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Operator
Good morning and welcome to the HealthSpring conference call to review its financial results for the first quarter ended March 31, 2007. Today's call is being recorded. The financial results were issued yesterday after the close of the market trading. If you did not receive a copy of the press release you may find a copy under the Investor Relations tab on the HealthSpring website, www.myHealthSpring.com.
Before we begin HealthSpring wishes to express that some statements made in this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual performance of the Company may differ from that projected in many statements -- I'm sorry, in such statements. Investors should refer to statements regularly filed by the Company with the Securities and Exchange Commission for a discussion of those factors that could affect the Company's operations and the forward-looking statements made in this call.
The information being provided today is as of this date only and HealthSpring expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. In addition, certain non-GAAP financial measures may be covered in this presentation. These non-GAAP measures are reconciled to the most comparable GAAP measures in the press release or on the Company's website. At this time I'll turn the call over to Mr. Herbert Fritch, Chairman, President and Chief Executive Officer of HealthSpring. Mr. Fritch, please go ahead, sir.
Herbert Fritch - Chairman, President, CEO
Thank you, operator. Welcome to HealthSpring's first-quarter 2007 earnings call. We're pleased to report a solid start to 2007. We had steady membership growth in spite of a very competitive environment on our Medicare Advantage HMO products and our stand-alone PDP membership continues to grow on a monthly basis. We did experience a somewhat higher level of Medicare medical expenses during the first quarter which we believe will moderate during the remainder of the year as the impact of the flu subsides and some of our network initiatives mature.
We are maintaining our full year's earnings guidance of $1.55 to $1.65 per share. Based on where we ended open enrollment we have narrowed the year end Medicare Advantage membership range to 130,000 to 133,000 members. We are encouraged by the steady growth in the stand-alone PDP membership and believe that we will end the year at between 120,000 and 130,000 members.
In spite of a challenging first quarter on the medical management front we believe we can end the year with Medicare Advantage MLRs at or below 80%. Our SG&A continues to track to end the year at or below our 12% target and the first and fourth quarter being a little higher due to increased sales and marketing expenditures during open enrollment. Let me discuss each major area in more detail.
On the Medicare Advantage membership front we had a strong open enrollment season in terms of gross enrollments. Our disenrollments held about flat year-to-year in spite of additional competition. We ended the quarter with just over 121,500 members -- 121,500 members and grew to about 123,900 members at the end of our open enrollment season.
On the PDP front we are seeing monthly growth from our national expansion. We attribute this to the fact that we now get a share of auto assigned new dual eligibles in several states where we had no base of enrollment to lose any members through death or disenrollment. As a result 108,000 PDP lives that we had in January has grown to 114,500 in May and we expect continued growth throughout the year ending in the 120,000 to 130,000 range.
We did experience a deterioration of our medical loss ratios in the quarter of about 3.5% compared to the first quarter of 2006. The deterioration was primarily in our Alabama and Texas markets where we experienced a prolonged flu season this year after a very minimal season last year. We anticipate this improving during the spring and summer months. The seasonality of the prescription drug component of the MA-PD also contributes towards a seasonally hirer MLR in the first quarter and, just based on benefit design, should improve as we go throughout the year.
Our MLR on the stand-alone PDP product was predictably high at 94%, but well in our expectations. Based on these results we are optimistic regarding the contribution to earnings for the remainder of the year on this line of business and very comfortable at an annual MLR ending up between 82 and 87%.
Our SG&A was favorable to our expectations considering the added sales and marketing expenditures for the quarter. I'll save the details for Kevin but reiterate that we feel very good about achieving our original target of 12% or lower for the year.
Our efforts to organize physicians continues to progress well in Alabama and Tennessee. We are confident that with the flu season behind us we can begin to see the fruits of our efforts in regard to reduced medical trends. The patient response to our Living Well Health Center prototype has been very encouraging. The initial operational challenge that primarily focused on the implementation of a new AMR largely behind us, patient satisfaction is overwhelmingly positive and we hope to see the tangible benefits during the next open enrollment season.
We are pleased to announce the signing of our second Living Well related professional services agreement with the Providence Health System in Mobile, Alabama. We have started work on a second Living Well Health Center to be staffed by Providence physicians and anticipate opening the center in time for the 2008 open enrollment season. Other discussions are ongoing regarding additional centers. M&A efforts remain active and we think some potential sellers are now more serious now that the open enrollment is over. We remain committed to put our capital to good use for shareholders.
The transition of Chief Operating Officer responsibilities from Jeff Rothenberger to Jerry Coil has progressed nicely. Jerry's fresh perspective has been welcome by both corporate leadership and the operating presidents in our local markets. During March Jerry assumed full day-to-day responsibility for HealthSpring's operations.
Congressional deliberations regarding changes to Medicare Advantage payment levels are going about as we anticipated. It's clear that no changes are imminent for 2008. Our pay per quality initiatives have now completed a full year with about 7,500 members covered and three to four times that number lined up by the end of 2007. We hope to be an integral part of the discussions demonstrating the potential of M&A plans to improve outcomes.
By positioning the Company with no exposure to private fee for service we think we have minimized the risk from additional reductions to reimbursement in 2009 and beyond. We believe we are well positioned to provide a sustainable value proposition to Medicare beneficiaries in what appears to be a more challenging reimbursement environment in the future. With that I'd like to turn the call over to Kevin to discuss the financial highlights for the quarter.
Kevin McNamara - EVP, CFO, Treasurer
Thanks, Herb. We reported first-quarter diluted EPS of $14.1 million or $0.25 per share compared to a prior year reported EPS of $0.14 and a prior year pro forma EPS of $0.24. Significant factors impacting first-quarter results were -- one, a 16.7% year-over-year and a 5.6% sequential growth in our Medicare Advantage membership; two, a 47.6% year-over-year and a 24.7% sequential growth in our PDP membership; three, a 7.2% increase in the PM PM rates of our Medicare Advantage members partially offset by a decline in the PM PM rates of our PDP members; four, as discussed previously by Herb, erosion in our Medicare Advantage MLRs; five, Part D seasonality; and 6, a significant increase in SG&A expenses in the first quarter of 2007 compared with the prior year's first quarter.
Let me now spend a few minutes on each of these. With respect to membership, we reported 121,527 Medicare Advantage and 110,692 PDP members at the end of the first quarter reflecting healthy growth on both a year-to-year and sequential quarter basis. In previous quarters we have provided a membership breakdown on this call; however, starting this quarter in response to a number of questions from you we have included by market membership detail within the body of the earnings release.
As Herb indicated, net growth resulted from healthy growth sales in all of our markets offset by flat year-to-year disenrollment activity. For the first quarter of 2007 we gross enrolled 18,750 new members compared to 15,100 in the prior year. Disenrollments were approximately 12,300 in both periods. Consequently on a net add basis we saw more than a twofold increase adding 6,400 in the first quarter of 2007 versus 2,800 in the first quarter of 2006.
PDP membership stepped-up nicely from year end predominantly due to the additional auto assignment of members residing outside of our five state Medicare Advantage service area. As previously disclosed, we expanded our PDP nationally in 2007 and bid under the benchmarks in 29 of the 34 service areas. As of March 2007 we had PDP members in all 50 states.
With respect to the most recently available membership data, we continue to experience growth in membership. Our May payment report, which we received from CMS last week, reflected approximately 123,900 Medicare Advantage and 114,500 PDP members. While not exact, this report should serve as a pretty good proxy for our April financial statement Medicare Advantage membership.
Preliminary reports from our market show April gross enrollments, the first lock-in month of 2007, of over 2,000 members. Most of these members will be reflected in our June payment report along with updated disenrollments data for April.
On the PDP side we are quite encouraged by the steady uptick that Herb mentioned we are seeing in this membership. Commercial membership was 15,118 at March 31, 2007. As previously disclosed, we had a number of groups choose not to renew during the past year and as such we projected that our commercial business would represent less than 4% of our overall revenue in 2007. Commercial premiums represented 3.7% of total revenue for the first quarter.
Moving to revenue, total revenue in the first quarter was $356.3 million, an increase of $49.6 million or 16.2% versus the prior year first quarter. Contributing to this increase was a 7.2% increase in PM PM rates on our MA members coupled with a 16.7% membership growth. Of the rate increase 4.3% represented actual CMS receipts to date with the remaining 2.9% attributable to our accrual for risk adjustment payment for the 2007 plan year to be received in the August/September time frame.
As we have discussed with many of you, for the past two years we have received two retrospective risk payments from CMS, one in the August/September time frame representing the updating of risk scores for the current year based on the prior year dates of service. We refer to this piece as "for the year in the year". The second payment historically received later in the year represents the final settlement of the prior year's premiums.
Effective January 1, 2007 we commenced accrual of the "for the year in the year" component given that we now have available data on which to accrue estimates. We still continue to record the settlement for prior year premiums on an as received basis. This fact coupled with the seasonality of Part D will cause our annual earnings to be back end loaded in the second half of the year.
On in overall basis Medicare Advantage revenue was up 24.7% or $59.2 million to $298.8 million compared to $239.6 million in the prior year. Of this increase $8 million is attributable to risk payment accrual. PDP premiums were $33 million in the first quarter of 2007, an increase of $5.9 million or 21.6% versus the first quarter in 2006. The 47.6% increase in PDP membership offset by a 14.6% decline in PM PM rates is responsible for the increase.
Commercial revenue declined by $19 million or 58.9%, membership was the primary driver of the decline as PM PM rates in the quarter were relatively flat. Fee revenue increased 7.3% year-over-year and, finally, investment income was up approximately 2.5 times due to the significant increase in cash balances coupled with higher overall yields.
Moving to medical expense -- combined medical expense was $283.7 million, an increase of $36.3 million or 14.7% versus the prior year. With respect to the components in the relative metrics, MA medical expense was $242.6 million, an increase of $52.8 million or 27.8% versus the prior year. On a PM PM basis MA medical expenses were $675.76, an increase of $60.36 or 9.8% versus $615.40 in the prior year first quarter.
The MA MLR on a reported basis was 81.2% reflecting erosion of 190 basis points versus the prior year at 79.3. However, this comparison is somewhat apples and oranges as the current year MLR reflects the accrual of the risk payment whereas the prior year reported number does not. On an apples-to-apples basis the current year's 81.2% MLR would compare to 77.7% in the prior year reflecting erosion of 350 basis points, as Herb talked about in his comments.
Although inclusion of MA-PD will cause a seasonally high first-quarter MLR, the erosion in MLR year-over-year is primarily attributable to medical trends previously addressed by Herb. PDP MLR compares positively against the prior year coming in at 94.1% versus 112.8% in the prior year. Most of the improvement is more bookkeeping related versus trend and is due primarily to the inclusion of the $8 million plus of claims for nonmembers in the first quarter of last year.
The supplemental portion of our MA-PD benefits had a higher claims experience than we expected. We believe that the majority of this experience is timing related and as such should be recovered later in the year. We currently expect our annual Part D results to finish at or better than our current plan.
On SG&A, SG&A expenses were $47.5 million, an increase of $12.9 million or 37.3% versus the prior year. On a sequential basis SG&A declined by $1 million or slightly over 2%. As outlined in the press release, with the advent of the shortened selling season we expect a number of expense items related to sales, marketing and enrollment to be seasonally weighted to the first and fourth quarters. While we remain comfortable with annual target at or below 12% for SG&A, the quarterly distribution will tend to be more "U" shaped.
With respect to year-to-year comparisons we expected that first quarter to first quarter would be the most difficult. Our expectations are that as we progress through the remainder of 2007 the comparative increases will continue to decline and should reach a relatively flat comparison by the time we get to the fourth quarter. Beyond this point we expect to experience some operating leverage on these expenses.
Contributing to year-to-year increase were -- one, a 32% increase in headcount and the attendant costs; we added approximately 300 physicians between the end of the first quarter of 2006 and the first quarter of 2007. Of these approximately 25 to 30% represented new corporate positions. Incremental selling costs were approximately $2 million and incremental FAS 123R costs of about $1.3 million. The first quarter of 2006 only reflected two months post the IPO with fewer options outstanding.
On EBITDA, EBITDA results were relatively flat year-to-year. The incremental $10.1 million in medical margin and $3.2 million in investment income was offset by the increase of $12.9 million in SG&A. We expect a reversal of this trend over the remainder of the year due to -- one, Part D seasonality turning favorable; two, a slowing overall SG&A growth; and three, moderation in the Medicare Advantage MLR.
Lastly balance sheet and cash flow -- our balance sheet at March 31, 2007 reflected cash and cash equivalents of $473.9 million, $134.2 million of which represented the early receipt of the April payment from CMS. Unregulated cash was $81.2 million; days claims payable were consistent with the prior year's statistic at 36; operating cash flow after adjusting for the early receipt of the CMS payment in both periods was a use of $7.3 million in the current period versus a source of $22.4 million in the prior year. The decline in operating cash is primarily attributable to the timing of claim payments, much of which relates to the Part D business.
With respect to our 2007 guidance, we are reaffirming our previously released GAAP EPS guidance of $1.55 to $1.65. Key assumptions behind this guidance are -- year end membership in our MA business of 130,000 to 133,000; in our PDP business of 120,000 to 130,000; total revenue of $1.5 billion to $1.55 billion; MLRs for the MA business at or below 80%; for the PDP business, 82 to 87%; and a weighted average share count of 57.5 million shares. Operator, that concludes our prepared remarks. We can now open the line for questions.
Operator
(OPERATOR INSTRUCTIONS). Matthew Borsch, Goldman Sachs.
Matthew Borsch - Analyst
Hi, guys. Good morning. My first question is on the Medicare Advantage cost trend in the quarter and your outlook. Could you give us a little more information about how the cost trend pressure manifest itself this quarter relative to what your internal plan is? I mean, you don't give quarterly guidance, so it wasn't clear to us exactly what you were expecting for this quarter in terms of MA MCI. And then, while I recognize you're probably not giving guidance for second quarter, can you talk about sequentially how you would expect the MCR maybe to be up or down next quarter relative to the back half of the year and which items are driving that?
Herbert Fritch - Chairman, President, CEO
Let me take a shot at that, Matt. Normally I think we think the first quarter -- January and March are typically pretty bad months, they're long months, they're in the middle of winter and the flu season if you have one. This year we saw February remaining at pretty high levels instead of coming in favorably. Normally the second quarter, April and June are usually pretty good months, May not too bad, maybe a little high, and so we'd expect some improvement as we go to the second quarter.
Just from a seasonal perspective, the PD component of MA-PD certainly accents that. The second quarter on our supplemental benefit portion of that is the best seasonally just based by benefit design. So that should help the second quarter a bit. I don't know what more I can give you. The primary drivers we saw were high hospital admit rates during the first quarter, well above what we experienced in the first quarter a year ago.
Matthew Borsch - Analyst
And were --
Kevin McNamara - EVP, CFO, Treasurer
The other thing seasonally on that topic, Matt, that was in my remarks is that cash basis risk payment will cause -- I mean historically it's come in in the fourth quarter. We've heard some talk about it might come in the third quarter this year. We're not holding out hope on that. But when that hits you'll look better in whatever quarter we get the receipt of that.
Matthew Borsch - Analyst
Okay. And just on the revenue side, did the revenue per member come in as you expected? I think you guys had guided for effectively a 3% increase this year before the risks score adjusters if I'm right on that?
Kevin McNamara - EVP, CFO, Treasurer
Yes, if anything on the revenue side, Matt, we're not very our off from where we thought. The breakdown of what we thought, we thought we'd see 6 to 7 overall on an annual basis and we thought the split of that was 3 to 4 and the balance being in risk payments.
Matthew Borsch - Analyst
Okay. And maybe if I could ask another one here. You refer to the environment; I gather it's gotten more competitive, if I'm correct, relative to last year. Is that on both the HMO product or is that predominantly from new or ramped up private fee for service offerings?
Herbert Fritch - Chairman, President, CEO
Primarily the private fee for service I think; there's just a lot more of them out there and so you have more sales folks out there. In Texas we did compete with that Any, Any, Any plan and they were easily, of any of the private fee for service plans, the one that attracted the most attention. But if you've got enough competitors out there, even if they're only enrolling 10 or 20 a month in your membership it adds up after a while.
Kevin McNamara - EVP, CFO, Treasurer
Matt, We were pretty good, as I outlined, on the gross enrollment side and on the disenrollment side where we were flat in numbers, as you well imagine, on a statistic that's improvement in that you're disenrolling off a base. So that statistic sort of on an overall disenrollment for the first quarter and we think disenrollments are skewed to the open enrollment period.
Last year in percentage terms we disenrolled 12% of our beginning of the year membership; this year it's 10.7%. And if you look at it by market, Tennessee and Alabama improved a fair amount, Alabama being the prior year we had counties being exited. And Texas declined a little bit. The erosion got a little bit greater and that's where we saw the most players in the marketplace.
Matthew Borsch - Analyst
Okay. And just one last one if I could. Can you give us a range of expectation on the pretax profit margin you would expect on the Medicare PDP drug plan?
Kevin McNamara - EVP, CFO, Treasurer
We started the year, Matt, and we're not prepared to move off of that yet, but when we had our investor day back in the winter we talked about 6 to 10%. And we're still comfortable with that range. And as we see a little bit more we might move toward the high end of that.
Matthew Borsch - Analyst
Got it. Okay, thank you.
Operator
Brooks O'Neil, Dougherty & Company.
Brooks O'Neil - Analyst
Good morning, guys. I have a couple questions also. First, I'm just curious how -- you commented how the accrual impacted the Medicare Advantage MA MLR last year, but I assume that it also benefited the MLR this year. And if I'm not mistaken, it's probably pretty much a pretax profit contributor purely. Is that correct?
Kevin McNamara - EVP, CFO, Treasurer
I mean, I'm not sure I understand your question, Brooks. In my remarks, to do the apples-to-apples comparison and what you really need to do, and it's on our website, you can do the math, is the prior year first quarter had no risk payment in it, it was all recorded on a cash basis in the third quarter. So on our website what we actually do on the supplemental schedule out on our website is we pro forma the effect as if that risk payment had been pushed back over the first two quarters. If you wanted to do an apples-to-apples comparison that's the numbers to compare.
Brooks O'Neil - Analyst
I guess what I'm asking you -- to do the same math for this year you just take out $8 million out of the revenue side of the MA --?
Kevin McNamara - EVP, CFO, Treasurer
Well, you've got to take out $1.9 million out of claims expense. That's the risk sharing piece of it.
Brooks O'Neil - Analyst
Okay, --.
Kevin McNamara - EVP, CFO, Treasurer
That's the inverse calculation.
Brooks O'Neil - Analyst
$6.1 million net.
Kevin McNamara - EVP, CFO, Treasurer
$6.1 million and then you tax effect it and that would be the math.
Brooks O'Neil - Analyst
Okay. And that would have an equal effect on the pretax profit margin this quarter?
Kevin McNamara - EVP, CFO, Treasurer
That would fall, yes. $6.1 million falls to the pretax line and then you tax effect it.
Brooks O'Neil - Analyst
Okay. And then Herb, what do you see as the underlying medical cost trends in your key markets right now? Are they running about what the national averages are or do you see your cost trends a little bit higher because of the strong flu season this year?
Herbert Fritch - Chairman, President, CEO
Well, clearly in the first quarter they were a little higher, but it's almost totally attributable to the higher inpatient admission rate due to the flu.
Brooks O'Neil - Analyst
Sure. And you don't expect that to continue obviously.
Herbert Fritch - Chairman, President, CEO
No, we sure wouldn't expect it.
Brooks O'Neil - Analyst
Would you characterize this year's flu season as particularly strong in a historical context or just strong relative to last year?
Herbert Fritch - Chairman, President, CEO
Last year was minimal, so it's certainly strong relative to last year. I think it was a pretty strong flu season -- at least in our markets. It wasn't across the country, I think it was very regionalized and I think some of the strongest areas were in Alabama and Texas and Tennessee had a fairly strong season too.
Brooks O'Neil - Analyst
Sure. United has commented that they've kind of bungled their performance in Medicare Advantage this year. Do you think you benefited from that or is that not much of a factor in terms of your enrollment performance this quarter?
Herbert Fritch - Chairman, President, CEO
It maybe helped us a little bit in Alabama. Alabama is the one market where we compete against United and they did have some net loss of membership down there and us and others gained. But I don't think that's a major factor.
Brooks O'Neil - Analyst
Not a big factor. And then just quickly, you cut just by a little bit the top end of your revenue and membership guidance. Was there any big reason that you felt that was appropriate?
Herbert Fritch - Chairman, President, CEO
I think there are two components that we look at, one is growth during the wide-open open enrollment which essentially gets you grow through April 1st, and then the last is just estimating what you'll grow on the dual eligible lock-in periods. And I think now that we feel pretty certain we know where we ended we think it's going to be hard to hit the high end of our former range. We still feel pretty good that we'll be within the range.
Brooks O'Neil - Analyst
And you feel like you'll continue to pick up membership throughout the year as you did last year, right?
Herbert Fritch - Chairman, President, CEO
Yes.
Brooks O'Neil - Analyst
Okay, great. Thanks a lot.
Operator
Josh Raskin, Lehman Brothers.
Josh Raskin - Analyst
Good morning. Just want to follow-up on the flu comments. Just reviewing some of the CDC data last night and it looked as though the flu season was actually a little bit more mild I guess on a year-over-year basis -- now that's national so it's tough for me to know on a regional basis. But maybe if you could point us to a specific market for was it a miss timing, was the flu season just earlier last year? I guess I'm just trying to get a little more understanding there.
Herbert Fritch - Chairman, President, CEO
We've looked at the data on a state specific basis -- we're able to get the state-level data and it was pretty clear in Tennessee and Alabama statewide that it was both a stronger flu season and a longer one. Texas data was a little bit worse. We think the Houston market specifically in Texas was probably worse than the whole state. But the state data for Texas did indicate a slightly worse flu season this year than last.
Josh Raskin - Analyst
Okay, maybe I'll just drill down further on the CDC info. And then the second question, just going back to the competition and you talked about the private fee for service offering. I'm just curious about what you're seeing in terms of competitive tactics. Is it mostly just simply through benefit design or are there others paying different broker commission schedules, just any sort of color there would be great.
Herbert Fritch - Chairman, President, CEO
The way I look at it, with the exception of the Any, Any, Any plan, it wasn't that the benefit designs were unusual or out of the ordinary compared to what we expected. Generally we have better benefits than most of the private fee for service competitors. I think there is some pressure on broker commissions; there are a lot more people bidding for the same number of brokers effectively and we've certainly seen some upward pressure on commissions.
And I just attribute it, at the end of the day there are lots of sales folks out there and there's a percentage of membership that if they get in front of them they'll probably sell them and some of those are going to be our members. But it's not -- like I think the benefit offerings we have weren't competitive for the most part and it's just a lot of noise out in the market. And I think it minimizes the impact and your ability to generate leads because the seniors are kind of swamped with direct-mail and I think things kind of get lost.
Josh Raskin - Analyst
That Any, Any, Any plan, they're still in the penalty box, right? They're not enrolling any more, are they?
Herbert Fritch - Chairman, President, CEO
No, they're not. But they did enroll through the middle of March. And I think if you look at -- and I know you guys do -- if you look at the national data, they still grew a little bit through April 1st.
Josh Raskin - Analyst
Interesting, interesting. And then just lastly, you had made some comments on M&A. It sounded as though the pipeline is full and it sounded after the open enrollment period or I guess lock in and lock out has come and gone, you seem to think that maybe there's more opportunity shorter term now, is that fair to characterize what you said?
Herbert Fritch - Chairman, President, CEO
I think so. At least a lot of the people we've been talking to for the last two years simply haven't sold to anybody. And I do know there are plans that we're hoping to kind of hit critical mass and we're waiting to see where they ended open enrollment. So we think there will be some sales that will happen here through the remainder of the year and hopefully we can be a part of that.
Kevin McNamara - EVP, CFO, Treasurer
Josh, we're sort of encouraged. A lot of the people we've talked to over the last six to 12 months, as Herb indicated, haven't sold and a lot of the discussions as we've kept in touch have said talk to us after open enrollment is over.
Josh Raskin - Analyst
Okay, okay. So that's a good catalyst. Thank you.
Operator
Justin Lake, UBS.
Justin Lake - Analyst
Just a quick follow-up on the medical cost issue. Herb, you said your inpatient admits were up. Can you give us an idea of days per thousand -- or admissions per thousand?
Herbert Fritch - Chairman, President, CEO
We hardly even track days per thousand since most of our contracts are DRG based.
Justin Lake - Analyst
So maybe you can give me admissions per thousand then, Herb?
Herbert Fritch - Chairman, President, CEO
The admits -- in Texas and Alabama were probably up 30 to 40 per thousand, Texas has a lower rate to start with. But I think the difference we're seeing is in that magnitude.
Justin Lake - Analyst
Okay and on a percentage basis what doesn't come out to, Herb?
Herbert Fritch - Chairman, President, CEO
15%, 10 to 15%.
Justin Lake - Analyst
Okay and what percent -- if you were up 20 to 30 per thousand, how many of those are flu versus everything else?
Herbert Fritch - Chairman, President, CEO
You know, it's hard, they don't put flu as a diagnosis, they put related stuff like pneumonia and other things and you see some of that throughout the year. So it's kind of hard to pin that down, but he we think the flu is the major part of it.
Justin Lake - Analyst
Got it. And maybe you can just tell us how that's trended for the first quarter and what you see now. We're into May so maybe you have some early April data?
Herbert Fritch - Chairman, President, CEO
It's down a little bit in April but still not to the levels we had hoped.
Justin Lake - Analyst
Okay. Do you think that could be some just -- I know you guys have done solid work on the utilization management side? Do you think you're getting through a lot of the low hanging fruit there and maybe that we're just seeing some normalization here? Or do you think there's still a lot more to be done and this is just more seasonality than anything else?
Herbert Fritch - Chairman, President, CEO
I think it's fair to say we're through a lot of the low hanging fruit, but we still think it's driven by seasonality. The only other factor that we think might play a role in Texas specifically is we did some reorganization and pulled out a local resource into a corporate level and I think we've decided, at least for a while, to put that medical director back in the local market and let him focus there.
Justin Lake - Analyst
Got it. And then on the SG&A, is there anything that you can kind of give us? The SG&A was up a little bit higher than I think most of us expected. Was there anything you did to your commission structures there or -- that kind of drove that as far as the selling cost?
Kevin McNamara - EVP, CFO, Treasurer
No, the big mover of that, Justin, were the people adds. And that's why I'm pretty confident that as we go forward and you start bumping up against comparable headcounts the prior year or smaller overall increases it starts to normalize.
Justin Lake - Analyst
Got it. When did that -- if you added 300 members, Kevin -- or 300 members -- 300 employees, when did those come on so that the comps start to get easier?
Kevin McNamara - EVP, CFO, Treasurer
Most of them were for the most part there by the fourth quarter.
Justin Lake - Analyst
Okay, so by the --?
Kevin McNamara - EVP, CFO, Treasurer
We had a pretty active ramp up. As you can imagine, we went public in February, so the fourth quarter of '05 we added a fair amount of corporate resources. We had the initiatives going on in the Tennessee and Alabama markets where we were trying to get more of the docs organized into pods. And you had that really taken place over the first half to the first three quarters then you start to bump against normalized numbers.
Justin Lake - Analyst
Got it. And one last question just on the capital outlook. Can you just give us an update on where you are as far as cash at the parent, what you expect to be able to dividend up from the subs this year and where you kind of expect to end the year?
Kevin McNamara - EVP, CFO, Treasurer
Cash at the parent, Justin, today is $81.2 million and where we've gotten the Texas health plan is actually gotten to and we've had a number of meetings with DOI there and have a formula with Texas to fund up excess cash twice a year. And so we expect to get some money out of the Texas health plans.
Alabama, there was no dividend out of Alabama during the '06 plan year, albeit by the time we had smaller discussions with Alabama and by the time we got to the end of the year we had gotten statutory capital levels in Alabama where the regulators wanted us to be. So we're hopeful that in Alabama we can start to get some dividends out of there in '07, albeit we've got to have those discussions with the state.
And then lastly, Tennessee is actually the lagging entity and I think we'll have Tennessee a year behind Alabama in sort of getting them where the DOI would like us to be and probably be in a dividend situation with Tennessee in '08. You know, what will cash at the parent be at the end of the year is pretty hard to modulate. I think we'll comfortably be over a $100 million number and that would assume no stock buyback.
Justin Lake - Analyst
That was kind of the follow-up there, the stock. When do you make the decision, especially given the --? You've got a very, very clean balance sheet. When do you make these kinds of decisions as far as what the M&A pipeline looks like? I know you say it's a little more robust versus --?
Kevin McNamara - EVP, CFO, Treasurer
(multiple speakers) Where we feel like is May, June, early July we're sort of in the sweet spot of the racket on some of these discussions. And we'll go back to everybody to sort of see -- surely after open enrollment. And if we can't get reasonably comfortable that we can shake one of these targets lose, then we'll look at buybacks.
Justin Lake - Analyst
That's great. Thanks, guys.
Operator
Carl McDonald, CIBC.
Carl McDonald - Analyst
Kevin, just want to spend a minute on the drop in the days claims payable. So eight days to start, I know you had I think about three days in the fourth quarter number related to some CMS payable that I'm suspecting you made this quarter. Can you walk through the (multiple speakers)?
Kevin McNamara - EVP, CFO, Treasurer
Carl, let me answer -- I'll speak to days claims payable, but let me speak to overall -- I'm sure your next question out of that is going to be cash flow from operations.
Carl McDonald - Analyst
Sure.
Kevin McNamara - EVP, CFO, Treasurer
The answer is the same for both. And what you've got is when we went public and when we looked at our results sort of on an historical basis that was obviously pre Part D. And we intended to sit in the statistic of 35 to 40 days. That was a commercial business that was running off a little bit; the statistic was a combination of commercial and Medicare and a Medicare business that was growing. Part D has really caused that statistic on us to whipsaw.
And if you're looking at cash flow from operations -- and I'll come back to days claims payable -- you've got a swing in cash flow from operations year-to-year of almost $30 million, $29.7 million is actually the swing in year-to-year cash flow from operations. And driving that are really two main items and to a lesser extent a third one. On Part D, which is the main driver of it we've got an $18.3 million negative variance which results from favorable cash flow in 2006 as we initially set up all the payables related to Part D that actually shows up as a source as you set up Part D pharmacy payables of $14.5 million for the first time.
And then when you move from '05, when you move into '07, the first quarter of '07 you still have a large pharmacy payable, but that moves around a fair amount and it actually went down in the first quarter by $3.8 million. So you'd add those two together that's $18 million. And then the other is the commercial business, when you went from December to January you had the biggest drop we've ever seen in a single point the business halfed. So what you've actually got is you've got no money coming in on a lot of your members where you're paying claims runoff. So the actual commercial claims liability decline year-to-year by about $4 million to $5 million or approximately in half and the membership cut approximately in half.
And then lastly and much smaller is we actually made a $2 million tax payment in the first quarter of this year versus none last year. When you dial that into a days claims payable metric, and what I tried to do to look at is I basically tried to go underneath our numbers and look at our Medicare days claims payable which is our big book of business. The Medicare days claims payable in the first quarter of '06 sequentially declined by two days and in the first quarter of '07 it sequentially declined by three days. So you've got a one day movement in the sequential trend.
Carl McDonald - Analyst
Okay. And I guess a related question to that, can you give us a sense of what the IBNR component of medical claims payable looked like fourth quarter to first quarter of this year?
Herbert Fritch - Chairman, President, CEO
I'm not sure I understand what you're talking about, Carl.
Carl McDonald - Analyst
Sorry, the incurred but not reported component.
Kevin McNamara - EVP, CFO, Treasurer
Yes, but what do you mean fourth quarter to first quarter?
Carl McDonald - Analyst
From fourth quarter of '06 to first quarter of '07.
Kevin McNamara - EVP, CFO, Treasurer
Hang on, Carl. I've got that on a piece of paper somewhere. It's up 13.7% year-over-year, it's down about $3 million versus the end of the year off of a $75 million number. That's just Medicare.
Carl McDonald - Analyst
All right. And the explanation for why that would be down despite the increase in membership?
Herbert Fritch - Chairman, President, CEO
Well, that's just Medicare IBNR.
Unidentified Company Representative
The year-end IBNR has a tendency, because of the trending -- as Herb talked about a little bit earlier, we discussed that there's seasonality in a lot of these patterns. And seasonality in November and December is low and it has a tendency to create a little bit more conservative reserve which gets released in the first part of the quarter. And the combination of those two --
Kevin McNamara - EVP, CFO, Treasurer
Carl, it declined last year too. Last year it went from 63 down to 63.8.
Unidentified Company Representative
And it's just an event in terms of looking at the different patterns of claims and the different points and times of the year that creates that. The overall level of assumptions that went into it have basically not changed, so it's a timing issue in terms of when we see claims in and out with the seasonality patterns.
Herbert Fritch - Chairman, President, CEO
The one comment I'll make is we've had the benefit now and yesterday reviewed IBNR for April 30 with one month's run out, and it pretty well confirmed our March 31st reserve estimates.
Carl McDonald - Analyst
Okay, I can follow up on that. The other question I wanted to ask was that you mentioned in the press release some pressure on unit costs, was that strictly related to drugs or did you see that in other components as well?
Herbert Fritch - Chairman, President, CEO
I don't remember any particular issue with unit costs. Certainly there's some inflationary pressure, but I don't think anything unusual.
Carl McDonald - Analyst
Okay. And I guess the last question, as you look back to the fourth quarter where you saw some higher utilization -- it's just timing, you attributed it to the flu seen again this quarter -- can you just give us a sense of the process that you go through or what you look at to get comfortable that it really is flu that most likely won't recur as opposed to something else on an underlying basis? To the point that you made, when you get claims they don't necessarily categorize them as related (multiple speakers)
Herbert Fritch - Chairman, President, CEO
It's certainly not a perfect science. We're really focused on hospital admissions, we get our clinical folks to look at what type of admissions and what are respiratory related largely and that explains a great deal of the increase, not 100%, but a lot of it.
Carl McDonald - Analyst
Great, thanks.
Operator
Matt Perry, Wachovia Securities.
Matt Perry - Analyst
I guess I was maybe a little bit confused by the press release as well. When you talk about the higher medical costs and you attribute it partially to utilization which we now understand it seems to be almost exclusively related to the flu and then inflation trends. Can you just explain what you're referring to with that phrase?
Herbert Fritch - Chairman, President, CEO
You mean the inflation trend part of it?
Matt Perry - Analyst
Yes.
Herbert Fritch - Chairman, President, CEO
Well, most of our contracts tie to Medicare. So October 1st the hospital DRG levels go up with Medicare increases and other increases that CMS puts through. That's the biggest thing. Certainly pharmaceuticals go up. We haven't seen a lot of unit price pressure on the doctor side and most of the increases in cost on the physician side are not unit price increases, they're much more related to utilization and new procedures, new pharmaceuticals, that kind of thing.
Matt Perry - Analyst
I guess then just looking at its simply, that would just be inflation trends above the rate increase causing pressure on the MLR?
Herbert Fritch - Chairman, President, CEO
Inflation trends above the rate increase, that's one components. I don't think we think that's the major component by any means. But it is a component that causes your medical costs to go up.
Matt Perry - Analyst
Okay. And then investment income a little bit higher sequentially. Is this a good run rate to look at for the rest of the year other than maybe accounting for potential M&A or share buybacks?
Kevin McNamara - EVP, CFO, Treasurer
Matt, it's good until we do the -- at some point right now it's scheduled to be in July, we're hearing some overtures that that might not take place, but you'll get a very large drop in your cash balances when we have to settle the '06 Part D plan year. Right now that's scheduled for July and we're hearing some rumblings that that might move to the fourth quarter. That would be a $100 million plus outflow number out of our cash balance.
Matt Perry - Analyst
Okay. And then just final question, maybe big picture. You maintained your full year EPS guidance, but it looks to me like your PDP growth is a little better than expected and your PDP margin is a little better than expected. And you ticked down I guess the high end of your MA enrollment a little bit, but still expect the same MCR for the full year. I guess is there a bias you have, either positive or negative, on your outlook relative to what it was last quarter?
Kevin McNamara - EVP, CFO, Treasurer
I guess in terms of the overall guidance for the year and our feeling of getting to that guidance, PDP contributes to part of it, but what gives us a lot of comfort is embedded within the MA business is the MA-PD part of MA which we think trends pretty favorably running out. It causes you to get back. So you get there and if you wanted to say what's sort of the make-up and how have you traded the membership dollars for other parts of the P&L, you'd really trade them into the PDP product, not the PDP, Part D in total.
Herbert Fritch - Chairman, President, CEO
I think just putting it simply, the first quarter our MA MLRs were higher than we thought they'd be. We think that improves, but you don't make up the higher amount for the first quarter. We do think the PDP, what we saw in the first quarter both in terms of volume and margins looks favorable and roughly offsets the unfavorable MA results for the first quarter -- when you look at the full year.
Matt Perry - Analyst
Okay, thanks. That's all I had, guys.
Operator
Ladies and gentlemen, this does conclude the Q&A session of our conference call. Therefore Mr. Fritch, I'll turn the conference back over to you for any closing remarks.
Herbert Fritch - Chairman, President, CEO
Thanks for your interest and we'll look forward to next quarter's call.
Operator
Ladies and gentlemen, this does conclude our conference call for today. We do appreciate your participation and you may disconnect at this time.