Universal American's (UAM) CEO Richard Barasch on Q2 2016 Results - Earnings Call Transcript

| About: Universal American (UAM)

Universal American Corp. (NYSE:UAM)

Q2 2016 Earnings Conference Call

August 4, 2016, 8:30 am ET

Executives

Richard Barasch - Chairman & CEO

Tony Wolk - General Counsel

Adam Thackery - CFO

Dave Monroe - CAO

Analysts

Kevin Fischbeck - Bank of America Merrill Lynch

Michael Baker - Raymond James

Sarah James - Wedbush Securities

Scott Fidel - Credit Suisse

Ana Gupte - Leerink

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Universal American Corporation Second Quarter 2016 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Mr. Richard Barasch, Chairman and CEO. Please go ahead, sir.

Richard Barasch

Thank you and good morning, everyone. Thanks for joining us on our second quarter 2016 conference call. I am here with our General Counsel, Tony Wolk; our CFO, Adam Thackery; and our Chief Accounting Officer, Dave Monroe.

Now I would like to ask Tony to read our Safe Harbor language.

Tony Wolk

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

I would also like to remind all participants that our call this morning may contain forward-looking statements within the meaning of the federal securities laws. These statements, which reflect management's current expectations, projections, and beliefs, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of these risks and uncertainties, we recommend that you review the company's Risk Factors and other disclosures set forth in our SEC filings. We undertake no obligation to update or revise any forward-looking statements to reflect events, developments, or circumstances after the date hereof.

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

Richard?

Richard Barasch

Thanks, Tony. Starting with Slide 3, Universal American's foundational strength is its proven ability to collaborate with primary care physicians to improve health outcomes while reducing costs in the Medicare population. Primary care is the least expensive part of the care continuum, but if given the right tools and incentives, primary care physicians have the greatest leverage to reduce costs and improve quality.

Over the past 15 years, we have built a platform that combines efficient use of data and care management protocols with the critical work of establishing trust with our physician partners. We now have over 350,000 Medicare beneficiaries on this platform with Medicare Advantage, Medicare Shared Savings ACOs, and Next Generation ACOs, with more than 5,000 physicians and associated clinical professionals in some form of advanced reimbursement model, mostly gainshare.

In our Texas HMOs, we have a successful history of list-sharing with primary care docs. And in 2016, we have rolled out a Next Generation ACO that brings nearly 14,000 additional Medicare beneficiaries into our advanced care model.

In the Northeast, we are using our experienced and growing market strength to bring value-based compensation to a provider community that has historically been tied to fee-for-service. We have also embraced the Medicare Shared Savings ACO program as another way to bring value-based payment to many more primary care physicians. We just received our 2015 report card and are very pleased that our gross revenue increased by 48%, while the net to Universal American increased by 38%.

We are encouraged by the performance of our hardworking physician partners and by the positive changes made by CMS to the program. We could not agree more with the recent proclamations from CMS and HHS, which support the goal of replacing antiquated Medicare fee-for-services system with payment reforms that reward quality, reward outcomes instead of quantity.

We believe that a bright future lies in partnering with providers, especially primary care physicians, to improve quality and reduced costs. We are confident that the scales and relationships we are building with our physician partners will become increasingly valuable as payment reform accelerates, especially with the advent of the MACRA legislation.

Since last year, we have executed an ambitious plan to streamline the company so that we can focus solely on our dynamic Medicare Advantage and ACO/MSO businesses. In 2015, we sold the ACO -- excuse me, we sold the APS businesses. And earlier this week, we closed the sale of our Medicaid and traditional businesses. In addition, in June, we issued convertible notes that allowed us to buy back the shares of a certain large shareholders who wanted to exit in an orderly fashion. Even though we added more leverage to accomplish the share buyback, we have substantially reduced the share count and have replenished our cash with the sale of the subsidiaries.

With these actions, we are a much simpler company and can sharpen our attention on our core business without distraction.

I am now going to turn it over to Adam to discuss the financial results of the first quarter.

Adam Thackery

Thank you, Richard. I'd like to remind you that we post additional information on our operating results in the financial supplement that can be found on our website in the Financial Reports tab of our Investors section.

Turning to Slide 4, as you see, for the second quarter of 2016, we reported a pro forma operating pre-tax profit from our Medicare Advantage and corporate segment of $11.2 million and an after-tax profit of $5 million or $0.06 a share. Our Medicare Advantage business generated an operating profit of $17.9 million on $342 million of premium, with an aggregate reported MBR of 82.6%, or 84.3% including $5.6 million of quality initiative expenses.

After taking into account $4.2 million of favorable prior-period items and excluding the quality initiative expenses, our adjusted MBR was 83.6%. More details on this will be discussed in a moment.

As a reminder, in 2016 we have refined the way that we estimate the risk-adjusted premium from CMS that will ultimately be realized based on a model developed from historical experience for our members. The change in estimate serves to better reflect risk-adjusted premiums in the period in which they are earned and resulted in the accelerated recognition of approximately $8.4 million pre-tax after gainshare with our physicians in additional current period premium revenue. Under our previous estimation process, the revenue would have been recognized in later quarters.

Our ACO business generated $13.7 million of after-tax profits for the quarter. In July, we were informed by CMS that our MSSP ACOs will receive $39.8 million in Shared Savings for the 2015 program year. After paying our physician partners approximately $11.2 million, Universal American netted $28.6 million, which includes the recoupment of expenses that were incurred by the ACOs. This compares to $20.9 million for program year 2014. We expect to receive a 2015 payment from CMS in the third quarter of this year.

Additionally, based on the first report from CMS for our Houston-based Next Generation ACO, we estimate revenue for the first quarter of 2016 of $1.2 million, which we recognized as of June 30. We do not yet have enough information to estimate the second quarter of 2016 revenue. In the quarter, we incurred $8.7 million in aggregate 2016 ACO expenses, resulting in a pre-tax gain for the segment of $21.2 million.

Below the line, we had after-tax impacts of $1.1 million for realized gains, $400,000 from tax benefits, and $1.8 million from legal and consulting costs related to corporate development activities. Our discontinued operations consist of the APS businesses that were sold during 2015 and our traditional insurance and Total Care Medicaid business that were sold earlier this week. We reported a gain from discontinued operations of $4.4 million after-tax.

Taking all of these items into account, we reported consolidated net income for the quarter of $22.8 million or $0.27 a share.

I think a look at our six month results on Slide 6 will be more informative to reviewing our segment operating performance. For the six months, our Medicare Advantage business earned $40 million on $689 million of premium with an aggregate reported MBR of 82.2%, or 83.8% if you include the $11.2 million of quality initiative expenses. After taking into account favorable prior period items of $11.2 million and excluding quality initiatives, our adjusted MBR for the six month period was 83.6%.

Looking at Slide 6, we break out the recasted MBRs by market. Our Southeast Texas HMO continued to perform well, with a recasted MBR of 82.9% for the first half of 2016. In the Northeast, the recasted MBR was 84.8% for the first six months of 2016. Year- to-date, we are observing improved PMPM premium in this market and believe it is on the path to modest profitability for the year.

Returning to Slide 5, our Medicare Advantage and administrative expense ratio was 9.5%. Given the seasonality of expenses, we expect the full-year expense ratio to increase through the course of the year, consistent with our thoughts from last year.

Our corporate segment, which comprises the results of our parent holding company, including its debt service, reported year-to-date loss of $14 million. We are continuing to identify ways to reduce our corporate expenses since we now have fewer operating businesses.

For the first half of 2016, our ACO business reported after-tax profit of $8.2 million. The 2015 Shared Savings revenue combined with the Next Generation first quarter 2016 share savings revenue offset $17.9 million of 2016 operating expenses, generating a pre-tax profit of $12.7 million for this segment.

During the first half of the year, we had realized gains of $1.6 million, net of tax; tax benefits of $600,000; and corporate development expenses of $2.8 million, net of tax. For discontinued operations, we reported income of $3.1 million after tax.

Taking into account these items, we reported net income of $23 million in the first half of 2016 or $0.28 per share.

Moving to page 8, we show the balance sheet. On June 27, the Company sold $115 million of convertible senior notes that are due 2021. We used the net proceeds, together with cash on hand, to purchase all 18.1 million shares owned by Perry Capital and Welsh Carson at a purchase price of $6.80 per share. Additionally, we repurchased 2.1 million shares of common stock for an aggregate purchase price of approximately $15.1 million from purchasers of those convertible notes in privately negotiated transactions.

As a result of these transactions, we now have 65.1 million in shares outstanding. The carrying value of the convertible notes, net of deferred fees, at June 30 was $90.3 million, after accounting for the equity component of this instrument.

At the end of the second quarter, we had $30 million of unregulated cash at the parent. Pro forma for the Total Care and traditional divestitures announced this week, we have $98.3 million in unregulated cash.

Our total assets were $1.7 billion, including $1.2 billion of assets of discontinued ops. Our shareholders' equity was $288 million, with a book value of $4.41 per share. When you exclude all the intangibles, we ended the quarter with a tangible book value of $3.14 per share.

The total capitalization ratio as of June 30 was 37.6%.

Richard?

Richard Barasch

Thanks, Adam. Let me amplify a couple of comments that Adam made about the second quarter. First, now that we are a smaller and much simpler company, we are highly focused on reducing expenses at all level of the company. We will have more to say about this in subsequent quarters.

Next, I want to make a couple of comments about the expected results for the MA business for the balance of the year. Given our new revenue estimation process, we can't expect that much prior-period positives in the next couple of quarters. Further, we are noticing a slight uptick in utilization. But as of now we, still believe that our full-year MBRs will meet our expectations. We expect the solid results in Houston to continue and are still on track to achieve our goal of profitability in the Northeast, a big turnaround from last year's results.

Let's move to Slide 10. This slide shows what we are trying to accomplish as a company. In all of our programs, we are managing more than $3.5 billion of Medicare spend for nearly 350,000 Medicare beneficiaries. Everything that we do is designed to bring more doctors and more members along the continuum toward the advanced PCP partnership model that has worked so well for us for so long in Southeast Texas.

The most important determinants of success is having doctors willing to do the hard work to change from fee-for-service to value-based reimbursement and having enough enrolled Medicare beneficiaries to make a difference in their practice economics. We have embraced the Medicare Shared Savings program as a way to gather willing doctors and sufficient membership as a start toward that goal.

Some of our successful original ACOs have moved across the spectrum to become Track 2 ACOs, where they are taking more risk in return for a greater share of the upside. Our relationship with physicians in two of our New York ACOs have led to value-based arrangements in our Medicare Advantage business. These relationships have helped fuel our membership growth in the Northeast.

And our Houston MSSP ACO has become a Next Generation ACO, which give the doctors and us many of the same tools that have worked so well in our Houston MA business. As we go forward, our goal is to bring in additional groups onto our platform and to move more of our successful groups across the page.

Let me be a little more specific about each program, starting with Southeast Texas on Slide 11. Our most experience, advanced and successful primary care physicians' model is in Southeast Texas. We work closely with our physician partners, providing usable data, coordination of care, and transparent risk-sharing to help them achieve our goals of higher quality and reduced costs. We continue to have the leading market share in the Medicare Advantage market in Houston and Beaumont. Virtually all of our members are seen by primary care physicians who participate with us in value-based payment arrangements.

The results of our Houston HMOs have been consistently profitable, and the second quarter of 2016 continued that trend. Houston is now in the fifth year of the significant rate drive-down that was mandated by the ACA. Nevertheless, in that period, we have been able to maintain our benefit structure, grow our membership, and achieve solid margins.

The 2017 bid was the last bid in which we will have to deal with the rate reduction headwinds. And we believe that we have submitted a competitive bid for 2017 AEP.

Beginning in 2016 in Houston, in partnership with our most experienced physician partners, we were awarded a Next Generation ACO contract. This program comes out of the Innovation Center at CMS, and we believe that this is the aspirational model for the rest of the Medicare ACO program. The Next Gen program gives us more tools than we have in Medicare Shared Savings, closer to what we have in Medicare Advantage.

Most important, we are able to create preferred networks and negotiate provider discounts especially for post-acute costs. In essence, we have added nearly 14,000 members to the successful Houston Medicare Advantage chassis. We are quite pleased that we were able to recognize current-year revenue for the Next Gen program.

Turning to Slide 12, since 2014, our membership in the Northeast has increased by 50%. And as we noted last year, we lagged the profitability in a region in which we historically made money. In the first half of 2016, we return to profitability, even backing out the prior-period items. We are also making strategic advances in the Northeast as we are attempting to transform the upstate New York fee-for-service market into a more value-based system by introducing pay-for-performance and gainsharing to the primary care physicians in the region.

A great example is our new PPO product in partnership with CareMount, formerly known as Mount Kisco Medical Group that allows us to extend our Medicare Advantage plans to Medicare beneficiaries in the mid-Hudson region while working closely with dedicated doctors who deliver outstanding clinical care.

We believe our Northeast bids are set up well for 2017 especially, in our PPO product, which will receive bonuses for the first time. This will help our strategy to migrate more membership toward PPO from our in-network private fee-for-service product where we have more medical management tools and product better suited to creating value-based arrangements with physicians. We expect our profit in the Northeast to continue to improve next year.

Moving to our ACO business on Slide 13. We believe that the Medicare Shared Savings program, which now covers nearly 8 million Medicare beneficiaries, is an ideal structure to help transform the outdated fee-for-service payment system. Slide 14 shows graphically how important the MSSP program has become in the movement to value-based payment in Medicare.

Turn to Slide 15, before I discuss the details of our ACO results, I'd like to note that we are under embargo by CMS not to get into too much detail about the performance of specific ACOs. The information is quite fresh. But we are able and very happy to report that 10 of our ACOs qualified for Shared Savings revenue for the 2015 program year. Our Shared Savings revenue increased by 48%, from $26.9 million to $39.8 million, and the net revenue to Universal American increased 37%, from $20.9 million to $28.6 million.

In the aggregate, our ACOs saved the Medicare Trust Fund more than $97 million in 2015. As Adam noted, the program year 2015 results, plus the current year results of our new Next Gen ACO, were included in our second quarter financials.

Based on the CMS data, we are seeing encouraging trends that demonstrate we are improving quality and positively impacting medical costs to reduce hospitalizations, reduce readmit rates, and reduce emergency room visits.

Now in our fourth year, we believe that we have learned what it takes to succeed. First and foremost, we need dedicated primary care physicians who are willing to work hard to change the way they practice, shifting from fee-for-service to value-based. Not everyone is up to this daunting task. Our job is to enable the willing doctors with a platform of usable data and care management tools that help them manage their patients with an eye to improved quality and lower costs.

CMS has also worked to improve the viability of the program. In each of the past couple of years, CMS has promulgated helpful new rules and created new program like Next Generation that have improved the business case for becoming a Medicare ACO.

Moving into 2016, we continue to refine our participation in the program, bringing on new groups that have the capacity to succeed as ACOs, shifting our successful ACOs across the spectrum to more risk and more reward, whether in Track 2, Next Gen, or Medicare Advantage, and culling the groups that are not able to work within this program. We are also continuously investing in improving our technology and workflow platforms so that we can help our dedicated physician partners become even more successful in the new payment environment.

Based on first quarter CMS data, there is reason to be optimistic we will generate increased revenue for the 2016 program year. Given the reduction in operating expenses, we think we have a chance to cross the line to profitability in this program year.

A few comments now on capital. Universal American has an excellent track record of deploying excess cash and capital for the benefit of our shareholders. In the second quarter, we took advantage of the opportunity to substantially reduce our share count by acquiring two large blocks of stock at what we considered to be an attractive price, especially given the instrument we used to raise the capital.

And true to our practice of keeping a strong and liquid balance sheet, we replenished our cash position as a result of the sale of the Medicaid and traditional businesses. Pro forma for these transactions, we now have approximately $98 million of free cash at the holding company and more than adequate capital in the remaining operating subsidiaries to support the growth of our core businesses.

We've made enormous progress on all fronts since the beginning of the year and look forward to being able to concentrate fully on our core business: partnering with primary care physicians to reduce the cost and improve the quality of healthcare for the benefit of Medicare beneficiaries.

Thanks for your time this morning. Adam and I will be happy to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions].

Your first question comes from Kevin Fischbeck, Bank of America Merrill Lynch.

Kevin Fischbeck

Okay, great. Thanks. I just wanted to clarify. So you said that -- I think it was your Next Generation ACO in Houston, you were able to book results related to Q1 in Q2; is that correct?

Richard Barasch

We have -- we've got a report for Q1 which we booked. We are awaiting the report for Q2. It's a little bit of a lag. This is much better lag, though, than -- a much -- it's a quicker lag than MSSP. So we are pretty clear that we are going to be able to continue to report in-period results in Next Gen through the balance of the year, with probably a one quarter lag.

Kevin Fischbeck

Okay. So that's just because it's a Next Generation one, and the reporting time is much quicker than the MSSP. But we should still expect the MSSP to be a lag.

Richard Barasch

Well, we hope at some point -- and we are now in the fourth year of the program -- we hope at some point to be able to estimate our results and whether we actually booked them for GAAP or give you supplemental information. I'm pretty sure that by the end of this year, we are going to give you a pretty good idea of current period results.

Kevin Fischbeck

Okay. So when you say breakeven for 2016 program year, what does that mean? Does that mean based upon what you are actually able to book in 2016? Or if we have to book in 2017, bringing it back and kind of matching things to the correct time period.

Richard Barasch

That's right. These are good questions, and we know it's confusing. Let me see if I can clarify this. What we just booked was the 2015 revenues based on the 2015 program year. We like to look at this on a program year basis. In 2016, we reduced our expenses, as you can see in the tables. And we believe that the net revenue to Universal American will equal or exceed the expenses that we believe -- that we are booking that we actually are incurring in 2016.

Our hope and expectation is that by the end of the year that we will maybe be able to report the results on a GAAP basis. But at a minimum be able to give a good, solid report on where we think we are for the balance of 2016.

The reason for this is the program is maturing, and we are getting better and better at the analytics. When we see the claims data from CMS now, we really have a much higher degree of confidence in the ultimate results, which we didn't have in the first couple of years in the program. So we are getting there. [Indiscernible]. It's moving in the right direction. And Next Gen is a -- by the way, we hope to have more Next Gen as time goes on. Next Gen, we really think is going to be the model that CMS uses for a lot of different reasons, not least is the ability to get results on a more timely basis.

Kevin Fischbeck

Okay, perfect. And then you mentioned that your bids for the Northeast have improved, particularly in the PPO which was at four stars. Is there an MLR differential between the PPO and the prior fee-for-service businesses that we can kind of think about modeling in for next year, if there is shift in membership?

Richard Barasch

Again we haven't gotten into that level of granularity. But just logically tell you that given more tools, that a PPO has more than network product fee-for-service, so the results ought to be better.

Kevin Fischbeck

Okay. And then, I guess my last question, you mentioned that you started to see some uptick in costs. Is that broadly across geographies? Or is it specific to across geographies, and there's a cost item line item that you spike out as --?

Richard Barasch

I have to tell you, we debated whether even -- not to put that comment in the report. Because it is there; we can see it; we are pretty attuned to this. We are not faked out by it yet. We actually have noticed over a period of time, a history of second quarter being a little bit worse, and then coming back through the balance of the quarters. So I don't -- it was enough to make a cautionary statement, but not enough, in our opinion, to change anything we think about the full-year.

Kevin Fischbeck

But is there a geography -- is there a line item that you would comment?

Richard Barasch

No, it's a little -- sort of a little across the board. Nothing -- look, we are -- we, like everyone, are fighting about a battle with providers who are trying as hard as they can to maximize their revenues. So we're -- we see this is as part of what we do. But again, as I said, we could actually see this over a period of years that this happens during this period of time, it comes back through balance of the year.

Operator

Your next question comes from Michael Baker of Raymond James.

Michael Baker

Yes, thanks a lot. I was wondering if you could give us a sense of what leverage you are comfortable with. And as you look forward to invest, which area of the business are you going to wait towards on an -- would it be ACO, or kind of the traditional MA?

Richard Barasch

You are asking a great question, because it's a segway to really how we're thinking about the company. We don't see this as necessarily two businesses anymore. Obviously they report it in a little bit of a different way. But what we are doing on the ground is actually very, very similar. The work that we're doing with the primary care doctors in ACO is very much to exactly like the work that we do with the primary care docs in Houston, in particular, and the growing relationships we've got in the Northeast.

An answer your question is we are going to invest in -- continue to invest; it's not a first time in technology that allows us to get the information about each patient/beneficiary in a great single source of truth data warehouse, and then be able to use that information to close gaps in care. Do better care management, all the things we have to do in both businesses in order to be successful.

So the answer to your question is one investment we are going to continue to make is in technology. And we know we are not talking about an amount of money that is enormous. It'll be something in the next period of time. And so that's really equally spread out toward all of our doctor groups, many of whom, frankly, are in both programs. So it's not one program or the other. It's really just in getting a great improving our platform to make it even better than it currently is. So that's kind of number one.

Number two; there are various extensions of our business that we look at. Many of our physician groups are asking us if we can help them with the revenue programs. We may gravitate toward that business a little bit. We are also seeing some reasons to think that we might want to acquire some practices in places that are strategically important for us. So this is all speculative. There's nothing specific, at this point. But these are the kind of directions that we are thinking about.

Michael Baker

And how about on the leverage side of things?

Richard Barasch

Oh, I'm sorry. I didn't answer that question. The amount of leverage we have now is frankly more than we've had. But at the same time, we have close to $100 million of cash in the bank. So the net leverage is still pretty modest. I think if you've been following the company for while, you know we are not leveraged folks. We like to keep it modest, and we like to keep liquid. I doubt it'll go much higher than this.

Michael Baker

Okay. And then, Richard, you've operated both obviously Medicare and Medicaid. Can you give us a sense of what you see as the key differences? And obviously, you are weighted toward the Medicare side. We've heard a lot about it. But any commentary on the Medicaid side?

Richard Barasch

In owning this company for three years, it has increased my respect for the people who've been doing this successfully for a long time. It is a complex business. And it has different drivers than the Medicare business, largely because you are dealing with a younger population that tends to be more episodic, as opposed to an older population that tends to be more chronic.

The interface with the state is different than it is a Medicare. And we did fine with the Total Care acquisition. And we -- the people -- we are going to miss the people in the company. We're going to -- we like the idea that we were taking care of a population that needed our help. But, very frankly, there are Bayer and those who are in that business can do it better than we can do it. And we were happy to pass it into those hands.

It is a complex business. And as I say, I give a lot of respect for the people who do it well.

Michael Baker

Thanks for the thoughts, Richard.

Richard Barasch

And, look, if you go back in Universal American's history, we have been really dealing with seniors for a very long period of time. It really is our expertise.

Operator

Your next question comes from Sarah James of Wedbush Securities.

Sarah James

Thank you. I wanted to go back again to the comment on the slight uptick on utilization. Was that a comment about July? Or was it more a progression in 2Q, so a comment on how it may be June compared to April and May?

Richard Barasch

It's in our numbers in 2Q. We increased our -- some of our numbers for 2Q. And you see in our Northeast MBR, a little bit higher than last quarter. So this is there. This is booked. Again, as I said, Sarah, it was a close call to call it out, because we are not panicked by it by any stretch. We noticed it. We think it is seasonal. We think the year comes in fine. But just in order to be careful, we thought we'd mention it.

Sarah James

Okay. And for the portions of healthcare costs that adjudicate more quickly, may be pharma or along those lines -- your first take on July, does it seem to be materially different from --

Richard Barasch

We've been -- we've --

Sarah James

Resolved yet?

Richard Barasch

We've been busy the last week, as you probably can see, from our string of press releases. So we really haven't focused on July just yet.

Sarah James

Okay. And then thinking about the earning progression from 1Q to Q2, and the ACO and MSO business, is there any seasonality to that business? Or is the ramp just the progression down the tracks for each of the ACOs? And how do we think about what a potential earning is?

Richard Barasch

The program -- and we make this not simple -- because we are reporting results of a prior year in the middle of the subsequent year. So everything that we've said about the second quarter, with the exception of Next Gen have to do with revenue attributable to 2015.

Our hope, over time, is that we can give you a much better view of what current revenues and current expenses are, so that the results can be smooth over a period of time as the way the actual expenses go. But we are not quite there yet, Sarah. This is something we are working toward. We understand it makes it a little harder for you folks to model because we have the bid -- usually now three years in a row, have a little -- have unfortunately, this year, a substantial bump in the second quarter. But our hope is that we will be able to make, over time, give you more information to give you a better sense of what these results are on a current period basis.

Sarah James

And have you guys thought about, or are you willing to share any thoughts on what a run rate margin profile for this business looks like? And I don't know if that [indiscernible]?

Richard Barasch

We are not quite there yet. I wish -- we will get there, Sarah. And I know these are not satisfactory answers for those of you who have to model our business. But what we see, and the way we look at this, is we see a very strong trend of positive numbers. We see the top line going up. We see the expense line going down. We are getting much better at what we are doing. The skill set that we are building is critical in Medicare. And, unfortunately, the results lag all the things I just said. But our job over a period of time -- and hopefully it won't a long period of time -- is to give you guys more of a view about what this all looks like.

Operator

[Operator Instructions].

Your next question comes from Scott Fidel of Credit Suisse.

Scott Fidel

Hi, thanks, good morning. I had question just on the 2017 bids for MA, and just as it relates to the industry tax moratorium. Can you talk about how you decided to employ that in your bids, and what the feedback from the CMS actuaries have been around that in terms of whether they want you to put that back into -- pass it along to the consumers? Or whether you think you can drop some of that to the bottom line?

Richard Barasch

The way it works when you are sitting in the bid room, Scott, is that's just one of 20 factors that go into the mix on the bid. And you try to -- you weight that with what the risk scores look like and what the increase in revenues are. In the case of Houston, the last year of the rate drawdown. So it all sort of factors into a big picture of putting together a benefit package with an expectation of margin that's sort of suitable to the company and is suitable return to shareholders.

I'm not giving you an incredibly satisfactory answer to that. But it's not the only factor. And you can't just isolate the factor and say that thing drops to the bottom line. It's one of 20 factors. So we try to balance everything. By the way, including the fact that we had an uptick in utilization in 2015 into a full set of bids -- that give us we think a competitive benefit package and a good margin.

Scott Fidel

Okay.

Richard Barasch

But you know, again, everything into the pot.

Scott Fidel

Right, right. Okay. Then just had a follow-up question, just back in the Medicaid business, I know that you have moved past that business, so I don't want to focus on it. But I am just interested -- just it does look like, in the 2Q release that you guys did post another loss of a couple million bucks in that. Can you just sort of talk about how the MLRs trended in that business over the course of the first half of this year? Just sort of thinking about the utilization trends that you observed in the business, relative to may be just sort of the lack of scale, or sort of experience?

Richard Barasch

I think you sort of answer the question. I think we had, candidly, a lack of strong candidates we probably less expertise than someone like our buyer will bring to this. And I think that there are levers that we will be able to pull on both sides of the equation. And I think we will make this business look quite a bit better as time goes on, in their hands. Scale being the biggest issue.

So I think that -- and, again, a lot of the -- some of the loss was prior-period. Some of the loss had to do with some elevated drug costs. The prior period, it goes to last year, the things like drug costs probably something like that gets better in the hands of someone who knows the business better than we do.

Operator

Your next question comes from Ana Gupte of Leerink.

Ana Gupte

Yes, I wanted to ask you about the MACRA initiative. I think, Richard, at the beginning, you said this was all going the right way in the space, and understand the fee-for-service doesn't make sense. So I'm just wondering if mandatory initiatives like MACRA takes a little bit primary care, there's been a lot of consternation around this, even to the extent that they've got [indiscernible] for the hospital. How might all this shake out with Medicare advantage updates, relative to share savings flags, and then MACRA on this goal now? Its complex and I think you have probably one of the best understandings of this, so will be helpful.

Richard Barasch

Yes do guys have an hour, so I can go over this with you? But the short tail here is that MACRA shows legislative intent to move Medicare to value-based payment. And there's no more clear expression of that than the MACRA legislation. Add to that the various programs that CMS has implemented, including MSSP -- which, by the way, is also a legislative program -- but Next Gen and some of the other programs. And it is very clear that the future is going -- we are going in this direction in the future.

We believe that this creates terrific tailwinds for us. Because what it really forces primary care physicians in particular who may be sitting on the sidelines and maybe kind of trying to wait this out, is you can't wait this out past the implementation of MACRA. You have to be doing something in order to get to value-based care.

If you really dig deep -- and this is a great question, because it's a great way for me to explain this. If you really go even deeper into how we think about our business, it's really helping these primary care physician groups move across the spectrum, including how they work within the new payment structure that has been brought in by MACRA.

Ana Gupte

Got it. Okay.

Richard Barasch

This is all good news for us.

Operator

This concludes today's question-and-answer session. I will now turn the floor back over to Mr. Richard Barasch for any additional or closing remarks.

Richard Barasch

Thanks, everyone, for your time this morning. As always, if you have any questions, please call Adam or call me. I hope everyone has a very nice day. Thanks.

Operator

Thank you for your participation in today's conference. This concludes today's call. You may now disconnect.

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