Universal American Corp (NYSE:UAM)
Barclays Healthcare Conference
March 13, 2013 10:15 ET
Executives
Richard Barasch - Chief Executive Officer
Unidentified Analyst
We are very pleased to introduce Universal America and CEO, Richard Barasch. The company has jointly undergone a lot of change with the sale of the Part D business and the acquisition of APS and it’s always great to hear Richard’s thoughts. So, without further ado, I’ll turn it over to him.
Richard Barasch - Chief Executive Officer
Thank you. We do have a little action now in our world. I am going to talk about that a little bit, but again just starting off, and I think none of these changes. The one thing I have been saying pretty consistently to investors and other web servers over the past couple of weeks relative to the 45-day notices, yes, this is a problem. It will royal the MA market, if it doesn’t get modified. I think there is some reason to think that we will get some relief on this, but the real issue is we still got to deal with these issues.
Medicare and Medicaid are still enormous. They are not going away. In fact, they are getting even. So, what’s so interesting is there is sort of the conspiracy view that the administration is finally getting its way with Medicare Advantage. I don’t subscribe to that view. I think this was just a series of circumstances that got us to a point of a rate adjustment that kind of everybody realizes too much and there needs to be some sort of stability brought to the market, because there will in fact be a lot of changes in the market if this stays, but this is one year on the way toward a movement that I think is going to happen anyway, which is fundamentally the privatization of the government programs in this country, you could see it happening at the state level, blue states like New York and California. This is interesting. I don’t know if you have heard this statistic, but the largest procurement in history is the California dualist procurement that just in process of being put into place. So, in the shift of money from the public sectors spending directly to the public sectors spending it through private companies is happening, it’s happening fast, it’s not going to stop.
So, what I would just, I know everybody is invest in a different way whether it’s short-term thinking or a little bit longer term thinking, but this whatever happens with this MA issue is temporary in my view, and it still doesn’t change the fact that we are moving toward the privatization of most health insurance in this country. I always chuckle when people talk about Obamacare and the exchanges as socialized medicine. It couldn’t be any further from socialized medicine. It’s regulated. There is a lot of rules around it, but it’s basically saying to the private companies, hey, we are giving you a set of rules, you bid to these rules and kind of the market is going to determine who the winners and who the losers are. So, I think this notion of socialized medicine is kind of crazy.
And the other thing that I find very interesting and this is when there are so many interesting parts about healthcare, the fact that President Obama was called the Ryan plan a voucher plan in a derogatory way talking about how that will be bad for seniors. Well, in fact the exchanges are the same thing what Ryan is talking about. It’s not a perfect analogy, but what Ryan is talking about is a program that gives people choice and gives people subsidy to pay for that choice.
Fundamentally, the exchanges are the same thing. If you can afford it on the exchanges to paid out of your own pocket, if you can’t you get a subsidy. So, it’s actually pretty interesting and I would – let’s say if I were a betting man, I would bet on this. I am actually a betting man, because I run a company in this business. I think we are heading toward some sort of defined contribution in Medicare one way or the other. So, having said that, ‘14, there is a lot of different ranges of results for companies like ours in ‘14. Obviously, we are looking at markets, we are looking at margins, we are looking at benefits, we are looking at the whole mix, and we will see sort of how this all will shake through on a temporary basis, but those of you who get a little bit nervous about being invested in this sector should just every once in a while pull this chart out and realize two things. This is happening and the government is the process of outsourcing almost all of this to the private sector. So, the opportunities just are enormous. And if you’ve got sort of the steel to kind of move from point-to-point on this without getting too crazy about what happens year-to-year, I think you will be rewarded appropriately over time.
This is our company in ‘12 we had a good year. We are a company in transition. Basically as you know, we have the second largest Part D program, we sold it. One thing that I think is incontrovertible by Universal American is when we act for the benefit of our shareholders, when it’s time to sell a company we do, when it’s time to give money back to shareholders we do, when it’s time to invest in our opinion we do that as well. I think the fact that most of our company is owned – most of our Board is owners, people with a lot of stock changes the dynamic of that conversation quite substantially. And we really think about creating shareholder value, not just in a sort of an amorphous sense, but in a tangible sense. Also we have given back $17 of money to our shareholders in the past two and a half, three years.
So, but as we go through this transition, one of the real points of this chart and the one following this is that we keep making money and we have a very strong balance sheet. We got just around depending on how you are thinking about DAC. We have got between $7.5 and $8 of capital money tangible that’s after – that’s knocking off the goodwill that we generated for the APS transaction. So, one of the nice – one of the things that you think about when you do go through transitional periods, and I am not trying to minimize their transition nature of ‘14 particularly in light of a 45-day letter, one of the nice things that you sort of look at is kind of are you built on a good foundation, do you worry about that, do you have any sort of structural issues that you are concerned about. And the answer for us is no, we don’t and that gives us a lot of flexibility to think about the future in a pretty non-critical – critical, but not acute. Yeah, we don’t have to make decisions other than what’s in the best interest of the company.
So, what’s the landscape? And we know what the landscape is, it’s ACA coming in. And I was in DC yesterday for the AHEB Board Meeting and there is a ton of work that needs to get done for the exchanges to get implemented by – and the deadlines are coming, there is an April 1st deadline coming, there is a October 1st, and then there is the January 1st implementation. We have been here before with Part D not nearly as big, but there is a lot of work that needs to get done and the lot of people are focused on this, and that will move the market around and there is going to be a lot of noise around the exchanges. I think everybody was an investor in healthcare needs to be prepared for a little bit of turbulence during that period of time as well. But there is really something else happening that in my mind is far more important ultimately for the healthcare system.
And then there is a revolution occurring underneath all this, payers are either fed up for a broke or on the way to going broke, because of healthcare. And you see that at every level everybody thinks where is the tipping point that companies are going to stop offering broad ranges of choices to their employees, will individuals in order to spend a lot less money going to very narrow network programs, you see this in Medicare Advantage. People actually – actually Medicare Advantage is interesting, because you’ve got a large percentage of the people in MA, excuse me, who have chosen narrow network tightly managed products in return for getting better benefits. Yeah, that’s pretty good trade for them as opposed to being in a loose network and sort of having this view that bouncing around the system is a good thing. So, there is a lot of conversations going on to see what’s going on with ACOs, people thinking about narrow network products and thinking about ways to save money.
I think the transparency obviously more you guys saw and if you did you have to read the pro article a couple of weeks ago. I think that will be a seminar article I think that will be ultimately as important as the New York article was that got Obama’s attention back in ‘07 or ‘08. And I think transparency coming to the provider side of the ledger and it’s a confluence of sort of consumerism. But the other decided of this is the use of big data and for the first time companies having access to all the data that they need in order to bring some transparency what in fact it really does cost for a day in New York Hospital as opposed to a day in White Plains Hospital. Why an MRI 49 Street cost triple, what an MRI on 69 Street costs. I think you’re going to see over time a great deal of movement towards transparency consumerism.
And we saw this in Part D fundamentally Part D did and the reason why Part D worked so well is the turn all these seniors into consumers. For the first time they were shown what is actually cost to get to your three drug, to your two drug, to your one drug the generic drug and the reason why Part D worked so well is because people saw the value in generics. They saw that there was no reason for them to be taken a brand when they can get the same clinical efficacy with the generic and it costs them a lot less money and they saw it and it was enacted. And I think you are going to see that happening a lot more on the exchanges. I think it’s going to take a little bit of time, but it’s going to happen. Again I talked about this sort of Medicare. I don’t think the movement towards sort of the privatization of Medicare is going to stop.
One thing that not a single person disagrees with whether they were republicans or democrats, is they can get costs savings through unit cost reductions. You just can’t get there and by the way politically, you can’t get there economically its clear you can’t get there politically. This SGR fixed and it’s become a joke, everybody knows it’s not going to happen, nobody wanted to happen frankly because it’s not the right answer to reduce doctor fees for primary care and the things you want to encourage, everybody get that it’s wrong. So, the notion that we are ever going to get any sort of costs savings through governmental control of unit costs which is fundamentally what Medicare does people – no one who thinks about this properly thinks that we are going to get any savings that way.
So, the better thinking about this is around bundling ACOs and some pharma premium support Medicare advantage. And I think that that’s – it’s to me it’s inevitable. Meaning if the Medicaid side of the equation sort of the same thing I think that you saw a couple of republican governors the other day just basically want the ability to move this money from federal government directly into the private sector to take care of people there is a absolute recognition at the government can’t do it as well as private. And I think this movement is just it should happening and its happening fast. And whatever happens with this 45-day letter, yeah slowing it down a little bit. Yeah, it’s going to create some problems in the market, but it doesn’t change the macro.
So, how do we fit into this whole thing? We’re – our belief is and we have done this over a period of time is that companies don’t have a control cost and maintain quality you are going to be the big vendors in this. And very importantly and I – we sort of highlighted this word measurably you can’t just say you’re doing all the stuff you are going to have to prove it – you’re going to prove it in the market. I think you’re going to prove it to whoever the person is that your payer is. But our secrete size and we’ve done this successfully now for a pretty long period of time is working with providers and finding the places in the system where you can align the incentives with providers.
We have been doing this in our MA business for a long time. One of the – even with wherever happens with the 45-day letter our Houston business and our advance HMO business are going to do fine. We have got collaboration with providers. We have worked closely with them. We are on a same page idea is 85% cap deals they are pretty much first dollar partnerships with providers and it creates a shared incentive and an alignment to have to do the right thing over a period of time. We are spending a lot of time and energy on technology and not because we think that’s machine is going to care for you, they can help you. What the machines do and what the technology does and what the algorithms do is they tell you how to best spend your time and energy in order to take care of people on the ground. This is healthcare. This is not money management you can do remotely. We are still way, way from – that was really interesting I saw this, a couple of weeks ago, and I submit to follow-up on it.
A study done that showed that telemedicine really didn’t work, yet. By the way I think it will work over time, but the notion of sticking your finger into a plug very different than seeing a nurse or talking to a nurse or when talking to a doctor. And so we see that the right answer here is using technology to enable human beings to interact with other human beings, because after all, this is healthcare. And the reason why this works, why it’s scalable is that 10% of the people are causing enormous percentage of the cost. And if you can hone in on those 5% or 10% of the people are really doing nice job for them, you are going to be able to move the needle, and it very much is a human interaction business at the end of the day.
So, we have got three businesses. I may, again the 45-day letter is a little bit of a cloud on this and how we think about it, how we think about benefits, margins, markets for 2014. We are April 1st I guess is couple of weeks away we will have answers. We will spend the month of April turning through this and making a bunch of classic business decisions. These will be really interesting business cases. The hang on the real estate, you touch margins, you touch benefits. It’s a whole series of sort of fundamental business questions that we are going to answer market-by-market. So, we not traveling during the month of April, I think this is going to be 24/7 trying to figure all this out.
ACOs for us we indubitably understood that we couldn’t be single threaded to Medicare advantage and everything accounts for the two boxes and both of them frankly are works in progress. And its part of the thesis about the investment in Universal American is we believe that that we are going to make some progress on boxes two and three. The ACOs, we are very hopeful about, it’s asking the program was basically setup for what we do and which is working with providers to teach them and help them how to save money in Medicare. Good news in Medicare, there are lot of low-hanging fruit, there is a lot of really easy steps you can do to change behavior and the part that for us and this is the key is that the only physician groups. And by the way these are 31 primary care driven physician groups is they wouldn’t have signed up for this unless they were had some view and some ambition to engage with us to learn how to put more efficient practices in place to drive quality and to reduce cost.
Great news in this business is driving quality reducing costs are absolutely lot separate each other. There is almost never attention between those two things people want to be taken care of particularly chronically ill folks outside of a hospital, outside of facilities, that’s just – and we can make them a lot happier and a lot healthier a lot cheaper.
So, again the word is helpful. We think we are going to see some earnings out of this. We have got to which we have talked about some issues around revenue recognition when we actually get to take the revenue – to take the savings in place we don’t get paid for another year. So, we are – this is by the way one of the great examples of luxury that I have got as the CEO of a Board that’s not just focused on sort of the short-term staffing. You can think about this on a longer basis at least 31 ACOs and we fully expect by the way for the 31 number to grow reasonably well for ‘14. This is just the ’13 group, is we believe that organizing docs into risk-bearing groups is even though it didn’t work in the 90s, this is not the 90s anymore, this is the 2010s whatever you want to call them, and I think the world has changed. And I think the learnings of the 90s aren’t forming a lot of how people are thinking about this model going forward.
And then finally Medicaid, again it’s a huge opportunity. We love it every time one of the big guys buys – one of the other big guys as it just reduces the number of folks in the game. And what we see happening is lot of opportunities. By the way working directly with the states on some fee-for-service stock, and that’s a business that APS historically did pretty well working with other health plans and then ultimately taking risk ourselves. This has been slower than we had hoped, but it’s still a – we are very, very hopeful about its prospects as well. I mean, the demographics in the sort of the addressable market is certainly there and we certainly have the capabilities to deal in this market. So, hopefully as the new few months wind through, we’ll have more to talk about this. And I am hopeful, confident, whatever word, you want to use that will keep me out of trouble that we are going to get something done there. Our operations are we are working through again, you got to need the operations to succeed. We have got our runoff traditional and we talked about our capital structure. This is pretty – it’s pretty good base to go into this period of transition, where particularly given where the price of our stock is now.
Just quickly, I am running out of time here, I will go through the slides fast. The story here again, this is ‘13/14’s comment as we saw growth in our core markets. And we had some still reductions in what we call our non-core markets in the way we define core, non-core, and this shouldn’t be a surprise to anybody who has been listening to my presentations over the past couple of years is where you can bring medical management, MA is going to work, where you were just working off the arbitrage as the premiums meltdown exacerbated by the call letter, it just gets harder to do it. And frankly it’s not a notion of whether it’s fee-for-service, it’s where you have medical management. If you’ve got, what you are doing in an HMO structure is wrapping a 100% of Medicare into an HMO structure with no real medical management. I think those are as vulnerable as private fee-for-service at 100% as well.
Talked about the ACOs and I’ll be happy to answer any questions. I have got 16 seconds left, but this map kind of shows you we are here, it’s a we have got rural, urban highly developed community health centers, IPAs. We have got one of the best laboratories you can have to see what works and what doesn’t work inside a fee-for-service Medicare. So, with that, I am going to head to (indiscernible) will be happy to answer any questions that you have.
Question-and-Answer Session
[No Q&A session for this event]
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