Universal American Corporation CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Universal American (UAM)

Universal American Corporation (NYSE:UAM)

Q2 2013 Earnings Call

August 2, 2013 08:30 AM ET


Tony Wolk - General Counsel

Bob Waegelein - President and CFO

Richard Barasch - CEO


Matthew Borsch - Goldman Sachs

Sarah James - Wedbush Securities

Kevin Fishbeck - Bank of America Merrill Lynch

Carl McDonald - Citigroup

Scott Fidel – Deutsche Bank

Tom Carroll - Stifel


Greetings and welcome to the Universal American Second Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Richard Barasch, Chairman and CEO of Universal American. Mr. Barasch, you may begin.

Richard Barasch

Hi everyone. Sorry for the short delay. Thank you and good morning everyone. Thanks for joining us on our second quarter 2013 conference call. I’m here with our CFO, Bob Waegelein and our General Counsel, Tony Wolk. I would like to ask Tony now to read our Safe Harbor language.

Tony Wolk

Before we begin, I would like to remind you that we have posted a presentation for this call in the Investors section of our website at www.universalamerican.com. I would also like to remind all participants that our call this morning may contain forward-looking statements within the meaning of the federal securities laws. These statements, which reflect management’s current expectations, projections, and beliefs, are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of these risks and uncertainties, we recommend that you review the Company’s risk factors and other disclosures set forth in our SEC filings. We undertake no obligation to update or revise any forward-looking statements to reflect events, developments or circumstances after the date hereof.

During the call, we will also be referring to certain non-GAAP financial measures. Please refer to the reconciliation tables listed in the press release for a discussion of these non-GAAP financial measures. Richard?

Richard Barasch

Thanks Tony. There is a lot to discuss this morning, so I am going to dispense with usual discussion of the environment, so we can get right down to business. Bob will begin by discussing our financial results. Bob?

Bob Waegelein

I would like to remind you that we posted additional information regarding our operating results in the financial supplement that can be found on our website in the Financial Reports tab of our Investors section.

So let's turn to slide five. As you will see for the second quarter we reported an after tax loss of 91.8 million or $1.05 per share, which include several non-operating or one-time items. First as Richard will discuss in more detail shortly, we worked out 90.6 million of the good will after tax relating to APS. This impairment charge was non-cash item and does not impact any of the covenants in our credit facility.

In addition, we continued to invest in our ACO business incurring $6.4 million of after tax expenses and realized $6.6 million in after tax realized gains in our investment portfolio. Excluding these items we posted an adjusted after tax loss from our operations of 1.4 million or $0.02 per share.

Clearly the driver of this result is weakness in certain non-core parts of our Medicare Advantage segment, resulting from higher loss ratios in the second quarter. After eliminating $6.5 million of out of period items our adjusted loss ratio for the quarter was 86.5%, which includes approximately 100 basis points for the effective sequestration.

I think a look at our six months results on slide six will be more informative to reviewing our overall results. For the six months in Medicare Advantage business operated profitably earning $38.7 million and $825 million of premium. The reported loss ratio for the six months is 84.1% and was aided by $11.6 million of favorable items relating to 2012.

Excluding these items, our restated Medicare Advantage MBR was 85.7% in the aggregate, higher than we anticipated even after considering the impact from sequestration since April 1st. The primary reason for this was an uptick in inpatient and emerging care, utilization during the second quarter primarily in the non-core HMO lines.

However, on slide seven you will note the disparity between our core and non-core MA businesses. And inside the core number our HMOs are performing well and more in line with our expectations, though the northeast did experience some of the same issues that we saw in the other non HMO segments.

Not surprisingly, the weakest results were in our non-core network enrolled private fee-for-service businesses. We remain mindful and active in bringing our Medicare Advantage expected in line with the size of our business. This has result in our expense ratio of 12.4% for the first six months but we still have more to go. The traditional businesses continue to perform well in its run off; earning $7.4 million on revenue of $120 million for the six months ended June 30.

Our corporate segment includes the operating results of APS and the cost of operating our parent company. Excluding the good will impairment charge, the operating results for APS for the six months of 2013 were breakeven net income on $142 million in revenue.

Finally, our investment activities continued to perform well generating $8.2 million after tax gains and we incurred $18.3 million or $11.5 million after tax and expenses related to our ACO business for the six months of 2013.

Moving to page eight, we can review the balance sheet. As of June, we had $2.4 billion in total assets including $166 million in unregulated cash at the parent, which included 90 million of extraordinary dividends from the subsidiaries received in June. And additional 52 million of extraordinary dividends in the subsidiaries were paid to the parent in July.

Our book value at the end of June was $10.26 per share and we exclude all our intangibles, the deferred acquisition cost, goodwill and other intangible assets. We ended the quarter with the tangible book value per share of $7.61. Our total capitalization ratio as of June was 15.3%.

As announced, we will pay a dividend of $1.60 per share to our shareholders later this month. After giving effect of the dividend payment, our book value per share will be $8.66, tangible book will be $6.01 and our debt to cap ratio will be 17.6%, a level that still provides the financial flexibility. We will have in excess of $60 million of unregulated cash at the parent after the payment of the dividend. Richard?

Richard Barasch

Thanks Bob. I’d like to start by highlighting the two issues that impacted our capital structure and then talk more about the business including some more color on the results of the quarter from an operating perspective. We acquired APS in March of 2012 for approximately 225 million with the expectation that the acquisition would accelerate our entry into the Medicaid market, particularly around dual-eligibles.

In 2011, APS generated approximately $30 million of EBITDA. Fortunately, APS’s earnings have decreased significantly from the 2011 level, despite the corrective steps that we have and are continuing to take, it now appears unlikely that near-term earnings from the business we acquired will reach previously projected levels. This shortfall in earnings is the cause of the non-cash impairment charge of approximately $90 million. The primary reasons for the reduction in earnings are the decline in scope and profitability of the APS business that existed as of the closing and the failure to win new contracts as we had projected.

Fairly in retrospect, the asset we acquired was not worth what we paid for given its performance into closing and management takes although no responsibility to a deal that has not lived up to expectations. Having said that, we believe that we have significantly legal claims, which we are pursuing vigorously. I appreciate that you may want more specifics about this and I’m sure you can understand why we will not be able to go into details at this point.

But I want to make sure to be clear that we are fully committed to Medicaid, including the APS business and still see significant opportunity for Universal American. We and the talented folks who work at APS do excellent work for our clients and have strong and long lasting relationships with several state Medicaid agencies. We are investing heavily in these relationships and our capabilities including a significant sum to improve our IT capability. We’ve been approaching the Medicaid market in a variety of ways, as a health plan that is willing and able to take risk and as a fee-for-service provider to states and other health plans and directed stay or in partnership with provider base health plans looking to share risk.

It appears that the pace by which states are moving their dual-eligible populations into fully integrated managed care programs has slowed. As a result, we’ve seen several states that are now looking at fee-for-service solutions for these populations, especially relative to long term care.

A good example of this trend is the State of Oregon, which recently expanded its long standing contract with us to include care coordination services, especially for long term care to approximately 26,000 Oregon dual-eligibles.

At present APS has approximately $280 million of annualized revenue, including approximately $120 million of fee based revenue and we expect positive EBITDA in 2013 and 2014. The concept of entering Medicaid is as valid as it was 18 months ago and it’s our intention to build on this base for both fee and risk business.

On a more positive note as Bob mentioned, we announced the $1.60 per share special dividend which will be paid on August 19th to holders of record on August 12. After filing our statutory statements for 2012, we approached several of the states where our regulated entities are (inaudible) and requested special dividends to allow us to right-size the capital of those companies.

We were successful with those request and we upstreamed approximately $142 million in special dividends to go along with the $59 million of ordinary dividends based on 2012 results. After the payment of the $1.60 per share or $142 million in total, we’ll still have approximately $60 million of cash at the holding company including approximately $40 million that has been currently used for additional dividend, stock repurchases or any other corporate purpose.

In addition, concurrent with the dividend our Board has authorized the company to spend up to $40 million to purchase shares of our common stock. After the dividend, Universal American will continue to be well capitalized. We still have $200 million of excess capital using a 350 RBC base, and we’ll have total book value of $8.66 per share, including more than $6 of tangible book supporting our business. These actions are consistent with our commitment to return capital that we are not fully employing to our shareholders.

It’s worth noting that after the $1.60 dividend paid, we will have distributed $18.60 cumulatively to our shareholders since August of 2010. It's also noteworthy that we were able to pay a sizeable dividend, even as we write down goodwill on the APS deal, and still have a lot of financial flexibility going forward.

Turning to slide 10, this is sort of a snapshot of how we see our business. Medicare Advantage will continue to be a core business for Universal American, however since the ACA was passed in 2010 and especially after we sold the part D business in 2011, we've been acutely aware of the need to diversify our earnings away from Medicare Advantage only.

This was a large part of the reasoning to build our ACO business and to enter the Medicaid business. Clearly the results of the quarter in certain portions of our Medicare Advantage business didn't meet our expectations, but I want to make sure we keep this in perspective. As Bob mentioned, I think it’s important to look at the results of the first half as a better indicator of where we are. In particular, if you exclude the adverse development in infective sequester, the results for the second quarter even make more sense. But we did see an uptake in utilization in the quarter in certain parts of our business.

Turning back to slide seven when you dig a little further into the results, they also tell a story that it's consistent with the way we've been thinking about the evolution of our business over the next few years. First and most important, our HMOs in Texas and Oklahoma continue to perform well. Loss ratios came in approximately where we expected, higher than last year, but on a dry path to the 85% requirement for 2014.

As I've often stated, Medicare Advantage will hold up well only when we can impact the cost of care. In our HMOs that's largely accomplished through our partnership with primary care providers, a model that has been and will be vibrant through the reduction in benchmark rates enacted by the ATA. We enjoy a market leading position in the Houston-Belmont markets fueled by long standing and successful relationships with primary care providers. In the Dallas and Oklahoma City markets we're experiencing growth in membership and profitability.

We've also identified core markets especially in the North East and in particular upstate New York, where we have a history of providers due to concentration and long presence in the markets going back to our Metsep (ph) days. The key to our ongoing success in these markets will be our ability to work more closely with the providers to improve health outcomes and lower costs. One good indicator is that we have formed eight deals in the North East with several of the most important primary care providers in the market.

Conversely and as Bob said not surprisingly, our worst result came in the noncore segments where we have the least ability to influence behavior. Our experiences with population health management can have some effect, but the key to long lasting success is relationships with physicians and other providers. We take our responsibility to our members in these markets seriously but it's likely that this part of our book will shrink as the other parts of our MA business grow as was the case in the 2013 AEP.

I'd to make a couple of comments about our 2014 bid. First and most important we remain confident in the basis of our HMO bids. Our loss ratios remain favorable on the stand so we have a high degree of provider engagement. As to the other PPO and private fee-for-service bids including in the North East, we're still optimistic but we need to watch carefully over the next months and quarters.

It's worth noting that the bids were largely based on trending forward 2012 results, which even with a little bit of adverse development have held up well, and early indicators that the preliminary and I stress the word preliminary results in July seemed to show us getting back in line. And we're not without some important tools to improve our results. For example if it turns out that our membership profile has gotten less healthy, we'll focus our efforts to make sure we get the appropriate risk adjustment recognition for this population. Further we’re in the early innings of ramping up our efforts to bring more effective care coordination to the North East and believe we can favorably impact the results over time.

Finally and very important as Bob mentioned, we must continue our efforts to bring our expenses down and our goal is to bring our expense ratio down by another 100 bips even after the effect of moving certain expenses to the MBR line in 2014.

Now let's turn to slide 12 to discuss our ACO business. In the Medicare shared savings program emerged from the 2010 Healthcare Reform Bill, we anticipated that the sort of techniques that we’ve been using successfully in partnering with primary care physicians in our Texas and Oklahoma HMOs, would also work in the fee-for-service population of the Medicare shared savings ACOs.

We currently have 31 ACOs with over 3000 doctors covering 333,000 Medicare fee-for-service beneficiaries. We also recently filed with CMS to add an additional seven ACOs that if approved by CMS will begin on January 1 2014. Counting some organic growth in several of our existing ACOs and the entering class of 2014, unless there's some drop offs before January 1st, we anticipate that we'll be in partnerships with physician groups to care for more than 400,000 Medicare beneficiaries in 2014.

Our ACO business is simply a logical extension of our provider focused approach to healthcare, which we call our healthy collaboration model. We align the stakeholder financial incentives around cost and quality and then provide data, technology and care coordination systems to physicians from early PCPs, which enhances their ability to identifying close gaps in care, improve quality, get patients compliant and healthy, so they stay healthy in a void, preventable, high cost acute events. We’ve been doing this very successfully to more than a decade in Texas and this is the core value proposition underlying our ACO strategy.

We’re actively involved with our ACO provider partners to deploy the care coordination techniques to close gaps in care and reduce overall cost. Specifically, we’ve identified the higher risk members with chronic conditions that are actively coordinated in care with underground case managers in cooperation with the primary care physicians. We’re also providing actionable data and analytics to the physicians and enable them to better manage the care of their patients.

In addition, we’re working on creatable approaches to enhance our engagement with beneficiaries so they can take a more active role in the overall quality and cost of their healthcare. Our ACOs have different characteristics urban and rural, large and small, loosely organized and tightly organized. We’ve an amazing laboratory to test the variety of care and medical management techniques as well as provider and beneficiary engagement tools to see what can move the needle in terms of driving higher quality, closing gaps and lowering cost.

On slide 13, it gives you the map of our existing ACOs and of the new perspective ACOs. As you can see, some of our ACOs are located in the areas that overlap with our existing MA footprint and others that are located in new areas, giving us potential opportunity to expand these relationships in the future for different products and services. We’re delighted to be in partnership with such a diverse and high quality group of providers and we’re committed to making the investments necessary to make this program successful.

The financial opportunity is straight forward as you continue on page 14. We and our physician partners are able to achieve savings over the trended benchmark. While demonstrating appropriate quality, the ACOs will split the savings with the government and we will participate in the profits of the ACOs. I must repeat however that the slide illustrated just to show you how the math works.

Among the nice things about ACOs as compared to MA are that there are no sales expenses, no marketing expenses, no claims paying issues, no enrollment issues. This is a focused strategy centering on partnering with primary care docs to provide appropriate care coordination to improve cost and quality.

While the program is still in its early states, we believe we’re building a distinctive important building business for Universal American and we’ll seek to leverage the capabilities and relationships we are building into new areas. At year end of the program, it’s quite appropriate to ask where we stand financially and whether the investment and time of resources looks like it will bear fruit.

Here is what I could say at this stage. If and these are too big Ifs, the data that we’ve gotten from CMS to date is fully accurate and the results that we have seen today continue through the balance of the year, we’re confident that we will generate sufficient cost savings to have revenue for the first performance year in the ACO program, ending December 31, 2013.

Turning to slide 15, we remain optimistic and enthusiastic about the compelling opportunities to pursue in the Medicaid space, particularly around dual-eligibles and long term care. These populations require a unique medical management capability that we believe we possess and currently serve duals in each one of our existing businesses, MA, the ACOs and our fee-for-service Medicaid services business.

Of note, we recently renewed our contract with the Puerto Rican government to continue providing managed behavioral health service to approximately 1.4 million Medicaid beneficiaries for an additional year through June of 2014, albeit at a lower rate.

I’d like now to discuss some recent development activities that we’ve been hinting about for the past while, but we can now actually start talking about more definitively. Today we’re announcing that we entered into a definitive agreement to acquire the assets of the Total Care Medicaid managed care plan. Total Care is one of the oldest and largest Medicaid health clients in upstate New York, currently serving approximately 35,000 members in Syracuse and surrounding areas. We’re acquiring Total Care from the Syracuse Community Health Centers, a group of federally qualified health center with 15 facilities in the area.

An essential aspect of the transaction is maintaining a close relationship with these important providers, consistent with our underlying focus of working in collaboration with providers, thus extending our healthy collaboration philosophy to Medicaid. This is a small deal from a financial perspective to Universal American, but a very important strategic step to strengthen our presence in upstate New York, one of our core markets. The transaction is subject to customary closing conditions including approval from the applicant of New York regulators would expect it to close in the fourth quarter of 2013.

Next, relative to the exchange, I think some of you have picked this up from some of the publicity recently, we have decided to take a cautious approach to exchanges near one of the programs and only file to participate in upstate New York, again a core market of ours. We were recently notified by the New York regulators, that our application to participate was approved. We have a long history in upstate New York, including strong ACO and Medicare Advantage footprints in Syracuse and the rest of the upstate area, and we hope to leverage our experience and operations in this strategically important area, as we roll out the exchange product and incorporate the total care Medicaid program.

Turning now to slide 16, Universal American has a successful history of demonstrating how the private sector can participate constructively in this type of evolving and growing market. Over the next several years, we have seen increasing number of prospects to do what we have done best; partnering with provider groups to help them analyze, manage and assume risk with the goal of providing measurably better care and controlling unnecessary cost. In the new and rapidly changing world of healthcare delivery, we position Universal American to thrive in this period of opportunity, largely due to our ability to partner with providers.

Thanks for your time this morning. Bob and I will be happy to answer your questions.

Question-and-Answer Session


(Operator Instructions). Our first question today is coming from Matthew Borsch from Goldman Sachs. Please proceed with your question.

Matthew Borsch - Goldman Sachs

A question on the non-core MA members in your bid there. If as you continue in the year you find that, you said you are going to watch it carefully. If you don't like what you see in terms of the trends, I realized that's an open way of putting it, but what are some of actions you can take for those non-core members? How are you going to manage that exposure going into next year?

Richard Barasch

Again ultimately it's a one year time decision. That's how the bids work. So at some point if we don't like what we are seeing, we have the right ultimately to withdraw from those markets. So that's the end piece of that. But in the middle, the real piece of this, we have relatively few tools at our disposal, because there are other dispersion if memberships. Our royalties is pretty well disbursed throughout the country.

In the network pieces, we do have some leverage, we have various aspects of our contract to give us some ability to do medical management and utilization management. So we're going to see if we can pick that up a little bit. Obviously we're going to work on making sure if we do have a population, it looks like I mentioned this, it looks like its less healthy, we're going to make sure that we get the appropriate risk adjusters for these populations. So we're not without tools, but candidly the further dispersed it is from our core, the less these tools are going to be useful.

Matthew Borsch - Goldman Sachs

If it's fair to ask this question on the call, just thinking about underlying valuation here. Let me just run this by you quickly. If you think about the excess capital above 350% of RBC being around 250 a share, if I got that right and then your core HMO business, you may be between $5 and $10 depending on what you use per member. Would you think about it that way and then how would you think at this point about the value of your other businesses, the ACO business?

Richard Barasch

It's an interesting question. Clearly you can look at our company in several ways, including some of the parts and obviously at some point the key collection is what our earning power is going to be from what we're doing. The way I kind of think about this math is, we still walk halfway. We pay a very hefty dividend, but we're still well capitalized. We got a good base for the amount of business that we got and the amount of business that we anticipate doing over the next year or two. So that's a good start.

The next piece I would say be kind of look at the core MA business and within the core MA, I think you would potentially give different valuations for our Houston HMO and other HMO businesses and kind of the further you get out on spectrum, maybe you would think about those values sort of changing. But I think that is exactly correct. It does too give you a pretty good base of value in the next piece.

And then you move sort of further out and we've got kind of two businesses that are development businesses, the ACOs and Medicaid. As I am sure you can appreciate it, it was extraordinarily pleasant for us to recognize this write down, but we feel very strong. We made the right choice in getting into Medicaid. And as we solve the issues inside of APS and expand the business, we’re seeing, frankly, lots of good opportunities, which we'll anxious to talk about as time goes on.

I think the Oregon contract is kind of interesting. It shows, I won’t say it’s a dispositive trend but it is certainly at least a mini-trend that we’re seeing among several states who really see some of the administrative and operational difficulties of doing the fully integrated plans, what’s happening in California and New York and Illinois and some places. They are on the right track. But it’s difficult, it’s not simple. And in the meantime there are populations that need to be managed from both, a cost and quality perspective. And as I say we’re seeing that trend emerge as well.

So, I wouldn’t give up at all on the APS business, on the fee for service side and clearly on the risk side with the acquisition of Total Care and some other things that we’re working on, I think that's going to result in a more structural merge for us as well.

So how you would value that on a current basis, hard to say. We value it greatly as a development business. And let me get to the ACOs and clearly we’re investing. We put out cash on this. We’re continuing to put out cash on this. But as I think I will, we’ve got enough data coming out in early basis and again that is an issue and I want to make sure that the people understand that we’re still dealing in a very early stage of a program, both starting to see some interesting trends, positive trends emerge in some of our ACOs. And we’re actually feeling pretty good about the investment that we’ve made and certainly on a risk reward basis the investment we’re making feel frankly quite good.

So I appreciate the difficulty that people would have in valuing, we’re fundamentally developmental businesses but we here think that those opportunities are quite real and again no guarantees but could turn out to be interesting businesses for us.


Our next question is coming from Sarah James from Wedbush. Please proceed with your question.

Sarah James - Wedbush Securities

Thank you, and I appreciate all the color on the 2014 bids. But I wanted to drill down a little further maybe breaking out the discussion into core, non-core, so on the core business can you talk about your pricing discipline for 2014? Some of your peers had spoken to targeting similar margins through historical levels in 2013 bid then what’s similar to your strategy and is it possible to grow enrollment with that strategy?

Richard Barasch

First let me take your last question first. The key that we’re working for is growth in core business. We know that we’re going to continue to have some attrition in the non-core. Again I want to repeat anybody who is a member of our plant is going to be treated as well as we possibly can do the fact that we from a corporate basis don’t see in this quarter doesn’t mean we’re not going to do the best we can for these beneficiaries.

But putting that off to the side we’re looking growth in the quarter. Inside the quarter we’ve got an HMO business that have been historically quite successful on many, many measures. We had big growth in that membership in 2013 and candidly our goal is to increase our membership in the HMOs and frankly in the rest of the core market for 2014.

We’re always reluctant to talk about profit margins on these businesses in advance particularly given the fluid nature of our business and even just this week we got notification of the benchmark supply fee which causes us to have to adjust our bids to some degree. So it’s a bit early and we’ll hopefully be more fluid coming about that at some point after.

Sarah James - Wedbush Securities

Thank you, that’s very helpful. And on the non-core, how should we think about the negative development trending on a monthly basis? Is it stable throughout the year or trending up or down?

Richard Barasch

I think, it was as a result of some of the uptick that we saw in the second quarter.

Sarah James - Wedbush Securities

And last question here is, can you speak to the motivation of timing of the special dividend from a strategy perspective whether items that changed either you no longer decided to pursue or opportunities that has changed in scale maybe?

Richard Barasch

I think if you look at our history before 2010 when the market was so weak in 2000 and 2009 we used a lot of capital to buy-back stock at that point. We have a history I think of using our capital for the best interest of our shareholders. We, if you recall… and I think we talked about this even explicitly in prior calls that we had to wait until the statutory volumes (ph) for 2012 were filed before we could go to the stage for extraordinary dividends because that really gives the picture.

So if you recall what Bob said, the money and actually, the approvals were given in June and early July. The money was brought up to the holding company immediately and frankly as soon as the money is there, it's our decision to distribute it. It's no more complicated than that there.


Our next question is coming from Kevin Fishbeck from Bank of America Merrill Lynch.

Kevin Fishbeck - Bank of America Merrill Lynch

I want to touch on the ACOs for a second, I guess there has been some information on the pioneer ACO and a couple of those ended up dropping out, a number of others ended moving down to a less risky share. I don't know if there is, if you can give some color on how you're are growing year to date but any lessons to learn from what has happened so far in the Pioneer ACOs, and I guess it sounds like in 2013 you look like you are on track to be profitable. Is there is similar dynamic that you laid out here, core to non-core business in the HMO side on the ACO side, or is that a more uniform experience?

Richard Barasch

Let me rephrase something. What I said is we're going to have revenues for 2013. We still are in developmental expense stage. So we're going to have revenues to offset, some of the expenses that we have incurred, trying to be clear on that point.

The rest of this, relative to the Pioneer, obviously we're interested in what's happened and what was described frankly is not to the degree, but kind of similar to our situations; several working, some below the line and we still have quite a nice period of time to work it through. So we have got some ACOs that have frankly given the data nicely over the lines, some just under the line. We thought it was very pretty interesting about the announcement and sort of the headline was, nine were dropping out the program, but the sub-headline was that seven of those nine moved to our program, the MSSP program.

So I was actually quite pleased to see that and is pleased to see that the people who have been in the program the longest still feel strongly about the possibility to frankly not even having given up but have moved to our program because they see that our program has a possibility of working.

So that was kind of one of the takeaways for us from that conversation. I think if your other question is do we seek certain ACOs as core and non-core, the answer to that is no. Kind of looking to at everything, equally now, obviously some of the larger ones and some of our existing core markets, we had the benefit of some history, particularly in Houston, we got a lot of our Houston MA docs who are members of our Houston ACO. So those folks are frankly ahead of the game on the techniques that we know how to use.

And then there is some other ACOs that are relatively new to the kinds of things that we're doing. So the ramp up for them is going to take longer. What we're pleased about is that even though it has taken a little bit longer than all of us expected to a really get traction at the year, we still see the vast majority of our provider partners are still enthusiastic about this. They see this as a great way for them to remain in the pen (ph), practice better medicine and potentially make a little bit more money. So we're working on this very, very hard.

Kevin Fishbeck

And then if you think about the capital position that you outlined there, kind of in the $300 million of extra RBC. When I think about your business, how do you think about growing the exchanges as far as that impacting your capital position, or any startup cost or ratios or anything about that?

Richard Barasch

It's a good question. We have distributed the amount of money that we thought would leave us in a comfortable financial position for the flexibility to do exactly the sorts of things that you just outlined. So we're, we still have a lot of excess capital given the size of our company and as events develop over the next several months. Quite frankly quite happy to have this capital base to support any new businesses that we may want to go into.

Kevin Fishbeck

And then may be just the last question about the 2014 bids on the MA business. I guess it's interesting that you kind of talk about it from a 2012 turning forward to 2014 base. How comfortable are you about what that base looks like, and your ability to bring down cost of where you are because most people kind if think about 2014 is being a disruptive year to begin with. It's said to be heading into that underperforming base.

Richard Barasch

2012 based on what we can see, it's developing fine. So 2012, we're pretty confident is what is it and what it is, was a good base for the bids. We're pretty confident about the HMOs for a variety of reasons. And as you get into the rest of our business, we've got the North east where we have been doing a lot of care management, a lot of individual care plans. We think that we have a good plan to moderate costs over time.

So even with this uptick, we have reason to be confident again, no guarantees, this is a health insurance line, that we're going to get that under control and that the 2014 bids will be okay on that basis. Frankly the further you get out at the curve, the harder it is to predict, but at the same time, that business will shrink as a percentage of our books. So it becomes less onerous. So without getting into details, we didn’t employ the same philosophy for the core business as we did for the non-core business. In the core business you might tilt toward growth. In a more stable or runoff business you might tilt toward maintaining profitability.


Your next question is coming from Carl McDonald, from Citigroup. Please proceed with your question.

Carl McDonald - Citigroup

So I'll sort of start with a big picture question. Industry's been consolidating. I'd just be interested your view on does this experience in Medicare, ATS, do you view this as sort of a blip and it will pass and nothing really changed in terms of how you think about the long term of the business or does the experience sort of suggest to you that maybe we're a better part of a bigger company or just anything along those lines.

Richard Barasch

We're a public company. I'm a public company CEO. So you sort of put that up on the board and we're fiduciaries to you guys and that's always the way we've looked at our company. But going kind of little deeper into the question and again I've been cautioned not to do too much mea culpa but we're not happy with what happened with ATS (inaudible) paying for us. We're all, we’re pretty competitive guys in this company and we're working hard to make this right and you know put that back on a good track.

One thing that I 'm absolutely sure of is that we made the right choice to go into Medicaid. The opportunity itself is so interesting, so diverse, 50 states, 50 different sets of problems and something like that is actually quite-quite good for a company like ours that can be nimble and think about things in a slightly different way. We're going to still have $275 million in the ATS book and we're going to make it work if possible. So that's kind of the ATS piece.

On the Medicare Advantage piece, as I said in the script, it backed up on us a little this quarter. We candidly didn’t expect this result, but if you look at the slide and I can tell you we have, there was a fair amount of debate in here about doing this right, because it was really the first time we’d broken out our MA book into anything, in chunks. We thought it was important that our investors see that the core business is in fact a solid business and does have staying power and that we can run a good MA business, even as a relatively small company.

So if anything Carl, big picture for us is that, being in healthcare right now, being a part of the changes that are occurring and being in a position to both influence the change and benefit from the change is quite exciting for us and we got a pretty energized group of people working in this company.

Carl McDonald -Citigroup

And then a couple more specific questions. The non-core business for you has shrunk over the last couple of years. So when I look at the 28,000 noncore lives that you have, any estimate of how many of those are going to go away next year just because you're not going to be in the market anymore?

Richard Barasch

I don’t know. I think it's probably working, we can go back and look what happened in '13, because we still had a fair amount of attrition in that book in '13. So we can get you something of what '13 looked like for book and percentages.

Carl McDonald - Citigroup

And then just one question on that loss ratio slide that you referenced. When I look at say the noncore loss ratio, the 87% year to date, can you give me sense of where you were last year? I just want to understand what I'm comparing that to.

Bob Waegelein

Carl, if you think about noncore in '12, three to six months ago about 84% on a restated basis for development and revenue that we saw in '13.

Carl McDonald - Citigroup

And then the last question I have is on the core loss ratio, the roughly 83% year to date, just want to understand how much of that deterioration relative to last year was planned versus unexpected and expected.

Richard Barasch

Carl, I can't provide you exact number on this but understand I think it’s worth noting that our HMO, particularly Texas loss ratios were quite favorable. We had our eye on 2014 and as I mentioned in my comments those were drive path to get something close to that number on a plan basis.

So, I say that the HMO piece of it was pretty planned. I think candidly we’ve got little bit surprised by some of the staff in the north east which were adjusted and so without putting a precise number on it, and I think that gives you the flavor.


Thank you. And next question is coming from Scott Fidel from Deutsche Bank. Please proceed with your question.

Scott Fidel – Deutsche Bank

First question is, I want to follow up on what Carl was asking, I was wondering you can estimate what your PMPM (ph) costs were up in the noncore year-over-year.

Richard Barasch

We don’t follow the PMPMs (ph). Just the MBRs

Scott Fidel – Deutsche Bank

Just one question for over to you APS, it will be helpful if you could give us sense of when you closed the deal what type of EBITDA you were forecasting that ATS would contribute in 2013 and where you’re estimates are that or now.

Richard Barasch

The company makes 30 million in 2011 and that was the starting point. I won't say that was the projection and that was the starting point. We are going to make positive EBITDA in the company did in '12, it was less than 10 million but around $8 million. We’re going to have positive EBITDA this year and plan a positive EBITDA next year. So, we’re not facing losses. We’re facing a situation where the profits just were not as much as we had anticipated.

Scott Fidel – Deutsche Bank

Okay. Next wanted to ask a question just on you’re thinking about the MLR for EMA business in the back half of the year end. If we look at the total first half result recast at around 85.7%, I know you’ll give specific guidance, but any thoughts just on sort of directionally.

Richard Barasch

We obviously took a good hard look at July in the last few days and as I said in my prepared notes, it’s preliminary but we have a sense that things have improved a bit. Some of the work we’re doing in medical management, in North East we think it’s going to start to kick in. So, we’re broadly optimistic about that. Obviously when you have MLR issue like this, we will gunshot that, make a prediction but we have had pretty stable book for pretty long time and we’re working our way through this.

Scott Fidel – Deutsche Bank

Okay. Then just one last question and maybe focusing a bit more on the North East market than the noncore since that’s more of a core market. As you look at some of the cost pressure that you’ve observed, do you think that you saw some negative selection in terms of the next the risk profile of the membership or…

Richard Barasch

It’s a good question and it’s clearly one of the things we look at and certainly in the noncore we saw a little of that and we saw higher risk was coming in and obviously higher utilization and it’s not unusual in shrinking book of business to observe something like that.

In the North East, we also saw a little of that and see a little of that and what that allows you to think of that is making sure that the HTC scores are appropriate for this population. So, again we’re not without some tools to rectify this if it turns out in fact that this a less healthy population.


Thank you. Our next question is coming from Michael Baker from Raymond James. Please proceed with your question.

Michael Baker – Raymond James

As you learn more about the ACOs can you give us a sense of what you’re finding to be some of the key drivers to the achieved savings and then how important do you think your IT platform will be in that process?

Richard Barasch

I think the answer to your question and its numbers one, two and three. In the level of physician engagement, aided by the level of peer physician leadership in each part of each ACO, that is the number one and driving factor.

One of the nice things about the ACO business is the self-selection of people who basically decided that they were willing to engage. Now, being willing to engage and actually engaging are not the same and we are asking many of these physicians to modify their practice behavior and maybe change their referral behavior, maybe do certain things in the front office that they weren’t doing before. So there is an education process but the big driver is inside the ACO there is a good leader, peer conversations, what’s working for you, what’s working for you, little bit of competition among the providers. These all are professionals and they want us to work, number one.

Second and you hear it, is the IT platform. Part of the APS transaction, we inherited is a good care coordination system. They're spending a lot of time energy, effort and money to improve it. Can make it useful for the businesses that we've got, particularly the ACOs. We gathered huge amounts of data from CMS and it's critically important that we sort of slice and dice the data, stratify the risk, find out who are the high risk patients are, get that information to the doctors, case managers working with the doctors in a way that's actionable.

So in our group of population I think 30,000 people there is probably 20,000 odd of those who have some sort of chronic condition. Finding out where they are, finding out what they are doing, finding out if they are in the hospital because very often the primary care folks don't know an admission has taken place because admission may have occurred based on an emergency or from a specialist. But finding out here in the hospital, real time so we can do transitional camp management.

These are the stuff we have done in Houston. Houston has been doing this for 15 years, to expect these new ACOs to get up to speed in six or eight months is a lot, feeding them a lot of information and we're trying to accommodate them, give them the amount of data that they can actually use.

Michael Baker – Raymond James

What percentage of the ACO's are kind of on your IT platform?

Richard Barasch

Every one of them. Let me qualify that, the care coordination for every one of the ACOs is on our platform. We're not in the practice management business. So I want to be clear on that point. We're not on the EMR business. So our system takes information from the EMRs but is not in EMR. So just want to clarify that point.

Michael Baker – Raymond James

And how about the data analytics side?

Richard Barasch

Not only there every one of the ACOs is having the data analyzed by our crack squad in Houston.


(Operator Instructions). Our next question is coming from Tom Carroll from Stifel.

Tom Carroll - Stifel

So a question on the total care Medicaid acquisition, and then the comment you made to Carl on this as well. Does this suggest a meaningful change at Universal American committing perhaps more to Medicaid as a product line? And are you actively looking at other Medicaid investment opportunities right now?

Richard Barasch

The answer to your second question is yes. And again I am not sure about the acquisition, but to use our capital on expertise in partnership with providers, we're seeing a ton of opportunities and we're quite happy in looking at them. Yes, it's a change. As I mentioned in the script we love the Medicare. Even with a kind of a sub-par quarter we think that's wonderful core business going forward. Just on that point I should have mentioned this earlier, I think Medicare Advantage is here to stay growing and will be a huge part of the Medicare going forward.

But we were a relatively small company, single threaded. So we really did feel the need to diversify our earnings stream. We did a little bit a detour with APS, but still never gathered the issue that we wanted to be and still want to be in Medicaid. So yes, we're investing. But total care, it's interesting because the reason why total care which is so appealing and may not be a model for other similar deals in other places is it's in Syracuse. We've got 17,000 or 18,000 Medicare Advantage lives in Syracuse with ACOs, with the leading primary care physicians in Syracuse.

So the notion of following on with an exchange product and a Medicaid offering makes sense to us and positions us frankly wonderfully well when the fully integrated dual administration programs, FIDA move from downstate New York to upstate New York. So there is a geographical reason here that may not be the case if a similar opportunities that they showed up in Illinois where we have relatively nothing. That is not a big deal for us financially. It's less than $10 million purchase price. It's relatively self-contained and it comes with a thing that we like the best which is partnership with primary care physicians.

Tom Carroll - Stifel

Did you do a press release on it?

Richard Barasch

You just heard the announcement.


We have reached the end of our Q&A session. I would like to turn the floor back over to management for any further closing comments.

Richard Barasch

Thanks for your time and your questions this morning. Clearly, there will be other issues that will come up based on this quarter. We appreciate your interest in Universal American and we look forward to future calls. Thanks very much, everyone.


Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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