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Universal American Corp (NYSE:UAM)

Q3 2010 Earnings Call

November 2, 2010 8:30 a.m. ET

Executives

Richard Barasch – Chairman and CEO

Tony Wolf – General Council

Bob Waegelein – EVP and CFO

Analysts

Josh Raskin – Barclays Capital

Scott Fidel – Deutsche Bank

Carl McDonald - Citigroup

Tom Carroll – Stifel Nicolaus

Sarah James – Wedbush

Operator

Greetings, and welcome to the Universal American Corp. third quarter 2010 conference call. At this time, all participants are currently in a listen-only mode. Our question-and-answer session will follow the formal presentation. (Operator Instructions)

And now, I will turn the call over to Mr. Richard Barasch, Chairman and CEO for Universal American Corp. Thank you Mr. Barasch, you may begin.

Richard Barasch

Thank you, and good morning, everyone. Thanks for joining us on our third quarter 2010 conference call. I'm here with Bob Waegelein, our CFO and Tony Wolf, our new General Council. I'd like to ask Tony to read our Safe Harbor language.

Tony Wolf

Good morning, everybody. Before we begin, I would like to remind you that we have posted a presentation for this call in the investor section of our website at www.universalamerican.com.

I would also like to remind all participants that our call this morning may contain forward-looking statements within the meaning of the Federal Securities Laws. These statements, which reflect management’s current expectation, projects and beliefs, are subject to risk and uncertainties that may cause actual results to differ materially.

For a discussion of these risk and uncertainties, we recommend that you review the company’s risk factors and other disclosures set forth in our SEC filings. We undertake no obligation to update or revise any forward-looking statements to reflect events, developments, or circumstances after the date hereof.

During this call, we will also be referring to certain non-GAAP financial measures. Please refer to the reconciliation table listed in the earnings press release for a discussion of these non-GAAP financial measures. Richard?

Richard Barasch

Thanks, Tony. This morning, Bob and I are going to spend some time describing the highlights of the first three quarters of the year, including the third quarter, and then move on to a discussion about how Universal American is positioned for 2011 and beyond.

As usual, Bob will be available later to answer any specific questions.

The short story is that 2010 is emerging better than we projected, enhanced by $0.11 of positive prior period items during this quarter. Therefore, as you saw from our press release, we increased our guidance by $0.20, and now project a range of $2.05 to $2.15 per share.

Starting with Slide 3 of the deck posted on our website, I’d like to reiterate that we still see tremendous potential in the senior market. This country faces an enormous task to pay for the increasing cost of healthcare in a rapidly growing senior population. Despite the rhetoric and increased regulatory scrutiny, we still see a huge role for private insurers, like Universal American to be a very constructive part of the solution.

Part D is proven to be a very successful partnership between the government and vibrant private enterprise. Each year the Part D sponsors compete to find better and less expensive solutions for the prescription drug needs of the Medicare population. In Medicare Advantage, we must be able to deliver to our members a better healthcare solution than standalone Medicare, and a less-costly alternative to Medicare, plus Medicare Supplement.

This can be achieved by wringing out the waste in the fee for service system with a combination of technology and common sense cost controls, and appropriately compensating our providers, for keeping our members healthy and delivering better and more effective cost outcomes. We must also focus on compliance and quality to the benefit of our members, and to conform to a more active, regulatory environment.

We’re doing this successfully in our HMOs through our Healthy Collaboration Model, in which we work closely with physicians and members to promote better health outcomes and control medical costs. And we’re confident we can deliver similar value to our new networks and rural members as well, even in a lower reimbursement environment.

As you see from Slide 4, we think we have the size and scale in Medicare to successfully manage through the coming changes.

Now, let’s turn to financial results on Slide 5 and 6, and I’m going to turn it over to Bob Waegelein.

Bob Waegelein

Thank you Richard. I’d like to remind you that we post additional information on our quarterly results in the financial supplement that can be found on our website in the financial reports tab of our investor section.

Turning to Slide 5, you will see that we reported net income of 60.7 million for the quarter, or $0.77 per share. Included in this amount are two non-recurring items, $0.10 of non-recurring tax benefits, and $0.04 of investment gains. Adjusting for these items our operating earnings amounted to $0.63.

While the quarter operating results were favorably impacted by 8.6 million, or $0.11 of after-tax items that related periods prior to the third quarter. These results were better than our internal forecast, and as a result, will be reflected in an increase to guidance that Richard will discuss shortly.

Our Medicare Advantage segment continues to provide solid results, generating 36.9 million of pretax earnings for the quarter, including 3.9 million of positive prior period items relating both to 2009 and the first half of 2010.

Our adjusted MBR of 84.8% was in line with our expectations. Our Part D business reported pre-tax income of 50.5 million for the quarter including 9.7 million in positive prior period items. Even though our results lagged last year’s third quarter, it is important to note that these results were more favorable than our expectations for the quarter. Of particular note, we continue to improve our Part D expense ratios, reducing it by 58 basis points from the third quarter of 2009.

Our traditional segment reported earnings of 3.5 million per quarter, ahead of our expectations primarily due to improved loss ratios in our Medicare Supplement business and lower claims incurred in our specialty health business.

Turning to our nine-month results on Slide 6, we reported a net income of 83.2 million, or $1.06 per share, including $0.15 of tax benefits and $0.04 per share of investment gains resulting in operating income of $0.87. Included in the operating income is $0.28 per share of prior-period items relating to 2009.

Our Medicare Advantage segment posted strong nine-month numbers earning 136 million for the year-to-date. This includes 34 million of positive prior-period items relating to 2009.

Part D year-to-date results are 4.1 million and have no material items in the aggregate that relate to prior years. As a result, the changes in the Part D standard benefit design for 2010, and the benefit design of our enhanced PDP plans. Our Part D operating income will have a steeper slope of seasonality in 2010 compared to 2009, with higher loses of incurred earlier in the year, projected to be more than offset by higher profits in the fourth quarter.

This seasonal pattern was exacerbated by the increase in our membership in 2010. In addition, our results reflect a higher benefit ratio as compared to 2009 since we bid to a lower annual margin in Part D than we had in the prior year.

We’ll be happy to answer any questions that you may have at the end of the call or offline. Richard?

Richard Barasch

Okay, good. Turning now to Slide 7, we’re talking about Part D. With more than 1.9 million members in our plans, we’re now the second largest sponsor of Medicare Part D prescription drug plans, based on the most recent CMS information. We’re quite pleased with the results of the 2011 bidding for dual-eligibles. We’re below the benchmark in 26 regions, and got the benefit of the new Dominance rules and three others.

We lost only one small region, Nevada, with around 55,000 lives. Based on our bids, we will keep our approximately 1.5 million dual-eligible and LIS members. However, CMS recently informed us that we will not receive the one time auto-assignment of new dual-eligible members on January 1, 2011 as a result of some correctable issues found by CMS in its recent audit of our plans.

This action does not impact our current dual-eligible and low income subsidy members. We’ve continue to receive the monthly auto-assigns of dual-eligible members in November of 2010.

Further, we believe there are corrective actions that will allow us to receive the monthly allocation of new dual-eligibles in 2011, after January.

Given the significantly reduced number of newly auto-assigned Dual-eligibles this year, this should not have a material impact on our 2011 financial results. CMS clearly wants there to be fewer and more distinct plans, and as a result, we reduce the number of our Part D plan offerings from 5 to 2, all under the brand of community CCRX as part of our ongoing arrangements with the NCPA.

We’re excited about the preliminary response to our innovative arrangements with the makers of Lipitor and Crestor, to offer these popular brand medications with low or no co-pay for our Part D and MAPD members. As a result of this program, in combination with the discounts offered by the manufactures in the doughnut hole, our members will have access to these widely prescribed medications at prices that are competitive with generics.

This is another example of a sort of innovative partnering to improve choice at affordability for the Medicare population. I won’t go over the items on Slide 8, but suffice it to say that in a very active political season we haven’t heard much about Part D, which indicates the broad support enjoyed from both political parties.

Now turning to Slide 9, as Bob mentioned, the third quarter 2010 results in our Medicare Advantage segment were very strong. We continue to increase membership and profitability in our network-based Medicare Advantage products further demonstrated in a success of our Healthy Collaboration Model.

It’s absolutely clear that in order to be successful in the new reimbursement structure, Medicare Advantage plans must materially influence the cost and outcome of healthcare. To that end, we’ve continue to invest in our medical management infrastructure, especially in our newer network markets and further with enhanced technology.

In our HMO’s, we continue to demonstrate success in a model that’s built on strong and granular partnerships with primary care physicians, whose mission it is to provide the best health outcomes which, not coincidentally, we usually lead to lower overall cost.

The improving performance in our new HMO markets, demonstrates that our works in South East Texas can in fact be imported to new markets, and we’ve got a lot of optimism that over time we can do the same in our other network markets as well.

I’m sure most of you are familiar with the items on Page 10 and 11 which describe the effect of the Healthcare Bill and the MA business. So let’s move to Slide 12, which describes how we were affected by the coming changes in reimbursements.

This analysis shows the distribution of our membership in the various buckets, in the new reimbursement regime, and it only includes our estimated 2010 memberships where either we have approved network products, plus qualifying rural membership. It does not include our 2010 members in area where we have chosen not to file network products.

As you can see from the distribution, it took – it’s a little bit of a barbell. We’ve got 36% in the 95% bucket, but most of those members fall into the transitional – the longest transition period which is another six years from now.

On the other side of the barbell, approximately 38% of our membership has a 115% with the fairly even distribution among 2, 4, and 6-year transitions. So we’re pretty comfortable, that in the context of a very complex set of reimbursement changes, the Universal American came out quite well.

We’re particularly happy about where we ended up in upstate New York, Indiana, and some of the other new network markets that we’ve got. And in the place where have most of our 95% membership, Southeast Texas, we’re very confident that we have the most advanced tools to deal with the reimbursements issues and a six-year glide path to get there.

Now turning to Slide 13, let me talk a little about the 2011 open enrollment period.

First, as all of you know, we’ve got a shorter selling season. So Universal American has spent a lot of time emphasizing with retention of its current members through outreach phone calls, and creation of competitive products. So we’ve got a little bit of much more intense selling season, and there’s a lot more advertizing, a lot of work that needs to get done in a shorter period of time. But we feel very good about the product mix that we’ve got, particularly in our core markets.

We’ve got Part D offered in all regions. Even though we had to consolidate plans down from five to two, all of the consolidations is in what we call passive migration, which means that the consumers do not have to choose to stay in our plan but passively are migrated from one plan to the other. And as I mentioned earlier, we’re very excited about having Lipitor and Crestor in Tier 1 of our formulary. This is a great product differentiator and we’re seeing some very good early excitement and enthusiasm about this program in our distribution and among our members. So we’re guardedly optimistic about how that’s going to work.

Turning now to Medicare Advantage, this is going to be a year of transition as the plans cope with the dual effects of the NIPA law, and the new Healthcare Reform Bill.

We see a lot of opportunity to pick up share in our core markets from plans that have had to scale back or eliminate Medicare Advantage products. We estimate that more than 100,000 Medicare Advantage members in our core markets have recently received notices of non-renewal from their previous carriers. That creates some nice opportunities for us.

We also feel particularly good about our core HMO markets in Texas. As a result of a Healthy Collaboration Model and our ability to control unnecessary medical cost, we’ve been able to maintain zero premiums and rich benefits even as rates have not kept up with overall inflation.

Over the past two years, Universal American has done a quite an incredible job of complying with the NIPA law, that required us to build networks for our privacy for service business.

For the 2011 annual enrollment period, we will have qualifying network products in 55 markets, covering approximately 85,000 of our current privacy for service members.

We got a couple of good breaks at the regulations for the implementation of NIPA was unveiled. These rules permit us to migrate 78,000 of our privacy for service members to our network privacy for service product on a passive basis without the requirements to reenroll. We do have to actively migrate approximately 8,000 to PPO products where we’re seeing some nice early success in that effort.

We’ve been able to maintain zero premium products around 64% of our privacy for service and PPO members, which should also make retention and migration as painless as possible.

Another positive development from the final 2011 regulations was the expansion of the number of counties that qualified as rural, which increased our estimate of the number of rural privacy for service members that we’ll be able to keep in 2011 to approximately 52,000.

So as you can see on Slide 14, this is a roll of our membership which basically graphically shows what I just described with 146,000 members currently covered in the networks or by the rural exception, and another 85,000 on privacy for service members which are in counties that now have the network product for 2011. So our base membership is just over 231,000.

Turning now to Slide 15, our balance sheet, I think payment of the special dividend in the third quarter, plus the buyback of stock that we did last year and the year prior to that, reflect our commitment to maintain a capital structure that fits our business. After payment of the dividend and the concurrent paid down of debt, our debt capital ratio’s improved, and we continued to maintain more than adequate capital in our operating subsidiaries, especially in light of the anticipated reduction in the size of our Medicare Advantage Privacy for Service Business in 2011. We still have more than 50 million in unregulated cash at the holding company, and a fully unused $150 million line of credit.

Assuming we hit our guidance numbers for the balance of 2010, we expect to end the year with significant excess capital in our company, even after having paid the dividend and paid down debt.

Turning now to the guidance slide on Page 16, as we noted before, we’re increasing our guidance by $0.20 to arrange a $2.05, $2.15. It’s important to note that approximately $0.11 of the increase comes from net positives from prior periods. The balance results from projected improvements in operating performance.

I also want to point out that our guidance does not include any one-time or non-recurring items in the fourth quarter.

Thanks for your time this morning to listen to my prepared remarks, now Bob and I will be very happy to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from Josh Raskin with Barclays Capital. Please proceed with your question.

Josh Raskin – Barclays Capital

Thank you. Good morning. My first question, just on 2011 as we start thinking about the year taking place; maybe you could tell us – highlight some of the big headwinds and tailwinds. I know you’ve done a good job of sort of outlining some of those factors, but maybe more specifically from an earnings perspective. Should we think about 2011 as likely a down year from an operating earnings perspective in light of the favorable development and the Private for Service lapses, or you know, the migration of the PDP margins to more normalized levels?

You know, maybe just some color around that.

Richard Barasch

You know, Josh, we haven’t yet really started talking about 2011. The biggest variable, of course, is going to be membership and we’re just going through the annual enrollment period, so it’s a little premature to talk about what the revenues are going to look like. It’s sort of more generically, you know, obviously the biggest headwind for Universal American is the fact that we’ve reduced our footprint because of the reduction in our Private Seeker Service membership.

You know, it’s hard to think about historically, but I think we came through this process, I think, in much better shape than I think people gave us credit for two years ago. So we actually feel pretty good about that.

And then, you know, candidly, we’ve really decided that, you know, we had visions of being a national company at some point and we really turned ourselves into a much stronger regional company; where in the 55 markets we’re going to go into, we’re going to have scale that we need to build a good program that has good medical management over a period of time.

So we actually feel pretty good strategically about both what’s going to happen in ’11 and beyond given the new reimbursements. But the biggest, you know, again, membership numbers is the biggest headwind.

Relative to tailwinds, you know, I think that the fact that there is consolidation of Medicare Advantage is going to be helpful. I think the stability of plans and the stability of pricing of plans that have been around and are going to continue to be around I think is going to help. There’s been several companies that have come in and recently have exited the market, so you know, and I mentioned we have 100,000 members who have gotten non-renewal letters in places where we are focused, so we think there should be a little bit of mix there; a particular tailwind for us. You know, a little bit to be seen and we’re going to be optimistic.

We think we have a very creative PDP product line, which includes Lipitor and Crestor in Tier 1.

Josh Raskin – Barclays Capital

Okay. I guess I was just, you know, you had used the term, Richard, year of transition and I guess typically when I hear that I think of repositioning and taking a step back and you know, making sure you’ve got everything, sort of all your ducks in a row for the long term. So maybe I’m –

Richard Barasch

We’re always focused on current profitability also, Josh. And I think we, you know, our bids were designed to get us the margins that I think you guys are used to seeing from us.

Josh Raskin – Barclays Capital

Okay. And then, did I hear, Bob, correct, 34 million is the total favorable development this year related to ’09, everything else has been sort of intra year? Is that right?

Bob Waegelein

Thinking about the full nine-year results obviously, that period eliminates what the nine months reported. So 34 million related to ’09 for the nine months. Correct.

Josh Raskin – Barclays Capital

Okay. And nothing in PDP?

Bob Waegelein

Correct.

Josh Raskin – Barclays Capital

Okay. Got you. Thanks. And then just a last question. I’m sorry. The CMS, I just want to make sure I understand what CMS – they’re just restricting you for the January 1 auto assignment? So you’re not going to get – you’re not losing anything but you’re not going to get your fair share of the new win for being under the benchmark, but then you think come February 1 and beyond, you’ll be getting some of those assignments?

Richard Barasch

That’s accurate. Obviously, we can’t guarantee February, but all indications are leading in that direction.

Josh Raskin – Barclays Capital

What were the sanctions for though?

Richard Barasch

I want to be clear, these are not sanctions. These are administrative actions by CMS and it had to do with some administrative items, like transition sales, in other words, when people come from a different plan to our plan to make it easier for them to get their new fill done. And in the plan, we’re pretty clear that we’ve solved that problem. And you know, issues of that type.

Josh Raskin – Barclays Capital

Okay. Thanks. Have a good day.

Operator

Thank you. Our next question is coming from Scott Fidel with Deutsche Bank. Please proceed with your question.

Scott Fidel – Deutsche Bank

Thanks. First question just on the guidance boost, if we take the $0.20 at the midpoint, how would you say that breaks out between Medicare Advantage, Part D and then the other segments?

Richard Barasch

I would say, you know, I can’t give it to you precisely Scott, but it’s more Medicare Advantage than Part D.

Bob Waegelein

Right. We are seeing good Part D results, a little better, but the lion’s share of the $0.09 increase relates to Medicare Advantage.

Scott Fidel – Deutsche Bank

Okay. And then just a check-in question on the Part D market and what do you think about, you know, Humana’s product with Wal-Mart and you know, what type of disruption, if any, do you think that could bring into the retail market? In 2011 clearly, you know, Humana is highlighting that they have the lowest premiums in that product across all the markets, so just some thoughts on how that impacts –

Richard Barasch

You know, I have a lot of respect for Humana as a competitor, creativity and for the fact that they’ve got people talking. You know, at the same time, you know, we come to this conversation with a lot of our own strengths. We’ve got a product with Lipitor and Crestor in Q1 that’s getting a lot of attention also, but it’s not getting attention from only one retail source of prescription drugs. We have 64,000 people in our network that can access the – 64,000 pharmacies in our network that will be able to offer this very good benefit as opposed to just one spot where the good benefits will be offered by our competitors.

So here again, I think they’ve done something creative. I think we’ve done something equally creative. We’ve got a lot of support from the community pharmacists for our program, so you know, if you shop one expression, game on.

Scott Fidel – Deutsche Bank

Yeah, and maybe just thinking more broadly about how we would describe the competitive environment for 2011, I guess, in both Part D and – the way I see it is we’ve got – it looks like with the smaller players we’re certainly seeing some of the less-focused player exiting the market and that opens up some opportunities. But it looks like the majors, you know, certainly at this point are pretty focused on taking share for 2011 and certainly aren’t backing off.

So would you say we’re seeing that, you know, divergence in the market where we’re seeing the key players really focusing ’11 on taking share, but we’re seeing some of the more marginal players stepping away?

Richard Barasch

I think that, you know, you’ve said it better than I could. I don’t see how you can be small in either one of these businesses.

Scott Fidel – Deutsche Bank

Okay. And then just finally, just maybe an update on medical cost trends. Including, I saw the favorably development just like all the other MCOs, but maybe just some insights into where specifically, you know, you were seeing the most improvement on your trends?

Richard Barasch

You know, I think it’s some sort of coming in all phases. You know, there’s a lot of theories about why this is happening. The recession could be playing a part of it, a bit of medical management could be playing a part of it. But you know, Medicare Advantage we’re kind of seeing it across the board because, you know, we see good trends both [inaudible] which is unmanaged and then in our more managed programs.

Scott Fidel – Deutsche Bank

Okay. Thanks.

Operator

Thank you. Our next question is coming from Carl McDonald with Citigroup. Please proceed with your question.

Carl McDonald - Citigroup

Thanks. You had mentioned having significant access capital in the company by year end, assuming you hit the guidance, so any more color on that? And then separately, what’s the updated projection on the amount of capital that’s going to get freed up from the Privacy for Service Membership that will be going away?

Richard Barasch

You know, I’m going to punt a little bit on this, Carl, because again, that’s membership driven. In 1/1/11, we’ll see how much membership we’ve got and then determine what the actual number is. But based on our projection, the number is going to be – it’s going to be notable. It’s more than a quarter of a million dollars most likely.

Bob Waegelein

You know, 55,000 or so members that we’ve been speaking about going away, you know, just on your basic RBC calculations, it would free up 85-or-so million of capital. I think we said that number before.

Carl McDonald - Citigroup

Got it.

Richard Barasch

And if you add that to our earnings, that’s the cash you’ve got in the bank and then, you know, and then hopefully we’ll have some payback from some good selling and that will give you the number.

Carl McDonald - Citigroup

Got it. Great. Thank you.

Operator

(Operator Instructions) Thank you. Our next question is coming from Tom Carroll with Stifel Nicolaus. Please proceed with your question.

Tom Carroll – Stifel Nicolaus

Hey, good morning. Just a follow-up on your MAPPD comments you made. I guess, what drove the lower level of positive development in the quarter? I guess this seemed a little contradictory to me given the low utilization trends we’ve seen cross the industry this year.

Bob Waegelein

Yeah, I think, you know, third quarter is a typical quarter for us to get our settlement with the government for prior-year revenue adjustments. So most of our positive development was from the revenue side. When you think about our managed care business, again, we are managing this at a level, as Richard said in the HMOs in collaboration with our docs, that you know, we’re encouraging people to come in in the like. A lot of other plans out there have been very vocal about seeing lower utilization and metrics like that. We’re not seeing anything drastic that would jump our number down from that perspective because of the way we engage our membership to access the benefits that they have in our plan relate to MBR and we have good results, but you know, that’s what we see as opposed to others.

Tom Carroll – Stifel Nicolaus

So there was no increase in utilization in your MA book then, or change in how you do reserving at all?

Bob Waegelein

Correct.

Tom Carroll – Stifel Nicolaus

And then on fourth quarter SG&A levels, I guess, what are you expectations in terms of marking and other SG&A expenses that might rise up during fourth quarter as we approach the 2011 year? I ask this just because our early modeling suggests that SG&A, the ratio at least, will be lower fourth quarter this year than it was last year. I guess that just doesn’t seem right to me. I thought it might be even a little higher as we reach into next year and pull some of the expenses forward.

Bob Waegelein

I think that’s right. We will be pulling expenses forward, largely on the marketing side. And you know, because of the – because of the season, you know, being so much shorter there’s more intense marking going on in the fourth quarter and I think we are trying to do a first and second – fourth and first quarter’s worth of marketing in the fourth quarter so that will have a negative effect. Obviously, why I’m saying negative is because it will drive some additional expenses.

And you know candidly to the point made earlier, we’re seeing some of the national players advertise heavily, spend more heavily, promote more heavily, and we’ve had to follow suit.

Tom Carroll – Stifel Nicolaus

So do you think your fourth quarter ’10 SG&A spend either on the – in the absolute sense or on a ratio basis is going to be higher than it was fourth quarter of ’09?

Bob Waegelein

On a ratio basis I would say no.

Tom Carroll – Stifel Nicolaus

Okay.

Bob Waegelein

More membership has driven more revenue to us. On an absolute basis, for sure in marketing we’re going to incur more but we’ve had some expense rationalization particularly in Part D, which will have a benefit year over year. We talked about that, we’ll see an improvement despite the expense ratio.

So we’re still monitoring and getting a patient administratively, but we’re spending money were we need to to enhance our membership and retain our members.

Tom Carroll – Stifel Nicolaus

And then lastly, if I could ask just one more, related to this CMS view audit. I don’t know what you want to call it. You certainly don’t want to call it sanctions. As we talk to execs out there in the MA world, one of the consistent themes that I keep hearing over and over again in thinking about MA going forward is this, you know, risk of this CMS wild card. You know, things coming out of left field either in terms of audits or changes to risk adjustment or something like that that is just not anticipated. I guess, was this PDP think somewhat anticipated by you? Is there any spillover to your MA business, and would you agree with the comment I made that this is something that is potentially maybe scary to you guys as leadership of a big MA company going forward?

Richard Barasch

Let me first say this was unanticipated and there is no spillover affect aforementioned. So mean, let me dispose of those questions.

But going to the broader question, you know, we choose to be in a business where the government is our basic payer. They are entitled to set the rules and candidly, what drives CMS to do what they do is protection of members. So I – it’s hard to argue with their regulatory impotence and what’s causing CMS to have more scrutiny. I think we’ll – well, in PS there’s some greater uncertainty, you know, nearly all plans that I’m aware of were audited in the past year or so, but I can tell you from our perspective that while it’s, you know, while the thoroughness of these audits can sometimes cause a little bit of difficulty inside the company, it’s going to make us a better company.

Tom Carroll – Stifel Nicolaus

Great. Thank you so much.

Operator

Thank you. We have a follow-up question coming from Josh Raskin with Barclays Capital. Please proceed with your question, sir.

Josh Raskin – Barclays Capital

Hi. Thanks for taking the extra question. Med sup, you guys seeing any additional interest, or maybe you could a little bit about some of the membership –

Bob Waegelein

Yeah, you know, I’m glad you brought that up because Rich and I should have added something. We had our best couple of med sup months in the last several years in the last two months. And we are starting to see a fair pickup. Medicare Advantage, to the last questioner’s point, you know some of the – some of what CMS has done recently is very much tightened up marketing requirements and marketing standards. And it’s made it a little bit less comfortable for some traditional insurance distributions to operate in the CMS world as opposed to sort of the traditional insurance world.

So a lot of the – and this is antidotal, I can’t give you stats or anything, but what we keep hearing is that lots of the independent brokers who sort of cut their teeth on med sup, MA in the last four or five years is starting to gravitate back to med sup because there’s a perceived stability, it’s not subject to Healthcare Reform, although as I think people who are following this know, Secretary [inaudible] wrote a letter to the Med Sup carriers about their rates also. So you know, to think that med sup is not in the mix from regulatory and a scrutiny perspective I think is wrong.

But the short answer to your question is yes, we’re seeing a pickup.

Josh Raskin – Barclays Capital

Okay. Thanks.

Operator

Thank you. Our next question is coming from Sarah James with Wedbush. Please proceed with your question.

Sarah James – Wedbush

Thank you. I just wanted to get a little bit of color on what’s been happening during the special election period for the disruptive markets. If you could just give us an idea of the 77,000 that can be passively migrated, how much of that is – are the locked in and of the 8,000 that could be migrated to a PPO product, or the 100,000 that you mentioned.

Richard Barasch

The way this works, Sarah, is that the 8,000 got letters early in October informing them that we would no longer be offering Privacy for Service in their county. Very quickly thereafter, we informed these folks that even though they couldn’t have privacy for service with us, we in fact had a PPO product in that market. And we’ve been working actively through the phones and through our distribution to migrate those folks over. And as I mentioned in my prepared remarks, they were pretty happy with the success rate to this point.

The other 77,000 do not have to be passively – do not have to be actively talked to at all. It’s frankly no different than a benefit change in HMO or PPO. So to the extent that they’re happy with what they’ve got from us and happy with the new premium and benefit design, it’s pretty easy really to do anything.

Sarah James – Wedbush

Okay, so no indication of material changes?

Richard Barasch

It’s too early.

Sarah James – Wedbush

When do you begin to get indicators for the other 100,000 members in your market?

Richard Barasch

We’ll start seeing results that are consequential towards the end of October.

Sarah James – Wedbush

Thank you.

Operator

Mr. Barasch, there are no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Richard Barasch

Thanks, everyone for your time this morning. Again, if you have any further questions, please call Bob. And I look forward to speaking to you again in the three months. Thanks everyone.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time.

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