Nov 7, 2012
Executives
Douglas Simpson John Cannon - Interim Chief Executive Officer and Interim President Wayne S. Deveydt - Chief Financial Officer and Executive Vice President Kenneth R.
Goulet - Executive Vice President, Chief Executive Officer of Commercial & Individual Business and President of Commercial & Individual Business
Analysts
Justin Lake - JP Morgan Chase & Co, Research Division Joshua R. Raskin - Barclays Capital, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Ana Gupte - Sanford C.
Bernstein & Co., LLC., Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division Melissa McGinnis - Morgan Stanley, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Scott J.
Fidel - Deutsche Bank AG, Research Division Christine Arnold - Cowen and Company, LLC, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Carl R.
McDonald - Citigroup Inc, Research Division Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division Jason Gurda - Leerink Swann LLC, Research Division David H. Windley - Jefferies & Company, Inc., Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the WellPoint Third Quarter Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to the company's management.
Douglas Simpson
Good morning, everyone, and welcome to WellPoint's Third Quarter 2012 Earnings Call. This is Doug Simpson, Vice President of Investor Relations.
Presenting this morning are: John Cannon, Interim President and CEO; and Wayne Deveydt, Executive Vice President and CFO. Also available for Q&A is Ken Goulet, President and CEO of our Commercial and Individual businesses.
John will start this morning with an update on the CEO search process and pending Amerigroup transaction, discuss interim priorities and actions, and provide some perspective on our investment plans. Wayne will then review the quarterly financial highlights and our updated outlook.
Q&A will follow Wayne's remarks. Just to walk through the disclaimers quickly.
During the call, we will reference certain non-GAAP measures. Reconciliation of these non-GAAP measures to the most directly comparable measures are available on our website, www.wellpoint.com.
We will also be making some forward-looking statements on this call. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of WellPoint.
These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in today's press release and in our quarterly and annual filings with the SEC.
Also, just a reminder that our current 2012 GAAP EPS outlook does not include any impact from the pending Amerigroup acquisition other than costs primarily related to the prefinancing of the transaction. I will now turn the call over to John.
John Cannon
Thanks, Doug, and good morning, everyone. First, let me start off by saying how honored and privileged I am to serve as Interim President and CEO of this great company.
I'm confident about the future and our ability to better leverage our assets against the opportunities we foresee in areas such as the dual eligibles, coming exchanges and the Medicare market. With better execution and incremental yet disciplined investment, I believe we can drive greater shareholder value over the long term.
As Doug mentioned, this morning, I'm going to focus my remarks on 3 areas: the status of the CEO search, I'll update you on the pending Amerigroup acquisition and I'll discuss the near-term focus areas for our company. With respect to the CEO search, our board continues the process of an internal and external search that's being carried out by a search committee.
In thinking about criteria, I would note that there are different combinations of skills and qualities that may be attractive in a CEO, but there's not one specific profile or combination of qualifications being considered, and for obvious reasons, it would be inappropriate for us to discuss potential candidates. In fact, the search will be conducted in strict confidence, but we do not expect to comment further on this topic until the search is concluded and the permanent CEO is announced, except to say that the search committee's outside advisers have indicated that something on the order of 3 to 6 months is a reasonable time frame for this kind of search, which could, therefore, extend into the first quarter of 2013 Nevertheless, let me stress that during the interim period, I'm very much focused on keeping us actively moving forward, and that includes addressing areas of clear opportunity to better position us for improved results under our permanent CEO.
As long as I have the job, I intend to do the job, and I'll touch on some specifics in a moment. With respect to the Amerigroup acquisition, we continue to expect the transaction to close by the end of this year, likely in December.
As previously announced, Amerigroup reached agreement to sell its Virginia business to Inova, and that includes approximately 55,000 members. We continue to work with the Department of Justice on the Hart-Scott-Rodino approval.
With respect to the state approvals, a number of those have been received, while several remain outstanding at this point. That said, the process with the state is proceeding well, and continues to move along in accordance with our expectations.
As you know, Amerigroup shareholders overwhelmingly approved the transaction last month, and as you also know, we secured financing on favorable terms. Integration planning has commenced.
A steering committee meets every 2 weeks. That is jointly led by Gloria McCarthy of WellPoint and Dick Zoretic, Chief Operating Officer of Amerigroup.
There are 30 functional teams meeting on a weekly basis, and all in, 300 people are involved in integration planning. We look forward to welcoming to WellPoint the very talented Amerigroup management team, who we felt [ph] what we believe, is a best-in-class company.
We've also made some key initial decisions around our organizational structure post-closing, which were designed to increase accountability and clarify decision rights. Some have questioned, why are we doing this now?
I certainly understand that the permanent CEO will have his or her own ideas and focus areas, but during this interim period, we still need to make decisions to best position the company for the coming market opportunities. Consequently, we'll be organized around 4 core businesses following the close.
First, commercial individual, and that will include our exchange strategy, and that will be led by Ken Goulet. Our second segment will be specialty to be led by Lori Beer, who will also continue to oversee information technology and our federal government solutions business.
Our third segment will be Medicare programs to be led by Leeba Lessin, who has been successfully overseeing the integration and expansion of our CareMore model, and has a proven track record of success in this business. And finally, Medicaid, to be led by the Amerigroup leadership team.
As previously communicated, Jim Carlson, Dick Zoretic and Jim Truess have agreed to join WellPoint's senior management team, post-closing. We've also asked Leeba and the Amerigroup team to jointly recommend the best structure to execute our dual eligible strategy.
We'll also be making some realignments in our clinical care management areas, customer service operations and other enterprise-wide shared services to ensure each business unit has the resources and decision-making authority to ensure success, while driving greater efficiencies as a combined company. As I said earlier, now is not the time to stand still.
In addition to our focus on the Amerigroup transaction, we are working on our 2013 plan and related investments to support growth. We will continue to focus on execution, and there are a few areas we specifically need to target.
For example, in our commercial business, we need to evaluate optimal product positioning and prepare for 2014 with the introduction of exchanges now basically just 1 year away. We're using extensive market simulations and pilot programs to develop our strategies for how best to position our brands and products for profitable membership growth on a state-by-state basis.
Partially based on these efforts, we're looking hard at our product price points and network strategy. Our existing Small Group business will likely face headwinds in '14, but based on our research, we like our positioning on both cost and brand awareness.
The government side. We need to prepare for the dual eligible opportunities while enhancing our Medicare Advantage operations.
Specifically, we're focused on the buildout of 12 new CareMore centers during 2013, which is in addition to the 12 new facilities that we'll be opening January 1 next year. The dual eligible opportunity in California is also rapidly approaching, with 3 of our counties going live next June.
We plan to participate in Alameda and Santa Clara counties directly and as a subcontractor in Los Angeles County. In our broader MA book, we are repositioning our product offerings and enhancing our data analytics.
We have started down the path on these multiyear opportunities, and we believe our MA margins can rise into and through 2014 from current levels. So to summarize.
We are moving ahead with an emphasis on finishing 2012 on a strong note, preparing for a successful Amerigroup integration and ultimately better positioning our combined company for the growth opportunities in front of us. Now before I turn the call over to Wayne, I would like to note that we believe our third quarter results were solid and reflected more consistent execution across our businesses.
Commercial performance improved in the quarter, with both operating gain and operating margin increasing from the prior year period. We also began our incremental investment spending during the quarter, particularly in the consumer segment areas.
In balance, the quarterly results increase our confidence in our ability to achieve our 2012 EPS guidance. As we've said previously, 2013 will be a year of meaningful investment, focused on areas including exchanges, Medicare, duals, as well as other initiatives.
I want to stress that we recognize the need to demonstrate progress with these investments to our stakeholders. Consequently, we've upgraded our internal business investment process, strengthened its linkage to our strategy with greater quarterly accountability to ensure execution against clearly defined milestones.
Investment returns will be closely monitored to ensure resources are being allocated as productively as possible. I would also note that this investment plan is flexible, and the level and pace will be tailored as necessary based on business and regulatory developments.
And finally, I would particularly like to thank our associates for their focus and dedication during this period. I know change can be both distracting and stressful, so I'm deeply grateful for their efforts and very pleased with our ability to deliver on our financial targets this quarter.
And with that, I'll turn the call over to Wayne, who will discuss our third quarterly results in detail. Wayne?
Wayne S. Deveydt
Thank you, John, and good morning. My comments today will focus on the key financial highlights from the quarter.
Additional details are included in this morning's press release, and will also be in our Form 10-Q that will be filed this afternoon. Our Investor Relations team will also be available after the call to address additional questions.
But what I'd like to do this morning is at least spend a few minutes on some of the quarterly highlights, and then I'll get a little more detailed on both the balance sheet and the income statement. Overall, results in the third quarter of 2012 compared favorably to our expectations, give us increased confidence in our full year outlook of $7.30 to $7.40 in adjusted EPS.
The third quarter '12 GAAP EPS was $2.15, which included $0.06 per share of net positive contributions, resulting from net investment gains, partially offset by acquisition-related costs. Excluding these items, adjusted EPS was $2.09, an increase of 18% from $1.77 in the prior year quarter.
Quarterly earnings results reflected a combination of improved core operating performance, administrative expense management and favorability in the capital management areas. We feel comfortable with where we sit at this point in the year in terms of operating trends, reserves and investments.
Just to anticipate a possible question, we are not raising our outlook for 2012, which could reflect some measure of conservatism that the solid trends we experienced in Q3 run through the end of the year. We believe this is the most appropriate way to handle the outlook, given the volatility we've seen this year.
Recall that in terms of earnings seasonality, we expect Q4 to drop from Q3, due to deductible leveraging and increased SG&A spending among other dynamics. Let me spend a few moments now on the income statement.
Membership declined slightly on a sequential basis by 54,000 or 0.2%. We continue to expect that we'll end 2012 with approximately 33.4 million members.
This obviously translates into our operating revenue, which was essentially stable versus the prior year period, as the impact of lower fully insured local group membership was partially offset by growth in the Senior business, premium rate increases designed to cover cost trends, and the inclusion of 1-800 CONTACTS in the current quarter. Benefit expense ratio of 85.4% rose 30 basis points from the prior year quarter.
Increase in the Consumer segment, which was expected, is partially offset by an improvement in the Commercial segment ratio. We currently expect that full year 2012 underlying Local Group medical cost trend will be towards the middle of the 7%, plus or minus 50 basis points range.
Unit cost increases continue to be the primary driver of medical trend, while utilization has moderated to some extent, relative to our view last quarter. We are not going to comment in detail about 2013 at this juncture for competitive reasons, but our bias would be for a modest increase in trend relative to 2012, as factored into our pricing.
SG&A expense reflected disciplined expense management across the company. SG&A expense costs were favorable, despite covering approximately $0.06 per share of higher-than-expected severance costs in the quarter.
We continue to expect an increase in SG&A expense in the fourth quarter of 2012, due to our strategic investments and the seasonal increase in marketing and enrollment cost. Moving to our balance sheet and cash flow.
Our reserves have developed favorably, and remain appropriately conservative. Favorable prior year development of $483 million year-to-date through 9/30 of 2012 was essentially unchanged from June 30 of 2012, and greater than the $206 million year-to-date through 9/30 of 2011.
We remain within our targeted range of a mid- to high-single-digit margin for average deviation as of 9/30/2012. Our DCP increased 1.6 days sequentially to 42.4 days as of September 30, 2012, driven primarily by a sequential increase in medical claim reserves and claims payment seasonality, including the impact of fewer claims processing days in the third quarter.
Our debt-to-cap ratio of 36.3% and parent cash balance of $4.9 billion at 9/30/2012 reflect our September debt issuance in preparation for the Amerigroup closing. Our debt-to-capital ratio will likely be close to 39% when Amerigroup closes, but we would expect to end 2012 with approximately $1.2 billion at the parent after funding the transaction.
Our operating cash flow of $240 million for the third quarter of '12 included only 2 monthly CMS payments. The July payment was received early in June.
But had it been received in the third quarter, our quarterly operating cash flow would have been $952 million or nearly 1.4x net income. We repurchased 11.3 million shares for $655 million in the third quarter of '12, and then repurchased an additional 10.4 million shares for $634 million during October, following the convertible debt issuance.
Year-to-date total, as of October 31, 2012, was over 39 million shares or 11.5% of the shares outstanding as of 12/31/11 for nearly $2.5 billion. I'd now like to move to the competitive environment.
The pricing backdrop feels about the same, with some hardening in certain markets as we near 2013, 2014. But from a commercial perspective, the fully insured business remains competitive, but rational overall.
We're currently in the middle of the pricing season for our 1/1/13 business, and we remain disciplined in advance of 2014, but this is expected to result in continued pressure on our commercial risk enrollment in 2013, though we expect somewhat less pressure than we experienced this year. We also anticipate some membership loss in the individual market during the second half of next year, as some people may choose to withhold buying coverage until the exchanges open in 2014.
From an ASO perspective, the 2013 national account selling season is nearing completion. With fewer accounts out to bid this season, we expect modest pressure on ASO enrollment next year.
We will be lapsing a few cases on January 1 due to the carryover impact of some legacy pricing decisions from 2011, and we had fewer opportunities to offset these cases with new business wins this season. We also expect some continued pressure from ingroup membership attrition as a result of the economy.
In terms of the environment for Medicare, we are comfortable with our positioning for 2013. We have modified some of our Medicare Advantage benefit offerings and coverage areas, which will likely limit enrollment results next year, but this should be partially offset by continued growth from our CareMore expansion, including entering into New York and Virginia.
Overall, we're comfortable with our 2013 outlook, but there continues to be opportunity to drive greater value in our Medicare Advantage business longer term. In terms of Medicaid, performance improved sequentially in the quarter, as we recognized higher reimbursement rates for the Medi-Cal program this quarter, including some retroactive revenue.
However, the California Senior and Persons with Disabilities program has experienced some unfavorable activity. The state is aware of the funding issue for this program, and we are cautiously optimistic about improved rates in the future.
I now want to take a few moments to talk about our 2013 outlook. We are in the process of finalizing our 2013 business plan, and currently expect relatively stable adjustment in income from 2012 through '13, with lower commercial risk member months and our incremental planned business investments largely offset by contributions from the Amerigroup transaction.
Below the net income line, we expect share count to decline from 2012 to '13 as a result of share repurchase activity. As John highlighted, we expect 2013 to be a year of investment, as we prepare for coming industry changes and opportunities.
At this point, we would expect something around $200 million to $300 million pre-tax of incremental investments for 2013 or approximately $0.40 to $0.60 per share focused on our exchange, dual eligible, Medicare and other growth initiatives. I want to emphasize that this is incremental investment spending, and would note that our total strategic business investment plan, including both capital and expense, is approximately $1 billion next year.
These investments will include both people and technology, and are reflected in our current view of 2013. I would note that we're working through our 2013 outlook concurrent with the pending CEO search.
We expect to offer more detail in early 2013. We're currently planning to release our fourth quarter '12 earnings in late January.
I'll now turn the call back over to John to lead the question-and-answer session.
John Cannon
Thank you, Wayne. Before I open the call for Q&A, I would like to take a moment to congratulate President Obama on yesterday's re-election.
We look forward to continue to work with his administration on ways to improve our nation's health-care system. Clearly, the need to improve access to and affordability of health care remains a critical issue.
This underlies our company's continued focus and investment in cost and quality initiatives, as we strive to create better health-care value for all of our customers. With that, operator, please open the queue for questions.
Operator
[Operator Instructions] Your first question comes from the line of Justin Lake from JPMorgan.
Justin Lake - JP Morgan Chase & Co, Research Division
First question would just be around Small Group. You mentioned there would be some headwinds there in 2014.
Certainly, a lot of uncertainty, but can you flesh that out for us any further?
John Cannon
Yes, Justin. When we're looking at the Small Group and really focusing more on 2014, we do fully expect that as you look at the size of an employer group and being the smaller the size of an employer group, the more that we anticipate that it will migrate to an exchange, versus the larger the smaller group, the less likely that they would move to an exchange.
And while we've built a number of strategies to keep those employers within our current book of business, basically being incented in certain ways of whether they would want to move to an exchange or not, we want to be prepared for the fact that the vast majority of our Small Group business is smaller scale in size. In fact, if you look at the average size of our Small Group membership, the average employer size is about 8.5 lives.
So we think there's a larger amount of that, that will actually shift to the exchanges. So with that being said, our focus in '13 is to maintain the book as it is today, begin to position that book for migration to the exchanges, and to be able to offer brokers many alternatives between now and then.
Joshua R. Raskin - Barclays Capital, Research Division
Great. So you mentioned the average size of the group is 8.5 or 8.5 members, I should say.
The -- can you tell us what percentage of the book maybe from a membership perspective sits in what you kind could term micro group and how the margins there look versus the typical?
Kenneth R. Goulet
Justin, it's Ken Goulet. The question is a good one.
We're not going to get into that level of detail. As Wayne said, the average-size group we have in our Small Group segment is under 10.
What I would highlight is Small Group's always been competitive. And as John mentioned earlier, we're going to go through a transition because about 10% of our book is grandfathered, and the remaining 90% will be going to our medal [ph] products.
We've done an awful lot of work on developing products for our medal [ph] product for 2014 and feel ready for it. And then as Wayne mentioned, for the exchanges, it's actually -- it's a change, but an opportunity and there'll be a lot more people covered.
And we feel that with our brand and with our product positioning, we're going to be in good shape to be able to participate on the exchanges, which will be a market-by-market decision on whether to participate. But we feel that in working with our regulators, we'll have a good opportunity to drive growth in 2014 and beyond.
Justin Lake - JP Morgan Chase & Co, Research Division
And just my second question would be on membership growth for 2013. Your PBM partner yesterday mentioned the uncertainty around the economic environment for next year and obviously, you've had some -- you've seen some of that in your membership this year.
I'm just curious how you were thinking about 2013 membership even just at a high level. And how you think it might compare to the 800,000 or so members you lost this year, x Amerigroup, let's talk.
Kenneth R. Goulet
Justin, I'll take that one as well, and it's across multiple lines of business, but I'll talk through, as I think you were mentioning more on the Commercial and Individual segment. So first, we do believe both our fully insured and ASO enrollment will decline a bit in 2013 for the reasons we've discussed, but that will be more stable than we were in 2012, and that we feel comfortable with the direction we're turning right now.
We do expect less enrollment pressure than we experienced this year. Now first, and we openly discussed our New York Small Group transition in a earlier call, and that transition's nearly complete, which was our Small Group business transition.
And then, our California, Virginia and Ohio markets are stabilizing well. We do anticipate some additional turnover in individual in the second half of next year, not offset by new business growth.
Essentially, we're believing that there will be normal trends going into the first half of the year. But in the second half of the year, there'll continue to be some turnover, but new sales will wait until the exchanges become available in 2014.
So our individual segment marks down a little bit in the second half of 2013, but will pop back up once we hit into 2014.
Operator
Next question comes from line of Matt Borsch from Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Could you just give us any more granularity you could on the -- you mentioned the hardening, a little bit of hardening on the commercial pricing, maybe relative to what you saw earlier this year? Is -- any regional variation there?
And would you think it's reasonable to attribute some of that to pre-reform implementation repositioning?
Kenneth R. Goulet
Yes, let me -- first, I would say that we, and I believe the market, in general, remains disciplined on margins, and we continue to price for our forward view of our underlying costs. We did see earlier in the year some impact in certain markets that were -- we don't quite know what competitors are doing, but they may have been more MLR-related or activity-related to medical loss ratios.
As we went into the third quarter, we're seeing our membership is firming up, and we feel pretty good going into the fourth quarter as well. So our price point and products that we've rolled out, we feel comfortable with them.
I would say that there continues to be a persistently weak employment environment, and more so in our 14 states than the 50 across the board. So as the economy turns, that will be favorable to us as well.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
And could you comment at all on your thoughts in terms of the setup so far, the California exchange and what you think of that model relative to what some other states may be doing?
Kenneth R. Goulet
Matt, it's Ken, and I'll continue on that one as well. I think for the other folks on the line, I would just say California is the first of our markets to go out with an exchange bid, and it is an active bid, meaning that California is identifying the products and the -- conducting an RFP process where each carrier will be actively participating in a bid selection process.
Our intent to bid was due in October, and we delivered an intent to bid, and in the first half of January will be our submission. I would say the difference is, first of all, California is ahead of most of our other markets, although we feel that markets will start moving forward fairly quickly now that the results of the election are concluded.
We also feel that California will be one of probably just 2 or 3 active bid processes across our 14 markets, that the others will be more of an open market bid and that California will be more of an active solicitor process. We feel very good about the interactions on the exchange between the consumer groups, the carriers and the regulatory agencies, and everyone's working very close to be able to pull our bids together in January for the 2014 rollout.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
If I just -- one last one. Any thoughts on where you think utilization trend will be going next year?
John Cannon
Matt, at this point in time, we're not providing guidance. Although I would say, as we mentioned earlier, our bias is that trend will be moving upwards and we're pricing accordingly for that.
Operator
Your next question comes from the line of Ana Gupte from Sanford Bernstein.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
So I'm looking at your consumer margins, and it seems like the turnaround is largely -- or the new CEO and new management team will need to focus on bringing your Medicare margins back to health. If you compare them to 2009, they've come in significantly.
And I'm just trying to understand beyond your commentary and your press release, on the risk scores, how do you parse out the margins and the downside that you're seeing from your networks, possibly because you have more PPO networks? Humana's certainly been seeing some issues there -- relative to the mix shift issue to aging boomers, perhaps with lower scores.
And then finally, on underwriting, and what is your turnaround plan in the kind of the trajectory back to health, if you will?
John Cannon
Thanks for the question, Ana. And overall, we are comfortable with our positioning for 2013.
We've modified some of our Medicare Advantage benefit offerings and coverage areas, as you know. That will likely limit somewhat enrollment results next year, but we expect that to be partially offset by continued growth from our CareMore expansion, including the entries into New York and Virginia.
With respect to specific products, we are comfortable with our HMO product pricing, and that is generally performing as we'd expected. With respect to our local PPO products, as you know, we've exited some of those markets in 2013.
We've also repositioned some of those product offerings in other markets, and we expanded into some new geographies. Overall, we have Medicare Advantage offerings in 484 -- excuse me, 484, yes, counties in 2013.
That is a net increase of about 11 counties over 2012, and CareMore will be in 5 states: California, Nevada, Arizona, New York and Virginia. So I would say, generally, we're comfortable with our outlook for 2013, but that's not to say there aren't opportunities to drive greater value in that business longer term.
We've started down that path, in what I would expect to be multi-year opportunities. As you know, there's some pricing constraints year-over-year in this business, but overall, we are comfortable with the actions we're taking in our outlook.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
You don't think that there is any structural issue then relative to the Blue brand and/or your focus? As largely commercial players, your networks are primarily to service a commercial population, and then Medicare and Medicaid kind of are built around that?
Wayne S. Deveydt
Yes, let me elaborate a little bit on that too. I would say that no, we actually -- we don't think there's a problem with the Blue brand.
It's not [ph] for the branding there. I do think, though, that the key is going to be the HMO products, and again, only about 40% of our membership is within the HMO, and you're going to see us slowly migrate from PPO products to more HMO products.
We really think to really effectively manage this population, and as you're moving to the 85% MLRs, that to really improve our margins, you're going to see more of a migration to that HMO market. So I do think over the next 2 years, though, what John was highlighting, is that we are starting to exit, as we did in '12, and you'll hear us exiting some more in '13 in the PPO markets, and entering more into the HMO markets along the way.
So it's probably going to take about 2 years to migrate to that. But with that, that's why John had commented earlier on in the call that we should see margin improvement continue, not only into next year, but through 2014, as we are starting to reposition our products.
John Cannon
And that, Ana, would include our regional PPO product too. As you know, we did exit Northern California last year, and we are repositioning that product as well in the Ohio, Indiana and Kentucky region.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
That's helpful. One last question on commercial.
You're structurally advantaged because you don't have the Blue competition in your state. So who exactly is gaining share from you on your local group fully insured?
Is it most -- largely the self-insured? Is it CIGNA?
Or is it more Aetna and United that are doing it? They don't seem to be growing much anyways [indiscernible]...
Kenneth R. Goulet
Ana, there's a couple of dynamics in place with the commercial business. So first, in the Small Group, 1/3 of all business that is leaving us is not going to a competitor.
It's going to either an uninsured or an individual rank, which our individual business, has grown slightly year-over-year and has done a good job on a membership basis. I would say that when I look at different carriers, there is some migration to ASO.
So that's both to our own ASO products or possibly to competitor ASO products, but it really is a combination of a declining membership base overall because of the economy. And then combining with some movement to ASO, I would say local competitors, while we don't have other Blues -- usually in our markets, the national competitors comprise about equal -- 1/3 of the market share of ourselves.
We're 2 to 3x larger, but the regional players make up the remainder, and is larger than the national players. So regional players remain key competition.
We have certain markets where you have up to 15 to 20 competitors that you are participating against. And there are ups and downs amongst the regional players, but 1/3 goes away, a portion going to ASO and the remainder kind of -- is a zero-sum game, as you know, between the regionals and ourselves.
Operator
[Operator Instructions] Next, we'll go to the line of Tom Carroll from Stifel.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
So question on just the spending, and Wayne, thanks for the forward look on that. But how do you or how discretionary do you believe the $200 million to $300 million next year potentially is in term -- I guess, said differently, how flexible are you with it in terms of either doing it all or pushing more into 2014?
And then, I guess, secondly and related to that, is it your goal to include as many AGP integration costs as possible in 2012 results?
Wayne S. Deveydt
Tom, let me hit the different questions there. The first one is on the $200 million to $300 million, it is very flexible.
And so the one thing I would highlight, for example, is we're assuming, though, that all exchanges will still move forward with the 1/1 effective date of 2014. And at this point in time, we have no reason not to believe that, but we all recognize too that many states have a long way to go and may be challenged, and we're still waiting for rules to be finalized at this point.
So we are giving you what I would view as an all-in number, as if markets are all going to go live on 1/1. It also assumes a pace for duals that may go faster or may go a little slower, and so that's flexible as well.
Relative to the AGP transaction, to the extent we are able to close this year, we will take a significant portion of the cost that we anticipated for next year in the current year. Specifically, we would assume we would take, obviously, all banker and legal fees.
We would take as much of the restructuring costs that we would need to take for integrating the 2 companies that we would be allowed under the accounting rules to come forward as well. So that could provide, obviously, a nice tailwind relative to some of our expectations.
You know when we close the transaction, we expect it to be approximately $0.15 accretive for next year, inclusive of those costs. So clearly, bringing those costs forward would make that number better.
And at this point, I would say, we are very pleased with where our debt offering came in relative to our expectations. We're very pleased with the work that the teams have done on synergies versus the expectations we were modeling.
So I think we feel good about those 2 areas at this point in time. The last piece that we'll have to finalize will be, upon closing, is modeling in the EBIT and the revenue growth, but my understanding is that from a membership and revenue perspective, everything is coming along as planned at Amerigroup right now.
So all in all, I'm feeling pretty good that if we can close in December [ph] time frame that we'll have a better accretion from the transaction.
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
And then just a second quick question, your deferred tax assets saw a large decline this quarter. What was behind that drop?
Wayne S. Deveydt
I'm sorry, Tom, on the deferred tax assets?
Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division
Yes.
Wayne S. Deveydt
The biggest thing was that we had a settlement with the IRS. That was one of items we tried to highlight.
If you recall years ago, we had a number of entities that demutualized. We had been in discussions with the IRS for a number of years in getting those items settled.
That is the primary driver, was that settlement.
Operator
Your next question comes from the line of Melissa McGinnis from Morgan Stanley.
Melissa McGinnis - Morgan Stanley, Research Division
Maybe just sticking with the $200 million to $300 million in spending, can you just confirm, is that actually incremental to the $110 million you'll already spend inside 2012? And then beyond that, can you help break down the various buckets of that spending around -- are exchanges the biggest piece?
Are duals the biggest piece? And are you actually including the California dual start-up cost inside that $200 million to $300 million?
Wayne S. Deveydt
Melissa, yes, this is incremental to our 2012 investments. And so if were looking at the other $200 million to $300 million for next year, about $150 million is exchange-related, incremental exchange related.
So important to recognize that. It's pretty much people, product and technology buildout to interface with the exchanges.
And so a big portion of that cost, about $150 million will go away, but there is a core underlying run rate of G&A associated with the exchanges that is part of that broader billion dollar spend that we've talked about. The other components of it, about the other half of it, is a combination of repositioning our products in our Medicare markets, building out more risk coding expertise in those markets and of course, Leeba, who does that quite well at CareMore, is going to be leading that effort for us now for all the Senior.
It does include our buildout for the dual activities, as they relate to California, for the 3 counties that we specifically talked about as well, and then other growth initiatives, depending on how the Medicaid may expand over time. So in general, I'd say about half of it, though, is exchange-related of the incremental component, and the other half is a combination of both our dual strategy work and our senior repositioning.
Melissa McGinnis - Morgan Stanley, Research Division
And then maybe just to stick with that a little bit since it does sound like some of your billion dollar spend is certainly run rate, but some of this is incremental. Should we think about a certain chunk rolling off in '14, in '15?
How should we think about the lapsing of some of these investments?
Wayne S. Deveydt
The way I would describe it is view the $200 million to $300 million as being the true incremental. We're making a conscious decision to invest at levels higher than we have in the past.
There's obviously fungible investments within that billion that we are able to shift dollars, for example, from certain business lines that we expect to migrate to exchanges over time, and then move those dollars over. So some of the dollars are fungible.
But if we're looking truly at incremental, we're looking at $200 million to $300 million on a pre-tax basis, which equates to about $0.40 to $0.60 to earnings. And then as we get into '14, if the world was perfectly flat and all things were equal, that would go away.
Now what we haven't modeled, though, is how quick will the pace of addition of duals be at that point in time, will there be even more legislation coming out with the ACA? But for now, we would view that truly as incremental.
Operator
Your next question comes from the line of Chris Rigg from Susquehanna.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
So I just wanted to, again, follow up on the investment spending theme, and to make sure I understand. What is the exact amount of investment spending you guys are projecting for 2013?
Wayne S. Deveydt
The total spend, what I'll call nondiscretionary dollars, whereby, we have -- obviously, we have a work force. We have real estate.
We have to pay claims, et cetera. But if you said what is your absolute capital and expense that you're spending on strategic investments, it's $1 billion, of which $200 million to $300 million of that is incremental of our historical spend.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Right. And so when I think about $1 billion, how much of that is sort of permanent and will sort of be in your cost structure in perpetuity versus how much will roll off?
Wayne S. Deveydt
Again, consistent with what we talked about earlier, view it as around $700 million is permanent and about $200 million to $300 million is the incremental component of it that in theory would roll off in '14, assuming that there aren't more aggressive investments needed because maybe duals are coming on sooner. So again, in that $700 million, though, there is a run rate for exchanges.
There is a run rate for duals. There are other dollars in there.
And that does include, of course, the portion that's capitalized with it. So I would say, though, each year, you're going to spend about $700 million a year, though, just to run your businesses, and that includes how our business is shifting, and again, the $200 million to $300 million is a discretionary piece that we can lever up and lever down on.
Christian Rigg - Susquehanna Financial Group, LLLP, Research Division
Okay. And then changing gears a little bit, can you just remind us of -- once AGP is done, what the share repurchase posture versus debt paydown will be for you guys?
What's the right way to think about that again?
Wayne S. Deveydt
Yes, Chris, I would view it for 2013, I don't want to get ahead of our board, but I will reiterate comments that we said previously. We do expect to still deploy about $2 billion in capital in 2013.
It would be a combination of share repurchase and dividends. The dividend is currently in the range of about $400 million, but that's before the board has an opportunity to review our dividend policies, so that could change slightly.
And then, of course, that would leave somewhere in the $1.6 billion for share repo for next year. So if you're modeling, look at it as about $2 billion being deployed in total, with right now using around $400 million for dividend and about $1.6 billion for repo, but you could see that fluctuate a little bit between the 2, depending on the dividend policy that the board will evaluate in December.
Operator
Your next question comes from the line of Scott Fidel from Deutsche Bank.
Scott J. Fidel - Deutsche Bank AG, Research Division
The first question, just wanted to follow-up on Medi-Cal and given the new contract announced by Health Net recently, where there seems to be some pretty advantageous protections from the states around losses that could accrue as the buildout of Medicaid and the duals plays out over the next couple of years. Just interested in your conversations with the state and whether there's any potential for a similar contract structure.
Clearly, you've seen similar margin pressures in your Medi-Cal business that Health Net has this year and then in the past relative to uncertainty around rates.
Wayne S. Deveydt
Scott, thanks for the question. We're very cautiously optimistic.
Obviously, the Health Net thing is a positive thing for their business, and we would anticipate a similar approach within our business model. I do want to emphasize that the SPD program in California has really been experiencing unfavorable activity, but only in the new mandatory enrollment portion.
The legacy voluntary SPD program has been really profitable for us. And so I think as the state's seeing where it's mandatory and as they're looking at the program, they're recognizing the needs to either adequately fund it differently or to change the mechanisms with which the benefits are provided.
So all in all, yes, we view that as a positive sign for the markets in general. We're having our ongoing discussions with the state as well, so I'd prefer not to comment on those, but in general, we see that all as very positive.
Scott J. Fidel - Deutsche Bank AG, Research Division
Okay. And then just the second question just in terms of context on 2013, Wayne, didn't really hear you touch on MLRs specifically.
So interested in trajectory, in particular, of the commercial MLR. You said you guys are going to be pricing to trend, and then you should have some extra pricing to start pricing it for the industry tax.
So interested in the outlook for the commercial MLR next year.
Wayne S. Deveydt
Yes, Scott, I apologize, but we're really not going to give detailed guidance at this point in time, and we would like to reserve that for a little bit later, early in the January time frame when we finalize some of our pricing decisions, and it's more for competitive reasons. But we are going to be moving forward in many of our lines, beginning to price, though, for the tax that's coming through in '14.
We think that's a prudent thing, and so that will obviously have some implications on the MLR, but we prefer to wait till a future call to provide more details.
Operator
Your next question comes from the line of Christine Arnold from Cowen.
Christine Arnold - Cowen and Company, LLC, Research Division
A couple of questions. One, it looks like your Medicaid MLR was over 100% this quarter.
As I think about your SPDs, it's 90,000 at kind of $525 per member per month, which gives you close to $600 million in revenue there. Was that MLR over -- first off, wasn't Medicaid MLR over 100%?
Wayne S. Deveydt
No, Christine, I'm not sure where that calculation is coming from. It was not over 100%.
And the one thing I would highlight is that Medicaid in all their markets is performing fine with our expectations, and then obviously, trend is coming in very stable, in some ways, better than expected. But the SPD, by itself, is the one area, and it's on the mandatory piece only, which is about 60,000 lives, that I would say that we're seeing closer to that 100%.
But outside of that, no, we did not see that.
Christine Arnold - Cowen and Company, LLC, Research Division
Okay. And can you give us a sense for how much you think that Medicaid MLR could improve next year?
Wayne S. Deveydt
At this point, no, we're still negotiating rates with the state, and anticipate finalizing that soon. I also think it's fair to say that as we start to integrate the Amerigroup model into our model, the pace at which we're able to push that through and move forward could also affect that.
So at this point, not able to speak to that.
Christine Arnold - Cowen and Company, LLC, Research Division
And can you clarify that you do expect the 2013 Medicare Advantage loss ratio to improve?
Wayne S. Deveydt
Yes, at this point, we expect it to improve, yes.
Christine Arnold - Cowen and Company, LLC, Research Division
And final question, how much utilization are you pricing for in the commercial book in 2013 relative to '12?
Wayne S. Deveydt
Again, at this point, Christine, we're not commenting at that level of detail. We will provide more of that in the future calls.
Operator
Your next question comes from the line of Kevin Fischbeck from Bank of America Merrill Lynch.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
I wanted to go back to the point that you made about the strong Q3, but not really raising the guidance for the year, and I understand that there's some conservatism in the number. But is there anything else to keep in mind, any movement from Q4 into Q3 during the year?
Some of your competitors talked about a Part D experience that kind of made them re-evaluate earnings progression intra-quarter? Was there anything like that we should be thinking about that might have also explained the strong Q, but lack of update this year?
Wayne S. Deveydt
No, Kevin, nothing of any significance to the operations of the company. I think it was our position that it would be best to maintain a conservative and cautious outlook.
We are in the process of closing October at this point in time, but aren't anticipating any surprise from what we saw in the quarter. So nothing more than a cautious view.
You do have the normal seasonality in the fourth quarter, though. Obviously, deductibles are being met at that point, so you get that, and but -- and you always have a better MLR for Part D in the third quarter.
But Part D doesn't really move the needle for us. So really, from our perspective, nothing other than just thinking that there was an important desire to show consistency in execution and maintaining a cautious view, and we thought that was a prudent thing to do.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
Okay. And then the lower risk score revenue in the quarter, is that something that you view as -- so that you can recapture later on this year or as some sort of onetime issue?
Can you just talk about what that was and what that means kind of prospectively?
Wayne S. Deveydt
Yes, the one thing I would highlight is it's more of a timing issue regarding the true-ups that we do each year. So from a comp perspective, it makes the quarter of this year versus quarter of last year look a little distorted.
So if you look at the full 9-month period to 9-month period, you'll see the Consumer segment's only down about 2 percentage points. So it's really more about timing on that.
I do fully expect, though, that we will see improvements in our risk coding going forward. I think there are many opportunities to improve in that area.
We have investment dollars earmarked for the fourth quarter of this year, as well as going into next year. But as you know, Kevin, even when those dollars are put forward, the actual value and benefits of those dollars don't start ramping up until the subsequent year.
So we'll see some improvements next year. We'll see a big improvement in the following year, and then building up from there, and we're leveraging the CareMore model.
They have obviously incredibly strong risk scores and good star ratings as well. We're leveraging that as well as we're building out our new products.
Kevin M. Fischbeck - BofA Merrill Lynch, Research Division
And then just quick clarification. You're maintaining your trend guidance range for this year, but I think -- are you qualitatively lowering it?
Because I think, last quarter, you had the same 6.5%, 7.5% range, but I think, last quarter, you guys said you felt like the upper end of the range. Now you're just saying the range.
Do you feel like it's more in the middle now, given the moderation in trend in Q3? Or you still feel like the higher end of the range is more likely?
Wayne S. Deveydt
Yes, Kevin, very important point to focus on. In the last quarter, because what we saw in May, we said our bias was going to be to the upper half, not the upper end, but the other half, meaning, in the 7 to 7.5 range now.
But seeing a very muted third quarter that we saw, we really think it's really fallen pretty much in the middle of that range, really, pretty close right now to right about 7% is our best estimate at this point in time. You could get a little volatility, but we're not expecting much based on what we saw in the third quarter.
Operator
Your next question comes from the line of Carl McDonald from Citigroup.
Carl R. McDonald - Citigroup Inc, Research Division
So wanted to come back to Medicare Advantage. A year ago, you talked about margin improvement in Medicare this year because of the repositioning that you'd done.
Margins have improved, but I don't think they have come back to where you anticipated. So as we look forward to the repositioning for '13, can you just talk about some of the differences?
And also be interested in the reasons behind the relatively rapid management change in the business.
Wayne S. Deveydt
Carl, let me start out on the margin improvements, and yes, I agree with your comments. While there's been some improvements this year, we're obviously far from where we want to be.
We're even far from where we think we should be even with a more muted margin in the future for Medicare, which we think is closer to a 5% margin. So we have an opportunity to obviously grow into that 5% margin versus being hit or negatively impacted hard in '14 when the MLRs go into play.
I'd say, fundamentally, what's really shifted and changed, one is our focus with CareMore leading this and our strategy around this is around the HMO model, is really where we need to position ourselves. It is very hard to obtain very strong star ratings in a PPO-like product model than it is versus an HMO model, and it also then allows you to leverage your investments around this coding much more efficiently in an HMO model than a PPO model.
So strategically, that's one major shift you're going to see start to happen. So the shift that started over a year ago was starting to exit PPO, but the more dramatic shift is going to be moving much more to the HMO, and then focusing on both star and risk coding along the way.
I'll let John comment more on the structural changes that were made in light of the timing.
John Cannon
Carl, thanks for the question. And I would say that the leadership change that you referred to is largely reflective of the fact that, as Wayne commented, our CareMore model and the HMO model is going to be our primary chassis going forward.
And I think the leadership change reflects the experience level of Leeba Lessin in that business, and I have complete confidence in her ability to bring that about. So our structure is designed to follow our strategy, and that explains much of what we did.
I felt the need to clarify roles and responsibilities, and I think we've done that. We've got some more work to do at some levels, but I think at the senior levels of the company, the structural changes that we've made are designed, as I said, to align with our strategy.
Operator
Your next question comes from the line of Peter Costa from Wells Fargo.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
John and Wayne, just back on the $700 million in annual spending, is that what -- for investment spending. Is that what you spent this year?
Or was is higher from systems conversions? And then are we done with the systems conversions at this point?
Where do we stand on that? What was that spending for this year?
Wayne S. Deveydt
Pete, no, the $700 million is pretty consistent with where we're at for both expense and CapEx for this year. We did shut down 2 more systems by the end of this year.
That has gone well on those migrations. We still are going to be close to 6 systems by '13 when ICD-10 goes live, and our in-state is really down to 3.
So we are working on a few more systems for next year, which gets us to the 6, so that we're not been investing dollars for ICD-10 because we'd rather shut the system down than invest those dollars. And then, at that point, we're down to 3 systems.
The important point, though, is the vast majority of our membership will be on the surviving 3 systems by October of 2013, though. So you won't necessarily see a ramp-down in the spend, but you definitely won't see a ramp-up, and then it will just be a question of what pace do we move those remaining 3 systems out, and then that'll be very flexible at that point on.
And our goal at this point, Pete, for some of that, is to really just start allowing the new business to ride on the primary platforms. So as exchanges roll out, as duals come into play, as our new senior business rolls out, we're really migrating most of that to those platforms.
So we'll make a more strategic decisions after we get through '13 on remaining the platforms, on is it prudent to shut them down or just let them run their course at that point.
Jason Gurda - Leerink Swann LLC, Research Division
And then in terms of the merger with Amerigroup, can you describe what states are left or have any scheduled hearings at this point? And so what states are left for approvals?
And have any scheduled any hearings? And then I think the second request from -- on Hart-Scott-Rodino was regarding Virginia.
Is that now put away at this point? Or why has not -- have you not gotten the Hart-Scott-Rodino clearance at this point?
John Cannon
Yes, you're right about that. The Hart-Scott-Rodino approval was keyed off of the divestiture of Amerigroup's Northern Virginia business, actually, all of its business, which was about 55,000 members.
What we're waiting for now is for the Virginia Department to do some testing of Inova's capabilities with respect to taking over this business, and that's expected to take place during the course of this month. So we're not expecting any surprises there at all.
It's a normal process, and we'd expect, as I said, to have the transaction completely closed by the end of this year. We have had public hearings on the acquisition.
They've been held in Tennessee, Louisiana, and most recently, earlier this week in Georgia. We have approvals in Tennessee and Texas.
There is some other public hearings likely in Washington. That's being scheduled as we speak, but as I said earlier, we fully expect all of the approvals to be completed by the end of this year.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Great. And then just a last one, if I could ask one more.
John, I think you said something important regarding why you have the job, doing the job. You've already done some substantial management restructuring of the business, which I applaud.
But what other things do you think need to be done here in the very short term to get WellPoint sort of moving in the right direction?
John Cannon
I think we've mentioned a number of them. First of all, we are in the process of developing our 2013 plan.
Obviously, we cannot stand still during this period. Our competition is moving forward, and I don't mean to suggest that I plan to do anything radical or that doesn't make sense.
If a decision does have to be made, I'm prepared to make it because we can't be in a state of suspended animation. There's a lot to be done with respect to Amerigroup.
There's a lot to be done getting ready for 2014. I hope you realize that I'm taking a common-sense approach here.
I am looking forward to what's best for the company and trying to make rational decisions. It was not a case where the reorganization was something that I just suddenly decided to do when I assumed this role and flex my new executive muscles, if you will.
The discussions about structure were ongoing for several months before the management change took place and continued thereafter. So it was a thoughtful process, and it was designed, as I said earlier, to make sure that people understood who had decision rights, to make sure that people knew what they were accountable for, who they were going to work for, and who they needed to work with.
Nothing more than that. So I'll continue to discharge these duties to the best of my ability until there is a permanent CEO made [ph].
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
Has there been anything that you've sort of had to unwind or substantially change in terms of the direction where the company's been going to? Preparing for the exchanges and all that kind of stuff, that was stuff the company was doing anyways.
And yes, I understand there's decisions along the way, but were there anything that you really wanted to change the direction of the company?
John Cannon
One area of focus was to improve our ability to make key operational decisions, particularly in the Medicare business. I would say, overall, the goal was to align our structure with our strategy, and there was some work to be done there.
It wasn't necessarily work that wasn't contemplated, but it needed to be completed so that on day 1, particularly with Amerigroup, we could hit the ground running. And people, as I said, know what they're responsible for and what their roles were.
We also are taking action, as Wayne indicated, quite a bit during the course of the call, to ensure that our investments are aligning with our strategy, and that is still a work in progress. We look forward to discussing that with you later, as we firm up our 2013 plan and our board approves it, and we do promise to do that.
But I would point to those areas as the principal areas of my focus now and most likely for the next couple of months.
Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division
The changes to the Medicare business that you contemplate, that you've seen sort of the way their products were positioned relative to others, did you increase your marketing spend for the fourth quarter, seeing how you did better here in the third quarter? Or are your plans for a marketing spend in the fourth quarter, given sort of whatever you perceived as the issues in the Medicare business?
Wayne S. Deveydt
Pete, it's Wayne. Where we have the HMO products and we are executing well relative to our star ratings and our risk coding, we obviously did reposition our marketing dollars within those markets.
We are obviously de-emphasizing our PPO markets, as you can imagine. So I would view it as not increasing the dollar spend, but reallocating the focus of those dollars to where we think the strategy needs to go.
And I would say, philosophically, that's the big thing that when John talks about aligning structure with strategy was to say that our strategy, we thought, needed to be more aligned around the HMO market, driven more from stars, and driven more by risk coding, and how that could actually be functionally applied within an HMO market versus a PPO. That's the big philosophical strategic shift.
The strategy then, of course, gets aligned to structure, which is where then John then look at the leadership groups and aligned them underneath the structure that had an HMO model, drove an HMO model and was successful with an HMO model, which that being Leeba and the CareMore leadership. And then, finally, our investment dollars then are being repositioned.
But in the case of Senior for this year in the fourth quarter, we're simply reallocating investment dollars to focus on the HMO markets. But going into next year, we have substantial dollars being invested to improve star ratings and to start building out more HMO product.
Operator
And your final question today comes from the line of David Windley from Jefferies.
David H. Windley - Jefferies & Company, Inc., Research Division
Following on that last question, so you've identified very well the $200 million to $300 million for next year. If you're not increasing spending in Medicare on the fourth quarter, I believe you are increasing your SG&A numbers for 4Q.
What is that money going toward? Is it similar to what you're directing the $200 million to $300 million for next year?
Wayne S. Deveydt
Yes, keep in mind, too, that in the fourth quarter, we are starting some work on the duals already for the California. We have our RFP for exchanges in California that we're working towards.
You always have open enrollment, though. So it's important to remember that from a Medicare perspective, we always spend more in the fourth quarter, regardless of the previous quarter, regardless of the year.
So part of that incremental spend in the fourth quarter is really about the idea that we're going to be spending more than we typically do, but not abnormally more. I would lastly just add that our fourth quarter has a conservative outlook to it, and I think that's probably the most concluding comment I can make on that.
David H. Windley - Jefferies & Company, Inc., Research Division
Okay. And then skipping over, Wayne, you at some conferences had talked about 2013, and then characterized 2014 as a resetting year.
I think we kind of understand from the call today more detail around 2013. I'm wondering if you could help to understand what your comments really mean about 2014.
What is the resetting year in 2014 mean? And is it predominantly around the share shift vis-à-vis exchanges?
Wayne S. Deveydt
David, it's exactly that. It's the share shift vis-à-vis exchanges and why we would expect, as we see some of our Small Group membership atrit from the Small Group bucket and moving to the exchanges, we expect some margin contraction within that group.
At the same time, though, we do expect a fairly large amount of membership that we will gain both our existing membership that moves there, coupled with the broader market of new lives that will be coming into the market, and we are investing heavy in the exchanges for that purpose. So when we talk about a reset in '14, it's not a reset for all of our book.
it's not a reset for Senior. It's not a reset for -- it's a reset specifically to the idea of the exchanges and the fact that some of our Small Group business will migrate, will get margin contraction, but will pick up new lives, and that becomes the new base to measure our commercial book off of.
David H. Windley - Jefferies & Company, Inc., Research Division
Okay. And if I could ask a last question on that, you've talked about Small Group, so a lot of the studies there are now pretty dated, but a lot of the studies have looked at the possibility of, say, large employers with perhaps, wage labor, significant amounts of wage labor that might also consider dumping.
I'd be curious of your -- of WellPoint's views on the potential for share shift into exchanges apart from Small Group?
Kenneth R. Goulet
David, it's Ken Goulet. When we look at our membership and segments going forward, there will be some attrition from Large Group.
But I believe that the interest is more emerging into private exchanges, driven both by the employer group's interest and the consultants who are providing options to them. So we saw some transition to private exchanges this year.
You are right that if there were -- if there is movement, it will be by accounts who have lower wages and are eligible for subsidies. But remember that there's so much emerging, at least in 2014, '15, on state-by-state differences that a multistate employer will have difficulty moving to exchanges because it will vary very significant, state to state.
There will be migrations over time, but we don't see that happening in the early years of the exchanges. It's something that would occur over time.
John Cannon
Thank you, everyone, for your questions. I'd just say in closing that we are pleased with our third quarter results and as hopefully, you gathered, we're taking steps to ensure that we're well positioned for increased growth and success in the future.
We've also promised, and we will share with you more information more about our investment plans, our 2013 outlook and the longer-term strategies in the coming months. Thanks, again, everyone, for participating in the call this morning.
And, operator, if you could please provide the call replay instructions, we'd appreciate it.
Operator
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