Magellan Health, Inc.
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

Welcome and thank you for standing by for the Fourth Quarter 2015 Earnings Call. At this time, all participants are in listen-only mode. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'll turn the meeting over to Renie Shapiro Silver.

[Renie Silver:]

Good morning. Thank you for joining us today for Magellan Health's fourth quarter 2015 earnings call. This is Renie Shapiro Silver, Senior Vice President of Corporate Finance. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin. This conference call will include forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown uncertainties and risks, which could cause actual results to differ materially from those discussed. Please refer to the complete discussion of risks in our most recent reports filed with the SEC and in the cautionary note in today's press release. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results. Specifically, we refer to segment profit, adjusted net income and adjusted EPS, which are defined in our SEC filings and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries, but excludes segment profit from non-controlling interests held by other parties, stock compensation expense as well as changes in the fair value of contingent consideration recorded in relation to acquisitions. Adjusted net income and adjusted EPS reflects certain adjustments made for acquisitions completed after January 1, 2013 to exclude non-cash stock compensation expense resulting from restricted stock purchases by sellers as well as changes in the fair value of contingent consideration recorded in relation to acquisitions and amortization of identified acquisition intangibles. Please refer to the notes included with this morning's press release, which is also available on our website, for a reconciliation of these non-GAAP financial measures to the corresponding GAAP measures. I will now turn the call over to our Chairman and CEO, Barry Smith.

[Barry Smith:]

Thank you, Renie. Good morning and thanks for joining us. We had a very strong fourth quarter completing 2015 with segment profit, adjusted net income and adjusted EPS above our previous guidance range and we surpassed $4.5 billion in revenue for the first time ever. For the full year, we produced segment profit of $275.7 million, adjusted net income of $91.8 million and adjusted EPS of $3.55. We ended the year with $160.2 million of unrestricted cash and investments. Regarding our share repurchase program, during the fourth quarter of 2015, we completed our previous $200 million authorization and purchased approximately $18.4 million under our new $200 million program. There have been no repurchases to-date in 2016 and while our authorization remains in effect, the pace of our repurchases from quarter-to-quarter will vary based on a variety of market and company considerations. We currently have approximately 24.7 million shares outstanding. Moving to our businesses, 2015 Pharmacy Management results were outstanding, reflecting particularly strong performance from our specialty pharmacy products. Our focus on delivering superior customer value and service has resonated well on the marketplace and we continue to market new capabilities that differentiate us and showcase our clinical depth. We experience solid sales and have a strong pipeline of opportunities across all of our pharmacy markets. We went live with our new Medicare Part D prescription drug plan effective January the 1, 2016. Enrollment exceeded our expectations with approximately 42,000 members as of the end of January, of which about two-thirds were voluntary enrollees and one-third auto assigned. Traction in the specialty market remained strong. We added a contract with a new national health plan to provide our medical pharmacy program for their Medicare population effective January the 1, 2016. In addition, later this year, a regional health plan customer will be expanding their existing medical pharmacy program to include our site of service management program for infused drugs. This high-touch program is designed to shift infusion services from costly hospital settings to quality lower-cost provider or home settings. And in our specialty product line, we've also expanded formulary management and clinical programs across various customers. In the employer market, we added 20,000 net employer lives in the fourth quarter, bringing us to a total of approximately 156,000 net lives added in 2015. In addition, we added more than 50,000 net lives effective 1/1/2016 and we continue to see increasing levels of interest for our full-service PBM offering in our target market of small to mid-sized managed care organizations. Looking ahead, our Pharmacy business will continue to focus on enhancing key capabilities and differentiators to support our value-based PBM, including new clinical programs, advanced analytics, member engagement strategies and technology innovation. We are also targeting acquisition opportunities that will provide additional scale or capabilities to further enhance our strategic position. Our Healthcare business provided solid results in the fourth quarter and we have begun to see some improvement from our care management initiatives in Magellan Complete Care Florida. Jon will address this shortly, but first, I'd like to update you on some other significant items in our Healthcare division. A few weeks ago, we announced our intent to acquire The Management Group, or TMG, a Wisconsin-based company with three decades of experience in a managed long-term care services and supports, or MLTSS space. This acquisition will broaden our capabilities in MLTSS, which we believe represents an important growth opportunity for our Healthcare business. Next to Medicaid expansion, one of the largest expected sources of growth in managed healthcare is long-term care for the elderly and those who live with physical or developmental needs. The market opportunity is significant. With 26 states in various stages of implementing regional or statewide MLTSS programs and an additional eight states actively considering this option, it is clear that MLTSS programs will be of considerable importance to states going forward. TMG provides us with an expanded presence and expertise in this complex area, along with an experienced and seasoned leadership team. And importantly, their innovative approach to self-directed long-term care, which is consistent with our own history and philosophy of person-centric care, has positioned TMG as a leader in the field. As we work proactively with states on their approaches to MLTSS, we believe this flexible business model can be leveraged in other geographies. We expect to close on this acquisition later today. Jon will provide you with the financial details and the impact on our 2016 guidance. In our Florida SMI Specialty Plan, the Agency for Healthcare Administration or AHCA recently expanded the SMI eligibility category, which has resulted in additional 14,000 members effective February 1, 2016, bringing the total membership in our SMI plan to approximately 56,000. Please note that roughly 9,500 of the new members are SMI dual-eligibles with significantly lower average Medicaid revenues than our existing SMI members. Our experienced leadership team is focused on operational and medical action plans in order to more appropriately manage care. We continue to focus on network re-contracting initiatives and have begun implementing alternate payment methodologies and rates for inpatient providers. Our fraud, waste and abuse initiatives continue to bear results and we are adding more proactive claims reviews and we've begun to see the early impact of our inpatient care management initiatives and we will provide a more detailed update on our first quarter call, as we get additional information. In New York, AlphaCare's MLTC membership continues its modest growth trend. As a result of the sluggish start to the Fully-Integrated Duals Advantage or FIDA program, in December, CMS and the state made some changes in order to make the program more appealing to the provider community. Accordingly, we have realigned some resources to work collaboratively with providers to grow the FIDA membership. We have also right-sized AlphaCare's infrastructure for their current and anticipated membership base. Next, to update you on the pipeline of some of the new near-term opportunities in our Healthcare business, in the MLTSS space, we expect to release a Pennsylvania RFP in March with Virginia's RFP expected in the second quarter. Two Pennsylvania counties, which we currently do not serve, released request for information for behavioral health programs. The associated RFPs as well as the RFP for a third county are expected later this year and will be effective in mid-2017 and 2018. And as we expand our healthcare product portfolio, we are seeing interest in a comprehensive musculoskeletal or MSK risk product that incorporates our traditional program along with pharmaceutical and behavioral health interventions. In addition, we are seeing demand for bundled services combining our various risk behavioral health, pharmacy and other healthcare products, such as our radiology and cardiac programs. I'm pleased with our fourth quarter 2015 results across both lines of business. Operationally, we made strong advances this year, consolidating into two businesses, strengthening our leadership team, developing new capabilities and further refining our MCC and pharmacy strategies. I'm also very excited about the TMG acquisition and its expected contribution to our future growth. I'll now turn the time over to Jon.

[Jonathan Rubin:]

Thanks, Barry, and good morning, everyone. For the year ended December 31, 2015, we reported adjusted net income of $91.8 million, adjusted earnings per share of $3.55 and segment profit of $275.7 million. For 2014, we reported adjusted net income of $110.6 million, adjusted EPS of $4.04 and segment profit of $266.9 million. Net income for the year ended 2015 was $31.4 million and EPS was $1.21 per share on a diluted basis. For the year ended 2014, net income was $79.4 million and EPS was $2.90 per share. Regarding our fourth quarter results, we reported revenue in the fourth quarter of 2015 of $1.3 billion, which reflects an increase of 29.1% over the fourth quarter of 2014. Approximately half of this revenue increase is attributable to acquired revenue. The remainder resulted primarily from the impact of new business and same-store growth, which were partially offset by the loss of revenues associated with contract terminations. Our segment profit for the fourth quarter of 2015 was $102.2 million, an increase of 22.8% in the fourth quarter of 2014. The increase in segment profit is primarily due to the net impact of favorable year-over-year medical claims development, new business, same-store growth, strong specialty earnings in our Pharmacy business and the inclusion of 4D results in the current-year quarter. These increases were partially offset by the impact of contract terminations, cost of care trends and a higher level of favorable customer settlements and retroactive revenue adjustments in the prior-year quarter. Included in segment profit for this quarter are approximately $10 million of net favorable non-recurring items mainly related to medical claims development in the Healthcare segment. For the fourth quarter of 2015, adjusted net income was $33.8 million and adjusted EPS was $1.39 per share on a diluted basis. For the fourth quarter of 2014, adjusted net income was $35 million and adjusted EPS was $1.33 per share. The decrease in adjusted net income between periods was mainly due to higher depreciation and amortization expense and a higher effective income tax rate in the current-year quarter, partially offset by the increase in segment profit. Net income and EPS for the fourth quarter of 2015 were $27.3 million and $1.12 per share on a diluted basis. This compares to net income and EPS of $21.6 million or $0.82 for the fourth quarter of 2014. In addition to the items affecting adjusted net income explained above, net income was impacted by decreases in contingent consideration expense and stock compensation expense related to acquisitions. I'll now review each of our segment's results and growth opportunities beginning with Pharmacy Management. Fourth quarter segment profit for the Pharmacy Management segment was $45.1 million, an increase of 33.8% over the fourth quarter of 2014. The year-over-year increase is primarily due to strong specialty earning as well as new PBM sales. In addition, the current-year quarter includes the results of 4D Pharmacy Management. These positive results were partially offset by the impact of terminated contracts. As Barry mentioned, the pipeline of opportunities across our employer, health plans, state and specialty market is robust and positions us well for the future. Barry also noted the higher-than-expected membership in our Part D plan due to higher levels of voluntary enrollment. At the current membership level of 42,000, we anticipate full-year revenue of approximately $130 million. In addition, the normal seasonality of Part D will result in lower reported segment profit in the first half of the year with stronger results in the second half. We are pleased with a continued strong growth in our Pharmacy business, ending the year with over $1.7 billion of revenue and segment profit of over $135 million and we believe that we are well positioned for future success. Turning to our Healthcare business, segment profit was $89.7 million, an increase of 13.2% from the fourth quarter of 2014. This increase is mainly due to the impact of net favorable year-over-year medical claims development as well as new business and same-store growth. These favorable variances were partially offset by the impact of contract terminations, cost of care trends and the inclusion of favorable customer settlements in the prior-year quarter. Segment profit in the quarter included approximately $10 million of favorable out-of-quarter items, primarily related to favorable medical claims development. In Florida, we ended the year with a medical loss ratio in the mid-90%s on a reported basis and we continue to make progress on our network, fraud, waste and abuse and care management initiatives, which should drive further improvement in 2016. Earlier, Barry discussed the acquisition of TMG, which enhances our MLTSS capabilities and is important to the future growth of Magellan Complete Care. The base purchase price of TMG is $50 million with an additional potential earn-out of up to $50 million through 2019 dependent on maintaining existing and growing new MLTSS business. As Barry noted, our pipeline of traditional and new healthcare product offerings is strong for both existing and perspective customers. Regarding other financial results, corporate costs excluding stock compensation expense totaled $32.6 million, which represents a $2.9 million increase from the fourth quarter of 2014. The increase was mainly due to additional expenses required to support the company's growth. Excluding stock compensation expense and changes in fair value of contingent liabilities, total direct service and operating expense as a percentage of revenue were 15.7% in the current-year quarter as compared to 18.5% for the prior-year quarter. The decrease is primarily due to the impact of higher revenue in the current-year quarter. Stock compensation expense for the year ended December 31, 2015 was $50.4 million, an increase of $9.8 million from the prior year. The increase is primarily due to a full-year of expense included in the current year related to restricted stock purchase by sellers from the CDMI acquisition as well as higher annual grants in 2015. The effective income tax rate for the year ended December 31, 2015 was 59.6% compared to 37% for the prior-year period. The increase in the effective rate was mainly due to lower reversals of tax contingencies in the current year from closure of statutes of limitations and a more significant relative impact in the current year from non-deductible health insurer fees as a result of lower overall income. Turning to cash flow and balance sheet highlights, our GAAP cash flow from operations for the year ended December 31, 2015 was $239.2 million compared to cash flow from operations of $211 million for the prior year. Our GAAP cash flow includes a shift between restricted cash and restricted investments, which affects the sources and uses of cash from operation and from investing activities. Adjusting for the impact of these shifts, cash flow from operations for the year ended December 31, 2015 was $133.9 million compared to $185 million for the prior year. This decrease of $51.1 million in operating cash flows is mainly due to net unfavorable working capital and other changes between years, partially offset by higher segment profit. The working capital variance is primarily attributable to accounts receivable timing and changes in restricted cash requirements associated with regulated entities. As of December 31, 2015, the company's unrestricted cash and investments totaled $160.2 million, which is after year-to-date share repurchases of $206 million and cash used for 2015 acquisitions of $55.8 million. Approximately $85.3 million of the unrestricted cash and investments at December 31, 2015, related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at December 31, 2015 of $415 million reflects an increase of $23.6 million from the prior year end. This increase is primarily attributable to the company's regulated entities. Regarding the impact of the TMG acquisition on our 2016 guidance, TMG is expected to generate revenues during the last 10 months of 2016 of approximately $40 million with segment profit of approximately $3 million. The impact to adjusted net income and adjusted EPS is an increase of approximately $3 million or $0.12 per share. The impact to net income and EPS in 2016 will not be material. Accordingly, we're updating our 2016 guidance to reflect the acquisition of TMG. We now expect revenue of $4.32 billion to $4.56 billion, segment profit of $263 million to $283 million, adjusted net income of $78.5 million to $97.5 million and cash flow from operations of $196 million to $227 million, excluding the net shift of restricted funds between cash and investments. We're also revising our 2016 adjusted EPS range to between $3.18 and $3.95. Our expected net income range remains at $51 million to $70 million, which represents EPS between $2.06 to $2.83 based on average fully diluted shares of 24.7 million. This updated share count reflects share repurchases and option exercises through February 24 that excludes any potential future activity. To-date, we sold approximately half of the new business target of $400 million for 2016. Overall, I'm very pleased with our fourth quarter 2015 results and the progress that we're making on our strategic initiatives. I believe this provides us with positive momentum as we begin 2016. Before turning the call back to the operator, I'd like to discuss the change we're making to our segment reporting beginning in 2016. Now that we have two businesses segments, Healthcare and Pharmacy, we will be revising the presentation of corporate costs to more fully allocate corporate costs to each business, which is more represented of the earnings of each business on a standalone basis. Beginning with the first quarter of 2016, we will allocate all corporate costs with the exception of certain public company and other executive-level expenses, which will remain in the corporate segment. At that time, we will also present the prior results reflecting this change. With that, I'll now turn the call to the operator for questions. Operator?

[Operator:]

Thank you, speakers. And we will now begin the question-and-answer session. [Operator Instructions] And our first question is from Josh Raskin from Barclays. Sir, your line is now open.

[Josh Raskin:]

Hi. Thanks. Good morning, guys. Wanted to talk a little bit about TMG first and just a better understanding of the business there. I understand the new capabilities in the MLTSS program. But is this a risk-taking entity, it seems, and maybe which states, specifically, are they taking risk? And then, are there specific RFPs that you see in the near term this year maybe into 2017 that you felt as though you needed to beef up some of the capabilities there?

[Barry Smith:]

Yeah. Josh, Barry here. Thanks for the call and the question. In terms of TMG, TMG does not take any risk at all and has largely focused its efforts in Wisconsin. They have a larger employee base as well as a large client base there, Wisconsin, and have been servicing the state for quite some time. They have been a resource to the industry through many of the consultants. So, the consultants would in turn, for the RFPs, would go back to the TMG group and ask for their advice and consulting on MLTSS, specifically. So, we're pretty excited about this transaction and the opportunity for them to assist us in the numerous contracts that are likely to be happening – will be happening this year. And in fact, there is a whole series of them that are being teed up, as we speak. We've talked in the past about Pennsylvania. And Pennsylvania, as you know, has a behavioral health – county behavioral health system and they contract county by county. So, none of that business will transition over. But the state is also developing pretty aggressive MLTSS or LTSS services contract, RFP, RFI that's out and several – and will be coming out more and be developed. And so, we're pretty excited about Pennsylvania. We've also mentioned Virginia. Virginia is anticipated to release the RFP in the second quarter of this year. It's not currently managed. It's a fee-for-service model. And the contract start date for Virginia should be – go live's about 1/1/2017 and they will phase in over roughly an annual period of time. So, it's a real opportunity there in Virginia. Nebraska, it's been talked about. We've mentioned Nebraska in the past as well. The state released a concepts paper just this last month in January here and they're requesting a feedback. The RFP is expected to be released in February of 2017, for implementation in 2018. So, we see that as a real opportunity. Arkansas, a recent RFI in May, I think, it was 2015, this last year and the potential program is focused on behavioral health, LTSS and developmentally disabled as well. So, we think that's a real opportunity as well. We've mentioned Louisiana, Louisiana has been in development for some time. We expected it out, actually a year ago – or I should take that back, just last year – probably later last year, that was delayed with the new – election of the new Governor, the Democratic Governor. They're looking at expanding Medicaid, authorized by the ACA, but also looking at formally releasing an RFP for LTSS. So, we would expect to see that out later this year, we would hope. So, those are just some of the states that we see the TMG group being very material to our ability to be competitive. They have 30 years of experience, and as we respond to these RFPs, they ask about the level of experience we have and we have a lot of great experience in New York, of course with AlphaCare. But with TMG's incremental experience to us, it'll make a big difference we think in terms of how the states view us and our expertise and ability to respond to the RFPs and RFIs.

[Josh Raskin:]

That's helpful. Barry, you said they were resource to the industry, I just want to make sure I understand that. Is that the states coming to them as they're developing RFPs to get the expertise as to sort of what they should be asking or are they managing the actual contracts and programs for certain health plans and sort of a management contract?

[Barry Smith:]

No, they typically will respond – for example, when we looked at Iowa, we went through a large consulting firm, who then in turn went to TMG to help us build our RFP to basically format it and to give us the expertise of the content. And so, they largely do that kind of work, advisory work, and they are not currently going direct to states, with some small exceptions.

[Josh Raskin:]

Okay. Got it. That makes sense. And then second, I think, Jon, you mentioned that half of the $400 million in new sales is already being booked. Is that typical for end of February or are you guys a little bit ahead of schedule or how does that compare?

[Jonathan Rubin:]

Josh, it's a good question. It does vary quite a bit from year-to-year. I think it's ahead of where we were last year at this time. But it's in the range of where we want to be and we feel, combined with the strong pipeline that we described, that we're in good shape in terms of where we're going into 2016.

[Josh Raskin:]

Okay. And then just last numbers one, just the fair value contingent liabilities on the income statement was a negative this quarter. So, was that expected in guidance and sort of what creates that drag or boost?

[Jonathan Rubin:]

Yeah. I mean, honestly, it's just true-ups to sort of some of the specific acquisitions that we've done. I would say, Josh, I wouldn't look at it this quarter as being particularly meaningful or material, but there has been a couple of true-ups just as we came through year-end.

[Josh Raskin:]

Okay. All right. Thanks.

[Jonathan Rubin:]

Yeah.

[Operator:]

Thank you. And our next question is from Michael Baker from Raymond James. Sir, your line is now open.

[Michael Baker:]

Thanks a lot. First question is on the PBM selling season as it relates to health plans, are you seeing any impact in terms of opportunities given Anthem/Express Scripts dispute?

[Barry Smith:]

Let me just make a general comment, Michael, about the PBM focus on the MCOs. A couple of things. First, as you recall last year, we talked about the importance of Medicare Part D and we were either looking for an acquisition or we were going to start our own. That component is kind of like the tail that wags the dog. If you don't have that capability as we do today, you really can't move forward. We very successfully launched our Medicare Part D plan. Interestingly, we got way more lives than we expected from just an auto enrollment, which is great. So, we have a quite a presence in that space now and growing, not clearly as large as many others, but it gives us that capability. Secondly, we've also built out our sales force and have probably the most robust MCO opportunity in terms of a pipeline today than we've never had. And we think that's in part due to our Medicare Part D capability, our general clinical programs in the company, the sales force. But as you point out, there are many plans out there today that are questioning where they've got to place their business. And so, with the consolidation, whether it's the larger players or the smaller players, the acquisition of Catamaran by Optum, they're all great competitors. I think people are looking for a fresh and new solution with the stronger clinical programs and orientation and more of a value-based approach rather than the general traditional PBM approach. So, for all those reasons, we see a much increased pipeline on the MCO front. And we do think that the consolidation will have a significant impact on our opportunities out there as many people are looking for solutions that may not have been a year or two year ago because of that consolidation.

[Michael Baker:]

And then, on the employer side – thank you on that. And then on the employer side, are you seeing the consultant community begin to change the way they look at vendors in terms of the shift that we're seeing from pharmacy benefit management to drug benefit management?

[Barry Smith:]

Yeah. That's a great point, Michael. We are seeing that begin to shift and the reality is the products have been so much the same in the past, when they see new models of care, more value based, a real focus and capability on the specialty side, they are beginning to change. So, what we're seeing is a migration from the smaller employers through the TPAs up to the midsize to larger employers and more opportunity than we've ever had before. So, we expect that to continue to trend in that way.

[Michael Baker:]

Thanks for the update.

[Barry Smith:]

You bet. Thanks, Michael.

[Operator:]

Thank you. And next is Mr. Dave Styblo from Jefferies. Sir, you may proceed.

[David Styblo:]

Hi. Good morning. Thanks for the question. First one, staying, on the PBM here would be, if you guys could just shed a little bit more color on the fourth quarter strength. I know you mentioned, I think, the new employer add was in there, but we got revenue up 8% sequentially, segment profit up quite a bit more. Can you comment a little bit more about seasonality in that? What might have happened this year, because if we run rate that out, I think we would get to something well above what your initial guidance was. So, if we could start there, that would be great.

[Jonathan Rubin:]

Hey, Dave, it's Jon. Let me try to give you some directional color there. So, yeah, the results in the fourth quarter were very strong in 2015, which was the primarily contributor to – primary contributor to our overall strong results. And as we mentioned in the prepared remarks, much of this came from specialty pharmacy on both revenue and strength in terms of the segment profit. And I'd really look at that in a couple of areas, the largest driver was actually in our formulary business, we had a very strong quarter on rebates and that relates both to sales and the customer side and also to improvements we were able to drive with pharmacy manufacturers. And to complement that, volumes also came in strong in the quarter, both for those drugs under rebates, but also relative to our specialty distribution. So, very strong results in the quarter. The way I characterize the run rate, though, is that really the results in the quarter, meaning that the run rate was very strong. So, there is a not a lot that I would characterize in there as being out of period or nonrecurring in nature. However, as is always the true with specialty pharmacy, the difficulty in projecting forward relates both to your ability to retain the volumes, especially in certain of these blockbuster drugs that could be difficult to maintain those volumes over time, and being able to predict what the uptake is on some of the new drugs that are coming under our formularies with health plans and, in a sense, our ability to collect rebates on them. So, putting that all together, I would say, you're correct in sort of interpreting that our run rate, as we go into 2016, is stronger than we would have previously anticipated. That certainty helps us as we're going into the year. At the same time, as we get through first quarter, we'll have a better sense for what our actual run rate is in 2016 and we'll, certainly, at that point, update you on our forecast for the full year.

[Barry Smith:]

And Dave, just to add on and underscore Jon's point, it's interesting that we've been very fortunate to be able to negotiate the kind of deals with our clients and with the manufacturers and implement our clinical programs. What's interesting about the future is that, there's a very, very robust specialty pipeline coming out, which is our kind of thing to do. I mean we have the ability to really, I think, do very well by our clients as these new drugs come out and work with them and they are very clinically-oriented products and programs. So, we think it's playing to our strength and we'll be able to again update you more as we see the pipeline develop and the introductions announced by these manufacturers.

[David Styblo:]

Very helpful. Thanks. On the PDP that came in higher than expected, I think it's over 40,000 lives. A lot of times, we've seen when it's voluntary that that can sometimes leads to some tough results in that year adverse risk selection. Do you have any more color sort of on the early trends of what's going on or what gives you confidence that six months from now we can look back and say, hey, this was actually a good cohort to pick up or this is what gave us confidence that we did the right pricing as we went into the year?

[Jonathan Rubin:]

Yeah. Well, Dave, first of all, those are the same questions that we're asking and trying to fully get our hands around now, only because it does take a little bit of time to get the claims data and fully analyze where we are in the first quarter. We think by about April, we'll have a good initial read on what the utilization looks like. A couple of things that I'd say just to put some parameters around this. So, one, well, certainly, there is the potential for people to select their plans based on what drugs they're utilizing and some of the tools that CMS have out there, assist people in doing that. At the same time, there are a couple of things that help us with respect to that. One, we've really taken an approach with our formularies such that where we – where we're including drugs in our formularies that, perhaps, other plans might not. There are often drugs where we've got high levels of rebates. So, that helps us significantly to sort of dampen any risk associated with utilization of those drugs. And secondly, as you know with Part D, there is sort of reinsurance and sort of corridor. So, we don't believe the downside is significant, material in terms of our full-year outlook. But in terms of exactly where we are within sort of the normal range of Part D earnings, we'll have a much better sense as we get to first quarter. But we're optimistic both in terms of the growth that we're getting and our ability to manage it. And so far, again, considering these volume of members that we've had and the newness of the program for us, we feel good about where we are. And again, we'll provide an update first quarter.

[David Styblo:]

Great. And then, just the last one, a couple of quick numbers on the Florida MLR. Can you kind of refresh us on the bridge of where you're at and where you're going to the high-80%s, what's the key levers are there? I think from this point, it's mostly medical management kind of kicking in maybe some network re-contracting, but maybe refresh us on that? And then lastly, maybe, I heard the segment profit guidance incorrectly, but I think it was the $263 million and I think it was only about a $3 million increase. I guess I would have thought that would have been closer to $5 million if we pre-tax the TMG contribution?

[Jonathan Rubin:]

Yeah. Well, I think, the $3 million is pretty much the estimate for full year for TMG. Now, again, there is always, with acquisitions, some opportunity to get synergies and some one-time expenses associated with integration. But net-net, we think that's a reasonable number. In terms of the Florida MLR, again, we ended 2015 in the mid-90%s for the full year, as expected and as we talked about on the call. The pattern, though, was that we were lower in fourth quarter as a result of some of the actions we implemented, both primarily the network contracting as well as, obviously, the rate increase we were able to obtain from the state and the beginning of some of the key care management initiative. So, we were in that 93% to 94% range on a run rate fourth quarter. So, I just look at that as what we're stepping down off of as we work towards the high-80%s from a 2016 standpoint. And as I think about the plan, there is sort of three major components that I'll describe with the action plan. One is broadly care management initiatives. And that's both sort of continuing to make progress on utilization management, making sure that we're appropriately applying the medical necessity criteria to manage admissions appropriately, but also care management to ensure that we're providing high quality of care, avoiding readmissions and doing all the things consistent with our mission as a manager of seriously mentally ill in the State of Florida. In addition to those initiatives, we continue to have additional opportunities on the network side. We've got a big improvement with some of the big hospital systems that we re-contracted in beginning of fourth quarter of last year. But we see incremental opportunity as we go forward. And then a fraud, waste and abuse initiatives, making sure that we're appropriately paying claims and identifying opportunities where we have recoveries that we can go after. So, all of those sort of contribute to think about round numbers of 5% improvement that we're targeting from the fourth quarter run rate into 2016. And we have made progress. The early results in January and February, from a utilization standpoint, we obviously don't have claims yet, but from utilization standpoint, do show improvement, specifically on that first piece that I mentioned, the application of medical necessity criteria upfront. And we're continuing to focus on that as well as on the broader care management and network initiatives that I mentioned. So, hopefully, that helps, Dave.

[David Styblo:]

It does. Thanks, guys.

[Jonathan Rubin:]

You bet.

[Operator:]

Thank you. And we also have a question coming from the line of Ana Gupte from Leerink. Ma'am, your line is now open.

[Ana Gupte:]

Yeah. Thanks. Good morning. So, just one nuts-and-bolts question on the Pharmacy side of it. It did look like the big feed in the segment profit and the improvement was the direct service cost and the operating expenses, it looks like sequentially you had an improvement there. So, just trying to understand that did you say anything about that in your prepared remarks and then how sustainable is that and are we ending up with a OpEx ratio that's that low on a go-forward basis?

[Jonathan Rubin:]

Yeah. Ana, the way I think about it – you are correct, the operating expense ratio is strong in the quarter, but it actually turn that upside down a little bit. The real benefit we got in the quarter on Pharmacy was higher revenue. And think about that higher revenue, both the improvement we saw in rebates as a result of both higher volume and, as I mentioned, some of the sales and contracting initiatives, both again with plans and with pharmacy manufacturers, as well as higher volumes in the specialty pharmacy side. So, it really is a higher revenue that drove the lower expense ratio and, in a sense, the strength of the earnings, not the expenses, per se. But it does show up that way. As I mentioned earlier, going forward, I think it will be hard for us to maintain the margins we're seeing in fourth quarter just because it was such a strong quarter for rebates. And as we go into 2016, there is always some uncertainty around the volumes, some of the drugs that have seen such big increases in 2015. However, again, certainly, we feel like going into the year, we're on a better run rate than where we previously had forecast. So, anyway, those would be the key points I'd made.

[Ana Gupte:]

Okay. So, then going into – looking at the guidance that you have for 2016, on three dimensions, I'm just wondering, what are you building into your revised guidance, firstly, on Pharmacy, and what the run rate expectation is on segment profit? Secondly, on the Florida MLR, which you went into some detail around, you're at the low-90%s in the fourth quarter, it sounds like you're getting some improvements. What was built in originally in your confidence and what is the expectation for your full-year annualized run rate? And then, thirdly, on the Nebraska, when does that contract loss hit your P&L and then I forget now, it's like $100 million in revenue, correct?

[Jonathan Rubin:]

Yeah. That's correct. It's $100 million in revenue is correct. So, – and again that – we're assuming at this point we'll obviously go away with the state's consolidation under the managed care plans. But getting back to your earlier question, thinking about the two factors that we mentioned, that you specifically asked on. As we think about, what's built into guidance for 2016, two things. First, in the Florida MLR, we're still projecting in the high-80%s next year. So, that has not changed at all since the guidance we gave in December. And in fact, fourth quarter, we said we were going to end the year for the full year in the mid-90%s, which obviously meant fourth quarter was going to be somewhat below that. There is always some puts and takes, but directionally we're still consistent with what we assume going into the year. On Pharmacy, there is a range that we look at. Again, there is a good amount of volatility given some of the moving pieces, especially on the rebate side. However, I would say, in general, that we're forecasting at the beginning of the year in a better place. And therefore, our range for Pharmacy is slightly better than what we assumed in guidance. So, again, think about it, as in total, we feel good about where we're starting the year. It's early in the year and we still see feel like our estimates are within our original guidance range, which is why we're maintaining our guidance at this point, but certainly the momentum is positive as we begin the year, especially in Pharmacy. So, hope that helps.

[Ana Gupte:]

Okay. So, it sounds like there is a little bit potentially upside in Pharmacy, but the guidance for the MLR on seriously mentally ill assumes that you get to that high-80%s loss ratio? And then, on the Iowa contract, given the delay, is that working in your favor or not when you're looking at the exit as far as your operating expenses, so then you do lose your revenue?

[Jonathan Rubin:]

No, we're still pretty much – on the Iowa contract has transitioned and the outlook going forward is immaterial, no change from what we previously assumed.

[Ana Gupte:]

But previously, I thought when you guided that you assume that there was a delay in the contract?

[Jonathan Rubin:]

No.

[Ana Gupte:]

The state has delayed it obviously. So, does that help you a little?

[Jonathan Rubin:]

No, the contract has transitioned, so there is no – in terms of the consolidation of the behavioral health, so there is no change there.

[Ana Gupte:]

I see. And then, finally, on the long-term support services, you and a number of your peers are very bullish about this as kind of next wave of growth. You have been operating with AlphaCare in New York. There has been some chatter about one of the players in New York saying that the cost structure is very challenging to make a profitable margin in both FIDA and [indiscernible]. What sort of experience are you seeing in New York and what makes – and gives you confidence and should the other players [indiscernible] Pennsylvania and Virginia and others also would be about to bid that it's a profitable business?

[Barry Smith:]

Yeah. Ana, Barry here. In New York, the cost structure really hasn't been overly challenging. There are risk adjusters that are currently happening and we're kind of working through that. But in terms of matching the cost of care, it really hasn't been a major – an overly great challenge for us. The challenge in New York with AlphaCare is the whole marketing model where you win life-by-life and so the growth has been relatively modest. In these other states, these are typically auto enroll or assigned wins, so that we have a bulk of eligibles that come in at one time. So, it's far more predictable in terms of what we have in terms of overhead. And we're pretty confident on the MLR. You never know how it's going to ultimately turnout, but the MLR really hasn't been the issue in New York. It's one basically of matching the administrative cost to the volume of membership that we have in the state. So, we anticipate these other states, which are large block enrollee being assigned to our plan, we wouldn't expect the same issue or the challenge of growing over time as we've seen in New York.

[Jonathan Rubin:]

The other thing, Ana, I'd just add on to that is, remember, in New York, the way the program was set up, there are something like 25 plans competing for these members just in the New York Metro area. It's still early in terms of the process for a lot of these other states, but you're talking three, four or five players, probably state-wide, is what many of these states are looking at. So, a little bit of a different scenario. And again, the biggest issue that we and, I think, many of the other plans faced in New York is scale, based both on the number of plans competing for lives and the fact again that the FIDA program, the Dual Eligible program has been slowed to date in getting traction within the states. Having said that, New York provides sort of a great opportunity for us in terms of experience that we can bring to other states and, hopefully, be successful.

[Ana Gupte:]

So, as far as – thanks for colors. So, as far as the initial profit margin with the new states by Pennsylvania and/or Virginia, what might you expect that to be? And then, what would be the normalized margin? And would there be these kind of premium deficiency reserves and so on that would have to be taken?

[Jonathan Rubin:]

Yeah. I would say – I mean, it's early to say, obviously, we only have limited visibility to the states, Ana. But I'd say a couple of things. One, I think the nature of the MLTSS is very different than the medical side with Medicaid. It's more smaller-dollar services and more predictable in terms of the volumes. So, I don't think you'll see the same level of volatility and it varies. And as Barry said, we've seen that in how we're managing things in New York. So, again – but it's still early, because each one we have to evaluate the pricing and see where things play out. But in general, I'd that that's the case. In terms of margins, again, we have to evaluate state-by-state, but we think typical Medicaid margins low-single digits, probably some investment upfront and, over time, growing to low- to mid-single-digit area that we'd typically be targeting. But again, it's certainly a state-by-state scenario that we'd be assessing and forecasting on.

[Ana Gupte:]

Hey. Thanks, Jon and Barry. Appreciate it.

[Jonathan Rubin:]

You bet.

[Barry Smith:]

Great. Well, we thank you all for joining us on our call today. And we look forward to seeing you again and speaking with you after our first quarter results in 2016. Thanks again for joining us today. Bye-bye.

[Operator:]

And that concludes today's conference. Thank you for participating. You may now disconnect.