State of the middle-market: Our 11th annual call with Steve Lewis

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1 Equity Research State of the middle-market: Our 11th annual call with Steve Lewis Transcript from our call with Steve Lewis of Willis North America We hosted our 11th annual industry expert conference call with Steve Lewis, regional leader for the employee benefit consulting practice of Willis North America. Our call provided a front-line, mid-year view on industry pricing and product trends, as well as discussion of issues facing mid-sized (MM) employers amidst implementation of the Affordable Care Act (AC). A transcript of the conference call is provided in the body of this report. UPCOMING EVENTS July 17, 2014: 2Q earnings season begins with results from UnitedHealth Group (UNH). RATING AND PRICING INFORMATION Aetna, Inc. (B/N, $80.99), Health Net, Inc. (B/N, $39.83) and Huntsman Corp. (B/A, $27.39) Risk from lower same-store price increases mitigated by low trend Mr. Lewis pointed to a mostly stable pricing and service environment with the intensity of price competition in a middle-range (i.e., in between a hard and soft pricing market). That said, the average level of price increases, on a same-store basis excluding the ACA fee pass-through, is somewhat lower than a year ago. While this is a risk to watch, it seems that underlying trend remains as low or even lower (at least so far), implying a positive spread or at least neutral price-to-cost trend spread for 2Q earnings. More cost-shifting and self-insuring but not much PEX adoption Other key takeaways include (1) employers are shifting costs to workers at a faster rate, which may be a factor moderating utilization trends, (2) private exchanges (PEX) are getting interest, but so far not much uptake, (3) the trend to self-insuring (ASO) is accelerating, (4) employers remain committed to sponsorship of employee health coverage (for now), (5) the approaching 2018 Cadillac tax is not yet a catalyst for change, (6) new costs, particularly new specialty drugs, may drive higher rates for Now see better odds that managed care will pass the 2Q test In the context of this frontline view of industry trends, we maintain our Neutral coverage view on Managed Care, but with more optimism that continuation of favorable trends will allow companies to pass the test of the ACA provisions in 2Q2014 earnings. Within the group, we continue to favor UnitedHealth, Aetna, and Health Net (all Buy-rated). Matthew Borsch, CFA Goldman Sachs does and seeks to do business with (212) matthew.borsch@gs.com Goldman, Sachs & Co. Ambarish Jajodia (212) ambarish.jajodia@gs.com Goldman Sachs India SPL Bo Brandt (212) bo.brandt@gs.com Goldman, Sachs & Co. companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research

2 Summary: Lower price increases matched by even lower trends Our bottom line from the call is that risk from deceleration in same-store price increases presents a risk factor but for now appears to be mitigated by continuation of moderate utilization trends, which is a view that most of the managed care companies strongly expressed at our recent annual conference (detailed in our report from June 16, Global: Healthcare: Wrap up from 35th Annual HC Conference). The apparent deceleration in average same-store price increases seems at odds with managed care company guidance for a higher level of same-store price increase this year (to reflect expectations for an uptick in utilization trend, which the companies say they have not yet seen). However, the yoy deceleration in price trend does seem to be consistent with the results from the government pricing surveys for health insurance (Exhibits 1-2). These include the monthly Producer Price Index (PPI) and the quarterly basis Employment Cost Index (ECI), both published by the US Bureau of Labor Statistics (BLS). The most recent PPI update was for May 2014 (+1.54%, up from the prior month +1.35% but lower than year-ago +1.69%), while the most recent ECI update was for 1Q2014 (+2.4% versus last quarter 4Q % and year-ago 1Q %). Exhibit 1: Price deceleration in ECI/PPI surveys ECI and PPI for group health insurance, last 10 quarters Exhibit 2: Price deceleration in ECI/PPI surveys ECI and PPI for group health insurance, last 10 years 5.0% 12.0% 4.5% 4.0% 10.0% 3.5% 3.0% 8.0% 2.5% 2.0% 6.0% 1.5% 1.0% 0.5% 4.0% 2.0% 0.0% 2Q Q Q Q Q Q Q Q Q Q Q Q Q 2014 ECI (quarterly) PPI (monthly) 0.0% ECI (quarterly) PPI (monthly) 2014 YTD Source: US-BLS. Source: US-BLS. Key takeaways from our conference call Following are the key takeaways from the call that we highlight. The intensity of price competition among the managed care companies is seen as about the same as a year ago and somewhere in the middle between hard and soft pricing environments. Goldman Sachs Global Investment Research 2

3 Net of the ACA industry fee, price increases look somewhat lower than a year ago. After negotiation, same-product price increases are seen in the range of 7%-8%, on average, which is 50bp-150bp higher than year-ago 5.5%-7.5%. However, price increases for this year include a 300bp or more add on for the ACA industry fee (as tabulated by carriers in renewal pricing), which was not the case a year ago. Adjusting for this, the net same-product price increases may be down 200bp or so (i.e., about 4% vs. year-ago 5.5%-7.5%). Employers are shifting costs to employees at a faster rate, which may be having a moderating impact on utilization trends. After buy-down (i.e., reduced benefits and/or higher employee cost-sharing), price increases are in the range of 5%-5.5%, on average, about 50bp higher than year-ago 4.5%-6.0% (again, the yearago level did not include the industry fee). Therefore, buy-downs have accelerated to a range of approximately 200bp-250bp, on average, versus year-ago 100bp- 150bp. An important factor here is the ACA affordability threshold (i.e., not more than 9.5% of worker income), which is leading some employers to buy-down more than they might have otherwise. All else equal, a greater level of buy-down will have a dampening effect on utilization demand, as one would expect. Private exchanges: lots of interest, but so far not much uptake. Middlemarket employers are expressing strong interest in evaluating the potential for private exchanges to reduce cost. The initial cost reduction potential is expected to come from employees buying lower cost health coverage when exposed to the full cost in a defined contribution model. Sustained cost reduction over time is expected to come from the shift to integrated care systems that take populationbased reimbursement (not fee-for-service). However, thus far, the actual adoption of private exchanges in the middle-market has been minimal and the tipping point for this is seen beyond The trend to self-insuring (ASO) among middle-market employers is accelerating. Among mid-sized employers, the shift to self-insuring (ASO) is accelerating. At present, approximately one-third of middle market employers are self-insured while about two-thirds remain fully-insured. The added costs of the ACA for fully-insured groups (notably the pass-through of the ACA industry fee on managed care, which applies to fully-insured market share only) are seen contributing to the accelerated shift to self-insuring. While adoption of private exchanges could drive the trend the other way (back towards fully-insured), that has yet to occur in the middle market in any meaningful way. Employers remain committed to sponsorship of employee health coverage for now. Even under private exchanges and defined contribution, the employer remains the sponsor, which is critical to maintaining the tax advantage of group coverage. Partly for this reason, there is not much actual dumping of coverage (e.g., to the ACA public exchanges) in the middle-market, nor is that expected for next year. The 2018 Cadillac tax: not yet a catalyst for change. The ACA will impose a 40% excise tax on the cost of health benefit plans above a defined threshold (starting at $10,200 per employee or $27,500 per family) starting in Many or most middle-market employers are expected to exceed this threshold by 2018 or soon thereafter. The prospect of the tax could be a catalyst for significant changes to employee benefit plans (such as migration to private exchanges / defined contribution). However, for now, employers are taking a wait and see approach, as there is significant uncertainty about whether or not the tax will actually be imposed on schedule in Goldman Sachs Global Investment Research 3

4 New costs may drive higher rates for It is too early to call the pricing trend for 2015, given that mid-sized employer renewals (for those on a calendar benefit year) are generally not finalized until 4Q. That said, there is potential for a harder pricing environment for next year given factors such as the high price of specialty products. Of the cost items, Sovaldi is the most notable. An example was a self-insured middle-market employer that experienced about $1 million in Sovaldi claims costs for about 10 patients during 1Q2014. While not necessarily typical, this level of claims experience is equivalent to added costs of about $100 per member per month (PMPM) when spread across the base of more than 2,000 employees along with covered spouses and dependents (put differently, Sovaldi drove a claims cost increase of about 25% for 1Q2014 for this account). Transcript from conference call (June 23, 2014) Matthew Borsch, Goldman Sachs: Thank you operator and thank you everyone for joining us and special thanks to our guest speaker Steve Lewis, who is actually participating in our 11th annual call. Steve Lewis is the regional leader for the Human Capital practice at Willis North America. Willis is a leading firm, and from our perspective particularly interesting vis-à-vis their perspective on the middle market employee benefit segment, which is a very market facing segment and sees a blend of both fully-insured and self-insured employer products and pricing. So I just also want to highlight the continuity over those 11 years has been fantastic and there have been a number of turning points when Steve and his colleagues have pointed to trends in the industry relevant to investors really before any other sources highlighted them. Steve may have some introductory comments to make, but I am going to ask the first question about the intensity of price competition now versus a year or two ago. Steve Lewis, Willis: Great. Thank you Matt and thank you again for hosting me 11 years in a row, flattered to be back. So just before I answer your question about price intensity if I may let me define how we use the term middle market. We serve employers with anywhere from approximately 100 to 5,000 employees, with a few clients smaller than that, a few clients larger than that, but that is really the market segment that our team serves across North America. Please note that my comments on this call will be directly based on my team s experiences and not necessarily reflect experiences of my Willis colleagues from around the country or around the world for that matter. I do want to offer a special thank you to my team who is always very helpful to me in preparing for these calls and helping you and I identify some of the trends that we have spotted over the decade of doing this together. So with that, with respect to price intensity we are seeing similar price intensity in the midyear time frame renewals, which is a smaller sub set of what we see for the January 1 time frames. Having said that, we do have some preliminary concerns from an employer perspective, maybe not so from an investor perspective; but, from an employer viewpoint the price intensity we have seen in the last two 1/1 cycles may not be the same for 1/1/15. Borsch: So you think that you see harder pricing from the carriers going into next year with the way preliminarily rate renewals are shaping up? Lewis: That s our initial read of the tea-leaves if you will. Borsch: Have you seen any impact from the regional Blues that would be different than in prior recent years as well as some of the new entrants, who on the margins are mostly on the ACA public exchanges and have made sounds about moving up market? Goldman Sachs Global Investment Research 4

5 Lewis: We have yet to see any impact or noise from the new entrants, we are certainly aware that they are out there and they are primarily focused on the public exchange marketplace. With respect to the regional Blues players, we do not really see them as driving the market, but as very effective in retaining the business that they have. They play great defense, but do not necessarily drive other carriers to lower pricing. Borsch: Can you characterize the average price increases that you are seeing and bake in with that the ACA industry fee and related tax gross up, knowing of course that range is going to be very wide here? Lewis: Well the industry fee and tax gross up is now in the 3% to 4%, even possibly 5% range for the pass through, and it is a pass through. We are seeing it very directly in the renewal workups from the carriers being passed directly onto employers. Having said that, when we look at the most recent largest data set from 1/1/14 and compare that to 1/1/13, renewal results are very similar with getting initial requests in the low to mid-teens from the incumbent carrier, getting as is pricing, meaning no plan changes, no carrier changes, ultimately in the 7% to 8% range including fees, and with plan changes and buy downs on average in there 5% to 5.5% range. Again, on average, and average is tough because our range of renewals does range from decreases up to mid- to high-teen renewals. Borsch: So that would suggest to me that the same store pricing, if you will, excluding the fee because 1/1/13 you really did not have the pass through of the industry fee and at the level of pricing, is lower than it was a year ago. Lewis: That is a fair summation; again, the middle market can be very much claims driven. So the utilization of the plan is ultimately what is driving the vast majority of the pricing decisions. Granted we have talked about price intensity around the last two 1/1 renewals so there is clearly some market pressure that helps bring those averages and final results into more favorable lines for our clients. Borsch: What about the MLR regulations? I realize now we are in the fourth year living under the regulations, but do you see it having completely stabilized by now, does it seem to be playing a role as far as you can tell in the pricing decisions of any sort? Lewis: I suspect it is, but we have fewer and fewer clients getting MLR rebates and the dollars that are rebated are tiny. When an employer gets a rebate it is still very difficult to explain to them how they are getting money back and facing a double-digit increase on their renewal. It does not seem to add up for that employer sometimes, but it is a very small part of the overall equation. Borsch: As we think about, if in fact on the same store basis the rate increases for 1/1/14 are a little bit less than 1/1/13, does that suggest to you that the underlying level of medical inflation is a little bit slower? I know it does not feel slow to employers, but relatively speaking it was only two or three years ago there was this big feeling of relief that we came down from the teen levels and employers felt like they were getting a break. Maybe they do not feel that way much anymore because it is such a big base and high single digits is still tough to swallow, even if it is better than teens, but do you get a sense that underlying trend is fairly moderate? Lewis: We do. Sort of the universal average if you will of what carriers are telling us is right around ten percent below historical norms, but still a high number. We see the real number in our book of business and our experience to be lower than that, so it becomes a constant area of negotiation with the insured carrier, but we do believe it is still lower. Most carriers tell us that they are expecting trend to edge up, which is why our tea leaf reading for 1/1/15 has concerns about whether price intensity continues given the communication we are getting from carriers on trend. Borsch: On that topic, does some of that relate to Sovaldi and the other high-cost specialty drugs that are new to the picture this year? Goldman Sachs Global Investment Research 5

6 Lewis: No question about it, the specialty drugs have everybody concerned. Trend in prescription drug area has spiked significantly while drugs still remain roughly 20% of an employer s overall medical spend, but specialty is rising and Sovaldi in particular. I mention anecdotally, we had a client that fits in that middle market range experience about a $1 million cost impact in the first quarter due to roughly 10 employees utilizing Sovaldi. Borsch: Great, so that may be part of what is building potentially to a harder carrier pricing environment for 1/1/15. So let me ask you about product changes, now and maybe in the last sixth months as we went through the 1/1/14 renewal season in a couple of areas: 1) on ACA compliance and 2) on benefit buy downs and what you have been seeing there. Lewis: With respect to ACA compliance, we are having a conversation with a client about it on a constant basis and as the regulations got further delayed it gave employers relief to think more thoughtfully about it. But those employers with part time work forces, they certainly are looking at providing lower value plans, minimum essential coverage, lower than what the baseline plans that they have today, and then adjusting contributions to making sure they are meeting affordability standards. So when you are talking about benefit buy downs for example, it is starting with lowering the base level plan that the employer offers, particularly if they have concerns about the affordability issue with respect to their particular industry, and then raising contributions on the other plans to see what kind of steerage they can get into the less rich, more affordable plan option. Borsch: And are you seeing any buy ups from those that might fall in short of the minimum actual value, or is that not really amongst your employer clients? Lewis: I would say we have virtually no clients that fell below the 60% threshold. Borsch: Okay so then you would need to buy up. And just on the consumer directed health plan products which obviously encompass a lot of the cost sharing that we are talking about, are you seeing as much interest in the sort of consumerist features whether its HSAs, HRAs or other tools that are chugging along in the background? Lewis: It is very much in the foreground. While PPO still is the dominate plan design, the high deductible health plan with an account based option associated with it is going to become in our view the predominate plan. There is continued interest and continued strategy around driving more participation into these plans and even elimination of other product alternatives, that are not high deductible health plans. Borsch: Could you hazard to guess on penetration? I presume maybe 25% to 30% penetration. Lewis: Willis North America just earlier this month released our healthcare reform survey of just over 1000 middle market employers and according to our results of that survey we have got just over 36% in consumer directed health plans with an HSA and then another 30% either with an HRA or without an account fund. So you add that up, that is almost 62% that have a High Deductible plan option, where 79% had a PPO option. Borsch: Okay, fantastic. The narrow network option is getting a lot of attention because of the ACA public exchanges but I am not sure it necessarily fits with the diverse work force that your middle market employers are dealing with. What are you seeing in terms of that? Lewis: We are hearing a lot of conversation with both the insurance carriers and with employers about it, but it is not yet resonating with employers. Borsch: Finally on self-insuring, which has had ongoing momentum in the middle market, is that accelerating or decelerating from what you can see right now? Lewis: It is accelerating. Both in terms of conversations and transitions. Goldman Sachs Global Investment Research 6

7 Borsch: Right and perhaps a factor is an added cost of the ACA; although I am speculating it is hard to know what the trigger is. Lewis: It is hard to know what the trigger is, but that ACA is the proverbial last straw. Employers have known for some time, that generally speaking, over time you will spend less money, but you have to be able to withstand month to month and year to year volatility when you have that claims fluctuation. By and large, employers are looking at that cost differential over time, adding in the reinsurance fees and saying, at this point it finally does make sense. In the middle market they are still buying stop loss insurance to protect themselves, but overall it is something that continues to pick up momentum. Borsch: Where are we now in terms of penetration on that? Are we close to 50%? Lewis: I do not think we are there yet, I do believe we are over a third, however. Borsch: Let me just pivot slightly to the private exchanges, which have gotten a lot of attention over the last year, and ask about the key attraction points, what is appealing to them about the concept, and the uptake? Lewis: When we talk to our clients and we even talk about this in our recent healthcare reform survey that released results this month. The results of that survey are that employers number one concern continues to be controlling healthcare costs. How do we reduce our costs and how do we reduce the trend curve that we are on? And when you dig further into that, a full 25% of employers believe that private exchanges will lower their costs. So if the majority of employers are struggling with how they lower their costs and 25% of them believe that private exchanges will lower their costs, that is a pretty healthy percent of the population that is very interested in it. So there are a lot of conversations about it and there is some strategic planning going on around it. The uptake is minimal at present, and you know that Willis has its own private exchange, we call it the Willis Advantage, but it is one of roughly 100 private exchanges that are out in the marketplace. There are a couple that get a lot of attention, but there is a lot of private exchanges competing for share at the moment and employers are taking a bit of a wait-and-see approach, a go slow attitude as they want to see a bit more of how this evolves because there is no need for 100 private exchanges and everybody recognizes that there will be winners and losers in that. Borsch: On another level, maybe with anything that is new in healthcare, there is a little bit of a chicken and egg dilemma, which is perhaps you need to get a significant mass of employees, employers into private exchanges before you can drive some of the underlying cost reduction potential, particularly as it relates to people moving and formation of integrated delivery systems. And then on the other hand they are maybe not going to move in until they can see that the benefits are definitely there. Lewis: There are two points to that Matt. One, the multicarrier model very much relies on volume because that is going to give them the leverage to negotiate with the carriers, keep the carriers in play, and get the carriers to compete on an individual by individual basis. There is momentum for some of that at the very largest of employers, the Fortune 500 or so. In the middle market, the single carrier private exchange is much more prevalent. And two, what you count on there and what the evidence shows, and there are some private exchanges that have been in existence for quite some time before all the headlines, is that if you give a consumer and employee the money to spend and you give them low cost options, then what you deliver today through your traditional defined benefit healthcare employer sponsored delivery system, employees will use that money to buy down on their own and buy down more frequently and at a greater rate than what an employer would essentially plan for those employees. Goldman Sachs Global Investment Research 7

8 And so as a result, you will get that initial reduction in costs when employers in the middle market move to a single carrier private exchange without the need for the volume. Whether it is sustainable over time really depends on the integrated healthcare and the wellness in those solutions, which at Willis we are huge believers in and that is some of the emerging conversation going on in the private exchange marketplace. Borsch: That makes sense and lastly as you look at the different models, any sense of what works best in terms of the self-funded versus fully-insured varieties? Not to pre-empt you but I would think that certainly multi-carrier fully-insured probably works better and single carriers are more contusive to self-funded. Lewis: Well the fully insured model is always better for the insurance carrier, and the selffunded model is better for the employer, generally speaking. The multi-carrier model seems to be steering towards fully-insured, but emerging enrollment seems to be spilt and is still staying more self-insured than people may have expected. In the middle market, it is really up to the employer because the employer is still sponsoring the coverage, it is still an employer/carrier contract. If you are comfortable in a fully-insured world today, you can remain comfortable in that way on a private exchange and conversely on self-funded basis as well. Borsch: What impact do you think health reform is having on the employer decision making process? I suppose private exchange is part of that now as we draw ever closer to the infamous 2018 Cadillac tax, which a lot of people are looking at. And maybe can you bake in the impact of ACA compliance today? Lewis: I reference again the healthcare reform survey that Willis North America released earlier this month which dovetails nicely with what we are experiencing within our own book of business and that is this the employer is still committed to providing employer sponsored coverage. The employee, generally speaking, still trusts their employer to make good decisions for them and provide them a reasonable set of benefits. When we look at specific industries, employers are struggling with tracking hours worked, making sure that in a retail type or healthcare type environment that the preponderance of part-time and seasonal employees are staying below that 30-hour threshold. If they are or need to be above that 30-hour threshold, but were not previously eligible for benefits, then as I talked about earlier, the employers are providing a bronze type level plan that provides minimal essential coverage and is affordable in a minimum value plan. Borsch: So they are very much making those decisions. Lewis: We have not had a whole lot of conversation about employers looking to drop coverage other than what is the cost, and so with every client we are doing what is called a healthcare reform calculator and we are showing: stay the course; make some changes; drop coverage; and, here is the financial impact to your organization. And by and large even giving up the tax break, dropping coverage is still the best economic deal for the employer. But it is not yet on anybody s radar screen to do it in the middle market. Borsch: Have you seen any evidence of higher uptake amongst the employees? In other words, if you have a given employer with say 80% of their workers opting-in to the employee health plan offering, are you seeing any change in the 20% who do not, as a result of the ACA? In particular, I am thinking of people looking at the prospect or the reality of the individual mandate penalty and seeking coverage. Lewis: Interestingly enough we have not yet seen it but I suspect after 1/1/15 it will be interesting to look at what the enrollment does. Now, we are all expecting it. Our healthcare reform calculator helps clients model it out to show what the economic impact would be should they get various ranges of that uptake. And so employers are preemptively making decisions such as spousal surcharges, or not covering spouses if they have access to coverage elsewhere to help balance out what they expect will be that uptake. Goldman Sachs Global Investment Research 8

9 Now, we have not seen it yet and that could be because of the nominal impact of the individual mandate at this stage of the game and people looking at it saying, $95 or 1% of my income, versus the expense of the plan and what I get for that plan; the economic decision is clearly to pay the mandate penalty when I file my taxes. Borsch: How many of your employers do you calculate will breach the Cadillac tax threshold in 2018 or soon thereafter? Lewis: Most if not all will have at least one if not the vast majority of their plans cross that threshold by 2018 or certainly within five years after that. The conversation we have had from the beginning is, here is the financial impact to you, we can start planning today to stay a dollar below that, or we can rip the band-aid off in 2017 and do everything we have to. Thus far most employers have taken the band-aid approach because they are skeptical, and maybe rightly so, that the Cadillac tax will proceed as planned. I could argue both sides of the fence as to why it will or why it will not, but most clients at this stage are having trouble planning for something that they are not really sure is going to exist. Borsch: On the ACA affordability threshold, where employers are bringing the minimum value down so that nobody falls outside of the affordability threshold, do you think there are employers that are allowing this to happen, so that some workers are in essence encouraged to go to the exchanges? Lewis: No question about it and that is part of the strategy discussion that we are having with some clients if this segment of the population goes these are the cost you are likely to face. Now, the reality is the employer only knows what they pay that employee right? And so the nine and half percent threshold, the safe harbor is what you pay, but the actual eligibility is the household income. So if you pay somebody below that threshold but their spouse makes more, then you may take the risk that when they go to the public exchange they will not qualify for subsidies because their household income is too high. So more and more employers are making that a very specific part of their strategy and it is part of the conversation that we have with them. Borsch: So let me pivot to the last broad topic, which is on the carriers themselves. And I am just interested, I ask this question every year and it is been awhile since there has been something notable to mention but on the service level picture in general is it still all quiet on the carrier front or is there a potential for a wounded wildebeest in the pack here. Lewis: If that potential exists we are not seeing it play out with our clients. Universally, all of the carriers are struggling to do what they can to meet all of the new requirements that they have, distracted by their new set of business goals and objectives around the public exchanges and as such have fewer resources to serve us and our clients. And so, that is just universal across the industry right now, that they are all dealing with the same challenges, that they are all throwing resources at it, and as a result that is straining the available resources to serve the employers. Borsch: But it is being strained on a level basis, so everybody is getting a little bit of that as opposed to any one carrier. Lewis: That s right. Borsch: And then you refer to the ACA implementation, or the focus and implementation resources that are required, I suppose the MLR regulations squeezed them on the other end, although it is not something that they would talk about or that you would have visibility on. Lewis: That s right, I suspect that to be the case but I have no visibility. Borsch: Okay, got it. Operator we are going to open it up to questions from clients if we have any and then we will wrap up the call. Goldman Sachs Global Investment Research 9

10 Bob Jones, Goldman Sachs Healthcare Services Analyst: Thanks for the question Steve and the overview, very helpful. I actually just wanted to shift gears over to the pharmacy benefit. Now that we are a pretty good way through the PBM selling season I was wondering if you could share or characterize how this year has been shaping up for the PBMs. Does anything stand out to you relative to the last few years? Lewis: The biggest standout has been for those employers in the middle market with over 1,000 employees and are self-funded have increasingly looked at carving out their prescription drugs from the imbedded relationship with their medical carrier and that has been by and large the biggest increase in change in the PBM environment. Borsch: If I could ask, are you advising them to do that? Lewis: We are. Borsch: Because there are savings potential available. Lewis: We think there is an opportunity to get savings. Now, it could be like any other marketing, that it ends up being a threat to get us better pricing with the medical carrier, to keep it embedded and the medical carriers have very good arguments and very good reasons as to why you should keep it integrated and why that is to the benefit of the employer over the long term. But in the middle market we have talked about many years, price is king and it drives a lot. So if an opportunity to carve out the prescription drug presents itself in a financially, economically beneficial way to the employer, they will do it. Borsch: Just a follow up on that, are there any other things that you would call out as far as pay or employers being more receptive to different types of offerings? We have heard a lot about more restrictive plans, narrow networks as it relates to the pharmacy benefit, are you seeing any of that out in the marketplace? Lewis: Well, that conversation is really being driven today primarily by defined contribution plan design and whether that is inside or outside of private exchanges. Maybe it s a precursor to preparing employees for that move to a private exchange by going to a defined contribution type benefit structure, but in terms of the narrow networks we talked about, they really are not resonating with employers. The ACO development is having some but not a ton of impact at this stage, though I suspect we will see much more of that as we move down the timeline. Borsch: Well with that I think we will wrap up the call. Steve, thank you very much as always and maybe I will be able to book you for our 12th annual call next year. Thanks for everyone dialing in. END Goldman Sachs Global Investment Research 10

11 Disclosure Appendix Reg AC We, Matthew Borsch, CFA, Ambarish Jajodia and Bo Brandt, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Matthew Borsch, CFA: America-HCManaged, America-Healthcare Services:Facilities. America-HCManaged: Aetna, Inc., Centene Corp., Cigna Corp., Health Net, Inc., Humana Inc., Magellan Health Services, Inc., Molina Healthcare, Inc., UnitedHealth Group, Universal American Corp., WellCare Health Plans, Inc., WellPoint, Inc.. America-Healthcare Services:Facilities: Bright Horizons Family Solutions Inc., Community Health Systems, Inc., DaVita Inc., Emeritus Corporation, Envision Healthcare Holdings, Inc., ExamWorks Group, Inc., HCA Holdings, Inc., IPC The Hospitalist Company, Inc., LifePoint Hospitals, Inc., Mednax, Inc., Surgical Care Affiliates Inc, Team Health Holdings, Inc., Tenet Healthcare Corp., Universal Health Services, Inc.. Company-specific regulatory disclosures Compendium report: please see disclosures at Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 53% 15% 53% 47% 40% As of April 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,662 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below. Price target and rating history chart(s) Compendium report: please see disclosures at Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities. 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12 Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. 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European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. 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