eHealth Inc (EHTH) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 eHealth, Incorporated earnings conference call. My name is Stacy, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Kate Sidorovich, eHealth 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 2011 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 IR 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 plans and projects for our Medicare business, future submitted application and member growth rates, our retaining an increasing percentage of Medicare leads for direct fulfillment, the lifetime [daily] and profitability of Medicare members, our future lead referral and commission revenues for Medicare, the Medicare membership base contributing to our revenues and earnings, future growth in revenue, operating margin, and earnings per share, impact of new commission rates, growth in Medicare leads, and our guidance for revenue, EBITDA stock-based compensation expense, and earnings per 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 reports on Form 10-K and quarterly reports on Form 10-Q filed with the SEC, which you may access through the SEC website or from the IR section of our website.

Forward-looking statements made on this call represent the Company's view 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.

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

Great. Thanks, Kate and good afternoon, everyone, and thank you for joining us today as we review our third quarter 2011 financial results.

Revenue for the third quarter was $34.8 million and earnings per share were negative $0.01, reflecting our significant investment in the Medicare business. Cash flow from operations was $5.4 million and we've now generated $20 million in cash flows from operations during 2011 in the face of many significant market and business changes. As of quarter end, we were approximately halfway through our $30 million share repurchase program, which was announced in June of this year and we remain debt free with over $126 million in cash and cash equivalence on the balance sheet.

As you know, we made a decision to invest more in Medicare in the third quarter relative to our plan at the beginning of this year. We did this because we saw indications that we can achieve our growth objectives in this business faster than originally expected. When we shared this decision with you on the second quarter earnings call, we left our annual guidance unchanged. Given the way the year was progressing with a stronger than expected first half, we felt we could still come in comfortably within our guidance despite the increased Medicare investment. The investment has negative near term impact on earnings this year, which is more pronounced in the third quarter, outside of the Medicare annual enrollment period. We expect a sequential margin increase in the fourth quarter, which is the largest quarter for the Medicare business.

2011 is an important transition year for eHealth. This year, we've experienced a decline in the commissions paid to us in the individual business, have seen results of certain structural changes in the health insurance market as a result of the affordable care act, and continued our expansion into the Medicare market. We are on track executing on our strategy. Overall membership continues to grow, and we again generated good cash flow. Third quarter individual and family submitted applications declined 20% as compared to the third quarter of 2010, which was within the range we anticipated.

As a reminder, there were a number of changes in the core individual market as a result of several Affordable Care Act mandates effective as of September 23rd a year ago. Young adults, 19 to 26 years of age, were given the option of staying on their parent's policies and many carriers dropped their child only plans for 18 year olds and below after these products became guaranteed issue. Now, as we enter the fourth quarter we are addressing a market profile that looks somewhat similar to the quarter a year ago when the mandates first became effective. Correspondingly, we expect that our submitted application decline will start to abate markedly in this current fourth quarter and that this trend will further improve in 2012.

Similar to the second quarter of 2011, we continue to see favorable trends in our individual and family owned business that help to mitigate the negative impact of reform on our IFP commissions. These trends include an annual growth in the number of members on each submitted application, meaningful annual increases in premium prices on products being selected on our platform, and an ongoing shift to older applicants who typically buy plans with higher premiums than children and young adults do.

Despite the structural changes in the health insurance market, our individual and family plan inventory remains robust. In fact, carriers view eHealth as an increasingly important and effective channel for reaching individual consumers. We are also seeing nice growth in ancillary products such as dental, vision, and accident insurance. Carriers, which are actively diversifying their product offerings for individuals are interested in our ability to cross-market these products to eHealth's individual and family plan consumers.

As planned, starting in the third quarter of this year we ramped up our investment in Medicare. This included expanding our customer care and enrollment team, increasing our marketing spend, and further enhancing our technology platforms. The goals to increase the percentage of Medicare leads that we retain for direct fulfillment, enhanced conversion on our fulfillment efforts, and further boost our visibility with seniors. This investment helped us to further position us for this year's annual enrollment period, which started on October 15th and will run through December 7th of this year. The Medicare annual enrollment period is the single most important time for our Medicare business. During last year's AEP, which represented our initial foray into this market, we had a limited amount of product inventory and we're in the early stages of developing our customer care team.

This year, we have products from leading national Medicare carriers, including Humana, Aetna, Anthem, Mutual of Omaha, and several prominent regional carriers, including CareFirst, Well Care, ProMera, and XL Health. We also have approximately 140 trained and licensed customer care and enrollment professionals. This should allow us to monetize a much larger percentage of leads through direct fulfillment, which is a significantly more lucrative revenue model compared to lead generation. As a reminder, we project the lifetime value of a member of a Medicare Advantage policy to range from $1,500 to well over $2,000 assuming a monetizable policy life of five to six years. This is significantly above what we've been generating in our individual business even before commission of changes went into effect this year. This is also significantly higher than what we earned from selling Medicare leads to a partner.

In preparation for this year's AEP, we signed a number of strategic partnerships in Medicare to supplement page search as a new member acquisition channel. I also would like to highlight our relationship with Wal-Mart, which is one of the largest pharmacy chains in the country. In 2010, Wal-Mart and Humana developed a cobranded prescription drug plan product, which has the lowest premium in the industry and quickly became a popular choice with seniors. Wal-Mart's website integrates plan prescriber as a place where seniors can compare Medicare products and apply for a plan that meets their needs.

With the increased investment in Medicare, our goal is to not only grow near term referral revenue, but even more importantly to create a significant backlog of highly profitable recurring revenues from directly fulfilled members. The Medicare membership base, which we are building now will be contributing to eHealth's revenue and earnings over the next several years. The 2012 annual enrollment period just began ten days ago and much remains to be done. Medicare is highly regulated industry and it's a new business for us. So there's execution risk and there are regulatory hurdles that we continue to address, but we remain excited and enthused about our growth opportunities in this area.

In conclusion, as I've remarked several times this year, 2011 is all about transition for eHealth. We've been adjusting to the individual business and market changes resulting from the Affordable Care Act. We continue to work closely with policymakers and legislators in preparation for 2014 when the major elements of the Affordable Care Act come into effect. We also continue to develop and evolve our technology to get consumers powerful online access to affordable and quality health insurance. We are leveraging our technology assets and know how to provide seniors online decision support and efficient access to Medicare products.

Given all that we've been dealing with this year, we are pleased with our performance so far in 2011 and now believe that in 2012 we will see a return to revenue growth. Now, I would like to turn the call to Stuart who will take you through our financial results in greater detail. Stuart?

Thanks, Gary and good afternoon, everyone. Our third quarter financial results clearly reflect our investment strategy in Medicare as we geared for an important annual enrollment period, or AEP. Our goal for the third quarter was to put the needed infrastructure in place to significantly grow our Medicare business in Q4's AEP and beyond, while at the same time generating good cash flow. We see a significant Medicare opportunity in front of us and are very focused in making the strategic investments necessary to maximize that opportunity.

In Q3, our increased Medicare expenses aligned with seasonally low Medicare revenues outside of AEP, a situation that will change in the fourth quarter when we expect sequential growth in Medicare revenues, which will allow us to better absorb the increased level of expenses. In the third quarter, we also recorded a one-time tax expense item, which had a negative impact of one penny on our earnings per share. I'll provide more detail on this item in a few minutes. Let me first review our third quarter results starting at the top line.

Our revenue for the third quarter was $34.9 million, a 7% decline as compared to $37.5 million in the third quarter a year ago. Commission revenue was $28.2 million, a decline of 12% over the third quarter of 2010, reflecting the impact of commission rate changes in our individual and family business. As you know, new commission rates were introduced for many carriers effective January first of this year and each quarter there will be an increase in the percentage of our membership base on which we get paid under the new schedule. We believe that by the end of 2012 we will be compensated under the new commission rates for the majority of our revenue generating individual and family members.

Other revenue, which includes sponsorship, ecommerce on demand, government systems, and Medicare lead revenue, was $6.6 million. This represented a 22% increase compared to the third quarter a year ago, driven by growth in Medicare and government systems revenues, and partially offset by lower ecommerce on demand and sponsorship revenues. Other revenue contributed approximately 19% of total revenue for the quarter compared to approximately 14% in Q3 2010 and 17% in Q2 2011, reflecting continued diversification of our business.

Our individual and family major medical plan submitted application volume declined just under 20% compared to third quarter of 2010. As Gary mentioned, our application activity during the quarter continued to be impacted by several provisions of the Affordable Care Act, which became effective on September 23rd of 2010. We have now passed the first anniversary date of these mandates and expect that annual application growth should improve starting in the fourth quarter and into 2012. We continued to see a higher average number of individuals per approved application compared to the third quarter a year ago due to a greater percentage of our applications coming from families, which is a favorable trend for us.

Our total estimated membership at the end of the quarter was approximately 810,400 members, which represents 4% growth over estimated membership reported at the end of the third quarter of 2010. The number of revenue generating individual and family plan members increased 1% while the number of other members, which includes Medicare members, increased 28%. We expect the uninterrupted year-over-year total membership growth to continue even as we work through the marketplace changes as a result of the Affordable Care Act.

Now, I'd like to review our operating expenses for the quarter. As you'll recall from our last earnings call, we made a decision to increase our investment in the Medicare business starting in the third quarter of 2011. The step-up in our third quarter Medicare related costs was approximately $2.5 million relative to the second quarter of this year. A significant portion of this incremental spend was to position us for the annual enrollment period, which started on October 15th. So while our Medicare revenue grew nicely in the third quarter, both sequentially and on a year-over-year basis, our Medicare related expenses increased by an even larger amount based on our investment decision, as we've previously explained.

As a result, our third quarter non-GAAP operating expenses, which excludes stock-based compensation and the amortization of acquired intangibles, increased as a percentage of revenue sequentially as well as relative to the comparable period a year ago. We expect our investment to begin paying off in Q4, which is seasonally the strongest Medicare quarter because of AEP. More importantly, we are laying down a foundation for a highly profitable multiyear recurring revenue stream based on our lifetime value projections for Medicare members.

Let me provide more detail on our investment strategy in Medicare. As we shared with you previously, our goal is to fulfill more of our Medicare leads as a broker instead of selling these leads to our partners for a one-time referral fee. To accomplish this, we expanded our customer care resources dedicated to Medicare. In preparation for AEP, we hired over 100 licensed customer care specialists during the third quarter. Many of these new hires are temporary health insurance professionals who will stay with us through the end of AEP and some are permanent employees since we also expect growth in leads generated after AEP as baby boomers age into Medicare eligibility.

As a result, our non-GAAP customer care and enrollment costs, which excludes stock-based compensation, increased to $6.2 million or 18% of revenues as compared to $4.6 million or 12% of the third quarter a year ago and $4.5 million or 12.5% in Q2 2011, or a sequential increase of $1.6 million from last quarter.

We also increased our investment in Medicare marketing. Our non-GAAP marketing and advertising expense was $13.6 million or 39% of revenue this quarter, up from $11.4 million or 31% in Q2 2011. While the majority of the $2.2 million sequential increase in this line item was driven by seasonally higher application volumes we experience every year in our IFP business, a meaningful portion of the increase came from Medicare spend. At the same time, non-GAAP marketing and advertising expense was lower in Q3 2011 relative to the $15.9 million or 42% of revenue in the third quarter of 2010, reflecting our reduced marketing spend in the online advertising channel, which started in December of 2010.

In the individual market, our cost of acquisition continued to decline versus last year. On a per unit basis, our cost of acquisition, excluding Medicare costs, measured as our total marketing and advertising expense per individual on an IFP submitted application, remained in line with the first half of 2011 representing a meaningful decline from a year ago.

Third quarter non-GAAP operating income, excluding stock-based compensation and the amortization of acquired intangibles was 7% of revenue or $2.3 million down from 18% of revenue or $6.8 million in the third quarter a year ago. In the fourth quarter, our operating margins is expected to improve substantially driven by an expected sequential uptick in revenues. EBITDA for the third quarter of 2011 was $2.8 million as compared to EBITDA of $7.4 million in the third quarter of 2010.

Moving down the income statement, our tax expense relative to our pre-tax income is unusual this quarter. Our tax provision of $271,000 for the quarter significantly exceeded our pre-tax GAAP net income of $22,000. This is driven mainly by an increase in our estimated effective tax rate for 2011. Given that in the first half of the year we booked tax expense using the lower estimate, we recorded a one-time tax item this quarter to catch us up to the new estimate rate year-to-date. The main reason for the increase in our estimated 2011 tax rate relates to our decision to increase certain non-deductible operating expenses that we expect to incur this year, including our costs related to government affairs. The one-time tax expenses had a $0.01 adverse impact on EPS.

Third quarter 2011 GAAP earnings per share were negative $0.01 driven by our investment in Medicare and the impact of the one time tax item I just described. Third quarter non-GAAP EPS, which excludes the impact of the amortization of acquired intangibles, stock-based compensation, and related income tax benefit was $0.06. Despite all the investment in Medicare, we continued to generate healthy cash flow. Our cash flow from operations was $5.4 million as compared to $5.6 million in the third quarter of 2010. This brings our total cash flow from operations to $20 million year-to-date through the end of Q3 compared to $16.9 million for the same period last year. Capital expenditures for the third quarter of 2011 were approximately $0.7 million, bring our total CapEx year-to-date to $1.9 million.

I would now like to comment on the balance sheet. Our cash and marketable securities balance was approximately $126.5 million at September 30, 2011 reflecting over $14 million in share repurchases executed through quarter end. As a reminder, our current authorization is up to $30 million of share repurchases. Therefore, we completed approximately 47% of the program during the quarter. With respect to guidance and based on information currently available, we are reaffirming the revenue, EBITDA, stock-based compensation expense, and earnings per share guidance for the full year 2011 that we provided in our fourth quarter 2010 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'd like to open up the call for questions. Operator?

(Operator Instructions) Your first question comes from the line of Sameet Sinha with B. Riley. Please proceed.

Yes, thank you. A couple of questions, if you can -- I'm just looking at your guidance and at the midpoint it implied revenues of $36.5 million in the fourth quarter and EBITDA of about $8 million. If you look at the third quarter versus the fourth quarter expenses, that would imply expenses also going down, not only revenues going up, but expenses coming down sequentially by about $4 million. So if you can talk about where that would happen.

Secondly, do you think you're fully staffed on the customer care side? We were a little surprised that customer care expenses didn't go up as much, but your marketing expenses did. So that tells us there's a (inaudible) expense that has gone up. And third, can you -- do you think you're still on track to generate the Medicare revenues that you had guided through the beginning of the year, considering the fact that now you're looking for more proper revenues versus early gen revenues. That's it. Thank you.

On the first question, it was hard to follow the numbers that you were throwing out there. But there's a wide range of revenue and expense outcomes for the fourth quarter. Obviously, a lot of the fourth quarter is hinging on the annual enrolment period, and so as you can see there's a fairly wide range that we've provided both for EPS and for revenue, recognizing the fact that this is a significant seasonal operation and it's really our second annual enrollment period. So we're really just setting up that range relative to a wide variety of different unit costs for that, for sourcing members, and also the potential revenue outcome related to that.

This is Gary. On the two other questions, I think the first you asked about the Medicare revenues in the fourth quarter. As Stuart said, we reaffirmed our guidance and so we've got one quarter to go. So it's easy to see what the differential is there and we've just begun the annual enrollment period. We feel that we're well staffed. We've got much more product in annual enrollment period, but we've got a lot of work to do, but we're optimistic.

In terms of the size of the customer care operation and so on, yes, we feel that we're well staffed. Remember that we don't just sell products on the phone, we sell products online being an internet Company and that's really key to what we do and how we go about all of this. And one other comment on the revenue, you had I think referenced direct fulfillment. I've always felt strongly that the more direct fulfillment we can do and the faster we can transition away from being a lead business, the better it is for us longer term. So I would hope that after this Medicare annual enrollment period you're going to see a much more healthy contribution of revenue coming from direct fulfillment, which then sets us up for follow-on recurring revenues, as well as a mix of lead gen revenue as well. But we're clearly going to be erring on the side of fulfilling as much of this in-house directly as we possibly can.

Great. Thank you.

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

Hi, thanks. It's Kevin Kopelman in for Jim. You guys mentioned that you're expecting total revenues to grow again next year. Based on your current plans for investment, do you have an initial view on EBITDA for next year? Would you expect that to grow as well?

I think it's a little bit preliminary to talk about EBITDA. It's really going to depend on the amount of growth that we're looking for in Medicare. As Gary has indicated, we're looking to move as fast as possible towards direct fulfillment. In the direct fulfillment model, we expense all of the marketing expenses, all the customer care expenses up front and recognize the revenue over time. So it's going to be highly dependent on the mix between lead revenue and direct fulfillment and also the growth rate in Medicare. I think that's the biggest impact on what the margins would look like next year. So I think as always, we're going to need to balance off the bottom line margins against what kind of growth rate we'll be looking for.

But I would add to that that the more direct fulfillment we can do this year, the better it is for margins in following years. Because as Stuart said, we take all the expense this year yet we get to enjoy the revenues over the next several years. So frankly, the more direct fulfillment you see us do in this annual enrolment period, the better the impact and the effect that's going to be on earnings and EBITDA in following years.

Okay, and it's probably too early but how quickly do you get feedback on how well the enrollment period is going? I think you said you're ten days into it. So have you -- is there anything that you can observe already or is it too early?

Well, it's early, but we're operating and I'd say at this point we're pleased with where we are to date. One of the things that's interesting about how this annual enrollment period is that the Centers for Medicaid and Medicare Services actually timed it earlier than it typically is, starting it on October 15th and ending it on December 7th. We've been doing a fair amount of media education and so on, so seniors understand that the enrollment period is now going. It's not unusual -- it's characteristic of this business that there's a hockey stick that in the last few weeks of the annual enrollment period you see an awful lot of activity as well. But after ten days, yes, we like what we see.

Okay, great, and just a housekeeping question. Do you have -- what are your expectations for the tax rate for the fourth quarter and for next year?

Well, for the year with the uptick that I indicated it will likely be more in the 47% to 48% for this year. And next year, it really is highly dependent on how much we have of the non-deductible expenses that I mentioned. So probably around that, possibly a little bit lower.

Okay, thanks a lot.

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

Good evening, guys. A question on the current split between leads versus broker on applications. I was just wondering what it was in the third quarter or what you anticipate it being in the fourth quarter?

Richard, it's Gary. In the third quarter, there's not a lot of activity. Most of the Medicare business that we're doing is people who are aging in, but I would say this, in the third quarter we certainly had a higher percentage of those that were directly fulfilling than we did in quarters preceding that. More importantly, I think in this quarter as I think Stuart indicated several calls ago, as much as 25% of the revenue could be commission based, and that's the GAAP revenue.

But actually, what we transact could be in excess of that because like the individual business with any of these products there's a lag between the time that someone enrolls and we actually see the revenue as well. So I'll emphasize what I said earlier that we're working hard to move as much of this as we can into direct fulfillment in-house because of the implications it has for us in the next several years as we build that revenue base. But I would think and I would hope that we'll be able to report a healthy contribution to revenue from direct transactions, people who have enrolled directly through us, as well as the backlog that we build as well.

Got you. And with respect to the relative economics of Medicare members versus IFP members, could we go through that again perhaps? I understand the lifetime value because of the longer lifetime of the customer is five to six years versus I think just over two years for IFP guys. But what about on an annual revenue basis? Is it also high and by how much? By my calculations, maybe twice as high?

Yes, I'll answer part of it and then I'll let Stuart take part of it as well. What we've -- the example I use, Richard, is a Medicare Advantage product and these commissions can range from between $1,500 to over $2,000 assuming a life of five to six years. And as a reminder, in our individual business we've stated often that the retention or the life of someone who holds a product is typically just a bit in excess of two years. So you can see the difference there. The stream of payments is a bit different as well.

Yes, and the margin dollars that we're looking for on a lifetime basis are much higher for Medicare products. Just looking at the cost of acquisition in our past history, we've spent less than the first year revenue in bringing in a member in cost of acquisition and yet we're projecting five to six years of revenue on top of that from a margin standpoint, which is much better than what we see in individual and family.

Right. Okay, thanks.

Your next question comes from the line of Scott Fidel with Deutsche Bank. Please proceed.

Hi, good afternoon guys. This is Justin Bowers actually on the line for Scott. Just continuing on with the Medicare, can you put a timeframe on what you would expect the Medicare initiative to turn profitable or kind of at least let us know how you're thinking about that according to your plan? And then is there kind of a break-even point in terms of the number of members you need to hit the hurdle there under the direct fulfillment model?

Yes, there's not necessarily a membership break-even point in that it's really more about the growth rate at any given point in time. I guess looking at next year, it's a little bit preliminary here, but as I've suggested, the faster we grow the more it has, in the early periods, a negative impact on earnings only to create a much bigger positive impact down the road. And so it's really about how much we decide to have that growth rate for Medicare next year as to when we would break even.

But another way to think about it is that on a per unit basis, these are profitable members right now. Our cost of acquisition relative, on a per unit basis, relative to the revenue that we generate on a per unit basis is really favorable. It's not unlike when we were building this business in the early years. We've got a fixed cost component that right now has got good size to it because of everything we're trying to do to achieve what we believe are going to be some very interesting growth rates. But we're not too far away, we think, from just if you isolated this Medicare business alone of it just in total being a profitable business, besides being profitable right now on a per unit basis.

Right, so essentially what you're saying is as you grow the margin profile, the business will improve.

That's right.

Okay, and then just moving onto commercial. Last quarter, you mentioned that you guys had benefited from some of the premium inflation you started to see in September of 2010 maybe due to, as a result of some of the health reform mandates. And I was just curious if you could give us an update now in terms of what you're seeing, in terms of pricing for the IFP products that have been listed recently and how that compares to what you saw last year directionally and whether or not it's accelerating, or decelerating, or stable.

Well, clearly as I think I mentioned, we're seeing more members or growth in the number of members on each submitted application compared to a year ago. We made the same comment last quarter as well. We're seeing what we think are meaningful increases in the premium prices on at least products that are being selected on our platform and that's not just necessarily all premiums increasing, but that also has to do with the demographic of the consumer that's selecting the product also because we've seen the average age of consumers who are applying increase.

And typically with these products as age increase, so does premium on a commensurate basis. So you combine all of those things and it very much has an interesting positive impact on what we yield from these products from a revenue standpoint. And probably one we didn't, I don't think we anticipated this quite to the degree that we're seeing it in our planning for this year.

Okay, that's helpful. But if you were to look at any two products kind of on a same store basis, so let's say an adult plus child and were to compare kind of the price to that product now versus where it was a year ago, would you say that the price of that product has accelerated or -- ?

Well, I think on average there have been increases. I want to be careful here because I believe that they're single digit increases and we've noted this in the past couple of calls. We do -- for years, we've published something called a cost and benefit study or survey where we go into our member base and we assess what are people really paying and what are they getting for benefits. We break it down a lot of different ways. I've just seen some of that data and we'll be publishing our annual cost and benefit survey some time in the next several weeks. That will give us some really interesting insights I think into what's been going on over the last year with these products both in terms of pricing, the configuration of the products, who is buying them, what the price differentials look like state by state, and on and on. But generally yes, you can assume that there has been some inflation on the price of these products.

Okay. Thank you for the questions, guys.

Thank you.

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

Hi, guys. Let's pretend I am a consumer coming in through a lead and plan -- how does this work exactly? Does plan prescriber get the first look at it and then they decide to send it directly to you or to then send it onto a third party for a payment?

George, it depends on a number of things. In some cases, you may not even be a lead. You may decide to enroll online. If you came to us through Plan Prescriber, you may be in a market where we have got product from Anthem, or Humana, or Aetna and we can fulfill it directly. We may elect to do that. You may be in a market where there's product that's available through on one of our partners. So we -- at that point, we may direct you in that direction as well.

But I guess our first test, our first filter is to take a look and assess whether we can fulfill that perspective consumer directly or if it should be through and with a partner.

And then when you're talking about 140 customer care people, is that a limiting factor to your growth or is it the availability of the policies in various markets?

Well, sure, there's some limits with 140 people, double 280 would be better but we've also got the demands generation side of this as well. Frankly, if we had enough resource and product in every market and we're building toward that, we'd fulfill 100% of this in-house. We've got 140 licensed, trained people today. A year ago we had a small handful. I think you'll find next year we're going to have far in excess of 140. So yes, it's -- it does limit what we can do from a direct fulfillment standpoint as does some of the product that's available as well. But it's all relative to where we've come from in the last 12 months. We're pretty enthused about what we've got right now in terms of resource and product availability.

You didn't address much around search this quarter, but my assumption is that the search costs have continued to remain high and therefore that has become a little bit less of your percentage. Is that a fair assumption and can you just give a sense of the search world?

Yes, I'd say that our search programs were very similar to what we -- how we ran them last quarter and that the year-over-year change, the declines that we've seen year-over-year are very similar to what we saw in Q2. So I'd say there was not a lot of change there.

And we also, as you might have taken from Stuart's comments, elected to spend more of that marketing money in the Medicare side of the business compared to where we were a year ago, spending it on the individual business as well as.

Very fair point. Last question, you mentioned other areas like dental, and vision, and accident. Can you just give us a quick update as to how those are progressing?

Yes, we feel like they're progressing nicely. It's been a focus item for many of the payers, many of the carriers and we've been working with them to introduce these what we call ancillary products to consumers and the take rate has actually been, we think, good.

Yes, in my comments I mentioned that we grew our non-IFP membership by 28% year-over-year and some of that's Medicare but it's also an indication of some of these other products like dental and vision as well.

Perfect. Thanks, guys.

By the way, these ancillary products are really good profit generators for us because ostensibly the acquisition cost has already been directed or spent on the individual consumer. So this is really a way to add more to the shopping cart if you will.

Your next question comes from the line of Ned Davis with William Smith and Company. Please proceed.

Yes, good afternoon. Just a couple of quick questions, Gary, and I wanted to try to get a little bit more sense for the up front kind of Medicare service development cost that obviously impacted the third quarter and is this, you said some of the workers are temporary. Obviously, it was a window and everything. How much is your kind of fixed cost nut or can you give us any guidance on what that would be going forward assuming the business continues to grow?

Yes, I'll make some comments and I'll let Stuart comment as well. So our third quarter expense, what we devoted to Medicare, let me note again was more than we had frankly planned when we started this year. And we decided to do it at the end of the second quarter, A, because we liked what we were seeing just in terms of the overall business against our plans, and revenue, and so on as it was matriculating. And secondly, we saw indicators and indications in this Medicare business that we could grow even faster, or that we had the change to grow even faster than we had been thinking.

And this expense in the third quarter was really focused on several areas. One is our customer care centers in hiring and getting people trained in there, licensed professionals. Two, continuing to build and evolve Medicare platforms because we've got multiple plan prescriber platforms as well as eHealth Medicare platforms. And third, marketing as well, awareness, visibility, demand generation, all really key. So it was all of those things.

On the customer care side, we've got a mix of some dedicated care customer care professionals who are licensed, who are full-time permanent employees, and some who are really transitional employees here for this annual enrollment period. I would say, I'll let Stuart pick this up, but I think that based on what we see in terms of business volumes, momentum, and so on will dictate at least for the following nine to 12 months what that -- what the size of that organization is going to look like.

Yes, and just to put some numbers around it, I mentioned a couple numbers in my script. One is that we increased sequentially our Medicare spend by $2.5 million. If you look at our customer care enrollment line, sequentially that increased about $1.6 million of that $2.5 million and most of the remainder is marketing cost. So just to break that down a little bit. Obviously, the marketing cost is completely variable. The way we run these programs it's very discretionary. On the customer care and enrolment side, we've tried to allow ourselves very much flexibility to move with -- as we decide down the road, dialing that up or dialing it back after annual enrollment period. We've done it in a way that we can have flexibility on that.

And if I remember, the revenue is more front-end loaded commissions when you do the commission business? (Inaudible) completely front-end loaded, right?

Yes, the first year revenue is front-end loaded. Right.

One last follow-up connected with that.

Let me also --

Sure.

Sorry. I just wanted to mention that, Gary just reminded me that there is some timing delay in when we would recognize that from a GAAP basis. So we could work through a policy, get somebody placed in a policy this year, but not necessarily recognize the gap revenue until we actually collect the commission, that first year commission. Many of those will lag into next year.

Just an update on the competition, particularly in Medicare. It seems like the competition just inundates people with paper and you guys are approaching it differently. But have you seen any significant change as we've gone into this season in the competition, in the Medicare competition or is it still a pretty wide-open field for you?

We think it's wide open. We think one of the real unique things that we bring to this is the way that we go about marketing, a lot of online marketing. We don't utilize paper, as you know. We're not advertising on TV and it's not unusual now to turn on Fox News, or CNN, or some of the others and see Medicare Advantage and other kinds of ads because it is the selling season for these plan sponsors.

We take a different approach. We're trying to be very solution focused. We're only trying to help the senior find the product that best matches their needs and requirements. We're not pushing one over the other. It's just not our model and not our approach and we're really trying to be a very trusted environment in which a senior can find a product that best meets his or her needs and requirements, and that's really key to what we do. With Plan Prescriber, we've got a very unique capability that allows a senior to analyze their prescribed medication out-of-pocket cost and hopefully help them reduce that to something that's manageable, so that in many cases they can continue to afford to take their prescribed medication.

As you know, we're doing work with Wal-Mart on other kinds of partnerships as well. So clearly, our approach is different than the traditional approach to marketing and selling these products. We are not a one-plan sponsor kind of shop or brokerage. Just the opposite. We feel very strongly about choice and giving seniors an objective, unbiased presentation of product. It's served us well in the individual business and we think it could serve us even better in this business, and we think it's a really unique way to market and to generate demand.

Also, I think you had said previously that getting approved for this is not easy. In other words, it's being a qualified marketer and have you seen an increase in the number of qualified marketers or is it still pretty limited group other than the plan providers -- ?

The competitive landscape, so you can go to Medicare.gov, which is the government exchange to enroll in Medicare Advantage or a prescription drug plan product, and many people do that. You can go directly to a carrier, in some cases to their sites, and in many cases they've got the direct sales organizations, and there's large brokerages that focus on this as well. But for the most part it's been very traditional. I don't think we've seen anything change a lot. It's highly regulated. We understand that. We have to get approvals on different approaches and things of that nature, and carriers that we're working with, and we're trying to be very, very careful and make sure that we're completely compliant with what CMS requires and needs and with our carrier partners as well.

So no, I don't think the competitive landscape has, at least from our viewpoint, has changed much since we really started looking at this business and investing in it.

Thank you.

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

Good afternoon. Sorry if these have already been asked and answered or addressed elsewhere, but I just wanted to go over -- just want to make a (inaudible) in Q4 for the IFP business in terms of the different behaviors that are going on. Do you think that you can see positive year-over-year growth in the number of submitted apps? That's question number one. then question number two, if you could give us an update on the government systems business and does there seem to be any prospect that the HHS Portal, which is now being I guess managed by CMS, is there any chance that you could sub in there given the fact that you've already essentially built it? Is that something that would make sense or something that you're looking at? Thank you.

Yes, Robert, first of all on the IFP in the application growth in the fourth quarter, no, I would not expect to see positive growth yet. I think that from a realistic expectation, especially given the way that we're spending, because remember we're spending Medicare and spending in the individual business as well, and we've got a lot of spend to focus on this Medicare business right now. I think it would be safe to assume that our application decline would be half or maybe a little bit less than half of what it was in this past quarter, and we would feel that that's very much in line with what we expect and we'll see that continue to improve into the next few quarters into 2012 as well. So that's one right there.

And that's a result of just the market being -- profile being similar to the way it was and what we're going to spend in that marketplace as well in this next 90 days. On the government systems side, we continue to support Health and Human Services with the information portal. We have a contract that's in place set to expire at the beginning of next year and we'll see where that goes and what they're ready to do at that point. We're also in discussions with several states on their state exchanges as well. I've noted this before and I'll say it again, the states have been slow to move on exchanges, especially the Republican governed states and you've got all of the politics in that as well. But we're very much present in a number of these states and working closely with them. So yet to be seen as to where all of that goes.

And the last thing I'll just add, that also is very much obviously dictated by the Affordable Care Act and whether it survives the Supreme Court test next year on the constitutionality of the mandate and the outcome of the presidential election as well.

Okay, thank you.

Our next question comes from the line of Nat Schindler with Bank of America Merrill Lynch. Please proceed.

Yes, hi Gary. Just wondering if there's been any indications of further structural changes in the commission rates paid by carriers coming in next year or thereafter, or have we really seen the drop and it's just going to play through as the mix shift occurs?

Nat, I'll take a crack at that and then I'll ask Stuart to make a comment as well on what he's seeing because he follows this very, very closely. But I can just tell you from a carrier-payer standpoint, no, we've not seen any changes. Haven't had any discussions about changes and so on. There are some carriers that, in fact Blue Shield of California is an interesting recent example that have announced they will be writing checks back to consumers because of where they have ended up relative to the medical loss ratio. As you recall, if you don't get to 80% you have to refund, per a formula, back to consumers. Other carriers are, we've already been told, are in good shape than that and are above the 80%.

So no, we haven't -- nothing at all. Nothing at all.

In those refunds back to consumers, do they effectively pull back commission dollars that would have been paid for those higher commission rates?

No.

Okay, so it just hits them and not you?

Yes, sometimes it's contractual and sometimes it's not, but I can tell you at this point we've experienced zero there.

Okay.

I have nothing to add.

Thanks, Nat.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect and have a great day.

Thank you.