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Executives

Robert A. Waegelein – Executive Vice President and Chief Financial Officer

Analysts

Scott J. Fidel – Deutsche Bank Securities, Inc.

Universal American Corporation (UAM) Deutsche Bank Securities Health Care Conference Call May 7, 2012 9:20 AM ET

Scott J. Fidel – Deutsche Bank Securities, Inc.

Okay good morning. I’m Scott Fidel with Deutsche Bank. Very pleased to have our first managed care presentation today from Universal American. Universal American is a operator specializing in the Medicare managed care market and focusing on the senior populations in general. Here from the company today we have Bob Waegelein. Bob is Chief Financial Officer. So with that I’ll turn over to Bob.

Robert A. Waegelein

Thank you Scott good to see you. Thank you for showing up today folks and welcome your participation and let’s end with your questions. Moving on to slide 3, this is sort of our strategic opportunity slide where you remember Universal American built itself in developing programs that service the senior population primarily since the mid-air market. We develop products like Medicare supplement. When those times change we adjusted and got Medicare Vantage plans and then sort the opportunity is actually a Medicare Part D. The Drug insurance program and built up very valuable, profitable I think good shareholder value type of program to those offerings.

About a year ago, just over year ago last month we saw the Part D business, I think a very share holder popular fashion, and now we are looking to see what’s our next act and that’s where the right hand of the slide comes in, the Medicaid market. We have build a good business on game sharing medical management with providers. We are looking to see how we can play in the Medicaid market, a growing need that’s happening around the states and a very troubled population. You will see how we are going to address that opportunity as I go through the presentation.

Quickly getting into our first quarter results that we reported last week on page 4. You heard that we reported $0.27 a share from operation. We had some non-recurring and unusual items, brining that down to reported $0.25, but really very importantly our Medicare advantage segment had a very solid first quarter.

Our reported MBR was 81.1% that did include some prior year items coming through to our benefit so when we adjust for that our run rate MBR was 83.50%, which is very much in line with what our expectations are.

You can see very another important number in the Medicare advantage is our SG&A cost ratio. You recall, Rich and I were a talking a lot last year about a lot of that adjustments we needed to make to bring that number down. It was over 15% in 2011, you got it down to 12.3% in the first quarter. I caution everybody that there is seasonality for some of our expense and pay rolls, primarily in sales and marketing as we get the open enrollment period later in the year to still look for us to hit our guidance about 13% for the full-year. 2012. In our traditional business, again a good profitable quarter for them. They had good mobility in there as you recall as a Medicare supplement, disability and some long-term care. We put that business into run-off this year, so we helped our SG&A a little bit by getting out of some of the acquisition expenses. We didn’t see the return on investment happening in that segment, so we put in a run-off, I think we can expect some good results that for 2012 is well.

During the course of the first quarter, we are going to talk about ACO’s and what that means to Universe American shortly, but we did invest some $4 million pre-tax and building out the ACO opportunities there related to our transaction whether it is APS, we had some transaction cost that came through, so we pulled them out and then we had a pretty active investment quarter. We moved some money from one of our subsidiaries up the (Inaudible) and we look (Inaudible) realized gains there.

Moving to the balance sheet on page 5, again a very strong solid balance sheet drove our business from. We ended the quarter with parent cash at about $109 million. We actually received the federal tax refund in April for $42 million, so we have a very strong cash parent position coming into this year.

Our investments portfolio remains very safe and secure AA rated. During the course of the quarter, we acquired ATS though, our balance sheet got a little bit more intangible as a result, as our goodwill went up, our PVP went up, we put some debt on the books, we issues 6.5 million shares to close the transaction, all had a little bit of an impact on the balance sheet, but at the end of the day, still think it is a very solid one of which to grow very comfortably. Our debt to cap ratio is just over 15%, so there is opportunity there, coupled with cash in the balance sheet, I think we are very opportunistic we said to the future. A fully deluded book-value per share is $7.95, again a very attractive level. So what does this mean, how is Universal American thinking about the landscape that’s ahead of us for healthcare? Clearly, there’s a lot of anxiety and curiosity about how the Supreme Court is going to deal with the legality of the Affordable Care Act provision, the individual mandate being a big part of it, the Medicaid expansion is affected by that.

We’re not worried about that, time will tell, and things will come to pass one way or the other, but one thing that’s for certain is not going to change is the outcome of the judge’s ruling, is that the real immediate driver of change that everybody is going to need to have; all the payers in this system, is they have to reduce their cost, but not at the extent of the quality of the people that they care about.

The federal government, the state government or municipalities, corporations and individuals themselves are based at a very high level of pressure in dealing with their healthcare costs. And I think we’re building the program in place to help them achieve lower cost with better quality.

In the Medicare, it’s a very attractive market still for us. Medicare Advantage is gaining ground, both sides of aisle are embracing Medicare Advantage as a private solution to the healthcare cost, and I think we endorse that, and we’re looking forward to maintaining our play in that area. And (inaudible) are doing premium support deals there, which is putting a little more positive spin on this sector.

Accountable Care Organizations came out of the Affordable Care Act, and even if that gets overturned, this is really a no-cost solution for the federal government to deal with this cost basis, I’ll talk about that; and how we and the government gain by going together in this sort of offering.

In the Medicaid, the states are clearly putting under a lot of pressure right now; and managing their budgets and dealing with the growing and needy population. And we’re talking about people here that really need the care, they have the lot of distressed symptoms, there are behavioral issues, there are mental issues, there’s drug addiction; it’s not just a healthcare solution, but a lot of behavioral things that we need to do; and APS is a big part of our straight focus onto that fairly unmanaged populations. So again, it’s the company know how to control costs and improve the quality of healthcare are going to thrive in that environment.

So when you look on page seven, how are we, Universal American, ready to take on that opportunity. Well, again, we built our business, when we decided that the Medicare opportunity was present and available to us, we bought an HMO in Texas. And the think that really attracted to us about the HMO in Texas was the healthy collaborative way that those folks dealt physicians in managing the care of their membership. Its very physician centric, its very member centric, they going in and they manage the care in a very collaborative way.

And we’ve had great results as a result, our Texas HMO has continually performed and extremely well and the healthcare status of our members have gotten better over time. Their existing enrollments rates are better; their reemit rates are better; their hospital status, it’s lower. So obliviously, the collaborative effort works.

We think we can take that to the unmanaged medicare population as well. We are gaining some numbers there, but that’s what the Accountable Care Organizations are all about, trying to manage the care of those that are not in a managed care program.

We believe that we can build leverage that we built up over the course of time in our significant dual eligibility penetration of our membership. In Part D, you will recall, we had 2 million in our program there; nearly 60% of them are dual eligible pipe of individuals. In our health plans, we’re managing dual eligibles as well. So we have experience in dealing with that type of population. The acquisition of APS, most of their members or at least half of them, are this type of population; so we are ready take on those sort of inter [cut] healthcare issues.

Very importantly, the study benefit ratios of our companies, I think we know how to manage risk very well, we’ve proven it out year over year with very solid bids that performed well competitively in the marketplace, as well as potentially in performing medical management for our members.

So coming into this year, we had very strong first quarter results. The 2011 year proved that we’ve developed in a positive way. So I think we have a very good base to build very competitive bids for 2013. We’re in the middle of doing that now. They are due in early June; I think we are comfortable that we will be in a position to bid very competitively in the markets that matter to us.

Our membership at the April time period is about $139,000. Clearly, we are impacted negatively from coming out a sanction and embracing the agents again. There was pretty much of a challenge, try to get them retained and its new ways of Universal American. We put in some pretty strict compliance producers that they needed for buy-buy and I am sure we had some fallout as a results of that.

But one thing that’s very important, we’re always going to do the right thing when it is comes to members and we are going to make sure are the appropriate compliance setups in place to manage through the enrollment and sales practices appropriately. But looking forward to embarrassing these folks, again in this upcoming selling season, I think we would be optimistic in the recruitment of some of the agents that want to kind of stay on the sidelines for this last selling season.

Clearly, G&A reduction was the prime focus. We spoke about it a lot. We were successful, but it’s not over, it’s an ongoing opportunity that we have to do to make sure that our infrastructure is at the right size and at the right cost level to support the membership at hand.

Our core earnings as a result of the first quarter, for guidance, we updated to range of $0.64 to $0.68. This excludes the ACOs startup cost and the realization capital gains. So we’re very optimistic about how the first quarter is going to handout for the balance of the year.

And then finally, we’ve always pride of ourself on our capital strength. Right around now, we’ve almost $700 million of cash and statutory capital; nearly $400 million is in excess of 350% RBC, a lot of cash is apparent. So I think we’ve really buildup a very solid foundation to build our strategic plan for this year or next. Debt to cap again at 15.3% and if we see an appropriate way to lever up an opportunity, I think some of that money is there for that as well.

So let's get into our new exciting opportunity, Accountable Care Organizations, it’s a health care reform that (inaudible) for that a program called ACOs to help improve the quality of the membership care and lower cost for really more active interaction with physicians over this population. 75% of the folks in medicare are in this unmanaged fee for service group and that's exactly what we’re going after are.

We worked very intimately in our HMOs with doctors, and one of the big questions we got over the last eight years that we bought the HMO is when you’re going to move that mall to new market. So as we went out and talked to physicians groups, they were very excited about gain sharing and heavy participation and healthy collaboration. And I said okay, show me the members we’re going to manage. It was sort of like I trust me, my sales department will bring them. It’s very difficult to get provider engagement when you don’t have the membership to support the opportunity. So the government took care of that. They assigned based on the polarity of the services, physician services, patients do the provider practices and based on that you have your patient base.

So we went out and we couldn’t, not only our current Huston Docs, but others in other regions plus the country who understood and appreciate the gain sharing model and working closely with others to improve health and quality to get their men and signed up as their partners in ACO. So we had nine approved by CMS, we’re in April going to start, about a 110 to 120 patients are assigned for those folks and that’s a good base that we can go in right away and start managing care.

APS, and we will talk about how they do it. It’s a great add-on opportunity for medical management. Our HMO, historically dealt with the doctors and worked very closely on a top down approach to that patient member base. What APS does is, they get the names, they find out who the sickest out of the members, find the members and bring them up to the doc. So I think this is a great top-down bottom-up approach to medical management. It’s going to really get a more comprehensive coverage for the patient-based population.

We believe that we’ll get some more approved in the July 1 start. We have applications pending at CMS, but based on our historical acceptance of nine-for-nine with our initial applications, we are comfortable that we’re going to get additional assignments in the July 1 and then hopefully again in the January 1 enrolment period. So it’s really an opportunity for us to capitalize on our core DNA of healthy collaboration with physicians.

To help us and help enter into that new opportunistic Medicaid population, we sort out an approach, the APS Healthcare to sort of do this on a joint venture during 2011. And you may recall, we submitted the bid to Texas for their STAR+PLUS program to participate in a capitated program with them as a joint venture. We didn’t fair too well in that application because we weren’t really united company. It was two people coming together offering an opportunity to service that need, Texas went with all incumbent, but the blessing to us was that we can’t just be joint venture and they want a solid person at the top owning the whole soup to nuts process.

So from that engagement of an opportunity, we turned that into an acquisition strategy enclosed on the acquisition of APS in March. I think this really enables us to then come with a more unified approach to a lot of the opportunities that are going to come to us by the states as they address their Medicaid issues and cost issues. With it comes from very seasoned insurance executives, I know Scott knows, Greg Scott fairly well from a historical perspective; and Greg was the former CFO of PacifiCare. So not only did he build a good business with APS Healthcare, he understands the managed care part of our company as well, and it’s a great addition to our management team to help bring this strategic plan to fruition.

So the capabilities of APS again are a little different but under the same theme as Universal America. We are helping collaborative at the top, what APS does is again they go to the Medicaid agencies, they get awarded contracts for various type of services, whether its behavioral or the population health management, disease, harvest, waiver programs whatever the medicaid agencies need to cover from a cost perspective they go out and they request APS from very successful in winning the bids for many of these fee-for-service type of an arrangement.

What they do is they get the population that they need to take care of, they run it through a analytic engine called the Percolator and it fits through all the different information and it finds that the sickest folks in that system and then it helps to deliver the care for that day for that individuals. So everything percolates up, the most risky people are identified, they are found, they are approached with feet on the ground to get him for the help, to get them to the drugs they need, to get the services they require, and as they do that that information cycles grow and the next level of risk percolates to the top and new daily technics are tests are handed out to our nurses and other healthcare providers on the street to go out and address those issues.

See you can see it’s really a percolation of getting the patients up to the docs. UAM comes in with the docs and I think in the middle we meet in a very productive manner. I think we also are looking to again to do the 50 states, Puerto Rico are going to come out with 51 different sorts of opportunities. I think they are going to look at their needs individually and come out with very tailored programs that meet their individual needs, APS is proven to understand and be able to do adjust to the differences in the various programs that come to the states. We are looking forward to building on the relationships that APS has made with all the various agencies to make sure we can meet their needs.

So how has that really positioned us for the future? And we see a wide spectrum of opportunities as it relates to Medicare, Medicaid and troubled population. The first com is our Medicare Advantage program. At least 25% of Medicare and low-leased are in these type of programs, we believe its one that has a lot of viability, it’s one we’re very comfortable with, we know how to bit it, we know how to risk management, we know how to care coordinate it. So we’re very comfortable with the opportunity there, we’re number one in our Houston market; we’re close three or five in our Northeast and Oklahoma market. So I think we have good penetration and good presence in the markets that matter to us.

Then we move over to the right, and it’s the 75% of the population that’s not enrolled the Medicare Advantage plan. They need help and they also need to reduce their costs, so we formed the ACOs to meet that; by partnering with the physicians, by acquiring APS, and understanding all the [elements] that need to go into care management, I think we bring our expertise there to help manage that population and reduce costs.

Medicaid and Medicare meet is through the dual eligibles, and we know that there’s a huge opportunity. We thought that was one that was coming more down the pipe, it seems like that pipe got short, there’s been a lot of activity in the last six to eight months in addressing this, the states – some are rolling out programs now, others are going to wait and see how other programs do to begin there. But nonetheless, there is opportunities that I think we are well suited for participating in, whether it’s a fee-based structure or capitative basis, we’re looking to participate in that.

We’re confident we have expertise to deal with this, very vulnerable population and understand that we can bring answers to the complex cases that develop as a result.

APS has proven themselves in developing relationships with the various Medicaid agencies. They do much work to ABDs, they do work for LTCs or folks that have their sort of healthcare conditions that are very much familiar with the long-term care population. They bring a lot of background experience in order to address this population. And then finally we have exchanges, and who knows what’s going to happen here, Supreme Court may take that out, the odds in this are 50:50, 60:40, depending upon how you come to the table to analyze this.

But nonetheless, again I go back to – even if this gets over turned, the real issue here is the bulging cost, the lack of some quality care, some element of exchange is going to have to come in, some states are even regardless of how the federal government tells that they’re still going to come out with exchange opportunities. And I think we’re very opportunistic when we look at new opportunities like that. I think in looking at our Part D program that came out of nowhere, we built the business around that.

When we think about exchanges, we have nothing to really protect, it’s a membership that is commercially oriented and those folks are going to have to protect their coverage universe, I think we can come into this with a fresh idea of how to service those individuals that are going to need to be covered in the insurance exchanges.

So less to be determined in this part of our business opportunity, but nonetheless I think we have the skill set and the training to get through, understand the opportunity and then build the business around that.

So with that Scott, I’d like to open it up for questions.

Question-and-Answer Session

Scott J. Fidel – Deutsche Bank Securities, Inc.

Okay. I’ll kick it off, and Bob maybe help us think about your perspective on the first quarter results and clearly within the Medicare area would be more of your specialty, particularly as it relates to some of the reserve development trends that we saw, UAM did have a nice stream of reserves development; others in this sector did not report any meaningful reserve development. So maybe first, just talk about sort of where you saw the reserve development falling through in your Medicare business, what were sort of the primary drivers of that, and then what your view of underlying utilization trends are in the Medicare business, early so far in 2012?

Robert A. Waegelein

Sure. Some of our positive development came on the revenue side as we got better risk towards than anticipated and additional revenue to accrete. So some of it came through the top line, but we had positive development in the benefit section as well.

I think one thing when you think about Medicare and the trended rates, you have to look at our business in sort of three components; we have our HMO business, we have our network private fee for service business and our rural private fee for service business.

And I’d say in the rural and more close with the network private fee for service, trends are coming inline with where the industry would see them develop. But really in our HMOs, our trends are much more favorable than what you would see in the industry. And as a result for that, and really it gets down to provider engagement, medical management for utilizing the cost of the care in more appropriate way. So we’re keeping folks out of the facilities, we’re getting them into their physician offices. So the trended rates, I think are more favorable for us in that part of the business than we’d see in just the traditional Medicare Advantage type of coverage. So we saw more coming out of, but we have an impact on the outcome, and sort of better development as a result.

And I think also with a fairly mild winter, so I was actually surprised with year-over-year, kind of flu type of conditionality in ’11 off of ’10, and ’12 off ’11; we just didn’t see any development from that perspective as well, I think it was a pretty healthy winter, late winter, early winter type of scenario.

Scott J. Fidel – Deutsche Bank Securities, Inc.

And then from the perspective of claim submission patterns and completion factors in the fourth quarter, some companies, and in fact hit the 50 – and the conversion that was underway there, did you guys see any type of variance in submission patterns from providers or clearing houses in the fourth quarter that could have been related to some of the regulatory changes?

Robert A. Waegelein

You know, not really our days pay and payable was very stable for the completion of sort of consistent even on our Medicare supplement business, which is smaller, we didn’t see any unusual pattern from anything like that. So a pretty stable development pattern for us and so I did observe other comments from other members in the industry, but we didn’t see any of that.

Scott J. Fidel – Deutsche Bank Securities, Inc.

Maybe we could – actually is there a question back there or?

Unidentified Analyst

Hi, I was just wondering if you could talk about the impact of the week day on the trend if that had an impact at all. And then also help us handicap outcome on MA rates depending on what happens with the Supreme Court and Healthcare reform?

Robert A. Waegelein

Alright, so we would say again it’s sort of Scots question about utilization and the like, we didn’t see anything develop in addition on utilization to have next day available. You know, when we were in the prescription drug business we did see that more acutely but I think folks, I’ll discuss that another day to go see the doctor, I don’t think hospital business or physician business or anything spike up, so nothing in the order of that.

Right now, we’re going through our bid work and again we’re evaluating the results of 2011, how we show the submission numbers for the first quarter of ’12. And we just thing, we’re having the right bid to build the good think and when you think about health care reform and sequestration and thinks that, little frustrating, we’d like to have more definitive answers as it relates to how they are going to deal with some of those issues. We’re going to deal with the information we have and I think we’ll be able to put in a bid that makes sense for the markets we’re in.

We think we know our competition is extremely well and our Houston and Dallas markets, I think we know our competition is fairly well based on historical experience into the Northeast. So you’re doing a sort of predictive modeling on how others might be dealing with the same issues we are in those markets, but we’re confident again with our experience in our risk management history to develop appropriate premium bidding for 2013.

Scott J. Fidel – Deutsche Bank Securities, Inc.

A question about the ACO business that you’re rolling out and clearly there are still a number of elements that are still being developed and determined, but can you help us think and talk about how the revenue model for this business, how you foresee that is this going to be a premium based business, will this be more of a fee-based business, then maybe talk about – you’ve talk about some of the G&A investments required but how much capital would you anticipate, would be required to support the build out of the ACO business?

Robert A. Waegelein

That’s great, I appreciate you asking that question Scott. ACO is extremely unique, its really started about a month ago. We got patient identification but really not an information yet to work with population. So the way it works is, we got these 150,000 members who are signed to us and we’ll go out and we’ll manage the cases, so the type of expenses that we are going to incur somewhere startup an application and hiring folks, do the leg work in the medical management, so that will continue so, when you’re thinking about medical management, what we’re doing in the HMO, on the ground nurses and sort of active case measures and folks going into the emergency room for discharges, hospital discharges managing that whole process.

So that’s what the infrastructure expense is, plus real corporate overhead of executives to manage the various markets in life. So that’s the sort of run rate expense, and what we expect is that as time goes on the government will be giving us our claims data, first they are going to give us the benchmark hospice, the patients that are signed to us and that’s the level of expectation of the benchmark cost for that membership. So as we work through the patients and try to improve the way they are accessing and getting their care, CMS will give us claims information on a look back basis. Here is what they incurred in month April, May, June we’ll develop some triangles also this claim experienced to understand ultimately what was the cost of that patient based for that relative month compared to the benchmark.

And the difference between the benchmark, what it actually costs and hopefully what it actually cost is less, that’s the shared savings that we have with the government. The government takes half, the ACO gets half, so that’s the revenue model. There is no premiums, there is no capital required, here we’re not at risk for any of this. The kind of capital we need is the investment capital of funding cash expenses before we get our cash revenue. So we set a lot with the government as we reconcile for 21 months in the first period, what was the claims costs over the period of time, what was the expected benchmark cost, that differences split 50:50. We dig out our expenses to manage it and then we have gain sharing with the various provider groups with separate rates.

So that’s sort of the economic model. Now the cash model is that in 21 months when we reconcile with the government, it is when we get that shared services payment. So the capital really is going to be coming from us not from the providers in the ACO. That’s really where I think the providers that we engage was very opportunistic about the opportunity, go out there and employ their services and they’ll script that to this population and then getting gain share for that, we’re the founder of this, and help manage this and then ultimately we get our money. So one thing that’s yet to be determined is the actual GAAP accounting for this business.

So I believe, there will be some revenue accruals that will happen as we can be fairly predictive about the shared service, savings for the particular months. We’ll get a development and are no difference than the completion factors that I referred to on the benefit side. How complete our months is, it goes out and then what are the savings of the benchmark. So we’ll continue our tutorial on this, we enjoyed the opportunity to talk to the investor and sell-analysts on how to account for in manage party, brand new, different and implied seasonality in this. We anticipate a lot of transparency in conversation around this as more information develops, but that’s sort of adjustment how the program is going to work.

Scott J. Fidel – Deutsche Bank Securities, Inc.

That’s helpful. And is there anyway that where you thought about or ranged from I guess the PMPM perspective, what the revenue opportunity could be on that, you will be thinking about this as the PMPM, Fee-for-Service spend and then what potential opportunity you have to drive down cost and then splitting that with the government and then there could be some additional services that you provide on top of that, is that the way to think about it or is there another way to think about it?

Robert A. Waegelein

I think the way to think about it is there is nine of them with nine different levels of provider engagement. So in Houston, these guys are already probably cranking in some of the good techniques. So we are not ready yet to really talk about what percentage of the benchmark or what PMPM of the original benchmark we are going to save until so we really see how engaged each of the practices historically has been and what’s their embracement of the new opportunity. And once we see some performance then I think we can get a little more predictive of how to start measuring of a level of savings.

But really, the history, the 12 plus years that we’ve observed and owned heritage seeing how that model develop over time, seeing how we brought it to Dallas, and as the providers get engaged, how it impacts our MBRs. We are very optimistic that the opportunity is going to fair out well unless we would not engage in the level of investment that we’re planning to do on this.

Scott J. Fidel – Deutsche Bank Securities, Inc.

And then just again early stage here, but sort of thinking about parameters around margins and it’s not a premium-based business. So I’d imagine that we’d necessarily need to be tied to thinking about sort of the 5% margin that we typically think about for Medicare managed care business. But it is the government services business, and clearly there is always going to be margin restraints around those types of services compared to promotional product. So maybe I’ll just think about some parameters that are along the lines with our margins in this business?

Robert A. Waegelein

Quite frankly on this one, I don’t think they’re going to care so much about the margin. Because the higher margin we have, the better benefit they have. So this is one that’s really ruling this thing together for a great reason with the government, it’s to reduce cost. There is quality metrics around this, and I’d like to add, we just can’t go in and save money without improving the quality or maintaining good quality procedures and care for our patient base.

What’s really hitting the quality measures of the healthcare stats, they put together the more savings we have, the better they’re going to be, because they’re going to save that much more of the program.

So this is one that’s not going to be so margin folks, it’s really going to be compliant with Healthcare quality to make sure that we’re maintaining that. And then once that and the savings come, I think the government is going to be thrilled with what we come from this.

Scott J. Fidel – Deutsche Bank Securities, Inc.

And then one last question on the ACOs, in the case that reform is struck down, how do you see the ACO initiative playing out at this point, does it essentially get struck down as well or are there contingency plans and enough momentum around this is as a new model that even if reform is struck down, there will be an opportunity for the government to move forward potentially in bit of an alternative structure?

Robert A. Waegelein

Right, a good question when we think about, but being the, never optimist as I generally am. Again if it becomes an illegal, the Affordable Care Act seems illegal and everything has to get thrown out, this is one that doesn’t cost money. All right, this is a completely cost savings, it doesn’t increase the budget of CMS at all converge we really generates the lower cost opportunities, so we would be hopeful that CMS and the other folks around the programs would administrate this into the profits at some point, there is a lot of momentum, there’s been a lot of excitement, a lot of endorsement, from CMS over this and I said very cautiously, but very optimistic that – this would be business as usual, keep moving forward again with a really strong focus on the health quality that we’re doing around the services.

Scott J. Fidel – Deutsche Bank Securities, Inc.

I’m want to ask about the medicare supplement business and the decision to stop active marketing of the traditional products, so may be walk us through the thought process there clearly, the volumes have been coming down in that block business for a number of years now, but the profitability is actually rebounded quite nicely in the traditional products, and I’ve traditional thought about you guys having that block some would have hedge to the managed care products, if the market and that moving in a different direction, you now see sort of the ATO strategy as where you want to focus more on the fee-for-service side of medicare and factorizing sort of transitioning over from Med Supp or help us think about some of the strategies that we’re in play there?

Robert A. Waegelein

Absolutely. Our Med Supp book is profitable as you know loss ratio is in the low 70 and when go out and try to get a rate increase this one thing you always held up against this – rates of others in the market that you’re, in the states that you are in, trying to roll out a product that’s price competitively for new business, you have to use your current rates. And – there is many companies out there that have various companies that come in and calculate low borrow rates, so competitively it was very difficult to try that get a price point that were to generate volume that supported the acquisition cost in acquiring that business, so economically we are spending tens of millions of dollars and there is not enough production that I could model out, that could want it be cooping that investment, given the rate pressure that we’re seeing from others.

The states are not – they are very tied on rate increase, again new companies, there are companies that come out with new offerings. But I think our GAAP losses, so to try to compete against that was a challenge, that’s also we’ve been burdened before in a smaller part of our business taking out for borrowers working at ACOs or the APS opportunity of Medicare advantage and getting caught with a problem developing under our nose that a main focus of our business. So just within that volume wasn’t up earnings and quite frankly when you turn off that new business, one off profitability really emerges in a stronger way, because it’s not diluted by some of the lower margin first year business. So it’s really very much of an economic decision, I think one that will prove well at the end of the day.

Scott J. Fidel – Deutsche Bank Securities, Inc.

That makes sense. Want to just ask about the Medicare advantage business and enrolment trends are clearly, its been a challenge now for some time you’ve talked about you’re your plan for 2013 and to get the business back into better position. Let me talk about the level of the confidence you think that you can return to membership growth in Medicare advantage in 2013? And then how are you thinking about the pricing environment in Medicare in the context of some of the or at least one of the major competitors now talking about, adding an element into their pricing and benefit designs to start thinking about the minimal and large in 2014 and the fact that they’re going to need to circulating their margins towards that.

Robert A. Waegelein

Well, two part of question, first membership is, again I think in our Texas HMO markets we were feeling very confident about the growth opportunities there. I think in the up-state New York again markets that we’re existed about and I think we can price competitively, very optimistic about that. So $139,000 there’s two elements I think will have next growth. Then you have the rule, private fee for service that by definition will change as they – finally it’s a rule of county, so I would expect attrition sort of coming out of that population, and then what we affectionately call is up here, in the non-core market. It’s one that will continue to price for retention, but there is more competition in that, that we’re not going to try to chase a bit for a smaller level of membership.

So I think, overall we’ll have some growth, we’ll have growth in the areas that matter to us, but there will be attrition in some of the other markets as we would expect. So overall, we’re still looking for continued modest growth.

Other growth down the line can come from the ACOs. If we build up a very good gain share opportunity and a patient pays to understand what we’re trying to do, new membership markets can evolve from our ACO opportunity, so we’re going to be watching that as that develops.

The second part of that MBR, a lot of our SG&A, and a lot others are different, but a lot of our MB expenses from medical management and the like are in SG&A. So we move that up the line, the premium tax will have an impact, and as we kind of do our quick forecasting of that, the impact of MBR to us, we’re not as concerned may be about as others in that regard.

So I think that might be a price advantage to us in the sense that we think we can maintain a very attractive price, given where premium trends are going and health trends higher, I think we can maintain our position quite fine, given how – just the numbers are got to crunch out for us.

Scott J. Fidel – Deutsche Bank Securities, Inc.

Any sense of what those re-classes will affect?

Robert A. Waegelein

Why don’t we wait and see until the ACOs develop, so we’ll have more comparative information, but again it was meaningful enough – there’s a couple of points probably in the SG&A that would go up in the MBR line.

Scott Fidel – Deutsche Bank Securities

Okay, great. Well, with that I think we’re out of time here. So Bob thanks very much.

Robert A. Waegelein

All right. Thank you.

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