Executives
Drew Asher - Sr. VP of Corporate Finance
Dale B. Wolf - President and CEO
Shawn M. Guertin - CFO, EVP and Treasurer
Analysts
Carl McDonald - Oppenheimer & Co.
Thomas Carroll - Stifel Nicolaus & Company, Inc
Matthew Borsch - Goldman Sachs
Joshua Raskin - Barclays Capital
Scott Fidel - Deutsche Bank Securities
Justin Lake - UBS
Ana Gupte - Sanford C. Bernstein & Co
Gregory Nersessian - Credit Suisse
Charles Boorady - Citigroup
John Rex - JPMorgan
Doug Simpson - Merrill Lynch
Brian Wright - Banc of America
Coventry Health Care, Inc. (CVH) Q3 FY08 Earnings Call October 21, 2008 5:30 PM ET
Operator
Good day and welcome to Coventry Health Care's Third Quarter 2008 Earnings Conference Call. Today's conference is being recorded and all participants are in a listen-only mode. Today's call will begin with opening remarks by the Chief Executive Officer of Coventry Health Care, Mr. Dale Wolf, after a brief forward-looking statements read by Mr. Drew Asher. Please go ahead, Drew.
Drew Asher - Senior Vice President of Corporate Finance
Ladies and gentlemen, during this call, we will make forward-looking statements. Certain risks and uncertainties, as described in the company's filings with the SEC on Form 10-K for the year ended December 31, 2007 and Form 10-Q for the quarter ended June 30, 2008 may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Dale?
Dale B. Wolf - President and Chief Executive Officer
A short time ago, we released our third quarter operating results and associated Q4 guidance. Shawn and I'll this afternoon provide additional color on those results. To say that we are disappointed by our performance in 2008 doesn't a justice. On the other hand it's also regrettable that the underperformance in two large areas; our commercial risk and Private Fee businesses, masks the many outstanding results in other areas of our company, our continued growth and our opportunities for the future.
As you will hear, our balance sheet and liquidity are in outstanding shape. And we are positioned to weather the challenges in the current macroeconomic environment clearly as we execute with urgency the action plans to return our company to acceptable profit margins. Understandably however, our focus today has to be on the current results and to that end I will turn things over to Shawn.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Thank you, Dale. Before I go into some additional detail regarding the third quarter and our guidance for the fourth quarter I want to offer some comments on the broader performance and outlook for the company. I offer these comments to ensure that you have the same contacts that we have in looking at the performance of the company from the inside.
The primary operating earnings pressure points are the same areas that we discussed a quarter ago. There are not multiple new problem areas popping up everywhere. On the contrary, our other major business lines are performing well and have largely performed consistent with our expectations. Part D, Medicare HMO, Medicaid, and Individual are all examples at this point.
The financial foundation of this company is quite strong. The revenue streams from our major lines of businesses have been stable or growing and our businesses continue to be strong cash flow generators as evidenced by the cash flow statements for the quarter and year-to-date. Despite the unprecedented economic events of late, the overall impact to our $2.7 billion investment portfolio has been minimal.
In last our decision to differ 2009 guidance should not be confused with the loss of faith on our strategic positioning or our ability to execute. On the contrary, we still believe our overall strategic positioning is excellent and you should rest assure that this is a company that is energized and a 100% focused on restoring our financial performance to an acceptable level.
Make no mistake here. We have identified the areas pressuring up creating result this year and have implemented that action plans to improve our performance. What we cannot change here is the calendar, which impacts the timing of one receipt of positive impacts of all of our actions nor can we control the unprecedented economic factors that seem to impact the landscape each and everyday.
As you saw on the press release, upon observing higher than expected medical loss ratios on commercial in the third quarter. We once again tore apart each of our commercial health plans to get up the drivers of this pressure. Here we had the benefit of an additional quarter of completed data from 2008 for our analysis. There were four key conclusions that have emerged from this review.
One, following the second quarter, we believe the core medical trend in 2008 was 150 basis points higher than expected. The good news here is that the third quarter review showed that the core medical trend results were no worse than this. This is very important.
As you know, we implemented forward pricing action earlier this year assuming 150 basis of elevated trend and some additional margin for any further deterioration. This estimate still appears accurate and as it pertains to core medical trend, we have not seen any further deterioration.
The second conclusion was that we were experiencing some additional MLL pressure that we tracked back to more subtle pricing and underwriting issues in two specific health plans. The nature of the issues we uncovered are not simple, easy to identify issues like, I wanted a certain price and that price was cut. They have more to do with the interplay between underwriting risk assessment and pricing factors as well as some of more the detailed factors in the underwriting pricing model itself.
The nature of most of these items is not that business was written and was unprofitable. Rather that it was less profitable, than it had been historically and less profitable than what we assumed in our forecasts. The impact of these issues is at 70 basis points to our outlook on full year virtual MLR. Needless to say, as a result of these reviews, all assumed just needed to address these issues have been put in place as we speak today.
The third conclusion was that having a full year of Vista, versus three plus months last year was having a bigger impact on the commercial MLR than we had previously thought. You will recall that our prior guidance assumed that the MLR in 2008 would be 50 basis points higher than 2007 due to this factor. An examination of updated experience for this year showed that this will be closer to 95 basis points or an increase of 45 basis points from our previous estimate.
Let me be clear on this topic. This is still a very good and important asset for the company and I have every confidence in the team we have in place in South Florida. It is the nature of this business that this calendar year's results are largely a reflection of operating action taken prior to our ownership.
The final conclusion from this review was that we had seen significant MLR deterioration on our federal employee HMO business. This is not nail handlers, but rather the risk HMO business we are in out of each of our health plans.
As you all know, this business is what we refer to a slice where we are one of multiple options. It would appear at this point that we have experienced a significant degree of adverse selection in the most recent renewal cycle, which has caught the MLR deterioration in this block of business. The overall impact of this issue is an increase of 25 basis points from our previous MLR guidance.
We have already said our participation in this program for 2009 and while we have made some changes to premiums and benefits, the jury is still out on what will happen to this block from both the membership and MLR perspective in 2009. But clearly any ongoing result like this would warrant consideration of a different path for 2010.
Let me conclude my comments on the commercial business by reiterating that our fundamental outlook on trend for 2008 and 2009 is the same as a quarter ago at 9% plus or minus 50 basis points.
As you know we decisively implemented forward pricing action earlier this year. In addition, this quarter we have made additional pricing changes on top of this to deal with the specific issues we found. All of our health plans are actively working on initiatives to improve medical expense trend out comes in 2009. The biggest question in my mind today is not whether we will fix this issue but all other things being equal, how much of it will show up in 2009 before it fully shows up in 2010.
Let me start out on the Medicare Private Fee-for-Service by clarifying what this is and it has been as it pertains to third quarter developments. This is not an issue that has anything to do with any additional reserve development back to 2007 nor is it any issue with any internal claim payment practices. Those issues were identified and fully corrected in the second quarter. It is an issue about current year 2008 performance on this product. To no surprise, revenue from member in 2008 is largely as expected. The problem therefore is being driven on the medical expense side and in particular on our individual products as opposed to our group products.
We are experiencing trends in 2008 of around 9% on the individual business. There is just a comparable expected trend in the 5% range. You will recall that on this product, we paid Medicare rates to providers. So with the exception of the implementation of MS-DRGs in the fourth quarter of 2007. The variances from expected results are largely driven by higher than expected utilization with the biggest variance being observed in the outpatient category.
Looking deeper into this, we can also see that one of our particular individual plan offerings is the real culprit here. In essence, our individual membership is primarily distributed across three plans. One is a richer premium bearing product, while the other two are leaner plan designs with zero premiums.
In 2008, this richer premium bearing product is running a loss ratio in the mid to upper 90s, while the zero premium products are running in the mid to upper 80s. In our 2009 bids, we have made some meaningful redesigns of this particular product in terms of where it is offered, the benefit plan design and the corresponding premiums. The ultimate impact of these specific changes as well as the refinement of our view on 2009 performance of Private Fee-for-Service in total will clearly be front and center over the next couple of months.
Regarding the balance sheet, I wanted to provide you with some additional insight into the activity in the third quarter. From an overall perspective, our investment portfolio continues to perform well and those are very high quality. As you saw on the press release, during the quarter we incurred $0.15 of expense which is about $36 million on a pre-tax basis, related to realized losses and impairment charges. Losses related to proactive selling of certain financial sector holdings, accounted for only about $3 million or $0.01 of this total.
During the quarter, we wrote-down to zero our holdings in Lehman, $9 million pre-tax, as well as of our holdings of any sub-prime or out-pay mortgage products, which were only $6 million pre-tax. I believe we have taken a prudent approach in this area and the resulting position of the portfolio is quite strong.
One way to gauge this is looking at the overall unrealized gain loss position of the portfolio. On a net basis, that is netting unrealized gains and losses, it is right around breakeven. Even if you look at only the gross unrealized losses, that total is about $28 million of this 930 or about 1% of the total portfolio.
The last item I wanted to touch on in this area is liquidity. Overall, the dynamics of our business, largely being a prepaid business, and our specific liquidity position are excellent.
In an effort to assure we had access to our available capital, we drew $440 million on our credit facility in early October. I want to reiterate that this was done to assure we had access to our available capital as opposed to any liquidity issues or concerns regarding the assets out of our balance sheet. It is our current plan to hold these funds through the end of the fourth quarter and reassess at that time. The carrying charge of this cautious approach will be about $0.02 which we have incorporated into our Q4 guidance.
Now, turning to Q4 guidance, I wanted to highlight a couple of detailed assumptions here. First, is the commercial MLR assumption for the fourth quarter. We are assuming a commercial MLR a little above 83% for the fourth quarter versus 82.3% reported for the third quarter. This should not be confused with the view that run-rate performance would be further deteriorating in the fourth quarter. Rather it is a reflection that our forward pricing action will have a minimal impact on the fourth quarter due to the relatively low percentage of renewals in the quarter as well as making a prudent provision for any fourth quarter seasonality driven by calendar year deductible plans.
Similarly, we have also assumed a slightly higher loss ratio for the fourth quarter on Medicare advantage. Again, in an effort to make a prudent provision for any fourth quarter seasonality and to take into account the scheduled Medicare provider reimbursement increases effective in the fourth quarter of 2008.
Now let me turn it back to Dale for some closing remarks before we open up the calls for questions.
Dale B. Wolf - President and Chief Executive Officer
We'll be opening up for questions in a moment. Before we do that I want to speak specifically to our decision not to provide '09 guidance at this time. I made that decision and actually it wasn't a difficult one.
The current economic environment is unprecedented and weeks can produce quantum change in outlook including for interest rates. And when you add to that our desire to have even a higher comfort level than usual in our next set of guidance waiting to see another two or three months of actual results and get some color on the Medicare selling season. It seemed the obvious choice. So as we move into the Q&A we will try to be helpful about business directions but we will be very unhelpful on specifics directly or indirectly about 2009.
The financial underpinnings of our company are exceptionally strong. Shawn has taken you through our clean balance sheet and we will have EBITDA in excess of $800 million this year. We believe the strategic position of our various business lines is unparallel and see multiple growth opportunities for our company. Please remember these things, as you now understandably focus on current results.
Those results this year have clearly been impacted by the world around us. I think we all understand that, but make no mistake, we also understand that our performance has been somewhere between disappointing and lousy. And we don't take that lightly.
If there is one thing the last 10 years has demonstrated, I would hope it is that we know how to improve operating margins. We have already initiated, as Shawn has outlined, many activities toward that end and the entire company will be focused on restoring those operating margins in the months ahead.
We will now open the call for questions, operator.
Question And Answer
Operator
Yes, sir. The question-and-answer session will be conducted electronically. [Operator Instructions]. We will take our first question from Carl McDonald with Oppenheimer.
Carl McDonald - Oppenheimer & Co.
Thanks. I'd be interested in your commentary about how the 2009 repricing is going. As you mentioned, you are targeting at the 150 basis point miss. Do you feel like you are getting that in the renewal pricing and any comments you have on anything that's changed over the last month or so because of the economy in those negotiations?
Dale B. Wolf - President and Chief Executive Officer
Carl, I think that I am going to give you an answer of mostly it's too soon to know exactly. There's no question, we will get it. The only question is what happens to volume and it is just too early to tell. When you think about the timing of this, while we did put a little bit of this sort in March that would have begun to be felt as Shawn mentioned before at the fourth quarter. This is not going to take hold very much of all except in 2009. So it's too early to tell how much impact this will have in the marketplace. But we will get the price.
Carl McDonald - Oppenheimer & Co.
And then just to, anything related to the economy in terms of the commentary do you see greater pushback from employers or more focus on cost sharing?
Dale B. Wolf - President and Chief Executive Officer
Yes. I think the answer to both of those is yes. But I don't think that's new particularly. I mean it's a competitive business. Employers have been pushing back for years. It would be indiscernible whether the pushback was higher or lower than it was three months ago and six months ago and 12 months ago. It's a seriously competitive business with pushback from the customers and negotiation around rate increases. And certainly to your second point, buy downs, call them what you want, whatever form they take have been a feature in the landscape for several years and continue to be and will continue to be.
Carl McDonald - Oppenheimer & Co.
Thank you.
Operator
We will now take our next question from Tom Carroll with Stifel Nicolaus.
Thomas Carroll - Stifel Nicolaus & Company, Inc
Good evening, gentlemen. I guess, just a couple of quick things and just to follow-up on Carl's question. Would you suggest that the Medicare bids for 2009 are your biggest concern, as you would contemplate next year's numbers?
And then secondly could you comment on why the Medicaid enrollment fell so much sequentially?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
The second one is related to something we I think disclosed as early as March of this year which is the loss of the Pennsylvania Behavioral Healthcare contract, which, in essence, was a capitated deal.
Thomas Carroll - Stifel Nicolaus & Company, Inc
Yes. Got you.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
And so that was expected. Yes, I guess I would answer your question that it is certainly, if it's not the top, it's the top two, in terms of thinking about next year that we are going to be working over the next couple of months. And that to Dale's point about the economic environment that spoke a volume question about sort of the sale season as well as sort of a margin question about all of the different things that has gone on this year and what that means for next year.
Thomas Carroll - Stifel Nicolaus & Company, Inc
What's bigger in your mind, the volume or the margin side?
Dale B. Wolf - President and Chief Executive Officer
In terms of leverage on EPS?
Thomas Carroll - Stifel Nicolaus & Company, Inc
Yes.
Dale B. Wolf - President and Chief Executive Officer
It's the margin. It's the de-rated rate, easily.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Easily.
Thomas Carroll - Stifel Nicolaus & Company, Inc
Thanks.
Operator
We'll take our next question from Matthew Borsch with Goldman Sachs.
Matthew Borsch - Goldman Sachs
Yes, thank you. I am just trying to understand your prospective now on what you are seeing in terms of medical cost. Trying to realize the 9% plus or minus 50 basis points hasn't changed per se from what you were seeing earlier on the commercial side. Although, there was some hope that maybe that would improve. If you look at it now when you had more chance to examine that, it seems to be sluggish volumes from healthcare product and provider companies overall and you juxtapose out on the elevated view of trend.
Do you have a sense whether, are you being selected again, how much of this is pricing perhaps and to the extent you have reached out to outside actuaries do they have a view of what we know. An industry trend that is similar or different from what you are experiencing?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I'll only take a couple of those. What we have tried to do and tried to do in particular in the third quarter is really peace out some of the differential elements between selection, pricing and the core trend. And so the 150, it is really what we would identify sort of the core trend.
And while I recognize that we are on the high end at least vis-à-vis some of the recent commentary from our peers. I don't know that we are that much of an outlier at times plus or minus fifty because I heard eight plus or minus fifty, 8.5 plus or minus fifty. And so again, I acknowledge that we are at the high end of that range but not that far for an outlier.
Honestly, I can not explain totally your questions about the healthcare system. I would tell you that in different conversations that various people have with providers, they would clearly talk about volume weakness in patient, but you would also hear a lot about maybe a better volume than expected and in outpatient from some of them. And again, this is also just a matter of degree.
In this year, we were getting relatively low yields, what might appear to the provider as being less than expected, well if it's a point or two, three too high. That's a problem for us. So again is that, I can explain sort of that by economy. I can tell you that again going through the results, where we see this pressure is the same as it is in facilities and to the point of your question, it is not in in-patient utilization. But it clearly is on the unit cost side and on the outpatient side more broadly.
Matthew Borsch - Goldman Sachs
And if I could just ask one more on the question of share repurchase and it seems like you suspended share repurchase almost right after your second quarter conference call, because you bought back the 3.1 million for the quarter already by then. But you have said you had an intention to fully deploy the balance of remaining share repurchase or something like that. I'm just wondering was there a growing awareness over the course of the quarter that there was going to be more of a problem and how does that tie into your decision to suspend share repurchase?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
No, I will ask Dale to deal with it. I mean I think a quarter ago, we might have said we had another $100 million and that was going to be in the fourth quarter. So we basically fully deployed the cash through an accelerated repurchase and in fact if you look at the cash flow statement, you can see we went in and out of our revolver to sort of fund that at the beginning of the quarter.
And so that was really what we had capacity to do for the current quarter and obviously with the changing sort of macroeconomic conditions, I would say today, we've taken a bit more of a wait and see approach on this issue. But what we did in the quarter was largely what we planned to do on the quarter and I think your commentary about fully deploying it had more to do with our intentions at that point for the rest of the year as opposed to the balance of the third quarter.
Matthew Borsch - Goldman Sachs
I got it. Okay, thank you.
Operator
We'll take our next question from Josh Raskin with Barclays Capital.
Joshua Raskin - Barclays Capital
All right, thanks. Good afternoon. Questions, I guess kind of figure out on the commercial book here, looks like you guys are attributing about $0.30 for the change in guidance which I guess is really just the second half to sort of like a $0.60 annualized change to the full year in the commercial group risk MLR. But, it sounds like there's no change in the cost trend outlook. There is no negative development and there are claims... sounds like you guys are getting the pricing as you say. So what exactly is causing the commercial short fall?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
So if it is laid out I think and I will go through a little bit but it is laid out I think fairly clearly in the pricing release, which is we... there's two things I think one is, on the side it's just sort of how Vista has performed this year compared to our original expectations and you sort of have both the annualization effect of that and then, a higher outcome there. But there's second way that sort of detail reviews as really will then cover some pricing and underwriting related strength and those are the drivers of that change.
Joshua Raskin - Barclays Capital
When you say this is not performing, is it fair to say the cost trends were higher? If you are talking about just a gross margin here and MLR I guess, I am just not understanding.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, that's part of it. I mean, that's part of the majority of it.
Joshua Raskin - Barclays Capital
Okay. So this day, you actually are seeing higher cost today than you thought three months ago?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Correct. Our outlook on that is higher today.
Joshua Raskin - Barclays Capital
Okay. And then on the underwriting I got the other part of it. I guess just a second question, just how do I think about, what is the run-rate, what is your real run-rate 2008 EPS number understanding you are not going to give a '09 number here?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Well, I mean, or it's most simple core, add the $0.15 back of investment losses and as we sort of talked about very broadly, we've had $50 million of prior period on Private Fee which we don't expect to recur. But we have also had a lot of SG&A relief this year on no incentive compensation expense that is roughly sort of offsetting that. So in sort of very loose terms, there's a sort of the added period plus or minuses at the highest level.
Joshua Raskin - Barclays Capital
Okay. And then I remember in the first half, there were some small realized gains as well since we take that out or?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes. I suppose you are correct. I mean, that stuff sort of pops up and down from quarter-to-quarter. So to be honest, that I don't recall that being that material of an issue but I'd have to go back and look at it.
Dale B. Wolf - President and Chief Executive Officer
But you have $0.02 to carry on the line that we drew in the fourth quarter. So I think you could probably assume that stuff washes, Josh.
Joshua Raskin - Barclays Capital
Got you. So 270 if we assume the same interest rate environment or something like that. Assuming that was normal. So 270 kind of where you are thinking '08 would be, and I know you are not giving guidance but it is fair to say you would expect improvement in '09 based on some improvement in the pricing actions etcetera?
Dale B. Wolf - President and Chief Executive Officer
In terms of that specific question, that's one of my category. We are not going to answer it directly or indirectly.
Joshua Raskin - Barclays Capital
Okay.
Dale B. Wolf - President and Chief Executive Officer
I do think however there is a piece of information just because I know you guys will be building off anyway. You ought to know which is we will have some ramped up spending next year to continue to ready our markets' networks for the Private Fee-for-Service network business. Now we could debate it and will at sometime in the future. How much of that is one-time versus continuing. But there will be some not in significant SG&A. I think we've actually shared that overtime and we've been refining the number and stuff. But it's not an insignificant number. And so its only relevant when we get into actual '09 numbers but I just did... I want it later on tables you guys didn't miss it.
Joshua Raskin - Barclays Capital
Okay, thanks.
Operator
We'll take our next question with Scott Fidel with Deutsche Bank.
Scott Fidel - Deutsche Bank Securities
Thanks. First question just if you can give us an update on your capital position at the end of the quarter. What your total capital was? Your cap to subs and then where your capital is running relative to minimum risk based capital requirements?
Dale B. Wolf - President and Chief Executive Officer
I think the best way and you can correct me if I'm wrong because I mean if we were looking at this recently is I would anticipate that by year-end which is typically our measurement points for this. We would be in the high 300s in term of RBC [ph].
Scott Fidel - Deutsche Bank Securities
Thanks. And then on the richer premium Private Fee-for-Service product that you referenced, can you actually spike out what the exact membership that is enrolled in that product?
Dale B. Wolf - President and Chief Executive Officer
Yes, as of September 30th, its in the... it's been in the 30, it's about 40,000 members just to here under that.
Scott Fidel - Deutsche Bank Securities
Okay, then also on the FEHB, on the FEHBA [ph], the slice accounts, how much commercial HMO business do you have enrolled in those FEHBA slice accounts?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
It is about 4.5% of our commercial revenue.
Scott Fidel - Deutsche Bank Securities
Okay. And then just have a follow-up question. Just around cost of sales. Looks like that was up around 13% sequentially, sort of run rating at $54 million. Can you talk about what sequentially maybe drove those costs up and is that sort of the new run-rate we should think about for the 4Q?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, I think that's right. There were some eyeball, sort of our projection for... yes, that is really been really driven because one of the aspects that is actually growing strongly in the workers comp business and our specialty division is the PBM there. And so as we talk about before that cost of sales is really the PBM claim expense that is going through there and is that a good run-rate?
Dale B. Wolf - President and Chief Executive Officer
Yes, Scott. It should be in the zone for Q4 as well.
Scott Fidel - Deutsche Bank Securities
Okay. And just thinking about the workers comp business, I know you guys are non-risk in that business. But I guess, just interested in sort of if you have seen any changes in the claims volume or sort of experience in that business relative to the changes in the border economy?
Dale B. Wolf - President and Chief Executive Officer
Yes, absolutely. I think we highlighted some of this on the last call. But clearly, all year we have seen as bigger drop in claim volumes as ever happened in this industry. And it has been a relative to our original expectations for the year. It has been by far than most significant shortfall in that business relative to our expectations because it impacts of our bill review volume, our network savings volume, and then some of our product line volumes as well. The business is still growing significantly, but this has been sort of one of the short falls, in fact the significant shortfall in that business.
Scott Fidel - Deutsche Bank Securities
Thank you.
Operator
We will go next to Justin Lake with UBS.
Justin Lake - UBS
Thanks. Few questions. First just the, then if you think about the eventual wisdom in the group has been that, you normally get the bad news and take your hands around issues by the second quarter. Given that it's hoping for September, October to realize what was going on with some of these, with the Medicare and negative selections versus the FEHB slice etcetera. What is that, I mean, can you give us a perspective on what you think that might say about the industry or the company's ability to pick this stuff off as far as why it took so long and you believe was anything special about what happens here versus historically?
Dale B. Wolf - President and Chief Executive Officer
I think, you are over thinking this Justin. I think that the factors that led to a real and perceived issues in the second quarter, I just... it's like apples and oranges, compared to some of the issues here without boring you with the details, you take Private Fee-for-Service for instance. Being a brand new product in 2007 and the time it took in evolving experience and stuff. It's sort of unprecedented in this business and just you can't compare it and contrast it with the others. So I wouldn't over think that.
Justin Lake - UBS
Okay. But is there any reason that specifically here it took this long to realize that you have been negatively selected in selling these businesses? What it takes till October rather than seeing the claims start coming through by June - July?
Dale B. Wolf - President and Chief Executive Officer
The negative selection is just a one piece on the, more on the Fed business.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, I just wanted to be clear on that, if that's really just a Fed business and again it's looking at the data now. So it's sort of the benefit and sort of additional completion. I mean needless to say, when if there is any benefit to experiences like these, if you look back and say what did you see one and how did you look at it. So things always seem clear in hindsight.
But I can tell you these on Private Fee the difficulty in not having claim experience and some of the issues we went through the first half of the year made it very difficult to sort of see some of these things emerging. For example, obviously, we saw some stuff on the richer Private Fee product because we did make some premium and benefit design changes going into 2009. So it's not like it wasn't totally there it just had not sort of manifested itself to the degree that we can see that now with complete data.
Justin Lake - UBS
Okay. Are you saying that, that 40,000 members net richer premium product, you don't feel like you were negatively selected?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I can tell you that.
Justin Lake - UBS
I was talking the FEHB and the richer premium product.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, it's sort of August down to--
Justin Lake - UBS
You think that was a benefit design issue or was that a selection issue?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
It's hard to define that it is selection. It does have a higher average risk than our other products and if you wanted to use that as your marker, then we'd answer the question yes. Depend again we get paid for the higher risk score. So again it's a matter of sort of how you define it. I don't think it's entirely crazy to sort of say at least a piece of it might be attributable for that.
Justin Lake - UBS
Okay. And thinking about that on the Medicare businesses is my second question which is just, when you look what happened over the last few years since Part D came into effect and with the growth in Private Fee-for-Service, it certainly feels like there is... I don't know if it's negative selection or if it's just the fact that you always want to put these benefit designs out once and really kind of, the key months before they go out of effect but with given how many companies have had issues in Medicare, everyone focuses on the rates and the political risks.
But thinking about just the number of execution or negative selection issues there's been, not just to obtain commentary but throughout the industry. Did it force you to take a step back and kind of review your Medicare strategy and maybe how much of the earnings base of the company you want behind this given, you know the volatility here?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Well again I don't can touch on sort of the proportionality. I would say that part of the answer to your question is yes and no. I would tell you that what we see happening in Part D and we see happening here in Private Fee-for-Service in some ways has been a true as in this business for a long time. But the relative performance of the richer higher premium products tend to be worse and the performance of the lean design low premium products tend to be the best. And so in many way, they don't view that as a very different dynamic than we've experienced in this business for a long time.
Dale B. Wolf - President and Chief Executive Officer
I think on the other part of the question Justin, I mean while we would like these results to be totally predictable and consistent from quarter-to-quarter unless that doesn't generally work like that but the real measure of the viability and the attractiveness of this business is not the quarter-to-quarter measure of it but it's the two, three year prospects for profitability and return on capital.
And I can assure you that any of these Medicare products passed that test with flying colors to date. Having said that, we are... this isn't new for us. We have talked about self limiting proportions of our company's business in the Medicare business and obviously, with a competitive bid Part D is a little different from the MA business where you sort of get handed premiums and stuff.
But conceptually, we absolutely ascribe to that. I believe that somewhere in the neighborhood of a third is how we describe that for a long, long time and we haven't changed our view on it. But it's not really as much impacted by quarter-to-quarter fluctuations and it is sort of the political and reimbursement risk.
Justin Lake - UBS
Okay, that's helpful. If I could just follow up on Scott's question just ask you three numbers, you've identified the percentage of commercial coming from slice and I think you slice, can you just give us the other trend numbers of Vista and the two issued the plans with issues where that come with proportion of your commercial revenues were coming from there?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Vista is a 11% of our commercial revenue this year and the two plans and question are 27% of our commercial revenue.
Operator
We will take our next question from Ana Gupte with Sanford Bernstein.
Ana Gupte - Sanford C. Bernstein & Co
Hi, thanks. Good evening. Wanted to like to get some color on the actions you're taking to address core medical cost trend issues particularly related to the severity spikes. I was wondering if there are opportunities to renegotiate your contracts with the facilities around carve out or stop loss provisions?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
No, that's exactly what is going on. I mean, unfortunately as you tear apart every plan there are very few sort of easy answers that summarize everything sort of across country, that sort of exposure to sort of carve outs of all kind is something that we fit sort of at the top of the list and we were... we have initiatives underway to deal with that better prospectively. But at the same time or sort of going through those claims and making sure that they are thoroughly reviewed in that what we are paying for those carve outs is reasonable.
So there are a number of things that we've identified on the contracting front. The provider audit contact that we will go through it as well. So, it really is all across the board and it's looking at our utilization management procedures again and making sure that they we're not missing anything there. But relative it's been also goes to sort of how can we contract better going forward and prevent this from happening again.
Ana Gupte - Sanford C. Bernstein & Co
On the outpatient side, you were planning to address this mainly through benefit designs and medical management?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
There will be some things in contracting that we look at as well. Not surprisingly, we have more exposure to build charges in our outpatient reimbursement formulas. And so that's something obviously that we'll be trying to tighten up over time. There's talk about sort of how we pay for some of these more specialized oncology drugs which run through there that will be something that's high up on the lost and in addition I don't' think benefit plan design will be a big part of this, but we'll also think through UM as well.
Dale B. Wolf - President and Chief Executive Officer
And I just want to add a context to this. Not unlike everything that will be part of this exercise. When we start looking at our contracts, we're not going to find from them materially broken. We have worked on implants for a long time, we have worked on stop loss provisions, we've worked on outliers within outpatient and so on, and so forth.
But when you are going through this kind of an exercise, you go back and re-look at everything. And at the same time, while we won't find them sort of materially broken we also won't find them perfect which is to Shawn's point and there will be opportunities, more or less by plan, more or less by contract, to tighten some things up and we'll take advantage of more we can find them.
Ana Gupte - Sanford C. Bernstein & Co
Okay, thanks. It's very helpful.
Operator
We'll next take our question from Gregory Nersessian with Credit Suisse.
Gregory Nersessian - Credit Suisse
Hi. Thanks for taking my question. Just a follow-up on that last question. Could you just address I think you mentioned the outpatient utilization as a driver on the Private Fee-for-Service side. Could you just maybe parse out what specific areas within outpatient you saw higher utilization?
And then I guess it sounds like you are not completely confident that your benefit design for '09 are going to capture those higher cost and obviously that how much you would doing on the provider networking side there. So what other action or what other alternatives do you have to try to improve the margins on Private Fee-for-Service next year?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, I mean as you know Greg. I mean it is fairly pervasive across the outpatient spectrum, and as you know we're sort of benefit plan design and that's in place and we just again to Dale's point, we're not going to give guidance, but one of the things we're going to look at is sort of how much that would bias. But obviously it is an unmanaged product. So your ability to sort of manage medical expense when your unit cost is already fixed and you really are not able to do much in the medical management arena is pretty limited.
Gregory Nersessian - Credit Suisse
Okay thanks. And then just in the commercial. The two health plans that you highlighted, was there anything as you look back over the course of the year I mean is there anything that's changed in terms of the competitive dynamics in those markets or is just would characterize more as a self inflicted kind of underwriting issue?
Dale B. Wolf - President and Chief Executive Officer
Shawn can add to this. I would say that there are always changing dynamics in every one of our markets. I would say one of those plans that we're not going to identify, which plans they are, but one of those plans has been more or less more stable than the other. But the other market arguably is getting a little better, but it's irrelevant. The lion's share of that was self-inflicted in those two plans and therefore will be self corrected.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
And I wanted to on that Greg, I would characterize it as sort of unintentionally self-inflicted. And what I mean by that is, again with the benefit of hindsight, we try to understand how was this decision made and who did what when. And it's not like, we had sort of people who will renegade doing things.
So we had kind of good people who have a good track record, who made a decision and expected a certain outcome and got a different outcome than they expect it as a result of that. And again, you can be a Monday morning quarterback about that after the fact. But, it was a conscious decision making that lead to it and unfortunately, it had an undesired result.
Gregory Nersessian - Credit Suisse
Okay, great. Thank you.
Operator
We will go next to Charles Boorady with Citi.
Charles Boorady - Citigroup
Hi, thanks. Can you explain the 5.3 day increase in days claims payable and how much of that was due to an increase in the IBNR?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, it's actually all of it. You recall last quarter, I actually commented that the number looked funny. In fact, that it had gone down a day and there were some funny things happening with Pennsylvania last quarter. But I had also indicated that the unfavorable development had masked that number on Private Fee and that we actually expected that it would increase. And indeed it has. So that number is up about five days. Three days of that are attributable to Private Fee-for-service. The other two days are attributable to our health plan business.
Charles Boorady - Citigroup
Got it. And to what extent is any of that an adjustment for previous years?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Actually, we had very slight favorable development to prior years, just even not inconsistent at this stage of the year is what we expected and there was no unfavorable development to prior years at all.
Charles Boorady - Citigroup
Is it a sizeable increase in IBNR. I am sure you are aware of--?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Well Charles, keep in mind too that we're growing. We continue to grow on Private Fee. We now have sort of the Pennsylvania account building up in the reserves. And as I mentioned, last quarter we did add a lot sort of here medically to the reserve balance, but with the prior period expense and everything, it's sort of masked this DCP.
So I don't have in front of me, but I think when we took these things out. We thought the number last quarter, might have been up a day or so. So maybe a better way to think about is it might be up more on a normalized basis four days.
Charles Boorady - Citigroup
Yes. Still a pretty big jump up. Does this reflect the change in your expected growth going forward? Is this building IBNR for your expected growth in '09 or do we think about this is all, being related to '08? Another way to ask the question, if you were going to restate '08 what would '08 look like excluding unusual items including IBNR builds?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
This is all related to sort of '08 current period expense so, I don't view that as being extraordinary. I think, we hit this question before that the simplest answer is to take our full year EPS, that's the $0.15 back for investment. And the $50 million of Private Fee restatement probably washes with some SG&A benefit we got on incentive costs. And that would probably be your straighter shot at sort of restated for the year.
Charles Boorady - Citigroup
Got it. So the $2.55 plus $0.15. So $2.70 is where you would call a pretty clean 2008 run-rate?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, I think right.
Charles Boorady - Citigroup
In terms of the jumping off point without actually guiding for '09?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Correct.
Charles Boorady - Citigroup
And then in terms of Vista, the disappointment there. To what extent could that have been accounted for differently, like as an adjustment to the purchase price versus the way you are accounting for. Can you be more specific about why it was off versus what you expected when you struck the deal?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I don't think we have any alternative accounting treatment that we could take it's very great expense it's not prior period expense. In fact we were largely insulated from that in the way we did the deal. At the end of the day, it's manifesting itself on a higher loss ratio. We expected the majority of which is in higher medical cost trend than expected. There's some, probably a little bit of volume in there and a little bit of sort of the revenue yield that we had a year ago.
Dale B. Wolf - President and Chief Executive Officer
And the only thing I would add to that Charles is do not be mislead, it is still a nicely profitable health plan. Just not as quite as profitable as we thought it was going to be.
Charles Boorady - Citigroup
The hesitation on guiding for 2009 irrespective coming from. I just wonder, at what point will you have had enough time to assess your Medicare offering versus the competition and size up the extent to which you might expect to see positive selection buyers or negative selection buyers in your Part D and Medicare advantage plans for '09? Is that a one month process or--?
Dale B. Wolf - President and Chief Executive Officer
Yes, I think Charles, I think we indicated that we would plan to issue full year 2009 guidance as we typically have no later than the Investor Conference on the West Coast, the second full week in January. Whether there is pieces that we are on volume, I don't think any loss ratio or cost stuff would be out before that. Whether there is pieces on volume or not, it started to come out or not, I am not sure. But we won't be going to any sort of loss ratio selection stuff before we issue the full guidance.
Charles Boorady - Citigroup
Yes, but is that still enough time for you when you give that guidance to make that assessment, I think to Justin's point earlier. It seems it's like really a long time to establish some of those issues this year. Has anything changed in terms of what you learned in your ability to predict and have you relied on outside help from Reden & Anders or Milliman or others that actuarial experts to help you make better predictions about '09 going forward?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Charles, I can tell you, we have used Reden & Anders as long as I have been here for 10 years as a second opinion on virtually everything we have done in Medicare.
Dale B. Wolf - President and Chief Executive Officer
So that's not going to change.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
No, it's not going to change.
Charles Boorady - Citigroup
Yes, so they missed it too in other words?
Dale B. Wolf - President and Chief Executive Officer
I think we're not sure how to answer your question, Charles. We will have a pretty good handle on volume for each of those products. We will be very circumspect about the enrolment and risk scores and changes in that relative to each of those products. And we will have had the benefit of hindsight to help us with that. But beyond that, it is not a perfect science and we will take our best shot or close to our best shot.
Operator
We will take our next question from John Rex with JPMorgan.
John Rex - JPMorgan
Thanks. Just on the commercial business, excuse me. I know back in March when this all started, you said it would take sometime to show up in the yield, in the fact that you are going for higher pricing. But I am looking at the yield in 3Q that's really kind of the same as I saw in 1Q about 4.6%. And I guess I wasn't expecting much. But I have seen nothing. I am just wondering why aren't we seeing any impact at all from the pricing actions. Admittedly, it shouldn't be much but literally nothing as we get to the 3Q?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Again, it's very minimal what you would expect to see in the third quarter. I mean, the first push goes is march, we virtually missed all of our July large group business and even some of our July small group business. So you are just talking about, I think you are making too fine a cut on that. And again does it vary in the fourth quarter we only have about 15% of the business renewing. So it will again be a small piece. It really should be more present in Q1 '09.
John Rex - JPMorgan
In what percent renewed in 3Q?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
It's probably 20%, but again we probably missed the majority of that because what makes that 20, is a lot of large group that goes on 7.1 that we missed.
Dale B. Wolf - President and Chief Executive Officer
And don't forget John in terms of this price push, there were two components of it, one was in March was the smaller of it. Sort of maybe a third of it or something. And the one that was two thirds of it we didn't even start until June or July.
John Rex - JPMorgan
So I mean should we be expecting the yield adjust between 4Q also should be completely installed with where they were back in 1Q this year that probably the better way we think of it. Really, instead of minimal impact, zero impact in '08 starts seeing rolling in '09, is that probably a better way to think about it?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I think that is just a better way to think about it. But one thing I would alert you to is, part of... we talked about this before, part of what you have seen through the first three quarters is the yield increases, we have been pushing which on an apples-to-apples had been more or like 3.5% and what you're seeing the 4.5% is actually Vista coming in which wasn't in the quarters last year. When we hit the fourth quarter, you will have Vista in both quarters so you actually may see on the income statement it may go down. That's just the mix issue.
John Rex - JPMorgan
Okay. And then, just back on the two health plans. Can you give us some more specific examples with this related to new product design, kind of some specific examples about where the misses were, kind from a practical level?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes. The way that started to appear is when we actually started to look at the performance of recently written new business. And so that is sort of where it manifests itself. I wouldn't really attribute this to sort of new product. And it could be a simple sort of having a geographic area of factor that was changed inappropriately in hindsight and ended up with too lower price.
Just sort of some of the more complicated things that had to do with how we were assessing medical risk on the front end and the credits that we were giving through that and/or how quickly we were loading up when we have some evidence of medical conditions. And some changes were made there that in essence gave more of a discount on the front end when we saw cleaner groups and so we wrote a lot of those groups and that's an example of what I talked about before at these groups.
They're still profitable, but they did not produce sort of first year new business loss ratios consistent either with our forecast or consistent with the history in these plans. So that is where the nature of sort of the issues, but that were uncovered in those plans.
John Rex - JPMorgan
So not new products, but new business or new accounts essentially?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Yes, it is more of a new business issue and then that's a big piece of it. There where some other renewing business issues as well.
John Rex - JPMorgan
Can you help me with it, the thing you said first about a geographic area was changed or... what does that mean?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Without getting into the bowels of rating, you might have rating for a given state and if you know you are in region A, you'll load the rate five. If you're in region B, you'll take it down 0.95. Again, if somebody thinks that 0.90 is a better answer for that and that turns out to be incorrect it has an undesirable effect.
John Rex - JPMorgan
Okay. And then so just to reiterate your view on trend and the components to trend if unchanged, from what you did several months ago. You are saying in terms of underlying trend, is that correct?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
That's correct.
John Rex - JPMorgan
Okay. And then just last on the workers comp business, what had that workers comp... I know you didn't own it in the last two session, but what had that workers comp business do in last two session? I asked this because sometimes on the insurance side of the business, you were actually about deteriorating loss ratios, during rising unemployment and that would seem to employ that you actually see some higher volumes?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Not again John. That is true that's the conventional wisdom. That is something we were sort of crossing our fingers and hoping would happen and we never really take into our guidance very much. But that does not only happen but volumes are declining. And it's pure speculation. But I suspect this has more to do with sort of the composition of the workforce in this country, than it does with some of the historic, reactions that we've seen. But we are clearly not seeing that so far.
John Rex - JPMorgan
I mean, could you be losing share?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I do not think that's... I think that's unlikely.
John Rex - JPMorgan
Okay, okay. And then did you take a look back and see how that that first health book [indiscernible] in the last two session.
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
I did not do that. No.
John Rex - JPMorgan
Okay. Okay, great. Thank you.
Operator
[Operator Instructions]. We will now go next to Doug Simpson with Merrill Lynch.
Doug Simpson - Merrill Lynch
Hi, one of my questions have been answered, but Dale I was wondering if we could ask you to step back a little bit and maybe talk about sort of the management level just below you guys and some of the changes that you have had recently in... do you think that's having any bearing unless just trying to get a read on what different this year that you're having these troubles and is that playing a role here?
Dale B. Wolf - President and Chief Executive Officer
As you might imagine, we are getting this specific to your question but what's different and why has some of these things showed up this year is a question I have asked myself many times in the last days and weeks. Like most things, there is no easy answer to it. I have... I can tell you what the questions are in my mind, a lot better than I could tell you what the answers to that are. You always have to ask yourself whether you as a company, in no particular order, are trying to do too many things. You have to ask yourself whether you have under resourced some critical areas. You have to ask yourself whether the quality of the folks in all your areas has kept up with the pace or growth of your business in the change of your business.
So I don't suspect that as we go through this ongoing process of developing and improvement plan that we will find a silver board and the answer to any of those questions. But I can assure you that sort of where I am thinking about this, Shawn does a terrific job of sort of articulating the financial wise. My job is to think about the cultural and business and company wise and I am doing that significantly.
I feel like over whatever months, years, whatever, we have made material upgrades in the quality of our management and in some cases the quantity of our management. I think we profess to wanting excess capacity in the management ranks. We've professed to First Health, if you, before go back that far sucking up the excess capacity we had in the ranks.
And we've made conscious decisions since then to try to recreate excess capacity. And so there's a long list of new folks, very capable new folks who have joined this company. I think, it's only added to the capability we have not detracted from it. But nonetheless I can't answer your question today except you should know that I am highly focused on that answer. And if and when we discover sort of one of those things that seems to bear a fruit we will fix it.
Doug Simpson - Merrill Lynch
Okay. And then just on hospital and patient pricing. How do you say pressure point, is there any change from last quarter? It sounds like in Pennsylvania, some of the hospitals are really trying to push their pretty big rate increases and can you just talk about that dynamic as well as that geography in particular?
Dale B. Wolf - President and Chief Executive Officer
Doug, I wouldn't have characterized particularly being sort of different in a quarter of time. It is certainly in an environment where there's a bid in and ask and I wouldn't say that it feels like their asks have been markedly higher certainly over the last quarter and nothing stands out of my mind on what I've seen in Pennsylvania.
Doug Simpson - Merrill Lynch
Okay. And then just, Dale, just your thoughts on to these issues that you've been having last two quarters make you rethink your position with Coventry as one of the smaller players in the industry. Do you think being part of a larger entity would have had any bearing on this or not really?
Dale B. Wolf - President and Chief Executive Officer
I think that... I don't know whether it doesn't matter whether it's the good news or bad news about this. But it has nothing to do with our position in the marketplaces. It has nothing to do with our sort of overall scale. It's all about individual market execution in some cases and in other cases, medical cost increases. But I've asked myself the same question. But our strategic positioning, our market and issues are really great. And I don't feel one bit worse about those than I did before. We just got to execute and get back the profit margins.
Doug Simpson - Merrill Lynch
Okay, thanks.
Operator
Our last question for the day comes from Brian Wright with Banc of America.
Brian Wright - Banc of America
Thanks. Can you talk about your plans going forward as far as paying down the credit facility and maybe the impact that would have on share repurchases going forward?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
Well then Brian, at this juncture, we have decided to hold the most recent draw which was $440 million through the end of the quarter and we will reassess that at the end of the quarter. And again as I mentioned, I don't want to get into '09 yet because the cash generated in '09 is a function to some extend of the earnings in '09. But in terms of share repurchase, again we at this juncture have sort of a wait and see attitudes for the given current economic climate.
Brian Wright - Banc of America
And this had any function of your current estimated capital level at the end of the year?
Shawn M. Guertin - Chief Financial Officer, Executive Vice President and Treasurer
No again, as I mentioned before, our prior guidance assume that we would have $100 million of free cash potentially available on the fourth quarter and that's... it was not a big number to begin with.
Brian Wright - Banc of America
Okay. Thank you.
Operator
And again we have no further questions. I will now like to turn the conference back over to management for any closing remarks.
Dale B. Wolf - President and Chief Executive Officer
Now that's all we have. Thank you for your attention this afternoon.
Operator
Ladies and gentlemen, that will conclude today's Coventry Health Care conference call. We appreciate your participation and we hope you have a wonderful day. .
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