Universal American Corp. Reports 2016 Third Quarter Results

WHITE PLAINS, N.Y.–(BUSINESS WIRE)–Universal American Corp. (NYSE:UAM) today announced financial results
for the quarter ended September 30, 2016.

Recent Developments

  • In June 2016, Universal American issued $115 million principal amount
    of convertible notes and used the proceeds, together with cash on
    hand, to repurchase approximately 20.2 million shares of our common
    stock for an aggregate purchase price of approximately $138 million,
    or an average price of $6.85 per share;
  • In August 2016, Universal American completed the sales of its Total
    Care Medicaid and Traditional Insurance businesses, generating cash
    proceeds of approximately $80 million;
  • In September 2016, Universal American entered into an agreement to
    fully resolve the litigation arising from the APS Healthcare
    acquisition in 2012 by acquiring all of the 6,272,104 shares of common
    stock held by the defendants for an aggregate payment of $13.0
    million. The result of this settlement and the June 2016 share
    repurchase was a 31% reduction in common shares outstanding; and
  • In October 2016, Universal American was notified that its flagship
    TexanPlus® HMO plan improved to a 4.5 Star Quality rating.

Results of Third Quarter 2016

Universal American’s reported net income for the third quarter of 2016
was $50.9 million, or $0.83 per share. Adjusted pre-tax loss was $0.8
million and adjusted net loss was $2.9 million, or $0.05 per
share, for the third quarter of 2016, which excludes the following
after-tax items:

  • $5.6 million, or $0.09 per share, of losses associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $0.1 million, or less than $0.01 per share, of net realized investment
    losses;
  • $0.7 million, or $0.01 per share, of non-cash interest on our
    Convertible Notes;
  • $0.3 million, or less than $0.01 per share, of tax expense;
  • $59.6 million or $0.97 per share of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which were sold in August 2016, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $0.9 million or $0.01 per share, of legal and consulting costs related
    to the sold businesses that were reclassified to discontinued
    operations.

Total revenues for the third quarter of 2016 were approximately $343
million.

Results of Nine Months ended September 30, 2016

Universal American’s reported net income for the nine months ended
September 30, 2016 was $73.9 million, or $0.97 per share. Adjusted
pre-tax income was $25.3 million and adjusted net income was $9.4
million, or $0.12 per share, for the nine months ended September
30, 2016, which excludes the following after-tax items:

  • $2.7 million, or $0.04 per share, of income associated with our
    Management Services Organization (MSO) segment, which includes our
    Accountable Care Organization (ACO) business;
  • $1.5 million, or $0.02 per share, of net realized investment gains;
  • $0.7 million, or $0.01 per share, of non-cash interest on our
    Convertible Notes;
  • $0.3 million, or less than $0.01 per share, of tax benefits;
  • $62.7 million, or $0.83 per share, of income from discontinued
    operations, including our Traditional Insurance and Total Care
    Medicaid businesses, which were sold in August 2016, and the APS
    Healthcare businesses, which were sold in 2015; and
  • $2.0 million or $0.03 per share, of legal and consulting costs
    relating to corporate development activities.

Total revenues for the first nine months of 2016 were approximately $1.0
billion.

Management Comments

Richard A. Barasch, Chairman and CEO, commented, “Universal American has
had a positive and productive third quarter and year to date. We sold
the remaining businesses that didn’t fit with our core strengths,
settled the APS Healthcare litigation and reduced our outstanding share
count by 31%. After this activity, including the large stock buybacks,
we ended the quarter with more than $100 million of available cash at
the parent. Further, our business has become significantly less complex,
which will allow us to meaningfully lower our corporate expenses in 2017.

Our core strength and the foundation of our strategy is partnering with
primary care physicians to improve health outcomes while reducing costs
in the Medicare population. Over the past 15 years, we have built a
platform that combines efficient use of data and care management
protocols with the critical work of establishing trust with our
physician partners. We now have over 350,000 Medicare beneficiaries on
this platform in Medicare Advantage, Medicare Shared Savings ACOs and
Next Generation ACOs.

“We are building on our successful 15-year history of working closely
with our physician partners in the Houston/Beaumont region to improve
quality and reduce cost for Medicare beneficiaries. This was again
validated by the recent award of 4.5 Stars for this plan.

“In partnership with many of our most experienced Houston doctors, we
were awarded a Next Generation ACO which began in January 2016. This
added approximately 13,600 full-risk Medicare beneficiaries to the
65,600 Medicare beneficiaries we are already serving in our Southeast
Texas Medicare Advantage business. We are pleased to report positive
current year results from this program.

“In the Northeast, especially upstate New York, we are in the process of
converting a fee-for-service market into a more value-based system by
introducing pay for performance to primary care physicians. We note that
the Northeast has improved from a $21.2 million pre-tax loss in 2015 to
an approximately $13.5 million pre-tax gain year to date.

“The results from the 2015 program year in our MSSP ACO business showed
significant improvement. Ten of our ACOs achieved shared savings in the
amount of $39.8 million, a 48% increase over PY2014. The net revenue to
UAM is $28.6 million, a 37% increase over PY2014. For the 2016 program
year, we have reduced the number of active MSSP ACOs, reduced our
operating expenses and have moved our most successful ACOs to 2-sided
risk with higher gain sharing. We are encouraged by the progress in cost
and quality shown by our physician partners and by the positive
regulatory changes in the MSSP program.”

2016 Membership (as of September 30, 2016)

  • Medicare Advantage:

    • 68,800 members in Texas
    • 45,600 members in upstate New York and Maine
    • 13,600 Medicare beneficiaries in our Next Generation ACO in
      Houston, Texas
    • 59,700 Medicare beneficiaries in 6 ACOs that have selected Track 2
      (2-sided risk) in the Medicare Shared Savings Program (MSSP)
    • 163,500 Medicare beneficiaries in 16 ACOs that have selected Track
      1 (1-sided risk) in the MSSP
    • Approximately 3,200 physicians and 1,800 associated clinical
      professionals

    Medicare Advantage

           

     

    Three Months Ended

    September 30, 2016

    Nine Months Ended

    September 30, 2016

    Financial Performance ($ in millions)

       
     
    Premiums(1) $ 340.6 $ 1,029.2
    Net investment income & other income 2.3   7.3  
    Revenue 342.9 1,036.5
     
    Quality initiatives 6.0 1.7 % 17.3 1.7 %
    Medical benefits 285.0   83.7 % 850.9   82.7 %
    Total benefits 291.0 85.4 % 868.2 84.4 %
     
    Admin expenses 38.8 11.4 % 104.3 10.1 %
    ACA Fee 5.5   16.3  
     
    Segment income before income taxes $ 7.6   $ 47.7  
     
    Reported Recast** Reported Recast**
    Texas HMOs Medical Benefit Ratio* 84.5 % 83.3 % 82.8 % 83.4 %
    Upstate New York/Maine Medical Benefit Ratio 82.8 % 82.2 % 83.1 % 83.1 %
     

    (1)  Effective January 1, 2016, we changed the way in which we
    estimate changes in risk-adjusted premiums receivable from CMS,
    which resulted in the accelerated recognition of additional
    current year premium revenue of $7.7 million and $26.5 million for
    the three months and nine months ended September 30, 2016,
    respectively. See our Form 10-Q for the period ending September
    30, 2016 for additional discussion.

    * Excluding quality initiatives.
    ** Recast excludes the impact of prior period items.
     

    Medicare Advantage pre-tax income for the three month period ended
    September 30, 2016 was $7.6 million, including $2.1 million net
    unfavorable prior period items. Medicare Advantage pre-tax income for
    the nine month period ended September 30, 2016 was $47.7 million,
    including $7.9 million net favorable prior period items. Our
    administrative expense ratio was 11.4% for third quarter 2016 and 10.1%
    for the nine months ended September 30, 2016.

    Texan Plus®, recently designated a 4.5-Star plan, is the largest
    Medicare HMO in Southeast Texas. Texan Plus® now has 65,500 members and
    has achieved 9% compounded membership growth over the past four years.
    Virtually all of our members in this plan are in value-based payment
    arrangements. For the third quarter of 2016, the reported Medical
    Benefit Ratio (MBR) in our Texas HMOs was 84.5%. Excluding negative
    prior period items, the MBR was 83.3% for the third quarter. For the
    nine months ended September 30, 2016, the reported MBR in our Texas HMOs
    was 82.8% and 83.4% excluding prior period items.

    Our Northeast markets experienced a 52% increase in membership since
    2014 year-end and now have 45,600 members with a large concentration in
    upstate New York. For the third quarter of 2016, the reported MBR in our
    Northeast markets was 82.8%. Excluding positive prior period items, the
    MBR was 82.2% for the third quarter. For the nine months ended September
    30, 2016, the reported MBR in our Northeast markets was 83.1% and 83.1%
    excluding prior period items.

    Medicare Advantage 2016 Stars

    The enrollment-weighted Star rating for Universal American’s Medicare
    Advantage membership increased from 3.96 to 4.12 Stars reflecting the
    quality of care delivered to our enrolled Medicare beneficiaries.
    Approximately 70% of our members are currently enrolled in plans awarded
    4 Stars or higher. A summary of these ratings is presented below:

                 
    2016 Universal American Medicare Advantage Plans
            Contract   Plan Name   Location  

    September
    2016
    Members

     

    2016 Star
    Rating

     

    2017 Star
    Rating

    H4506   Texan Plus HMO   Southeast Texas   65,600   4.0   4.5
    H2775   Today’s Options PPO   Northeast   13,600   4.0   4.0
    H0174   Today’s Options on Texas HMO   Southeast Texas   300   4.0   4.0
    H2816   Today’s Options Network PFFS   Northeast   31,900   4.0   3.5
    H5656   Texan Plus HMO   North Texas (Dallas)   3,000   3.0   3.0
             

    The company’s flagship TexanPlus® HMO plan, serving Medicare
    beneficiaries in Houston-Beaumont, Texas for more than 15 years and
    representing 57% of current membership, has improved to a 4.5 Star
    Quality Rating. Our PPO in the Northeast, Todays Options, maintained its
    4 Star Quality Rating and our Network Private-Fee-For-Service plan in
    the Northeast was reduced from 4 Stars to 3.5 Stars.

    Management Services Organization (MSO)

           

    Financial Performance ($ in millions)

    Three Months Ended

    September 30,

     

    Nine Months Ended

    September 30,

    2016

     

    2015

    2016

     

    2015

    Shared Savings Revenue:
    Gross Shared Savings $ 0.1 $ $ 41.1 $ 26.9
    ACO Partner Share   (0.2 )       (10.6 )   (6.0 )
    Net Shared Savings Revenue (0.1 ) 30.5 20.9
    Operating expenses   8.5     9.3     26.4     30.3  
    Segment (loss) income before income taxes $ (8.6 ) $ (9.3 ) $ 4.1   $ (9.4 )
     

    The MSO segment includes our ACO business, in which we collaborate with
    primary care physicians and other healthcare professionals to operate
    ACOs under the Medicare Shared Savings Program (MSSP) and the Next
    Generation ACO model. At September 30, 2016, we had 22 MSSP ACOs and one
    Next Generation ACO (in Houston, Texas) with approximately 236,800
    assigned Medicare fee-for-service beneficiaries.

    On July 29, 2016, the Centers for Medicare & Medicaid Services (CMS)
    informed us that our Medicare Shared Savings Program (MSSP) ACOs
    generated $97 million in gross savings for program year 2015. This
    compared to $80 million in gross savings for program year 2014. Ten of
    our ACO’s qualified for shared savings payments in program year 2015,
    compared to nine in program year 2014, and received gross shared savings
    payments of $39.8 million, compared to $26.9 million in program year
    2014. Our share of these payments, after payments to our physician
    partners increased to $28.6 million from $20.9 million in the prior
    year, and is reflected in equity in earnings of unconsolidated
    subsidiaries in our consolidated statements of operations. We received
    these payments during the third quarter of 2016. Quality scores improved
    for all of our ACOs with start dates prior to 2015, indicating an
    improvement in healthcare management resulting from enhanced physician
    engagement.

    The 10 ACOs that qualified for shared savings payments for program year
    2015 met quality standards and savings thresholds established by
    Medicare. In addition to the 10 ACOs that will receive shared savings,
    eight other ACOs achieved savings but did not exceed the minimum savings
    threshold in order to qualify for a shared savings payment. Together
    these 18 ACOs generated $97 million in total savings for the Medicare
    program.

    Effective January 1, 2016, in partnership with a high-performing group
    of our Houston physicians, our Houston-based ACO was selected by CMS to
    become a Next Generation ACO, a value-based payment model that
    encourages providers to assume greater risk and reward in coordinating
    the healthcare of Medicare Fee-For-Service (FFS) beneficiaries. The Next
    Generation ACO adds approximately 13,600 beneficiaries in a full-risk
    program that allows us to use many of the same techniques, including
    creating preferred networks and negotiating discounts that have worked
    well for our Medicare Advantage plan in Houston.

    Our MSO segment generated pre-tax income of $4.1 million for the nine
    month period ended September 30, 2016 compared to a loss of $9.4 million
    in the same period of 2015. Operating expenses for the quarter were $8.5
    million compared to $9.3 million for the quarter ended September 30,
    2015.

    Corporate & Other

           
    Three Months Ended

    September 30,

     

    Nine Months Ended

    September 30,

    Financial Performance ($ in millions)

    2016

     

    2015

    2016

     

    2015

     
    Revenue $ 0.8   $ 3.4   $ 1.4   $ 6.9  
     
    Segment loss before income taxes $ (8.1 ) $ (7.4 ) $ (26.5 ) $ (29.3 )
     

    Our Corporate & Other segment reflects the activities of our parent
    holding company, debt service and other ancillary operations including
    support services provided to the buyers of the APS Healthcare
    businesses, Total Care Medicaid and Traditional business through
    Transition Services Agreements.

    Dividends on our Preferred Stock were $0.8 million and $2.4 million for
    the three and nine month periods ending September 30, 2016,
    respectively. Interest expense on our Convertible Notes was $2.2 million
    and $2.3 million, respectively, for the three and nine month periods
    ending September 30, 2016, including $1.0 million and $1.1 million,
    respectively, of non-cash interest expense.

    Discontinued Operations

    Discontinued Operations includes our Traditional Insurance and Total
    Care Medicaid businesses, which were sold in August 2016, and the APS
    businesses, which were sold in 2015.

    The following table presents the components comprising the income (loss)
    from discontinued operations before income taxes:

           

    Financial Performance ($ in millions)

    Three Months Ended

    September 30,

     

    Nine Months Ended

    September 30,

    2016

     

    2015

    2016

     

    2015

    Total Care Medicaid:
    Operating results $ 0.2 $ 0.5 $ (4.1 ) $ (0.9 )
    Gain on Sale 20.4 20.4    
    Total Medicaid 20.6 0.5 16.3   (0.9 )
     
    Traditional Insurance:
    Operating results $ 0.1 $ 1.8 $ 11.4 $ 7.4
    Realized gains 0.2 0.1
    Amortization of HFS reserve (2.2 )
    Gain on Sale 2.8 2.8    
    Total Traditional 2.9 1.8 12.2   7.5  
     
    APS Healthcare:        
    Total APS Healthcare (1) $ 33.5 $ 1.2 $ 39.5   $ (21.7 )
     
    Income (loss) before income taxes $ 57.0 $ 3.5 $ 68.0   $ (15.1 )
     
    (1)   2016 amounts include earn-out revenues and litigation settlement,
    while 2015 amounts include initial gain (loss) on sale of APS
    Healthcare.
     

    Share Count Reduction

    Over the past five months, Universal American retired more than 26
    million common shares, reflecting a 31% reduction in its outstanding
    share count through the following transactions:

    • Share Repurchase: On June 27, 2016, Universal American used the net
      proceeds from the offering of $115 million of Convertible Notes,
      together with cash on hand, to repurchase: (i) 18.1 million shares of
      Universal American common stock from existing large shareholders and
      (ii) 2.1 million shares of its common stock in connection with the
      offering, for an average price of $6.85.
    • APS Litigation Settlement: On September 9, 2016, Universal American
      entered into a Settlement Agreement to fully resolve the litigation
      arising from the Company’s acquisition of APS Healthcare in 2012.
      Pursuant to the Settlement Agreement, we acquired all of the 6.3
      million shares of common stock held by the defendants for an aggregate
      payment of $13.0 million. In addition, we received $1.6 million that
      was held in an escrow account relating to the acquisition. Certain
      defendants received $0.75 million that was held in such escrow account.

    As of September 30, 2016, there were 58.8 million common shares
    outstanding.

    Investment Portfolio

    As of September 30, 2016, Universal American had $494.8 million of cash
    and invested assets as follows:

    • 67% is invested in U.S. Government and agency securities, primarily
      due to cash equivalents from the early receipt of our October 2016 CMS
      payment;
    • The average credit quality of the investment portfolio is AA; and
    • Less than 1% of the investment portfolio is non-investment grade.

    A complete listing of our fixed income investment portfolio as of
    September 30, 2016 is available for review in the financial supplement
    located in the Investors – Financial Reports section of our website, www.UniversalAmerican.com.

    Balance Sheet and Liquidity

    As of September 30, 2016, Universal American’s Balance Sheet had the
    following characteristics:

    • Unregulated cash and investments of $119.6 million;
    • Total cash and investments were $494.8 million and total assets were
      $915.2 million, including $238.2 million in assets of discontinued
      operations;
    • Total policyholder liabilities were $82.9 million and total
      liabilities were $623.7 million, including $236.1 million in
      liabilities of discontinued operations;
    • Stockholders’ equity was $291.5 million and book value was $4.96 per
      diluted common share;
    • Tangible book value per diluted common share (excluding accumulated
      other comprehensive income, goodwill and amortizing intangibles) was
      $3.70;
    • $115 million of convertible senior notes with a carrying value of
      $95.4 million which bear cash interest of 4.0% per annum and an annual
      effective interest rate of 8.5%; and
    • $40.0 million of mandatorily redeemable preferred stock, reported as a
      liability, with an annual dividend rate of 8.5%, which will mature in
      May 2017.

    As of September 30, 2016, the ratio of debt to total capital, excluding
    the effect of AOCI and including Universal American’s mandatorily
    redeemable preferred stock as debt, was 36.6%.

    Conference Call

    Universal American will host a conference call at 8:30 a.m. Eastern Time
    on Tuesday, November 8, 2016 to discuss financial results. Interested
    parties may participate in the call by dialing (661) 378-9883. Please
    call in 10 minutes before the scheduled time and mention conference ID:
    11918476. This conference call will also be available live over the
    Internet and can be accessed at Universal American’s website at www.UniversalAmerican.com,
    and clicking on the “Investors” link in the upper right. To listen to
    the live call on the website, please go to the website at least 15
    minutes early to download and install any necessary audio software. A
    replay of the call will be available on the investor relations section
    of the Company’s website for approximately two weeks following the call.

    Prior to the conference call, Universal American will make available on
    its website a Third Quarter 2016 Investor Presentation and supplemental
    financial data in connection with its quarterly earnings release. You
    can access the Third Quarter 2016 Investor Presentation and supplemental
    financial data at www.UniversalAmerican.com
    in the “Investors” section under the “Presentations” and “Financial
    Reports” sections.

    About Universal American Corp.

    Universal American (NYSE: UAM), through our family of healthcare
    companies, provides health benefits to people covered by Medicare. We
    are dedicated to working collaboratively with healthcare professionals,
    especially primary care physicians, in order to improve the health and
    well-being of those we serve and reduce healthcare costs. For more
    information on Universal American, please visit our website at www.UniversalAmerican.com.

    * * *

    Forward Looking Statements

    This news release and oral statements made from time to time by our
    executive officers may contain “forward-looking” statements within the
    meaning of Section 21E of the Securities Exchange Act of 1934, as
    amended, and the Private Securities Litigation Reform Act of 1995, known
    as the PSLRA. Such statements that are not historical facts are hereby
    identified as forward-looking statements and intended to be covered by
    the safe harbor provisions of the PSLRA and can be identified by the use
    of the words “believe,” “expect,” “predict,” “project,” “potential,”
    “estimate,” “anticipate,” “should,” “intend,” “may,” “will,” and similar
    expressions or variations of such words, or by discussion of future
    financial results and events, strategy or risks and uncertainties,
    trends and conditions in our business and competitive strengths, all of
    which involve risks and uncertainties.

    Where, in any forward-looking statement, we or our management expresses
    an expectation or belief as to future results or actions, there can be
    no assurance that the statement of expectation or belief will result or
    be achieved or accomplished. Our actual results may differ materially
    from our expectations, plans or projections. We warn you that
    forward-looking statements are only predictions and estimates, which are
    inherently subject to risks, trends and uncertainties, many of which are
    beyond our ability to control or predict with accuracy and some of which
    we might not even anticipate. We give no assurance that we will achieve
    our expectations and we do not assume responsibility for the accuracy
    and completeness of the forward-looking statements. Future events and
    actual results, financial and otherwise, may differ materially from the
    results discussed in the forward-looking statements as a result of many
    factors, including the risk factors described in the risk factor section
    of our SEC reports.

    A summary of the information set forth in the “Risk Factors” section of
    our SEC reports and other risks includes, but is not limited to the
    following: the impact of the Centers for Medicare and Medicaid Services’
    (“CMS”) final Medicare Advantage reimbursement rates for calendar year
    2017 could have a material adverse effect on Universal American’s MA
    business; we are subject to extensive government regulation and the
    potential that CMS and/or other regulators could impose significant
    fines, penalties or operating restrictions on Universal American,
    including with respect to False Claims Act matters or Risk Adjustment
    Data Validation (“RADV”) audits; the results of the 2016 presidential
    election, the Affordable Care Act and subsequent rules promulgated by
    CMS could have a material adverse effect on our opportunities for growth
    and our financial results; we are investing significant capital and
    management attention in new and unproven business opportunities,
    including our Accountable Care Organizations (“ACOs”), where we will
    begin to take two-sided risk in 2016, that may not be profitable; we may
    experience higher than expected medical loss ratios or lower revenues,
    especially with our new members in our Northeast markets, which could
    materially adversely affect our results of operations; If we are unable
    to develop and maintain satisfactory relationships with the providers of
    care to our members and ACO beneficiaries, our business and overall
    profitability could be materially adversely affected; if we fail to
    design and price our products properly and competitively or if the
    premiums and fees we charge are insufficient to cover the cost of health
    care services delivered to our members, our profitability may be
    materially adversely affected; our significant shareholders may have
    interests that are different than other shareholders and may sell or
    distribute their stock which could cause the price of our stock to
    decline; changes in governmental regulation or legislative reform could
    increase our costs of doing business and adversely affect our
    profitability; reductions in funding for Medicare programs could
    materially reduce our profitability; failure to reduce our operating and
    corporate costs could have a material adverse effect on our financial
    position, results of operations and cash flows; we may not be able to
    maintain or improve our CMS Star ratings which may cause certain of our
    plans to receive less bonuses or rebates than our competitors; changes
    in governmental regulation or legislative reform, including the impact
    of Sequestration, could reduce our revenues, increase our costs of doing
    business and adversely affect our profitability; a substantial portion
    of our revenues are tied to our Medicare businesses and regulated by CMS
    and if our government contracts are not renewed or are terminated, our
    business could be substantially impaired; any failure by us to manage
    our operations or to successfully complete or integrate acquisitions,
    dispositions and other significant transactions could harm our financial
    results, business and prospects; we could be subject to a cyber-attack
    or similar network breach that could damage our reputation and have a
    material adverse effect.

    Contacts

    Universal American Corp.
    Adam C. Thackery, (914) 597-2939
    Chief
    Financial Officer
    or
    Investor Relations Counsel:
    The
    Equity Group Inc.
    www.theequitygroup.com
    Fred
    Buonocore, (212) 836-9607
    Kevin Towle, (212) 836-9620

    Read full story here

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