Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Call End 12:10

Metropolitan Health Networks (MDF)

Q2 2012 Earnings Call

August 9, 2012 11:00 AM ET

Executives

Michael Earley - Chairmand & CEO

Roberto Palenzuela - General Counsel & Corporate Secretary

Bob Sabo - CFO

Joe Guethonour - President & COO

Analysts

Matt Weight - Feltl and Company

Josh Raskin - Barclays

Jeff Jonas - Gabelli & Company

Gregory Macosko - Lord Abbett

Alex Clark - Apollo Capital

Matthew Nirenberg - Oppenheimer & Co

Operator

Welcome to the second quarter 2012 Metropolitan Health earnings conference call. My name is Monica and I will be your operator for today’s call. (Operator Instructions). I will now turn the call over to Michael Earley, Chairman and CEO. Earley you may begin.

Michael Earley

Thank you Monica. Good morning everyone and welcome to our call. This call is been broadcast over this conference line and is also available via the web as noted in our press release. It will be available in recorded format through the conference service and on our website. Many of you are probably noting our first use of a PowerPoint in today's presentation. We are now finally two-dimensional, we think this is an improvement and will help you better visualize our results and how we look at them. We are being the first time please bear with us, with me this morning are Dr. Joe Guethonour, President and Chief Operating Officer, Bob Sabo, our CFO and Roberto Palenzuela, our General Counsel.

A press release was issued this morning outlining our earnings for the second quarter in a quarterly report on Form 10Q will be filed with the Securities and Exchange Commission shortly. Today I will discuss the continuing growth of our company and related news. Bob will review our financial results for the quarter and first half of the year, Joe will cover some exciting news for us as we move beyond quarter with Humana. And I will close with a few comments, then we will get to Q&A.

Before we go further, let’s have Roberto cover our Safe Harbor statement.

Roberto Palenzuela

Thanks Mike. In order to comply with the forward-looking statements, Safe Harbor, I want to advise you that except for historical matters contained herein. Statements made during this conference call are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Without limiting the generality of the foregoing, words such as may, will, to, plan, expect, believe, anticipate, intend, could, would, estimate or continue or the negative other variations thereof or comparable terminology are intended to identify forward-looking statements. Investors and others are cautioned that a variety of factors including certain risks may affect our business and cause actual results to differ materially from those set forth in the forward-looking statements.

These risk factors include without limitation, the impact of our significantly increased levels of indebtedness on our funding costs, operating flexibility and ability to fund ongoing operations with additional borrowing, particularly in light of ongoing volatility in the credit and capital markets, our ability to operate pursuant to the terms of our debt obligations, are our ability to integrate the acquired operations of Continucare and to realize the anticipated revenues, economies of scale, cost synergies and productivity gains in connection with the merger and any other acquisitions that we may undertake as and when planned including the potential for unanticipated issues, expenses and liabilities associated with those acquisitions and the risk that Continucare fails meet its expected financial and operating targets.

The potential for diversion of management time and resources in seeking to integrate Continucare operations. Our ability to successfully establish a presence in new geographic markets, our ability to meet our cost projections under various provider agreements with Humana, our ability to reach an agreement to amend the new payer contract on favorable terms, our failure to accurately estimate incurred but not reported medical benefit expense. Pricing pressures exerted on us by managed care organizations and the level of payments we indirectly receive under governmental program or from other payers. Our still limited ability to predict the direct and indirect effects of the healthcare reform laws adopted in 2010, future legislation and changes in governmental regulations, the impact of Medicare risk adjustments on payments we received for our managed care operations and a loss of any of our significant contracts or our ability to increase the number of Medicare eligible patient lives we manage under these contracts.

Metropolitan is also subject to risks and uncertainties described in its filings with the Securities and Exchange Commission including its annual report on Form 10K for the year ended December 31, 2011 and its quarterly report on Form 10Q for the quarter ended June, 2012 which is expected to be filed shortly.

With that said I will turn it back to Mike.

Michael Earley

Thanks Roberto. If 2011 Metropolitan’s year, our transformational change with the acquisition of Continucare, 2012 is shaping up to be a year of growth, and some growing things. We are seeing increasing opportunities to work with Humana and other payers and helping him better manage Medicare advanced memberships and other lives as healthcare report takes root, health plans are realizing the need to align with risk providers who can deliver and who have delivered true accountable care.

A look at the graphs and pie-charts on the slide show the growth that we have achieved over the last 12 months. Growth both in terms of customer account and in terms of types of customers. The Continucare acquisition bought us both bringing new markets, additional payers and expanding our business and expertise beyond Medicare Advantage.

We have entered into non-risk arrangements giving us entry into a broader group of customers, we have continued to grow in 2012. We have taken the liberty of including the 9900 new customers that we just are announcing today in the far left charts here. Joe will provide more detail on this shortly. Going forward, we’re responsible for approximately 87,500 customers up from 34,000 at June 30, 2011.

There are a few ways to bring in new customers in our business; organic growth and provider consolidation by payers are a couple of ways. We can also buy memberships through acquisition of medical practices or other risk providers presumably paying a market multiple based on the performance of that customer base. We have done all three of these and expect to do more as we move forward.

Another way to grow is to enter or assume management of underperforming or relatively new memberships, in structure arrangements that provide long-term upside as we work with the plans, members, provided communities and customers. There is often limited short-term downside in these situations, while we won't generate earnings we are used to in the short term, the out of pocket by in is much less when compared to buying into a performing situation. Our investment if you will is working in a limited risk, limited upside format as we install our systems and practices. In the end, we believe we can create real long-term value. The concept of graduating risk arrangements comes into play here, Joe will describe our entry into the Midwest with Humana where we are using this type of arrangement. Now let’s talk about a 2012 situation where we’ve stumbled a bit, with the contract covering about 6600 Medicare Advantage customers in Florida with a major Medicare Advantage Payer not Humana.

We took risk immediately with this contract and have lost $4.4 million in the first six months of the year. The good news is that we are making progress in rectifying the situation and we are working with the payer to modify the contract, to eliminate future losses and to recover or offset losses incurred to-date under this agreement. Even if we can't get this modification completed which we believe we will, the impact is containable as we exit the contract in a relatively short period of time. Some more detail, the 6600 new customers are in both Medicare Advantage HMO plans and Medicare Advantage Point of Service plans. The Point of Service is different from an HMO plan as the patients are able to see physicians without referrals and are more challenging to manage.

Unfortunately the medical cost of the new customers under this agreement are higher than anticipated by both the HMO and by us, and we are also higher than the revenue earned from the agreement resulting in a loss. Another factor relates to revenues, historically we find that new customers have lower resource and thus lower revenues compared to those customers who over time have had their health conditions properly documented and captured as they access the healthcare delivery system.

As I mentioned we are currently in discussions with the HMO to modify the contract terms to eliminate future losses and to recover or offset losses incurred today under this agreement. While no amendment to the agreement is in place today the HMO has indicated a willingness to amend the agreement. Both parties believe a long-term relationship is beneficial and we hope to properly structure this arrangement for the underlying circumstances. However, as I indicated earlier the losses containable and that this agreement can be terminated with a 120 days’ notice.

And I will ask you to refer to our second quarter 10-Q for further details. This one contract unfortunately has had an impact on our operating results in 2012. A lot of are factors are responsible for this situation. Needless to say both parties are working hard to rectify the situation so we can move forward appropriately. Let me stop here, and turn it over to Bob to review our financial results.

Bob Sabo

Thanks Mike and good morning everybody. Before I begin to talk about the second quarter and first six months of 2012, I want to cover some items that are impacting our results. As occurs each year in the second order we receive the actual retroactive midyear risk for adjustment. In the first quarter of each year, we estimate the amount and we throughup ours ended of June, 30 when we are notified of the actual amount.

We were notified that the midyear adjustment will total $11.4 million, $6 of which relates to the first quarter of 2012. We had estimated the amount in the first quarter to be $4.4 million, as a result our revenue for the second quarter of 2012 was increased by $1.6 million, the difference between the originally estimated $4.4 million and the $6 million of retroactive revenue for that period.

This difference is comparable to the second quarter of 2012, when the difference was $2 million. The retroactive adjustments also positively impact capitation fees we received under our risk arrangements for the balance of the year as it resets the customer's risk score and resulting premium. We expect to receive the 11.4 million in mid-August as well we expect to receive a smaller final risk score adjustment of 2.7 million for 2011, this amount will be received in mid-September.

We continue to operate the sleep diagnostic business in the second quarter and account for this business is a discontinued operation. We expect to have sold this business prior to the end of 2012, our sales processes well along here. As Mike noted, our operating results in 2012 are impacted by a new risk agreement that we had entered into with the Medicare Advantage plan at the beginning of the year. As a result of this contract in the second quarter of 2012, we realized a loss of $3.6 million from this agreement. The loss under this agreement includes unfavorable claims development from the first quarter of 2012 of $1.6 million, for the first six months of 2012 the loss under this contract is $4.4 million. In addition, throughout my commentary I'll be speaking about nonrecurring legal and accounting fees related to certain SEC filings including our self-registration and other projects. These amounted to $900,000 and $1.4 million in the second quarter and for the first half of the year respectively.

Let’s turn to the second quarter results, our customer base at June 30, 2012, was 77,600 compared to 34,000 at June 30, 2011. With customer months for the quarter coming in at 233,900 compared to a 102,200 for the same period in 2011. Customers on a risk arrangements increased to 69,400 at June 30, 2012 from 34,000 at June 30, 2011.

Revenue for the second quarter of 2012 was a 193.4 million compared to 97.3 million for the second quarter of 2011, an increase of 96.1 million or 98.8%, the increase in revenue was primarily attributable to customers added with the acquisition of Continucare, the net addition of new customers under risk arrangements since December 31, 2011 including the 6600 added under the new HMO agreement, an increased risk scores of our customers. Our per customer per month percent PCPM Medicare risk revenue increased by $60 for the second quarter of 2012 compared to the same period in 2011.

Total medical risk expense for the second quarter of 2012 was a $165 million compared to 80.7 million for the second quarter of 2011, an increase of 84.3 million or 104.5%. This increase is primarily attributable to new the customers added the addition of the cost of the 19 Continucare medical practices, the addition of the three practices we purchased in the first half of 2011 and an increase in benefits, utilization and medical cost inflation. Our PCPM Medicare risk expense increased by $45 for the second quarter of 2012 compared to the same period in 2011, this was lower than the $60 increase in our PCPM revenue for this period.

The medical expense ratio or MER which is computed by dividing total medical expense by revenue, represents a statistic used to measure gross margin. In the second quarter of 2012 our MER was 85.3% compared to 83% for the second quarter of 2011. Excluding the revenue and medical costs associated with the new HMO agreement, our MER for the second quarter would have been 82.1%. Operating expenses, increased by $9.8 million for the second quarter of 2011 from the second quarter of 2011 primarily due to expenses of Continucare and an increase in amortization expense of $3.1 million related to the amortization of intangible assets recorded with the Continucare acquisition.

The $900,000 nonrecurring professional fees discussed earlier also were part of this increase, other expense increased by $7.4 million due primarily to an increase in interest expense of $8.1 million for the second quarter of 2012, related to the debt used to finance the Continucare acquisition. Net income for the second quarter of 2012 was $2.9 million compared to 5.9 million in the second quarter of 2011.

Although we experienced significant growth in both revenue and gross profit, our quarterly net income declined primarily due to the $3.6 million loss related to the previously discussed new HMO agreement and the increase in professional fees of $900,000. Moving on to the six-month period, customer months for the six-month period were 470,100 compared to 205,100 for the same period in 2011. Revenue for the first six months of 2012, was 388.7 million compared to a 192 million for the first six months of 2011, an increase of a $196.7 million or a 102.4%.

The increase in revenue was primarily attributable to the customers added with the acquisition of Continucare, the net addition of new customers risk arrangements in 2012 and increased risk scores for our customers.

Our PCPM Medicare risk revenue increased by $77 for the first six months of 2012 compared to the same period in 2011. Total medical for the first six months of 2012 were $322.3 million compared to a 156.2 million for the first six months of 2011, an increase of a 166.1 million or 106.3%. This increase is primarily attributable to the new customers added, the addition of the 19 Continucare medical practices, the addition of three medical practices and repurchase in the first half of 2011 and an increase in benefits utilization and medical cost inflation.

Our PCPM Medicare risk expense increased by $48 for the six months of 2012, compared to the same period in 2011. The increase in our PCPM expense was primarily generated by the acquisition of Continucare and the higher than average medical claims expense associated with the new HMO agreement. The increase in PCPM medical costs was lower than the $77 PCPM increase in revenue.

Our MER was 82.9% for the first six months of 2012 as compared to an MER of 81.4% for the first six months of 2011. Excluding the revenue in medical costs associated with the HMO agreement, our MER for the first six months of 2012 would have been 80.3%. To put this in perspective this compares to 81.4% and 79% for the first six months and full year of 2011 respectively.

Operating expenses increased by $20.1 million in the first half of 2012 compared to the first six months of 2011. The increase in operating expenses is primarily due to the additional expense of the Continucare and increase in amortization expense of $6.2 million and related to the amortizable intangible assets recorded in the Continucare acquisition and the increase in professional fees as a result of various projects we did not have in 2011.

Other expense increased by 15.8 million due primarily to an increase in interest expense of 16.4 million for the first six months of 2012. This related to the debt used to finance the Continucare acquisition. Net income for the first six months of 2012 was $10.8 million compared to 13.9 million for the first six months of 2011. As with the second quarter we did experience significant growth in both revenue and gross profitability during the first six months of 2012 as compared to the same period in 2011. The year-over-year decline in earnings was primarily due to the $4.4 million from the HMO agreement and 800,000 decrease in favorable claims variance in the first six months of 2012 compared to 2011 and an increase in professional fees of 1.4 million in the first six months of 2012 compared to 2011.

Now let’s look at EPS and adjusted EBITDA for both this quarter and six months, basic and diluted earnings per share were $0.07 for the first quarter of 2012 as compared to $0.15 basic and $0.14 diluted for the same period in 2011, combined the loss of the contract plus the non-recurring professional fees reduced both basic and diluted earnings per share by $0.06. Basic and diluted earnings per share for the six month period were $0.26 and $0.24 respectively as compared to $0.35 and $0.33 respectively for the same period in 2011. The EPS with the adjustments for the HMO loss and professional fees are $0.34 basic and $0.32 diluted.

Our outstanding shares at June 30, 2012 were 44.2 million, weighted average basic shares for the three and six months periods in 2012 were 43.2 million and 43 million respectively. Weighted averaged dilutive shares from the three and six month periods in 2012 were 45.6 million and 45.5 million respectively. Adjusted EBITDA from continuing operations for the current quarter were 17.6 million compared to 10.3 million in the year ago period.

If we add back the HMO loss adjusted EBITDA is $21.2 million, I should note that adjusted EBITDA from continuing operations is not defined under U.S. GAAP and may not be comparable to similar titled measures reported by other companies.

We believe adjusted EBITDA from continuing operations is useful to investors and is widely used measured performance and adjustments we make to adjust EBITDA from continuing operations provide further clarity on our profitability.

For the six months adjusted EBITDA from continuing operations for the first half of 2012 was $43.7 million up 81% from 24.2 million in the first half of 2011. With the aforementioned adjusted EBITDA is $48.1 million.

Moving on to the balance sheet, cash, cash equivalents and short term investments at June 30, 2012 totaled $44.4 million as compared to 18.3 million at December 31, 2011, an increase of $26.1 million. Our working was increased by 8.6 million since December 31 to $51.8 million and total stockholders’ equity was a 118.2 million at June 30, 2012 and a 104.6 million at December 31, 2011.

Long term debt including current portion amounted to 310.5 million compared to 320.7 million at December 31, 2011, this of course relates to the Continucare acquisition. In summary, we had a bit of bump with our new contract and we learned to transition this business overtime as we were doing with the contracts we announced this morning and I would like to note that while we focused a lot of the new HMO business, the balance of the business continues to do well. Thank you for your attention. I will now turn the call over to Joe.

Joe Guethonour

Thank you Bob. Good morning everyone, during the conference call in May, I gave a brief report on our growth strategies, these include practice acquisitions, expansion into new markets and expanded partnerships with Medicare Advantage plans. Today I'm pleased to deliver concrete steps towards that growth strategy. As we expanded into Florida’s panhandle in January of this year, we began discussions with Humana about an opportunity to take our business model outside the state. We are pleased to announce that after several months of due diligence and negotiations, Metropolitan and Humana have agreed to enter into a joint venture. Rather than the typical contractual relationship or operating agreement, the joint venture reflects a stronger commitment between these two companies. Metropolitan will operate under its newly branded wholly-owned subsidiary Symphony Health Partners, Inc. This business unit will be responsible for markets outside of Florida and the joint venture it has entered into with Humana will service the operating model for our initial foray into Cincinnati and Indianapolis. Humana has identified markets across several states were strong partnership with proven risk providers make sense, our first expansions are in Cincinnati and Indianapolis service areas, so let me provide a brief overview beginning with Cincinnati.

The Cincinnati market is comprised of nine counties, four of which are double bonus counties in Northern Kentucky and Southern Ohio with over 235,000 Medicare eligible. While the Medicare HMO plan is only in its third year, it is a 3.5 star rated plan and has grown to approximately 7600 customers. The area boasts several sophisticated health systems with physicians who've made a commitment to the patient centered medical home model of care, in fact a significant number of practices there are recognized level three NCQA medical home. As you recall our medical practices were the first to receive this type of recognition in State of Florida. Indianapolis is a relatively new HMO market with 2300 customers after just two enrollment periods. This service area is comprised of seven counties with approximately 220,000 Medicare eligible. Mike mentioned the graduating risk of great arrangements under these contracts earlier, what this means is that the first two years we will work under a management fee while we evaluate the market build relationships with the physicians and begin to implement our various programs and systems.

We are staffing a business unit there in Cincinnati, to handle provider services, provider education, coding, data analysis and medical management functions. We believe that this is a prudent approach to new markets like Cincinnati and Indianapolis. Beginning in calendar year 2014, the joint venture will assume partial risks and moves to full risk in 2015. These markets combined represent an additional 9900 customers under management for Metropolitan. We believe that we’re appropriate addressing these new markets, they present significant opportunity as well as increased challenges since and our approach with the graduating risk arrangement. Additionally this will allow us to demonstrate to our payer partner that our model is indeed transportable. In addition to this new business, we continue to pursue other similar opportunities. I'm pleased to say that we're not lacking for opportunities at this time and we continue to pursue medical practice acquisitions in Florida and we expect to be able to announce a couple of this transaction shortly.

It's been a busy year but we're confident that we can continue to deliver value and that our results will get back on track as we move forward. A quick thanks to our medical professionals and support staff for their continued support and dedication. Let me turn the call over to Mike.

Michael Earley

Thanks Joe. Let me wrap up here, good report guys. Hopefully we've done a good job covering our results, talking about our growth and talking about our growing pains (ph). Ours is a risk business as it is true for most businesses really, in our healthcare industry more specifically in our government program oriented sector and business, rapid change driven by economic and reform are increasing both the level of risk and range of opportunities. We are working hard to take advantage of the experience and expertise of the highly dedicated and capable teams that we have in our terrific operating businesses, MetCare, Continucare, and now Symphony. Opportunities are expanding for us and we're choosing to stretch and to grow. With that comes some bumps but if we respond appropriately, learn and get better it will strengthen our franchise and allow for even more growth.

In some, we are better and smarter as a company than we were a year ago. We are enthusiastic about the future and look forward to next steps. We appreciate the support of many, customers, our payer partners, our clinicians, staff and managers, our investors and our lenders. Without them, without you we wouldn’t be succeeding. Thank you. Now Monica can we have your help with the question please?

Question-and-Answer Session

Operator

(Operator Instructions). Matt Weight, Feltl and Company is online with your question. Please go ahead.

Matt Weight - Feltl and Company

Mike, let’s start with the new payer contracts in Florida first here, you know can you help us understanding quite honestly what did you get wrong in the structuring of this contract, you how was this I guess able to happen in your mind and what have you learned and what can we do see you avoid this in the future?

Michael Earley

Well I think first of all there are a number of factors, a number of assumptions that turned out to be wrong. On our part and on the payers part, and quite frankly we are all surprised at the results we are seeing here and I think that's best demonstrated by the fact that the payer here is working with us to correct the situation. In retrospect, given the nature of this, we probably shouldn't have taken full risk but we hope to modify the arrangement so that we eliminate the potential for these sorts of losses going forward and we think in the end, this will be a good and valuable piece of business. We would be thinking much differently about the situation if the payer wasn’t working alongside of us to rectify the situation.

I think we did learn as we move forward in these new markets as Joe described in being a little bit more cautious protecting ourselves, contractually as we move into populations of relatively new or immature Medicare Advantage populations. So I think we have learned a lot, we’ve already made changes from this lesson. In the end I think we have a terrific partner here and I think this will be a good business for us.

Matt Weight - Feltl and Company

So I am trying to understand, I mean the losses been driven more off of, is that on the revenue side because Joe said it low-risk scores or are you surprised at the cost equation of it, I know it's a combination of the two, but which one is in more of the…

Michael Earley

It's really been on the cost side and we were evaluating data historically that prove to not be as useful as we expected to be and as I said the payers are a bit surprised by the reaction. We came into this understanding that you bring in new memberships that aren’t well-managed, you are going to see inappropriately low risk or as it takes time to get those to where they need to be and we are working on that. So it really caught us on the expense side and just across the spectrum of cost, very high pharmacy cost. So lessons learned, but I think we will write the situation and move forward.

Matt Weight - Feltl and Company

And if you are able to restructure this contract, is it something where you are not going to be bearing all the medical cost in the near-term or is it going to be a higher revenue components?

Michael Earley

Well we don’t know the specifics, we are discussing a range of alternatives to make the situation right and at this point we are waiting for the payer to consider those various alternatives, they are considering him and we will see. So I can't tell you exactly what the fixed will be going to be like but our goals in the negotiation and I think the payer understands and agrees that we need to be put into a position where we are not fairing was effectively their risk here. We will work with them and we are working with them very hard in terms of working on both sides of the equation, on the revenue side with the coding discipline and then bringing more medical management and what we do into the system.

Matt Weight - Feltl and Company

Okay and it sounds like you are fairly confident or hopeful that you may even be able to recover, offset the losses that you have incurred. So what I assume especially given your option to walk away from this contract that breakeven is kind of a worst-case scenario and that the contract could turn profitable if it gets restructured this year.

Michael Earley

We are hopeful that this will be a breakeven situation for us for the year, that where we are trying to get and then of course we want this to be an opportunity that provides us the profit opportunity going forward and again we feel very confident in that the payer is very engaged with us and analyzing the situation and quite frankly have been for a couple of months now as the claims for the first part of the year started flushing through the system. So they are engaged, I mean one hand you can take the approach that you know this is a contract and it's your loss, good luck, but ultimately they want to work with us and we want to work with them.

Matt Weight - Feltl and Company

So is there a time frame you could expect that this could approach company averages profitability?

Michael Earley

I think the answer is it will take these situations take a few years, I mean it takes us a couple of years to get revenue right, it takes us that period of time to put in our medical management systems and discipline within the network. So and we didn’t plan that this would be as profitable as our other business in the first couple of years. This is an investment if you will, moving into this business and we think there is additional business that follows on behind us if we can get the relationship straightened out. And let me say we are working as hard as we can at the operational level to do what we need to do here to ultimately cause, we are not stepping back to say well let’s see if we can get the contracts straightened out. Our operations people, our management people are working just as they would if we didn’t have this issue.

Matt Weight - Feltl and Company

And then moving on to just quickly here, the great growth that you're getting in the new market sphere, looks like a fairly low-risk entry and talk about you know what you think you can really learn over the first couple of appears giving that administrative fee and operating their and would that imply that you know in Florida you can turn that on full risk and be closure to company profitability rates, that you're getting now.

Michael Earley

That’s our assumption, I mean we are going to phase into a full risk arrangement over a period of years, so you know we will work essentially for an administrative fee to cover our costs in doing what we do. One of the things that Joe did not point out in this commentary but I think we addressed in our press release and certainly in our 10Q when you get a chance to look at that is, not do we receive a administrative fee, we also have some upside opportunities in these first couple of years so to the extent that we can move this population in the right direction and show gains and performance we have opportunity to receive a percentage of that improvements or surplus. So there is a little more upside in the short term here but we clearly will work very hard with Humana to structure the arrangement such that we can phase into it, we can get to work but we don't have the type of exposure that we are seeing on this other situation.

Operator

The next question comes from Josh Raskin of Barclays. Please go ahead.

Josh Raskin – Barclays

I think you mentioned pharmacy as one of unexpected cost, so I am just curious you had mentioned that the data wasn’t consistent, did you see sort of change in trends or did you not have these members previously in an MA plan? Were this just new to MA, I am just trying to figure out what happened in terms of the cost change there?

Michael Earley

Well a lot of these members were new to the program and a number of them came in through a point of service plan, so we were just surprised by the share utilization in that group and also with the brand utilization, in our typical business we see generic utilization in the mid- 80% but we are not seeing anything like this.

So it's a sort of both utilization and then too much brand.

Josh Raskin - Barclays

It sounds like a relatively simple benefit design change, do you know if this was caught in time to make that change by that first Monday in June.

Michael Earley

This situation started to really rear its head as we got really about four months in, three to four months you start seeing the actual claims for January, February rolling through. So the answer is it's part of this fix we've been in discussions with them about benefit changes to structurally help take care of this situation.

Josh Raskin - Barclays

And then just more broadly speaking on the benefit design changes for your health plan partners, as they were preparing the June bid, have you gotten a lot of information yet as to what the new benefit designs are going to look like, you have many projections or thoughts about, whether or not your plans are going to have relatively stable benefits next year, are you seeing any increase benefits around the area where the benefits are getting reduced?

Michael Earley

We operate with a few different payers here. Humana of course is about 80% of our business, and then we operate in different markets. So we see very different benefit packages in Dade County versus Daytona for instance. And the processes, the plans Humana and other really don't give us a real clear view of what they're proposed benefits for the next year are because of the competitive situation, they're just not freely discussing where they are going to move benefits you know, where they are going to change benefits. So we don't typically see that they will inquire of us, we will meet with him, we will talk about different areas that they will have ideas, they will ask input from us, they will ask us projections in various markets where we think benefit should move, of course they are a doing a lot of competitive analysis.

I will tell you on Humana, the best guidance we've had so far was their call, ten days ago when they basically suggested that in 2012 for 2012 benefits they had moved more aggressively than they have historically and that moving into 2013 they see, I think they described this headroom to sort of move back down towards a more middle-of-the-road benefit package. So I think that's interesting for us to know, just to fill out the discussion in terms of when we find out what generally as we move into the early fall and they are getting ready to announce benefits in our budgeting process, we will meet our actuaries will meet with the various plan actuaries and sort of take a look at what benefits are being changed and what the cost and anticipated cost changes are going to be. And we build our budget around that data. So you know by the September timeframe we start to get a real glimpse, at least if not to the specific benefit changes to what the anticipated benefit cost are going to be.

Josh Raskin - Barclays

Okay that makes sense and then just last question just on the expansion markets with Humana, the two news one there, how should we think about sort of long term plan, it sounded like you were alluding to more opportunity in the future. Should we think about two new core markets like that per year, is kind of the pay shoot like to see or would you expect once you get the first couple up and running and you feel comfortable that you would be able to expand at even a faster pace or.

Michael Earley

I will say that this is a big undertaking for us and we are prepared to do that and we have been, we've been actually been working on this for a number of months, we've actually been in the Cincinnati market for a number of months working and quite frankly we just got all the various agreements finalized, we have been working under effectively term sheets but we want to get to work in the marketplace. So we have been in the Cincinnati marketplace for a number of months now actually working. You know if we could add one or two of these every year I think that would be terrific growth for us. I think there is continuing growth opportunities in Florida and I just have to tell you we are seeing more opportunities today than we've ever seen before and I think the payer simply are searching for high-quality partners who can help them out in this various market and Josh as you know Florida and California and perhaps Texas tend to be markets where risk management is much more developed than in the rest of the country.

When you get out to the rest of the country, payers have huge needs out there and you know I think the general trend is to move from unmanaged products down into managed products. So sort of everything is kind of coming our way and those and the few others like us are seeing a lot of opportunities right now.

Operator

(Operator Instructions). The next question comes from Jeff Jonas of Gabelli & Company.

Jeff Jonas - Gabelli & Company

I was looking for a little more color on these two new markets, I guess in terms of revenue and expense expectations and should we assume it's essentially breakeven until you capture a portion of those savings?

Michael Earley

I think there is not tremendous upside just on the administrative fee, less our actual administrative burden. So you're not going to see I think we were careful in the press release and we are in our disclosure to point out. I don't assume that these are going to be the revenue and cost implications of our full risk benefits. The surplus you know we are hopeful that we will see surplus over the first couple of years and then as we shift limited risk then on to full risk, it should become more a normal market for us.

Jeff Jonas - Gabelli & Company

And you mentioned that you're building some infrastructure up there, are you actually going to practices and do sort of that physical infrastructure or is it more of the back office staff?

Michael Earley

Well it's really more of the back office staff, I think the way to think about how we move into markets is you first move in, you work with the provider community, in the market. It doesn't make sense to work out-of-the-box to go into a new market and fire practices or build practices, I mean you want to work with integrate with the provider community and every market is unique in terms of the dynamics and history of that community.

So you work with them and overtime as you see opportunities, as we see opportunities we will acquire practices or perhaps open practices and I will tell you that the landscape is changing I think quite a bit here as the managed care plans are looking differently. I think there is going to be morbid trend towards our own practices for us and others because that's where you really get beyond the level of control where you can really appropriately take care of the customers and address all the drivers you have to address in this business whether it's revenue drivers or cost drivers.

So I could envision for instance in the panhandle, we are in for the first year, I could have envisioned over on the next couple of years as we get a better sense of the community. I could see opportunities for us to acquire practices in the marketplace like that, the same with these other expansion markets but that's the first step is to get in there partner with and integrate with other resident providers.

Jeff Jonas - Gabelli & Company

Well that segue ways into my final question, just wondering if you can give us some color on this potential acquisitions on maybe the size or there are new markets versus just building out existing markets, those sort of things.

Michael Earley

We have been looking at a number of different opportunities, I think within the coming months or weeks even we will have the opportunity to announce additions of a number of offices to our own practice set and in that these are end markets where we are currently operating today. So it's just strengthening the percentage of our business that's managed in wholly-owned offices.

Operator

Our next question comes from Gregory Macosko of Lord Abbett.

Gregory Macosko - Lord Abbett

Just with regard to the 6600 and the renegotiation et cetera, is you mentioned that you hoped or look forward to it perhaps being break even for the year, does that imply that you maybe be able to get some of the cost retroactively given the information you provided?

Michael Earley

We are hopeful of that and if not retroactively given back to us offset going forward in another words we will be compensated contractually going forward to offset that loss. So our goal is to and when we got originally got into this deal we didn’t neither we nor the plan expected that we were going to be losing a lot of money on this contract. So we are trying to get back to that assumption.

Gregory Macosko - Lord Abbett

And then just looking just your operating expenses, generally speaking, you mentioned being in Cincinnati already right now. So in effect were you adding cost for Cincinnati and this new contract which looks very nice in the second quarter and not been compensated for it?

Michael Earley

Yes we have actually been compensated for it, we received a small amount of the admin fees so it's been reflected. So that market has been operational for a few months now, we just haven’t been in a position where we could announce the business because we didn’t have all the agreements in place here.

But we have hired employees here, we have had a number of the key managers and position managers in the market working with the communities there. So you we have seen some of that business already.

Gregory Macosko - Lord Abbett

And so but is there cost in the quarter that for that in another words, was there additional cost and the margins would have been a little bit higher without it?

Michael Earley

Well the answer is that there's little bit of additional cost, in the scope of our numbers I wouldn’t think of it as moving the needle.

Gregory Macosko - Lord Abbett

And then just with regard to the future expectations, are you, I mean the geographies in your mind that you know the possibility of maybe another in the next years or in the future years similar situations, geography really is not an issue for you, you feel comfortable going pretty much anywhere around the country where you might -- where Humana might be?

Michael Earley

The answer is yes, certainly on the eastern half of the U.S. is relatively accessible to us, you know one of the things that I will note about Cincinnati for instance it's probably easier for us to get to Cincinnati that it is for us to get the Pensacola in the panhandle just because Cincinnati is more of a city and has a busy airport. So it's easy for us to get into the Midwest, to get Pensacola you visit the Atlanta every time. And we are going to put resources into the market that are going to run the business, our biggest market is in Daytona, Daytona isn’t particularly easy to get to for us, I mean it's 3.5 hour incredibly boring ride and you know we are doing, using things like videoconferencing and alike.

Operator

Next question comes from Alex Clark of Apollo Capital. Please go ahead.

Alex Clark - Apollo Capital

Mike sorry to go back to the 6600, I just trying to understand how you calculate your MoRs, I assume the lives (ph) came either they might be agents or they were poorly managed, so say you got the math, base rate, you are going to code them correctly overtime, risk code them correctly over time you're paid for this full year at the rate they came in at, is that correct?

Michael Earley

The rate that they come in at and we get our percentage of the premium, a majority of the premium.

Alex Clark - Apollo Capital

But during the year you code them you code them correctly, so you know what they should be paid which I assume is a catch up next June or August but when your MoRs, you calculate your MoRs, you calculated assuming you get the pickup or the base or on the rate that was that you're paid for this year well?

Michael Earley

Well we account for risk or pick up on an accrual basis, so you know as we are looking forward for the period of time, when we see what the anticipated risk or pickup is, we will start accruing and then and you know we talk about the midyear adjustment the fact Q1, based on the best data that we have available, the plants have available, we make an estimate about what risk or pick up if any is at the end of Q1. So you accrue that amount, we actually find out what the midyear pickup is in July and that's for the first six months and we adjust our accrual accordingly because we know what the number is and we actually collect that amount in august.

So will we do it on an accrual basis? Now in this situation one of the startup issues we had was just mechanically getting risk coding data through the payer system into CMS are getting reflected, not that the data is lost, we have just had some mechanical issues that we work to resolve.

Alex Clark - Apollo Capital

So the 85.3 may actually, it may be out lower that as the coding gets increased in you correct your accruals.

Michael Earley

Not significantly for the balance of this year, but certainly going forward in ’13 and this is probably a good place just to sort of cover the opportunity and why we look at these businesses here. This cohort of patients as a risk or well below 1.0, significantly below 1.0 and based on our experience in this marketplace, the cohort should have a risk or significantly higher than one. So this perhaps as much as 30% or more additional revenue applicable to this membership, but you have to capture the codes correctly, appropriately and you know we spend a lot of time, we have a lot of resources with more than 70 dedicated coders today working in our various markets and then we use a data tools to help us do that process and in some cases we use outside vendors to help us.

So there is huge opportunity in these situations and that's why we're interested in getting involved with it because we think we have the expertise and the people to get it right.

Alex Clark - Apollo Capital

Great, have you stated what region are these concentrated lives coming out maybe of Broward County?

Michael Earley

These are in South Florida.

Alex Clark - Apollo Capital

Fairly, concentrated or?

Michael Earley

Well it's in the three south Florida counties from Palm Beach down to Dade.

Operator

Our next question comes from Matthew Nirenberg of Oppenheimer & Co. Please go ahead.

Matthew Nirenberg - Oppenheimer & Co

Obviously Medicare's been your bread-and-butter but now that you have had some time with Continucare, can you discuss your experiences with the non-Medicare customers and whether you think there be a real opportunity there?

Michael Earley

Well I think, Medicare is our bread and butter and will continue to be our bread and butter, it's a terrific business to be in, the Continucare brings a little bit of commercial business into the fray here. I don't believe that’s going to be a significant business for us going forward, Medicaid on the other hand, that is a good business, we think it is a good business going forward particularly as Florida moves to an all managed-care format beginning as early as ’13. So we think we will have a lot of additional opportunities to participate in the Medicaid sector with Humana and other providers, we just have to see how the program is designed and what our specific opportunities are but having Continucare and their data expertise is clearly one of the assets that we were interested in when we made the acquisition.

Operator

(Operator Instructions). I am showing no further questions in queue at this time. I will now turn the call back over to Michael Earley for any closing remarks.

Michael Earley

Great well thank you all for joining us. I hope our report helped you understand the opportunities we are seeing, our approach to growing this business and hopefully to see how we respond to challenges and there is going to be challenges as this business moves forward but I as I said in my comment I think we become stronger as an organization as we handle these challenges. I will say as a management team it's gotten better and better over time and clearly bringing in the Continucare folks who has helped dramatically improve this group but our core management team has worked hard to grow this business and we dealt with the challenges far more difficult than what we are seeing here, we are associated with rate payers, they're very interested in what we do. We are good at what we do, so we are very pleased about that and we hope, we would normally be talking in three months. I expect that we will be issuing positive news as we move forward in the coming weeks and months that our representative of the kinds of things that we talked about here today, so stay tuned, keep your eyes open and again we appreciate your support and those on the call, those that asked questions, we are pleased to have the caliber of folks that you are and we are excited about what's happening. So thank you and all have a good day.

Operator

Thank you ladies and gentlemen for participating in the second quarter 2012 Metropolitan Health earnings conference call. This concludes today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Metropolitan Health Networks CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts