Coventry Health Care, Inc. Q4 2007 Earnings Call Transcript

Coventry Health Care Inc. (CVH)

Q4 FY07 Earnings Call

February 08, 2008, 08:30 AM ET

Executives

Drew L. Asher - Sr. VP, Corporate Finance

Dale B. Wolf - Director and CEO

Shawn M. Guertin - EVP and CFO

Analysts

Christine Arnold - Morgan Stanley

Charles Boorady - Citigroup

Carl McDonald - Oppenheimer & Co

Josh Raskin - Lehman Brothers

Justin Lake - UBS

Douglas Simpson - Merrill Lynch

Matthew Perry - Wachovia Capital Markets

Thomas Carroll - Stifel Nicolaus & Co

Presentation

Operator

Good morning and welcome to Coventry Health Care's Fourth Quarter 2007 Earnings Conference Call. Today's conference is being recorded and all participants are in a listen-only mode. Today's call will begin with opening remarks by the Chief Executive Officer of Coventry Health Care, Mr. Dale Wolf, after a brief forward-looking statement read by Drew Asher.

Please go ahead, Drew.

Drew L. Asher - Senior Vice President, Corporate Finance

Ladies and gentlemen, during this call, we will make forward-looking statements. Certain risks and uncertainties as described in the Company's filings with the SEC on Form 10-K for the year ended December 31, 2006 and Form 10-Q for the quarter ended September 30, 2007 may materially impact those statements and could cause actual future results to differ materially from those anticipated and discussed. Dale?

Dale B. Wolf - Director and Chief Executive Officer

Good morning everyone. Earlier this morning, we reported operating revenues of $2.8 billion for the fourth quarter, up 44% over the prior year quarter. And net income of $184 million or $1.18 per diluted share, which was up 22% from the prior year quarter. As this is typical, Shawn will go into a good deal of detail behind these results in his remarks.

Notwithstanding, the merit of activities going on within our Company, if was in many respects, a steadier she [ph] goes quarter. Our commercial business grew again on the back of our small group engine, and loss ratios remain stable. Also, in Medicare, most of the activity was pointed towards 2008 in the fourth quarter, but the existing quarter culminated in an outstanding 2007. Our individual product continues to gain steam, adding nearly 10,000 members in the quarter and the strength of our workers’ comp franchises evident again as revenues grew 4% sequentially, with the PBM operations leading the way.

While we try to never be totaling satisfied, the stability of our financial results and the strength of our franchise in key strategic areas is very evident and continues to produce the kind of significant growth and stability of results evidenced in 2007. I want to focus the balance in my remarks this morning on our 2008 prospects as well as couple of things that have emerged for the longer term.

You probably already sick of hearing these, but I have to go back to the key growth drivers we identified nearly a year ago for 2008. First in our commercial business. Our ability to grow there will be driven by our success in the small group arena, in self funded better retention on the large group side and expansion to new market territories. In a couple of these areas we can’t and need to do better. Apart from a few notable large group sales, our ability to generate bread and butter ASO sales if not where it needs to be, and we have stepped up our efforts in this area. Also a retention of larger accounts since not improved to the point where we like it, and will step up our efforts here as well.

I feel very differently, however, about our renewed focus on small group sales. We put increased energy in 2007 into an area that has always produced well for us and has paid off with even better results, as evidence by our 6% organic growth in our small group block for the year, and positive overall group risk enrollments for the last three quarters.

Lastly, on commercial, our new market development is on track, with Oklahoma now a full fledged operating market. With South Carolina, Memphis, and Tampa on their way and a couple of others in the planning stages.

The key levers in our commercial business have performed exceptionally well in this Company, year-after-year-after-year and continue to do so. But along the lines, they have never been satisfied. We will continue to look for improvement opportunities as mentioned above to enhance our franchise growth.

The second growth drivers, of course, Medicare. I do want to update you on our enrollment status and prognosis for Medicare Advantage. But before I do that, I would be miss if I didn’t mention the outstanding year, that our Part D business is shaping up to have. Our January enrollment is up, over 125,000 members from the end of year, certainly, part of that from auto enrollments. But new sales have by all measures didn’t terrific.

On the Medicare Advantage side, I think you will see in mid February release of the CMS Medicare membership report. We have added approximately 23,000 net members in early January across private fee for service in Medicare coordinated care products. In addition, we know of 5,000 to 10,000 mote net adds since the cut off of that data and these in conjunction with the large group sale for April 1, bring us to approximately 80,000 known net adds against our target of a 100,000. It feels like we're right on track, albeit, with a slightly different mix. We have more data on the pieces of this enrolment that you can imagine, but I wanted to highlight a couple of high level observations.

In sales of our individual product, private fee for service sales are running a little below plan and coordinated care products are running ahead of plan and the best ever. I think, this characteristic is not uncommon to you. In an individual disenrollments the data from the last month actually suggests a somewhat lower rate of disenrollment than we were forecasting a month ago, particularly in private fee for service.

Lastly, in the Medicare arena, you remember we opened four new markets for January 1, 2008 for the coordinated care product and are working on opening five additional ones for 2009 including two in our existing health plans and three in entirely new markets for Medicare. These network efforts always seem to come down to the wire, but we have a full court press on for sufficient market penetration to gain CMS approval.

As I mentioned earlier our third growth driver the individual business is still performing exceptionally well. Including Vista, we grew 70,000 net members in 2007 an increase of more than 300% and are off to a good start with 3,500 net growth for January 1, and our best sales month ever, in the month of January. Loss ratios for the full-year were about 60% and we have high hopes for this business. And lastly on the growth driver is our workers comp business. You can see revenues increase nicely in the fourth quarter and you can also decide from our ’08 guidance that our administrative services revenue is increasing principally driven by workers comp.

Our value-added proposition and product positioning here are outstanding and resonating with both existing and new customers. Overall 2008 feels like it will be another outstanding year. But quite apart from our 2007 results or 2008 outlook. I also want to remind you how we see the future for our company. First, in the area of strategic positioning. I couldn’t feel better about our target market segments. Small group, government programs, individual. These areas capitalize on our historic strength and represent the right places to be in the future. And second, our growth prospects remain very encouraging the strategic positions mentioned will enable us to grow faster than the market.

We’ll certainly emphasize these as we move into 2009 along with the introduction of specialty products, which we mentioned before. Such as life, behavioral and dental. On that subject, I did want to share with you that we did recently enter into a transaction to acquire a behavioral health company called MHNet. That transaction should actually close this month in February. This is a company that provides classic behavioral health services to employers and health plans and has actually been a vendor to a couple of our local markets for a number of years. While it is a relatively small company and will have very modest impact on our revenue, particularly as we consolidate our own business. We fully expect to gain the benefits of in sourcing our behavioral health business in all of our health plan markets, over time.

That company will also continue to compete in the marketplace for third party business as MHNet. We're also pursuing a range of solutions in both life and dental and expect to have something consummated in 2008 in those areas as well. And thirdly about our company in lastly the financial discipline and execution. Whether it's our motto about best margins and acceptable growth or low cost wins or the strong financial control over our underwriting possesses we remain committed to the same kind and levels of discipline, stability and predictability we have demonstrated for many, many years. Now let me turn it over to Shawn for some financial comments.

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Thank you, Dale and good morning everyone. I’ll start off this morning with the commercial business. Overall, this business continues to perform very well. Dale already commented on the topline results, driven largely by our success in small group. From a bottom line perspective the commercial results continue to be impressive as well. On a same store basis that is excluding the Vista and Mutual of Omaha acquisitions to help plan commercial MLR with 77.3% in the fourth quarter, down 10 basis points from the fourth quarter of 2006 and down 140 basis points sequentially. This brings the full year commercial MLR to 78% on a same store basis, a strong result and a result consistent with the expectations we shared with you last quarter.

One item I would like to touch on is the Days and Claims payable metric for the current quarter. As you can see in the press release, as reported this metric is down 8.7 days in the quarter. As you would suspect with a decrease of this magnitude there are a number of one time items impacting this measure in the fourth quarter. We have displayed this in a explanatory footnote in the press release. As you can see there are three specific items, the MAPD or health plan portion of the 2006 Part D settlement drove this down 3.8 days. The inclusion of Vista for the first time reduced the measure by 1.7 days, an acceleration in the overall claim payments deed on the private fee for service business pushed the metric down 2.5 days.

I will discuss the Medicare related items that are a bit more… in a moment but the key takeaway here is the remaining change is a relatively small decrease of 0.7 days, a fairly typical fluctuation in such a large liability.

Looking to 2008, our outlook for trend is unchanged, that is it will be stable versus 2007 and in the neighborhood of 7.5%. All of the fundamental markers continue to look good in line with expectations. Our pricing philosophy on commercial continues to be that we price at least equal to expected medical cost trend thus we expect yield increases, similar to what we have experienced in 2007 and our expectation for the 2008 commercial medical loss ratio is reported to be flat versus 2007 on a same store basis, so right around 78%.

On a reported basis we expect a slightly higher result due to the inclusion of both Mutual of Omaha and Vista for a full year. Working the acquisition in for 2008 should add about 50 basis points to 70 basis points to the same store commercial medical loss ratio, producing a reported commercial MLR in the mid to high 78s.

Our Individual consumer and government division has been a star performer for us in 2007 and fourth quarter saw this trend continue. As you have seen in the press release the performance of our Medicare business is continues to be exceptional. The impressive results we have seen on the Part D and Medicare Advantage business continue to play out as we had expected. The Medicare business was also where the action was in terms of two items in the quarter that require some explanation regarding the impact of the balance sheet and cash flow statements. The first item was the 2006 Part D and MAPD settlement with CMS.

As we had mentioned last quarter, CMS begins to collect the monies due to them as a result of the settlement calculation in the fourth quarter. As a reminder our total settlement due to CMS was $395 million, in all, but $31 million of this was collected in the fourth quarter. Consistent with how these monies were reflected when they were received, the outflow of the monies is running through the cash flow from operations for the current quarter. We have enhanced the reconciliation contained in our press release to display not only the impact of these 2006 payments going out, but also our estimate of the 2007 plan year settlement, the latter being cash we received this year, that will be paid out next year as part of the final 2007 Part D settlement process.

The main impact of this settlement, as you would expect was on our standalone Part D business, but there was also an impact to our health plan based Medicare Advantage business. As you know, many of our health plan based Medicare Advantage products contain an integrated Part D benefit, subject to the same subsidies and risk sharing as the standalone Part D business. As we received the subsidy payments from CMS during 2006, they were accrued as medical claim liabilities. The payment of these MAPD monies back to CMS, well it has no income statement impact, leads to a reduction in medical claim liabilities on the balance sheet and as stated earlier, produces a decrease of 3.8 days to the DCP metric.

The other Medicare related item pertains to the receipt and processing of claims and the private fee for service business. As a result of our rapid membership growth during the first two quarters of the year, and then the addition of 35,000 PEIA members at the beginning of the third quarter, we were incurring medical expense faster than the rate of claim submission and claim payment. The result of this was a build up of reserves during this period and is evident looking at our DCP metric for the previous couple of quarters.

During the fourth quarter, the receipt of claims began to catch up with the increased membership and we made a concerted effort to increase our overall claim processing speed through both a substantial reduction in claim inventory and accelerating the rate at which we paid new clients once we received them. The result of this effort led to significantly more paid claims in the current quarter impacting both cash flow from operations and the needed reserve level on private fee for service.

As mentioned earlier, the decrease in needed reserves on private fee for service as a result of the higher paid claims explains 2.5 days in PCP decrease for the fourth quarter. You can also see in the press release that the ratio of cash flow from operations to net income for the fourth quarter is lower than usual. I point out that quarterly numbers can bounce around a bit, both good and bad but in this case it is almost entirely explained by the private fee for service claim push in the quarter.

I would draw your attention to the full year cash flow results as being a more indicative and stable data point. These results show that after adjusting for the ins and outs related to Part D and including the private fee for service activity in Q4, we are at 144% of net income for the full year.

Turning now to 2008 guidance. We are affirming our earnings guidance of $442 to $458 per diluted share, an increase of 11% to 15% from 2007. As a reminder our range includes both the potential fluctuation related to our operating metrics as well as the use of net free cash which we continue to project to be in the neighborhood of $600 million in 2008. A closer examination of our detailed guidance elements will show few changes, so I wanted to fill-in some of the detail here. One, we still expect to add 100,000 Medicare Advantage members during 2008. As Dale mentioned the mix here will likely be different than we originally thought, with more group than individual and due to this a bit more back-weighted during 2008 than we initially expected. Two, we will do better than we initially expected and Part D, with membership in January up more than 125,000 members from December ’07. One additional point on this is, is that this increased membership will create a more pronounced seasonal impact to our earnings, as you will hear in a moment.

Three, we still expect to grow our commercial risk membership 1% to 2% for the full year. As we communicated at Investor Day, we expect that our commercial risk membership will decrease in Q1 2008; similar to the decrease we experienced in Q1, 2007. Based on the strong underlying small group results, in the large group pipeline, we expect to grow in each of the remaining quarters getting back to the 1% to 2% growth by year-end. Our outlook on the most important commercial item, the MLR, is also unchanged. We expect the same-store loss ratio to be flat in 2008 versus 2007.

Four, workers’ compensation services business is expected to perform better than we initially expected and this has been reflected as part of the increase in fee revenue guidance. And last, number five, investment income will be less than initially expected due to the decrease in short-term interest rate as a result of the recently announced Fed rate cuts. The impact here is partially offset by lower interest expense, as you will see in our updated guidance for both of these items. Overall, the net result of this detailed guidance elements produces higher EBIDTA from an operating perspective, offset by the changes in investment income.

Now, turning more specifically to the first quarter, we are providing initially EPS guidance of $0.85 to $0.87 per share. This is a bit lower than what I’ve seen out there for estimates, so, let me provide some insights into the key driver here, which is Part D seasonality. In short, the seasonal impact of Part D is a bit higher than you might have expected as we have significantly more Part D membership than we originally thought, a good chunk of which is low Income. And when combined with the wider risk-sharing quarter in 2008, this produces a more pronounced seasonal effect. More specifically, in the fourth quarter of 2007, we had a Part D MLR of 58%.

For the first quarter of 2008, we are expecting a loss ratio of around 104%, which produces negative gross margin. This swing explains almost all of the progression in EPS from Q4 2007 to Q1 2008. Again, this does not have any impact on the full year, it’s just timing within the year.

In conclusion, fourth quarter 2007 was yet another strong record setting quarter for Coventry Health Care. At the core, our business is continue to perform very well, as evidence by the updates to operating elements of our guidance. We are affirming our guidance for 2008 and continue to feel good about our positioning and the many, many different growth drivers we have that work.

This concludes my prepared remarks this morning. Operator, we will now open up the call to questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

We will go to Christine Arnold Morgan Stanley.

Christine Arnold - Morgan Stanley

Hi, there. A couple of questions, first, could you comment on the Medicaid outlook given kind of where state budgets are both from an enrollment perspective and from kind of what you expect with payments and new contracts that maybe coming up?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Christine, I’ll try this in no particular order. As far as contracts going up, we will… we are… will obviously be strongly at the table in Tennessee in both regions, that’s certainly the most meaningful one on the horizon. We have a couple of others that are a little further out that we are engaged on. But certainly, would not have any meaningful impact on 2008.

In terms of enrollments and reimbursement to rates. First on the enrollment side, there is a bunch of noise in this, I mean, for instance, as you may remember there is a couple of new programs in Missouri which is a very strong state for us. There was actually an expansion of an existing program to Counties and then there is a new program. We are participating in both of those. And so, I expect to pickup enrollment in Missouri, but it’s quite apart from any budget situation. It’s really what happens in these two new programs. It’s going to far out way the impact of the budget situation there.

And so, in this… go back to the where we are. Missouri big time, Michigan and after that there is a handful of other states that are much smaller than the rest of them. We don’t have any particular insight on the economic impact on enrollment or rates, because we are in a small enough numbers states that tend to be very states specific as opposed to broad.

Christine Arnold - Morgan Stanley

Okay. And then your individual enrollment grew pretty dramatically this year and helped kind of the aggregate loss ratio. And then the divergence between what you report for commercial what we are calculating kind of widening, but individual I think bring it down. What are your growth expectations for ’08 relative to ’07 in your individual book?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Christine, let me just read… I want to make sure we are all on the same page. And you right. Certainly, individual at 60 when you look at that vis-à-vis are all in loss ratio, what you stated is correct. But all of the numbers that I am talking about on health plan commercial exclude the impact of that. So, that is purely sort of the classic group enrollment.

Looking forward, we expect basically to get to 150,000 members by the end of the year, which essentially will be a doubling again of our organic sort of non-Vista individual membership. We… as you have seen end of the year around little over 90,000.

Christine Arnold - Morgan Stanley

Okay. Thank you very much.

Operator

We will go next to Charles Boorady with Citi.

Charles Boorady - Citigroup

Thanks. Good morning. First, I am wondering if you could just briefly talk about the performance of your investment portfolio and any issues that cropped up from the credit or subprime markets.

Dale B. Wolf - Director and Chief Executive Officer

I am pleased to tell you that we have virtually no issues here. We have not had any material impairment issues at all this year. And as you would suspect with everything going on today, we had… we have conducted a very thorough internal review, and this is something I would say in the external audit world as well, that it is getting a much, much more rigorous review. And the result of that it really frankly couldn’t have been any better and any cleaner. We have virtually zero subprime exposure. I think it’s down to $2 million in the portfolio and it’s actually still performing and AAA rated.

So, the other comment I would offer as well because there has been a lot of media coverage certainly about the bond insurers and we are a fairly big municipal investor is I would tell you that our investment guidelines are such that we do not buy municipal bonds unless they could basically be investment grade on their own merit from a credit perspective and in a way we look at the insurance as just sort of gravy on that.

Charles Boorady - Citigroup

Is that a new policy or is that implemented as a result of the environment or--?

Dale B. Wolf - Director and Chief Executive Officer

It always has been our policy. As well as thanks to my predecessor in this job. We had an inside limit on how much we would ever let sort of total mortgages to build up as well. So, we would have… in our portfolio, we have a much lower relative weighting of mortgage exposure than what people would tell us a classic portfolio would look at. So, all in all, it has performed extremely well related to credit quality conditions. And again, we have really gone through this with a fine toothed comb over the last few months, and we virtually have found no issues in that.

Charles Boorady - Citigroup

Great. Next question. How are your mix of more improved MA business impact your overall MAMLR and are you considering that higher group MLR in your guidance?

Dale B. Wolf - Director and Chief Executive Officer

We thought that through. At this point it’s really not… again we had thought group would go up 20 net and we might be up I think 35 to 40 net right now. So we are only talking about an increment that is fairly small. So, at this point we have considered it and we are comfortable with our range. The thing I would point out though is both products, while they have different loss ratios individual or group are still both priced with the same target margin. So, if I was wanting to refine it as you had outlined, the group product would have a slightly higher MLR, but it would have a lower SG&A ratio getting to the same bottom line.

Charles Boorady - Citigroup

And I ask this one every four years. How do you take the leap year effect into account? Is there an extra day of medical expense and no extra day of premium?

Dale B. Wolf - Director and Chief Executive Officer

I don’t want to go there. But there certainly is a relationship between sort of the week days in a month and sort of medical expense. It is not a pure one to one relationship. So, on that I believe there is a very, very small impact but you get into a lot of other drivers in terms of… you got what’s happening with the flu season to frankly just other seasonal impacts. So, I wouldn’t say it’s entirely irrelevant but I think in the grand scheme of things it becomes a fairly small item.

Charles Boorady - Citigroup

Okay. But you would say you consider it as a small item?

Dale B. Wolf - Director and Chief Executive Officer

Yes.

Charles Boorady - Citigroup

Okay. Compared to everything else. And then just the last question the… you talked about the same store MLR in the fourth quarter. Can you give us a sense of what the ’08 MLRs would be without the Vista and Mutual of Omaha acquisitions. Just to get a sense for what your same store MLR trends are expected to look like going into ’08?

Dale B. Wolf - Director and Chief Executive Officer

Yes, we expect… let me make sure I understand the question. We expect it to be flat. I mean it’s 78 this year. We expect the same store to be more or less 78 next year and that Vista and Mutual will push that up into the mid to high 78s.

Charles Boorady - Citigroup

Got it. Thank you.

Operator

We will go next to Carl McDonald with Oppenheimer.

Carl McDonald - Oppenheimer & Co

Hey, thank you. Question is on the private fee for service claims payment acceleration. As you actually paid those claims how did that compare to the reserves that you estimated and was there any integral development?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

It wasn’t material, and that’s why actually I took a lot of comfort in it. In that, we went through that and our reserves were fine, kind of even post that payment. So, when we look out the back window now obviously we have pretty good clarity on that looking at the first nine months of the year and that still looks good. I think that’s sort of evidence by looking at our overall and a loss ratio for the quarter.

Dale B. Wolf - Director and Chief Executive Officer

Let me just elaborate on one part of that. I know it’s underlying your question. As most people would remember, we only provide growth forward once or twice a year and not on a quarterly basis. But I think I would feel comfortable in making this statement as we have other times before, that our prior period enrolls forward experience has been consistent for a long, long time and hasn’t changed.

Carl McDonald - Oppenheimer & Co

Okay. And then second question, if you started repurchasing any stock yet in January or is that going to be more backend weighted?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

It will be. We do not as a policy by… when we’re in a quiet period or the window is closed. So, basically the window closed December 31, and it doesn’t open until three business days after call.

Carl McDonald - Oppenheimer & Co

Got it. Great. Thank you.

Operator

We’ll go next to Josh Raskin with Lehman Brothers.

Josh Raskin - Lehman Brothers

Hi guys. Thanks. Good morning. First question just to clarify the investment income and interest coming down, is that sort of using sort of spot rate today or is there an assumption of further rate declines as we go?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

At this point, we have not factored in any further rate cuts in our guidance. So, it’s basically the rate cuts today.

Josh Raskin - Lehman Brothers

And have you looked at what an extra 25 basis points would mean?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Yes, it would probably mean $3 million of investment income. Obviously, as we start to get a little insulated from it because we don’t have 12 months when these cap. And we have nine, six and so on.

Josh Raskin - Lehman Brothers

Right. Okay that’s helpful. And then just, maybe an update on the new market startups. I know Dale mentioned Oklahoma sort of no longer in that category, but Memphis and Tampa, in terms of the ramp up there sort of… any lessons you’ve learned there. And then how would you think about the number of new markets in ’08 and ’09 based on those results?

Dale B. Wolf - Director and Chief Executive Officer

We certainly learned some lessons along the way, Josh. As I mentioned… let me take them one at a time. Oklahoma is up and running. This is almost mechanical, but it’s important. We’ve actually moved it from our new market development group to our ongoing management group as a matter of responsibility. So, it’s a full fledged market.

South Carolina as I’ve reported before, while… actually sales in the fourth quarter were pretty decent in South Carolina, it has not been our star performer. But we have and are continuing to make some realignment in the management structure there. It is still within our new market development group and will stay there for a while. But it’s work in progress.

Memphis, it’s August 1, it’s pretty early. But we like our positioning in there in the markets. It’s still a lot. We’ve got the right team in place and pretty optimistic about that one.

And Tampa is just frankly, too early to tell. In terms of number in new markets, there are already two beyond the ones I have mentioned that I have reviewed and we are tentatively moving forward. So, whether beyond Tampa, it turns out that there are two or three, or four more this year, it is a little early to tell. But those will be the choices.

Josh Raskin - Lehman Brothers

Is it simply that sort of that 10,000 member cut-off that moves it from developing to full fledged markets?

Dale B. Wolf - Director and Chief Executive Officer

That’s a little too precise probably we’ll more than be end up being far from the truth. But it has to do with sort of how we feel about the provider contracts in the market whether they’re solid and competitive. How we feel about our team in the market, whether it’s built out, we have the right leadership and a couple of other factors. But it won’t be far from the truth that it’s likely to be in that 10,000 to 15,000 member range as well.

Josh Raskin - Lehman Brothers

Got you. And then just a last question on MHNet the acquisition you did. I guess two questions. Can you just remind us who your behavioral health partners are currently? And then, do you think there is any capacity issues in terms of in sourcing your current book to business?

Dale B. Wolf - Director and Chief Executive Officer

On the first, our vendor stuff is pretty spread out today a little bit with Magellan. We got some with United. We had a number of them with MHNet already. Value Options I think still has a piece, a small piece but there’s about four or five of them. APS has a piece, four or five of them.

Capacity issues at MHNet, we’ll be careful about that. It would not be a smart idea to roll all that on the business immediately. So, Rick Bates who is going to run that for us. He got a plan with the folks at MHNet in terms of the geographies and the impact. And it will be scheduled out over a period of a couple of years.

Josh Raskin - Lehman Brothers

Okay. Couple of years. Perfect. Thanks.

Operator

We’ll go next to Justin Lake with UBS.

Justin Lake - UBS

Thanks. Good morning. Just a quick couple of questions. First on the Medicare Advantage enrollment. Can you kind of give us your impression of how things are running on the individual side? I think you’ve stated that the individual additions were running a little bit below plan. Can you tell us and give us some numbers around that, what was the plan expectation versus today? And I think at the Investor Day you had said that they were running pretty much inline with plan. So, how this… I guess this has slowed down more recently. And then, maybe just compare that versus last year.

Dale B. Wolf - Director and Chief Executive Officer

I will try to do this Justin. My only hesitation is there are so many numbers here I don’t want to lose myself or the audience in doing it. But let me give you a sense for it. At Investor Day, on the individual sales side… we didn’t know anything about this enrollment at the time. But on the sales side in individual, we were pretty close, but slightly below where we were a year ago, on individual sales. As we look at it today, we are certainly below a year ago on individual sales. But there is one important distinction here I want to make and that has to do with dual eligibles. During last year sort of the initial part of this program, we sold a lot of dual eligibles, a private fee product, in access of 20,000. As it became apparent in the first and second quarter of last year, we did not expect to have that many duals and we didn’t think frankly it was a good buy for that many duals. So, working with CMS, we have done what we can to shut that down. We have been very successful at that. And so, as contrasted with those kind of numbers for duals, we have this year for January, one, written less than 5,000 duals.

So, there is a tale of two cities in the individual sales story. One, non-duals and one, duals. That’s the dual story. It’s a good thing, but it’s materially less than it was a year ago. On the non-dual side, we are probably less than last year, but only a little bit. But it feels pretty comparable for the last year on the non-dual side. And so it feels okay. But if you actually look at the raw numbers, the duals will be misleading on that. But it was a conscious decision having to do with how we paid commissions and a whole bunch of things that really ramped that down.

Justin Lake - UBS

That’s helpful. And just a quick follow-up on that. The trajectory of growth versus on the non-dual side, is that staying fairly similar as you are in early February now or is that just in total?

Dale B. Wolf - Director and Chief Executive Officer

Well, it’s staying fairly similar to where it’s been. It’s below last year in terms of what we’re picking up everyday, now versus last year. But it’s still continuing at a fairly steady rate now and expected to through the end of March.

Justin Lake - UBS

Okay that’s great. And then just a lot of questions around the economy and the impact on MLR membership and given how close you are to the small group factor which I think might be a little more sensitive to just some of the recessionary impacts.

Dale B. Wolf - Director and Chief Executive Officer

I will take the enrollment piece and Shawn can chime in on the MLR. I am going to sound like I am out of step on this issue. But if you go back and check the transcript the last time we were through this and I was in the other Chair. I got to tell you, if you go through the data from last time for us, our ability to sell new business and keep the business we had was way more impact full than any in group enrollment changes we had, by orders of magnitude.

So, I mean like a 4 or 5 to 1 ratio. We certainly tracked our in-group enrollment and through the last cycle, I mean it got worse. It went negative as opposed to a positive in any particular period, but it was order of magnitude couple of thousand members or something like that, non-material in terms of our overall enrollment changes. And I have no reason to believe otherwise this time.

You want to take the loss ratio?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

I mean, Justin, obviously, it’s something that we’re watching very, very closely. But I think a little bit like Dale said that there is some debate as to when this happens in a cycle. But the factors about sort of medical management unit cost and pricing tend to largely out weigh this. I would tell you right now, again, in the fourth quarter, we spent a lot of time looking at sort of the fundamental cost drivers and there really isn’t anything that you could see in the data right now that would say that there is material pressure coming out of that phenomenon.

Justin Lake - UBS

Right. Thank you very much.

Operator

We’ll go next to Douglas Simpson with Merrill Lynch.

Douglas Simpson - Merrill Lynch

Hi, good morning. Dale, I was wondering, you mentioned Life and Dental as you’re looking towards 2009. Could you just give us the sense for what kind of assets are out there? What could we expect to see from you guys potentially in the M&A front to maybe bulk up those offerings?

Dale B. Wolf - Director and Chief Executive Officer

Let me take Life first, because it’s a much easier answer, because I know what we’re doing on that. We’re not going to buy anything. We’re going to build it. And so, as I’ve described to somebody, it’s not hard to adjudicate claims in life insurance. And we can do that as well as product develop price and so on and so on. So, we’re going to build that. We’ve already started. We’ve hired somebody to lead that effort and we’re on our way.

As far as Dental goes, I don’t know yet. We will explore a range of options for dental, not unlike we did for behavioral by the way. And whether it actually turns out to be a buy or a partner or a build, I don’t think it will be a build, but it could still be some sort of partnering or buying or whatever. More will follow up.

Douglas Simpson - Merrill Lynch

Okay. And then just expectations for business mix, any… as you’re looking out the next couple of years, any thoughts on where we should expect that to go among three different buckets, four different buckets now I guess.

Dale B. Wolf - Director and Chief Executive Officer

By the way, let me just backup one step on the Dental piece. I think it is… maybe I should have said this. It’s obvious to me. But it is highly unlikely that we’re going to spend a lot of money to go buy a big dental player. So, puts it in perspective. In terms of business mix, you’re talking of across the whole Company?

Douglas Simpson - Merrill Lynch

Just across government, commercial workers’ comp, any--?

Dale B. Wolf - Director and Chief Executive Officer

I think that not unlike has been the last couple of years, you are likely to see the growth rate in the individual and government space significantly above the growth rate in the commercial space. And then my guess is that the specialty business, well, on the workers’ comp side, it’s likely to be in between, higher than the commercial, but lower than the individual government and the other specialty behavioral life that will… you're measuring from a zero base so the growth rates are almost immaterial.

Douglas Simpson - Merrill Lynch

Okay. And then are you seeing any evidence of the bigger guys coming down market into the small group area and is there anything out in the field that you are hearing from people?

Dale B. Wolf - Director and Chief Executive Officer

We're hearing a lot of rhetoric about it. But the marketplace itself has not changed significantly at all.

Douglas Simpson - Merrill Lynch

Okay. Thank you.

Operator

[Operator Instructions]. We’ll go next to Matt Perry with Wachovia Capital markets.

Matthew Perry - Wachovia Capital Markets

Hi, good morning. First on the PDP, you're picking up. It looks like a lot more LIS members that you thought your prior guidance, I think, it’s been up, MCR up 250 maybe 350 basis points. Has that changed with the addition of these new members and I think, some of these members were dropped by their former plans, maybe because of some form… maybe formalities were too wide open. Can you just talk about your comfort level that your formalities are structured appropriately for these members?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Yes. In fact I think, that’s a key to our success actually on low income members so, we've always had… we've always thought and since day one in this program that having the appropriate sort of formulary prior authorization controls was actually critical to providing a quality product. But a cost effective products. So, that’s something I think, that we've done very well since day one. I think, it's been a key driver and of course we have tweaked to that over time as we've got an experience. So, I would still stand by that guidance range, I would tell you that we've seen some seasonality impacts on the low income sort of the actual to expect it's haven’t been all that different between what I’ll call kind of non-low income and low income. So, I think, in that range the high end of that range is probably where you ought to think about the Part D, MLR.

Matthew Perry - Wachovia Capital Markets

Okay. And then, secondly, if I heard you correctly earlier in the call, I think, you’d said maybe that you expected to generate $650 million in free cash in ’08. I mean, if I was wrong on that, maybe you can correct me. And then I look at your share count guidance, seems to imply maybe only less than half of the cash might be used for share buybacks. Should we think in the absence of the M&A opportunities that maybe more of that cash gets used?

Shawn M. Guertin - Executive Vice President and Chief Financial Officer

Yes. I think, what you're saying… let me clarify first, the number was 600 even not 650. Second, I think, you have to account for timing here. In other words we're not deploying all of that cash on 1/1 and so we assume and it actually lines up fairly well with when we get dividends from our plans sort of the half year convention. So, we only… in this year we will only get half the year effect of the buyback. And the last point I think is correct, in the absence of M&A and some other commitments we have the rest of that free cash would largely go to share repurchase.

Matthew Perry - Wachovia Capital Markets

Okay. Thanks very much.

Operator

We will go next to Thomas Carroll with Stifel Nicolaus.

Thomas Carroll - Stifel Nicolaus & Co

Hi. Good morning. Couple of quick follow ups, pretty much everything has been answered for me. On Medicaid, could you comment on your expectations for competing either in New Mexico or with for the healthy kids program.

Dale B. Wolf - Director and Chief Executive Officer

No, and yes.

Thomas Carroll - Stifel Nicolaus & Co

And then secondly on Medicare, you said your mix is more group than individual and you have already hit on the individual comment already. Any more insight on the group discussions that you are already having that are in the pipeline?

Dale B. Wolf - Director and Chief Executive Officer

Let me take the first question. I want to say one more thing. We are already in Florida kid… to help the kids.

Thomas Carroll - Stifel Nicolaus & Co

Yes.

Dale B. Wolf - Director and Chief Executive Officer

And other than that we don’t intend to go into Mexico. And we are, of course, actively pursuing the Florida healthy kids program. The pipeline on the group side on Medicare, I guess I feel like a broken record on this, but remains robust, very robust. And we are active with many of those as we can and as many of those that are appropriate for us. Time will tell.

Thomas Carroll - Stifel Nicolaus & Co

So, it still feels as lumpy as it ever did.

Dale B. Wolf - Director and Chief Executive Officer

Yes.

Thomas Carroll - Stifel Nicolaus & Co

Thank you.

Operator

This concludes our question-and-answer sessions. I would like to turn the conference over to Dale Wolf for any additional or closing comments.

Dale B. Wolf - Director and Chief Executive Officer

We are finished. Thank you very much everyone.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect.

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