Jan 25, 2012
Executives
Wayne S. Deveydt - Chief Financial officer and Executive Vice President 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 Brian A. Sassi - Executive Vice President of Marketing, Chief Executive Officer of Consumer Business Unit and President of Consumer 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 David H. Windley - Jefferies & Company, Inc., Research Division Thomas A.
Carroll - Stifel, Nicolaus & Co., Inc., Research Division Joshua R. Raskin - Barclays Capital, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Ana Gupte - Sanford C.
Bernstein & Co., LLC., Research Division Scott J. Fidel - Deutsche Bank AG, 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 Fourth Quarter Results Conference Call. [Operator Instructions] And 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 Fourth 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 a summary of our fourth quarter and full year 2011 performance.
Angela will also provide an overview for our strategies for continued success in 2012 and beyond. And will be followed by Wayne, who will review our 2012 financial expectations and capital management plans in detail.
Our prepared remarks 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. The 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 fourth quarter and full year 2011 results that are at the high end of our guidance range.
In the fourth quarter, earnings per share totaled $0.96 and included net investment losses of $0.03 per share. Earnings per share in the fourth quarter of 2010 totaled $1.40, including net investment gains of $0.07 per share.
Excluding the net investment gains and losses in each period, our adjusted EPS was $0.99 in the fourth quarter of 2011 compared with adjusted EPS of $1.33 in the same period of 2010. Our fourth quarter results concluded a successful 2011 for our company.
During the year, we added 928,000 new medical members and achieved financial results that were in line or better than we expected in most of our businesses. We also created a more efficient organization and executed on a number of strategic initiatives as we prepare to capitalize on the important future growth opportunities we see in the marketplace.
For the full year of 2011, we reported GAAP earnings per share of $7.25, which included $0.25 per share of net investment gains. Excluding the net investment gains, our adjusted EPS was $7, which exceeded our original plan and represented an increase of 3.9% from adjusted EPS of $6.74 in 2010.
We've now grown adjusted earnings per share for 3 consecutive years, and we expect our positive momentum to continue in 2012. As of December 31, 2011, our medical enrollment totaled nearly 34.3 million members and represented approximately 11% of the U.S.
population. Our enrollment decreased by 104,000 during the fourth quarter as we lost one very large self-funded group and, to a lesser extent, continue to experience negative in-group change.
For 2012, we expect that in-group membership change will continue to be negative, although the amount of attrition has and should continue to moderate. As we've discussed previously, we remained thoughtful and disciplined in our actions throughout the year and currently expect enrollment to decline by 600,000 members in 2012.
Most of this is the result of specific actions we've taken with certain self-funded National Accounts, in the California regional PPO Medicare Advantage product and in the New York small-group market. With the most recognizable brand name in our industry, comprehensive and high-quality provider networks, strong medical management programs, a leading cost structure and excellent customer service, our value proposition remains very compelling.
We believe our 2012 plan reflects a proper balance between generating appropriate returns for the value we're providing to our customers and positioning the organization for continued profitable growth beyond 2012. Despite these selected membership declines in 2012, we've had a positive start to the year.
In Commercial, sales remained strong due to our value proposition, and we had successful open enrollment results outside of the specific decisions we made on certain accounts and in certain markets. In the Senior business, our sales of both Medicare Advantage and Medicare Supplement products met our goals, and membership retention has been in line with our expectations.
We put our customers first and took a number of actions to make sure our customers' needs were met concerning the Walgreens exclusion from our pharmacy network. To date, the Walgreens contract termination with Express Scripts has not meaningfully impacted our medical enrollment.
Our operating revenue totaled approximately $15.2 billion in the fourth quarter of 2011, an increase of 5.5% from the fourth quarter of 2010. Approximately 1.6% of the increase related to the CareMore acquisition.
The remaining 3.9% was driven by premium increases designed to cover overall cost trends and membership growth in the Senior business, partially offset by a decline in fully insured Commercial membership. Our operating revenue was just under $60 billion for the full year of 2011, an increase of 3.7% from 2010.
Overall, the marketplace is competitive but generally rational. Our benefit expense ratio was 87.6% in the fourth quarter of 2011, which was in line with our expectations and represented an increase of 310 basis points from the fourth quarter of 2010.
The increase was driven by our Consumer segment and included adverse selection in certain Medicare Advantage products. While most of our businesses performed well in 2011, results in Senior were significantly behind our plan.
We believe we have taken the appropriate action to improve our Senior business results for 2012. Our fourth quarter benefit expense ratio also increased in the Local Group business as we complied with the Patient Protection and Affordable Care Act, or PPACA, and as a result of changes in reserves.
In the fourth quarter of 2010, we recognized an estimated $105 million of pretax income due to a reduction in the targeted margin for adverse deviation and higher-than-anticipated prior-period reserve development. For the full year of 2011, the benefit expense ratio was 85.1%, an increase of 190 basis points from 2010, driven primarily by higher medical costs in the Senior business, changes in prior-period reserve development and the impact of minimum medical loss ratio requirement in PPACA.
We estimate that underlying medical cost trend in our Local Group business was approximately 7% for the full year of 2011. Medical cost trend increased during 2011 but by less than we originally anticipated.
Unit cost increases, including an increase in the acuity of services, continued to be the predominant driver of overall medical cost trend. During 2011, we executed on a number of initiatives designed to improve the quality and cost of healthcare for our members.
We formally announced our value-based contracting initiative, where the vast majority of hospital payment increases are predicated on a demonstration of customer value, such as participation in our Quality Insights Hospital Improvement Program, or QHIP. We're also focusing our strategy on collaborating with primary care physicians in ways that allow them to thrive in a value-based environment while helping our members manage their health.
We've expanded our patient-centered medical home program and launched new accountable care organizations, or ACOs. We're now partnering with 6 organizations and ACO pilot programs across the country, encompassing 120,000 members and over $240 million within a shared savings framework.
We believe these payment models have the potential to meaningfully reduce future healthcare cost increases by appropriately aligning incentives among patients, payers and providers. For example, in our medical home program in Colorado, we experienced an 18% decrease in acute inpatient admissions over the first 2 years and a 15% reduction in emergency room visits.
We also experienced consistent results in the first year of our ACO partnership with the Dartmouth-Hitchcock Medical Center in New Hampshire, where inpatient admissions and avoidable ER visits declined. Total per-member, per-month medical cost was lower than expected, and member satisfaction has been high.
We've also advanced our use of technology to foster better healthcare decision-making. In December, we announced a partnership with Verizon Wireless that will enable our members to communicate face-to-face with nurse case managers via video consultations on their mobile devices.
We expect this service will help consumers take a more active role in their healthcare, leveraging the power of personalized intervention to positively influence behavior and improve the lives of the people we serve. We also recently announced the innovative utilization of IBM technology known as Watson, and together, we're developing a program that can help doctors make more informed personalized treatment decisions for and with their patients.
We'll begin piloting the IBM Watson technology with our nurses and utilization management this year, and we'll be partnering with oncology specialists at the Cedars-Sinai Cancer Institute (sic) [Cedars-Sinai Samuel Oschin Comprehensive Cancer Institute] to develop the clinical protocols to expand the applications to oncology. Our leadership in promoting high-quality and more affordable healthcare is being recognized.
Last month, our Patient Safety First program in California was recognized by the Blue Cross Blue Shield Association and Harvard Medical School with a 2011 Best of Blue Clinical Distinction Award. Patient Safety First is the collaboration between the National Health Foundation; 3 regional hospital associations representing 95% of all hospitals in California; and our company, Anthem Blue Cross, to improve the consistency and quality of healthcare and save lives by reducing avoidable medical errors.
In addition to reducing hospital-acquired infections, Patient Safety First is focused on reduction of elective delivery prior to 39 gestational weeks and reduction of sepsis mortality. The interventions use evidence-based medicines, such as care bundles, and leveraging a peer-to-peer regional learning network to accelerate adoption and improvement.
To date, more than 160 hospitals in California are engaged, making it the largest patient safety collaborative in the nation. Year 1 analysis showed that more than 800 lives have been saved through Patient Safety First.
More than 300 patients have avoided hospital-acquired infections, and millions of dollars have been saved on patient care. We're excited about the initial success of this program and believe it's scalable to other states.
While we're focused on optimizing healthcare cost and quality, we've continued to streamline our administrative cost structure to better serve our members and provide more affordable benefits. During 2011, we lowered our selling, general and administrative, or SG&A, expenses by $297 million or 3.4%, even as we served nearly 1 million more members than we did in 2010.
This achievement brings our 2-year SG&A cost-reduction effort to $584 million or 6.5%, and the reduction would be even larger if we adjust it for the impact of our CareMore acquisition and the $50 million of restructuring expenses and branding investments we recorded in the fourth quarter of 2011. We've become a more efficient company while continuing to invest for the future and maintaining excellent service for our customers and business partners.
Our electronic data interchange, or EDI, rate exceeded 90% every month in 2011, and our auto-adjudication rate is above 80%, meaning that at least 8 out of every 10 claims we receive are now processed electronically, while our claim inventory levels remain low. We also exceeded our member satisfaction and first call resolution targets during 2011, and we've improved our member touch-point measures, which are the customer service metrics our members value the most and are shared with other Blue Cross and Blue Shield plans.
Our success in diligently reducing administrative cost reflects our focus on continuous improvement as we create a more affordable operating model for our customers. Our SG&A expense ratio of 14.1% for the full year of 2011 is at what we believe to be an industry-leading level for comparable books of business.
There continue to be opportunities for further improvement in our SG&A ratio, and we will maintain our goal of keeping SG&A expenses flat to down on a per-member, per-month basis. We expect to achieve this goal again in 2012, excluding the impact of CareMore.
Recall that our 2012 results will reflect a full year of CareMore activity compared with only 4 months that were reported in 2011, and that the care center model incorporates a higher SG&A requirement than our traditional Commercial and Senior businesses. We'll also be making investments in 2012 to expand CareMore services to new markets and more individuals.
We currently have 29 CareMore care centers in operation and expect to open several more this year. These investments are part of a multiyear expansion strategy that will provide meaningful returns over time.
In total, our 2012 plan includes approximately $700 million of business investments designed to ensure we continue to be a leader in the marketplace. We will advance successful medical management programs and payment reform models and also pilot new innovative opportunities to improve quality and lower the cost of care, such as the IBM Watson initiative and other programs to assist providers in the support of their patients, our members.
We will also be working to engage consumers in more affordable products as the marketplace becomes increasingly consumer-centric, and we anticipate incremental investments in our Consumer business to develop a broader portfolio through which we can meet the needs of individuals who are dually eligible for both Medicare and Medicaid. By building on our CareMore foundation and our experiences in Medicaid managed care, we believe we will be well positioned to serve the burgeoning dual-eligible opportunity.
We'll also continue our significant activities in legacy system consolidation and large scale regulatory requirements, such as ICD-10, which will enable increased clinical quality information. We plan to shut down one of our legacy claims processing platforms next month and expect to complete the transition of another system in December.
By year-end, we expect to have 96% of our membership on the platforms that will be ICD-10-compliant. We're a financially strong company, and we'll continue to reinvest in our businesses while also returning capital to our shareholders.
In 2011, we generated operating cash flow of nearly $3.4 billion or 1.3x net income. We repurchased 44.5 million shares of our stock, or almost 12% of the shares we had outstanding as of year-end 2010, for $3 billion.
We also utilized $358 million for our quarterly dividend. We had $4.3 billion of board-approved share repurchase authorization remaining as of December 31, 2011, and we expect to repurchase at least $2.5 billion of our stocks during 2012, subject to market conditions.
Our board has also increased our dividend by 15%, and our first quarter dividend of $0.2875 per share will be paid on March 23, 2012, to shareholders of record as of March 9. This increased dividend represents an annualized yield of 1.6%.
The board's continued support of our share repurchase and dividend programs reflect their commitment to and confidence in our strategy and execution. In summary, we're pleased with our fourth quarter and 2011 results.
At this time last year, we laid out a plan to grow adjusted earnings per share by at least 10% on a compound annual basis over a 5-year period. We produced membership and earnings per share results in 2011 that have positioned us ahead of this road map, and we anticipate accelerating growth in both operating gain and adjusted earnings per share in 2012.
Our core objectives of creating the best healthcare value in our industry, excelling at day-to-day execution and capitalizing on new opportunities for growth, all while continuing to stay focused on our core value of customer-first, continue to drive us forward. We believe we have the best assets in the business, and we'll continue to invest in new services and capabilities to ensure our leadership position.
We're looking forward to delivering even more healthcare value in 2012 and continue to expect long-term growth and success. I'll now turn the call over to Wayne to discuss our 2012 expectations in more detail.
Wayne?
Wayne S. Deveydt
Thank you, Angela, and good morning. I agree that we're building off a solid 2011 and are well positioned for continued success in 2012 and beyond.
Let me begin with our membership expectations for 2012. As Angela discussed, we currently project a decline of 600,000 members in 2012, approximately 70% of which is related to strategic decisions we've made in selected markets and will result in margin improvement.
From a funding perspective, we expect self-funded and fully insured enrollment to decline by approximately 350,000 and 250,000, respectively. The declines will occur in the Commercial segment and reflect our disciplined pricing in National Accounts, the actions we've taken in the New York small-group market and our expectation for continued in-group membership attrition.
We expect Senior membership to grow modestly as declines in California related to the regional PPO product are offset by growth from our expansions in new service areas and the rollout of our CareMore model. State-sponsored enrollment will likely remain relatively flat, with growth in the California Seniors and persons with disabilities program and in Texas, predominantly offset by anticipated declines in Medi-Cal.
Our outlook for state-sponsored membership reflects our strategy to maintain our market shares in these programs given current state fiscal situations, while we continue to be optimistic about the significant value that can be created through Medicaid managed care over the long term, including new opportunities to serve the dual-eligible population. Premium revenue is expected to increase by 4% to $58.2 billion in 2012.
The increase reflects commercial pricing that is generally commensurate with underlying cost trend and the inclusion of CareMore for a full year, partially offset by the decline in fully insured membership. Our pricing assumes minimal rebates related to minimum medical loss ratio requirements and that benefit buy-downs are consistent with historical averages.
Administrative fees are expected to be flat at $3.85 billion as the impact of lower self-funded membership is offset by an increase in our member-per-month fees. Our overall operating revenue is expected increased to $62.1 billion.
The benefit expense ratio is expected to be approximately 85.3% in 2012, up 20 basis points from 2011. The benefit expense ratio in our state-sponsored business is expected to increase as a result of the Medi-Cal provider rate reductions in Assembly Bill 97.
We're evaluating strategies to address this issue, including adjusting our provider contracts and reimbursement, but we expect our 2012 results to be negatively impacted. The benefit expense ratio in our Commercial segment is expected to increase slightly, and growth in the cost-plus Federal Employee Program will also cause the consolidated ratio to rise.
These increases are expected to be mostly offset by decline in the benefit expense ratio for Senior business, reflecting the product changes in California. And we'll also note that our guidance assumes no net favorable impact from prior year reserve releases.
We believe our medical claims liabilities are conservatively and appropriately stated as of December 31, 2011. We slightly strengthened our reserves during 2011, and our days in claims payable increased during 2011 by 0.9 days excluding CareMore and by 1.3 days including CareMore.
Underlying medical cost trend in our Local Group business was approximately 7% for the full year of 2011, and we expect medical trends to again be in the 7%, plus or minus 50 basis points, range for the full year of 2012. By component, we expect inpatient trend to decline slightly to the upper single digits, as an improvement in unit cost trends resulting from our contracting efforts is partially offset by an expected increase in inpatient utilization.
Outpatient trend is expected to remain in the upper single digits, increasing slightly due primarily to unit cost influences other than contracting, such as the continued increase in the acuity of outpatient services. Professional trend is expected to remain in the mid-single digits, increasing slightly due to higher unit cost and an expected increase in physician utilization.
And pharmacy trend is expected to decline to the mid-single digits due to an improvement in cost trends, including savings from generic drug conversions. Turning to selling, general and administrative expenses.
Our SG&A expense is expected to increase by approximately $40 million or about 0.5% in 2012 due to the impact of CareMore. CareMore expenses will increase by approximately $160 million, 75% of which is simply annualized results, while $40 million is related to integration and expansion.
Excluding CareMore, our SG&A expense will be declining by $120 million, and our SG&A expense will be flat on a member -- per-member, per-month basis. I would like to highlight that the incremental investments we're making in 2012, including those in our Consumer business, our cost of care and enhanced care management initiatives, systems integration, ICD-10 and related quality measures, branding, marketing and other expansionary ventures will be more than covered by SG&A cost reductions we've achieved in other parts of our business.
We expect the increase in our reported SG&A expense to be offset by the impact of higher operating revenue in 2012, resulting in a 50-basis point improvement in our SG&A ratio to 13.6%. We expect operating gain to reach approximately $4 billion in 2012, which represents an increase of approximately 6% from 2011.
Moving to below the line items. As we've discussed previously, we anticipated a combined headwind of approximately $125 million pretax between our investment income and interest expense.
With a fixed income portfolio of $16.2 billion, we reinvest around $4.5 billion of our securities each year due to the timing of maturities, and many of our existing securities are currently invested at higher rates. We're also anticipating we will carry higher average debt balance during 2012 than we did over the course of 2011.
We expect amortization expense to be $235 million in 2012, and our effective tax rate is expected to be approximately 35%. Please recall that we benefited from some favorable tax settlements during 2011.
We are not projecting additional settlements in 2012. We expect to generate at least $2.9 billion of operating cash flow in 2012.
This is lower than the $3.4 billion we reported for 2011 due in part to reserve strengthening and rebate accruals in 2011 that will be paid in 2012. However, operating cash flow is expected to remain strong and in excess of our net income.
As of December 31, 2011, our investment portfolio was in unrealized gain position of $936 million, and we had $2.7 billion of cash and investments at the parent company, of which $350 million was used to repay a senior note that matured in mid-January. We expect a dividend of approximately $2.4 billion from our subsidiaries to the parent company in 2012.
We have scheduled interest and other payments totaling approximately $500 million and an additional $800-million note maturing in August that we intend to refinance subject to market conditions. Our debt-to-capital ratio was 29.6% as of December 31, 2011.
We are currently in the middle of our targeted range of 25% to 35% and continue to have significant financial flexibility, which we value in light of the current health benefits marketplace. We expect our share repurchase and dividend programs to utilize at least $2.9 billion during 2012, subject to market conditions.
We expect our full year diluted share count to be approximately $335 million, which, for comparison, is 44% lower than it was in the full year of 2007. We are committed to managing shareholder capital with discipline while continuing to invest in products and services for our customers to enhance future growth in our businesses.
Putting all the pieces together, we expect earnings per share of at least $7.60 in 2012, which represents an increase of greater than 8.5% over adjusted EPS of $7 in 2011. In conclusion, I would characterize 2012 as a year for which we anticipate continued strong performance in our Commercial and Individual businesses and a turnaround in Senior.
We expect the growth in operating gain from these businesses to be partially mitigated by margin pressures in state-sponsored programs. We believe our assumptions related to the economy, in-group change, medical cost trends, claim reserves and low-lying metrics are appropriate, and we believe WellPoint continues to be very well positioned for the future, and we expect to continue creating value for our customers and shareholders in 2012 and beyond.
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] Our first question will come from Justin Lake from UBS.
Justin Lake - UBS Investment Bank, Research Division
A couple of questions here. First, on the Medicare side, Wayne -- or on the Consumer side, I should say, can you talk about the op gain there and specifically what you saw in the quarter, maybe kind of spiking out the California PPO from the rest of the business?
Walk us through Medicaid in terms of what you saw in cost trends and the impact of pricing and how that business ended up relative to your expectations coming into the quarter.
Angela F. Braly
Justin, let me start and then turn it over to Wayne. Clearly, our Consumer segment underperformed, and it was almost entirely due to the Senior business.
You know that the most significant issue we had related to the California RPPO product, where we had a pretax loss of about $150 million for the full year, and as we've discussed with you all earlier, the product was not renewed for 2012, and we are expecting improved results. Now outside of California, we did have lower op gain than we expected for 2011, but it was profitable.
And we think we priced our products appropriately in these markets for 2012. And then going into the year, in Medicare Advantage, we grew our service territories and we achieved the growth we expected there and that the op gain is going to turn around this business -- is going to turn around.
So Wayne, do you want to break it out and also kind of talk about the seasonality for the fourth quarter as well?
Wayne S. Deveydt
Yes, just to give everybody -- we recognize this is probably the biggest question on folks' minds. I'll give you some comfort here.
If you look at fourth quarter of 2010 versus fourth quarter of 2011 and really try to do a comp, we like that comp better simply because seasonality -- doing a sequential third quarter to fourth quarter can be misleading, but I will do that as well just to give you some of the data there. But if you look at Q4 of last year versus this year, the Consumer segment made about $112 million versus a loss this year of about $5 million, so there's about $117 million gap.
Of that gap, about $50 million is the California RPPO, as we had highlighted in previous calls and said that we expected about $50 million for the remaining 3 quarters. $35 million of that gap relates to fourth quarter of 2010 positive reserve releases that were above and beyond our expectations, which we did spike out in the fourth quarter of last year.
And then about $15 million is related to AB 97, which was passed in California, although CMS is still evaluating its implementation. It represents about $100 million of the gap, and the remaining $20 million are additional reserves that we chose to put up to reflect any potential advert deviation from any of the runoff on the businesses that we have as we go into 2012.
So whether or not we'll need that reserve remains to be seen, but we thought it was appropriate in light of the runoff that was going to occur there. That's essentially the gap when you compare 4Q to 4Q, and it is almost entirely related to our Senior business, which we believe we've corrected for next year.
In addition, if you were to look at it sequentially, you've got about a $250-million explanation between the Consumer, what it made in the third quarter of around $245 million versus the minus $5 million for this quarter. And about $200 million of that delta is the normal seasonality, with almost the vast majority of that, over 60% of that being in Individuals.
That's the normal seasonality. Individuals was fine in the quarter.
In fact, it over-performed versus our expectations. I would say that medical trends both for Individual as well as our Commercial book came in lower than our expectations, and we think we're well positioned with our pricing going into 2012.
So the issue really is directly related to Senior, specifically California RPPO being the vast majority of it, where we've already made the decision to exit. And our pricing for 2012 is actually reflecting in the membership what we would have expected it to do in our other locations.
So we're fairly -- doing fairly good about entering 2012 with it being isolated to Senior.
Justin Lake - UBS Investment Bank, Research Division
That's a lot of detail. Just one more quick follow-up on the Commercial cost trend commentary.
Wayne, it sounded like the -- you're expecting trend to be relatively flat. Can you talk about where it ended the year versus that 7%?
And then can you give us an idea -- one of the things I've been thinking about is just in terms of the core trend coming out of the year and how that 7% compares to core trend given the moving parts on, for instance, PPACA costs, like the impact of 26-year-olds and the cost of covered deductibles that are kind of onetime and maybe inflated core trends. And maybe there's more price cost spread there than looks apparent at first glance.
Wayne S. Deveydt
Yes, so just to make sure I understand your question, but trend finished just about 7% for the year in 2011. And obviously, our guidance for '12 is 7% plus or minus 50, but all things being equal, it's obviously year-over-year relatively flattish.
However, when you look at -- we're pricing for rising trend. We believe trend is rising.
If you consider PPACA, it was first implemented, though, in 2011. With the benefit of hindsight now, depending on markets, it had anywhere from a 1- to 1.5-point impact on trend for the year because again, as you know, you had the impacts of dependents up to the age of 26, no lifetime limits and sort of preventive care being part of the baseline policy.
So when you evaluate from that perspective and you bifurcate that component out, you'll see we are predicting the trend will, in fact, rise from '11 to '12, with the PPACA effects pulled out. But because they're in the baseline, you get to a little more of a flattish trend year-over-year.
And again, our pricing reflects that rising trend that we're expecting, excluding PPACA, and I would say fourth quarter on the Commercial book and Individual came even slightly lower than our expectations so far. So I would still say that I think we're entering the year with a more muted trend at this point.
Operator
And our next question comes from John Rex from JPMorgan.
John F. Rex - JP Morgan Chase & Co, Research Division
I just want to continue on the Senior books. So I guess first, you referenced that there was also lower-than-expected performance in some other Senior books in the country.
And can you talk about what you're seeing there and what was driving it? And then I think you commented that you think you incorporated that into your '12 benefit design, and maybe I'm overreading your commentary there because it wouldn't seem like in June, you had to submit those bids, that you would have had this kind of visibility into the poor performance.
Wayne S. Deveydt
John, let me -- I'll go ahead and start on this one, and then, Brian, feel free to add any commentary on this as well. I would say that first of all, John, we saw what we needed to see back by the time we submitted the bid.
So in many of our bids, we reflected benefit design changes, pricing changes. We don't want to be an alarmist here.
Our other markets still perform profitably. We still grew in our membership.
We have roughly a 3-year lag though before you get all the revenue -- risk score rating revenue that you're entitled to on that membership, which actually deflates your profits in the early period, but not anything we're concerned about in our ability pulling out and getting the risk score adjusters improved year-over-year, and we expect that with our midyear spike this year. There'll be settlements as well as a final settlement related to this year.
So not concerned on that. I would also say the new membership that we've seen coming on the books, we have a view of that and the average risk score premium that we're going to be getting on Day 1 for these members.
And so I would say that -- I want to make sure folks are clear. California RPPO was a primary driver for our Senior issues.
It was the primary driver. We have small pockets in a few markets, but they weren't pockets that meaningfully moved the needle relative to our ability to achieve our guidance or the fourth quarter.
I mean, really, California RPPO was the major area. That being said, we feel very confident going into next year.
But, Brian, do you want to comment on that?
Brian A. Sassi
Yes, I think, Wayne, you covered most of the points. Certainly, we adjusted the bid for the RPPO.
We also took a look at all the other geographies at the same time. We have a growing book of business in certain geographies, and I think what we saw was a reflection of kind of the growth in those markets.
And as Wayne indicated, it takes a period of time for the revenue to catch up, and so we've got aggressive programs in those markets that we've grown to drive the revenue up. And we're confident that our forecast and our guidance reflect current claims trends as well as expected premium for this year.
Angela F. Braly
I would also add, John, that one difference between this year and next is next year, we'll have had the CareMore team as part of our care management capabilities. And their expertise in both maximizing the revenue related to the risk scoring as well as the care management capabilities, we think, can also be put to work here in terms of the Senior membership.
So overall, we're expecting a $150-million tailwind in '12 for the Senior product.
John F. Rex - JP Morgan Chase & Co, Research Division
So, Angela, can you just help us understand kind of how the CareMore team will fit in? I mean, my perspective here, kind of as the team expresses confidence in kind of getting it is like -- I mean, the track record in the Senior books over the last several years has been spotty at best, so kind of help us understand a little more kind of how we get more predictability and more consistency here.
Angela F. Braly
Well, I think that's a fair comment and question, John. A couple of things.
One, we did make some changes in the management of our Senior business line, and we do have this opportunity with the management team of CareMore to look at the whole model for Senior and the capabilities both, as I said, on the revenue side, as well as on the care management side. So the capabilities around a Healthy Start visit, collecting more risk information, improving the star rating are all brought together by this combined management group now that we have serving both the Senior product side as well as the Senior care management side.
And we think these capabilities around care management are really designed for the senior population, and so we made changes there. We are going to focus on making sure we're integrating the capabilities that we have, maximizing the risk revenue, managing the cost of care for the senior population.
So we carry -- the brand is attractive to seniors. We think that this is an asset that we have in our portfolio that can make a big difference.
We're also motivating our local leadership, our plan presidents to have a specific incentive relating to growing the business in their state, that Senior business. So I think that alignment will also help us take advantage of the assets we have in the marketplace.
Operator
And our next question is from Charles Boorady from Crédit Suisse.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
My question is around how much are you budgeting in 2012 that you're going to spend on new care delivery models and also reform implementation, specifically for accountable care organizations, bundled payments, CareMore expansion and then healthcare IT-related changes for ICD-10 and other reformulated changes. I understand those have been pretty big expenses in the recent past for you.
I'm wondering what's in your budget for 2012. And then, what do you hope to get out of those investments in terms of, by how much do you think you can bend the cost curve from implementation of bundled payment or ACO arrangements and from the rolling out of the CareMore operations into other markets?
Angela F. Braly
So, Charles, I'm going to let Wayne get into some of the numbers here. Let me talk a little bit about the new care delivery model.
As we described, we've had a number of ACOs and patient-centered medical homes, and over the next few days, you're going to hear more and more about our primary care -- the patient-centered primary care model that we're going to be announcing. And so you'll see, we think, really, there's a lot of power in just better care coordination led by primary care focus.
And in terms of the investment, a lot of the expenses associated with the processes are really already in the run rate. In terms of additional capabilities, there are some cost care analytics capabilities that we continue to invest in.
As you acknowledged and we've described over the years, the ICD-10 expenses have been included and described. We've also made a number of transitions off of systems that went quietly -- you haven't heard much about those, which is exactly how they should be -- to avoid the remediation of certain systems for ICD-10 when we wanted to consolidate and get to fewer platforms.
So, Wayne, can you be more specific about the budget impact?
Wayne S. Deveydt
Yes. So, Charles, if you look at what I'll call kind of discretionary investment dollars in total, let me first start there and then kind of pull you back into some of the questions you had.
We are investing approximately $700 million total this year into a variety of programs, all of which are not related to the specific question you asked. And about $400 million of that becomes actual expense, about $300 million being CapEx over the period of time.
If you get to some of the more detailed questions, though, around how much we're spending on ACOs; care management models, which we view CareMore being a care management model; and the expansion there; et cetera -- when you add up those combined, it's about $100-plus million. When you look at implementing reform, new regulations, ICD-10 is almost $100 million by itself for this year.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Expense?
Wayne S. Deveydt
Yes, almost a big support -- a big portion of it is fully expensed, and the other thing I would say is we have about $100 million in additional costs associated with other mandates associated with the reform act and preparing for the exchange environment. We've also baked in incrementally additional expense this year, on top of the branding that we did, the investments we made in the fourth quarter.
We're spending about $35 million more in branding this year in a multiyear branding strategy because we think as we get to the exchange, that the brand will be a very important asset for us, and so we're going to have incremental investments there as well.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
So this is a massive -- you're expensing a lone $400 million in 2012 related to these items and spending a lot more than that. When will that curve invert in terms of the return on these investments exceeding the amount that you're investing?
Because these are all things that should have long-term payback in terms of bending the cost curve. When will we hit that inflection?
Wayne S. Deveydt
Charles, obviously, each investment has a different inflection point. ICD-10 itself will be complete, assuming they don't push the reg out.
We're not going to assume that, so it will be done by October 13. So the benefits on a run rate basis of that will begin to see in '14.
Obviously, under a CareMore model, we're expanding that this year. We expect to expand that again in '13.
I think you'll start seeing some very good incremental benefits starting in '14 and beyond. The branding is more one that you'll start to see the real incremental values as we do a multiyear branding strategy as we get to the exchange, again, our '14, '15 period.
And I would say that we are trying to make sure that some of the benefits that we are seeing each and every year, in fact, are going to the benefit of our shareholders in the interim. So as you've seen, we're trying to remain disciplined in the investments.
We took down absolute G&A in 2010 by $270 million. We're down another $300 million in 2011, and that included all of CareMore, the acquisition cost, its G&A, as well as the $50 million that we took in charges in the fourth quarter.
So we actually achieved over $400 million of savings in the quarter -- or in the year last year. So our goal this year, though, was to make some more of these incremental investments, maintain a flat PMPM in 2012, and as you'll see, on a total G&A basis, it's only up modestly despite our full year CareMore and all these investments.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Are you holding back on the CareMore expansion? As a result of results coming in a little bit light in the fourth quarter, did you change your 2012 plan?
Wayne S. Deveydt
Quite the contrary. The CareMore model is a proven model that had excellent results, that continue to have those positive results that we would have expected in the 4 months that we've been fortunate to own this enterprise, and we see this as a future model around care management.
So we will not be slowing down that expansion.
Operator
Your next question is from the line of Josh Raskin with Barclays.
Joshua R. Raskin - Barclays Capital, Research Division
Just a question -- maybe you could walk us -- I'm just trying to figure out the bridge for the MLR increases, up 310 basis points. Those are maybe year-over-year ranges, because you talked about the seasonality impact.
So I think I know 80 basis points was clearly that $105-million release, but I just want to make sure I have all the moving parts on what's impacting the MLR on a year-over-year basis, maybe the rest of that, that 230 basis points extra.
Wayne S. Deveydt
Yes, Josh, a couple of things to keep in mind. I would tell you that almost the vast majority of that, though, still relates directly to the Senior business and what we spoke about.
When you look at it by itself from a year-over-year basis, it was about 650 bps unfavorable relative to the -- so on a weighted average basis, though, it's about 95 bps of that 310. So almost a full point of that 310 when you weight-average it versus the rest of the books related to that.
About 45 bps -- well, about 0.5 bps relates to -- basically relates to Individual. And while Individual improved in the quarter relative to California, this was the first year of PPACA MLR minimum requirements and so you have the whole rebate effect coming through in the fourth quarter and the continued true-up of that.
And we took a cautious posture on those as well as we continue to wait for final definitions around rebates. State-sponsored was around 30 basis points of that delta, and that was primarily related to the fact that we took an AB 97 charge in the quarter, and we had the lower rates that we reflected.
We've talked about it in the third quarter, and we said we see -- it's the one headwind we see going into '12 because the new rates went in effect on October 1 in California, in particular, which is our largest market. And then about 10 points is for FEP and other.
And again, as you know, that's just a cost-plus program with the delta being what you highlighted, being the primary reserve changes in that.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. And so just so I understand, when you talk about that sort of 95 basis points, the overall Senior, that meant that the Senior MLR was up 650 basis points.
And then maybe you could give us corresponding numbers for the Individual. What does a 45-basis point-increase mean?
And Medicaid, what is the 30-basis-points contribution? What does that mean in terms of an overall Medicaid MLR?
Wayne S. Deveydt
Well, just to give you a feel, Josh, and I've said of every one of those pieces here, the Senior, obviously, was our big focus. We knew that was the primary driver.
But what I can tell you is that Senior by itself, as I said, when you weight-average it, was at 95 but 650 in total. State-sponsored, though, is below the 650 but not substantially below that.
Obviously, the other ones are much, much smaller numbers. Obviously, so you can pretty much see it's a Medicare and a Medicaid driver, the rebates being the biggest impact on Individual.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. And then on the rebates, when you guys finally file your forms -- I know they'll be public at some point -- any sense as to what that total dollar amount is going to be?
Angela F. Braly
No, we really can't speak to the total dollar amount yet. As you know, the regulations have continued to come out and be clarifying in terms of what that calculation is going to be.
We still don't have the form of the rebate notice going out to consumers, so we're not yet ready to say the total amount. We try to be thoughtful about how we could use the potential for rebate strategically in certain markets, and we believe we price products and have the resounding commercial longer-term impact and value of that.
Operator
Our next question is from the line of Doug Simpson from Morgan Stanley.
Doug Simpson - Morgan Stanley, Research Division
Wayne, maybe just following on some of those G&A comments. Can you just walk us through a little bit exactly what you're doing to bring down the G&A dollar spend to offset some of these investments that you're making, and just talk about sort of your level of comfort that those cost reductions are not going to have any sort of adverse impact on the ability to execute?
Angela F. Braly
Let me start that, and then Wayne can be more specific. We have -- and it's in flight now.
We're in our third year of a continuous improvement program that's really a multiyear productivity enhancement program. And what's critical about it is it's a multiyear plan to take out the legacy of being 14 different Blue Cross plans.
We have a lot of runway, frankly, to consolidate systems, simplify and standardize processes that are not distinctive in the marketplace but that can both reduce costs and improve capabilities. So we're both automating certain capabilities, creating more self-service opportunities for consumers and physicians' offices through our portals.
We are improving our EDI rate, our auto adjudication rate. We have been improving significantly our member touch-point measures and other metrics that relate to service.
So while we are taking out admin -- what I would call the traditional admin run rate cost, we're improving service levels at the same time and improving member satisfaction because we're giving them self-service tools. So I feel really good about our ability to execute on those fundamental administrative, operating deliverables, improving service while reducing costs at the same time, as Wayne described.
And we make investments from some of those savings in the capabilities that we think will enhance growth for the future. So, Wayne, do you want to add to that?
Wayne S. Deveydt
Just a couple of things. As Angela said, one of the biggest savings, though, is we've been consolidating systems now over the last 3 years and have been doing that quite successfully while managing our inventories, having a good outlook on where that was going.
We shut down another system this past year, and a vast majority of our membership now is on the surviving system. So while it may not seem like a big deal to move 200,000 lives off one system to another system and shut it down, the cost of running that system is no different whether we have 200,000 lives or 20 million lives on it.
And so the more that we continue to consolidate these systems and platforms, the more that you'll start seeing the savings. And we're consolidating to the platforms that have better automation for auto adjudication, better EDI rates.
We will be shutting down another system next month, and we have another one scheduled for later this year. And those are some of the benefits.
The other thing I want to highlight, though, that we've said many times that should give you some comfort, too, is that we believe the brokers are a very important part of our business, and at the same time, we recognize the minimum medical loss ratio requirements and they recognize the shared responsibility we all have. So we laid out a multiyear program to help maintain our brokers, give them an opportunity to adapt their business models just as we're doing and that the benefits of the commission structures would inure over time.
And so you're seeing in 2012 -- in '11, they were relatively flat, and we tried to maintain that. In '12, you're starting to see those benefits as well.
And those will ramp up over time as well because of the PCPM model that we're on.
Doug Simpson - Morgan Stanley, Research Division
Okay. And then maybe just switching gears a little bit back to the Senior business, in the process of integrating CareMore, obviously.
How do you think about your capacity to think about other opportunities to serve the more chronic populations, duals, those types of folks in light of some of the challenges that have popped up over the last 12 months in the Medicare business?
Angela F. Braly
I think it's a fair question, but I do think that the CareMore capability and the lessons through -- that they have learned over their expansion, so part of the interest we had in CareMore was it had scaled to some level. They were up to -- now they're up to 29 neighborhood care centers.
They grew their book of business when we acquired them, so their ability to scale and serve a broader population is evident and proven, and we think we can bring that to bear. And they are designed to address both the needs of a healthier Senior.
They have in their neighborhood care centers these Nifty after Fifty workout training facilities. They do their Healthy Start visits.
They have high member satisfaction there. But then with the very acutely ill population, they have this extensivist model.
And so I think those capabilities are going to be critical to the dual-eligibles. As we look at where we think the dual-eligible marketplace will begin, our expertise and experience in the Medicaid population, the footprint we've had in Medicaid population in California, in particular, will be relevant here as well as CareMore's footprint was primarily in California as well.
So I think in terms of readiness for our ability to do that, I think we're better positioned than anyone else in the marketplace.
Doug Simpson - Morgan Stanley, Research Division
Okay, great. Then maybe just one last one, if I can sneak it in.
Wayne, in your list of investments, did I miss something about exchanges? Did you comment at all about investments specifically in preparing for exchanges in 2014?
Wayne S. Deveydt
Yes, they are in there. That's part of 2 things.
One was we talked about ICD-10 being by itself $100-plus million. That does not relate to exchanges at all.
Another $100-plus million are related to mandates and exchange preparation, as well as the additional incremental investment dollars for branding to prepare for exchanges, and that will be $35 million incremental this year.
Operator
Your next question comes from Christine Arnold from Cowen and Company.
Christine Arnold - Cowen and Company, LLC, Research Division
I just want to make sure I understood what your response to Josh's question. Did you say that the Medicare Advantage MLR was up 650 basis points?
Wayne S. Deveydt
Yes, if you look at the quarter by itself, Christine, that would be the driver [indiscernible]...
Christine Arnold - Cowen and Company, LLC, Research Division
Can you give brief detail on kind of what had happened year-over-year? And $50 million year-over-year was the California PPO.
Can you give us -- you said also, though, that x California, the operating gain was less than expected. How much less than expected was the x California Medicare Advantage operating gain?
And then can you review for us your outlook for your Medicaid book? Is it still a $75-million headwind in 2012 for Medicaid versus 2011?
And does that include or exclude the $650 million up -- or 650-basis-point uptick this quarter?
Wayne S. Deveydt
So I'll make sure I answer these questions in parts. For Medicaid, we estimated the headwind being up to $75 million.
We do reflect still AB 97 and some run rate impact into next year. We still think that's a high-water mark, and I believe we can hopefully do better than that.
But I would make that the high-water mark, Christine, not the absolute water mark. The other thing I would say is relative to Medicare, again, with us exiting the California RPPO, we were able to retain membership, but it was in the southern aspects in our local PPO where we had a very good book there.
So we're feeling pretty good about that, that we'll actually get the tailwinds we expected. Relative to the miss in the other markets, it's not significantly off from where we would expect the long-term margin to be in this book, which is closer to a 5% margin.
So I would say that as we were bidding for the next year and keeping that in mind, we're bidding closer to what we think a long-term margin is. So it's not substantially off the long-term margin target we had.
Christine Arnold - Cowen and Company, LLC, Research Division
Okay, and then the deterioration in Medicaid, you said it could be up to $75 million. It sounds like you hope it will be better.
Is that because you reserved for any retroactivity already? Is that because SPDs or medical trends and Medicare are coming in better?
Why would it be less than the $75 million?
Brian A. Sassi
Christine, this is Brian. The reason for that is we did reserve for anticipated retroactivity.
So we did take into consideration worst case, and certainly, CMS has not approved all aspects of it. So there could be upside there, depending on how that unfolds.
Operator
Our next question is from the line of Scott Fidel from Deutsche Bank.
Scott J. Fidel - Deutsche Bank AG, Research Division
First question. If you can talk to with the enrollment losses expected in Commercial for 2012, how much of those would you say specifically are due to some of the targeted actions that you said you've taken in the self-funded business?
And maybe just talk a bit about your ASO pricing strategy. Our survey had shown you guys raising your fees a bit higher or keeping those in line a bit more than some of the competitors.
So you're comfortable that, that's not resulting in the loss of any profitable business, and maybe your ASO pricing strategy in general.
Angela F. Braly
Yes, I'm going to obviously have Ken speak to this. When you look at the total membership decline for 2012, we think there are specific actions we took.
The California regional PPO comes out. Our actions in New York small group does come out.
So, Ken, do you want to focus then on the ASO national...
Ken R. Goulet
Yes. Let me, really, take us back to first quarter of last year when we discussed that we would be doing this.
We felt we were in a very strong position, and we indicated that we would be strengthening pricing in ASO, particularly for some existing groups that were not covering their share. We had a -- actually, we had a wonderful growth year last year.
We had for 1/1/12 very good new business growth and expansion of current. But there were certain accounts that we set price levels that they would need to go up to, that were significantly greater than where they were.
And we did lose about half of those cases that we had substantial increases on. We kept the others.
70% of the overall losses in our business were targeted, and the remaining 30% is really based on in-group change and the economy, where our numbers are right where we expected them to be a year ago when we stated we would take this strategy. And we feel very comfortable with it.
So we are selling new. We're expanding, but we needed to clean up some of the book.
The changes are in ASO. They're in -- and then in also New York where you saw that we repositioned our small group book.
Angela F. Braly
I would say, too, we really know our market advantages in terms of our overall discount levels, and we're enhancing our cost of care and care delivery platforms significantly, as well as our other related offerings. And we think some of that membership will come back because when you interface with a procurement officer, they may look at the fees disproportionately.
But when they experience the P&L impact, losing our discount advantage, we expect some of that membership will be back in a year for the greater value proposition that we have to offer.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. And then just a follow-up, just going back to the dual-eligible opportunity in California.
And certainly we'd seen the CareMore acquisition should help your platform from the cost management side. How do you feel though about how you think pricing will look in this dual-eligible opportunity in California?
Obviously, it's still a ways out, but just given some of the rate dynamics we've seen with Medi-Cal recently and historically, do you think that this dual-eligible opportunity in California will be structured in a way that it could be profitable for the industry?
Angela F. Braly
Let me speak to that broadly and then Brian will speak to it in terms of California specifically. We do believe that the dual-eligible population and the lack of coordination today between the Medicare and Medicaid programs creates a great opportunity, both for creating revenue opportunity to serve this type of membership across the country.
But also, this is -- the disconnects between these programs are really tough on human beings. You have complexity that is unnecessary there, and so we're very supportive of the dual-eligible population and the rationalization of those 2 programs.
We absolutely believe that the CareMore capabilities, as well as our history in Medicaid and in California, will position us uniquely to serve that membership. So do you want to speak to, Brian, the specifics for our California pricing?
Brian A. Sassi
Yes, I think you were accurate in that we're still a ways off. But I think early indications and discussions that we're currently having with the state and certainly, our experience with the expanded ABD population, we're hopeful that pricing will be adequate, again, as well.
As Angela had mentioned, we feel very well positioned. We're the leading provider of Medicaid services today in California.
CareMore is primarily sited within California. We feel that the combination of not only their care model and infusing some of that into how we manage the duals will set us up for success, but we're confident, based on where we are today in discussions with the state, that it will be a somewhat rational pricing environment.
Operator
Our next question is from the line of Tom Carroll from Stifel.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
I want to be super clear on the Medicare Advantage book issue, and I want to make sure that there was nothing -- no new reason over and above what you gave us on second quarter that would account for the deterioration that you saw at the end of the year.
Angela F. Braly
And let's be really clear, Wayne, in terms of the number. We think that we had a $150-million impact from the California regional PPO.
We've exited that program. We saw some impact, but the other business, while we saw the impact, we did see, to the earlier question, the ability -- we see that some of those [ph] claims and we priced and made adjustments in benefits and the filing that went in to improve operating margin in the Senior line.
We think, overall, it's a $150-million tailwind for 2012. But, Wayne, do you have more to say than that?
Wayne S. Deveydt
Yes, Tom, I think, I want to be very, very clear. Our other markets had some slight deterioration relative to our margin expectations, but relative to our long-term margin goals, they don't.
The benefit designs that we wanted reflect them. We think we'll be at our margin -- targeted margins we want to be at for this year.
And our $150-million tailwind that we committed to earlier in the year that we thought would be the tailwind for Senior, we also believe that's an at least $150-million tailwind for us. And I feel very confident of that going into the year.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Right. And just as a follow-up, given the changes you made in Medicare products and moving into the second year with some Accountable Care Act items in plays and the SG&A items that you've highlighted for us today, how do you expect the quarterly earnings to progress in 2012, so that maybe current expectations that are out there could perhaps be rationalized as we kind of move through the year?
Angela F. Braly
Tom, we don't give specific quarterly EPS guidance. Wayne, I don't know that we can say too much more.
We have tried to be clear about the progression of the quarters in terms of seasonality. But do you want to speak to that?
Wayne S. Deveydt
The only thing I would say, Tom, is that obviously, always directionally, there's nothing secret here about our history that the first quarter is always our highest EPS quarter and the fourth quarter is always our lowest, and I don't expect that to change. The only thing I would highlight as you're doing your models is keep in mind that our first quarter of '11 is a little distorted, just as our '12 -- our second quarter is because of the unfavorable development of our Senior business from the first quarter.
And then, we took an opportunity then to move our reserves to the higher end of our adverse deviation range. So just keep that in mind.
I would say, first quarter last year is probably a little -- it's overinflated, and second quarter is underinflated. And you got to adjust for that, but you should be able to pull all those adjustments from our public comments.
Operator
Our next question is from Matt Borsch from Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Just wanted to get a little more on the 2012 Commercial trend view. I think, last quarter, you guys have talked about seeing utilization increase in 2012.
The -- your outlook for flat trend, does that embed some utilization increase? Or are you not expecting that at this point?
Wayne S. Deveydt
Matt, we have embedded some utilization increase, although I will tell you, we are still finishing with admits per thousand still down at this point, and bed days per thousand are just slightly up, so -- but we are assuming that utilization will, in fact, rebound in inpatient. But we do have improved unit cost trends, which we have great visibility on regarding our contracting, that we think would offset that.
But nonetheless, we are assuming a rising utilization pattern.
Angela F. Braly
And we did price for that.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Okay, got it. And relative to fourth quarter, I realize you don't give the Commercial MCR but if you were to -- if I could ask the question this way: if we back out the reserve changes and we back out the impact of rebates, would the Commercial MCR have been flat or higher relative to a year ago?
Wayne S. Deveydt
Let me maybe answer it a little bit differently. I would say the Commercial MCR was much lower in the quarter than we would have anticipated, but Senior offset that delta.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Okay, okay. And last question on the pricing.
Can you spike out any markets or any general change in the intensity of price competition, either risk or ASO, relative to your view maybe 3, 4 months ago?
Angela F. Braly
Ken, you want to address that?
Ken R. Goulet
Yes, Matt, I would say it's consistent with what we've been saying. 2011 was a different year and '12 will be slightly as well simply because there are certain pockets where a competitor may work around an MLR issue, and we may do the same as we're working towards our MLR baselines, but it's a competitive but rational market.
There is no spike out of any area where we don't understand what's going on. And then all of our markets we've fully priced for our forward cost, and it seems to be we're well positioned in 2012 and feel very comfortable with where we are.
Operator
And our next question is from Kevin Fischbeck from Bank of America Merrill Lynch.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
It sounds like most of the commentary around the government business and the headwinds there has been from kind of a pricing perspective. Can you talk a little bit about trend on the Medicare and the Medicaid side?
Was there any change there? And are you forecasting it as a change going forward in 2012?
Wayne S. Deveydt
On the Medicaid side, we didn't see any real change at all in the trend there. So again, it was pretty much as expected.
In some ways, it was a little bit better than expected, slightly better than expected in the quarter as well. So again, I'd say when you look at Individual, Commercial and Medicaid, slightly better than expected pretty much across the board.
When you look at the Senior, we obviously knew what the big item would be, which was the California RPPO. And again, I want to emphasize we did make a decision because of run-off to put up additional reserves of about $20 million for any adverse deviation that could occur.
So that also causes, obviously, I would say something normal -- above normal. But that was an intentional decision we made, and whether we'll need that or not, we'll see as the first quarter progresses.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. Then maybe just to follow up on that because as far as the reserve positioning, I think last quarter you categorized as kind of the high end of your range, and I think it sounds like you boosted it here in Q4.
Do you still feel comfortable with that categorization?
Wayne S. Deveydt
Yes. And having the benefit of 930 running out, I would say we are at the high end of our range.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then just one last question here.
I just -- can you just give a little more color on your Medicaid plans? I mean, you talked a little bit about the ABD side of things.
But when we look at some of the RFPs, you weren't really aggressive in Kentucky, which is a state that you're in. You've got to exit Kansas, rebid where you're the incumbent but you're not the actual Blue in there.
Any thoughts about your willingness and ability to compete for new RFPs?
Angela F. Braly
Yes, let me speak to it broadly, and then Brian can speak to it more specifically. We do think we have opportunities to look and expand the Medicaid managed care business.
A couple of things we did. If you look back 2 years ago, we had a platform that really now is quite scalable for this business and the processes and procedures all around it to really grow in a couple of different ways.
One way is to grow in the states in which we have the Blue Cross licenses. Other opportunities include partnering with other Blue plans.
With each of these RFPs, we really need to look at that -- at the sustainability of that program as evidenced by their RFP. And some of those -- frankly, some of the RFP situations do not look sustainable from a pricing perspective or they create pretty significant predictability issues in terms of kind of drawbacks into prior performance.
So we're going to be thoughtful about the choices that we make in those programs, and we do have opportunities here to go beyond what have been our traditional borders. So, Brian, do you want to be more specific than that?
Brian A. Sassi
Yes, I think, that's right. Certainly, we're taking a look at all the opportunities, both within our Blue states and then potentially with other Blue partners.
As we evaluate that, it's got to be -- we've got to feel comfortable from a rate adequacy standpoint, and outside of our states, our partners have to feel comfortable with that. And so that kind of all goes into the mix.
And sometimes, it's our partners that aren't comfortable, and sometimes, our evaluation of it is that it's not a sustainable rate environment over time. So that all goes into the mix.
So we're taking a very measured approach to growth in that segment, as we also prepare for the dual opportunity within the states that we do business in.
Angela F. Braly
Yes, I think there's an important element of the Medicaid managed care business in that it's strategic for 2 opportunities: One is the dual eligible population and our combination of our Medicaid managed care and our Medicare capabilities, which obviously we've invested with CareMore and other things. The other strategic element is how the Medicaid opportunity aligns with the exchange opportunities in the future.
And as we've said, we can't predict yet what states will be in or participating in exchanges or participate off exchanges and in exchanges. But the idea that the Medicaid managed care members may be, in some respects, very similar to the exchange members who are subsidized and they make a minute [ph] out of Medicaid into a subsidized exchange product means that, that Medicaid -- those Medicaid capabilities are strategic and important for the long run.
So we don't want to get distracted by difficult contracts that we don't think are sustainable. We're going to stay focused on the more strategic opportunities that, that platform will allow us.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
And just maybe to build on that, if you have those opportunities outside of the core business that you're bidding on, it sounds like you're not willing to use that as a loss leader to get access to these other opportunities. You want the core plan to make money before incorporating some things.
Or is it, potentially, you make sort of lower margin on the initial bid for the opportunity to address those other strategic markets?
Angela F. Braly
Yes, "loss leader" is not a word that we accept for most contract discussions. So I think it's important that it be a rational contract, it be worth both the investment in terms of setting up for that state and having a successful execution over time and strategically positioning us well with those state regulators who are administering the Medicaid program, as well as they then start to consider both the exchange opportunities, as well as the dual eligible opportunities.
We want them to think about us as the preferred partner.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. Then one last quick question here.
I think last quarter when you highlighted the headwind from interest income expense as being about $125 million. Did I have that -- is that still the right number?
Wayne S. Deveydt
Yes, Kevin, that's still the number that we anticipate at this point in time.
Operator
Our next question is from David Windley from Jefferies.
David H. Windley - Jefferies & Company, Inc., Research Division
So, Wayne, I believe you said that share repurchase and dividend will consume about $2.9 million, which is -- or billion, excuse me, which is also the amount you expect to generate in operating cash flow, I believe. So I wondered what your appetite was, if you could characterize, around M&A, if you do have appetite there, and confirm for me that you would feel comfortable taking up the leverage to do that.
Angela F. Braly
Wayne, before you do that, I do think it's important for you to talk about the whole approach we have to capital management. Let me talk to the M&A idea, though, for a minute, because I think that's an important one.
We do think there are opportunities in M&A. We always, always have and will.
Having the opportunity uniquely to be a Blue consolidator has always been important. But in this environment, that hasn't been as apparent in the process that Blue plan goes through.
It's unique in every state, but those are time -- they take time. And so our approach has been, and has been successful, to continue to partner with our Blue brethren in terms of capabilities.
For example, our acquisition of Bloom Health was a shared acquisition with other Blue plans. As we've talked about, we have the opportunity to partner with other Blue plans on Medicaid managed care.
We think there are other opportunities beyond that as well, which we think are ways to create more scale, and then it's short of an ultimate M&A acquisition but gives us new capabilities and opportunities. When we look at other capability acquisitions in the M&A market, we're interested, and we're looking at those consistently.
But we -- they need to make sense economically and financially. We always do a build-versus-buy analysis in terms of the opportunities out there that are similar to our core capabilities.
We also look at opportunities that are more diverse than our core businesses, and those need to make sense economically. So, Wayne, why don't you talk about both the way we analyze that and then also go back to the question about capital management?
Wayne S. Deveydt
Yes. So David, just at a very high level, obviously, our debt-to-capital is 29% at year end.
Our targeted range is between 25% and 35%. Our preference would be, obviously, over time to be closer to that 35%.
But right now, we like where we're at because it gives us the financial flexibility to lever up quite significantly for an M&A opportunity if we wanted to. We would be willing to go higher than that, both of the asset actually having enough cash flow putting off that we could drive that back down pretty quickly to our targeted range.
We our finishing the year with $2.7 billion at the parents. You are correct in saying that if we just generate our operating cash flows for that and dividend buybacks, you'll see that does give us additional powder as well for an acquisition, either through cash or through levering up and accessing debt markets.
We have about $350 million coming due, though, in January. It has come due, actually.
We're paying that down out of the free cash flow we have at the parent. About $800 million in August, but we do plan to refinance that during that period.
So we -- I would tell you we clearly have a bias towards M&A and the opportunity for top line growth. But that bias will never be trumped by the economics of what we think makes sense for longer-term returns.
And if -- very few things would be better than buyback initially, but as long we can show that the long term growth potential and the top line is better over the longer term, we will err on that side of an M&A that we think makes a lot of strategic sense for our business and have a longer-term return for us. CareMore is a perfect example of that, but there's many assets we think we can build as well.
David H. Windley - Jefferies & Company, Inc., Research Division
Super. If I could go back to trend and just understand -- I don't know if you're willing to put numbers on it but if you would, put numbers on the relative difference in trend between the books of business, Commercial, Medicare and Medicaid.
If not, talk relatively to those and specifically, help me to understand how the composition of trend changes as you move to '12.
Angela F. Braly
We really don't break down the segment -- the trend by segment. But what we have done is we do describe the trend expectation for '12 and where it comes from.
So about 22% of it, we think, is coming from inpatient. It's in the high-single digits, and that's down from the low-double digits in 2011.
We see improving unit cost trends in '12 due to our contracting efforts and our care management efforts, partially offset by some rebounds that happens mathematically and over time in inpatient utilization. And the inpatient trend is still primarily unit-cost-driven.
The outpatient piece of that is about 24% of the total. It's in the high-single digits, up just slightly but in the same range as 2011, unit-cost-driven as well.
Shift of services from inpatient to outpatient is something we're managing carefully. The professional piece of that is about 34% of the total, mid-single digits up slightly but in the same range as 2011.
Our contracting changes are driving an increase in unit cost and we'll hear more, in the days to come, about how we really want to motivate primary care physicians and reward them appropriately for care throughout the system. So we do expect a slight increase in physician utilization, a bit of that rebound and expectation of the utilization overall.
Pharmacy is about 20% of the total. It's in the mid-single digit.
It's down from mid- to high-single digits in 2011. It's improving due to unit cost, and there are a lot of branches in there in conversions in 2012: Lipitor, Plavix, Lexapro, Singulair.
They're -- so we think those have an impact. So that's kind of the breakdown.
David H. Windley - Jefferies & Company, Inc., Research Division
If I could just clarify or ask it a slightly different way. So if I think about book of business, I would expect that you think your MLR for MA is coming down significantly, and you're expecting the consolidated MLR to increase, I think you said 20 basis points.
And so I was hoping to get a little bit more clarity on the composition of, say, trend across all books of business as it affects MLR difference, as we think about how it affected MLR in 2011 versus how it will affect MLR in 2012 and it being 3 different books of business.
Wayne S. Deveydt
Yes, let me take a stab at that. Maybe this will help.
When you look at Senior, we think Senior, obviously, will improve quite a bit. That improvement though, we expect to be offset by FEP, which, again, it's a cost-plus program.
We're expecting a lot more FEP members. It's an MLR that's in 90%-range plus, and we're expecting that to be offset by state-sponsored business because we've taken a more cautious view on AB 97 and the rate environment that we've seen out there.
Commercial has a very small impact on it in total, about 10 basis points at most.
Operator
Our next question is from Chris Rigg with Susquehanna.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
I just had one qualifying question -- or clarifying question on the Medicaid headwind for this year and the $75 million that you guys characterized as the high-water mark. What -- I think you made it -- you commented on an earlier question that there's a retroactive assumption in the $75-million headwind.
Can you help me better understand what you mean by that? And then, in addition, when did you guys assume, in 2011, the AB 97 hit in your MLR assumptions?
Angela F. Braly
Wayne and Brian, do you want to address that?
Wayne S. Deveydt
Let me first start off. The retro impact we have reflected in our fourth quarter of 2011, so that's the first part.
But we've also assumed that because the implementation continues to get delayed in how it's going to be effective, we also have approved a prospective projection at the pace we'll be able to implement. We're not allowed to take certain actions until it's finalized.
And then as soon as it is, we'll be taking the actions we need to take to try to mitigate. We've also baked into our 2012 guidance a prospective view of how that could affect us as well.
That prospective view is part of that "up to $75 million" number, but we think we have opportunities throughout the year to hopefully improve either on that or other areas of our Medicaid.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
And I guess -- so in 2011, in the Medicaid business, when did you assume -- I'm assuming you're that saying AB 97 is the 10% reduction. When did that begin to impact your numbers?
Was it June 1 or July 1? Or how did that impact you guys last year, at least from a timing perspective?
Wayne S. Deveydt
The impacts of it are in the fourth quarter, right, in the fourth quarter. We guided in the third quarter that we would be assuming some impact for that in the fourth quarter.
We do not have anything reflected in the third quarter for AB 97. At that point, it was still unknown as to even if it was going to move forward in any capacity.
Operator
And our next question is from Ana Gupte from Sanford Bernstein.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
The question is on the PBM, and I'm just going back to 2009. I think on the other segments you used to run $450 million to $500 million, and if I remember right, your initial expectation had been that the sale would be accretive on op earnings even before share repurchase.
So while in 2010 and 2011, there have been multiple moving parts on Individual and Medicare and Medicaid and other headwinds, are you -- have you realized those synergies in terms of your cost and SG&A? Is there more room to go there?
And can you comment on what the sourcing driver was of the dispute with Express and where you are on that?
Angela F. Braly
Let me speak to that. I think, even though we will speak to some of the issues with Express Scripts, we are pleased with the results of the transaction and have done a number of look backs and are really very supportive of having done that transaction.
I'll let Wayne be more specific to that. We continue to have a multiyear contract with Express Scripts, and we are in negotiations with them to resolve the differences that were expressed by them, and we'll continue to focus on that.
We need to get resolutions, and those resolutions are important to us and important to our customers. And so we're going to stay very focused on resolving that in the right way that needs to happen.
So I think that's our expectation, overall. As we described earlier, we took a very proactive approach to the Walgreens contract issues with Express Scripts, and that is not really the most significant concern we have in that discussion.
Wayne, do you want to be more specific than that in terms of our analysis?
Wayne S. Deveydt
Yes, Ana, the one thing I would say is the transaction did exactly what we wanted it to do. In some ways, I would say it's turned out better than we would have expected.
Clearly, part of the better-than-expected was at time we were deploying the capital, we were able to deploy it in a period when the stock price was closer to $45 a share, and we were able to take advantage of that. At the same time, in the last 2 years, as you said, while there's been a number of moving parts, one thing that we can comment on is -- that everybody, I think, would agree with, is that the economy has been anywhere but up.
It's been down substantially, and it's had a substantial drag on in-group change in membership. And at the same time, we had PPACA implemented, which put a floor on minimum MLRs.
And if you look at our 2012 guidance of our op gain that we said approximately $4 billion and you compare that back to '09, you'll see that our op gain is actually not that far off at all, despite the economy and despite the PPACA regulations. Now keep in mind, because of the minimum MLR though, some of the benefits that we would get, obviously, have to be passed on along the way, and it's all the more reason we wanted to protect our shareholders and get to the $4.675 billion upfront.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
Okay. So I'm understanding that the $450 million was somehow absorbed or recovered in the other 2 segments.
So follow-up to the Walgreens issue, can you just give us an update on your retail selling season and how that looked in terms of the gross adds, the retention, both across the Part D as well as MAPD book?
Angela F. Braly
Yes, let me speak to it, generally. So we -- what we did is took a very customer-first approach here and, anticipating that Walgreens would not be in the network, we did very direct outreach to the members who had access to or were utilizing the Walgreens pharmacy.
We also made sure almost in every case, there was another pharmacy that was in our network that was within 0.5 miles of an existing Walgreens pharmacy. So we took -- and that we made a number of communications and outreached to them, and as a result, we do not think it had a meaningful impact on our medical management enrollment.
And I think people are adjusting, frankly, to it in the marketplace and we aren't seeing -- I'll turn it over to both Ken and Brian in terms of other impact that it had. In terms of the Part D membership, really when we look at Part D, we don't think that Walgreens, specifically, had that much of an impact.
We do think that membership is going to PBM-available Part D program and moving in a number of ways. So I'll let them speak to that.
Ken R. Goulet
Yes, I think, as far as MAPD sales, we didn't see any deterioration in our sales expectation as a result of those. MAPD sales were strong.
Standalone Part D, we have been seeing, obviously, more competitors with the PBMs entering the space, so that is kind of a challenging environment. Although on an overall basis, our Part D membership is pretty flat, and it's what we expected.
So no deterioration as a result of Walgreens.
Brian A. Sassi
And same on the Commercial. I would simply say that we did a tremendous outreach to all of our clients who were both at the employer level and at the member level, gave the options, shared the information, and it was a very smooth transition for us.
Operator
Our last question this morning will come from the line of Carl McDonald from Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
There's been some commentary from other parts of the healthcare chain that utilization picked up a bit in the fourth quarter. So I'd be interested if you correlate that your commentary about a 7% cost trend.
Are you seeing the utilization pick up in the fourth quarter but it's being offset by lower unit cost? Or are you seeing utilization pick up in certain areas but more than offset by, say, the drop in the admits per thousand?
Wayne S. Deveydt
Carl, I think it's a combination of normal seasonality. I mean, we always see utilization uptick in the fourth quarter, so I'm not so sure if people are publishing this wrong or writing about.
We did see an increase slightly in most categories but in accordance with our expectations, but still a little bit lower than maybe we would've expected at this point. And then again, with our admits per thousand being down, it's more an elevated case that you were seeing, but then our unit prices are improving quite dramatically from our negotiations.
So all in all, I would say that it's going to move up in the quarter because it always does in the fourth quarter for utilization. It's just a common pattern we typically see in most lines of business and with deductibles being met.
But I would still say it's not the levels we would have expected.
Angela F. Braly
Thank you, and thank you for all your questions. In closing, I'd like to reiterate that we're pleased with our 2011 results, and we're excited about our business prospects for 2012.
We have made important changes to address some of the challenges that our businesses face, and we do have the right strategies in place to continue improving the lives of the people we serve and the health of our community. I'd like to thank our more than 37,000 associates for their commitment, their dedication and their innovation.
It's their hard work that provides excellent service to more than 65 million individuals that we touch each and every day. As a team, we produced "better than originally expected" 2011 results, and we believe we are well positioned for the future.
I want to thank everyone for participating on our call this morning. And I'll now turn it over to the operator who can provide the call replay instructions.
Operator
Thank you. And ladies and gentlemen, this call will be available for replay after 11:00 today through February 8.
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