eHealth Inc. Q2 2009 Earnings Call Transcript

Jul.28.09 | About: eHealth, Inc. (EHTH)

eHealth Inc. (NASDAQ:EHTH)

Q2 2009 Earnings Call

July 28, 2009 5:00 pm ET


Gary Lauer - President & Chief Executive Officer

Stuart Huizinga - Senior Vice President & Chief Financial Officer

Kate Sidorovich - Director of Investor Relations


Youssef Squali - Jefferies & Co.

Steven Halper - Thomas Weisel Partners

William Morrison - Thinkequity

Mack Finler - Bank of America/Merrill Lynch

Richard Fetyko - Merriman

Jim Friedland - Cowen & Co.

George Askew - Stifel Nicolaus

George Sutton - Craig-Hallum

Sameet Sinha - JMP Securities

Carl McDonald - Oppenheimer


Welcome to the Q2 2009 eHealth Incorporated Earnings Call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Kate Sidorovich, Director of Investor Relations of eHealth. Please proceed.

Kate Sidorovich

Good afternoon and thank you all for joining us today either by phone or by webcast for a discussion about eHealth, Inc. second quarter 2009 financial results. On the call this afternoon, we will have Gary Lauer, eHealth’s President and Chief Executive Officer; and Stuart Huizinga, eHealth’s Chief Financial Officer. After management completes its remarks, we will open the line for questions.

As a reminder, today’s conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the Investor Relations section of our website following the call.

We will be making forward-looking statements on this call. All statements other than statements of historical facts are forward-looking statements. Forward-looking statements made on this call will include statements regarding the implementation of and the relation of platform to Utah Health Insurance exchange. The consideration we expect to receive from members generated through the exchange, our pursuit of additional government opportunities, the passage of healthcare reform legistlation, its content and its impact on our business, marketing and advertising expense as a percentage of revenue in the third quarter of 2009, applications volume in the third quarter of 2009, our target for marketing and advertising expenses as a percent of revenue for 2009, our 2009 factored GAAP tax rate, our expectation regarding the repurchase of shares of our stock and our 2009 guidance for revenue, stock-based compensation expense, GAAP income tax rate and the GAAP net income per diluted share.

Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by these statements. We describe these and other risks and uncertainties in our Annual Report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website.

Forward-looking statements made on this call represent the company’s views as of today. You should not rely on these statements as representing our views in the future. We undertake no surety to update or revise any forward-looking statements made during this call whether the result of new information, future events or otherwise.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G. For reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release, and in our SEC filings, which can be found on our corporate website under the heading Investor Relations.

At this point, I will turn the call over to Gary Lauer. Gary.

Gary Lauer

Thanks, Kate. Good afternoon and thank you all for joining us today. I’d like to begin by commenting on several of our financial highlights for the second quarter.

Revenue of $33.4 million grew 22% over the second quarter a year ago. Earnings per share was $0.16 and non-GAAP operating margin, excluding the effect of stock-based compensation, was 24%. During the quarter, we generated $8.3 million in operating cash flow, bringing our overall cash and marketable securities balance to $160 million as of June 30th. These financial results and others illustrate the continued leverage and strength of our business model.

Second quarter individual and family plans submitted application growth was 17%. By channel, direct continued to be the largest source of submitted applications at 43%, up from 41% in the first quarter of 2009, and 40% in the second quarter a year ago. I will provide more details on each of our marketing channels further on in my prepared remarks today.

During the second quarter, significant progress was made in many important areas of our growing business. For example, we won and signed an agreement with the state of Utah to utilize our internet platform and technology in connection with the Utah Health Insurance Exchange, allowing us to launch our public eCommerce on-Demand or eOD business.

We also added several new carriers and products to our offerings including an important addition to the State of Massachusetts. Additionally, we broadened the utilization of e approval, added important enhancements to our technology platform and continued to expand the presence of our commercial eOD platform and business.

As a reminder, eOD is our technology licensing business that allows carriers and others to market and sell health insurance directly under their name on our internet platform, which we host and to power their broker and agent channels by utilizing our online platform as well. I will talk about most of these areas in more detail later during the call.

I want to conclude today’s call with an update in public policy. As you may know over the past few months, I personally and others have been very heavily focused on healthcare reform and engaged in discussions with key members of the Senate and House Committees, their staffs also who more involved in shaping potential healthcare legislation.

Let me now go over our marketing initiatives by channel. Our direct channel generated 25% annual IFP application growth during the quarter. Strong performance in this channel reflected a continued increase in our visibility driven by media focus on healthcare, growing recognition of the eHealth brand, a public relations outreach and our highly relevant position in the marketplace and our value proposition.

EHealth’s PR strategy remains focused on consumer education, as we continue to share our wealth of information on a variety of essential health insurance topics, in press releases, media appearances, website content and company sponsored webcasts. Through our targeted PR campaigns we reached out to the growing ranks of recently unemployed and to this year’s college grads, who are coming off their parents’ coverage and need to look for quality, affordable health plan.

During the second quarter, eHealth was featured in leading national newspapers like The Wall Street Journal, USA Today, The New York Times and the Washington Post as well as top tier broadcast outlets like CNN, CNN Headline News, CNBC’s On the Money and national public radio.

eHealth was also covered by reporters in large regional papers, a variety of blogs, consumer lifestyle magazines and a multitude of local TV stations. We also had favorable response to e-mail campaigns that targeted former eHealth members, website visitors, who have started, but not completed an application, leads provided by many of our partners and another high relevance groups.

The performance marketing channel generated 21% annual IFP application growth. During the quarter, we continued to add new partners in many major categories. Of note, our new performance based partnerships with CareCounsel, one of the nation’s leading healthcare advocacy firms,, a leading online personal finance service and, the largest social network in online community of human resources executives.

Our business development team, also continue to leverage many of our long-term strategic partners, particularly in the employee benefits and traditional insurance brokerage areas to find new growth opportunities. One such example was with our good partner Aon, a leading global provider of insurance and risk management services.

In the second quarter, we launched a relationship with Aon’s client, ADP TotalSource, where our COBRA Learning Center will be made available to current and future COBRA eligibles of ADP TotalSource. ADP TotalSource is a subsidiary of ADP, one of the world’s largest providers of business outsourcing solutions.

Also Next Generation Enrollment, a leading HR outsourcing firm has agreed to launch our new dependent program for their dependent audit customers. This program finds attractive coverage alternatives in the individual market for dependents of employees that are not eligible for their employer coverage.

Also during the quarter, CareFirst and Premera agree to offer our COBRA Learning Center to their agents into their direct consumers that come through our eOD platform. Our online advertising channel submitted application growth was flat compared to the second quarter of 2008 and represented a disappointment during the quarter.

We believe there are several contributors to our second quarter paid search results including a decline in contribution from secondary search engines and a decline in conversion rates from all of our online advertising sources.

We believe that our paid search conversion yields may reflect more comparison shopping and research activity by visitors, consistent with reports from some of our search engine partners during the year regarding lower click yields and diminished commercial intent of search users.

We have recognized the paid search issue that we have and we are currently working on bringing paid search back on track. I would like to emphasize that paid search performance in Q2 was not reflective of the overall demand for our products in the second quarter, which remain strong.

As demonstrated by growth in our direct and marketing partner channels. I would also like to point out that second quarter application growth of 17% was within the range of assumptions behind our annual guidance.

During the quarter we added new inventory to our offerings. I especially want to highlight our entrance in to the retail health insurance market in Massachusetts by offering 16 individual and family health insurance plans from Fallon Community Health Plan.

Fallon is one of the leading individual and family plan carriers in the state. We are very happy to be marketing and selling Fallon products directly on eHealth. Based on this launch with Fallon, and our ongoing eOD relationship with Blue Cross Blue Shield of Massachusetts, this state is becoming an increasingly attractive market for eHealth and a good example of how we can thrive in a guaranteed issue, mandate regulated public exchange environment.

In fact, I want to note that the commissions that we earned with Fallon are competitive with what we generate on average across our entire inventory of individual and family plan products nationally.

We are currently in active discussions with other Massachusetts carrier that we hope to add to our retail site over time. We also added three new states with our plans underwritten by Aetna, targeting the fast growing 50 to 64-year-old segment. Other noteworthy inventory additions included Aetna plans in Indiana, CareFirst in Texas and AvMed in Florida.

We continue to broaden the carrier base utilizing our market leading e approval technology. During the quarter we added two new carriers using e approval including Celtic in 37 states from the District of Columbia and market leader CareFirst in, Maryland, Virginia and the District of Columbia.

We also launched two additional states with one of our largest carrier partners, Wellpoint. As you may recall, we initially rolled out eApproval with Wellpoint’s Anthem Blue Cross plans in California.

In the second quarter we added Wellpoint’s Texas Unicare and Wellpoint’s BlueCross BlueShield of Georgia plans to the eApproval technology base. As I mentioned at the beginning of my remarks, we continue to expand our commercial eCommerce on-demand business, which is becoming an increasingly important growth driver for our company.

Second quarter sponsorship, licensing and other revenue grew 28% year-over-year, or 54% when you adjust for a one-time item recorded in the second quarter of 2008 with eCommerce on-demand or eOD being the fastest growing revenue component.

During the quarter we launched eOD with three new carriers, extended Coventry’s eOD relationship to an additional state and saw strong year-over-year application growth within existing eOD customers. We also contracted with our partner Premera LifeWise to launch our second Medicare eOD site and we see the senior market as a new and large potential eOD business opportunity for us.

We are in the early stages of penetrating the eOD licensing opportunity with over 30 carriers currently on the eOD platform and over 185 carriers that we represent at eHealth. The adoption by the agent-broker community is also in the very early stages with our carrier partners increasingly encouraging their brokers and agents to use eHealth’s platform for all IFP submissions.

During the second quarter, the broker and agent channel generated annual application growth in excess of 100% on our eOD platforms. During the quarter, we also made the strategic decision to begin to license our technology to wholesale general agents that provide insurance brokers and agents with services and products that make selling health insurance more efficient. This new business provides for the licensing of our eCommerce platform, to general agents, who in turn provide our online quoting, online enrollment and electronic processing capabilities to their client base.

We see the strategic expansion of our eOD business as an important component of achieving our mission to become the online health insurance distribution standard. We had our first major general agent win during the quarter with Emerson Reid, one of the largest general agents in New York, New Jersey and Pennsylvania. This is yet another example of the broad and large market opportunity we see in the commercial eOD business.

Now, I would like to describe the details of an important development in our public ecommerce on-demand business. By the way, public eOD is our new initiative to expand the use of eHealth’s eCommerce platform to government agencies.

We are pleased to announce that eHealth participated in and won a competitive RFP process with the state of Utah to use our Internet platform and technology to connect Utah residents to individual health insurance through the state’s individual and family Health Insurance Exchange. The state’s online insurance exchange, which is currently in the process of being implemented, will link to a designated eHealth online portal that will support the selection and enrollment of private individual and family health insurance.

The eHealth technology platform will be an online destination for residents to view a comprehensive selection of private, individual and family health insurance plans in Utah, and utilize consumer friendly decision support tools like plan comparisons, physician choice, information resources and online applications and approvals.

The economics under our agreement with the state of Utah are quite familiar to us. eHealth will be compensated on a commission basis under our existing Utah carrier relationships at the same rates as carriers are paying us for products sold on our retail site, outside of the exchange environment in Utah.

This is a very important announcement for eHealth, which launches our public eOD business initiatives and positions us well for pursuing additional government opportunities. Our proven online comparison shopping and enrollment platform make us a very appealing partner for any government entity that wants to use the Internet as an exchange or connector to increase health insurance access, efficiency, and enrollment of the uninsured.

Now, I would like to make some comments on public policy. Presently it seems that you cannot turn on a news program or pick up a newspaper without healthcare reform being a headline topic. It is frankly been fascinating for us and me to be so personally involved in discussions around potential healthcare reform legislation in Washington, D.C. and to see how this issue continues to unfold.

As you know, important bills in the House, Energy and Commerce Committee and the Senate Finance Committee have encountered more resistance and complications than some may have anticipated. Scoring by the Congressional Budget Office has shown that the house draft bill may cost well in excess of $1 trillion over 10 years with no significant cost savings resulting.

The attempts by the Senate Finance Committee to produce a bipartisan bill seemed to be mired over the public plan idea, among others. Both the House and Senate are struggling to find ways to fund these very expensive legislative proposals.

At eHealth, we have spent significant time and energy working personally with many members of both Houses and Committees and many of their staffs, often at their invitation. Our focus and message is not so much oriented to whether the development is worth legislation, as it is to the post legislative environment.

We believe that an enrollment strategy must be a key component of any healthcare reform. Passage of a bill is only the first step in closing the gap in access to healthcare. A diverse enrollment strategy, which utilizes the best of the private sector combined with legislative initiatives, will help to maximize coverage of the uninsured and that is the President’s stated goal for legislation and reform.

We know that enrollment of people into health insurance is not simple and that experience matters. We have been educating policy makers and legislators about how eHealth operates at the intersection of health and technology and has the expertise, technology, and years of experience that can help policy makers implement the most effective ways to connect Americans to coverage.

Our strategy and message of utilizing technology and viable resources like eHealth to connect the public to coverage resonates with Democrats and Republicans alike. Because they all realize that after reform legislation is passed, its effectiveness and success will be quantitative and measurable, by how many uninsured have become enrolled.

As the healthcare legislative discussion has become more heated and as the process has slowed, I believe we may see legislation passed, which is not as broad and sweeping as some may have expected. It is clear that the President wants legislation passed by Congress this year and it appears that compromises must be made to achieve the President’s objective.

As a result, we may very well see legislation signed, which is less government centric than some of Congress has wanted, creating significant opportunities for eHealth. This is precisely how we are positioning ourselves in Washington, D.C, to be a constructive and collaborative participant, both pre and most importantly post legislation, to help make any passed legislation as effective and successful as possible.

On this note in the second quarter, we launched our Ready2Connect micro site gear toward various public policy topics. The launch of is an important step in our PR policy campaign designed to support and deliver our message on topics related to healthcare reform. I encourage you to visit the new site.

Finally as you know, last year we authorized a share buyback program and have purchased 412,000 shares cumulatively under a 10b5-1 trading plan. While we were not active in the market in the second quarter, given the parameters of our original 10b5-1 plan, we expect to be more active in the third quarter as that plan is expired and is now being replaced by a new plan with revised parameters. We continue to believe that repurchasing our shares is financially attractive and accretive to our earnings per share.

Now I’ll turn the call to Stuart, who will go over our financial results in greater detail. Stuart?

Stuart Huizinga

Thanks, Gary. Good afternoon, everyone. I will now review our financial results for the second quarter of 2009. As Gary mentioned, we saw continued positive momentum and leverage in our business as reflected by the revenue growth, strong cash flow and solid operating margins reported in the second quarter.

Starting at the top line, our revenue for the second quarter was $33.4 million, an increase of 22% over the second quarter a year ago. Commission revenue was $29.9 million, an increase of 21% over Q2 2008. Our year-over-year commission revenue growth was mainly due to growth in our membership base.

Sponsorship, eCommerce onDemand and other revenue was $3.5 million in the second quarter of 2009, or 28% annual growth. Excluding the $0.5 million in revenue related to a one-time eCommerce onDemand item that we recorded in Q2 of last year, the annual growth in sponsorship eCommerce onDemand and other revenue was 54%.

During the second quarter, we achieved 17% year-over-year growth in individual and family major medical plans submitted applications, down from 23% reported in the first quarter of 2009.

As Gary pointed out, our application growth reflected some under performance in our paid search channel, even as our direct and marketing partner channels continue to generate 20% plus annual growth, building upon solid first quarter performance. We were especially pleased in our direct channel, which generated 25% year-over-year individual and family application growth and contributed 43% of total individual and family plan submitted applications.

In the second quarter, we had 103,400 approved members for individual and family products. During the quarter, we observed more stringent underwriting standards with our carrier partners and that created a headwind for our approved member growth.

Our approved member growth was also impacted by a decline in the average number of individuals we had per approved application in the second quarter. Our total estimated membership at the end of Q2, 2009 was over 700,000 members, which included approximately 30,000 net members at the end of the quarter, who had transferred from Health Benefits Direct pursuant to our business development agreement with them. Virtually all of the members under the HBD agreement have now been transferred to eHealth.

I would like to comment on member retention, but before I do, I would like to remind you that we estimate retention using trailing historical data. Our second quarter view of retention is based on data from the fourth quarter of 2008.

Excluding HBD, members from the number of total revenue generating members in both Q1 and Q2 of 2009, our estimated member retention rate remained within our historical range and was comparable to our view of retention in the first quarter OF 2009. We also observed year-over-year improvement in retention as compared to the view we had in the second quarter of 2008.

In the second quarter our non-GAAP operating expenses as a percentage of revenue, which excludes stock-based compensation increased as compared to the second quarter a year ago. During the quarter, we saw continuing economies of scale in customer care and enrollment, G&A and technology and content, which were offset by an increase in our marketing and advertising spend, and higher cost of revenue sharing.

Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 38% of revenue in the second quarter, as compared to 34% in the second quarter a year ago. On a GAAP basis, our second quarter marketing and advertising expense was 39% of revenue.

We are still targeting our marketing and advertising to be in the 38% to 40% range as a percent of revenue, on a GAAP basis for the full year. However, please note that due to seasonal patterns, we are likely to be above that range in the third quarter of 2009, which is typically a high application quarter for eHealth.

Our cost of acquisition per member on an individual and family plan submitted application was $73 in the second quarter. If measured as our marketing and advertising expense per individual on IFP submitted applications for the quarter, a 22% increase as compared to $60 in the second quarter of 2008.

This was primarily driven by higher costs in our paid search channel. Factors that impacted member acquisition costs in this channel included higher prices per click in our category, and a decline in yields from quote to submit for website traffic, generated through our paid search initiatives.

The increase in our cost of acquisition during the quarter was also driven by a decline in the average number of individuals per submitted application in the second quarter as I mentioned earlier, since individuals on submitted applications are the denominator for this cost of acquisition measure.

Our new member additions remain highly profitable based on our second quarter cost of acquisition per member. However, we are focused on and are working to resolve the underperformance that we experienced in the paid search channel this quarter and to improve our conversions in paid search and across all channels.

While marketing and advertising expense increased compared to a year ago, we continued to focus on, and to achieve significant efficiencies in other operating areas. Non-GAAP technology and content costs, which exclude stock-based compensation expense improved from 12% of revenue in the second quarter of 2008, to 11% for the second quarter of 2009.

General and administrative costs also improved on a non-GAAP basis from 14% of revenue in the second quarter of 2008, to 13% in the second quarter of this year. Our non-GAAP customer care and enrollment costs were 11% for the second quarter of this year as compared to 12% for Q2 ‘08.

Our GAAP operating margin was 21% or $6.9 million as compared to 23% or $6.4 million in the second quarter a year ago. Our non-GAAP operating margin excluding the effect of stock-based compensation was 24% or $8.1 million as compared to 27% or $7.4 million in the second quarter a year ago.

Second quarter non-GAAP operating income grew 9% as compared to the second quarter of 2008. Excluding the one-time eOD revenue item recorded in Q2, 2008, which I mentioned earlier, our non-GAAP operating income grew 17%.

Our approach to investing and managing our cash remains conservative. Currently, over 94% of our cash and marketable securities consist of cash, US Treasury funds, US government agency funds or direct investments in US Government agency securities.

The remaining investments are in high grade corporate bonds and commercial paper that we plan to hold to maturity. Interest and other income was $0.3 million during the quarter, down year-over-year from $0.9 million in the second quarter of 2008.

Interest and other income almost all of which reflects interest earned on our invested cash, cash equivalents and marketable securities continued to be impacted by the low interest rate environment.

Our GAAP pretax income of $7.1 million in the second quarter of 2009 was down slightly from $7.3 million in the second quarter of 2008. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pretax income was flat at $8.3 million.

The lower year-over-year growth of our pretax income as compared to operating income, both on a GAAP and non-GAAP basis, is primarily attributable to a 73% year-over-year decline in our interest income.

We estimate our 2009 effective tax rate for GAAP purposes in the 43% to 45% range, even though we expect to pay cash taxes at a much lower rate due mainly to significant net operating loss carry-forwards that reduce the cash taxes we pay.

Second quarter 2009 GAAP net income was $4 million, down from $4.2 million in the second quarter of last year. Non-GAAP net income excluding the effect of stock-based compensation and related tax effects in both years was $4.8 million, as compared to $4.9 million in the second quarter of 2008.

Our cash flow from operations was $8.3 million, as compared to $8.6 million in the second quarter of 2008. As explained in our Q1 earnings call, the tax benefit that we received from our NOLs has a different impact on our cash flow statement this year than it did in 2008.

In the second quarter of 2008, we had a $3.1 million change in deferred taxes, all of which benefited operating cash flow. In the second quarter of 2009, we had a $3 million cash flow benefit from taxes. For purposes of our 2009 cash flow statement however, that $3 million cash flow benefit was split with $1.5 million benefiting operating activities, and the other $1.5 million benefiting financing activities.

So, our operating cash flow was approximately $1.5 million lower in Q2 ‘09 than it would have been if we were applying NOLs purely related to past losses, as we did last year. Our Q2, 2009 cash flow from operations would have been $9.8 million on that basis or 13% growth as compared to last year’s number for Q2.

Capital expenditures for the second quarter of 2009 were approximately $300,000 and totaled approximately $500,000 for the first half of 2009. We did not repurchase shares under our buyback program during the quarter. As Gary mentioned earlier, we were precluded from being more aggressive with our repurchases based on the parameters of our original 10b5-1 trading plan put in place in the fourth quarter last year. The original plan has now been replaced with a new plan and we expect to be more active in the market in coming months than we have been previously.

Our cash and marketable securities balance was approximately $160 million as of June 30, 2009. Our cash and marketable securities constituted more than 94% of our total assets excluding deferred tax assets at the end of Q2. Given this and the fact we have no debt, we continue to believe we have a very strong balance sheet.

With respect to guidance and based on information currently available, we are reaffirming the revenue, stock-based compensation expense, GAAP income tax rate, and GAAP net income per diluted share guidance for the full year 2009 that we provided in our last earnings call.

I want to remind you that these comments are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update our guidance.

Now we would like to open up the call for questions. Operator?

Question-and-Answer Session


(Operator Instructions) Your first question comes from Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

Couple of questions, I guess going back to the online acquisition channel; I’m still not clear exactly what happened. Did you just suffer from poor performance based on, quick yield as you said earlier, because my issue with that is paid search is something that you get returns relatively quickly on.

So, you probably would have stopped spending money and moving in to a different channel that was better performing or was it something that maybe Google and Yahoo did with the algorithm to change in midstream. So, any kind of clarification on that would be helpful.

Then secondly, gross margins were down 140 bps and sequentially got 240 bps year-on-year, can you just clarify what’s behind that and what’s baked into your annual guidance? Thank you.

Gary Lauer

Hey, Youssef, it’s Gary. Let me take the search question and then I’ll let Stuart talk about the margin question. On search, we saw several things. First of all, we typically operate on Google and Natural Search, Organic Search in the number one position. We believe there were some algorithm changes in the last quarter.

We were operating two and three. I think today we’re number two. We’re doing some things that we think will help influence us back into the number one position. That’s important because, when we’re bracketed number one in Natural or Organic as well as paid, which we buy, we do find that our conversions are much better on the paid side. So, there is one element that we think we know.

Secondly, watch this carefully during the quarter and yes, frankly, we expected to see better conversion than we did, especially from the secondary search sources, Microsoft and Yahoo, for example, who got their own sets of challenges as we know.

We had some of that, but not as much in Google. What we did find was that, we weren’t converting as much as we have historically and certainly we’ve heard commentary from some of these search engines publicly that they believe that there has been more comparison shopping and not as much transacting in most of the categories. There maybe some of that here as well.

We’ve also taken some other steps in terms of looking to change some of the language that we advertise with. We’re landing visitors now and what we call more contextual space. So, for example, if you key in New York health insurance, Youssef, we want to land into an area that’s relevant to New York, not just kind of the vanilla eHealth experience, for example.

So, we think, we know what to do. In fact, paid search has always been, what I have felt has been a real good core competency in our company. I still believe it is. We had a few things that we think occurred either because we frankly weren’t as focused on it as we should have been last quarter and/or some things happened in those channels that well have contributed to all of this.

Having said that, we were heavily focused on our partner channel this past quarter as well, saw a good return there, in light of what we saw on the direct side So if there is any good news in what happened with search here is that it’s not any kind of malaise across the business, rather, we think it’s very much located and very much focused in this one area and isolated in this one area, which is paid search and I can assure you we are all over that right now.

It is not something I want to just -- if we’re not converting, just take the money and put it to some other place. It is really important that we have got very, very strong visible presence in search. So that’s why I want to continue to spend and we will, but to ensure that we can convert better.

Youssef Squali - Jefferies & Co.

Just on that point, so before moving to the gross margin question, so historically, you’ve talked about a 20% plus applications growth being kind of an acceptable run rate or achievable run rate. Has that changed in our mind or is that still the case?

Gary Lauer

That is absolutely the case. I believe strongly that application growth for us starting with a two is what the opportunity that’s available in the market. I think if you take a look at our direct growth, which was 25%, if you look at our partnered growth, which was 21%, I think both of those very much support that. We were 23% overall application growth in the first quarter. There’s no reason why we shouldn’t see application growth in future quarters starting with a two as well.

That is something as I think you know I’ve always felt very strongly about and something we’re pushing hard on. Let me also add once again, as I think as I did say in my commentary, that the application growth that we actually generated in the second quarter is within the range of application growth that was actually within the guidance, the parameters in which we established our guidance and forecasting for this year as well. I think we can do more.

Stuart Huizinga

On the margin question, it’s always most appropriate to look at the year-over-year comparisons, because of the seasonality and if you look at Q2 to Q2, it’s about 300 basis points lower this year than last year.

About two thirds of that relates to the one-time revenue item that I mentioned in my comments. That dropped entirely to the bottom line. That was about $0.5 million that went all the way down to the bottom line in Q2 a year ago, and gave us about 200 basis points of margin last year.

Then as I commented, our marketing costs as a percentage were higher this year. They are about 400 basis points higher than Q2 a year ago and we made up most of that through other line items on the P&L.


Your next question comes from Steven Halper - Thomas Weisel Partners.

Steven Halper - Thomas Weisel Partners

Just to pinpoint the gross profit margin issue from the previous caller, so your cost of, what do we call it? Cost of revenue, the cost of revenue sharing was $1.3 million on the income statement. So what’s responsible for that increase from the first quarter, from $800,000 to $1.3 million?

Stuart Huizinga

Most of that increase comes from our revenue sharing on our Health Benefits Direct. Arrangement. So that’s the primary cause there.

Steven Halper - Thomas Weisel Partners

So you talked about the weakness in paid search, so what are the things that you can do to get that channel moving again? What kind of fixes do you have to put in place to increase conversions from that segment?

Gary Lauer

They are already underway. The good news here again is this is something we know because this has always been a good channel for us in the past. We have got a number of things underway. We are making some language changes in terms of the actual advertising text. We are doing testing with that and finding some things that are more relevant today than what we may have been using.

We are looking at what we call contextual landing environments, so again, Steve in New York, if you go to Google and key in New York health insurance and I’m not saying this will happen today if you key it in, but we would like to land you’re going to place where the context is New York with New York plans and so on. So it’s seems very relevant to your search.

That’s awfully important. We’re looking at some of the things that we do actually inside of our site in terms of where we take people who come from paid search through the process and so on, and there are different conversion factors there.

In facts, we’ve got a number of things under way. I think I commented as well that in natural or organic search which is part of this, we’ve been maintaining the number two or number three positions, in the past we’ve been number one. When we’re number one we know that that has positive impact on our position in paid search as well. We’ve got a number of initiatives under way to hopefully influence that.

We believe that there may have been some algorithm changes at Google for example, which is where I’m referring to natural search as the number one position, which happens from time-to-time.

Steven Halper - Thomas Weisel Partners

So if you implement one, two, and three, right, the first three things that you identified, then the goal is to get back to number one in natural search?

Gary Lauer

Well, one, two and three won’t get us back to number one. There are different things that have to happen there. The combination of all of those things will have and we believe is having positive impact on paid search and our conversions of paid search.

Steven Halper - Thomas Weisel Partners

So what can you do to get back to that number one in the natural search?

Gary Lauer

Well, there’s some science and there’s some art to that. The science is that we know that there are a number of things that the Google algorithms for example go out and test and look for to determine or really to assess the relevancy of everything that’s out their in the world, then they rank them as such. So, right now we’re ranked number two.

We know there are a number of things that we can do, that will impact that and that’s the work that’s underway. I can’t tell you what they are absolute because nobody knows what they are absolute, except some of the people, who control some of the algorithm work and so on in these different search engines.

Believe me, when I tell you that we are, this is one that we’ve got a number of people on right now and we think some of the steps that we’re taking may very well influence that position for us. Having again that number one position in natural search just reinforces and frankly makes the number one position in paid search typically work and convert better for us.

Steve Halper - Thomas Weisel Partners

Is that a three month project? Six month project or what kind of timeframe are you thinking about?

Gary Lauer

Well, it’s underway right now. We’ve got some people on it full-time and a half. I wish I could tell you, when we’re going to be back to number one. I wish I could tell you it was going to be this afternoon or this evening. It is something that we have a great sense of urgency on and I would certainly hope that it’s a lot less than months in terms of timing.


Next question comes from William Morrison - Thinkequity.

William Morrison - Thinkequity

I have a few questions about the Utah win, Gary. I guess starting with; can you talk a little bit more about why they’re doing this exchange? I mean are they moving more towards a Massachusetts guarantee issue with individual mandate type of environment or are they doing this preemptively with the expectation that’s the way that the federal legislation is going to go? That’s question number one.

Question number two is, I’m not sure I heard you right. I thought, I heard you said you’re going to get a commission on every individual that signed up through the exchange, as if you would through Can you just confirm did I hear that correctly? If so, why is it being structured differently than your commercial eOD business, where it’s more of a technology licensing fee, do you think that’s going to be the trend going forward?

Then last question is, are there any other states that you’re currently entering RFPs and competing for business like this?

Gary Lauer

First of all in Utah, I don’t believe Utah is trying to do anything to preempt what’s going on in D.C. This is work that’s been underway for sometime. We’ve been talking with them for a year before the presidential election.

The RFP was actually let out last fall, before any of the healthcare reform start to take shape in D.C. They have just felt very strongly in Utah that they want to get everyone covered and the governor in Utah, Governor Huntsman, this has been something that’s been very high on his agenda.

There’s a really nice article that I would refer everyone to that was in the Washington Post this past Sunday that I’m looking at it entitled Health Reform Utah’s Way, by Kathleen Parker. In fact, Kate can get you an online link to it as well. It does really nice job describing what’s going on in Utah and frankly the thesis here is that a lot of what’s going on in Utah should be a model for the rest of the US. Thus describe that.

I don’t think there was anything there to preempt what’s happening in D.C. They just feel strongly about getting aggressive and doing some things to help the residents in Utah. Secondly, Bill, yes you heard me right, we’re actually in this exchange going to be paid a commission, same commission that we earned through the carriers.

So, the state is not getting in the middle of any of the finances with any of this. Rather, they are just on their dime putting up the exchange, will be doing things to market it and get residents to it and to help them get health insurance.

The state is looking at subsidies and things like that and what we found was that through the carriers in the state that it looked like the way that was most amenable for everybody was to simply build this as an extension of the commission model that we already have in place. Obviously, we’re pleased with that. It’s the best of all words from a financial standpoint for us. I wouldn’t expect other public eOD implementations of ours to be the same. I think this could end up being rather unusual and one off.

I’ve always thought a public eOD as being an extension of our commercial eOD business, which would be some kind of a transaction fee. This is our first one. The only one going up in the country beside the connector at Massachusetts and we are very, very pleased.

I want to emphasize how important this is to us. Because we can really put in place here what we thing is a lighthouse for other states and Federal Government as well. Is a way to use what exists in the marketplace today, implement it effectively, economically, quickly and most importantly get people connected to coverage as soon as possible, which is a big part of my message in D.C. as well.

Last part of your question, yes, there are other states that are considering this also. We are in discussions right now in the state of Oregon, for example, where they also seem to be very progressive about want to do some things to help residents.

By the way the state of Oregon, interesting, that’s where Ron Wyden is one of the Democratic Senator, who have been very, very involved in healthcare and proposals for healthcare reform for several years. He’s also on the Senate Finance Committee. I should add as well that what we see in the Senate Health Committee bill is a state-by-state implementation of exchanges.

We don’t know what the House bill is going to end up looking here with all the compromising and so on. You may see in a Senate Finance Committee bill, which could be the bill in the Senate. You may see state-by-state exchanges as well. Which we actually believe is a more effective way to get people enrolled and covered and we think is also a very intriguing business opportunity for us.

William Morrison - Thinkequity

A couple quick follow-ups on that. Is there a mandate in Utah that individuals have to buy their insurance through the exchange? Then broaden that to the government. I know, you don’t know which way it is going to go, but if you had to bet today, do you think the final legislation is going to include some sort of individual mandate to buy insurance within the exchange environments, whether a national or state exchanges?

Gary Lauer

Yeah. Bill, in Utah there’s not a mandate today. Rather, there is going to be some work done to help people fund it, but no mandate currently, not in the legislation that was recently passed.

From a federal standpoint, as I commented, I believe with everything that we’re seeing and hearing and a lot of contact with people in DC, that if there’s legislation that’s passed this year, and I’m assuming there’s going to be, by the way, I think it’s going to be much more moderated than some of the things that have been reported recently.

As you know in the Energy and Commerce Committee in the House, headed by Henry Waxman. They have got a number of center’s Democrats known as blue dog Democrats who simply won’t support where the bill is today and they’re stuck.

There’s going to have to be some significant compromises made. I believe that what we’re going to end up with is, if we have legislation passed, it’s going to have a guaranteed issue. It’s going to have mandate provisions that require everyone to have coverage. I don’t believe there’s going to be a mandate or requirement that everyone has to go through a government exchange.

I think, a government exchange whether it’s national, regional or state-by-state, is going to simply end up being an option or a place that people can go. A big part of my message has been that once legislation is passed, the real hard work begins, which is getting these 46 million to 50 million uninsured Americans covered. To do that you’ve got to use all of the viable means that exist today.

Put exchanges in place, eHealth associations, and other things as well. Let us extend the technology which is already built to a lot of different places to do this, and this resonates very well with Democrats and Republicans and I think that’s probably where we’re going to end up and it’s one of the reasons why frankly we’re really getting more and more enthused about what we’re seeing from a legislative standpoint as things continue to unfold and change in D.C.


Your next question comes from [Mack Finler] - Bank of America/Merrill Lynch

Mack Finler - Bank of America/Merrill Lynch

Not to beat a dead horse, but I’d like to go back to that cost of revenue sharing number. If I understand it correctly, that number is related to the 30,000 this quarter and 20,000 last quarter you got from Health Benefits Direct and the increase in both the last two quarters over a baseline of last year. Would I then expect those numbers to stay at those levels until those customers churned off at the normal pace?

Stuart Huizinga

Yeah. As I mentioned in my remarks, we’re virtually complete with bringing those on to our books. So, 30,000 is roughly in the ballpark of what we’re bringing over and then you would expect those to go through kind of the normal kind of retention cycle that you would see with our individual and family policies in our books. Most of those are individual and family policies.

Mack Finler - Bank of America/Merrill Lynch

So, roughly two years.

Stuart Huizinga

Yeah, roughly two years, plus.

Mack Finler - Bank of America/Merrill Lynch

Two year. Okay.

Stuart Huizinga

Well, I should say, many of those that we brought on were already in the life cycle. We bring them in a year into their life cycle. Some of them are three months in, some are close to two years in. So it’s a mix. It’s a mix of membership there.

Mack Finler - Bank of America/Merrill Lynch

Okay. Your cost of submitted applications, trying to figure out, the increase seems -- considering that direct, your 22% increase in cost per submitted member seems even with an increase in the cost and the decrease in the efficiency of search, seems a little strong, considering that direct, which is largely free, I believe, went up considerably. Was there a change in the partner cost?

Stuart Huizinga

You know, the partner cost stayed relatively stable this quarter, relative to last quarter. We did spend a little bit in the direct channel. We’ve been spending more on email campaigns.

We did do a little bit TV this quarter. You know, another impact here that I mentioned is, is that we have fewer members per policy and that’s the denominator of that calculation and so, that actually does have an impact as well in bringing that number up relative to other quarters.

Gary Lauer

It’s primarily, for the most part, its search related. Frankly, the cost per click is up as well, because we believe that others who are in paid search with health insurance terms are finding that they’re not converting as well also and we’re all spending more going after that right now. So, the key for us, which we’ve been really good at in the past and that we will be I believe again soon, is to find more efficient ways to convert those clicks.

Mack Finler - Bank of America/Merrill Lynch

Interesting, cost per click went up even as ROI on a given click, the conversion rate on a given click went down?

Gary Lauer


Mack Finler - Bank of America/Merrill Lynch

That’s happening separately in other industries, the opposite direction.


Your next question comes from the line of Richard Fetyko with Merriman. Please proceed.

Richard Fetyko - Merriman

Just a couple of questions. First, on the writing criteria by carriers, you mentioned that it was a little more stringent than in the past. Are you talking sort of on the sequential basis or year-over-year basis and why do you think that change has taken place?

Stuart Huizinga

I was talking on a sequential and a year-over-year basis. It’s something that we have seen over the last many quarters, it has gotten tighter and I don’t really have a good answer for you as to why it is getting tighter. That’s something that’s in the carrier’s domain.

Gary Lauer

It is a cyclical thing. We noted in Aetna’s results yesterday, they had commented that they found that utilization of products is up and as a result you could expect to see their member base decline a bit, as I think they get more inspected as well.

So we do see these things cycle. I should add by the way, it is probably obvious, but that if we get the kind of legislation passed that’s being discussed, and I still underscore if, in a guaranteed issue environment, we probably won’t be having many discussions about these kinds of conversion rates and so on, because every applicant by definition is approved.

Richard Fetyko - Merriman

Then on eApproval, did you mention – I missed the first 15 minutes of the call, whether you added new eApproval carriers and what’s in the pipeline for that?

Gary Lauer

Yes, Richard. In fact, that continues to broaden and we feel good about where it’s moving. We added Celtic in 37 states plus DC. We added CareFirst in Virginia and Maryland and also DC and then with WellPoint, we added two of their large plans, Texas Unicare and BlueCross BlueShield of Georgia, and yes we have others in the pipe that are coming on as well.


Your next question comes from Jim Friedland - Cowen & Co. Please proceed.

Jim Friedland - Cowen & Co.

Thanks. First, a follow-up on the Utah connector. In Massachusetts, as the connector hasn’t really generated a lot of demand from what we’ve seen and granted, that’s a very different state, but do you think it’s possible that you’ll see the same thing in Utah and other states?

Second question is on the subsidy. On the COBRA subsidy, now that we’re well into that going into effect, are you seeing that impact your conversion rates, et. cetera? Is that having any kind of impact on your business? Thanks.

Gary Lauer

This is Gary. I’ll take the second part of your question first on COBRA. No, we’re not – we haven’t seen any unusual impact from COBRA or the COBRA subsidies in the stimulus bill or whatever in the second quarter. We continue to see a number of people come to us who are recently unemployed looking for COBRA alternatives, and we’re marketing that very aggressively as well. No, nothing unusual as there.

In terms of the connector in Massachusetts, it’s important to note, and this is publicly available information, that’s a large majority of people who have actually gone through the connector and gotten themselves enrolled in health insurance have gotten subsidized by the state or free health insurance for the state on the connector.

A very small portion of those have actually bought private plans. In Massachusetts, we power Massachusetts Blue BlueCross BlueShield their eCommerce onDemand side. We believe that, we’re led to believe that the volume there is greater than the volume they see in the connector.

With Fallon, we’ve just launched in Massachusetts, we expect that just us alone what will be marketing and selling for Fallon in Massachusetts will be more than they see in the connector. So, the connector just hasn’t had the kind of impact on the private sector or private insurance in this guaranteed issued, mandate regulated state that one might think or want to think.

It’s one of the things I caution people, and policy makers in D.C a lot about, that you just can’t build the website and expect that most of the free world is going to come to it. It just doesn’t work that way as we all know.

I think Utah will be interesting. I think the state will market the exchange or the connector in Utah. People will come to it. I think we’ll continue to have a really vibrant business in Utah and others will as well.

I think, in an environment nationally again where you’ve got guaranteed issue and mandates and so on, and some kind of a government sponsored connector or exchange, if that connector or exchange, that’s the only place you can get subsidies, you can attract a lot of people who are looking for subsidized health insurance.

One of the things I also feel strongly about, very vocal about with policy makers is that any subsidies that you make available in new legislation, put those in some kind of connector, be sure you put them at eHealth and a few other places as well because we’ll get more people covered that way.

Jim Friedland - Cowen & Co.

Okay. A separate follow-up on eOD with all the sign-ups that you mentioned in the first part of the call, is there a potential to see any kind of acceleration in that growth line or is it sort of stair step a little bit each quarter? How do you think that plays out in the second half and into 2010?

Stuart Huizinga

This is Stuart. I think there is potential for acceleration there. I don’t know that I would expect acceleration but there is potential. It depends on the volumes, the transaction volumes of the carriers. As always, it’s going to be somewhat seasonal. It should pick up transaction-wise in Q3 because that’s a high season for applications, just like in our core business. Could have been slow a little bit, based on the seasonality there.


Your next question comes from George Askew - Stifel Nicolaus.

George Askew - Stifel Nicolaus

A couple of questions. Regarding the paid search weakness in the quarter, if I can address that once again, can you help us understand over the three months of the quarter, when did it impact you? When did you hopefully see it bottom? How are you seeing it? You kind of recover, or any kind of sense of that trajectory?

Gary Lauer

Well, yeah, it was certainly throughout the quarter it wasn’t where we have experienced it or where we wanted it. I think it bottomed out mid-quarter. Frankly, June was better. That was important because we are already taking steps at that point and the work we’re doing right now is to continue the improvement trajectory into this quarter and next as well.

George Askew - Stifel Nicolaus

Good. When does the Utah exchange actually go live?

Gary Lauer

Should go within the next several weeks. They’re just finishing up a few small things there right now. We have already released everything and we’re ready to go, which by the way that’s one of the things that I think was really appealing during the whole RFP process was that, we competed with systems integrators, software companies and so on.

As you might imagine they all had to go build this from scratch, while we were ready to implement this within a few weeks. In fact, we’ve been waiting on the state. They have not been waiting on us. I think that makes it a very compelling, it makes it very attractive to other public agencies and entities as they consider doing things like this in the future as well.

George Askew - Stifel Nicolaus

Is the lower number of individuals per IFP submitted application related to the mix of application source or maybe related to the growth in eOD? I mean, in other words, are you seeing more people who come through eOD or direct, for example, are singles?

Gary Lauer

We’ve watched the eOD landscape very carefully. We do surveying and so on because, frankly, we’ve been interested to note if eOD would cannibalize our business in any of the markets that we are in. One in particular is with a very large carrier we looked at a couple of markets that they are in our business there as well, we have seen absolutely no cannibalization or affect.

Our direct business with that carrier is growing at a very, very nice rate as is their eOD business. So, that hasn’t had any impact on our core business and I don’t believe it has any impact on the number of members that we have on an application.

We are seeing interestingly more people coming to us rather than putting an entire family on an application, putting several members, just putting several family members on an application. We don’t know enough to tell you if people are just economizing and deciding that as a family the adults won’t be covered but the children will. We don’t know that.

We do think we hear the senate told you that there are some people who get health insurance from their employers, their dependents aren’t covered or they take the dependents off the employer rolls but there’s nothing of substance beyond that.

George Askew - Stifel Nicolaus

Okay. Just one last question, any update on the China operations?

Gary Lauer

Thank you for asking. We continue to grow our business in China at a very nice pace. We have got several carriers nationwide. We’ve got several others in the pipeline that we hope to be adding in China. Although what we’re generating in China isn’t yet material enough or enough substance for us to give you the actual financial metrics, we’re seeing really, really nice growth there and I think probably the next quarter or two probably we may very well be making some comments on that. Things are going very nicely for us in China.


Your next question comes from George Sutton - Craig-Hallum.

George Sutton - Craig-Hallum

Most of my questions have been asked and answered but one question on non-IFP. Can you just discuss the challenges there? We are seeing negative net additions. I just wanted to understand what’s behind that?

Stuart Huizinga

The primary reason behind that has to do with our short-term product and that’s always been sort of a byproduct of the traffic that comes to our site. It’s not a core area for us. It is kind of a side light and so I’d say the emphasis has not been as strong on that product line and that shows in terms of the performance of that. That’s a quick cycle product. People buy it for a month or two or three but it’s a very short-term product.

The other one to a lesser extent is small business. In this tough economic environment, small businesses are struggling so that product line is not growing that significantly right now.

Gary Lauer

Yes George, this is Gary. On short-term, we used to promote short-term quite a bit, especially when we were in a not a good business environment like we are today. I

n fact, we started this years ago when unemployment was high because we found that people were buying major medical individual and family plan products, holding them for a few months and dropping them, so it had an effect on retention we didn’t like. We’re watching that closely right now. We are not seeing that. In fact Stuart actually commented that our retention improving again.

So, I think by choice we have not been pushing the short-term products because there hasn’t been a need to. We make them very visible, but we’re not marketing them aggressively.

George Sutton - Craig-Hallum

One other question, looking at the state of Utah uninsured population it’s 387,000 people. Is that the target market that you and the state are going after with this new program?

Gary Lauer

Well, that’s part of it. The state is also going to put what’s called a defined contribution model in place to get businesses some small businesses kind of a cafeteria approach to products and so on. There maybe some subsidization for that as well. So, it’s going to be a number of things. I think as everybody knows, if Utah is not a big population state. I believe it’s about 2.7 million people today.


Your next question comes from Sameet Sinha - JMP Securities.

Sameet Sinha - JMP Securities

Couple of questions, in terms of Utah, can you talk about, who are the people, which companies, system integrators and software companies were you bidding against, how long was the RFP process and how much time did it take for them to make a decision and then I have another question.

Gary Lauer

The RFP process in Utah was late last year, was actually in the fall, into the early winter. Because of the nature of RFP processes and so on, we don’t know everyone that bid and so on. I don’t believe that it’s public information as well. We know that there were some known named systems integrators involved and some software companies in Utah as well.

Again the RFP process, it was a typical government RFP process in previous company I had been through this many, many times, but there were several iterations and so on, best and final offer process and the such. We were obviously delighted with the outcome and also feel that it was a good exercise for us to go through that RFP process really for the first time in this company and to come out of the way that we did. We are feeling very optimistic about some other potential processes in states like this that we see in front of us as well.

Sameet Sinha - JMP Securities

Second question, just wanted to spend some time on Health Benefits Direct, can you talk about what the revenue contribution has been? I know 20,000 customers in Q1, 10,000 in the second quarter, so there has to be some, was it under 1% or about 1%, 2%? Can you talk about that?

Stuart Huizinga

We don’t break it out because it’s not material. We have provided the number of members and they’re all, almost all individual and families. So, you can get a general sense from that and you can also see the step-up in the cost of revenue and get a general idea of what that might be.

Sameet Sinha - JMP Securities

So, would you say that on an averaged 30,000 people look very similar to an average eHealth customer base?

Stuart Huizinga

Generally speaking in the ballpark.

Sameet Sinha - JMP Securities

I mean, in terms of longevity and ARPU and everything?

Stuart Huizinga

Well, in terms of ARPU, and yes, the way the retention so far. We don’t have a lot of experience, but so far similar.

Gary Lauer

We’re expecting that the life cycle’s about the same, but also note that these that we brought over all at various points in the life cycle.

Sameet Sinha - JMP Securities

Sure. You made a $1.3 million upfront payment in Q1. Was any incremental payments that were required in the second quarter or that’s it?

Stuart Huizinga

Well, there is ongoing payments of revenue share over and above that that we are paying to them. So, a portion of the $1.3 million is amortized as we go into that cost of revenue number along with an ongoing revenue share.

Sameet Sinha - JMP Securities

Would you say that, my understanding was that they have to hit certain revenue benchmarks and then that will trigger off any payments beyond the $1.3 million or that $1.3 million is upfront and you have to or you have already started paying some revenue share for these 30,000 new subscribers.

Stuart Huizinga

Well, really for all intents and purposes the $1.3 million with like a down payment against the rev share. A total bundle of revenue share that we were going to pay them over time, roughly an advance against the future stream of revenue.


Your last question comes from Carl McDonald - Oppenheimer.

Carl McDonald - Oppenheimer

Wanted to come back to the Fallon commission. Just to clarify, did you say the commission on Fallon is the same as other health insurers in Massachusetts get or I should say brokers in Massachusetts get or similar to the commission that you receive across the country?

Gary Lauer

Yes, Carl, here what I said is that it’s similar, in fact it’s equivalent to the average that we receive across our entire inventory of individual and family plan products in the US. So, not Massachusetts, but all 50 states.

Carl McDonald - Oppenheimer

Can you just give a little color on that? My understanding is that, if you get an individual policy through eHealth, or you go through the connector, you’re going to pay the same price for a commensurate policy. So, from the health plan perspective, if they’re paying 20% commission in the first year, how do they make any money on the policy relative to selling it through the exchange, where there’s a very, very limited commission?

Gary Lauer

Well, they’ve got their products in the exchange, but I can’t speak to how they make money. That’s their business to build those different mechanisms and so on. Rather, what Fallon has found and I think what we are going to see in a guaranteed issue environment is that, once you start to get the uninsured covered and the ranks of the uninsured decline, in Massachusetts less than 3% of the population now is uninsured. 97% is covered.

Then what it becomes is really a challenge or a game of market share for these carriers. Fallon now has got to figure out ways to take market share from its competitors like Pilgrim and Blue Cross Blue Shield of Massachusetts. Sitting on a government run exchange probably isn’t the best way for them to market and take market share.

So what’s happening is we’re finding these carriers waking up and starting to get very competitive and more assertive about how they market and sell their products. When Fallon goes on eHealth, they know that there’s going to be a lot more marketing than they’re going to get from the connector in Massachusetts or maybe through their own efforts as well.

We’ve had them up for a little over a month and I can tell you that just the volume results so far are beyond their expectations and ours and it’s doing exactly what they wanted and it’s why other carriers may want to come on as well. They’re very willing to pay the commission that they’re paying us to do this and at least as they tell us, Carl, it’s a profitable, very positive business for us and they find a very efficient, frankly economical channel to do this with and through.

Carl McDonald - Oppenheimer

In your conversations in DC, have you gotten much pushback on the amount of commissions that brokers receive? I mean, 20% of the premium obviously, lower in the second year but a fairly significant amount of money and also when you thing about how much premiums have accelerated over the last five years, been some pretty significant improvements in the compensation that brokers make. So has that been a focusing in any of your conversations?

Gary Lauer

Interestingly, I have not had a discussion with a Democrat or a Republican about commissions or commission structures and so on or the margins or any of that. The concern that legislators and policy makers seem to have about kind of traditional agents and brokers is about adverse selection.

In fact, Henry Waxman made a comment at a breakfast I was at that that he believes that there may be some brokers who position themselves in an office that require somebody to walk up three flights of stairs to fill out an application. You went there and if you’re not healthy enough to get three flights of stairs, then you’re not going to fill out the application and so that’s up you could get adversely selected.

So some policy makers look at agents and brokers as a bit of an extension of the health insurance carrier world. We’re different and we’re getting recognition for that. Everything we do is presented in an objective and unbiased fashion. We are blind to commissions that no one in our Company knows what the different commissions are and for most part in different plans and so on.

No, that has not been an issue. The issue in the discussion is, how do we get these 46 to 50 million people who are uninsured connected and how do we get them connected economically and efficiently. As the President and others have said, an exchange, applying technology to healthcare to reduce cost and increase efficiency is the way to impact a lot of delivery of healthcare. I think that we’re an example of how to do that but no discussion at all about commissions or commission rates.

Carl McDonald - Oppenheimer

Then the last question, sounds like a simple question which is have you guys done any work on the size of the individual market in the US? I mean, I’ve seen the figure, 17, 18 million on a national basis, but when you do more of a bottoms up analysis looking at some of the bigger publicly traded and not for profit plans, can’t really get anywhere close to 17 or 18 million. Just wondering if you guys have done any work to try to get a size of where the individual market is today.

Gary Lauer

Well we have in the past. We used data from the Census Bureau. Last Census report had the market at about 18 million policy holders. Let’s talk about two things, you’ve got the number of people to hold these policies and then the market opportunity. Bureau of Labor Statistics comes in at about $18 million as well.

As we do work in share intelligence with the carriers and so on, we commend a similar numbers, actually between 18 and 20 million. Remember, you’ve got between 46 and 50 million people uninsured. 46 million people per census at a year ago, closer to 50 million or even more than that, if you look at some of the research that start initially with people who are unemployed.

Between 8 and 12 million of those 46 to 50 million people are eligible for children’s health insurance program and Medicaid, but they’re not enrolled. That’s an issue. Secondly, you’ve got someplace between 15 and 20 million who have annual household incomes in excess of $50 to $75,000 a year.

Many of those people can afford health insurance, don’t have it, don’t know how to access it, or they don’t know they can afford it. So you’ve got to put them into the market opportunity. Then you’ve got others on the cusp that if they had subsidies from the federal government, suddenly the market opportunity grows larger, still which is one of the reasons we’re so intrigued with this idea about healthcare reform.

Then I’ll take it a step further. You’ve got over 50 million people today who are covered by small business health insurance, yet we know statistically from the national federation of independent businesses and in the chamber of commerce and others that over half of small businesses with less than 50 employees don’t provide any health coverage to their employees, although they would like to.

One of the issues today is a law called ERISA, which essentially precludes or prevents a business from funding an employee to buy an individual product, because for the most part, this is the logic behind the law. Some people will be left behind, because they won’t be underwritten for health reasons.

Group health insurance is guaranteed issue by federal law, so everybody is included but it’s very expensive. In the new environment, where you had guaranteed issue and a mandate, it’s acknowledged by many policy people that ERISA requirement or law may very well change or go away, because you have guaranteed issue then a small business could fund or co-fund an employee to go to a place like eHealth and look at this cafeteria of different kinds of products and make a selection.

Then you add that to the market opportunity. Suddenly you’re looking at something that is much more significant than we face and have today.


There are no further questions. I would now like to turn the call over to Gary Lauer for closing remarks. Please proceed.

Gary Lauer

Well, I just want to thank everybody for the time. This call has gone a bit long than we typically do, but we had a lot to share with you today and be anxious to talk with you individually if it needed as well. So, thanks a lot.


Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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