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eHealth (NASDAQ:EHTH)

Q2 2014 Earnings Call

July 30, 2014 5:00 pm ET

Executives

Kate Sidorovich - Vice President of Investor Relations

Gary L. Lauer - Chairman, Chief Executive Officer and Member of Equity Incentive Committee

Stuart M. Huizinga - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Adam Klauber - William Blair & Company L.L.C., Research Division

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

David A. Styblo - Jefferies LLC, Research Division

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Shawn Bevec - Deutsche Bank AG, Research Division

David K. Francis - RBC Capital Markets, LLC, Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 eHealth Inc. Earnings Conference Call. My name is Whitney, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Ms. Kate Sidorovich, Vice President of Investor Relations. Please proceed.

Kate Sidorovich

Good afternoon, and thank you all for joining us today either by phone or by webcast for a discussion about eHealth Inc.'s Second Quarter 2014 Financial Results. On the call this afternoon, we'll have Gary Lauer, eHealth Chief Executive Officer; and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website. A replay of the call will be available on our website following the call.

We will be making forward-looking statements on this call, that includes statements regarding future events, beliefs and expectations, including those related to the changing market landscape and carrier participation in the individual market and the impact of these changes on our members' purchase decisions. Our expectations regarding submitted applications in the third and fourth quarters of 2014; our belief regarding demand drivers for our short-term products, opportunities related to the health insurance market as a result of the Affordable Care Act; the effectiveness of our solution to help subsidy-eligible individuals enroll in qualified health plans; expansion of our trustable Individual & Family Plan market; our ability to transact large volumes of subsidy-eligible individuals in the upcoming open enrollment period; our belief that our sale of these new Medicare plans help increased Medicare business transacted outside of the AEP; our belief regarding the growth of opportunities in our Medicare business; our expectations regarding margin expansion in our Medicare business as a result of an increased member base; our expectations regarding our ability to scale our Medicare business and the retention rates and life time value of our Medicare Advantage and Medicare Supplement members; our expectations regarding our performance in the upcoming Medicare annual enrollment period; our estimates over the number of revenue-generating IFP, Medicare ancillary and small business health insurance members; our guidance regarding our expected total revenue, EBITDA, stock-based compensation expense and non-GAAP net income per diluted share for the full year of 2014; our expectations relating to revenue for the rest of the year; and finally, our expectations regarding our revenue, earnings, marketing and customer care and enrollment expenses and their impact on earnings for the third quarter of 2014.

Forward-looking statements on this call represent eHealth's views as of today. You should not rely on these statements as representing our views in the future. We undertake no obligation nor duty to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements. We describe these and other risks and uncertainties in our annual report on Form 10-K and quarterly report on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. We will be presenting certain financial information on this call that will be considered non-GAAP under SEC Regulation G. For a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the About Us section of our corporate website, under the heading, Investor Relations.

And at this point, I will turn the call over to Gary Lauer.

Gary L. Lauer

Good afternoon. Thanks, everyone, for joining us today as we report our second quarter 2014 results. The health insurance industry continues to undergo significant changes related to the Affordable Care Act and we continue to see the impact of these changes on our Individual & Family Plan business. Recent conflicting federal court decisions have done little to allay the uncertainty, confusion and turmoil in the health insurance markets.

Our second quarter results reflect the changing health insurance industry environment. One of the factors that includes our second quarter financial results was what appeared to be a changing market landscape and participation of carriers in the individual market. We believe that as a result, the overall mix of Individual & Family Plan products selected by our paying members in the first quarter of 2014 changed compared to prior years. Given that our commission rates vary by carrier and state, the change resulted in lower second quarter individual and family health insurance commission revenue than we anticipated. Secondly, we have not received a first commission payment on a large number of applications obligations that were submitted in the first and second quarters and that were approved by carriers, which adversely impacted our second quarter membership and revenue.

Additionally, due to the technology and implementation challenges of healthcare.gov and state exchanges, we were unable to address the significant demand that we generated from subsidy-qualified individuals during the open enrollment period that ended March 31, 2014, which would have translated into membership in commission revenue in the second quarter and throughout the year. Somewhat offsetting this impact during the second quarter, we saw a significant increase in applications for short-term products. A continuation of strong demand in revenues in our Medicare business and continued year-over-year growth in demand and revenue in our ancillary products business. And I'll provide more color on these points later during the call.

Our financial results for the second quarter were as follows: second quarter revenues were $42.6 million and GAAP earnings per share were $0.15; EBITDA was $9.6 million and cash flow from operations was $300,000. Although second quarter Individual & Family Plan revenues were less than we have expected, at the same time, our operating expenses declined meaningfully compared to the first quarter levels driven in part by careful expense management and reduced Individual & Family Plan marketing expenses. Our balance sheet remains strong at the end of the second quarter with no debt and $70 million in cash, reflecting some of our share repurchases under our $50 million share buyback program authorized by our Board of Directors in March of this year. We began to repurchase shares in June and completed the program earlier this month.

Not surprisingly, second quarter submitted applications for Individual & Family Plans were down substantially year-over-year. This decline reflects the new seasonality inherent in the Individual Health Insurance business. As a reminder, following the completion of the open enrollment period, only a small subset of consumers with qualifying life events can transact and buy major medical plans until the next open enrollment period starts on November 15. Accordingly, we expect to see another year-over-year decline in submits during the third quarter followed by a strong spike in demand in the fourth quarter.

While Individual and Family health insurance application volumes declined, we generated significant demand for short-term health insurance products, with submitted applications growing 130% compared to the second quarter a year ago, and the number of approved short-term members growing in excess of 100%. We believe that much of this demand was driven by consumers buying short-term plans to bridge themselves to the next open enrollment period. Our goal is to transition many of these members to major medical policies after the open enrollment period begins this November.

As I mentioned, an important factor that impacted our revenue performance this past quarter was the mix of plans selected by new Individual & Family Plan members. Going into the year, we estimated that our Individual & Family Plan commissions per member would be flat to slightly up in 2014 compared to 2013, assuming a constant product carrier mix. However, what we are finding is that the products that are paying members selected during the open enrollment period and especially in the first quarter of 2014, represented a change from our historic product in carrier mix. Some of the carriers that have been, in the past, been part of our top revenue contributors in the Individual & Family Plan business, deemphasize their participation in the individual market during the first quarter following the affordable care launch.

At the same time, other carriers pursue their Individual & Family Plan business more aggressively in the marketplace. These dynamics resulted in the change in the concentration of our paying members with certain carriers, which after incorporating the positive impact of premium inflation has slightly reduced our commissions per member. Stuart will provide more color on our carrier and product mix during this call. Although the shift in mix adversely impacted our revenue, it illustrates that the eHealth Marketing and Sales process for consumers is unbiased and objective.

Total membership was 1.25 million, up 14% year-over-year and down slightly sequentially. Our estimated Individual & Family Plan membership was 751,000, up slightly year-over-year and down sequentially from 800,000 we had at the end of the first quarter. The sequential decline in our estimated Individual & Family Plan membership occurred despite record submitted application volumes that we generated in the fourth quarter of 2013 and the first quarter of this year. The number of Individual & Family Plan members approved during the second quarter exceeded the number of members on submitted Individual & Family Plan applications during the same time period by more than 50,000 due to a large number of applications which had been submitted in the first quarter of 2014 but not approved until this past second quarter. While the approval rates for applications submitted during the open enrollment period were higher than what we've seen historically, we did see a decline in the percentage of approved members for which we've received a first commission payment compared to our historical experience. We believe that this step-down is driven by processing backlogs and other issues at some of our carrier partners and by members not paying for their policies at historical rates. This impacts not only our commission revenues but also our ability to record new paying members. It is difficult at this point to parse out how much of the membership shortfall was due to changing patterns of consumer behavior during the first open enrollment period versus a delay in receiving commission checks from carriers.

Our Medicare business continue to grow at a fast pace outside of the Medicare annual enrollment period. Second quarter submitted applications for all Medicare products grew 52% compared to the second quarter last year. And our submitted applications for Medicare Advantage products grew 43%. We are seeing an increased contribution for Medicare Supplement products with Medicare Supplement applications growing in excess of 80% year-over-year, and contributing 17% of our total Medicare-submitted applications during the quarter.

We are also beginning to ramp our sales of special needs plans for Medicare beneficiaries who were duly eligible for Medicare and Medicaid. About 9 million people in the United States are currently covered by both Medicare and Medicaid, and carriers are interested in this market. We began selling dual-eligible special needs plans this year and currently offer products from Humana, Cigna, HealthSpring and Coventry. Dual-eligible consumers can buy Medicare plans throughout the year and are not constrained by the annual enrollment period which, over time, can help increase Medicare business transacted outside of the annual enrollment period. The broker economics for dual-eligible Special Needs Plans are generally the same as the broker economics for Medicare Advantage product.

In addition to our continued success with our existing Medicare carrier, such as Humana, we're also seeing an increased diversification in carrier mix with strong growth of submitted applications from recently added carriers, including United, WellCare and Coventry. The estimated number of our paying Medicare members grew 41% compared to the end of the second quarter of 2013, and we have 44% year-over-year growth of Medicare commission revenue. Total medical revenue was up 32% year-over-year. We're pleased with these results and are optimistic about growth opportunities in our Medicare business. As we continue to scale our Medicare business, we expect to see margin expansion in this business resulting from an increased member base which generates a recurring revenue stream for us. As a reminder, the retention rates and lifetime values we project are considerably higher for our Medicare Advantage and Medicare Supplement members compared to our Individual & Family Plan members.

In conclusion, the challenges that we face during this transitional period under healthcare reform are far outweighed, in our opinion, by the significant opportunities related to the individual health insurance market expansion as a result of the Affordable Care Act. The record Individual & Family Plan application volumes that we generated in the first open enrollment period are a good testament to that. Over 480,000 individuals applied for Individual & Family Plans through eHealth during the open enrollment period, and the vast majority of those were not subsidy-eligible. For comparison purposes, approximately 1.2 million non-subsidy-eligible individuals applied for Individual and Family Plans through all of the government changes during the same period.

We learned a lot in this past open enrollment period and the next open enrollment period in the individual market starts on November 15 of this year. We believe that we have developed an effective solution for which subsidy-eligible individuals can enroll in qualified health plans at eHealth, which could considerably expand our addressable Individual & Family Plan market compared to this past selling season. We're operating under the assumption that we are not going to get any additional functionality from the government exchanges to help us enroll individuals and subsidy-eligible health insurance through the exchanges. What they have provided to date is far from ideal, but we believe that working through different access points provided by the exchanges and also by leveraging our call center and in-house technology, we can transact large volumes of subsidy-eligible individuals in the upcoming open enrollment period. If we have had these processes in place during the last open enrollment period, we believe we could've generated significantly higher application volume based on the demand that we observed but could not address.

In our Medicare business, we are preparing for the Medicare Annual Enrollment Period, which starts on October 15. We are optimistic about the opportunities in the upcoming enrollment period, given the brand name carriers and products we have on our platform, our technological capabilities, the recent acquisition of Medicare.com and the strength of demand for Medicare products that we have observed so far this year outside of the annual enrollment period.

And now I'll turn the call over to Stuart.

Stuart M. Huizinga

Thanks, Gary, and good afternoon, everyone. Our second quarter revenue fell short of our expectations while earnings were strong, reflecting careful expense management and a reduction in cost in our Individual & Family Plan business outside of the open enrollment period. Our second quarter 2014 revenue was $42.6 million, a 7% increase compared to the second quarter of 2013. Commission revenue for the second quarter was $38.5 million, representing 10% year-over-year growth. Commissions from Individual & Family Plan and ancillary products combined grew by 5% compared to the second quarter of 2013 driven by strong growth in our ancillary product membership, while our second quarter Medicare commission revenue grew by 44% year-over-year.

Other revenue, which includes sponsorship, eCommerce On-Demand and noncommissioned Medicare revenue, was $4.1 million in the second quarter, a decline of 16% compared to the second quarter of 2013. The decline was driven primarily by lower sponsorship revenue in our Individual & Family Plan business. Sponsorship revenue is linked directly to the application volumes for insurance products offered by carriers participating in our sponsorship program. The softness in overall demand for Individual & Family Plan products, such as we observed in second quarter outside of the open enrollment period, reduces the revenue in this category.

Turning to membership metrics. Our total estimated membership at the end of the quarter for all products combined was approximately 1.25 million members, which represents 14% growth over estimated membership reported at the end of the second quarter of 2013. The estimated number of revenue-generating Medicare members was 113,000, up from 80,400 at the end of the second quarter of 2013 or an increase of 41%. The estimated number of members on ancillary and small business products was over 384,000 at the end of the quarter, reflecting 46% annual growth. The estimated number of our revenue-generating Individual & Family Plan members was 751,000 as of June 30, 2014, up by approximately 3,000 members compared to Q2 of last year. The small year-over-year growth in our Individual & Family Plan membership was due to a shortfall in rates at which first and second quarter submitted applications converted into paying members as reported to us by carriers, and to a low level of new applications generated during the second quarter.

Our Individual & Family major medical plans submitted application volume was down 78% compared to the second quarter of 2013. As Gary described, this was driven by healthcare reform, which has prevented most consumers from purchasing a major medical policy in the individual market outside of the open enrollment period. We also observed some unusual dynamics relating to the conversion of Individual & Family Plan applications, which were submitted during the first quarter into paying members. As you know, our first quarter Individual & Family Plan application volume was back-end loaded with the majority of applications submitted in the last month of the quarter and a significant portion of that submitted in the last 2 weeks. We expected that a large share of these applications would be approved and start generating revenue for us in the second quarter. We did see strong approval rates in the high 70% on these applications, reflecting the guaranteed issue provisions of the Affordable Care Act. This compares to historical approval rates in the high 50s to 60%.

However, the percentage of approved members who became paying members so far was meaningfully below historical levels. As a result, first quarter submitted applications did not contribute to second quarter paying membership and revenues at the expected levels. This is a new development as previously the percentage of consumers who pay after approval of their application has been very stable and predictable. We have been and continue to actively work with many of our carrier partners to determine how much of the shortfall was driven by members not making their premium payments after being approved, versus a delay in carriers processing payments and generating commission checks. Some of our carrier partners have told us that they continue to experience system issues as a result of the changes they made in advance of the open enrollment period and significant application volumes they generated during the open enrollment period, leading to processing delays and difficulty in attributing submitted applications to specific brokers.

In the second quarter, we also saw a decline in the average commission revenue per paying member in our Individual & Family Plan business compared to the second quarter 2013. Net of the positive impact of premium insulation, the average commission per member declined at a mid-single digit percentage rate year-over-year. Broker commission rates vary by carrier and what we're observing is that the mix of the product selected by our new members is having an impact on our average commission revenue per member. This affected our Individual & Family Plan commission revenues in the second quarter and will have some impact for the remainder of the year. At least some of this change in carrier mix is driven by the competitiveness of Affordable Care Act-compliant products offered by individual carriers and their overall interest in participating in the individual market post-ACA.

Now I'd like to review our operating expenses for the quarter. Our second quarter operating expenses declined significantly in absolute terms and as a percentage of revenues in the second quarter of last year. The decline was even more pronounced on a sequential basis compared to the first quarter of 2014. As I mentioned, our operating expenses during the second quarter were impacted by careful cost control measures across the organization and a reduction in expenses in our Individual & Family Plan business outside of the open enrollment period. The decline in our marketing and advertising costs was the largest driver of the year-over-year expense reduction in the second quarter.

Second quarter 2014 non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 21% of revenue compared to 33% in the second quarter of last year. Our marketing costs are largely variable and are directly tied to application volumes each quarter. A decline in the Individual and Family Plans submitted application volume during the second quarter drove a decline in Individual & Family Plan-related marketing spend. Second quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles, was $8.6 million compared to non-GAAP operating income of $4.2 million in the second quarter a year ago. EBITDA for the second quarter of 2014 was $9.6 million compared to EBITDA of $4.9 million for the second quarter of 2013. Second quarter 2014 non-GAAP earnings per diluted share was $0.22 compared to non-GAAP earnings per diluted share of $0.12 in the second quarter a year ago. Second quarter 2014 GAAP earnings per diluted share was $0.15 compared to GAAP earnings per diluted share of $0.06 in the second quarter of 2013.

Our cash flow from operations was $300,000 compared to $6.6 million in the second quarter of 2013. Cash flow from operations for the second quarter was impacted by a $9.3 million -- a $9.3 million outflow in cash for accrued marketing expenses which were predominantly incurred during the first quarter open enrollment period but paid during the second quarter. Capital expenditures for the second quarter of 2014 were $1.2 million, our cash balance is approximately $70 million at June 30, 2014. During the quarter, we repurchased approximately $28 million in common stock pursuant to our share repurchase program. In July, we completed the entire $50 million program, repurchasing an additional $22 million in stock.

With respect to guidance and based on information currently available, we are updating our guidance for the full year of 2014 as follows: total revenue is expected to be in the range of $185 million to $194 million; stock-based compensation expense is expected to be in the range of $8 million to $9.5 million; EBITDA is expected to be in the range of $13.5 million to $18.5 million; and non-GAAP net income per diluted share is expected to be in the range of $0.30 to $0.43 per share.

I also wanted to make some comments on certain expected quarterly trends in the second half of this year. We expect the revenue impact from the factors which affected our second quarter performance, including a change in product and carrier mix and lower conversions of approved applications into paying members, to carry throughout the rest of the year. As a result, our revenue for the third quarter is expected to be similar to slightly below the second quarter levels. You should also expect a sequential decline in earnings in the third quarter relative to second quarter levels.

While Individual & Family Plan application volumes and related marketing spend are expected to remain soft in Q3, we're starting to ramp our Medicare spend in preparation for the annual enrollment period, which starts on October 15. This mainly includes a sequential increase in customer and care enrollment expense as we start hiring call center professionals, which we expect to ramp at a faster rate than last year.

I want to remind you that these comments, as well as our annual guidance, are based on current indications for our business, which are subject to change at any time. And we undertake no obligation to further update our guidance. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adam Klauber with William Blair.

Adam Klauber - William Blair & Company L.L.C., Research Division

A couple of questions. Can you tell if churn was normalized or was it more higher, more similar to what we saw last quarter?

Stuart M. Huizinga

Our view of churn is that it's a little bit lower than what we saw in Q1. We still have -- this is on a look-back, so we still have a few more months before we get a final look at the whole period across Q1 and Q2. But looking at our collections of cash and looking at revenues, things look to be in line right now.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. So below 1Q, but is that still above historic?

Stuart M. Huizinga

It is a little bit elevated from historical levels, yes.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, okay. And of that, the nonpayment, is that from carriers just not having the data at this point still, is that what's going on?

Stuart M. Huizinga

In some cases, that's clearly what's going on. We've had carriers specifically tell us that, that they've had system issues. They've acknowledged that. And we're still waiting for them to resolve those. We've had situations where we have seen these nonpayment shortfalls. We've brought them to the attention of the carrier, they work through them and they've determined that they had broker attribution issues, specifically. So but we have to push to get that. I will say that it's very wide. It's a very wide range of outcomes among carriers. Some carriers are very much in line with their historical norms and there are other carriers that are -- they're very significantly off of their norms. So it's very carrier by carrier-specific.

Adam Klauber - William Blair & Company L.L.C., Research Division

So historically, but before the change in ACA, what was the general percentage of nonpayment and what is it running right now for approved members?

Stuart M. Huizinga

Well, historically, if you go back to this time a year ago, you'd see high 80s percent conversion. And for Q1, we saw low 70s. So we're seeing 15% or more of delta.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay. And at this point, it sounds like you just don't know whether that's people not paying or a systems issue. It sounds like a combination, but you really don't know and that you don't know [indiscernible]. It's just, the data isn't out there to know. Is it just people not paying or is it just a systems issue, is that right?

Stuart M. Huizinga

That's correct. We still need -- at this stage, we still need more information from carriers to fully understand what still needs to be resolved in their systems and what simply is nonpayment.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, that's helpful. Any sense that that will be better after the next enrollment or they're just still too much noise in the system to have a view on that?

Stuart M. Huizinga

Well, I would assume a lot -- I'm assuming that a lot of this stems from what they've told us is they've, in many cases, changed their systems in advance of open enrollment period. That they, in some cases, separated their systems between on-exchange and off-exchange. And so they may be system changes and I would think that over a year's time span that they would clean up some of the things that caused problems this time around.

Adam Klauber - William Blair & Company L.L.C., Research Division

Okay, okay, that's helpful. And then could you maybe go into a bit more detail on your workaround for subsidized individuals. Do you actually have to -- how do you actually get the data from the Federal Exchange? Does the enrollee actually have to have his data physically hit the Federal Exchange? Any detail would be great.

Gary L. Lauer

Yes. What we are provided near the end of the open enrollment period in the first quarter of this year was something called the double redirect, and very simply, you start on our site. We have to drop you to their site, redirect you back to our site. Really pretty archaic, but that's what we have. And what it appears is that healthcare.gov is the people at CMS and our contractors are still working very hard on that site. And so we don't expect to see anything other than the double redirect this year. But we think that is going to be more stable, but it's not highly efficient. So we are looking at ways to utilize our call center and some of our technology so that we can certainly scale this and make it a process through which a consumer can come to eHealth and hopefully, in a fairly transparent fashion, go through the enrollment process. As we said many times, we weren't lacking demand for subsidy-eligibles in this last open enrollment period just due to all of the instability and the exchanges, we didn't have anything that was reliable to be able to work through. We again, let me make this caveat, that the government exchanges healthcare.gov and some of the state exchanges has got to be able to work so that they can access either double redirect or, in some of these states, what's called a broker portal to be able to accomplish this. It's going to be more manual than we would like, but we're going to deal with the -- we're going to work with the cards that are on the table we've been dealt and we think make this work in a way that we hope to be able to get some very significant scale.

Operator

Your next question comes from the line of Nat Schindler with Merrill Lynch.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Yes, so if I understand correctly, you had a large amount of applications late in March that drove up the application number for last quarter that happened because of the marketing from the government and the push. And -- but those didn't go into estimated members because they don't go in until they pay. We also don't know though how many people quit, do you, until they pay, right? So how many -- did you see a significant number of people in March go to healthcare.gov and get their healthcare that way who were members of you, and then switched out in -- then in April or May or sometime in that timeframe, you find out from Blue Cross that they're no longer paying and you removed them from members?

Stuart M. Huizinga

My previous comment was that our churn was in line with across the OEP and including Q2 was in line with what we are expecting. And so I wouldn't say I've seen anything unusual in that regard. People jumping back and forth. People jumping back and forth between platforms.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

But your churn last quarter around 18% and there's now 18%, I mean, dependent on how you, based on IFPs. Those are quite elevated from when you ever been in the past. You would think that...

Stuart M. Huizinga

They are -- I guess my comment is in line with our expectation. I mean, we expected to have a certain level of people leaving to go to exchanges who are -- other ways to find insurance in the transition to the Affordable Care Act. I'm just saying that our churn levels over that period are in line. I think I'll also say that you probably calculated -- part of the churn that you would calculate, if you're taking beginning members, add the approves, back off the ending to back into the leftover, which would be presumed to be churn. That number is going to appear elevated to you, especially in Q2 because of the fall-off from approved members to paying members. That will show up in your calculation as churn when in fact they never even started making that first payment, and that's fairly significant for Q2.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

How significant a difference is that from a historical norms on that metric?

Stuart M. Huizinga

That's what I was mentioning earlier. We were in the high 80% conversion from approve to pay historically. And now we're in the low 70s. It's a fairly significant drop.

Gary L. Lauer

Nat, this is Gary. But the other thing that Stuart pointed out earlier, which has been somewhat puzzling, is that with many carriers we're still operating in that traditional approved to pay, but with many other carriers, we're not. And it's very, very unusual to see that, and we wish we had more insight into that right now because, typically, what we see with these kinds of trends is that they're pretty much carrier-wide. And that's not the case here. If you graph this thing, it's all over the place.

Stuart M. Huizinga

In fact some carriers are still up at those high 80s, even 90% on this conversion rate. And so nothing different from their norm which is, I think, significant to me relative -- yes, I look at many other carriers that can be even in the 50s.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Does that make you -- does that make it seem more like a bureaucratic error as opposed to people actually not paying -- an attribution error or something like that? That some carriers are having massive differentials here?

Gary L. Lauer

You're asking the all-important question. We don't know the answer to that. Any answer we give you is speculative right now. We just don't have the data to go either way. And certainly if all of the carriers were at these low conversion rates, one would want to conclude that there's a lot of people in the open enrollment period at least from eHealth who applied, who weren't serious about really matriculating into having the health insurance and paying, but that's not what we've seen. We've seen a very, very wide distribution of approved to pay across these carriers. Whether it's carrier processing, whether it's some consumers who just aren't paying. We don't know the answer to that yet and we really wish that we did. So that's one of the contributors to the revenue. I wish we had a better answer for you on that, but you know as much as we know right now, in fact even with these conversion rates that Stuart just gave you. But I also want to call attention to the other point that I think we both made, is that we have seen some product mix change. And as a result, at least on recent applications, our commission on average across all members, new members, is down slightly from what we've seen historically and slightly from what we expected.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Okay. And looking into your marketing spend, it seems that you have pulled back very heavily in this time of limited applications from the online marketing spend. I don't even go on Google and I don't see you as a -- doing any keyword ad buys or at least not significant. Do you -- is this is the trend going forward, or do expect that during open enrollment periods, you'll get much more aggressive in online marketing?

Gary L. Lauer

Well, we've -- look, we've always been very scientific about this and very formulaic. And depending upon what zip code you're in, right now, you may see us or you may not see us. The same thing is going to be at the height of the open enrollment period. And we manage thousands of keywords, by the way. So obviously, at a time like this, we're outside the open enrollment period, there is not much that can be transacted. We're very careful and very focused about where we spend and how we spend. In the open enrollment period, you can expect we're going to be spending a lot more because we're going to -- there's a lot more opportunity to convert that spend into potential revenue-generating members.

Nathaniel H. Schindler - BofA Merrill Lynch, Research Division

Okay. And just a final thing on kind of a more holistic view. You guys did very well at the beginning of the open enrollment period and just before the open enrollment period due to a lot of confusion around the ACA, as well as poorly built state and federal exchanges that really benefited you early on. Now as you got to the later part of -- in that you were seeing the effect of the March surge right now, where you got a lot of applications, but you're not becoming approved members as quickly as you thought and they're going to lower-grade products than you thought. Is the ACA -- as the exchanges get better, the federal and the state changes get better, are we going to -- is it going to be a much more competitive environment this November in this open enrollment plan -- period than it has been in the past?

Gary L. Lauer

We expect to be much more competitive because we think we're going to have some capability on the subsidy-eligible side of this that we didn't have. And so we're really eager for this open enrollment period to get started. I want to remind everyone again that I think a little more than 10,000 of our applicants out of that 480,000 were subsidy-eligible. And we did those right near the end when we finally had a little bit of, I should say, help or support from the federal government. We think we're going to be starting at a much different point here. I'd also point out that, I'm glad you brought this up, that remember, almost everyone who applied through us was non-subsidy-eligible. About 480,000, maybe 470,000 were non-subsidy-eligible, you net out the subsidy-eligibles. 1.2 million through all the government exchanges. So we did more than 1/3 of what all the government exchanges did with all that money that they spent. Think about -- if, this is a big if, but if we had a similar kind of a factor apply to subsidy-eligibles this time, or even a fraction of that, we're talking about a whole different scenario here. So the one point I do want to make today is that we are coming into this open enrollment period with a much different view of our ability and hopefully the stability of the government exchanges for us to be able to work through them to be able to enroll subsidy-eligibles.

Operator

Your next questions comes from the line of Dave Styblo with Jefferies.

David A. Styblo - Jefferies LLC, Research Division

Let me start on a topic that might be a little bit -- that have less moving parts in Medicare. Can you talk a little bit more about what you saw this quarter. I guess I was expecting the membership to sequentially move up quite a bit, maybe similar to the level that you had generated the last in the 6% to 7% range and here we are, the movement was essentially flat, marginally up. What's going on in there? Is there something that may have changed in the churn? Or what am I missing about the fact that I know you guys are going after the 11,000 agents daily, trying to increase your penetration, it just seems like there's an unexplained delta for one that would not have grown.

Stuart M. Huizinga

Yes, as we described, our growth rates in our submitted applications are high, and there's nothing -- there's no metric that's out of the ordinary there in terms of churn rates and our growth rates. It's fairly -- yes, I mean, yes. Just cut off of that quarter when things were closed out and become paying members, could be slightly different year-to-year. I mean, that's the only way I guess I could explain that.

Gary L. Lauer

But in Medicare, we did grow our membership year-over-year 41%.

David A. Styblo - Jefferies LLC, Research Division

Understood, but I guess that you -- I would assume you would have had quite a few submitted apps in the fourth quarter that would have bled over into the first quarter and then, obviously, we saw a decline because of higher churn on the base. So I thought this quarter -- that churn is out and then we'd have a stronger sequential movement. Are you suggesting now that all of the submitted apps are going to show up in the third quarter as members, and we should have stronger membership growth then?

Stuart M. Huizinga

No, I'm not trying to say that. It may be a cut-off at the front end or it's -- the metrics that we're seeing are, for the quarter itself, are in line with our norms in terms of churn and so forth. So I can't talk that up to any kind of change in churn or anything like that.

Kate Sidorovich

We definitely suggest to everybody to look at the year-over-year comparison. This business is highly seasonal in its nature. And sometimes making quarter-to-quarter comparisons would not give you the same results. So for the full year, the 40% and that's really within our expectations [indiscernible].

Gary L. Lauer

Yes, let me just say this. We're very pleased with the application growth we've seen in the last 2 quarters outside the annual enrollment period. We're pleased with the new carrier inventory, United for example, and we're really pleased with both the revenue and the member growth year-over-year.

David A. Styblo - Jefferies LLC, Research Division

Okay. So maybe we can circle back to the IFP side. I'm just trying to hone in on what exactly you're still trying to find out. Because my sense was that the big backlog or the big rush of applications that came in at the end of the first quarter, you maybe have something in the order of 70,000, 90,000 lives who were submitted, but weren't showing up at some conversion level for members, and that we would see that flow through this quarter. Is it that cohort that came in at the very end of the quarter, the main question mark for you guys as to what has gone on? Either they're -- they've decided not to pay or they're just caught up in the system somewhere? Or does that extend beyond that? Is that, it's even beyond in a more broad-based unknown?

Stuart M. Huizinga

Well, our approved rate that we saw for the quarter was very close to what we expected. We expected the high 70s to 80%, and we were in the high 70, very high 70 range. It's really this pay, approved to pay part of the equation and we -- many of the carriers resolved issues that they had very late in the quarter. And I was describing earlier, we still have carriers that are sitting down in the 50s, maybe even lower than that, that are questionable to us when we see other carriers still at 80, high 80s, 90%, we still need to resolve that in our minds. And I can't tell you right now whether that's members for those particular carriers not paying as readily as they had in the past or whether there's a system issue still to be resolved.

David A. Styblo - Jefferies LLC, Research Division

Okay. If I can sneak one more, just kind of about the opportunities that lie ahead. You -- I think Gary had mentioned a spike in 4Q applications that you're expecting. I haven't run my model quite yet, but curious what the guidance imply for the fourth quarter IFP or a membership or however you want to characterize it? and the other opportunity just being the connectivity to the exchange. What else do you need at this point? Last time we talked I know you were looking for broker attribution. Are there other elements that you're still waiting for from the federal government official to help you out and establish a stable connection?

Stuart M. Huizinga

No, I think we indicated in our comments that we're not holding out for additional technology from the government at this point. Just cleaning up things that they are working on internally. We did indicate that we expect a significant spike in submitted applications in the fourth quarter. I don't want to quantify it, what we're expecting there in that -- we're expecting a very significant spike across the open enrollment period from open enrollment period to open enrollment period. Not clear how much of that's going to be weighted fourth quarter versus into the first quarter where the final deadline is February 15. There's a wide range of where those apps will come from timing-wise, but we do expect to drive significant application growth there across OEP. And so we'll have high marketing costs in the fourth quarter, much of which will not contribute to revenue this year, most of the open enrollment period or anything that gets transacted for January 1, '15 coverage, which will be the bulk of what happens in the fourth quarter, will contribute nothing to this year's revenue.

Gary L. Lauer

And David, if I could just make a few more comments. We're going to have 2 things going on in the fourth quarter and the first quarter. The annual enrollment period for Medicare, the open enrollment period for the individual business, and as Stuart spend, our guidance presumes -- as Stuart said, our guidance presume a lot of spend and not much revenue coming from those because of the revenue lag that we typically see there. On the government side of things, we continue to work with both the federal government and many of the states. We try to do it as cooperative of a fashion as we can because we just believe that we can help, but we're also trying to be very pragmatic about this and assuming, at least going forward, that -- let me say it this way, we're operating with the assumption we're not going to have any more than we've got today, which is broker portables in the states and, let's call this, double redirect with the federal government. If we get more that would be terrific. But we think we can -- we think that we can have the opportunity to scale in some really good volume with what we got and how we're working toward all this. Remember, a year ago, we had nothing. We had nothing. A result promise and nothing else. Many of the state exchange, it didn't work, healthcare.gov didn't work. We're in a different place now. Again, what we've got from government is far from ideal in terms of what we'd like, but it's enough to work through and it's enough that we think that we can leverage it quite nicely.

Operator

Your next question comes from the line of Tobey Sommer with SunTrust.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

This is Frank in for Tobey. I wanted to see if you've heard from the carriers if they've given you any time horizon or view in terms of when you may have additional clarity. And also kind of what percentage or number of carriers are experiencing this type of the delay.

Stuart M. Huizinga

The carriers aren't really telling us when they're going to be able to resolve these things, and we may find that this is all that we get from open enrollment period from them at the end of the day. Because we have to push for them to dig into their systems and look at specific cases that we have. And I guess I just like to say that in our guidance, we've assumed that the majority, vast majority of the delta from our norm, will not be recovered, and that we're going to keep pushing for it, but we're not -- I'm not trying to say we're holding out that a large number of this and a big dollar amount is going to show up in Q3, for instance. I'm just trying to give you a flavor of some of the dynamics that we saw that were very different from what we had in the past and we've uncovered specific carrier issues that they've resolved for us, and I don't know that all the carriers can do that.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay and in terms of how kind of can pervasive it is across the carriers, any color there?

Stuart M. Huizinga

It's -- I'd say some of the ones that are down in the very lower ranges that I was indicating, there'd be -- could be a couple dozen in that category. So this isn't like onesie, twosies. It's across several carriers.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then it was asked earlier about the competition -- competitive landscape and with the healthcare and the public exchanges in the government side, but have you seen any changes in terms of private or commercial players in terms of the competitive landscape?

Gary L. Lauer

No. Nothing noteworthy, nothing different than where we were a year ago. What we'll compete with is a lot of government spending, one would assume, on advertising and so on, coming up in this open enrollment period. But as you know, we think we do really well from a marketing demand generation standpoint. And we feel really good about this. Look, we're really optimistic. We think the opportunity is tremendous. There's still just a small fraction of people who are eligible to enroll in plans through the Affordable Care Act who have. We think there's going to be a lot of switching going on because of pricing and a number of other factors as well. So no, we're as optimistic as ever about this. We're certainly -- we're not pleased with where we're sitting right now with some of this, some of what we've just experienced here. As Stuart said, we don't know all the reasons. Certainly if we did, we'd be sharing them with you but we're going to this annual enrollment period for Medicare and the open enrollment period for the individual business. We think really loaded up really feeling quite strongly about it.

Operator

Your next question comes from the line of Scott Fidel with Deutsche Bank.

Shawn Bevec - Deutsche Bank AG, Research Division

This is Shawn Bevec in for Scott. With regard to workaround for the subsidy-eligibles, what's your capacity there to enroll those individuals?

Gary L. Lauer

I'm not going to quantify it but it's high. Put it this way, I've said this before, we think we could've had the opportunity to have enrolled as many subsidy-eligibles as we did non-subsidy-eligibles in this last open enrollment period. We certainly believe that the demand was there and had we had what we think are acceptable conversions we could've done that. If we could do something like that in this next open enrollment period or more, we shall see. We're not highly capacity-bound. We are investing in this area and we're certainly going to have to invest in call center resource, which is not exactly the way that we like to approach things. But as I said earlier, we're going to play the hand that we've been dealt here, and that's what it takes, that's what it's going to take. But we think we're good enough to do this I think we can figure out some ways -- we have figured out some ways to do it efficiently. And we think we can do it profitably, most importantly.

Shawn Bevec - Deutsche Bank AG, Research Division

Okay. And what percentage of apps in the past were due to what would be considered a qualifying life event today? You have any metrics around that?

Gary L. Lauer

No. We've never really measured in the past before the open enrollment period that someone came to us because of birth of child or divorce or move from one state to another. Some of that data is available to us and some of it is just not. So -- but I would -- I'm sure it was a small fraction of those who transacted with us. It's what we're seeing now. I mean, this shouldn't surprise anyone. Someone who doesn't have a life-changing event, which is divorce, moving from one state to another, birth of a child, things of that nature. It's a small part of the population on any given day, and that's what we're seeing -- I think it's what everybody's seeing in the industry from a volume standpoint.

Shawn Bevec - Deutsche Bank AG, Research Division

Okay, and then last question on the lower commission per member that you're seeing. What are the specific drivers there in terms of the mix of products? I mean you've seen -- are you getting lower commissions on, for example, ACA compliant plans or something, or what can you...

Stuart M. Huizinga

No, it's not that our commission schedule stayed differently from a, let's say, on-exchange versus off-exchange or different metal plans, for example. It's really more driven by carrier and state mix and the differentials that we see in payments between each of the carriers. And it's ultimately driven by the number of members who become paying members and the mix of those paying members. And as I've suggested, there's been quite a differential in that close rate to a paying member by carrier, and that's really influenced the mix.

Operator

Your next question comes from the line of Dave Francis of RBC Capital Markets.

David K. Francis - RBC Capital Markets, LLC, Research Division

Gary, last call you guys talked about efforts to move into talking with consultants and brokers on the commercial side of things. We hadn't talked about that at all in this call. Can you give us any color as to where you are there from a process or spending perspective?

Gary L. Lauer

Yes. I think you may be referring to what a lot of people term as a private exchange opportunity. We continue to have discussions. We've got good partners. AEON's a good example right now. We announce a partnership with AEON -- I'm sorry, with Aetna for example. And so we're -- really good progress there. Nothing material to report at this point from a revenue standpoint, and we don't really expect to see anything until next year that's when the employer mandate actually goes into effect for the Affordable Care Act. But that is an area that we're very, very enthused about, is that we think a future adjacent market for us. It comes in several flavors. It's a business that we're not really in today, which is a group, a large -- medium or large-sized group using an Exchange technology like us for group plans. It's certainly groups moving into the individual market and a business that's been a good one for many -- for a few years, which is the retiree transition business as well. To say nothing of a private exchange technology for part-time consultant and contract employees as well. So we've got some things in place already and I think others possibly developing. So yes, an important place for us, something we'll probably spend some more time focusing on in the next couple of quarters as we get closer to that in terms of what we discussed and what we might comment on in earnings calls and conferences and so on.

David K. Francis - RBC Capital Markets, LLC, Research Division

Okay. Stuart, back to the numbers in a couple of different points. Number one, can you quantify how much of the Q1 very late application volume actually created revenues spilling into Q2 so that we can try to get a sense if we're looking at relatively flat revenue performance give or take Q3 to Q2 sequentially, what was the Q1 impact going into Q2 so that we can get a better look as to what Q3 might look like?

Stuart M. Huizinga

Well, the majority of the approved members for IFP in Q2 were from Q1 applications, close to 80% of what we saw in the approved members came off of Q1. But as I said, a higher percentage of those didn't convert to paying, but that -- I guess that's my best indication of how much spilled over into Q2.

David K. Francis - RBC Capital Markets, LLC, Research Division

Okay. And then 2 more quickies. As it relates to the next open enrollment period for IFP, with the procrastination effect that we saw with the last open enrollment period, kind of asking someone else's question a differently to -- is there any reason for us to believe that, that won't be the same kind of volume characteristics going into this one so that we're looking at -- so that we're looking at more application volume coming in in February rather than in the end of the fourth quarter, and therefore, impacting the revenue profile for the fourth quarter?

Stuart M. Huizinga

Well, first of all, even if we have a large surge in the fourth quarter most of that is not going to develop into revenue anyway just because of the timing and how we collect our cash from the payers. But I think you're raising an important point, which is really just kind of consumer behavior and we've seen this in the Medicare business for several years and certainly saw it in the individual business just last open enrollment period, which is that consumers procrastinate and wait. So you get the hockey stick effect. We'll see that, we think, in this annual enrollment period for Medicare and we're sure that we'll see it in this open enrollment period as well for the individual products. However, there's a new dynamic this year which didn't exist last year for the open enrollment period, which is that you've got a lot of individuals who enrolled in products in this last open enrollment period and want to switch. So we look at several market segments and one of them we look at is going to be a new one here called switchers. Someone's got a product, they don't like it because their physician's no longer in the network, their physician wasn't in the network, the rate is going up, a claim -- there's a whole long list of reasons. And so we think right coming out of the gates, there'll be a lot of switching going on, which is going to generate quite a bit of volume. Then you've got the uninsured segment and now, for us, the subsidized segment as well, which we really couldn't address in this last open enrollment period. So to your point, yes. We expect to see a late spike in both the annual enrollment period and the open enrollment period, but in the open enrollment period, we would expect there's going to be some pretty healthy volume right in the beginning and through it as well because of consumers right now who are waiting and wanting to switch.

Operator

The final question comes from the line of George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Gary, you discussed the completing legislation that's out there right now. How's that affecting the market? And do we need to get some clarity for the results of the better in the open enrollment period?

Gary L. Lauer

Well, yes. George, the only thing I was referencing was the federal court decision last week on the Affordable Care Act. There are actually 2 court decisions. One went one way and one went the other. They're headed to a higher court. There's speculation this could end up in the Supreme Court again. Who knows, but it certainly just adds to, I think, at least more intrigue and uncertainty around all of this. We just assume that nothing's going to change. We're getting ready for this open enrollment period. We're investing heavily right now in preparation for this, including for the subsidy-eligible part of the population, which we think we're going to be able to address in volume as I said earlier. But no, nothing beyond that, George, right now. But, my gosh, who knows?

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

One other question. Given the wide range of numbers you're seeing from the different carriers in terms of them going to actual payment, is there something that you are doing upfront in presenting options to potential customers that may change as a result of this?

Gary L. Lauer

We wouldn't change anything in terms of trying to direct one consumer -- or consumer to one product or another simply because of the carrier or how we're paid. We just feel so strongly about being unbiased and objective and having an environment where someone can find a product that best matches their needs and requirements. And then it's our job to go figure out our problems after that, which is what we're in the middle of doing right now. But no, that won't have any impact from that standpoint, if that's what you're asking.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

It is. Obviously, you need to have some push with the carriers to get them to be more responsive, I would think. But I guess, there's not much you can do on the front end of the equation, is what you're saying.

Gary L. Lauer

Nothing that we would do, that's right.

Operator

That concludes our Q&A. I'll now turn the call back over to Gary Lauer for closing. Please proceed.

Gary L. Lauer

I just want to thank everyone for their time, interest and support, and we look forward to talking with many of you over the next several days and weeks. Thanks, everyone.

Operator

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

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