eHealth Inc (EHTH) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter 2009 eHealth Incorporated earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Katie Sidorovich, Director of Investor Relations of eHealth. Please proceed.

Good afternoon, and thank you all for joining us today, either by phone or by webcast, for a discussion about eHealth Inc's second quarter 2009 financial results. On the call this afternoon we will have Gary Lauer, eHealth's President and Chief Executive Officer, and Stuart Huizinga, eHealth's Chief Financial Officer. After management completes its remarks, we will open the line for questions.

As a reminder, today's conference call is being recorded and webcast from the Investor Relations section of our website. A replay of the call will be available from the Investor Relations section of our website following the call. We will be making forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements.

Forward-looking statements made on this call, will include statements regarding implementation of and the relation of our platform to the Utah Health Insurance Exchange, the compensation we expect to receive from members generated through the Exchange, our pursuit of additional government opportunities, the passage of healthcare reform legislation, its content and its impact on our business, marketing and advertising expense as a percent of revenue in the third quarter of 2009, application volume in the third quarter of 2009, our target for marketing and advertising expenses as a percent of revenue for 2009, our 2009 effective GAAP tax rate, our expectation regarding the repurchase of shares of our stock, and our 2009 guidance for revenues, stock-based compensation expense, GAAP income tax rate, and GAAP net income per diluted share.

Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments, and business decisions, to differ materially from those contemplated by these statements. We describe these and other risks and uncertainties in our Annual Report on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website, or from the Investor Relations section of our website.

Forward-looking statements made on this call represent the Company's views as of today. You should not rely on these statements as representing our view in the future, we undertake no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise.

We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G, for reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release, and in our SEC filings, which can be found on our corporate website under the heading Investor Relations.

At this point, I will turn the call over to Gary Lauer. Gary?

Thanks, Kate. Good afternoon, and thank you all for joining us today. I would like to begin by commenting on several of our financial highlights for the second quarter.

Revenue of $33.4 million grew 22% over the second quarter a year ago. Earnings per share was $0.16, and non-GAAP operating margin, excluding the effect of stock-based compensation, was 24%. During the quarter, we generated $8.3 million in operating cash flow, bringing our overall cash and marketable securities balance to $160 million as of June 30th. These financial results and others illustrate the continued leverage and strength of our business model.

Second quarter individual and family plans submitted application growth was 17%. By channel, direct continued to be the largest source of submitted applications at 43%, up from 41% in the first quarter of 2009, and 40% in the second quarter a year ago. I will provide more details on each of our marketing channels further on in my prepared remarks today.

During the second quarter, significant progress was made in many important areas of our growing business. For example, we won and signed an agreement with the state of Utah, to utilize our Internet platform and technology, in connection with the Utah Health Insurance Exchange, allowing us to launch our public eCommerce On Demand, or eOD business. We also added several new carriers and products to our offerings, including an important addition in the state of Massachusetts.

Additionally, we broadened the utilization of eApproval, added important enhancements to our technology platform, and continue to expand the presence of our commercial eOD platform and business. As a reminder, eOD is our technology licensing business that allows carriers and others to market and sell health insurance directly under their name on our Internet platform, which we host, and to power their broker and agent channels by utilizing our online platform as well. I will talk about most of these areas in more detail later during the call.

I want to conclude today's call with an update on public policy. As you may know, over the past few months, I personally and others have been very heavily focused on healthcare reform, and engaged in discussions with key members of the Senate and House Committees, their staffs, all of whom are involved in shaping potential healthcare legislation.

Let me now go over our marketing initiatives by channel. Our direct channel generated 25% annual IFP application growth during the quarter. Strong performance in this channel reflected a continued increase in our visibility, driven by media focus on healthcare, growing recognition of the eHealth brand, our public relations outreach, and our highly relevant position in the marketplace, and our value proposition.

EHealth's PR strategy remains focused on consumer education, as we continue to share a wealth of information on a variety of essential health insurance topics, in press releases, media appearances, website content, and Company sponsored webcasts. Through our targeted PR campaigns we reached out to the growing ranks of recently unemployed, and to this year's college grads, who are coming off their parents' coverage, and need to look for quality affordable health plans.

During the second quarter, eHealth was featured in leading national newspapers, like The Wall Street Journal, USA Today, The New York Times, and The Washington Post. As well as top tier broadcast outlets, like CNN, CNN Headline News, CNBC's On The Money, and National Public Radio. eHealth was also covered by reporters in large regional papers, a variety of blogs, consumer lifestyle magazines, and a multitude of local TV stations.

We also had favorable response to e-mail campaigns that targeted former eHealth members, website visitors who have started but not completed an application, leads provided by many of our partners, and other high relevance groups. The performance marketing channel generated 21% annual IFP application growth. During the quarter, we continued to add new partners in many major categories. Of note, are our new performance based partnerships with CareCounsel, one of the nation's leading healthcare advocacy firms, Mint.com, a leading online personal finance service, and HR.com, the largest social network and online community of human resources executives.

Our business development team also continued to leverage many of our long-term strategic partners, particularly in the employee benefits and traditional insurance brokerage areas, to find new growth opportunities. One such example was with our good partner Aon, a leading global provider of insurance and risk management services.

In the second quarter, we launched a relationship with Aon's client, ADP Totalsource, where our COBRA Learning Center will be made available to current and future COBRA eligibles of ADP Totalsource. ADP Totalsource is a subsidiary of ADP, one of the world's largest providers of business outsourcing solutions.

Also, Next Generation Enrollment, a leading HR outsourcing firm, has agreed to launch our new dependent program for their dependent audit customers. This program finds attractive coverage alternatives in the individual market, for dependents of employees that are not eligible for their employer coverage. Also during the quarter, CareFirst and Premera agreed to offer our COBRA Learning Center to their agents, and to their direct consumers that come through our eOD platform.

Our online advertising channel submitted application growth was flat compared to the second quarter of 2008, and represented a disappointment during the quarter. We believe there are several contributors to our second quarter paid search results, including a decline in contribution from secondary search engines, and a decline in conversion rates from all of our online advertising sources.

We believe that our paid search conversion yields may reflect more comparison shopping and research activity by visitors, consistent with reports from some of our search engine partners during the year regarding lower click yields, and diminished commercial intent of search users. We recognize the paid search issue that we have, and we are currently working on bringing paid search back on track.

I would like to emphasize that paid search performance in Q2 was not reflective of the overall demand for our products in the second quarter, which remains strong, as demonstrated by growth in our direct and marketing partner channels. I would also like to point out that second quarter application growth of 17% was within the range of assumptions behind our annual guidance.

During the quarter we added new inventory to our offerings. I especially want to highlight our entrance into the retail health insurance market in Massachusetts, by offering 16 individual and family health insurance plans from Fallon Community Health Plan. Fallon is one of the leading individual and family plan carriers in the state, and we are very happy to be marketing and selling Fallon products directly on eHealth.

Based on this launch with Fallon, and our ongoing eOD relationship with Blue Cross/Blue Shield of Massachusetts, this state is becoming an increasingly attractive market for eHealth, and a good example of how we can thrive in a guaranteed issue, mandate regulated, public exchange environment. In fact, I want to note that the commissions that we earn with Fallon, are competitive with what we generate on average across our entire inventory of individual and family plan products nationally.

We are currently in active discussions with other Massachusetts carriers that we hope to add to our retail site over time. We also added three new states with our plans underwritten by Aetna, targeting the fast growing 50 to 64-year-old segment. Other noteworthy inventory additions included Aetna plans in Indiana, FirstCare in Texas, and AvMed in Florida.

We continue to broaden the carrier base utilizing our market leading eApproval technology. During the quarter we added two new carriers using eApproval, including Celtic in 37 states and the District of Columbia, and market leader CareFirst in Maryland, Virginia, and the District of Columbia. We also launched two additional states with one of our largest carrier partners, Wellpoint. As you may recall, we initially rolled out eApproval with Wellpoint's Anthem Blue Cross plans in California.

In the second quarter, we added Wellpoint's Texas Unicare, and Wellpoint's Blue Cross/Blue Shield of Georgia plans, to the eApproval technology base. As I mentioned at the beginning of my remarks, we continue to expand our commercial eCommerce on demand business, which is becoming an increasingly important growth driver for our Company. Second quarter sponsorship, licensing, and other revenue grew 28% year-over-year, or 54% when you adjust for a one-time item recorded in the second quarter of 2008. With eCommerce On Demand, or eOD, being the fastest growing revenue component.

During the quarter we launched eOD with three new carriers, extended Coventry's eOD relationship to an additional state, and saw strong year-over-year application growth within existing eOD customers. We also contracted with our partner, Premera LifeWise, to launch our second Medicare eOD site, and we see the senior market as a new and large potential eOD business opportunity for us.

We are in the early stages of penetrating the eOD licensing opportunity, with over 30 carriers currently on the eOD platform, out over 185 carriers that we represent at eHealth. The adoption by the agent and broker community is also in the very early stages, with our carrier partners increasingly encouraging their brokers and agents to use eHealth's platform for all IFP submissions.

During the second quarter, the broker and agent channel generated annual application growth in excess of 100% on our eOD platforms. During the quarter, we also made the strategic decision to begin to license our technology to wholesale general agents that provide insurance brokers and agents with services and products that make selling health insurance more efficient. This new business provides for the licensing of our eCommerce platform to general agents who in turn provide our online quoting, online enrollment, and electronic processing capabilities to their client base.

We see the strategic expansion of our eOD business, as an important component of achieving our mission, to become the online health insurance distribution standard. We had our first major general agent win during the quarter with Emerson Reid, one of the largest general agents in New York, New Jersey, and Pennsylvania. This is yet another example of the broad and large market opportunity we see in the commercial eOD business.

Now I would like to describe the details of an important development in our public eCommerce On Demand business. By the way, public eOD is our new initiative to expand the use of eHealth's eCommerce platform to government agencies. We are pleased to announce that eHealth participated in and won a competitive RFP process with the state of Utah, to use our Internet platform and technology, to connect Utah residents to individual health insurance, through the state's individual and family health insurance exchange.

The state's online insurance exchange, which is currently in the process of being implemented, will link to a designated eHealth online portal, that will support the selection and enrollment of private individual and family health insurance. The eHealth technology platform will be an online destination for residents to view a comprehensive selection of private individual and family health insurance plans in Utah, and utilize consumer friendly decision support tools, like plan comparisons, physician choice, information resources, and online applications and approvals.

The economics under our agreement with the state of Utah are quite familiar to us. eHealth will be compensated on a commission basis under our existing Utah carrier relationships, at the same rates as carriers are paying us for products sold on our retail site, outside of the exchange environment in Utah. This is a very important announcement for eHealth, which launches our public eOD business initiatives, and positions us well for pursuing additional government opportunities. Our proven online comparison shopping and enrollment platform make us a very appealing partner for any government entity that wants to use the Internet as an exchange or connector, to increase health insurance access, efficiency, and enrollment of the uninsured.

Now I would like to make some comments on public policy. Presently it seems that you can't turn on a news program or pick up a newspaper without healthcare reform being a headline topic. It has frankly been fascinating for us and me, to be so personally involved in discussions around potential healthcare reform legislation in Washington, DC, and to see how this issue continues to unfold.

As you know, important bills in the House Energy and Commerce Committee and the Senate Finance Committee have encountered more resistance and complications than some may have anticipated. Scoring by the Congressional Budget Office has shown that the House Draft bill, may cost well in excess of $1 trillion over 10 years, with no significant cost savings resulting. The attempts by the Senate Finance Committee to produce a bipartisan bill seem to be mired over the public plan idea, among others. Both the House and Senate are struggling to find ways to fund these very expensive legislative proposals.

At eHealth, we have spent significant time and energy working personally with many members of both Houses and Committees, and many of their staffs, often at their invitation. Our focus and message is not so much oriented toward the development of legislation, as it is to the post-legislative environment. We believe that an enrollment strategy must be a key component of any healthcare reform.

Passage of a bill is only the first step in closing the gap in access to healthcare. A diverse enrollment strategy, which utilizes the best of the private sector combined with legislative initiatives, will help to maximize coverage of the uninsured, and that is the President's stated goal for legislation and reform.

We know that enrollment of people into health insurance is not simple, and that experience matters. We have been educating policymakers and legislators about how eHealth operates at the intersection of health and technology, and has the expertise, technology, and years of experience, that can help policymakers implement the most effective ways to connect Americans to coverage.

Our strategy and message of utilizing technology and viable resources like eHealth to connect the public to coverage, resonates with Democrats and Republicans alike. Because they all realize that after reform legislation is passed, its effectiveness and success will be quantitative and measurable, by how many uninsured have become enrolled. As the healthcare legislative discussion has become more heated, and as the process has slowed, I believe we may see legislation passed, which is not as broad and sweeping as some may have expected.

It is clear that the President wants legislation passed by Congress this year, and it appears that compromises must be made to achieve the President's objective. As a result, we may very well see legislation signed, which is less government-centric than some in Congress have wanted, creating significant opportunities for eHealth, and this is precisely how we are positioning ourselves in Washington, DC, to be a constructive and collaborative participant, both pre and most importantly post-legislation, to help make any passed legislation as effective and successful as possible.

On this note, in the second quarter, we launched our ready2connect microsite, geared toward various public policy topics. The launch of ready2connect.org, is an important step in our PR policy campaign, designed to support and deliver our message on topics related to healthcare reform. I encourage you to visit the new ready2connect.org site.

Finally, as you know, last year we authorized a share buyback program, and have purchased 412,000 shares cumulatively under a 10b5-1 trading plan. While we were not active in the market in the second quarter, given the parameters of our original 10b5-1 plan, we expect to be more active in the third quarter, as that plan has expired, and is now being replaced by a new plan with revised parameters. We continue to believe that repurchasing our shares is financially attractive, and accretive to our earnings per share.

And now I will turn the call to Stuart, who will go over our financial results in greater detail. Stuart?

Thanks, Gary. Good afternoon, everyone.

I will now review our financial results for the second quarter of 2009. As Gary mentioned, we saw continued positive momentum and leverage in our business, as reflected by the revenue growth, strong cash flow, and solid operating margins reported in the second quarter. Starting at the top line, our revenue for the second quarter was $33.4 million, an increase of 22% over the second quarter a year ago. Commission revenue was $29.9 million, an increase of 21% over Q2 2008. Our year-over-year commission revenue growth was mainly due to growth in our membership base.

Sponsorship, eCommerce On Demand, and other revenue was $3.5 million in the second quarter of 2009, or 28% annual growth. Excluding the $0.5 million in revenue related to a one-time eCommerce On Demand item that we recorded in Q2 of last year, the annual growth in sponsorship, eCommerce On Demand, and other revenue was 54%. During the second quarter we achieved 17% year-over-year growth in individual and family major medical plan submitted applications, down from 23% reported in the first quarter of 2009.

As Gary pointed out, our application growth reflected some underperformance in our paid search channel, even as our direct and marketing partner channels continued to generate 20%-plus annual growth, building upon solid first quarter performance. We were especially pleased in our direct channel, which generated 25% year-over-year individual and family application growth, and contributed 43% of total individual and family plan submitted applications.

In the second quarter, we had 103,400 approved members for individual and family products. During the quarter, we observed more stringent underwriting standards with our carrier partners, and that created a headwind for our approved member growth. Our approved member growth was also impacted by a decline in the average number of individuals we had per approved application in the second quarter.

Our total estimated membership at the end of Q2 2009 was over 700,000 members, which included approximately 30,000 net members at the end of the quarter, who had had transferred from Health Benefits Direct, pursuant to our business development agreement with them. Virtually all of the members under the HBD agreement have now been transferred to eHealth.

I would like to comment on member retention but before I do, I would like to remind you that we estimate retention using trailing historical data. Our second quarter view of retention is based on data from the fourth quarter of 2008. Excluding HBD members from the number of total revenue generating members in both Q1 and Q2 of 2009, our estimated member retention rate remained within our historical range, and was comparable to our view of retention in the first quarter of 2009.

We also observed year-over-year improvement in retention, as compared to the view we had in the second quarter of 2008. In the second quarter our non-GAAP operating expenses as a percentage of revenue, which excludes stock-based compensation, increased as compared to the second quarter a year ago. During the quarter, we saw continuing economies of scale in customer care and enrollment, G&A, and technology and content, which were offset by an increase in our marketing and advertising spend, and higher cost of revenue sharing.

Our non-GAAP marketing and advertising expense which excludes stock-based compensation expense, was 38% of revenue in the second quarter, as compared to 34% in the second quarter a year ago. On a GAAP basis, our second quarter marketing and advertising expense was 39% of revenue.

We are still targeting our marketing and advertising to be in the 38 to 40% range as a percent of revenue, on a GAAP basis for the full year. However, please note that due to seasonal patterns, we are likely to be above that range in the third quarter of 2009, which is typically a high application quarter for eHealth.

Our cost of acquisition per member on an individual and family plan submitted application was $73 in the second quarter, if measured as our marketing and advertising expense per individual on IFP submitted applications for the quarter, a 22% increase as compared to $60 in the second quarter of 2008. This was primarily driven by higher costs in our paid search channel.

Factors that impacted member acquisition costs in this channel, included higher prices per click in our category, and a decline in yields from quote to submit for website traffic generated through our paid search initiatives. The increase in our cost of acquisition during the quarter was also driven by a decline in the average number of individuals per submitted application in the second quarter, as I mentioned earlier, since individuals on submitted applications are the denominator for this cost of acquisition measure.

Our new member additions remain highly profitable, based on our second quarter cost of acquisition per member. However, we are focused on and are working to resolve the underperformance that we experienced in the paid search channel this quarter, and to improve our conversions in paid search and across all channels. While marketing and advertising expense increased compared to a year ago, we continued to focus on, and to achieve significant efficiencies in other operating areas.

Non-GAAP technology and content costs which exclude stock-based compensation expense, improved from 12% of revenue in the second quarter of 2008, to 11% for the second quarter of 2009. General and administrative costs also improved on a non-GAAP basis, from 14% of revenue in the second quarter of 2008, to 13% in the second quarter of this year. Our non-GAAP customer care and enrollment costs were 11% for the second quarter of this year, as compared to 12% for Q2 '08.

Our GAAP operating margin was 21%, or $6.9 million, as compared to 23%, or $6.4 million in the second quarter a year ago. Our non-GAAP operating margin excluding the effect of stock-based compensation was 24%, or $8.1 million, as compared to 27%, or $7.4 million in the second quarter a year ago. Second quarter non-GAAP operating income grew 9%, as compared to the second quarter of 2008. Excluding the one-time eOD revenue item recorded in Q2 2008, which I mentioned earlier, our non-GAAP operating income grew 17%. Our approach to investing and managing our cash remains conservative.

Currently, over 94% of our cash and marketable securities consist of cash, US Treasury funds, US Government agency funds, or direct investments in US Government agency securities. The remaining investments are in high grade corporate bonds and commercial paper that we plan to hold to maturity. Interest and other income was $0.3 million during the quarter, down year-over-year from $0.9 million in the second quarter of 2008. Interest and other income, almost all of which reflects interest earned on our invested cash, cash equivalents and marketable securities, continued to be impacted by the low interest rate environment.

Our GAAP pretax income of $7.1 million in the second quarter of 2009 was down slightly, from $7.3 million in the second quarter of 2008. On a non-GAAP basis, excluding the effect of stock-based compensation in both years, our pretax income was flat at $8.3 million. The lower year-over-year growth of our pretax income as compared to operating income, both on a GAAP and non-GAAP basis, is primarily attributable to a 73% year-over-year decline in our interest income. We estimate our 2009 effective tax rate for GAAP purposes in the 43 to 45% range, even though we expect to pay cash taxes at a much lower rate, due mainly to significant net operating loss carry-forwards, that reduce the cash taxes we pay.

Second quarter 2009 GAAP net income was $4 million, down from $4.2 million in the second quarter of last year. Non-GAAP net income excluding the effect of stock-based compensation and related tax effects in both years was $4.8 million, as compared to $4.9 million in the second quarter of 2008.

Our cash flow from operations was $8.3 million, as compared to $8.6 million in the second quarter of 2008. As explained in our Q1 earnings call, the tax benefit that we received from our NOLs has a different impact on our cash flow statement this year, than it did in 2008. In the second quarter of 2008, we had a $3.1 million change in deferred taxes, all of which benefited operating cash flow.

In the second quarter of 2009, we had a $3 million cash flow benefit from taxes. For purposes of our 2009 cash flow statement, however, that $3 million cash flow benefit was split, with $1.5 million benefiting operating activities, and the other $1.5 million benefiting financing activities. So our operating cash flow was approximately $1.5 million lower in Q2 '09, than it would have been if we were applying NOLs purely related to past losses as we did last year. Our Q2 2009 cash flow from operations would have been $9.8 million on that basis, or 13% growth as compared to last year's number for Q2.

Capital expenditures for the second quarter of 2009 were approximately $300,000, and totaled approximately $500,000 for the first half of 2009. We did not repurchase shares under our buyback program during the quarter. As Gary mentioned earlier, we were precluded from being more aggressive with our repurchases, based on the parameters of our original 10b5-1 trading plan, put in place in the fourth quarter last year. The original plan has now been replaced with a new plan, and we expect to be more active in the market in coming months, than we have been previously.

Our cash and marketable securities balance was approximately $160 million as of June 30th, 2009. Our cash and marketable securities constituted more than 94% of our total assets, excluding deferred tax assets at the end of Q2. Given this and the fact we have no debt, we continue to believe we have a very strong balance sheet.

With respect to guidance and based on information currently available, we are reaffirming the revenue, stock-based compensation expense, GAAP income tax rate, and GAAP net income per diluted share guidance for the full year 2009, that we provided in our last earnings call. I want to remind you that these comments are based on current indications for our business, which are subject to change at any time. We undertake no obligation to further update our guidance.

And now we would like to open up the call for questions. Operator?

Sure. (Operator Instructions). Your first question comes from the line of Youssef Squali with Jefferies & Company. Please proceed.

Thank you very much. Good afternoon everyone. Couple of questions. I guess going back to the online acquisition channel, I am still not clear exactly what happened. Did you just suffer from poor performance based on click yields, as you said earlier?

My issue with that is paid search is something that you get returns relatively quickly on, so you probably would have stopped spending money, and kind of moving into a different channel that was better performing, or was it something that maybe Google and Yahoo did with the algorithm to kind of change it in midstream? So any clarification on that would be very helpful.

Secondly, gross margins were down 140 bips sequentially, about 230 bips year-on-year. Can you just clarify what is behind that, and what is baked into your annual guidance? Thank you.

Youssef, it is Gary. Let me take the search question, and then I will have to let Stuart talk about the margin question. On search, we saw several things. First of all, we typically operate on Google, and natural search, or organic search in the #1 position.

We believe there were some algorithm changes in the last quarter. We were operating two and three, I think today we are #2. We are doing some things that we think will help influence us back into the #1 position. That is important because when we are bracketed #1 in natural organic, as well as paid, which we buy, we do find that our conversions are much better on the paid side. So there is one element that we think we know.

Secondly, we watched this carefully during the quarter, and yes, frankly, we expected to see better conversion than we did, especially from the secondary search sources, Microsoft and Yahoo, for example, who have got their own sets of challenges, as we have known, as we know. And we had some of that, but not as much in Google.

What we did find was that we weren't converting as much as we have historically, and certainly we have heard commentary from some of these search engines publicly, that they believe that there has been more comparison shopping, and not as much transacting in most of the categories. There may be some of that here as well.

We have also taken some other steps, in terms of looking to change some of the language that we advertise with. We are landing visitors now into what we call more contextual space. For example, if you key in New York health insurance, we want you to land into an area that is relevant to New York, not just the vanilla eHealth experience, for example. We think we know what to do.

In fact, paid search has always been what I have felt has been a real good core competency in our Company. I still believe it is. We had a few things that we think occurred, either because we frankly weren't as focused on it as we should have been last quarter, and/or some things happened in those channels that well have contributed to all of this.

Having said that, we were heavily focused on our partner channel this past quarter as well, saw a good return there. Delighted what we saw on the direct side. So if there is any good news in what happened with search here, is that it is not any kind of malaise across the business, rather, we think it is very much located and very much focused in this one area, and isolated in this one area, which is paid search, and I can assure you we are all over that right now.

And it's not something I want to just, if we are not converting, just take the money and put it in some other place. It is really important that we have got very, very strong visible presence in search. So that is why I want to continue to spend, and we will, but to ensure that we can convert better.

Just on that point, so before moving to the gross margin question, so historically you've talked about a 20%-plus applications growth, being kind of an acceptable run rate, or an achievable run rate. Has that changed in your mind, or is that still the case?

That is absolutely the case. I believe strongly that application growth for us starting with a 2 is what the market, is what the opportunity that is available in the market. If you take a look at our direct growth which was 25%, if you look at our partnered growth which was 21%, I think both of those very much support that. We were 23% overall application growth in the first quarter.

There is no reason why we shouldn't see application growth in future quarters, starting with a 2 as well, and that is something as I think you know, I have always felt very strongly about, and something we are pushing hard on. Let me also add once again, as I did say in my commentary, that the application growth that we actually generated in the second quarter is within the range of application growth that was actually within the guidance, the parameters in which we established our guidance and forecasting for this year as well. But I think we can do more.

Okay.

Great. And on the margin question, it is always most appropriate to look at the year-over-year comparisons because of the seasonality, and if you look at Q2 to Q2, it is about 300 basis points lower this year than last year. About two-thirds of that relates to the one-time revenue item that I mentioned in my comments. That dropped entirely to the bottom line. That was about $0.5 million that went all the way down to the bottom line in Q2 a year ago, and gave us about 200 basis points of margin last year, and then as I commented, our marketing costs as a percentage were higher this year. They are about 400 basis points higher than Q2 a year ago, and we made up most of that through other line items on the P&L.

Okay. Thank you very much.

Your next question comes from the line of Steve Halper with Thomas Weisel Partners.

Just to pinpoint the gross profit margin issue from the previous caller, so your cost of, what do we call it, the cost of revenue. The cost of revenue sharing was $1.3 million on the income statement. So what is responsible for that increase from the first quarter, from $800,000 to $1.3 million?

Most of that increase comes from our revenue sharing on our Health Benefits Direct.

Okay.

Arrangement. So that is the primary cause there.

Okay. And so you talked about the weakness in paid search. So what are the things that you can do to get that channel moving again? What kind of fixes do you have to put in place, to increase conversions from that segment?

Yes, already under way. The good news here again is that this is something we know, because this has always been a good channel for us in the past. We have got a number of things under way. We are making some language changes in terms of the actual advertising text. We are doing testing with that, and finding some things that are more relevant today, than what we may have been using.

We are looking at what we call contextual landing environments. So again, Steve in New York, if you go to Google, and key in New York health insurance, and I am not saying this will happen today if you key it in, but we would like to land you in a place where the context is New York with New York plans and so on, that seems very relevant to your search. That is awfully important.

We are looking at some of the things that we do actually inside of our site, in terms of where we take people who come from paid search through the process, and so on, and different conversion factors there. In fact, we have got a number of things under way. I think I commented as well that in natural or organic search, which is part of this, we have been maintaining the #2 or #3 position.

In the past we have been #1. When we are #1, we know that that has positive impact on our position in paid search as well. We have got a number of initiatives under way to hopefully influence that. We believe that there may have been some algorithm changes at Google for example, which is where I am referring to natural search as the #1 position, which happens from time to time.

So if you implement one, two, and three, the first three things that you identified, then the goal is to get back to #1 in natural search?

Well, one, two and three won't get us back to #1. There are different things that have to happen there. But the combination of all of those things will have, and we believe is having positive impact on paid search, and our conversions in paid search.

So what can you do to get back to that #1 in the natural search?

Well, there is some science, and there is some art to that. The science is that we know that there are a number of things that the Google algorithms, for example, go out and test and look for, to determine or really to assess the relevancy of everything that is out there in the world and then they rank them as such. So right now we are ranked #2.

We know there are a number of things that we can do that will impact that, and that is the kind of work that is under way. But I can't tell you what they are absolute, because nobody knows what they are absolute, except some of the people who control some of the algorithm work, and so on in these different search engines, but believe me when I tell you this is one that we have got a number of people on right now, and we think some of the steps that we are taking, may very well influence that position for us. And having again, that #1 position in natural search just reinforces, and frankly makes the #1 position in paid search typically work and convert better for us.

And is that a three month project? Six month project? Or what kind of time frame are you thinking about?

Well, it is under way right now. We have got some people on it full-time and-a-half, and I wish I could tell you when we are going to be back to #1. I wish I could tell you it was going to be this afternoon, or this evening. It is something that we have a great sense of urgency on, and I would certainly hope that it is a lot less than months in terms of timing.

Great. Thanks.

Thank you.

Your next question comes from the line of William Morrison with Thinkequity. Please proceed.

Hi. Thank you. I have a few questions about the Utah win, Gary. I guess starting with can you talk a little bit more about why they are doing this exchange? I mean, are they moving more towards a Massachusetts guarantee issue with individual mandate type of environment, or are they doing this preemptively with the expectation that that is the way that the federal legislation is going to go? That is question number one.

Question number two is, I am not sure I heard you right. I thought I heard you say that you are going to get a commission on every individual that signed up through the exchange, just as if you would through eHealthinsurance.com. Can you just confirm, did I hear that correctly?

And if so, why is it being structured differently than your commercial eOD business, where it is more of a technology licensing fee, and do you think that is going to be the trend going forward? And then last question is are there any other states that you are currently entering RFPs, and competing for business like this?

Yes, thanks, Bill. Let me see. First of all, in Utah, I don't believe Utah is trying to do anything to preempt what is going on in DC. This is work that has been under way for some time. We have been talking with them, for my gosh, a year before the presidential election. The RFP was actually let out last fall, before any of the healthcare reform started to take shape in DC.

They have just felt very strongly in Utah, that they want to get everyone covered, and the Governor in Utah, Governor Huntsman, this has been something that has been very high on his agenda. There is a really nice article that I would refer everyone to, that was in The Washington Post this past Sunday. It is entitled 'Health Reform Utah's Way,' by Kathleen Parker. Kate can get you an online link to it as well.

It does a really nice job describing what is going on in Utah, and frankly the thesis here, is that a lot of what is going on in Utah, should be a model for the rest of the US. That describes that. I don't think there was anything there to preempt what is happening in DC. They feel strongly about getting aggressive, and doing some things to help the residents in Utah.

Secondly, yes, you heard me right; we are actually on this exchange going to be paid a commission, the same commission that we earn through the carriers. So the state is not getting in the middle of any of the financial finances with any of this. Rather, they are just on their dime putting up the exchange, doing things to market it, and get residents to it, and to help them get health insurance.

The state is looking at subsidies and things like that, and what we found was that through the carriers in the state, that it looked like the way that was most amenable for everybody, was to simply build this as an extension of the commission model that we already have in place. Obviously, we are pleased with that. It is the best of all words from a financial standpoint for us.

I wouldn't expect other public eOD implementations of ours to be the same. I think this could end up being rather unusual and a one-off. I have always thought a public eOD as being an extension of our commercial eOD business, which would be some kind of a transaction fee. This is our first one. It is the only one going up in the country, beside the Connector in Massachusetts, and we are very, very pleased.

I want to emphasize how important this is to us, because we can really put in place here what we think is a lighthouse for other states and Federal Government as well. Is a way to use what exists in the marketplace today, implement it effectively, economically, quickly, and most importantly, get people connected to coverage as soon as possible, which is a big part of our message in DC as well.

Last part of your question, yes, there are other states that are considering this also. We are in discussions right now in the state of Oregon, for example, where they also seem to be very progressive about wanting to do some things to help residents. The state of Oregon is very interesting. That is where Ron Wyden is from, one of the Democratic Senators who has been very, very involved in healthcare, and proposals for healthcare reform for several years. He is also on the Senate Finance Committee.

I should add as well, that what we see in the Senate Health Committee Bill is a state by state implementation of exchanges. We don't know what the House Bill is going to end up looking here, with all the compromising and so on. You may see a Senate Finance Committee Bill, which could be the operative bill in the Senate, you may see state by state exchanges as well. Which we actually believe is a more effective way to get people enrolled and covered, and we think is also a very intriguing business opportunity for us.

A couple of quick follow-ups on that. Is there a mandate in Utah, that individuals have to buy their insurance through the exchange? And then broaden that to the government. I know you don't know which way this is going to go, but if you had to bet today, do you think the final legislation is going to include some sort of individual mandate to buy insurance within the exchange environments, whether national or state exchanges?

Yes. Bill, in Utah there is not a mandate today. Rather, there is going to be some work done to help people fund it, but no mandate currently, not in the legislation that was recently passed. From a federal standpoint, as I commented, I believe with everything that we are seeing and hearing, and a lot of contact with people in DC, that if there is legislation that is passed this year, and I am assuming there is going to be, by the way, I think it is going to be much more moderated than some of the things that have been reported recently.

As you know the Energy and Commerce Committee in the House, headed by Henry Waxman, they have got a number of centrist Democrats, known as Blue Dog Democrats, who simply won't support where the bill is today, and they are stuck. There are going to have to be some significant compromises made.

I believe that what we are going to end up with, is if we have legislation passed, it is going to have a guaranteed issue. It is going to have mandate provisions that require everyone to have coverage.

I don't believe there is going to be a mandate or requirement that everyone has to go through a government exchange. A government exchange whether it is national, regional, or state by state, is going to simply end up being an option, or a place that people can go. A big part of my message has been that once legislation is passed, the real hard work begins, which is getting these 46 million to 50 million uninsured Americans covered.

To do that, you have got to use all of the viable means that exist today. Put exchanges in place, use eHealth associations, other things as well, let us extend the technology which is already built to a lot of different places to do this, and this resonates very well with Democrats and Republicans, and I think that is probably where we are going to end up, and it is one of the reasons why frankly we are really getting more and more enthused about what we are seeing from a legislative standpoint, as things continue to unfold and change in DC.

Great. Thanks a lot.

Your next question comes from the line of [Nat Schindler] with Bank of America/Merrill Lynch. Please proceed.

Yes, hi, thank you. Not to beat a dead horse, but I would like to go back to that cost of revenue sharing number. If I understand it correctly, that number is related to the 30,000 this quarter, and 20,000 last quarter you got from Health Benefits Direct, and the increase in both of the last two quarters over a baseline of last year. Would I then expect those numbers to stay at those levels, until those customers churned off at a normal pace?

Yes. As I mentioned in my remarks, we are virtually complete with bringing those on to our books, so 30,000 is roughly in the ballpark of what we are bringing over, and then you would expect those to go through the kind of normal kind of retention cycle, that you would see with our individual and family policies on our books. Most of those are individual and family policies.

So roughly two years?

Yes, roughly two years, plus.

Okay.

Well, I should say, many of those that we brought on were already in the life cycle. We would bring them in a year into their life cycle. Some of them are three months in, some are close to two years in. So it is a mix. It is a mix of membership there.

Okay. And going to your cost of submitted applications, trying to figure out, the increase seems, considering that direct, your 22% increase in cost per submitted member, seems even with an increase in the cost and a decrease in the efficiency of search, seems a little strong, considering that direct, which is largely free, I believe, went up considerably. Was there a change in the partner costs?

The partner cost stayed relatively stable this quarter, relative to last quarter. We did spend a little bit in the direct channel. We have been spending more on e-mail campaigns. We did do a little bit in TV this quarter. Another impact here that I mentioned is, is that we have fewer members per policy, and that is the denominator of that calculation, and so that actually does have an impact as well, in bringing that number up, relative to other quarters.

But it is primarily, for the most part, it is search related. And frankly, the cost per click is up as well, because we believe that others who are in paid search with health insurance terms, are finding that they are not converting as well also, and we are all spending more going after that right now. So the key for us which we have been really good at in the past, and we will be I believe again soon, is to find more efficient ways to convert those clicks.

Interesting, cost per click went up even as ROI on a given click, the conversion rate on a given click went down?

Yes.

That is happening separately in other industries, in the opposite direction. But thank you very much.

You bet, thank you.

Your next question comes from the line of Richard Fetyko with Merriman. Please proceed.

Good evening, guys.

Hey, Richard.

Just a couple of questions. First, on the underwriting criteria by carriers, you mentioned that it was a little more stringent than in the past. Are you talking sort of on a sequential basis, or a year-over-year basis, and why do you think that change has taken place?

We are talking on a sequential and a year-over-year basis. And it is something that we have seen over the last many quarters. It has gotten tighter, and I don't really have a good answer for you, as to why it is getting tighter. That is something that is in the carriers' domain.

It is a cyclical thing. We noted in Aetna's results yesterday, they had commented, that they have found that utilization of products is up, and as a result, you could expect to see their member base decline a bit, as I think they get more inspective as well. So we do see these things cycle.

I should add by the way, it is probably obvious, but if we get the kind of legislation passed that is being discussed, and I still underscore if, in a guaranteed issue environment, we probably won't be having many discussions about these kind of conversion rates, and so on, because every applicant by definition is approved.

Right. And then on eApproval, did you mention, I missed the first 15 minutes of the call, whether you added new eApproval carriers, and what is in the pipeline for that?

Yes, Richard. In fact, that continues to broaden, and we feel good about where it is moving. We added Celtic in 37 states plus DC. We added CareFirst in Virginia and Maryland and also DC, and then with Wellpoint we added two of their large plans, Texas UniCare and Blue Cross/Blue Shield of Georgia, and yes, we have others in the pipe that are coming on as well.

Okay. Thanks.

Thank you.

Your next question comes from the line of Jim Friedland with Cowen and Company. Please proceed.

Thanks. First, a follow-up on the Utah connector. In Massachusetts, the connector hasn't really generated a lot of demand from what we have seen, and granted that is a very different state, but do you think it is possible that you will see the same thing in Utah and other states?

Second question is on the COBRA subsidy, now that we are well into that going into effect, are you seeing that impact your conversion rates, et cetera? Is that having any kind of impact on your business? Thanks.

This is Gary. I will take the second part of your question first on COBRA. No, we haven't seen any unusual impact from COBRA, or the COBRA subsidies in the Stimulus Bill, or whatever in the second quarter. We continue to see a number of people come to us who are recently unemployed, looking for COBRA alternatives, and we are marketing that very aggressively as well, but no, nothing unusual there.

In terms of the connector in Massachusetts, it is important to note, and this is publicly available information, that a large majority of people who have actually gone through the connector and gotten themselves enrolled in health insurance, have gotten subsidized by the state, or free health insurance through the state on the Connector. A very small portion of those have actually bought private plans. In Massachusetts, we power Massachusetts Blue Cross/Blue Shield, their eCommerce On Demand site. We are led to believe that the volume there is greater than the volume they see in the Connector. With Fallon, who we have just launched in Massachusetts, we expect that just us alone, what we will be marketing and selling for Fallon in Massachusetts, will be more than they see in the Connector.

The Connector just hasn't had the kind of impact on the private sector, or private insurance in this guaranteed issued, mandate regulated state, that one might think, or want to think. It is one of the things I caution people and policymakers in DC about, you can't build a website and expect that most of the free world is going to come to it. It just doesn't work that way, as we all know. I think Utah will be interesting. I think the state will market the exchange or the connector in Utah. People will come to it. I think we will continue to have a really vibrant business in Utah, and others will as well.

I think in an environment, nationally again where you've got guaranteed issue and mandates and so on, and some kind of a government-sponsored connector or exchange, if that connector or exchange, if that is the only place you can get subsidies, you are going to attract a lot of people who are looking for subsidized health insurance.

One of the things I also feel strongly about, and very vocal about with policymakers, is that any subsidies that you make available in new legislation, put those in some kind of connector, be sure you put them at eHealth, and a few other places as well, because we will get more people covered that way.

A separate follow-up on eOD with all the sign-ups that you mentioned in the first part of the call, is there potential to see any kind of acceleration in that growth line, or is it sort of stair step, a little bit each quarter? How do you think that plays out in the second half, and into 2010?

This is Stuart. I think there is potential for acceleration there. I don't know that I would expect acceleration, but there is potential. It depends on the volumes, the transaction volumes of the carriers. As always, it is going to be somewhat seasonal. It should pick up transaction-wise in Q3, because that is a high season for applications, just like in our core business. And it could ebb and flow a little bit, based on the seasonality there.

Great. Thank you.

Your next question comes from the line of George Askew with Stifel Nicolaus. Please proceed.

Yes. Thank you very much. A couple of questions. Regarding the paid search weakness in the quarter, if I can address that once again, can you help us understand over the three months of the quarter, when did it impact you? When did you hopefully see it bottom? How are you seeing it kind of recover, or any kind of sense of that trajectory?

Well, yes, it was certainly throughout the quarter, it wasn't where we have experienced it, or where we wanted it. I think it bottomed out mid-quarter. Frankly, June was better. That was important because we were already taking steps at that point, and the work we are doing right now is to continue the improvement trajectory into this quarter, and next as well.

Good. When does the Utah exchange actually go live?

Should go in in the next several weeks. They are just finishing up a few small things there right now. We have already released everything, and we are ready to go. That was one of the things that was really appealing during the whole RFP process, was that we competed with systems integrators, software companies, and so on.

As you might imagine, they all had to go build this from scratch, while we were ready to implement this within a few weeks. In fact, we have been waiting on the state, they have not been waiting on us. That makes it very attractive to other public agencies and entities, as they consider doing things like this in the future as well.

Is the lower number of individuals per IFP submitted application, related to the mix of application source, or maybe related to the growth in eOD? I mean, in other words, are you seeing that more people who come through eOD or direct, for example, are singles?

We watch the eOD landscape very carefully. We do surveying and so on, because frankly, we have been interested to know if eOD would cannibalize our business in any of the markets that we are in. And one in particular is with a very large carrier. We have looked at a couple of markets that they are in, and our business there as well.

We have seen absolutely no cannibalization at all. In fact, our direct business with that carrier is growing at a very, very nice rate, as is their eOD business. That hasn't had any impact on our core business, and I don't believe it has any impact on the number of members that we have on an application. We are seeing interestingly, more people coming to us rather than putting an entire family on an application, just putting several family members on an application.

We don't know enough to tell you if people are just economizing and deciding that as a family, the adults won't be covered, but the children will. We don't know that. We hear anecdotally that there are some people who get health insurance from their employers, their dependents aren't covered, or they take the dependent off the employer rolls. But there is nothing of substance beyond that.

Any update on the China operations?

Thank you for asking. We continue to grow our business in China at a very nice pace. We have got several carriers nationwide. We have got several others in the pipeline that we hope to be adding in China. And although what we are generating in China isn't yet material enough or enough substance for us to give you the actual financial metrics, we are seeing really, really nice growth there, and I think probably the next quarter or two, we may very well be making some comments on that. But things are going very nicely for us in China.

Thank you.

Your next question comes from the line of George Sutton with Craig-Hallum. Please proceed.

Hi, guys. Most of my questions have been asked and answered. But one question on non-IFP. Can you just discuss the challenges there? We are seeing negative additions, negative net additions. Just wanted to understand what is behind that?

Yes, the primary reason behind that has to do with our short-term product, and that has always been sort of a byproduct of the traffic that comes to our site. It is not a core area for us.

It is kind of a side light, and so I would say the emphasis has not been as strong on that product line, and that shows in terms of the performance of that. That is a quick cycle product. People buy it for a month or two or three, but it is a very short-term product.

The other one to a lesser extent is small business. In this tough economic environment, small businesses are struggling, so that product line is not growing that significantly right now.

George, this is Gary. On short-term, we used to promote short-term quite a bit, especially when we were in a not a good business environment, like we are today. In fact, we started this years ago when unemployment was high, because we found that people were buying major medical individual and family plan products, holding them for a few months, and dropping them, so it had an effect on retention we didn't like.

We are watching that closely right now. We are not seeing that. In fact Stuart actually commented our retention is actually improving again. I think by choice we just have not been pushing the short-term products, because there hasn't been a need to. We make them very visible, but we are not marketing them aggressively.

One other question while I have got you. Looking at the state of Utah uninsured population it is 387,000 people. Is that the target market that you and the state are going after with this new program?

Well, that is part of it. But the state is also going to put what is called a defined contribution model in place, to get businesses, small businesses kind of a cafeteria approach to products, and so on. There may be some subsidization for that as well. So it is going to be a number of things. I think as everybody knows, Utah is not a big population state. I believe it is about 2.7 million people today.

Perfect. Thanks, guys.

Thank you.

Your next question comes from the line of Sameet Sinha with JMP Securities. Please proceed.

Yes, thank you. Couple of questions. In terms of Utah, can you talk about who are the people, which companies, systems integrators and software companies were you bidding against, how long was the RFP process, and how much time did it take for them to make a decision? And then I have another question.

The RFP process in Utah was late last year, actually in the fall, into the early winter. We because of the nature of the RFP processes and so on, we don't know everyone that bid and so on, and I don't believe that it is public information as well. We know that there were some known named systems integrators involved, and some software companies in Utah as well.

Again, the RFP process, it was a typical government RFP process, in a previous Company I had been through this many, many times, where there were several iterations and so on, best and final offer process, and such. But we were obviously delighted with the outcome, and also feel that it was a good exercise for us to go through that RFP process, really for the first time in this Company, and to come out of it the way that we did. We are feeling very optimistic about some other potential processes in states like this, that we see in front of us as well.

Great. Second question, just wanted to spend some time on Health Benefits Direct. Can you talk about what the revenue contribution has been? I mean, I know 20,000 customers in Q1, 10,000 in the second quarter, so there has to be some, was it under 1%, or about 1%? 2%? Can you talk about that?

We don't break it out because it is not material, but we have provided the number of members and they are almost all individual and families. You can get a general sense from that, and you can also see the step-up in the cost of revenue, and get kind of a general idea of what that might be.

Would you say that on an average, 30,000 people look very similar to an average year of eHealth customer base?

Generally speaking, in the ballpark.

I mean, they in terms of longevity, and ARPU, and everything?

In terms of ARPU, and yes, the retention so far. We don't have a lot of experience but so far, similar.

We are expecting that the life cycle is about the same, but also note these that we brought over are all at various points in the life cycle.

Sure. You made a $1.3 million upfront payment in Q1. Was any incremental payments that were required in the second quarter, or that is it?

Well, there are ongoing payments of revenue share over and above that that we are paying to them, and so a portion of the $1.3 million is amortized as we go into that cost of revenue number, along with an ongoing revenue share.

My understanding was that they have to hit certain revenue benchmarks, and then that will trigger off any payments beyond the $1.3 million, or that $1.3 million is up front, and you have to, or you have already started paying some revenue share for these 30,000 new successful subscribers?

Really for all intents and purposes the 1.3 million was really like a down payment against the rev share. A total bundle of revenue share that we were going to pay them over time. That was roughly an advance against the future stream of revenue.

Okay. Fair enough. Thank you very much.

Your last question comes from the line of Carl McDonald with Oppenheimer. Please proceed.

Thank you. Wanted to come back to the Fallon commission. Just to clarify. Did you say the commission on Fallon is the same as other health insurers in Massachusetts get, or I should say brokers in Massachusetts get, or similar to the commission you receive across the country?

What I said is that it is similar, in fact, it is equivalent to the average that we receive across our entire inventory of individual and family plan products in the US. So not Massachusetts, but all 50 states.

So can you just give a little color on that? My understanding is that if you get an individual policy through eHealth, or you go through the connector, you are going to pay the same price for a commensurate policy. So from the health plan perspective, if they are paying 20% commission in the first year, how do they make any money on the policy, relative to selling it through the exchange, where there is a very, very limited commission?

Well, they have got their products in the exchange, but I can't speak to how they make money. That is their business to build those different mechanisms, and so on. But rather, what Fallon has found, and I think was we are going to see in a guaranteed issue environment, is that once you start to get the uninsured covered, and the ranks of the uninsured decline, in Massachusetts less than 3% of the population now is uninsured. 97% is covered.

Then what it becomes is really a challenge, or a game of market share for these carriers. And Fallon now has got to figure out ways to take market share from its competitors like Pilgrim and Blue Cross/Blue Shield of Massachusetts, and sitting on a government run exchange probably isn't the best way for them to market and take market share. So what is happening is we are finding these carriers waking up and starting to get very competitive, and more assertive about how they market and sell their products.

When Fallon goes on eHealth, they know that there is going to be a lot more marketing than they are going to get from the connector in Massachusetts, or maybe through their own efforts as well. We have had them up for a little over a month, and I can tell you that just the volume results so far are beyond their expectations and ours, and it is doing exactly what they wanted, and it is why other carriers may want to come on as well. And they are very willing to pay the commission that they are paying us to do this, and at least as they tell us, Carl, it is a profitable, very positive business for us, and they find a very efficient, frankly economical channel to do this with and through.

In your conversations in DC, have you gotten much pushback on the amount of commissions that brokers receive? I mean, 20% of the premium obviously, lower in the second year, but a fairly significant amount of money, and also when you think about how much premiums have accelerated over even the last five years, there have been some pretty significant improvements in the compensation that brokers make. Has that been a focus in any of your conversations?

Interestingly, I have not had a discussion with a Democrat or a Republican about commissions or commission structures, and so on, or the margins of any of that. The concern that legislators and policymakers seem to have about kind of traditional agents and brokers, is about adverse selection.

In fact, Henry Waxman made a comment at a breakfast that I was at, that he believes there may be some brokers that position themselves in an office, that require somebody to walk up three flights of stairs to fill out an application. By innuendo, if you are not healthy enough to get up three flights of stairs, then you are not going to fill out the application. That has helped people get adverse selected. Some policymakers look at agents and brokers as a bit of an extension of the health insurance carrier world.

We are different, and we are getting recognition for that. Everything we do is getting presented in an objective and unbiased fashion. We are blind to commissions. In fact, no one in our Company knows what the different commissions are for different plans, and so on. No, that has not been an issue.

The issue in the discussion is how do we get these 46 million to 50 million people who are uninsured connected, and how do we get them connected economically and efficiently, and as the President and others have said, in an exchange, applying technology to healthcare to reduce costs and increase efficiency, is the way to impact a lot of delivery of healthcare. I think that we are an example of how to do that, but no discussion at all about commissions or commission rates.

And then last question, it sounds like a simple question which is, have you guys done any work on the size of the individual market in the US? I mean, I have seen the figure, 17 million or 18 million on a national basis, but when you do more of a bottoms-up analysis, looking at some of the bigger publicly traded and not for profit plans, can't really get anywhere close to 17 million or 18 million. I wonder if you guys have done any work to try and get a size of where the individual market is today?

We have in the past. We use data from the Census Bureau. The last Census report had the market at about 18 million policyholders. Let's talk about two things. You have got the number of people holding policies, and then the market opportunity. The Bureau of Labor Statistics comes in at about 18 million as well. As we do work and share intelligence with the carriers, and so on, we come into similar numbers, actually between 18 million and 20 million.

Remember, you have got between 46 million and 50 million uninsured. 46 million people per census a year ago, closer to 50 million or even more than that, if you look at some of the research that was done recently with people who are unemployed. Between 8 million and 12 million of those 46 million to 50 million people, are eligible for children's health insurance program and Medicaid. But they are not enrolled. That is an issue.

Secondly, you have got someplace between 15 million and 20 million, who have annual household incomes in excess of 50,000 to $75,000 a year. Many of those people can afford health insurance, don't have it, don't know how to access it, or don't know that they can afford it. You have got to put them into the market opportunity. Then you have got others on the cusp, that if they had subsidies from the Federal government, suddenly the market opportunity grows larger still, which is one of the reasons why we are so intrigued with this idea about healthcare reform.

Then I will take it a step further. You have got over 50 million people to today who are covered by small business health insurance, yet we know statistically from the National Federation of Independent Businesses, and the Chamber of Commerce and others, that over half of small businesses with less than 50 employees don't provide any health coverage to their employees, although they would like to.

And one of the issues today is a law called ERISA, which essentially precludes, or prevents a business from funding an employee to buy an individual product, because for the most part, this is the logic behind the law, some people will be left behind, because they won't be underwritten for health reasons.

Group health insurance is guaranteed issue by Federal law so everybody is included, but it is very expensive. In a new environment where you have guaranteed issue and a mandate, it is acknowledged by many policy people, that that ERISA requirement or law, may very well change or go away, because you have guaranteed issue. Then a small business could fund or co-fund an employee, to go to a place like eHealth, and look at this cafeteria of different types of products, and make a selection. When you add that to the market opportunity, suddenly you are looking at something that is much more significant, than we face and have today.

Great. Thank you.

There are no further questions. I would now like to turn the call over to Gary Lauer for closing remarks. Please proceed.

Well, I just want to thank everybody for the time. This call has gone a little bit longer than we typically do, but we had a lot to share with you today. So I would be anxious to talk with you individually if needed as well. Thanks a lot.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.