Magellan Health Services' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: Magellan Health (MGLN)

Magellan Health Services, Inc. (NASDAQ:MGLN)

Q4 2013 Results Earnings Conference Call

March 03, 2014, 10:30 AM ET

Executives

Renie Shapiro - Senior Vice President, Corporate Finance

Barry M. Smith - Chairman and Chief Executive Officer

Jonathan N. Rubin - Chief Financial Officer

Analysts

Joshua Raskin - Barclays

David Styblo - Jefferies & Co.

Ana Gupte – Leerink Partners

Operator

Welcome and thank you for standing by for the Fourth Quarter 2013 Earnings Call. At this time all participants are going to be on a listen-only mode. (Operator Instructions). Today’s conference is being recorded. If you have any objections you may disconnect at this time.

Now I will turn the meeting over to Renie Shapiro. And ma’am you may begin.

Renie Shapiro

Good morning and thank you for joining us today. This is Renie Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services. With me today are Magellan’s CEO, Barry Smith and our CFO, Jon Rubin. They will discuss the financial and operational results of our fourth quarter ended December 31, 2013.

Certain of the statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed. These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on Form 10-K for the year-ended December 31, 2013 which will be filed with the SEC later today and will subsequently be available on our website.

In addition please note that in this call, we'll refer to segment profit. Segment profit is disclosed and defined in our annual report on Form 10-K and is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries but excludes income from non-controlling interest held by other parties as well as stock-compensation expense. Segment profit information referred to in this call may be considered a non-GAAP financial measure. Included in the table issued with this morning's press release is the reconciliation from segment profit to the line item income before income taxes. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure.

I will now turn the call over to our CEO, Barry Smith.

Barry M. Smith

Thank you, Renie. Good morning and thank you for joining us. Magellan Health Services is a very different company today than it was a year ago. While our core businesses continue to perform admirably we've made significant advancements in our two strategic initiatives. Magellan Complete Care is operational and continues to expand.

In addition we now have a single integrated and growing pharmacy operation with the complete set of product offerings. The two acquisitions completed last year Partners Rx and AlphaCare have given us additional scale, capabilities and market focus to further these strategies. We've added breadth to our already robust leadership team [providing] [ph] additional skills and expertise. In addition we've implemented changes to our operations and products to ensure that Magellan is nimble, competitive and poised to respond quickly to the changing healthcare marketplace.

We are moving closer to our vision of becoming a real growth company. As you read in our press release this morning for the full year 2013 we produced net income of $125.3 million, diluted EPS of $4.53 and segment profit of $259.4 million. During the year we repurchased approximately 1.2 million shares for a total cost of $60.1 million. Through last Wednesday, February 26th we have completed approximately 126.5 million or 42% of our $300 million program. We ended the year with $261.4 million of unrestricted cash and investments.

Let me provide an overview of the progress we've made on our Magellan Complete Care and pharmacy management initiatives as well as update you on the status of our protest in Maricopa County. This has been an important year in terms of advancing our Magellan Complete Care initiative. We are operationally growing in three key states, Iowa, Florida and New York and are positioning ourselves for entry in to several others.

In Iowa, Phase I of our behavioral health led health homes program launched last July and we are about to start the next phase of the rollout in surrounding counties. The third and final phase covering rural counties will begin on July 1st. As a reminder this integrated care program in Iowa is available to approximately 26,000 adults with serious mental illness or SMI as well as 16,000 children with serious emotional disturbance, also referred to as SED and we expect we will cover approximately 50% of the eligible individuals.

This ASO contract runs for only two years from the implementation date in each county and is expected to generate approximately $30 million of revenue in 2014. We are expanding our considerable dataset on these two populations which will provide further insight as we launch program for individuals with SMI in other states. Our desire is to work with the state of Iowa to create an SMI specialty plan similar to our plan in Florida, to be up and running when the first phase of this behavioral led health homes program as they complete in July of 2015.

In Florida we recently signed a contract with the Agency for Healthcare Administration, AHCA, and completed the readiness review of our Medicaid Specialty Plan for individuals with SMI. The criteria used to define an individual SMI has been finalized and we estimate that there are at least 100,000 individuals with SMI in the regions we were awarded. We continue to work with AHCA to finalize rates and we now have a better sense of the timing and enrollment process for all of the regions.

The State is on track to migrate our eight awarded regions to managed care on a phased basis from May the 1st to August the 1st. Based on the State's readiness and approach to auto assignment specialty plans we anticipate that we will receive auto assignment in four of the eight regions beginning in July. These four regions include the majority of the membership.

We expect that eligible members will have 30 days to choose between traditional managed care plans and specialty plans such as ours. Subsequently those individuals who haven't chosen a plan will go through an auto-assignment process and individuals that have been identified as having SMI will likely be auto-assigned to our specialty plan. Members who are auto-assigned may opt out of the plan and then choose another managed care plan.

We are in frequent contact with AHCA in terms of readiness and providing counsel to make the process seamless for the beneficiary or member in order to ensure continuity of care. We remain confident in our guidance assumption of achieving penetration of at least 20% within the first year of implementation with a potential for significant additional penetration over time.

In New York, our strategic investment in AlphaCare a Medicaid-managed long term care or MLTC and Medicare Advantage Plan closed on December 31, 2013 and we now own 65% of AlphaCare. AlphaCare is experiencing steady growth in its MLTC plan which launched in June of 2013 as well in its Medicare plans including Medicare Advantage, Dual-Eligible and Institutional Special Needs Plans, which launched on January 1, 2014.

In January, AlphaCare completed its readiness review with the State of New York and CMS for the state’s Fully Integrated Dual-Advantage or FIDA demonstration program. The FIDA program which integrates Medicaid and Medicare benefits has been delayed and is now on schedule to begin October 1, 2014 for voluntary enrollment with auto-assignment and the ability to opt out of the Medicare benefit on January 1, 2015. MLTC members have been mandatorily enrolled in Medicaid plans like AlphaCare since last year.

With the completion of the AlphaCare transaction as well as the activities in Florida and Iowa we are now managing a variety of special populations and we look forward to expanding and exporting these capabilities in other markets. We are pursuing HMO licenses in Iowa, Nebraska, Pennsylvania and Louisiana and we’ll also continue to pursue acquisitions to enter additional geographies and expand our capabilities. Our goal remains to manage no less than $2.5 billion of total healthcare spend for targeted populations in approximately five to seven states by 2017.

In our Pharmacy Management segment we have made great progress since our acquisition of Partners Rx on October 1ar. The commercial, Medicaid and specialty units are now operating as one organization and have launched their new brand as Magellan Rx Management. We have begun to develop and build out a more robust infrastructure for networks, rebates, mail service and Part D which will allow us to complete and compete more effectively. These infrastructure improvements will be achieved through internal development and through acquisition.

We continue to further augment the talent of our Pharmacy Management segment and have significantly expanded and reorganized our sales force and account management teams to focus on the employer, managed care, specialty and government markets.

Our radiology business has grown several fold since we acquired it 2006. We have developed material risk-based business and added products to help serve new populations in markets. We have broaden the scope of this business beyond advanced imaging management and now offer programs that manage the evaluation and therapy associated with cardiac services, radiation oncology, obstetrical ultrasounds and muscular skeletal management formally referred to as pain management. Accordingly this is an appropriate time to change the name of this business segment to reflect the expanded breadth of services we provide and we are calling this segment Specialty Solutions.

Next I would like to update you on the status of our protest in Maricopa County. In December, we filed an appeal in the Arizona Superior Court, Maricopa County and subsequently requested a judicial stay of the implementation of the contract until after the court's decision on our appeal. Two weeks ago the superior court denied our request for stay of implementation. The appeal of the award is still in process. However there is no assurance as to the timing or the result of the court’s actions on this issue.

In the meantime we continue to fully execute on the Maricopa contract deliver our entire complement of clinical services to members and meet all performance targets. We begin to transition the contract to the successful vendor affective April 1, 2014. I will be remiss if I didn't mention the extraordinary commitment of our staff during this time of uncertainty. They continue to perform with their usual high standards to ensure the focus remains on our members.

To complement the many changes that have taken place over the last year we're introducing a new look and feel for Magellan which is an important part of our next chapter. We're rolling out an updated brand story and visual system including new logos, imagery and names for our businesses. I am quite pleased with the new brand which will help differentiate us as we grow our company. We're also planning to hold an Investor Day in New York City on June the 17 which will feature our business leaders discussing the steps they are taking to move Magellan forward.

Although 2014 will be a transitional year after the progress we've made in 2013 on our strategic initiatives we are poised for future long-term growth. We are a more competitive company, better prepared to serve our customers and shareholders in the dynamic and changing healthcare market.

I'll now turn the time over to our CFO, Jon Rubin who will discuss our results in detail. John?

Jonathan N. Rubin

Thanks Barry and good morning everyone. For the year-ended December 31, 2013 we reported net income of $125.3 million, diluted earnings per share of $4.53 and segment profit of $259.4 million. For 2012 we reported net income of a $151 million, diluted earnings per share of $5.42 and segment profit of $267.4 million.

Net income for the fourth quarter of 2013 was $18.5 million or $0.67 per share on a diluted basis. For the fourth quarter of 2012 net income was $37 million or a $1.32 per share on a diluted basis. The decrease in net income between periods was mainly attributable to a decrease in segment profit. Our segment profit for the fourth quarter of 2013 was $55.9 million compared to $77.7 million for the fourth quarter of 2012.

Revenue in the fourth quarter of 2013 was $1.0 billion which was a $177.9 million higher than the fourth quarter of 2012. The revenue increase resulted primarily from the inclusion of Partners Rx revenue in the current year quarter and new business partially offset by revenues associated with terminated contracts.

I will now review each of the segments results and growth opportunities beginning with commercial. Segment profit for commercial behavioral health was $31.3 million, a decrease of $3.7 million from the fourth quarter of 2012. The decrease is mainly due to terminated contracts and care trends in excess of rate increases which were partially offset by increased membership from existing customers.

In the latter part of the year we prepared to serve the expected January 1st exchange business. Due to enrollment challenges faced by the government to-date we've experienced lower than expected membership. Our health plan clients and federal exchange markets are all facing similar enrollment issues. In addition we are in discussions with several of our health plan and employer customers whose contracts are up for renewal in 2014. None of these customers have initiated competitive procurements. From a pipeline perspective we continue to work on health plan and employer opportunities for the latter part of 2014 as-well-as pursue opportunities for 2015.

Segment profit for public sector was $23.7 million, a decrease of $14 million from the prior year quarter. This decrease was mainly due to timing of incentive revenue, the recognition in the current year quarter of severance and other cost related to terminated contracts and care trends in excess of rate increases. The Virginia Behavioral Health Contract with annual revenues of approximately $20 million went live on December 1st. In addition in 2014 the State of Iowa has further expanded our contract to include full risk behavioral services for the frail and medically needy population which went live on January 1 and autism support which went live on March 1st. Now that all these expenses have been implemented we expect annualized revenues from the Iowa contract in excess of $400 million.

Regarding the public sector pipeline the State of Maryland recently released an RFP for its behavioral health business. In addition we expect that the RFPs for carve-out contract in New Jersey and Texas will be released during the first half of 2014 while other RFPs including Georgia and Greater Arizona will be released later in 2014.

Fourth quarter 2013 segment profit for our newly renamed specialty solutions segment was $17.7 million, a decrease of $1.7 million from the fourth quarter of 2012. This decrease was mainly due to care trends in excess of rate changes. These decreases were partially offset by the net impact of new business.

We continue to see growth from both new product and from Medicaid expansion. We implemented a new contract in our muscular-skeletal program on January 1, 2014 and implemented two additional markets for advanced imaging in the fourth quarter for a National Medicaid Managed Care Plan. We’ve also built interfaces to deliver our programs to new exchange members from many of our current customers in 2014.

Our growth strategy focused on new sales and product suite expansion continues to produce positive momentum. By bundling multiple products and continuing to expand the scope of our solutions we’re able to deliver greater value to the market. 57% of our current customers have more than one of our specialty solutions product and the vast majority of our new sales include the purchase of multiple products. We have successfully renewed all of our health plan customers whose contracts were up for renewal in 2014.

We continue to see interest in our muscular skeletal management products and our pipeline includes risk RBM and cardiac opportunities as well. Fourth quarter segment process for the Pharmacy Management segment was $21.9 million an increase of $3.3 million over the fourth quarter of 2012. This increase was primarily due to the inclusion of Partners Rx in the current year results. We expect strong organic growth in our pharmacy business as we continue to focus on employer, managed care, specialty, and government markets.

We recently signed a new PBM contract with the Medicaid MCO which is subject to review by the State Medicaid Agency. We expect this contract to go live with 65,000 members in the second quarter of 2014 and produce annualized revenues of approximately $40 million. We’re entering the year in a very strong position and look forward to continued growth in our pharmacy business.

Regarding other financial results, corporate costs, excluding stock compensation expense were $5.7 million greater than in the fourth quarter of 2012. This increase was primarily due to one-time compensation cost provided to a former Executive Chairman under his employment agreement.

Excluding stock compensation expense, total direct service and operating expenses as a percentage of revenue were 17.1% in the current year quarter as compared to 17.0% for the prior year quarter. The effective income tax rate for the year-ended December 31, 2013 was 24.2% compared to 20% for the prior year. The increase in the effective rate was mainly due to more significant reversals of tax contingency reserves in the prior year.

Now turning to cash flow and balance sheet highlights. Our cash flow from operations for the year-ended December 31, 2013 was a $183.2 million compared to cash flow from operations of a $181.3 million for the prior year. Cash flow for the current year includes the positive impact as a shift of restricted cash in to restricted investments in the amount of $29.2 million which is reflected as a source of cash from operations and a use of cash from investing activity. Cash flow for the prior year included the negative impact of a shift of restricted investments to restricted cash in the amount of $16.7 million.

Absent these transfers cash flow from operations for the current year period totaled a $154 million compared to $198 million for the prior year period. The reduction in cash flow between years is attributable to the reduction in segment profit of $7.9 million, increase of tax payments of $7.8 million and the net unfavorable impact of working capital changes of $28.3 million.

The working capital changes were mainly due to an increase in restriction cash requirements for the company’s regulated entities. As of December 31, 2013, the company’s unrestricted cash and investments totaled $261.4 million, with approximately $40.9 million of this amount related to excess capital and undistributed earnings held with regulated entities.

The company’s unrestricted cash investments totaled $302.3 million as of December 31, 2012. The company’s restricted cash and investment balance at December 31, 2013 of $386.8 million reflect an increase of $39.4 million from the prior year balance. Most of this increase is due to the net increase in restricted cash requirement for expansions in public sector business.

Related to 2014 we are maintaining the ranges discussed in our December guidance call for net revenue in the range of $3.6 billion to $3.8 billion; net income of $57 million to $73 million and segment profit of $215 million to $235 million. We're also maintaining our guidance for cash flow from operations in the range of $181 million to $203 million.

Taking into account the impact of share repurchase activity through February 26, 2014 but not considering any potential future share repurchases our guidance range for fully diluted EPS is estimated to be $2.02 to $2.58 based on $28.25 million average fully diluted shares.

In closing I am pleased with our results for 2013 and our continued progress on our strategic growth initiatives, which I believe positions us for future success. Barry and I are now available to answer your questions and I'll now turn the call over to the operator. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Josh Raskin, Barclays. Your line is open.

Joshua Raskin - Barclays

Hi, thanks good morning. Just a couple of quick clarifications; first just any one-timers in the fourth quarter Jon, any favorable development from any of your segments?

Jonathan N. Rubin

Josh in the fourth quarter there were some out of period items, not a lot in terms of reserve of development but we did have a handful of items, both primarily in corporate and in public sector. In corporate as I noted we did have the acceleration in recognition of the cash long-term incentive payable to our former Chairman and also some severance charges. Those totaled about $12 million and we had severance and other close out costs that we recorded in public sector in the neighborhood of $6 to $7 million.

So those are really the big one-time items, those are both unfavorable which means on a run rate basis our segment profit would have been higher in the quarter.

Joshua Raskin - Barclays

Right, but those were both expected with corporate severance, is that expected as a 4Q event?

Jonathan N. Rubin

We had not fully expected that in fourth quarter Josh but the others were generally in a range of what we expected.

Joshua Raskin - Barclays

Got you. And then the Partners Rx contribution in 4Q, do you have a revenue or segment profit or both contribution?

Jonathan N. Rubin

In terms of -- I don't have the revenue contribution, in terms of the segment profit contribution round number is $2.5 million.

Joshua Raskin - Barclays

Okay. And is there anything unusual in terms of seasonality or one-timers in there or is that a decent run rate for the quarter?

Jonathan N. Rubin

No, that's a decent run rate, other than just noting we're continuing to experience very strong growth in pharmacy in general including the segments that Partners Rx has traditionally been focused on.

Joshua Raskin - Barclays

Okay. And then just a third question on the Florida update that you gave, it sounded Barry as though there was a little bit of a change in terms of the auto assignments that there would be auto assigned into your plan at some point and then I guess they could opt out. That sounds a little bit better than I guess what we had previously known and assumed. So I know you guys are still talking about that same targeted 20% but would you say now there is higher likelihood of upside or are you at least more comfortable with 20,000 lives or how should we think about that nuance?

Barry M. Smith

Yeah, Josh that's a good observation. As you know we've been working with the state very closely with AHCA over the last year, year and a half and working through the methodology for enrolment. And it appears a positive for us and you never know as you go through the process until it is finalized which is not yet but all indications are that it gives us greater comfort with our initial projections of 20,000. And we were pretty comfortable as before but I think we're even more comfortable with it now. So there is certainly an upside but again until what actually happens we hesitate to make any further estimates.

Joshua Raskin - Barclays

Barry, but just so I understand the assignment here if members don’t actively select an option they are going to be auto assigned into your plan, those 100,000, some will opt out and then the remainder of that 100,000 will get put into your plan and then I guess some can opt out after that as well, is that the way to think about it?

Barry M. Smith

That is correct. We the de facto are the default plan for the SMI population which is very positive for us and so we expect to see very strong enrollment through the auto assignment process. Again until it happens you never know if there are going to be some last minute changes but that indeed does seem to be the case at this point.

Joshua Raskin - Barclays

Well, not to push that, but it’d be highly unusual in any of the state programs where 80% of the individual would actually opt out, right?

Barry M. Smith

I think it’s safe to say that individuals would likely not opt out. Although we have no experience, this is the first data point but I think that we’re thinking similarly but again we really don't know until we see it happen.

Joshua Raskin - Barclays

Okay, all right, that’s fair. Thanks, Barry.

Barry M. Smith

You bet.

Operator

Thank you. And our next question comes from Dave Styblo, Jefferies. Your line is open.

David Styblo - Jefferies & Co.

Sure, thanks for taking the question guys. Just a follow-up on Josh’s point with the Florida SMI, extending that a little bit more on the profitability side, what gives you confidence about generating profitable margins after this year and what sort of range are you targeting? Are you thinking about that low single digit or could it be as high as the mid-single digits?

Barry M. Smith

Well, I think in terms of the profitability clearly it’s dependent upon the enrollment. It’s also -- clearly based upon our experience and our ability to manage the MLR we do have significant health plan experience and great experience clearly working with this population. So we certainly don't want to be overly confident. We are paying very close attention to it. We have weekly updates and monthly updates with our rollout in care management process. We would generally say for any of the states we would see between 3% and 5% margin.

We wouldn’t forecast. It could be higher, it could be but we wouldn’t forecast that at this point in time and again this is our first data point so we’ll know a lot more as the rates are set which we expect in the near future and when we actually see the real experience in this population. The good news is that we have a lot of great data. Kind of unusually good data both from medical claims side, the pharmacy side and clearly we’ve been managing the SMI for years now in Florida.

So working with the State [inaudible] there seems to be a great working relationship and we have that trend data. So it’s an unusually good circumstance for us to go into knowing what we know. So again we believe it's going to be in the 3% to 5% range.

David Styblo - Jefferies & Co.

Okay. And just a follow-up back on the fourth quarter, I know Street estimates probably don't mean a whole lot to you guys versus your internal but it was weaker in the quarter relative to consensus and it was lower than your midpoint. What exactly would you attribute it to, is that mostly from the corporate expenses being higher that you had mentioned earlier?

Jonathan N. Rubin

Yeah, I mean a couple of things Dave. One as you know I mean we were actually pretty close to the midpoint of our estimates but the one item as I mentioned in response to Josh’s question earlier is on the corporate side there were some compensation expenses I alluded to that we did not expect in the quarter. So you can gauge that the results otherwise would have been higher than even what we had said as the midpoint otherwise.

David Styblo - Jefferies & Co.

Okay. My last one is just on the contract [rebate] [ph] you had mentioned. It sounds like you hit several of those and I had in my notes here looking back at your 10-K that there was one large commercial customer that would expire in ’14 worth $65 million to $70 million and then there were couple in radiology that totaled to nearly $100 million. Were those the ones you had alluded to or what’s the status of those [three] [ph] contracts that you flagged in the 10-K before?

Jonathan N. Rubin

Yes, I mean I think those essentially at this stage again have been renewed and there really aren’t any contracts out for bid at this point in 2014.

Barry M. Smith

And just to follow-up there Dave, we’re following through on these contracts. It’s a very different year and environment this go around. We did lose some contracts clearly a large one at the end 2012 or at the very last day and then there were some challenges during 2013 as well but 2014 really things that worked through the pipeline to a great degree and we’re working through the final details in some of these larger contracts but we’re very optimistic that it’s a very different picture than it was in 2013.

David Styblo - Jefferies & Co.

Thank you.

Barry M. Smith

You bet.

Operator

Thank you. (Operator Instructions) And our next question comes from Ana Gupte, Leerink Partners. And your line is open.

Ana Gupte – Leerink Partners

Yeah, thanks. Hi, good morning. So a couple of follow up questions on what’s been asked earlier. I think you talked about finalization of rates in Florida and then on the Iowa contract I think on the [inaudible] contract you talked about on the ASO arrangements. So as you are looking forward into these other three states, Nebraska, Pennsylvania, Louisiana, how would you see these playing out, both from the point of view of your, the type of contract this will be, the rate expectations and then the competitive environment and your potential to win the business there and can you just sort dimension the magnitude of what these might look like and the timing?

Barry M. Smith

Sure, sure. As you know we went -- and you mentioned Nebraska for example and we’ve gone from an ASO contract to a risk contract with very substantially higher revenues which is great in the next step or stage going to a full risk contract we hope one day. All of these contracts you’ve named Iowa, Nebraska, Louisiana, Pennsylvania and even in Florida, we would say globally we would anticipate margins in the 3% to 5% range when mature, meaning that year one for health plans and we’re no different than anybody else, we typically do a lot of investment and set up and so the margins are at flat or we might make a bit of an investment, but you would see those margins grow at maturity between 3% to 5% of revenues.

Now as it relates to Florida we expect to see those rates here shortly and again this is under control of the state but they have been hitting all their milestones and so we fully expect them to have those rates we will shortly through it with them. Again we got a great working relationship with the State of Florida. And so we understand when we have those rates and we have the real experience of what that means.

Now the transition of these states from a standard DH contract to a fully featured MCC, they are all very different. Florida of course we’re seeing exactly how that’s working out. In Iowa where we’re due 400 million and this is up from I think about a 150 million in 2009 make sure I say that number right, that’s going to 400 million. So it’s been a very good working relationship and a great, group contract for us in the State of Iowa.

When we transition to a risk contract in Iowa, again we won’t know if that works until we go to the procurement process and no doubt it will be competitive as it is in all of these states. But we would expect it ultimately to transition over and in terms of profitability it would probably look very similar to what we’re seeing today, but we know that there will be 3% to 5% margin in state of Iowa.

And then when you take a look at the risk business of Nebraska, again its 3% to 5% we’re forecasting going forward, same as Louisiana and Pennsylvania. They all have their unique risk profiles. But again generally speaking we would expect these contracts to migrate over to 3% to 5% margin contracts longer term. But be and also I would say be far more sticky than a traditional DH contracts.

Ana Gupte – Leerink Partners

And is the timing of that 3% to 5%, can you give me some color on that, in year one what would the margins look like as you’re starting to phase in membership for example in Florida SMI?

Barry M. Smith

Sure and I would say in the first year, we would expect investments in building out incremental network capability on the physical medicine side, we would expect more investment in infrastructure to convert to a full health plan. And so there are kind of naturally occurring first year investment expenses, and so we would forecast year one in virtually all these contracts as being flat in terms of no margin, or marginal margin. And then we would expect in maturity year two of operation and three to grow to the 3% to 5% margin.

Ana Gupte – Leerink Partners

Got it. Okay so can you just give me in terms of your priorities for your cash, your unrestricted cash as you are transforming this company and building out these two division which I think will be bearing fruit if you will?

Jonathan N. Rubin

Hey Ana it’s Jon. Really when you think about use of cash our priorities really haven’t changed, I mean our priorities continue to be invest to grow the business, both as we’ve done with MCC, as we’ve done in our pharmacy business, investing in capabilities and market expansion to enable us to grow and that will continue to occur. Also we continue to pursue growth opportunities through acquisition, as we did with Partners and as we’ve spoken about previously we really are looking for additional capabilities in scale in pharmacy business as well as opportunistically looking for opportunities to help our MCC business expand either again through capabilities or getting into additional markets.

Given our cash position and our balance sheet we’re very comfortable that we can continue to support strong growth through those types of investments while at the same time continuing to return capital to shareholders through our share repurchase program.

Ana Gupte – Leerink Partners

Great. Thank you. Appreciate it.

Barry M. Smith

You bet.

Operator

Thank you. And at this time there are no further parties in queue at this time.

Barry M. Smith

Great, well we appreciate all of you joining us here today and look forward to seeing you on our next quarterly results in when they come out in April and we will discuss our first quarter results. Take care.

Operator

Thank you. That does conclude today's conference call. Thank you for participating. You may disconnect at this time.

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