Metropolitan Health Networks Inc. Q1 2010 Earnings Call Transcript

| About: Humana Inc. (HUM)

Metropolitan Health Networks Inc. (MDF) Q1 2010 Earnings Call May 4, 2010 11:00 AM ET


Michael Earley - Chairman and CEO

Dr. Jose Guethon - President and COO

Bob Sabo - CFO

Roberto Palenzuela - General Counsel


Mickey Schleien - Ladenburg

Bernie Harris - American Portfolio

Jeffrey Cohen - C. K. Cooper & Company

Robert Wasserman - Dawson James


Good day, ladies and gentlemen and welcome to the Q1 2010 Metropolitan Health Earnings Conference Call. My name is Peggy and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I will now like to turn the conference over to your host for today Mr. Michael Earley, Chairman and Chief Executive Officer. Please proceed.

Michael Earley

Thank you, Peggy. Good morning, everyone. Welcome to today's call. The call is being broadcast over this conference line and his also available via the web as noted in our press release. It will be available in recorded format through the conference service on our website. With me this morning are Dr. Jose Guethon, our President and COO, Bob Sabo, our CFO and Roberto Palenzuela, our General Counsel.

The press release was issued this morning outlining are earnings for the first quarter of 2010. A quarterly report on Form 10-Q will be filled with the Securities and Exchange Commission shortly. Great to say that we are pleased with our first quarter results. 2010 is off to a terrific start. This year is characterized by a significant number of changes impacting the Medicare advantage industry both short term and long.

From base premium rates decreasing for the passage of healthcare reform is changes increased the number of variable that we must consider again both in the short run and longer term. As well we have seen important changes in our company's leadership with recent appointment of a new Board of Directors. We will discuss all of these changes this morning.

That said, it does look like 2010 will be another good year for metropolitan. Once again, we realize company best in terms of customers, revenues and earnings. Our balance sheet remains strong and our share count is down, now below 40 million shares the results of repurchasing more than 13.7 million shares since October 2008.

Beyond our great results and strong finances, we are continuing to invest in many aspects of our business comparing it to continue succeeding in the future as the demand and expectations of our customers, industry and nation growth. Although the details of healthcare reform have yet to written, we are focused on continuing to develop a business model that will provide high quality, cost effective care to our customers.

Before we go further, I would like Bob to take u through the financial performance for the quarter. Joe will then give us some additional color to our operating results and specifically discuss various initiatives underway in our business. First Roberto will cover our Safe Harbor Statement.

Roberto Palenzuela

Thanks Mike. In order to comply with the forward-looking statements of safe harbor, I want to advice you in addition the historical information, certain comments made during this conference call, particularly those anticipating future financial performance, business prospects and gross operating strategies constitute forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Such statements maybe identified by words such as anticipate, believe, estimate, expect, intend, predict, hope, or similar expressions. Such statements which include estimated financial information or results are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements, including without limitation, our dependence on Humana and our ability to maintain and/or renew our agreements with them on acceptable terms. The impact of potential reductions in funding for Medicare program and other healthcare reform initiatives and legislation, especially the new healthcare reform legislation passed in March 2010.

Our ability to effectively manage our medical expenses, our failure to accurately estimate incurred but not reported medical benefits expense. And the impact of Medicare Risks Adjustments on payments we receive for our managed care operation. The company is also subject to the risk and uncertainties described in its filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2009, and its quarterly report on Form 10-Q for the quarter ended March 31, 2010, which will be filed shortly.

With that said, I will turn it over to Bob.

Bob Sabo

Thank you, Roberto and good morning everyone. As Mike noted, we realized record net income in the first quarter of 2010 and our operating results substantially improved over a very good 2009.

During the quarter, we saw a significant decrease in medical costs, I'll discuss little later. Our net income in the first quarter of 2010 was $7.1 million compared to $4 million in the first quarter of 2009, this translated earnings per share of $0.18 basic and $0.17 diluted in the first quarter of 2010 compared to $0.09 basic and $0.08 diluted in 2009 first quarter.

Revenue in the quarter exceeded $93 million as compared to $90.4 million in the first quarter of 2009 an increase of 2.9%, this increase was a result of a 1.1% increase in customer months and an increase in our per customer per month payment of approximately 1.7%.

As a reminder in 2010, CMS reduced the base premium rate paid the Medicare Advantage plans by approximately 5%. This decrease was more than offset by an increase from the average Medicare score of our customers.

Total medical expense was $76 million and $79.5 million for the first quarters of 2010 and 2009 respectively. The decrease in medical expense in the first quarter of 2010 was primarily due to the decrease in certain benefits under Humana's Medicare Advantage plans in the markets we serve, the elimination of high-cost special need plans and certain of our counties and favorable utilization.

As important as anything however is the continued efforts of our Medicare management team to share that our customers are receiving the right care, at the right time, and at the right level. Dr. Joe Guethon will discuss these efforts in a few minutes. These factors resulted in a decrease in our per customer per month or PCPM medical expense from $754 in the first quarter of 2009 to $713 in the first quarter of 2010 and a decrease in our medical expense ratio or MER from 87.9% in the first quarter of 2009 to 81.7% in the first quarter of 2010. This result is extraordinarily positive. Do we expect to see this level performance from the entire year? History tell us that utilization and the resultant medical expense fluctuate throughout the year but we believe the fundamentals are in place for a very good 2010.

Our tax rate was 37.4% in the first quarter of 2010 as compared to 38.8% in the first quarter of 2009. The lower rate in 2010 was primarily a result of our short term investments being substantially tax-exempt securities.

Turning now to the balance sheet cash, cash equivalents and short term investments at March 31, 2010 were approximately $30.3 million as compared to approximately $33.8 million at December 31, 2009. This reduction is primarily a result of the continued repurchase of our common stock and an increase in the amount due from Humana.

Our networking capital increased to $33.4 million at March 31, 2010 from $27.7 million at December 31, 2009. During the quarter, we repurchased 1.7 million shares of our common stock for an aggregate price of $3.9 million. Shares outstanding at March 31, 2010 were $39.7million. Weighted average common shares outstanding basic was just over 39 million shares, while weighted average common shares outstanding diluted was approximately 40.8 million shares. All in all 2010 is off to a very good start.

Before I turn it over to Joe, I would like to spend a little time talking about the Healthcare Reform Legislation. This legislation is considered by some to be the most dramatic change in the country's healthcare system in decades. The new laws impose significant new regulations and make changes to the Medicare Advantage program. Among other things the new laws limit the Medicare Advantage payment rates and stipulate a prescribed minimum MER to be extended on medical cost.

This is important to note, because substantially all of our revenues is directly or directly derived for Medicare Advantage premiums. Under the new legislation we expect that the general CMS reimbursement rates with respect to our current customer population would be reduced over phase in periods ranging from two to six years beginning in 2012. We are still in the process of seeking to identify the extent to which the projected general premium decrease would be offset by changes in our patient population, enhanced medical management that will reduce the cost to care, reduced benefit offerings by Humana, increased customer co-pays and deductibles, the potential for quality bonuses, improved risk or compliants and other factors.

In the near term we do understand expected premiums for 2011. With the various factors considered, we anticipate base rates declining by less than 2%. This decline would be mitigated to some extent by the factors I just mentioned. Remember that base rates decreased approximately 5% in 2010 compared to 2009. That completes my report for this morning. Now on to Joe.

Joe Guethon

Thank you, Bob good morning. As Mike and Bob indicated this was a great quarter from several aspects. Utilization and related medical cost in the quarter reflect a mild flu season, favorable hospital utilization and the impact of the reduction in the 2010 help line benefits. The elimination of several special needs plans that were running medical expense ratios over 100%, also contributed to the lower medical cost on a per customer per month basis.

We're also beginning to see the impact of the network strategy that we implemented back in the second quarter of 2009. Principally this involves terminating physician agreements were there was minimum growth and to our few customers and little to no physician engagement with such key initiatives as risk or coating and documentation, utilization management and clinical risk management and we continue to pursue this strategy even as we move into the second quarter of the year.

One area were this has been particularly successful is our former advantage care markets now owned by Humana and service by us. In these markets we have seen stellar improvements. We are confident that these changes will continue to deliver improved outcomes.

Well, the first quarter was a very busy one, we continue to focus on process improvement related to proper documentation and coating and on several network and contractual changes that we believe will help us better manage our medical expense in the third and fourth quarters of 2010.

Of these involve several high volume, high cost services such as cardiology, radiation oncology, dermatology, mental health vision, preliminary and high-tech diagnostic imaging such as CAT scans (inaudible) and MRIs. In keeping with this its interesting to note that managed recent earnings call they address what they turn their code 15% solution. This refers to the observation that approximately 15% of their customers account for approximately 70% of their total medical costs. We as you might imagine see the same phenomenon in our business. As a result we are devising and implementing strategies this specifically address these customers and their needs.

Therefore our medical management strategies are very similar. And these are all embedded into the patient center medical home model of care. They include a focus on both the physical and mental aspects of chronic conditions what we call integrated primary care disease state management, health education and costumer engagement, chronic care management, and clinical pharmacy management.

And on that note, we are currently recruiting a clinical pharmacist to direct a pharmacy care management program that we have developed. We believe this will help us not only manage our pharmacy cost, but improved compliance which will ultimately lead to better and safer outcomes.

We also plan to launch and innovative a (inaudible) care model pilot in the second quarter up in our Daytona market. We are in discussions with a unique company that provides chronic care management services to seniors across the entire continuum of care. This includes face-to-face assessments of the customer in their home, in the hospital, the nursing home and of course in the office setting. This new relationship will serve as an extension of the medical home and will provide us with expertise that we currently do not have.

Initiatives like these will help us develop and deliver the kind of comprehensive care that accountable care organizations or ACOs, a new term coming out of healthcare reform will be expected to provide to their customers. We have worked very hard during these last three years to evolve our business model, to handle both a rapidly growing senior market in a more challenging financial environment. We believe that both our operating strategies and our execution are the very best we've ever been but continuous improvement is the name of our [game].

Well, that's the end of my remarks. Thank you taking time to listen. Let me turn over the call back to Mike.

Michael Earley

Thanks, Bob. Another great report. I hope you can see that this business, this organization is on the move. We want to see a significant increase in customers in 2010. We expect to see fine financial performance. And that performance will continue to give us the opportunity to invest in our business for it's long term health success for the benefit of our customers, our partners, our associates and of course our owners.

We have tried to be both deliberate and opportunistic during the last two years as both the financial markets and healthcare world has been rocked by seismic quarters. During the financial market collapse, our operations continue to produce significant cash flow allowing us the opportunity to purchase our own stock, one of the best investments we could see.

We deliberately slowed our M&A activity as the fog of healthcare reform set it beginning back before the Presidential Election. We simply couldn't see where to go with the uncertainty involved. In the meantime, we didn't sit on our hands. We took that time and used our resources to work on the engine if you will, to work on our business model, to better prepare for the future.

We believed and still do believe that the business of providing and coordinating care for seniors is a business that is and will be characterized by rapidly growing market and demand and scarce resources with better opportunity. As you could see we have to be more customer centric, more effective and more efficient whatever the government does or doesn't do, the share goes to the economics of limited resources in growing demand we'll require survivors in this industry to look very different from how they look today.

We believe that we are among the leader and thinking and acting differently. Our own centers for example with the first medical practices recognized by NCQA as Patient-Centered Medical Home in the state of Florida and they achieved the highest level certifications. This achievement required a significant reorientation of our operator model and staffing or as a result we are seeing demonstrable improvements in key metrics ranges from customer satisfaction, medical utilization costs, this meaningful change that will serve our customers and serve us well in the future.

The so-called reform legislator we wait and see the details and volumes and regulations that will be produced over the next couple of years. But I think we can conclude the Medicare advantage will continue as a good and viable business. A number of changing variables will impact our business, some negative like decreasing base premium, others positive at the opportunity to earn bonuses to quality outcomes. These will also doubt as we move forward but please understand that these changes will take place over two to six years of transition as Bob noted earlier.

Let me ramp up by commenting on recent governance with them, involving our new board of directors in my continuing role. First, we welcome six new independent directors to join our managers and may in shaping and guiding the performance for the future. An examination of their respected [resonates] and then as you that we will enjoy our breadth in business and healthcare experience in a range of expertise and background. A look forward by shareholders I know that our company and its stakeholders will benefit from rhythm and judgment. We will work closely with our new board evaluate our strength, weaknesses, opportunities and risks and make decisions about our future direction and initiatives.

Specifically included in these discussions will be the use of our cash resources whether to continue buying background stock or not. The current authorization to buy upto 20 million shares is in place. With 5.6 million shares remaining available to be purchased. That's my role I am pleased to have the opportunity to continue as Metropolitan and leader. We put together our grade (inaudible) of talent and build the company that's poised to continue its growth and success.

And now have more than seven years invested in this endeavor and I can imagine having a better seat to participate in the revolution of this remaking our challenged healthcare industry.

Healthcare is the largest industry in our great country and this is also the industry most in need of being brought into the 21st century. In terms of very basic sound business practices utilizing the business system technology that have rationalized and advanced nearly every other business we know.

I appreciate the opportunity I have and I appreciate the support our shareholders have demonstrated, many thanks. We work everyday to earn that support. And finally of the last comment, I want to thank the customers their place for care on hands, our management team, medical professional and staff they do it so well everyday. We aim to not only survive but to drive as an active leader in the healthcare revolution that is now underway.

At the end of our prepared statement I am sure many of you have question Peggy could you help us out?

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Mickey Schleien with Ladenburg. Please proceed.

Mickey Schleien - Ladenburg

These are surprisingly strong results despite week customer growth. So given the soundness of your business and the elimination of much of the uncertainty surrounding healthcare reform? What is the outlook for you to expand your footprint either into the counties where you can already operate, but you are not there or through acquisitions?

Michael Earley

I think as I noted in my comments there was so much uncertainty with the healthcare debate now that that's been resolved, we can understand our market opportunities going forward and clearly I think we have an opportunities to expand our business both in our existing markets and in the number of counties that we have contracted which amounted to operate in, we are in the process now of evaluating those opportunities. And I think as a backdrop there will be a significant consolidation of the primary care industry moving forward.

And I think we're very well poised to move forward and be active participants in that activity we have not only the financial resources to do that, but we also have I think the organizational expertise and technologies that we've invested and that makes that all very workable. Scale will be very important going forward in this business and again I think we are well poised to move forward and will do so.

Mickey Schleien - Ladenburg

So do you think you and the board could make some decisions even this year about expansion into counties were you're already contracted?

Michael Earley

Absolutely. The new board although with us really a very short time, a week. We've already met with the directors who started the process of discussing these various alternatives. So we expect to spend significant effort and amount of time with them in the coming weeks and months to do that. So we will be making decisions certainly before the year-end.


And your next question comes from the line of Bernie Harris with American Portfolio.

Bernie Harris - American Portfolio

Question for you in the papers about a month a week ago they talked about fraud, and they said that the government as the 5.6 and something like a percent of fraud on all the Medicare claims and Medicaid both. And the insurance companies have less than 1%, does that type of control I think it might have an effect in the future about reducing the idea of getting rid of the private insurance companies for Medicare?

Bob Sabo

Well, I think I understand your comment Bernie, but it's well known and acknowledged that there is a substantial amount of fraud in the various government funded health programs whether Medicare, Medicaid or other programs. And certainly there is a significant opportunity to reduce that number and it involves billions of dollars.

The fact of the matter is, I think if you look at the Medicare advantage industry where you have at risk active management intermediaries like Metropolitan involved, like Humana involved, you certainly have less opportunity for fraud versus in the fee-for-service world. I think the true abuse in these programs operates in the fee-for-service environment and I think we're reading more and more as the government is putting folks in windbreakers out, visiting doctor's offices and it turns out they aren't doctors, don't have real patients. These folks are truly abusing the fee-for-service market.

I will argue all day along that the Medicare advantage business provides a number of advantages in terms of rendering effective care on an efficient cost effective basis, but I will also argue that we manage cost and this far less opportunity for fraud in our business.

Bernie Harris - American Portfolio

On other question, with the new passage of the Medicare bill, all the insurance health bill rather, are doctors now more after want to get out of the practice or you see any change on that? Doctors wanting to sell their practices?

Bob Sabo

Well, I think its certainly the more complexity, the requirements you put on the lease positions, the harder it is for them to earn a reasonable living and devote a reasonable amount of time in a week to that job. So I think the increased regulation, the requirements to bringing new technologies like EMR, as well as just the fact that physicians are generally looking for support in managing their business, they want to practice medicine, they don't want to run businesses. I think all of these forces will cause a rationalization or consolidation of what really is one of the last large cottage industries in this country


Our next question comes from the line of Jeffrey Cohen with C. K. Cooper & Company. Please proceed.

Jeffrey Cohen - C. K. Cooper & Company

Good morning, I guess part of my question revolved on the first question you had relative to acquisitions of physician practices in some of the counties in Florida over the course of 2010. If you could expand upon that discussion just a little bit for me. Thank you.

Bob Sabo

I think the answer is that we're really starting to look again at acquisition opportunities. We had went actively pursuing a number of opportunities, but nearly two years ago as the election approached, as the financial markets had their problems we really stepped away from the that process and I think we saw that generally throughout the industry.

Everyone went into a wait-and-see mode, but at this point we are ramping up the efforts. We think we're better positioned than ever to make acquisitions and to bring them in. Dr. Guethon and his people are out meeting with physicians. They recently attended a large industry group of Florida physician group meeting and part of that was one, to talk about what we've done here at Medicare with the patient center Medical home model which everyone's very interested in, but secondly it was a recruiting effort to identify physicians in practices that were interested in joining us and participating in sort of the next phase of healthcare. So the efforts are underway. We have the resources to move forward. So I think you could expect some activity in the coming months.

Jeffrey Cohen - C. K. Cooper & Company

I just have one more short question I guess is probably for Bob. So, I'm looking at income 7.219238 share count 39,700,000 and that's giving me 17.95777 cents. You're calling 17 for diluted.

Bob Sabo

Yes, because you have to add in the options and the restricted stocks, it's not tested and all the other things to get to the about 40 million shares. We are going to consider all those to bring it down.


Our next question comes from the line of Robert Wasserman with Dawson James. Please proceed.

Robert Wasserman - Dawson James

Hi, Mike congratulations on a good quarter. Just a couple of questions. The first about the patient center medical home, can you tell me what percentage of either your customers or your revenues came from that model and kind of related, are you going to any plans to expand that either in terms of your existing counties or new counties. I know Humana has been little bit more upfront about this whole program recently.

Michael Earley

You are right, Humana has taken great interest in this model of care that has have the other insurer and what's happening is that they are seeing indeed positive results. You would recall that we ran a sophisticated pilot with the innovation folks at Humana and we're in the second year of that pilot, but the first year results were across-the-board positive not only in terms of cost savings, but also in terms of customer satisfactions. So they've taken a great interest in it.

Today about 26% or so of our customers reside if you will in one of our own practices in our own practices of where we've implemented the PCMH model. As we acquire and control additional practices, we will certainly implement this strategy with regard to them and I will say that we will move and so our goal is to have more owned practices ass we move forward. Specifically so we can implement this model because we think it better served the customers and provides better outcomes for all involved. So absolutely we're going to expand that as we move forward.


(Operator Instructions). And it appears that we have no further questions, so I'll turn the call back over to Mr. Michael Earley.

Michael Earley

Great, thank you Peggy. Let me just say we're very pleased with the starts of the year. We look forward to our report with you. And I'd like to say personally that I am very graceful to the support that the shareholders of this company have given this company, this management team and me. And we continue to work very hard to earn that trust and support and I hope you are please with efforts we've made and certainly the results we are seeing with each successive quarter.

So, we appreciate the opportunity to be with you. Thank you for listening and we will be communicating with you soon. Thank you.


Ladies and gentlemen that conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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