HealthSpring reports net income of $38.8M for fourth-quarter 2009

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Feb 8 2010

HealthSpring, Inc. (NYSE:HS) today announced its results for the fourth quarter and year ended December 31, 2009. Highlights included:

Net income in the 2009 fourth quarter of $38.8 million, or $0.68 per diluted share, compared with $28.3 million, or $0.51 per diluted share, in the 2008 fourth quarter, an increase of 33.3% on a per diluted share basis.
Full year EPS of $2.41, compared with $2.12 for 2008, an increase of 13.7%.
Medicare premium revenue in the 2009 fourth quarter of $663.0 million, up 25.5% over the 2008 fourth quarter.
Medicare premium revenue for the year of $2.6 billion, an increase of 22.5% over 2008.
Medicare Advantage membership of 189,241 and stand-alone PDP membership of 313,045 at December 31, 2009, an increase of 16.8% and 10.8%, respectively, over the 2008 year end.

Commenting on the 2009 results, Herb Fritch, Chairman and Chief Executive Officer, said, “We are pleased with our operating results in 2009. Outperformance in most of our health plans and in our stand-alone prescription drug plan, coupled with continuing SG&A operating leverage, allowed us to close the year on a high note. Moving to 2010, our Medicare Advantage membership has increased despite the fact that we reduced benefits across many of our markets in response to Medicare rate cuts. In addition, our stand-alone PDP saw significant auto-assigned membership growth in January. Although our outlook does anticipate a modest increase in our MA MLR, we believe that 2010 will be another good year for HealthSpring.”

Fourth Quarter Operating Highlights

Revenue

Medicare Advantage (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") premiums were $586.5 million for the 2009 fourth quarter, reflecting an increase of 24.2% over the 2008 fourth quarter. The higher premiums in the 2009 fourth quarter were attributable to increases in both membership and per member per month, or “PMPM,” premium rates.
Medicare Advantage PMPM premiums were $1,037.45 in the 2009 fourth quarter, compared with $976.58 in the 2008 fourth quarter. The PMPM premium increase in the 2009 fourth quarter resulted from rate increases in CMS-calculated base rates as well as rate increases related to risk scores.
Stand-alone PDP premium revenue was $76.5 million for the 2009 fourth quarter, an increase of 35.6% compared with the 2008 fourth quarter. The increase in revenue was the result of a 10.8% increase in membership and an increase in PDP premiums PMPM in the 2009 fourth quarter.
Investment income decreased from the 2008 fourth quarter by $2.3 million, or 75.2%, to $0.8 million for the 2009 fourth quarter, primarily as a result of a lower average yield on invested and cash balances.

Medical Expense

Medicare Advantage medical loss ratio, or "MLR," was 81.1% for the 2009 fourth quarter, compared with 78.9% for the prior year’s fourth quarter. The impact from risk adjustment payments relating to prior periods was favorable by 0.8% and 1.8% in the 2009 and 2008 fourth quarters, respectively. Increased inpatient procedure costs in our Tennessee health plan and higher outpatient expenses across all health plans resulted in an increase in the current period MLR, compared with the 2008 fourth quarter. These increases were partially offset by improvements in inpatient admissions across all markets and continued strong performance in the Florida health plan.
PDP MLR was 60.7% for the 2009 fourth quarter, compared with 75.8% for the 2008 fourth quarter. Higher PMPM premium revenue in the 2009 quarter was the primary reason for the improvement in PDP MLR.

Selling, General & Administrative (SG&A) Expense

SG&A expense as a percentage of total revenue in the 2009 fourth quarter decreased 100 basis points to 11.7%, compared with 12.7% in the 2008 fourth quarter. The improvement in SG&A as a percentage of revenue resulted primarily from improvements in the Company's operating model and revenue increases. The $10.6 million increase for the 2009 fourth quarter compared with the 2008 fourth quarter was primarily the result of additional personnel costs associated with membership increases and increases in other administrative costs, including contract termination expenses.

Interest Expense

Interest expense in the 2009 fourth quarter decreased $1.0 million compared with the 2008 fourth quarter as a result of lower effective interest rates and lower average principal balances.
The Company's weighted average effective interest rate (exclusive of the amortization of deferred financing costs) for the three months ended December 31, 2009, was 4.6%, compared with 5.5% for the three months ended December 31, 2008.

Income Taxes

The Company's effective income tax rate for the three months ended December 31, 2009, was 39.7%, compared with 36.1% for the three months ended December 31, 2008. The annual effective income tax rate for 2009 was 36.4%. The rate increase in the 2009 fourth quarter compared with the 2008 fourth quarter was the result of a greater concentration of the Company’s profitability in entities taxed at a higher state tax rate and the reversal of tax benefits on cancelled stock compensation awards, primarily for certain executives retiring in 2009.

Full Year 2009 Operating Highlights

Medicare Advantage premiums were $2.3 billion for 2009, reflecting an increase of 22.5% over the prior year. Changes in estimates for prior year retroactive risk settlements increased premium revenue by $6.5 million and $29.3 million in 2009 and 2008, respectively, and increased net income by $2.1 million (or $0.04 per diluted share) and $13.4 million (or $0.24 per diluted share) in 2009 and 2008, respectively.
Medicare Advantage MLR was 81.0% for 2009, compared with 78.3% for the prior year. The 2009 MLR includes the impact of the risk adjustment payments and the costs of the related risk-sharing arrangements. Adjusting for out-of-period risk adjustment payments, the Medicare Advantage MLR was 81.1% in 2009 as compared with 79.1% for the 2008 MLR, as similarly adjusted. The increase in the MLR for the current year was primarily attributable to increases in inpatient procedure costs in our Tennessee health plan and increases in outpatient expenses across all health plans. The MLR increase in 2009 was partially offset by improvements in our Florida health plan’s MLR attributable primarily to hospital recontracting efforts.
Stand-alone PDP premium revenue was $325.4 million for 2009, an increase of 22.6% compared with 2008. The increase in revenue is the result of an 11.2% increase in member months and a 10.3% increase in PDP premiums PMPM in 2009.
Fee revenue was $42.3 million for 2009 compared with $32.6 million for 2008, an increase of $9.7 million, or 29.6%. The increase in 2009 is attributable to increased management fees as a result of higher membership in managed IPAs compared with 2008.
The Company’s PDP MLR was 83.3% for 2009 as compared with 89.6% for 2008. The improvement in the PDP MLR was primarily attributable to higher PMPM premium revenue. Higher utilization of generic prescription drugs during the year also contributed to the improvement in the 2009 PDP MLR.
SG&A expense as a percentage of total revenue for 2009 decreased 80 basis points to 10.5%, compared with 11.3% for 2008. The improvement in SG&A as a percentage of revenue resulted primarily from improvements in the Company's operating model and revenue increases.
Investment income decreased from 2008 by $10.7 million, or 71.5%, to $4.3 million for 2009, primarily as a result of a lower average yield on invested and cash balances.

Balance Sheet Highlights

At December 31, 2009, the Company’s cash and cash equivalents were $439.4 million, $106.4 million of which was held by unregulated entities, compared with cash and cash equivalents of $282.2 million at December 31, 2008, $31.4 million of which was held by unregulated entities.
Contingent consideration of 2,666,667 shares of the Company’s common stock was released from escrow in November 2009 to the former stockholders of Leon Medical Centers Health Plans, or “LMC Health Plans.” The released shares are included in the computation of basic and diluted earnings per share for the fourth quarter of 2009 and as issued and outstanding on the Company’s balance sheet at year end 2009. The Company recorded additional goodwill of $34.7 million in the 2009 fourth quarter associated with the acquisition of LMC Health Plans and the release of such shares.
Total debt outstanding was $237.0 million at December 31, 2009, compared with $268.0 million at December 31, 2008. There were no borrowings outstanding under the Company’s revolving credit facility during 2009.
For the year, net cash provided by operating activities was $170.0 million, or 1.3x net income, compared with $162.0 million, or 1.4x net income, for 2008.
Days in claims payable totaled 35 at the end of 2009.

Outlook

EPS: The Company expects its earnings per share for 2010, on a diluted basis, to be in the range of $2.25 to $2.50, on weighted average shares outstanding of approximately 57.8 million (an increase of 2.4 million weighted shares outstanding over 2009).
Membership: The Company expects Medicare Advantage membership to be in the range of 195,000 to 200,000 at the end of 2010. The Company estimates PDP membership to be in the range of 410,000 to 420,000 at the end of 2010.
Revenue: The Company estimates that 2010 total revenue will be between $2.85 billion and $2.95 billion.
MLRs: The Company estimates that Medicare Advantage (including MA-PD) full-year MLR will be in the range of 81.5% to 82.0% for 2010. The Company estimates stand-alone PDP MLR to be in the range of 85.5% to 86.5% for the year.
SG&A: The Company estimates that selling, general and administrative expense will be at or below 10.5% of total revenue for 2010.
Income taxes: The Company estimates that its effective income tax rate for 2010 will be 36.5% to 37.0%.