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Universal American Corp. (NYSE:UAM)

Q3 2013 Results Earnings Call

November 7, 2013 8:30 AM ET

Executives

Richard Barasch - Chairman and CEO

Bob Waegelein - President and CFO

Tony Wolk - General Counsel

Analysts

Matt Borsch - Goldman Sachs

Sarah James - Wedbush

Kevin Fischbeck - Bank of America

Michael Baker - Raymond James

Carl McDonald - Citi

Operator

Greetings. And welcome to the Universal American Third 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 for Universal American. Thank you. Mr. Barasch, you may begin.

Richard Barasch

Thank you, and good morning, everyone. Excuse me, thanks for joining us on our third quarter 2013 conference call. I’m here with our CFO and President, Bob Waegelein; and our General Counsel, Tony Wolk.

Now I’d like to ask Tony 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

Thank you, Tony. Good morning. I am going spend with the usual discussion of the regulatory and political environment. This is not much to me added this point. The one comment that I’d make is none of the noise coming from D.C. in the start up difficulties with the implementation of Obamacare and medicare.gov. Change the fact that we’re in the midst of revolution in the way healthcare is delivered and paid for.

Despite the weakness in our recent results, Universal American has a solid capital pace, valuable business assets and the business permitted desire to participate profitably in a rapidly changing healthcare environment.

Bob’s going to begin by discussing our financial results. Bob?

Bob Waegelein

Thank you, Richard. I’d like to remind you that we post 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.

Looking on slide four, you can see for the third quarter we reported an after-tax loss of $12.7 million or $0.15 per share, which includes $6.6 million of after-tax expenses as we have continued to invest in our ACO business and also approximately $900,000 of non-operating benefits. Excluding these items, we posted an after-tax adjusted loss from our operations of $7 million or $0.08 per share.

Our Medicare Advantage MBR for the third quarter was $84.6, compared to $88.2 in the second quarter of 2013 and our restated loss ratio for the quarter was $85.2 compared to $86.5 in the second quarter.

Let’s turn to slide five to review the Medicare Advantage performance for the year-to-date. As you can see, the MA business operated profitably for the nine months ended September earning $41.9 million, $1.2 billion of premium for the reported loss ratio of 84.3%.

However, let’s look at slide six, and you will note the disparity between our core and non-core MA businesses including rural markets. After eliminating the out of period items the core market MBR for the quarter was 83.1% and for the nine months was 83.6%. This MBR was within our expectations and 100 basis points better than the second quarter with most improvement coming from the Northeast.

Not surprisingly, the weakest results were in our non-core network enrolled private fee-for-service businesses. For the nine months the restated MBRs for these products 89% in non-core network and 94.6% in rural private fee-for-service much higher than we anticipated on our 2013 bids.

To mitigate this issue we are not offering a rural private fee-for-service product in most of the country in 2014. Currently we have 12,000 members whose plans will not be offered in those markets.

Returning to slide five, we recognized that the run rate level of administrative expenses in our Medicare Advantage business is unsustainable, particularly as we reduced our footprint in the non-core markets. We are committed to take the necessary actions to bring the cost structure in line with our membership size.

Looking at the traditional business, it continuous to perform well in its run off earning $11.7 million on premiums of $163 million for the nine months ended September 30th. Our investment activities continued to perform well, generating $8.6 million in after-tax gains. Finally, we incurred $28.4 million or $18.1 million after-tax in expenses related to our ACO business for the nine months of 2013.

As a result of the lack of clarity and the data that we are receiving from CMS, it is unlikely that we reporting revenue from our ACOs in the fourth quarter. Rather the savings is generated for the period April 1, 2012 to December 31, 2013 likely be reported in 2014.

Moving to page seven, we’ll review the balance sheet. As of September, we had $2.2 billion in total assets, including $89 million in unregulated cash at the parent after paying $140 million in dividends in August.

Our book value at the end of June was $8.53 per share and we exclude all our intangibles, our deferred acquisition cost, goodwill and other intangible assets, we ended the quarter with a tangible book value of $5.92.

Our total capitalization ratio as of June -- as of September was 17.5%. Since the revenue recognition for ACO will likely be 2014 we mended certain financial covenants in our credit facility to spending the consolidated leverage and debt service ratio and replacing them with total debt to capitalization and minimum liquidity ratios. In connection with this amendment we prepaid $17.8 million of schedule principle payments due to December 31, 2014 rolling our total capitalization ratio to 15.9%. Richard?

Richard Barasch

Thanks. Excuse me, thanks Bob. I’d like to start my comments by amplifying some of the comment Bob has made about our Medicare Advantage results. Clearly, the results of the quarter in certain points to our any business did near expectations but I want to make sure that we keep this in perspective.

Let’s begin with the discussion of our MBRs. As Bob noted, we’ve seen an overall uptake in utilization this year in certain aspects of our business. However, when you looked back at slide six which is a quite important slide, it tell a story that consistent with the way we have been thinking about the evolution of our MA business over the next few years.

First and most important, our HMOs and taxes in Oklahoma continue to perform well. Loss ratios came in approximately where we expected them to higher than last year but on a glad path to the 85% of requirement for 2014.

As I have often stated, Medicare Advantage will hold up well only where we can impact the cost of care and improve quality. And our HMOs, that’s largely accomplished through partnership -- through our partnership with primary care providers, a model that has been and will be a vibrant through the reduction in benchmark rates enacted by the ACA.

In Houston, Beaumont, we enjoy market leading position that’s powered by our long-standing and successful relationships with primary care providers and will be further solidify by the positive effect of the increase in our 2014 starts.

We’ve also identified core markets especially in the Northeast and then particularly upstate New York where we have a history of providers due to our concentration of membership and long history in the market going back to our med supp days.

We did see higher utilization in Northeast markets in the second quarter but our MBR in the third quarter improved substantially. A key to our ongoing success in these markets will be our ability to work more closely with the providers in the Northeast to improve health outcomes and lower costs.

As Bob said, its not surprising that our worse results came in the non-care segments where membership is the huge geographically which weakens our ability to influence behavior by other providers or members.

You can see the distribution of our membership on slide nine. We are focusing on marketing resources in the 2014 AEP and building membership in our core market and expect the other markets to shrink.

I’d like to make a few comments about how these year results impact our thinking about the predicted MBRs in 2014 bid. First and most important, we remain confident in the actuarial basis of our HMO bids. Our loss ratios remain favorable on the plans, but we had a high degree of provider engagement and member satisfaction.

As to the other core PPO and network private fee-for-service bids in the Northeast, we’re also optimistic but we have more work to do especially on Medicare management. We are nearly spinning to ramping up our efforts to bring more effective care coordination to the Northeast, which shown with time favorably impact our results.

We have clearly seen an unexpected material deterioration of MBR in our non-core markets in 2014 where we are able to mitigate the issues to a significant degree for 2014. Less important, we are not offering real private fee-for-service outside the New York in 2014, which will eliminate the worst drag on our overall MBR results. As you can see from slide six, this is our worst block of business and a copy issuing time to withdraw.

Finally, and probably most important, we must accelerate our efforts to bring administrative expenses down. If you just look at the MBRs for the company as a whole and especially in our core markets, there for the most part on target, especially as we ahead toward minimum MBRs. But we still have not reached our ALR goals, these two is a major focus for us and we expect to see material improvements.

Jumping over to slide eight, we made a substantial corporate light effort to increase our star ratings for 2014 and the effort in expense to improve the quality of our plans for the benefit of our numbers has clearly paid off, approximately 75% of our core members are now in plans that have achieved a four star rating. Not only did we make absolute gains which we will have the very significant revenue implications for us in 2015. We made important relative gains measured against key competitors in our core markets.

Clearly, this is an excellent development for Universal American. Although, 2015 is still the way off. We are able to plan for our future in MA with reduced headwinds and increased optimism.

Turning to slide 11, I’d like to discuss our ACO business. In Medicare Shared Savings Program emerge from the 2010 healthcare reform bill. We anticipated the sort of techniques that we used in our successful and enduring partnerships with primary care physicians at our Texas HMOs but also were in the fee-for-service population assuming that we could align incentives. Our ACO business is simply a logical expansion of our provider focused approach to healthcare, which we call our healthy collaboration model.

We aligned the stakeholder financial incentives around cost and quality and then provide data, technology, care coordination assistance to physician, primarily PCPs, primary care physicians, which enhances there ability to identify and close gaps in care, improve quality and ultimately get patients compliant and healthy, so they stay healthy and avoid preventable high-cost acute events.

We are actively engaging with our ACO provider partners to deploy care coordination techniques to close these gaps. Specifically, we’ve identified the high risk member with chronic conditions. They are actively coordinating their care with on-the-ground case managers in corporation with their PCPs. We’re also providing actionable data and analytics to the physicians that enable them to better manage the care of their patients.

In addition, we’re working on creative 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 have an amazing laboratory to test a variety of care and medical management techniques, as well as provider and beneficiary engagement tools to see what we can do to move the needle in terms of driving higher quality, closing gaps and care, and lowering costs.

While the program is still in the early stages, we believe that we are building a distinctive important business for Universal American and we will seek to leverage the capabilities and relationships that we are building into new areas.

Slide 12, is a map of where we are with the ACOs. As you can see, some of the ACOs overlap with our existing MA footprint and others located in new areas giving us potential opportunity to expand relationships in the future with different products and services.

Turning to Slide 13, I’d like to spend the balance of my prepared remarks looking at Slide 13. This hasn’t been an easy period for Universal American. We are still working off a solid capital base and have the well expertise and capacity to participate in the highest growth parts in the healthcare system.

A few comments on capital, even after the $1.60 dividend paid in the third quarter, Universal American continues to be well capitalized. At close of the quarter, we had $200 million of excess capital and 350 RBC and total book value of 866, including almost $6 a share of tangible book value all to support our business.

The actions that we’ve taken are consistent with our commitment to return capital to our shareholders, so we are not fully employing in our business. It’s worth noting that including August 2013 dividend, we’ve distributed $18.60 per share to our shareholders since August 2010 and still have a lot of financial flexibility going forward to invest in the areas that we believe have high growth potential.

Looking at the chart on Page 13, I have already discussed where we stand in Medicare. So, I will move to our efforts in Medicaid. Despite the noise around the APS litigation, I want to make it clear that we are fully committed to Medicaid, including the APS business and still see significant opportunity for Universal American in this area.

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 company that is willing to do fee-for-service work with states and another health plans on a direct-to-state basis who are in partnership with provider-based health plans looking to share risk.

On the risk side, we recently renewed our contract with Puerto Rican government to continue providing managed behavior health services to approximately 1.4 million Medicaid beneficiaries for an additional year through June of 2014, albeit at a lower rate than we had before.

In addition, we expect to close on the acquisition of Total Care, sometime before the end of the year. Total Care is not the oldest and largest Medicaid plans in upstate New York, currently serving approximately 35,000 members in Syracuse and surrounding areas.

Although, this is a small deal from a financial perspective, it’s an important strategic to getting more experience in Medicaid risk and strengthen our presence in our core, upstate New York market. It appears that the pace by which states are moving the dirigible 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 solution for these populations, especially relative to the long-term care piece.

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 for approximately 26,000 Oregon dual eligible. We are also doing similar work in Vermont and are answering several fee-for-service RFPs that focus on this important topic.

As you know, we filed an exchange product in one region of upstate New York, as a way of getting our [feet wet] in business. And despite its current issues, we will be a huge source of premium growth in the next several years. We don’t expect material membership in the first year, but we will gain valuable experience. We are content to go slowly here.

Universal American has a successful history of demonstrating how the private sector can participate constructively by evolving and growing market. In the rapidly changing world of healthcare and healthcare delivery, we position Universal American to thrive in this period in large part due to our ability to partner with providers to achieve these goals.

Thanks for your time this morning. Bob and I will now be happy to answer any questions that you’ve got.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Matt Borsch with Goldman Sachs. Please proceed with your question.

Matt Borsch - Goldman Sachs

Yes. Good morning. And I guess, first of all congratulations on the star rating results. That is really quite impressive jump you made there ahead of ‘15 and I wanted to ask you on a different topic. First, I guess you couldn’t mention the private fee-for-service exit on the second quarter or maybe that was just three months ago and I forgot about it. But would you have -- based on what you know now, would you have pulled out also from the other core parts of your business? I’m sorry, the non-core.

Richard Barasch

Yeah, I knew the question. It’s easy in retrospect to say that. We are also up against scale issues as well, so we try to balance scale and loss ratios. Given the actual expenses in that market, even at the higher loss ratios, it’s probably not a drag. We are nearly as much as we are all was. So, yeah, of course it will clearly make our MBR numbers look better but it might not make our overall numbers look better.

Matt Borsch - Goldman Sachs

And can you talk about maybe you haven’t had to do much of this, but the network changes that you may have made coming into 2014, how much if any you did there or maybe some renegotiating of arrangements and again maybe they need to -- are you seeing that from competitors, are you seeing member reactions to either your or competitor benefit changes and of course as I just referred to you network changes? I’m wondering if there is an opportunity there.

Richard Barasch

Just on the last one, the issue of benefit changes, candidly, we really didn’t even see much in a way of our competitors reducing the benefits in the markets in which we’re pretty competitive. We don’t know the national footprint, so I can’t make a global comment about that. But in our market, we play a competition on benefits. The issue of the providers and some of the competitors changing their networks, I mean, their contract with providers. Just kind of doubling up a little bit. We did not do anything like that.

We choose to spend our efforts was trying to bring providers more in alignment with what we’re doing, particular some of our hospital contracts in the northeast. So of course it hasn’t been an issue of reaching our network. It’s more a question of kind of getting the network to work with us. And obviously, this is one of the same investment that make it’s a full statement book. These historically are issues, have never really focused around changing unit costs, as much they are achieving a level of cooperation with the providers.

Matt Borsch - Goldman Sachs

Yes. Understood. Sorry, I didn’t mean to interrupt there, Richard, but…

Richard Barasch

That’s okay. I’m finished with the answer.

Matt Borsch - Goldman Sachs

Okay. The other question I wanted to ask and you did addressed somewhat before, but can you describe if you’re not changing your networks, although I gather some changes in the Northeast on alignment, and how do you -- how much of the -- when you bridge the gap between the rate and the trend before further care management initiatives, how do you bridge that gap going into next year and how much margin?

Richard Barasch

Yeah. So let’s start with our most advanced markets in Houston particular. We were operating for years at a variable loss ratio. We knew we would have to be on as soon as the bill passed. We knew we have to be on a glide path to get to the 85. It’s not an exact apples-to-apples because you are permitted to shift some expenses into the MLR calculation which we will do. But still we’ve known for quite a while that we’re going to have to move up to continent with changes and rates, so there was sort of -- that kind of work in concert to a great degree.

In addition, one of the great things about our advanced models is they work and you don’t get to an absolute number, you get to -- you are on a continuous improvement streak and we’ve been able to do that over a period of time. We’re now -- I guess ‘14 is the fourth year of the glide of the new rates after the ACA.

And fundamentally, we haven’t had to change our benefits to a great degree and one change we did make is we did modify our Part D in order to -- just to see it. It’s probably the price that we did the most in terms of kind of bringing our folks into a more restrictive regimen, more so they’ve been doing with our docs.

Matt Borsch - Goldman Sachs

Okay. And just last clarification, I think you said the fourth year of the benchmark class, I think it’s the third year for ‘14, right? ‘12, ‘13, ‘14, ‘15. ‘16. Sorry, it doesn’t matter. I’m good for that. Thank you, Richard.

Richard Barasch

You maybe right, but we are mid way through it and still we haven’t had to do anything material

Matt Borsch - Goldman Sachs

Right.

Richard Barasch

I may have it.

Matt Borsch - Goldman Sachs

Right. Thank you.

Richard Barasch

Thanks for that. But we’ll get the right answer. Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Sarah James with Wedbush. Please proceed with your question.

Sarah James - Wedbush

Thank you. I wanted to talk a little bit about capital uses. What are your main uses -- not main uses but one of your uses that the last few quarter has been investing in ACOs and we saw an uptick there sequentially in the third quarter? So, I wanted to, see if you could give us a little bit more details? Should we think about this as something that’s going to continue to tick up or is third Q at the run rate level and then how do you think about the return on capital for those ACO investments versus other potential pieces of cash?

Richard Barasch

I think, Sara that the expenses really detracting more of the ACOs, so we have few more coming online in 2014. But I would say, fundamentally, the run rate we are at now is kind of where we were planning it to be. Financial return on capital, this is complicated, we believe, we believe two things as core foundations to our assets in the ACOs.

First is that we believe there is a good chance, very good chance that the program itself is going to work and then many of our ACOs and it wont be all of them, but they will achieve savings and will understand what we are trying to do, what’s proper in this circumstance and really take some of the ways that they make for fee-for-service system.

Our goals are locked in here. If you sort of look at the underlying results of our Houston HMO, they are quite lower than fee-for-service to fund and then they will take time here. So we see in and of itself a business that has a very good chance of being profitable in and of itself.

The other benefit, which is much higher to quantify is that we’re establishing very close relationships with primary care groups and believe that these relationships will be very useful in other areas. I don’t think there’s any question that the trend is toward providers taking more risk, taking more responsibility for both cost and quality. I believe that our company fundamentally -- our thesis rest on that point. So we’re -- our view is that there will be other crisis for us to do, work with some of our [ATF].

Sarah James - Wedbush

That’s very helpful. And then as we think about Medicaid and dual contract opportunities over the near-term, call it the next one to two years. Should we think about Universal American strategy to bid on primarily fee for service, or could we see full risk bids in the next one to two years?

Richard Barasch

We are looking at participating on the full risk side also.

Sarah James - Wedbush

And then last question, could we get a cash flow from operations number. I think Universal American is only ensure not to provide that. So just given your business structure now being more in line with the traditional managed care plans then when this policy started. What’s the rationale around continuing, not to report cash flow until the SEC filing?

Richard Barasch

We’ll consider trying to pull that up into this call and the future. Obviously, we had different businesses that have different kind of cash flows traditional and the like. So we’ll see what kind of organized presentation we can give on that in the future.

Sarah James - Wedbush

Do you have a number for this quarter?

Richard Barasch

Not in front of me.

Sarah James - Wedbush

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.

Kevin Fischbeck - Bank of America

Okay. Thank you. Can you just go back to the covenant modification? It sounded like it was a timing of the ACO payments that caused you to go back. Can you just go through that again?

Richard Barasch

That’s right. So when you look at that agreement, it’s an EBITDA type of leverage calculation that we need not having to recognize the revenue or the strain of the expenses of the ACO make it troublesome to try to meet that covenants. So our creditors in the banks have been very supportive of our business and agreed to more turn this into a balance sheet, a financial covenant which is more appropriate for where we are in our company. We offered to pay down the debt a little bit to just bring that leverage down a little bit for them by pre-paying the potential payments required through the end of next year.

Kevin Fischbeck - Bank of America

Okay. So the covenants have changed prospectively or they will go back to where they were?

Richard Barasch

We plan on in 2015, in 2015 returning to our pre-agreed upon covenants.

Kevin Fischbeck - Bank of America

Okay. Sounds like you are accepting to get ACO payments next year for this year’s number but if you could just give us just the timing of when that might come through that positive or do we think on the 2014, they will also come in 2015 so there is still this one year delay?

Richard Barasch

Yes. There is a delay in the revenue recognition of these savings. Again as I indicated in my remarks the data that we are getting from CMS doesn’t give us the clarity and ability to calculate the savings for the fourth quarter. So that will come in ‘14 and then hopefully they will have a track record of information and develop the revenue recognition more timely in the future given better information but we will get paid in ‘14 for the program we are ending December 31st, ‘13 in the third quarter. So then we will have some certainty there and then we will go from there.

Kevin Fischbeck - Bank of America

Okay, in the third quarter 2014. Okay and then moving to this balance sheet, does it change in anyway positively or negatively your ability to share repurchase or special dividend next year?

Bob Waegelein

Richard might have indicated in his notes, we do have $40 million repurchase plan approved by the Board that we not yet acted on, that doesn’t get impaired by these covenants now.

Kevin Fischbeck - Bank of America

Okay. Perfect. And then you mentioned that you guys are putting it to medical management initiatives particularly in some of the non-core markets. The comment made it sounds like if that’s a ramp maybe through 2014 and any thoughts about timing and when you think these things take off?

Richard Barasch

Let me clarify, the medical management ramp up is more in the core market.

Kevin Fischbeck - Bank of America

Core market.

Richard Barasch

Not in the non-core. I am sorry for that. I wasn’t clear on that point. The stuff is already happening we are working it now. The expectation is that we will start seeing improvements currently and we’ll continue through ‘14. Now we did see an improvement in the core markets of the north east in the quarter. One quarter is not enough to declare any sort of victory on this. But we are working hard at this.

Kevin Fischbeck - Bank of America

Okay. And did your bids for 2014 contemplate these initiatives?

Richard Barasch

I am sorry. Can you repeat that?

Kevin Fischbeck - Bank of America

The bids for 2014 they contemplated these improvements?

Richard Barasch

Yes. We do expect to see some improvement in medical management. It goes to probably Matt’s question also is one of the way you mitigate the changing rates is through better medical management.

Kevin Fischbeck - Bank of America

Okay. And then exiting of the markets, is that free of capital for you next year?

Richard Barasch

That’s a little bit, it does. Again it’s -- yes, the answer is yes. It does free up some capital.

Bob Waegelein

Kevin, it’s about 170 million of premium related to that, so the capital of $127 million gets freed.

Kevin Fischbeck - Bank of America

Okay. Great. And then last question, with the market exits, do you guys thinks that now you will be growing membership next year or you’re going to end up being somewhat flat given the…

Richard Barasch

I think that -- we’ve thought it is sort of three things happening simultaneously. The one is we’re eliminating any dropout and so that goes off to the size. Two is that we’re focusing on attention on the core markets. We expect some ratification in the non-core markets. The hope is that the improvements in the core market overcome the deterioration in the non-core markets. That’s the way we have planned it.

Kevin Fischbeck - Bank of America

Okay. So when you say that you mean bring a 12,000 core versus non-core, it should equally turn it out. Okay.

Richard Barasch

I mean we would hope to do more than that but there is going to be definitely a balance there.

Kevin Fischbeck - Bank of America

All right. Perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Michael Baker with Raymond James. Please proceed with your question.

Michael Baker - Raymond James

Yes. Thanks a lot. Just the some questions on the ACO side. It appears as though earlier in the year there was a change in leadership there. I was wondering if you could give us some color on what drove that and who is kind of in-charge of the effort today?

Richard Barasch

This has been managed by the same women for quite a while now. I am not sure what you’re referring to.

Michael Baker - Raymond James

I was referring to a Kirk Clove who is a primary…

Richard Barasch

Well, I guess, right, yeah, Kirk left the company…

Michael Baker - Raymond James

… out there…

Richard Barasch

All right. Fair enough.

Michael Baker - Raymond James

… and now it looks like you said a different shop.

Richard Barasch

Yeah. Kirk left the company at the end of 2012.

Michael Baker - Raymond James

Okay.

Richard Barasch

So he is not -- so he hasn’t -- leadership passed to Erin Page, right around that time.

Michael Baker - Raymond James

Okay. And then I noticed that you didn’t include in your slide deck the financial model just go around through the ACO, is there anything we should infer on that or are there any changes to some of those assumptions that I understand is preliminary?

Richard Barasch

It’s a good question. We had that in the deck, two straight quarters. We figured you guys, got it, copied it, we didn’t have to repeat it.

Michael Baker - Raymond James

Okay. I will just checking. I appreciate it.

Operator

(Operator Instructions) Our next question comes from the line of Carl McDonald with Citi. Please proceed with your question.

Carl McDonald - Citi

Great. Thanks. I wanted to focus on SG&A and whether or not there is insurmountable SG&A problem. This year you were able to improve SG&A decent amount on flat revenue next year with the combination -- close to 10% of the membership plus the rate card. Presumably there is going to be some meaningful pressure on the G&A. So just want to think about the longer term trajectories, that is something you can really improve on your own whereas other do you sort of need other alternatives to ultimately get the SG&A?

Richard Barasch

It’s an excellent question. There is no doubt that we got to -- on our own to change -- to continue change this dynamic. If you recall in the past, we very often have called out sort of expenses like excess marketing expenses, excess start-up expenses, and as a matter of being fair to you in creating maximum amount of discipline for us.

We are not calling out anything, its got to work. Its got to work within what we think is a right parameter for ALR. We had 2,000 numbers or so at one point and not too distant past. Candidly, we have some synergy. It hasn’t been easy. It’s been higher than we expect it to move it down.

We now have geographically -- kind of brought ourselves even more to core and all of this is going to help us to do that. And I think we’ve been through. I’m not saying that we’re not going to continue invest in quality in our business.

The upside is getting high stars is paramount. But the heavy lift, the first heavy lift to getting the systems in place is over. So we can -- we’re more on the glide path with less investment in the system side. That’s one kind of question. We’re just getting more efficient in what we’re doing. And I think we gotten up.

Another aspect to this is on the corporate side. We’re too fat on the corporate side as well and some of those corporate expenses are finding new way into the expenses of Medicare advantage. And we’re working hard on the corporate side to make our company of the size that it make our -- commensurate the size it should be. We absolutely have the comparative necessity to move this number down substantially in ‘14 and even more so in ‘15.

Carl McDonald - Citi

And when you talk about the room that you had with G&A. if I look at the -- within the Medicare segment G&A maybe 14%, 14.5% this year. It seems to me like to get to a realistic target, I mean, you really need to take that down from closer to 10%. Are we talking that there is that kind of room on your own?

Richard Barasch

I think 10% would be high for us, frankly, it does. But we’re getting pretty aggressive in to our goals for ourselves. And we need to doing that, keep in mind that some of these expenses shift over to MBR. So it can be 150 basis points, you can shift immediately to the MBR. So the volume isn’t quite as bad but it still -- it’s tough to working with committee.

Carl McDonald - Citi

And then the other question, I just -- if you said it, I didn’t catch it, the $89 million cash at apparent and then how much excess cash at the subs above 350%?

Richard Barasch

I said we have $200 million of total capital excess of the $350 million including cash.

Bob Waegelein

$89 million was prior to prepaying $70 million at the facility as well.

Carl McDonald - Citi

Excellent. Okay. Thank you very much.

Operator

Thank you. Ladies and gentlemen, we have come to the end of our Q&A session. Mr. Barasch I would like to turn the floor back over to you for closing comments.

Richard Barasch

Thanks everyone for participating this morning and for your questions. I think both in the prepared remarks and your questions, I think we hit the key points that we wanted to this morning. As always feel free to call Adam, Bob or myself if you have any follow-up question. We look forward to speaking to you again after the next year. Thanks very much.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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