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Magellan Health Services, Inc (NASDAQ:MGLN)

F4Q08 and Full Year 2008 Earnings Call

February 27, 2009 10:00 am ET

Executives

Renie Shapiro - Senior Vice President of Corporate Finance and Investor Relations

René Lerer, M.D.- President, Chief Executive Officer, Chairman

Jonathan N. Rubin - Chief Financial Officer

Analysts

Carl McDonald - Oppenheimer & Co.

Gregory Nersessian - Credit Suisse

Ray [Win] - Barclays Capital

Michael Baker - Raymond James & Associates

Operator

Good morning ladies and gentlemen and welcome to the Magellan Health Services Inc. Fourth Quarter and Full Year 2008 Earnings Results Conference Call. (Operator Instructions) Now I would like to turn the call over to your host today Senior Vice President of Corporate Finance and Investor Relations Miss Renie Shapiro.

Renie Shapiro

Good morning and thank you for joining us today. Here with me today are Magellan’s Chairman and CEO René Lerer, and our Chief Financial Officer Jon Rubin. They will discuss the financial and operational results of our fourth quarter and year ended December 32, 2008.

Before we proceed with this call let me read our disclosure statement.

Certain of the statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed. These forward-looking statements are qualified in their entirety, but a complete discussion of risks is set forth under the caption Risk Factors in Magellan’s annual report on Form 10-K for the year ended December 31, 2008 which will be filed with the SEC later today.

In addition, please note that in this call we refer to segment profit. Segment profit is disclosed and defined in our annual report on Form 10-K and is equal to revenues plus the sum of cost of care, cost of goods sold, direct service costs and other expenses, excluding stock compensation expense.

Segment profit information referred to in this call may be considered a noon-GAAP financial measure. Included in the tables issued with this morning’s press release is the reconciliation from segment profit to the line item income from continuing operations before income taxes and minority interest. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure. For additional information regarding this measure, including the reasons management considers this information to be useful to investors, please see Magellan’s annual report on Form 10-K for the year ended December 31, 2008 which will be filed with the SEC later today and which will be posted on our website later today.

I will now turn the call over to our Chairman and CEO, René Lerer, M.D

René Lerer, M.D

Thank you Renie and good morning everyone and thank you for joining us.

Let me begin with some comments on the full year and fourth quarter results, then we’ll turn it over to John to review the details of the year and quarter, as well as provide some commentary on 2009. In my closing remarks I will comment on key issues for the company including our outlook for growth, legislative initiatives, recent changes to our Board of Directors and a discussion of our strategic focus and priorities.

Let me start by saying that we are very pleased with our results for 2008. Our segments have performed well with particular strength in public sector behavioral, specialty pharma, and radiology benefits management. As you saw in the press release issued this morning, for the full year ended December 31, 2008 we produced net income of $86.2 million, EPS of $2.16, and segment profit of $219.6 million.

For the fourth quarter we produced net income of $23.6 million, EPS of $0.61, and a segment profit of $55.0 million.

We ended the year with a solid balance sheet, no debt, and $321.1 million of unrestricted cash and investments.

In addition to our strong operating results, we have made good progress on the share repurchase program we announced last January. Through February 25, 2009 we repurchased approximately 4.3 million shares for a total of $151.6 million completing approximately 76% of the approved $200 million program authorized by the Board.

Before John discusses the details of our financial results, let me first provide a brief review of each of our businesses and some of the key issues in each.

In the behavioral health line, let me discuss results in both commercial and public sector, progress on key account renewals, and developments in Maricopa County.

First, results of our commercial segment are down year-over-year due primarily to terminated contracts as well as higher cost of care and a portion of a larger risk contract as we’ve discussed on prior calls. John will provide more details on this later in the call. We are committed to implementing plans to improve results on this account going forward.

On the public sector side, earnings have grown significantly year-over-year. This reflects strong results across the entire segment and it includes the impact of a full year of the Maricopa contract. We have worked diligently on improving our service results in Maricopa and we continue to work with our customer and the community to affect the transformation and visions to the system of care there. I will talk about Maricopa a little more later.

Regarding behavioral health renewals, we disclosed at the end of the year that one customer, which generated net revenues of $217 million for the year, extended its contract for an additional two years through December 31, 2012. We are engaged in renewal discussions with another customer, which generated net revenues of $90.8 million for the year and has a contract that runes through June 30, 2009. Although the contract has yet to be signed, we are optimistic about its outcome.

As we’ve previously discussed the Iowa Medicaid Behavioral Health contract, which we have held for over ten years, is up for mandatory rebid. The RP was released at the end of December and responses are due on March 20. The effective date of the new contract is January 1, 2010 and accordingly we have received a six-month extension of our current contract. The 2008 revenue from this account was $140.5 million and the extension reflects no material changes to the current contract terms. We believe we have had a very positive story to tell about the results we have produced for the state of Iowa and we are making every effort to retain this business.

Turning to the radiology business, we are very pleased with the performance of NIA in 2008. We ended the year with segment profit of $34.9 million, a significant increase over 2007 segment profit of $8.9 million. I’m also delighted to announce that we have signed an additional risk radiology contract. We look forward to adding this new customer to the Magellan family and have already begun implementation of this contract with an expected go live date of May 1, 2009. This contract, which serves Medicaid recipients, has total revenue of approximately $115 million over the three-year contract period. This was a competitive bid for a population not currently managed by an RBM vendor.

The specialty pharma segment also produced strong results with full year segment profit of $30.5 million, a 69% increase over last year. ICORE demonstrated significant growth within all product lines, rebate, distribution, and strategic solutions. I’m very pleased with these results and continue to be quite bullish on the future of this business.

In previous calls I’ve touched on the oncology benefits management product we’ve been developing and I’m pleased to also announce that on January 1 we began implementing this new offering with an existing health plan customer. This product, which we believe is unique in the marketplace, encompasses reimbursement, contracting strategies, and clinical and claims management services. It addresses the selection, quality, and cost of pharmaceutical agents, supports effective clinical care management, and improves administrative processes and outcomes such as the accuracy of claims payment.

As oncology is one of the major drivers of medical spend for health plans today, there is great interest in this capability. We have an active pipeline and we are currently marketing this full service product to a number of health plans. We are pricing this product such that we retain a portion of the savings realized by our customer. We are excited about our ability to deliver an oncology product unique to the industry that combined our expertise in specialty pharma, utilization and pricing, as well as our core capabilities and claims management, underwriting, pharma contracting, and technology.

We believe that over the next several years oncology benefits management will become a material part of ICORE’s overall business.

We continue to successfully diversify the Company’s earnings. We are pleased that our combined radiology and specialty pharma segments represented 20% of both our revenues and segment profit in 2008, prior to corporate overhead.

We have also made significant progress in cross selling across our business lines so that seven of our top ten health plan customers are in two or more of our segments.

Let me now turn the call over to John, our CFO, who will discuss the fourth quarter and full year 2008 results in greater detail.

Jonathan Rubin

Great, thanks René and good morning everyone. As indicated in the press release issued this morning, for the year ended December 31, 2008 the company reported net income of $86.2 million or $2.16 per diluted common share and segment profit of $219.6 million.

For 2007 the Company reported net income of $94.2 million or $2.36 per diluted common share and segment profit of $223.3 million.

Our 2008 financial results are in line with our guidance, which consisted of EPS of $1.95 to $2.17 per diluted share and segment profit of $215 to $225 million.

We are pleased with the full year results of our operating segment, especially as they relate to the strong performance of our radiology and specialty pharmacy businesses.

At the operating segment level, fiscal 2008 segment profit was higher than the prior year for the public sector, radiology, and specialty pharmacy segments. Public sector benefited from lower cost of care inclusive of favorable out of period care development in the current year, as well as the full year earnings impact from the Maricopa County contract.

Radiology’s improved results were driven by a full year of impact in 2008 of our risk radiology contracts that began during 2007.

Specialty pharmacy’s earnings growth primarily reflects our strong focus on expanding the rebates business.

Results for the commercial segment were lower than the prior year, mainly due to the impact of contract terminations and margin compression.

Now looking at the quarter, net income for the fourth quarter of 2008 was $23.6 million or $0.61 per share on a diluted basis.

For the fourth quarter of 2007, the Company’s net income was $31.3 million or $0.78 per share on a diluted basis.

Revenues in the fourth quarter of 2008 were $661.8 million compared to $658 million for the same period last year. The revenue increase resulted primarily from same store membership increases of $27.8 million, net favorable rate changes of $22.4 million, increased revenue from expansion of our business in the specialty pharmacy segment of $10.4 million, new business of $3.8 million, and other net increases of $2.1 million. These increases were partially offset by the loss of membership due to contract terminations of $62.7 million.

Our segment profit for the fourth quarter of 2008 was $55 million, which compares to segment profit of $66.2 million for the fourth quarter of 2007.

Segment profit in the quarter for the commercial business was $29.6 million reflecting a decrease of $31.1 million from the prior year’s fourth quarter. This decrease was mainly due to the impact of contract terminations of $16.2 million, care trend in excess of rate increases of $5.8 million, the impact of favorable out of period care development affecting the prior year quarter of $5.8 million, unfavorable out of period care development recorded in the current year quarter of $6 million and a one time charge in the current quarter of $2.5 million associated with legal matters. These decreases were partially offset by increased membership from existing customers of $4.4 million and other net favorable variances of $0.8 million which mainly related to new business.

The unfavorable care development and higher care trends experienced in the current quarter were primarily related to a portion of one large risk account. As we discussed during the last call, there was an addition of a new group of members to this account who have had a higher utilization profile than the preexisting membership. These new members, as well as changes to the plan design, have created unanticipated higher care costs for this contract, including unfavorable care development in the quarter. Now we are actively working with the customer and in the process of implementing a broad action plan to mitigate the cost of care pressures that were experiencing. Aside from this account, the care trend for commercial is still estimated to be approximately 7% to 09 for 2009.

Fourth quarter segment profit for public sector was $34.6 million representing an increase of $10.1 million over the prior year fourth quarter. This increase was mainly due to the net impact of favorable rate changes of $4.6 million, same store membership increases of $5.3 million, and favorable out of period care development recorded in the current quarter of $5.7 million. These increases were partially offset by the impact of favorable out of period care development affecting the prior year quarter of $4.2 million and other net decreases of $1.3 million which were mainly due to contract termination.

Care trends in the public sector for 2009 are expected to be 3% to 5% consistent with our previous expectations.

Fourth quarter 2008 segment profit for the radiology benefits management segment was $4.1 million, representing an increase of $2.1 million over the fourth quarter of 2007. This increase was mainly due to favorable rate changes of $3.2 million, higher performance revenue of $2.4 million, the impact of unfavorable out of period care development affecting the prior year quarter of $1 million and other favorable variances of $1.4 million mainly related to new business. Now these increases were partially offset by the impact of terminated contracts of $3.5 million, retroactive rate decreases recorded in the current year quarter of $1.5 million, an unfavorable out of period care development recorded in the current year quarter of $0.9 million.

We continue to expect 2009 care trends for radiology to range from 10% to 13%.

Fourth quarter 2008 segment profit for the specialty pharmacy segment was $9.2 million compared to $4.6 million which was recognized in the prior year quarter. With the increase mainly due to growth in the rebate and consulting businesses as well as lower cost of goods old ratio in the current year period.

Corporate costs, excluding stock compensation expense, were $3 million less than the fourth quarter of 2007 primarily due to lower insurance expenses in the current year period..

Excluding stock compensation expense, total direct service and operating expenses were 14.8% of revenue in the current year quarter, which was consistent with a ratio of 14.9% experienced in the prior year quarter.

In the fourth quarter of 2008 we recognized $6.4 million of stock compensation expense compared to $7.3 million in the fourth quarter of 2007. The decrease is mainly due to lower stock compensation expense in the 2008 period due to the termination of the employment of our former CEO in the first quarter of this year, as well as higher forfeiture activity in the current year.

Depreciation and amortization expense was $15.8 million for the fourth quarter of 2008 compared to $16 million in the fourth quarter of 2007.

Interest expense was minimal for the fourth quarter of 2008 compared to $1.4 million in the fourth quarter of 2007 with the reduction mainly due to reductions in outstanding debt balances and lower interest rates in the current year quarter.

Interest income was $3.7 million for the current year quarter, compared to $6.7 million for the prior year quarter. This decrease is mainly due to the impact of lower investment yields.

The effective income tax rate for the year ended December 31, 2008 was 38.5%, this compares to 38.3% for the prior year period.

Now our effective income tax rate varies from the federal statutory income tax rate primarily due to state income taxes and the permanent differences between book and tax income.

Now turning to cash flow and balance sheet highlights, our cash flow from operations for the year was $268.3 million. This amount includes the positive impact of a shift of restricted cash into restricted investments in the amount of $108.7 million which is reflected as a source of cash from operations and a use of cash from investing activities. Absent this transfer, the cash flow from operations for the year was $159.6 million.

As René mentioned earlier, through the 25th of February we repurchased a total of approximately 4.3 million shares for a total cost of $151.6 million at an average price of $35.25.

As of December 31, 2008, the Company’s total unrestricted cash and investments were $321.1 million which represented a decrease of $32.5 million from the balance at December 31. 2007.

The decrease in unrestricted cash and investments was mainly due to cash settlements for stock repurchases of $136.2 million that were made under the program announced earlier this year, settlement of the $25 million deferred payment associated with the acquisition of ICORE, capital expenditures of $36.3 million, the funding of restricted cash of $13.3 million for one of the radiology risk contracts, the run out of net contract liabilities for terminated contracts of $13.9 million, debt and capital lease payments of $14 million, tax payments of $13.6 million, and other net changes of $12.7 million, which mainly related to increased working capital to support growth in the radiology and pharmacy segments. Partially offsetting such items were segment profit for the year of $219.6 million and proceeds from exercises of stock options of $12.9 million.

Our unrestricted cash and investments of $321.1 million at December 31, 2008 consisted of $211.8 million of unrestricted cash and $109.3 million of unrestricted short-term investments. Approximately $45.8 million of the total unrestricted cash and investments at December 31, 2008 relates to excess capital and undistributed earnings held at regulated subsidiaries.

The Company’s restricted cash and investments of $317 million reflect an increase of $48.9 million since December 31, 2007, $13.3 million of which is attributable to restricted cash funding in relation to one of the risk radiology contracts as discussed in previous quarters and the remainder of which is attributable to the timing of cash flows with our regulated subsidiaries and other regulatory requirements.

Now mindful or our significant cash and investment position, we continue to closely monitor the markets and the safety of these assets is of utmost importance to us. We’ve consistently maintained our conservative investment strategy, emphasizing a diversified, high quality, liquid short-term portfolio. Naturally the trade off to this strategy is lower investment yields.

In light of this focus our current cash and investment portfolio is heavily weighted towards cash and cash equivalents as well as high quality investment grade corporate debt securities. To date we have not realized any permanent losses on our investment portfolio and as of December 31, 2008 we had approximately $172,000.00 of unrealized gains.

As of December 31, 2008 our only debt consisted of $28,000.00 of capital lease obligations.

Now relative to 2009 we are maintaining our net income and segment profit guidance in the ranges of $73.4 million to $93.7 million and $190 million to $210 million respectively.

We have updated our EPS guidance to $1.99 to $2.54 per share which reflects the share repurchases made through September 25.

While we are maintaining our segment profit guidance, note that we have additional pressure on the commercial cost of care, as we previously discussed, offset by potential favorability in the public sector segment. As a reminder, our outlook also includes the assumption that we will be able to reverse the majority of our deferred Maricopa revenue for fiscal year 2008, as well as to recognize the full revenue for this contract for fiscal year 2009.

With that, I will now turn the call back over to René.

René Lerer, M.D

Thanks, Jon. Let me now spend a few minutes reviewing several issues, including a discussion of the status of Maricopa, future prospects for each of our businesses, pending and proposed legislative initiatives, some recent changes on the Board and a summary of our strategic focus and priorities.

Some of you may be aware of media coverage in the Phoenix area highlighting criticism of the mental health system and Magellan’s role of manager of the contract. To help address that, let me discuss recent developments and progress we’ve made on the program.

First though, I think it’s appropriate to emphasize that news articles don’t always tell the whole story and certainly that’s been the case in Maricopa County recently. While there is clearly work to do and issues to address, in the 18 months that we filled the contract we have consistently executed on the states transformation plan and improved many aspects of the system in collaboration with our state partner. We have made significant financial investments in improving the direct care facilities as well as considerable progress in quality of care initiatives. We have now transitioned 13 of the original 24 direct care facilities to provider network organizations and we are on track to transition the remainder of the clinics by September of 2009 as required. In addition we have strengthened and empowered local leadership while continuing to provide corporate support as needed.

We care profoundly about the people that we serve and are steadfast in our commitment to partner with the state of Arizona to continue the transformation of the mental health system in Maricopa County.

Moving to growth strategies for the future, our radiology pipeline includes numerous opportunities which we are actively pursuing. Risk based prospects represent the majority of our pipeline with 775 of the pipeline in lives and 98% of the pipeline revenue in risk contracts.

Some additional potential opportunities relate to new products and initiatives, including our cardiology management and non-advanced imaging products management. Both of these initiatives are in rapidly growing areas of healthcare and these products, which leverage our core capabilities, have generated great interest.

On the specialty pharma side, we continue to pursue additional rebate and distribution opportunities and interest in those products remains strong. As discussed earlier, we are excited about our opportunities to continue to grow and develop our oncology benefits management products.

We also continue to be active in our search for acquisition opportunities to further grow and diversify our current healthcare product offerings. While we previously spoke about valuations continuing to remain high, we believe that these dynamics will likely be short lived and that we will have meaningful opportunities in the future.

Next, let me address recent legislative activities, specifically some of the healthcare reform initiatives under consideration, SCHIP, mental health parity and the recently passed economic stimulus package.

Regarding the Children’s Health Insurance Program Reauthorization Act of 2009, this legislation reauthorizes SCHIP through 2013 and includes key provisions to allocate funding for the program, expand coverage, and improve benefits. It also contains a provision that provides for mental health parity with medical benefits in SCHIP plans. While we don’t expect this legislation to have any impact on our existing SCHIP membership or 2009 results, we believe there may be increased demand by states for the management of behavioral benefits for their growing population under these programs, thereby creating additional opportunity for us.

We have spoken in our previous calls about mental health parity. We are actively pursuing opportunities with states, health plans, and employers and have seen increased interest in this area as well.

With respect to the economic stimulus plan and potential healthcare reform, we continue to monitor any legislation of actions and research them as they pertain to us.

Let me now address a change to our Board of Directors. Earlier this week we announced that Steven Shulman resigned his position as Director and Chairman of the Board effective February 25. Over the past year Steve has continued to provide guidance and support to me as I transitioned into my role as CEO. Steve’s resignation comes at the one-year anniversary of his transition to Non-Executive Chair and he feels he is leaving the Company in good hands. All of us at Magellan and the Board thank him for his vision, leadership, and support during his career at Magellan and I am personally grateful to Steve for the partnership we’ve enjoyed over the course of the last 15 years and I wish him well.

In this morning’s press release we announced a few additional changes in the composition of our Board. As a result of his appointment as CEO of Coventry Health Care and the increased responsibilities associated with this position, Allen Wise has decided to resign from our Board. Allen has served diligently on our board since 2006 and has provided Magellan with his thoughtful counsel and guidance. I thank him for all of his efforts and wish him the best in his reentry as CEO of Coventry.

Effective February 25, I am very pleased that Eran Broshy has agreed to join our Board. Eran is currently the Executive Chairman of inVentiv Health, a customized solutions company which provides outsourced services to pharmaceutical and life sciences companies. Eran led the Company for nine years as CEO through its initial public offering and built it into a $1.1 billion revenue company and the leading provider of commercialization and complimentary services to the global pharmaceutical and biotech industries. He brings many years of experience in healthcare consulting, biotechnology, and the pharma industry and I am very excited to have him joining our board.

With these changes the Board has appointed me Chairman of the Board and has decided to decrease its size from ten to nine members. As a result, we have one vacancy on the board which we are actively seeking to fill. We have assembled a strong group of Directors with significant experience in a wide variety of areas and I have the utmost confidence in its abilities.

In closing, I want to reiterate our priorities for the coming year. Our focus on continued profitable growth for the Company spans many objectives including new business initiatives across our existing and emerging businesses. Stabilization and growth of our core behavioral health segment, continued diversification across customer and business lines and execution of our capital deployment strategy.

We are committed to transforming the system of care in Maricopa County and continuing to deliver quality care to all the people we serve. I am confident that we will leverage all the strengths, talents, and focus of Magellan to ensure the successful execution of these priorities. I am very pleased and proud of our results and accomplishments in 2008 and look forward to a successful 2009.

I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Carl McDonald of Oppenheimer & Co.

Carl McDonald - Oppenheimer & Co.

Could walk through the timeline of the Medicaid radiology RFP that you want in terms of when you first came in contact with the customer, how long did the process last and contrast that with differences in time line for any customer that doesn’t have any existing radiology arrangement.

René Lerer, M.D

Sure. Again, you know one of our challenges Carl has been sort of the latency between initial discussions with the customer and then final approval. We’ve been in discussions with this particular customer probably six to nine months before we were able to get a deal signed. Again, some of the key factors that have slowed us down with other customers relate primarily to IT technology issues, implementation issues, and obviously understanding data and being able to underwrite and price the information.

I think, again, probably six to nine months ago between the time we had our initial discussion to the time we were able to sign a contract and then from that time probably three to four months to go live date, although depending on our level of comfort with where we are in negotiations, very often we will start implementations even before we’ve had a signed contract.

Carl McDonald - Oppenheimer & Co.

As we look at the radiology pipeline today, it’s significant weighting of that to customers that don’t have an existing radiology relationship today or is it more customers that do and are maybe looking for another option?

René Lerer, M.D

It’s actually a mix. It’s a mix of both customers who are currently ASO with us or with others as well as customers who are ASO with someone else, or have no RBM at all. So there isn’t a single driver to that. We’re seeing all different sorts of areas in the space.

Carl McDonald - Oppenheimer & Co.

My second question is around the cost of care trends in the quarter, were higher in basically all of the segments. Can you again walk through the unfavorable development in the quarter and how you are thinking about it in terms of continuing in, say, the commercial business versus some of the other segments where you would view it more as a one time.

Jonathan Rubin

I am assuming that you’re referring primarily to commercial when you talk about the unfavorable development?

Carl McDonald - Oppenheimer & Co.

Yes, it looked like the costs of care trends were higher in commercial radiology as well; maybe you can pick up a little bit in the public sector sequentially?

Jonathan Rubin

Okay, well in commercial in particular, as noted, the results include about $6 million of unfavorable prior period development. Now I view $1.5 million of that as being completely non-fundamental as that actually relates to an agreement we have with a customer to pay certain claims that date back to prior year. The balance of the prior period development relates, as noted, to the unfavorable development on the one risk contract that we discussed. I would look at that as really being attributable to second and third quarter restatement as we’ve really gotten our hands around the changes that took place with this customer through the course of the year.

That would be the way that I would look at commercial and obviously that piece of it impacts our run rate, but as both René and I noted, we’re working with the customer and doing everything possible to correct that as we go forward.

In the other segment there isn’t anything of great note. I mean in NIA we had for radiology about $1 million of unfavorable prior period development in the quarter, but again, I wouldn’t look at that as fundamental in nature as that and actually even a little bit more than that came from a single customer and again related to claims that actually went back well into the contract period; so I would look at that, from a run rate standpoint, really as being non fundamental.

In public there really isn’t any significant news. We had some favorable development in the quarter and other than that, I’d look at the level of claims really being more based on seasonality.

Carl McDonald - Oppenheimer & Co.

Okay great, thank you.

Operator

Your next question comes from Gregory Nersessian of Credit Suisse.

Gregory Nersessian - Credit Suisse

Following up on the last question, if I think about the right run rate for the commercial segment should I think about taking the 4Q number adding back the PPRD and the legal settlement? Is that fair run rate? Are you baking in any improvement on that one account into your ‘09 guidance?

Jonathan Rubin

Yes. I think if you want to look at the run rate in 2008, I think what you described, Greg, is accurate, that the prior period development in the one time legal expenses which total $8.5 million. In fact, it is representative, if you want to think about the run rate for the business coming out of the year.

As we talked about previously, going forward there is a couple of things that we are expecting with the commercial segment. One, we did have some lost business in the segment related to the termination of a Medicaid contract during the year as a result of one of our health plan customers withdrawing from a couple of markets. Also, as we noted, we are expecting some margin compression into next year in the segment.

Then as I said in my remarks, we do expect that we will have some pressure, even with the actions that we’re implementing on the one risk contract that obviously has been problematic for us in the last quarter, we are implementing actions to improve that, although we do expect that there will still be some impact in 2009.

Gregory Nersessian - Credit Suisse

Okay that’s very helpful. Then my second question is do you expect there to be any material start up costs for this Medicaid NIA contract in the first quarter? In other words should we think about some earnings being moved from the first quarter to potentially later in the year due to that or how should we think about that?

René Lerer, M.D

Again, there is always some start up costs as it relates to network development or as it relates to administrative hooking ups. But when we put our guidance out in December and we talked about new business, you noted that the amount of the contribution from that new business in the first year is relatively low. So, we typically don’t give that kind of guidance by quarter. But obviously, in the first year there are some expenses that are built into the guidance that relate to new business that we bring on.

Operator

Your next question comes from Joshua Raskin - Barclays Capital.

Ray Win - Barclays Capital

This is Ray Win filling in for Josh. My question is in regards to your anticipation for the next Board meeting and maybe the potential for an increase in buy-back authorization?

René Lerer, M.D

We discuss all of our capital deployment strategies as we go. We have implemented the program, which is now about seven months ago, and put out again, as you saw in the discussion in the press release, a little over $151 million. As for future capital deployment strategies, they’ll get discussed at each Board meeting and we’ll bring up the topic then. Right now we have an authorization in place and that’s what we’re acting on.

Ray Win - Barclays Capital

I’ve got it. Do you guys expect any underlying organic growth in the public sector from the Medicaid population?

René Lerer, M.D

Clearly given the economy and given what’s going on in unemployment, we have begun to see, in certain communities, higher enrollment in the Medicaid population as well as state supported populations that may or may not be directly eligible for Medicaid, which in certain states we have responsibility for as well.

In our forecast and in our guidance we typically don’t include that growth unless it’s something that the state gives us and the state forecasts, we don’t unilaterally forecast state Medicaid population changes. As they occur, obviously, if we are generating revenue from that we’ll disclose it, but our guidance that we put out in December is reflective of our best information based on discussions with the states.

Ray Win - Barclays Capital

I understand, thank you.

Operator

Your next question comes from Michael Baker of Raymond James & Associates.

Michael Baker - Raymond James & Associates

Yes, René I was wondering if you could comment or provide a little more color on the President’s budget, particularly in light of some specific developments around savings driven by radiology benefit management?

René Lerer, M.D

There are more than enough people commenting on the President’s budget. I’m not sure that I need to weigh in on that one.

In terms of radiology benefits management, clearly over the past year we’ve talked a lot about the fact that we think at some point Medicare will become more involved in using different RBM techniques in the management of RBM expenses. We did see this discussion of the $260 million in savings as a result of initiation of RBM activities by Medicare in the non-Medicare Advantage plans. As you know, we’ve had conversations on and off with CMS and others and we’re very active in the development of some of the programs that are being considered.

We honestly don’t know where the $260 million comes from, how it’s defined, but we are active in reviewing any potential pilots that may come out, any RPs that may come out potentially from the Feds and obviously have been very involved. We will watch it closely. If there is an opportunity for us we will bid, but specifically where their number came from, it’s really too early for us to understand that.

Michael Baker - Raymond James & Associates

I was wondering if you could do a quick post mortem on New Mexico. I know you guys were in the running for that, but you kind of cautioned about that being a different dynamic. I was just wondering at the end of it, what kept you away from it? What are your thoughts on that?

René Lerer, M.D

We thought this was going to be a tough battle for us and unfortunately it was, as we weren’t successful. As you know, Optum and United were successful. I think there are some active protests going on by some of the vendors, so it’s a little bit difficult for me to comment. We did look at the scoring. We haven’t seen pricing, that’s not been released, so we don’t know where we stood relative to pricing. On the scoring, we felt there were some wide disparities in scoring. We’re not sure we understand all of that. We’re trying to get a better handle from information as it gets released by the state. Again, it’s a disappointment for us, but it’s a little bit difficult, in retrospect, to know exactly what drove United’s success and our inability to succeed.

Michael Baker - Raymond James & Associates

Thank you, René, for your thoughts.

Operator

There are no further questions sirs.

René Lerer, M.D

Well thank you very much, operator. I would like to thank everyone for joining us today and for your continued interest in Magellan. We look forward to speaking to you in April when we will talk about our first quarter’s results. We wish you all a great weekend. Thank you.

Operator

This concludes today’s conference.

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Source: Magellan Health Services, Inc F4Q08, and Full Year 2008 Earnings Call Transcript
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