Oct 26, 2011
Executives
Wayne S. Deveydt - Chief Financial officer and Executive Vice President Brian A.
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 R. Goulet - Executive Vice President, Chief Executive Officer of Commercial Business Unit and President of Commercial Business Unit Angela F.
Braly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Analysts
Carl R. McDonald - Citigroup Inc, Research Division Charles Andrew Boorady - Crédit Suisse AG, Research Division Kevin M.
Fischbeck - BofA Merrill Lynch, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Christine Arnold - Cowen and Company, LLC, Research Division Doug Simpson - Morgan Stanley, Research Division Justin Lake - UBS Investment Bank, Research Division Scott J Fidel - Deutsche Bank AG, Research Division David H. Windley - Jefferies & Company, Inc., Research Division Joshua R.
Raskin - Barclays Capital, Research Division Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division John F.
Rex - JP Morgan Chase & Co, Research Division
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 the company's management.
Michael Kleinman
Good morning, and welcome to WellPoint's Third 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 third 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 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 F. Braly
Thank you, Michael, and good morning. Today, we're pleased to report third quarter 2011 earnings per share of $1.90, which included net investment gains of $0.13 per share.
Earnings per share in the third quarter of 2010 totaled $1.84 per share and included net investment gains of $0.10 per share. Excluding the net investment gains in each period, our adjusted EPS was $1.77 in the third quarter of 2011, an increase of 1.7% compared with adjusted EPS of $1.74 in the same period of last year.
Our third quarter results were higher than we anticipated and were driven by continued strong performance in our Commercial segment. On a consolidated basis, we experienced sequential increases in both membership and operating gain during the quarter and based on our overall results, today, we're raising our full year 2011 earnings per share guidance to a range of $7.18 to $7.28 on a GAAP basis, which includes $0.28 per share of net investment gains in the first 3 quarters.
On an adjusted basis or excluding the net investment gain, our full year EPS guidance is $6.90 to $7. Our medical enrollment increased by 169,000 members during the third quarter and totaled approximately $34.4 million as of September 30, 2011.
We added 99,000 members organically in our Local Group business during the quarter, while our Senior enrollment increased by 89,000 including 57,000 members from the CareMore acquisition and organic growth from agents. These increases were partially offset by modest in-group attrition in our National business.
We believe that further attrition is likely during the fourth quarter, and we therefore expect in 2011 with approximately 34.2 million members. In light of current economic conditions, we anticipate that in-group membership attrition will continue to pressure our enrollment in 2012.
We currently expect that the number of workers with health benefits may decline modestly, as many employers are facing a challenging business outlook. We also expect that individual membership will continue to be negatively impacted by the economy.
In our National business, we expect to maintain our leadership position next year with enrollment in excess of 12 million members. We had another successful selling season in a competitive marketplace with some very large account wins, and we continue to attract new customers as a result of our compelling value proposition.
By offering access to the broadest provider network in the country, with the leading cost structure, strong medical management program, innovative health and wellness capability, actionable transparency tools and superior customer service, our value proposition is excellent for National Accounts. We remained disciplined in our pricing of new business in renewals.
As a result, we lose some no or low margin accounts next year. Coupling this with our expectation that negative and group change will continue for National Accounts, we now expect a small decline in National Account membership for 2012, while we continue to anticipate that our national operating gain will grow.
In the Senior market, we're making a number of changes to our business for 2012. In California, we've restructured our Medicare Advantage portfolio, and will be offering products on a local basis.
We believe our plan designs and pricing appropriately reflect the underlying cost of the local market and we expect improved financial results. Additionally, we'll be expanding our Medicare Advantage footprint outside of California including large expansions in Georgia, Missouri, Virginia and Wisconsin.
In total, we will be growing our Medicare Advantage service territory by 136 counties in 11 states. And we expect this to drive growth in our Senior membership next year.
We're also pleased that the CareMore acquisition closed earlier than we'd anticipated. We're working diligently to bring the CareMore model to more members across the country and currently expect to open at least a dozen new care centers in 2012.
We believe this will enhance our ability to create better quality health outcomes for seniors and improve our future membership and revenue growth. In our State Sponsored programs, we expect relatively stable enrollment for 2012.
We expect to gain additional members through the continued implementation of the California Seniors and Persons with Disabilities Managed Care Program. And I'm also pleased to announce that we will be serving as an administrative services partner to Health Care Service Corporation or HCSC, the parent company of the Blue Cross and Blue Shield plants in Texas, Illinois, Mexico and Oklahoma.
Together, we will provide Medicaid benefits in the Austin, Texas area beginning March 1, 2012. We're also awaiting final RFP decisions in some of our existing service areas.
Our operating revenue totaled approximately $15.2 billion in the third quarter of 2011, an increase of nearly 6% from the third quarter of 2010. This was driven by premium increases designed to cover overall cost trends and membership growth in the Senior business and the Federal Employee Program partially offset by a decline in fully insured Commercial membership.
Overall, the marketplace is competitive but generally rational. Our benefit expense ratio was 85.1% in the third quarter of 2011, an increase of 130 basis points from 83.8% in the third quarter of 2010.
This was driven by changes in prior period reserve development, as we recognize an estimated $110 million of higher-than-anticipated favorable prior year reserve development, during the third quarter of 2010. The benefit expense ratio also increased due to business mix changes including growth in our senior membership and adverse selection in certain Medicare Advantage products.
We now project that underlying medical cost trends in our Local Group business will be in the range of 7%, plus or minus 50 basis points, for the full year of 2011. Unit cost increases including an increased in the acuity of services continue to be the primary driver of overall medical cost trend.
We're intensely focused on holding down unit cost increases, with various contracting strategies especially our value-base contracting initiative. This initiative conditions negotiated payment increases on a demonstration of customer value, which is participation in our Quality Insights Hospital Improvement Program or QHIP, which focuses on improving quality and lowering cost for all in-patient admissions.
Since July 1st of this year, when we formally announced our intention to tie payment inclusive to quality measures over 97% of the eligible hospitals have agreed to participate in QHIP. In total, we have now completed nearly 90% of our hospital contract negotiations for 2011 and we've had a successful year.
On average, the hospital rate increases we've negotiated are lower than they were in 2010 and we've worked collaboratively with hundreds of institutions to ensure that these increases are being supported by quality performance force and to preserve an extensive high-quality network for our customers. In addition to our focus on contracting, we continue to expand innovative and successful medical management programs designed to optimize healthcare costs and quality for our members.
Last month, our American Imaging Management or AIM subsidiary announced the results of a customer case study showing that prospective clinical review for echocardiography improves a clinical appropriateness of cardiac imaging services and helps prevent unnecessary utilization. AIM evaluated the client population of approximately 3 million members over a 2-year period to determine the impact this clinical review program had on provider ordering behaviors and utilization pattern.
Under this program, a physician ordering a particular cardiac image study, contacts AIM via phone or the Web to supply the demographic incremental information appropriate to the requested procedure. This information then allows AIM to evaluate the request using tools consistent with the guidelines established by the American College of Cardiology.
AIM's case study found that it's clinical review program resulted in 18% decline in the utilization of certain imaging services when compared to the prior year. As unnecessarily -- unnecessary imaging procedures frequently cited as contributing to our nation's rising healthcare costs, we're pleased that AIM's clinical review program continued to demonstrate success in improving patient safety, decreasing unnecessary utilization and delivering savings for the healthcare system.
Another way in which we're advancing evidence-based medicine is through our recently announced innovative agreement with IBM to develop Watson-based solutions for healthcare. By combining our extensive healthcare knowledge base with the IBM Watson technology, we envisioned a tool that can help doctors more efficiently access information from their patient's medical record, compare it with the latest evidence-based medical research and make more informed healthcare decisions for and with their patients.
We know that high quality healthcare could actually cost less and through this partnership, we expect that Watson will be able to help our members receive more appropriate and effective treatment. We recognize that there is an extensive pipeline of diagnostic and therapeutic technology that can favorably impact the cost and quality of healthcare, and we see Watson as an enabler to assuring that these tools are used at the right time and in the right setting.
We'll begin piloting the Watson Technology with our nurses early next year. We'll continue to invest capital on support of our objectives to create the best healthcare value in our industry, to expel a day to day execution and to drive future profitable growth.
In addition to our investments in CareMore, AIM, Watson and other ongoing initiatives related to ICD-10 and healthcare reforms, we also recently announced the strategic partnership with HCSC and Blue Cross Blue Shield of Michigan to acquire a majority ownership stake in Bloom Health. Bloom is an innovator in the defined contribution healthcare marketplace and through this investment, we intend to offer a nationwide defined contribution solution for employers to use in managing their health benefits.
We believe employers will continue to search for more predictability in their healthcare spending and a defined contribution solution that we can offer through Bloom will help us to continue leading the marketplace. The Bloom solution will begin offering limited enrollment for groups renewing in 2012 and will be fully operational in all markets by 2013.
While we continue to invest for the future, we're becoming a more efficient company. On a year-to-date basis, we've grown by more than 1 million new members while reducing our selling, general and administrative expenses by $185 million or 3%.
Our SG&A expense increased sequentially during the third quarter due to expenses designed to enhance our low-cost operating model and the acquisition of CareMore. We're also anticipating some restructuring costs in the fourth quarter, but we remain on track to significantly reduce our SG&A cost for the full year of 2011 even with our stronger than expected growth in membership this year.
We're now serving more than 66 million people across our businesses, including our Medical and Specialty products, our comprehensive health solutions businesses and other small but growing ventures. Our ability to add new customers, while controlling costs demonstrates our execution and emphasis on creating a more affordable operating model for our customers.
We now expect that our SG&A expense ratio will improve to 14.1% for the full year of 2011, which we believe is an industry leading level for comparable books of business. We are also maintaining modest profit margins and on average, expect to earn approximately $3 per individual served per month after paying taxes in 2011, while providing these individuals with access to more affordable, quality healthcare.
We understand the need to optimize our cost structure, and through our continuous improvement initiative, we intend to become an even more efficient and effective organization. While we will require continuous investments over the next few years to comply with new regulations and prepare for a changing marketplace, our goal is to at least cover these required investments and those needed to continue to grow our business with administrative cost savings from other areas so that our SG&A expense remains flat to slightly down on a per member per month basis.
Longer term, we see significant SG&A opportunities, particularly as we achieve ICD-10 compliance, complete our migrations to preferred claims systems and continue to drive greater economies of scale. We're actively preparing for another successful year in 2012.
We expect to continue improving the lives of the people we serve and the health of our communities by delivering new products and services to the marketplace, by partnering with providers that enhance the quality and manage the cost of healthcare, by increasing productivity across our organization and by investing for future growth and greater long-term performance. We expect that our focus on creating the best healthcare value in the industry will continue to drive success for our customers and shareholders in 2012 and beyond.
I'll now turn the call over to Wayne to discuss our financial results and updated outlook in more detail. Wayne?
Wayne S. Deveydt
Thank you, Angela, and good morning. Premium income was $14.2 billion in the third quarter, an increase of $815 million or 6% from the prior year quarter.
This reflected rate increases designed to cover overall cost trends and membership growth in the Senior and FEP businesses, partially offset by a decline in fully insured commercial membership. The administrative fees were $963 million in the quarter, an increase of $26 million or 3% from the third quarter of last year, driven by growth in self-funded membership.
As of September 30, 2011, approximately 60% of our medical enrollment was self-funded and 40% was fully insured, compared with approximately 59% and 41%, respectively, as of September 30, 2010. As Angela noted, we now expect to end 2011 with approximately 34.2 million members.
We also now estimate the full year operating revenue will be approximately $60.1 billion. The benefit expense ratio for the third quarter of 2011 was 85.1%, highly favorable to our expectation and 50 basis points lower than in the second quarter of 2011.
We now expect our benefit expense ratio to be in the range of 85% to 85.2% for the full year of 2011, which is a reduction from our prior guidance and reflects lower than anticipated underlying medical cost trends in the Commercial segment. The benefit expense ratio is expected to increase sequentially during the fourth quarter primarily due to the seasonality of our Commercial and Individual product designs.
We now anticipate that underlying Local Group medical cost trend will be in the range of 7%, plus or minus 50 basis points, for the full year of 2011. For the rolling 12 months ended September 30, 2011, medical trend continued at lower than expected levels.
Inpatient trend is currently in the very low double digits. Outpatient trend is in the high single digits.
Physician services trend is in the low-to mid-single digits and pharmacy trend is in the mid-single digit range. Our rolling 12 month medical trend increased slightly this quarter but by less than we expected.
Unit cost increases continue to drive overall medical trend as utilization has remained stable to declining in all categories except pharmacy, which is modestly higher. We are recognizing an increase in the acuity of services as evidenced by the fact that our in-patient admissions per 1,000 numbers are down, but the average length of stay has increased.
We currently anticipate that in-patient utilization will rebound in 2012 and we are pricing our business accordingly. Our SG&A expense ratio was 14% in the third quarter of 2011 and was slightly higher than we expected due primarily to expenses designed to enhance our low-cost operating model and the acquisition of CareMore, which closed earlier than we anticipated.
Overall, CareMore negatively impacted our third quarter EPS by $0.02 due to recognized-only 39 days of operating activity in the quarter that incurred the one-time transition closing cost. Turning to our reportable segments.
Commercial operating revenue was approximately $8.7 billion in the third quarter of 2011, $172 million or 2% increase from the third quarter of 2010. This reflected premium increases designed to cover overall cost trends, partially offset by a decline in commercial fully insured membership.
The Commercial segment operating gain was $712 million in the third quarter of 2011, a decrease of $49 million or 6% from the prior year period. Decline was driven by lower prior period reserve development in the third quarter of 2011, which was offset the impact of lower than anticipated underlying medical cost trend.
Commercial reserve development was in line with our expectations during the third quarter of 2011, while we recognize an estimated $75 million of higher than anticipated payable prior to reserve development during that third quarter of last year. Our Consumer segment operating revenue totaled approximately $4.6 billion in the third quarter of 2011, increasing by $537 million or 13% from the third quarter of 2010.
This was driven by membership growth in Senior including CareMore, high-risk score revenue and premium increases designed to cover overall cost trends. Operating gain for the Consumer segment was $245 million in the quarter, a decrease of approximately $17 million or 6%, compared with the third quarter of last year.
This was driven by changes in prior period reserve development and higher medical costs in the Senior business. We recognize an estimated $35 million of higher than anticipated favorable prior year reserve development in the Consumer segment during the third quarter of 2010, but modestly strengthened consumer reserves in the third quarter of 2011.
These declines in operating gain were substantially offset by improved results in our California Individual business and higher risk score revenue in Senior. Operating gain in the other segment was $16 million in the third quarter of 2011.
It was nearly equivalent to the $17 million reported in the third quarter of 2010. Net investment income totaled $171 million in the third quarter of 2011 down $35 million or 17% in the third quarter of 2010, primarily due to a decline in dividend income from a cost-method investment and lower yields on investment balances in the current year quarter.
Interest expense was $108 million in the third quarter of 2011, up $2 million or 2% from the third quarter of 2010, due to higher average debt balances in the current year quarter. In August, we issued $1.1 billion of long term notes and a weighted average interest rate of approximately 3.2%.
We recognized net investment gains during the third quarter of 2011 totaling $72 million pretax, consisting of net realized gains from sales of securities totaling $95 million partially offset by $23 million of other than temporary impairments. As of September 30, 2011, the portfolio's net unrealized gain position was $749 million consisting of net unrealized gains on fixed maturity and equity securities totaling $574 million and $175 million, respectively.
We continue to be in a sound financial position with subsidiary capital levels comfortably in excess of our targeted thresholds. Our effective tax rate was 34.6% in the third quarter of 2011, down slightly from the prior-year quarter and in line with our expectations.
Turning now to our earnings quality metrics. Our higher than anticipated third quarter membership, and earnings results were supported by a slight increase in days and claims payable and adjusted operating cash flow of 1.2x our net income.
Medical claims payable totaled approximately $5.5 billion as of September 30, 2011, an increase of $118 million or 2% from June 30, 2011. The increase was due to the CareMore acquisition.
Excluding the impact of CareMore, our reserves developed favorably in the third quarter of 2011 relative to our expectations as of June 30, 2011, which shows to modestly increase our reserves of September 30, 2011, primarily in the Senior business. We now believe that we're in the upper end of our margin for adverse deviation target range.
Including in our press release is a reconciliation and roll forward of the medical claims payable balance. We report prior year redundancies in order to demonstrate the adequacy of prior year reserves.
Medical claim reserves established at December 31, 2011, developed favorably and we experienced positive prior year reserve development of $206 million for the 9 months ended September 30, 2011. The level of prior year positive development declined by $16 million during the third quarter predominantly in our refunding business including FEP.
Prior development for our traditional risk business was essentially stable in the quarter. We believe our medical claim reserves are conservatively and appropriately stated as of September 30, 2011.
The days and claims payable or DCP was 41.6 days as of September 30, 2011, an increase of 0.8 days from 40.8 days at June 30, 2011. The increase was almost entirely related to CareMore, as we recognized only 39 days of benefit expense in the quarter, while our medical claim reserves fully reflected the CareMore membership.
Excluding CareMore, DCP was 41 days as of September 30, 2011, an increase of 0.2 days from June 30, 2011. Operating cash flow in the third quarter of 2011 was $1.4 billion or 2.1x net income, and included receipt of the October 2011 monthly payment from CMS which totaled $597 million.
Excluding this payment, our adjusted operating cash flow was $833 million, 1.2x net income in the third quarter of 2011, and $2.7 billion or 1.2x net income for 9 months ended September 30, 2011. We now anticipate that full-year of 2011 operating cash flow will be at least $2.9 billion.
Please note that our reported fourth quarter operating cash flow is expected to be unusually low due to the timing of the October CMS payment. In the third quarter, we utilized $898 million to repurchase 13.4 million shares of our common stock, bringing our year-to-date repurchase activity to 34.2 million shares or 9% of the shares we had outstanding as of December 31, 2010 for approximately $2.4 billion.
On September 30, 2011, our Board of Directors increased our share repurchase authorization by $5 billion, which we currently intend to utilize over the next couple of years. Also during the quarter, we used $88 million to pay our quarterly cash dividend.
And yesterday, the Board approved a fourth quarter dividend of $0.25 per share. We ended the third quarter with $2.4 billion of cash and investments at the parent company.
We expect to receive approximately $600 million of ordinary dividends from our subsidiaries in the fourth quarter, and anticipate uses of parent cash totaling approximately $800 million. We therefore expect to end 2011 with approximately $2.2 billion at the parent company.
Our debt to total capital ratio was 29.7% at September 30, 2011, with an increase of 290 basis points from 26.8% at June 30, 2011, due to the August debt issuance. We're currently the middle of our targeted range of 25% to 35%.
We continue to have significant financial flexibility which we value in light of the current health benefits marketplace. Moving now to our updated outlook.
We are increasing full-year 2011 guidance for membership, earnings per share and operating cash flow based on our strong year-to-date results. Specifically, we now expect the net income will be in the range of $7.18 to $7.28 per share including net investment gains of $0.28 per share recorded during the first 9 months of 2011.
On an adjusted basis or excluding the net investment gains, our EPS guidance equates to a range of $6.90 to $7. Year-end medical enrollment is now expected to be approximately 34.2 million consisting of 13.7 million fully insured members and 20.5 million self-funded members.
Operating revenues is now expected to be approximately $60.1 billion. The benefit expense ratio is now expected to be in a range of 85% to 85.2%.
SG&A expense ratio is now expected to be approximately 14.1%. This expectation now includes the impact of CareMore, as well as approximately $50 million or $0.09 per share of restructuring costs anticipated in the fourth quarter that we yield savings for 2012 and beyond.
And finally, operating cash flow is now expected to be at least $2.9 billion. We're currently finalizing our business plans for 2012.
While it's too early to provide a specific guidance, we currently expect growth in both operating gain and earnings per share next year. Some of the tailwind to EPS growth include the following: we expect significant improvements in the Senior business given the changes we are making to our Medicare Advantage portfolio, and the expansion of service areas.
I will note that the 2011 outlook for our California Medicare Advantage business has improved modestly from last quarter, and we now anticipate that our Senior business operating gain will improve by approximately $150 million in 2012. In commercial, we expect fully insured pricing to be generally commensurate with medical cost trends.
Although, these increases are expected to be partially mitigated by in-group membership attrition and lapses during -- due to the economy. We also expect operating gain growth in the National business.
We expect our focus on SG&A efficiency and continuous improvement to yield a lower SG&A expense ratio. And finally, our share repurchase activity will result in a lower diluted share count.
In terms of headwinds, we continue to expect that State Sponsored business will be pressured due to state fiscal situation unless we apply the changes in certain markets. This could reduce operating gain by up to $75 million based on the outcome of certain regulatory issues and rate negotiations.
We also expect the and combined headwinds of approximately $125 million of pretax between our investment income and interest expense. With a fixed income portfolio of $16.7 billion, we reinvest around $4.5 billion of securities each year due to the timing of maturities and many of our existing securities are currently invested in higher rates.
We also anticipate that we'll be carrying higher average debt balances during 2012 than we did over the course of 2011. And finally, we expect our effective income tax rate to increase and be closer to 35% for the full year of 2012.
Please recall that we benefited from some -- favorable tax settlements in the second quarter of 2011 and we're not projecting additional settlements in 2012. In summary, we are pleased with our performance in 2011, which continues to exceed our original expectations for 2011.
We've significantly grown our membership this year executing on our SG&A reduction initiatives and continue to manage our capital effectively resulting in year-to-date adjusted earnings per share of $5.96, which represents a growth of 10.8% over the same period of 2010. Based on these results, we have raised our full year 2011 adjusted earnings per share guidance.
We anticipate that we can grow from this increase base in 2012. I will now turn the conference call back over to Angela to lead the question-and-answer session.
Angela F. Braly
Operator, please open the queue for questions.
Operator
[Operator Instructions] Your first question will come from John Rex with JPMorgan.
John F. Rex - JP Morgan Chase & Co, Research Division
So I appreciate your comment on kind of describing how you keep the '12 coming up. And I wanted to come back particularly to your commentary that you're looking for your pricing in line with cost trends.
So can you tell us what you're expecting in terms of cost trend for '12 versus what you're seeing in '11 thus far?
Angela F. Braly
Wayne, do you want to speak to the transfer swap...
Wayne S. Deveydt
Yes, thanks, Angela. Let me first state how we're -- how we've have been pricing so far for renewals that have occurred this year as they relate to '12.
We would clearly have been pricing to date based on trend elevating to more historically normal levels. Obviously through the first 9 months of this year, we've not seen that occur yet.
But we are making the assumption that, that will in fact occur and that we will price as if that event would happen. Again, for the first 9 months it does not happen at this point, but we would prefer to take that more cautious view.
As we mentioned earlier relative to trend, we are lowering our full year guidance now from previously 7.5, plus or minus 50, down to 7 and that will become at least a new starting point for us as we look forward.
John F. Rex - JP Morgan Chase & Co, Research Division
So would you view historically normal levels, as I mean, if you look past over time in this country, it's probably been 8%, 8.5% in terms of trend. Can I think about that as your view for '12 then in terms of your -- what your pricing will reflect?
I'm talking about kind of before mix shift and such.
Wayne S. Deveydt
I think, John, I wouldn't be viewing it from that. But again, when you look at the mix shift, we're seeing more normalized flow, more normalized utilization.
The mix shift with the business changes in some ways. But all in all, yes, I mean, I think it's clearly, at levels over where we've been seeing a trend at over the last 9 months or for that matter, over the last 2 years.
John F. Rex - JP Morgan Chase & Co, Research Division
Let me just try it just this way. So how much would trend have to rise from where we are today to get to like -- I'm talking about what, would we need 100 basis points rise in trend from where we are today to match--to kind of take away what would be otherwise a favorable spread?
Wayne S. Deveydt
No, John, it's not nearly that high, though.
John F. Rex - JP Morgan Chase & Co, Research Division
Okay, something less than 100 basis points in terms of what you'd envisioned? Okay.
All right.
Angela F. Braly
No, I think we should add a couple of comments there. One, is when you look at trends and obviously lowering it for this quarter announcement, and everyone's talking about utilization, which we are experiencing as well, but also we've been successful in our contracting efforts this year, which have contributed significantly to our results.
And we typically have 3-year contracts, and this was the first year, I think we've seen better than expected contracting results. And we have a cycle now 2 more years, and we're going to be very focused on getting the right results there.
And also I think it's important, Ken, maybe can speak to pricing, the rationality of pricing in the commercial market for sure, and how this trend assumption is working out in the marketplace.
Ken R. Goulet
And, John, as I look at how we're working in each of our markets, we've -- we're in a competitive marketplace but a very market rational marketplace. As we indicated last quarter, there's occasionally a few activities where carriers may be responding to MLR activity, but in general, very rational across the board.
We're anticipating a slight rebound in trend and pricing for it, and it appears that our positioning remains very consistent with others in the market. I'm very comfortable with our pricing and at the same time, very comfortable with where we are competitively and with our membership.
Operator
Our next question in queue that will come from the line of Charles Boorady with Crédit Suisse.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
I just wanted to ask a longer-term sort of forward-looking question around CareMore, which is a pretty bold step in the direction of vertical integration. And I wanted to understand a little bit more about how much you plan to invest in growing that business, 2012 and beyond.
And also how you manage the risk -- looking back over -- and this might be dating myself a little bit, but looking back over the last time the industry went through a cycle of more vertical integration. You had some plans like, CR health, looking to expand into Texas.
The Las Vegas model, Kaiser are looking to expand out of California it's model. Aetna buying U.S.
healthcare to try to retool itself as more of an HMO. And we saw some upside and also some risks in those ventures and I'm wondering how you're thinking about managing those risks and how much you plan to invest in the coming years to build off the CareMore platform?
Angela F. Braly
Charles, I want to speak a little bit about the CareMore. Brian and Wayne, might speak to the specific investments.
But CareMore, well yes, it is more of an integrated delivery entry for us. It really is a unique care coordination model.
I think it does a couple of really exceptional things. One of which is it really captures the member and engages them very early in the process.
They have these healthy start visits. They engage them in the care centers, and then they, through the spectrum of care and the special needs plan, that specifically focus on certain conditions, they have extents of us that really are engaged in coordinating care and really no way that we've ever seen executed as well as we see at CareMore.
So while I understand your question about, is this full flash integrated delivery of health, I would say, no, it's an exceptional care coordination model with positions to our really terrific at touching the health delivery system in the right way to make a difference for the members, very member focus. So we have committed to expand the CareMore model across our states and have some targeted plans to do that.
Now, Brian and Wayne might talk about the investment. But Brian, you want to add to that?
Brian A. Sassi
Sure. As Angela said, the expansion of CareMore is really very focused.
We thought it was an exceptional model, particularly focused on the special needs plans and the chronically ill. Currently, CareMore operates in -- largest footprints in California with a small footprint in Arizona and Nevada.
And we're taking a close look at how can we expand that model and our plans are to at least add 12 more care centers to the existing 25 care centers that exist. And we're going to be very selective about the markets that we go into.
We have large HMO Medicare populations and a couple of other geographies. So we're taking a close look at that.
But this is going to be a very measured approach because this is really a targeted model. Plus the other thing that's really attractive to us about this model is, it's very effective at managing the chronically ill, which is going to be very instructive and helpful in managing that -- those populations in some of our other businesses.
So taking some of the principals at care management, the CareMore is successfully deployed, and rolling that out across some of our other businesses was one of the other, kind of, strategic values in the CareMore purchase.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Is the 12 centers, is that a 2012 target? And I'm I right that it's around $3 million per site?
Brian A. Sassi
Yes, it's a little higher than that. Part of that's is capital, part of that is expense, but that's pretty accurate.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
12 in 2012?
Brian A. Sassi
12 in 2012.
Wayne S. Deveydt
And Charles, one last comment I want to add to that, though, just to remind to is that unlike other expansions in the past in the vertical model, CareMore has had 5 years of piloting, 5 years plus. The model works.
We've seen the results. We do want to highlight that the -- it's approximately an 18 month break-even period per location, as they open.
And then we've seen IRRs in each location well in excess of 25%. So this is clearly investing an investment in our future.
We have a track record from this management team of great success already, and we're going to be very focused on how we roll it out and we're doing this will making it mutual to earnings. So in this case, CareMore are generating net profit from other facilities and locations that we can actually cover these investments through their existing operations.
Operator
Our next question in queue that will come from the line of Justin Lake with UBS.
Justin Lake - UBS Investment Bank, Research Division
First, I just want to follow-up on John's question around cost trend. You talked specifically about the third quarter trends still being well below typical but being up slightly.
Can you give us any greater specificity there, Wayne, in terms of what you're seeing and what the actual, let's call it 3-month rolling cluster was in the third quarter?
Wayne S. Deveydt
Yes, I would say beyond normal seasonality, Justin, that we saw in the third quarter that you would typically see anyway, trends are still playing very similar to what we saw earlier in the year versus expectations. So I mean, I'd say we're still seeing new [ph] trend on both utilization.
And I think the point that Angela highlighted is probably even more relevant that while utilization is staying very new to this point. Our activities around pricing has been quite significant, and that will continue to get better and we believe, over the next several years.
So it's important to recognize who to -- about 1/3 of our hospitals renew each year that provide the context doing so. We're just starting to see even more of the impact of that come through as well, in tying compensation to quality.
Justin Lake - UBS Investment Bank, Research Division
Okay, and would it be fair to say that the 3-month trend might be closer to 6%, which I think one of your peers mentioned last week?
Wayne S. Deveydt
It's reasonable, Justin.
Justin Lake - UBS Investment Bank, Research Division
Okay. And normalize trend, if we think about your guidance coming into the year was probably closer to around 7.5?
I think is what you initially guided to, is that right?
Wayne S. Deveydt
That's correct.
Justin Lake - UBS Investment Bank, Research Division
Okay I mean, you said it was less than 100 basis points. But if we think about the real trend right now running at closer to 6, and that normalize trend being 7.5 unless it's changed?
Does that add up in your mind?
Wayne S. Deveydt
It's reasonable. But again, let's wait until 2012 for further guidance.
But I'd say right now, we have confidence in our pricing and our outlooks.
Justin Lake - UBS Investment Bank, Research Division
Okay, great. And then just quickly on the headwinds-tailwinds.
You gave specific numbers on most of them and the one we didn't really get, a ton of specificity, was SG&A. If we were just to think about the moving parts, obviously, you've got a pretty big headwind in there from investment income and interest expense which typically ends up improving somewhat conservative I think over time.
Would it be fair to say that maybe the SG&A savings that you have kind of targeted for next year might offset that? Just a kind ballpark the number.
You put in interest expense at $1.25, I think, plus investment income. Would it be fair to say that SG&A maybe offsets that number or is it not that meaningful?
Wayne S. Deveydt
I think SG&A will be meaningful. But I also think we're very having very positive results in a lot of our lines of business beyond just SG&A.
So I think we're seeing core improvements from our operating results. We've seen that in our individual business and all of our segments this year.
We're very happy with that. Now that's progressing.
Our small group is doing quite well as well. So the one thing I would say Justin is, it's not just going to be the G&A that will help us achieve our EBITDA growth that we believe will achieve as well.
But we are seeing core improvements in investments we've made in our businesses coming through in virtually every line of business.
Operator
[Operator Instructions] And our next question in queue will come from Josh Raskin with Barclays.
Joshua R. Raskin - Barclays Capital, Research Division
My question was on 2012, I think you guys have talked about a long-term growth rate of about 10% for EPS. I know you're saying operating gains would be up, and obviously, with share repurchases that may indicate something close to that range.
But just curious, if you sort of confirm or want to wait on whether or not '12 is going to be within or close to that longer-term goal? And then just sort of 2 specific components that you talked about, I think you said Medicare Advantage would be up next year, I'm just curious it looks like that exit in California has been affected by about 110,000 lives.
So curious what the expectation there. Do you think you're going to retain some in local products?
And then I guess the last part, hopefully, of this one question is that, you've added to your reserves this year, you talked about the Seniors as well in the third quarter. So I didn't hear that mentioned that they had -- as a tailwind for next year, but can we assume, it won't be the reserve boosting for next year?
Angela F. Braly
Well, let me try to address the big long-term question. As you said, we really, post reform, wanted to look out longer-term and that's when really we set forth on a pathway to the 5-year plan.
So the 10% was a compound annual growth rate over the 5-year period and not an annual target. And we're not going to give guidance on this call.
We need to go through our Board and go through the annual plan, but we wanted to really reflect, kind of, our focus on the long-term that was part of our authorization for the $5 billion share repurchases over time. The plan, the roadmap that we have for this long-term CAGR, is really looking at operating growth -- operating gain growth as well as below the line return of dividends and share repurchases as well as making investments, like we did in CareMore and in our core business.
So the thing about that long term, we'll get back to you with guidance, early next year in terms of what that means specifically, for 2012. Also in terms of the reserves, remember, we did take some of the reserve releases in 2010.
So you're right in saying, in '11, we had some strengthening. I'll let Brian speak to the Medicare issues.
And Wayne, if you want to add to that?
Brian A. Sassi
Okay. You're correct, we have a little more than 110,000 members in the RPPO in California.
Exiting that, we do expect to attrit a fair amount of that membership. But as you recall, we do have 13 local RPPOs approved in California.
So we'll be expecting to retain a portion of that membership. And as Angela mentioned, we also have quite a bit of expansion in other geographies ongoing next year, 136 new counties across 11 states.
So we do expect to gain membership and to grow Medicare Advantage kind of, given that overall footprint. And given -- we've been very focused on expanding the footprint across our 14 geographies.
We still have a lot of headroom to go in future years. We're not border to border in terms of HMOs or local PPOs.
And so you can look to expect additional expansion not only next year but in the years ahead.
Wayne S. Deveydt
And the only last thing I'd like to add, Josh to your question is, clearly, just as prior period reserve development gave us a negative comp for the current year, it will give us a positive comp for next year, because we'd strengthened reserves. There's no need for us to further strengthen.
We're well within our targeted range and in the upper end of our targeted range. So from that perspective, we would fully expect not to have to do that.
The only other thing I want to highlight again, and as Angela said, we cannot get ahead of our Board on guidance for 2012. What we try to do is be transparent with our shareholders based on what we know at this point in time.
And depending on other assumptions you may, as you develop your models, around headwinds and tailwinds, it may lead to an EPS increase in the general direction of our long-term targeted range. But again, the key for now is we want you to be aware that even the headwinds we've outlined, we believe it will more than cover those.
We really think we're positioned well. And I would also say that the clarity around '11, '12, and '13 is much easier to evaluate and look towards as we still wait for clarification on some of the rules for 14.
So we think we have a pretty good outlook in terms of the next several years based on the clarity we have in the current regulatory environment.
Joshua R. Raskin - Barclays Capital, Research Division
And Wayne, what's a quantification of that reserved tailwind? What was total strengthening that we've seen into the first 3 quarters?
Wayne S. Deveydt
Josh, we haven't quantified that. It's all because of that is both the mix of refund business and non-refund business.
What we had said, is that how our reserves develop, as of 12/31 versus how much we tried to strengthened at a minimum. We have said publicly in the past about $40 million will get you into a more normalized level.
But obviously, we saw opportunity and strength in a little more than that this year as well.
Operator
Our next question in queue that will come from the line of Doug Simpson with Morgan Stanley.
Doug Simpson - Morgan Stanley, Research Division
Just a two-part around sort of where employers are -- or how employers are viewing the market right now. Just -- if you can flesh out the comments, the Bloom Health deal, the defined benefit moving to defined contribution.
What's the level of interest from employers on those products? And maybe talk a little bit about how your products line up against a direct comp defined contribution employer channel versus the more traditional individual market.
And then maybe also just on the in-patient contracting improvements that you're seeing, it sounded that Angela, like you said you may have some opportunity for further improvements in '12 and '13. Just what's changing there with respect to the conversations you're having with employers and, sort of, how are they viewing cost drivers and what's their willingness to move to more lower price point products, maybe now or network products, given those challenges?
Angela F. Braly
So clearly, and I'll let Ken speak to this. He's been leading efforts around Bloom and our efforts with all of our employers.
Affordability is a real issue whether it's individuals or companies. And the obvious interest of companies is to create a hedge against their long-term healthcare liabilities.
So they're quite interested in defined contributions, particularly as they go into a reform environment. They've been looking at it for retirees for the last couple of years.
So, Ken, you want to speak to Bloom and the defined contribution, and then more of their appetite for that.
Ken R. Goulet
Sure. Doug, the Bloom acquisition that we did along with HCSC in Michigan was a joint approach to help meet employer needs.
That for say, when your general question, employers are looking at affordability and predictability over the next several years. And many of them, along with their consulting partners, are doing multi-year planning right now.
And we wanted to make sure that we had a portfolio that met the needs of many different ways that employers could go. One of the ways and the strong interest is in the affordability or the predictability of a defined contribution model.
And there are advantages over Individual and that it offers both some tax advantages, as well as the guaranteed underwriting across your entire population. So we've had a lot of interest since announcing it, from a number of both large and small group employers.
We plan to be introducing it in 2012 on some renewals and then fully introduce it in 2013. Now I would just say, that the market feedback has been quite strong, and I think what employers like are the tools that are available through the asset that we purchased to help someone choose their coverages and the variety of coverages available.
And that it really lets a member look at the dollars available to them and make sure that they make a planned choice that's best for them and their families.
Angela F. Braly
Let me speak, Doug, to the issue about contracting, too. Our approach is very focused on the right partnerships that would provide our -- a focus on primary care in particular, and what we are doing through this contract negotiations and the focus on quality is aligning the risks and incentives that we have, that employers who are self-funded have, with the provider community.
Also we're anticipating and executing on quality measures like the STAR program and Medicare, the heated [ph] measures and State Sponsored. We anticipate exchanges will be quality-oriented as well.
And so as we align with providers around those incentives, they see upside in the essentially risk relationship that we're developing or rewarding them for quality. And as Wayne said, we have typically 3-year contracts.
This, I think, wasn't a year where really experienced a better contracting relationship with some of our providers, and we have 2 years in that essentially 3-year cycle. You'll see a lot of evolution though over the next couple of years in terms of the models that we're bringing forward whether they're patients that Medical home models, ACO models.
Whether it's bundled payment arrangement, capitations, as well as the benefit design changing. So have reference pricing designs in some geographies.
So I would expect those efforts to continue to evolve over the next few years. And it's a recognition that we all have, that we need to appropriately manage costs and improve quality.
Operator
Our next question in queue that will come from the line of Christine Arnold with Cowen.
Christine Arnold - Cowen and Company, LLC, Research Division
A couple of follow-ups here. SG&A, I think you said that you expect it to be flat to down on a PMPM basis.
Is that on total medical memberships? Is that how should we be thinking about that?
And can we assume with this extra investment spending and the one-time transaction cost of CareMore, that should be down as opposed to just flat on the SG&A per member? And then can you bring us some California rate increases, is that about $2 billion in premiums and have you asked for the rates to be increased for next year?
Angela F. Braly
Overall, SG&A, and Wayne, you can answer Christine's specific questions. But our goal is, as we look longer term, as we created this 5-year roadmap, we really have developed a multi-year plan that focuses on getting to an affordable operating model both efficiency from an SG&A perspective as well as the right investment to manage and lower the cost of cares.
So Wayne, I think we -- touched on that in the remarks. Do you want to add to that?
Wayne S. Deveydt
Yes, Christine, the only thing I would comment is one, would be pull CareMore off to the slide for a minute. Because clearly, as we grow that model, those will be separate investments and we'll highlight that.
But in terms of a pure run rate, SG&A, it is based on all memberships. It's on a PMPM adjusted basis.
And why a Senior member does cost us more, we recognize that mix shift, but we still believe on a run rate basis we can get our SG&A and PMPMs flat to down. So we're covering other investments that we're making.
But in it of itself, CareMore will add a lot more G&A. The thing for CareMore for the quarter, Christine, is it was about a $30 million impact on our SG&A for the quarter, but only about half of that related to the one-time cost that we incurred with the transaction.
So that gives you a little bit of a gauge of the impact. So when you get a full-year impact on the one-time cost aren't insignificant to the full year for this year or that.
It did, more or less, affected the quarter only.
Angela F. Braly
Which transitions into your question about rate increases in the Individual market in California. Our focus is on reducing our SG&A, on making cost of care, lower-cost, higher quality, all of which contribute to our ability to get rates that we think are essential and sustainable to create a sustainable individual marketplace.
And so clearly, that will continue to be our focus. And frankly, I think it's a focus of the regulators to make sure there's not a major disruption in this important segment of business, particularly now -- between now and 2014.
So Brian, you want to speak more to that?
Brian A. Sassi
Yes, specifically, to your question, Christine. We're currently working on our 2012 rate increases.
We have not filed with either of the California regulators yet. But expect to be doing that shortly.
Christine Arnold - Cowen and Company, LLC, Research Division
Okay, there's about $2 billion of revenue still?
Brian A. Sassi
Yes, approximately, maybe a little less.
Operator
Our next question in queue, that will come from the line of Matthew Borsch with Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
I wanted to ask you a question about the pricing environment. I know you talked about that already.
But in California, in particular, a pure company of yours talked about seeing really spiking out California as a market, where price competition had become noticeably more intense. Do you think that's just their perspective or would that be one that you would share, and any elaboration you can give?
Angela F. Braly
Yes, I'll turn this over to Ken. It is the only state where we compete with another Blue plan.
Although, we think we have a lot of benefits relative -- on a relative basis, around our efficiency and our scale. But Ken, you want to speak to our pricing experience in California?
Ken R. Goulet
Yes. First, as Angela said, it's the only one we compete with another Blue.
It's always been a competitive market. And California has a large number of competitors.
But we've seen in general, we're beating our plans, in both membership and in our general positioning for California this year in small or large group. We are aware of the comment made in the other -- with one of our peer groups.
And we have seen some -- more competitive positioning, but it's more on the ASO market than in the fully insured. So the fully insured seems to be rational in there.
As they're always are, there are spikes in certain areas where a competitor gets a little more aggressive with one type of program or another. And we've seen that in California but nothing that really has moved us -- moved our needle much at all.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Great. And then if just one more if I could on the -- your comment on Medicaid and the possibility that, that could reduce your operating gain by $75 million next year.
Can you just give us a little more detail on that?
Angela F. Braly
Yes, Brian you want to speak to that?
Brian A. Sassi
Yes, Matt. That's really a combination of a couple of things.
One, we've taken a look at the impact of AB 97 in California. Remember, that about half of our Medicaid population is still in California.
So we've taken, I think a fairly consecutive view. But accurate and build that into our 2012 plans, and then that coupled with, kind of, the ongoing situation with state budget deficits in other geographies and anticipating that some of the rate negotiations may result in a slight premium reduction.
So it's really the combination of expectations of those 2 things.
Operator
And our next question in queue, that will come from the line of Scott Fidel with Deutsche Bank.
Scott J Fidel - Deutsche Bank AG, Research Division
First, just -- if I could actually just follow-up on Matt's question on Medicaid and maybe just to highlight what you're seeing on the cost side on Medicaid. With some of the recent reports, there's been some conflicting, sort of, just directionality in terms of whether Medicaid cost trends are actually up, stable or down right now?
So interested in your view on that.
Brian A. Sassi
Yes, I'll take that, Scott. Medicaid is really the story of where you do business.
And so as we look across our different geographies, we have seen in the first half of the year, a slight uptick in some markets. We haven't seen that in other markets.
So I think that's why you're hearing potentially, kind of, conflicting stories because as you look across our footprints are all very, very different.
Scott J Fidel - Deutsche Bank AG, Research Division
Got it. And then I'd just like to ask a broader question and just interested in an update on Blue's conversion to for-profit possibilities.
Obviously, there hasn't been much at all to speak with. But just given that the state budget challenges are going to remain an issue for quite some time and we have a whole crop of new GOT governors and just based on the news up in Michigan that the governor has directed a review of the feasibility of converting BCBS of Michigan to for-profit status.
Just interested if you think there could be some renewed possibilities of states looking again at Blue's conversions.
Angela F. Braly
Let me answer that in a couple of ways. One, obviously WellPoint's uniquely positioned a Blue plan consolidation opportunities that we are and really came from.
But I have to say, it's reflected anything in our partnership, both with Michigan for the Bloom acquisition as well as with HCSC in South Carolina. On Medicaid, that we have a number of opportunities short of conversions and combinations to create more scale and seamlessness throughout the Blue Cross system.
We've done that very effectively in National Accounts. With a Blue Card program, we're doing it, and quality initiatives.
We're doing it in transparency initiatives. Our Anthem Care comparison tool was adopted as the Blue Cross Blue Shield tool for transparency for all members.
We have a great dental program that we're working with the other Blue plans to create -- really an unbeatable dental network that's seamless. So yes, I think over time, the benefits of scaling and consolidation, benefit our customers and as a result benefit our shareholders.
I think, realistically, we're not expecting that in short-term, but we're going to continue to work on these partnerships which we think will add scale in any event.
Operator
And our next question in queue, that will come from the line of Kevin Fischbeck with Bank of America-Merrill Lynch.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
You mentioned that in the quarter, you did some consumer reserve strengthening and I was wondering why you needed to do that? It sounded like that was one of the areas of strengths as far as a modest cost trends in the quarter?
Angela F. Braly
So Wayne, do you want to speak to that or Brian?
Wayne S. Deveydt
Yes, Kevin, the short answer is we didn't need to do it. Essentially we saw things coming in better than anticipated, and rather than holding those reserves down, we'd rather chose to maintain them at the more elevated levels that they develop that.
So it was just another opportunity to further strengthen our balance sheet. And so from our perspective, it was just positioning us well as we move forward into 2012.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay, and then related to that on the trend commentary, you talked a lot about how you're doing a better job on provider contracting. What if I compare what you said this quarter about trend versus -- would I have my notes about last quarter with in-patient being low double digits.
I think the last quarter was high single digits, and outpatient being high single digits. And I think last quarter, it was mid to high single digits.
With the commentary that utilization remains flat to down, I guess, I think similar to comments about acuities last quarter, I guess what is the delta there when we think about what looks like a slight uptick in some of these numbers?
Wayne S. Deveydt
I really appreciate the question on this one because essentially what you're seeing is, as we do the rolling 12 months, you can have disparities in those metrics move from one quarter to the next quarters as an old 3-month period rolls off, and a new 3-month period rolls on. But I can tell you that on an absolute basis, trend is still coming in lower than our expectations.
We model what we expect to get for pricing in a year and then we aggressively go out and negotiate based on quality metrics in others. And we are beating that across the board in all areas.
And we will get the run rate benefits of the first year of those contracts over the next 2 years. But as Angela said, we're getting them after.
So it is literally the math. I hate to make it that simple.
But that's really what it is it. It is simply drop the math of when one quarter rolls off, and then another rolls on, depending on the time of those roll-offs.
And what happened in that previous quarter versus the current quarter, it can distort those small differences between seeing slightly up or slightly down.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay, and then one last question, I just take it in. I guess, you talked about operating gain being up year-over-year, but I guess interest income and investment income -- investment expense being a drag, and I guess the tax rate being a drag.
Is there a comment in there about net income being up year-over-year? Or is it or...
Wayne S. Deveydt
On a run rate basis, again, we haven't given guidance yet. And obviously, our net income is important by a lot of other items.
We couldn't realize gains and losses and others. But I do believe that our tailwinds will exceed our headwinds on absolute dollar basis going into next year.
Operator
And our next question in queue will come from the line of David Windley with Jefferies.
David H. Windley - Jefferies & Company, Inc., Research Division
A couple of questions on the fourth quarter if I could make it 2 part or here. First of all, your implied MLR for 4Q does suggest a pretty substantial sequential uptick more than looks like explained by seasonality.
I wondered, if you could elaborate on that a little bit. And then secondly, I don't think I've heard you describe the specifics of the restructuring and what you hope to achieve with the $50 million structuring in the fourth quarter?
Angela F. Braly
Wayne, you want to take that?
Wayne S. Deveydt
Yes, a couple of items. First of all, when comparing last year to this year, keep in mind that last year we did have a favorable reserve of leases that were over $105 million.
That is going to create a comp issue for us on an MLR basis. In addition, recognize that we will have CareMore in our results for the first time.
And as you know, the Senior business isn't in over a higher MLR business than other businesses. So that does create a little bit of a comp problem if you're looking to periods.
And then in addition, as Brian mentioned, that we are assuming that AB 97 will in fact impact us starting at some point in the fourth quarter. And that of course does a load of more MLR impact for us as well.
Obviously if that doesn't occur, then you'll get a different result. Relative to discharges that we're taking the fourth quarter, of the $50 million, there are a number of initiatives that we've been doing across the company to continue to become administratively efficient and create a low cost, operating, and affordable model for our members.
As we continue to make these investments, we have certain facilities that we're consolidating. And about $30 million of that relates to clearly the one facility.
There's approximately 8 years left on a lease. So we think the present value of those lease payments as a write-off in the fourth quarter.
We will clearly try to sublet that, over the next 8 years. And if we're able to do that, that would be upside.
But if you think about it in simple terms, the third divided by years on a present value basis, you pick up about $4 million per year run rate. But we also save, obviously, around utility costs, we save on insurance, we save on other things.
And it's part of longer-term plan to getting to a more efficient model. And then the remaining $20 million, just relates to some of the benefits and savings that we expect to further get as we consolidate systems and are able to be more efficient in the support that we have around our remaining business.
Operator
Our next question in queue, that will come from the line of Carl McDonald with Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
So I know the CareMore acquisition closed and with the expansion you're projecting for Medicare next year, do you think the business has enough scale or are you still interested in acquisitions?
Angela F. Braly
Well, we're always interested in acquisitions. And we think that the Senior business is one that we're going to invest in, as we describe the rollover of the CareMore model, and we think our organic, potentially our core Senior business has opportunities to grow as well.
Brian, you want to speak to Senior any further?
Brian A. Sassi
No, I think you covered the pretty important points. We're looking to increase the scale of the business, but organically.
And we will continue to look at every acquisition opportunity that comes up.
Operator
Our next question in queue, that will come from the line of Ana Gupte with Sanford Bernstein.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
My question's again about the Medicare book. I think you'd said it was $150 million, not gain going from 2011 to 2012.
Would you be able to tease out how much of that is coming from repricing versus new membership given CMS has guidance to 10% overall industry growth?
Angela F. Braly
You want to talk about that?
Wayne S. Deveydt
Yes, and we will provide more detail at our IR day. One of the things that I will say, though, part of that improvement clearly, is because our California business is improving over our initial estimates of the loss of $170 million.
That's improved for us already. It's still a loss, obviously, in excess of $130 million, $140 million already.
So we are seeing improvement. Now that exit, there are certain fixed G&A costs that we have to absorb.
And that cuts into some of our G&A efficiencies. We are expecting growth, though, in many markets.
And while we expect good membership growth -- in fact, even with the exit, we do believe we'll be able to potentially grow in Senior, even with those exiting the RPPO in terms of membership. But it's important to recognize who they were, headwind cuts across-the-board, though, for everybody next year, regarding the pricing environment from a CMS terms and what we're paid.
So we believe we're able to offset all of those as well and still grow modestly excluding the RPPO next year. And the RPPO obviously adds a big tailwind for us.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
And looking at the product design, though, do you have a local PPO now about $40 plus in premium and then there is about 2 or 3 still zero premium plans? HMO, I think there's one from United, one from CareMore, and probably one from Kaiser.
As -- you've been now 2 weeks into the selling season, where do these 100,000 plus Seniors go next? They were in CIGNA and then you got them.
Do you have a sense where they will go?
Wayne S. Deveydt
Yes. Ana, if you look at, kind of, the distribution of our membership in the RPPO, we have a lot of population in Northern California.
If you look, there are a number of plans that are offering, either PPO or HMO plans there. So I think there are available options.
In Southern California, again, we had 13 local PPOs approved, the majority of which are, kind of, in Southern California or in Central California. And really if you look across, we have a variety of plan options ranging from slight benefit changes, slight increases in go-pays, to -- up to, as you said, $40.
And we feel that we're going to be competitively priced in the middle of the pack and be able to recapture a portion of that membership.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
And one final one, on CareMore, how much of a boost do you expect in rate from risk scoring and then you did very well. CareMore does very well on STAR, so on a -- in a long-term sustainable basis.
And then just related to that, what percentage of your Medicare membership do you think you'll have in clinic-based models, say, by 2013?
Wayne S. Deveydt
Okay, that's a couple part question. So in terms of -- you're correct, CareMore has historically, done a very good job in terms of risk coating and revenue enhancement.
And so certainly, with that expertise in the company, we've had a number of initiatives for the past several years. We've made, I think some pretty good strides in that area ourselves, but obviously, we want to leverage the expertise that we have in-house.
So we expect that to continue. If you look at our STARS ratings, on our -- just organic business, all of our markets are at least a minimum of 3.0.
Some of our key markets, where we have a lot of our membership, particularly in clinic-based models are already at 3.5. So again, we'll leverage the expertise that we brought in-house from the CareMore team.
But we're also making, I think significant inroads. If you look across in our -- across our population, I would say about half of our current MMA population is in managed HMO products already.
And we're looking to not only continue to grow clinic base, HMO products, but also on a local PPO basis.
Angela F. Braly
Thank you. I want to thank everyone for their questions.
In closing, I want to reiterate that we're pleased to be exceeding our original goals to the first 9 months of 2011. We've grown organically and modestly through acquisition this year, and have done so well realizing the significant administrative savings and efficiencies across the organization.
We expect additional success in the years to come and we'll continue to focus on providing outstanding and innovative products and services for our customers. We look forward to providing you with more information about our future expectations in the months ahead.
We're currently planning to host an Analyst Guidance Conference Call in February to discuss our 2012 financial expectations and longer term outlook in more detail. I want to thank everyone for participating on our call this morning.
Operator, please provide the call replay instructions.
Operator
Thank you very much. And ladies and gentlemen, this conference will be available for replay after 11:00 a.m.
Eastern time today, running through November 9, 2011 at midnight. You may access the AT&T Executive playback service at any time by dialing (800) 475-6701 and entering the access code of 186084.
International participants may dial (320) 365-3844. And that does conclude your conference for today.
We do thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.