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Operator
Good morning, and welcome to this HealthSpring conference call, to review its financial results for the second quarter and six months, ended June 30, 2007. The financial results were issued yesterday after the close of 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.healthspring.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 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. Please go ahead, sir.
Herbert Fritch - Chairman, President and CEO
Thank you, operator. Welcome to the HealthSpring Earnings Call for the second quarter of 2007. We are pleased to report that after a challenging start, we were able to finish the quarter on a positive note.
Several factors in June contributed to the strong finish for the quarter. We benefited from a return to historical admission levels in Texas, we experienced positive trends in our core middle Tennessee market, and we had favorable prior-period development in most markets.
During our June 13th call when we revised 2007 earnings guidance, we discussed the higher admission rates in Texas and higher than expected medical services expenses in most markets related to emergency room outpatient hospital other ancillary medical services. Numbers for June and July in Texas reflect a return to historical levels of hospital admissions. We are cautiously optimistic that these favorable levels will continue at least through the summer and fall.
As a result of this and other positive developments, we are adjusting our MLR guidance for the full year to 80.5% to 81.5% from prior guidance of 81% to 82% that we gave during our June call.
In Tennessee we received a boost from favorable in-the-year retrospective rate adjustments, and we believe that our physician engagement efforts, particularly in middle Tennessee, are beginning to show some positive results.
For the quarter, those positives were offset in part by the adverse trends for emergency room outpatient hospital and other ancillary services. In our core middle Tennessee market, we noticed a sharp increase in the number of services being provided in each emergency room visit, led by high-tech imaging and observation. The increases were not uniform by hospital. We believe that changes we have implemented to our review procedures will have an impact on some of these service expenses.
We also saw increases in utilization in our smaller, newer markets in Tennessee, which we recognize as a consistent trend as the enrolled population matures. We are also just starting to engage our key primary care physician groups in these markets, which should have a favorable impact on adverse utilization trends.
In Alabama, we believe most of the increase in medical trend is related to the increased utilization of services. We have made significant progress getting our physicians organized and engaged, and are actively working with them to tighten our referral processes and networks.
On the membership front, growth enrollment numbers were about where we expected, disenrollments are slightly higher than anticipated, which has resulted in a slightly lower net enrollment growth in the MAPD product. We now expect enrollment to come in between 128,000 and 131,000 at year end.
Our PDP enrollment continues to grow, and we now believe we'll finish the year toward the upper end of our prior guidance. We are raising our 2007 earnings per share guidance to $1.33 to $1.43 per share from the $1.20 to $1.35 that we gave in June.
During the quarter, we received a suggestion from one of our shareholders that we use the Company's strong balance sheet for a leverage-free capitalization. We agree that we should take advantage of the potential to put the Company's balance sheet to work in the best interest of the Company and its shareholders. Our current preference, however, is to use our balance sheet to enhance our buying power and acquire another Medicare health plan, or other strategic assets. We continue in active pursuit of acquisition targets, but also continue to consider a sizeable repurchase of shares if our M&A efforts are not successful.
On the political landscape, any potential for reductions to Medicare managed payments for 2009 and beyond remain difficult to predict. The initial S-CHIP proposal from the senate was favorable for our business, while the initial proposal from the House was unfavorable. We continue to feel as though there is likely to be some reduction in payments, but not as much as contained in the House proposal.
In the event that there are rate cuts, we believe that we are better positioned than many of our competitors to weather that negative impact, primarily because of the strength of our medical management model and physician engagement expertise.
To further emphasize this point, let me reiterate that we are exclusively focused on providing locally managed Medicare advantage coordinated care plans. Our plans feature full coordination of all members' care with an emphasis on wellness and prevention, established relationships with a network of doctors and hospitals, local customer service support and a carefully managed staff of sales representatives and brokers who undergo extensive training and periodic compliance reviews.
Our members receive extra benefits beyond those covered by traditional Medicare, including prescription drug coverage beyond the basic Part D, more preventative care and screening, no deductibles, predictable co-pays, and no or very low monthly premiums. We acknowledge that we, like our peers, are paid slightly more than traditional Medicare to provide these additional benefits. However, with our lack of private fee-for-service membership and a relatively small proportion of our membership in four counties, we should be less adversely affected than most MA plans by any changes to reimbursement that are ultimately passed by Congress.
With that, let me turn things over to Kevin to review the financial results in more detail.
Kevin McNamara - EVP and CFO
We reported second quarter diluted EPS of $16.2 million, or $0.28 per share, compared to a prior year reported EPS of $0.37. Significant factors impacting second quarter results were one, a 16.4% year over year and a 3.1% sequential growth in our Medicare Advantage membership. Two, a 34% year over year and a 6.7% sequential growth in our PDP membership. Three, a 5.9% 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, the previously discussed erosion in our Medicare Advantage MLRs. Five, a significant but moderating increase in SG&A expenses in the second quarter of 2007 compare with the prior year second quarter. Six, a charge of $4.5 million or $0.05 on a per-diluted-share basis after tax for the impairment of intangible assets, and seven, investment income of approximately two and a half times last year's second quarter.
Let me now spend a few minutes on each of these. On membership, we reported 125,267 Medicare Advantage, and 118,124 PDP members at the end of the second quarter, reflecting healthy growth on both a year-to-year and a sequential quarter basis.
We have included by-market membership detail within the body of the Earnings Release. On a year-to-date basis, we have increased our Medicare Advantage membership by 8.8%, and appear on track to achieve 10% to 15% annual organic membership growth.
PDP membership is up 33.1% year-to-date, which is significantly higher than our expectations at the start of the year. As you will recall, since the inception of the Part D program, our standalone PDP strategy has been relatively passive. That is, designed products targeted to the dual-eligible population, bid below benchmarks, and receive our share of this population through the auto-assignment process.
In 2006, we focused on our core MA markets and enrolled just under 89,000 PDP members. During 2007, we rolled out our PDP product nationally, with an expectation of receiving an additional 25,000 to 30,000 members through the reassignment of the core population in agents. We are quite pleased that our year-to-date growth has exceeded that goal, and we continue to grow this membership base.
As of CMS'd August payment report, our PDP membership stood at 125,231. MA membership reported in this report was 125,834, reflecting continued growth, albeit at a slower pace than PDP membership growth.
While these reported numbers vary slightly from our final membership used for accounting recognition purposes, due to a number of reconciling items, we have found that the CMS numbers serve as a good proxy for relative growth.
Commercial membership was 14,698 at June 30, 2007. Included in this membership count are approximately 1,250 HealthSpring employee plan members. 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 will represent 3% to 4% of our overall revenue in 2007. Commercial premiums represented 3.4% of total revenue for the second quarter.
Moving to revenue, total revenue in the second quarter was $368.2 million, an increase of $45.3 million or 14% versus the prior year second quarter. Medicare Advantage revenue, exclusive of PDP, was up 24.6% or $62.5 million to $316.9 million, compared to $254.4 million in the prior year. Contributing to this increase was a 5.9% increase in PM PM rates on our MA members, coupled with the 16.4% membership growth.
As we have previously discussed, for the past two years we have received two retrospective risk payments from CMS. One in the August/September time frame, which this year was received earlier than expected in June, representing the updating of risk scores for the current year. We refer to this piece as for-the-year, in-the-year.
Our results reflect the accrual of $17.8 million related to this payment. $8 million related to this payment was accrued in the first quarter, with the balance of $9.8 million being recorted in the second quarter.
In percentage terms, the for-the-year in-the-year component of retrospective risk payment represented an increase of 3% or $24.21 PM PM compared to our full year 2006 reported PM PM rate of $807.08. The second payment, historically received later in the year, represents the final settlement of the prior year's premiums. As noted in our release, we recently received preliminary notification from CMS regarding this retroactive adjustment. The total payment reflected in the notification was approximately $16.8 million, which is composed of $16.1 million for Medicare Advantage, including MAPD, and $700,000 for PDP.
We are currently reviewing and analyzing the preliminary retroactive rate adjustment information, and expect to recognize additional premium revenue in the third quarter ended September 30, 2007, when our analysis is expected to be completed.
A portion of these payments will be paid to providers under risk sharing arrangements. We expect that amounts related to Part D will be subject to risk corridors. I'll point out that our annual guidance includes both the in-year and prior year risk adjustment payments.
Our 2006 full year results included total retrospective risk adjustments of $18 million, $12.3 million for the first two quarters of the year, and $5.7 million related to the final 2005 settlement. Although the July report data is preliminary, a comparison based on currently available data shows that our 2007 full year results are expected to aggregate $33.9 million, $17.8 million for the first two quarters and $16.1 million related to the final 2006 settlement.
PDP premiums were $27.1 million in the second quarter of 2007, a decrease of $800,000 or 2.9% versus the second quarter in 2006. A decline in bid PM PM rates was offset substantially by the 34% increase in PDP membership.
I caution, however, that actual reported PM PM rates will vary substantially from this bid rate when risk corridor and other periodic adjustments under the Part D program are taken into account.
Commercial revenue declined by $19.7 million or 62%. Membership was a primary driver of the decline, compounded by a PM PM rate decline in the quarter of 3.9%. The PM PM decrease was the result of a shift in mix from less profitable groups with higher premiums, to more profitable groups with lower PM PM premiums.
Fee revenue was relatively flat quarter over quarter, and finally, investment income was up approximately 139% due to the significant increase in cash balances, coupled with higher overall yields.
Moving to medical expense, combined medical expense was $292.2 million, an increase of $41.4 million or 16.5% versus the prior year's quarter. With respect to the components and relative metrics, MA medical expense was $256.8 million, an increase of $54.6 million or 27% versus the comparable prior year quarter.
On a PM PM basis, MA medical expenses were $686.20, an increase of $50.33 or 7.9% versus $635.85 in the prior year second quarter. The MA MLR on a reported basis was 81%, reflecting erosion of 150 basis points, versus the prior year's 79.5. However, this comparison is somewhat apples and oranges, as the current year MLR reflects the accrual of the risk payment, whereas the prior year report number does not. On an apples to apples basis, the current year's 81% MLR would compare to 78% in the prior year, reflecting erosion of 300 basis points. The erosion of MLR year over year is primarily attributable to medical trends previously addressed by Herb.
PDP MLR deteriorated versus the prior year second quarter coming in at 91.7% versus 69% last year. The notably lower PDP MLR experience in the prior year second quarter included the impact of a $3.8 million reduction to medical expenses associated with recording receivable amounts owed the Company by other health plans under the CMS plan-to-plan reconciliation process.
On a year-to-date basis, our PDP MLR is relatively in line with that of the prior year, finishing at 93% versus the prior year's 90.6%. We still expect our PDP results and Part D results to improve during the second half of the year, and remain comfortable with our guidance for an annual PDP MLR in the range of 82% to 87%.
SG&A expenses were $43.7 million, an increase of $7.7 million or 21.4% versus the prior year. The increase in the current quarter was primarily the result of a 22% increase in head count and the attendant costs.
We added approximately 220 positions between the end of the 2006 second quarter and the second quarter of 2007. Of these, approximately 35% to 40% represented new corporate positions. It is significant to note that approximately 150 of the 220 position increase occurred in the last half of 2006. As such, we expect our relative year-to-year comparative increases to moderate in the second half.
On a year-to-date basis, SG&A expenses were 12.6% of revenue, and we remain comfortable with an annual target at or below 12% for SG&A. As noted in prior calls, we expect SG&A to be seasonally weighted to the first and fourth quarters, as a result of the shortened open enrollment period.
As referenced in our June press release, our results for the second quarter include a charge of $4.5 million or $0.05 on a per-diluted-share basis after tax for the impairment of intangible assets associated with commercial relationships in our Tennessee health plan. We took this charge as the result of our expectation that significant declines in commercial membership are likely as a the result of our decision during the second quarter to implement premium increases upon renewal for large group plans.
The carrying value of the related tangible asset was $0.9 million at quarter end, and will be amortized ratably over the nine month period ending March 31, 2008.
On balance sheet and cash flow -- Our balance sheet at June 30, 2007 reflected cash and cash equivalence of $540.4 million, $114.8 million of which represented the early receipt of the July payment from CMS, and approximately $100 million of which is expected to be paid to CMS to settle 2006 advance payments under Part D.
Unregulated cash was $78.3 million. Days claims payable increased to 39 or by three days compared to 36 at March 31, 2007, operating cash flow for the quarter was a source of $33.7 million or 2.1 times net income for the current quarter, versus the source of $25.4 million or 1.2 times net income in the prior year quarter.
On a year-to-date basis, cash flow from operations was $21.2 million or 0.7 times net income compared with $44.9 million or 1.6 times net income for the six months ended June 30, 2006. The main drivers of this variance were, one, a $22 million negative variance related to the timing of income tax payments. Two, a $10 million negative variance related to pharmacy payables, and our entry into the Part D business in 2006. Three, a $5.5 million negative variance related to the runoff of commercial medical claims on groups no longer covered in 2007, and four, an offsetting favorable variance of $13.5 million for changes in accounts receivable related to rebate receivables and CMS premiums. We expect annual cash flow from operations to exceed net income for the year.
With respect to our 2007 guidance, we are increasing our previous released GAAP EPS guidance to $1.33 to $1.43. Key assumptions behind this guidance are year-end membership on the MA side of 128,000 to 131,000 members, PDP membership approximate--of approximately 130,000 by year end, total revenue of $1.45 billion to $1.50 billion, MLRs on the MA side at 80.5% telephone 81%, on the PDP side at 82% to 87%, a weighted average share count of 57.4 million and a tax rate of 36%.
Operator, that concludes our prepared remarks, we can now open the line for questions.
Operator
Thank you, sir. (Operator instructions) We'll go first to Matthew Borsch of Goldman Sachs.
Matthew Borsch - Analyst
Yes, thank you. I guess, you know, obviously we were pleased to see the improvement relative to the outlook you provided in June. I guess the question is, you know, is there anything that you think can be done differently or you are doing differently to try to improve the visibility you have on the cost ratios in your book of business, recognizing that with a relatively small book, you are going to have much more volatility than larger companies would, but--
Herbert Fritch - Chairman, President and CEO
Boy, Matt, I don't know that there's anything we've thought about that could improve the visibility to some of these trends. The Texas admission rate trend was flat for over three years, and bounced up for a period of seven months, and has now returned back down. And I don't-- even in retrospect, I don't know how we would have predicted that.
Matthew Borsch - Analyst
Sure.
Herbert Fritch - Chairman, President and CEO
And some of these other trends, we keep looking at the data on a monthly basis and drilling down and trying to get our hands around them, but I don't know that, again, even in retrospect, that there's a lot we could do to predict or foresee them in advance.
Matthew Borsch - Analyst
Okay. You know, and I guess this is sort of a high level question, but it sort of begs the question of whether your book is too small as a public company, given the kind of volatility that you've been showing. Does it sort of force the question whether you should be looking to be part of a larger entity where your volatility would be reduced.
Herbert Fritch - Chairman, President and CEO
Fair question.
Matthew Borsch - Analyst
Okay, no, I've got-- sorry, I guess I can't expect you to--
Kevin McNamara - EVP and CFO
We're working on the adverse side of that, Matt. We're trying to make our book larger.
Matthew Borsch - Analyst
Right, right.
Kevin McNamara - EVP and CFO
To reduce that volatility.
Matthew Borsch - Analyst
Sure. But the flip side of that is that at your size, you can't have a very large management team, and if you do even a modest size acquisition, don't you think that's going to be a distraction from your operating focus?
Herbert Fritch - Chairman, President and CEO
I think it all depends. I mean, it depends a lot on the kind of acquisition, you know. We've categorized them broadly into broken plans and well-run plans, and I think certainly if it were a broken plan it would be a distraction. If it's a well-run plan that's operating pretty well and isn't going to take a lot of integration effort, that might be a different story.
Matthew Borsch - Analyst
Okay.
Kevin McNamara - EVP and CFO
The one thing, Matt, that I'll comment on, that I think we were much more vulnerable to and relates to sort of the timing of when we [went] public, is that the shift to risk-adjusted payment is very magnified on us, and is very significant to us.
Matthew Borsch - Analyst
Sure.
Kevin McNamara - EVP and CFO
So our ability to forecast and estimate those adjustments under risk adjustment is a very hard task, regardless of how big your staff is.
Matthew Borsch - Analyst
Okay. And last question, just on a different topic, if I can ask. As you look back, I mean maybe there isn't an explanation for the pickup in the Texas admissions other than the trigger of some flu season down there, unless you have one. But on the unit cost and utilization side, outpatient and ER, do you think you're seeing something there that relates to higher charges as hospitals seek to offset the evident increase in uninsured that they're seeing, or just-- I'm just curious if you have any new inferences on that.
Herbert Fritch - Chairman, President and CEO
You know, the one thing we've picked up, and it's specific to a handful of hospital systems, but it is of surprising magnitude in those systems is putting in-- it isn't an increase in unit prices, it's billing for additional services pretty routinely as a part of each visit. And I think that we do think there are some short-term opportunities, it isn't going to completely turn that trend around, but there are some short-term opportunities to tighten up our review processes and procedures, and our medical necessity checks on a few items with a few hospitals, and then that'll have not a small impact, I mean, that'll have a material impact. But that isn't in and of itself the entire trend, by any means.
Matthew Borsch - Analyst
Okay, I'll leave it at that, thanks guys.
Operator
Thank you, we'll go next to Josh Raskin of Lehman Brothers.
Josh Raskin - Analyst
Hi, thanks, good morning. Question relates to the retrospective rate payments, or I guess, from CMS, and Kevin, I appreciate you giving all of the details there. But I guess my question is, if I look at the aggregate payment last year of $18 million and I compare that to the aggregate payment of $34 million or $33.9 million expected this year, it just seems like a really big increase, and it looks like more of it, I guess, is on the final settlement for what would be the 2006 year. I'm just curious, what's driving that big increase and how do we think about the impact in 2008?
Herbert Fritch - Chairman, President and CEO
Well, I think it reflects a couple of things, Josh. I think one is, we expected a significant increase based on two things, the increase relates totally to the percentage of your payment that's based on a risk-adjusted system, that has increased over time, it's now 100%. But for example, that final payment was on 2006 where we increased to 75% from 50% in 2005. Membership is increased.
I think the other thing it reflects is some of our efforts with physicians to capture codes more accurately, and I think we're all learning about that as we go, and I think we're probably, we're getting better at it. I still think we have a ways to go.
Josh Raskin - Analyst
Okay. So in terms of ongoing, we should think about, obviously, the phase to go 100% that's complete, so that's not on-- that won't--
Kevin McNamara - EVP and CFO
No, but with next year's final, you'll get another pickup, Josh.
Herbert Fritch - Chairman, President and CEO
Yeah, I mean, this year was related, that last payment was related to 2006 when it was 75%, so you still get the pickup going to 100%.
Kevin McNamara - EVP and CFO
You'll get that in 2008.
Josh Raskin - Analyst
Okay.
Kevin McNamara - EVP and CFO
And then you'll be on a normalized basis.
Josh Raskin - Analyst
And theoretically, potential improvements in the claims submission from providers and other efforts you guys are making as well could increase it as well.
Herbert Fritch - Chairman, President and CEO
Right.
Josh Raskin - Analyst
Okay, second question, just on the membership. As we-- two questions on membership, I guess. First is, there's been a temporary suspension of private fee-for-service marketing by a couple of competitors in some of your markets, and I was wondering if you're seeing any positive impact from that. And then secondarily, how do we think about 2008 membership goals in terms of your market and how you think you guys will end up next year?
Herbert Fritch - Chairman, President and CEO
I think it's too early to tell on the suspension of private fee-for-service marketing. I don't think we were losing a ton of members to private fee-for-service anyway. The one thing that had been noted in the last two or three months on our disenrollment rates going up a little bit is the increase in special needs plans, especially chronic care special needs plans that continue to have open enrollments in the lock-in period.
I don't know that we've-- really, as a company, we haven't sat down to begin to budget for next year and 2008 enrollment, so I don't think I want to try and give any guidance on that right now.
Josh Raskin - Analyst
Okay, that's fair. Thanks.
Operator
Thank you, we'll go next to Charles Boorady at Citigroup.
Charles Boorady - Analyst
Thanks, good morning. How much of a retroactive risk adjustment do you expect in 2008 related to 2007? Is that something we can extrapolate from what you're getting this year related to 2006, or do your current year accruals already reflect the higher levels based on what you're getting from 2006?
Herbert Fritch - Chairman, President and CEO
Well, the, you know, Charles, the basic factors, if you did nothing different on the collection of codes, you'd go from a 75% risk adjustment to 100%, and then take any increase in membership between 2006 and 2007 into account. And so you'd expect probably, if membership is up 10% to 15% and the other factor is 33%, you could expect about a 50% increase.
Charles Boorady - Analyst
So the retro--
Herbert Fritch - Chairman, President and CEO
In that second payment. I mean, that's not-- that's the final settlement of-- that we'll receive in 2008 for 2007 revenues, not the-- the first payment is related just to the difference in risk scores between the July through June period, and the calendar year period.
Kevin McNamara - EVP and CFO
Hey Charles, the way we look at it, and when we will try very hard to attempt to extrapolate it, is-- and if you recall back at the start of the year, we spent a lot of time trying to figure out what our annual PM PM rate's going to be, the increase is going to be on an aggregate basis. And then we just try to distribute that across the year. And so when we went through last year and we started-- we were giving guidance at the start of the year, we thought that overall, our premiums would be up around 6%, of which we thought 3% or thereabouts would represent risk score improvement. And that's how we look at it. And we'll do that process again at the end of this year, and we try to have a little bit of intelligence of at least knowing what our January rates are when we get that report at the end of December.
Charles Boorady - Analyst
I guess I'm just trying to match-- I appreciate that, and I guess I'm just trying to match the revenues to the appropriate year, to the extent that you received a risk-adjusted payment that was related to 2006.
Herbert Fritch - Chairman, President and CEO
Of the two payments, Charles, that I talked about, of the $33.6 million, if it holds up, it will fall into this year, $17.8 million of that is-- relates to 2007, it's for-the-year in-the-year.
Charles Boorady - Analyst
But--
Herbert Fritch - Chairman, President and CEO
The final settlement payment relates to the prior year.
Charles Boorady - Analyst
Right, and so next year, you're saying you would get an additional final settlement payment related to 2007?
Herbert Fritch - Chairman, President and CEO
That's correct.
Charles Boorady - Analyst
And what I'm wondering is are you accruing something this year to reflect the payment that you would expect to get next year?
Herbert Fritch - Chairman, President and CEO
This year-- no, we're not
Charles Boorady - Analyst
Okay.
Herbert Fritch - Chairman, President and CEO
Not into our results for this year.
Charles Boorady - Analyst
Okay. And does the amount that you're receiving this year related to 2006, do you look at that as sort of a one-time recapture of money you should have gotten last year, or do you build that into your baseline assumption for your run rate this year?
Kevin McNamara - EVP and CFO
We try to build it in, Charles, but it's really pretty difficult to do.
Charles Boorady - Analyst
Okay.
Kevin McNamara - EVP and CFO
And as you can tell by the order of magnitude of the shift in the numbers, it's pretty hard to estimate that final settlement payment.
Charles Boorady - Analyst
And then after 2008, this-- does the retroactive payment actually go away, or--
Kevin McNamara - EVP and CFO
No, that process is ongoing forever, under the current legislation.
Charles Boorady - Analyst
Right.
Herbert Fritch - Chairman, President and CEO
It's part of the process, the difference is after 2008, risk payments will have been 100% of your payment, so the, you know, it's effectively a payment on all of your revenue, whereas in the past it's only been a payment on part of your revenue, as risk payments were getting phased in.
Charles Boorady - Analyst
And so going forward, would you be able to more reasonably predict an accrue during the year that those revenues relate to, rather than having to wait until you actually receive the payment a year later?
Herbert Fritch - Chairman, President and CEO
We're getting better and better at modeling that. I don't know that it's something that'll-- part of it is data that comes in on members that you haven't had for the entire period, and CMS adds data on Medicare fee-for-service claims that we don't have access to. So I don't think you'll ever get to a point where you can absolutely pin it down to a very small variance, very precisely.
Kevin McNamara - EVP and CFO
And, I mean, Charles, we're going to try, but the GAAP guidance is if you can reasonably estimate it, you attempt to estimate it and accrue it. And so we continually look at it.
Charles Boorady - Analyst
Can I just ask how many special need plan members you have right now, and what the rough difference is in the premium PM PMs that you're getting from those special need plan members versus other MA members?
Herbert Fritch - Chairman, President and CEO
You know, the last time I looked, I think we were in the low 20% range, maybe 22%, 23% for overall, mostly dual eligible members. We have added institutionalized NIT plans, but we've got minimal enrollment in them. I think on those dual members, we're getting somewhere in the order of about 30% more per member than a non-dual.
Charles Boorady - Analyst
Gotcha. And I recognize it's early to predict a rate, but based on the kind of enrollment growth you're seeing so far this year, can you reasonably estimate the top line for 2008? Anything you could tell us that would make your top line grow faster or slower organically based on what your plans are for MA in 2008?
Herbert Fritch - Chairman, President and CEO
Really, nothing at this point. We're still just starting our budgeting process, and I wouldn't want to speculate before we've seen that.
Charles Boorady - Analyst
Okay, thanks.
Operator
Thank you, we'll go next to Carl McDonald at CIBC.
Carl McDonald - Analyst
Good morning. I wanted to know if as you've gotten some more visibility into some of the trends driving costs higher in emergency and outpatient, are there any initiatives you've identified that you think you can help improve trend over the back half of the year?
Herbert Fritch - Chairman, President and CEO
Well, the main one, I think that there are some opportunities to look at specific systems, they're-- especially emergency room claims through a review process with some medical necessity, develop some guidelines on certain kinds of things that we've seen, just to, you know, we've seen an increase year over year from some hospital systems of ten to one in terms of the level that they're billing certain services for, and it just doesn't-- and it's of a magnitude of 20 to 1 compared to other hospital systems. So there are some things we think we can focus on, develop some guidelines for medical necessity on, that should be of an impact in the second half of the year.
Carl McDonald - Analyst
Okay, so do you think that they can be implemented second half as opposed to more of a 2008 impact?
Herbert Fritch - Chairman, President and CEO
Yes.
Carl McDonald - Analyst
Okay. And then the second question is, based on the revised cost base, given that Texas has improved, without giving specific loss ratio guidance for 2008, I think you mentioned last quarter that if costs had continued at the same level as they were last quarter into 2008, based on the bid that you had submitted, that would translate into something roughly like an 81%, 82% loss ratio. With the improvements you've recognized this quarter, where's the right level to think about in 2008?
Herbert Fritch - Chairman, President and CEO
Well, I think-- under the assumption that-- I would just, order of magnitude, say the issues in Texas were about half of our increase in loss ratio, the outpatient emergency room trends were the other half. Assuming that the Texas situation continues to look favorable, and we see the same rates that we have in June and July, about half of that difference should be corrected. So I wouldn't be as optimistic-- I think as I mentioned, I think we'll make a little progress on the ER and outpatient trends, but we think that's a little longer term fix. Hopefully we'll have that fixed in 2008 too, but I can't point to a historical experience that says we'll have it fixed today.
Carl McDonald - Analyst
Thank you.
Herbert Fritch - Chairman, President and CEO
I can say roughly half of that difference and variance should-- assuming Texas stays on track, would be corrected.
Carl McDonald - Analyst
Thanks a lot.
Operator
Thank you, we'll go to Brian Wright of Jefferies & Company.
Brian Wright - Analyst
Good morning. Given the July 27 timing of the retroactive payment for 2006, is it fair to say the sequential increase in medical claims payable was primarily a result of that?
Herbert Fritch - Chairman, President and CEO
Say that again, Brian? We didn't hear the second part of the question.
Brian Wright - Analyst
Yeah, I was just-- given the timing of that $16.8 million coming on July 27, I was just wondering whether that was the primary cause for the increase in medical claims payable in the sequentially, because some of that's going to go to providers, right?
Herbert Fritch - Chairman, President and CEO
No, that's actually a July event, and it actually will be August.
Brian Wright - Analyst
So it's-- okay.
Herbert Fritch - Chairman, President and CEO
So that's a disclosure item, is the way it's treated in our books right now.
Brian Wright - Analyst
So it wasn't indigenous, because it was received in July, you couldn't accrue it.
Herbert Fritch - Chairman, President and CEO
It got reflected in the June results.
Brian Wright - Analyst
Okay. Thank you.
Operator. Thank you, we'll go to Justin Lake of UBS.
Justin Lake - Analyst
Thank you. Just wanted to parse this risk adjustment just a little bit closer. What I'm thinking is, when I look at this-- you said the 2006 adjustment was about $16 million for Medicare Advantage?
Herbert Fritch - Chairman, President and CEO
Yes.
Kevin McNamara - EVP and CFO
That's right, Justin, $16.1.
Justin Lake - Analyst
And there was an additional $5 million for 2005?
Herbert Fritch - Chairman, President and CEO
No, the amount for 2005, which is in the fourth quarter of 2006, was $5.7 million.
Justin Lake - Analyst
Oh, okay, so that's--
Herbert Fritch - Chairman, President and CEO
That's the reference point.
Justin Lake - Analyst
Got it. So when you receive this money, I guess what I'm trying to figure out is that $16 million looks like it's a little more than 100 basis points to your MCR, yet you only took down your guidance by 50 basis points, and that's with the taxes. So I'm just wondering if you're vetting some further conservatism in the forward guidance on the MLR, or if this had already been implanted into that higher 81%, 82% number.
Herbert Fritch - Chairman, President and CEO
Our original guidance gave consideration to that final payment, and I'll just leave it at that.
Justin Lake - Analyst
Your original 2007 or your revised-- your first revision of 2007?
Herbert Fritch - Chairman, President and CEO
Both.
Justin Lake - Analyst
Okay so you, when you guided to 80% it was including the $16 million coming in?
Herbert Fritch - Chairman, President and CEO
It was including an estimate for what we thought the $16 million would be.
Justin Lake - Analyst
Right. So then, I guess, just getting back to one of the previous questions, I think Carl asked, you normally do vet your bid at 80% target MLR, is that correct?
Herbert Fritch - Chairman, President and CEO
Yes.
Justin Lake - Analyst
So then why would you guide to 80% if you knew you were going to get $16 million, wouldn't you guide to 79% then?
Herbert Fritch - Chairman, President and CEO
Well we-- in taking that 80% into account, we estimate what that payment will be, and that's included in our revenue assumption.
Justin Lake - Analyst
Ah, got it. You build that in-- so you've estimated that back from June of 2006 when you submitted the bid.
Herbert Fritch - Chairman, President and CEO
Right. Correct.
Justin Lake - Analyst
Got it. So when you submitted bids for this year, what did you-- for 2008, what did you do embed in as far as the as the assumption for what you're going to receive?
Kevin McNamara - EVP and CFO
You know, we haven't disclosed that specifically, but we do make an estimate of it based on the history every year, and that's just part of what we include in estimating what the PM PM revenue will be.
Justin Lake - Analyst
Got it. That's all I've got, thanks a lot.
Operator
Thank you, we'll go to Matt Perry with Wachovia Securities.
Matt Perry - Analyst
Hi, good morning. Just maybe a little further clarification on this, the retroactive 2006 risk adjustment payment. Did that end up being, or does it look like that $16.8 million, is that going to be larger than what you had been expecting?
Herbert Fritch - Chairman, President and CEO
The-- for the year in the (inaudible) was fairly in line with what we expected, the final settle up was a little bit larger than what we expected.
Matt Perry - Analyst
Okay. And then if I look at the increase in your guidance you've provided with the second quarter results versus the guidance you'd given a month and a half ago, there's a $0.10 or $0.12 increase if you exclude the charge. How much of that increase is related to the better cost trends you've seen in June and July, and how much is related to the retroactive payment from 2006?
Kevin McNamara - EVP and CFO
It considers both of them, Matt, and we'd rather not sort of put a marker on each one of them. But it considers both of those items.
Matt Perry - Analyst
Okay. And then is there any rule of thumb that we can use on thinking about how much of that total $16.8 million actually flows to your EBIT line and how much you share with providers?
Kevin McNamara - EVP and CFO
There is-- if you go to the schedule on our website where we restated prior year results, pro forma, to give effect for last year's, you'll see adjustments to both the revenue line and the medical expense line which reflects the sharing, and you won't miss by very far.
Matt Perry - Analyst
Okay.
Kevin McNamara - EVP and CFO
It's [in motion] a little bit, but it won't change that much.
Matt Perry - Analyst
And then, I mean, I just tried to do that this morning, does that look like 15% to 20%, or am I way off on that?
Herbert Fritch - Chairman, President and CEO
No, that's about right.
Matt Perry - Analyst
And then these emergency department and outpatient trends, do you think the fix for that involves any type of recontracting, or is it simply prior review of claims submission?
Kevin McNamara - EVP and CFO
In looking at it, the short term impact will be by review on the claims submission. Maybe you can get by with some recontracting, but that would be pretty spotty. I don't think you're going to get a wholesale change across markets and hospital systems and contracting. You know, you might find an opportunity here or there, but it's-- as soon as you set about recontracting, that's a three to six month process at best, and I don't know, I don't see a lot of opportunity for that.
Matt Perry - Analyst
Okay, and then just a final question related to that emergency department and outpatient. You're still not seeing any increase in visits or, you know, the number of visits by your members, are you?
Herbert Fritch - Chairman, President and CEO
Not in our mature markets. I think we'd-- as I mentioned, we did see some increase in utilization in out-- some of the markets that we entered in 2005, and this is about the timeframe when I think we typically would expect to start to see the population mature a bit and utilization increase somewhat.
Matt Perry - Analyst
Okay, thanks.
Operator
Thank you. (Operator instructions) And with no further questions at this time, I'd like to turn the conference back over to Mr. Herb Fritch for any additional or closing remarks.
Herbert Fritch - Chairman, President and CEO
Well, we'd just like to thank you for your interest and participation in the call, and we'll look forward to talking to you again in three months or so. Thanks.
Operator
Thank you for your participation, that does conclude today's conference. You may disconnect at this time.