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Universal American Financial Corp. Discusses Part D Opportunity

Posted on: Friday, 23 September 2005, 15:01 CDT

Universal American Financial Corp. (NASDAQ: UHCO) ("Universal American") makes the following comments regarding its participation in the Medicare prescription drug insurance program ("Part D") that will begin on January 1, 2006.

Part D, which was established by the Medicare Modernization Act of 2003, created a structure in which private insurance companies will offer Medicare-sponsored prescription drug insurance plans to Medicare beneficiaries. The federal government will support Part D through a combination of direct subsidies of premium, risk adjustors, stop-loss reinsurance and risk corridors. Further, the federal government will provide additional subsidies to Medicare beneficiaries who also qualify for Medicaid ("dual eligible") and other low income beneficiaries ("LIS").

In March 2005, Universal American entered into a strategic alliance with PharmaCare Management Services, Inc. ("PharmaCare"), a pharmacy benefits manager ("PBM") that is a wholly owned subsidiary of CVS Corporation (NYSE: CVS) ("CVS"). CVS operates over 5,400 retail drug stores under the CVS/pharmacy name. PharmaCare is the fourth largest PBM in the nation, covering more than 30 million lives. The essential elements of the strategic alliance are:

-- The PDP's would contract with PharmaCare to provide the full range of PBM services required to operate the PDP's.

-- A PharmaCare subsidiary would reinsure approximately half of the risk assumed by our PDP's.

-- CVS/pharmacy stores would assist in the marketing of our PDP's on a non-exclusive basis, subject to the rules established by CMS.

In March 2005, three insurance subsidiaries of Universal American applied to the Centers for Medicare and Medicaid Services ("CMS") to become a Prescription Drug Plan sponsor ("PDP") in 32 of the 34 regions designated by CMS (excluding Regions 33 (Hawaii) and 34 (Alaska)), thereby becoming eligible, upon final approval by CMS, to offer the Medicare-approved plans in those regions. The insurance subsidiaries are: Pennsylvania Life Insurance Company (31 regions), Marquette National Life Insurance Company (22 regions), and American Progressive Life Insurance Company (8 regions). In March 2005, we received conditional approval from CMS for these insurers to become PDP sponsors in the regions in which we applied.

In June 2005, Universal American's PDP's, in consultation with PharmaCare, submitted bids for a wide range of Part D products that we believe will be attractive to a variety of Medicare beneficiaries and will, in our best judgment, result in an appropriate financial return to our PDP's. We submitted bids for the standard product prescribed by CMS, for products that are actuarially equivalent to the standard product and for products with enhanced benefits.

On September 23, 2005, CMS announced that our bids have been accepted in all 32 of the regions in which we bid.

Dual Eligibles

A dual eligible beneficiary will have the right to enroll in a qualifying standard PDP product beginning November 1, 2005. However, CMS will automatically assign, on a pro-rata basis, those dual eligibles who do not enroll themselves in one of the PDP's whose bids for the standard product fall below the applicable regional benchmark calculated by CMS as a result of the bidding. We expect that most dual eligibles will be auto-assigned. Since dual eligibles can change PDP's each month, we are not assured that the dual eligibles who are auto-assigned to us will stay in our PDP's.

Recently, CMS released its calculation of the national and regional benchmarks for standard plans. We have determined that the standard bids of our PDP's are below the benchmark in 26 regions, encompassing approximately 4.5 million dual eligibles. Based on the number other PDP sponsors whose bids are also below the benchmark in these regions, our preliminary estimate is that we will receive 440,000 auto assignments, less those who choose a different plan or who are enrolled in a Medicare Advantage plan. We estimate that our average base premium will be $89.50 per member per month subject to further modification by the risk adjustors. Dual eligibles automatically will receive an initial 8% risk adjustment, but the final risk adjustment will vary based upon the health status of each covered beneficiary.

The regions in which our bid was not below the benchmark were Regions 11 (Florida), 12 (Alabama and Tennessee), 14 (Ohio), 28 (Arizona), 29 (Nevada) and 32 (California). We are nevertheless free to market our products in these regions to Medicare beneficiaries who are not dual-eligible.

Low Income Subsidy

Medicare beneficiaries who qualify for the low income subsidy can choose to enroll in the PDP of their choice. In May 2006, those beneficiaries who qualify for this subsidy but do not so enroll will be automatically assigned by CMS to one of the PDP's whose bids for the standard product fall below the applicable regional benchmark.

We estimate that there are 3.5 million LIS beneficiaries in the regions in which our bids are below the applicable regional benchmark. Since we cannot predict how many LIS beneficiaries will sign up for programs voluntarily, we cannot estimate the number of LIS who may be auto-assigned to our PDP's.

Marketing

There are more than 30 million Medicare beneficiaries who will not be automatically assigned to PDP's and are eligible to buy this coverage voluntarily. Enrollment for this population begins November 15, 2005 for a January 1, 2006 effective date. Our marketing campaign, which will begin on October 1, 2005, will have several components:

-- Branding: Our PDP's will be marketed under the trademarked brand name, Prescription Pathway (sm).

-- Current Policyholders: We will focus on providing information and then selling our products to our existing policyholder base, principally our 312,000 existing Medicare Supplement policyholders.

-- Agency Force: We will educate and mobilize our career and independent agents to offer our products in the 32 regions in which our PDP's are approved. To help educate Medicare beneficiaries about Part D PDP's, we will offer local seminars hosted by our agents at senior centers and residential facilities.

-- CVS Stores: We will continue to work closely with PharmaCare and CVS to create appropriate marketing programs in the CVS stores consistent with CMS marketing requirements, using our agents, and in conjunction with other CVS initiatives, including out-of-store seminars.

-- Website and Call Center: We will provide information and enrollment online at our website and over the phone through our call center. Our website will also provide formulary and pharmacy searches, to enable prospective members to determine if their prescription drug needs will be addressed in our formularies and if their local pharmacy is part of our pharmacy network.

Alliance with Arkansas Blue Cross/Blue Shield

We have entered into an alliance with a PDP sponsored by Arkansas Blue Cross and Blue Shield in which CHCS Services, Inc., our senior third party administrator, will provide all administrative services for this PDP's entrance into the Part D program in the Arkansas region. PharmaCare will provide all PBM services. An insurance company subsidiary of Universal American will provide 33.3% reinsurance to this PDP.

The PDP sponsored by Arkansas Blue Cross and Blue Shield has submitted a bid that qualifies for automatic assignment of dual eligible and LIS beneficiaries.

About Arkansas Blue Cross

Arkansas Blue Cross is the largest health insurer in Arkansas. The company affiliates have more than 2,700 employees and serve approximately one-third of Arkansans, including more than 113,000 Medicare supplement policyholders. Founded in 1948, Arkansas Blue Cross is an independent licensee of the Blue Cross and Blue Shield Association.

Part D Administration

We are incurring significant effort and expense to implement our Part D program. We estimate that we will expense an additional $5 to 6 million of incremental out-of-pocket costs relating to product development, systems development and upgrades and marketing costs before revenues are earned beginning January 1, 2006.

About Universal American Financial Corp.

Universal American Financial Corp. is a specialty health and life insurance holding company. Through our family of companies, we offer a broad array of health insurance and managed care products and services, primarily to the growing senior population. Universal American is included in the NASDAQ Financial-100 Index, the Russell 2000 Index and the Russell 3000 Index. For more information on Universal American, please visit our website at www.uafc.com.

Risk Factors

Our participation in the Medicare Part D program is subject to significant risk factors. These are detailed in our filings with the Securities and Exchange Commission, including our prospectus supplement, dated June 16, 2005 and our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Certain matters discussed in this news release and oral statements made from time to time by representatives of Universal American (including, but not limited to, statements regarding our expectations of Universal American's operating plans and strategies generally and our introduction of the Part D program) may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Federal securities laws. Although Universal American believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Many of these factors are beyond Universal American's ability to control or predict. Important factors that may cause actual results to differ materially and could impact Universal American and the statements contained in this news release can be found in Universal American's filings with the Securities and Exchange Commission including quarterly reports on Form 10-Q, current reports on Form 8-K and annual reports on Form 10-K. For forward-looking statements in this news release, Universal American claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Universal American assumes no obligation to update or supplement any forward-looking statements whether as a result of new information, future events or otherwise.

Source: Business Wire

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