HealthSpring, Inc. Reports 2009 Third Quarter Results

Increases 2009 Earnings Per Share Guidance to $2.30 to $2.40

• Press Release
• Source: HealthSpring, Inc.
• On 6:30 am EDT, Thursday October 29, 2009

NASHVILLE, Tenn.--(BUSINESS WIRE)--HealthSpring, Inc. (NYSE:HS - News) 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.

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Symbol	Price	Change
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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.

Conference Call

A live audio webcast of the conference call regarding third quarter results will begin at 10:00 a.m. ET on Thursday, October 29, 2009. The public may access the conference call through HealthSpring’s website, www.healthspring.com, under the Investor Relations tab. The conference call can also be accessed by dialing (913) 312-0643, confirmation number 6838864. An online replay will be available approximately two hours following the conclusion of the live broadcast and will continue for 30 days.

About HealthSpring

HealthSpring is based in Nashville, Tenn., and is one of the country’s largest coordinated care plans whose primary focus is the Medicare Advantage market. HealthSpring currently owns and operates Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas and also offers a national stand-alone Medicare prescription drug plan. For more information, visit www.healthspring.com.

Cautionary Statement Regarding Forward Looking Statements

Statements contained in this release that are not historical fact are forward-looking statements, which the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would," and similar expressions are forward-looking statements. Such statements include statements regarding 2010 open enrollment and 2009 guidance, including effective tax rates. The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause its actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Any projections or other forward-looking information in this release or made orally and related thereto are based on management’s beliefs and assumptions and on information available to HealthSpring at the time the statements were or are made, which is subject to change. Although any such projections and forward-looking information and the factors influencing them will likely change, HealthSpring will not necessarily update the information except as required by law, as HealthSpring will only provide guidance at certain points during the year. Information contained herein speaks only as of the date of this release.

The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements: changes in membership enrollment and dis-enrollment patterns; legislative and regulatory actions or changes, including changes in Medicare funding and premium rates; changes in our members’ utilization of medical services; changes in medical and prescription drug cost trends; the Company’s ability to accurately estimate CMS retroactive risk adjustments to Medicare premiums; competition; the Company's ability to accurately estimate incurred but not reported medical claims; negotiation of acceptable contracts with physicians, hospitals, and other providers; contractual disputes with providers; increases in costs or liabilities associated with litigation; costs associated with compliance with regulatory mandates and with responding to regulatory audits; management changes; substantial changes in interest rates over a prolonged period; and changes in tax estimates, assets, or liabilities and valuation allowances related thereto. The foregoing list of factors is not intended to be exhaustive. Additional information concerning these and other important risks and uncertainties can be found under the headings "Special Note Regarding Forward-Looking Statements" and "Item 1A. - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and in other public filings by the Company.

As of January 1, 2009, the Company revised its methodology for allocating the selling, general, and administrative expenses within its prescription drug operations, which resulted in its allocating a greater share of such expenses to its MA-PD segment. 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 and nine months ended September 30 is as follows (in thousands):

HealthSpring, Inc.
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