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Executives

Herbert Fritch - Chairman & CEO

Karey Witty - EVP & CFO

Analysts

Michael Baker - Raymond James

Charles Boorady - Citigroup

Joshua Raskin - Barclays Capital

Scott Fidel - Deutsche Bank

Darren Miller - Goldman Sachs

Matt Perry - Wells Fargo

Thomas Carroll - Stifel Nicolaus

HealthSpring Inc. (HS-OLD) Q4 2009 Earnings Call February 8, 2010 10:00 AM ET

Operator

Good morning and welcome to the HealthSpring conference call to review its financial results for the fourth quarter and year end December 31, 2009. The financial results were issued before the opening of market trading today. If you did not receive a copy of the press release, you may find a copy under the Investor Relations tab on the HealthSpring website at www.agalthstring.com.

Before we begin, HealthSpring wishes to caution that some statements made in this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those in the forward-looking statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission for a discussion of those factors that could affect the company's financial results and the forward-looking statements made in this call. The information being provided today is as of this date only.

For discussions of those factors that could affect the company’s financial results and the forward-looking statements made in this call. The information being provided today is as of this date only. HealthSpring expressly disclaims any obligation to updates these forward-looking statements as a result of new information, further events or development except as required by law.

In addition, certain non-GAAP financial measures will be covered in this presentation. These non-GAAP measures are reconciled to the most comparable GAAP measures in the press release, or on the company's website. Please note today’s call is being recorded. At this time, I'll turn the call over to Mr. Herbert Fritch, Chairman and Chief Executive Officer of HealthSpring. Please go ahead sir.

Herbert Fritch

Thank you, operator. Welcome to our 2009 fourth quarter and year end conference call. We are pleased to report another good quarter and a close to what we think was a very strong 2009. Our total revenue and net income for the year were over $2.6 billion and $133 million respectively.

This represents an increase of 22%, 12% over 2008. We began the year with an earnings per share guidance range of $2 to $2.20; raised to two times during the year and today we are forwarding EPS of $2.41 which is above our most recent guidance of $2.30 to $2.40. I would like to spend some time discussing the many things that went right in 2009 and a few that went wrong and how this positions us well for 2010 and beyond.

This time last year we were talking about issues in our standalone prescription drug plan in Florida markets. In both respects those parts of our business deserve the comeback award for 2009. Perhaps, our biggest disappointment in 2008 was significantly lower margins in our standalone PDP business. At that time, we reported an MLR of 89.6% for fiscal 2008. With several years of operating on a national basis in this product, however, we now believe our business has achieved a level of stability to allow for more predictable results.

We're extremely pleased with our 2009 Part D performance, and are reporting today an MLR for the year of 83.3%. Tighter bids and a more efficient process for member data exchange were significant drivers of our 2009 improvement. Moving to 2010, we believe that our ability to bid accurately for this product continues to improve and our guidance contemplates MLRs in operating margins in line with our bid amounts.

We made the strategic decision to reduce our PDP target margin in 2010 somewhat to stay below selected regional benchmarks, and appears that this decision was a wise one, as we've picked up approximately 75,000 new PDP beneficiaries in the first part of 2010.

Changes in the bid calculations implemented in 2010 have also reduced the potential for large ships and membership going forward. Despite MLR guidance to the 85.5% to 86.5% which is higher than we experienced in 2009, we expect the profit contribution from this line of business to increase in the aggregate of 2010 due to the increased PDP membership.

Another focus in 2009 was improving the results of our Florida Health Plan. The medical trends and inpatient utilization metrics in 2008 in Florida were significantly higher than they were in prior years. Plan recontracting efforts with hospitals completed during the second half of 2008 proved to be fruitful. In addition, the expansion of the number of facilities, hours of operation and scope of services at Leon Medical Centers, is having a positive effect on both the medical trends and the enrollment levels for the health plan.

Moving into 2010, we certainly are not expecting the same sort of out performance in Florida that we saw on 2009 as the year-over-year improvement in medical trends from recontracting cannot be replicated in 2010. However we continue to believe that the enhanced clinical capabilities at Leon Medical Centers will have a positive impact on membership and medical trends going forward.

Other positive developments in 2009 include a strong performance in our Texas and Alabama markets while we continue to face increased outpatient medical costs in all of our markets year-over-year improvement in inpatient admissions help these plans deliver results succeeding our initial expectations.

One significant negative development in 2009 was the underperformance of our Tennessee plan. Coming into the year we had high expectations for Tennessee after the success of their IPA development network [tiering] efforts in 2008.

However it appears that Tennessee experienced both higher patient procedure cost and increased outpatient expenses in 2009. To address these issues our leadership has been focused on medical management initiative centered on clinical interventions at the member level by HealthSpring nurses and other staff members. We are also working more closely with our physician partners to address the sources of higher costs and have renegotiated our IPA contracts to create even stronger incentives to drive down medical trends.

It is our belief that these trends will have a positive impact on the Tennessee plans MLR. On a positive note the membership growth in Tennessee in 2009 and thus far in 2010 has been the best of any of our markets. We believe that this has been driven by the level of engagement achieved within several key primary care groups in the market creating significant network advantages.

In general, we are optimistic about our future prospects in Tennessee. Concerning developments in Washington, we now believe that comprehensive healthcare reform may no longer been near term possibility. While we may have at least another year before our legislative reduction in Medicare Advantage rates becomes a reality. We continue to believe that Medicare Advantage rates will be cut at some point in the future to help pay for other policy initiatives.

We developed our business model and drive them Medicare Advantage rates were at parity with fee-for-service and we believe we are well positioned should they return to parity. Tightly managed coordinated care models like our, should be able to provide better benefits than our competitors and certainly better fee-for-service Medicare in most markets. In the near term, we are focused on whether a single or multi-year position fee schedule fix will be implemented before the end of March thus impacting 2011 rates.

Before I pass the call over to Karey, I want to briefly discus a few pieces of our guidance for 2010. MA membership growth of 3% to 6% is below our historical experience due to the negative impact of product changes we made for 2010 and select geographies coupled with the benefit cuts that we have to make in light of declining reimbursement environment.

The product changes include tearing of networks in Texas and the elimination of several of our Chronic Cares SNP products. We are also forecasting an increase in our MA-PD, MLR from 81% in 2009 to a range of 81.5% to 82% in 2010. This is caused by forecasted medical cost trends net of benefit reductions being somewhat higher than we had expected in our 2010 bid assumptions. Offsetting this MLR erosion is an expected increase in our interest income and in our fee income which is tied to the overall increase in membership and total premiums. We have made a concerted effort these past few years to increase our IPA management business, both in terms of the number of IPAs and product design efforts to drive membership into the IPAs.

These efforts have been successful enough to make this line of business a significant contributor to our financial results. It also positions us well should accountable care organizations become a meaningful alternative in future legislation or if employers return to tighter network models as a way to address rapidly increasing premiums or higher deductibles in their employee benefit offerings. We hope that our clinical initiatives will drive further improvement in our medical trends but for now we're not building it into our guidance.

Finally we continue to believe that we are well positioned to capitalize on potential acquisition opportunities created by both the current rate environment and the healthcare reform. To that end we continue to evaluate our capital structure including our borrowing capacity and review alternatives providing us with greater flexibility to react quickly should the opportunity arise.

With that I'd like to turn the call over to Karey.

Karey Witty

Thank you Herb and good morning everyone. We are very pleased with our performance for the quarter and the year, including our reported quarterly net income of $38.8 million or $0.68 per share, an increase of 33% compared to 2008 fourth quarter EPS of $0.51.

Moving to the specifics, we reported 189,241 Medicare Advantage members at the end of the fourth quarter reflecting year-over-year growth of 17%. Growth here in the lock-in period of 2009 was significantly better than we expected.

During fourth quarter we added approximately 2600 new members. As is highlighted in our earnings release, our February 2010 plan payment report reflected MA membership of 193,320 representing growth of 2% from year-end. This should serve as a good proxy for our January 2010 membership.

PDP membership at year-end of 313,045 increased 11% over 2008 and our PDP membership for the February 2010 report is 387,442 reflecting 2010 growth of 24% so far.

Total revenue in the fourth quarter was $677.6 million, an increase of $136.8 million or 25% versus the prior year fourth quarter. Medicare Advantage revenues was up 24% or $114.4 million to $586.5 million. Primary drivers of this increase were an increase in member month and MA premiums PMPM. For the three months MA premiums PMPM increased 6% year-over-year, to $1037. For the year MA premiums PMPM were $1050, an increase of 5% year-over-year.

PDP premiums were $76.5 million in the fourth quarter of 2009, an increase of $20.1 million or 36% versus the fourth quarter of 2008. For the full year PDP premiums PMPM were $91, an increase of 10% over 2008. Keep in mind that quarter-to-quarter and year-to-year percentage changes and PDP PMPMs are significantly affected by risk corridor adjustments.

Fee revenue for the quarter increased $4.6 million as compared to the fourth quarter of last year. The increase was primarily the result of higher membership and IPAs.

Investment income was down 75% to $800,000 in the quarter due to the significant decrease in investment yields.

Total medical expense in the quarter was $522.5 million, an increase of $106.6 million, or 26% versus the prior year's quarter. With respect to the components in the relative metrics, MA medical expense was $475.4 million, an increase of $103.1 million, or 28%, versus the comparable prior-year quarter.

MA medical expenses PMPM were up 9% over 2008 to $841. For the full year, MA medical expenses PMPM were $851, an increase of 8% year-over-year. The MA MLR was 81.1% for the current quarter versus the prior year's 78.9%. The increase year-over-year was primarily the result of higher inpatient cost in our Tennessee market and higher outpatient costs in all markets offset by previously mentioned improvements in the Florida plan's MLR. For the year, the MA MLR was 81% as compared to 78.3% in 2008. The drivers of this increase are similar to those mentioned for the fourth quarter.

PDP MLR in the 2009 fourth quarter decreased to 60.7% versus the year ago 75.8%. For the year, the PDP MLR was 83.3% versus 89.6% in 2008 driven primarily by increases in PMPM revenue. We were quite please with the profit contribution from our PDP business in calendar year 2009 driven by the significant increase in membership coupled with the lower MLR.

SG&A expenses for the quarter were $79.4 million, an increase of $7.6 million or 15% versus the prior year. The increase year-over-year was primarily a result of additional personnel cost associated with membership increases and increases in other administrative costs. SG&A expense decreased 100 basis points to 11.7% as a percent of total revenue in the 2009 fourth quarter compared to 12.7% in the fourth quarter of 2008. Sequentially, SG&A costs increased $13.6 million. Primary drivers of this increase were marking related expenses including advertising, printing and postage costs as well as other administrative expenses. Let me reiterate, that we expect SG&A to remain seasonally waited to the first and fourth quarters as a result of marketing and commission costs.

For the year, SG&A of $279.8 million represented 10.5% of revenue; this reflected a decline of 75 basis from 2008 as we continue to be focused on driving operating efficiencies in all aspects of our business. The annual decrease as a percentage of revenue resulted primarily from improvements in our operating model and revenue increases. We're pleased that our team was able to significantly out perform their SG&A targets in 2009.

Moving to the items below the line, depreciation and amortization expense in the 2009 fourth quarter was $7.8 million. For the year, depreciation and amortization increased $2.2 million in 2009 as a result of increases in amortization of intangible assets related to the Valley Baptist Health Plans acquisition and additional depreciation expense on capital expenditures.

Interest expense in the 2009 fourth quarter was $3.6 million, a decrease of $1 million from the 2008 fourth quarter. For the year interest expense decreased by $3.5 million. Both the quarterly and declines were a result of lower average debt balances and reduced interest rates in 2009. Our weighted average effective interest rate for the quarter was 4.6% compared with 5.5% in 2008. The company’s effective income tax rate for the three months ended December 31, 2009 was 39.7% compared with 36.1% for the three months ended December 31, 2008.

The annual effective income tax rate for 2009 was 36.4%. The rate increase in the 2009 fourth quarter compared with the 2008 fourth quarter was a result of a greater concentration of the company’s profitability and entities taxed at a higher state tax rate and the reversal of tax benefits on canceled stock compensation awards for certain executives retiring in 2009.

And these changes into our tax rate going forward we expect our 2010 tax rate to be between 36.5% and 37%. Moving to the bottom-line, net income in the 2009 fourth quarter was $38.8 million or $0.68 per diluted shares. This represents increases of 37% and 33% respectively for the fourth quarter of 2008.

For the year, net income was $133.6 million or $2.41 per diluted share reflecting increases of 12% and 14% respectively over 2008. Included in our 2009 results is $0.04 of EPS associated with prior year retroactive risk settlements recorded during the first half of 2009. The corresponding amount in 2008 was $0.24.

Moving to the balance sheet and cash flow, our balance sheet at December 31, 2009 reflected cash and cash equivalent of $439.4 million. Unregulated cash was $106.4 million. Days claims payable were 35 days at the end of 2009 unchanged from the sequential third quarter.

Total debt outstanding was $237million at year end 2009. During the quarter, we also released from escrow approximately 2.9 [million] shares to the former shareholders of Leon Medical Center's health plans following the opening of two additional LMC facilities.

These shares are now reflected in our issues in outstanding shares on the balance sheet as well as included in our basic and diluted share count for the quarter. We reported $34.7 million of additional goodwill during the fourth quarter associated with this issuance. In 2009, cash flow from operations increased $8 million to $170 million, or 1.3 times net income compared to $162 million or 1.4 times net income in 2008.

Moving to 2010 guidance, we expect earnings per share to be between $2.25 and $2.50. Major components of this guidance include MA membership of 195,000 to 200,000, an increase of 3% to 6% versus 2009, PDP membership of 410,000 to 420,000, an increase of 31% to 34% over 2009, total revenue of $2.85 billion to $2.95 billion representing growth of 7% to 11% versus 2009.

MA-PD premium PMPM decline of approximately 2.5%. A PDP premium PMPM increase of 1.5%, an increase in management and other fee revenue of 20% to 25%. As to interest income we've implemented a new investment strategy in 2010, and expect to redeploy a substantial portion of our cash from money market funds to high quality fixed income assets.

We expect that this change should increase the average [GLs] on our portfolio without taking out significant additional risk. MA-PD MLR of 81.5% to 82%, PDP MLR of 85.5 to 86.5%. The PDP MLR in 2010 should continue to follow our historical seasonal pattern of improvement throughout the year.

SG&A as a percentage of total revenue at or below 10.5%, a 2010 tax rate of 36.5 %to 37% and average shares outstanding of 57.8 million in 2010. This year count assumes no share repurchase and includes the additional 2.7 million shares issued to the former shareholders of Leon Medical Centers health plan. All things being equal, this increased share count is $0.09 dilutive to our 2010 EPS.

Before we take questions I want to invite all of you to our 2010 Investor Day which will be held in New York City on Friday March 26. A release will be going out later, with all be specifics that we look forward to seeing you there. Operator and that concludes our prepared remarks and we can now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Michael Baker with Raymond James please go ahead.

Michael Baker - Raymond James

Thanks a lot. Karey, I was wondering if you can give us a sense of the CapEx plans for 2010 and also any plans with respect to additional Living Well centers.

Karey Witty

I would say that at this time, it’s not in our current thing or short-term thinking that we would be billing additional Living Well facilities and that said on the CapEx side our expectations for 2010 would not be materially different, we do have some IT initiatives that we will be working on over the next 12 to 24 months that you will see as utilizing from additional CapEx dollars but for 2010 we are not expecting anything widely out of the norm what you have seen historically.

Michael Baker - Raymond James

And then I was wondering if you could provide an update on the coding audits whether there has been any pickup around those in terms of activity?

Karey Witty

Really the I don’t know about pickups in activity, they are preceding on with the audits I think the big question in everybody's mind in the industry is clarification on what if any extrapolation they will make to full year revenues and it was I mean of recent developments, it was noted at that the President's budget asked for legislative clarification of their authority to extrapolate but so far nothing has come out specifically regarding that.

Michael Baker - Raymond James

And then finally, Herb, I was wondering if you could just comment on your thoughts as it relates to M&A obviously the [Ford] acquisition played out every well, I know that reform kind of comes and goes. So I was just wondering in context, your updated thoughts along those lines?

Herbert Fritch

I think, we continue to think in this environment, that there will M&A opportunities, we continue to think it’s a preferred way to expand geographies rather than (inaudible) expansions. So we are continuing to explore the options out there.

Operator

Well, our next question is from Charles Boorady with Citigroup. Please go ahead.

Charles Boorady - Citigroup

First question is just generally as you look at the components of your 2010 guidance what are some of the key risks that we should be thinking about in terms of any major provider contracts up for renewal, any quoting audits and just being that we've passed the major (inaudible) enrollment period, can you describe for us, what you've been able to do so far. I know only a month has passed but to look at prescription trends or other key tell tales of whether the selection of new enrollees that you've gotten will represent risk or upside potential to your guidance.

Herbert Fritch

All right, let me see if I can remember all those. I don’t think that I'm aware of any really major provider contract issues. We have the usual hospital renewals during the year but I don’t know that anything stands out as a particular risk from a renewal standpoint. In terms of coding, I think we've talked about that. We do have an audit going on of our Tennessee plan I think for 2008 but it really remains to be seen though. The big question is this extrapolation issue and how and whether they'll take the results and extrapolate and there have been word out of CMS in that regard right now. Part D trends, I think it's just too early to say. I'm certainly not aware of anything negative at this point but as far as I can tell everything seems on track but it's awfully early in the year yet.

Charles Boorady - Citigroup

Yeah, in terms of MA though are able to look at the prescribing habits of your new MA lives and it's got a sense for whether you're adversely selected against or if you got the risk for that you expected [Multiple Speakers]

Herbert Fritch

Given that all our business is this auto-assigned dual eligible business we don’t feel like there's much risk of adverse selection inherit in that as there would be in the voluntary PDP business. And as far as we can tell I don’t think we've seen any signs of anything.

Charles Boorady - Citigroup

Okay great and then just longer-term if I can ask a final question, should we expect your Med Advantage loss ratio to take off a little bit over year over the coming few years based on the, and I know the reimbursement system is subject to change, but given the system that we presently have, is it reasonable to assume that the loss ratio ticks up each year for the next few years? And that cost seem to be going up more than the reimbursement is.

Herbert Fritch

I think our goal has consistently to bend the whole margins flat we did see some, we realized some reduction in our SG&A and that allowed us to up the MLR a little bit and still to hold margins above level. But I think we'll continue to try and hold the MLR as flat as we can and that will be our strategy in the bid process. It is certainly more challenging if rates are coming down but none the less we're going to try and hold it as flat as we can going forward.

Operator

Your next question is from Joshua Raskin with Barclays Capital. Please go ahead.

Joshua Raskin - Barclays Capital

Maybe any preliminary expectations for 2011 rates, we never get the 45 day notice in a week or so. Just curious what you guys are expecting?

Herbert Fritch

Josh I think the big variable we're focused on as I mentioned is this SGR fix. I think there is a scenario where if they can get this thing fixed, at least through 2011, we could have a positive if we don’t get a negative legislative change and that’s looking more and more unlikely that we'll get it in time to impact the '11 rates, but we really don’t know. I mean that is the key variable I mean it could be as much as a four point positive if they do get it fixed through 2011 and don’t pay for it with reductions in MA rates, but that just remains to be seen.

Joshua Raskin - Barclays Capital

Okay I mean and obviously static flow would have sort of a two month error corrections for '10 then a similar sort of drop off back in '11. So I assume no doubt fix it all before the April deadline would be slight negative?

Karey Witty

Yes, slightly negative maybe level. I did something; I think was a senate bill that they talked about another three months fix on top of the two months fix that which might turn it slightly positive from slightly negative but not a major change.

Joshua Raskin - Barclays Capital

And then as you think about your January and I guess you got your February enrollment date as well. Any way to part how much of that is coming from seniors that were previously enrolled in privacy service plans or you know you getting a sense of any of that shift that occurred this year?

Herbert Fritch

I don’t think we've had a change to analyze the details yet to get any read on that, so I haven’t received any word one way or another, I imagine some component of it is shipped over but we have been able to quantify that.

Joshua Raskin - Barclays Capital

Okay. Let me ask you a different question then maybe, Kerry you had mentioned the IPA management revenues continue to grow. Were there any one time items in that fourth quarter or is that the fee revenue that you guys reported that was about $13 million, is that a good run-rate now?

Karey Witty

That's a pretty good run-rate Josh. We just looked at it in totality guiding it up 20to 25% growth in 2010 over 2009. So with the point being, I think it's probably something that we've been quietly drilling as a company and felt for various reasons that it was really to call it out and call it to your attention.

Operator

The next question is from Scott Fidel with Deutsche Bank. Please go ahead.

Scott Fidel - Deutsche Bank

Thanks. Can you just talk about what your building in to 2010 PMPM yields for risk adjusted impacts. Would that be primarily what gets us from the down 4 to 5% CMS rates to down 2.5% in your guidance or is that more just your market specific rates relative to the national?

Herbert Fritch

No, I think that's accurate. I think that's kind of the coding also primarily.

Scott Fidel - Deutsche Bank

Okay, so we should take that coding as like 2% sort of a build in to your rates?

Herbert Fritch

Yeah that's the way it looks.

Scott Fidel - Deutsche Bank

Then just on the SNP membership that you exited for '09 that you won't have in 2010. How much membership was that?

Herbert Fritch

I don’t know if I got the specific number on that. We might have to get back to you with that. I don’t think I have any thing off the top of my head.

Scott Fidel - Deutsche Bank

Okay. It's very small though right?

Herbert Fritch

It is small all right.

Scott Fidel - Deutsche Bank

Okay and then just one last question just do you have a update for DNA expense guidance for 2010 and then on operating cash flows, should we expect a similar relationship to net income around 1.3 times for 2010.

Karey Witty

Cash flow I would say yes to that Scott and depreciation and amortization again with no wild exceptions to CapEx during 2010 plan, I was expecting a kind of similar DNA rates

Operator

(Operator Instructions). Our next question is from Darren Miller with Goldman Sachs. Please go ahead.

Darren Miller - Goldman Sachs

Herb a question you, you indicated that you have reduced your target margin on the PDP business. I was wondering where do you expect that margin to come in and how much of a reduction is, did you guys forecast and then as we look forward, is that lower margin what you are looking for or would you expect the margin to come back up.

Herbert Fritch

I think generally we’ve tried to normalize the PDP margin with our MA margin to make it all pretty close, its just the higher MLR recognizes that our SG&A expense is associated with the PDP is lower and on the MA business. But we felt that was a reasonable way to approach it and that resulted in us targeting what about a couple of points higher MLR targets.

Darren Miller - Goldman Sachs

But the extra margins are going to come in lower.

Herbert Fritch

Well lower than we experienced this year but comparable we think with targeted margins on our MA business.

Darren Miller - Goldman Sachs

So is the 2010 margin, what we should think about long-term?

Herbert Fritch

Yes.

Darren Miller - Goldman Sachs

One question just on priorities of use of cash, what is your target debt level and then how do you think about potential M&A as we look forward the next couple of years, where we could see a challenge in rate environment, when do you think you guys hit the most opportunistic point as far as plans and trouble on looking this out?

Herbert Fritch

I would say for me from a debt level, one could argue that we're under levered. We certainly have capacity from a leverage ratio standpoint. And as a matter of timing, there is no magic catalyst necessarily. Certainly, with what seemingly some clarity on reform might that free up some opportunities. We certainly think so, so our goal was just to position us when those opportunities avail and take advantage of them as we can.

Darren Miller - Goldman Sachs

What would be the peak kind of debt level you guys could take on?

Herbert Fritch

I would say probably two times leverage.

Operator

Your next question is from Matt Perry with Wells Fargo.

Matt Perry - Wells Fargo

Herb, wanted to make sure I understood the comment that you made in your prepared remarks. I thought you said that the medical cost trends that you're expecting for Medicare Advantage in 2008 are now higher than what you had expected when you submitted this. Can you clarify that for me; make sure I'm understanding it?

Herbert Fritch

I think these outpatient trends that we've talked about have been a little more persistent. We're putting actions in place to try and modify them but at least right now we are taking a little more conservative position on their impact relative to the MLR in [Tenn].

Matt Perry - Wells Fargo

Okay. I guess if I look at your 2009 guidance for MA MLR as it's progressed through the year you had been thinking 81.5 and you ended the year closer to 81.0, but is there some kind of offsetting factor that happened in 2009 that kind of offset those higher trends that you are talking about for 2010 that wont recur in 2010?

Herbert Fritch

Actually I think the reduced loss ratio may actually be more of result of higher than expected revenues than they were lower than expected medical expenses and at least right now we are not changing our outlook in terms of revenue levels for Tenn.

Operator

Your next question from Thomas Carroll with Stifel Nicolaus. Please go ahead.

Thomas Carroll - Stifel Nicolaus

Could you comment just briefly on your expectations for the sequence in quarterly EPS in 2010 and is there going to be roughly the same as it was in 2009? And then secondly, I wonder if you could just comment on the large sequential decline in your PDP medical loss ratio, from third quarter to fourth quarter and I guess I don’t know if it will be quite as steep in 2010, maybe just some comment on that? Thanks.

Karey Witty

Certainly the PDP loss ratio as we indicated in our prepared remarks, you do see that drop sequentially, I think you would see the same phenomenon in your past that Q4 is always our strongest quarter from the PDP standpoint. As the members enter more of the membership enters the (inaudible). So that’s really the loss ratio on the PDP product in Q1 is extremely high and Q4 is substantially lower so and those are drivers of the overall loss ratio. So, that’s how you are modeling the PDP side. The MA side I would say no thinking for 2010 outside of the norm from seasonality within our business.

Thomas Carroll - Stifel Nicolaus

But we definitely expect to see a big drop for Q, even third quarter a bit, but it seemed like we went, prior years we've dropped 10 percentage points, five percentage points. We're just seeing a much more sizeable decrease. So, are you suggesting that I should be modeling fourth quarter in this 60% range? It seems like the magnitude is bigger?

Herbert Fritch

Yes. I mean recognizing our target MLR is up a little bit nonetheless I think we think the quarterly patterns should be reflective more of what we saw in '09 and what we saw in '08.

Thomas Carroll - Stifel Nicolaus

So new plan designs for 2010, the change is PDP is going to potentially put up an MLR in the 60% range 4Q 2010, that’s fair to assume?

Karey Witty

I think so.

Herbert Fritch

A little higher than what we had this year but it will still be in the 60% range.

Operator

Mr. Fritch, there are no further questions at this time. So I'll turn the call back to you for closing remarks.

Herbert Fritch

Thank you, operator. We appreciate your interest and attendance on the call. We look forward to hopefully seeing at our Investor Day in New York in March or on the next call. Thanks.

Operator

That thus conclude today's call. You may now disconnect.

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