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| HS > SEC Filings for HS > Form 10-Q on 1-May-2009 | All Recent SEC Filings |
1-May-2009
Quarterly Report
We disclose our results by reportable segment in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information." We report our business as managed in
four segments: Medicare Advantage, PDP, Commercial, and Corporate. The following
discussion of our results from operations includes a discussion of revenue and
certain expenses by reportable segment. See "-Reportable Segments" below for
additional information related thereto.
Results of Operations
The consolidated results of operations include the accounts of HealthSpring
and its subsidiaries. The following tables set forth the consolidated statements
of income data expressed in dollars (in thousands) and as a percentage of total
revenue for each period indicated.
Three Months Ended March 31,
2009 2008
Revenue:
Premium revenue $ 634,596 98.2 % $ 540,890 97.8 %
Management and other fees 9,969 1.6 7,008 1.3
Investment income 1,550 0.2 4,811 0.9
Total revenue 646,115 100.0 552,709 100.0
Operating expenses:
Medical expense 529,600 82.0 444,182 80.4
Selling, general and administrative 72,250 11.2 62,899 11.4
Depreciation and amortization 7,524 1.2 7,248 1.3
Interest expense 4,281 0.6 5,404 1.0
Total operating expenses 613,655 95.0 519,733 94.1
Income before income taxes 32,460 5.0 32,976 5.9
Income tax expense (11,848 ) (1.8 ) (11,918 ) (2.1 )
Net income $ 20,612 3.2 % $ 21,058 3.8 %
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Membership
Our primary source of revenue is monthly premium payments we receive based on
membership enrolled in our managed care plans. The following table summarizes
our Medicare Advantage (including MA-PD), PDP, and commercial plan membership as
of the dates indicated.
March 31, December 31, March 31,
2009 2008 2008
Medicare Advantage Membership
Tennessee 53,833 49,933 49,174
Texas 48,456 43,889 38,357
Florida 29,978 27,568 26,681
Alabama 29,385 29,022 28,045
Illinois 10,067 9,245 8,735
Mississippi 3,419 2,425 1,535
Total 175,138 162,082 152,527
Medicare PDP Membership 286,810 282,429 258,012
Commercial Membership
Tennessee(1) - - (2) 1,402
Alabama 758 895 1,028
Total 758 895 2,430
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(1) Does not include a health plan maintained by the company for company employees or members of commercial managed care plans owned and operated by unrelated third parties that pay us a network rental fee for access to our contracted provider network.
(2) As of January 1, 2009, the company has discontinued its commercial business in Tennessee.
Medicare Advantage. Our Medicare Advantage membership increased by 14.8% to
175,138 members at March 31, 2009 as compared to 152,527 members at March 31,
2008, with membership gains in all our health plans. Our Medicare Advantage net
membership gain of 13,056 during the 2009 first quarter reflects both focused
and successful sales and marketing efforts through the annual open enrollment
and election periods and the relative attractiveness of our various product
offerings. We anticipate small but incremental membership growth throughout the
remainder of 2009 in our Medicare Advantage membership through the offering of
products to beneficiaries whose enrollment is not restricted by lock-in rules,
including age-ins, dual-eligibles, and beneficiaries eligible for one of our
special needs plans ("SNPs").
PDP. PDP membership increased by 11.2% to 286,810 members at March 31, 2009
as compared to 258,012 at March 31, 2008, primarily as a result of the
auto-assignment of members at the beginning of the year, despite reducing the
CMS regions in which we receive auto-assignments from 31 in 2008 to 24 in 2009.
We do not actively market our PDPs and have relied on CMS auto-assignments of
dual-eligible beneficiaries for membership. We have continued to receive
assignments or otherwise enroll dual-eligible beneficiaries in our PDP plans
during lock-in and expect continued incremental growth for the balance of the
year.
Risk Adjustment Payments
The company's Medicare premium revenue is subject to adjustment based on the
health risk of its members. This process for adjusting premiums is referred to
as the CMS risk adjustment payment methodology. Under the risk adjustment
payment methodology, managed care plans must capture, collect,
and report diagnosis code information to CMS. After reviewing the respective
submissions, CMS establishes the payments to Medicare plans generally at the
beginning of the calendar year, and then adjusts premiums on two separate
occasions on a retroactive basis.
The first retroactive risk premium adjustment for a given fiscal year
generally occurs during the third quarter of such fiscal year. This initial
settlement (the "Initial CMS Settlement") represents the updating of risk scores
for the current year based on updated diagnoses from the prior year. CMS then
issues a final retroactive risk premium adjustment settlement for that fiscal
year in the following year (the "Final CMS Settlement").
During the 2008 first quarter, the Company updated its estimated Final CMS
Settlement payment amounts for 2007 based on its evaluation of additional
diagnosis code information reported to CMS in 2008 and updated its estimate
again in the 2008 second quarter as a result of receiving notification in
July 2008 from CMS of the Final CMS Settlement for 2007. These changes in
estimate related to the 2007 plan year resulted in an additional $12.0 million
and $17.3 million of premium revenue in the first and second quarters of 2008,
respectively. The impact on net income, after the expense for risk sharing with
providers and income tax expense, for the first quarter of 2008, was
$5.3 million. There were no material adjustments made in the 2009 first quarter
relating to 2008 Final CMS Settlement.
Comparison of the Three-Month Period Ended March 31, 2009 to the Three-Month
Period Ended March 31, 2008
Revenue
Total revenue was $646.1 million in the three-month period ended March 31,
2009 as compared with $552.7 million for the same period in 2008, representing
an increase of $93.4 million, or 16.9%. The components of revenue were as
follows:
Premium Revenue: Total premium revenue for the three months ended March 31,
2009 was $634.6 million as compared with $540.9 million in the same period in
2008, representing an increase of $93.7 million, or 17.3%. The components of
premium revenue and the primary reasons for changes were as follows:
Medicare Advantage: Medicare Advantage (including MA-PD) premiums were
$541.4 million for the three months ended March 31, 2009 versus $459.3 million
in the first quarter of 2008, representing an increase of $82.1 million, or
17.9%. The increase in Medicare Advantage premiums in 2009 is primarily
attributable to increases in membership and in per member per month, or "PMPM,"
premium rates in all of our plans. PMPM premiums for the 2009 first quarter
averaged $1,047, which reflects an increase of 6.8% as compared to the 2008
first quarter, as adjusted to exclude favorable out-of-period retroactive risk
adjustments in the 2008 period. (See "Risk Adjustment Payments" above.) The PMPM
premium increase in the current quarter is primarily the result of rate
increases in CMS-calculated base rates as well as rate increases related to risk
scores.
PDP: PDP premiums (after risk corridor adjustments) were $92.5 million in the
three months ended March 31, 2009 compared to $79.2 million in the same period
of 2008, an increase of $13.2 million, or 16.7%. The increase in premiums for
the 2009 first quarter is primarily the result of increases in membership and
PDP PMPM premium rates. Our average PMPM premiums (after risk corridor
adjustments) were $108.60 in the 2009 first quarter, as compared to $103.31
during the 2008 first quarter.
Fee Revenue. Fee revenue was $10.0 million in the first quarter of 2009
compared to $7.0 million for the first quarter of 2008, an increase of
$3.0 million. The increase in the current period is attributable to increased
management fees as a result of new independent physician associations ("IPAs")
under contract since the 2008 first quarter and higher premiums in managed IPAs
compared to the same period last year.
Investment Income. Investment income was $1.6 million for the first quarter
of 2009 versus $4.8 million for the comparable period of 2008, reflecting a
decrease of $3.2 million, or 67.8%. The decrease is attributable to a decrease
in the average yield on invested and cash balances.
Medical Expense
Medicare Advantage. Medicare Advantage (including MA-PD) medical expense for
the three months ended March 31, 2009 increased $74.9 million, or 20.5%, to
$440.3 million from $365.4 million for the comparable period of 2008, which is
primarily attributable to increases in PMPM medical expense and membership
increases in the 2009 period as compared to the 2008 period. For the three
months ended March 31, 2009, the Medicare Advantage medical loss ratio, or
"MLR," was 81.3% versus 80.9% for the same period of 2008, as adjusted to
exclude favorable out-of-period retroactive risk adjustments in the 2008 period.
(See "Risk Adjustment Payments" above.) The MLR deterioration in the 2009 first
quarter is primarily attributable to increases in PMPM medical expense,
primarily unit costs, exceeding PMPM premium increases, as anticipated, which
were offset partially by lower utilization and units costs in our Florida plan.
The comparative degradation in MA MLR in the 2009 first quarter as compared to
the prior year period was also partially offset by MLR improvement in the drug
benefit component of our MA-PD plans in the current period.
Our Medicare Advantage medical expense calculated on a PMPM basis was $852
for the three months ended March 31, 2009, compared with $793 for the comparable
2008 quarter, as adjusted to exclude favorable out-of-period retroactive risk
adjustments in the 2008 period.
PDP. PDP medical expense for the three months ended March 31, 2009 increased
$11.9 million to $88.6 million, compared to $76.7 million in the same period
last year. PDP MLR for the 2009 first quarter was 95.8%, compared to 96.8% in
the 2008 first quarter. The decrease in PDP MLR for the current quarter was
primarily attributable to higher PDP revenue resulting from our PDP bid process.
Selling, General, and Administrative Expense
Selling, general, and administrative expense, or "SG&A," for the three months
ended March 31, 2009 was $72.3 million as compared with $62.9 million for the
same prior year period, an increase of $9.4 million, or 14.9%. The increase in
the 2009 first quarter as compared to the same period of the prior year is the
result of personnel cost increases, primarily related to growth in headcount of
approximately 20% subsequent to the 2008 first quarter, and increases in
commissions associated with the growth in membership in the current period. As a
percentage of revenue, SG&A expense decreased approximately 20 basis points for
the three months ended March 31, 2009 compared to the prior year first quarter.
Consistent with historical trends, the company expects the majority of its
sales and marketing expenses to be incurred in the first and fourth quarters of
each year in connection with the annual Medicare enrollment cycle.
Depreciation and Amortization Expense
Depreciation and amortization expense was $7.5 million in the three months
ended March 31, 2009 as compared with $7.2 million in the same period of 2008,
representing an increase of $0.3 million, or 3.8%. The increase in the current
quarter was primarily the result of incremental amortization expense associated
with intangible assets recorded as part of the acquisition in October 2008 by
our Texas plan of certain Medicare Advantage contracts from Valley Baptist
Health Plans operating in the Rio Grande Valley.
Interest Expense
Interest expense was $4.3 million in the 2009 first quarter, compared with
$5.4 million in the 2008 first quarter. The decrease in the current quarter was
the result of lower effective interest rates and lower
average principal balances outstanding. The weighted average interest rate
incurred on our borrowings during the three month periods ended March 31, 2009
and 2008 were 6.4% and 7.2%, respectively (5.2% and 6.2%, respectively,
exclusive of amortization of deferred financing costs.)
Income Tax Expense
For the three months ended March 31, 2009, income tax expense was
$11.8 million, reflecting an effective tax rate of 36.5%, versus $11.9 million,
reflecting an effective tax rate of 36.1%, for the same period of 2008. The
higher rate in 2009 is primarily attributable to the estimated annual decrease
in non-taxable investment income. The Company expects the effective tax rate for
the full 2009 year will approximate 36.5%.
Segment Information
We report our business as managed in four segments: Medicare Advantage,
stand-alone Prescription Drug Plan, Commercial, and Corporate. Medicare
Advantage ("MA-PD") consists of Medicare-eligible beneficiaries receiving
healthcare benefits, including prescription drugs, through a coordinated care
plan qualifying under Part C and Part D of the Medicare Program. Stand-alone
Prescription Drug Plan ("PDP") consists of Medicare-eligible beneficiaries
receiving prescription drug benefits on a stand-alone basis in accordance with
Medicare Part D. Commercial consists of our commercial health plan business. The
Commercial segment was insignificant as of December 31, 2008 and continues to be
so, as a result of the non-renewal of coverage by employer groups in Tennessee.
The Corporate segment consists primarily of corporate expenses not allocated to
the other reportable segments. These segment groupings are also consistent with
information used by our chief executive officer in making operating decisions.
The results of each segment are measured and evaluated by earnings before
interest expense, depreciation and amortization expense, and income taxes (or
"EBITDA"). We do not allocate certain corporate overhead amounts (classified as
selling, general and administrative expenses) or interest expense to our
segments. We evaluate interest expense, income taxes, and asset and liability
details on a consolidated basis as these items are managed in a corporate shared
service environment and are not the responsibility of segment operating
management.
Revenue includes premium revenue, management and other fee income, and
investment income.
Financial data by reportable segment for three months ended March 31 is as
follows (in thousands):
MA-PD PDP Commercial Corporate Total
Three months ended March 31, 2009
Revenue $ 552,749 $ 92,618 $ 736 $ 12 $ 646,115
EBITDA 48,821 2,125 (14 ) (6,667 ) 44,265
Depreciation and amortization expense 6,356 20 - 1,148 7,524
Three months ended March 31, 2008
Revenue $ 469,805 $ 80,432 $ 2,337 $ 135 $ 552,709
EBITDA 50,244 1,213 314 (6,143 ) 45,628
Depreciation and amortization expense 6,240 - - 1,008 7,248
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As of January 1, 2009, the Company developed a new methodology for allocating
the selling, general, and administrative expenses, but only within its
prescription drug operations, which resulted in its allocating a greater share
of such expenses to its MA-PD segment than in previous years. As such, the MA-PD
and PDP segment's EBITDA amounts for the 2008 period include reclassification
adjustments between segments such that the periods presented are comparable.
A reconciliation of reportable segment EBITDA to net income included in the
consolidated statements of income for the three months ended March 31 is as
follows (in thousands):
2009 2008
EBITDA $ 44,265 $ 45,628
Income tax expense (11,848 ) (11,918 )
Interest expense (4,281 ) (5,404 )
Depreciation and amortization (7,524 ) (7,248 )
Net Income $ 20,612 $ 21,058
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Liquidity and Capital Resources
We finance our operations primarily through internally generated funds. All
of our outstanding funded indebtedness was incurred in connection with the
acquisition of the LMC Health Plans in October 2007. See "-Indebtedness" below.
We generate cash primarily from premium revenue and our primary use of cash
is the payment of medical and SG&A expenses and principal and interest on
indebtedness. We anticipate that our current level of cash on hand, internally
generated cash flows, and borrowings available under our revolving credit
facility will be sufficient to fund our working capital needs, our debt service,
and anticipated capital expenditures over at least the next twelve months.
The reported changes in cash and cash equivalents for the three month period
ended March 31, 2009, compared to the comparable period of 2008, were as
follows:
Three Months Ended
March 31,
2009 2008
(in thousands)
Net cash provided by operating activities $ 7,860 $ 14,010
Net cash (used in) provided by investing activities (12,680 ) 25,094
Net cash provided by (used in) financing activities 27,443 (2,848 )
Net increase in cash and cash equivalents $ 22,623 $ 36,256
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Cash Flows from Operating Activities
Our primary sources of liquidity are cash flow provided by our operations and
available cash on hand. To date, we have not borrowed under our $100.0 million
revolving credit facility. We generated cash from operating activities of
$7.9 million during the three months ended March 31, 2009, compared to
generating cash of $14.0 million during the three months ended March 31, 2008.
Cash Flows from Investing and Financing Activities
For the three months ended March 31, 2009, the primary investing activities
consisted of $2.8 million in property and equipment additions, expenditures of
$24.8 million to purchase investment securities, and the receipt of
$15.0 million in proceeds from the maturity of investment securities. The
investing activity in the prior year period consisted primarily of $5.5 million
used to purchase investments, $32.5 million in proceeds from the maturity of
investment securities, and $1.9 million in property and equipment additions.
During the three months ended March 31, 2009, the company's financing activities
consisted primarily of $36.9 million of funds received in excess of funds
withdrawn from CMS for the benefit of members, and $9.5 million for the
repayment of long-term debt. The financing activity in the prior year period
consisted primarily of $21.5 million of funds received in excess of funds
withdrawn from CMS for the benefit of members and $20.6 million used in the
purchase of treasury stock. Funds due from CMS received for the benefit of
members are recorded as an asset on our balance sheet at March 31, 2009 and at
December 31, 2008. We anticipate settling approximately $36.7 million of such
Part D related amounts (including risk corridor settlements) relating to 2008
with CMS during the second half of 2009 as part of the final settlement of
Part D payments for the 2008 plan year.
During the three months ended March 31, 2009, the company did not purchase
any shares of its common stock under its open market repurchase program. The
company currently has approximately $2.7 million in remaining repurchase
authority under the existing program.
Cash and Cash Equivalents
At March 31, 2009, the company's cash and cash equivalents were
$304.9 million, $44.2 million of which was held at unregulated subsidiaries.
Approximately $35.5 million of the cash balance relates to amounts held by the
company for the benefit of its Part D members. We expect CMS to settle this
amount, related to the 2009 plan year, during the second half of 2010.
The current credit and stock market crises have not had a material effect on
the company's financial condition or results of operations and, at least as
currently foreseeable by management of the company, such crises are not expected
to adversely affect the company's liquidity or operations. Substantially all of
the company's sources of liquidity are in the form of cash and cash equivalents
($304.9 million at March 31, 2009), the majority of which ($260.7 million at
March 31, 2009) is held by the company's regulated insurance subsidiaries, which
amounts are required by law and by our credit agreement, to be invested in
. . .
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