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Magellan Health Services Inc. (NASDAQ:MGLN)

Q2 2008 Earnings Call

July 31, 2008 10:30 am ET

Executives

René Lerer – President and Chief Executive Officer

Mark Demilio – Chief Financial Officer

Melissa Rose – Senior Vice President of Investor Relations

Analysts

Gregg Genova - Deutsche Bank

Daryn Miller - Goldman Sachs

Josh Raskin - Lehman Brothers

Operator

Welcome to the Magellan Health Services second quarter earnings conference call. At this time all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (Operator Instructions). Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn over the meeting to Miss Melissa Rose, Senior Vice President of Investor Relations.

Melissa Rose

Good morning and welcome to Magellan’s second quarter 2008 earnings conference call. This is Melissa Rose, Senior Vice President of Investor Relations for Magellan Health Services. And here with me today are Magellan’s President and CEO, René Lerer and our Chief Financial Officer, Mark Demilio. They will discuss the financial and operational results of our second quarter ended June 30, 2008.

As many of you already know, this is my last day with Magellan, so also joining us today is Renie Shapiro, Senior Vice President of Corporate Finance, who will be assuming the Investor Relations function on an interim basis, until she and the new CFO, once hired, can assess how to best address the function going forward.

Before we continue with the call, please note that certain of the statements that will made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed.

These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on the Form 10-K for the year ended December 31, 2007 which was filed with the Securities and Exchange Commission on February 29, 2008, and in the 10-Q that which will be filed later today.

In addition, please note that in this call we refer to segment profits. For reconciliation of segment profits to the most directly comparable GAAP financial measures, please see our Form 10-Q for the quarter ended June 30, 2008, which you will you find under our web site, on MagellanHealth.com under the heading Investor Info.

I will now turn the call over to our President and CEO, René Lerer.

René Lerer

Thank you, Melissa. Good morning, everyone and thank you for joining us today. I’m very pleased to report that this was another excellent quarter for Magellan. As you saw in the press release issued this morning, we produced $55.4 million of segment profit in the second quarter ended June 30, 2008.

These excellent results were driven by strong current performance from all of our segments. NIA and ICORE continued to deliver strong results in the second quarter.

Our behavioral health business results were notably improved, driven by better than anticipated results from our public sector segment. The quarterly results were also favorably impacted by net positive prior period care developments of $4.7 million in public sector, of which $1.9 million related to the first quarter, and a $1.0 million in radiology, most of which related to the first quarter of 2008.

Overall, our results exceeded our expectations for the quarter, and we are now projecting that we’ll be in the upper half, of both the segment profit guidance of $205 to $225 million, and our EPS guidance of $1.73 to $2.17, that we discussed in our first quarter earnings call.

The past few months clearly have been quite turbulent for the managed care markets and investors, and investors have continued to be concerned about managed care companies’ care trends in recent months.

We have not seen signs of this acceleration or trend in our business segments. In fact in our radiology benefits management segment, we are seeing signs that our trend is running at or slightly below the bottom of our previously announced range of 12 to 15%.

It is important to note that we believe that this trend reflects the initial impact of implementing a managed care program in a previously un-managed or lightly managed environment.

In a more mature contract, we continue to expect trends to be in the 12 to 15% range. This is in contrast to trends in an un-managed environment, which are usually in the upper teens or higher.

Our trends in behavioral continue to be in line with our original guidance of 5 to 7% for our commercial segment. We have not seen signs of these trends accelerating, due to the problems in the economy.

During the slowing economy, we would not expect to see a material increase in in-patient care, since these members typically have serious mental illness, and their conditions are unlikely to be directly affected by the economy.

We would however expect to see some increase in the use of Employee Assistance Programs or EAPs, which are designed to help people through life stress incidents, such as they might experience during difficult economic times.

EAP represents less than $30 million annually in care costs for our commercial business. Therefore, the impact from any increase in care trend would be quite limited. For the first six months however, we have not seen a material change in the EAP utilization.

In a weak economy, we might also expect to see some modest increase in traditional out-patient utilization in our behavioral commercial segment. At this point, we have not seen that occur.

However, recognizing that there could be a lag in seeing an uptick in care trend, particularly in the out-patient environment, we have built in some room in our commercial forecast in order to accommodate an increase in trend, should it begin to develop. Mark will provide some additional color on this forecast later in the call.

Our public sector segment care costs continue to trend at 3 to 5% on a same store basis, excluding Maricopa County. We’ve consistently excluded Maricopa from this analysis, because there has been a significant change in the management of the program since we took it over from the prior vendor, which makes it difficult to accurately separate trend data out for that account.

We did achieve better financial results in Maricopa this quarter than we experienced in the first quarter. As we stated last quarter, we are implementing various initiatives to better manage care under that contract, and we are particularly focused on improving the management of our direct care clinics.

We have seen progress in these initiatives, and while there’s still work to do, we are pleased with the progress we’ve seen to date.

In addition, as we discussed during our last quarter, we have been deferring revenue due to our inability to meet certain contractual performance thresholds, relating to documenting services required by the state.

We deferred revenue again this quarter for this issue and we continue to work hard at improving our ability to meet these requirements.

Overall, in public, we are seeing improvement in our public sector business relative to our expectations, which Mark will discuss later in the call. Before proceeding further with the discussion of the quarterly results, let me take a minute to update you on the results of our strategic review.

As you saw in our press release this morning, our Board of Directors have authorized a share repurchase program, under which the company may purchase up to $200 million of its outstanding common stock, to be completed by January 31, 2010.

As we stated last quarter, over the past several months the management team and the Board have been conducting an in-depth strategic review of the company’s long-term strategy.

As a result of this review, we have reconfirmed our long held view that well executed acquisitions remain a fundamental element of our strategy, given the fact that they can support and accelerate further growth, and diversification of our business.

In reviewing capital deployment alternatives in light of this strategy, we determined that given our significant unrestricted cash balance, our excellent historical and projected cash flow, and our access to capital, that there is capacity to support both our acquisition strategy and the share repurchase program.

The program that the Board has authorized balances our desire to execute the repurchase in a manner that efficiently returns capital to our shareholders, while maintaining the flexibility we need to pursue strategic acquisitions.

This share repurchase demonstrates our confidence in the company’s future prospects, and our commitment to deploying capital in the manner we believe improves shareholder value.

I will now turn the call over our CFO, Mark Demilio, who’ll walk through the additional details on our strong second quarter financial results. He’ll provide some additional color on our 2008 guidance.

Mark S. Demilio

Thank you, René. As indicated in the press release issued this morning, our segment profit for the second quarter of 2008 was $55.4 million. As Melissa stated earlier, segment profit is disclosed and defined in our quarterly reports on Form 10-Q, and our Annual Report on Form 10-K, and is equal to net revenues, less cost of care and cost of goods sold, direct service costs, and other operating expenses, excluding stock compensation expense.

Included in the tables for our press release issued this morning, and to be included in our Form 10-Q to be filed later today is the reconciliation from segment profit to the line item income from continuing operations before income taxes and minority interest. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure.

Revenues in the second quarter of 2008 were $656.9 million, compared to $452.9 million for the quarter ended June 30, 2007. The revenue increase resulted, primarily from new business added since the prior year quarter, of $213.1 million, including two radiology benefits management risk contracts, and the Maricopa County behavioral health contract.

Also contributing to the increased revenue were the impacts from favorable rate changes, of $15.3 million, same store membership increases of $9.3 million, and increased revenue from expansion of business in the specialty pharmaceutical management segment of $10.9 million.

These increases were partially offset by the loss of membership due to contract terminations of $40.8 million and other net decreases.

Net income for the second quarter of 2008 was $21.9 million, or $0.54 per share on a diluted basis. For the second quarter of 2007, the company’s net income was $16.8 million or $0.42 shares per share on a diluted basis.

Segment profit for the commercial segment was $40.9 million, which was a decrease of $12.6 million from the prior year period. This decrease is mainly due to:

The impact of contract terminations of $11.5 million;

Care trend in excess of rate increases of $2.3 million;

The favorable care development reported in the prior year quarter of $2.6 million;

And favorable retroactive membership and rate adjustments recorded in the prior year quarter of $2.2 million.

These decreases were partially offset by increased membership from existing customers of $3.3 million, and other net favorable changes of $2.7 million.

As René stated, the care trend for commercial is still estimated to be approximately 5 to 7%. We have not seen any indication that the trend is changing materially as some other healthcare companies have stated.

However, in looking at the remainder of the year, we have assumed that we could be in the upper-end of that range given that some minor impact may result from the downturn in the economy, particularly in our EAP product.

Also impacting our results in the second half of the year will be the loss of business resulting from WellPoint’s withdrawal of Medicaid contracts in Ohio.

As you know, we subcontracted with WellPoint for the management of the behavioral care portion of that business, and the withdrawal from those markets by WellPoint will adversely affect our results in the second half of the year.

Given these two factors, our results in our commercial behavioral business are likely to be toward the bottom of the range of segment profit we previously provided of $170 to $175 million.

Current year second quarter segment profit for the public sector segment is $26.4 million, which is $13.3 million better than the prior year second quarter.

This increase is mainly due to favorable care development recorded in the current year quarter of $4.7 million, which consists of $6.7 million of favorable development of care, net of $2.0 million of profit share related to such development.

Approximately $3.5 million of the $6.7 million of favorable development in care and $2.8 million of the $4.7 million net impact of segment profit relates to the prior year.

The reminder of the increase in segment profit over the prior year is due to the addition of the Maricopa County contract, rate increases and other net favorable variances.

Given the results for the quarter, we expect results in the public sector segment for the full year to be approximately $10 million better than the previous guidance range we provided of $81 to $84 million.

Second quarter 2008 segment profit for the radiology benefits management segment increased by $7.0 million from second quarter of 2007, mainly due to the impact of the new risk contracts of $6.2 million and $1.0 million of favorable prior period care development, which is net of $500,000 of profit share.

We continue to see to favorable care development in our risk radiology contracts, and as René stated earlier, we believe that our care trend for the year is now running at the bottom of or slightly below our previous estimates of 12 to 15%.

Given this trend in our results in the first half of the year, we expect that the result for the radiology benefit management business for the year will be in the upper half of the range we previously provided, up $32 to $38 million.

Second quarter 2008 segment profit for the specialty pharmaceutical management segment was $6.9 million compared to $3.4 million in the prior year quarter, with the increase being mainly due to an increase in rebate and consulting revenues.

We continue to see improved results in the ICORE segment, particularly in expansion of the rebate business, and we expect full year results to be at or slightly above the upper end of our previous guidance of $23 to $27 million.

Corporate costs, excluding stock compensation expense, were $2.3 million higher than the second quarter of 2007, primarily due to $1.2 million of net one time expenses incurred in the current year quarter.

Revisiting our outlook for the year, you will recall that in the first quarter, we incurred $4.7 million of costs related to the departure of our CEO. Despite that item and other one-timers, we forecasted only a slight increase in corporate costs to $99 million to $101 million for the year in the belief that we could trim costs for the remainder of the year.

However, as a result of the amount of corporate support needed for our growth initiatives, including support for the initiatives in the Maricopa Country contract we discussed earlier, as well as the product enhancement and innovation René will speak about later, we now believe our run rate costs will come in slightly higher rather than slightly lower than our original guidance.

Therefore, this factor combined with the extraordinary items we have experienced in the first six months, we expect the full year corporate cost to be approximately $7 million higher than the previous range we provided of $99 to $101 million.

Looking at our total administrative costs, excluding stock compensation expense, total direct service and operating expenses were 15.2% of revenue in the current year quarter, compared to 20.0% in the prior year quarter.

This decrease is primarily due to our ability to leverage our operating and corporate infrastructure in total as we added additional revenues from the radiology benefits management risk contracts and Maricopa County contract.

In the second quarter of 2008, we recognized $6.5 million of stock compensation expense, compared to $7.7 million in the second quarter of 2007. The decrease is mainly due to the termination of the employment of our former CEO in the first quarter of this year.

Depreciation and amortization expense was $14.5 million for the second quarter of 2008 compared to $13.5 million in the second quarter of 2007. The increase is primarily due to asset addition since the prior year quarter, inclusive of assets related to the Maricopa County contract, partially offset by a decrease in amortization expense due to an intangible asset, which became fully amortized in the prior year.

Interest expense was $1.0 million for the second quarter of 2008 compared to $1.6 million in the second quarter of 2007; the difference mainly due to reductions in outstanding debt balances and lower interest rates in the current year quarter.

Interest income was $3.7 million for the current year quarter compared to $5.5 million for the prior year quarter. This decrease is mainly due the impact of lower investment yields, which was partially offset by an increase in average invested balances.

The effective income tax rate for the six months ended June 30, 2008 was 41.1% compared to 41.7% for the prior year period. As you know, our effective income tax rate varies from the federal statutory income tax rate, primarily due to state income taxes and the permanent differences between booked and tax income.

Looking at our projections for these items for the reminder of the year, depreciation and amortization is expected to be at the upper end of the $56 to $58 million range we previously provided.

Stock compensation expense is expected to be at the lower end of the $36 to $40 million range. And interest income and interest expense, absent any impact from share repurchases, are expected to be in the ranges previously provided. In addition, we continue to expect the effective income tax rate for the year to be 40%.

The net result of these updated expectations is that, as René stated, we believe our full year results will be in the upper half of both the segment profit and EPS guidance ranges we previously provided, which were $205 to $225 million of segment profit and $1.73 to $2.17 of earnings per diluted share.

Again, this EPS range excludes the impact of any share repurchases that may occur during the remainder of the year.

Turning to cash flow and balance sheet highlights, our cash flow from operations for the six months ended June 30, 2008 was $124.8 million. This amount includes the positive impact of a shift of restricted cash into restricted investment in the amount of $77.4 million, which is reflected as a source of cash from operations and a use of cash from investing activities.

Absent this transfer for the six months ended June 30, 2008, the cash flow from operations was $47.4 million. For the six months ended June 30, 2008, the company’s total unrestricted cash and investments increased by $26.1 million from $353.6 million at December 31, 2007 to $379.7 million at June 30, 2008.

The increase in unrestricted cash and investments is mainly due to segment profit for the six months ended June 30, 2008, of $107.0 million, which was partially offset by:

The funding of restricted cash and investments of $14.9 million for one of the radiology risk contracts;

The run out of net contract liabilities for terminated contract, up $14.2 million;

The payment of 2007 management bonuses of approximately $18 million;

Capital expenditures, up $16.7 million;

And debt and capital lease payments of $12.7 million.

We believe our increase in unrestricted cash and investments for the year will be in the range we previously provided of $116 to $173 million prior to any stock repurchases that may be made under the program that we announced today.

Our unrestricted cash and investments of $379.7 million at June 30, 2008 consisted of $266.3 million of unrestricted cash and $113.4 million of unrestricted short-term investments.

Approximately $37.5 million of the total unrestricted cash and investments at June 30, 2008 relates to excess capital and undistributed earnings held at regulated subsidiaries.

The company’s restricted cash and investments increased by $39.9 million; $14.9 million of which is attributable to funding in relation to one of the risk radiology contracts as I just mentioned, and the remainder of which is attributable to the timing of cash flows with our regulated subsidiaries and other regulatory requirements.

As of June 30, 2008, we had $1.4 million of capital lease obligations, and no other debt. As we discussed during our last call in May, on April 30, we repaid all of the outstanding term loans of our previous credit agreement, and entered into a new $100 million revolving credit facility with Citibank and Deutsche Bank.

As you know, our previous credit agreement was due to expire in August of this year, and we wanted to proactively address the paying of the facility to back our letters of credit and provide additional liquidity. This is a one year facility and provides us with some flexibility during this time of credit market turmoil.

And now, let me turn the call back over to the René.

René Lerer

Thanks Mark. Let me spend a few minutes updating you on our sales prospects. As we said last quarter, we believe that an environment where managed care plans are struggling with costs helps us in marketing our products, particularly in our growth areas of radiology and specialty pharmacy.

There continues to be very strong interest in NIA’s products. I remain confident that we’ll be successful in growing this business. Interest in our product and sales pipeline activity is exceptionally strong in the commercial health plan market.

We are also seeing growing interest outside of our traditional market for commercial health plans, and we believe that we will begin to see increased opportunities in both Medicaid and Medicare.

In July, we implemented an ASO contract with the State of Pennsylvania, which is the first Medicaid carve out for radiology benefits management. In addition, we’re seeing promising signs of opportunities in Medicare, both managed and traditional indemnity, which I will discuss more in a few minutes.

Overall, the pipeline is robust, and we are working diligently to translate the pipeline activity into another sold account. We have many active prospects, and I believe that we will be successful in selling business for 2009.

On the behavioral side of our business, the biggest immediate opportunity is the State of New Mexico contract. We believe a RFP for the contract will be released in early August, and that the implementation of this contract would be July of 2009. This contract is currently served by our competitor ValueOptions, and we expect that this will be a very competitive procurement process.

In addition, as Mark stated earlier, sales for ICORE’s rebate business continue to be very strong. As you may recall, last year we made a decision to refocus our sales efforts primarily on the rebate portion of ICORE’s business, which was the root of ICORE’s historical success.

This refinement in our strategy began to demonstrate strong results last quarter, and has continued to deliver excellent results in the second quarter.

In addition to our strong performance in our rebate business, we continue to see solid performance in our distribution and consulting businesses as well.

As Mark indicated, ICORE is now projected to come in at or slightly above the upper-end of the guidance that we provided last quarter, driven in large part by the strong sales in the rebate business.

We continue to invest in the build out and further enhancements of all of our product lines, with particular emphasis on NIA and ICORE, as a result of our continued commitment to create new product offerings and approaches that differentiate ourselves from our competitors. We are very pleased with our development activities to date.

Overall, I am pleased with our sales prospects and our growth segments and I believe that the current turbulence that managed care companies are experiencing in their care costs, provide additional support for our sales and growth initiatives.

Before we close today, let me spend a few minutes updating you on some recent legislative developments.

First, the recently passed Medicare Improvements For Patients and Providers Act of 2008 contains important imaging provisions which NIA has worked to introduce over the past several years. The Medicare bill contains certain requirements related to radiology services.

Most notably, there is a requirement that a demonstration project aimed at monitoring and positively influencing the appropriateness of advanced diagnostic imaging services be conducted in Medicare. We believe that this is the first step toward bringing greater management to the Medicare future service program.

At least two models will be used in the demonstration project, although the opportunity exists to consider other types of models. One that will be used will be called the point of service model. This model requires that providers submit a standardized form that contains information that will allow for an evaluation of the appropriateness of the treatment.

A second model that will be used is called the point of order model. This model requires providers to electronically submit relevant information regarding the requested services and receive a computer generated evaluation of the appropriateness of care.

We believe that contractors might be used in testing one or more of the models and the NIA might be able to bid as a contractor. The demonstration project will run for two years and is expected to start in 2010. We are not yet aware of a formal timeline being announced for the bidding process.

Funding for the demonstration project is expected to be $10 million, which includes the cost of government administration of the project, provided participation incentives and fees to contractors.

While the revenue associated with this pilot is not likely to be material given the overall funding for the program, we believe that this demonstration project represents a major step in the movement towards CMS’s use of appropriateness criteria in managing radiology costs in Medicare, which could ultimately provide significant long-term opportunities for our radiology business.

Another legislative development relates to federally mandated mental health parity, which continues to move closer to becoming a reality as a result of the House and Senate Committees having reached a compromise on a bill.

As expected, the Mental Health Parity Compromise requires parity between physical and mental health coverage and financial requirements and treatment limitations, including such things as deductibles, co-payments and visit limits.

In addition, if a plan offers out of network medical coverage, it must also offer out of network benefits for mental health treatment. The bill does not mandate that health plans cover mental illness, but instead mandates that if plans cover both mental and physical illness, they would be required to treat both with parity. The bill does not require that any specific disorders be covered.

Magellan has been a long-time advocate of mental health parity and we believe that this legislation represents an important positive step in improving members’ access to care.

While the new compromise has yet to be voted on, the fact that the committees in the House and Senate have come to agreement on the frame work of this legislation is a major development, and we believe that this significantly increases the likelihood that the bill will pass sometime later this year.

As we have said in the past, we believe that parity would be a positive event although the impact on our current book of business would be limited.

Federal parity legislation would only impact our health plan business. All of our health plan contracts are (left) for re-pricing with current premiums if legislation of such parity is passed. This gives us the ability to renegotiate rates to reflect the changes.

However, we estimate that less than 5% of our risk business would experience any material change in the benefit structure. The bulk of our risk business would not be materially impacted, because either it would be exempt from the legislation or because it relates to clients in states that already have full or robust state parity laws.

We do believe that there will be some limited increases in our rates in both our risk and ASO products for some customers resulting from the implementation of full federal parity, but the impact on an individual client could vary significantly, depending on the benefit structure of each plan.

On an overall basis, we are not expecting material increase in our existing health plan business due to all of the factors I just explained.

It is, however, important to note that it is still too early to predict the impact of parity on our business with anything more than the high level overview I am giving you. Obviously, the bill needs to pass before there can be any impact.

Further more, the ultimate impact on our business will be driven by our ability to sell or expand our products to new and existing customers and to a lesser degree on our rate negotiations on existing business.

Overall, we are pleased that House and Senate have reached a compromise, which greatly improves the likelihood that the parity legislation could pass this year. While we predict that the impact on us will be modest, the passage of federal mental health parity would be a positive development and we remain hopeful that this important legislation will pass.

Let me also take a minute to give you a brief update on our CFO search. We continue to move along on schedule and we remain confident that we will meet our initial estimated timeframe of finding a replacement by late summer to early to mid-fall.

In closing, I would also like to thank everyone for joining us today. I would like to take a minute, however, as you know, this is Melissa’s last earnings call. I want to take a moment on behalf of Magellan and personally, to publicly thank her for her fourteen years of service to the company. She’s been a great asset; she’ll be missed; and we appreciate and wish her best in her future endeavors.

I will now turn the call over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions). First question is from Josh Raskin - Lehman Brothers.

Josh Raskin - Lehman Brothers

Hi, thanks. Two question for you: one, on New Mexico, could you give us a rough estimate of what you think the size is, assuming that the new contract is similar to what’s currently in place; I know obviously Maricopa is not great example of that.

René Lerer

Clearly, we’ve said all along, there is no other Maricopa. We haven’t seen a lot of visibility obviously on the revenues in the State of New Mexico, but our expectation would be probably somewhere in the $250 to $300 million range.

Josh Raskin - Lehman Brothers

That’s on an annual basis?

René Lerer

Yes.

Josh Raskin - Lehman Brothers

Okay, perfect. And then a second question, the public sector segment profit number was particularly strong even if I x out some of the favorable development that you saw. I’m just curious on a sequential basis from the first quarter to the second quarter, how much of that increase was Maricopa County and were there any other areas that provided some of that benefit?

René Lerer

The benefit was really across the entire book. We typically wouldn’t give specifics for any individual account. But we saw improvements on care and administrative costs really across the entire book in public sector.

Josh Raskin - Lehman Brothers

Okay. And in terms of a run rate, should we think about the current quarter segment profit less the favorable development as a good run rate for that business?

Mark Demilio

Josh, that’s a lot of ins and outs there that will happen in the second half of the year. Remember we’re going to lose the one region of TennCare as of November.

Basically, I think, take what we gave you as the new guidance, which we said is going to be $10 million higher than the previous guidance. Then you’ve got seasonality and other things, we didn’t give quarter-by-quarter. But you at least know what the second half has to be to hit that guidance.

Josh Raskin - Lehman Brothers

Okay, thanks, Mark.

Operator

Next question is from Daryn Miller - Goldman Sachs.

Daryn Miller - Goldman Sachs

René quick question, just in terms of the decision to go with the repurchase versus the dividend; I was wondering if you could just provide a little bit of color on that.

René Lerer

There were obviously lots of discussions about that. We were comfortable on the repurchase; it really demonstrates number one, our confidence in the company, our confidence in where the company is going, and it’s more consistent with our ability to retain flexibility as we go forward as it relates to both the repurchase and acquisitions.

We felt it sent the right message to the marketplace in terms of our confidence in the company and moving forward.

Mark Demilio

We had a lot of factors that went into that; I think René summed it up. The Board’s primary focus was what they thought would best optimize shareholder value, and at this time we believe it’s the repurchase.

Daryn Miller - Goldman Sachs

Great. Regarding your conversations on risk radiology that you’re having with health plans, is the duration this is taking to get something signed and over the goal line, is it representative of potentially size of the entity that you are dealing with here?

René Lerer

No, it’s a real mix. It’s a function more of the size of the contract and the intricacies of doing these deals. As we’ve talked about before, getting access to the data, doing detailed underwriting, on all aspects of the data with the actuaries at the host plans that we’re talking to, it’s a function of the number of geographies they’re in and detailed discussion with them on impacts on provider relations and members.

It’s an identification of some of the enhancements to the products that we’ve put in place relative to consumerism and redirection. It’s really a number of factors that come into play and it really varies by customer, not so much by size of customer, but by style and approach of the customer from a management perspective.

Mark Demilio

I think it’s not so much the absolute size of the contract, but for any customer, it’s a fairly material contract for them to sub out, no matter what the absolute size is, right? Because radiology is a significant percentage of their overall costs.

I think it’s the significance of the cost to them rather than the absolute price. Whether it’s a small potential customer or large, it’s the same impact to them. Therefore it takes a lot of discussion and a lot of analysis on both sides.

Daryn Miller - Goldman Sachs

Great. Thank you.

Operator

Next question is from Gregg Genova - Deutsche Bank.

Gregg Genova - Deutsche Bank

What’s the revenue impact from the WellPoint withdrawal in Ohio, this year?

René Lerer

We haven’t typically given individual account revenue. The impact of it on a segment profit basis is built into the forecast going forward. But, we haven’t splayed it out by account.

Gregg Genova - Deutsche Bank

Okay. And on the Maricopa, you said that you deferred the revenue again this quarter. Can you give us any color on how much revenue is being deferred and is that expected to come? Do you expect to recognize revenue in the back half of this year? Or do you think that’s in 2009?

René Lerer

Again, we haven’t given out specific numbers on what we’re accruing in the revenue. The contracts and the performance guarantees are based on an annualized basis on the contract year.

We’re still in this contract year, and we’re still reconciling. Our best estimate is what’s in the guidance. And that we’re withholding it from revenue, because that’s our best estimate today of what we think is likely to happen.

Gregg Genova - Deutsche Bank

Okay. Thanks.

Operator

(Operator Instructions)

René Lerer

In the absence of any further questions, we appreciate very much. Thanks again, for joining the call. We’re pleased that we’ve been able to deliver another great quarter. And we’re bullish for our future prospects up. I’m pleased with our results and look forward to keeping you updated through the year. Thanks everyone. Have a good day.

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Source: Magellan Health Services Inc. Q2 2008 Earnings Call Transcript
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