Executives
Drew Asher – SVP, Corporate Finance
Allen Wise – CEO
John Stelben – CFO
Analysts
Doug Simpson – Morgan Stanley
Charles Boorady – Citi
John Rex – JPMorgan
Josh Raskin – Barclays
Christine Arnold – Cowen and Company
Ana Gupte – Sanford Bernstein
Scott Fidel – Deutsche Bank
Coventry Health Care, Inc. (CVH) Q4 2009 Earnings Call Transcript February 9, 2009 8:00 AM ET
Operator
Good morning and welcome to the Coventry Health Care fourth quarter 2009 earnings conference call. Today’s conference is being recorded. And all participants are in a listen-only mode. Today’s call will begin with opening remarks by Chief Executive Officer of Coventry Health Care, Mr. Allen Wise, after a brief forward-looking statement led by Mr. Drew Asher. Please go ahead, Drew.
Drew Asher
Ladies and gentlemen, during this call, we will make forward-looking statements. Certain risks and uncertainties as described in the Company’s filings with the SEC on Form 10-K for the year-ended December 31st 2008 and Form 10-Q for the quarter ended September 30th 2009 may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Allen?
Allen Wise
Good morning. Good morning from snowbound Maryland and thank you for your interest in our Company. As you saw in our press release this morning, we just reported a strong finish for 2009, both for the fourth quarter and the full-year. The results were a product of each of our seven major businesses performing at or in many cases, better than budget.
I’m very pleased with the progress the Company has made over the past year. And if you will recall in prior calls, there were a number of initiatives and improvements we embarked on in January of 2009. And although we understand that you are interested in the future and that we are clearly focused on the future I think it’s instructive to go back and review the goals that we laid out for you and the accomplishments of the Company during 2009, because they really set the foundation for the future and it’s a strong future.
First and foremost, we returned to the stable and predictable performance that you’ve come to expect from Coventry over the past decade. This is evident not only in our aggregate earnings performance, but also in metrics such as the commercial group medical loss ratio, which as you can see is better than our original and most recent guidance.
As you will recall, beginning in early 2009, we examined all of our businesses in terms of where we create the most value for our shareholders and where we provide the best value proposition for our customers. And as a result we decided to place our focus on seven core businesses.
And in that context, during 2009, we successfully divested First Health Services, a non-core asset which was effective in July of 2009. We also decided early in Q2 of 2009 to exit the private fee-for-service Medicare business after evaluating the reimbursement pressures for 2010 and the legislation, which essentially eliminates the product in 2011. Our preparation for this exit went well, as evidenced by the slight profitability of the product as we began to wind it down.
In the meantime, we repositioned our resources to focus on Medicare products where we provide a stronger value proposition to both our customers and the federal government with the Medicare Advantage Coordinated Care Product and Medicare Part D.
As a result of exiting private fee-for-service, we should be able to dividend up to our parent the $250 million or so of capital that was supporting this $3 billion revenue stream late this year or in early 2011.
We also improved operational areas where necessary. The best example of this is that the Medicare intake and enrolment have been dramatically improved and improved our understanding of our SG&A expense attributable to each and all parts of the operations that support our business.
We also announced the acquisition of PHS, a locally based health plan in Wichita, Kansas with about 120,000 commercial risk and ASO members. We received all required federal and state approvals at the end of January which allowed us to close the transaction February 1. This not only added strength to our considerable Midwest regional presence, but allowed us to begin discussions on some interesting strategic initiatives with the Via Christi Health System.
In terms of our balance sheet, we paid down over $300 million of debt for the full year and we still have $0.5 billion of free deployable cash on our balance sheet. And as promised, I reorganized and fortified the management team with an improved environment of accountability and focus. The work outline just mentioned resulted in a foundation which allowed us to achieve and exceed our EPS commitment to you for 2009.
Well, let’s move on to 2010. I agree with comments by many of my peers in our sector who’ve expressed the view that industry-wide headwinds will be evident this year. Some of these headwinds are obvious, such as pressure on the size of our commercial group insured pool, revenue reduction in Medicare and likely continuing pressing on Medicaid revenue. Even so, we’re forecasting EPS guidance of $2.10 to $2.25 per share for this year.
While John Stelben, our CFO, will elaborate additionally on guidance, I did want to say that I’m comfortable that our strong results in Q2 and Q4 position us very well for 2010 even in a challenging environment.
Now, some comments about our commercial business. I’m pleased with the results of the pricing corrections that were started in 2008 and continued through 2009 and the stability that this action has created with the margins. However, volume, our membership count is still a challenge. We expect membership to be slightly down in 2010, but significantly less than what we’ve experienced in 2009. We can and will improve both new business sales and retention of existing business.
I’m encouraged with the early returns on our sales process and some leadership changes we have made in our health plans as we work to mitigate this macro headwind. Although our health plans are well positioned today, we’re never satisfied with our cost structure and want to be able to provide our customers with the best possible value proposition.
Each of our health plans has a very specific medical cost structure set of initiatives that gets worked daily and with clear accountability. The small and mid-size insured market has been core strength of our Company for well over a decade and this will continue in 2010 and beyond.
With regard to Medicare, I’m pleased with the early volume reads on our Medicare Advantage Coordinated Care business. As you will likely see in the next CMS membership file, we’re down only slightly from 2009 membership goals, but recall that we exited certain SMBs and small subscale expansion markets totaling of about 13,000 members right out of the gate.
We may be even and we’ll just know more about that when we know more about the terms, but I think the coordinated care membership will essentially be even with the end of last year. And I consider this a very good result, considering the level of benefits that needed to be adjusted for 2010, given the weak revenue picture for 2010.
We are working on improving the cost structure and our capabilities that we believe will be necessary in a leaner revenue environment, which looks inevitable in one way or another. And as we have shared with you previously, we must improve in five areas to have a long-term future in Medicare Advantage.
And as a reminder, these are carefully modifying benefit designs and premium. We think that we’ve hit the suite spot there and that we’ve done that well. The second is best business practices for achieving proper risk adjusted revenue. We’ve made a large improvement there and that that’s going very well.
The third is improving unit cost. I believe that substantially more work needs to be done in this area. I’m not satisfied with our 2009 progress and we must and will do better in 2010.
The fourth area is we must do a better job in managing our members’ product care needs. And to that end, we’ve embarked on several initiatives and put considerable resources to improve this area. It’s difficult to do, but we understand that providing better care and more cost-effective care for our members is basic to stay in this business.
And last and certainly not least is SG&A. And that’s something we can largely control. Our own costs will absolutely have to come down because of Medicare and Medicaid revenue pressures. We’re making progress in this front. This Company knows how to control costs and we will.
In the long run, we continue to believe that Medicare Advantage can be a viable product with a reasonable margin. Quite frankly, if bending the cost curve is really the goal of our customer, federal government, then managed care is the best way to accomplish this goal, while providing an enhanced value proposition for the senior population.
Some comments on Medicare Part D. Couldn’t be more pleased with the 80% growth in this business during 2009 while achieving target margins. Remember, this is our fourth year of growth and on target or better performance from this business. On looking at our positioning and early membership results, our best guess is we’ll end up at about 1.6 million members, down a little bit less than 100,000 members.
With regard to Medicaid, early in 2009, we told you we like the Medicaid market and would pursue growth opportunities beyond our existing Medicaid footprint. I’d like to update you on that front.
During 2009, we’re qualified as a bidder in Pennsylvania to participate in the Medicaid program in the Southeast and Lehigh capital regions. And since then, we have been finalizing our networks and going through readiness reviews.
With respect to Southeast, we’re very close and are working on finalizing the contract with the Commonwealth of Pennsylvania for a targeted entry in the second quarter of 2010.
In the Lehigh capital area, we continue to work on building network toward readiness with a potential entry in the third quarter. If we successfully enter these two regions, we would expect to build toward a 30,000 membership to 50,000 memberships over the next 24 months.
Sticking on the Medicare and Medicaid subject in Nebraska, you’ll recall that we bid in the first half of 2009 and were awarded the RFP as one of two entrants in the second quarter with an estimated 40,000 members. As we previously disclosed, the state decided to invalidate the RFP process, reject all proposals, and restart the bidding process.
Although disappointing, it did give me some degree of confidence that our RFP approach was professional and proper, and that we brought a value proposition to the business. We’ve therefore since resubmitted our bid pursuant to the state’s rebid process and expect to hear the outcome very shortly.
Given the penetration opportunities and as I stated the long-term opportunity to help states better manage their costs, we will continue to evaluate and selectively pursue growth opportunities in the Medicaid space.
Some comments on our remaining businesses, which is our fee-based businesses. And that’s our workers’ compensation services, our rental network, and the federal, the FEHB business, which are all stable with improving results, well-positioned and produce a diversified revenue, earnings and cash flow stream while capitalizing on our core managed care capabilities. During 2009, we spent time addressing the administrative cost structure for these areas and improvement will continue during 2010.
While I can’t predict where changes in government involvement will go there are certain things we can and must do everyday. We can better manage our cost structure and we will. This includes both medical and SG&A. We’re beginning to lay out the design of new products, particularly, individual, that should work better in the long run by bringing a better value equation to our members.
At the end of the day, cost structure by market is likely going to be the major factor in our ability to compete, just like it is today, just like it has been for the last decade.
On an unrelated subject, we tentatively scheduled March 4 of this year as a date to host our investor day and I have decided not to proceed with this meeting this year. Frankly, we would not be able to add much more of any substance to our comments than we have today and therefore elected not to host the conference.
We will stick with our traditional Investor Relations activities in 2010. We’ll remain visible and available at investor conferences starting with the end of March. And in addition, Drew Asher, John Stelben, and I will be visiting investors over the next few quarters, both on the road and hosting meetings here at our offices in Bethesda.
In closing, 2010 was a year of continuing to refine our existing business, reduce our cost structure, work on tomorrow’s product, enhance our new development capability, develop systems and resources to care for our chronic need members, and work toward development of new, profitable revenue sources.
We clearly recognize there’re challenges and work to be done, but we are very positive about our future and believe that new opportunities in our business will occur for well-managed companies just as they always have. This concludes my opening comments. And John Stelben, our CFO, will now present the financial report.
John Stelben
Good morning. As you have seen in the earnings release, we reported $0.74 of EPS for the fourth quarter and $2.14 of EPS for the year from continuing operations. We are very pleased with this strong result as we finish 2009 and move into 2010.
First, let me provide some details behind the favorable result to ‘09 guidance. Midpoint of our previous guidance implied a fourth quarter guidance midpoint of $0.56. While there are always a few moving parts, I will address the primary drivers of the $0.18 favorable variance.
The Q4 commercial group loss ratio of 82.9% was better than previous guidance, primarily due to a much more moderate flu impact than expected and a leveling off of COBRA enrolment at 1.7% of commercial group enrolment versus the 2% we’ve built into guidance.
And consistent with prior quarters, we continue to see positive signs from our actions to set appropriate pricing. The net result of all these items is about $0.08 of favorability versus guidance in the quarter.
In our Medicaid business, Q4 loss ratio of 85.8% was also better than expected, primarily due once again to a much weaker than expected flu result. In guidance, we provided for sequential quarterly flu impact of 300 basis points, the majority of which did not materialize. The Medicaid performance was worth about $0.05 of favorability versus guidance in the quarter.
Private fee added $0.06 in the quarter as the MLR continued to run slightly favorable to plan in the first half of the year. As you may recall, last quarter, private fee produced $0.07, so the total for 2009 is $0.13 of EPS.
In summary, the $0.18 of outperformance is driven by the $0.06 of private fee, $0.05 in Medicaid due to better than expected flu result and $0.08 in commercial risk due at a better than expected flu and COBRA result, slightly offset by other normal activity, including tax rate.
Let me turn to balance sheet and cash flow. Total cash and investments stand at $3.85 billion. Our investment portfolio is in a net unrealized gain position at the end of the quarter and the quality and diversity of our investments has never been stronger.
GAAP cash flow from operations for the year was strong at $882 million, fueled by the top line Medicare growth in ‘09. Health plan and private fee days and claims payable are 53.5, a decrease of about 1.3 days versus Q3. The decrease is about evenly split between health plan and private fee.
In Q4, we worked our claim inventories down to create capacity in our customer service operations to handle expected increases in call volumes for the Medicare open enrolment season as well as our transition to Medco, as the PBM for our commercial businesses. Remember that our CSO personnel are cross-trained so they can work claims as well as customer service calls.
With respect to capital, we paid down $110 million on our revolving credit facility in the quarter and our debt-to-cap ratio now sits at 30.1%. That’s 30.1%. Total deployable free cash at the parent is approximately $510 million. Aggregate RBC level is approximately 400% consistent with prior periods.
Turning to 2010 guidance, we are estimating EPS in the range of $2.10 to $2.25. To give some perspective, we had 2009 EPS of $2.14 from continuing ops of which $0.13 was for 2009 private fee.
Our guidance range in 2010, then assumes an increase in EPS year-over-year. Consistent with our historical guidance, the low-end of the range assumes no deployment of cash for share repurchase and the high-end of the range assumes use of free cash generated in 2010, continued progress on reducing administrative cost and results at the higher end of operating metrics.
While there are clearly headwinds in the macro environment we operate in today, we are very pleased to forecast growth in operating earnings and EPS compared to 2009. The guidance and ranges in the press release do incorporate the PHS acquisition effective February 1, 2010, which we are still forecasting to be neutral to EPS in 2010.
Let me provide a few more highlights on the guidance. In the commercial risk business, we expect membership to be down for the year in the low-to-mid single digit range excluding the addition of PHS commercial risk membership of about 100,000. This is a much better result than we experienced in '09.
The improvement is primarily due to improved sales execution in small group, coupled with better underwriting execution to attract and retain better risk. Our small group sales engine is performing fine with small group sales in January up slightly over January 2009.
In terms of pricing, we’re pricing the trend with our usual margin for error. We do not see any pervasive, aggressive pricing across our markets. Consistent with our history, we will work to maintain margins and membership growth will be the variable.
The commercial group loss ratio is expected to be flat to slightly down on a same-store basis. We are providing for a flu impact in the zone of slightly up year-over-year.
We expect the COBRA impact to be higher in 2010 due to the annualization impact of our Q4 COBRA membership level, extension of the eligibility provision, and potential membership increase of up to 2% of group membership. These pressures are expected to be offset by the finalization of the pricing actions we began taking in 2008.
Forecasted health plan group loss ratio is expected then to be in a range of 81.5% to 82% on a same-store basis compared to the 81.9% result in ‘09. Although the 2010 impact from PHS is expected to be neutral to overall EPS the addition of PHS effective February 1st is forecasted to mathematically push the aggregate 2010 commercial MLR up by about 75 basis points. Therefore, we are forecasting the commercial group MLR at a range of 82.25% to 82.75%.
Our fundamental view of trend is that it is stable. While stability is positive, the absolute level of trend in the 8.5% to 9% range is not an acceptable result to us. We are executing on a number of national and local initiatives to reduce the trend line. But consistent with our prudent nature, we are not building these projected savings into our forward pricing until we can count the savings and believe they will be sustained.
While our network-based Medicare health plan membership looks to be about flat compared to ‘09, it is important to remember that we exited several small, underperforming markets that produced a 13,000 member drag going into 2010. This means we have positive growth in our same-store businesses. Given that we emphasize margin over growth in our 2010 bid, this is a nice early result. We expect the 2010 Medicare Advantage loss ratio to be in the mid-80s.
On Medicaid, we expect continued modest membership growth, primarily due to economic conditions. Premium yield will be slightly lower than ‘09 driven by nominal rate increases, more than offset by the carve-out of the pharmacy benefit in our Missouri plan that became effective October 1, 2009. Loss ratio is expected to be consistent with 2009 in the mid-to-high 80s.
On Part D, revenues grew 82% in 2009 and you will recall that we were certainly cautious about our outlook for ‘09, given this large increase in membership. So we approached the 2010 bids emphasizing margin over growth.
As you may also recall, on the Q3 call, we discussed that we would lose some auto-assign regions along with some SPAP membership in those regions, roughly 100,000 members in total.
Our retail sales appear to be tracking well so far. And coupled with growth in our remaining auto-assign regions, we expect to partially offset the aforementioned loss and end up with membership around $1.6 million, slightly down from '09.
Our margin expectations for '010 are consistent with the performance we saw in ‘09 with an MLR expected in the mid 80s. Given our very large growth in ‘09 and the pricing actions we took in the '010 bids, we are pleased with this initial outcome we’re seeing in membership.
On SG&A, the midpoint of 2010 guidance is $1.94 billion. Our total SG&A from continuing ops in '09 was $2.15 billion, which indicates a reduction of $210 million year-over-year. We previously expected total private fee, direct and indirect to be about $180 million. The actual number for the year was closer to $200 million, given growth and allocation of overhead.
There are other puts and takes, but we are pleased to be able to fully adjust our cost structure for the exit of private fee as promised, without missing a beat. Excluding private fee, SG&A percent of revenue is about flat year-over-year, which means we’ve been able to avoid negative leverage on the G&A given volume pressures. That being said, we need to make more progress on SG&A costs and we can and will get better.
As stated earlier, we ended the year with $510 million of deployable capital. We expect to generate approximately $250 million in free deployable corporate cash at the midpoint of guidance in 2010. We completed and paid for the PHS acquisition last week and assuming we do not retire any debt or repurchase any shares, we would end 2010 with almost $700 million of deployable capital.
In addition, we anticipate freeing up an additional $250 million of capital as we run out the private fee business. That capital should free up by early ‘11, but we will certainly try to begin the dividend process to access that capital in late 2010.
Our priorities for deployable cash are the same as they have always been. M&A opportunities and investing in tomorrow, followed by opportunistic share repurchase and delevering.
So to conclude, you can expect that we will maintain our pricing discipline, focus on improving our medical and administrative cost structures, and look for opportunistic ways to grow. When I look at 2009 in the rear view mirror, I see many positives.
In no particular order, I would recognize renewed focus on our seven core businesses, improvement in our service operations, with special kudos to the progress made in our Medicare enrolment operations, the addition of new management, proven talent and experienced leaders to help navigate the waters ahead. And last but not least, a solid financial result in a tough environment.
Given the progress we have made in 2009, we certainly have a better foundation to support profitable growth. Allen, do you have anything to add or would you like to turn the call over to questions?
Allen Wise
No, we’ll open the call for questions at this time.
Question-and-Answer Session
Operator
(Operator instructions). We’ll go first to Doug Simpson of Morgan Stanley.
Doug Simpson – Morgan Stanley
Hey, good morning, everyone. Allen, in your comments, you talked about working on retention. And I’m just wondering, given the economy and your focus in the market could you give us some color as to what smaller employers are saying, maybe walk that up to the larger accounts as well, just what types of things are on their mind? How are they thinking about product offerings? And just how do you expect to really push the retention? How do you expect to drive that higher?
Allen Wise
I’d answer that in two ways, Doug. One, I probably have mentioned in the past, but I think that our enrolment loss in 2009 was about 50% attributable to the environment lay-offs, people dropping benefits because of personal financials and some Chapter 11s and small business. At least half of it was really self-imposed. Sometime in 2007 and early 2008, we got a dysfunctional process between actuarial and underwriting and our health plans, had some weak leadership in some of the health plans. So clearly, half of it was self-induced and we have adjusted and corrected that. And I’m very pleased that we have, I think, the best leadership in the history of our Company in the health plans.
The person that runs those health plans ran our Utah business for eight years is an underwriter and an actuary by training. And along with some new people in the health plans, just bought day and night better execution. So, I’m comfortable that in doing a post-mortem of business that we lost with the financial staff here that at least half of it was just our own fault.
With regard to what’s on people’s mind, it hasn’t changed. If they possibly can, employers still compete in spite of the unemployment numbers; they still compete for high quality workforce, just the way we do here. And it’s one of the last things that they drop. They’re creative in terms of deductibles and co-pays and benefit reductions. And I don’t see that that has changed a lot in the last 12 months. But clearly, the pool is challenging and clearly we can and will do a better job. I don’t think the environment itself has changed that much.
Doug Simpson – Morgan Stanley
And then maybe just updated comments on the Pennsylvania market and is there any change in the backdrop there, given the cancellation of the merger plans last year –
Allen Wise
I really believe without being unkind to anyone, but to be factual, I think that a lot of our challenges in Pennsylvania were self-induced. We just did not have the caliber of leadership that we needed there. We have a man that’s running it now, Tim Nolan, who’s been with our known him he’s been with us since the U.S. Health or I’ve been with him since the U.S. Healthcare days. He left the company briefly because of some personal issues that he had to take care of and he’s been back for most of the year.
We had, in November, the first positive growth month in 46 months in the Commonwealth of P.A and we’re just doing a lot better job there. P.A. has always been a difficult environment. The combination between Highmark and UPMC and Western P.A. is just difficult. The Blues have a huge market share and formidable competitors. But we’ve always made a very good margin for our shareholders there.
And I really believe that the pricing environment is better for us, super tough for a couple of years, that has turned slightly better and we have much better leadership there. And the last four months of new group, small and mid-size group sales has turned and we’ve been positive three months of the last four months. So I think it’s been through a tough time there and it’s improving and will improve this year.
Doug Simpson – Morgan Stanley
Okay, thanks. And then, John, you said the number was 250; did you guys get pulled from the subs after the private fee exit? Is that right?
John Stelben
That’s correct.
Doug Simpson – Morgan Stanley
Okay. Thank you.
Operator
Our next question will come from Charles Boorady of Citi.
Charles Boorady – Citi
Thanks, good morning. Two questions. One, just for some detail around medical cost trends if you can share the unit cost and volume components of trend. And can you give us a couple examples of the initiatives you alluded to, to improve the cost trends? Whether that might include tighter networks, prior authorization, gate keeping or is just more on the contracting side?
John Stelben
Sure, Charles. On the trend, in-patient is in a high single digit and I would say that that’s really tilted primarily towards unit costs. Outpatient is low double-digits. It’s split about evenly, but I’d say tilted a little more towards unit cost. Physician, mid-single digit split and RX, mid-to-high single digit about split.
On the medical initiatives, there’s a number of them. I would say at a high level, as you know, we are working with Magellan on radiology benefit management in several of our markets and on oncology drug costs. We’re really looking at better control of lab cost with some recontracting we did with Quest and LabCorp.
And really each health plan has a medical expense initiative list that’s specific to that health plan’s market and what they are seeing that’s got names and dates. And so really across the board, I think there’s some national initiatives and local initiatives. And I think it’s about as well-defined and as well-controlled as I’ve ever seen in the Company.
Charles Boorady – Citi
In terms of what is in your expectations, I just want to be clear. So I think I heard you say that you are not budgeting that any of those initiatives are going to work and your pricing to your present view of trend. Do I have that right or are you taking into consideration?
Allen Wise
You do have that right, because I’ve watched good intentions for a long time and watch people price to the good intentions doesn’t work. We always have done it the reversal. We have a roadmap in each of these marketplaces with where things are off base and what we’re going to do about it, who’s responsible.
But we are not going to count that money until we see it because it’s like an inter tube sometimes. You work hard and fix one thing and it sticks out someplace else; very difficult. Nice rhetoric. It’s a lot of work and it’s a lot of conflict in the marketplaces sometime and we don’t count it until we can count it. And nothing has changed there.
Charles Boorady – Citi
I’m glad we’re back to the old conservatism, Allen. Any way to just size up as you look at those initiatives. And you’ve got a couple decades in the industry, Allen, so your gut check on this just sort of what it might mean and at what time of the year you would be more comfortable reevaluating your trend based on the success of those initiatives?
Allen Wise
No, I think maybe next quarter or the quarter after that we would be in a position to talk about where we’ve made progress, in what areas, and what it yields, but the real answer is I don’t know. I’m sorry, that’s, yes, I don’t know.
Charles Boorady – Citi
Thanks.
Operator
Our next question will come from John Rex of JPMorgan.
John Rex – JPMorgan
Thanks. First just on, I wonder if you could tell us how much reserve development you had in the quarter. I think John, you talked somewhat to paying, I’m particularly thinking about there’s about $100 million drop I think in med payable. I think you mentioned in your commentary some pay-down of claims inventory. So I’m just trying to kind of parse out how much impact were coming from different elements.
John Stelben
Yes, there’s about three pieces to that. The first piece, I would say we had a payout related to our Part D standalone product for 2008 low income subsidy. That was about a third of the drop. I’d call the other third inventory reduction. And while the math isn’t perfect here, you can think about the balance being that our volume has been decreasing as we’ve gone through the year.
John Rex – JPMorgan
You are talking about just member volume on that?
John Stelben
Yes. Yes.
John Rex – JPMorgan
So, was there favorable development in the quarter? Or can you quantify how much was that maybe I assume it was all intra year at this point in 4Q?
John Stelben
John, we don’t discuss our restatement by quarter. Certainly in the K that you will see in a few weeks, we will discuss our restatement for the year, but we don’t discuss it by quarter. Our restatements this year have been consistent quarter-to-quarter.
Allen Wise
This is Allen. The way to think about that is with the exception of a little stub in 2008, I came to the Company in 1996, and our reserve processes has always been prudent. And we’ve always taken the view, and there’s not been any change in that since 1996. So in theory, if it’s an educated guess, which it is, there’s always in 31 of 32 quarters, there’s always been a little prior period positive development. And there’s no change in our philosophy since 1996 year.
John Rex – JPMorgan
So can I take that as what you’re saying is in terms of the run rate coming off the 4Q, favorable development was not a significant contributor?
John Stelben
I think that’s fair.
Allen Wise
That’s correct.
John Rex – JPMorgan
And then what percentage of your 2010 commercial member months already priced?
John Stelben
At this point I would say it’s in the neighborhood of 55 to 60.
John Rex – JPMorgan
55 to 60 priced. And then, when we think about your 2010 and quarterly progression, what would be the things that would be altering from previous patterns that you’ve had?
John Stelben
I think the pattern should be consistent. The two biggest drivers are Part D and then the progression of deductible satisfaction on the commercial side. So, while we’re not giving quarterly guidance I think you could think about it in the relative range of what we saw in '09.
John Rex – JPMorgan
I just didn’t know if it would be altered somewhat just because of the revenue mix change with PFFS being out of there and not kind of having the acute seasonality like Part D, if instead, you’d see kind of actually a bit more seasonality because of that?
John Stelben
No, I don’t think it’s going to be affected much, John.
Allen Wise
No, it shouldn’t be that, with regard to private fee-for-service if you remember we had substantial volume and enrolment difficulties and we had a substantial challenge in Q2, end of Q1 and Q2, getting our revenue and getting our enrolment reconcile with CMS and getting our revenue right. So, private fee may have looked a little worse than it was, but it shouldn’t be anything materially different than about this year.
John Rex – JPMorgan
Okay, great. Thanks.
Operator
We’ll now hear from Josh Raskin with Barclays.
Josh Raskin – Barclays
Hi, thanks. Good morning. Two questions just on the Medicare side I guess on private fee-for-service. First, were any of those private fee-for-service lives retained by Coventry some of your network products for 2010? And then –
John Stelben
Yes –
Josh Raskin – Barclays
Yes, go ahead, I’ll start with that.
John Stelben
Sorry, Josh. About 9,000 or so.
Josh Raskin – Barclays
Were retained into the existing health side. And then I guess secondarily on the cash flow, just thinking about private fee-for-service, my guess is your days in claims payable probably a little bit longer, more stretched on that business. The $3 billion of revenue, if it’s, I don’t know, 60 days in claims payable, about $500 million of sort of claims lag; should we think about cash flow from operations being negatively impacted in '10 because of that? And how should we think about first half cash flow?
John Stelben
Yes, I think your point is correct. The payout of those reserves will have a negative impact on cash flows from operations. But remember that all that cash is sitting in the regulated subsidiary. So from the standpoint of free cash generation to corporate it will be unaffected by the run out of the private fee business.
Josh Raskin – Barclays
Right. I understand you guys are fully accrued down at the sub level. But when you report your GAAP cash flow numbers I’m assuming there’s going to be a big drag next year. Is that correct?
John Stelben
That’s correct.
Josh Raskin – Barclays
And then just any perspectives on 2011 MA rates and what you guys are expecting on a 45 day notice?
John Stelben
It will be out next week. And what we do is we plan that revenue gets leaner and so we’re building our plans to be able to be profitable in a leaner revenue environment. But I’m not making any guesses on what the rates are looking like at this point.
Allen Wise
Plenty of guesses out there.
Josh Raskin – Barclays
All right. I’ll do one as well.
Allen Wise
That’s one to two, but I don’t know. We’ll know soon. But John made a good point. When we come to work everyday, we think that it’s going to be more challenging and spend a lot of time thinking how we thrive in that environment.
Josh Raskin – Barclays
Great, thanks.
Operator
We’ll go next to Christine Arnold of Cowen and Company.
Christine Arnold – Cowen and Company
Good morning. Thank you. I’d like to parse out a little bit what’s happening in Medicare Advantage. I estimate about kind of a 93.6% private fee-for-service MLR in 2009. Is that about right?
Allen Wise
The range of that loss ratio is in the low 90s.
Christine Arnold – Cowen and Company
In the low 90s? Is it possible to get more specific just because you ended it and we’re trying to parse it out and it kind of matters if it’s 92 or 94?
Allen Wise
I think, Christine, I would call it somewhere around 93.
Christine Arnold – Cowen and Company
That’s really helpful. So, as we think about that, it looks then like that’s about 93, then you’re about 85 on the coordinated care. So when you are kind of saying mid-single digit, again kind of ranges matter because we’re dealing with about $2 billion in revenue here.
Can you give me a sense of how much of the negative price cost spread you think you captured with benefit design changes versus premiums and how much you expect to get maybe with risk adjusters? And then how much maybe network changes and exiting that 13,000 help and give me a sense for what’s up in the air as medical management may help or not? Just give us some parameters?
Allen Wise
That would take half the morning. Why don’t you call after the meeting and we’ll try and do a better job to talk about the process that we undertook to get the benefits, deductibles, premium sharing and what piece that is. And can’t answer that in the time we’ve got here. We’ve talked a whole bunch of times about the five things that we’re doing to get that right and we can make a guesstimate on what each of those produce overtime. But I don’t think its right at this time.
Christine Arnold – Cowen and Company
Okay, thank you.
Operator
We’ll go next to Ana Gupte with Sanford Bernstein.
Ana Gupte – Sanford Bernstein
Thanks. Good morning. The question is again about the in-patient trend and you mentioned the high-single digit largely from unit cost. Is that mostly because of contracting or are you still seeing the facility coding that was a problem for you and some of your competitors, is that behind you? And then a follow-up to that is will adoption of the MRs and conversion to ICD-10 make that again a problem for the industry?
John Stelben
I would say that it’s no worse than what we said before. So you’re out there everyday trying to re-contract with these hospitals; you’re trying to do your best job in it. We look at the charge master increases and we try to understand what those are doing versus our contracts. On the ER side, we’re pulling charts and we’re trying to at least put in a sentinel effect on any up-coding and trying to reduce the number of levels there. So, overall, I don’t think we’ve really seen a whole lot of change there.
Ana Gupte – Sanford Bernstein
And then on the contracts, you’ve established a low cost organization I believe. Are you seeing hospitals and facilities open to new approaches? And might that what specifically would get the industry and you to something that’s a little bit better on the in-patient side, because that just seems to be exacerbating year-over-year?
Allen Wise
I think one way to look at that our company and I think our industry ten years ago or certainly 15 years ago made a lot of attempts to do things collaboratively with health systems. In many of the cases that didn’t work, but we’ve returned to that. I mentioned our association with Via Christi, which is an integrated system in central Kansas with a couple thousand beds and six hospitals or eight hospitals. We begin discussions for a Medicare product limited to their network. They have a lot of resources in terms of medicine at home, monitoring at home, intermediate facilities, but between skilled nursing and in-patient.
And I would like to start with Via Christi and other organizations doing something where we could offer a better value equation to the members, more benefits at resources to have and then do some type of profit sharing with the facility so that we are not fighting over per diems or not fighting over rates, but doing something more collaboratively together and so that system is the first initiative.
Our Medicaid leadership has much better numbers, forgetting what the cost per confinement or the cost per day or on a total cost for different diagnoses for we get a lot better information on the true costs and where we need to direct traffic to get the best results. We didn’t do much for a long time. If you go back to eight years or nine years ago, there was sort of an anti-managed care backlash. Everyone wanted to see every provider.
And I think that that cycle has kind of run its course and we will do more with more limited or efficient providers in more collaborative ways. Easy to talk about. Takes a long time. It’s hard to do. But we’re going to get started this year.
Ana Gupte – Sanford Bernstein
Okay, thank you.
Operator
Our next question will from Scott Fidel of Deutsche Bank.
Scott Fidel – Deutsche Bank
Thanks. First question. Just if you’ve identified any level of annualized SG&A savings that you think you can take out of the business or maybe just as a percentage of SG&A, how much you think you can reduce as you look to further right-size for the lower Medicare revenue?
And then just more conceptually just interested we’ve seen in the guidance for a lot of the MCOs for 2010 them guiding up for SG&A. So, we are probably seeing some of the impact here from just the commercial market risk reductions. And just interested if you think the industry can reduce SG&A consistently unless we do get a recovery in commercial risk enrolment in the market.
John Stelben
Scott, the SG&A year-over-year, as I discussed earlier, we are going down in absolute terms. And so there’s a lot of initiative that are underneath that to get there. And like medical, we have name, dates and accountability for all those initiatives. We reduced the private fee year-over-year. I think as we stated earlier on calls, there was direct costs attributable to that and there was indirect costs, and we’re able to get that out. At some point, if volume is continued to be pressured, there’s a limit to how much fixed cost you can take out of the business.
That being said, I think that we’re looking and are always looking for ways to reduce that through better use of technology and more efficient ways to run our business. So, I think there’s a downward limit on this. I can’t tell you where that is yet, but I can tell you we think we can continue to make more progress.
Allen Wise
Well, John has been working on this for a year. He’s not just when he assumed the CFO role here. And every leader in the Company has got targets. And as John pointed out, in our IT area, the leadership there is looking at more outsource, offshore new development. And we have 150 things on the list. It’s one of these things you can’t do with a pencil or you can’t do it with a meat ax, because you’d cause damage to the organization. But it’s something that historically we’ve done well.
John has led that effort here on and off over a 12-year period. And we understand that it’s sort of basic to our being able to thrive. And we have a plan that will get significant results this year. And, John, I guess with the price a range, right, a range in absolute terms?
John Stelben
Our goal would be to continue to try and drive down the SG&A rate overtime. As I said before we take out private fee and the other costs, our SG&A rate percent of revenue year-over-year is about flat. Don’t forget, PHS adds some money into the G&A. So, we’ve made really good progress this year.
Scott Fidel – Deutsche Bank
And then just I had a follow-up just on the M&A pipeline at this point. And Allen, maybe how you’re thinking about just keeping an eye on Washington whether your priorities change if reform sort of falls away here or gets reinvigorated? And just in terms of the markets that you would be prioritizing, are you looking more just at bottoms up in terms of individual properties? Are you thinking about potential targets based on mix of business relative to potential reform outcomes?
Allen Wise
Recognizing what I can comment on, I think the best way to think about that is 2009 was a year where a lot of our focus was on getting our existing businesses running better and that will continue. 2010 this year is that Drew and I will spend a considerable amount of efforts trying to find some more profitable revenue. You can’t exactly save your way to prosperity. And it wouldn’t be inconsistent with what we’ve talked about earlier in the year. Even though there are challenges on the revenue side, we like the Medicaid space and have begun some initiatives that will hopefully produce some membership in the Commonwealth of P.A. and hopefully Nebraska.
We’re absolutely committed to the Medicare coordinated care plan and we would look at that space in rural areas. We will continue to look for opportunities like the Kansas property. One, we want to get a stronger regional presence across straight lines, we have a very strong Midwestern region, it was basically insured business, which I like better than ASO business.
And more than that, it’s a really innovative system with innovative leadership. So, I think that not only do we get a very good cost structure with the acquisition for the region there for that. And I’d like to find way to drive more regional business to that system. But, it’s someone that’s philosophically attuned that the world is changing, they need to change and they’re tired of fighting over nickel, so to speak.
So, on the M&A front, you can’t ignore the government programs. We have to get better than that. But we love the insured business; we love the health plans. And so, we will be getting our balance sheet in better shape and we will be working those things hard. But not just the health plan, but with the system that we can do more with and just gain the membership.
Scott Fidel – Deutsche Bank
Thank you.
Operator
That’s all the time that we have for questions. I would like to turn the conference to Allen Wise for closing remarks.
Allen Wise
Thank you so much for your interest in our company. And that will conclude our call for today.
Operator
That does conclude today’s conference. Thank you all for your participation.
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