Magellan Health Services, Inc. 2009 Financial Guidance Call Transcript

| About: Magellan Health (MGLN)
This article is now exclusive for PRO subscribers.

Magellan Health Services, Inc. (NASDAQ:MGLN) 2009 Financial Guidance Call December 17, 2008 9:00 AM ET


Rene Lerer – President & CEO

Jonathan Rubin – CFO

Renie Shapiro – SVP Corporate Finance


Josh Raskin – Barclays Capital

Daryn Miller - Goldman Sachs

Carl McDonald - Oppenheimer

Scott Fidel - Deutsche Bank

Michael Baker - Raymond James

Greg Nersessian - Credit Suisse


Welcome. (Operator Instructions) I would like to turn the call over to Renie Shapiro, Senior Vice President of Corporate Finance and Investor Relations; you may begin.

Renie Shapiro

Good morning. Thank you for joining us today. This is Rene Shapiro, Senior Vice President of Corporate Finance and Investor Relations for Magellan Health Services. Here with me today are Magellan’s President and CEO, Rene Lerer and our Chief Financial Officer, Jonathan Rubin.

This morning we will be discussing our 2009 financial guidance. Before we proceed with this call, let me read our disclosure statement.

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.

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 Form 10-K for the year ended December 31, 2007 and in the Form 10-Q for the period ended September 30, 2008 which are both posted on our website.

In addition, please note that in this call we refer to segment profits. Segment profits is disclosed and defined in our Quarterly Report on Form 10-Q and on our Annual Report on Form 10-K and is equal to net revenues plus the sum of cost of care, cost of goods sold, direct service cost and other operating expenses and excludes stock compensation expense.

Segment profit information referred to in this call may be considered a non-GAAP financial measure.

Included in the tables issued with this morning’s press release is the reconciliation from segment profit to the line item income from continuing operations before income taxes.

We encourage you to review such reconciliations for an understanding of how segment profit compares to that GAAP measure. For additional information regarding this measure including the reasons management considers this information to be useful to investors, please see Magellan’s Annual Report on Form 10-K for the year ended December 31, 2007 which was filed with the Securities & Exchange Commission on February 29, 2008, and is, as I mentioned before, posted on our website.

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

Rene Lerer

Good morning everyone and thanks for joining us and let me wish each of you a Happy Holiday season. As you saw in the press release issued this morning inclusive of share repurchases to date our projected net income for 2009 is expected to be in the range of $73.4 million to $93.7 million which translates to diluted earnings per share in the range of $1.96 to $2.51.

Our segment profit for 2009 is expected to be in the range of $190 million to $210 million. In July we announced the approval of a $200 million share repurchase program to be implemented over an 18-month period.

We previously disclosed that through September 30, 2008 we had repurchased approximately 395,000 shares at a total cost of $16.7 million. Through the close of business yesterday, December 16, we have repurchased approximately 3.7 million in total for a total cost of approximately $132 million.

Our 2009 guidance and EPS projections include these repurchases to date but exclude the impact of any potential future repurchases.

Jonathan will give more details on the financial outlook but I’ll first provide a few perspectives in our business outlook including our growth opportunities and potential impacts of the economic environment.

Starting with growth, there continues to be a strong market opportunity for radiology benefit management services and our pipeline continues to grow. The revenue opportunities and covered lives in our pipeline have increased significantly from this time last year.

Risk based products represent the majority of our radiology pipeline with 60% of the pipeline lives and 98% of the pipeline revenue in risk contracts. We have made significant product enhancements over the past year which are designed to promote the risk product demand and serve as an effective differentiation strategy.

Our full consumers and model has been well received by both customers and prospects. As I have spoken about previously the decision to outsource radiology benefits management involves multiple stakeholders and is both complex and time consuming particularly as it relates to information needed from IT departments for historical data to underwrite risk contracts.

We are disappointed about our inability to identify any closed deals this year. However we remain optimistic about our potential for signing new risk [RBM] business in 2009 and have built in new business radiology revenue into our guidance.

Jonathan will expand on the assumptions for the new business during his discussion. With respect to specialty pharma we have seen growth in 2008 and we expect to continue to focus on our rebate management and associated distribution businesses in 2009.

In addition we have been developing a market leading oncology management product which addresses the choice and cost of pharmaceutical agents, supports effective clinical care management, and impacts administrative issues such as the accuracy of claims processing.

Oncology costs represent a fast growing component of health plans medical expenses and we are beginning to see interest in our offers. We are confident in our ability to create value for health plans and are optimistic about implementing our first customers for this product in 2009.

As is typical with health plan based products, uptake is often very slow, and we don’t expect to see a material impact to our financials before 2011.

While we may not have built any significant new business revenue for our behavioral based businesses into our outlook we still have many significant opportunities both in the commercial and the public sector areas.

We are actively quoting on new business within commercial to health plans and to employers. With regard to the public sector I have spoken previously about the state of New Mexico bid and will give you an additional update later on.

There continues to be [RFP] activity in other states, albeit on a smaller scale then [either] America but more New Mexico.

Turning to the economic environment the situation is quite dynamic and the impacts are still uncertain. We would expect that the environment would impact both our membership and utilization. With respect to behavioral utilization as reported in our third quarter earnings call, we had not seen a significant increase in utilization resulting from the economic struggles.

We are starting to see some indication that utilization may be increasing however to date, it appears to be driven primarily by changes in our mix of business rather then a result of the economy. We will continue to monitor this situation closely.

On the health plan side, while some customers have reported expected declines in membership it is often offset by expected growth in other contracts. On an individual plan basis, there are some membership shifts between risk and ASO.

Our overall planned membership across both radiology and health plan sectors is assumed to be flat on a same store basis. While the economic and competitive environment is putting pressure on all health care margins we are continuing to see some evidence that the challenges facing many health plans and states are in some cases creating focus on reducing costs and therefore increasing interest for services that Magellan provides.

Examples of this are the increasing pipelines for radiology and oncology. In addition there will likely be increases pressure on state spending budgets and as unemployment increases demands for additional Medicaid services may rise.

The pressure on state spending budgets may result in revisions to benefits or other program changes in the contracts we manage. We again are closely monitoring the situation in the states we contract with and will react to and respond to any changes that occur.

The upcoming year brings many challenges for us but also brings exciting and promising opportunities. I will now turn the call over to Jonathan Rubin our CFO, who will discuss the 2009 guidance in greater detail.

Jonathan Rubin

Thanks Rene and good morning everyone. Before I get started as noted in our press release we’ve decided from this point forward to give formal guidance only at the consolidated level rather then at the segment level.

However we will continue to discuss all of the material components of our guidance which will provide good visibility into each of our businesses.

We believe that this will best enable us going forward to focus on the key drivers of our business rather then on explaining the volatility of individual segments in specific periods. Please note that this does not effect the way that we’ll report actual results and we intend to continue to provide both consolidated and segment specific results each quarter.

I’ll begin my remarks today with an overview of our 2009 outlook followed by a more detailed discussion of the key drivers and explanations of our expectations.

As Rene mentioned in his opening, our projected net income for 2009 is expected to be in the range of $73.4 million to $93.7 million which equates to an EPS range of $1.96 to $2.51 on a diluted basis.

Our segment profit guidance for 2009 is expected to be in the range of $190 million to $210 million. Our 2009 guidance and EPS projections includes share repurchases made through the close of business yesterday, but exclude the impact of any potential future repurchases.

These estimates compare to our current full year 2008 segment profit guidance of $215 million to $225 million and EPS guidance of $1.95 to $2.17.

The decrease in our segment profit guidance year-over-year reflects the impact of lost business across our segments and expected margin compression in the commercial segment offset by earnings improvement for our continuing public sector business and continued earnings growth in radiology and specialty pharmacy which includes the impact of projected new business.

I’ll now talk about each of these drivers in a discussion of our individual segments starting with commercial.

For the commercial segment the impact of lost business and margin compression is expected to yield lower profits in 2009 on a year-over-year basis. Our guidance includes approximately $25 million of lost revenue related to Medicaid contract terminations as a result of [Well Point] withdrawing from Ohio and Nevada.

In aggregate we’re projecting that our commercial revenue will grow by approximately 4% on our existing book of business in 2009 primarily due to rate increases. Our same store membership is projected to remain relatively flat into 2009 and we expect commercial trend to be in the range of 7% to 9% thereby resulting in margin compression in the range of $6 million to $8 million.

This year-over-year care trend increase includes the impact of [big] business mix changes representing approximately 1% to 2%. Excluding the business mix impact we expect our 2009 care trend to be up slightly from 2008 levels.

Relative to commercial new business revenue we’re actively quoting on a solid pipeline of opportunities however our current guidance does not reflect any material earnings from new contracts.

Next I’ll discuss our public sector in which the loss of the Tennessee contracts with revenue of over $240 million will result in lower segment profit in 2009.

Turning to our Maricopa County contract throughout 2008 we have been deferring revenue related to contractual performance thresholds required by the state. The deferral of this revenue is necessary due to inherent uncertainty as to whether we have met such thresholds and policies relating to the timing of revenue recognition.

The Maricopa contract year runs through June 30 of each calendar year. Our guidance assumes that we’ll be able to release the majority of deferred revenue relating to the 2008 contract year in calendar year 2009 and also reflects our expectation that we will be able to recognize the full revenue relating to the 2009 contract year by the end of 2009.

Excluding Maricopa the remaining public sector revenue growth for existing business is expected to be approximately 3% with [tier] trends in the range of 3% to 5%. Our guidance does not assume any material earnings from new public sector contracts.

Next I’ll discuss our segment profit outlook for radiology where we anticipate earnings growth in 2009.

First, our guidance includes approximately $60 million of revenue from new business. While we have not yet sold any new customers this projection is based on a probability-adjusted assessment of our current pipeline which as Rene noted, continues to be quite strong.

As we previously discussed in the initial year of risk contracts, we experienced lower profitability due to start-up costs and build up of reserves. Lost revenue from terminating radiology contracts is expected to be approximately $9 million and includes the previously announced loss of [Well Point’s] ASO radiology contracts due to in-sourcing.

On the same store basis our guidance reflects average care trends in the range of 10% to 13%. Margins are expected to improve modestly year-over-year reflecting the combined impact of rate increases, cost trends, and productivity.

Rounding out our guidance for segment profit, we expected that ICORE will produce double-digit earnings growth in 2009 which reflects our projection for continued strong results. New business revenue in the specialty pharmacy segment is projected to be approximately $35 million in 2009.

As Rene previously discussed we anticipate that our early oncology management initiatives will begin to produce small amounts of revenue in 2009. Also included in our guidance is lost revenue from terminated rebate and distribution business of approximately $25 million which is primarily driven by the loss of a material customer previously disclosed in our third quarter 10-Q.

In addition to our top line growth in specialty pharmacy we expect solid improvement in our margins in both the rebate and distribution businesses in 2009 through purchasing initiatives and [formulary] re-contracting.

Finally we expect that corporate expenses will decline in 2009 mainly due to expenses included in 2008 related to the transition of our former CEO.

Moving on to other items in our forecasted earnings, our 2009 stock compensation expense is forecast to be in the range of $25.5 million to $29.5 million which will be lower then that incurred in 2008.

The main reason for the decrease is that 2008 included expenses related to management transitions.

Depreciation and amortization is expected to be between $39.5 million and $43.5 million in 2009 which is lower then what we expect in 2008. As you may recall when the company emerged from Chapter 11 in accordance with fresh start reporting requirements, we determined new fair value and estimated lives for all of our fixed assets as of December 31, 2003.

A significant amount of our fixed assets pertained to the company’s claims, clinical and related systems. Such assets were given a five-year life and these assets will be fully depreciated as of December 31, 2008.

For 2009 the company expects to generate between $6 million and $12 million of net interest income in excess of interest expense which reflects the accumulation of cash from operations during the course of the year and continuing lower yields on invested assets.

Interest income is based on our current interest rate expectations and could change if the rate decreases persist. The amount does not reflect any potential future stock repurchase activity beyond purchases to date identified earlier.

Net interest income for 2009 will be lower then 2008 primarily due to cash used for stock repurchases completed to date. In addition this month the company expects to pay the final ICORE deferred purchase price payment of $25 million plus interest which was originally due to be paid next year.

Our guidance provided today does not assume any acquisition activity or any change in our capital structure. As we’ve discussed previously we continue to investigate acquisition opportunities and evaluate capital structure alternatives.

The effective income tax rate is forecasted to be approximately 40% for 2009. The effective rate is higher then federal statutory rates primarily due to the inclusion of state taxes.

We are projecting that as of December 31, 2008 our remaining federal net operating loss balance will be in the range of $95 million to $115 million. Approximately half of that amount will be available to partially shield the company from the cash payment of federal taxes in 2009 with most of the remaining NOL carry over available for use in 2010.

Rounding our discussion of earnings as noted in our press release our EPS calculations on our forecasted 2009 performance is based on our estimate of 37.4 million fully diluted shares outstanding for the year.

This amount was estimated inclusive of stock repurchase activity to date but with no consideration of future potential stock repurchases.

Now moving to cash flow, our 2009 cash flow from operations is expected to range from approximately $129 million to $178 million. The cash flow from operations is expected to exceed our net income primarily due to non-cash charges and expenses included in our net income including stock compensation expense, which is entirely a non-cash charge, non-cash taxes primarily due to the utilization of federal NOLs, and depreciation and amortization expense which of course is also non-cash.

Partially offsetting this our cash flow from operations assumes a net use of cash from working capital changes of approximately $17 million to $37 million driven primarily by increased working capital requirements for projected business growth, including additional restricted cash requirements for regulated subsidiaries, and runoff of net liabilities related to terminated accounts.

Capital expenditures are expected to be between $25 million and $35 million in 2009 which is a level we would expect going forward based on our current businesses. Financing activities are expected to be fairly nominal during 2009.

The result of all these activities discussed and cash activity is an expected net increase in unrestricted cash and investments of approximately $96 million to $157 million in 2009 excluding the potential impact of any 2009 share repurchases.

With that I’ll now turn the call back over to Rene for some closing remarks.

Rene Lerer

Thanks Jonathan, let me give you a brief update on the status of the New Mexico public sector RFP. The latest state revenue forecasts made public December 8, 2008 indicate a worsening financial situation for this state as is becoming more and more common in many states.

The change in the state’s financial situation had caused the state to delay the reward announcement originally scheduled for early December. We are still expecting a decision prior to year-end but as I have mentioned to you in the past I believe this is a difficult challenge for us as in this environment it is quite difficult to [in seat an incumbent].

In summary we continue to successfully diversify the company’s earnings. As mentioned previously we are pleased that the radiology and specialty pharma businesses now represent 20% of our segment profit prior to corporate overhead.

Our focus in 2009 will continue to be on the growth of our core businesses with specific focus on radiology, ICORE, and public sector.

Let me close by saying a few words on our strategic focus, as we’ve stated consistently in the past our strategy is to leverage Magellan’s strong and efficient platform by accelerating growth both organically and through acquisitions that supplement our more mature business lines.

We continue to look for acquisition opportunities to further grow and diversify our current health care product offerings. This has been challenging of late, as prices and multiples have not come down as much as we would have expected given the challenging economic and credit environment.

We believe that in the coming years sellers will begin to adjust their expectations to more rational levels which will create opportunities and advantages for us given our strong cash position. Acquisitions will continue to be a key focus for us in 2009.

We are very pleased with our results and our accomplishments in 2008 and our improved EPS outlook for 2009. We look forward to continuing the strong performance in the year ahead.

Let me now turn the call over for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Josh Raskin – Barclays Capital

Josh Raskin – Barclays Capital

Maybe you could expand a little bit on what you were saying around the commercial utilization that you were seeing a slight uptick but you don’t think its economically related and maybe what sort of magnitude are we talking about there?

Rene Lerer

First I think if you remember in the third quarter we talked about a specific account that had somewhat increased utilization. It was an account that we had that had a significant influx of members. As membership changes amongst health plans there are certain plans that just generally have a higher utilization pattern then others.

Some of its driven by plan designs, some of its driven by geography and as the mix of business switches amongst those you tend to see higher utilization. So when you adjusted out for that I think we said the mix was worth about 1% or 2%. We’re still seeing utilization trends adjusting for that mix if you take that out, of 5% to 7%.

Josh Raskin – Barclays Capital

So it doesn’t sound like there’s any change in the fundamental trend or anything like that.

Rene Lerer

We don’t see that, again it’s the mix that shows a little bit higher total cost because of those cases having just greater percentage of the business.

Josh Raskin – Barclays Capital

On the process of giving guidance here, I guess two things that changed. One not giving the segments any more specifically and then second it sounds like you’ve actually included some potential contract wins in radiology and I think those are obviously both different then what we heard last year. What changed in your mind, what necessitated those changes?

Rene Lerer

We have as you remember in the past, have recorded new business revenue in our guidance. When we did this a year ago, we did have new business revenue for radiology. We then subsequently during the course of 2008 identified that it was unlikely that that revenue would materialize and we removed it.

So its actually quite common for us historically to include unsold business, blue sky revenue, whatever you want to call it, based on our pipeline and based on our adjusted probabilities. So this isn’t atypical for us.

Jonathan Rubin

On the segment guidance question, as I mentioned in my prepared remarks, as we’ve evaluated this given the nature and the diversity of our businesses and the period-to-period volatility of the individual segments, we really feel like its best for us to focus on the key drivers of the overall business results and not get caught up in the discussion and sort of maintenance over time of the segment specific guidance in which case we’d have to react often through the year relative to volatility.

So again we’ll continue to provide visibility to all the key drivers of the business results and financial outlook as we’ve done today, and we’ll also as noted continue to report actual results both on a consolidated and the segment specific basis.

Josh Raskin – Barclays Capital

So you’re going to give us, it sounds like you’ll give us at least qualitatively the updates versus prior expectations within the segments, maybe just not the exact dollar numbers.

Jonathan Rubin

Correct, we won’t be giving the formal guidance but we’ll be talking about certainly what’s happened of a material nature within each of the businesses.

Rene Lerer

Similar to what we just did.


Your next question comes from the line of Daryn Miller - Goldman Sachs

Daryn Miller - Goldman Sachs

I missed what the assumption you had built in as far as new radiology business.

Jonathan Rubin

We said approximately $60 million in revenue.

Daryn Miller - Goldman Sachs

And how do you think about that in terms of, I imagine some of those contracts are fairly large and even if you give them a small probability it creates a meaningful number.

Rene Lerer

We don’t, if something has a 10% probability we don’t adjust that. We’re only looking for things that we believe have significant enough probability to be real. When we have things that are low probability or early in the pipeline in the states, we don’t really mix that into what our budget would look like or what our guidance would look like for the year.

So this is based on those books of business where we think we have a reasonable probability of achieving them not low probability.

Jonathan Rubin

And also we look at the projected timing within the calendar year because in some cases obviously we wouldn’t be recognizing if we’re successful in seeing the full year’s revenue in 2009.

Daryn Miller - Goldman Sachs

And will you share how many contracts are building up to that $60 million number?

Rene Lerer

No, I mean as we’ve, given how material this is and we understand it we will announce these accounts on our quarterly calls unless they’re very large ones we will announce them. But the numbers in the pipeline or how we build it up, we typically wouldn’t disclose.

Daryn Miller - Goldman Sachs

Looking at the Maricopa contract, how do we think about how you get rate increases there in terms of given that their state budget pressures, have rates been established for 2009 at this point?

Rene Lerer

Again remember that most of these state contracts are on a fiscal year so the fiscal contracts typically start in July. We don’t have rates for July of 2009 yet, it would be atypical to get them this early, but obviously rates that would have been impacted in July of 2008 are already built into our built out 2008 results as well as our 2009 guidance.

The state, there are several parts of any of these state plans including both Medicaid and very often state-only, or its non-titled benefits and there the dollars appropriated to each of those segments vary. All of the Medicaid businesses actuarially has to be actuarially reviewed and sound based on benefits so typically if the state had to cut back on their costs, they would have to go back and adjust benefits or eligibility.

They can’t just unilaterally cut revenue without some [inaudible] adjustment with it. On the non-Medicaid side or the state-only side, they have a little bit more latitude and that’s often legislated by their state legislators.

Daryn Miller - Goldman Sachs

The segment profit range of $20 million is consistent with last year but the revenue range is wider and the cost of care range is wider, I’m just wondering what was driving that.

Jonathan Rubin

I wouldn’t attach any specific importance to that. As we were looking at the puts and takes those were the ranges we came up with.

Daryn Miller - Goldman Sachs

You mentioned some other states in terms of new RFP opportunities, can you tell me what those states are?

Rene Lerer

We typically haven’t listed them. Obviously the two biggest ones that we’ve talked about publically have been in Mexico which I talked a bit about and the other one was Iowa which is an existing customer which we talked about.

Others, there’s a smattering of them across the country. Much of it is ASO, some small risk deals but there’s a number of states that are either coming up for renewals or bringing their business for the first time into a [inaudible] basis.


Your next question comes from the line of Carl McDonald - Oppenheimer

Carl McDonald - Oppenheimer

I just wanted to spend a minute on the health plan contract that is running through June 30 of next year, has that, so we know since you haven’t talked about it you haven’t lost the contract, has it been renewed? If it hasn’t been renewed any color in terms of if you are in renewal discussions.

Rene Lerer

We are, it hasn’t been lost obviously. We are constantly in discussion with them. There are lots of discussions going on and in our next call we’ll give you an update of what’s going on. But things are moving along well in those discussions.

Carl McDonald - Oppenheimer

On the specialty pharma side, you mentioned $35 million in new business revenue there, how much of that has been sold already versus more in the pipeline?

Rene Lerer

Well again, in the specialty side since we’re not paid on a PMPM basis, its really, relationships on contracts that generate rebates and distribution there’s no guarantee in distribution because typically, which is the bulk of the revenue, typically distribution is not done on an exclusive basis but its based on relationships and historical growth factors that we’ve seen in 2008.

So its sold in that the relationships with the customers are generally there and the rebate contracts are generally there but the exact numbers of what it produces is driven on essentially the volume of rebates, drug utilization, and the volume of fills that we do in the distribution side.

So its different then on a PMPM basis, its not a guaranteed revenue, its driven by utilization.

Carl McDonald - Oppenheimer

Just thoughts on piece of share repurchase, a little bit low in third quarter partially due to the timing and when the program was announced, obviously this quarter up pretty significantly.

Rene Lerer

Again third quarter we didn’t begin the repurchase until August. We were in a different environment in the fourth quarter. Again the assumptions were based on where the market was based on cash available to us. We went obviously a bit faster and obviously put out a lot more.

We’re not going to speculate on future plans, we’ll continue to update as we go though.


Your next question comes from the line of Scott Fidel - Deutsche Bank

Scott Fidel - Deutsche Bank

Maybe if you could just give us some context in terms of the radiology pipeline, what type of segment of customers you would say that the largest or most imminent opportunities are in terms of is it with the blue plans or more with public MCOs like your two existing risk-based customers?

Rene Lerer

Well one of the existing risk-based customer is a blue and public plan. Its both with public companies and with blue plans and with private health plans.

Scott Fidel - Deutsche Bank

And then just what are you assuming in terms of your risk-based membership in radiology on the current customers just given that [Signa] has guided for their guaranteed cost membership to be down in the high single-digits and we would assume that [Well Point] probably on the risk-based side as well will be seeing a decline in their risk-based membership in 2009.

Rene Lerer

Again I think what we’ve guided to you and in the conversation that Jonathan had, is that overall on our same store business we’re looking at essentially flat membership. So rather then going into each of the contracts and talking about their expectations, our guidance and given our discussions with customers is that overall its flat year-over-year.

Scott Fidel - Deutsche Bank

And then in terms of the direct service costs, it looks like the guidance is for those costs to increase at a pretty faster clip then your expected revenue growth. Maybe if you could talk about some of the inputs into the operating expense increase for next year. Are there any projects or investments you’re making.

Rene Lerer

We’re continuing to do a number of things. One we’re investing in development as we’ve talked about oncology, we continue to put money in there. We talked about, I mentioned some of the enhancements we’ve made to products on the behavioral side. So there’s some dollars there. The other issue is that clearly on the behavioral side, there is some pressure to continue to innovate and demonstrate ongoing value so we are continuously enhancing our service deliveries on the behavioral side.

So its really in all of our lines we’re doing some of that.

Scott Fidel - Deutsche Bank

Just around the expectation for commercial margin compression, could you maybe provide some context into the magnitude that you expect from that. Let’s say if you’re running at around a 25% operating margin right now before corporate expense, how much compression you expect off of that and how that will be biased towards the MLR as compared to SG&A.

Jonathan Rubin

The only thing I’ll note is what we’ve said in the prepared remarks which is we’re expecting between $6 and $8 million of margin compression in the commercial segment.


Your next question comes from the line of Michael Baker - Raymond James

Michael Baker - Raymond James

I was wondering if you could provide us a little more color on whether or not there are any new factors that health plans are facing that are further elongating the sales cycle as it relates to radiology and give us a sense of where it seems like their priorities are from a cost management perspective and whether there’s been any change there and whether those priorities are opening up potential new opportunities for you.

Rene Lerer

On the second piece of that obviously one of the things we think has become very interesting to us is the design and the development of the oncology programs. We’ve all heard on some of the other announcements that health care companies have made that oncology costs particularly oncology related drug costs are going up more quickly then expected so it precipitated our interest given our experience in ICORE to continue to enhance and build that and I think as I mentioned we expect to see small amount, but revenue and implementation in 2009 for some of those oncology programs.

I think on the radiology side again, the biggest factors related to data and IT integrations and I think given some of the struggles the health plans have, its classic health plans, they get into issues and they have fires to put out and those fires become a priority for them and other things get pushed back a little bit.

So we have sort of share of mind when we talk to these customers but the impact of data extraction and IT integration is occasionally what slows us down.


Your final question comes from the line of Greg Nersessian - Credit Suisse

Greg Nersessian - Credit Suisse

On the deferred revenue in Maricopa, could you just remind us what the amount there is and then I guess in terms of the timing of when you expect to recognize it, is it fair to say given the June 30 date, that’s going to be a second quarter recognition, a third quarter, how should we be modeling that?

Rene Lerer

First off it would be hard to remind you because we haven’t told you. So we haven’t given out that number but in terms of revenue recognition again, these relate to the recognition rules. Given that this is the first year we’re going through this process with the state and our revenue recognition requires that the state signoff based on their own processes, the data we give them, data they give back to us and potentially their audit, its not clear exactly what quarter that would happen.

We think it is unlikely it would be a first quarter event, but it could be. So our expectation for the fiscal year 2008 would probably be sometime before the end of the first half of the year. But again, given that it’s the first time we’re going through the process, that’s one of the reasons we didn’t want to give the guidance [where we did] is because it will fluctuate from quarter to quarter based on the impact that we see from the state.

So our expectation is sometime in the first half of the year for the 2008 fiscal year, but again not having gone through the process with them in prior periods, we’re not really sure.

Greg Nersessian - Credit Suisse

So is it a situation where once you’ve established that you’re meeting that criteria then you book the, and you’re able to book the revenue then from that point forward its going to be part of your run rate revenue that you’re going to accrue each quarter or are we going to have this timing thing in each year.

Rene Lerer

It depends, its complicated, but it depends on the process of how that first year is established. Whether its based on data that we’ve given them that they’ve validated, whether its based on a detailed audit that they require before they validate, again, generally we can do that when there’s a pattern of data agreement and solicitation between us and the state.

Given that we don’t know what that pattern would be, it is our hope that at some point we would get to what you’re describing, its just not clear whether that happens this year or next year until we see how the matter resolves with the state and we get a greater level of comfort that we can then predict how our data is received by the state and responded back to.

Greg Nersessian - Credit Suisse

And then just trying to better understand the commercial revenue, I guess there are a couple of moving pieces, so you’re losing the [Well Point] Medicaid business, I think its $25 million and then you’ve got the 4% rate increases and then I think you mentioned a shift in mix from risk to ASO on the health plan side, is that shift accelerating? Is that creating a drag on your commercial revenue, is that what you’re saying for next year, if you could just maybe give a little more color around that.

Rene Lerer

I don’t know that we said it specifically relates to behavioral but in general in many of our plans we’re seeing movement from the risk side to the ASO side. I don’t think we specifically described that as a behavioral issue. We’ve seen it more on the radiology side then we’ve seen it on the behavioral side and maybe because the mix of customers for those [inaudible] are different.

Greg Nersessian - Credit Suisse

So net net, should we think about commercial revenue essentially, how should we be modeling that for next year?

Rene Lerer

There’s really two issues, one particularly on the behavioral side, is the mix issue where the number of risk lives isn’t so much the issue as to where those risk lives are and what their inherent utilization costs are.

On the radiology side there’s more, I think you will see more of the risk to ASO.

Jonathan Rubin

I think in total if you make the assumption that our guidance includes relatively flat risk membership on behavioral, I think you’d be pretty close.


There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Rene Lerer

First off thanks everyone for your support and participation over the past year. We look forward to a great year in 2009. Thank you for all of your interest and hope you all have a Happy Holiday and healthy new year.

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 All other use is prohibited.


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