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Metropolitan Health Networks, Inc. (MDF)

Q4 2007 Earnings Call

March 4, 2008 11:00 am ET

Executives

Michael Earley - Chairman and CEO

Robert Sabo – Chief Financial Officer

Roberto Palenzuela – General Counsel

Dan McCarthy – President of METCARE Health Plans, Inc.

Analysts

Bob Leatherman – Hissup and Mammoth

Cole Zinger – Fundamental Management

Roth Stohoe – RBAC

Jeremy Hellman – Singular Research

Neil Myers – Bullpest Capital

Richard Weinstein – vFinance

Mark Dodd – Omni Capital

Ben Atkinson – Gagnon Securities

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2007 Metropolitan Health earnings conference call. (Operator Instructions) I will now turn your call over to Mr. Michael Earley, Chairman and CEO. Please proceed.

Michael Earley

Thank you, JD. Good morning. We are pleased to be discussing our fourth quarter and full year 2007 result. Thank you for joining us.

We issued the press release this morning outlining our earning. We anticipate that our annual report on Form 10-K to be filled by weeks end with the SEC. This call is being broadcast over this conference line and it is also available via the web as noted in our press release. It will be available after the call in recorded format to the conference service on our website. With me today are Robert Sabo, our Chief Financial Officer and Roberto Palenzuela, our General Counsel, Dan McCarthy who manages our HMO is also with us.

Before we get started, I would like Roberto to read our safe harbor statement.

Roberto Palenzuela

Thanks Mike. In order to comply with the forward-looking statements of safe harbor, I want to advice that in addition to historical information, certain comments made during this conference call, particularly those that pertains future financial performance, business prospects and gross operating strategies constitute forward-looking statements within the meaning of Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Such statements maybe identified by words such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “predict”, “hope”, or similar expressions, such statements which include estimated financial information or results are based on managements current expectation and are subject to a number of factor and uncertainties which could cause the actual results to differ materially from those described in the forward-looking statements, including without limitation, are failure to accurately estimate in current without reported medical benefit expenses.

Rising pressures inserted on us by managed care organizations and the level of payments we received under governmental programs or from other payers, future legislation and changes in governmental regulations, the impact of Medicare risks adjustments on payments we receive for our managed care operation, a loss of any of our significant contracts or our ability to increase the number of Medicare eligible patient lives we manage under this contract.

Our ability to successfully operate a health maintenance organization otherwise known as HMO and our ability to continuously increase enrollment and effectively manage expenses in our HMO as well as the risks and uncertainties described at the report filed by the company with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as amended, including without limitation, cautionary statements made in the company’s annual report on Form 10-K for the year ended December 31, 2006, its quarterly report on Form 10-Q for the quarter ended March 31, 2007, its quarterly report on Form 10-Q for the quarter ended June 30, 2007 and its quarterly report on Form 10-Q for the quarter ended September 30, 2007 and its annual report on Form 10-K for the year ended December 31, 2007 which is anticipated and be filed shortly.

Michael Earley

Thanks Roberto. I cannot help but repeat my opening remarks when we last spoke in November. Our 2007 has been challenging for Metropolitan, its managers and employees and the shareholders. I believe today, the company is in the best position than it has ever been in. That was two to three months ago and it is our belief today.

It is not to say that we do not have our challenges, we do but we have worked very hard and made real progress in both growing and improving the operations of our Medicare HMO. There are still works to be done so we believe our increasing scale and experience are allowing us to meet those challenges.

In terms of financial risk, the HMO now presents a more stable and tolerable profile as we move into 2008. We will discuss these matters in more detail later in the call. Today, we are caring for approximately 33,000 people with Medicare, stock business generating annualized revenue of more than $300 million.

Our balance sheet is as strongest that it has ever been with working capital of $29 million and that will be evolved for $38 million. We have no long-term debt. We operate two businesses. Our core Provider Service Network or PSN business generating 80% of our revenues and the profits and cash flow that enable us to fund the development of our second business, our own Medicare advantage HMO which today has the membership approaching 7500.

Our PSN business had its best year ever in terms of profitability and cash flow in 2007. We believe that our relationship with Humana, its 26,000 members we provide care for is strongest that it has been in its 10 year history. We have expanded our relationship with Humana to include serving their cared flow subsidiary and nine Florida counties. That brings the total number of counties we conserve in our Humana business to 11.

As well, we are more aggressively looking to expand our Humana business and maybe most important of all, our management team and our entire staff for that matter are the strongest and most talented we have enjoyed in our history.

Before we go further, let us have Bob takes us to the numbers.

Robert Sabo

Thank you, Mike and good morning everyone. First, I will discuss the results for 2007 at a high level. I will then talk about the fourth quarter and then get into more in depth analysis of the annual results.

By any measure, the operating results for 2007 show marked improvement over 2006. We realized revenue of $277.6 million in 2007 compared to $228.2 million in 2006, an increased of approximately $49.4 million or 21.6%. Our ratio of medical expense to revenue or medical expense ratio decreased to 86.7% in 2007 compared to 90.1% in 2006.

Pre-tax income for 2007 was $9.4 million compared to $826,000 in 2006. Net income for 2007 was $5.9 million compared to $473,000 for 2006. Net earnings per share basic was 12 cents for 2007 compared to a penny for 2006 and diluted earnings per share was 11 cents in 2007 compared to a penny in 2006.

I will now discuss the fourth quarter results. Overall, the 2007 fourth quarter results were dramatically improved over the fourth quarter of 2006. Net income in the fourth quarter of 2007 was $2.6 million as compared to a loss in the fourth quarter of 2006 of $2.7 million. Earnings per share basic and diluted were 5 cents per share in the fourth quarter of 2007 compared to a loss per share basic and diluted of 5 cents in 2006, an improvement of 10 cents a share.

Revenue in the fourth quarter of 2007 was almost $70 million as compared to almost $56 million in the fourth quarter of last year, an increase of 25%. Revenue in the PSN increased by 12% from $47.4 million in the fourth quarter of 2006 to $53.1 million in the fourth quarter of 2007, this increase is primarily the result of a higher monthly premium from increasing Medicare risks course of the customers we served.

For the HMO, revenue increased 100% to $16.8 million. The HMO customer months increased from 11,000 in Q4 of 2006 to 18,600 in Q4 of 2007. Also, in the fourth quarter of 2007, we recorded revenue in the HMO of approximately $1.3 million related to retroactive premium payments for certain HMO customers in 2007 that had not been previously recognized by the CMS for inclusion in the HMO customer base.

Of this amount, approximately $900,000 related demands prior to fourth quarter of 2007. We received this premium payment from CMS in 2008. The medical expense ratio or MER for both the PSN and the HMO improved over the prior year core. The PSN’s MER dropped from 90% in the fourth quarter of 2006 to 83% in the fourth quarter of 2007. For the HMO, the MER dropped from a 102% in the fourth quarter of 2006 to 88% in the fourth quarter of 2007.

As previously discussed, some of the retroactive premium adjustment related demands outside of the fourth quarter reduced the HMO’s MER by approximately 5%. The MER of both the PSN and the HMO were positively impacted by favorable claims development in the fourth quarter of estimated medical expenses payable at September 30, 2007. fourth quarter medical expenses for the HMO and PSN were reduced by approximately $1 million and $3 million respectively.

In the fourth quarter of 2006, we realized unfavorable claims development in the HMO $480,000 and favorable claims development related to the PSN of $1 million. In the fourth quarter of 2007, the PSN realized that segment gain before income taxes an allocated overhead of $7.9 million compared to $3.7 million for 2006, an increase of $4.2 million.

The HMO segment incurred a loss before income taxes an allocated overhead of $1.8 million for the 2007 quarter compared to a loss of $5.5 million for the fourth quarter of 2006, an improvement of $3.7 million. Allocated overhead for the 2007 fourth quarter was $2 million as compared to $2.6 million in Q4 of the prior year.

I will now discuss the results for 2007. 2007, especially when compared to 2006, was a terrific year by every measure. Revenue increased over $49 million or 22% to $277.6 million from $228.2 million in 2006. Revenue from the PSN in 2007 was $222.5 million compared to approximately $200 million in 2006. The increased is a result of the average premium per customer per month increasing by approximately 14.1% in 2007. Based on the payments we received thus far in 2008, we believed that the base per customer per month’s premium for the PSN will increased approximately 5% to 6% from 2007, excluding potential changes in the current Medicare risk course.

Revenue for the HMO is $55.1 million of the 2007 as compared to $28.2 million in 2006, a 95% increase. The increase is primarily attributable for the 82.9% increase in our customer months and a 6.8% increase in per customer per month premiums from CMS. The reported medical expense ration for the PSN decreased to 85.2% in 2007 as compared to 88.3% in 2006. This improvement is attributable to the increased premiums noted earlier and the favorable utilization resulting for medical management improvements implemented in 2006.

The reported medical expense ratio for the HMO declined to 92.9% in 2007 from a 102.5% in 2006. This decline is primarily result of our success in renegotiating certain contracts with hospital and out-patient service providers in 2007 that reduced the amount we paid for services provided. In addition, during 2007, the HMO maid improvements to the referral and preauthorization processes for medical services provided to the HMO’s customers and medical management processes where enhanced.

As a result, we realized a 3.2% decrease in the per customer per month medical expense. Operating cost increased almost $6 million or 26.2% in 2007 over 2006. This increase was a result of payroll, payroll taxes and benefit cost associated with the HMO segment increasing approximately $1 million. The increase in this cost was a direct result of the additional administrative personnel required service growth in HMO customers.

Corporate payroll, payroll taxes and benefit increasing $1 million or 23.3% primarily as a result of a $500,000 charge relating that separation agreement with our former president and chief operating officer. [1511] expense, which is primarily based on an operating result, was approximately $700,000 higher than in 2006. A charge of $584,000 associated with restructuring plan recurred in 3rd quarter of 2007, general administrative expenses increasing $2.9 million or 34.8%.

Approximately of this increase is attributable to the HMO. As a result of the 82.9% increase in customer months, the HMO incurred increase cost per claims processing and customer service cost of $1.1 million. In addition, this actuarial services increased by $800,000 over 2006. This cost related to among other things are efforts to analyze and improve the HMO’s operations and to the development of the 2008 plan design and big process.

At the professional service cost increased approximately $300,000 and depreciation expense increased by $274,000. The 2007 operating result had a very positive impact in our balance sheet with cash and cash equivalents increasing by $16 million to $38.7 million at December 31, 2007. Of this amount, $13 million is a restrictive for use within our HMO. In addition, our networking capital increased from $19.6 million at December 31, 2006 to $29.2 million at December 31, 2007 and we continue to remain debt free.

I will now turn it back to Mike.

Michael Earley

Thanks Bob. All in all, we are pleased with our 2007 performance. Our core PSN business is being managed very well and it is producing outstanding result. One concern we have not seen growth in customers in this business in the last couple of years. As of January 1, we are caring for 25,900 customers compared to 25,600 a year ago. To address this situation, we have been and are working on a number of opportunities.

First, during the 3rd quarter of 2007, we acquired one of our contracted primary care practices that provided care for about 1250 of our Humana customers. While this acquisition seems immediately add to our customer account, this practice is very well located for our business and provides an opportunity for membership growth and enhanced operating performance. We invested $900,000 in this practice.

Next, late in 2007, we opened a new holly home center in the northern part of our Daytona market located in Bunau [ph], a growing community, this better provided significant customer growth opportunities in our Humana business.

Third, in the last 12 months, we added 21 new primary care affiliates for our Humana market. Fourth, in November 2007, we acquired contracts to served approximately 1,000 Humana members to primary care offices in South Florida not only to regain members but we expanded our network presence in this important market. This acquisition cost us $1.4 million. Just we are gracefully exploring other acquisition opportunities to grow our Humana related business and our existing and other market.

Last, we have expanded our relationship with Humana through Care Plus our holly home Medicare advantage HMO. Under these new contracts, we are provider for them as we are with Humana. The contract covers nine counties in South and Central Florida. This business is being operated with networks of primary care position separate from our existing business. To date, we have contracted with six primary care practices and are pursuing others.

Now to the HMO, first we are pleased with our increasing customer account. Our membership is growing from 5,000 as March ended last year to an expected 7,500 as a turn open enrolled and period end. If we continue making improvements and controlling medical expenses and our overall expending, this new level of membership significantly reduces our financial commitment required to this business.

In shortly, our medical expense ratio in the HMO has been our most important challenge. Last year, this ratio came in at a disappointing and obviously unacceptable 102.4%. We experienced great fall until the end of our cost. Some of that are expected given our relatively low membership. More concerning are utilization and unit cost were unacceptably high.

This year, we have undertaken a number of changes and improvements within the HMO that are impacting both the cost and utilization price of the medical expense ratio. We ended 2007 with the MER of just 193%. The work continues but we expect our progress along with our growing membership where we have continuing improvement as we move in the 2008.

Our goal has to be to continue driving this ratio down. Market wise, we are focusing on three existing market areas which we referred to as the treasure coast of Florida’s east coast, the gulf coast that includes Fort Myers and Sarasota and central Florida just north of Orlando. We added one new county for 2008 that being [2132] county that assists some of our gulf coast market bringing the total number of county served by the HMO to 13.

We have focused on marketing and sales resources and our dollars on these markets where we have build the front row and where we can build on our brand and our reputation. A note on the quality of our HMO operation, we were notified last week that we been awarded a three year term of the presentation by the Accreditation Association for Ambulatory Health Care, Inc or AAAHC.

Receiving this level of accreditation or a new plans like ours speaks well to the commitment and capability of our HMO managers, staffs and provider partners and then speak to the level of care being provided are very important customers. Lucille [2232], our vice president of clinical affairs, deserves special recognition for guiding us to the support and accreditation process. Thank you, Lucille.

In summary, I believe the HMO is on much better footing today compared to where we were a year ago. Next, as to the uses of our cash, we continue to believe that our cash balances are best reserve for business growth opportunities versus using it to repurchase our own stock or otherwise. We have invested a little more than $2 million recently in small strategic transactions that we believe will benefit us currently and then the future.

We want to make sure that we have resources to continue in developing our business and we want to be at the best position possible to response to other growth opportunities given when they arrive.

That concludes our comments. As always, thank you to our team of managers and staffs. They continue to work hard, focused on our key objective that is providing quality care for our 33,000 customers. We do care at METCARE.

Had said, I would like open the call at the question. JD, can we have your assistance?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will be from the line of Bob Leatherman [ph] of Hissup and Mammoth [ph]. Please proceed.

Michael Earley

Hi, Bob.

Operator

Bob, your line is open now.

Bob Leatherman – Hissup and Mammoth

Can you hear now?

Michael Earley

Yes, we can hear you now, Bob.

Bob Leatherman – Hissup and Mammoth

Okay, good. What is your account for the fourth quarter?

Michael Earley

The outstanding?

Bob Leatherman – Hissup and Mammoth

Yes.

Michael Earley

Outstanding was $51,556…I am sorry, $51,500,736.

Bob Leatherman – Hissup and Mammoth

Okay, great. Thanks. The other question relates to Care Plus and question is how is that progressing and may be you could give me an idea what the membership or member months were and what do you project that for ’08? How is that going to grow?

Michael Earley

We got them to this contract very late in ’07 so there is very little impact on our result in 2007, not enough to matter. Care Plus is aggressively growing their business in the several counties to them in Florida and we are participating with them. We expect that it will be a growth business but at this point, it is too hard for us to project the impact to ’08 but we are gaining members in that business. Currently, we pick up a handful in the fourth quarter and we expect more in 2008.

Bob Leatherman – Hissup and Mammoth

Okay, great. Relating to the acquisition opportunities that you are seeing more opportunities in position practices to grow the PSN or in the whole HMOs, I know some of those have been in Florida have been high in financial difficulty like America’s health choice, are you seeing more of those type of opportunity?

Michael Earley

Does not, the biggest group of opportunities we are seeing are small MSOs serving Humana that are coming on the market. I think that in general, the players in the industry are recognizing that scale is very important and that this is an interesting time for them to explore their opportunities for their business. We are also seeing primary care practices that serve principally the Medicare segment, many of them want to be for service bases, also available in the market and we are actively looking at a number of those.

Bob Leatherman – Hissup and Mammoth

Okay, great. Thanks.

Michael Earley

You are welcome.

Operator

(Operator Instructions) Your next question will be from the line of Cole Zinger [ph] of Fundamental Management. Please proceed.

Cole Zinger – Fundamental Management

Hi, Mike. How are you?

Michael Earley

Very good.

Cole Zinger – Fundamental Management

I want to tell everybody who is listening to this one that most of the investors or anything else, as you and I both know, we were very instrumental in bringing you in to this company and once in a while, we kind of shows on the back and we say we use good judgment in doing it because everything that has happened in this last four years has indicated that it was such judgment. We continue to be a 13D holder, we support what you are doing and we want to compliment you completely for you and all your staff and just wish you continuity of it and anything else we can do to back you up, you know where we are.

Michael Earley

We appreciate that call. Thank you.

Operator

Your next question will come from the line of Roth Stohoe [ph] of RBAC [ph]. Please proceed.

Michael Earley

Hi Roth.

Operator

Roth, your line is open.

Roth Stohoe – RBAC

Yes, hi Mike. Congratulations, my sentiments from the last call are congratulations to your entire team.

Michael Earley

Thank you.

Roth Stohoe – RBAC

The question that I have got is in terms of the HMO, now you expect to be around 7500, do you see any type of way to grow that membership once you get out of your open enrollment period?

Michael Earley

We always have opportunities beyond open enrollment to grow the business through our special needs plan which serves duo logical members, in other words, Medicare beneficiaries that are also qualified for Medicaid so we shift our marketing efforts to those potential members trying open enrolment but thoroughly, the opportunity is much less during than period. We also have the opportunity to enroll people that are aging into the Medicare sector focused at our moving in to our market from other areas we refer to them as moving so we have a variety of campaign. That is our plan and we have used them in the past to target those specific groups.

Roth Stohoe – RBAC

And then one final question, what type of a level of membership, Mike, you really need to have, you believe to get this HMO business comfortably profitable?

Michael Earley

We have said over the last couple of calls with investors that we think the 10,000 membership mark is an important goal for us. That brings us more stability in terms of medical expense exposure but rises business to a claim where it can clearly stand in its own two feet.

Roth Stohoe – RBAC

Okay. That is all for me, thank you.

Operator

Your next question will be from the line of Jeremy Hellman of Singular Research. Please proceed.

Jeremy Hellman – Singular Research

Hey, good morning everybody. Can you hear me okay?

Michael Earley

Yes, hi Jimmy.

Jeremy Hellman – Singular Research

Alright, maybe a little bit kind of part two of other callers’ questions and just kind of thinking to the model, a little bit. The payroll, the administrative payroll line down was, thank you for sequentially and plus the year over year which had a buff the pattern that we have seen in the past. Does that an enduring chase you have been able to put in that might result to just about my own model where I might be able have some better numbers?

Michael Earley

Well, we went through a restructuring effort in the late summer of 2007 and we did that to bring down our cost wherever we could so we have positively impacted our numbers going forward. So, we would expect to see that trend continue and we continues to challenge our numbers. We spend certain amounts last year for actuary for instance. We spend an incredible amount of money with our outside actuaries to have them do a variety of tasks for us, much of that, we would expect without the ongoing as we move into 2008.

So, I think as we move forward, our expense profile will be more attractive.

Jeremy Hellman – Singular Research

Okay, thank you. It make sense and also, would I be wrong in thinking that and I think you noted this to one of the commentary that as your HMO moment is getting to a level of sufficient scale that as you present all along and invest couple of years that the MER will become a lot more normalized, do you think that that is part of what is going on as well?

Michael Earley

Well, I think there is clearly more stability in larger numbers so I think we are staying that as particularly as we are moving into this new year with our increased membership.

Jeremy Hellman – Singular Research

One last thing and I will jump off, just a quick question about the competitive landscape that are going back a bit, it is kind of a hot topic last year in terms of some people that were competing on thin ice if you will whatever description you want to add, what do you see is the current landscape about they are doing this year’s open moment period?

Michael Earley

Well, there are clearly were more competitors in all of our market but I think we would characterize the competition that we were seeing as much more normal or tolerable. We did not see some of the outlay plan designs that we were competing with over the past couple of years. Universal Health Care is one of the companies that was very involved in this much in the news. They are back competing but with much more tolerable plan designs.

I think what has happened is you can say the market, there are increased numbers of competitors but folks are operating within the band of acceptable or reasonable plan designs.

Jeremy Hellman – Singular Research

Do you think that Universal’s change in courses the result of their time in the doghouse or the regulator was that they kind of woke up and realize that financially, their plan was not degrees obtainable?

Michael Earley

Well, we do not have inside knowledge on that but you would have to expect that multi growth scheme and the plan.

Jeremy Hellman – Singular Research

Okay, great honest report, Mike. Thanks.

Operator

Your next question will be from the line of Neil Myers of Bullpest Capital [ph]. Please proceed.

Neil Myers – Bullpest Capital

Hi, Mike. Good morning.

Michael Earley

Hi Neil.

Neil Myers – Bullpest Capital

Just a couple of questions, first of all, on your cash balance, can you give us an idea how much of that cash is unrestricted or unencumbered either at the parent company or that you could take out from your regulated subs that is not needed at the sub serial level for RBC?

Michael Earley

At year end, about $13 million of the balance was restricted. In other words, it was down in the HMO subsidiaries so we cannot move that up to the parent without the states approval and when it expected that we would seek that anytime. So, about $25 million of our cash balance that year end is unrestricted and available for any corporate uses.

Neil Myers – Bullpest Capital

Okay, do you have a number for a segment profit on the PSN after allocation of corporate overhead?

Michael Earley

We do not breakout the numbers that way.

Neil Myers – Bullpest Capital

Okay. That is usually in the SEC fillings and I can wait until the cable, I was just wondering if you have that before?

Michael Earley

We can give you the number, I misunderstood, $24,560,000.

Neil Myers – Bullpest Capital

$24 million, okay. So, I guess I can ask you a high level question, if you look at where in this kind of three parts here in my mind, if you look at where the PSN is operating on that business is generating about roughly 30 cents of EPS after quarter overhead, I understand on the alone basis when you stripped out the HMO losses, you have about 50 cents of cash on the balance sheet with no debt, that is on encumbered and your HMO business that is loosing some money right now is probably where anywhere between $30 million to $50 million on unit based on per member evaluations on the open market which you translate to kind of 60 cents to a $1 in shareholder value.

If you add all these pieces together given…put any reasonable Multiplan in the PSN on in string, you get kind of shareholder value potentially well north of $4 and I was wondering if you can give us any kind of a more discrete idea about your timeline to do something to unlock some of that late in shareholder value that is sitting on the balance sheet right now?

Michael Earley

I will say that the first and foremost mission for us is to manage the business, grow this business and see them perform as the best as they can. If we are successful in a month mission, hopefully the market is going to give us appropriate credit forward but rest assured, the board of directors and the management of this company is focused on first of all building good solid businesses and technically having that recognize by the market.

So, we expect 2008 to be another good year for us and hopefully the market will give us appropriate credit. In terms of responding to opportunities that are available to the company, we will do whatever is appropriate as we move through time.

Neil Myers – Bullpest Capital

Can you, I appreciate that, can you just give us an idea looking at the HMO business, what the timeline is for evaluating the long term prospects of that business? Obviously you are not on the breakeven level that we see in the 1st quarter of ’08, what is your timeframe for doing something you done the emanate front to get that to a breakeven or profitable level or to dispose to that business so that you can bring to light the earning stream of the PSN business so that everybody can see that?

Michael Earley

Well, that process is ongoing and has been ongoing for some time now, I think, it is the responsibility of the board of directors particularly to make those considerations on an ongoing basis so we are looking and that thinking about it. We still believe that this is a good business we are operating in good markets that has growth potential. We are pleased with our increasing growth in the number of customers and we are going to continue to operate it.

Of course, we have to be responsive to changes in the marketplace. We have to be responsive to alternatives that present themselves but again I assure you that we are thinking about the growth development and opportunities for both of our businesses and for the company as a whole on an ongoing and regular basis.

Neil Myers – Bullpest Capital

Okay, thank you.

Operator

Your next question will be from the line of Rich Weinstein of vFinance. Please proceed.

Richard Weinstein – vFinance

Good morning. I would like to ask you how to go over your advertising spend and how it lays out on a quarterly basis for your open enrollment period?

Michael Earley

Well, if you look, we are spending in round numbers about $3 million annually and that has been the case for the last two years and we would expect that that would be the case as we move forward and away. The bulk of the spending is really spent in the fourth quarter of the year and the 1st quarter of year and those really correspond to the open enrollment period.

We do spend monies targeting the special needs program of the duo logical that I have referred to before and other potential members we can bring into the plan during the 2nd and 3rd quarters but the spending is minuscule compared to what we spend in the other two quarters.

Richard Weinstein – vFinance

Is it the way that we will have here in the fourth quarter than the 1st?

Michael Earley

No, it is really, it is split.

Richard Weinstein – vFinance

Okay, alright but, and then the following two quarters are…

Michael Earley

Very well.

Richard Weinstein – vFinance

Alright, thank you very much.

Michael Earley

Alright.

Operator

(Operator Instructions)

Your next question will be from the line of Mark Dodd of Omni Capital. Please proceed.

Mark Dodd – Omni Capital

Hello, Mike. Can you hear me?

Michael Earley

Yes, hi Mark.

Mark Dodd – Omni Capital

I am sorry if I missed it, what was the MER in the fourth quarter for the HMO, the MER ratio?

Michael Earley

It was about 88%.

Mark Dodd – Omni Capital

Yes, it is pretty good. Now, it is my understanding you spent annually a benefits program so to say to the CMS and I would think after several laps that we have taken that we could maybe expect the ratio to cut down on that.

Michael Earley

Our goal is to continue to improve the medical expense ratio and drive it in the more normal…

Mark Dodd – Omni Capital

Like below 80 or so?

Michael Earley

Certainly in the mid 80’s as a goal. Plan design, let me just cover briefly what the process is that we each has to develop our plans for the next year and we do that well ahead in about 6 months ahead of opportunity year so by June we submit to CMS what our various plan designs for our various markets will going to be and we are taking to consideration a number of factors, competitive considerations as well as medical utilization and cost consideration and what we determined that will be attractive for the customers that we are serving and the ones that we are thinking so it is a very involved process utilizing sort all the aspects of our operations working with actuaries determining that. So, it is very involved process but clearly part of the goal is to develop a plan where utilization and cost reduced attractive MER.

Mark Dodd – Omni Capital

With it, I mean, you seems to be working and that is pretty good enrollment so far so.

Michael Earley

As I said, I think that we have done well during the open enrollment period and we will see how it plays out in terms of medical expense performance but fairly we are in much better position than we were a year ago.

Mark Dodd – Omni Capital

Great, I have been a shareholder for four years and I am really pleased today. I want you to know that and I know you do not ever address future earnings but it sure looks like we could make 30 cents in 2008.

Michael Earley

We appreciate that.

Mark Dodd – Omni Capital

Okay, Mike. Thank you.

Operator

Your next question will be from the line of Ben Atkinson of Gagnon Securities. Please proceed.

Ben Atkinson – Gagnon Securities

Thanks. Congratulations on a good quarter. I was wondering if you expect the HMO monthly revenue per member to be up 5% to 6% similar to the Humana number before accounting for any risk adjustments.

Michael Earley

Well, the wild part in that is our risk warning and with the increasing number shift, it is hard for us to predict what scoring or result in increases but we do expect and are planning on for at least the base increase to be about 4% and then if we do well on our scoring to the year, it will be better than that.

Ben Atkinson – Gagnon Securities

So, 4% on a sort of a steady-state basis but then at your average risk score of the overall group build up or down will be affected accordingly?

Michael Earley

Right.

Ben Atkinson – Gagnon Securities

That is the way we will think about it, okay and then just to make sure on the $1.3 million in revenue that you booked for basically retroactive payments from CMS, $400,000 of that was actually for members services delivered in the fourth quarter and the balance was for the first three quarters of the year?

Michael Earley

That is correct.

Ben Atkinson – Gagnon Securities

Okay, so if we look at the annual numbers then that is not really an exceptional number, that is really part of what you actually did earned this year.

Michael Earley

That is correct.

Ben Atkinson – Gagnon Securities

Anything special going on true ups that general way of saying you had situation from the past where money is going back and forth between you and Jim Messor [ph], maybe with Humana in the middle there just based on estimates of medical cost that the members will think like that I mean should we expect anything like that in the next quarter?

Michael Earley

Well, the answer is this is a business where reconciliations between CMS and the ensures it is the…I mean there is constant reconciliation process going on and particularly over that last couple of years with the growth in membership and MA plans and the event of the part three program. There is a lot of movement of members so there is a constant reconciliation process going on so it is hard for us, I can assure you there will be adjustments made in nearly every quarter, do we expect it? Can we anticipate the extraordinary amounts or unusual amounts? No, we cannot and we do not and we hope in our disclosure particularly when you get your hands on our 10-K, you will be able to see the detail of the significant items as a goals but I think it is fair to say that this reconciliation process is just a part of this business.

Ben Atkinson – Gagnon Securities

Thank you.

Michael Earley

Bye.

Operator

Your next question is a follow up from the line of Jeremy Hellman of Singular Research. Please proceed.

Jeremy Hellman – Singular Research

I just want to go back; I do not know if I had missed it in my notes talking about Care Plus, did you have any contacts about how many members you expect in Care Plus to add?

Michael Earley

At December 31, we had about 76 members I think.

Jeremy Hellman – Singular Research

76 as of December 31, okay and one last thing, as a prior caller just in line of the question about ’08 premium increases, last I saw for ’09 at the rumored increase is 4.8%, have you heard anything otherwise on that?

Michael Earley

That was the base rate increase that was disclosed in the CMS of 3 or 4 weeks ago. All of the information will be available on a call that will be made in notice by CMS in early April; I believe it is April 5 or April 7. So, CMS puts out some basic guidelines as to what is going to happen in the May. They will come to and confirm it in early April so we will know. Those are the numbers that was posted was about 8%.

Jeremy Hellman – Singular Research

Right and am I right that in the 2008 increase was greater than the originally proposed number?

Michael Earley

Well and you cannot look at just the base rate. There is a number of factors in computing it but it came in basically what they had projected.

Jeremy Hellman – Singular Research

Okay great. Thanks again.

Operator

And there are no more questions at this time. I would turn the call back over to Mr. Michael Earley for closing remarks.

Michael Earley

Great, thank you. Thank you for participating in the call. We appreciate your support and look very much to be speaking with you shortly on 1st quarter result. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

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