohort versus existing members.
And further looking at all of our new business that we've received in 2011, further isolated the issue to really being directed at switchers. Some of our membership growth in the RPPO has been agents, but that appears to be performing as expected.
So it's really the switcher cohort primarily in Northern California. As Angela mentioned, we did see this emerging in early Q2.
We followed it very closely. We have adjusted and really bid appropriately based on the emerging experience, and do expect that we will resolve this through the bidding process in 2012.
Angela Braly
And Wayne, do you want to speak to that as well?
Wayne Deveydt
Yes. So Justin, relative to 2012, then we would expect that this $0.30 headwind we have for the current year impacting our current earnings would be resolved.
And we would expect that our previous assumptions regarding run rate and execution, other lines of business, would remain consistent with our previous expectations. So relative to our growth, while we're not giving guidance for next year at this point in time, we view this as an incremental benefit to our run rate because it was obviously not anticipated to be an incremental detriment to our run rate this year.
Operator
Our next question is from the line of Josh Raskin from Barclays Capital.
Joshua Raskin - Barclays Capital
I want to stay with the Medicare business obviously here. So it sounds like, Brian, you guys feel like – you mentioned you saw this at the end of the first quarter, but we didn't hear anything about that when you reported last quarter.
So is it that things deteriorated significantly after the end of April and before the beginning of June? And then, as I look at the California landscape, in terms of switchers and movers, I guess, the CIGNA exit was about 15,000 lives.
There's no one else that even lost 10,000 lives. So you guys are up about 43,000 lives in California, I'm just sort of doing the rough math, if you got 40 basis points or something in that ballpark of MLR, I’m coming up with like 220 million.
It just seems like the MLR would be off the charts for this California cohort. So maybe just a little more color as to what exactly is happening and how come you didn't see your product being sort of mispriced versus the others?
Angela Braly
Josh, let me have Wayne answer the question about the timing, and then Brian to add the specifics.
Wayne Deveydt
Josh, I think the primary thing in the timing I want to keep in mind is that where we're seeing the issue is on the switchers, not on the agents. And so for new individuals that switched over to us in January, we really don't start getting any visibility on claims until really early March.
Ultimately they start seeing the doctors in mid-late January, doctor starts sending in claims in later February. But you really don't have a lot of real good data at that point for the switchers.
So in March, I would say it wasn't really a huge outlier. I mean, it was a small blip at that point but nothing of concern.
When we got April results in, we were more concerned about what we saw being more elevated claims, and that's when we did our deep dive to identify where this was being driven from, and that's where we identified that it was in the Northern California location, and it was really the switchers. We then went ahead and estimated the bid process that would reflect as if that was more run rate, under the hope that that wouldn't be the case.
And when we say May, in fact, that was the case. So we know that now having April, May and June versus what we've spent as part of the process, that we've always considered that activity and then feel comfortable with that.
To your question about size and scale, $0.30 for us, if you look at the number of shares outstanding, that equates to close to $170 million, so I think if you're looking at numbers, you're looking at closer to $170 million, put that in perspective. And keep in mind that the MLR on this is greater than 100% on this group of cohorts.
And we are talking about a small number of members in between 40,000 and 50,000 that are basically this entire group that's impacting us, while the PPO has over 110,000 in it, it's the northern portion that we're focused on.
Brian Sassi
Yes, and just to add a little more color. I think your numbers are directionally right as we've looked at kind of all the new members, we have the ability to look at kind of where they come from.
Certainly, the CIGNA exit in Northern California, we did pick up a large chunk of that membership. This is a regional PPO, so some of the membership growth, probably about half, occurred in Southern California.
Historically, as we look at the performance of the RPPO, that has been a possible program for us, more so in Southern California and that does continue, but the Northern California cohort, particularly the new membership from some of the competitor exits is where the problem lies.
Operator
And our next question is from John Rex from JPMorgan.
John Rex - JP Morgan Chase & Co
A couple of things. I guess first, I want to focus on during the course of the quarter, you've often talked to how we should consider quarterly progression here in earnings, and 3Q being higher than the 2Q is what you’d typically expect.
The guide you have out today would indicate that's not the case, I guess, unless we should be expecting a dramatically lower 4Q, and I just want to get your sense for the 2H progression here, and if it's changed from the pattern you were indicating?
Angela Braly
Wayne, why don't you address the quarterly pattern question for John?
Wayne Deveydt
Yes, John, on a quarterly progression basis now, we do expect 3Q now to be slightly lower than 2Q at this point in time. So primarily because of some of the tax benefits we received, and we did take a cautious view on the back half of the year regarding Senior.
Obviously, we hope to do a number of medical managements to potentially alleviate it. We took a cautious view on commercial trends, if those would potentially rebound in the back half of the year.
And we also took a view around some of the regulatory environment changes we're seeing out there, in particular an AB 97, if that could have some potential impacts as well. So for that reason, I wouldn't call it down substantially, I'd say it's slightly lower than what we finished 2Q on an adjusted diluted basis right now.
John Rex - JP Morgan Chase & Co
Okay. And then, just the other thing just that you'd mentioned, I think very early in the quarter, in the 2Q you noted you were seeing some signs, I think in your script data, that would indicate that maybe utilization was edging up, but I want to know if focus is more on your Commercial book rather than your Medicare book?
Was that borne out over the course of the -- it doesn't seem like that you saw broad utilization coming, edging up in the Commercial book, however. Is that a fair characterization?
Angela Braly
Yes, John, let me let Ken speak to the Commercial book, the performance has been good there. And so I'll let Ken talk about the Commercial trend.
Ken Goulet
John, the second quarter did develop slightly better than we expected, and we've had good performance as you can see. I would say the utilization has been stable to declining in all categories, except pharmacy, which is modestly higher.
However, we are expecting an uptick to occur in the second half of the year and we priced accordingly.
Operator
Your next question is from the line of Doug Simpson from Morgan Stanley.
Doug Simpson - Morgan Stanley
I guess just you guys have a history of conservatism on your guidance, so just to come at that question maybe a little bit differently, how would you characterize your confidence in the $6.75 to $6.95 that you've laid out? Wayne, you mentioned you took a cautious view of the second half of 2011.
The seasonality would imply then, really, sort of a number in the Q4 that's closer I guess to around $1, so just how would you characterize your level of confidence in the range you've laid out?
Angela Braly
We believe our guidance reflects our expectations. We've always been cautious about trend in the second half of this year.
We're pricing, as Ken said, for it. We continue to be very focused in our medical management areas and working on cost of care very intently.
And so we do think the guidance range reflects our best estimate. Wayne can speak to how we looked at it for the overall year and below the line.
Wayne Deveydt
Yes. I mean, Doug, the one thing I would say is, this is a unique industry that we continue to see many state budget deficits, a regulatory environment that evolves by the day, and I think it's fair to say that for those reasons that both from an operating perspective, we generally try to err on the side that many things will come to light in, sometimes, a less than optimal level of expectation.
Whether that occurs or not will remain to be seen, but we would rather not have shareholders surprised by things that we see out there that are evolving that could occur. Below the line, we have a very, very solid confidence in those numbers, those updated guidance numbers and where that's at.
So I think to Angela's point, the $6.75 to $6.95, we wouldn't have guided to that range if we didn't have a level of confidence that we would be able to achieve it, and we do believe that it contemplates a number of potential downsides for the back half of the year.
Operator
Our next question is from Scott Fidel from Deutsche Bank.
Scott Fidel - Deutsche Bank AG
I just want to follow up on the change in the Medicaid view that you discussed in, maybe if you can frame what the operating margins look like for Medicaid in the first half and what you're assuming for the back half of the year? Or maybe what the deterioration is that you're building in?
And then, give us an update on what your composite rate expectation is for Medicaid for the full year and for the back half of the year?
Angela Braly
Yes. Let me speak a little bit to that, and then I'm going to turn it over to Brian.
Because State Sponsored, our Medicaid managed care business, has performed in line with our expectations for the first half of the year. But as we look out at the states and their budgetary pressures and some of the issues specifically in California, we're expecting pressure on the reimbursement levels and tougher program requirements.
So Brian, do you want to speak more specifically?
Brian Sassi
Yes, so as we looked at the second half of the year, particularly given some AB 97 in California, we did establish a reserve for potential adverse impacts of that. Certainly, while AB 97 is a law that has been passed in California, subject to CMS approval.
That has not occurred yet. We do know that there are a number of potential challenges to that legislation.
But to be prudent, we felt that in our analysis of the law, in all the different components of it and our ability to kind of react to it, we felt that it was necessary to put up a reserve in the last half of the year, which we feel will adequately cover us. Looking ahead, in terms of, as Angela talked about, many of the states are being pressured with state budgets, a lot of which since Medicaid is either #1 or #2 in terms of expenditures.
We do see a tightening in potential reimbursement levels and are expecting compression in the level of increase, down into potentially the low single digits for next year.
Angela Braly
Let me say, longer term, this business is one we do think there are opportunities. We think scale -- the scale that we can bring to this is important.
But we are committed to staying disciplined in how we do this. So we'll continue to focus on the opportunities but we’ll only take them where we think it's appropriate.
Operator
And our next question is from Christine Arnold from Cowen and Company.
Christine Arnold - Cowen and Company, LLC
I'd like to just talk about the starting point on the Medicare MLR. I'm thinking around 95% this quarter and that your guidance assumes you rise to 96%, 97%, kind of in that range.
Am I ballpark in kind of my starting point and where you're going on that?
Angela Braly
Wayne, can you address that?
Wayne Deveydt
Yes. I mean, Christine, we obviously don't give MLRs by lines of business.
We want to be careful at this point, as we're still in the bidding process, there's certain things we're allowed to discuss and not discuss, as we're still working with CMS. That being said, what I am confident in telling you is that we had obviously significant deterioration in the quarter due to the California, there's over 100%.
We expect that to continue into the back half of the year, although we are putting mitigation strategies, but we've taken a more cautious view on that. And we do expect to get to a normal run rate for next year on our MLRs.
Operator
Our next question is from Matthew Borsch from Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc.
Can I just -- I just wanted to try to better understand the issue in the Medicare Advantage product. In Northern California, are these members where the issue is primarily their acute health status and the fact that the CMS risk adjusters don't adequately correct for those?
And therefore, with those types of members, they need to be spread across several plans to be able to absorb the impact, rather than concentrated in the way that you found yourselves with the exit of a competitor? Or is it more the product premiums and the product offering?
Angela Braly
Brian, you want to address that?
Brian Sassi
Yes. I think it's more the former than the latter.
If you look at the competitiveness of the RPPO product, it's generally not an overly rich product. It's better than traditional Medicare, but it's not super rich when compared to other offerings around the country.
And I think your characterization in the front of your statement is accurate. We've had the RPPO for a number of years.
The new membership that we've received essentially doubled our Northern California membership because most of our membership had historically been in Southern California. So the combination of the increased morbidity and the unique situation with competitors exiting, and potentially not gathering or knowing that in advance, maybe not gathering, the optimal risk data that would impact risk course in 2011 have created kind of a unique situation for us.
Of course, some of which, it's a calendar year issue. As we see it, increased morbidity over a population, it's difficult to correct that in the current calendar year, but certainly that increased morbidity and our ability to provide the data to CMS could have a positive impact into next year's final settlement that we receive in 2012 based on 2011 data.
Operator
Your next question is from Kevin Fischbeck from Bank of America.
Kevin Fischbeck - BofA Merrill Lynch
I wanted to talk a little bit about the CareMore deal. I guess, Wayne, the company hasn't been talking very strongly about how -- when you think about capital deployment, it's always being evaluated against share repurchase, and it sounds like I guess maybe we can get there over time.
But I just wanted to hear your thoughts about that transaction accretion and what do you think you're going to be getting from that? And how you think about deploying capital outside of share repurchase going forward?
Angela Braly
Let me speak to CareMore. We're obviously really pleased about the announcement of our acquisition of CareMore, and it does a number of things for us that I think will be important.
Of course, we hope that the transaction is going to close by the end of the year, hopefully sooner. We have gotten through the antitrust regulatory process and we have more steps in the regulatory process to go on the state but are optimistic about that.
A couple of things that this transaction brings to us, obviously, they have a unique model that both addresses the need for the seniors in terms of health outcomes, both on the front end, in terms of the way that they bring in membership. They encourage and have a very large percentage of their members come in for a healthy start visit, which really helps them gather the information that's relevant to the risk adjustment process, as well as the star rating process.
And then in the most chronic care cases they have an extensive list model that really addresses the needs of the seniors who are the most ill and have the greatest needs and do so in a really cost-efficient and effective way. Our commitment with respect to CareMore, is it can bring immediate value, obviously, to us, bringing on its membership, as well as its capability to address the membership that we have ourselves in WellPoint and can grow together.
We do believe that part of our model with CareMore is to invest, given the ability to expand the care center model that they have. And that through their earnings and the earnings we generate, together, we can reinvest for those, that expansion plan, so that we can double the number of care centers we have over the next, hopefully, couple of years, bringing this model out throughout our other states and serve a bigger footprint for senior members there.
Wayne, do you want to speak to the efficiency question?
Wayne Deveydt
Yes. Thanks, Kevin, for the question.
We continue to be committed as our board is to deploy capital at the most optimal use for our shareholders. And one of those things that we continue to evaluate in any transaction is whether this transaction is more optimal than other alternatives, whether that be a buyback program, dividends or other investments in the business.
In the case of the CareMore situation, we believe that this is a better long-term return for our shareholders and it will help support our broader expansion strategy into Senior. It is very challenging to have anything in day 1 be better than a buyback.
I mean, the reality is, you can buy the share, there's no execution risk and we get immediate lift. But when we evaluate our transactions, we have to look over not just the immediate term but the longer-term impact of both the buyback as well as the accretion from these investments.
I want to reiterate on CareMore for 2012, we expect to be neutral, but the neutral in CareMore is not due to CareMore by itself. It's due to the fact that we want to expand and more than double the number of locations over the next 2 to 3 years.
These locations have about an 18-month breakeven period, and then the IRR is substantially higher than anything a buyback could return. Clearly, we could choose an option of not doing anything and have this be very accretive next year, in similar accretion what you may see in a buyback, but we think the longer-term investment is really the better play here.
So I do want you to know, Kevin, and other investors, that our focus has not changed around deployment, and we will continue to evaluate all transactions with that same lens.
Operator
Our next question is from Thomas Carroll from Stifel, Nicolaus.
Thomas Carroll - Stifel, Nicolaus & Co., Inc.
A question for you on -- and I realize you're not talking about 2012 just yet, but wanting to -- starting to think about the pricing process into next year, in particular for the Commercial business. So maybe give us a sense of how you're thinking about pricing your Commercial fully insured book into next year, given lower utilization we've seen and given the fact that states are going to be better prepared to perhaps oversee a bit more than in the past, what insurers are doing with their Commercial price increases?
And also, understanding that sometimes the Blues tend to be a regulatory target. So let me stop there and maybe just let you chat about that a little bit.
Angela Braly
Tom, let’s let Ken speak to the pricing environment. Obviously, we're staying disciplined.
We're also looking at trends and have expectations about it growing for a number of reasons. So that discipline is important.
But Ken, do you want to speak to your hopes there?
Ken Goulet
Yes. Tom, let me just say, we always price to what we believe forward cost will be.
And we are assuming an uptick in the trends, and therefore, pricing to it. And when I look at the market overall, I would say the market's competitive but very rational and seems to be pricing in the same way right now.
We're ensuring that our pricing is consistent with our historical pattern of being disciplined, but using our advantage to win customers in the market. So I would just say it's disciplined.
It's covering forward-looking costs, and our forward-looking costs assume that there will be an uptick in trend.
Operator
And our next question is from David Windley from Jefferies.
David Windley - Jefferies & Company, Inc.
I wanted to have you comment on SG&A and the gains that you've made so far. I'm wondering how sustainable those are.
How much lower -- how much more cost and how much lower you think your SG&A ratio can go? And then if you'd also please comment on what triggered the lower tax rate in the quarter and where you expect the tax rate to be for the full year, that would be great.
Angela Braly
Yes. Let me speak to the SG&A piece, and then Wayne can answer as well.
Importantly, I think the key for us has been giving the SG&A expense in the right way, and we're doing that through initiatives that we've described as Building a Better WellPoint, there are continuous improvement. We're training all of our managers.
We're delivering these savings because, frankly, because of the history of having so much variation from coming together as 14 separate companies over time, and so we can get this SG&A in the right way and continue to improve services to our members. So we're executing well on our continuous improvement efforts.
We're executing well on systems migration that we have accomplished over the last 2 or 3 years in particular, and we're confident about our ability to do that. Now we do think there is run rate with respect to SG&A expense declining, but we also need to balance that with the investments that we are making for future growth for the company.
So Wayne, do you want to speak to how that question is?
Wayne Deveydt
Yes. So just one last comment, and to Angela's comment about the SG&A, I mean, as an organization, we are committed, though, on a per member per month to continue to be more efficient.
And so while we believe absolute dollars will continue to come down this year, as you know, we have committed to taking out almost $400 million this year, we believe we're well on pace to achieving that. And we expect much of that to run rate with some incremental benefits to next year.
That being said, we balance that with investments. But on a total basis, we expect it to be leveraged off our existing membership growth, so in theory, PMPM should continue to be flat-to-down year-over-year, not just for the near term but we believe the long term, as we build the longer term operating model.
Relative to the tax rate, we as you know, we continue to take a cautious conservative posture regarding tax exposures that may exist. And we have generally had favorable outcomes regarding those exposures, of which we had some favorable outcomes this quarter as well.
That being said, we expect our full year tax rate to be just below 34%. Some of that, of course, is the release and the benefit of what we received this quarter.
Some of that is run rate, but it's not run rate I hope that we will not have repeat next year, specifically that when you're not making money in a particular state, in Individual or in Senior, which is a higher state tax rate, you're not paying taxes in that state, which in general drives your rate down. So ultimately, we expect some of that to actually pop back up next year as we improve in those markets.
Operator
Our next question is from Carl McDonald from Citigroup.
Carl McDonald - Citigroup Inc
Can you talk about your outlook for the rate review bill in California, likelihood for amendments over the next couple of months, likelihood of passage, and if it did get passed in the current form, how that would change the view for 2012, given the relatively strong profit margins that you've historically had in Small Group in the state?
Angela Braly
Well, obviously, in California and other states where we are working on either rate filings or the potential for rate regulation, the level of transparency that we now have in terms of the rate review and regulation process is so significant and the fact that the minimum medical loss ratio exists, creates a number of protections for members and for protecting to make sure that the industry is very transparent about what our opportunities are there. So like in California, we bring the view of what does this mean for our customers in the end, because ultimately, this is about the customers.
So it's too early to say what exactly will happen in California. There are amendments being discussed.
What that means in terms of the ultimate end results for AB 52, we can't yet say. We obviously are believing it's in the best interest of California and all other states, for there to be a sustainable market for consumers to buy products in both the Individual market as well as in the group employer market so we're going to continue to advocate in that way.
Operator
And that question will come from the line of Michael Baker from Raymond James.
Michael Baker - Raymond James & Associates, Inc.
I was wondering if you could comment on the expected benefits that you would anticipate, particularly from a capability standpoint, with the pending merger of Express Scripts and Medco assuming that goes through. And then if you could just comment in general from your perspective, how important is Walgreens as part of the network as you move into the selling season for seniors?
Angela Braly
Well, let me say that our partner, Express Scripts, brings us a significant benefit in the PBM process. Scale is obviously important, so if they come together, hopefully, with Medco, that we'll benefit from that enhanced scale.
And the capabilities of the 2 together, we think will be important for our customers. And so we’ll look forward to that.
In terms of Walgreens, I think it's early, and the negotiation process there gives them plenty of time to work that out, and I think that's how the market is viewing it overall. So with that question, I want to thank everyone for the questions that you've had today.
Let me say in closing, I want to reiterate that we're pleased to have exceeded our plans through the first 6 months of 2011. We're now forecasting higher earnings for the full year and we expect continued growth and success in the years to come.
We're successfully executing on our strategy to reduce general and administrative costs, while adding new customers and improving our service. I'd like to recognize our more than 37,000 associates for their discipline and their dedication.
We are achieving our goals by keeping our customers first and committing to our continuous improvement culture. I want to thank everybody for participating on our call this morning.
Operator, would you please provide the call replay instructions?
Operator
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