信諾集團 (CI) 2009 Q2 法說會逐字稿

Good morning, and welcome to this HealthSpring conference call to review its financial results for the second quarter and six months ended June 30, 2009.

The financial results were issued before the opening of the market trading today.

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 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.

Also, today's call is being recorded.

And at this time, I'd like to turn the call over to Mr.

Herbert Fritch, Chairman and Chief Executive Officer of HealthSpring.

Please go ahead, sir.

Thank you operator.

Welcome to our 2009 second quarter conference call.

Despite some challenges in several of our markets, we are pleased with our results year to date and are increasing our guidance for the balance of 2009.

Membership continues to exceed our expectations due to both increased sales as well as lower member turnover.

Our national PDP is also performing much better this year than it was at this point in 2008.

In addition, renewed attention to administrative expenses has translated into a lower SG&A expense ratio than expected despite the higher commissions associated with our increased sales activity.

Our Medicare Advantage MLR for both the quarter and the six months is running somewhat higher than our expectations going into the year.

This is being driven by increased medical cost trends in several of our health plans.

Inpatient unit costs are running higher than expected especially in our Tennessee health plan.

In addition, our Alabama, Tennessee and Texas plans are all seeing higher professional costs.

These trends are somewhat offset by favorable results in our Florida plan.

I will provide more specifics on these and other issues a little bit later.

All of these factors translated into a net income in the quarter of $31.9 million or $0.58 per diluted share.

This compares to $40.2 million or $0.72 for the second quarter of 2008.

As we have discussed, results for the second quarter of 2008 included $0.15 of EPS from the favorable impact of out-of-period risk adjustment.

By comparison, second quarter 2009 included only $0.05 of earnings related to the final 2008 retrospective risk settlements.

We believe this decline in revenue from out-of-period risk adjustment payments is further validation of our improved ability to forecast and accrue for such amounts in the appropriate period.

Medicare Advantage membership of 182,231 at June 30, is already above the high end of our original expectations.

This represents a 12.4% increase year to date and membership growth is favorable as compared to forecasts across all of our plans.

Membership growth has been driven in the quarter by continued lock-in sales activity, which we expect to slow over the remaining six months of the year, as well as favorable disenrollment trends.

MA-PD membership in our August plan payment report was in excess of 184,000 and we are now guiding the -- end the year with 186,000 to 188,000 MA members.

Our standalone PDP also continues to add members on a monthly basis, although at a slower rate than we have seen in previous years.

PDP membership stands at 294,753 as of June 30, and was at 301,537 in the August report.

We anticipate ending the year with approximately 310,000 to 320,000 PDP members, which is slightly below our previous guidance.

This does not bother us, however, as any PDP member additions this late in the year are unlikely to contribute meaningfully to earnings.

MA premiums in the quarter of $583.2 million also came in above our expectations.

This represents a 21% year-over-year increase.

$7.9 million of this premium relates to the 2008 final retroactive risk adjustment settlements.

For the six months, MA premium PMPM of $1,055 are up 6% year over year as adjusted.

This is in line with our expectations for the year.

MA premiums per member per month should erode somewhat over the remaining six months of 2009 due to member mix changes.

PDP premiums in the quarter of $87.4 million are up 23.6% year over year.

For the six months PDP premiums per member per month of $104 were up 8% year over year.

I would remind you that PDP premiums per member per month will fluctuate significantly over the balance of 2009 due to risk corridor calculations.

Moving to medical costs, our 2009 second quarter MA MLR of 82.4% as adjusted was above our expectations.

For the six months, as adjusted MA MLR was 81.8% representing an erosion of 260 basis points over the comparable 2008 period.

Entering the year we expected our annual MA MLR to erode by approximately 200 basis points.

Driving this erosion are a few factors.

Like many of our competitors we are seeing increased costs per admission in inpatient setting.

This phenomena has been particularly acute in our Tennessee market.

The issue appears to be associated with the change in CMS reimbursement methodology and aggressive hospital coding practices, which create a shift in case mix to higher cost DRG cases.

To address this issue we are, among other things, conducting targeted audits of our high dollar inpatient claims and we are working to re-contract facilities that are paid in excess of Medicare allowable rates.

Tennessee has also experienced an increase in mental health costs year to date.

We believe this is attributable specifically to increased disabled and dual eligible membership, which we believe is isolated in our Tennessee market because of recent changes to TennCare, the Medicaid program in the state.

We are working closely with our physician partners to identify the outliers [in] developed care plans for our high cost populations that address health issues earlier and in lower cost physician office settings.

Our MA MLR has also been negatively impacted by higher physician costs in our Alabama, Tennessee, and Texas markets.

In some markets this phenomenon is driven primarily by providers outside of our traditional IPA networks.

We attribute this at least in part to our own efforts to get members into physician offices for annual visits.

Over the long term these effects should be reflected in better quality of care and higher risk adjusted premiums, which will offset these costs.

But it does have a short term negative impact.

I also cannot help but think, although it has not been verified empirically, that some of these additional physician costs are being driven by members who are influenced by fears over the H1N1 virus and are seeking preventive treatment.

Anecdotally we are not hearing anything from our hospital providers about increases in emergency room flu cases year over year.

Offsetting these negative medical cost trends in our markets are strong results from our Florida health plan.

As you may remember, 2008 was a challenging year for Florida and as a result the market leadership spent the second half of 2008 re-contracting with hospitals.

I am pleased to report these efforts are bearing fruit in 2009.

Florida's results have been strong for the first six months of the year and we anticipate this trend continuing for the balance of 2009.

The combination of these positive and negative factors caused us to modify our MLR guidance from the previous MA MLR guidance of 80.5% to 81.5%.

We are now guiding MA MLR to be approximately 81.5%.

While we are not banking on near term improvements in our underlying costs from the initiatives I discussed, the Part B benefit design should drive some seasonal improvement in the Part D component and the overall MA MLR for the second half of the year.

PDP has also been a strong performer in 2009.

As you likely remember, our PDP MLR for the full year of 2008 was 89.6%, well above our expectations.

Going into 2009, we believed that our bids took into account the turnover cost and utilization issues in the PDP business, and with six months of results we now have a greater level of confidence that we were correct in our assessment.

For the first six months of 2009 the PDP MLR was 93.5%, an improvement of over 300 basis points versus the first six months of 2008.

With these strong results we are improving our PDP MLR guidance to 84% to 86%.

As a result -- as a reminder, the bulk of the profits in the PDP are generated in the second half of the year.

Before I hand the call over, let me spend a couple of minutes commenting on 2010 and beyond.

At the beginning of June we submitted our 2010 bids to CMS.

Despite the headwinds of a lower reimbursement environment I was quite pleased with how our plans came forward with benefit packages that met our goal of maintaining overall margins.

This is not to say that we did not have to reduce some benefits.

In 2010 we are also expanding into a few counties in northeast Georgia, located just across the border from our Chattanooga, Tennessee operations.

We are being far more selective in choosing where we expand given the changing reimbursement environment.

I also want to comment on the latest developments out of Washington.

It appears that the House is close to finalizing its negotiations on a health reform package, which represents some of the ideas of a centrist group of Blue Dog Democrats.

The draft legislation is likely to include a move to parity with fee for service Medicare over a timeframe of three years beginning in 2011.

We believe we are well positioned for that environment.

On the Senate side, a bipartisan group of senators in the finance committee is meeting to hammer out their own draft of reform legislation.

Early versions have included MA payments based upon a competitive bidding proposal with bonus payments for quality and cost efficiency that would begin to be phased in during 2012.

Given the group of senators working on the proposal represent mostly rural populations, it's no surprise that they would include competitive bidding as it would be most favorable to rural county MA benchmarks.

On the other hand, members of the finance committee from more urban states, including Schumer from New York and Nelson from Florida, are beginning to question the wisdom of competitive bidding as it would negatively impact their constituents.

Despite the negative rhetoric of Medicare payment reform, there are some aspects of overall healthcare reform being discussed by both houses of Congress which could open new business opportunities for HealthSpring.

A public plan option based upon regional exchanges and mandated provider reimbursement rates could open new membership opportunities in the under 65 market for us.

This would certainly be the case in our existing markets where exchanges would create a menu of plan options thus minimizing our sales and marketing expense.

Our issues with the commercial market have primarily centered on our ability to negotiate competitive provider payment rates based on leverage through membership volume.

The public plan option could minimize or eliminate this issue by formally or informally establishing unit prices that are tied to Medicare or some other fee schedule.

Another area of potential growth for us would be an increased focus on IPA management for accountable care organizations.

By nature of our physician-centric business model, we believe we have one of the largest IPA management businesses in the country and should be able to quickly expand beyond our existing 30 to 40 IPAs to address the needs of providers in a new reimbursement environment.

It remains to be seen just what the final legislation will look like and things are likely change significantly as the debate goes to the full House and Senate, not to mention conference committees.

No matter what happens in Washington, however, we have strong visibility into this year and next and we believe we are well positioned for the longer term.

At this time I want to introduce the newest member of the HealthSpring team, Karey Witty.

Karey joined us on July 1 as Executive Vice President and Chief Financial Officer.

Karey's experience in both finance and operations in managed care has already brought valuable insight to our management team.

We look forward to introducing or reintroducing him to many of you in person in the coming months.

I welcome him and look forward to working closely together in the years to come.

With that, let me hand the call over to Karey to discuss a few more of the financial details of the quarter.

Thanks Herb and good morning everyone.

Let me start by saying how excited I am to be joining the HealthSpring team.

I'm confident that our model of healthcare delivery will continue to play an industry leading role, and I look forward to working with Herb, Mike and the rest of the team on gaining clarity in that regard.

It is my belief the Medicare payment reform will create a significant opportunities for plans to differentiate themselves on the basis of superior medical management and a disciplined focus on operating efficiencies.

I, like Herb, believe that Medicare Advantage and specifically coordinated care plans such as ours are the answer to Medicare's financial issues.

I look forward to engaging our employees, providers, members, and investors in the coming months to promote my positive impressions of the company.

Given my newness to the company and the fact that Herb has covered many of the financial specifics already, I would like to highlight just a few additional items from the quarter.

Premiums were covered by Herb so I will just review other revenue items.

Fee revenue for the quarter was up $1.1 million, or 13% year over year to $10 million.

The increase was primarily the result of increased membership in new and existing IPAs.

Investment income was down $2.3 million or 67% year over year to $1.1 million.

This decline in investment income has been a consistent trend for the last several quarters as yields on our investment portfolio have declined.

We have consciously maintained a very high level of liquid investments in our portfolio and have not aggressively reinvested assets over the past six months.

However, we have recently strengthened our investment management resources and hope to reinvest our assets in the coming months and improve yields while diversifying risk.

Moving to SG&A.

Expenses for the quarter were $62.3 million, an increase of $6.3 million or l1% year over year.

For the six months, SG&A as a percentage of revenue was 10.1%, significantly below our guidance of less than 11% revenue.

The company's focus on SG&A efficiencies has more than offset increased commission cost associated with the increased sales activity.

We continue to expect SG&A to be weighted to the first and fourth quarters of the year but we are reducing our target SG&A ratio to approximately 10.5% of revenue for the year.

Our operations team continues to believe that there are further efficiencies we can derive from the business.

As to items below the line, depreciation and amortization expense in the second quarter was $7.6 million, an increase of 9.4% year-over-year.

Interest expense was down 13.5% to $4 million in the quarter.

Much of our interest expense is tied to a movement in LIBOR so expect this to remain relatively low.

Moving to the balance sheet.

We had cash and cash equivalents of $295 million at June 30.

$57.7 million of this balance was held at unregulated subsidiaries.

Consistent with the prior year, operating activities were a use of cash for both the quarter and the six months but this trend has reversed itself in a significant way with the receipt of cash settlements from CMS for risk adjustment payments in the third quarter.

These settlements totaled $88.2 million for both the mid-year and final risk adjustment periods and were received in our July and August CMS payments.

During the second half of the year we will also receive a final settlement for 2008 Part D subsidies.

These amounts will be reflected as movement on the balance sheet only, [totaling a] receivable from CMS of $36 million at June 30.

In light of these factors, we continue to expect that cash flow from operations for the year will exceed net income.

We believe that our three year average of operating cash flow at 1.4 times net income is a good approximation.

Days claims payable remained at 36 at June 30, flat sequentially.

Reserve development related to 2008 was immaterial in the quarter.

Our debt balance was approximately $251 million at the end of the quarter, down $27.6 million from a year ago.

During the quarter we did not complete any stock repurchases.

Moving to our revised 2009 guidance.

We are increasing our 2009 earnings per share guidance to a range of $2.10 to $2.25.

Major components of this guidance include MA membership of 186,000 to 188,000 and PDP membership of 310,000 to 320,000 at year end; MA MLR of approximately 81.5% and PDP MLR of between 84% and 86%; SG&A as a percentage of total revenue of approximately of 10.5%; and average diluted shares outstanding of 55.3 million for the year.

This reflects the inclusion of 2.0 million -- 2.7 million shares in the fourth quarter relating to the LMC Healthplans acquisition.

These shares are being held in escrow pending the opening of two additional Leon Medical Centers.

As of the end of Q2, they are on track and have -- to have both centers open by November 1.

Finally, I would like to let you know that a copy of our 10-Q will be on file later today in case you have more specific questions on the financial details of the quarter.

Joining Herb and me today to take your questions are Mike Mirt, our President and COO, Dave Terry, our Chief Actuary, and Lankford Wade.

Operator, that concludes our prepared remarks, and we can now open the call up for questions.

(Operator instructions) Tom Carroll with Stifel Nicolaus.

Hi, good morning.

Couple of quick questions for you here today.

Last quarter you implied that you would have a zero premium product available in all of your markets and I want to know if that is still the case given that you obviously have visibility on what you bid.

And I guess secondly to that, were these underwritten at perhaps lower than expected margins?

Herb, I know you mentioned in your prepared remarks you're basically looking for no margin contraction into next year, but maybe dovetail those two things together for me-- zero premium, no margin contraction.

I believe we were successful in getting a zero premium product into virtually all of our markets.

We did in some cases narrow networks and went with a tiered network product.

So it's possible that in some markets you'd have to switch primary care physicians to maintain zero premium.

And consistent with our historical policies we bid consistent margins as we have in the past.

So, we believe we were able to maintain margins in doing that.

So margins next year in line with what we're seeing this year?

Yes.

Okay.

And then secondly, you mentioned -- you referred to the under-65 market.

Are you implying a commercial enrollment expansion related to HealthSpring's participation in a health exchange if that's what we see out of reform?

Yes, I think if we believe we can -- and this largely applies to the hospital side -- if we can get competitive hospital rates where we're not at a disadvantage on unit prices, we think a lot of the methods and position engagement strategies that we use on Medicare will give us a competitive edge in the under-65 market as well if we can just not have a disadvantage on those unit prices.

So we're looking at that.

That's a real long term look as that would ultimately be implemented.

But we're paying attention to see if there are some other opportunities.

I mean would you call that more pre-Medicare type beneficiaries or would you call it more of a commercial type footprint that you're looking to grow into?

Well, I think what we're anticipating is these exchanges will effectively be the individual market for under-65 where it isn't -- I wouldn't say it'd be limited to just pre-Medicare, it would be more the broader under-65 market that we're expecting these exchanges people could go and purchase coverage directly from.

Okay, very good.

Hey, Karey, welcome back to conference calls.

Thanks Tom, appreciate it.

Charles Boorady with Citi.

Thank you, good morning.

First, I'm just wondering what level of membership attrition you would expect in 2010 if you've priced to maintain stable margins and cut benefits?

I don't think we're expecting necessarily any member attrition.

It's possible we'll see some in some markets but we have other markets where we're certainly expecting to grow.

I don't think we've sat down yet and done a detailed budget look but I'm not expecting that we're going to see lower membership numbers overall.

Do you expect to see higher total enrollment at the end of 2010 versus '09?

I don't -- it wouldn't surprise me if that's the results when we take a look at it.

I know that will be the case in some markets, for example Florida, where we're opening two new clinics and opening up more capacity.

But we'll have to take a more detailed look and comment on that later.

Then what's the capacity of providers who have capitated arrangements with you or other arrangements that share in the percent of premium that you get paid?

Do you have a sense for what their capacity is to absorb the lower rates next year and how you'll manage that process to make sure that they're not financially overly strained with the lower reimbursement?

I don't -- in terms of membership capacity we're not sensing any real limitations there.

I mean I think it shouldn't be any problem to absorb whatever increase in membership we get.

These provider arrangements effectively share upside and downside and in many instances there's probably a 50/50 sharing if budgets are contracted based on lower reimbursement.

But right now, many of our providers are getting -- ending up reimbursed significantly above Medicare.

We continue to think that that will be the case albeit at maybe a little bit lower.

But it's certainly still a much better alternative than fee for service Medicare would be for them.

Even in 2010?

Yes, even in 2010.

All right.

And then just lately, you talked a little bit about reform, which was really helpful.

Do you have a view on whether we'll wind up with competitive bidding or a cut to 100% of fee for service in the final legislation?

And just sort of talk about the impact to your company under either of those two scenarios.

That's the $64 question right now.

I think we're cautiously optimistic that the House version is likely to prevail but it's certainly up in the air.

I think we view the move to parity as being more favorable at least based on the preliminary methodologies for competitive bidding.

Although a change in those methodologies could also mean competitive bidding might be favorable to us or at least as favorable as a move to parity.

But the current methodology, I think we'd prefer the House version over the Senate as we're aware of these bills today.

Okay, thank you.

Josh Raskin with Barclays.

Hi, thanks.

Good morning.

First quick question just on the Medicare revenues.

I guess just in terms of reconciling the MA-PD, I think in the press release you talk about $583.2 million but then there's that segment information with $594.3 million.

And I don't think that the -- well the difference doesn't come out to the risk adjuster.

So just -- what am I missing on those MA revenues?

Hey Josh, this is Lankford.

I'll follow-up with you after to reconcile those two.

I don't have it off the top of my head right now.

Okay.

And just using the MLR as the cost, we've probably got to go through that as well, so.

Second, just on Florida coming in a little bit better, how much of that, Herb, would you say is, as you mentioned, sort of hospital re-contracting versus sort of a more favorable reimbursement environment in 2009?

We really think most of it is, of the significant impacts, the hospital reimbursement has come in better than expected.

I think we all budgeted revenue side and that's come in just about where we anticipated.

But the hospital reimbursement piece has been a little better than anticipated.

Got you.

And then 2010, just one more sort of clarification.

It sounded like you said you were bidding to keep margins flat.

Now, I think your MA margins in 2009 are probably coming in a little bit lower than expected because the MLR obviously has come in higher.

So, 2010 are you bidding to get back to that original target or are you bidding so that your '10 margins will look like your actual 2009 margins?

I think we bid to get back to the original margins.

I think what's at issue is the trends so far year to date in 2009 have been higher than expected.

And if those level off or come back down, because you're effectively trending over two years in the bid process, hopefully we'll hit those original targeted margins.

But if the trends and costs remain high we may be closer to the margins we're seeing this year.

Okay, so you were bidding to sort of keep them -- get them back to the original with your best knowledge on June 1.

However, since then you've seen a slight deterioration in the loss ratios.

So maybe that indicates that 2010 would be similarly, whatever the differential since June has been.

Is that fair?

That is fair.

I mean I think it really depends on the success of our efforts to rein these trends in over the remainder of the year.

Hey Josh, this is Lankford.

The reconciling item is our B income and part of our investment income, which we include in the segment information but we don't include it obviously when we break out premiums separately.

So in the segment you allocate?

Correct.

Okay, thank you.

Justin Lake with UBS.

Thanks, good morning.

First question, Herb, on the -- on your bid here.

The -- can you just talk through how specifically you bid for the potential SGR fix or the physician fix?

Well, we assumed that physician fees would be flat in '10 compared to '09.

We just don't think there's any way that Congress can reduce fees by anything close to 21% and still have primary care physicians willing to see Medicare patients.

Perfect.

And then the hospital IPPS rates came out and they were about 200 basis points better than the preliminary.

And I'm just wondering was that something you were able to factor in or will that be a kind of a bit of a headwind for 2010?

No.

I think by the -- when we set original rates we were trending pretty much based on historical levels, which I believe saw hospital increases between 3 and 4% in the base DRG rates.

We were hoping it might be a big positive.

The way it looks now it's a little positive.

Okay, that's good to hear.

And then secondly, there's been some confusion I think in the market around what in the -- this bid process where you're -- you put in your final bids in June but they're not really approved until the September timeframe.

And I just wanted to get your view on what ability do you have to change bids during this kind of negotiation -- negotiating timeframe?

My understanding was that basically CMS comes back to you on these bids and basically asks for changes.

You don't really have much of an opportunity to change your bid let's say for the hospital rate if you hadn't been conservative there.

Is that wrong or do you have the ability to kind of change some of your bidding structure?

No.

I mean you're just pretty much responding to CMS's reaction to your bids and any -- I mean usually they're pretty minor tweaks and details.

But you can't go in and change your trend assumptions after you've submitted them.

Okay, that's exactly what I thought.

And then just a last question on risk scores.

You spiked out to 8 million, the -- obviously I would assume that is the number that was different from what you've been accruing for the year.

Can you give us some idea of what the total risk adjustment payment was for the 2008 year?

Yes, Justin, we'll break that out specifically in the 10-Q which will be filed later today.

Okay.

And then Herb just your view on how much -- given that CMS now is trying to play catch-up on these risk scores as far as kind of mitigating some of the coding optimization that's gone on, do you think that -- how much more optimization do you think you'll have left in the book as far as being able to code folks better?

Boy, I -- there's certainly still some there.

I'd hesitate to try and put a number on it.

We're always trying to come up with better methodologies to categorize and document the risks involved in these members.

There's certainly still some opportunity there where I think us and a number of the other plans in the industry are starting to be a little more proactive on doing annual assessments with members to make sure we get them in once a year and have the appropriate documentation.

And we also think it helps with the quality of care in terms of identifying diseases and starting to get them treated a little more proactively and earlier, which ultimately we think helps our costs and utilization numbers.

Perfect.

Thanks for all the color.

Scott Fidel with Deutsche Bank.

Thanks.

First a question, just, Herb, in your prepared remarks you mentioned that you thought the premium yields could be down a bit in the back half of the year in MA just relative to changes in member mix.

Maybe you could just highlight what specific changes in mix you're expecting and if you reported $1,060 in PMP average for the 2Q, what do you think is a good run rate for the back half?

I think what we've seen -- and it isn't specific to HealthSpring, this is true of the whole MA business -- is every month the members who drop off due to death are older, sicker, and higher risk scores.

The members you're adding, especially [age-ins,] tend to be lower acuity and paid less from a risk basis.

And what we tend to see is it seems like every month your average PMPM revenue will go down by maybe 0.02 to 0.03% per month.

And so I mean I think we just build that into our forecast and that's just the nature of how risk adjusted payments work until the periods are updated and then you get caught back up starting in January.

Okay, that makes sense.

Second question, just interested in your sense on how much variability you think there ended up being amongst the plans with their bids for 2010.

Do you think most plans adjusted their bids to fully absorb the CMS cuts or do you think there's going to be quite a bit more variability in terms of some plans out there willing to take a hit to margins next year?

I only know about as much as you guys report.

We were certainly surprised by what we heard in terms of United's assumptions.

I think there's a tendency, and I have no way of checking this, that people tend to be a little overly optimistic about trends when cuts are had.

Hopefully we've been a little more disciplined.

But I -- we just have to mind our own business I guess and make sure we're -- we believe we're rated appropriately and have the right benefit levels and we'll let the chips fall where they may with our competition.

Okay.

Then just a question just on how the bid review process has gone with CMS.

And there's been a couple of different articles out of DC and comments just on how CMS has pretty taken a much more aggressive tone with plans around reviewing bids.

And just interested in your thoughts on how the review process has gone and how [active they've been] in making -- coming back with recommended changes to the products.

This is Dave Terry.

This year has been more challenging and I think that's an industry phenomenon as CMS stepped up its review of all the bids, specifically with related to the clarity of how you identify the bids in the PDP packages, which ultimately translates into the -- what winds up on the web pages.

So, the majority of our interactions this year has not been specifically with the bids themselves in terms of their development or the level of the benefits.

It's been making sure that there's a high level of clarity between what we've bid in terms of benefits and what we're going to report in our packages.

And that's where a lot of the additional details have been.

Other than that it's just been the normal course of working with the CMS departments to make sure that everybody understands what we put in the bids.

Okay.

Then just one last question.

Just obviously still early here but how are you thinking about SG&A for 2010?

It sounds like you're assuming at least flat MA membership, maybe some growth.

So should we think about SG&A on an absolute basis trending up with that or do you have some cost reduction plans in place just given the challenging rate environment?

Hey Scott, this is Lankford.

I know that Mike and the team continue to be focused on generating operating efficiencies from the business.

So we still think that there's probably some juice to be had there, but we won't give specific guidance yet as it relates to SG&A as a percentage of revenue for next year.

Okay.

Thank you.

Michael Baker, Raymond James.

Thanks.

I was wondering if you could give us a sense for what you've baked in with respect to the flu back half of the year?

I don't think we've put anything specific in.

I think it's -- the flu season is just a routine part of our business and we expect at some point we're going to see an increase in hospitalization rates whether it hits at the back half of this year or waits until early next year is still anybody's guess.

Okay.

And then I was wondering if you could give us a sense for how the CMS audit -- coding audits are going and when you kind of anticipate that process to wrap up?

I don't think it's started yet.

So, CMS has just seemed to put all that on hold for a while.

I think we're anticipating it will start at some point but I'm not sure what the hold up is within CMS.

But we're ready whenever they are.

That's good to know.

And then finally, Herb, I was wondering if you could comment on what you see in terms of MLR performance in an area where there's a LivingWell Center?

And when you do tend to see a pickup in trend, how quickly you can kind of rein it in in those regions and how that compares to an area that doesn't have one of those centers present?

Well, I think generally speaking we've had pretty favorable MLR results around our LivingWell Centers.

I think the ability to rein in trends -- I don't know that we pick things up any more or less quickly around a LivingWell Center.

I think the ability to rein in the trends is a function of how much the doctors are engaged.

And the engagement levels in the LivingWell Centers are probably as high as we have anywhere.

But that's not to say some of our IPAs, those docs are really engaged too and -- to respond pretty quickly.

And to the extent we have direct individual relationships those tend to respond less quickly.

Thank you.

Carl McDonald with Oppenheimer and Company.

Thanks.

So to summarize the 2010 commentary, I mean, it sounds like your bias is towards higher membership.

You're bidding for a flat margin so that would you seem to suggest at least directionally at this point your anticipation is for operating earnings to be up next year.

And I think maybe I could -- to rephrase, I mean is there anything in the 2009 earnings projection other than the $0.05 you broke out this quarter or the share count increase for the new centers in Florida that we should be thinking about?

Hey, Carl, it's Lankford.

I mean I don't think there's anything necessarily one time as it relates to the 2009 earnings that won't translate into next year.

But obviously there are still a lot of moving pieces related to the competitive environment, as well as where we shake out in the PDP bids for next year relative to the benchmarks, that could change things year to year pretty significantly.

And any expectation for cash position at the parent company by end of year?

I think that that's a continue-to-grow versus where we were at end of second quarter.

Obviously with the risk settlement, some of that money will flow up and we typically see pretty strong cash generation at the parent in the second half of the year.

Okay, thanks.

(Operator instructions.) Daryn Miller with Goldman Sachs.

Hi, good morning.

Herb, quick question.

What do you consider to be an acceptable profit margin on the PDP product?

Well, I mean I think we're looking at probably pre-tax of 7%, 8%, something like that, I mean as we bid the product.

Daryn, when we bid the product we don't bid it too materially different than we do the rest of our products.

Probably some slight differences based upon different SG&A loads, et cetera, and obviously different MLR assumptions.

But when you net everything out it's not too different than it is for all of our benefit packages.

Okay.

And what is the MCR assumption on that?

Well, you know what our guidance is for the year, we're now at 84 and 86%.

I mean, no, what would we think longer term?

Your bidding approach for 2010, was it 84 and 86%?

We're not changing that materially year to year in terms of how we bid it.

Nothing next year very different than this year.

Got you.

And then can you just remind me what you guys are doing with your LivingWell Center strategy?

Well, right now we've put new full bricks and mortar pretty much on hold.

We are trying to identify committed existing practices and find physician partners where we can put some of the same resources and hopefully get a lot of the same results into existing practices to gain some efficiencies in terms of what it costs us to get a committed practice up and running.

Great, okay, thank you very much.

Matt Perry with Wells Fargo.

Hi, good morning.

Couple of questions.

One, the stronger growth you've seen in MA this year, it seems part of it at least due to the maybe different competitive position you're finding yourselves in or better competitive position you're finding yourselves in this year.

Do you know how many of the members you've added you've taken from other MA plans?

And do you expect that to be a more important source of growth over the next couple of years as well?

We really don't.

We get some indication but we don't track that specifically.

I think what our expectation is in this reduced reimbursement environment, and especially as private fee for service phases out, we think we'll see members coming out of plans, either dropping out or reducing benefits significantly, as a more important source of growth going forward.

The fact that reimbursement is down, benefits will be down and you'll have a little less compelling of a case to lure new members over.

But we are thinking that the members who have already made a selection and their options either become less attractive or non-existent will be a good source of growth going forward.

I mean we have three companies already announcing they're dropping out of private fee for service for '10, and obviously there'll be a much bigger change in that for '11.

And I think with this reimbursement environment we're expecting to see some reduction in pure MA comp competitors also.

And we think that's an important source of growth over the next few years.

Right.

And kind of maybe taking one step further in that line of questioning, I think you mentioned in last quarter's call that over the long term you're still interested in M&A but that maybe valuation expectations hadn't come down much to reflect the different reimbursement environment.

Is that changing now?

Are expectations coming down a little bit?

Oh, I think they're coming down a little bit.

I'm just not sure if it's enough.

Okay.

And then a last question from me.

The share buyback expired, I think, at the end of June.

You have $50 million, $60 million in free cash at the parent company and your cash flow in '09 is going to be -- looks like it's going to be very much weighted towards the back half of the year.

So you could end the year with a higher cash balance.

Just wondering if you have plans for the -- putting a buyback back in place or to offset some of the dilution you might see in the second half of the year?

Matt, this is Karey.

That's certainly something that we are going to be exploring It would require some maneuvering with our bank group but definitely something we're going to explore as we kind of gauge where best to use our capital.

And any estimate on where you'd end the year, I guess excluding share buybacks, where you'd end the year in terms of parent company cash?

I'm sorry if you gave that out earlier.

We just gave a total cash flow from ops metric.

We didn't give parent cash.

per se free cash.

Okay.

All right, thanks.

And Mr.

Fritch, there are no further questions in the queue at this time so I'll turn the call back over to you for any closing remarks.

Well, thanks for your continued interest in HealthSpring and we look forward to next quarter's call.

That does conclude today's conference call.

You may now disconnect.