Triple-S Management Corporation (NYSE:GTS)
UBS 2013 Global Healthcare Conference Call
May 21, 2013, 03:00 pm ET
Ramón Ruiz-Comas - President & CEO
Okay. Good afternoon everyone. Thank you so much for coming to the 2013 UBS Global Healthcare Conference. My name is [Kenneth Sule] and I am happy to be your host for this session. We are very pleased to have with us today, Mr. Ramón Ruiz-Comas, the President and CEO of Triple-S Management. I just want to remind everyone that there will be breakout session in room Liberty III just down the hall right after the presentation. Thank you very much.
Good afternoon to everybody. First, let me thank all the folk of UBS for providing us with opportunity to present our company, talk and strategy to you today. Today, I am accompanied by Amílcar Jordán, our Chief Financial Officer and Alan Cohen, our Chief Marketing and Communications Officer.
Be advised that this presentation includes forward-looking statements. You can refer to the risk factors as outlined in our press release and our Form 10-K.
Triple-S Management is a well established corporation with over 50 years serving Puerto Rican market. We are one of the leading managed-care organizations serving the commercial, Medicare and Medicaid business with a dominant front on broader provided network. We currently hold the Blue Cross and Blue Shield license for Puerto Rico and the US Virgin Islands. We are very proud of our strong physician network and consistent customer satisfaction.
As we look to the future we have an opportunity to improve our MLR through a number of ongoing initiatives and take advantage of our inherent operating leverage. We have a balance book of business in addition to our managed care segment we operate our life and property and casualty insurance segment. The balance put us in an advantageous position to diversify our risk and we are not dependent on any single segment.
Before I go to the strategy, I think it's important to discuss Puerto Rico’s unique operating landscape so we can understand why we are different than US managed care companies. First, 93% of the Puerto Rican population have insurance coverage already. The Government Reform or Medicaid programs covers up to 200% of the poverty layer. On the Medicare side, there is currently a 70% participation rate and we have a higher incidence of [dual eligible].
Medicare beneficiaries account for 19% of the total population, 300 basis points higher than in the US and with the star rating unlike the United States Medicare advantage market, no plan in Puerto Rico has a four star rating. Furthermore, in CMS, in April 2013 ruling, they recognized that Medicare enrollment cost and use for in the Puerto Rico are different than the mainland.
We have a strong physician contract. Being a leader in Puerto Rico, doctor and dentists recognize Triple-S. We distinguish our sales through our excellent relation with the physician and dentist community. Importantly, we get involved at the community level which means creating strong relationship with our constituents and our customers; because we are leading managed care organization with highly recognized brands.
In addition to our managed care segment, we operate the leading life insurance company in Puerto Rico and one of the top five property and casualty companies on the island. Notably, we are the only company with a strong presence in all three business segments. This put us in advantageous position to diversify our risk hence we are not depending on any single segment.
Our life, largest segment, managed care encompass our commercial Medicare or Medicaid business. We currently serve approximately 1.7 million lives making us the dominant player on the island with the most recognizable brand. In 2012, our managed care premium and fee revenue was more than $2.1 billion.
Our goals continue to be controlling and reducing our MLR in both commercial and MA segment. We want to expand our operating margins and realize further operating efficiency. We believe this can be achieved by focusing and reducing drugs spend and better physician align. We are continually refining and redesigning our plans to reduce costs, while at the same time improving clinical outcomes. Expanding our partnership with physicians and further positioning the pay for performance model are also key.
In the Medicare Advantage segment, we will leverage the Blue Cross and Blue Shield Triple-S brand on the American health platform to improve market share and to fit in the growing market. There are ample opportunities to complete complimentary and accretive acquisitions we have seen and outside of Puerto Rico and across two of our segment platforms, managed care and life.
With more than 50% of the market we remain the dominant player in the Puerto Rican commercial health insurance market. Due to the competitive landscape and lack of pricing flexibility we will focus on maximizing profitability at the expense of market share gain. Promotion of preventive care through primary physician, clinical management programs to improve utilization, conversion and use of electronic medical record, new product with more of HMO structure, and review of compensation structure to improve quality of care are important components of our strategy in the segment. Our retention rate stands in 97%. In Medicare Advantage we are the third largest player on the island. Based on the challenge we face in 2012, we reorganized the entire MA business unit and undertook a number of measures to manage cost and utilization. I will provide additional information on the next slide.
Since November 2011, Triple-S has served the Medicaid population through an ASO model under our 12-month contract with expiration up to June 30, 2012. We are the exclusive provider of healthcare service in five of the eight regions for almost 875,000 members in the island public insurance program. We do not anticipate any change for the next fiscal year given that we are already in the third week of May and in a recent newspaper article the Secretary of Health stated their intention to expand the contract one more year.
Participating in the Medicare Advantage business is important to our overall growth strategy in managed care. We recognized the total MA business and consolidated business unit under Susan Rawlings’ leadership. She is streamlining operations and increasing accountability. We are also working proactively to improve our rating. We made significant progress in 2012 and now offer consumer products with three stars. This is consistent with most companies on the island. Our current goal is to reach a four star rating which is essential for receiving bonus payment from CMS in the future. During 2012, our results were unfavorably impacted by higher utilization particularly in pharmacy and higher rate of cost in the American Health business. We implement a number of proactive measures to manage costs and utilization including evaluating and reassigning products in American Health to ensure that 2013 will be adequately priced. And we signed our new PBM contract with Abarca Health achieving more favorable pricing among other benefits. We are happy to report that in the first quarter of 2013 we demonstrated significant progress.
One aspect of our strategy is to focus on accurately measuring the risk of the population served. As part of this process we will increase our use of health reassessment and implementing an increasing utilization of electronic health risk evaluation from providers. We are also working diligently to allow incentive with our provider network to more effectively influence patient outcomes and cost. Since going public in late 2007 Triple-S has a dual capital structure. December 7, 2012 marks the fifth anniversary of our IPO. We gave the Board authority to convert any remaining class VIII common stock in to class  share. On March 06, 2013, we launched our shareholder outreach program to invite our class A share to convert the shares in to Class  shares and to sell those converted share through our market secondary offering and concurring share repurchased by the company as up to $30 million of the class  share. Several dates ago, we announced the completion of that offering; 5.4 million class 3 shares were priced at 18.25 per share. 4.4 million shares were sold to the public and 1 million shares were purchased by Triple-S. The underwriting has granted a 30-day option to purchase up to an additional 810,055 shares of Class B common stock from the trailing shareholder to commence any of our allotment. The company will not receive any proceeds from the (inaudible) exercise.
We remain confident that different instructions is in the best interest of our stakeholders, has been increased the threading liquidity of least security and provide for the orderly disposition of the converted shares in the markets, return excess capital, enhanced earnings per share and substantially unified the company share structure. Let me now review briefly the first quarter performance on our financial guidance. Pro forma net income for the first quarter was $15.6 million or $0.55 per diluted share versus $6.1 million or $0.21 per share in 2012. We were very pleased with our better than expected first quarter performance. The proactive measure implement last year in Medical Advantage business are having a positive impact reflects by their 480 basis point improvement in the managed care MLR, which came in the 85.7%.
Consolidated operating revenue was 589.6 million. We achieved modest premium price increase growth all of our managed care segment. While we experience a slight decline in our overall membership in both the MA and commercial segment; I want to emphasize that as far as our strategy, we are willing to sacrifice market share for improved profitability. Our [life] on property and casual business were inline with our expectation. And in the case of the property and casualty line of business we have a significant improvement as compared to the first quarter in 2012. This slide details our 2013 financial guidance which we use in conjunction with a release of our first quarter result in early February. While we were very pleased with the company performance in the first quarter; we felt if more important to take a prudent stand until additional information becomes available validating the sustainability of our strong performance.
It should be noted that the EPS guidance does not include the impact of any share repurchase activity that may occur in 2013. In summary, GTS has over 50 years of experience in the Puerto Rico market [hold] the exclusive Blue Cross Blue Shield license for Puerto Rico and the US Virgin Islands and the leading managed care organization serving the commercial Medicare and Medicaid business has a dominant brand and broadest provider network, has a diversified and complementary book-of-business, has an opportunity to improve margins and our MLRs.
I thank you for your interest in our company. I would now like to open the floor to any questions. Thank you.
Okay; one of the things that I mentioned that Puerto Rico is different than in the mainland. In the case of the Medicare ruling I will say finally we were able to convince CMS that the calculation that was made for Puerto Rico was wrong when it was compared to the calculation made in the states for the refurbished rates. In Puerto Rico I will say other members have to request Part B and they are not included automatically as compared to the state of that member, automatically are obtained in Part B and they cannot have, okay. That has a significant effective in terms of that when they were establishing the base line to compare rates to Medicare Advantage rates. Our rates were affected because there was a lot of the population that didn't have the Part B. This year CMS recognized that issue and instead of announcing the rates for Puerto Rico in early April we worked on for all the states. Actually we recognized that they were going to recalculate those rates for 2014.
The actual rates were published at the end of April and at this point we know that they are going to be better to the amount that they were supposed to be using the prior formula, but right now our actuaries are working with the numbers to determine the real effect of that change because actually that will increase the rate that we would have for 2014, but to determine what will be the impact compared to the rate 2013, well we thought the market was -- that we were going to announce that information as part of our second quarter guidance. But the numbers were published at the end of April and that's why (inaudible).
I will say the situation is similar here in the state, so in our case we will be subject to that rate and we will need to consider that when we provide our pricing for the 2014 business. So that will be considered and that's part of the adjustment that we will need to pass to our customers. Accounting wise, it's similar also to hearing the state. We're buying capital. Any other questions? Well, thank you everybody. Do you have any?
Okay. The way I will answer that question is, in November 2012 there was an election in Puerto Rico and they were changing government. Therefore, prior government has made a decision that they were not going to participate in the change. Actual government is reviewing that decision. Up to this moment they have not make -- at least they have not announced what would be the final determination. So up to this moment we don’t know whether the changes are going to be implemented in Puerto Rico.
Let's say then you ask the question, what would be the effect? Okay. Is the federal exchange will go to Puerto Rico? It would be interesting how that will be implemented in Puerto Rico because I will say the rates are very different. So I don't know how they are going to implement that with the difference in cost structure that Puerto Rico and the U.S. If I use guidelines, national account, when national accounts go to Puerto Rico and price a business, there is a huge difference.
For a business in Puerto Rico is whether to contract directly through us rather than go to national accounts because the price difference is significant. So there are some things that are we need to see. However, my personal expectation is that they change people will be very careful with them because they will see it as a program run by the government. Therefore, it will take time to people are set receiving an insurance from the government rather than by private service. When you see the other type of insurance like the short-term disability that before was gone by the government now many companies in Puerto Rico purchase that insurance through their private insurers.
I would say being in the business for so much time, you understand that in order to improve your performance you need to work with every component, you need to work pricing, you need to work cost reduction initiative in terms of [playing] and you need to continue to become more efficient in terms of operating efficiency. So the way we see it, we need to work with every component in terms that we need to try to increase price to customers, because they will need to pay for the service that they receive. By the same token we have opportunity. We are creating constantly new programs to enhance the quality of service.
I will say I see change in the pay structure that we pay to provider. I will see more pay for performance, pay for quality service and in terms of, I mean (inaudible) efficiencies, I see the opportunity that in the past four years we invest, we made significant investments in data processing, I expect to use more and more data processing in order to improve our efficiency and reduce our [earning] expense. However, I will say requirements for ICD-10 is one requirement that requires a lot of investments and I will say my expectation of when it becomes mandatory in 2014 the implementation of ICD-10 that will create also a lot of administrative noise because a provider community would not be prepared to handle the new requirements of ICD-10 and insurance company will need to work with them in an effort to pay them the correct amounts.
So it would require premium, adjustment in claim and I would say in our case every 50 basis points of reduction in claims that represent almost $0.30 of EPS. So that's how you will start looking at these things that if there's not one item that you have to focus, you need to work with the three line items in order to be productive and efficient. Okay, well, thank you.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!