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Executives

Alexander R. Cunningham - Chief Executive Officer and Director

Thomas L. Tran - Chief Financial Officer and Senior Vice President

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

WellCare Health Plans, Inc. (WCG) Barclays Global Healthcare Conference March 13, 2013 1:00 PM ET

Joshua R. Raskin - Barclays Capital, Research Division

Are we ready in the back? So we're going to start with the audience response system question, give these guys a minute and then we'll do the introductions. So why don't we take the first question? So everyone's got their handhelds. I think we know how they work by now. Do you think -- simply speaking, do you think Health Reform will be a positive or negative for WellCare, specifically in 2014? Let's start with 1 being very negative, 5 being very positive and everything else in between.

You'll enjoy the music.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Now that's very telling. I've been into -- we haven't seen that yet. So let's take Question #2. This is not applicable. Let's go to Question #3. Utilization trends. Do you think that medical costs will be up significantly? Down significantly? Or somewhere in between?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow, everyone thinks a slight increase. Okay, number three, what would you like to see the company do? Let's give you time. You're here for this. So I was going to -- these people are going to tell you what to do this year. M&A? Repurchase shares? Increase in the dividend or pay dividend? Repay your debt? Or invest in the core business?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So a huge consensus there, obviously, as well. Next question. At least repaying debt. So now there's agreement. So do you think the company will grow earnings? We've been defining it as EPS. Do you think we're going to see growth in earnings per share in 2014 for WellCare?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Mostly yes, okay. And then do you currently own -- so 2 more. Currently own shares in WellCare?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right, that's the opportunity flag. We've been calling it. It's Jim Bloom's [ph] term. And then what's your current bias on the stock? So [indiscernible].

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Neutral. Then all right. So interesting. All right. So we shall see. Let me introduce, to my immediate right, Tom Tran, who is the CFO of WellCare. He's been in that role for several years. To his right, Alec Cunningham, the Chief Executive Officer. And to his right, Gregg Haddad. The team has actually been here presenting as a team for now a couple of years. Not exactly a home game but hopefully not that far of a trip for them. And I've already taken up almost 4 minutes of your time. So let's jump into it. I'll ask you the first question that sort of everyone has been asking, which is the 45-day notice came out February 15. Maybe you could give us some comments around what you thought of the rates when they came out. And then also, if you could talk about what the levers are that you'd be willing -- that you guys think you could pull to reduce some of the impact potentially. And then do you think there's any change on April 1 when we get the final notice?

Alexander R. Cunningham

Sure, Josh. The way we've characterized those preliminary rates is the various inputs to that equation, a number of them, I think, were already known and understood by us and others in terms -- in particular, things like the changes that came from the Affordable Care Act, some of those step-down in funding over several years, the industry fee and other things. I think the part that was more of a surprise to the industry and the analysts was the negative trend assumption, the 2.3% negative one. The majority of people were anticipating, I think, a slight positive. So in terms of what we got versus what we expected, that's the primary difference. In terms of how we react to that, as I think you pointed out, we are a 100% HMO, 100% coordinated care products. So it's somewhat different than some of our competitors that have exposure to Private Fee-For-Service for the PPO products. And by being 100% HMO, we do have a number of different levers that can take the forms from addressing benefit design, both in terms of what's broadly known as the extra benefits, the dental division, the chiropractic and other things. It can also be the economics of the product design in terms of premium, co-pay, cost sharing, those sorts of design features. We also can use risk transference, capitation, selective network contracting. So a net negative reduction in revenue, of course, will create challenges and pressures. But by having 100% of the HMO product, we do have a number of different levers that we can deploy. And the way we manage the product is not singularly as a national Medicare product, but each of our states as a state leader, each of those people is accountable for knowing what's going on at a local market, county and product level, beneficiary preferences, competitive behavior, the network dynamics so that we understand exactly what those levers are by product, by county. And so currently, Tom's team is working with the markets to say, this is the outlook mathematically. And now it's the responsibility of each of those people to really understand what they need to do at a localized level by product to adapt to that.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. That's helpful. And just in terms of your prognostication for April 1, I mean, would you think there's a likelihood that some of this will change? Or what exactly is WellCare doing in the 45 days in terms of trying to impact that decision?

Alexander R. Cunningham

Sure. We're fully engaged with the industry, and we have been to make sure that people understand not only the impact on us but also the impact on the seniors that we serve. I actually spent the last couple of days in Washington with industry in some meetings on our own to really make sure that people fully understand what this will mean, how this works, make sure they understand the realities of our funding levels but want to raise an awareness around the potential impact. And so we certainly are hopeful that there will be some policy changes, but we're really going to wait until April 1 to prognosticate anything.

Joshua R. Raskin - Barclays Capital, Research Division

So let's move back to last year's prompts. So Kentucky. To simply put it, it -- I think it took a while, but we got to a decent place. So how do you think about the lesson learned in Kentucky? And how does that impact your future appetite for large-scale implementations, particularly ones where there might be a bidding component or previously unmanaged the -- all sorts of aspects that became a little bit troublesome in Kentucky?

Alexander R. Cunningham

Sure. Starting with the more recent events, I mean, we're -- as you say, we're very, very pleased with the recent outcomes, both the policy and the economic changes of the program, policy in terms of the things that the state did with changing their application of risk adjustment and also ending the practice of retroactively auto-assigning the SSI population, and then, of course, getting the 7% rate increase January 1 and getting what was October's 3% rate increase accelerated to July. I feel good about the program. I feel good about the stabilization and are bullish on the outlook there. In terms of the lessons learned, there really are a number of unique characteristics to the Kentucky program in terms of how rapidly the state deployed the program, I mean, going from pure Fee-For-Service to managed care. There are a number of things that were handled differently there given that rapid launch that are quite different from other markets. And I think there are a lot of lessons learned from that, that we and others have talked about with the state. But more broadly, this is what we do for a living. Medicaid is over half of our business. We serve the entire spectrum of populations across a very broad set of geographies. And so we continue to be excited about it, excited about the opportunities. But there certainly were lessons learned. And in future procurements, we would certainly share these learnings with prospective new state customers.

Joshua R. Raskin - Barclays Capital, Research Division

And do you think there has been sentimental [ph] effect already in some of the states that you're talking to, saying just remember, Kentucky tried to accelerate the timing of their program, the data wasn't perfect and all that sort of stuff? Have you -- has that already gotten traction with some of your customers?

Alexander R. Cunningham

I haven't seen another state that was planning to do exactly the same thing, but the world of managed Medicaid is not large. And so I'm sure that there are lessons learned being discussed in a number of different corridors.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. Maybe talk a little bit about exchanges. We've heard others talk about exchanges as an offensive opportunity, some suggesting a defensive necessity because of the churn around Medicaid, et cetera. What are you guys thinking about exchanges?

Alexander R. Cunningham

On a market-specific basis, I think it is likely to provide an interesting opportunity for us into the future. The way we're generally thinking about that is an individual or a household at 140% of the federal poverty level is unlikely to be significantly different than somebody at 138%. They're going to live in the same communities. They're going to have a number of the same challenges each day. The demographics are likely to be similar. And so we believe that if we're in the communities, we have the right network, we have the right community partnerships, we are seen as having the right programs to meet the needs of those populations, we think there will be good opportunities there. That said, of course, many of the details are yet to be determined. And so, we'll take a measured, cautious approach to that. But I think having the skill set and being totally oriented across Part C, Part D and Medicaid, we focus on that low-income strata of the population, I think for that expansion segment of the exchange products, there are likely to be opportunities.

Joshua R. Raskin - Barclays Capital, Research Division

It's a decent segue for my next question. So now, this, as you call it, measured and cautious approach to exchanges, I sort of contrast that with what's been a relatively aggressive M&A agenda in recent quarters. And I understand this may have been a strategy longer prior to that, but there were other things that WellCare was settling and had to get behind them from -- before your time with sort of legacy issues. So should we think of M&A as a clear focus? And do you guys think of that as your best use of capital? And a lot of the acquisitions you've done are what's called sort of single state. Are you looking more at targeted opportunities? Or are there -- are you guys open to larger transactions? How would you sort of characterize the agenda in M&A?

Alexander R. Cunningham

Sure. As we've said, we've never ruled out any growth vehicle, whether it's bidding, building, buying. And we're pleased to have the balance sheet flexibility and the capability to pursue opportunities on a targeted basis. But I think, to take it a step further back, again thinking about who we are and what we do, each of our 3 products, Part C, Part D and Medicaid, has been an attractive, freestanding product for us. The real strength of our strategy is the interplay between those, whether that's cross-selling of Part D life into an MAPD product, similarly cross-selling a Medicare product into a full dual on the Medicaid side or the benefit our HMO products get from the size and the expertise that we've gotten from our Part D business. So the interplay of those 3 products is important. That said, we have a perspective across the 50 states. We have a perspective across the different counties. And with that 3-product strategy, what we've been able to do is find an attractive product opportunity to enter a market. In the case of the 4 acquisitions that you mentioned from last year, it was to buy business. But each of those was an entry into what we view as an otherwise attractive state. And from there, we can use that presence, that vehicle, that network to expand our geography, expand our product mix or both. So for example, Arizona, we are pleased to get into Arizona. Obviously, a relatively small membership in the northwest corner of the state, but that wasn't the end of the story for Arizona, and we've been able to use that vehicle to now look to the future and expand geographies for the MA product, hopefully in the future evaluate our Medicaid opportunities. Conversely, South Carolina is a market that we've liked for a number of different years. That's currently a Medicaid product. But there are a number of counties that we like for MA. It leverages our significant presence in Georgia. And so, while we're working to integrate that acquisition, we're also thinking to the future about the opportunity to build networks and to be able to offer MA products into the future. So broadly, against the backdrop of Part C, Part D and Medicaid, build, buy or bid, we can get into various markets any number of different ways, and we're pleased to have the balance sheet flexibility and the capability to pursue acquisitions when they make sense. But again, we're open to any of those growth vehicles.

Joshua R. Raskin - Barclays Capital, Research Division

And just to follow up on what you said and sort of juxtapose that with the first question that we talked about on the Medicare rate, does Medicare Advantage become a -- assuming rates are to stay the same or something close to that, do -- does M&A in MA become more attractive in light of what we've seen sort of at least public valuations do in the short term -- I'm assuming private valuations sort of moved down there as well -- and the fact that it's going to be more difficult for a subscale plan to -- certainly to grow but even to survive longer term?

Alexander R. Cunningham

I think that's something we've already seen, and it's certainly something we've talked about historically, is that we thought over time, as regulatory requirements, capital requirements and others get more rigorous, that there might be opportunities for acquisitions with some those smaller call it single-market, limited-product opportunities. Of course, we will all need to get past April 1 to see what the revenue outlook is, but I think we have already seen the trend that you mentioned.

Joshua R. Raskin - Barclays Capital, Research Division

I agree, you guys have participated. It sounds like -- my guess is the goal is to participate further.

Alexander R. Cunningham

I think under any scenario into the future, besides the right core capability, scale will be a benefit.

Joshua R. Raskin - Barclays Capital, Research Division

Yes. Well, I think that the dual eligibles -- you talked about the combination of your skill sets. There's nothing as obvious as the dual eligibles, that's sort of right in your crosshairs. I think there's -- and the conversation, I feel like, in the last month or 2 has moved from the assumed savings rate and getting comfortable with that now to the measurement of the baseline trend. And maybe this is Kentucky related or some of the other markets where you've seen some of the issues, but how do you guys gain comfort that the rates are adequate for some of these dual opportunities? And how do you mitigate the risk around -- and some of this is just natural standard deviation that occur in your markets, et cetera, but how do you guys gain comfort that if we're going to invest the capital into a large dual opportunity, that we're going to be able to manage that effectively to start?

Alexander R. Cunningham

Sure. I'll give a broad, qualitative overview and then Tom certainly can add some in that. Of course, being in the business for many years in many markets, serving the full spectrum of populations gives us a good basis of our own data in terms of utilization, unit cost, the effect that we've been able to have in terms of utilization and outcomes, in terms of assessing what we are able to accomplish through one of these programs. But our actuarial team engages very actively to understand the base data, historical utilization and the assumptions, the managed care assumptions that the state and their actuaries would be using. Before I hand it over to Tom, though, one qualifier I would say is that we certainly will bid, have bid with discipline. There have been markets that we bid. One that stands out is the Kansas procurement opportunity from last year that we bid and we weren't successful. But it was a 2-part procurement under which the state evaluated the technical proposals and bidders had to achieve a certain number of points in the technical before their business bid would be opened. We got through the technical. I'm pleased to see that. But we weren't 1 of the 3 lowest bidders. And the state said very matter of factly they were going to award contracts for those 3, so we bid in a way that we thought was appropriately rigorous but also disciplined. And in that case, not having won on price, frankly, was fine. But Tom, what would you add?

Thomas L. Tran

Sure. I mean, we are managing over 100,000 duals today. So we have had a lot of experience over the years. And generally, the performance of our dual population is more favorable than the non-dual population. So that gives you some sense as to how we go about managing the cost of that.

Joshua R. Raskin - Barclays Capital, Research Division

So 100,000 you manage, both -- is that just the Medicaid benefits for those 100,000? Or are you doing both for [indiscernible]?

Thomas L. Tran

Yes. So we have today in the -- we call it a Dual SNP plan today. In the MA market share, we have over 80,000 members in the D-SNP today. So in addition to that, we have other who are really not in the dual plans, but we also manage a component of that.

Joshua R. Raskin - Barclays Capital, Research Division

Right, right. So the 80,000 is full dual, right? And then 20,000 is partial.

Which brings me to the next question, which is the medical management, right? These are -- you guys have expertise obviously with Medicare. You've got expertise with Medicaid. But these tend to be what seem to be more chronic, more complex and more costly. And so, it sounds like there's a lot of -- there's a higher need for medical management. And so how do you make that investment? Is that something you can build? Does that have to be bought? Is it a combination? I'm just curious. And what exactly are sort of the areas are you focused on?

Thomas L. Tran

So the -- on the dual side, what we've -- we've been managing this for a long time starting probably in early 2000. And we have essentially program targeted to different disease states for the members, from the highest acuity, you can say, from close to long-term care all the way down to the lower acuity. So we have nurses that we deploy on the field to really help manage the population in addition to telephonic support. And that -- the transition of care of people from hospital into the home into a step-down facility is very important. So we basically have had quite a bit of success. And we have over the last couple of years deployed a care model with a lot of foot soldiers on the field, and all the predictive modeling can also help us to look at that population as well.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, that's helpful. You mentioned Kansas. There's been a couple of other states that the procurements have gone other ways and some are certainly price related. Some are not as obvious. We don't necessarily know what happened. So how do you guys go through the review process? What are you guys doing to improve your bid? I guess the whole process by which you guys respond to RFPs, et cetera, has there been any substantial changes? And how do you sort of learn lessons?

Alexander R. Cunningham

Sure. What we have done, what we do, do at the end of the procurements, whether they're successful or not, is a postmortem evaluating our performance and scoring that against those of our competitors, when and where we can get a debrief from the customer, from those who are actually procuring, so we get some sense of what the relative value was, how they interpreted our offering. And it gives us an opportunity to continue to either think about core capability enhancements or perhaps the presentation and positioning of a number of our capabilities. But we certainly look at each of those opportunities as one to learn from.

Joshua R. Raskin - Barclays Capital, Research Division

I mean, has your sense been some of these have been presentation related? Or do you think there are lessons around capabilities that you guys are going to focus on?

Alexander R. Cunningham

And what -- I think over the last couple of years, what you see in the different programs is it's very hard to find a common thread across those. And we've had a number of wins, there have been some also that have not turned out that way. But they're very different constructs in the way that states are procuring, price bidders versus price taker, how they might value incumbency, various other things and even -- and as I mentioned, it's -- whether it's a multitiered procurement or whether it's just raw scoring across boxes full of binders, so to speak. And so it's hard to find a common thread. What becomes most important is to really engage in a postmortem and identify the key areas for opportunity into the future that may or may not translate to the next state, the next customer, the next procurement.

Joshua R. Raskin - Barclays Capital, Research Division

Got you, got you. I was reading about Medicaid expansion. I think that's relatively obvious that it's a positive. But one of the issues in the PPA's case is industry tax. And I guess we're going to start finding out very quickly whether or not states are willing to accept that. It sounds like Florida has got some budgetary language already that acknowledges the cost of that. So it sounds like the home state is at least there. Have you gotten any challenges yet? Are there any states in which you're looking for a midyear update, the Georgias of the world where they have not included that yet? And what happens in that situation?

Thomas L. Tran

I guess it's still early in the rate setting process for many states. But as you said, Florida has agreed to include that in their budget for the next fiscal year. So that's a positive for us. But most of the state actuaries that we have had discussion with deal with the industry pack as an item they need to bake into the rate setting process from an actuarial soundness viewpoint. So right, that's what we have heard from many of them. And so obviously, it's going to take the time to work with the states based on that.

Joshua R. Raskin - Barclays Capital, Research Division

But so far, the feedback seems to be there's an acknowledgment that this is a cost to running a Medicaid managed care plan in a specific state and...

Thomas L. Tran

That's true. And there has been precedent, including premium packs, best packs [ph], many other things they have included in really the rate setting process.

Joshua R. Raskin - Barclays Capital, Research Division

All right. Last one for me and then we'll move to the breakout is just there's a lot of growth. You guys have bought some growth. Medicaid is expanding. You've got some contract wins, et cetera. Can you talk about your capital position, Tom? And when and -- I don't know if it's when in there for when. Or we should just say when it arises, the need for capital, how do you guys think about addressing that?

Thomas L. Tran

Yes. So as you know, the -- we have recently completed an expansion of our debt facility and increasing our debt facility by $230 million. So that gave us a lot of flexibility on the balance sheet for capital deployment for growth either organically or acquisitions. But the -- from a debt-to-capital structure, we're still very low compared to our peers. So in addition to that, if you think about capital structure at the subsidiary, in Shaun's [ph] HMO level we have very strong balance sheet there. It's -- basically, we have 2.4x the required capital. So we do have capability for dividend or for growth to support -- and the capital to support growth. In terms of predicting future capital structure, I would shy from that right now, and we're just basically looking at a lot of opportunities. Certainly, we like what we see in growth as opposed to returning capital to the shareholders at this time or dividend for that matter.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And is there a way to estimate the excess level of capital that you guys are currently holding, what that translates into in terms of your potential revenue capacity with the understanding that at this capital, this sublevel, it will have to be moved up and over in all the [indiscernible] and even multi-year.

Thomas L. Tran

Right. If you think about it at the subsidiary level, we can double our business in the aggregate, right, on average, without any challenge. That -- so in addition to that, we still have excess capital at the parent's company that we can deploy.

Joshua R. Raskin - Barclays Capital, Research Division

Well, thank you gentlemen. We'll hold the audience questions till we get over the break room. We're in Point Sienna 3 for those that are going to join us. Thanks, guys.

Alexander R. Cunningham

Thank you.

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