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Universal American Corp. (NYSE:UAM)

Q1 2010 Earnings Call Transcript

April 30, 2010 10:00 am ET

Executives

Richard Barasch – Chairman and CEO

Martina Alisuag – Director, IR

Bob Waegelein – EVP and CFO

Analysts

Tom Carroll – Stifel

Joshua Raskin – Barclays Capital

Carl McDonald – Oppenheimer

Daryn Miller – Goldman Sachs

Sushil Garg – Dowling & Partners

Justin Bowers – Deutsche Bank

Sarah James – Wedbush

Operator

Good day, everyone and welcome to the Universal American Corp. first quarter 2010 conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. Richard Barasch, Chairman and CEO of Universal America. Please go ahead, sir.

Richard Barasch

Thank you. Thank you. Good morning everyone. Thanks for joining us on our first quarter 2010 earnings conference call. I'm here with Bob Waegelein, our CFO and Martina Alisuag, our Director of Investor Relations. I'd like to ask Martina to read our Safe Harbor language.

Martina Alisuag

Before we begin, I'd like to remind you that we have posted our presentation for this call on the investor section of our website, www.universalamerican.com. I would like to remind you that some of the information discussed during this conference call will constitute forward-looking statements within the meaning of the federal securities laws. These forward-looking statements may include statements regarding the likelihood or effect of any legislative or regulatory changes; our expectations of the performance of our Medicare Advantage, Part D, Med Supp, and other lines of business; the estimation of loss ratios and lapsation; the adequacy of reserves; our ability to institute future rate increases; expectations regarding our Part D and Medicare Advantage programs, including our estimates of membership costs, revenues, future operating results, prior period adjustments. This is excess of our filing for new products, estimates of future membership and the risks inherent in these businesses; the identification of acquisition candidates; the completion, integration, or accretion of any acquisition transactions and the viability of any acquisition proposal.

Although we believe that the expectations reflected in these statements are based upon reasonable assumptions and estimates, we cannot give assurance that we will achieve the expected results. We also suggest that you review the most recent risk factors that we periodically file with the SEC. Richard?

Richard Barasch

Thanks Martina. This morning, Bob and I are going to spend some time describing the highlights of the first quarter and then move on to discussion about how universal American is positioned for the new environment. Finally, I'll talk about our prospects from the balance of 2010. As you saw it in the press release, we're affirming to $1.70 to $1.80 per share.

The company in the healthcare business and as American before we supported the aspiration for health care reform in our country and the extent to which the recently enacted legislation will provide need to changes to be subject of debate for a long time. In the meantime, we now have the basic rules of the road for our business and can get on with the task of managing our business through the coming changes.

Starting with slide three of the deck posted on our website, I’d like to reiterate that nothing in the enacted legislation diminishes the size of the task this country faces to pay for the increasing cost of health care, the rapidly growing and avidly consuming senior population.

Despite all the negative rhetoric we heard during the health care debate, we still see a huge roll for private insurers to be a part of this solution. To be successful in the long run, our products has offered a compelling value proposition for our members and to our partners in the government.

Embedded in many, many Medicare advantage plans, ours included, many of the same concepts enacted in the legislation. We are ready by definition bundling, we work with providers to create medical homes, many of our provider groups are already in fact accountable health organization and we have and are expanding paid for performance model that we think creates an appropriate alignment.

At the end of the day, we must be delivered – we must be able to deliver to our Medicare advantage care members, better healthcare solution and standalone Medicare and a less costly alternative to Medicare plus med stock [ph]. This can be achieved by bringing out the waste in the secret service system, the combination of technology and common sense cost controls and appropriately compensating our providers and keeping our members healthy and delivering better and more cost effective out comes.

We're doing this successfully in our HMOs for our healthy collaboration model in which we work closely with physicians and members to promote better health outcomes and control medical cost. We’re confident that we can deliver similar value to our new network and rural members as well, even in the lower reimbursement environment. As you can see from the chart on slide four, we have the size and scale of Medicare to manage through the coming changes.

Now, let's turn to our financial results on slide five. Even though, we're focused on the affect of reform, we believe there are consistent financial results to provide a solid foundation upon which we can approach the new environment. Bob, do you want to go through some of the details, please.

Bob Waegelein

Sure, Richard. We reported a net income of $1.5 million for the quarter, a Medicare advantage segment provided solid results of the quarter earning $47.5 million which included around $16 million in prior period items. Our membership is up 23% from March of 2009, generating 785 million in revenue for the quarter with an adjusted MBR of 84.4%, right in the middle of our expectations.

In addition, our expense ratio improved about 74 basis points from 2009. Part D experienced its normal seasonality of earnings for the loss of $32 million for the quarter and 10% improvement from 2009.

Increased seasonal losses from higher membership were offset by continued improvement in our expense ratio as 207 basis points lowered in the first quarter of 2009. Our traditional segment also had seasonality from our Medicare supplement business. The loss in the quarter of $5.7million with $10 million less than 2009 as a result of a 17% decrease in our Medicare Sup and improved MBR and expense ratios.

Finally, our reported earnings of $0.02 per share included in non-recurring tax benefit of $0.03 per share. We'll be happy to answer any questions that you may have at the end of the call or off line, Richard.

Richard Barasch

Okay. Turning to page six, slide six. We now have nearly a million nine members in our plan and consequently, we’re the second largest part D plan. We had a very good 2010 selling season which included getting 149,000 new dual eligibles, some very interesting new relationships with SPAPs, which is the State Prescription Assistance Program and a total of 164,000 estimated new members. This was slightly lower than we projected but still a very strong performance for the company.

The highlight of – one of the highlights of 2010 is our continued improvement in our G&A costs. Given our scale and specific focus, we've been able to improve our expense structure over the past several years and think we still have more room to go.

Finally, we're delighted with our strategic relationship with the NCPA, the National Community Pharmacists Association, which allows us to create a pharmacy-centric program for the benefit of our members. This has worked out quite well.

The recent legislation largely had a positive impact on Part D as described in slide seven. Most important for us is that the bidding rules now make it easier for the plans to keep their duals and low income members and it was a very large provider of Part D to dual eligibles. This probably is a good – not probably, it is a good positive for Universal America.

The closing of the donut hole also has real and symbolic importance. First, over time, we'll be providing more coverage, but probably more important is that Part D has been adopted by the administration, now that they have fixed a large and unpopular flaw in the program, the donut hole.

Turning now to slide eight, Medicare Advantage, as Bob mentioned our first quarter 2010 results were very strong. We had a good selling season also, particularly successful in our network-based sales and we're delighted to see a lower lapse rate, which in the aggregate, led to higher membership.

We're also seeing a reduction in our G&A percentage and our MBRs inline right down the middle where we had guided you. Our Healthy Collaboration model, it continues to be very successful, both in our core HMO markets and in our new HMO markets. This gives us a lot of confidence that will be able to bring the model out to more places as time goes on.

It's absolutely clear that in order to be successful in Medicare Advantage, we have to materially influence the cost and outcome of health care. To that end, we continue to invest in our medical management infrastructure, especially in our newer network markets.

Looking forward to 2011, when non-rural price fee-for-service is no longer permitted. We have 43, 2010 markets in which we have currently PPOs. We've done quite well in the selling of those PPOs. We filed nine to 12 new markets for 2011. The reason there's a spread is because we are likely to have to modify or perhaps withdraw some of those applications over time if they don't conform to CMS requirements or leaving ourselves a little bit of room there.

But we had a particular focus on our network private fee-for-service products, which I'll describe in a moment. And then, basically, of course, successful with these filings, which we think we are, we will have covered as we have talked about the appropriate number of our private fee-for-service members.

A big boost that we got was that in the rural strategy, with the re-definition of the rural counties, in which 300 additional counties became part of definition rural, thus adding to our membership base in private fee-for-service. I'm sure most of you are familiar with the items on page 9 and 10, which describe the effects of the health care bill on Medicare Advantage.

I'll answer any questions you might have on this. So let's move to slide 11 to describe how we see 2011 and beyond. If we're successful in our 2011 filings, we'll have qualifying network products in 52 to 55 markets.

CMS seems to want there to be fewer plans of higher quality. Consequently, we're focusing our 2011 filings on network private fee-for-service, the product which allows the easiest transition for our current private fee-for-service members.

The recently finalized rules will permit us to migrate private fee-for-service members to our network private fee-for-service products on a passive basis without the need to re-enroll. This is a pretty big positive for us.

Another positive development, as I have mentioned is the addition of the 3,000 – 300 counties that are designated as rural, which increased our estimate of the number of rural numbers that we'll have in 2011 to nearly 50,000. Now, I need to add that the preliminary for 2012 is that 175 of the counties will move back into network status in 2012 and not – looks like it will be the loss of approximately 8,000 Universal American members.

The other very important parts of reform for us and for all people in the Medicare business, is the new importance of the stars. There are – there are more than 30 attributes currently in how the stars are going to be given. There's a lot of new work that's going to be done around us in the rule making, which is going to be very important.

The bottom line is that our operations and our medical management must be improved to attain the amount of stars that we will need to continue to offer benefits to our members. This is a very, very important thing for us to work on and focus on. We've got a year and a half to do it, but we're going to start right now.

Alike to that is increased focus on compliance. If you've seen any of the new rules that CMS has promulgated over the past several weeks, you can see the increased emphasis on compliance across the board. This is a cost to entry into this program. The program is a wonderful program but our regulators are going to be regulating us quite tightly.

The other big change for us and for others in the Medicare Advantage business is the shorter-selling season. This is going to create for us, obviously, an emphasis on retention, more of a focus on the selling season in this year. And it probably will cause us to re-examine our distribution structure since the selling season is so much – excuse me – so shorter. We'll talk about this more as time goes on.

Turning to slide 12, which gives an estimate of where we think our membership is. Total guidance for our 2010 membership remains 280,000 to 300,000 members, but inside of that number, highlighted in yellow, is the change in our estimate of rural private fee-for-service as we talked about with final call there.

So if you go below the line in the middle, starting with our HMO, we'll have 65,000 to 70,000 HMO members, 23,000 to 27,000 PPO members, 45,000 to 50,000 rural private fee-for-service members and this is all at the end of 2010 without the benefit of anything in the selling season in 2011.

On top of the 133,000 to 147,000 members that we see as currently covered, 32,000 to 35,000 members are in counties where we currently have a network product. Another 35,000 to 45,000 members are in counties where we've filed a network product for 2011. So if you do the math on that, you see the range of where we think we're going to be at the end of 2010 and then on top of that, whatever happens in the 2011 selling season. Particularly with the change in the rural definition, we see this as a pretty positive development.

Now turning to Page 13, which is also quite important to us. This analysis shows distribution of our memberships in the various buckets in the new reimbursement regime. It only includes our estimated 2010 membership in places where we're going – we either have or are in the process of filing network products plus are qualifying rural membership. It does not include our 2010 members in areas where we have chosen not to file network products.

If you look at the chart, it's kind of interesting the way it's sets up. As you can see, approximately 36% of our members are in areas where the floor will ultimately be 95% of fee-for-service cost. For us, though, the fact that most of these members, 31%, are in our most advanced HMO members in Texas where we have the most tools to deal with the issues and a seven-year phase-in which gives us a great deal of comfort.

On the right side of the chart, under the 115% category, you could see that 38% of our members are in the 115% category within approximately equal distribution of three, five and seven year phases. As you can also see more than half of our new members – more than half of our members in the new and proposed network markets are in these 115% categories. Another 15% of our members are in the 107.5% markets. A total of 51% of our members are markets where we have seven year phase-in.

Under the circumstances, this distribution worked out quite well for us. In our lowest reimbursement market, like Southeast Texas, we have the market present, time and the tools to maintain our position. In most of our newer network development markets, we have the benefit of higher ultimate floor and in several markets also a long phase-in period. For example, we see up state in New York and Indiana, as markets of particular strength for Universal American. I'm sure you'll have questions about this slide. And I'll be happy to answer them in the Q&A.

Now let me turn to our capital position on slide 14. In the aggregate, our book value including the unrealized losses of our bonds is $18.32 per share and $11.82 when goodwill is excluded. Keep in mind, however, that most of the good will, around $500 million supported by the MemberHealth acquisition which generated approximately $125 million pre-tax earnings last year.

As a result of the strong quarter earnings in our subsidiaries and the sale of life and annuity business last year, we ended 2009, with approximately $800 million statutory capital in an aggregate risk-based capital ratio for approximately 550% of ACL, more than ample to support our existing businesses.

In addition, we now have nearly a $100 million of unregulated cash at the holding company and a fully unused $150 million line of credit. We ended 2009 with a lot of cash in our balance sheet. And while we still don't see a lot of value in acquiring longer dated fixed income securities, we've begun to reposition our cash in the shorter assets that will generate additional income throughout the balance of this year without taking a lot of risk, either in duration or credit.

Turning now to the guidance slide on page 15. We are reiterating our guidance between a $1.70 and $1.80 per share. The only change of note, as I mentioned earlier, since we gave guidance last month, is we have reduced our Part D membership revenue estimates.

With that I'd like to open the line to questions, Bob and I will be happy to answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Tom Carroll with Stifel.

Tom Carroll – Stifel

Hey, good morning. Can you hear me, okay?

Richard Barasch

Yes. I can.

Tom Carroll – Stifel

Very good. So your Medicare advantage margin of about 6.1%, I guess is that a relatively clean margin number that we should think about, given stuff that can interact in the quarter, like prior period development, things like that?

Richard Barasch

I think it's certainly in the range. The answer is yes. I think it's in the range.

Tom Carroll – Stifel

To me, that's not much of a decrease that I think, a number in investment community we're thinking about given the reimbursement costs this year. So my question is, going forward and given that we're in this environment right now, where we did have a big cut, you guys just printed a 6.1% operating margin in this business. Can we think about as a relatively stable margin amount going forward?

Richard Barasch

You do have to back off the prior period in this, so.

Tom Carroll – Stifel

That what I was getting at in my first part. Yeah.

Richard Barasch

I think I misunderstood what you were saying. We have to back off the prior period. So, no, it isn't a clean run rate number. It's lower because of that, but, if the question is six the right number or is five the right number. What I was trying to say in my answer, I think this is the range that we're going to be in.

Tom Carroll – Stifel

If you back it out, I apologize I haven't done the math on it, what are we looking at?

Bob Waegelein

You're looking at the high end of 4 and a half or five through the quarter, in the first quarter, the full year.

Tom Carroll – Stifel

Okay. Excellent. So you say that 4.5 and 5.5, we're in kind of a stable range now, so we can think about going forward.

Richard Barasch

I appreciate the way you are asking the question. I would love to think we can print 5, 5.5 for a long time and that's our goal. We're still in an environment where we've got plenty of work to do, in all of our margins to keep those margins where they are.

Tom Carroll – Stifel

Don't misunderstand me I'm suggesting that it's a decent number given where we are.

Richard Barasch

I appreciate the question.

Tom Carroll – Stifel

Second question, if I look at your – thanks for the slide presentation too. This is a lot of great data and it will be a bunch to digest here today. But, if I go to slide 12 and you highlight your rural, private fee versus non-rural. So you've got your 13 to 15 growing to 45 to 50. Does that suggest that you are going to be able to hold on to more private fee for service business, kind of end of 2011?

Richard Barasch

Yes. The answer is in the growth –

Tom Carroll – Stifel

Is that the take away?

Richard Barasch

From 13 to 15, to 45, to 55. That change occurred because of the change, the addition of the 300 counties, for the launch of the list of counties, where rural private-for-service was going to continue into 2011. So, yes, 45 to 50,000 members are currently members of ours in private-fee-for service products in counties, where in 2011 we will be able to continue to offer the product.

Tom Carroll – Stifel

Excellent. Thank you.

Richard Barasch

And I made the point, the 2012 county list has already published and we know we've got a little bit nicked on that. We probably will, on this static 45,000 to 50,000, lose 8,000. But of course, that doesn't include the benefit of the future selling seasons. So I think the summary of this is that we feel pretty good about the sustainability of this level of membership in private fee-for-service for at least the next few years.

Operator

Our next question is from Joshua Raskin with Barclays Capital.

Joshua Raskin – Barclays Capital

Sorry about that. Good morning. First question is just around Texas. You guys have shown some strength there and there's been some, I think, a good amount of membership moving on. Maybe just a quick update on what you think of the competitive landscape being there and how you guys are operating.

Richard Barasch

You said the question is Texas, Josh?

Joshua Raskin – Barclays Capital

Yes. MA.

Richard Barasch

Texas is our flagship market, southeast Texas, both Houston and Beaumont. We've been in these markets now for – even prior to Universal American acquiring those plans, for more than ten years. It's a very deep relationship with the provider community in Houston. There's an advanced medical management model, advanced pay-for-performance model. Several of our members, several of our providers are either have, or in the process of becoming medical homes. So we see that in all respects as an advanced market.

Now, Houston has had favorable reimbursements for quite a long time. And the new law will reduce where we are to 95% plus whatever bonuses we're entitled to, over a seven year period of time. So we see – in fact we're the largest MA plan in this region. So we think that this is a region where we can actually increase our advantage, where there's a lot of MA memberships, a lot of private fee-for-service membership in the area. It's going to be looking for a home over the next couple of years. We'll have good products to offer these folks for, I think, indefinitely for as long as the program exists. If we had a select a market to move to 1995, this would have been the market to select because we have so many tools and so much strength in that market.

Joshua Raskin – Barclays Capital

Got you. And then the CMS shows you having a big jump in Pennsylvania. Is that just a licensing, is that just where you have a plan, or is there a license or is there actually big growth in Pennsylvania?

Richard Barasch

There was some growth there. Pennsylvania has historically been a very good state for Universal American. Some of the companies that left the market had a Pennsylvania presence and we were, I think, one of the beneficiaries of that movement. Pennsylvania has always been a good state for us. We see Pennsylvania as one of our core states. As I said in my presentation, New York, even though we didn't see a huge percentage growth in New York, we had terrific growth across the board. We've got nearly 50,000 members in the various communities in upstate New York and see it as one of our key markets going forward. And a lot of New York has a 115% floor.

Joshua Raskin – Barclays Capital

Right. Okay. Last question on the Donut Hole, as we begin the rebate part and then the phase out, I think you said that's a good thing because you got more coverage. I guess, I think of it as it's a change product structure and it's going to become more costly for the members. And I'm curious how you think about bidding. Obviously this has become a huge part of your business, especially with the dual. How do you sort of balance the fact that there could be some behavioral changes, based on the fact that seniors won't have that same level of incentive to move to –?

Richard Barasch

It's a great question. It's a great question. And we obviously spend a fair amount of time thinking about this in the last several weeks of this game. I was enacted. There are kind of two things to think about here. First, is the question of what's the behavior of the people going to be when they have more coverage in the gap? First off, it's always going to be 25% cautionary in the gap. So, it's still designed to incent behavior appropriately.

But the other part of this that I think gives us a little bit of a leg up is that all of our duals currently have 100% coverage through the gap to a combination of what the program offers to them and what extra help offers to them. So we actually see a million of our members already exhibiting the behavior of being fully covered from dollar one to dollar infinity. So we have a pretty good handle on what that means.

The other way to answer the question is, it's going to happen one-eighth a year, approximately, over the next eight years. So, we don't have to get it exactly right in the first year. It doesn't come all at once. If you think about the gap, it's going to be changed incrementally over an eight-year period of time. It gives us plenty of time to figure this out.

Joshua Raskin – Barclays Capital

Got it. That's helpful. Thank you.

Operator

Our next question is from Sarah James with Wedbush. Ms. James, your line is open. The question is withdrawn.

Our next question is from Carl McDonald with Credit Suisse.

Carl McDonald – Oppenheimer

Thanks. So first question –

Richard Barasch

Did you move to Credit Suisse, Carl?

Carl McDonald – Oppenheimer

Not that I know of.

Richard Barasch

You were introduced as Credit Suisse. We know you don't work there. So tell everybody where you work.

Carl McDonald – Oppenheimer

That would be Oppenheimer, at least as far as I know.

Richard Barasch

I was wondering maybe –

Bob Waegelein

Maybe, we could get back to your office.

Carl McDonald – Oppenheimer

The first question is on the slide 13. So if I just do a simple average, ultimately it gets me to basically you getting paid at 105% of a fee for service. So the question is, what's the starting point there? Where are you going? Where is your starting point to get to that 105%?

Richard Barasch

The average is probably sort of 113, 112, 113 range.

Carl McDonald – Oppenheimer

Okay. And can you remind me why the fazing period like to say Houston for example is sever years as opposed to?

Richard Barasch

Yeah. I actually give the policy makers credit for the way they set this up. I think it was actually done with some degree of thought and actually covered in creating a reasonably fair and relatively fair geographic result, fair overall result, fair geographic result. Basically, what they said in low cost counties, the floor is going to be higher and in counties where there's a greater difference between where county currently is and where they ultimately get to. We're going to give the plans a longer period of time to get from the current number to the ultimate number.

Carl McDonald – Oppenheimer

And so my way to think about that I mean I would think that's a fairly significant positive in the sense that your reimbursement gone from the 112 to 113 to 105, but for – essentially half your business is going to take seven years to get there?

Richard Barasch

Yeah. I think that's right. We're going to verify the cost number for you. But I think that's fundamentally right, even if I'm off a little bit on the starting number.

Carl McDonald – Oppenheimer

Okay.

Richard Barasch

That's right. I think – look, I will candidly, we saw this as – kind of near in the scope of a tough bill if leaving us a lot of room for – to maintain what we're doing.

Carl McDonald – Oppenheimer

Okay. Next topic on this star ratings not something I've never really paid attention to, I guess that's not something that plans to historically have paid a lot of attention to. Can you give us a sense of – what would you cause the easy things that you can do operationally to get those star ratings up versus some other things they’re going to take time?

Richard Barasch

It's nothing easy, let's start with that.

Carl McDonald – Oppenheimer

Okay.

Richard Barasch

We're going to be graded very difficultly – in a very difficult way by tough regulator. So I don't want make none of this is going to be easy. What are the elements though, half of them and this is in broad brush and by the way, the actual rules about stars haven't been promulgated yet. This is based on the current, what we see in the current star rankings. Half of them have to do with how the plan operates relative to its members of enrollment, market conduct, disenrollment stats.

Frankly, everything that we as operators and running these plans would think – are in this of a good plan. The other part of this, Rich, is going to create and the first part of to a great degree is in our control. We need to devote the time energy source et cetera, giving ourselves to best physician to achieve new starts.

Second piece of this actually is going to evolve over the next period of time and a lot of that has to do with the actual delivery of care to the members from the providers. This is this is relatively easier to the extent that plans that kind of control provider relationships harder for plans that more sort of in the private fee-for-service. Where there's very little contact between the plans and the providers other than paying clients.

So as you know, it's a fair range of how this is going to work. But those are kind of the few basic elements to it, plan operations and how the members are dealt with by the physicians is scores against (inaudible).

Carl McDonald – Oppenheimer

And then the last question is for Bob, estimate of what you think the subsidiary dividends will look like in the first quarter and if you have a breakdown between much of that’s ongoing business versus how much of it is capital coming from life business that got sold?

Bob Waegelein

Yeah. We have many different legal entities progressive and America progressive and Pennsylvania life are in our dividend paying position. So the other subsidiaries, which we did have some life sales and are not in a position to pay dividend yet. But we'd expect to get about $130 million of dividends up from the sub on the slide of balance sheet that showed that ending number for the excellent 2010 includes that dividend.

Carl McDonald – Oppenheimer

Thank you.

Bob Waegelein

Something out of the ordinary results from last year's operations.

Operator

(Operator Instructions) Our next question is from Daryn Miller with Goldman Sachs.

Daryn Miller – Goldman Sachs

Hi, good morning.

Richard Barasch

Good morning.

Daryn Miller – Goldman Sachs

Richard, was wonder if you get provide a little commentary on how your new PPO markets are performing?

Richard Barasch

Performing from what perspective, Daryn.

Daryn Miller – Goldman Sachs

From a medical loss?

Richard Barasch

Three months of experience. So it's almost impossible to make real judgments. Yeah, clearly we're not seeing anything that alarms us. But to sort of – kind of put a real statement how they're performing I think is a bit early.

Daryn Miller – Goldman Sachs

If we look at the markets that came on last year, any commentary on those?

Richard Barasch

Yeah. I mean in general, none of our markets are showing anything that alarm us at all. But again, if just we have 25,000 members in new programs, fundamentally new members, yeah, probably it's a quarter or two before we can make it a specific statement about it.

Daryn Miller – Goldman Sachs

Okay. And the staple development you saw was that spread pretty evenly across you various MA lines? IE by products?

Richard Barasch

By product we push our business a large part.

Daryn Miller – Goldman Sachs

Okay. And how many are those signs to have in PDP?

Richard Barasch

It’s about $1 million.

Daryn Miller – Goldman Sachs

Got you. And then just looking at your decision to sale the admin services business, you talked about some of kind of non-core businesses, what's last in kind of your mind on the non-core side and what would…

Richard Barasch

Again we've got some – we've got two older NH [ph] blocks, one is long-term care and the other is an old disability income block. We would certainly entertain divesting those. Those are small and as you probably know, there is not a huge line of people looking to take older long-term care blocks, especially smaller ones.

So the great likelihood is one of keeping both of those. Med Supp is not non-core for us. Certainly it hasn't gotten the attention recently that our Medicare Advantage and Part D business have gotten. But with the movement from private fee-for-service or moving away from private fee-for-service, we expect to see an uptick in our Med Supp business and still consider that to be part of our core.

Daryn Miller – Goldman Sachs

Thank you very much.

Operator

Our next question is from Sushil Garg with Dowling & Partners.

Sushil Garg – Dowling & Partners

Good morning. Can you give us a little more color on the CHCS divesture in terms of timing of closing and any financial disclosures?

Daryn Miller – Goldman Sachs

Timing of closing, probably…

Bob Waegelein

Within in 30 days. It's subject to the Texas Regulatory Department to approve partner America is who is already improve many other states of PPA. So it's really just about 30 day process.

Daryn Miller – Goldman Sachs

Okay. Great.

Bob Waegelein

In financial terms, generally we're getting $6 million for this. We'll disclose that in our 10-Q. We won't really have a significant gain or loss due to the write-off of some tangibles in that business. That's the financial part.

Sushil Garg – Dowling & Partners

Okay. In the negative PPRA in the quarter in Part D, what particularly segment was that?

Bob Waegelein

Well, it's Part D as a segment itself. And we have 1.9 million members in there. It's a settlement of some of the final PDEs and quarter calculations.

Sushil Garg – Dowling & Partners

Okay. Great. Thanks.

Operator

Our next question is from Justin Bowers with Deutsche Bank.

Justin Bowers – Deutsche Bank

Hi, good morning. CBO noted that, based on the provisions in the health reform act that they expect MA market to shrink to about $9 million. The recent CMS actuary's reports said that the market will half in size. And given the value that MA plans deliver relative to fee-for-service and the growing demographics, how are you guys thinking about the market longer term in light of their estimates?

Richard Barasch

I was actually surprised by the latter when I saw that last week as well. I respectfully disagree. I think what is lost sometimes in this conversation is the vast need that middle class and lower middle class seniors have for products like this. Medicare supplement has gotten very, very expensive. It's going to continue to get expensive as the rate increases are going to be necessary to keep on top of a unmanaged program we're going to be – continued to go higher. We've seen it in overall lots of business.

So we have to position ourselves, when I say, we Medicare Advantage has to position itself as a product that delivers more value than fee-for-service alone and delivers more value than fee-for-service plus Medicare Supplement. I believe that we will be able to do that because of our ability to reduce medical cost. And if we're able to do that, we're going to be able to offer products of benefit to this population. I think that they're underestimating how important Medicare Advantage is in the lives of millions of seniors.

Justin Bowers – Deutsche Bank

Got you. And just – in light of the bolus of enrollment coming on and the Medicaid program over the next four years or so. How are you guys thinking about that market and potential opportunities there?

Richard Barasch

We're not geared up to do anything with TANF or SCHIPS programs. It's just kind of not our market. In a market that's interesting to us for obvious reasons because we've got a history in long-term care and a history in Medicare, is the ABD business particularly the long-term care portion of it. And we would love to find an appropriate entry to that business.

Justin Bowers – Deutsche Bank

All right. Great. Thank you, Richard.

Operator

Our next question is the follow-up from Sarah James with Wedbush.

Richard Barasch

Sarah?

Sarah James – Wedbush

Hello?

Richard Barasch

Sarah, you're on?

Sarah James – Wedbush

Okay. Okay. I was thinking about the MLR floors being several years out. How do you guys think about the transition, specifically would you look to transition some of the counties early?

Richard Barasch

Some aware in our MLR right now is in the 84 range as it currently. So the movement in the aggregate 85, frankly isn't that far, isn't that hard or far for us. To the extent the definition includes medical management in any way we're can't going to be close to there or even in excess of that pretty quickly.

Our more advanced markets like Texas are running lower than that, but as we spoke about before where that's also the market that is going to be a 95% reimbursement market. So just almost by definition and by the force of the need to deal with the 95% loss ratio, we're going to get pretty close to the 85% any way. We don't see the MLR issue as a huge issue for us.

Sarah James – Wedbush

Add a little bit more color about how reform may impact the dynamics and the attractiveness of the Med Supp market?

Richard Barasch

Yeah. I mean I think Med Supp, we'll see resurgence. I think there's clearly, at the end of this year in companies like, we're going to be giving up several tens of thousands of our private fee-for-service members. And we're going to try to bring as many of those folks as we can back to us in Medicare Supplement. So I think you're going to see them. I think you will see an uptick in Med Supp for 2011. I think that's pretty clear at this point and we intend to participate in that.

Operator

(Operator Instructions) There are no further questions. I will now turn the conference back over to management.

Richard Barasch

Thanks everyone for participating this morning. As always please feel free to call Bob or Martina for any specific questions that you might have. Thanks very much.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating. And have a nice day. All parties may now disconnect.

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Source: Universal American Corp. Q1 2010 Earnings Call Transcript
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