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Universal American Corporation (NYSE:UAM)

Q4 2012 Earnings Call

February 20, 2013 08:30 am ET

Executives

Richard Barasch – Chief Executive Officer

Bob Waegelein – Co-President & Chief Financial Officer

Analysts

Sarah James – Wedbush Securities

Michael Baker – Raymond James

Scott Fidel – Deutsche Bank

Scott Green – Bank of America Merrill Lynch

Carl McDonald – Citigroup Global Markets

Operator

Greetings, and welcome to the Universal American Corp. Q4 2012 Conference Call. (Operator instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Barasch, Chairman and CEO for Universal American Corp. Thank you, Mr. Barasch, you may now begin.

Richard Barasch

Thank you and good morning, everyone. Thank you for joining us on our Q4 2012 conference call. I’m here with our CFO Bob Waegelein and I’d like to ask him to read our Safe Harbor language.

Bob Waegelein

Before we begin I would like to remind you that we have posted a presentation for this call in the Investor Relations section of our website at www.universalamerican.com.

I would also like to remind all participants that our call this morning may contain forward-looking statements within the meaning of the federal securities laws. These statements which reflect management’s current expectations, projections, and beliefs are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of these risks and uncertainties we recommend that you review the company’s “Risk Factors” and other disclosures set forth in our SEC filings. We undertake no obligation to update or revise any forward-looking statements to reflect events, developments, or circumstances after the date hereof.

During the call we will also be referring to certain non-GAAP financial measures. Please refer to the reconciliation tables listed in the press release for a discussion of these non-GAAP financial measures.

Richard Barasch

Thanks, Bob, I’ll be back to you in a few moments. Well, I had to rewrite my script over the weekend. A lot has changed since last Friday, and my guess is that most of the listeners on this call are not particularly interested in hearing my pontificate yet again about the changes in the healthcare landscape. So Bob and I will get through the basics and then turn to our plans for going forward, especially in the context of the 45-day notice.

I’m pretty sure that I will not be able to satisfy all of your questions but I will try to put it into context for our company. As you know, Universal American has been actively involved in Medicare for quite a while and we have been quite adept over time at keeping pace with what the legislative and regulatory environment permits and adapting our business accordingly. We expect this coming period to be no different. We feel very good about our decision to pursue ACOs as a complement to the Medicare Advantage program and we are now even exploring whether we should revive the Medicare Supplement business that we put into runoff a year or so ago.

We also feel good about our decision to get into Medicaid. Until last year we were only able to approach the Medicare opportunity but we are now actively pursuing the growing Medicaid market and in particular dual-eligibles and people who need long-term care and other assistance. The APS acquisition has proven to be more challenging than we had anticipated but we continue to believe that we will make some noise in Medicaid, certainly by 2014.

I’ll come back to our current business and new initiatives in a moment, but first let me turn it back to Bob who will describe our results for the quarter and for the full year 2012.

Bob Waegelein

Thank you, Richard. I would like to remind you that we’ve posted additional information regarding our operating results in the financial supplement that can be found on our website in the “Financial Reports” tab of our Investors section.

So looking at Slide 4 you will see for Q4 we reported after-tax net income of $15 million or $0.17 per share. Excluding investment gains, ACO startup costs, our investment in Stars and other special items our adjusted income was $14.1 million or $0.16 per share. Let’s turn to Slide 5 where a review of our full-year results will be more informative.

Our Medicare Advantage business had a solid year with gross profits before expenses of $338 million on $1.6 billion premium. After taking into account positive prior-year adjustments our restated MA medical benefits ratio for 2012 was 81.9% consistent with our expectations. As we look back at how 2011 has developed and the full-year results of 2012 we maintain our confidence in the actuarial and experience basis for our 2013 bids.

We have taken actions in our MA business to bring our expenses in line with the size of our business. Excluding expenses for Stars improvement, the expense ratio of 14.6% for 2012 is down from 15.4% in 2011. During Q4 we decided to increase spending in sales and marketing and medical management to improve our market position for the annual election period which caused our expense ratio to be higher than expected. We continue to evaluate opportunities to reduce the expense ratio further in the future, a task that remains a high priority.

The traditional business continued to perform well in 2012, earning $18.1 million with overall improved benefit and expense ratios from 2011 primarily in our Medicare Supplement business. Finally, our corporate segment also reported improvement from 2011 as a result of planned expense reductions offset by debt service costs relating to our acquisition. 2011 also contained certain nonrecurring restructuring expenses that totaled $41 million. As reflected in our earnings release we’re reporting the startup costs for ACOs in the corporate segment. On a year-to-date basis these costs amounted to $14.3 million after-tax which is reflected below the operating profit amount on Slide 5.

The operating results for APS are included in the corporate segment. For the ten months since the acquisition, we reported a small profit on $250 million in revenue. Our reported results were $53 million or $0.61 per share for full-year 2012. Excluding investment gains, ACOs’ startup costs, our investments in Stars and other special items as shown on this slide, our adjusted income was $59.5 million or $0.69 per share.

Moving to Page 6 we show the balance sheet. As of December we had $2.5 billion in total assets. After the payment of the special dividend in November we had $59 million in available holding company cash. When we exclude all our intangibles – acquisition costs, goodwill, and other intangible assets – we ended the quarter with a tangible booked value per share of $7.35 which reflects the effects of the special dividend. Finally, the total debt to capitalization ratio as of December was 14.9%, a level we believe still provides additional financial flexibility if needed. Richard?

Richard Barasch

Okay, thanks Bob. I think the most important takeaway from the financial slides is that even as we have invested heavily in our core MA business and entered into the ACO and Medicaid businesses we’re still making money and even had enough balance sheet strength to distribute a sizable dividend to our shareholders. As both an officer and shareholder of Universal American, I take a lot of comfort from the relative strength of our balance sheet especially as we might be entering a more turbulent period for our Medicare Advantage business.

I won’t go into the details on Slide 7 but suffice it to say that a revolution in healthcare is being driven by the fact that all of the ultimate payers of healthcare costs – the federal government, state governments, municipalities, companies and individuals – are looking to reduce these costs either because they’ve got severe fiscal problems or simply can no longer afford their health insurance. There’s one thing that the federal government, all 50 states and Puerto Rico have in common. They all have fiscal issues that are exacerbated by the increasing costs of Medicare and Medicaid. Every state is looking at ways to make Medicaid more efficient and more affordable, especially for long-term care patients and dual-eligibles.

The punch line here for Universal American is that companies who know how to partner effectively with providers and the government to control costs and improve the quality of healthcare are going to thrive in this environment. This will prove to be the case even more accurate if the MA rates come in as high as they are right now.

On Slide 8, our healthy collaboration model in which we work and risk share with primary care physicians will clearly become an increasingly important model of controlling costs and improving quality. We’ve been doing this very successfully for more than a decade in Texas and we’re now working to expand the model to our PPOs, especially in the Northeast. In addition, this is a core value proposition underlying our expansion into ACOs.

Aligning the financial incentives is important, but equally or more important is the intense collaboration enabled by technology and data which enhances the ability of primary care physicians to care for their patients. This is not an exercise of taking down hospital rates to 95% of Medicare or negotiating better specialist rates. This is a one-on-one, patient-by-patient exercise working with physicians to identify gaps in care to get these folks compliant and healthy so they stay healthy and out of high-cost facilities.

Moving now to Slides 9 and 10 which describe our business going into 2013, first we have a strong Medicare Advantage business. I recognize that the elephant in the MA room is the recent 45-day notice. Clearly the aggregate of what was already in the law, like the premium tax, reductions in benchmarks, and increased MA coding adjustment factors plus the unexpected negative revisions to fee-for-service cost trends combine to create a scenario that is significantly more challenging than we were anticipating. In addition we finally got some clarity about the rules for the 85% loss ratio.

I recognize that many of you will have questions about the specific effect on Universal American but I’m going to deflect those questions until we have the full picture including the possibility of CMS using its authority to change or revise the more onerous aspects of the 45-day notice prior to the publication of the final rule. In the interim I can assure you that we will look closely at all possible ways to address and mitigate the proposed reduction in rates. This will clearly force us to examine the viability of our MA product in several of our markets.

Risk management has historically been a strength for Universal American, and looking ahead only into 2013 we are very comfortable with our bids. 2014 will definitely present a new set of challenges to us. While we’ve had some success in reducing our core overhead we still have a way to go to reach our targets.

In 2012, we also recognized the need to invest in our MA business to build a solid foundation for the future. In particular we made a meaningful investment to improve our Stars ratings which means investing in quality and being vigilant on compliance. The first tangible benefit from our investment in Stars is our ratings improved in each of our core HMO markets and in the Northeast, another area of strength for us.

The revenue increase is important especially in light of the call letter, but the reduction of the rebate for the 2014 bid in the Southeast Texas HMOs is even more significant since our bid is still likely to be below the benchmark. This will be some ballast against the coming reduction in reimbursements and the premium tax which also starts next year. Having said that, we have work to do to first categorize the expenses that will properly go into the MBR calculation and then work to reduce the total amount of expanses which is beneficial in any scenario.

The final form on Slide 10 as we discussed before is that even after the $1.00 dividend we retained capital strength in our subsidiaries, liquidity in our holding company, and flexibility to manage our capital appropriately. We still have around $630 million of cash and capital of which $340 million is excess of the 350 RBC level and approximately $50 million of usable cash at the holding company even after the dividend. Since most of the excess capital is in the subs we’ll be as aggressive as possible in moving the capital up to the parent.

Turning to Slide 11, as we mentioned before we significantly ramped up our investment in sales and marketing for the current AEP with a good result. As we’ve reported, we saw notable membership growth in our core HMO markets as well as in the Northeast. I should also point out that our retention rates have been better than they’ve been in the past in these important markets.

Turning to Slide 12, when the Medicare Shared Savings program emerged from the 2010 Healthcare Reform Bill, we anticipated that the sort of techniques that we’ve used very successfully in Texas would also work for the ACOs. In the past year we’ve worked with many primary care groups to file applications to participate in the Medicare Shared Savings program including in our Texas markets and in several other markets outside of our MA footprint. We now have partnered in 31 active ACOs with more than 2000 doctors and approximately 320,000 Medicare beneficiaries.

Turning to Slide 13 we show a map of the locations of our 31 ACOs. As you can see, some of the ACOs are located in areas that overlap with our existing MA footprint and others are located in new areas giving us potential opportunities to expand these relationships in the future with different products and services. We’re delighted to be in partnership with such a diverse and high-quality group of providers and we’re committed to making the investments necessary to make this program successful.

Turning to Slide 14, the financial opportunity is pretty straightforward. If we and our physician partners are able to achieve savings over the trended benchmark while demonstrating appropriate quality, the ACOs will split those savings with the government and we will participate in the profits of the ACOs. In order to achieve these goals we’ll employ the same techniques that have worked so well in our Medicare HMOs. We’ll help the physicians identify and care for their high-risk patients and we’ll help them identify and fill in gaps in care, especially in situations that occur outside of the office.

I must repeat, however, that this slide is illustrative just to show how the math works – not as a stealth way of indicating projections. Among the nice things about ACOs as compared to Medicare Advantage is that there are no sales expenses, no marketing expenses, and no claims [paying] issues. This is just an exercise in partnering with primary care docs to provide appropriate care management to reduce costs while maintaining or improving quality.

We think the results will start to become apparent toward the end of this year. CMS has been incredibly cooperative about this but we’re still struggling to get all the data we need to make an impact and measures our results. This will be a conversation that we’ll be having with our investors for the balance of the year until the contours of this become sharper.

Moving to Slide 15, while we’re excited about the future of Medicare Advantage and the ACOs we’re also enthusiastic about the compelling opportunities to pursue in the Medicaid space particularly around long-term care and dual-eligibles. These populations are very [different than TANF] and require a unique medical management capability that we believe we possess.

Through our strong balance sheet, risk management expertise and complex care skills we believe that we are well participated in this larger opportunity from a variety of angles including direct-to-state through RFPs, providing services to states and to health plans, capital and risk sharing to incumbent health plans, and working directly with provider groups.

We’re particularly proud of the work we do in Puerto Rico where we provide behavioral health coverage to approximately 1.4 million Medicaid beneficiaries. We’ve been impressed by the quality of the workforce in Puerto Rico as well as the pro-business environment created by the administration and we’re actively looking for opportunities to expand and expand our workforce on the island.

Finally, moving to Slide 16 we think that we are particularly well positioned to participate in the several high-growth areas of healthcare. Starting with MA where we have a solid profitable footprint, I think this will persist no matter how the 45-day letter finally comes through. Medicare Advantage now has 25% penetration and is growing. It has been growing through 2013 and we’ll see what happens in 2014.

Even despite the 45-day letter, if ideas like premium support or defined contributions catch on as part of a grand bargain we think this growth can accelerate. However, 75% of the Medicare population is not on Medicare Advantage and this is where the ACOs come in. We think our experience in creating successful risk sharing arrangements with primary care physicians to improve quality and lower costs positions us well for this new program.

Moving across the spectrum to dual-eligibles, which is the intersection of Medicare and Medicaid, we know that the area is large and important. We’ve now got the expertise in Medicare, Medicaid, and complex case management so we can approach these opportunities on a fee for service or capitated basis. Finally there are the exchanges and right now for us that’s still TBD although we’re looking quite carefully at it. While I can’t predict how this will shake out we have risk management expertise, licenses, capital and no incumbency.

Medicare Advantage has been and I believe it will continue to be a core business for Universal American. However, since the ACA was passed in 2010 and especially after we stole the Part D business in 2011, we’ve been acutely aware of the need to diversify our earnings away from Medicare Advantage only. This was a large part of the reason to build an ACO business and to enter the Medicaid business. By 2014 it’s our goal to have three vibrant businesses – Medicare Advantage, ACOs, and Medicaid services and risk.

Universal American has a successful history of demonstrating how the private sector can participate constructively in this type of evolving and growing market. Over the next several years we see an increasing number of prospects to do what we have done best – partner with provider groups and the government to help them analyze, manage and assume risk with the goal of providing measurably better care and controlling unnecessary costs.

Finally, I’d like to point out that we are not providing guidance for 2013. We’re pretty confident that we will have another good year in Medicare Advantage especially given the growth in our core markets, and we expect the runoff of traditional to continue to be positive. However, there are several uncertainties and they impact our numbers now exacerbated by the need to address the issues in the 45-day letter assuming many or most of them become final.

The biggest predictive issue we now face is if, how, and when we start reporting the numbers on the ACOs. This is a new business with complex revenue recognition issues that have not been finally resolved. We do believe, however, that we will see revenues from this program in 2013. We also commit to continue our practice of being as transparent as possible when we report our numbers.

Thank you for your time this morning. Bob and I will be happy to answer your questions although I have to kind of be a little bit warning again – I know you’re going to have a lot of specific questions about the 45-day notice and its effect on us but it’s going to be very hard to answer these questions until we see what the final results are and have a full opportunity to analyze them for our company. So thanks, and Bob and I will do the best we can to answer the questions that you’ve got for us.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator instructions.) Thank you. Our first question is from the line of Sarah James with Wedbush Securities. Please proceed with your question.

Sarah James – Wedbush Securities

Thank you. I understand you don’t want to talk about ’14 in particular, but maybe if we can take a step back and take a look at your long-term view of your business. Richard, in the prepared remarks you talked about reevaluating your business model and mix in response to the advanced notice by reviving your Med. Sup. business. Does that mean that you think the rate environment would be, or the harsher rate environment would be sustained or multi-year or there’s some sort of intent from CMS for there to be a harsher multi-year rate environment?

Richard Barasch

I think if you listen to what the Deputy Administrator said yesterday, CMS has expressed their support for the Medicare Advantage program. If I give you my personal opinion I don’t believe that this is sort of a stealth way to reduce the program; I think it was just a confluence of factors that came in 2014 that some of which were in the law and some of which came in some of the formulas that CMS uses. So I doubt that there’s an intent to hurt the program.

Having said that, there may be some unintended consequences of some of these actions and I think it’s pretty clear, and for not just us – we see the same data that everybody else does – that there are going to be some markets that at these rates, if they go the way they’re going it’s going to be very hard for Medicare Advantage to survive in some markets. So I think that sort of we have to see how this is all going to shake through but I think it’s an important factor.

What I meant to say is not that we were going to reevaluate our entire model because our model absolutely includes Medicare Advantage and will because we’re very convinced that it will be harder in some places but we’ll get through this and resume sort of the different revenue and reimbursement trends at some point later. So I think that it’s going to be sort of a market-by-market, company-by-company exercise, so that’s sort of the first question.

The second question is one of the things we as a company have to do is take what we’re given and do the best with it. Eight years ago we started a trend to move away from Medicare Supplement and we reduced it and stopped focusing on it. The trend may change now so the good news is that we’re experienced in that business, we’ve been in that business, we know it and it may be the time if Medicare Advantage becomes less attractive in some places to bring that business back out.

Sarah James – Wedbush Securities

Okay, that’s very helpful. My second question is you’ve been making sizable investments in bringing up Stars ratings and you talked about the return that you saw in your review last October. But I was wondering if you could talk about some of the improvements you’ve seen since last October, so if you look at where enrolment came in and some of the more recent improvements how do you view the Stars rating distribution.

Richard Barasch

We’re in the marking period, we’re going to get our results in here but obviously the kinds of things we look at, we look at the (inaudible) but a lot of things that we look at… I think the greatest, best report card that we get is where our retention rates are and they were quite a bit better this year than they’ve been in the past – we’re pretty happy about that.

We’ve been very active in a program called Live Healthy where we actively go to our members, find out what’s going on with them, identify gaps in care and sort of get them to the right medical facility or process. That’s good on all fronts. That helps quality, it helps patient member satisfaction – that’s working out well. The results we’ve seen from that have been terrific, but kind of getting more granular it’s sort of hard to do, in other words just in the middle of the marking period.

Sarah James – Wedbush Securities

Okay, thank you.

Operator

Our next question is coming from the line of Carl McDonald with Citigroup. Please proceed with your question. Gentlemen, we’ve lost Mr. McDonald’s line. Our next question will then be from Michael Baker of Raymond James. Please proceed with your question.

Michael Baker – Raymond James

Yeah, thanks a lot. I know that the thing that surprised folks obviously are number surprises in the 45-day notice but I’m just curious on your take in terms of the baseline trend adjustment being down 2.3%. I know that there’s a thought out there that maybe it was done that way in order to address the doc fix. I was just trying to get your sense on what your thoughts are at this point in terms of how that may ultimately play out and just your thoughts on the negative 2.3%, because I think that surprised a number of players in the industry that it was that negative.

Richard Barasch

We were surprised as well. We can join that club. How this number was derived, we obviously don’t know the answer. We’re hoping to get some clarity around this going forward. I’m encouraged that CMS has been encouraging the companies to come forward with their views about this. Again, you know, if you’re asking my personal view on this I think that the confluence of things that came together with this surprised a lot of people including CMS and I think that there’s going to be a legitimate and constructive effort to not create an onerous 2014 that will affect lots and lots of seniors. So I’m hopeful, I’m optimistic, and beyond that it’s kind of speculative.

Michael Baker – Raymond James

And then I just had a question on the ACO accounting. When do you think you’ll get clarity on the revenues side of it at least-

Richard Barasch

Yeah Michael, it’s a great question and you know, let me answer this two ways. One is on a technical GAAP basis and I think kind of towards the end of the year we’ll have more clarity on that. What we’re hoping to be able to do before that is on a non-GAAP basis give a bunch of indications of where we are. We don’t want this to be a black box for you guys and obviously we, for our own purposes, want to know where we stand to the best we can. So we may be engaging, and this is frankly one of the reasons why we didn’t want to do guidance. We’re going to be engaging in a lot of non-GAAP conversation over the next six to twelve months.

Michael Baker – Raymond James

Thanks for the update.

Operator

Thank you. (Operator instructions.) The next question is from the line of Scott Fidel with Deutsche Bank. Please proceed with your question.

Scott Fidel – Deutsche Bank

Another question just on the 45-day notice, and I’m not sure if you have the answer on this yet but just relative to the language that CMS put in about reducing the cost sharing allowances to $30 PMPM from $36 last year; and some uncertainty about how much flexibility plans would have around that because it looks like that number can fluctuate based on where plans are relative to the benchmark and relative to the bonus payments that they’re receiving. So I’m just interested if you guys have an initial take on how much flexibility you’ll have for cost sharing or for raising member premiums given how significant these proposed rate cuts are for 2014.

Richard Barasch

Yeah look, I think the industry is going to present a very compelling argument to CMS that what’s been done is not in the best interest of seniors. If the interest of CMS is to have a vibrant Medicare Advantage program there has to be some additional flexibility of the companies to react to changes in reimbursement. It’s hard to have one and not the other so I think logic would dictate that there should be additional flexibility. Scott, having said that we’re about to embark on a 45-day process.

Scott Fidel – Deutsche Bank

Got it. Then just I understand you’re not comfortable giving sort of macro company guidance right now, but just wondering if you can give us maybe directional views on the expectations for the MA business in 2013 since that shouldn’t be influenced by some of the non-GAAP dynamics around the ACOs. I know you gave us your January membership; just any indicators you can give us on your expectations for margins in terms of MORs and SG&A for MA in 2013?

Bob Waegelein

Yeah, I would say that you would expect us to report a comparable full-year premium amount as we did this year. I think you’ll see medical benefit ratios tick up a little bit and we’re looking for opportunities to cut the AORs. So more of the same in MA for ’13.

Scott Fidel – Deutsche Bank

Okay, thank you. And then just last question, Richard, you mentioned that you’re thinking about maybe going back into an active selling mode on Med. Sup. One just sort of thought around timing – would that be something that you would look to do for the 2014 AEP and then in terms of strategic rationale is this something that you’re just now chewing over after seeing the 45-day notice or…

Richard Barasch

If there were markets that we would have to exit we’d like to continue to offer valuable products to people who have been loyal to us and we want to be loyal back to them, so I think that’s part of it. I also candidly, and this is maybe so speculative that I probably shouldn’t even say it – I’m very convinced that the Medicare Advantage or something like it is going to be one of the solutions to the long-term Medicare issue. It’s hard to see, although I think the ACOs in this also will be one of them as well, but I think the notion of defined contribution is going to have a part in the ultimate solution to Medicare.

So from our perspective, if this evolves over time we still want these folks to be our members. What we feel very good about is we’ve done a lot of good medical management especially for the higher-risk folks and throwing them back into the unmanaged original Medicare pool doesn’t feel like a good solution for them either.

Scott Fidel – Deutsche Bank

Okay, so timing-wise it sounds like you probably want to see what the final notice looks like.

Richard Barasch

Yeah, although I’ll tell you we’re dusting some of that [old stuff] off the shelf. It has a bunch of dust on it but now we’re looking at it again.

Scott Fidel – Deutsche Bank

Okay, thanks.

Operator

Our next question is from the line of Scott Green of Bank of America. Please proceed with your question.

Scott Green – Bank of America Merrill Lynch

Hi, thanks for the questions. First, what do you think the implications are to your ACO initiative if CMS is now assuming a gross trend annually going forward of 1% or 2%? Do you think ACOs can achieve meaningful savings versus that kind of deeper service comparison?

Richard Barasch

Again, as you know this is a specific comparison, not an overall comparison so whatever the overall factors are really don’t matter. It’s actually what the specific factors are in our population. But even if trend has slowed down for our populations we still believe that there are lots of ways to save money. I mean you hate to use the term low-hanging fruit but the waste in original Medicare is huge.

I think again, going back to sort of Scott’s question, I don’t think anyone quarrels with the notion that well-managed Medicare is going to save money. And I think that that’s a concept which is not a red/blue political concept. Everyone who’s paying attention gets that. What the ACOs will give us the ability to do is to do that. I’m sure many of you saw the article in The Wall Street Journal yesterday which I thought was wrong, and to what we’re looking forward to [permanently wrong].

Scott Green – Bank of America Merrill Lynch

Okay. And what are the mechanics of how the negative true-ups would impact your fee-for-service baseline off of which you’re compared?

Richard Barasch

Let me say again, Scott, it’s based on our population. So in other words it’s not an overall rebate or recalc number. This is arithmetic for the people who are in our pool.

Scott Green – Bank of America Merrill Lynch

So but your pool wouldn’t…

Richard Barasch

Our pool might reflect that but where are you kind of seeing it? We’re seeing the actual numbers. So in other words, if our pool let’s say was costing $2000 a person that’s the cost. CMS doesn’t get to come in later and say “Well no, it was $9900 because of some factor.” It is the arithmetical addition of our particular pool.

Scott Green – Bank of America Merrill Lynch

Okay. Can you just update on the ACOs that launched in April, 2012? I think there were 115,000 lives, just your progress on starting to implement some medical management programs like health risk assessments. Have you done a lot of those at this point?

Richard Barasch

We’ve done a fair amount and you know, again – and please, if anybody from CMS is listening please don’t take this as blame, but frankly the program has been slow to get off the ground from a data perspective and a lot of improvements have been made. So I think we are doing things in the April 1 group but the level of data has been slow and I think we’ll get some results ultimately out of 2012. But really starting, I would say we really started this in earnest in the last part of 2012.

Scott Green – Bank of America Merrill Lynch

Okay, that’s helpful. And then last question on this topic, can you just remind us how long your ACO contracts are?

Richard Barasch

Three years.

Scott Green – Bank of America Merrill Lynch

Okay. And then after that point we don’t know exactly what…

Richard Barasch

No, we don’t know, but my point is very clear on this – if we have… By the way, we expect to expand this. We’ve got a nice pipeline going into 2014 for this. But if we are able to work with primary care docs to reduce Medicare costs in a way that’s demonstrable and creates quality and quality metrics it’s hard to imagine that this won’t have applicability in any system going forward.

Scott Green – Bank of America Merrill Lynch

Okay, that makes sense. A separate topic – how much RBC capital is at your PPO and private fee-for-service subsidiaries? So in some hypothetical scenario where you shut those products down, how much cash have you freed up?

Richard Barasch

You used the correct word, “hypothetical.” You know, look, there’s one company called Pyramid Life where we’ve got a lot of private fee-for-service spread out quite a bit over the country. That already has $160 million of statutory capital. I’m saying it off the top of my head and my truth squad Mr. Waegelein is checking the number as we speak.

Bob Waegelein

We’d expect to end around $180 million.

Richard Barasch

$180 million if we’re no longer doing business in Pyramid, and by the way, don’t take from what I’m saying that that’s our intention. This is just something that we pay attention to but your point is right: to the extent that we reduce Medicare Advantage it will free up a bunch of capital for other uses.

Scott Green – Bank of America Merrill Lynch

Okay. And then in Texas, your HMO product certainly seems very defendable. You have a very low cost structure there. Just curious if you would perceive there to be acquisition opportunities in a more difficult rate environment in that area of any others from maybe higher costs to competitors?

Richard Barasch

I think one of the things that I read made the point which I think is right, and I think this is something that I’m hoping CMS will look at, is that the pressure that this 45-day notice puts on is significantly higher for smaller companies who don’t have scale. It really does put much, much more pressure on the administrative loss ratio. We feel it; we’ve got 135,000 members and feel it. I can’t imagine how hard it is at 40,000 or 50,000 members. I think having said that, what this will do is make it harder to be small. It’s already hard to be small, it’s going to be even harder to be small going forward.

Scott Green – Bank of America Merrill Lynch

Okay, thank you.

Operator

Our next question is from the line of Carl McDonald with Citigroup. Please proceed with your question.

Carl McDonald – Citigroup Global Markets

Okay thanks, apologies for the technical difficulties before.

Richard Barasch

We’ve answered your question, Carl.

Bob Waegelein

We had to. [laughter]

Carl McDonald – Citigroup Global Markets

You did. So you mentioned in the remarks you were hopeful CMS would use their statutory authority to make some things better. I’m interested in what some of the sort of immediate things that comes to mind that you’ll be commenting on where they could do it.

Richard Barasch

Yeah, I think the things that are in the law, for example the pattern of reimbursement reductions that were in the ACA are not going to change. I think in the recent [period] at the end of the year there were some other issues that affected risk scores. Obviously those won’t change, but I think and as Scott pointed out the notion of how much you can change benefits, a change in premium environments – that’s the sort of flexibility that we’re hoping to have. And frankly, most important we’re hoping that they look back at the trend factor and examine whether that’s accurate.

Carl McDonald – Citigroup Global Markets

Got it. And then a couple of APS questions. Do you anticipate revenue and earnings growing in 2013 and then separately, when is the Puerto Rico behavioral health contract up for renewal?

Richard Barasch

To the latter question it may be up for renewal sometime this year – it’s still TBD. There’s a new administration, etc. The program is working well so we’re confident that even if it does get rebid we think we’re in a good position for it. Relative to APS, I think the APS entity will be less interesting as a reporting and conceptual matter than in general our forays into the Medicaid business. I think we’ll be starting to talk about that less of APS and more as Medicaid. So I wish I could be more forthcoming but we’re working on some very interesting programs and look forward to talking about them at some point later on.

Carl McDonald – Citigroup Global Markets

Okay, thank you.

Operator

(Operator instructions.) Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Richard Barasch

Yeah, thanks everyone. I appreciate your forbearance on these issues. They’re fresh, they’re new, we’re trying to get our hands around them in the same way that you are. There’s work to do with CMS which I’m hopeful and which they signaled that there’s going to be some flexibility, so I’m hopeful that there will be. We look forward to talking to you folks further about the emergence of our ACO business and our Medicaid business and with that I will sign off. Thanks, everybody.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time and we thank you for your participation.

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