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Health Net (NYSE:HNT)

Q2 2011 Earnings Call

August 04, 2011 11:00 am ET

Executives

Joseph Capezza - Chief Financial Officer and Executive Vice President

Jay Gellert - Chief Executive Officer, President and Director

Analysts

Joshua Raskin - Barclays Capital

Peter Costa - Wells Fargo Securities, LLC

Justin Lake - UBS Investment Bank

Carl McDonald - Citigroup Inc

Charles Boorady - Crédit Suisse AG

David Windley - Jefferies & Company, Inc.

Unknown Analyst -

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Doug Simpson - Morgan Stanley

Christine Arnold - Cowen and Company, LLC

Kevin Fischbeck - BofA Merrill Lynch

Operator

Good morning, everyone, and welcome to today's Health Net, Inc. Second Quarter 2011 Conference Call. Today's call is being recorded. Thank you for joining us for a discussion of Health Net's second quarter 2011 results.

During this call, we will make forward-looking statements are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC, as well as the cautionary statements in our press release issued in advance of this call. In today's call, we will refer to adjusted days claims payable, which excludes reserves from health plan services expenses related to the company's capitation, provider and other claim settlements and Medicare stand-alone Prescription Drug Plan payables and cost. This adjusted metric is not being presented in accordance with Generally Accepted Accounting Presentables (sic) [Principles] or GAAP. Please refer to today's press release, which is available on the company's website, for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure days claims payable.

I will now turn the call over to Jay Gellert, Health Net's CEO.

Jay Gellert

Thank you and good morning. I'm pleased to report this morning on another solid quarter for Health Net. We made significant progress over the past 2.5 years and believe we are well-positioned for growth in the years ahead. The first half results support our improving view on the full year of 2011. We've raised guidance for earnings, from the combined Western Region and Government Contract segment to between $3 and $3.05 per diluted share.

Looking specifically at the second quarter, we see that earnings per diluted share have shown strong growth. On a GAAP basis, earnings per diluted share climbed by 40% compared to the second quarter of 2010. For the combined Western Region and Government Contract segment, diluted EPS rose by approximately 25% compared with the second quarter of 2010. Western region operating revenue rose year-over-year. Total health plan enrollment was up modestly despite the Medicare sanction. We also had higher PMPM premiums.

The pre-tax margin, on a GAAP basis, improved significantly to 3.2% compared with 2.3% in the second quarter of 2010. For the Western Region and Government Contract segment, the pre-tax margin is the second quarter of 2011 rose by 110 basis points to 4.1% compared with the second quarter of 2010. We've noted for some time that our strategies support margin expansion for the combined Western Region and Government Contract segment. We believe we have opportunity to continue these gains going forward.

We did very well in commercial. The second quarter of '11 showed further commercial enrollment gains in targeted market segments. Gross margin, PMPM climbed by 9% in the second quarter of '11 versus the comparable prior year period. Total risk enrollment was up by approximately 2,000 members in the second quarter of '11 compared with the second quarter of '10. In-group losses continue to moderate, and we've been growing enrollment in key segments such as the midmarket. This is especially encouraging, given California's 11.8% unemployment rate.

Our risk enrollment growth is being driven by gains in our Tailored Network products. Membership in these products grew by 48.2% or approximately 137,000 members from the end of 2010 second quarter to the end of 2011 second quarter. That enrollment now accounts for 31% of our commercial risk membership. The premiums in these products are 10% to 20% lower for the same coverage when compared with full network products. We believe our Tailored Network Products are well-positioned to achieve further growth in the future. We believe these products will also do well under healthcare reform.

Further confirmation of our commercial progress comes when we look at MCR as in yield cost spreads. The commercial MCR improved by 60 basis points year-over-year in the second quarter of '11. The spread between the PMPM premium yield and healthcare cost was 70 basis points, the same as the first quarter, and substantially better than the 20 basis points in 2010 second quarter.

Commercial cost trends remain moderate. In fact, our second quarter experience looks better than the first quarter. As a result, we've raised guidance on the spread between PMPM premium yields and cost. It's now 140 to 150 basis points for the full year of '11, up from our first quarter yield of 100 to 120 basis points. The PMPM yield gain was 4.7%, lower than the first quarter, but that was due to a onetime premium reconciliation with a large employer group. Absent that change, the PMPM yield gain would have been more than 5%. We've lowered our annual PMPM yield guidance slightly. This is a result of factored Tailored Network Product growth, greater benefit buy downs, and larger geographic mix shifts.

Turning to Medicare, as of Monday, August 1, 2011, CMS lifted certain marketing and enrollment sanctions against Health Net. We're now able to sign up new members with September 1 effective dates. In June, we submitted bids for 2012 and we can now look forward to our active participation in the annual enrollment period, starting October 15 for January 1 enrollment. The absence of new members due to these sanctions affected both MA enrollment and MCR. There were some revenue timing items that impacted the MCR in the second quarter. We continue to grow and do well in Medicaid. But the tough economy continues to drive Medicaid enrollment higher for Health Net. In addition, on June 1, we started enrolling new members from the senior and persons with disability population here in California under a new mandatory managed care program. This population historically has been in fee-for-service Medicaid, though we've been enrolling some of them on a voluntary basis for some time. For now, we expect to enroll between 6,000 and 8,000 new SPD members monthly through May of 2012. As of June 30, 2011, we have approximately 38,000 SPD members, after adding 8,600 new members in June. As we indicated earlier, our full year guidance assumes higher MCRs for this population than for the overall Medicaid program.

Let's now look at the impact of the new TRICARE contract on the financial statement. The second quarter of '11 is the first quarter under the new contract. Under the new contract, we record revenues and costs for administrative services and related performance incentive and guarantees.

Now, let me turn to our financial performance. And I'd like to start with a discussion of cash flow. During the second quarter, there were 3 primary timing factors that affected operating cash flow: first, was a $181 million payment for the AmCareco litigation judgment; second, was approximately $25 million in Northeast-related expenses; and third, was approximately a $102 million increase in receivables related to TRICARE Medicare. These 3 items amount to $308 million. When added to the second quarter cash flow, the total is $162 million, which is significantly greater than net income from depreciation and amortization in the quarter. We expect $250 million of government payments for Medicare and TRICARE receivables in the second half of 2011. In fact, we've already received more than $100 million in Medicare payments in the third quarter of '11.

As we noted before, we also anticipate receiving approximately $121 million in payments related to the Northeast transaction in the second half of the year. This amount is recorded in investing cash flow, not in operating cash flow. Combined with our expectations of strong second-half operating cash flow, we expect to have the resources to continue to deploy capital for the benefit of our stockholders.

We have done that well, so far this year. Between January 1 and July 29 of 2011, we repurchased 6.4 million shares for approximately $195 million.

So in summary, we continue to see demand for our more efficient commercial products. Low commercial healthcare trends persist, Medicaid is growing, we are back to selling Medicare Advantage, we are up and running on the new, less risky TRICARE contract, and we expect to see strong second half cash generation from operations and Northeast payments that will allow us to continue to use free cash for stock repurchase.

Thank you for your time and we now look forward to hearing your questions. Tanya, could you open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your next question comes from the line of Charles Boorady with Crédit Suisse.

Charles Boorady - Crédit Suisse AG

I wonder if you could comment on the outlook for Medi-Cal, in light of the rate changes that were proposed by the state, and how well insulated you are from any cuts in reimbursement there, based on your provider arrangements?

Jay Gellert

Well, the majority of our provider arrangements are on a capitated basis, so they protect us to some significant degree from some of the proposed arrangements. In addition, a lot of them relate to co-pay and member share reductions, which naturally flow through. So while none of that's been fully resolved, our second half guidance, I think, adequately heeds that issue in terms of what we're doing.

Charles Boorady - Crédit Suisse AG

Got it. And in terms of the ABD population migrating in, can you tell us what you're seeing so far in that regard, what your expectations are for net new adds in the ABDs?

Jay Gellert

Yes, we anticipate through May of 2012, 6,000 to 8,000 new members per month. As we earlier indicated, we've assumed a very high MLR for that population until we get some more information and some more indications. So far, we're encouraged by the initial data we've seen in terms of that population.

Charles Boorady - Crédit Suisse AG

Got it. And given the different nature of that population, are they also covered by mostly capitated arrangements? Or are you more at risk for the medical expenses in that population?

Jay Gellert

There are 2 things. First of all, the state is retaining some risks for some of the extraordinary expenses related to them. But other than that, they're in our capitated arrangements just like the other populations.

Charles Boorady - Crédit Suisse AG

Okay, great. And then just finally, on the improvement in your price cost spread, you mentioned that it was more on the cost side due to mix. Could you just elaborate on that a little bit? I'm not sure I caught the gist of the driver that improved spread.

Jay Gellert

No, the comment on the mix relates more to the reduction by about 50 bps in our premium yield expectation. On the spread difference is the result of the fact we're seeing lower utilization than we anticipated, and actually, better utilization in Q2 than Q1, combined with the fact that the lower cost products we're selling typically have a greater spread in them. So the combination of those things is what leads us to give the guidance we've given. In addition, the guidance that we've given in terms of the spread for the second half follows our historical experience. We always have to remind people that since we set the capitation at the start of the year, as revenue increases relative to its product mix, the costs don't increase at the same rate.

Operator

Your next question comes from the line of Josh Raskin with Barclays.

Joshua Raskin - Barclays Capital

Just picking on that comment you made, Jay, about the second quarter utilization looking better than first quarter, I'm just curious, could you give us some statistics maybe around that? What's driving the better utilization? And do you have an updated view on the first quarter? Was there any favorable development in light of additional claims coming in?

Jay Gellert

First of all, in terms of the second quarter, vis-à-vis the first we're seeing, lower hospital utilization, even some lower outpatient utilization. We don't have as much of a physician effect because of the capitated arrangements which we have. We're seeing it both on units and the unit cost side, I think as a result of the change in product mix. We've historically not seen the positives first quarter. I think that there's not as much positive there. We had a couple of large cases in the first quarter, but the second quarter looks very strong.

Joshua Raskin - Barclays Capital

Okay. So it seems like we're going forward. It seems like the second quarter, I guess, got better in terms of cost trends relative to the first. And then the second question, on the California small group, we're still seeing, I guess, a little trickling out there. Can you just maybe give us an update? Anything you're seeing in the market? Do you think others are acting based on, maybe, rebate management, or anything like that? Are you seeing any changes in the environment there?

Jay Gellert

I think it's kind of an up-and-down related to when people file. Product costs change, kind of more consistent with timing of filings, which has historically gone on. We've also seen some instances where people in some targeted areas are maybe filing at different price points. But we don't think it reflects an aggregate change in the competitive environment.

Joshua Raskin - Barclays Capital

So does that mean, Jay, that Health Net files for a rate increase in the second quarter?

Jay Gellert

Well, yes. We file quarterly, but typically, we're behind some other people and ahead of others. And someone, if they file a lower rate increase ahead of us, they'll move some share back.

Joshua Raskin - Barclays Capital

And then just lastly, do you have a cash at the parent number?

Jay Gellert

For when?

Joshua Raskin - Barclays Capital

June 30.

Jay Gellert

We have relatively little cash at the parent, and at the end of the second quarter, about $10 million because of all the payments we made and the lack of receiving the TRICARE money, that goes directly to the parent. It isn't in a regulated entity. So the combination of the TRICARE money and the money we're going to receive in the Northeast transaction will all go to the parent. That's why our cash in the second half will be so strong.

Joshua Raskin - Barclays Capital

Got you. So if I took the $10 million, I could add in the $100 million that you got already. That's probably a current number. And then you're expecting the $120 million to come in. Is that...

Jay Gellert

I think the $100 million that we got so far from Medicare, that would be in a regulated entity. Over $100 million that we expect in the rest of the year from TRICARE, plus the $120 million from the Northeast transaction, which we haven't yet received, both of those go directly to the parent.

Operator

Your next question comes from the line of Tom Carroll with Stifel, Nicolaus.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

It's good news that the CMS sanctions are now lifted, but they still were in place for over half the year. Wonder if you could give us just a sense of your expectation for Medicare Advantage and Part D as we approach the selling season and looking into 2012.

Jay Gellert

I think that our view is pretty much that it will mirror in the MA side our experience in previous years, which is that we have some opportunities for growth. We generally had mid-to-high single-digit growth. I think that's a reasonable expectation as we look forward into 2012. We've been careful, we want to make sure that we focus on profitable areas and not end up in a situation where we end up with a large flow of members that are unprofitable. But I think we've been able to sustain them. Believe we will on a going-forward basis. In terms of Part D, the one remaining restriction is on getting duals, who don't select. And so that will slow our Part D growth for the first quarter of 2012. So the focus we expect is on the growth in terms of the MA side along our historical experience. The other benefit we expect is some margin improvement in terms of MA as a result of getting some new members.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Okay. So you don't think that the sanctions really hindered your ability into 2012? And you're going to stay away from Northern California?

Jay Gellert

I think that the sanctions will not hinder our opportunities in 2012. In fact, they've let us improve some of our product offerings. I actually think we will have some better, more economics in terms of our own operation's product offerings. I think that the PPO issue you're referring to is throughout California, and we will stay away from it.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Do you have an update on AB 52? Could you give us a sense of that?

Jay Gellert

Well, the legislature is out of session until the third week of August. So it will be considered starting in the Senate fiscal committee when the legislature comes back.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Okay. Any Jay Gellert opinion on it though?

Jay Gellert

I think that the history in California is that people get really nervous about what the state's going to do and then it does fairly responsible things. I'd just tell you, parenthetically, one thing that I think people are starting to realize, when they look at the data, they see in terms of auto insurance, right now, California's the second most expensive of the 10 largest states. In terms of health insurance, it's either second or lowest. So I think there's a concern that they want to make sure that whatever they do, it doesn't disrupt the fact that, of all the things in the world in California, we're never cheapest at anything, and this is when we are. I think people are starting to think about making sure that whatever they do, if they do anything, that it doesn't interrupt the most economic large state health market in the country.

Operator

Your next question comes from the line of Justin Lake with UBS.

Justin Lake - UBS Investment Bank

Two questions. First, the commercial MLR trajectory or the price cost spread. And the second implies pretty significant improvement versus the first half. I just wanted to know what gives the company such confidence that, that's going to -- it seems like the price cost spread was about 70 basis points in the first half, and I think you need to be closer to 200 in the back half to get to the guidance?

Jay Gellert

Yes. Historically, we do have that 130-basis-point differential between the first and second half, because of the point I made earlier, the effect of capitation. Because on the commercial side, 40-plus percent of our costs are fixed, while as revenue increases. But secondly, the trends we've seen in the second quarter, and even going into July, are not even fully reflected in those numbers. So it give us even some cushion for some experience, change, even in the second half of the year, which we haven't seen yet.

Justin Lake - UBS Investment Bank

I'm looking at numbers from '09 and '10 in my model, and it looked like the MLR was down that much first half to second half? Am I...

Jay Gellert

We looked at them, and we'll reconcile them with you. But actually, we've gone through that process.

Justin Lake - UBS Investment Bank

Okay. So you feel comfortable there?

Jay Gellert

I think we feel, if anything, again, as I said, I think we are comfortable that it would at least follow the experience of previous years which I articulated. But I think that's the least of our worries right now.

Justin Lake - UBS Investment Bank

Okay, great. Just last question on the government contracts. The contributions there was only down about 20% year-over-year. Would have thought that might have been greater, given the structure of the new contract going to ASL. Just curious if this is a good run rate here, or are we benefiting from someone run-out on the old contract?

Jay Gellert

We're benefiting from some run-on on the old contract. When we talked on the first quarter call, we said we anticipated a $20 million reduction in the spread on that line approximately, and a $20 million savings in the G&A to compensate for it. And that's actually what has exactly happened. So we expect, on average, this run rate for the rest of the year, as we've run out the old contract and as it includes some other things we're doing in that area, and then it will come down as we go into 2012.

Justin Lake - UBS Investment Bank

Okay, so this contribution of about $40 million a quarter is good for the back half of the year? And then it probably goes down in 2012 by about $10 million?

Jay Gellert

Probably a little more than that, and that's been our standard cost initiative which we've talked about to compensate for that.

Operator

Your next question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck - BofA Merrill Lynch

I just want to follow up on one of the earlier questions about the impact of the provider cuts in Medicaid. You talked about the flow to -- I was wondering if you could put a little more specifics around how much of your costs are capitated.

Jay Gellert

Of our total healthcare costs, I think 52% are capitated. Part of those are pharma, too.

Kevin Fischbeck - BofA Merrill Lynch

Is that within the Medicaid program, 52%?

Jay Gellert

Yes. That's what I said, yes.

Kevin Fischbeck - BofA Merrill Lynch

Okay, that's helpful. And then just a point of clarification. The interest income number included some gains on sale of investments. How are you thinking about that in the context of your guidance? Do you see that those things recur going forward? It seems to be about half of your interest income so far this year.

Jay Gellert

Yes. We're not anticipating that level going into the second half of the year. Historically, to go back, we've had 42-or-so percent of our earnings in the first half of the year and 58% in the second. This time it's 45%, 55%. So if you basically take those out and go to our guidance number, which is about $71 million or $72 million for the whole year, it's consistent with the guidance we're giving.

Kevin Fischbeck - BofA Merrill Lynch

Okay. And it looks the one place that you are showing some pretty good growth here in membership is in Arizona, can you tell us about what you're seeing there?

Jay Gellert

Yes. I think that up until this point, we've not been as active in the PPO market in Arizona. And I think we've built a suite of products that are both performing well and seem attractive to the market.

Kevin Fischbeck - BofA Merrill Lynch

Okay. And so, is that something that you, I guess this growth is pretty good, but do you expect this to continue for the foreseeable future? Or is going to kind of normalize once the benefit is on...

Jay Gellert

No, I think we have, at this point in time, we have a good product and we have some other things we're working on. So I think that it's an attractive market with a growing population, where I think we've kind of become successful. Now bear in mind, we went way down. So we're really more recovering with a new suite of products than getting to the point where our growth is more than what we have had over the past periods there.

Kevin Fischbeck - BofA Merrill Lynch

Okay. And then last question, just to clarify, I just want to make sure I understood something you said earlier. So we talked about the MA growth next year. Do you believe that you will be able to achieve that growth while seeing an improvement in MLR just because of the new members coming in?

Jay Gellert

Partially because of the new members, and partially because we have some proprietor partner arrangements that will allow us to offer products more efficiently in certain markets.

Operator

Your next question comes from the line of Ana Gupte with Sanford Bernstein.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

The questions about the hospital contracting environment, they're still seeing a double whammy at this point with utilization levels continuing to stay low and this impending cut to the unit cost on the Medicare side. As you're having conversations with them, and specifically in the California environment, what are you seeing them looking for? They're veering more toward doing more restrained type contracts with you, and still even with that type of arrangement, what would the unit cost environment look like next year?

Jay Gellert

Well in California, what we're seeing, which makes a lot of sense in response to the double whammy you articulated, is a growing concern with our capacity to hit price points to move share or stabilize share versus Kaiser. So unlike many other markets where the system is all around kind of trying to hit a revenue target in basically a closed market, here, the way you deal with the whammy is by moving share, and there's a big opportunity to move share. So we are seeing, unlike other geographies, we're seeing people really begin to talk about how do we take risks? How do we build products? What do we do? How do we hit price points? So I think it's a little bit different than in other markets, potentially, where people are just saying, I have a revenue loss, I have to make it up and everyone else has to, too.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

And just going one step further then, beyond the narrow network, in smaller plans and the like, is there more of an appetite for plans to buy a provider and even get more into the vertical integration side?

Jay Gellert

I think that in this market, because of its size and because of the degree it's fragmented, it's more of partnership-type arrangements than it is buy-up arrangements.

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Okay. And then in terms of narrow network, to what extent do you think you can retain your competitive advantage relative to the other players, given that they're probably moving more and more in that direction as well?

Jay Gellert

I think that part of it is competitive advantage, and part of it is the fact the size of that market is growing. And our sense is that the size of the market is growing faster than the competitive environment.

Operator

Your next question comes from the line of Peter Costa with Wells Fargo Securities.

Peter Costa - Wells Fargo Securities, LLC

Can you kind of go through for me a little bit on through your expectations for CMS, I'm sorry, in terms of Medicare, your marketing going forward now that CMS sanctions have been lifted? What should we look at for expenses for that, in terms of the ramp up this year relative to last year?

Jay Gellert

Our guidance includes ramp up in both Q3 and Q4 for that purpose. I'd estimate it to be about $20 million higher than the previous year.

Peter Costa - Wells Fargo Securities, LLC

And that's spread out over the 2 quarters?

Jay Gellert

Yes.

Peter Costa - Wells Fargo Securities, LLC

And can you tell us what's happening with the Sutter JV in terms of the membership? Have you picked up membership there? How's that going?

Jay Gellert

It seems it's going very well. We already have a significant number of members in it. As many of these ventures are skewed because they put the hospital in place and we're not doing any of that, so we actually have seen some high 4, low 5 digit growth already.

Peter Costa - Wells Fargo Securities, LLC

Okay. And just lastly, on your cost trend expectations going into next year with pharmacy. Can you talk a little bit about what you expect to see your pharmacy trend to do next year? And contrast that to the average bids in Part D that came in at 3% lower yesterday?

Jay Gellert

I think that we anticipate, as everyone, I think, knows is, that a number of drugs are growing off patent, that we'll have a more favorable pharmacy trend next year than this year. And we're in the process presently of sizing them and really kind of getting a good beat on this year's trend side. I think we'll have better comments in the next couple of months, but I think definitely, directionally, we see what you're seeing.

Peter Costa - Wells Fargo Securities, LLC

Okay. And then relative to the CMS lease part, the averages? Average bid?

Jay Gellert

You mean, do I think that pharma's going to go down 3% overall in the commercial market next year? I don't think necessarily that's going to happen. But we're not to the point yet where I think I can be clear on that.

Operator

Your next question comes from the line of Carl McDonald with Citigroup.

Carl McDonald - Citigroup Inc

I guess first question would be, now that you have visibility on the $121 million payment from United, where does that bring the total payment post that transaction? And is that $121 million the last piece that you're anticipating?

Jay Gellert

It brings the total to between $520 million and $540 million. And the total is the amount net of the closing costs, so that we're still finalizing those. I think, are there any other payments forthcoming?

Joseph Capezza

No.

Jay Gellert

That wraps it up. And we're actually, I think, ahead of schedule on the cost side. So some of the cash issues which we've had this quarter, 25 of them are the result of some severance payments that came earlier, in fact, than we anticipated.

Carl McDonald - Citigroup Inc

Second question is, I know you guys don't have a big participation in the Medicare PPO in California. But as you think about that product generally, is the bigger concern adverse selection or is it more about trying to predict the geographic distribution of the membership? Meaning, because you're going to have the same benefits across the entire state, and Northern California and Southern California are so different?

Jay Gellert

No, I think it's more a phenomena that the HMO product is so competitive in the areas where you have populations you can manage, so you end up getting volume in places like Calaveras County and Fresno County which have historically not been counties consistent with the general California trend of managed care. So I think the PPO problem would exist, in my sense, in any market where you have such a powerful concentration of the HMO business.

Operator

Your next question comes from the line of Christine Arnold with Cowen.

Christine Arnold - Cowen and Company, LLC

I'd like to explore the SPDs a little bit more. The 68,000 a month, is $850 per member per month a reasonable estimate on that? And we have to transition the mature capitation arrangements or can you force them into it? Or is there a time period over which you have to wait in order for that to happen? I'm trying to get a sense for the risk that the trends come in higher than expected, given as I mentioned.

Jay Gellert

Actually, as you know, we've booked roughly 100% MLRs. So the number is more in the 500 range. They do transition to capitation. And actually, the experience so far, as I said, it's been more favorable than expected. The initial pharma trends look good. So, I think that at this point in time, we booked them conservatively. The initial indications are they're running ahead of the number. But we're going to continue to book them equally conservatively going forward.

Christine Arnold - Cowen and Company, LLC

And can you remind us on the economics of the narrow network products in terms of the higher PMPM profitability? I know it's a lower yield and a lower MLR. And then how's that looking going into 2012? Because I think you probably renewed some of the larger groups, and maybe gotten some more as a result of this.

Jay Gellert

The dollar margin per member is equal or slightly higher than the full network products. So as a result, even though the yield is lower, the MLR is somewhat lower in those products. So probably in average 15% down in the yield, probably a 20% higher percentage margin. You can play with those numbers, but that's in order of magnitude.

Christine Arnold - Cowen and Company, LLC

And how's the pipeline looking for 2012 relative to this time last year with the large employers?

Jay Gellert

Well, I think we had a couple of very large moves last year. We'll have somewhat lesser moves, but they're moving stronger in the midmarket.

Christine Arnold - Cowen and Company, LLC

So net-net, the amount moved should be pretty equivalent?

Jay Gellert

Probably a little less, because we had one very large move. But it will move us directionally towards the 50% mark over the next 2 or 3 years.

Operator

Your next question comes from the line of David Windley with Jefferies.

David Windley - Jefferies & Company, Inc.

So kind of a follow-up to that one. First of all, do your narrow network wins come from your existing customer base? Or are they more often outside of your client base?

Jay Gellert

About 50-50.

David Windley - Jefferies & Company, Inc.

And then how much of a headwind does that put on your commercial premium yield, the 4.7%? Where would that be if not for this issue?

Joseph Capezza

A couple -- 200 basis points.

David Windley - Jefferies & Company, Inc.

200 basis points. Okay.

Jay Gellert

We'd be 200 basis points higher if we didn't have that.

Operator

Your next question comes from the line of Eli Rudensky [ph] with BTID [ph].

Unknown Analyst -

This is Eli. Since you borrowed knowing your revolver for the AmCareco litigation, and you're getting additional cash from the second half of the year, is it your expectation to keep that money up in the parent or to pay down debt? I mean, clearly, and also, what is the amount of share repurchases that we should be expecting from you in the second half of the year?

Jay Gellert

Well, first of all, let me answer the last question first. We repurchased about 8% of our shares last year. We repurchased about 7% or 8% this year. We intend to continue to repurchase. The exact amount will depend on our market, but it won't be determined by cash because we'll have ample cash based on the payment from the Northeast and the other cash coming in to do whatever makes sense in the context that where purchased. Our anticipation is over the next couple of years, we'll pay down the AmCareco obligation. We don't feel a compelling need to do it in the immediate term, particularly given this kind of general cash flow will be foreseen coming in over the next couple years.

Unknown Analyst -

Okay, great. What is your appetite for either acquisitions or divestitures over the next year or 2?

Jay Gellert

I think we're pretty comfortable with where we are. I think that there may be a small tuck-in opportunity, but I think we like the business we have. And I don't think there's really any probably significant divestitures that makes sense to us. And I think that we see some opportunities to do some joint venture things that don't require acquisitions.

Unknown Analyst -

And lastly, just from an operation perspective, clearly hospitals at some point are going to be hit with reduced revenue associated with readmissions from Medicare patients. Either on your Medicare Advantage or your base business, are you planning on mimicking something along those lines at the hospitals, as well? That if certain patients are readmitted within a certain period of time, you'd pay a reduced amount to those hospitals?

Jay Gellert

Our first preference is to move them into overall the sharing arrangement. I think that -- we think hospitals are more interested in that. Because our experience is that one imperfect measure isn't the best way to really promote economic operation. In some ways, some of the measures that are being presently promulgated in Medicare are encouraging people to talk to us about broader risk-sharing arrangements, which make more sense to us.

Operator

[Operator Instructions] Your next question comes from the line of Doug Simpson with Morgan Stanley.

Doug Simpson - Morgan Stanley

Jay, you've talked a lot about the Tailored Networks this morning. I guess, just as you think about the relations with physicians, can you just give us a sense for the types of situations where you've been more successful in dealing with the docs? And maybe talk about situations where docs are considering employment, and just how do you navigate that? Is that a big operational issue? How has that tracked in the last 12 months?

Jay Gellert

Well, in our market, docs are largely in medical groups. So the question of whether they go to an employment model or in a medical group model has less of an effect on us. I think that more and more our industry is going to have to learn to deal with the organized unit. And that's what our experience is. And so I think we're less affected by the change in all of that.

Doug Simpson - Morgan Stanley

And then just on the operating expense side, as you look at the next 3, 6, 9 months, what are some of the potential improvements we could see there?

Jay Gellert

Well, we have opportunities in terms of continued consolidation of administrative expenses with the conclusion of the Northeast arrangement. We have opportunities in terms of technological advances in some of our call center and some of our claims operations and some continued outsourcing opportunities. And I think we have some significant administrative opportunities on the pharmaceutical, mental health, some of those areas. So I think all of those areas offer opportunities for us to find efficiencies going forward.

Operator

There are no further questions at this time. This concludes today's conference call. You may now disconnect.

Jay Gellert

Thanks.

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