Executives
Randy Giles - Chief Financial Officer, Executive Vice President and Treasurer
Allen F. Wise - Executive Chairman and Chief Executive Officer
Drew Asher - Senior Vice President of Corporate Finance
Analysts
Charles Andrew Boorady - Crédit Suisse AG, Research Division
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Doug Simpson - Morgan Stanley, Research Division
Joshua R. Raskin - Barclays Capital, Research Division
Joshua Kaplan-Marans
John F. Rex - JP Morgan Chase & Co, Research Division
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
Coventry Health Care (CVH) Q3 2011 Earnings Call October 28, 2011 8:30 AM ET
Operator
Good morning, and welcome to Coventry Health Care's Third Quarter 2011 Earnings Conference Call. Today's conference is being recorded [Operator Instructions] Today's call will begin with opening remarks by Chief Executive Officer of Coventry Health Care, Mr. Allen Wise, after a brief forward-looking statement read by Mr. Drew Asher. Please go ahead, Drew.
Drew Asher
Ladies and gentlemen, during this call we will make forward-looking statements, certain risks, and uncertainties including those referenced in our press release and described in the company's filings with the SEC on Form 10-K for the year ended December 31, 2010, and Form 10-Q for the quarter ended June 30 2011, may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Allen?
Allen F. Wise
Good morning. Thank you for your interest in Coventry Health Care. I'm pleased to share with you the results of the quarter and I believe, more importantly, to discuss the progression of our business and our plans for growth.
As you saw this morning, the company had another good quarter. And accordingly, we were able to increase our full year 2011 guidance for the third time this year. For the quarter, we reported $0.84 per diluted share, and we are now targeting a 2011 EPS in the range of $2.95 to $3, which excludes last quarter's $0.68 one-time gain. This compares favorably to our original 2011 guidance midpoint of $2.60 and the most recent guidance midpoint of $2.88 per share, both on an equivalent basis, excluding the $0.68 gain from the prior quarter.
Today I want to spend most of my time, during the prepared remarks, talking about seizing growth opportunities and the positioning of our company. And I also will follow up, as promised, on our CEO role on the company. Randy Giles will address the details of the quarter and the performances of our businesses in his prepared remarks. While we are squarely focused on growth and that's both organically and through acquisition, I'd like to talk about recent accomplishments that we believe will not only deliver growth but will better position the company for the future.
Starting with Medicaid. As you recall in 2009, one of our priorities was to better position the company for Medicaid growth. Last quarter, we walked you through our Medicaid accomplishments over the past year or so, which included the 2010 Nebraska RFP win, qualification entry into the Pennsylvania Medicaid program. Probably, most notably, the July 7 award for Coventry to provide services for the Commonwealth of Kentucky's Medicaid program in 7 of 8 regions. Since the second quarter we've opened up offices in Louisville and Lexington, which totals about 120 employees. We have a fleet of network development representatives on the ground. The success of our bid and network development has resulted in Coventry saving an outsized initial allocation of auto-assign, in the region, of approximately 200,000 members. And although Medicaid recipients will have a chance to switch payers during a 90-day transition phase, we like our positioning out of the gate. I'm really very pleased with how the organization responded, organizationally, in implementing a very large contract in short order. We look forward to next Tuesday's program commencement and being a partner with the Commonwealth of Kentucky for many years to come.
As you saw earlier this week, we announced an agreement to acquire the business of Family Health Partners, a large Medicaid plan operated by Children's Mercy in Kansas City, serving Kansas and Missouri Medicaid recipients. Once this transaction closes, Kansas will represent our 10th Medicaid state. Family Health Partners enjoys the #1 Medicaid market position in Kansas, with approximately 155,000 members. We're also looking forward to fortifying our position in the Western part of Missouri through the addition of approximately 55,000 Family Health Partner Missouri members. Our company has been working with Children's Mercy for much of 2011 to structure mutually benefit transaction and contractual partnership to serve the Medicaid populations of Kansas and Missouri. Once these 2 most recent opportunities are completed and implemented, we'll be serving our Medicaid and state-sponsored programs in a portfolio of 10 states, with approximately $2.5 billion in annualized revenue. This compares to 6 states and $1.1 billion revenue at the end of 2009. And we will continue to seize additional opportunities in the Medicaid space.
A few comments on the Medicare front. Since the last call, we received a notification of approval of all of our 2012 Medicare products, and we've started a marketing process pursuant to the annual election period. As you may have seen, on October 1 we announced the new innovative Part D product for 2012 with a preferred pharmacy network including Walgreens, Walmart, and Target. We're also pleased to be able to reintroduce a third low-cost product to our portfolio, and more importantly, team up with major pharmacy and retail partners to establish a creative product that we believe will be very attractive and cost-effective to the senior population. We told you in early 2011, when we had disappointing, and personally, unacceptable Part D membership results coming in the year, that we would position ourself to grow in 2012. We like our Part D position and our new enhanced product, First Health Value Plus, and feel reasonably confident about our growth prospects in this area. In addition, our basic Part D product, First Health Premier, qualified in 23 auto-assign regions in 2012 as compared to 15 in 2011. As you will recall, both are mainstream and low-income auto-assign products that performed overtime, and we're pleased to grow the number of auto-assign regions, back above 20, which is similar to the 4 years prior to 2011. With regard to our Medicare Advantage product, after reviewing our competitive position in our 20 Medicare Advantage markets, we feel positive about our positioning for 2012. We're going to have a lot better visibility on the Medicare open enrollment season, for both Part D and Medicare Advantage, at the time of our next earning call and we'll be able to share with you the actual membership results and related guidance at that point.
Our commercial business continues on track with our plan. Absent the partial shift of the state of Illinois account from risk to ASO. Our Commercial Risk membership would've been stable sequentially. Our Commercial Risk memberships sits at 1.64 million members, which is up from 1.53 million members a year ago. Every single one of our markets, as well as the hundreds of corporate employees, are focused on preparation for 2014 and positioning our business to seize the potential jump-ball presented by health care reform and exchanges. And many of the things that we're doing, including the constant drive to obtain low cost structure, with the development of high-performance networks and products, should benefit our business regardless of how reform plays out. With regard to our fee-based businesses, they continue to produce a steady level of earnings and cash flow, which provides fuel for the opportunities such as the recently announced Family Health Partners acquisition.
Randy is going to provide details on our balance sheet. But we continue to be well positioned with $1.15 billion of deployable cash at the end of the third quarter. That's after buying back $227 million in shares, so far in 2011, including $127 million in Q3, and after setting aside $150 million to pay for our new Medicaid acquisition, Family Health Partners. Our preference is to continue to fund opportunities to build our businesses. But as you can see, we have complemented that approach with share buyback.
As promised, I want to update you on our CEO succession planning. As I told you last quarter, our board was scheduled to meet in August to address the company succession planning, and specifically, my preparation beyond 2012. Accordingly, the board has concluded the following, as reflected in this statement from our board, which I will read to you. "The company health care Board of Directors has continued to reflect on management succession planning. The board has confidence in the current senior management, and has concluded, that the needs of the company are well served with Allen Wise, our CEO, in continuing to fill that role for the foreseeable future. The board has also determined that we have great talent within the company to provide for seamless transition at the appropriate time." So in summary, I look forward to continuing to serve as CEO, and I'm equally pleased with my other fellow board members, with the management team that we've been able to assemble.
I'm going to let Randy Giles walk you through the details of the quarter. But I do want to comment, again on the current strength of our businesses, which has enabled us to increase 2011's guidance for the third time this year. And more importantly, our ability to seek growth opportunities that should serve the company, our members, and our shareholders well in the long run. We have a diversified set of businesses, providing an excellent foundation upon which to seize opportunities. We continue to have a strong balance sheet to provide the flexibility to pursue new opportunities. 2009 and 2010 were dedicated to improving our 7 core businesses and planning for tomorrow's growth. While we're not totally finished with our 2012 budget, I believe our annualized revenue growth will be in the range between, an increase, of $1.5 billion to $2 billion. We're going to use our balance sheet wisely for the right combination of growth opportunities and share repurchase, both in Q4 and during 2012.
And with those brief comments, I'll have Randy Giles, our CFO, walk you through the financials and the specifics about our businesses. Randy?
Randy Giles
Thank you, Allen. This morning I will be discussing our performance in the third quarter, our guidance for the remainder of 2011, as well as some broad commentary on some of the key drivers for 2012. Before I go through the details for each of our businesses I want to, first, start at a consolidated level.
Our GAAP EPS for the third quarter was $0.84, which includes $0.02 related to the runout of the Medicare Advantage Private Fee-for-Service business. For the full year, we reported GAAP EPS of $3.09, which includes $0.68 of earnings related to the litigation resolution, as well as $0.13 of earnings related to Private Fee-for-Service, producing an adjusted EPS for the full year of $2.28. I'm pleased with this result, I'm even more pleased to, once again, increase our full year guidance, excluding the litigation adjustment, to a range of $2.95 to $3, which includes actual year-to-date Private Fee-for-Service earnings of $0.13 through Q3. You can see the table and reconciliation on Page 3 of our press release. Each of our businesses continues to perform at or above our expectations. And as Allen highlighted throughout this commentary, we have utilized the strength of our balance sheet to seize an exciting growth opportunity in Medicaid and we remain well-positioned for further deployment initiatives.
But first, let me give you a little more color on the performance across our key businesses. In our Commercial Risk business, we reported an 82.5% MLR, for our group business in the third quarter and a year-to-date result of 81.3%, which keeps us on track for our full year guidance of 81%, plus or minus 50 basis points. Our full-year view of individuals also unchanged at 76%, plus or minus 100 basis points, with year-to-date results consistent with this full year expectation. While we are still not assuming any benefit from the multiple states that have minimum MLR waiver request pending with HHS, we do expect to have more clarity around this topic in the near-term as requests for 2 of our key states, Florida and Georgia, have recently been deemed complete. We shall all hear very shortly on Georgia, while Florida's decision is expected later in the fourth quarter.
Next, let me provide you with some updates on impact of healthcare reform on our results, and then some commentary on what we're seeing in terms of medical trend in pricing. Starting with healthcare reform, the composition of our Commercial Risk revenues and data points around our percentages of business, and rebate positions, remains consistent with what we shared with you on the last call. For 2011, we expect total Commercial Risk revenues of a little more than $5.9 billion. Of that total, individual business is expected to generate just over $350 million in revenue, with the vast majority of this business being in a rebate position today. The remaining $5.6 billion group risk revenues are split roughly 40% small group and 60% large group, with a little more than half of our small group business in a rebate position, and a little less than 1/4 of our large group business in a rebate position. We continue to look at numerous strategies to utilize these estimated rebates to benefit our members and improve our cost structure. Our strategy continues to be focused on pricing consistent with our forward view of medical trend, with our rebate positioning in a given rate cell being just one of many factors into the equation. While growing our Commercial Risk membership is something that we focus on every day, in a variety of ways, we will do so with a prudent pricing posture, including our view of forward medical trend. Broadly, the competitive environment continues to be rational. We are not seeing widespread aggressive behavior from the peers. One note on the Health Plan commercial yield in the press release. As Allen said earlier, a portion of the State of Illinois' account transition from risk to ASO effective July 1. This account ran at a significant higher yield than the rest of our book. So this mix change had the effect of pushing down the overall commercial yield sequentially.
Moving on to trend. Our view of fundamental prospective trend remains unchanged in the range of 8% plus or minus 25 basis points, primarily driven by unit cost trend. You may recall from last quarter that we indicated, in the rearview mirror, we saw aggregate medical trend at its lowest point in the second half of 2010. With one more quarter of runout visibility, it is pretty clear now that the low point of utilization overall trend was indeed in the back half of 2010. So as we move forward, from a base experience period with meaningful negative utilization, as that utilization becomes less negative and our approach is flat, it has the effect of pushing up aggregate trend as compared to the historically low levels on the second half of 2010. With our rearview mirror, trend is in the range of 7%. Impact to utilization, as one example, remains negative year-over-year for each quarter of 2011. Outpatient and physician remained at relatively low absolute historical levels of utilization trend with higher than the negative trend at the back half of 2010 and moving to a very low, positive trend when compared to an extremely low base period in the third quarter 2010. As we've said time and time again, we will price to our forward view of trend, which has consistently anticipated return to normal levels of utilization. In this discussion about negative utilization moving to more normalized levels, don't lose sight of the fact that facility unit costs are the largest driver of trend. We continue to be focused on managing unit cost trends on behalf of our customers every day.
Our Medicare results for the third quarter are a continuation of the strong results that we saw in the first half of 2011. Membership levels, as expected, have remained consistent with the prior quarter, while the respective MLRs of 82% for Medicare Advantage and 76.8% for Medicare Part D, were both very strong. On a full-year basis, we now expect the Medicare Advantage MLR to be towards the lower end of our previous guidance, for mid-80s, while our Part D expectation continues to be right on track to result consistent with the prior year.
Moving on to Medicaid. As Allen already highlighted, we are very excited about the launch of our Kentucky Health Plan next week, with approximately 200,000 members, as well as entering into a definitive agreement for the Family Health Partners acquisition, the leading Medicaid plan in Kansas and Western Missouri, with approximately 210,000 members. This will simultaneously strengthen our Medicaid line of business, as well as expand our presence in the Midwest region. Coventry will be providing services to nearly 900,000 Medicaid members, diversified across 10 states following the closure of the transaction, which will nearly double our Medicaid membership from today's level while positioning us well for the pursuit of further growth opportunities. Our Medicaid results in the quarter were consistent with our expectations for both membership and medical loss ratio. We are now including Kentucky Medicaid in our 2011 guidance projections, although we are not expecting the contract to have a material impact on 2011 profitability due to normal startup costs.
On the topical item, our renewal rate adjustments, state budgets are clearly challenged. We expect this dynamic to persist into 2012. While we did receive a mid-single digit rate increase, effective July 1 from the state of Missouri which represents approximately 40% of today's Medicaid business, the remainder of our adjustments were essentially flat in aggregate. It certainly creates pressure in relation to medical trend. We view our state relationships as partnerships and we continue to work with them collaboratively as we balance budget constraints with the need to achieve actuarially sound reimbursement levels.
Now let me give you some more detail around the balance sheet and cash flow. Our investment portfolio remains in excellent shape and is in the net unrealized gain position of $90 million at quarter-end, with total cash and investments of $4.8 billion. In terms of our deployable cash apparent, we have $1.15 billion available, which is after making a provision for $150 million to fund the Family Health Partners transaction, as well as the deployment of $127 million during the third quarter for share repurchase. In addition, we have a $750 million credit facility in place, which is currently undrawn. While we continue to do pursue acquisition opportunities as our preferred method of deployment, we're also committed to returning capital to shareholders through opportunistic share repurchases as a secondary option, as we have now done, each of the first 3 quarters in 2011.
Moving on to our cash flow results. GAAP cash flow from operations for the quarter was $484.2 million. This was impacted by the receipt of an extra payment, in the quarter, from CMS. So after adjusting for normalized payment pattern, our cash flow from operation's percentage of net income was still very robust 186%.
Let me now move on to our updated 2011 guidance. As detailed in our press release, we are increasing our 2011 GAAP EPS guidance to a range of $3.63 to $3.68 from prior guidance of $3.48 to $3.63 or an increase of $0.10 at the midpoint. This increase guidance range includes a $0.68 adjustment related to the Louisiana provider class action litigation, as well as the $0.13 year-to-date contribution from Private Fee-for-Service. We have included a table in the press release to show the latest guidance increase on a comparable basis to the prior quarter forecast. The largest driver of this improved earnings view was SG&A, as for the third quarter in a row, we're able to maintain our SG&A guidance range while increasing our revenue forecast. Going back to our initial guidance for 2011, we're now expecting revenue to be nearly $400 million higher without any projected increase to SG&A expense. This is a result that I'm particularly pleased with as the cost reductions that we made early in the year have allowed us to make important investments for the future while not pressuring our earnings outlook for the year. Our current SG&A guidance, as a percentage of revenue, is 16.7%, a 50 basis point improvement from our original 2011 guidance and an improvement from the strong results in 2010. During the third quarter, we have spent $1.48 billion on SG&A activities. Our full-year forecast of $2.02 billion projects that we will spend an additional $50 million during the fourth quarter, above the year-to-date run rate across a number of different investments that I want to highlight. You should note that this progression is similar to our sequential investment increase in the fourth quarter 2010. First, as Allen mentioned, we are in the midst of annual election period for Medicare, which requires resources for enrolling new members as well as advertising expenditures that we are making, particularly around our new Part D product. Then, of course, we have the normal ramp-up of spending associated with the first quarter enrollments for the commercial business. And finally, there is a launch of the Kentucky Medicaid contract on November 1, which will contribute additional SG&A expense during the fourth quarter. So the takeaway here is that we're very pleased to be able to maintain the same expense target that we started the year with, while seeing our expectations on revenue growth, launching a new health plan in Kentucky, and investing resource and capabilities associated with healthcare reform strategy and compliance.
Before I conclude my comments, I want to spend a little bit of time on 2012,while also being clear that we are not providing formal guidance on today's call. Consistent with prior year, we want to get through our budgeting process in the open enrollment periods, and we plan to provide detailed guidance on next quarter's conference call. But as Allen mentioned, we have the opportunity to grow revenue meaningfully in 2012, based upon our work in 2011, factoring in a full-year of the Kentucky Medicaid business, the addition of the Family Health Partners acquired Medicaid business for part of 2012, county expansion in Medicare risk and our new Part D product. Of course, there are always challenges in this business as well. I mentioned a few, investment SG&A spending, the difficult Medicaid rate environment, the low-interest rate environment, and conversions from risk to ASO, and so on. We look forward to providing detailed 2012 guidance, incorporating all of our businesses on the Q4 conference call. Finally, on capital deployment. We are in a very strong balance sheet position and we'll seek opportunities to deploy our capital to the benefit of our shareholders, whether it be through additional acquisitions, share repurchase or a combination of the two.
In conclusion, I'm very pleased with the results across our core businesses for the third quarter. We're increasing our full-year guidance by $0.10 at the midpoint, which shows our confidence that these favorable year-to-date results will continue through the fourth quarter. On the last call, I committed to choosing the right capital deployment avenues for our shareholders. We have shown progress here with increased share buybacks during the quarter, as well as announcement of Family Health Partners transaction, building on our Medicaid business. I can assure you that we continually seek out additional growth opportunities, both organically as well as those that will strategically improve our portfolio of businesses.
Operator, this now concludes our prepared remarks and we're ready to open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from Josh Raskin with Barclays Capital.
Joshua R. Raskin - Barclays Capital, Research Division
Just a question around the PDP expectations. It seems like there's a lot of good momentum, additional states, obviously with the new product at the lower price point. You guys are down just under 500,000 lives year-to-date. Is it fair to say you think you can get back that sort of pocket of loss? Do you think you can sort of reverse that all next year? I mean, I assume based on the duals, as well as the new product, that seems like a safe bogey. Is that fair?
Allen F. Wise
Well, I think we're really very well-positioned and that we'll regain some of that 500,000 members. But to guess what that number is at this stage is -- 8 days or 9 days into the open enrollment period is probably not useful. But we worked on this for the year and as we have looked, region by region, and we think that we're in a very favorable position and that we'll regain part of it, Josh. Whether we make it all or not, I don't know.
Joshua R. Raskin - Barclays Capital, Research Division
Okay. It's early, that's fair.
Allen F. Wise
We'll know soon enough though.
Joshua R. Raskin - Barclays Capital, Research Division
On the M&A front, you guys historically have been -- I guess, what I would consider value buyers, fixer uppers. It seems like you've transitioned to -- you guys are buying a Medicaid plan now. Is that indicative of your thought that the valuations around Medicaid plans are now coming back to a little bit more reality? And maybe, conversely, should we think about the changes in some of the M&A transactions on the Medicare Advantage front? Maybe putting you on little bit further way from that side?
Allen F. Wise
I don't think we've changed our view in terms of valuation. I mean, for the plan we just announced, that had $80 million in statutory net worth, $20 million tax benefit. And it gives us a cost structure, in the Midwest and the Western part of Missouri and Kansas, and to complement the cost structure we have in Wichita with our preferred relationship with Via Christie. So we really feel pretty strongly that this is kind of classic things that we like to do, long-term strategic relationships and a cost structure that's going to let us play for a long time in the areas. I don't think, when you add up all the pieces, it's much of a departure from how we've always done things.
Joshua R. Raskin - Barclays Capital, Research Division
Has Medicare gotten a little pricey? I mean, just on a per member basis, look at the valuations in recent months have come a little bit higher? So I'm just curious of the effects there.
Allen F. Wise
Well, I think it's gotten pretty pricey.
Operator
Our next question will come from Matt Borsch with Goldman Sachs.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Could you guys comment on what you're seeing in the pricing environment? And then maybe I missed your comments at the opening but some, not all, of your peer companies have reported seeing intensification of price competition in some selected geographies. And I don't think that you're necessarily in those so I'm just wondering what you're seeing.
Randy Giles
Well, generally, in terms of pricing. We see pricing remaining rational and we don't see -- I think it varies by market, obviously, but I think we're seeing pricing remaining rational in most of the markets we are competing in. So at this point, we haven't seen tremendous variations in that.
Allen F. Wise
It probably hasn't changed much. I mean, there a couple of markets where it's difficult now. But we're in 20-some markets, it always ebbs and flows and I don't think it's much different than it's always been. Tough in Pittsburgh, tough in Highmark, going to West Virginia. But it's always tough somewhere.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
And at this point, just to be clear, the statement you're willing to make about 2012 is that you can see revenue higher in the range of $1.5 billion to $2 billion. Did I get that right?
Allen F. Wise
Correct.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
Okay. Can you give us any information on the MLR rebate accruals? I assume that's a considerable impact for you guys in what you've accrued year-to-date?
Randy Giles
We generally don't break that out separately. But we have it in accrual, it is significant for us in terms of the rebate accrual amount. It has, obviously, affected year-over-year comparisons.
Matthew Borsch - Goldman Sachs Group Inc., Research Division
And as you go forward into 2012, are you managing the rebate accrual a little bit differently? In other words, some other companies have talked about that they are paying out maybe larger rebates for 2011 or they expect to be. And they will, in effect, pay out those rebates more proactively going forward by reflecting that in price to a greater degree. Is that where you guys are?
Randy Giles
Generally, as it relates to pricing on our rebates. Generally, positioning regarding the rebates is one of the factors that goes into our pricing calculations. But it's one of many things that goes into -- our rebates are concentrated -- over 85% of our rebates are concentrated within 15 markets cells, so out of 113. So if you think about pricing, for us in general, the rebate calculation will impact most of our rate cells. In those cells where we do have rebates, we're looking at what can we do to improve our cost structure, can we enhance benefits that get members to make better choices around healthcare, and that will lead to a lower cost structure, and selectively taking actions to try and grow our business.
Allen F. Wise
It represented a significant challenge for us. And I feel, really, pretty darn positive about being able to maintain Commercial Risk membership. And we have an MLR that's fairly close to what we targeted because it's, as they say, not an exact science. And the world that we lived in before, where we had some very favorable markets and some that weren't so favorable, and we could blend those together, worked just great. Well, it doesn't work in today's arena. I'm pretty pleased. You can certainly grow membership if want to give up some margin and you can grow earnings if you want to give up some membership. But in a difficult environment, to maintain our market position and maintain our membership and be close, I think, is one of our more significant accomplishments here this year.
Operator
Our next question comes from Ana Gupte with from Sanford Berstein.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
In context of the Healthspring acquisition by Cigna, I think Barron's said something about you being a potential candidate for takeout, it happens periodically. And in light of your disclosure, today, about your extension of contract, indefinitely. Can you kind of put all those together for us and give us your thoughts, Allen, on what you think about consolidation in the industry, the likelihood and attractiveness of your asset to someone else, and what combinations might make sense?
Allen F. Wise
Well, one comment that I would make is that, and I've probably made before, is that our margins are under attack from just about every business. Whether it's the government as the payer or whether it's other risk businesses. So we are dedicated to growing this place and growing revenue because we think that margins are going to be harder to come by. And I think that's reflected in our focus on Medicaid and our focus on the 3 last acquisitions we've done. I think that the business is getting more difficult and that the consolidation will continue. And if we don't employ best business practices, some of us won't be around.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
And is the likelihood or the attractiveness of consolidation more, you believe, at the local market level? Do you feel disadvantaged still? Or at this point, are your discounts, and this is an ongoing question, are your discounts comparable to others? Would there be any advantage in more density at the local level or is it more about SG&A? And do you think you're doing well enough on your own organically, and you are on an SG&A front, but do you see yourself...
Allen F. Wise
Drew Asher sitting next to me and he has overseen M&A for more than a decade here. Drew, do you want to have a go at that answer?
Drew Asher
Yes. Clearly, Ana, cost structure really is key to any acquisition, as well as kind of our ongoing businesses. And we feel pretty good about our market positions, where we have chosen to do business in the 25 commercial states in which we do business. So there are places where we don't have cost structure and that's where we don't have health plans, and that's intentional. And clearly that's an element that we look for in acquisitions and I assume others look for when they are considering targets as well.
Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division
And a final question on the share repurchase you did. You accelerated it in the third quarter. Should we view that as run rate or is that more opportunistic in light of the pullback in the shares?
Randy Giles
I think, in terms of share buyback, it was -- obviously, part of it was opportunistic, given what was happening in the broader -- the markets. And it's something that we dynamically manage quarter-to-quarter and on an ongoing basis, and we reassess what we're going to do. We're committed to continuing our repurchases but we're really not committed to any specific level.
Operator
Next we'll go to Kevin Fischbeck with Bank of America Merrill Lynch.
Joshua Kaplan-Marans
This is actually Josh Marans in for Kevin. Just wanted to dig a little deeper into the commercial and MLR trajectory. Obviously other companies in the space have been showing upside in the commercial MLR. I just wanted to get your thoughts there, on why Coventry isn't seeing it. And then, more specifically, whether -- you said previously, that trend has picked up higher into 2012 and you saw low point utilization in the back half, sorry, trend higher in 2011 and you saw low point utilization in the second half of 2010. I just wanted to ask if that higher trend has been lower than you thought, coming into the year.
Randy Giles
Looking at the commercial group MLR, again, year-to-date MLR is 81.3%. We're forecasting, full-year, at 81% plus or minus 50 bps. That's consistent with our previous guidance. August had the highest seasonality factor of any month for us in 2011. Particularly in August, we saw that utilization was higher, we have a lot of school district customers and that's typical for us to have higher cost in that timeframe. We're seeing utilization becoming less negative, approaching flat. And given the comparison period, year-over-year, that has an effect of pushing up aggregate trend compared to the trial levels of the second half of 2010. I would say, in terms of expectations around utilization, we've talked about -- our trend view was 80% on a forward basis, and on a rear basis, that's 7%. So in that context, yes, I think trend is coming in a little lower than anticipated but it's moving I think upwards toward our forward view. And it's mixed. I think, surprisingly, inpatient utilization has remained negative year-over-year, in every quarter this year, and that was somewhat unexpected. Physician and outpatient has moved more upwards to more of a low positive number, from negative levels. But, yes, the components are moving around, but in aggregate result is, when you compare it to an extremely low second half of 2010, you get more of a higher trend view.
Joshua Kaplan-Marans
So if an aggregate, trend has come in lower than you expected heading into the year. Why hasn't there been more EPS upside driven by the commercial MLR line? Is it just a reflection of the fact that Coventry has a higher percentage of premiums that are below MLR floors?
Allen F. Wise
Yes. The answer to that is -- it's kind of heads we lose and tails we lose. If we have favorable markets, which we do, it increases our rebate liability. And if we have markets that -- and we do, that are in the mid- to high 80s, there isn't any freebie upside anymore. It's just a more difficult environment for us.
Randy Giles
I think, one other factor that's impacting us, as you saw in our second quarter 10-Q, our reserve development during 2011, from prior year, was favorable and within the historical norms. But certainly not at the robust levels we saw 2010 relating to 2009 year-end reserves. So our prior period development, excluding Private Fee-for-Service, was $29 million higher during the first 6 months of Q2 2010 and the 6 months of this year. So MLR is a little pressured by the lower prior period development.
Joshua Kaplan-Marans
Okay. So that implies there's close to $0.19 headwind, excluding Private Fee-for-Service development in 2011, from lower prior period development. So when you think about the outlook for 2012, would you expect there to be any headwind or tailwind heading into 2012, relative to 2011, in terms of prior year development?
Drew Asher
Just to be clear, Josh, it was $29 million. Not cents, delta. Between the prior period development first 6 months last year and the first 6 months this year.
Joshua Kaplan-Marans
Okay. But I guess there's still -- so maybe it's not -- well, I guess, in the second half of 2010, there was additional development as well. And you did mention in the second quarter 10-Q that Coventry expects minimal favorable development in the second half of 2011 related to 2010. So if you think about the total amount of prior development in 2010, excluding Private Fee-for-Service runout versus the amount that you're going to get for 2011, it comes out to about a $0.19 headwind in 2011. So my question is just, if you think of the current prior period development in 2011 as a good number to think about for 2012.
Drew Asher
I think your math is a little off. We should probably follow-up afterwards. You may be comparing apples and oranges, relatively to the back half of periods. But, Randy, as he addressed in his script and the comments, that's certainly an area that has had a negligible effect but an effect on this year's reported commercial MLR.
Randy Giles
Last comment I would make on that is, as we look at days in claims payable, DCP, that's increased every quarter. This year we're now -- up to 50.5, to addressing part of your question.
Operator
Next we'll go to Doug Simpson with Morgan Stanley.
Doug Simpson - Morgan Stanley, Research Division
I apologize, I missed the first part of the call. But if you could talk a little bit about your view of capital deployment priorities, within the context of the deal this week and then just -- how did you think about the return on that investment versus buying back your own stock, given where the stock is? And how do you think about priorities over the next 12 months on that front?
Allen F. Wise
I guess, we're doing both. We're always seeking opportunities in businesses that we understand and geography we like, and with long-term cost structure, that puts us in advantage. Realistically, while we can't find enough of them to meet our criteria, to utilize our cash. So we would prefer to grow our business, realistically. If you're a prudent buyer -- and I think we historically have been. Still think we've, historically, been able to find enough. So we're going to do more share repurchases. We're going to do both. But our preference would be to invest it all in the business, but I don't think that's possible, so what you saw in Q4 is an acceleration of share buyback. And barring some great M&A opportunity, I think that what you've seen in Q4 is what you'll see -- or in Q3, is what you'll see in the future.
Doug Simpson - Morgan Stanley, Research Division
If you just baseline us on -- if you had to pick sort of a run rate level of capital apparent that you know you'd like to run the business with on a sustained basis and you think about the cash balance you have now. Under what scenario would you think about closing that gap more aggressively with buybacks? Recognizing that it seems like you would still have pretty good access to the capital markets in the event that you would need to finance a deal? How much cushion do you need and how do you think about that?
Allen F. Wise
Let me answer that in a different way. I don't think we're going to sit on a huge pile of cash indefinitely. We will be more aggressive in investing it in the business, or doing share repurchase.
Doug Simpson - Morgan Stanley, Research Division
Okay. And then, just on the provider-sponsored deals. 2014 obviously, coming up -- it's going to come quickly. Given some of the changes under PPACA, you could see why more providers may want to think about doing something with those assets. Can you just talk about the pipeline broadly, that you're seeing, maybe now versus a year ago? Are you seeing an uptick in the size of that pipeline? And how would you expect that to trend the next year?
Allen F. Wise
Well, we look at we look at a lot of properties, and I guess we look at 20 for every one that works for us. And in terms of the pipeline, I think it's improving substantially, in the last quarter or so. I guess, as reflected by transactions that have been announced, too. But I think that the mindset of people with assets out there, where they have gone through a period of not knowing what to do. And I think that, strategically, businesses are tougher for everybody and the revenue is going be hard to come by. So I think the pipeline will improve, and has, the last quarter or 2.
Operator
Our next question comes from John Rex with JPMorgan.
John F. Rex - JP Morgan Chase & Co, Research Division
Allen, as you look at kind of the margin profile in your current commercial book, and you kind of think ahead. So do you view yourself in kind of a sustainable margin profile right now, when you think about the competitive markets in those regions? You've made some commentary that every business gets more competitive every year, or would you think that, as you think about pricing in out years, that margins would have to come in, still, on those books?
Allen F. Wise
I think that the margins in the commercial piece, with the given -- being that we grow the business a bit, or hold our own in the business, are not going to change a lot. I think we'll get a little better in a year or 2, managing the individual loss ratios by market than we did in year 1, when we missed a couple of prices on the high side. So I think that'll improve a little bit. I think we did pretty decent for the first year. It was a substantial challenge but, I think, we'll get a bit better because we had a couple of markets where we just missed on the high side.
John F. Rex - JP Morgan Chase & Co, Research Division
And with at least $1.5 billion of new revenues coming on '12, is there any probable reason why you wouldn't grow earnings off your core '11 when you think about the '12? And I'm just talking probable.
Allen F. Wise
These are new businesses. If we're able to make up 1/2 or 2/3, or greater, of our Part D business, I think we'll have an attractive margin on that business. The Kentucky Medicaid business haven't received their first penny of revenue yet, so we'll have to comment on that, better, in a quarter or probably 2 quarters. Haven't closed the Children's Hospital transaction yet, just announced it this week. We know the revenue is going to be there, and the second step is that we'll, over time, figure out how to make a reasonable margin. We have always been disciplined on the cost structure side, but it's just too early yet to put a plug in the budget. But the goal has been to grow the revenue around this place and grow our businesses, and we're on target to do that. And I think we'll get a reasonable margin, whether that's 6 months and coming, after getting up and rolling, or whether it's longer, I don't know. But there'll be some margin in there, I just don't know long traditional, there's too much we don't know yet.
John F. Rex - JP Morgan Chase & Co, Research Division
Right. Assuming that there would likely be some margin on that $1.5 billion to $2 billion, next year -- I mean, it would seem improbable there won't be some growth off that quarter. Is that a fair statement for me to make?
Allen F. Wise
Yes. Absolutely.
John F. Rex - JP Morgan Chase & Co, Research Division
Okay. And then just, I missed -- the headwinds/tailwinds discussion went a little fast. so let me sure I got the headwinds, SG&A investment, Medicaid rates, interest rates, conversion from risk to ASO. Is that right?
Randy Giles
Yes.
John F. Rex - JP Morgan Chase & Co, Research Division
Okay. I think tailwinds and Medicaid, Medicare. Did I miss one there? I'm so sorry, Randy, was that the...
Randy Giles
Yes, I think you got it.
Operator
Next we'll go to Peter Costa with Wells Fargo Securities.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
How big was that state of Illinois account, that switched from risk to ASO?
Allen F. Wise
30,000 members.
Drew Asher
About half of it switched to ASO and we picked up some additional members, as well, in ASO.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Only half of it switched?
Drew Asher
Yes.
Allen F. Wise
A little over half...
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Okay. So you just had like maybe 3,000 member growth in the Commercial Risk business x that?
Allen F. Wise
That's about right.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Okay. And then, I think last time you gave the portion of your business that was -- in rebate status it was 40% on overall book and then this time it was about 35%. So it seems like it dropped a little bit. Was that a result of pricing or was that as a result of cost trend?
Allen F. Wise
It's actually the same, as prior quarter, in terms of percentages.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
And I thought you'd -- worked out to 40% before. Okay. And then can you talk a little bit about West Penn, and Highmark, and UPMC, and all the turmoil going on in that market, and how that's affected your enrollment for next year?
Allen F. Wise
Well, it's been difficult in Western PA market for a long time, being caught between Highmark and UPMC. I think that the membership has been tough to come by, out there, for the last year. And whether or not it gets better, now that we're in contract with UPMC. I guess Presbyterian Hospital in other areas, it may get slightly better, but I don't know how it'll get any tougher.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
And you haven't really seen any real impact, yet, in terms of your enrollment?
Allen F. Wise
Well, it's been very difficult prior to the Highmark West Penn relationships. It's been very difficult being caught between too aggressive not-for-profits out there, and not having UPMC. I think, actually, it gets a little less chaotic and a little less better, but it's very difficult before the West Penn.
Randy Giles
Clearly there's customers that have traditionally -- we've not had a chance to bid on. We're seeing opportunities to bid on customers, particularly now that we have UPMC and the network under a long term deal.
Allen F. Wise
Nothing really new there, in terms of how difficult the environment has been. We've always had a niche there. We've always had periods where we've lost membership and stayed out of harm's way, and then regained it when pricing became more rational. No real change. The bottom line is, Commonwealth; the PA marketplace; genesis of our company; and the most profitable plan we have; and we manage, carefully, the discipline of not participating in prices that are going to guarantee a loss, and really no change over a pretty long period of time.
Operator
Next we'll go to -- actually, our final question today will come from Charles Boorady with Credit Suisse.
Charles Andrew Boorady - Crédit Suisse AG, Research Division
First question, you've acquired about $1 billion in revenue in 2012 through the PHS and Mercy plans. And I'm just wondering if you can talk about how those acquisitions have tracked in 2011 versus your expectations and how you see them playing out through 2012.
Randy Giles
Actually, better than our expectations. The Wichita acquisition and the cost structure that we got there has allowed us to grow it. Small group at 5x of level that we've ever done before. The plan contribution is fivefold what we were expecting there. Mercy is a little newer but it's tracking very well and, at this stage, above our expectations. So both of those -- I wish I could find one a quarter. Those are the things that work very well, for us.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Me too. You got the cash for it. And next question. In light of the fast growth in Medicaid that we're expecting is becoming a bigger part of your business. And given that we're seeing signs of some state rate pressures, California getting the okay from CMS to cut providers 10%. I'm wondering if you can just share the nature of your provider contracts in Medicaid, the extent to which, perhaps, price changes are automatically passed through to providers in a form of capitation or contracts tied to fee schedules. So that we can assess the risk to your margin from state price action.
Allen F. Wise
It'd really be a market-by-market answer. And it's not possible to generalize, except that we're in this business understanding that the revenue is going to be more difficult, that our cost structure has to be something that we continually improve and we have to learn to take better care of the patients, especially the dual eligibles. So long-term, we think that the revenue is going to be difficult. We're going to have to be better at it than some of the other people in the business, and we feel very confident that we can do that. But in terms of Florida's difference, and Missouri, which is different than Michigan, and what we do market-by-marketplace, you can call up after the call and we'll do our best to answer that more specifically. But...
Randy Giles
There was a recent example of where a state was making a rate change and we were able to immediately achieve a reduction and reimbursement to the providers related to that. So that's something we're, obviously, managing aggressively and something we focus on.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
Got it. And so, state-by-state, I'll follow-up with you afterwards. But it sounds like, philosophically, you don't have a sort of cookie-cutter model for all your markets in terms of the nature of the provider contracts. And so we really need to look at it on a state-by-state basis.
Allen F. Wise
I think that's correct. Yes.
Peter H. Costa - Wells Fargo Securities, LLC, Research Division
And just finally the cash apparent of $1.1 billion, that's after paying for the recent acquisition?
Randy Giles
Correct.
Allen F. Wise
Thanks for joining us. That concludes the call, operator. Thank you.
Operator
And that does conclude today's conference. Thank you for your participation.
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