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Universal American Corporation (NYSE:UAM)

Deutsche Bank Securities Health Care Conference Call

May 30, 2013 04:10 PM ET

Executives

Richard Barasch - Chairman and CEO

Analysts

Scott Fidel - Deutsche Bank

Question-and-Answer Session

Scott Fidel - Deutsche Bank

Alright thanks. Scott Fidel, managed care analyst with Deutsche Bank. We are delighted last but not least to be able to encore out the healthcare conference with Universal American. Here from the company, we have the Chairman and CEO Richard Barasch, we will just do a Q&A session and certainly want to solicit the questions in the audience if you have them but Richard I don’t know is there a comment or two that you wanted to make to start or?

Richard Barasch

I am just happy to answer your questions. It’s the end of a long day that started with the 6 AM shuttle, so I am very happy to have the incoming as opposed to me saying the same thing that I said already 10 times today.

Scott Fidel - Deutsche Bank

Perfect, then why don’t we get right into it and actually maybe we could consider this a two part discussion on Medicare, we actually just had Humana up on the podium right before this session so we were talking quite a bit about the Medicare business and I thought maybe we can start just sort of following up on that conversation and clearly, I wanted to ask a question just first Richard just on your thinking around as the MA bids are due in just a few days.

And while each company has their own considerations they need to make about, their own cost structures and market positioning, each company also has to think about where the industry’s thought process is overall and particularly relative to the question on maintaining a growth trajectory in the business as compared to potentially wanting to maintain the margins at a level they have been running at it.

As you think about some of the game theory dynamics and you sense somewhere the industry is headed right now. Because you sense that your competition generally is going into this bid process with a view that they do want to continue to grow the business even if it requires taking margins down somewhat or that companies are willing to step back from markets and focus on retaining margins?

Richard Barasch

Before I answer that question what did Humana say?

Scott Fidel - Deutsche Bank

They said they want to grow the business in 2014.

Richard Barasch

Yes look I think that the macro for us and I think the correct macro is that Medicare Advantage is here to stay. I think one of the things that the, all the 45 day letter issues proved is that the politics around Medicare Advantage are very positive. And in long haul it’s going to be, it is and it’s going to be a successful program.

I think it’s not crazy to think that in three or four years 50% of seniors will be in some sort of (captivated) program. I think what we are doing in the ACO is, it’s kind of interesting too and where that fits we can talk about also. ’14 presented a lot challenges even before the 45 day letter. The challenges were reduced correctly I think by CMS. But still it was going to be challenging in all the issues that we are all facing.

The companies kind of knew that they existed six-eight months ago and hopefully prepared and we are thinking about it. We said that you said bid will and try to predict what your competitor, trying to predict what the government is going to do in years out, trying to predict what your competitors are going to do in this year. It’s complicated, it’s tricky, and there is game theory.

And you look at it market-by-market, circumstance-by-circumstance. In Houston, we look at and think a lot of that, think elsewhere. In New York we think more about United and some of the blues and kind of trying to figure out what, trying to decide what they are thinking. It’s complicated, but Universal American has a pretty good history of bids both in Part D, and now in MA for a long period of time and we, you know, our bids are done we are going at the CMS over the weekend and I am, first of all happy it’s over and I think I am pretty happy with where we are.

Scott Fidel - Deutsche Bank

And as you thought about where you think the heads are of those other companies, where do you think they are? What’s your best sense on that?

Richard Barasch

Look my gut is that, this is me, this is not a Universal American comment. I think people like the business; they want to keep their market share.

Scott Fidel - Deutsche Bank

And then just thinking about UAM more specifically and clearly the business now is primarily composed of three primary segments in MA. You have got the Northeast business network base and a pretty good positioning, the Southwest Texas business, which has been in excellent positioning and then some of the non-core which is some of the world (privacy insurance) that’s left and I guess some other stuff.

Richard Barasch

Right.

Scott Fidel - Deutsche Bank

And as you think about those three components and then maybe talk a little bit about how in thinking about the 2014 context, how you the positioning is for each of those three and from a geographic and products positioning whether you can maintain or are there certain elements of each of those markets that where you do need to make some rationalizations?

Richard Barasch

One of the things that I am very sure, happened in everybody’s bedroom, was sort of an internal dialogue about how good is our current medical management and our infrastructure for controlling costs, and in places where it maybe not quite as good, is the prospect of being better over the next year or two or three. And I think that helps you make a decision about your level of being aggressive in a particular market. We couldn’t be any more (Plato) if you’re calling a core a non-core where our heads are.

We’re focused on the places of core. In the non-core we are still offering a product of value. And we’re still offering medical management and care coordination to those who want it. But long call, this was something I have said, how many times you have heard me say this, if you are not doing medical management, a good medical management in Medicare Advantage then you are not, it’s not going to work over a long period of time. But most of the companies, they are actually, I think do it much, much more, than they were before.

Scott Fidel

And then on the thought processes around margins and it’s been a business where folks have been targeting 5% and earning that pretty consistently, if not more, Universal American certainly has been right there and even though your foot print isn’t as large as some of the competitors your margin profile has been very competitive in the Medicare Advantage business.

But we certainly see companies, sort of recalibrating the discussion around margin at this point and you know that 5% margin target is clearly not as concrete for 2014 at this point and I was just asking Humana about this before in terms of as we think about where MA sits. And it has sat over the last five to six years with the 5% margin, comparing it to some of the other government type product sets.

Medicaid, you know, has been running probably more 2% to 4%. Exchanges industry sort of setting led up to be a 3 to 5 point type business. Where do you think MA sort of evolves into? Do you think there is reason that MA can sustain a superior long term margin profile level to those areas? Or do you think the margins convert more with some of those other government segments?

Richard Barasch

It’s the dynamic of Medicare Advantage; it’s different in dynamic of Medicaid, which would give me some optimism they were not going to go quite that well. And I think the reason is because, in most of your state are different, but (kind of) is either a big process where you get everything at one price; you know it almost pricing the group, one time one price.

And you are in this competition with a lot of your peers, very different than individual business. Individual businesses have historically been little bit more profitable than group businesses. And I think Medicare Advantage stores the characteristics of an individual business, and while it’s a government program, lot of it depends on the behavior of our competitors as much as does the behavior of the government.

And I know that’s an imperfect answer but I actually think that Medicare Advantage probably sits above Medicaid, and for good structural reasons.

Scott Fidel

And, you know maybe thinking just a bigger picture within senior and one thing I have always admired about, you know because American frankly is that while your target market is clearly the senior market, the company has never had been philosophically or emotionally (wed) long term to one individual and market.

I think you always had a view that the market evolves and certain parts of it may become more attractive and you have been willing to reposition the business to be there obviously Part D, Medicare Advantage, you used to be more in Med Sup job and clearly things are evolving right now. The ACO strategy clearly is an area to think about within traditional Medicare. So maybe you’re tying that end here.

I know recently you talked about after thinking about Med Sup maybe a little bit more excited, didn’t want to put time to that old memory. So maybe you know if you think about the evolution here, maybe thinking about the context of MA sitting at 27% of Medicare right now and sort of within that senior context where do you think the next evolution is in terms of how the market is going to shift?

Richard Barasch

I think, whether or not there is a pause in growth in Medicare Advantage in ’14 or not, and I am not putting a marker down on that. I think Medicare Advantage will grow substantially over the next five years. And I think, everybody is sort of just thinking about maybe just got to hang in on through these, kind of, tough years.

And then, getting back to the original thesis which was demographics and (inflation) has just inherent good drivers of more, of higher revenue. I think the internal demographic dynamic is that, I think it’s reasonable to think that 27 goes up over time. So, you really have the overall demographic is the pie is getting bigger and the percentage of the pie is bigger and then you get the benefit of inflation at some point when rate reductions stop eating into that.

And I think the business will be, will continue to grow, I think Dual Integration will make a, will grow. I think there is almost no one who doesn’t think that Dual Eligibles isn’t better in managed care at some level. I think that’s going to continue to evolve. But the way kind of we look at this is that we made a decision to go into fee-for-service Medicare also because even if I’m wrong a 45% or 52%, it’s still an enormous number of people in the fee-for-service program for some foreseeable period of time and that’s where the ACO strategy comes in and choosing between the two strategies of ACO on Med Sup to deal with fee-for-service population.

Our choice was to be forward that again and think that if the world is going to move toward managing the care, care coordination, even in the fee-for-service population, it doesn’t exist in Medicare supplement, and it does exist in the ACOs. And love my friends at the ARP and (inaudible) I think but they don’t do doing any kind of cost containment for managed care and I think that there will be outliers at some point, pretty soon.

Scott Fidel - Deutsche Bank

And when considering the work you’re doing on the ACO side and still sort of work in progress in terms of giving us some sensitivities in terms of how to think about that financial model of it. We’re still at a point where I think, we all of us, when we get into our own models. We know exactly what to do with that, but maybe as sort of thinking about 2014. Is the ACO strategy is going to be something where when it gets the point to talk about 2014 that it is going to impact the model where can be a material?

Richard Barasch

We have three hundred odd thousand numbers, 31 ACOs. The notion that all 31 are going to succeed equally is wrong. I mean the chance of that are just not very high. I think we’ll figure out what works and what doesn’t. I think we’re going to add some more in the ’14, 1/1/14 contract year and we’re, there is reason to be optimistic that we start move the needle.

Scott Fidel - Deutsche Bank

Maybe we’ll just chat on APS for moment and maybe for sure just give us an update, it’s been a bit a tough start to that acquisition. Can you maybe just help us understand first in terms of what have been some of the key challenges relative to expectations? Is it been really just the revenue situation, or are there other variables to consider about? And then sort of the current status around, are you seeing any brightening of the prospects as this point or still sort of same status as we’ve seen since the deal was initially closed?

Richard Barasch

So, let me first say why we did. The acquisition was for us to kind of get a footprint in Medicaid. You’re correct. It hasn’t worked out as well as we’d hoped. The company lost a few contracts pretty early. In our incumbency, we didn’t get something as we thought that we might have got and so to say that we’ve bring it off through a good start is totally accurate.

Having said that, and kind of the way we think of this now, we are not quite ready to segment at this way, but how we’re thinking about it is there is really two pieces of the Medicaid business that are interesting to us. One is the fee-for-service piece which is the historical legacy, APS business; we’ve got terrific contracts in states like West Virginia, Oregon. But we are in fact doing administration of the care coordination of Dual Eligibles in those places on behalf of these states.

And I think there is been a lot of discussion about healthcare California, the California demonstration and they were (annoyed), Massachusetts, it’s all really, I think there were dozen states that have integrated programs yet, 38 states are still doing it on Duals or on a fee-for-service basis. So, there is still a very interesting market to work with states to help them manage these populations, on a fee per service basis because they're not all getting it.

Now many of them are sort of bifurcating long term care and the A&D part and a lot more states like Florida as an example are doing as long term care programs, so is New York. So there is just a myriad of opportunities both on, on the fee per service side. On the risk side, we have a pretty robust behavioral risk feeling (vertigo) and that's still working out okay for us. And I think we will see, I think the goal is to see progress on both of these.

And a lot of the progress on the risk side is going to come from the integration of what we do currently in Medicare with what some other folks may be doing in Medicaid and marrying those two. And one of our goals is to do the same thing in Medicaid as we've done in Medicare, which is find appropriate partnerships with providers to put us sort of on the right side of the curve.

Inadvertently I don't know, by the way, if any of you guys have read it that means you got to get a life, there's this publication called I think I know it's called Managed Long term Care, where one of our guys Steve (Voida), if you guys know him he's a (inaudible)Steve, great guy, and he's working for us now for a year or so, gave an interview where he let the cat out of the bag about a program we're doing in rural markets Arkansas.

Not big, not going to move the needle in ‘14, but really interesting where we’ve created a (inaudible), their license, this is an amalgamation nursing home top owners in rural Arkansas, basically concluded that there are two choices, either that we're just going to be at the kind of butt end of unit cost reductions or they could take control of it, create their own (D-SNPs) and kind of start to take control of the entirety of the amount of money that's being spent on this population and to aid the long term care management.

We got a very interesting partnership with them. We're doing reinsurance, we're doing care management for them, we provide some capital for them, and these are the sort of things that I think you will see us do a little bit more in the future.

Scott Fidel - Deutsche Bank

And in terms of, on, so it sounds like it's more from here on looking to do some of these, more of these partnerships or is there a thought process that you still have capital capacity and maybe APS was the first shot in goal and if you still have the same, you know, sort of level of excitement around the Medicaid piece, would you consider doing a follow up transaction to try to get the assets you need? Or do you want to really try to focus on making APS work better along with some of these partnerships?

Richard Barasch

If I were to stay we staying, I could go outside look at my email and there might be a really interesting acquisition for us so, to say never is too strong, but I think we all, very from, we're very focused on business development as opposed to acquisition at this point.

Scott Fidel - Deutsche Bank

Any questions, Jack, out there? Maybe staying on the balance sheet and on capital end, maybe give us an update on where your thought processes there, I mean clearly you've got capital capacity and some more should be coming up. You know if we think about MA the next year or two may be it grows but probably not at as fast a pace as recent years so, (that’s) the context, do you have any thoughts around capital.

Richard Barasch

I think it's a good question, it’s a legitimate question, it's a question I hear a lot from investors, legitimately. I think it's very important in our story and one of my answers is in the last five years we've done everything. We bought, we sold, we've paid dividend, two dividends, we sold the company, made a big distribution, we bought back stock, we bought a company. So, we've used every club in the bag, so to speak to this point.

And you know in general and understandably some of the disappointments around the APS transaction, I think by and large we've managed our capital well, and there's no reason to think we won't continue to manage our capital well. So I kind of ask for a little bit of dispensation based on past history that we're doing the best we can to get as much money up the line to do the right things with it.

Scott Fidel - Deutsche Bank

Then, thinking of another element, new element for 2014, (inaudible) Medicare, clearly something that has not been as meaningful part of the conversation, given some of the general thought processes, that margins are probably going to come down somewhat and that maybe next year. With that said, company performances continued to be very strong, posts very good results in the first quarter.

So as we think about some of the flow through from that, are there any geographic markets where you know sort of in the baseline year of 2013 sort of underneath the threshold then you have to sort of make some calculations around that on top of the other the headwinds side it with the rate cuts?

Richard Barasch

Very big question, but ’14 there is a lot of moving parts in ’14, whether bids were complicated and (MLR issues) were complicated, every class of AOR into (NYSE:MLR) in some cases, not some cases, in all cases, which you had, you know, you had to do, none of this was simple. I am not sure I have a great answer for you question.

We sat in the room, we did the best we could with the information that we had. I am pleased with where we came out, given all the inputs that we had and the most important next moment for us is going to be when CMS post saw our competitors to see their how good our game theory was. I'm not sure I answered your question but you know.

Scott Fidel - Deutsche Bank

SG&A and the Medicare advantage segment I think you’re saying it will be a little over 13% this year, is that request at all?

Richard Barasch

No request in that number and some portion of that gets request.

Scott Fidel - Deutsche Bank

Any idea how much?

Richard Barasch

It’s immediate to numbers, it’s meaningful.

Scott Fidel - Deutsche Bank

Like a couple of hundred basis points?

Richard Barasch

I don’t think we’ve been met.

Scott Fidel - Deutsche Bank

Okay, well, I guess the question is over the next it’s still higher that periods I guess, so over the next couple of years, if you’re growing in core markets and really not growing and noncore markets, you know, how much should we expect in terms of potential SG&A improvement, if overall maybe enrollment isn’t growing by much?

Richard Barasch

You know hopefully there is two numbers, there is the number of members and there is the revenue. And one of the good things is that our core market tend to be much higher PMPMs than rural (property) for services as an example. So even if we grow one and lose the other at the same rate we still have higher revenues, not huge, but it won’t be flat or negative if that were to happen.

We know we’ve got too much capital and we know we’ve got too much overhead. And both of those were issues that we have to address. First problem is good problem, too much capital, high class problem. Second problem is real problem.

Scott Fidel - Deutsche Bank

I want to ask about just thoughts around utilization and sort of where we’re now and where we’re heading clearly MA, MLR was very strong in the first quarter. So certainly that seems like utilization been a factor over the last couple of quarters for UAM.

How do you feel about sort of where we’re sort of now that here on the second quarter and sort of what’s your running thought process on the trajectory of utilization over the course of the rest of the year?

Richard Barasch

Again quarter to quarter, there is nothing that’s we’re jumping out. (Inaudible) I’m very bullish on the notion of utilization reducing. I just recommend everybody to read the article in near times by Thomas (Friedman) over the weekend. Very interesting article and that sort of saying something that, kind of I’ve been saying for a while.

Of course when he agrees with me, I think it’s a great article. I agree with him that the ACA is up there and that’s important and the question of exchange is important more particularly or perhaps more important is that there is myriad of start of companies and nearly all of those are trying to figure out ways to improve quality and reduce cost.

And the market is driving this and if you could say anything about the ACA whether you like these changes, don’t like it, don’t like the 2000 pages, it accelerated a market revolution that I think is profound and it’s going to change the way people think about their healthcare.

In two other articles and one of the great things being a healthcare you get to read about your business in the news paper every day. Today’s Wall Street journal, how our small business is dealing with these changes? I don’t know if you have saw that article, one guy was a pizza guy and he is dealing with it, one guy was is manufacturer, a high tech guy now he is dealing with it and the long and the short of it is people are thinking about things that they didn’t think about before.

In the old days, old days like last year they’d get their renewal from the broker on their small group and they would say oh darn, 8% increase maybe we will increase deductibles to keep it at 6% or 12% and life went on. Now, everybody is being really forced to rethink the whole thing. Are we going to offer insurance, are we going to do a defined contribution plan, if we do insurance, maybe we do a self-insured plan with some of the things that have Safeway has done, or with the CVS has recently done with value based plans.

So, personally I think companies reached the tipping point in the last couple of years where it’s like enough is enough with the rate increases. And now they are more willing to go to narrower networks and more willing to do value-based and more willing to reward people for better health, penalize people for worst health habits.

And there is, this is all happening underneath and I think it’s going to have a profound effect on all of this. In our little corner in the world, 300,000 Medicare advantage members, we are going to do our best to reduce their utilization in a safe, good, high quality way. Because people in the Medicare fee-for-services and which is the part of the reason I philosophically don’t like Med Sup, because it encourages people to kind of bounce around in the system without any kind of thought process.

We are going to have our folks get referred to doctors, that if you are walk in with a sprained neck, you don’t go right away to the emergency room and get an MRI. You go home and put an ice on it and if it’s still bad in a couple of days you come back and things like that accumulate and become very, very important overtime.

Scott Fidel - Deutsche Bank

So as the bottom line, your call is that split on utilization is structural as compared to cyclical?

Richard Barasch

Absolutely, absolutely and I think it’s going to accelerate. I think we are just in the first ending or two of this. Burwick we had an article that I saw yesterday, basically said that his view and he is a smart guy, is if there is still 35% waste in healthcare. Now fairness, a big hunk of that was fraud.

So a lot of the other is overutilization of facilities and overutilization of care. In our (neck of the woods) in New York, two of the biggest institutions in New York were dark for four months, NYU and (inaudible) after Sandy. Any stories about people not getting healthcare? There is a huge excess capacity on the provider side, the facility side.

Scott Fidel - Deutsche Bank

So that’s on the utilization side as you think about sort of the unit cost or sort of the inflation side. What’s you are thinking now I mean clearly we have been running at very low general inflation in the broader economy, but with that said clearly there is the mandate everybody needs to get cost down in healthcare.

So, let’s say we work under an assumption that sort of general

inflation, interest rates, et cetera all start to move higher over the next year or two I mean clearly asset prices Case-Shiller, consumer confidence all of those things, some of those already starting to come back.

Richard Barasch

I have a theory about that too but keep going, the house prices?

Scott Fidel - Deutsche Bank

About the (inaudible) though but more just to the point if we have leading indicators of some general inflation rate is rising, can that start to show up on the healthcare side?

Richard Barasch

The answer is I think that the revolution in utilization is going to be way overwhelming.

Scott Fidel - Deutsche Bank

And what’s the theory on Case-Shiller?

Richard Barasch

That in the last six months, as a personal investor, I have seen seven very large deals, Colony Capital, JPMorgan, Goldman Sachs, every single one of these guys had a deal to buy single family homes and rent them until the market got better.

And I think these deals sucked up a lot of capacity, a lot of over capacity in some markets because they went into Florida, California, and some of the places where prices have been very low and bought thousands of homes in a very short period of time. And I think that might have jumpstarted off the theory. But still a much of it matters because prices are going up and supply has dropped for people who are homebuyers.

Scott Fidel - Deutsche Bank

Well I think on that note, since probably we have talked enough healthcare now to housing I think that we will cap off up the Deutsche Bank healthcare conference on that housing commentary, Richard thank you very much.

Richard Barasch

Thank you.

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