Aetna 2Q16 Earnings Call Notes

Aetna (AET) Mark T. Bertolini on Q2 2016 Results

We are in the process of defending against Justice Department

“As most of you are aware, we are in the process of defending the Justice Department lawsuit to block our proposed acquisition of Humana. The DOJ action ignores the simple fact that there is robust competition in Medicare, as evidenced by, all Medicare eligibles are free to choose between traditional fee-for-service and Medicare Advantage, and approximately 70% of the Medicare eligible population chooses traditional Medicare.”

reassessing level of participation in exchanges

“In light of the disappointing year-to-date performance, and updated 2016 projections for our individual on and off exchange products, combined with the significant structural challenges facing the public exchanges, we believe it is only prudent to reassess our level of participation on the public exchanges. Our initial action will be to withdraw our 2017 public exchange expansion plans. ”

Losing $300m this year in ACA business

“We expect the year to have a loss on ACA business of – in excess of $300 million. We are evaluating our footprint as it exists today to understand what solutions we can put forward to either fix the business, or exit the business. And so we’re going through that analysis now. As you know, there’s a short window to divestitures. But the simple – the solutions here are really two.

The problem with exchange is that the current risk adjustment mechanism does not include specialty pharmacy

“First, let me make the comment that the people that are seeking care through these exchange products need this care. So these aren’t people running off to get services that they don’t need. These are people that need the care that they’re getting. What we’re seeing in the exchanges is double-digit trend year-over-year, overall. You can double that when you talk about pharmacy. And you can triple that initial number when you talk about Specialty Pharmacy. So we have two very important things going on in the exchanges here. First, we now believe we have third parties paying premiums for special interest groups both in a small group and individual that are supporting people getting access to these services. And because of that, we have – while we have the same demographic mix in this population, we have a much higher intensity and morbidity in that population, largely around Specialty Pharmacy. So given that the current risk adjustment mechanism does not include pharmacy, we’re not actually – nobody is getting adequately reimbursed, and given that the risk adjustment mechanism is a zero sum game, there is no way to fix this unless we include pharmacy, we deal with the eligibility requirements of third party payers paying premium, and we find a way to cover these individuals.”

Issues must be addressed around eligibility and risk adjustment

“Kevin, let me – this is really a balance sheet discussion and what happens to our capital and how big the loss could get. Unless some of these issues are addressed around eligibility and the risk adjustment, this could get a lot worse. And so we have to evaluate each market by its level of volatility, the other competitors, our amount of share in that market and whether or not it’s appropriate for us to take that risk absent any other changes in the program.”

Shawn M. Guertin – CFO, Executive VP & Chief Enterprise Risk Officer

23m members

” We ended the quarter with 23 million medical members, essentially flat with the first quarter of the year. We grew operating revenue by 5% over the prior year to a record quarterly level of nearly $16 billion, driven by higher healthcare premium yields and membership growth in our Government business, partially offset by membership declines in our Commercial Insured products.

Expecting MLR at 82%

“We now project that our full-year total health medical benefit ratio will be in the range of 82% to 82.5%. The increase from our previous projection is driven by our updated view of our ACA products. Based on our improved outlook and adjusted operating revenue and continued cost control initiatives, we now project that our operating expense ratio will be approximately 18%.

Aetna (AET) Q1 2016 Earnings

Aetna (AET) CEO Mark Bertolini said they are attempt to transition the health insurance marketplace to one of value based care from one of quantity based care

Our strategy to achieve this mission in part involves working to transform the health care system model to one in which hospitals and doctors are rewarded for delivering real value to patients and consumers. Our differentiated approach focuses on meeting providers where they are in terms of their readiness for varying levels of coordinated care and risk. We are applying our proven framework to support the advancement of value-based care models and move providers up the continuum from simple pay-for-performance models to ACOs and even joint ventures.  We’ve made good progress in the first quarter and now have 77 ACO agreements and approximately 40% of our claims payments running through some form of value-based care model. Based on our progress to date, we believe we remain on track to achieve our 2020 goal of 75% of claims in value-based care models and our broad mission of creating a healthier world.”
Strong growth in their government business
“Shifting to our Government business, which continues to be a key source of growth for the company. We grew medical membership by nearly 150,000 members in the quarter, including growth of 81,000 in Medicare Advantage; 46,000 in Medicare Supplement; and 22,000 in Medicaid members. Additionally, we grew Medicare PDP membership sequentially by over 470,000 members. As a result of this strong medical membership growth, we grew our first quarter 2016 Government premiums by over 13% compared to the prior-year period, achieving a record $6.5 billion. Government premiums now represent nearly 50% of our total healthcare premiums.”
Downward trend in facility day usage
We’re not seeing an increase on the facility side at all. As a matter of fact, we continue to see a trend downward in facility day usage. And so our view would be that this is probably related to a few instances, most likely related to flu. And maybe leap year. I mean, leap year is always a mystical thing for me. One day actually makes a difference, but it does.”
The Southeast is the has seen the strongest growth for their individual ACA insurance exchange marketplace product
We are seeing the growth in the markets where we have very good cost structure, particularly in the Southeast. So Florida was a big growth for us, now Georgia and North Carolina as well. We saw about 55% coming in from new business and, generally speaking, we have 75% of our membership in our top five states.”


Aetna 4Q15 Earnings Call Notes

Aetna (AET) Mark T. Bertolini on Q4 2015 Results

Believe we remain on track to close Humana acquisition in 2H16

“Beginning with the Humana acquisition, we continue to work diligently with the Department of Justice and with state regulators toward final approval of the transaction and continue to advance our integration readiness plans. We have obtained seven of the necessary state approvals required to close the transaction and we believe we remain on track to close in the second half of 2016.”

We have serious concerns about the sustainability of public exchanges

“despite our improved finish, this business remained unprofitable in 2015, and we continue to have serious concerns about the sustainability of the public exchanges. Specifically, we remain concerned about the overall stability of the risk pool, including enforcement of standards related to special election period enrollment, where CMS has made some recent changes, but more needs to be done. The lack of predictability and full transparency of the risk adjustment program, which is key to long-term program health, especially as the other two premium stabilization programs expire in 2017; and newly-proposed CMS regulations on network adequacy and standardization of benefits that would limit our ability to offer affordable, innovative on-exchange products. We continue to work constructively with CMS and lawmakers to set this program on a more sustainable path and achieve the underlying goal of making healthcare more affordable and accessible.”

Small group market remains rational

“the market remains rational from a pricing standpoint. We don’t see any unusual behavior, more so this year than in other years. So we see this as a rational environment.”

Seeing a slowdown in private exchanges as a employers didn’t see rate stability

“Well, I think first on private exchanges, we’re seeing the slowdown we anticipated as a result of employers who have tried it, but didn’t see the rate stability that they want to see and have pulled back, particularly on the fully insured segments and moved back to ASO. And so, that’s a sign that there need to be better proof points.”

Shawn M. Guertin – EVP, Chief Financial & Enterprise Risk Officer

Not seen any disruption from move to ICD 10

“Well, it’s certainly an issue that we have watched carefully during the quarter. We have not really seen any meaningful disruption as a result of ICD-10, and I suppose that is one of the silver linings of having a long time to get ready for this as a broader industry. But it is something that we are definitely paying attention to carefully throughout the quarter and frankly even into the beginning of this year as wel”

Aetna 2Q15 Earnings Call Notes

The Humana acquisition will accelerate our growth in Medicare Advantage

” the acquisition will substantially accelerate our ability to grow in Medicare Advantage. Aetna’s current Medicare Advantage footprint covers approximately 45% of the Medicare eligible population. The combined companies serve 4.4 million Medicare Advantage members, representing 8% of today’s 54 million Medicare beneficiaries, and will expand our geographic footprint to cover approximately 90% of the Medicare eligible population”

We think the deal will go through because there will still be plenty of competitors in each market

“On the regulatory approach, we’ve already filed our HSR. We’re starting to file in a number of states. We need 20 state approvals for Form As. We’ll file our S4 in the next couple of weeks. And so all of that, since the process is underway, we’ve engaged in conversations with insurance commissioners, with governors, with Washington, and we are most concerned about staying on our strategy, our point of view.

We’re doing deep analysis, even deeper than we did before the deal on a number of competitors by market the plans offered, the opportunity to divest. I think if you all do your homework like you have been on all of the competitors in each market and look at the markets where we may need to consider divestiture, there are plenty of competitors left in the market.

And so, I think our comfort is in the actual analysis at the end of the day, we will still be 8% of the overall Medicare market on a combined basis. We will be big in some markets where we may be have to divest. There will be plenty of competitors in each market.

And quite frankly, I think the bigger issue at the market level, where this analysis will occur, is the level of market share that the blues hold, which is really the dominant competitor in each market.”


Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.


C.H. Robinson (CHRW) CEO John Wiehoff says the company played a critical role to helping customers ship their goods effectively and efficiently given the West Coast port shutdown 

“Unlike intermodal, we do believe that the port delays on the West Coast probably helped our global forwarding business a little bit. We do know that several of our customers had difficult opportunities that we were able to help them with, and in some cases where customers were unable to get direct access to ocean capacity, we were able to help them with our capacity. So we do know of examples and believe that our global forwarding results probably were helped somewhat by the West Coast port delays.”

C.H. Robinson (CHRW) CEO John Wiehoff says he would like to do an acquisition in the intermodal or contract logistics space, the firm remains disciplined on finding the right candidate

“With all of the services that we offer, our belief is that our long-term competitive advantage is in the quality of our service and the quality of our people. And when we look at the acquisition opportunities, we want to make certain that we’re not disrupting any of that service capability or continuity and that we have the time and focus to make sure that we improve our competitive position in the marketplace while doing it. So while we’ve been looking at opportunities in both intermodal and contract logistics, we haven’t found what we thought was the right blend of value and integration capabilities to really improve our competitive positioning in the marketplace.”

C.H. Robinson (CHRW) CEO John Wiehoff says he still believes firm’s “asset light” business model is a differentiator versus many of its competitors

“In the longer run, we have belief that our third-party model of separating the capacity ownership and the capital investment from the customer service and go-to-market strategies can be a very effective way and the most effective way to serve a large part of the marketplace.”

But he conceeds more competitors have entered the space in the last few years

“As others continue to invest in that business model and more of the marketplace gets served by a third-party or a logistics-type business model, we think that that just reflects some of the secular changes in how we’re all competing. So the market is more competitive, we’re adapting to how things are changing and with regards to the business model that each of our competitors pursues around a blend of capital and logistics type stuff, we’ll just have to factor that in to how we sell and how we grow in the marketplace.”

Their customer base continues to be diversified 

“From an enterprise standpoint, we have a lot of customers that are around the 1% net revenue, and we’ve shared before from an enterprise standpoint that our top 100 customers are around a third of the business and that our top 300 or 400 customers make up around half of the business.  That’s part of that customer diversification that we feel is the strength of our business model.”





McGraw Hill Financial (MHFI) CEO Doug Peterson says the firm’s bond rating unit has benefited from a large number of corporations refinancing before the oncoming Federal Reserve rate hike

“If we turn to issuance, the recent trends in US and European issuance did benefit our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%.  In the US the improvement in corporate issuance was largely due to a 45% increase in industrials issuance.  Large debt financed M&A transactions also contributed to the lift in issuance.  In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%, public finance was up 61% over an unusually weak first-quarter in 2014.”

Additionally, the firm remains competitively positioned with its S&P ETF business

“If we turn to the key business drivers, the ETF industry experienced record first quarter inflows of $97 billion.  We believe that once investors place funds into passive investment, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions.  ETF AUMs associated with our indices increased 22% to $810 billion versus the end of first-quarter 2014 with approximately three quarters of this growth coming from inflows.”

The company’s Platts commodity business continued to grow revenue during the quarter even though client interest in commodity investments remains muted

“During the quarter, Platts continued to grow revenue despite low commodity prices. As we have seen in recent quarters the newer areas of metals and agriculture had the highest revenue growth rate.  Global trading services revenue increased primarily due to license revenue from the steel index derivative activity at the Singapore Exchange.”

The firm continues to benefit from some of the large U.S. banks shedding non-core assets

“We are also encouraged by the facts that banks are probably struggling after the LIBOR scandals with their ability to continue to manage benchmarks inside of their businesses. They might be non-core or they might not really be a business that it makes a lot of sense for them to be in.”





Aetna (AET) CEO Mark Bertolini says value based medical care reimbursement as opposed to quantity based reimbursement is now a substantial portion of the business

“Value based contracting now represents approximately 30% of Aetna’s medical spend with a goal to achieve 75% by the end of the decade.”

The firm benefitted from having lower medical insurance claims than expected

“Our commercial medical benefit ratio was 77.4% for the quarter, an excellent result that benefited from higher premiums, moderate cost trends and strong prior year’s reserve development.”





Loews (L) CEO Jim Tisch says the company is positioned opportunistically to deploy its large cash balance

“I want to start today by looking at Loews $5.5 billion of cash and investments.  As we have said before, money doesn’t burn a hole in our pockets. While we acknowledge that cash can be a drag on Loews short term returns, we feel that having the flexibility to be opportunistic and not rely on financing markets has served our shareholders very well over the long term.”

Loews (L) CEO Jim Tisch says the market is priced for perfection and he is having a hard time finding undervalued assets

“I think that after all these years of low interest rates and quantitative easing, what we have is markets both fixed income and equity markets that are priced for perfection.  So, my guess is that for the time being businesses look like they’re priced too high for us.  Now one of the things that I always remember is that the world is cyclical. And it’s easy to lose sight of that because we’re now in – firmly in year six of an upcycle for equity prices.  But at some point in time something will happen, people will lose all the confidence that they have and my guess is that opportunities will present itself.  I’d rather be patient and get a good business at an attractive price rather than lose patience and buy a business at too higher price.”

Loews (L) CEO Jim Tisch says that one of it’s oil rig subsidiaries, Diamond Offshore, performed poorly during the quarter but still sees further downside for the industry ahead which he hopes will ultimately lead to a buying opportunity

“I think right now the conditions are bad enough for rig valuations to go down. The problem is they haven’t been bad enough for long enough.  In the next two, three or four quarters, I think we could see that some fifth and six generation rig assets become available for sale.





Solarcity (SCTY) Chief Technology Officer Peter Rive says solar installation costs are falling at a dramatic pace which is allowing solar energy distribution to be competitive to electric utilities

“On the residential side, our fully installed solar battery system costs are about one-third of what they were a year ago. We expect cost to decline further at manufacturing sales and over the next five to 10 years these costs reductions will make it feasible to deploy the battery by default with all of our solar power systems.”

Solarcity (SCTY) Chief Financial Officer Brad Buss says access to the capital markets for the solar capital markets is gaining momentum as investors becoming increasingly confident in the business model

“Every six months I only see our credit spread shrinking as we continue to perform as the paper continues to perform. So I am very happy where things are going from that perspective and then obviously on a cost spend of it. It is really is the cost of capital and the cost that’s really driving our success and where I think we will continue to outdistance and be cost efficient.”






Intercontinental Exchange (ICE) Chief Financial Officer Scott Hill says the company has seen increased volume in its oil contracts and is benefitting from increased volatility in the commodity sector

“This was enabled by an 11% increase in commodity revenues on the strength of our global oil markets.  Brent crude contact revenue  grew 51% year-to-year to a record $74 million. Brent continues to expand its lead as the global benchmark for pricing crude and refined oil products, with open interest up 15% from year-end to a record 4.4 million contracts. Notably, Brent open interest is up 49% from last March, with strong growth due to the ongoing shift of Brent in commodity indexes and longer-term secular trends.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says he expects to see continued growth in their Asian products over the coming years

Similarly, Asia’s markets are expanding due to greater demand for the type of products we currently offer through our Western exchanges and clearinghouses.  Our work there is foundational, and we will launch ICE Futures Singapore and ICE Clear Singapore this year. We’re seeing a good deal of interest in our newly announced Asian market products and for the increased access to central clearing.  The other interesting thing is there’s also a lot of capital moving towards Asia.  You see it in the demand right now for the linkage between the Hong Kong Exchange and the Shanghai Stock Exchange in equities.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher is optimistic about taking over the LIBOR and gold price benchmark administration from what used to be a consortium of banks that set those price levels 

At ICE Benchmark Administration, in March, the ICE Swap Rate replaced the ISDAFIX, and we successfully launched the gold price with record-level participation. We’ve also undertaken market consultations for both LIBOR and the LBMA Gold Prices to evolve the best practices for determining these prices.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says the New York Stock Exchange continues to be the global leader in IPO’s and capital raising

The New York Stock Exchange continued to lead in global capital raising, with $50 billion in total proceeds raised in the first quarter. This is more than the next 2 largest exchanges combined. And we continue to attract companies of all sectors and market capitalizations because of our unique market model, combined with our unparalleled visibility and service.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher focuses on profit per share of the company rather than market share

We have, in a very disciplined way, decided to not participate in options volume that does not earn a return for the company.  So the fact that we send uncompetitive business to our competitors is to not concern our shareholders.  And let’s let those competitors have the bragging rights if they have a lot of market share, but there isn’t a lot of income to go along with some of that business.”




Chesapeake Energy (CHK) Executive VP Chris Doyle says the firm is using big data techniques to analyze how to drill the most effective well

“The Operational Support Center (OSC) is manned by 100 industry experts, drilling superintendents, geosteerers, geologists, engineers, lease operators and analysts. OSC is Chesapeake’s central command center. It’s like NORAD in Oklahoma City. But more than just monitoring and supporting, the OSC links our teams executing out in the field with real-time data analytics, industrial analytics and tactical performance-enhancing adjustments.  y identifying optimal drilling parameters based on historical drilling data, every single well had a well plan based on what it took to drill the fastest, best, most competitive well. And any and all trouble time was analyzed, evaluated, all events in the past and so the OSC was able to forewarn our drilling organization, including the drillers on the rig floor, when they were either outside the optimal drilling window or they were headed for a potential issue. The result was optimized drilling performance and elimination of downtime events. That’s how you reduce cycle times from 26 days to 12 days.”

Chesapeake Energy (CHK) Chief Financial Officer Domenic Dell’osso stated that the company has reduced it’s rig count dramatically which will likely hurt oil rig manufacturers

“We started 2015 with around 70 rigs running, including a few spud rig, and averaged 54 rigs during the first quarter. Today, we’re running 26 rigs in total and we’re forecasting to drop to 14 rigs during the third quarter.”





Anheuser Busch Inbev (BUD) CEO Carlos Brito said that the Bud Light brand continues to struggle in its attempt to resonate with the U.S. consumer

“We estimate the Bud Light brand was down approximately 20 bps in terms of total market share.  We have a long way to go in stabilizing the share of Budweiser.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito said the company continues to gain market share in China and its various brands now represent almost 1/5 of all beer consumed in China

“We estimate our market share in the quarter reached 18.5% when including our recent acquisitions.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how he thinks about the craft brewing movement in the U.S.

“We’re adopting the strategy very clearly of having more regional relevant brands. So that’s the case when we joined with Goose Island, Blue Point, 10 Barrel, Elysian, but also developing our own like Shock Top, and also trying to focus in a few that could be nationally expanded.  In other markets, what we’re trying to do is get the U.S. learnings over to other markets and try to be, of course, ahead of the curve, especially markets where we lead, like Brazil.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how they are incorporating social media into their marketing

Social media continues to grow within our mix of media spend between social and traditional. We are learning every day by connecting more with consumers and making our contents relevant. Of course, it’s a very fast paced type interaction with consumers, and we don’t intend to get everything right all the time.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito expects the company to compete effectively in the Vietnamese beer market

So in terms of Vietnam, yes, we’re building a brewery there. We expect to ship beer in May. So this month in Vietnam. We’re very excited about Vietnam. It’s a country, again, demographics, weather, beer culture, 90 million people, a very extensive or a very big high-end segment. And that’s where we want to play with Budweiser, Stella and Corona, also Hoegaarden. So very exciting market, we’re very committed to it, and learning from our experience in China to do a lot of what we did with Budweiser in China in Vietnam.”





National Oilwell Varco (NOV) CEO Clay Williams says the pace of the decline in the oil rig count is unprecedented in history

The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns. NOV saw activities and orders slow in just about all areas of our business and all of our units are experiencing pricing pressure.”

And the company is under serious pricing pressure to reduce their selling price to customers

“We are also under pricing pressure and requests to cancel work, which we are vigorously opposing. We are seeking to structure discounts around volume-related rebates tied to payments and expanded product purchases, in effect picking our points, to try and win greater share, defend volumes, and improve absorption in our plants. We don’t want our customers to get out of the habit of buying from us, to maximize our market position when the inevitable recovery comes.  We closed three facilities within the unit during the first quarter and continued to reduce costs within our supply chain. North America was hit hardest, but the Middle East and other international markets are more stable.”





Markel (MKL) CFO Anne Waleski says the firm remains disciplined on price and will not write insurance in which it cannot earn a reasonable rate of return

“Market conditions remain very competitive, consistent with our historical practices we will not rate business when we believe prevailing market rates will not support our underwriting profit targets.”

Marke (MKL) President Rich Crowley says the reinsurance sector remains ultra competitive with capital as a result of low interest rates

“In the reinsurance segment we saw pressure in terms and rates during the January 1 renewal process. As the year moves forward, while still extremely competitive it does appear that the decrease in rates and terms has slowed to some extent.  In summary and we stated it many times, we’re not going to chase premium when we feel the rates are inadequate. We continue to reinforce this message with our underwriting teams as is reflected in our first quarter’s gross premium numbers.”

Markel (MKL) Chief Investment Officer Tom Gaynor says even though they are earning very little on their short duration bond portfolio due to the low interest rate environment, they think today’s economic and financial climate warrants conservatism

“I’m sure that if we were really smart and clever we could find some alternative investment approach that would increase the yield on our short term portfolio from essentially nothing to something more than that. We’re not that clever or smart, so we won’t try to perform that sort of alchemy. We’ve seen enough of those experiments end badly to dissuade us from going down that path.”

Aetna 1Q15 Earnings Call Notes

21% EPS increase

This morning, Aetna reported record first quarter operating earnings of $2.39 a share, a 21% increase from last year’s very strong first quarter. Our first quarter performance speaks to Aetna’s focus on operating fundamentals and the continued execution of our growth strategy.”

Expanding margins thanks to moderate cost trends

The combination of this membership growth and strong yields from disciplined pricing actions drove solid topline growth as quarterly operating revenue reached $15.1 billion. Medical cost trends remain moderate and we experienced a healthy level of reserve development in the quarter and we now project that pretax operating margins will expand in 2015, despite an increasing mix of lower margin government sponsored business.”

Raising EPS projection

With this strong start to 2015, today we’re increasing our operating EPS projection to $7.20 to $7.40 per share from our previous projection of at least $7. At the top end of the range Aetna would achieve its low double-digit operating EPS growth call in 2015.”

Medicare advantage funding will increase in 2016 for the first time in several years

“For the first time in several years federal funding for this program will increase in 2016, which we expect will help us to further improve the value we offer to seniors as well as our returns to shareholders.”

90% of public exchange membership is subsidized by the government

“The demographic profile of Aetna’s public exchange membership remains generally consistent with last year. While the average age of our membership has declined modestly, the vast majority remains in silver and bronze plans and nearly 90% of our members receive a subsidy from the federal government, consistent with national averages.”

Optimistic that exchanges could develop into a growth opportunity

“We remain cautiously optimistic on the potential for the public exchanges to develop into an attractive growth opportunity where we can continue to offer value to customers and generate a reasonable return for our shareholders.”

We anticipated that cost trends would increase this year, but they haven’t

“I would say that there is really two things, obviously the preferred drug pricing contract is part of that movement. And as you know we anticipated that we would see a trend increase this year, utilization increase. We really did not see that, trend was very moderate in the first quarter.

So those are really the two items when we think about 2015 trend that are bringing that down.

Under the covers looking at it by category, there really hasn’t been anything I would say that is fundamentally changed in the story. Outpatient, emergency department usage continues to be one area that’s running.

Specialty Pharma continues to be part of the story, but there is really nothing that I would say is very different or extraordinary in the other categories compared to what we talked about over the last couple of quarters.”

Aetna Investor Day Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

“At a recent investor conference, I was actually asked multiple times, “What do you think investors will look back on in a couple of years and really kick themselves over?” I really didn’t have to think about it very long because I think the fog of 2014 and all of the change in 2014 is masking the incredible growth opportunities that are before this company and, frankly, this industry.”

Mark T. Bertolini – Chairman, Chief Executive Officer

” Here’s how you want to think about taxes and fees. You’ve got to get them in the baseline and then — for in future years, the pain isn’t nearly as bad as it was this year.”

“there are 2 ways you solve for these taxes and fees. One is you price for it, and we will detail some of that later. And the other is you solve for it.”

“we believe in the future, that with virtual integration with the provider system, that we’ll become like the Intel Inside of the provider system through virtual integration, connecting with them in ways that allows them to do a bigger piece of what we do today.”

“Secondly, we believe that the marketplace is going to retail. And I’ll show you some statistics in a moment. And that retail marketplace is going to have individuals making the buying decision. And what they value is fundamentally different than the people we have dealt with in the past as benefit managers.”

“what’s happened with the Affordable Care Act is that it has — broke open the black box of managed care. How the business works has been exposed and regulated in far finer ways than it has in the past.”

“what does that cause you to do? Well, you have 2 choices. You can admit you’re a commodity. And when you do that, you put your thumb in your mouth, you get in a corner in a fetal position and you wait till it all goes away, till you’re out of business, or you keep cutting costs, cutting price and hope you’re the last standing. Think of the steel industry in the United States.”

“The other option is to take a look at the things you do as a company and decide which of those things that you do are of value to other parts of the value chain and create a different business model that makes you relevant in powering the rest of the value chain so that you’re no longer a commodity. And that’s the choice we have made.”

“We believe that we have the opportunity to enable the provider network to handle risk, to change the way the provider system works. And we have the opportunity to drive a retail market in health care. ”

“in the future. It will not be about employer-sponsored insurance, it will be about who is providing the subsidy to the individual who’s buying a health care policy. And we believe that subsidy will come in 1 of 3 places: it’ll be the employer providing a subsidy, the government providing a subsidy or people paying for all of it out of pocket.”

“when you get to a retail marketplace where the individuals making the decision based on the subsidy they get from either the employer or the government, their view of what is important changes, and it needs to be a system where the consumer gets what they want or finds what they want, value.”

“Third is that the distribution channel is going to change, and I think pretty dramatically over time. That’ll be more of a retail marketplace, not the model we have today.”

“the system is labyrinthian in its thinking and the way we work. Just take a look at And those people can’t figure it out, and so we have to make it a lot simpler.”

“When you incorporate out-of-pocket cost changes with the amount of premium employees are paying, employees, consumers are now paying 41% of the health care dollar in the United States. We are not far from them paying more than their employers. That’s a huge change.”

“More and more are asking their doctor, do I need to do this? Oh, by the way, how much does it cost? ”

“we believe that the retail marketplace, whether it’s fully insured or self-funded, the retail marketplace grows to 75 million by 2020.”

“here’s how we see it breaking out: we believe there will be 9% uninsured; that there’ll be 15% in government fee-for-service, Medicaid and Medicare; and then the retail market will be individual private and public exchanges, Individual MA, Medical Supplement, managed Medicaid, 46%; and there’ll be 30% remaining in the commercial employer-sponsored market but with largely, probably, employees making a greater part of the decision given their out-of-pocket.”

“CMS, every time they make a decision, impacts the rest of this industry. They’re like the blocking fullback going through the line, and we’re like tailbacks following them. Every time they fix the SGR, we reduce our physician fee schedules because we don’t have to make up for what we thought the SGR was going to generate.”

“if you’re one of those people trying to navigate the health care system, you’re looking in a system that was originally built in 1945 for — with the Hilbert and ACT and a whole bunch of other programs to create a health care system that takes care of people and to employ people after they came back from the war.”

“so this model has to change. This is too complex for consumers to figure out. The incentives are all wrong in dealing with an individual consumer. And so moving this payment model will get all of these parts of the system to work together.”

“all the tools that we invest in, the ACS investments we made, the retail exchange, private exchange models we will build and our public exchange participation is all aimed at having the system work for the individual versus having the individual trying to find their way through the maze.”

“And now if we can make that happen on an individual basis, then what happens is private exchanges allow us to take this across the country. ”

“If you have a health system that’s approaching its community, sign up individuals to be part of its health plan, the carrier doesn’t matter anymore. Multi carrier is extraneous as a concept. It’s really about, are you able to offer a breadth of plan designs, a breadth of care management capability, wellness, et cetera, a product set that provides value to consumers to want to purchase in that place.”

“That same experience is going to occur here when these retail marketplaces occur up. They’re going to want to stay with their system, the people who know them, not necessarily the benefit plan that they have before.”

“the only constant is change and change brings opportunity.”

“Public exchanges are struggling. The enrollment is lower than everybody expected. But my view is that by 2015, if we get it fixed right, it will be a new start, and 5 years from now, nobody will remember it. I think it’s just going to continue. I’m saying public exchanges are here to stay.”

“I don’t think we’re going to repeal the Affordable Care Act. I think we’re going to change it, we’re going to make it better, because it’s now starting to get metastatic to the system in the way we’re all changing and the way the system’s evolving. And while its intention wasn’t to have that all happen, it’s happening anyway, because the private sector is reacting to it.”

“So in the long term, public exchanges will survive. We believe there will be 25 million members on public exchanges and $75 billion in premium. That’s a CBO estimate. We think that’s legitimate”

“in 2016, it’s a completely different game. The ACA pressures abate, hopefully we’ll be over some of the kludginess of what’s going on today, longer-term revenue growth opportunities begin to mature and we’ll return to longer-term operating EPS growth dynamics. So we think the next couple of years is like hard work.”

“For every million members that go from self-insured to fully-insured, it’s $4 billion more in revenue. And 4x to 5x margin, dollars of margin. Public exchanges for every million members, $3 billion of revenue. Medicare Advantage, every 500,000 members, $5.5 billion of revenue. Every 100,000 of dual eligibles, which we’ve won a number of large contracts, $3.5 billion of revenue.”

“we believe that we can go from 2013 to 2020 all the way up to $100 billion in revenue. We believe we can more than double our revenue.”

Joseph M. Zubretsky – Senior Executive Vice President of National Businesses

“[Providers] now understand that by forming communities, health care communities, with physicians, ancillary and ambulatory facilities and acute care facilities and engaging in virtual integration themselves, they can change their revenue model, be reimbursed on the basis of value and not volume and completely change the game.”

“aiming our product line in our business at the large sophisticated integrated delivery systems and freestanding hospitals is the way to go. Because the hospitals are rolling up the docs. We thought about rolling up physician practices. We thought about buying bricks-and-mortar, vertical integration. Our view is, let the hospitals deploy their capital, monetizing the value of physician contracts and physician practices, let them create the communities and we’ll contract with the hospitals.”

“In order for these to work really nicely, having 30%, 40% and 50% market share aggregated in the ratio delivered to the insurance marketplace is about right. So in Chicago, where it’s very fragmented, you need 6, 8 or 10 ACO deals to make it work. But in Dallas and Houston, you may only need 1, 2 or 3. Concentration of patient market share is what make these work really well.”

“if anybody think that just because you own a physician’s contract, you can tell them what to do and how to behave, you’re wrong.”

“our differentiated solution allows us to then convert from volume-based reimbursement to value.”

“This is about enabling them to convert from episodic acute care to patient population health. Episodic acute care, when you show up, I’ll patch you up and send your home. Patient population health, I know everything there is to know about everybody in this room, you’re part of my medical community, you’re part of the medical home.”

“The shift from episodic acute care to patient population health allows the hospital system to convert from volume-based reimbursement to value-based reimbursement.”

“Aetna is your patient aggregator.”

“the business of provider contracting. We’re not in that business anymore. We’re in the business of Supply Chain Management. And the most complex, arcane, Byzantine supply chain ever designed is the healthcare delivery system”

“this is not an HMO. An HMO had a gatekeeper, that gatekeeper was sitting as a payer. That HMO shifted the risk, but it didn’t share the risk.”

“the intense clinical focus of the ACO is a completely new model and is completely anathema to the HMO model of the mid 1990s.”

Dijuana K. Lewis – Executive Vice President of Consumer Products and Enterprise Marketing

“the healthcare system was built to deliver healthcare. It was not built to deliver a simple shopping experience for consumers. That’s the transition that we are making”

Aetna at Morgan Stanley Healthcare Conference Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“When you look at our first half 2013 performance, on the positive side the story really was the commercial business and that was really a function of the medical cost trend environment being fairly stable and benign during the first half of the year, so commercial was the real story.”

“I’m under no illusion that it’s going to be a high margin business, but I think we will be able to earn a fair margin. Really there’s a lot of different forces whether it’s consumerism or the cost of healthcare that I think are going to make [exchanges] a place that more and more people will go to get their healthcare. My only concern all along is getting from A to B, right? There inevitably will be operational bumps in the road as these things get off the ground but they will be worked through and I think that’s really – the only question is, is when do we get there.”

“Well, I think Medicare Advantage is going to be a fine business long term. I’ve always thought that…We’ve been preparing for a long time that we were going to get to revenue that was at a 100% of fee-for-service. Some of these announcements just accelerated that process a bit for us.”

“the buying decision used to sort of be do you have every hospital and every doc in the network and if you did not, then that was a problem. Clearly now it’s not only a cost issue but I think the ability to managed care in a more effective way can happen in a smaller system.”

“If you think about it in a very simplistic sense in an exchange sort of consumer-oriented world, the consumer does not care as long as they’re doc and hospital is in the network, right? So they don’t necessarily even may not put a lot of value on a broad network. ”

“So both of those things I think are things that are narrowing sort of the network footprint size. I think we’ve said in the past our exchange networks are pretty meaningfully smaller than our standard commercial networks I think is good evidence of that.”

“So I view it sort of in the DNA of the company almost how we think about the business is all about care management and care management models and always making those better year-after-year.”