HealthSpring's net income up by $42.3 million in the third-quarter of 2009

HealthSpring, Inc. (NYSE:HS) today announced its results for the third quarter and nine months ended September 30, 2009. Highlights for the 2009 third quarter include:

• Net income of $42.3 million, or $0.77 per diluted share, compared with $29.4 million, or $0.53 per diluted share, in the 2008 third quarter;
• Premium revenue of $649.8 million, up 26.0% over the 2008 third quarter; and
• Medicare Advantage membership of 186,635 at quarter-end, up 19.4% over the 2008 third quarter-end, and up 15.1% compared with 2008 year-end; stand-alone PDP membership of 303,975, up 11.6% over the 2008 third quarter-end.

Commenting on 2009 third quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, “We are pleased with our strong performance in the third quarter of 2009. Performance in the quarter was driven by improvement in inpatient admissions in most of our markets that more than offset any higher trends we continue to experience in outpatient and professional costs. Our Florida and Part-D operations also continue to outperform our expectations for the year. These positive trends have caused us to increase our earnings per share guidance for 2009. We believe that our intense focus on physician engagement and the value proposition we offer to Medicare beneficiaries have led to the current year’s strong performance and position us well for a strong 2010 open enrollment season.”

(1) Weighted average shares outstanding used in the calculation of net income per common share - diluted, were 54,700,390 and 55,811,236, respectively, for the three months ended September 30, 2009 and 2008.

Operating Highlights

Revenue

• Medicare Advantage premiums (including the prescription drug component of HealthSpring's Medicare Advantage plans, or "MA-PD") were $580.0 million for the 2009 third quarter, reflecting an increase of 27.3% over the 2008 third quarter. The premium revenue increase is attributable to a 19.4% increase in membership and a 6.7% increase in premiums per member per month, or “PMPM.” Additionally, the 2009 third quarter included $6.4 million of premium revenue for changes in estimates for current-year retroactive risk settlements related to the first half of 2009. This change in estimate had a favorable impact on net income of $3.5 million, or $0.06 per diluted share, in the current quarter. By comparison, the change in estimate for the 2008 third quarter was insignificant.
• Medicare Advantage PMPM premiums were $1,043.09 in the 2009 third quarter, compared with $977.38 in the 2008 third quarter. The PMPM premium increase in the 2009 third 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 $69.0 million for the 2009 third quarter, an increase of 16.8% compared with the 2008 third quarter. The higher revenue resulted from an 11.6% increase in membership and a 4.7% increase in PDP premiums PMPM in the current quarter.
• Investment income decreased from the 2008 third quarter by $2.9 million, or 76.9%, to $0.9 million for the 2009 third 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 79.7% for the 2009 third quarter, compared with 79.2% for the prior year’s third quarter. The impact from risk-adjustment payments relating to prior periods of 2009 was favorable by 0.7% on the 2009 third quarter. Higher outpatient expenses and increases in physician expenses in the Alabama, Tennessee, and Texas health plans resulted in an increase in the current period MLR, compared with the 2008 third quarter. Increasing pharmacy trends for the drug benefit component of the Company's MA-PD plans during the current period also contributed to the increase in the MLR. These increases were partially offset by improvements in inpatient admissions across all markets and continued strong performance in the Florida plan. On a year-to-date basis, the MA MLR was 81.1%, compared with 79.2% for the prior year’s first nine months, as adjusted in both periods to exclude favorable final CMS settlement adjustments associated with prior years.
• PDP MLR was 81.5% for the 2009 third quarter, compared with 85.1% in the 2008 third quarter. On a year-to-date basis, the PDP MLR was 90.2%, compared with 93.3% for the prior year’s first nine months. The improvement in the PDP MLR was primarily attributable to higher PMPM premium revenue. Higher utilization of generic prescription drugs in the 2009 period also contributed to the improvement in the year-to-date PDP MLR.

Selling, General & Administrative (SG&A) Expense

• SG&A expense as a percentage of total revenue in the 2009 third quarter decreased 110 basis points to 10.0%, compared with 11.1% in the 2008 third 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 $7.2 million increase in the 2009 third quarter compared with the 2008 third quarter was primarily the result of additional personnel costs associated with membership increases. On a year-to-date basis, SG&A expense as a percentage of total revenue in 2009 was 10.1% compared with 10.8% for the prior year’s first nine months.

Interest Expense

• Interest expense in the 2009 third quarter decreased $0.8 million compared with the 2008 third 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 September 30, 2009 was 4.7% compared with 5.3% for the three months ended September 30, 2008.

Income Tax Expense

• The effective income tax rate was adjusted in the 2009 third quarter to 34.9% for the nine months ended September 30, 2009. This lower tax rate resulted primarily from a favorable tax impact related to business combination accounting for the Florida health plan acquisition. This and other minor adjustments contributed $0.04 to diluted earnings per share for the 2009 third quarter. The Company currently expects the effective income tax rate for the full year will approximate 35.2%, which includes the items reported in the third quarter.

Balance Sheet Highlights

• At September 30, 2009, the Company’s cash and cash equivalents were $389.8 million, $75.3 million of which was held at unregulated subsidiaries, compared with cash and cash equivalents of $282.2 million at December 31, 2008, $31.4 million of which was held at unregulated subsidiaries.
• Total debt outstanding was $244.2 million at September 30, 2009, compared with $268.0 million at December 31, 2008, and $275.3 million at September 30, 2008. There were no borrowings outstanding under the Company’s $100 million revolving credit facility at September 30, 2009 or 2008.
• For the first nine months of 2009, net cash generated in operating activities was $115.5 million compared with $152.6 million generated in the same period of 2008. Operating cash flows on a year-to-date basis for 2009 included the receipt of approximately $31.8 million of prior-year CMS risk premium settlements compared with the settlement of $57.9 million received in the first nine months of 2008.
• Days in claims payable totaled 35 at the end of the 2009 third quarter, compared with 36 at the end of the 2009 second quarter.

Outlook

• EPS: The Company is increasing its expectations for diluted earnings per share for 2009 to be in the range of $2.30 to $2.40, on weighted average shares outstanding of approximately 55.4 million.
• Membership: The Company increases its estimate for Medicare Advantage membership from 186,000–188,000 to a range of 188,000–189,000 at the end of 2009. The Company also refines its estimate for PDP membership from 310,000–320,000 to a range of 311,000–313,000 at the end of 2009.
• Revenue: The Company now estimates that 2009 total revenue will be approximately $2.65 billion.
• MLRs: The Company is modifying its estimate for Medicare Advantage (including MA-PD) full-year MLR to be approximately 81.0% for 2009. The Company maintains its estimate for stand-alone PDP MLR to be in the range of 84.0% to 86.0% for the year.
• SG&A: The Company continues to estimate that selling, general and administrative expense will be approximately 10.5% of total revenue for 2009.