In today's call, we will refer to adjusted days claims payable. This adjusted metric is not being presented in accordance with generally accepted accounting principles or GAAP. Please refer to today's press release, which is available on the company's website for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure, days claims payable.

I will now turn the call over to Jay Gellert, Health Net CEO.

Jay M. Gellert

Thank you, Angie. I want to get directly to the issues impacting our first quarter and our revised guidance for 2012. After that, I'll spend just a few moments on other factors influencing the first quarter, and then open it up to your questions.

As you've seen in our release, we recorded $67 million in adverse medical claims development from prior periods in the first quarter of 2012. The adverse development was due to an underestimate of our incurred but not reported claims liability at year-end 2011. As we indicated, it was the result of an unanticipated flattening of our commercial medical claims trend, coupled with a larger-than-expected impact from the implementation of HIPAA 5010, the new claims coding system mandated by the federal government.

We did not have similar trend expectations in Medicare and Medicaid. As a result, we had adequate reserves for those lines.

In late March, we saw substantial uptick in claims for 2011 service date coming from our intermediaries. The level was above our expectation. It led to slower claims completion factors than anticipated. This led to the unanticipated increase in commercial development.

We believe that the 5010 issues have now been essentially resolved. We have seen the daily claims submissions have settled down to a reasonable and expected level. The $67 million of adverse development impacts our run rate for 2012. In addition, we recognized the $67 million in prior development in the first quarter. Therefore, we have adjusted the low end of our guidance to reflect the $134 million pretax impact of the adverse development and the run rate impact.

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