信諾集團 (CI) 2007 Q4 法說會逐字稿

Good morning and welcome to this HealthSpring conference call to review its financial results for the fourth quarter and year ended December 31, 2007. 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 at 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 the 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 on 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 the presentation. These non-GAAP measures are reconciled to the most comparable GAAP measures in the press release on the Company's Website.

At this time, I'd like to turn the conference over to Mr. Herbert Fritch, Chairman, President and Chief Executive Officer of HealthSpring. Mr. Fritz, please go ahead, sir.

Thank you, operator. Welcome to HealthSpring's 2007 fourth quarter and year end earnings call. As previewed in our revised 2007 EPS guidance at last month's Investor Day, the close of the fourth quarter marked the end of a challenging year for HealthSpring. We finished 2007 with EPS of $1.51, which was within our recent guidance range but not where we wanted it to be when we started the year.

We are very encouraged by our prospects for 2008, however, given the addition of Leon Medical Center Health Plans' continued strong performance and our stand-alone PDP product and significant growth in PMPM revenue.

Kevin will go into detail regarding the quarter's and year's financial results. I'd like to first highlight for you significant developments in the past year and the positive momentum generated so far in 2008.

The 2007 fourth quarter began and was certainly highlighted by the consummation of the acquisition of Leon Medical Centers Health Plans on October 1. The acquisition of Leon provides a 25,000-plus member presence in the important South Florida Medicare market, a long-term partner with expertise in operating world-class medical centers and an appetite for further growth throughout Florida.

The integration of the Florida plan with our existing operations has gone exceedingly well. We learn more from Leon each day about the importance of consistent customer service to quality of care and member retention. In our increasingly competitive markets, the ability to reduce disenrollment levels has become a key part of our strategy, and Leon's disenrollment rates are about half the disenrollment rates experienced by the rest of our markets, in spite of being in the more competitive Miami market.

Furthermore, the acquisition put our strong balance sheet to work in a way that was immediately accretive to fourth-quarter earnings. Leon's operating and financial results will continue to be a significant contributor to our 2008 consolidated results.

As I mentioned, member retention is a key component of our member growth strategy. We ended 2007 with 11% organic membership growth in our existing markets. So far in 2008, membership is down about 1500, or 1%, as we expected it would be. County and product exits accounted for the loss of about 3400 members. In addition, disenrollments in our core Middle Tennessee market from our nonpreferred panel product, which reduced benefits from those previously provided, accounted for another 2100 members lost.

By contrast, our preferred network product in Tennessee saw over 95% retention and showed significant growth in new membership. We attributed these positive statistics for the preferred network to a combination of organic growth, member transfers from nonpreferred, primary care physicians, and some primary care physicians joining our more organized preferred delivery systems. We expect this latter physician transition trend to continue throughout 2008.

All in all, we are pleased with the results of our tiered network strategy for 2008. In total, the number of members in the nonpreferred network dropped by about a third, and on the remaining members we are collecting $55 more premium per month. As a result, although we are not expecting a similar need to reduce benefits for a meaningful portion of our membership in 2009, we would not rule out employing this tiered network strategy for selected smaller segments of membership in the future.

Medicare Advantage PMPM premium rates increased on a same-store basis by a modest 4% for the full-year 2007 over 2006. We are pleased with what appears to be a 7% to 8% increase in PMPM revenue for 2008 calculated on a similar basis. This increase is further enhanced by the relatively higher premium rates in South Florida, such that overall PMPM yields on the membership should be about 10% to 11% year-over-year.

A portion of this increase is also attributed to the risk-adjusted payment system reflecting a more mature population with more acute illnesses, which resulted in part from increased discipline in our risk coding training initiatives with our network physicians.

Our prototype LivingWell Health Center in Middle Tennessee began to hit its stride in 2007, ending the first full year of operation and the first open enrollment period in the fourth quarter. We are encouraged by the improvement in revenue through accurate capture of member risk (inaudible) costs through more intense medical management and quality of care metrics. We are especially pleased by the high member retention rates at the Center. Although slightly disappointed in the rate of new member sales, we were able to validate that once a member experiences the quality of care and comfort at the Center, he or she is very reluctant to leave.

Our challenge now is to focus on how to get more seniors to appreciate the higher levels of care available to them.

We recently opened a second LivingWell Health Center, this one near Mobile, Alabama, and plans are still on track to open a third center this year in downtown Houston.

We continue to be very pleased with the performance of our stand-alone PDP business. The MLRs and margins continue to be well within our expectations and the large increase in membership assigned on January 1, 2008 appears to have been retained, with March membership standing at 258,000 members up over January numbers.

Medical loss ratios stabilized on a normalized basis in the fourth quarter, more so than prior quarters in 2007. We were pleased that our MLR deterioration was less pronounced in the second half of 2007 compared to the first half. I'm also encouraged that the combined effects of the decision to drop some poorer performing counties, our tiered network strategy success and moving members to better-performing networks and the benefit of 2007's MLR deterioration reflected in 2008's increased premium rates should serve to somewhat stabilized our MLRs going forward. Moreover, the higher Florida premium rates and added geographic diversity, together with the growth in our PDP business, should allow us to better absorb adverse medical trends in a single market.

Finally, commenting on the political front, I believe our efforts in Washington in 2007 have been effective in distinguishing our Medicare Advantage coordinated care model from the less tightly managed private fee-for-service plans. Our commitment to stronger engagement of primary care physicians and a gatekeeper model is, I believe, the only way to manage costs over the long-term.

Additionally, we are keenly focused on compliance, particularly in our sales and marketing activities. In response to the increasing focus in Washington on regulating sales and marketing, we believe we have made considerable progress in improving our sales and marketing compliance.

As the political process unfolds throughout the year, we remain confident in the sustainability of our business model. All in all, we are encouraged by these developments as we look ahead at 2008.

With that, I'd like to turn things over to Kevin McNamara to review the fourth quarter and full year financial results.

Thanks, Herb. Prior to discussing our results, I would like to remind everyone of the update to our Q4 and 2007 full-year results that we provided during our January 2008 Investor day. As was referenced in our press release of January 23rd, during the fourth quarter of 2007, we began accruing for the final retroactive risk premium adjustment settlement payment. Previously, we referred to this payment as the in-the-year for-the-prior-year payment.

Prior to this quarter, we had recognized this payment upon notification from CMS, as we were unable to reasonably estimate the final settlement amounts. However, as our analysis capabilities have developed and we have more experience operating under the risk-adjusted payment system, we now feel we can reasonably estimate the amount of this final settlement payment.

Thus, our full-year 2007 financial results reflect two such final settlement amounts, one for the 2006 plan year, which was received during the year and recognized during the second quarter of 2007, and the second for the 2007 plan year, which was accrued during the fourth quarter and should be received during the calendar year 2008.

These amounts had the following impact on our financial results during the year. One, the 2006 benefit year final settlement payment positively impacted the 2007 second-quarter EPS by approximately $0.13. Two, the 2007 benefit year final settlement accrual positively impacted the 2007 fourth-quarter EPS by approximately $0.20.

Beginning in 2008, we will ratably accrue for the final settlement amount estimated for the 2008 plan year to be received in the late summer or early fall of 2009. Thus, for making apples-to-apples comparisons to our 2007 results in 2008 and beyond, one would need to adjust the 2007 financial results to eliminate the 2006 final settlement payment. Or, said another way, take $0.13 out of our 2007 earnings per share.

To that end, we have provided a supplemental schedule in our current earnings release which adjusts our premiums and medical costs related to all retroactive risk adjustments to allocate them to the appropriate period for the past eight quarters. As these premiums and associated medical costs are the only moving pieces, one would simply need to tax effect them to understand their net impact on our results.

During today's call, I will attempt to highlight the results on both the reported and on an an-adjusted basis, as reflected in the supplemental schedule in the press release.

Moving to the current quarter, we reported 2007 fourth-quarter net income of $26.2 million, or $0.46 per diluted share, compared to 2006 fourth-quarter EPS of $0.35. Adjusting both periods to reflect the final settlement payments and accruals in the periods in which the related initial premiums were recorded, the 2007 fourth-quarter net income would be $17.6 million, or $0.31 per diluted share, compared to prior-year adjusted EPS of $0.33.

Significant factors impacting the 2007 fourth-quarter results were the following. On the positive front were, one, the inclusion of our recently acquired Florida health plan, Leon Medical Centers Health Plans, beginning on October 1, which had 25,946 members at year end. Two, organic growth of 11% year-over-year and 1% sequentially in our Medicare Advantage membership.

Three, 57% year-over-year and 9% sequential growth in our PDP membership. Four, an increase in the PMPM rates for our Medicare Advantage members, partially offset by a 21% decline in the PMPM rates of our PDP members. For the full year, our adjusted Medicare Advantage rates, excluding Florida, were up 4% versus the prior year. And five, a positive impact on medical costs of $4.5 million from a member rewards program accrued in prior quarters which saw lower redemptions than expected.

On the negative side were, one, a significant year-over-year erosion in the MLR of our PDP business. Two, a sequential increase of $14.7 million, or $10.4 million excluding Florida, in SG&A expenses in the fourth quarter of 2007. Three, a 40 basis point increase in year-over-year as-adjusted Q4 MA MLRs. Four, a negative impact on medical costs of $2.7 million from the settlement of a 2006 claims dispute with our PBM. Five, declines in the profitability of our commercial business. And six, incremental amortization expense of $3.4 million and incremental interest expense of $7 million related to the acquisition of the LMC Health Plans.

Moving to the details on the membership front, we reported 153,197 Medicare Advantage members and 139,212 PDP members at the end of the fourth quarter, reflecting growth on both a year-to-year and sequential quarter basis. 25,946 of these MA members are from the inclusion of LMC Health Plans in our results.

As we've done in prior quarters, you can find by-market membership detail within the body of the earnings release.

On a year-to-date basis, our organic Medicare Advantage membership growth was 11%, at the low end of our targeted 10% to 15% growth expectations. PDP membership is up 57% year-over-year, which is significantly higher than our expectations at the start of the year. Our January 2008 PDP membership was approximately 254,000.

PDP membership is up significantly in 2008 due to the additional auto assignment of membership, primarily in the California and New York regions. MA membership reported in January was 151,671, down 1500 members versus year end. As Herb outlined, this decrease was not unexpected given network changes in our Tennessee market and exited counties in Alabama and Tennessee as of January 1 of '08.

Total revenue in the fourth quarter was $468.5 million, an increase of $132.8 million, or 40%, versus the prior-year fourth quarter. After adjusting the 2007 and 2006 amounts to reflect the retroactive risk payments in the appropriate period, Medicare Advantage revenue was up 47%, or $127.3 million, to $400.3 million compared to $273 million in the prior year. Contributing to this increase was the inclusion of the Florida operations in our 2007 fourth-quarter results, a 4% organic increase in adjusted MA premium PMPMs, and a 12% organic growth in MA member months.

For the full year, adjusted MA PMPMs were $859, an increase of 6%, or $45, year-over-year. Excluding the impact of Florida, adjusting MA premium PMPMs were up 4% over the 2006 year adjusted.

PDP premiums were $28.7 million in the fourth quarter of 2007, an increase of $4.9 million or 20% versus the fourth quarter of 2006. A 21% decline in PMPM rates was more than offset by the 57% increase in PDP membership. For the full year, PDP PMPMs were $80, a decrease of $20 or 20% versus 2006.

Fee revenue for the quarter decreased $0.7 million as compared to the fourth quarter of last year. For the full year, fee revenue declined $2 million versus 2006. The decrease in both periods was primarily the result of the termination of a management contract with an unrelated plan at the end of last year. In 2006, that contract accounted for $4.3 million of fee revenue during the year.

Investment income was up 47% or $1.9 million in the quarter due to the significant increase in cash balances. On a sequential basis, investment income was down $1 million or 14% as a result of declines in investment yields and a sequential reduction in cash balances due to the previously disclosed 2006 Part D settlement activity and the use of funds to acquire Leon Medical Centers Health Plans on October 1, 2007. Investment income in 2008 is expected to be less than it was in 2007 due to lower forecasted investment yields.

Before I discuss the details of our medical expenses, let me highlight a few significant items which impacted medical expenses in the quarter. First, the accrual of the 2007 final settlement payment has an impact on both MA premiums and medical costs. I will refer you to the supplemental schedule in the press release which highlights the calculations necessary to reflect premiums and medical expenses in the appropriate quarters of 2006 and 2007.

Second, our MA medical expense in the quarter was negatively impacted by a onetime settlement with our PBM of $2.7 million. This amount relates to disputed MA-PD pharmacy claims from 2006.

Third, we also began offering a rewards program in 2007 as part of our benefits package in select products. We have been accruing expenses for this program to the full potential exposure, as the program was new and we had no basis for forecasting utilization in the programs. Ultimately, we had much lower utilization in the program than expected and we reversed much of this expense during the fourth quarter, resulting in a positive impact of $4.5 million on our medical costs during the quarter.

The net impact of items 2 and 3 on the fourth quarter is favorable to our Medicare Advantage MLRs by 40 basis points. Eliminating these items from our results would yield a fourth-quarter adjusted MLR of 80.9%, or flat to the adjusted Q3 MLR. This compares to the supplemental schedule in the press release, which shows a 40 basis point sequential improvement.

Moving to the results, total medical expense in the quarter was $358.3 million, an increase of $104.4 million or 41% versus the prior year's quarter. As a reminder, the fourth quarter of 2007 results include the full quarter's impact of the operations of LMC Health Plans.

With respect to the components and the relative metrics, MA medical expense was $326 million, an increase of $107.2 million or 49% versus the comparable prior-year quarter. As adjusted, MA medical expense was $322.2 million, an increase of $103.4 million or 47% for the full year.

For the year, MA PMPMs were $692, an increase of $56 or 9% versus 2006. As adjusted, MA medical expense PMPM was $690, an increase of $52 or 8% versus the prior full year. And on an organic basis, MA medical cost PMPMs were 7% year-over-year -- were up 7% year-over-year.

The MA MLR on a reported basis was 78.1% for the current quarter versus the prior year's 79.6%. As adjusted, the current quarter's MLR was 80.5% versus 80.1% in the prior year fourth quarter, reflecting erosion of 40 basis points. For the year, the MA MLR was 79.7% in 2007 versus 78.8% in 2006. As adjusted, the MA MLR was 80.3%, an increase of 200 basis points from 2006 full year. Much of the increase was due to the previously disclosed higher utilization and medical cost trends experienced during the first six months of 2007.

PDP MLR in the 2007 fourth quarter increased to 78.7% versus the prior year's 45.8%. On a year-to-date basis, our PDP MLR also deteriorated, finishing at 86.3% versus the prior year's 73.4%. The increase in the MLR in both periods was expected due to a number of factors, including lower PDP PMPM this year per bid design and, as previously discussed, the 2007 results include a significant amount of retroactivity related to 2006 plan year settlements which were booked in 2007. This activity, if adjusted, would make the comparison between 2006 and 2007 PDP results more comparable.

All in all, despite being above our most recent guidance, the annual PDP MLR ended within the expected range of 85% to 90% we planned at the beginning of the year.

Our commercial medical expense in the quarter also came in higher than expected. The commercial MLR deteriorated 150 basis points year-to-year and over 1600 basis points sequentially to 93.3% in the 2007 fourth quarter. This resulted in a sequential negative impact of $1.8 million on our pretax results.

SG&A expenses for the quarter were $54.8 million, an increase of $6.3 million or 13% versus the prior year, primarily as a result of the inclusion of SG&A for the LMC Health Plans in the 2007 fourth quarter. Sequentially, SG&A expenses represented 11.7% of total revenue in the 2007 fourth quarter compared to 11.0% in the third quarter of 2007.

Excluding SG&A for the LMC Health Plans and the 2007 final risk payment premium accrual, SG&A expense for the fourth quarter of 2007 was higher than anticipated, representing 14% of total revenue. Excluding the LMC Health Plans, SG&A expenses on a sequential basis were up $10.4 million for the quarter, significantly higher than expected. Contributing to the sequential increase were approximately $4.3 million of advertising, printing and postage costs, $2 million of increased corporate costs, and $3.4 million in incremental personnel costs, including costs related to headcount additions. The excess above our expectations primarily relates to overall higher personnel, legal and professional service costs than expected.

Let me reiterate that we expect SG&A to remain seasonally weighted to the first and fourth quarters as a result of the marketing costs associated with shortened open enrollment period. As we have discussed previously with you, LMC Health Plans has historically operated at much lower SG&A expenses as a percentage of revenue. We continue to set an internal target at or below 11.5% of revenue for SG&A expenses in 2008.

Pretax income was negatively impacted by increases in depreciation and amortization and interest expense during the current quarter. Depreciation and amortization expense in the 2007 fourth quarter increased $4.6 million over the 2006 fourth quarter, primarily as a result of the amortization of the intangible assets identified in the acquisition of the LMC Health Plans in the 2007 fourth quarter.

Amortization expense in the current quarter exceeded our forecasted amount by approximately $550,000 as a result of higher-than-expected amortization on LMC Health Plans' intangibles and incremental amortization expense related to our existing intangible assets.

Interest expense in the 2007 fourth quarter increased $7 million over the 2006 fourth quarter as a result of the interest incurred on the Company's $300 million term credit facility entered into in the fourth quarter of 2007. Included in this increase is a onetime write-off of approximately $650,000 of deferred financing costs associated with our previous credit facility.

Moving to the balance sheet and cash flow, our balance sheet at December 31, 2007 reflected cash and cash equivalents of the $324.1 million. Unregulated cash was $36.2 million. In addition to $300 million of borrowings under our new term credit facility, we used unregulated cash on hand of approximately $56 million for the purchase of LMC Health Plans and related acquisition in debt-issue costs.

Accounts receivable are up, primarily as a result of our accruing the 2007 final risk payment. Days claims payable were 39 days at the end of 2007 compared with 44 at the end of 2006. Of the five-day decline year-over-year, three days are attributable to the addition of LMC Health Plans in our 2007 results. We will include a schedule detail and the components of the medical claims liability in our Form 10-K, which we intend to file later this month.

Finally, total debt outstanding was $296.3 million at year-end 2007. Operating cash flow for the quarter was a source of $17.8 million versus a source of $69.4 million in the prior-year fourth quarter. The 2006 operating cash flow amounts for both the quarter and the year included significant favorable amounts related to our entry into the Part D business.

On the quarter, operating cash flow was negatively impacted by the $27.1 million accrual of current year risk adjustment payments and by the use of $34.1 million to settle the 2006 Part D risk corridor with CMS, offset by approximately $8.6 million of net favorable cash flow variances related to changes in working capital accounts and non-cash expense items.

On a year-to-date basis, cash flow from operations was $80.2 million compared with $167.6 million for the year ended December 31, 2006. The main drivers of this variance were a $32.8 million use of cash related to the timing of settlements and receipts of Part D funds with CMS, a $31.1 million negative variance resulting primarily from the accrual of risk settlement premiums from CMS in the current year, and a $26.8 million negative variance in the timing of pharmacy claims payments and the run-out in the commercial claims.

Absent the favorable cash flows in 2006, due to the entry into the Part D business, the negative cash flow impact from 2006 Part D settlement payments to CMS, which were paid in 2007, and the accrual of risk adjustment payments in 2007, operating cash flows in both the quarter and annual periods would have been comparable relative to net income in each period.

Lastly on the balance sheet, I would like to comment briefly on our cash and investment portfolio. As of year-end, we had little to no direct exposure to subprime or other assets that could create the potential for write-downs or liquidity constraints. While we remain focused on maximizing the potential for investment return within the constraints of the regulated environment in which we operate, our primary concerns have always been minimizing risk and maintaining liquidity.

As to guidance, we are reiterating our prior operating and financial guidance and maintaining our diluted EPS forecasts of $1.75 to $1.90 for 2008.

Operator, that concludes our prepared remarks. We can now open the line for questions.

Thank you (OPERATOR INSTRUCTIONS) Charles Boorady with Citi.

Thanks. Good morning. First question on the flu season and the obvious sensitivity to not wanting lightning to strike twice in the same place, which I know we all learned a lesson from that last time around. And this year the flu season had a mild start, but is really picking up, especially in certain areas like Texas, Alabama, Tennessee.

And I'm wondering if you are seeing this yet in your results, and how and when we should see it impact your medical cost trends. And do you think that you've priced for this accordingly in light of the late start that it got, or did you anticipate the season would remain mild when you priced this year's business?

Well, Charles, I think you are kind of accurately describing the results have -- didn't hit much in the fourth quarter. We are seeing it in selected markets, the ones you mentioned.

Pricing really relates to a bid process, and the bid process was done back in the early part of last year, based on 2006 as a basis for projecting 2008. And all in all, I mean, this is just something we absorb. I think the good news this year is what we are seeing is with Leon down in South Florida, it gives us a little bit of a buffer to some of these other markets, because so far, I don't think the flu has hit at all down there.

How much of an impact can the flu or flu-related illnesses have on your medical cost trends? So what is the delta between a weak flu season and a strong flu season in terms of what it could do to your loss ratio?

Boy, I don't know. In a particular month, I think a strong flu season, you could see hospitalization trends up 10%, 15%; other medical costs up somewhat. You are probably looking at 10 points in the particular month that it would hit, on a medical loss ratio, if it really hits hard.

10 basis points on a loss ratio in a month --?

No, 10 points.

Oh, okay. So it is significant, and we saw the impact last year of that. Are there certain early warning signs that you can look for and is there a way to be more proactive this year than you were last year? I'm wondering if there are any lessons learned that you can apply to help mitigate the risk of a repeat.

The main thing we do -- and it's almost every year -- is try and immunize -- get the percentage of immunizations up and flu shots up. And we constantly are looking for more ways to effectively do that. But even that is somewhat hit and miss, just based on the effectiveness of the vaccine in a particular year.

Do you know what the vaccination rate is of your vulnerable population?

I think it is up -- it will end up, we think, in the 50% to 60% range this year.

Okay. And did you comment on just whether you have seen the pickup impact your results yet, or is it something you are hearing about but haven't yet seen it flow through your claims processing yet?

I think it started to hit in mid-January, as we look at -- the first indicator for us is we track almost on a daily basis the hospital admission rates. And we started to see those rise in the middle of January in some of these markets, and it is certainly still ongoing right now. I mean, the claims won't hit till a month or so later, although we do use, in setting our reserves and estimates of incurred claims, the hospital admission data.

So when you estimate your incurred claims for Q1, how will you take the information that you have today about a higher flu season into consideration? What might that mean for the range of EPS in the first quarter?

I don't know if I've got it down to what it will mean for the range, but essentially, as we set reserves at March 31, we will have fairly complete claim data on January, reasonably complete data on February. And we will use the admit rates for March to estimate March incurred claims.

Got it. Okay, thanks.

Josh Raskin with Lehman Brothers.

Hi. Thanks. Good morning. First question, just on your risk scores. You talked a little bit about the changes in reimbursement as an improvement in risk scores. Could you tell were your average risk scores in 2006 versus what they came in in 2007?

I don't have that off the top of my head. My sense is they were -- in aggregate, they are probably up 3% to 4% though. And it varies by market, based on the percentage of duals and that kind of stuff. The duals are quite a bit higher than the normal MA members.

And Herb, where does Leon fall in under that? Are they higher than typical or are they lower than your overall --?

You know, they are pretty close to average.

Okay, that is helpful. And then the PDP MLR in the fourth quarter obviously came in a little bit higher in the fourth quarter than the fourth quarter of '06. And it seemed as though it was a much smoother sort of progression of MCR. Is there a difference -- is there something changed in the PDP operation that's deflating that seasonality or were there some onetime risks in the fourth quarter?

Josh, I think what you've got to look at on the PDP, the quarterly seasonality is probably closer to right in 2007. In 2006, if you'll recall, you had a lot of plan-to-plan reconciliation and they were a lot of estimates related to that plan-to-plan reconciliation, positive adjustments that were reflected in Q4 of '06 that ultimately a lot of which developed unfavorably throughout '07, and that is reflected in the results. So I wouldn't read a lot into the quarterly-quarterly move in '07 versus '06.

You'd expect '08 to look more like '07, is what you're saying.

Yes.

Okay, got you. That is helpful. And then just a last question. The CMS data showed you guys down about 1000 through the February 1st data. And you guys talked about -- I know the 3400 in the counties that you exited and the nonpreferred networks. But could you give us a sense of gross sales? What are you guys seeing in terms of gross numbers on a monthly basis?

I don't remember those numbers, Herb.

Yes, I don't have that off the top of my head either. I know it was very strong during that open enrollment period, and we're still getting significant sales. But it is down somewhat, not unexpectedly, now in '08.

We don't have it with us, Josh. We will get back to you on that.

Maybe asked another way -- the retention numbers, how much have you seen in terms of disenrollment?

The retention numbers are relatively consistent year to year.

My sense is they would have been down except for that nonpreferred product driving some pretty high retention in our core Middle Tennessee market.

Okay, thanks very much.

Oppenheimer, Carl McDonald.

Great. Thank you. Just wanted to focus on the stand-alone PDP. If you could just go back and give a sense of what you think the true run rate loss ratio was in '07. I'm just trying to get a sense for how much of an improvement you need to see from '07 to get to the 81% to 83% guidance for 08.

I mean, I can tell you, Carl, sort of directionally. You had a lot of adjusting activity flowing through '07 that related to '06, only a couple of which we talked about discreetly. If you remember back in -- I can't remember whether it was the second or third quarter -- we disclosed when we adjusted the plan-to-plan settlement liability, that resulted in a negative impact of about $3.5 million to us. About half of that related to the PDP.

So if you adjust just for that -- and there was more activity than just that -- you'd get to about 85.5; that is about 120 basis points. And I wouldn't want to go a lot farther than that. I think the MLRs, if you did it truly on '07 activity, would be a fair amount lower than that. But I wouldn't want to pin down a discrete answer of what they would be. I mean, we view those -- the 81 to 83 is somewhere approximating flattish to maybe down a little over what '07 should have been.

Any comments or guidance you want to give ahead of the CMS release for the '09 rates on February 22nd, in terms of what that rate might look like?

You know, just from what I know, I think it's -- the underlying inflation in the Medicare business is probably about where it has been the last couple of years. I expect a little less of a negative adjustment for the budget neutrality piece. Still some negative adjustment, but that is declining to where it is not very large. So I mean, I think our expectation is that it would be up maybe a half a point or so from what last year's was.

And then just the last question is the Investor Day, you had guided first quarter to roughly flat earnings with where you were in 1Q '07. Are you still comfortable with that, knowing everything you know about medical costs and how things have turned out to this point?

We are not making any adjustments to our previous guidance.

Got it. Thank you.

Justin Lake with UBS Securities.

Thanks, good morning. Just a couple of questions. One on your special-needs products. Can you remind us if those are chronic SNPs or not?

Well, we've had since '05 the dual SNPs. We introduced this year some chronic SNPs and got them in all the markets with the exception of Florida.

Okay. And so for 2007 -- I'm sorry -- for 2008, can you tell us how much in your memberships should come from special-needs products?

Well, we are actually fairly optimistic that we will have some -- we think a lot of our growth will be in the Post-Lock-in period, given the negative impact from these exits and product strategies that we have talked about. We are expecting to start growing again in April. And we are hopeful that -- I think we've guided toward 5% to 10% kind of growth numbers, and we are expecting to see that -- a lot of it coming from the special-needs products in the last nine months of the year.

Okay. So we could kind of think about half or more coming from special-needs?

Yes, I think that is fair. I mean, some of it's certainly age-ins. But in addition to the age-ins, I think the special-needs products should have probably more than half the growth.

Can you tell us how the MLR trajectory looks on that when you bring them in -- the upfront type of costs of kind of stabilizing, especially a chronic patient, and how you think about the MLR year 1 in those products versus year 2 and year 3?

I don't know that we even at this point -- especially these are Chronic Care, special-needs products, and I'm not sure that I'd want to even tell you about that. We don't have any experience with the Chronic Care products. We think in general new membership tends to come in and seems to have a little more favorable loss ratio for a period. But I don't know how much that will turn out being the case with these Chronic Care products.

Okay. But do you feel comfortable that given that it's only going to be -- let's say it's 5% of your membership that comes from these new products, even if it has a higher MLR, it shouldn't really have much of an impact or you have kind of embedded that? It's just because one of your competitors has said that the special-needs product usually comes in at a very high MLR and then you'd work it down over time.

I don't think we've seen that. And you are right, it is a relatively small percentage of our membership. I don't think we've budgeted to have exceptionally high MLRs initially.

Got it. That is helpful. And just the last question on SG&A. Kevin, I think you've talked about the startup costs in a lot of these new markets and putting on a lot of salary expense in 2006 and into 2007. And we're just curious, given the guidance on the SG&A of 11.5% or better, how do you kind of look at that trajectory over 2008, as far as getting leverage off of that SG&A and that spending? And maybe even a little bit further down the road, where do you kind of target --?

Justin, we were pretty constant throughout '07 that we didn't think we would see a lot of leverage in '07, that we thought we were on the tail end of a lot of ramp-up costs. And what I fully expected, and what you saw in Q4, I expected by the time we got to Q4 we would have a flattening to slightly running down SG&A trend, which didn't happen; it turned the other way.

I feel better going into '08 about the ability to leverage. We feel pretty good about the 11.5. And we are going to challenge ourselves to try to break through that, as we've done in previous years. So the 11.5 is the new 12 for us, and I'm hoping a lot of the build and a lot of the expense load that we experienced in '06 and '07 is behind us.

That is very helpful. Thanks a lot.

Daryn Miller with Goldman Sachs.

Hi, good morning. The member rewards program that you offered in '07, are you offering that again in '08?

We are. It's cut back. And in '08, now we have experience, so we will accrue for some breakage in it.

Got you. And then in terms of your county and product exits, do you have a sense of -- as far as what the MLR, those lives were running at and how much MCR improvement you are going to see from that initiative in '08?

Well, clearly they were higher. I want to say they were probably on average close to 90%. And we are hoping it will certainly have a positive impact. But at this point, there's a lot of things going on in terms of which of the members actually drop versus the ones that stayed, and we are still analyzing that.

Would you expect that population to be at 80% then?

Yes, we would sure hope so.

Okay. And then one last question. Could you guys provide any color on your commission structure and how you account for that?

I think the accounting is just on a --

I mean, the accounting -- the commissions are loaded in at the effective date of the member. So, what you get in Q1, all of the sales that are taking place in the tail end of '07 related to open enrollment -- and we've got various relationships -- some of those we pay, some of those we don't pay. But to the extent we pay them, we put them in prepaid and it actually flows through on the effective date of the member.

So is then amortized over the course of the year, once the member goes active?

No, it's not amortized. It's front-end [bullet] expensed.

Okay. Great, thank you.

At this time, there appear to be no further questions in the queue.

Well, thanks. We look forward to talking to you again in another three months.

That does conclude our teleconference for today. We'd like to thank everyone for your participation and have a wonderful day.