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Operator
Good morning and welcome to the HealthSpring conference call to review its financial results for the third quarter and nine months ended September 30, 2008.
The financial results were issued earlier this morning.
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 which is 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 forward-looking statements based 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 the 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 and on the Company's website.
At this time I will turn the call over to Mr.
Herbert Fritch, Chairman, President and Chief Executive Officer of HealthSpring.
Please go ahead sir.
Herbert Fritch - Chairman, President, CEO
Thank you operator.
Welcome to our 2008 third-quarter conference call.
We are pleased to report another strong quarter leading us to improve our earnings guidance for the full year.
As expected our medical cost trends in our core Medicare Advantage business continued to improve during the quarter.
These improving cost cost trends and higher than anticipated premium increases have year-to-date MA MLR standing at 78.2% which gives us confidence in both maintaining our annual MA MLR guidance at or below 79% and increasing our 2008 earnings per share guidance range to $2.10 to $2.20 cents.
A slight disappointment for the quarter is the continuation of lower margins on our stand-alone PDP business.
We now understand the drug utilization patterns this year are different from our prior experience particularly in California and New York which were new regions for us in 2008 have led to a delayed turn to profitability in this line of business and higher MLR's than originally anticipated.
Accordingly we are revising our PDP MLR upward to 89% for the full year.
Fortunately, we anticipated these trends in our 2009 PDP bid submission which have resulted in being below the benchmarks in 24 of the 34 CMS PDP regions for 2009, seven less regions than we qualified for in 2008.
California and New York represent two of the seven regions we are now in that we won't be in as of January 1, 2009.
Based on recent data released to us by CMS we expect to have approximately 260,000 to 270,000 members in the 24 regions as of January 1, 2009 compared to the 272,469 members in 31 regions at quarter-end.
We also expect our MLR's and operating margins on these members will improve in 2009.
Kevin will speak to more details regarding our financial results in a moment.
As you are aware sales and marketing activities for annual open enrollment began October 1.
Each of our plans adapted sales and marketing activities to conform to recent legislation and CMS regulations.
And notwithstanding the current confusion by CMS and others on sales commissions structures, we are currently active in our enrollment efforts.
In that regard we feel our Medicare Advantage product suite and benefit structures are competitive in each of our respective markets.
On the membership growth from front, I am pleased to report that as of October 1, 2008 and following the quarter-end our Texas plant added almost 3000 members in the Rio Grande Valley in connection with our acquisition of a Medicare Advantage plant formally operated by the Valley Baptist Health System.
An added benefit to the acquisition was a long-term facilities contract we entered into with Valley Baptist.
We're hopeful that opportunities to make these types of acquisitions in our existing markets become more commonplace as smaller plant operators feel the increasing regulatory and financial burdens associated with the Medicare Advantage program.
In preparation for expected growth and more acquisition opportunities, we've recently taken steps to add depth to our executive management team.
I am pleased to report that effective tomorrow, Mike Mirt, who I have known and whose abilities I have respected for many years, will become our new President.
Mike is well-known as a skillful and results driven operator.
He has extensive experience in managed care executive positions, most recently as COO of AmeriChoice and before that as President of CIGNA Healthcare's Western region.
His reputation for integrity and team building should make this transition to be our President a smooth one.
I will of course continue as CEO but I gladly relinquish the President title to a man of Mike's caliber.
Also effective tomorrow, Sharad Mansukani, a current board member, will take on a part-time role as our Executive Vice President and Chief Strategy Officer.
In such capacity, Sharad will assist me in among other things developing new network relationships, expanding position engagement strategies, identifying and evaluating potential acquisitions and interacting with CMS, our primary regulator and our state and federal legislative constituencies.
Sharad is a former practicing physician and Senior Adviser to CMS.
He understands our culture and our mission and believes our model of aligned incentives for physicians can be a model for meaningful healthcare reform that addresses both cost and quality improvement.
We welcome both men aboard.
We're also pleased at the steady progress of our expanding innovative delivery system models.
During the third quarter we opened our third advanced medical home practice model in Houston.
Our initial prototype in Gallatin, TN continues to evolve and expand.
We're now adding on-site pharmacy capabilities to this facility.
The progressive physician practice staffing this site has been active in our Partnership for Quality Care program for over four years now.
During that time their compliance with evidence-based guidelines has increased from the 30 to 40% range typically seen in fee-for-service primary care practices to the 80 to 90% range.
The improvement in chronic care management and additional preventive medical services has resulted in better care at a lower overall cost.
This group's MLR performance continues to be one of the best in our network.
As we have said before, this is a focus area for us and we have continued to make progress expanding the Partnership for Quality program and it should effectively cover about 35% for membership by year-end and over 50% next year.
The success of these models has caught the attention of several large medical groups and these groups are driving our expansion plans for 2009 and 2010.
We continue to believe that we're well-positioned for the future.
We think Medicare Advantage rates begin to trend toward parity with fee-for-service costs in 2011 irrespective of which candidate wins the presidency.
We believe that smaller more tightly managed networks like ours will be the winners in this new environment.
With that, I'd like to turn the call over to Kevin.
Kevin McNamara - EVP, CFO, Treasurer
Thanks Herb.
We were quite pleased with our performance including our reported quarterly net income of $29.4 million or $0.53 cents per share, an increase of 36% compared to the 2007 third quarter EPS of $0.39.
Significant factors having a positive impact on 2008 third quarter were increases in the PMPM rates for our Medicare Advantage and PDP members, year-over-year improvement in our MA including MAPD MLR and the inclusion of our Florida operations, Leon Medical Center's Health Plans which we acquired on October 1, 2007.
On the negative side, while pleased with our 113% increase in our PDP membership, an MLR erosion of 485 basis points year-over-year caused a negative comparison to the prior year contribution of our PDP business.
Moving to the specifics, we reported 156,305 Medicare Advantage members at the end of the third quarter reflecting year-to-year growth of 23%.
27,204 or over 90% of this growth is from the inclusion of LMC health plans in our results.
Growth during the lock-in period this year has been better than we expected.
During the third quarter we added approximately 2350 new members as compared to 1350 during the third quarter of 2007.
As Herb mentioned during his remarks, the combination of better lock-in results and the acquisition of approximately 3000 members in Texas leads us to now guide to 161,000 to 162,000 MA members at year-end.
PDP membership of 272,469 is up 113% year-to-date.
We have updated our guidance to assume year-ended PDP membership of approximately 280,000.
Total revenue in the second quarter was $527.7 million, an increase of $161.4 million or 44% versus the prior year third quarter.
Medicare Advantage revenue was up 45% or $140.6 million to $455.8 million compared to $315.2 million in the prior year.
Primary drivers of this increase were an increase in the MA premiums PMPM and the inclusion of the Florida operation in our 2008 results.
For the three months MA premiums PMPM increased 12% year-over-year exclusive of the LMC Health Plans' results.
For the nine months ended September 30, 2008 as reported MA premiums PMPM were $1011, an increase of 19% year-over-year or 14% when you exclude Florida.
PDP premiums were $59.1 million in the third quarter of 2008, an increase of $32.2 million or 119% versus the third quarter of 2007.
This increase was driven by the 113% increase in PDP membership and PDP premiums which increased 1% year-over-year.
Year-to-date PDP premiums PMPM are $88, an increase of 6% over 2007.
Please remember that quarter to quarter and year-to-year percentage changes in PDP PMPMs are significantly affected by risk corridor adjustments.
Fee revenue for the quarter increased $1.5 million as compared to the third quarter of last year.
The increase was primarily the result of higher premiums and management fees associated with IPAs that have come online since last year.
Investment income was down 44% or $3 million in the quarter due to the significant decrease in investment yields.
Most of our cash investments are held in floating rate instruments so this decline is not expected.
We expect investment income will continue to decline in the fourth quarter of 2008 due to the refunding of $111.5 million in final 2007 Part D settlements.
Total metal medical expense in the quarter was $411.7 million, an increase of $123.4 million or 43% versus the prior year's quarter.
With respect to the components and the relative metrics, MA medical expense was $361.1 million, an increase of $102.8 million or 40% versus the comparable prior year quarter.
MA medical expense PMPM was up 14% over 2007 to $774.
Of this increase, 7% is attributable to the inclusion of LMC Health Plans and 7% relates to cost trends in the rest of our health plans.
The MA MLR was 79.2% for the current quarter versus the prior year's 81.9%.
The improvement year-to-year was primarily attributable to increases in premiums PMPM [and excessive] medical trends.
For the nine months ended September 30, 2008 the MA MLR was 78.2% as compared to 80.5% in 2007.
Adjusting for out of period risk adjustment, the MA MLR was essentially flat year-over-year at 79.2%.
PDP MLR in the 2008 third quarter increased to 85.1% versus the year ago 80.2%.
Year-to-date the PDP MLR was 93.3% versus 88.8% in 2007.
As Herb mentioned, our 2008 results for the PDP business has been disappointing.
The higher medical trends in this line of business have continued into the third quarter and we do not expect them to improve during the fourth quarter relative to last year.
A great deal of this increased cost is coming from our membership in California and New York.
These are the two regions where we picked up the bulk of our auto-assigned measurement in 2008.
We're once again increasing our PDP MLR guidance to approximately 89%.
While we still expect incremental profitability from our PDP business in calendar year 2008 versus 2007, the erosion in margins will cause this portion of our business to fall well short of our plan as outlined at the beginning of the year.
Fortunately outperformance in the rest of our business has made up for this miss.
While the publishing of the results of the 2009 bid results, we expect that the loss of these higher cost regions and the additional membership in existing regions should help to improve the profitability of the PDP business in 2009.
SG&A expenses for the quarter were $58.6 million, an increase of $18.5 million up 46% versus the prior year.
SG&A expense as a percentage of revenue came in at 11% of total revenue in the 2008 third quarter compared to 11% in the third quarter of 2007.
Year-to-date SG&A as a percentage of revenue stands at 10.8%.
On a sequential basis, SG&A expense increased $2.7 million or 5%.
The primary driver of this increase was activities associated with preparation for the 2009 open enrollment marketing period which began in October.
We continue to expect SG&A to remain seasonally weighted to the first and fourth quarters as a result of marketing and commission costs associated with the limited open enrollment period.
Moving to items below the EBITDA line, depreciation and amortization expense in the 2008 third quarter increased $4 million versus the 2007 third quarter primarily as a result of amortization expense associated with the LMC Health Plans acquisition.
Interest expense in the 2008 third quarter increased $4.4 million over the 2007 third 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.
For the first three quarters of 2008, the decline in interest income and interest expense has been relatively consistent and thus we have been somewhat hedged in an unplanned way.
Given the recent movement in LIBOR, we do not expect this phenomenon to continue.
Thus in October we entered into in interest rate swap transaction for $100 million of our outstanding debt.
We felt that the predictability of the interest cost on a sizable portion of fixed-rate debt was wise in light of the current credit markets.
We fixed this portion of our debt in an effective all-in interest cost of approximately 6.5%.
During the quarter, there was no share repurchase activity.
On a year-to-date basis we have repurchased 1.6 million shares for $28.4 million.
We still have approximately $21.6 million remaining in our current repurchase authorization.
Moving to the balance sheet and cash flow, as we mentioned to you during our second quarter earnings call, we received sizable cash payments from CMS for 2007 retro risk adjustment payments during the third quarter.
Thus as of September 30, 2008 our balance sheet reflects a significant increase in our cash and cash equivalents to $427.2 million versus the $304.7 million at June 30, 2008.
Our cash balance should decline in the fourth quarter due to the Part D settlement activity highlighted in our press release.
Unregulated cash at quarter-end was $58 million.
We had $275.3 million of borrowings under our long-term credit facility at September 30.
Accounts receivable are down significantly as a result of our receiving the risk payments.
Days claims payable were 40 days at the end of the quarter, flat to the second quarter and up two days from 38 at the end of 2007 third quarter.
Given the current market environment, I thought it would be helpful to briefly discuss our investment portfolio.
The relative short duration of the liabilities in our business has caused us to be much more focused on liquidity than on investment yields.
In addition, the regulatory environment in the states in which we operate as well as our own self-imposed investment policy restrictions have kept us in relatively safe investment vehicles.
We've conducted a thorough review of all of our investments and believe that our potential exposure to investment impairments is fairly limited.
Our portfolio is primarily comprised of money markets, bank CDs and overnight sweeps and high-quality corporate and municipal bonds.
We're constantly monitoring the trading values and credit ratings of our assets including discussions with our investment managers as to the quality of the underlying assets in which our money markets are invested.
We have avoided impairments thus far and hope to in the future.
Moving to the cash flow statement, operating cash flow for the nine months was a source of $152.6 million versus a source of $62.3 million in the prior year.
We're pleased that operating cash flow year-to-date now exceeds net income at 1.7 times.
As to guidance, based on what we see as a solid third quarter, we're increasing our earnings per share guidance to $2.10 to $2.20.
Our health plans continue to focus a great deal of their efforts on risk adjustment submissions and we anticipate substantial additional submissions to CMS in the fourth quarter.
Because of the potential impact of such submissions on premium revenue, we're maintaining a $0.10 range on our guidance for the year.
The major components of this updated guidance are year-ending MA membership of 161,000 to 162,000, PDP membership of approximately 280,000 at year-end, total revenues of 2.1 to $2.2 billion, MA MLR at or below 79% for the year on an as-reported basis, a PDP MLR of approximately 89% for the year and average fully diluted share count of 56.2 million shares.
This assumes no additional share repurchases.
As has been our practice since going public in 2006, we plan to issue our 2009 guidance early next year.
Preliminary results from the annual open enrollment period and January 1 PMPM rates significantly influence our annual projections.
As such we believe a review of our January plan payment report received in late December is prudent prior to issuing annual guidance.
Operator, that concludes our prepared remarks.
We can now open the lines for questions.
Operator
(Operator Instructions) Daryn Miller, Goldman Sachs.
Daryn Miller - Analyst
Question -- if we were to look at the PDP MLR for the year and back out California and New York, do we have a sense of what that would look like?
Herbert Fritch - Chairman, President, CEO
We don't have that off the top of our heads.
We could get that data but it would take a little work.
Daryn Miller - Analyst
Herb, kind of a broader question.
As we look forward and we see the Medicare rates trending towards 100% of fee for service, can you give a sense if you were to maintain your benefit structure, what would the MLR look like or maybe another way to look at that is if you were to maintain your margin on your Medicare product, how much additional benefit if any would be provided versus the traditional Medicare product?
Herbert Fritch - Chairman, President, CEO
Well, we would still have room to provide additional benefits.
We think that that move to parity isn't going to happen in a single year and that is kind of the open question is how quickly that would happen.
But our best guess would be probably over three years.
We think that would mean 2 to 3% for us.
We think our exposure is a little less probably than most plans but two to three point revenue production compared to what it would otherwise be.
And actually I don't think we expect a reduction in revenue but the increases will be two to three points less.
And we think we can kind of manage through that kind of a trending in revenues and still -- my expectation would be benefits are not going to be as rich as they are today.
But likely that will eliminate a number of other competitors and it won't be nearly as competitive a marketplace which is kind of the environment we started in pre-MMA.
Daryn Miller - Analyst
Could you provide a sense as far as where is HealthSpring in relation to fee for service?
I know when you look at the industry as a whole, Medicare Advantage is maybe 117% or so.
Where is HealthSpring?
And then if you were to go towards the 100%, can you quantify how much incremental benefit there is as far as -- or how much incremental benefit you would be able to offer versus traditional?
Herbert Fritch - Chairman, President, CEO
HealthSpring, I think it's closer to around 110%.
So we don't have 17 points to have to make up.
And the last time that I checked, I think our bids were coming in at about -- before benefit adjustments something like 82% of fee for service.
So I mean I think we would still have some room assuming we continue to maintain that.
Daryn Miller - Analyst
Great.
One last question, the acquisition you made.
How much did you pay for those 3000 (inaudible)
Herbert Fritch - Chairman, President, CEO
It amounted to about --
Kevin McNamara - EVP, CFO, Treasurer
We paid approximately $7.2 million, so it was a little less than $2500 per member.
Operator
Josh (inaudible) Barclays Capital.
Unidentified Participant
Just on the PDP, I think Kevin in your comments you mentioned that you expected improvement in the PDP MLR and I think we have heard sort of two updates since the bids were released where the costs are continuing to come in higher.
So is this just a factor of we priced ourselves out of the troubled markets or was there some recognition of this cost sort of earlier?
I'm just trying to figure out how that MLR is going to improve next year.
Herbert Fritch - Chairman, President, CEO
Yes, it's a little bit of both of those.
Not getting under the benchmarks in California and New York will help.
But also when we did the bids, our experience had been better than we had seen in other players in this business.
And when we did our bids, we gave consideration to what others were seeing.
So some of that was factored in too.
So it's a little bit of both.
Daryn Miller - Analyst
Okay, so maybe (inaudible) and then I guess just -- the second question is just in terms of the competition, Herb, you suggested that if we see reimbursement pressures, that may help eliminate some of the competition.
But what are you seeing now?
One of the bigger competitors mentioned that the market had become sort of very difficult.
They had a growth outlook from next year that was a little bit lower than they had previously expected.
I'm curious are you seeing anything maybe specifically in Florida or any of your markets at this point?
Herbert Fritch - Chairman, President, CEO
Nothing, we feel -- I suspect, although I don't know exactly who you're referring to -- but I mean that's certainly the case for the private fee-for-service guys.
We don't have any of that.
But I mean we feel we are probably at least as good off and in most cases better in terms of our relative benefits this year compared to -- well for 2009 compared to 2008.
Unidentified Participant
Okay, so I don't wnat to put words in your mouth but it sounds like you feel more confident about the growth next year than what you have seen this year?
Herbert Fritch - Chairman, President, CEO
We think we're really well-positioned.
We think this economy helps us in that people will put greater emphasis given their reduction in retirement accounts on the savings that an MA plan can provide.
The one negative -- and we really -- remains to be seen where it nets out.
The one negative is really the new rules that CMS has imposed is going to limit somewhat our ability to generate as many leads.
That also works for the competition so we would expect our disenrollment rates to be favorably impacted at the same time.
Kevin McNamara - EVP, CFO, Treasurer
Relative to ourselves, Josh, we don't have in '09 which we had a fair amount of in '08 is county exits iAnd significant product changes in markets.
Unidentified Participant
Right, okay.
So you'll get sort of that benefit.
I know that was a first quarter (inaudible) sorry.
Just last question -- why no repurchases in the quarter?
Herbert Fritch - Chairman, President, CEO
I mean, Josh, we don't have a 10b5 plan out there.
So we have been repurchasing when the windows were open and if you go back and look at sort of trading activity, we just didn't choose to repurchase during that window period.
Unidentified Participant
I guess maybe more specifically, the stock at sort of $15 today, I'm just curious is this a point where it's attractive enough at this point or I'm just curious -- you guys had ample cash, the cash flow was real strong, the balance sheet is not an issue.
Herbert Fritch - Chairman, President, CEO
We will look at that.
The window doesn't open until next Tuesday.
So if you go back and do a little bit of homework, when the window was open for us last during the third quarter, our stock price was significantly higher than it is today.
Operator
Justin Lake, UBS.
Justin Lake - Analyst
First question around the Medicare Advantage MLR.
Can you just kind of -- as it continues to come [in better] here, can you spike for us how much of that improvement is a function of higher revenue maybe from (inaudible) versus actual better utilization because of some of the clinical stuff you put in place this year?
Herbert Fritch - Chairman, President, CEO
To some extent the two are a little bit tied because we do have a lot of arrangements that are percent of premium either risk sharing or capitation payments.
But the revenue is probably the more -- when we look back at what we would have projected, I would say the revenue increase is the main component.
Healthcare costs are pretty much where we projected so them.
(multiple speakers) favorable.
Justin Lake - Analyst
And you mentioned the capitation agreements.
I know how well you're doing in Miami and Texas with some of those IPAs.
Can you give us an idea of what the MLR is?
Is there a tremendous difference between the MLR achieved in the markets where you have those IPA agreements versus where you don't, just general numbers?
Herbert Fritch - Chairman, President, CEO
In general some of the markets -- in Tennessee we have parts of the networks in IPAs and parts not.
But generally speaking we see -- I don't know -- four to five points maybe more favorable MLRs where we have IPAs in place and where we don't.
But it's pretty market specific.
I mean, some of the markets seem to work out pretty well without it especially in the startup years but ultimately we feel a lot more confident that as docs are engaged and helping us out that it is well worth bonus payments and additional payments we make to them.
Justin Lake - Analyst
Sure.
How does your membership split out between those that are covered by IPAs and those that aren't?
Herbert Fritch - Chairman, President, CEO
I would say -- just thinking about it -- but I would say we are probably now in the 60 to 70% range that are probably covered under some kind of an arrangement, maybe trending more toward the 70 (multiple speakers) that tends to -- we have increased that throughout the year.
So we're getting more and more under all the time.
Justin Lake - Analyst
Great, and just last question around -- I know it's early around '09 and I am trying to think about the broad strokes.
I know membership is too early but just thinking about how you -- where you bid the MA and the PDP product.
I think everyone is just trying to figure out where -- if you just think about the MLRs, typically I guess if I were to think about '09 I would think about PDP likely improving.
Can you tell us what your target MLR there was when you submitted the bids?
Herbert Fritch - Chairman, President, CEO
On the PDP side?
Justin Lake - Analyst
Yes.
Because this you targeted 84.
I'm just wondering if you targeted returning to that number or did you feel like that (multiple speakers)
Kevin McNamara - EVP, CFO, Treasurer
We will speak to that in January.
We expect that when we come out with '09 guidance that the PDP MLRs will be better than this year.
That's all we really want to say now.
And.
Justin Lake - Analyst
Would it be safe to say that the Medicare Advantage MLR might be targeted closer back to the 80% range I know you kind of looked at long-term?
Herbert Fritch - Chairman, President, CEO
That's probably fair.
Operator
(Operator Instructions) Charles Boorady, Citigroup.
Charles Boorady - Analyst
Just a question on the process that you go through between now and the time you give us guidance on '09 as you try to put your budget together to assess your product design and pricing and how that stacks up against your competitors.
I know earlier in the year before the bids were due, you talked about the gaming theory involved and trying to estimate what your competition might do and contemplate that when putting your own product design and pricing together.
And so I'm wondering now that you can see what the rest of your competitors did for MA and for PDP next year, what is the process you go through to try to model out whether you will be adversely selected against or not next year?
Herbert Fritch - Chairman, President, CEO
I don't think we have a lot of concerns about adverse selection.
We're pretty mature in most of our markets and the new memberships are a relatively small percentage of the total.
Frankly I think just by waiting we will be able to get a pretty good sense.
We've got six weeks of knowledge between November 15 and January 1 as to how actual sales are running and how we're doing in the markets before we finalize budgets and guidance.
So that is going to be the biggest -- when we look at it isn't going to be any abstract theory.
Kevin McNamara - EVP, CFO, Treasurer
The mechanical process is we have gone through a first phase of doing sort of a ground up build of a budget which the markets have gone through in tremendous detail and they are very close to their markets of sort of what they expect from membership.
We have done a rough modeling out of rates which we passed down to them and then what we do is we just put our pencils down for a little bit.
The markets obviously have all their attentions focused from November 15 to December 31 on the open enrollment period and then we sit down when we get that payment report in late December and sort of adjust to what's in there and then revisit everything.
Charles Boorady - Analyst
I see.
Some of your competitors have described the process almost as a game of hot potato where every year you wonder -- it sounds like you might agree with that characterization and maybe not for yourselves but for some others that every year you've got to wonder whether a flock of heavy drug users are going to find through CMS.gov who has got the best deal for the very expensive drugs that they are on and that this year Humana got 180 plus thousand of them, it cost them over $1 per share.
Humana is obviously very mature, very expert at Medicare and they didn't recognize until March of this year that that happened whereas drugs are settled real-time.
And with MA, I mentioned it's even more difficult to know.
It took Coventry until October of this year to realize the full extent to which they partially were adversely selected against.
They had other issues as well.
I'm just wondering between now and January, is that really enough time and is there anything more that you can do on a modeling standpoint or bringing in some outside independent actuaries, is there anything else to give you an earlier read of whether -- in your case I think more relevant is the PDP -- your pricing which is having an impact on the dual population and your benefit design is going to result in adverse selection or do we really need to wait until at least March before we are 100% confidence in what the reasonable range of results for '09 might look like?
Kevin McNamara - EVP, CFO, Treasurer
Charles, I will let Herb speak to the MA side but on the PDP side, that phenomenon -- and I do tend to agree with it a little bit -- but that is predominantly on the voluntary business and we are not in that.
Herbert Fritch - Chairman, President, CEO
We recognized early on that there was the chance for adverse selection especially on the drug coverage.
We have had I guess tighter, more limited formularies, a standard design with a limited formulary on the PDP side from day one and continue to.
And generally speaking that's reflected in our MA products too.
So we haven't had much issue.
We feel pretty comfortable with the approach and it hasn't changed.
Charles Boorady - Analyst
But Humana are pretty confident they are not going to keep these 180 plus thousand really heavy drug users that cost them over $1 per share this year.
Can you be pretty confident taht you're not going to be the recipient of them?
Herbert Fritch - Chairman, President, CEO
We're not in the voluntary business and I think most of them as Kevin was saying, most of that I believe is voluntary membership and we don't even have plans for the voluntary membership.
We just have a standard plan that applies to the duals and auto assigns.
Charles Boorady - Analyst
Got it.
Okay, great.
Thank you very much for elaborating on that.
It's top of mind for people and so I appreciate the extra color on it.
Operator
Carl McDonald, Oppenheimer.
Carl McDonald - Analyst
One of the swing factors for earnings next year at least from an EPS basis will be the share count as it relates to the completion of the two additional LMC centers.
Can you give us an update on where they stand in that process and when you think you would recognize the additional (multiple speakers)
Herbert Fritch - Chairman, President, CEO
The substance of the agreement is their due to bring those centers online prior to the '09 open enrollment period.
I guess it would be the '10 open enrollment period.
So they're targeted to come online sort of in the October/November timeframe, somewhere in there.
I doubt they're going to bring them up significantly ahead of that.
I believe we have got 2.7 million shares in escrow.
So the actual accounting guidance is you start counting them at the point at which you are reasonably assured that they are going to come up.
And so they're probably not going to go into the share count until sort of second half of '09 and probably more weighted towards the fourth quarter of '09.
Charles Boorady - Analyst
Okay so probably then more of an impact as you think about 2010 earnings (multiple speakers)
Herbert Fritch - Chairman, President, CEO
Correct, yes.
Operator
(Operator Instructions) Brian Wright, Bank of America Securities.
Brian Wright - Analyst
Can you just give us the PMPM for the Medicare year-over-year ex the impact from Leon?
Herbert Fritch - Chairman, President, CEO
I believe it was 12%.
I think it was in our release.
Brian Wright - Analyst
Ex the Leon?
Kevin McNamara - EVP, CFO, Treasurer
For the nine months it was up 14% ex Florida.
Brian Wright - Analyst
And for the third quarter?
Herbert Fritch - Chairman, President, CEO
For the third quarter it was up 12% ex Florida.
Brian Wright - Analyst
Thanks.
Operator
(Operator Instructions) Mr.
Fritch, It appears that there are no further questions at this time so I will turn the call back over to you for any closing remarks.
Herbert Fritch - Chairman, President, CEO
Thanks for your time and interest and we look forward to next quarter's call.
Thank you.
Operator
Thank you ladies and gentlemen.
That does conclude today's call.
You may now disconnect.