eHealth Inc (EHTH) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 eHealth, Incorporated earnings conference call. My name is [Tahesha] and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kate Sidorovich, Director of Investor Relations. 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 third quarter 2010 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 make forward-looking statements on this call. All statements other than statements of historical fact are forward-looking statements. The forward-looking statements made on this call will include statements regarding the extent of our involvement in a Florida insurance marketplace contract, components of state exchanges and related economics, functions of eHealth's new Government Systems Unit, future coverage choice options in specific states, timing and impact of medical [altered] regulation, senior market growth prospect and member economics, our business model relating to Medicare, our plan to offer online enrollment capabilities and decision support tools through the PlanPrescriber.com and eHealth/Medicare.com platforms, and our expectations with respect to plans available on such platforms; our ability to take advantage of changes in the health insurance marketplace; our future prospects with respect to exchange business and revenue; future contribution of non-commission revenue; timing of PlanPrescriber contribution to our 2010 revenue and operating income. Also, our target marketing and advertising expense, diversification of all business, our estimated GAAP-effective tax rate and cash taxes; our expectation with respect to certain tax benefits; and our 2010 guidance for revenue stock-based compensation expense; income tax rate and earnings per share for the full year 2010.

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 views 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 a 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 in the About Us section of our corporate website under the heading Investor Relations.

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

Thanks. Good afternoon, and thank you all for joining us today as we review our third quarter 2010 results. During the third quarter, significant progress was made in many important areas of our growing business. First and foremost, we saw solid application growth in our individual and family business of over 9%. In fact, the third quarter application volume was the largest in the history of eHealth.

Secondly, working with the Department of Health and Human Services, we launched the enhanced health insurance web portal at Healthcare.gov, which was awarded to us through a federal government RFP process in July of this year. And, just a few days ago, we received news from the State of Florida that we will be working with our partner Ceridian on an award issued in connection with the Florida state government RFP process to provide our technology for a Florida-specific health insurance marketplace.

During the quarter, we also established a new group in our Company, eHealth Government Systems, that is aggressively pursuing additional government exchange mandates and opportunities.

And finally, we entered into a relationship with another national Medicare carrier and started operating our new customer care center in Utah dedicated to the Medicare business. I will talk about these areas in more detail later during this call.

At this point, I'd like to provide a summary of third quarter financial results. Our third quarter revenue increased 7% to $37.5 million compared to the third quarter of 2009. During the quarter, our non-GAAP operating margin, excluding the effect of stock-based compensation and the amortization of acquired intangibles, was 18%, or $6.8 million. We generated $5.6 million in cash from operations, bringing our overall cash balance to $139 million.

As of October 25, we have repurchased approximately $16 million of our common shares in connection with the share repurchase program we put in place in July, which authorizes us to acquire up to $30 million of our stock. The share repurchase activity reflects our confidence in the value and future of eHealth and, given our strong cash flow generation, allows us to maintain significant cash reserves.

The positive application growth that we began to observe in early June of this year, as I noted on our last earnings call, continued uninterrupted throughout the third quarter. Submitted individual and family application volume growth exceeded 9% year over year reflecting growth across all member acquisition channels.

We also saw resumed growth in approved individual and family plan members, which increased 6% as compared to the third quarter of 2009. We believe that our marketing efforts, the COBRA subsidy expiration, and perhaps more clarity on the provisions and timeline relating to healthcare reform contributed to application growth during the third quarter.

During the third quarter, Paid Search was once again our strongest member acquisition channel based on individual and family plan application growth, generating 16% year-over-year growth, or 27% of total submitted applications. Our Direct channel remained the largest contributor to individual and family plan submitted applications at 43%, representing 8% year-over-year growth.

Finally, our Partner channel returned to growth with a 6% annual growth as compare to a decline of 16% in the second quarter of this year, 2010. The cost of member acquisition declined during the third quarter on a sequential basis as compared to the second quarter of 2010. If you adjust marketing costs for some of the Medicare spending that we did not have last year, we also saw a decline in the cost of member acquisition as compared to the third quarter a year ago. Stuart will expand on this point in his comments.

During the quarter, we maintained our No. 1 national ranking for the term health insurance and our leading position in Paid Search on Google for relevant terms such as health insurance, medical insurance, individual health insurance and health insurance quotes.

We are pleased with the launch of the enhanced HHS health plan, data collection and software services Web portal for which we provided nationwide comparison and pricing capabilities. eHealth was the prime contractor for this project with Deloitte Consulting serving as a subcontractor. The portal accessible at healthcare.gov was mandated by the recent Healthcare Reform Bill, which requires Health and Human Services to establish an Internet website to help individuals nationwide compare their insurance options and assist them in making decisions on their healthcare coverage needs. Much effort went into winning this very important, multimillion dollar government contract and ensuring an on-time launch of the enhanced portal. eHealth was able to provide the necessary functionality and consumer tools in record time. We had just two months from being awarded the contract to launch. We will continue to provide our technology and additional services pursuant to the contract.

Participating in this important early deliverable under the Affordable Care Act is a big first step in establishing eHealth as a strong potential technology provider to the states as they are mandated to implement and manage exchanges. It's important to note that the HHS portal serves an informational purpose and does not provide enrollment capabilities to consumers. We believe that transactional and enrollment capabilities that are required of state exchanges will add another level of complexity and could provide even more favorable economics for eHealth.

As I noted earlier, eHealth is pleased to be participating in an award based on the State of Florida RFP to help support the Florida health choices online marketplace. This new state marketplace will allow small businesses and Florida government employees to compare and enroll in health insurance products best suited to their needs and budgets. We partnered with Ceridian on this winning bid.

In conjunction with the HHS information exchange, we formed the eHealth Government Systems Business Unit. Government Systems will tap into our years of expertise and technology to pursue additional state exchange contracts and help state governments design, implement and deliver effective online health insurance exchanges that have to be operational by January 1, 2014, as mandated by the Affordable Care Act. eHealth Government Systems will be led by Sam Gibbs, who has been part of our Senior Executive Team for over 10 years, and has both government and technology contracting experience.

In the third quarter, we continued to add leading carriers to our individual and family plan offerings. Highlights include expanding our relationship with IHC Companion Life in Indiana, with Aetna and AARP in Alabama, Louisiana and West Virginia, and with Coventry in Delaware. We also added Physicians Plus plans in Wisconsin, Capital Blue Cross plans in Central Pennsylvania and new supply in the dental, vision and student categories.

We're also pleased to welcome Wellmark to the eHealth platform. We signed an agreement with Wellmark in October to sell their individual and family and short-term products in South Dakota and Iowa where Wellmark operates under the Blue Cross/Blue Shield brand name.

Recently, Health Care Services Corporation that operates under the Blue Cross/Blue Shield brand name in Texas, Illinois, New Mexico and Oklahoma, informed us that they have decided to focus primarily on direct sales in the individual and family market; and, as a result, we will be removing their plans from the eHealth platform later this year. In these states we have a meaningful selection of plans from several other carriers and believe we will continue to offer compelling coverage choices to customers in these geographies.

I'd also like to provide you with an update on the medical loss ratio requirements of the Healthcare Reform Legislation. Last week, the National Association of Insurance Commissioners, NAIC, which was tasked under the Affordable Care Act to establish uniformed definitions and standardized methodologies for calculating the medical loss ratio, submitted proposed MLR regulations to the Department of Health and Human Services. The next step is for HHS to consider the recommendations and release the regulations and formulas for calculating MLRs, which is expected to occur later this year. As a result, we could see adjustments in broker commission rates, and we have had discussions with some carriers around potential MLR scenarios and their impacts.

In another reform-related development, several new provisions of Healthcare Reform Legislation took effect on September 23, including guaranteed coverage for children under 19 years of age; the ability of dependent children up to age 26 to remain on or enroll in their parents' plans; no lifetime dollar limit on coverage for essential health benefits as determined by HHS; beginning of the three-year phase out of annual coverage limits; restrictions on policy rescissions by carriers; and free coverage for specific preventive care services.

As a result, some carriers discontinued their child-only plans, and in some markets carriers took longer than expected to introduce products satisfying these new benefit requirements.

Now, I'd like to turn my comments to our developing Medicare business. We are enthused about the senior market growth prospects and member economics and have made significant progress in the development of our Medicare business offerings.

PlanPrescriber, which we acquired in April of this year, is proving to be a highly-efficient member acquisition platform, and we are seeing a large number of interested Medicare consumers being sourced through PlanPrescriber. Consumers find PlanPrescriber through a number of venues, including organic and Paid Search, and PlanPrescriber's unique partner channel of pharmacy and supermarket chains.

Our business model is to monetize these potential Medicare consumers through a combination of our own enrollment efforts with carriers and referral-based arrangements with our partners. We continue to expand our Medicare inventory and signed an additional field marketing organization level agreement with Aetna, a major national Medicare carrier. We now have under contract Aetna, Anthem, Humana and United Health Group, four of the largest Medicare carriers in the country. And we are also in discussions with leading regional carriers to further augment our offerings next year.

In time of the annual enrollment period this year, we plan to offer online enrollment capabilities through the PlanPrescriber.com and eHealth/Medicare.com platforms and expect to have several plans for seniors to choose from, subject to the Center for Medicare and Medicaid Services, otherwise known as CMS, and carrier approval. Both online platforms will include decision support tools, including an out-of-pocket drug cost calculator.

On October 1, we opened our Salt Lake City customer care center dedicated to our Medicare business and eHealth agents are already marketing plans. These agents will support our online experience, as well as telephonic enrollment during the annual enrollment period and into the future.

In summary, we are in the center of a marketplace and environment which is going through significant change, and we are positioning ourselves to take full advantage of these changes. We have made important progress in the fast-growing senior market with our Medicare offerings. We are pleased with our recent HHS and Florida exchange wins, which position us for future and further exchange business and revenue. And the application growth during the third quarter in the individual market demonstrates our continued strong value proposition to consumers. In fact, we believe that the changing landscape and environment makes our technology and platform more relevant and needed than ever.

Now I'd like to turn the call over to Stuart for his comments on our financial results. Stuart?

Thanks, Gary. Good afternoon, everyone. As Gary mentioned earlier, we're pleased with our third quarter results. During the quarter, we generated positive individual and family application growth and saw resumed growth in individual and family approved members. We also continued to make progress in our emerging businesses, Medicare and Government Systems.

Third quarter operating margins declined both sequentially and on a year-over-year basis, which is directly related to our record submitted application volume and the associated marketing and advertising costs and continued investment in Medicare. I'll expand on these points shortly, but first let me review our financial results starting at the top line.

Our revenue for the third quarter was $37.5 million, an increase of 7% over the third quarter a year ago. Commission revenue was $32 million, an increase of 3% over Q3 2009. Sponsorship, technology licensing, and other revenue, which includes contributions from PlanPrescriber that we didn't have last year, was $5.4 million in the third quarter of 2010, reflecting 34% annual growth.

As we continue to diversify our business, sponsorship, technology licensing and other revenue is expected to account for an increasingly large percentage of total revenue. In the third quarter, it contributed 14.4% of total revenue, up from 11.5% in Q3 last year.

During the third quarter, we had approximately 143,200 individual and family major medical plan submitted applications. As Gary mentioned, the largest application volume in the Company's history. This represents 9% growth as compared to the third quarter of 2009, and compares favorably to the 3% year-over-year decline in application volume we had in Q2 2010.

Our total estimated membership at the end of Q3 2010 was approximately 779,000 members, which represents 7% growth over estimated membership reported at the end of the third quarter of 2009. In the third quarter, we had over 117,000 approved members for individual and family products, reflecting 6% growth as compared to the third quarter of 2009. The approved member growth was driven by the strong submitted application volume and an increase in the average number of individuals per approved application, as compared to the third quarter of 2009.

I'd like to comment on member retention, but before I do, I'd like to remind you that we estimate retention using trailing historical data. Our third quarter review of retention is based on data from the first quarter of 2010. On that basis, our estimated member retention rate remained within our historical range and improved slightly, as compared to our estimated retention rate we discussed on our third quarter 2009 earnings call last year.

In the third quarter, our non-GAAP operating expenses, which excludes stock-based compensation and the amortization of acquired intangibles from the PlanPrescriber acquisition, increased as a percentage of revenue as compared to the third quarter a year ago. The increase was driven primarily by strong application volume and costs associated with building out our Medicare business capability.

As Gary mentioned, during the quarter we staffed our new customer care center in Utah and expenses related to that reduced our GAAP operating margins by approximately 100 basis points. In addition to our efforts to build out our organic Medicare business, third quarter margins were impacted by the PlanPrescriber business, which we acquired in April of this year, making Q3 2010 the first full quarter of PlanPrescriber's contribution to our financials.

The PlanPrescriber impact reduced our third quarter GAAP margins by approximately 300 basis points and our non-GAAP margins by over 180 basis points. The Medicare business is highly seasonal with the fourth quarter being by far the strongest quarter of the year, driven by the annual open enrollment season that starts on November 15. Because of that, the bulk of PlanPrescriber contributions to our 2010 revenues and operating income is expected in the fourth quarter.

Our non-GAAP marketing and advertising expense, which excludes stock-based compensation expense, was 42.4% of revenue in the third quarter, up from 40.1% we reported in Q3 '09. Our GAAP marketing and advertising spend was 43% of revenue, as compared to 40.6% in the third quarter of last year. The increase in marketing spend was driven primarily by record application volume and Medicare-related marketing expenses.

As a reminder, the vast majority of marketing and advertising costs to generate applications are expensed when they are incurred; while the revenue stream resulting from that spend comes in over future periods. As a result, high application volume quarters will also have higher marketing spend.

The sequential growth in individual and family plan submitted application volume was over 20% during the quarter, as compared to the sequential revenue growth of 3%. This compares to sequential growth in individual and family plan application volume of 8% and sequential revenue growth of 5% in the third quarter of 2009.

We continue to target a range of 40% to 42% of GAAP marketing and advertising expense as a percentage of revenue for the full year 2010, including our marketing expenses for Medicare. Through the first three quarters of 2010, our marketing and advertising expenses represented 40.8% of revenue, right in the middle of our target range.

Our cost of acquisition measured as our marketing and advertising expense per individual on individual and family plan submitted applications was $75.38 for the quarter. This represents a sequential improvement from $79.51 in Q2 2010, even with increased Medicare spending in the third quarter. As I mentioned on our call last quarter, given the addition of PlanPrescriber, this measure now includes Medicare marketing spend in the numerator, while the denominator includes exclusively individual and family plan members and no Medicare members. As a result, this measure is less comparable than it has been in the past and will likely become less relevant as we continue to diversify our business.

For comparison purposes, our Medicare marketing spend added over $4.00 in costs per individual and family submitted members this quarter, compared to a little less than $2.50 in the second quarter of this year. Excluding PlanPrescriber costs, we also saw a year-over-year improvement in costs of member acquisition as compared to the third quarter of 2009.

Our non-GAAP customer care and enrollment costs, which excludes stock-based compensation expense, were 12% of revenue for the third quarter of this year, up from 10% for Q3 '09, driven primarily by salaries and other costs related to the new customer care center in Utah, and by higher volumes of approved individual and family plan applications during the quarter.

Non-GAAP technology and content costs, which excludes stock-based compensation expense, were 11% of revenue in the third quarter of 2010, flat with the third quarter of 2009. General and Administrative costs were 16% of revenue on a non-GAAP basis as compared to 13% in Q3 of last year.

Our GAAP operating margin was 12.9%, or $4.8 million, as compared to 18.5%, or $6.5 million in the third quarter a year ago. Our non-GAAP operating margin, excluding the effect of stock-based compensation and the amortization of acquired intangibles, was 18.3%, or $6.8 million, as compared to 22.2%, or $7.8 million in the third quarter a year ago.

We estimate our 2010 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 and excess tax benefits related to share-based payments that reduce the cash taxes we pay. Our expected cash taxes for 2010 have increased from what we estimated last quarter due to recent changes in California's Tax Code. The majority of our state taxes are in California where our headquarters is located.

As you may know, the State of California is experiencing significant budget deficits, and in the budget that was just passed the state again suspended the use of net operating losses to offset corporate tax payments this year. The suspension is retroactive to the beginning of 2010. These changes do not affect the amount and the wealth that we expect to ultimately use to offset future California taxes, but it will result in our paying more cash taxes in 2010 than we anticipated.

Third quarter 2010 GAAP net income was $2.6 million, or $0.11 per diluted share compared to $3.5 million, or $0.14 per diluted share in the third quarter of last year. Non-GAAP net income, excluding the effect of stock-based compensation and related tax effect in both years, and amortization of acquired intangibles in 2010, was $3.8 million as compared to $4.3 million in the third quarter of 2009.

Our cash flow from operations was $5.6 million as compared to $7.6 million in the third quarter of 2009. During the third quarters of 2010 and 2009, we utilized $2.1 million and $1.4 million, respectively, as previously unrecognized excess tax benefits related to share-based payments to reduce our federal and state income taxes payable. These excess tax benefits are shown in the cash flow statement as an increase in cash flow from financing activities. If you adjust operating cash flow in both periods to reflect the full benefit from deferred income taxes, including the portion that is reported in cash flows from financing activity, this quarter's cash flow from operations would have been $7.7 million as compared to $9 million in Q3 '09.

Capital expenditures for the third quarter of 2010 were approximately $1.1 million. During the quarter we spent $8.7 million in connection with our share repurchase program. This translates into a total repurchase of approximately 751,000 shares. Our cash and marketable securities balance was $139.1 million as of September 30, 2010, compared to $141.3 million at the end of last quarter, or a decline of $2.2 million after reflecting the stock repurchases during the quarter. We continued to buy back stock in October and our cumulative spend through October 25 was approximately $16 million under the program.

With respect to guidance and based on information currently available, we are reaffirming the revenue, stock-based compensation expense, income tax rate, and earnings per share guidance for the full year 2010 that we provided in our last earnings call. I want to remind you that these comments are based on current indications to our business, which are subject to change at any time. We undertake no obligation to further update our guidance.

And now I'd like to open up the call for questions. Operator?

Thank you. (Operator Instructions). Your first question comes from the line of Youssef Squali from Jefferies & Co. Please proceed.

Thank you very much. So, Gary, I was wondering if you could expand on the medical loss ratio discussion that you talked about, and it seems like you started already talking to some of these entities. I was wondering if maybe you can just help us understand kind of the different scenarios that are kind of -- that may be playing out in terms of adjustment to commission rates?

Yes, Youssef, the discussions we've had for the most -- and it's only with a few carriers, let me emphasize that, are not highly definitive because the regulations haven't been released yet. I think one of the things that, one of the factors that's an important one in this regulation, is how taxes are accounted for. And in the recommendations made by the National Association of Insurance Commissioners, NAIC, they did not include taxes for the most part as part of the administrative portion of the MLR. But ultimately, this is up to Health and Human Services and Secretary Sebelius and we, like the carriers and everyone else, are waiting to see what that looks like.

I wish I could be more definitive at this point, but I don't know anymore about where HHS is going to come out in these regulations than any of the payors do, or anyone else at the moment. We know what the recommendations are that went in from the NAIC and they are about what we expected, and based on the legislation they seem to be very much in line with that. You know, if that's what comes out in the regulations, it's something that we think we're going to be able to work with and, hopefully, work well with. But until we see those regulations, it's unknown.

And you think the timing for this is by year-end you said?

Yes. It has to be, Youssef, because these MLRS, the 80% MLR requirement for both these individual and family plans and small business plans has got to be in place by January 1, 2011. Presumably, these payors need some time to be able to arrange for all of that. I can only tell you what I read and what I've heard, and what I've read and what I've heard is that Health and Human Services may have these at some time in early November, after the November 2 elections. Now, I'm not trying to connect the election results to that. It just happens to be that's what I've read and what I've seen. I would expect to see something in November and, hopefully, early in November, but that's just my estimate. It's not based on anything else that we know.

Okay, thank you.

Your next question comes from the line of Steve Halper of Stifel Nicolaus.

Hi, Gary, you mentioned Florida. Are there other activities in other states starting to percolate as well? But it sounds like Florida was happening independent of the exchange mandate.

Steve, yes, that's correct. Florida is independent and was independent of the mandate and the legislation and so on, although obviously it looks there may end up being a fair amount of overlap. We're having some very high-level discussions with a few states as they're trying to organize their ideas and their thoughts around this. It's interesting, many of the states at this point aren't prepared to move forward. Some legislation in California was passed and signed by the governor several weeks ago on this that establishes a board and so on. But as you know, we're going to have a new governor in California after November 2, and presumably a whole new staff and so on, so we'll see where that goes and what it means.

There's been some funding that's been released by Health and Human Services to the states, approximately $1 million per state, to go out and do some survey work and so on to assess how they'd go about the development of the exchanges. I would expect that we're going to see some guidelines from Health and Human Services to the states on how to construct these exchanges and so on. The legislation requires that in January 2013 the states have got to have a solid plan for being ready to launch in January 2014. So there's still some time and that's where we are on that right now. We are beginning to staff up as we're engaging with the states and so on, but nothing more definitive than that at the moment. To my knowledge, we're not working anything else right now that's the size or the scope of Florida, or certainly the HHS exchange.

I guess the last point I would make in summary is that we're pleased of these significant RFPs, especially Health and Human Services and also Florida that we've been fortunate enough to win both of those. I think it's a really good indicator of, I think, the appeal of our technology and the value proposition that we have to support and get these exchanges in place. I think it can be a really lucrative business.

Yes, and just one quick follow up. Those plans that are pulling out of eHealth, was it Texas and Illinois, could you just give us a little bit more rationale behind the plans' motivation to just focus on direct?

Yes, and I know not a whole lot more than I've already said, which isn't much; that they have pretty much taken the decision to go about this direct, including online, and we respect that. We like them. They're good plans. We've had a good relationship with them and we're certainly ready, willing and able to help them if maybe at some point they come back and are part of the eHealth platform as well; but really no more than that. In all of those states we have other product. We feel good about our position in those states and so on, because as I noted there's a lot of other product that we've been adding as well, so.

Were they just not getting the volume through your site?

No. In several of the states, I think we've generated good volume for them and, as I've said, we've had a good relationship. For whatever set of reasons, they've made a decision, whether it's economic or whatever I don't know, that they believe that they can be effective selling their plans directly.

Okay, thanks.

You bet.

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

Thank you and good afternoon. Gary, could you provide some clarity on the Medicare opportunity now with PlanPrescriber in tow and four carriers on your platform? How should we be thinking of the revenue opportunity for Q4, which is ostensibly built into your guidance, and then the bigger opportunity for 2011?

Yes, George, I'm glad you asked about that. Let me first qualify the four plans that we have under contract are the four largest in the country. They're not all on the site yet, but we've contracted with them to get them on the site. What's interesting about Medicare is it's a highly, highly-regulated business by the federal government, by CMS, so there's a lot of work we have to do with the carriers and with CMS to get them on the site, but all that work's underway.

We're very pleased with the demand generation that is coming from PlanPrescriber. It's working and it's working really well. Frankly, one of our challenges right now in this fourth quarter and then beyond that is simply fulfillment of all the demand that we have and we'll be doing it a number of ways. We'll be doing some of it through the customer care center that we've recently launched. We'll be doing some of it presumably through online sales at both PlanPrescriber.com and eHealth/Medicare.com, and we'll be doing it through placement of these potential consumers as leads to other entities that are able to fulfill and so on.

And you heard Stuart reiterate the guidance for the fourth quarter. We just feel good about what we see in the Medicare business in the fourth quarter. I think beyond that it's got the potential to be a very, very large business for us and quickly, which is why we've invested in it. We are much further down the road today than we were 90 days ago in our last earnings call on this, and I can tell you that after 90 days I'm probably more enthused and more committed to this business than ever. Everything about it says to us it's just -- it's the right place for us to be expanding into.

The number of people who are having their 65th birthday every day; 42 million Baby Boomers aging into the ranks of being 65 years of age over the next several years; more of these people coming online; more of these people frankly concerned about reimbursement rates and so on with Medicare; more of these people on prescribed medication and a lot of out-of-pocket costs with that. So, there's just all kinds of things here that we can address very effectively and we're doing that today.

Now, I should note that the revenue will really come in two forms in the fourth quarter. We'll have the lead generation revenue with these other entities that we extensively sell the leads to, but we'll also have potential revenue we're generating through enrollment. And that's what we're really interested in, because the retention and the lifetime value of these products is very, very high. So, it could be that after the fourth quarter we're talking about two things. We're talking about the lead generation revenue and the demand that we generated in the fourth quarter, and also the revenue that we've actually sold yet to actually realize, because it'll be coming after the fourth quarter as these products are in force. But, we like everything we're seeing about this business right now and so do the big carriers. The fact that we've got the four largest carriers in contract with us is, to me, is a very important indicator of this business and what we're doing and how they view it with us as well.

And just as a brief follow up, you mentioned the call center a couple of times supporting this effort. Is there any way you can quantify the investment or the number of people involved in this effort?

That's one application I gave for this quarter as I mentioned 100 basis points of the margin related to that. You can get a pretty good feel for the dollar impact there and that will be -- that was a partial quarter so next quarter will be a little bit bigger than that as we have a full quarter of -- a full complement of staff on hand.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Jason Helfstein from Oppenheimer.

Hi, thanks. Thank you. Given that you guys didn't change the guidance for the year on the profit line, and I think this quarter was probably either better than expected or in line, depending on what you thought about it going in, and then you had costs in this quarter having to do with PlanPrescriber, are there any one-time costs you are expecting in the fourth quarter that would hold margins down? Because it would just seem that the guidance seems to be overly conservative on the margin side for the year.

Well, our application volumes were high this quarter, I think relative to where we were going into the quarter, and that drives higher marketing expenses. And so, I think part of it is just the demand generation that we're seeing there and the associated marketing expense. So, that would be part of the thoughts. I wouldn't say there's any one-time expenses that are impacting margins that I can see here for the fourth quarter. I think the comment I'd just make is that I'd stick with the expectations that we set last quarter with respect to EPS and revenue. And we're not looking to change anybody's expectations for the year from what we talked about last quarter and I'd just leave it at that.

And this is Gary, the other comment I would make about guidance is that, and this goes back to the question that George asked previously about Medicare, the thing that's still a bit of an unknown for us is what the Medicare momentum is going to be like in the fourth quarter. We feel optimistic that we've got a view into a Medicare business right now that obviously supports the guidance that we've reaffirmed. But you know, any expansion of that either in the revenue or the margin side right now we need a little more history and experience. The potential's there, but we're certainly not signaling that right now.

And just to follow up, do you see yourself breaking out subscriber metrics between Medicare and non-Medicare going forward?

Yes, I think when it makes sense to. I mean, I think when it becomes a critical enough mass of subscribers I think it'll make sense, and we've been trying to break out meaningful parts of our Medicare business here. You see that I break out the costs of marketing related to Medicare. The costs of setting up the call center I've broken out as well. So, I think when metrics and expenses make sense we'll try to break it out to make it meaningful.

Thank you.

Your next question comes from the line of Jim Friedland of Cowen & Co. Please proceed.

Thanks. First, on individual pricing, or pricing in the individual market with some of these changes in the plans that make it less favorable for the carriers to be in the marketplace. You know, we keep hearing about the attempts to raise pricing, but then push backed on the political front. Is pricing trending up, or what do you see there?

And then second, looking at the Medicare business, really even more for next year, is there anything that's in the Healthcare Reform Bill or stuff that's being talked about that we need to be thinking about in terms of commissions or that kind of thing that could change that model? Because it's my understanding that there's much less of an impact on these incremental Medicare plans than on the core individual market. Thanks.

Yes, Jim, this is Gary. On pricing, it's a little bit early yet to comment on whether we're seeing price inflation in mass. I can tell you that there have been some premium increases that have been approved. As you may recall, the one that was highly politicized at the beginning of this calendar year was Anthem here in California. Well, interestingly Anthem has now had pricing increases approved in California and the double-digit kinds of increases. There's some controversy in Massachusetts over this right now. In fact, it's one of the -- part of the political debate for the governorship in Massachusetts and a few other states. So, we're beginning to see some of that.

We know we've got some plans that are still reconfiguring and redesigning products and so on to meet the requirements of the legislation, and certainly there'll be some pricing implications there as well. I think what'll be interesting is that after this calendar year is over, we typically do this every six months, we'll take a look at the costs and benefits and pricing and so on and have some, I think, some really interesting data in that area. I can only give you a personal opinion and viewpoint, which is I don't expect to see prices going down. I fully expect they're going to be going up. I just think the question is to what degree.

In the Medicare business, yes, and you asked a great question there. The Medicare business is impacted in one way by healthcare legislation, which is that the Medicare Advantage plans ostensibly have less funding for reimbursement to physicians and so on. This is something that's also been politicized and has concerned a number of seniors and so on. And how much impact that's actually going to have to people or not is unknown right now and I don't want to ever enter that debate as to whether it's good or bad, or has impact or not. But, I think what it may do, is it may cause seniors who have Medicare Advantage plans to reevaluate the plans that they're on and look at other plans, other benefit configurations and so on, which would be right up the alley of what we do. But aside from that, there's really nothing in the legislation that's going to impact Medicare in the short term, especially from a pricing standpoint, or any kind of a compensation standpoint.

And just to make sure I have right, so outside of Advantage on the Medicare plans that you sell, is the structure going to be something along the lines of what we have seen with eHealth to date where you get a commission sort of every year? Can you give us just an idea of how that will look?

Yes. So we don't have revenue streams yet. But, what I would expect for now is that it would be similar to our individual and family business, where you'd see commissions over time.

And Jim, I just want to add to that, that the lifetime commission value of these products is several times greater than what we have in the individual and family plan business. And as a result, the lifetime revenue value can be quite significant, and the retention typically is two to four times as long.

Okay, great. Thanks a lot, guys.

Thank you.

Your next question comes from the line of Robert Coolbrith of ThinkEquity. Please proceed.

Good afternoon. First, wondering if you could provide a little more color on the situation with HCSC. I think you've addressed this, but just wanted to make sure I understand. Are they discontinuing all third-party sales, both offline and online? Also, maybe if you could describe qualitatively, or even quantitatively your level of exposure, either in terms of your entire ISP book or member additions generally speaking, or in the individual markets in which they operate? And then finally, is there any OD opportunity there with HCSC, and then I might ask one follow up. Thank you.

Yes, sure. Again, on HCSC, I can only tell you what they've communicated to us, which is that certainly with products online they want to try to do this direct. It's my understanding that they may continue to work with some of their brokers and agents, and the basis through which they do it is not quite clear to us or to me. We've had a good relationship with them. We have a good relationship with them right now, but this is a strategy that they're going to embark on and, I think, they're going to find out whether they can effectively market and sell their products directly in that form or fashion. There's two good-sized states that they're in, which are Illinois and Texas, where we've got really good businesses with them and with other carriers as well. You know, part of our job will be to replace some of that that they've had there in terms of applications and so on. But aside from that, no, there's nothing that's very concerning or material from that standpoint. If you look at our entire inventory of business and products and so on, we've added a lot more in this last quarter, as we typically do every quarter, than HCSC is going to represent in terms of what we're taking out in terms of a number of plans, for example.

Is there an opportunity for EOD with HCSC?

Yes, there is and I honestly can't tell you sitting here that I know that there's an active one, or there's one specifically today, but there's ostensibly an EOD opportunity with all the carriers. In some ways, made even more interesting, I think, by legislation and so on and MLRs.

Great. One follow up, I was just wondering if maybe you could describe, as you've referenced, some of the plans that have been sold in the past were sort of outdated by the regulation that took effect on September 23. I guess that sort of closes the blocks in which, I guess, at least theoretically change some of the members or the retention characteristics. Could you maybe give us some insight on what percentage of the members currently are in plans, which have essentially become obsolete, or have been closed off to incremental applications? Thank you.

Yes. Well, it's an interesting question. You know, part of the legislation essentially grandfathers plans that were existing, but plans going forward have got to meet these new benefit requirements; many of which went into place September 23. I can't tell you the sheer number, but it's -- there's a lot of plans that were affected, most of which have already been changed or are in place. The child-only plans where somebody just buys a plan only for a child is, I don't know, been someplace in the 5% range for us over time just to give you a flavor for what that looks like. And for those carriers who have dropped the child-only plan, it doesn't mean that children still can't get plans. It simply means that they're either applying for a different plan on their own, or they're doing it with an adult and so on.

All right, thank you.

Your next question comes from the line of Matt Schimler from Bank of America Merrill Lynch. Please proceed.

All right, thank you. I was just wondering if you could give us a little bit more detail on the Healthcare.gov RFP end product that you have done and launched? Was the launch of the site just the first deliverable on a multimillion dollar contract, or was that what you needed to do to be awarded the multimillions of dollars?

Yes, so this information site is required as part of the legislation. It actually had to be up and running by, I believe it was either July 1 or August 1, because of the timing of the legislation when it was signed and so on. There wasn't enough time to put the entire site up the way it was intended to be, so Health and Human Services put a bit of a site up in summer. But in late spring, put out a request for a proposal and RFP through the government procurement process to help them put in place really the Phase 2 of what they had already put in, which was Phase 1; but was the site as required and described in legislation, which is what we bid on and what we won.

It's in place. It's running. You can go to www.healthcare.gov and you can see it and experience it. You'll recognize, I think, an awful lot of the flow and so on in there. It seems to be working well for Health and Human Services. We put a lot of effort into this to get it going for them; (a) because we wanted to that; we wanted them to be as satisfied as we could possibly have them be; (b) secondly, we just see it as a great precursor to exchange business going forward.

I should note that when this was announced by the federal government it was announced as a four-year opportunity. The ways these work is it's a one-year contract that's renewed every year for up to four years, a total value of $19 million. But, these things can change and expand as requirements change and so on as well, so hence, the multimillion dollar value of this. It's in place. It's running. We're doing some other work for them in and around it right now, and I'll say this, it's a profitable business for eHealth.

Do you recognize the revenue for that as work is deliverable or ratably across the fours year of $19 million divided by 16 quarters?

We're recognizing that ratably over the life. And there is ongoing services as far as content, updating and refreshing content over time as we go through that. But, from the revenue side, it's pro rata.

Okay, great. Thank you very much.

Thank you.

There are no more questions. I will now turn the call back over to Mr. Gary Lauer for closing remarks.

Well listen, thank you, everybody, for your time. Once again, we appreciate it and look forward to speaking with many of you individually as well. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.