Magellan Health's (MGLN) CEO Barry Smith on Q2 2016 Results - Earnings Call Transcript

| About: Magellan Health (MGLN)

Magellan Health, Inc. (NASDAQ:MGLN)

Q2 2016 Results Earnings Conference Call

July 29, 2016 10:00 a.m. ET

Executives

Renie Shapiro Silver - Senior Vice President, Corporate Finance

Barry Smith - Chairman and Chief Executive Officer

Jonathan Rubin - Chief Financial Officer

Analysts

David Styblo - Jefferies

Ana Gupte - Leerink Swann

Operator

Welcome and thank you for standing by for the second quarter 2016 earnings call. [Operator Instructions] this call is also being recorded. If you have any objections, you may now disconnect. Now, I will turn the meeting over to Renie Shapiro Silver. You may begin.

Renie Shapiro Silver

Good morning. Thank you for joining us today for Magellan Health’s second quarter 2016 earnings call. I am Renie Shapiro Silver, Senior Vice President of Corporate Finance. With me today are Magellan’s Chairman and CEO, Barry Smith; and our CFO, Jon Rubin.

This conference call will include forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed. Please refer to the complete discussion of risks in our most recent reports filed with the SEC and in the cautionary note in today’s press release.

In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, adjusted net income and adjusted EPS which are defined in our SEC filings and in today’s press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries, but excludes segment profit from non-controlling interest held by other parties, stock compensation expense, impairment of intangible assets, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions.

Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration and impairment of intangible assets, as well as amortization of identified acquisition intangibles. Please refer to the tables included with this morning’s press release, which is available on our Web site, for a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures.

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

Barry Smith

Thank you, Renie. Good morning to all and thank you for joining us today. As you read in our press release this morning, for the second quarter of 2016, we have produced net income of $4 million, EPS of $0.16 and segment profit of $56.9 million.

Second quarter adjusted net income was $14.4 million and adjusted EPS was $0.58. For the six month year-to-date period, we produced net income of $17.2 million, EPS of $0.70 and segment profit of $116.8 million. Adjusted net income for the six month period was $33.8 million and adjusted EPS was $1.38. Year-to-date through Wednesday, July 27, we repurchased approximately 376,000 shares for a total cost of $25.5 million at an average price of $67.78.

To date, we have completed approximately 22% of our current $200 million share repurchase authorization. We ended the quarter with $236.3 million of unrestricted cash and investments. I will now discuss our segment highlights starting with our pharmacy business which continues to have strong financial and operational results.

During the second quarter, we experienced strong sales results across all of our markets. Our employer business grew by over 40,000 net lives during the second quarter. We continue to make positive strides in the managed care segment and were awarded full-service PBM contracts for two local health plans. One will go live in the fourth quarter of this year and the other on January 1, 2017. We launched a state Aids drug assistance program on July 1. Annualized revenues are expected to be approximately $325 million with low single digit margins.

Our Medicare Part D prescription drug plan continues to add members and currently has over 51,000 lives. In addition, we submitted our annual bid for 2017 to CMS and expect to have information any day on which regions we will receive auto assignment of members for 2017 and in the specialty market, we now cover approximately 12.4 million lives in our medical pharmacy program, an increase of nearly 700,000 from last quarter. In addition, we continue to expand our formulary management business, adding new clients and expanding drug categories with existing clients.

Our pharmacy team remains focused on a number of strategic efforts to continue driving growth and customer results. We have successfully transformed over three-fourths of our commercial business through our own traditional mail order facility and will complete this effort by early fall. In addition, we continue to enhance our clinical programs and advanced analytic capabilities to deliver targeted value-based management strategies for our customers.

In our healthcare business, the second quarter results were solid and reflect continued progress in executing our key priorities. Strategically, we have made important strides in several key areas. First, we are seeing continued improvement in our Florida Specialty Plan, serving individuals with serious mental illness. We are effectively executing against all of our medical action plans and other initiatives, resulting in improved performance. In addition, membership has grown and is now at 57,000 lives.

Next, we have supplemented our capabilities in special population management with the recent acquisition of Armed Forces Services Corporation, AFSC, which closed on July 1. AFSC expands our presence in the federal and military space and combines Magellan's clinical expertise with AFSC's extensive experience providing and managing services for various federal agencies, including all branches of the armed forces. This acquisition allows for the first time to participate as a prime contractor instead of as a sub-contractor. It has significantly increased our contract base in the federal and military space and enhanced our management team. It also affords us the opportunity to up sell some of our products and services to AFSC's approximately 60 existing contracts.

And third, we are bolstering our commercial business by investing in population health capabilities and innovations such as co-located provider models and collaborative care with accountable care organizations. Our co-located provider model utilizes advanced analytics to identify individuals with high touch BH needs, designs personalized care delivery plans and coordinates care between medical and behavioral providers, delivering comprehensive integrated care solutions.

Lastly, we recently sold our risk-based behavioral health product to a regional health plan, that was previously only a specialty solutions customer, deepening our client relationship with additional offerings. The pipeline across our healthcare business is growing. In the managed long-term care services and support, so MLTC, MLTSS space, several states have either recently issued or will issue RFPs. We are evaluating these opportunities to manage this population either directly through partnerships or as an outsource vendor.

We continue to monitor other longer-term opportunities to manage SMI, LTSS or IDD populations in states such as Arizona, Texas and Louisiana, just to name a few. We are still expecting RFPs for three new Pennsylvania counties behavioral health programs in the third quarter of this year, with effective dates mid-2017 and late 2018. Our pipeline of commercial behavioral health, advanced imaging, cardiac and musculoskeletal opportunities, is stronger than we have seen in recent years. And as most of you know from the media coverage, the epidemic of opioid abuse is generating significant dialog and proposals from federal and state governments as well as health plans and employers.

We believe that there will be future opportunities for increased in government funding for access to treatment and services which may foster the demand for our unique expertise in this area. As we grow and refine our programs to manage SMI, LTSS and IDD populations as well as implement new and innovative programs with our commercial and federal customers, we are also identifying new opportunities both organic and inorganic to grow our healthcare business.

I will now turn the call over to John, who will provide you with more details on our first quarter results. John.

Jonathan Rubin

Thank you, Barry. Good morning, everyone. Revenue in the second quarter of 2016 was $1.2 billion, which is up almost 1% from the second quarter of 2015. This increase is attributable to the impact of new business and same store growth as well as revenue from our acquisition of TMG, which were partially offset by the loss of revenues associated with terminated contract.

Our segment profit for the second quarter of 2016 was $56.9 million, an increase of 7% from the second quarter of 2015. This increase in segment profit is primarily due to the impact of new business, net same store growth, strong earnings in our pharmacy business, and the inclusion of TMG's results in the current quarter, partially offset by the impact of contract termination. In addition, the current quarter includes a loss of approximately $4.5 million from our Part D plan, the majority of which we project to be timing related as a result of benefits seasonality in the first half of the year.

Including in segment profit this quarter is approximately $2 million of net favorable non-recurring item, mainly related to $5.5 million of favorable prior period medical claims development in the healthcare segment, partially offset by one time corporate costs related to the AFSC and TMG acquisitions, as well as severance expense. For the second quarter of 2016, adjusted net income was $14.4 million and adjusted EPS was $0.58 per share on a diluted basis. For the second quarter of 2015, adjusted net income was $14.7 million and adjusted EPS was $0.56 per share. The change in adjusted net income between periods was mainly due to a higher effective income tax rate offset by higher segment profit in the current quarter.

Net income and EPS for the second quarter of 2016 were $4 million and $0.16 per share on a diluted basis. This compared to net income and EPS of $4.6 million or $0.17 per share on a diluted basis for the second quarter of 2015. In addition to the items affecting adjusted net income explained previously, the change in net income between periods also reflects lower contingent consideration expense since stock compensation expense related to acquisition, partially offset by an impairment of acquisition intangibles in the current quarter.

During the current quarter we recognized $4.8 million in impairment charges which are reflected in direct service costs and other operating expenses in the consolidated statements of income and are reported within the healthcare segment. This request of full impairment of the FIDA and Medicare Advantage customer contract intangibles recorded for our investment in AlphaCare.

As a result of the lower than anticipated FIDA enrollment across the New York market, we have decided to exit the FIDA and Medicare Advantage programs at the end of this year. However, we remain in the MLTC program and anticipate growth opportunities in this business.

Now before I review each of our segments results, I would like to remind you that we revised the presentation of corporate costs to more full allocate costs to our healthcare and pharmacy businesses, which is more representative of the earnings of each business on a standalone basis. In my following discussion of results, we restated prior results to reflect this change.

In our pharmacy management segment, second quarter segment profit was $32.3 million as compared to our 2015 second quarter segment profit of $26.7 million, reflecting an increase of 21%. This year-over-year increase is primarily due to strong specialty, employer and government results as well as new PBM sales. These positive variances were partially offset by the seasonality in our reported Part D results. For the second quarter we recorded Part D revenue of $65 million and we now anticipate full year revenue in excess of $270 million.

As noted, the normal seasonality of Part D will result in lower reported segment profit in the first half of the year with stronger results in the second half. Now turning to our healthcare business, segment profit was $34.4 million, an increase of 9.2% from the 2015 second quarter segment profit of $31.5 million. This increase is mainly due to new business in same store growth and the inclusion of TMG's results in the current quarter, partially offset by the impact of contract termination. Segment profit for the current quarter included $5.5 million of favorable prior period medical claims development.

In our Florida SMI specialty plan, we have seen continued benefit from our operational and medical action plans. We have strengthened our clinical care programs which has resulted in a reduction in in-patient admissions. In addition, we have seen benefits from our recently launched emergency room program that reduces costs for emergency room business. We have also implemented several disease specific care management programs to ensure appropriate treatment for these complex cases and they are showing early signs of promising results.

In Florida, our year-to-date medical loss ratio was in the high 80s on a reported basis and as we make further progress on our network, fraud, waste and abuse and care management initiatives, we expect to drive further improvement over the balance of 2016. As our plan continues to mature, we are confident that we are on track for long-term success.

Regarding other financial results, corporate costs inclusive of eliminations but excluding stock-compensation expense, totaled $9.8 million, which represents a $4.8 million increase from the second quarter of 2015. The increase is mainly due to cost related to the recent AFSC and TMG acquisition and to higher severance cost. Excluding stock-compensation expense, changes in fair value of contingent consideration and impairment of acquisition intangibles, total direct service and operating expenses as a percentage of revenue, were 17.1% in the current quarter as compared to 15.1% for the prior year quarter.

This increase is primarily due to the inclusion of TMG in the current year, the impact of business mix changes and higher corporate costs in the current year quarter. Stock compensation expense for the current six-month period was $18.4 million, a decrease of $9.3 million from the prior year period. The decrease is primarily due to expenses included in the prior year period related to restricted stock purchase from sellers from the CDMI acquisition as well as lower annual grants in 2016.

The effective income tax rate for the six months ended June 30, 2016, was 62.6% compared to 46.8% for the prior year period. The increase in the effective tax rate was mainly due to valuation allowance increases in 2016 with respect to losses at AlphaCare which is outside of our consolidated tax filing group.

Turning to cash flow and balance sheet highlights. Our GAAP cash flow from operations for the six-months ended June 30, 2016, was the use of $66.2 million compared to cash flow from operations of $112.7 million for the prior year-to-date period. Our GAAP cash flow includes the shift between restricted cash and restricted investments, which affects the sources and usage of cash from operating and from investing activities.

Adjusting for the impact of these shifts, cash flow from operations for the six-months ended June 30, 2016, was the use of $34.8 million compared to a source of $49.5 million for the prior year period. This decrease of $84.3 million in operating cash flow is mainly due to current year contingent consideration payments, as well as the buildup of approximately $55 million from our Part D business in receivables, partially offset by other net favorable working capital changes.

This year the company has made contingent consideration payments of approximately $91 million of which $51 million is reflected as operating activities and $40 million as financing activities. As June 27, we closed an additional $200 million term loan. The purpose of this facility was to provide funds to address capital needs for the AFSC acquisition, Part D plan receivables and for contingent consideration payments. This term loans matures on December 29, 2017.

As of June 30, 2016, the company's unrestricted cash from investments totaled $236.3 million which represented increase of $76.1 million from the balance at December 31, 2015. Our unrestricted cash and investments balances after payments for year-to-date share repurchases of $25.5 million, cash used for 2016 acquisitions of $16.2 million, contingent consideration payment of $91 million and reflects the proceeds from the new $200 million term-loan, as well as a $25 million draw on our revolver.

Approximately $78.5 million of the unrestricted cash and investments at June 30, 2016 is related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at June 30, 2016 of $330.7 million, reflected a decrease of $84.3 million from the balance at year-end. This decrease is primarily attributable to the use of restricted cash for the payment of claims and other liabilities associated with terminated contract.

Regarding the impact of the recent acquisition on our 2016 guidance, AFSC is expected to generate revenues of approximately $90 million and segment profit of $8 million over the last six months of this year. Stock compensation expense and depreciation and amortization related to this acquisition are approximately $1 million and $3.5 million respectively. The accretive impact to net income is approximately $2 million or $0.08 per share. The accretive impact to adjusted net income is approximately $6.4 million or $0.26 per share.

Relative to full year 2016, to date we have sold approximately $660 million new business revenue to be recognized this year. This compares favorably to our previous projection of $625 million and our original guidance of $400 million. Because of implementation cost and lower margins on new sales, we do not expect the 2016 segment profit impact of this to be material.

We are revising our guidance to reflect the impact of the AFSC acquisition, the impairment of AlphaCare contract intangible assets, higher than anticipated pharmacy revenues and recent share repurchases. We now expect revenue to be in the range of $4.76 billion to $5 billion and segment profit to be in the range of $271 million to $291 million. We are revising our expectation of net income to be $49 million to $68 million, which equates to EPS between $1.99 and $2.77 per share.

Adjusted net income is expected to be between $85 million and $104 million with adjusted EPS between $3.45 and $4.22. EPS and adjusted EPS are based on average fully diluted shares of $24.6 million. This updated share count reflects share repurchases and option exercises through July 27 but excludes any potential future activity. In addition, we are revising our guidance for cash flow from operations to a range of $104 million to $135 million due to the acquisition of AFSC.

Now compared to the first half of 2016, we expect the second half of the year to produce stronger segment profit due to the following factors. The seasonality and timing of care results and customer settlements, mainly in our healthcare business, normal earnings seasonality in our Part D plan, the impact of new business growth across our businesses, our improved care management results primarily In MCC of Florida, and the impact of AFSC and TMG acquisitions.

In closing, I believe we are on track to meet our full year financial objectives. In addition, I am encouraged by our strong sales results and pipeline in both our healthcare and pharmacy businesses. With that, I will now turn the call back over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from David Styblo from Jefferies. Your line is now open.

David Styblo

So maybe I could start up on just the guidance that Jon you were talking about a second ago and can you help just to, maybe the granular part, to make sure that we understand it. So I think AFSC is, from what I heard, about a plus 8, and then the write-off and the tangibles I think was a negative 5. Were those the two largest, key components and the rest are sort of better operating improvement.

Jonathan Rubin

Dave, when you are asking the question, you are referring to the guidance for the second half of the year?

David Styblo

I was referring to just the entire segment profit, full year guidance increase.

Jonathan Rubin

The increase.

David Styblo

I think it's $7 million or $8 million, $8 million.

Jonathan Rubin

Yes. It's really primarily the AFSC acquisition, the $8 million.

David Styblo

Okay. But then you also, I guess, have the write-off and they are $5 million too? Right?

Jonathan Rubin

Yes. But that’s not a segment profit item, Dave, that impacts net income and is factored into our guidance for that component.

David Styblo

Okay. That’s not a segment profit item. Okay.

Jonathan Rubin

No.

David Styblo

Okay. I thought that was captured in there when you guys reported it this quarter.

Jonathan Rubin

No.

David Styblo

Okay. All right. I'll maybe back about that, okay. I see. And then shifting over to the pharmacy business and the Part D. So I think you guys lost $4.5 million last quarter, $4.5 million this quarter again. Usually seasonality of that business tends to improve pretty markedly throughout the year and sequentially. Curious, just what sort of experience you are seeing on that book and what gives you confidence that that will continue to increase. What's embedded in your guidance for profit or segment earnings on that Part D book for the full year?

Jonathan Rubin

Dave, as we talked about, sort of consistently since last quarter, two things. One is if you look at the full year, we don’t expect the profitability of that book to be material. Think of it in broad terms as breakeven. So we are expecting improvement over the second half of the year. Also, as we talked about last quarter, we did expect the reported losses to kind of beat essentially the first two quarters of the year. And that’s based on a couple of things. One, the timing of when people kind of go into the donut hole or coverage gap but also when we start to get the federal reinsurance for some of the higher cost claimants over the course of the year. So this is not a bright line but in general what we are expecting is the losses we have seen over the first two quarters being largely offset over the last two quarters of the year.

In terms of what gives us confidence, I mean there is still some potential volatility as there always is in the insured book of business like this but we have been tracking pretty closely the claims activity. Compare that both to our internal and external actuarial projections and believe that we are on track relative to what we expected and what the assumptions would say, the claim activity should be at this point of the year. Obviously it's something we watch every month and every quarter and we will give an update as we go through the next year.

Barry Smith

And Dave, Barry as well here, if you could recall, we initially thought we would have about 14,000-15,000 covered lives and now we have 51,000. So in that respect we have had a much greater revenue opportunity here than we anticipated but also exacerbates the donut hole issue. But as you pointed out, we expect it to recover nicely in the third and fourth quarters of the year.

David Styblo

Okay. Got it. And then maybe more broadly about the pipeline there. It sounds like things are continuing to look bright. I think you flagged a couple of additional wins, one starting out in the fourth quarter and then in January. Anyway to sort of give us a size or magnitude of those as well as there has been some comments and I am sure you have seen the articles about potential customers pushing back on PBM. What's your dialog with your customers? Maybe it doesn’t affect you guys as much because you are working with the smaller, mid-size employers. So what sort of conversations and dialog are you having from them about potential push back?

Jonathan Rubin

Let me answer the first part of the question and then I will let Barry comment on the second. Relative to the two managed care sales we talked about in the quarter, they are very important for us because it really signifies our advancement in traction that we are making in the managed care market and believe as we move forward, will give us strong referencable customers and a track record that we can build off of. These two plans are local health plans as we noted. So I wouldn’t look at them, Dave, as being material financial on their own, but obviously very important to us as we advance our strategy.

Barry Smith

Yes. Let me give you a little color Dave on the question about the push back by customers. Our model is fundamentally very different in how we present to our clients. We have got a very transparent model. Our clients know and understand how we make money and we do in a way where we deliver value by component. Much much higher clinical content, greater involvement in medical pharmacy and what we do in specialty is a good case in point. So the nature of our relationships in contrast are fundamentally different. We don’t have mega client contracts where essentially they have control over us and they can essentially mandate what you will do going forward. So you have much more contention given these more traditional, less transparent agreements.

In our book of business we have our, our larger clients are 10,000, 20,000, 30,000, 40,000, employer groups and regional MCOs. And so these clients tend not to push back as strongly, the leverage is not there. But importantly, the nature of our relationship is very different, it's much more open and transparent. And so we don’t really have the same kinds of contractual terms that would lead to this type of disagreement and rights and obligations. So we haven't really felt the same level of pressure.

We are hopeful as we go forward, we could continue to have these more transparent relations with our clients. We continue to go upstream to gain access to larger clients through the broker community and have been quite positively received because of some of the negative emotion in some of these larger, less transparent deals historically.

Operator

Our next question comes from Ana Gupte from Leerink Partners. Your line is open.

Ana Gupte

So maybe just talk a little about the healthcare segment. Just want to start with, you said that the Florida SMI loss ratio is improving. Can you tell us where you are now relative to the guidance and could you give us any color on where you think you will end up for the full year relative to guidance.

Jonathan Rubin

Yes. Ana, as I mentioned in my prepared remarks, we are running year-to-date in the high 80s. So think of it just below 90%. We would expect that to improve slightly over the balance of the year but more importantly, our run rate is improving which clearly will set us up well as we go forward. So hopefully that’s helpful to you.

Ana Gupte

And the guidance of 90, was it for full year...

Jonathan Rubin

It was high 80s.

Barry Smith

And Ana...

Ana Gupte

It was high 80s. So you are running now year-to-date at guidance. Last year I remember you had some back and forth with the state around your rate increase. Initially you came in lower, maybe that’s because of the way actuarial is set up and in some ways as a high risk pool. And then you got a rate increase and do you expect, you have price increases to track your things after this point.

Jonathan Rubin

Would say, obviously with the SMI specialty plan, it was a new program not just for us but for the state. So they didn’t have a lot of managed care experience and with the risk adjustment process that needed to be sort of fit to the specific population, it has been a little bit of an evolving process between us and the state and other health plans to really make sure we are appropriately rated for this population. And then there were some other adjustments that were made by the state that related to all health plans as we went through this past cycle.

But we do feel like the rates do track the claim experience in total. Obviously, it's incumbent on us to manage to the revenue and we are seeing the improvements in care cost that I noted earlier. Going forward, clearly we are continuing the dialog between with the state between our actuaries to make sure that we are positioned to have the rates accurately reflect the risk pool and the population but I am comfortable that the rating methodologies and the actuarial analysis, it goes into [indiscernible] and we will over time be able to be successful in managing it, as I noted earlier.

Barry Smith

And Ana, I would just add to Jon's on target comments. We are thrilled to be in a position today where we are first such plan nationally. There is a learning process that we have gone through both working the state, they have been just terrific to work with. Very very reasonable and very thoughtful about how they set their rates and [indiscernible]. So we are pretty optimistic about the future there in the state. The flip side of it is, on the care side we want to make sure that we do the ethical and correct thing by all of our members in Florida. But we also want to make sure that the cost and utilization is appropriate for the circumstances and what we have been able to do is more highly refined, working with this unique population to really get a full picture, a holistic picture of the health and the individual and help them get their homework cost effectively by bringing down unnecessary hospitalization in patient care.

So we have seen a lot of improvement over this last, this year particularly, but we are seeing pretty consistent results come through going in the right direction. So we have a fairly high level of confidence, we will be able to achieve our goals for the year.

Ana Gupte

And will you be able to, or other states looking to put that model up out of Florida. You know you were optimistic on that at one point.

Barry Smith

Yes. In fact we have been talking to many states and this is an area that we have invested fairly heavily in, and that is having the discussion well in advance and helping to shape a policy as it comes out, to create plans that really focus on this population given its unique nature and have the cost be in line with what states need and demand these days. And so with several states we are having these discussion with. As you know, we have expressed interest in several states already. Pennsylvania, for example, have expressed interest, and Virginia. We don’t go into the details which ones we have bid on and the circumstances too specifically, but we do have regular ongoing conversations. We have a fairly extensive network of coverage from a policy standpoint. The [payment] [ph] relations people who are very very capable and experienced. So the short answer, I am making a long answer out of a very good short question. But we are very engaged with many, many states.

Ana Gupte

And [indiscernible] on the healthcare contracts top line inventory, looks like SMI in the best piece will be kind of flattish, it looks like on a go forward basis. With this TMG acquisition, how comfortable are you that you might be able to win some new contracts and how should we think about your drivers on the top line on healthcare going forward?

Barry Smith

You know, Ana, it's interesting, there is the pure play SMI contract that would be the older model that states used to have that we have a lot of experience with. But the newer models really incorporate working with these complex populations in the context of a long-term care of services contract in which we are working on multiple states. So essentially, we are extending what we did historically in to an integrated care model and that’s exactly the model for the SMI population. So in our world, both on the commercial side, our pipeline is greater than it has been in my memory, candidly here at the company. We have got a very robust pipeline on the commercial side that involves SMI but largely going more integrated with the care with these large clients.

And then also with the states, again, they are working diligently to holistically care for these individuals within the state as we are as well working with them. So we see these as both on the commercial side, on the public sector side, as a great opportunity for us.

Jonathan Rubin

Yes. And Ana, the only other thing I would add is, your question really to the TMG, as we both have been approaching RFPs and also dialoging with the states about future opportunities. TMG, their expertise, their track record and the strength of their management team has been invaluable to us in both responding to opportunities and, again, the dialog between our government relations, folks in the states, to try to position future opportunity. So, so far we believe there has been tremendous value from that acquisition.

Barry Smith

And TMG has a terrific leadership management team. As Jon points out, very well respected across the industry. We actually first became aware of TMG because we were referred to them for the expertise in this space to help us going forward with policy and how to construct these systems and capabilities. As you know, they manage a very significant plan today in Wisconsin, working with the long-term support services population. So we are pretty excited about what TMG has brought to us and will continue to bring to us.

Ana Gupte

And then what happened on AlphaCare exactly? I remember you were so bullish on that in 2013 and now you are out of FIDA, you are still in MLTC. Have you thought about all these -- what changed and could that happen out there in some of the deals you are doing?

Barry Smith

Well, with AlphaCare specifically, we invested in AlphaCare on the premise that FIDA would be a growing robust program, the Duals program, both combining Medicaid and Medicare. As we all know, nationally the Duals program really didn’t pick up the steam that I think everybody hoped for and anticipated, at least from a policy standpoint. There was really no incentive on the part of the position to encourage their patient panel to go into FIDA, the Duals managed care program. And on the part of the individual, there were no specific incentives for them either to be able to enter into the FIDA program.

Now interestingly, although that didn’t pan out as I think anybody anticipated, what is panning out there is that we are seeing growth in the MLT, see the underlying Medicaid population. We have grown from 3000ish roughly, we are up to 3400 going to 3600, 3700. So we are seeing nice growth since the beginning of the year in the MLTC space. So we think there is opportunity and they are profitable, good MLTC plans there in New York. And so we think it's a wonderful opportunity there.

Jonathan Rubin

Yes. And the only other very quick thing I would add is, relative to the decision to exit the FIDA Medicare lines of business there. FIDA, as Barry mentioned, because the program didn’t pan out, we had a very small number of members. Yet we needed to maintain the infrastructure for compliance and doing the things you need to to run a Medicare program. So with the fact that we weren't able to achieve growth largely because of the marketplace there not gaining traction with the Duals. It was the right decision for us even though, as Barry noted, the MLTC business is much more robust.

Barry Smith

Yes. Essentially, we had to reduce the overhead to make it make sense and since the FIDA program or the Medicare part of the program wasn’t really the opportunity, we thought why keep the additional infrastructure and overhead and compliance, which is significant, if the opportunity really wasn’t there. But the MLTC provides an opportunity for us otherwise.

Ana Gupte

And just quickly on the pharmacy side, a couple of questions. Just following up on the previous question. Is there anything around benefit design that might refer to on the Part D book of business because typically they are in the high 90s or low 100s on the loss ratio, but by the second quarter it rapidly goes down to somewhere in the mid-80s or high 80s, Have you thought about what that might be next year in your bidding process [indiscernible] given that’s your first year here.

Jonathan Rubin

Ana, a couple of things. One, as Barry mentioned, the membership enrollment has been much higher than we expected, particularly the voluntary membership enrollment. And the one thing I will note is that it's a little bit different about our plan, is our plan is structured in a way where our formulary is a little bit broader and as a result of that, the utilization patterns are a little bit different than you might typically expect in Part D in that, both in terms of the seasonality of the benefit but also the degree that the federal reinsurance plays a role. As well as rebates from, you know manufacturer plays a role in the process. So we are probably a little bit more back-ended in terms of the seasonality that might be typical. And then secondly, to answer the second part of your question, yes, certainly we are reflecting our learnings relative to the plan in our bidding strategy for next year. That’s clearly a very dynamic process right now as noted on the -- in our prepared remarks, we expect the information from CMS that would identify sort of where the benchmarks are for next year and that clearly will have an impact on our auto assignment we expect at any day now.

So while I can't give you results yet, that’s something we certainly will provide an update on as soon as that information is available.

Barry Smith

All right. Operator, if there are no further questions, is that true?

Operator

Yes, sir. We are showing no questions at this time.

Barry Smith

All right. Thank you. Well, we thank you all for your participation in today's conference call. We look forward to speaking with you next when we discuss our third quarter results 2016. Thanks so much.

Operator

And that concludes today's conference. Thank you for your participation. You may now all disconnect.

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