Oct 24, 2013
Executives
Renie Shapiro - Senior Vice President, Corporate Finance Barry Smith - Chief Executive Officer Jon Rubin - Chief Financial Officer
Analysts
Dave Styblo - Jefferies Josh Raskin – Barclays Scott Fidel - Deutsche Bank Michael Baker – Raymond James Carl McDonald – Citi
Operator
Welcome and thank you for standing by for the Third Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode.
(Operator Instructions) Today’s conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I will turn the meeting over to Renie Shapiro. Thank you, ma’am.
You may begin.
Renie Shapiro - Senior Vice President, Corporate Finance
Good morning and thank you for joining us today. This is Renie Shapiro, Senior Vice President of Corporate Finance for Magellan Health Services.
With me today are Magellan’s Chief Executive Officer, Barry Smith and our Chief Financial Officer, Jon Rubin. They will discuss the financial and operational results of our third quarter ended September 30, 2013.
Certain of the statements that will be made during this conference call are forward-looking statements contemplated under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown uncertainties and risks which could cause actual results to differ materially from those discussed.
These forward-looking statements are qualified in their entirety by the complete discussion of risks set forth under the caption Risk Factors in Magellan’s Annual Report on Form 10-K for the year ended December 31, 2012 and in the current quarter’s Form 10-Q, which will be filed with the SEC later today and will be subsequently available on our website. In addition, please note that in this call, we refer to segment profit.
Segment profit is disclosed and defined in our Annual Report on Form 10-K and is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses excluding stock compensation expense. Segment profit information referred to in this call maybe considered a non-GAAP financial measure.
Included in the tables issued with this morning’s press release is the reconciliation from segment profit to the line item income before income taxes. We encourage you to review such reconciliation for an understanding of how segment profit compares to that GAAP measure.
I will now turn the call over to our CEO, Barry Smith.
Barry Smith - Chief Executive Officer
Thank you, Renie. Good morning and thank you for joining us.
I am pleased to report that Magellan had a solid third quarter. It is on track to complete the year in the upper half of our segment profit guidance range.
This has been an exciting quarter for us as we took several tangible steps to advance our growth strategies. We also brought on two executives with deep healthcare experience to lead Magellan Pharmacy Solutions and Magellan Plan Services.
The Magellan Pharmacy Solutions now includes our new acquisition Partners Rx. Magellan Plan Services includes our core commercial and public sector behavioral health businesses as well as Magellan Complete Care.
This is the dynamic time at Magellan as we continue to transform in order to position ourselves for future growth. I will discuss at a high level our financial metrics for the quarter provide more details on the progress of our growth initiatives and offer an update on the Maricopa County contract.
Jon Rubin will then discuss detailed financial and operating information for each of our segments and our preliminary outlook for 2014 before we take your questions. For the third quarter of 2013, we produced net income of $47.2 million, diluted EPS of $1.70 and segment profit of $59.2 million.
For the nine-month year-to-date period, we produced net income of $106.8 million, diluted EPS of $3.87 and segment profit of $203.5 million. As of September 30, 2013, we had $355.9 million of an unrestricted cash and investments prior to the closing of the Partners Rx transaction on October 1.
We did not have any share repurchases during the quarter and as of October 21 we have approximately 27.1 million shares outstanding. There are number of factors that affect the timing and pace of our purchases such as our stock price, projected capital needs, M&A prospects and a termination of open and close trading windows.
Turning next to progress on our growth strategies, I’d like to detail some of the steps we have taken to advance our goals. We continue to see significant opportunities to grow Magellan Complete Care and have made important strides this quarter.
As we have previously discussed we began operating in Florida as a general Medicaid HMO on June 1 in Broward County integrating and taking full risk on all medical, behavioral and pharmaceutical care. We continued to expand our presence in Broward County through efforts with community based organizations and the provider community.
We are pleased to perceive notice of the contract award from the Florida Agency for Healthcare Administration or AHCA to launch a Medicaid specialty plan for individuals with serious mental illness or SMI. This plan the first of its kind to the nation provides individuals with SMI improved access to coordinated physical and mental healthcare and assistance with navigating the healthcare system.
Our model of care will allow this vulnerable population to live longer and healthier lives. Our proposals were accepted in all eight regions where we have been which include 40 of Florida’s 67 counties.
We estimate that there are at least 100,000 individuals with SMI in the regions where we were awarded whose total healthcare spend is significantly higher than that of the average Medicaid covered individual or approximately $15,000 to $20,000 per year. Magellan Complete Care will be the only SMI specialty plan available in Florida over the five year contract period.
Implementation is expected to begin in the second quarter of 2014 and we are actively working with AHCA on the rollout logistics including enrollment criteria and rate setting methodologies. Until the enrolment process is finalized we cannot estimate the number of potential members for next year or in subsequent years.
While we are still working through the enrollment methodology with the state, our goal over time is to achieve penetration of at least 20%. Our participation is subject to customary contract negotiations, final rates and contract execution.
We are excited about this opportunity and we will provide more specifics after we conclude our discussions with AHCA. In August we announced that we had entered into a definitive agreement to make a strategic investment in AlphaCare of New York.
Our newly licensed Medicaid managed long-term care HMO and Medicare plan are initially focused on serving the unique needs of the New York’s long-term care and dual eligible populations. We currently have a 7% equity interest in AlphaCare through a net investment of $7.9 million.
Upon funding the reminder of the total $25.5 million investment Magellan will own 65% of the company with the option to purchase the remaining portion beginning on the January 1, 2017. The closing of the transaction is awaiting regulatory approval and we anticipate it will take place late this year or early next year.
AlphaCare was established in 2012 by seasoned health care exactly executives and began enrolling members in its Medicaid managed long-term care or MLTC plan in August of this year in five of the eight counties surrounding the New York City metropolitan area Bronx, New York, Queens, Kings and Westchester. There are approximately 124,000 of long-term care individuals in all the eight counties surrounding the New York City metropolitan area, almost all of which are eligible for both Medicaid and Medicare.
Medicaid rates for individuals enrolled in an MLTC plan are approximately $4000 PMPM. The state has not released membership in the five counties we will focus on.
However, we believe that they contain approximately 90% of the long-term care eligibles in all eight counties. AlphaCare is also positioned to participate in the New York State Department of Health’s Fully Integrated Dual Advantage or FIDA demonstration project which is currently scheduled to begin in July 2014.
The FIDA program currently covers the eight counties around the Greater New York City metropolitan area and we were selected to participate in all four counties in which we bid. The FIDA program is focused only on the dual eligible members in those counties who are eligible for managed long-term care.
The combined Medicaid and Medicare spend for these individuals is approximately $6,000 PMPM. In addition to the participating in the Medicaid MLTC and the FIDA programs AlphaCare is poised to focus on all Medicare eligible individuals.
As a result on October 15, AlphaCare also launched a Medicare advantage plan a Dual-Eligible Special Needs Plan or D-SNP and an Institutional Special Needs Plan, or ISNP. These plans have begun active enrollment for members during this year’s open enrollment period and will be effective 01/01/14 in the four counties in which we participate for the FIDA program.
These additional products allow us to offer all categories on Medicare planned coverage to the patients of our network providers. Our investment in healthcare provides us the opportunity to enter the New York marketplace which has one of the largest Medicaid and Medicare spends in the country and leverages our expertise to create an integrated care offering.
It also provides us capabilities in the Medicare and long-term care spaces which support our broader Magellan Complete Care strategy. Magellan Complete Care will continue to implement integrated management programs in existing markets and look for opportunities to expand our geographic footprint.
We are continuously refining our market entry approach into additional states through building new programs or acquisitions in certain states where we currently have significant behavioral health networks and experience such as Louisiana or Iowa, we may pursue obtaining an HMO license similar to what we did in Florida. Our goal by 2017 remains to manage no less than $2.5 billion of total healthcare spend or targeted populations in approximately five to seven states.
We are excited about our accomplishments to-date and look forward to continued growth in this business. We also have made significant strides in growing our Pharmacy Solutions business.
Earlier this month, we completed our acquisition of Partners Rx, a full service commercial pharmacy benefits management company, or PBM founded in 2001 with a strong focus on health plans and self-funded employers sold primarily through third-party administrators or TPAs, consultants and brokers. We acquired the company for $100 million cash.
The net cash impact was $88 million which reflects a $10 million investment by key management Magellan restricted stock and working capital adjustments of $2 million. Partners Rx has a successful operating model and a stable and growing book of business today encompassing approximately 300,000 core commercial lives.
This acquisition is important for a number of reasons. It enhances our core commercial PBM expertise and provides additional scale.
It supports our comprehensive drug strategy to provide a complete set of pharmaceutical management services through a broad range of customers and leverages our core capabilities in specialty, medical pharmacy and pharmacy benefits management. Partners Rx brings an expanded sales and marketing function, experienced with the health plan and self-funded employer markets, access through TPAs, consultant and brokers where we historically have not had a strong presence.
And lastly, it has a seasoned management team that has significant experience and proven expertise to our existing pharmacy leadership. Our pharmacy business is one of our primary growth engines for the future and our goal is to grow our total pharmacy revenues to at least $2.5 billion over the next five years.
We plan to achieve this goal through both organic and inorganic means and we may seek further acquisitions to provide additional capabilities such as mail order or Medicare Part D and to increase scale and efficiencies. I am also pleased that we have added two new members to our senior management team, Bob Field, who has been the President and CEO of Partners Rx, has assumed the role of CEO of Magellan Pharmacy Solutions and Sam Srivastava, who has been appointed to the new position of CEO of Magellan Plan Services.
Both Bob and Sam are dynamic leaders with significant track records of success and innovation and they Tina Blasi, an exceptional proven leader who is CEO of our RBM segment. I am delighted that these gifted industry leaders are part of the Magellan executive team.
Next, I want to update you on the status of our contract and bid protest in Maricopa County. The Arizona Department of Health Services extended our contract through March 31, 2014.
It had been scheduled to expire on September 30, 2013. After January 1, 2014, the state will have the right to terminate the contract upon 30 days notice.
This six-month extension will provide our members and providers continuity of service while our protest and appeal are being considered and ensures that our members receive quality healthcare with the focus that drives the recovery and promotes resiliency. Our protested appeal was the subject of a hearing before the opus of administrative hearings that concluded on September 27.
Both parties were required to file or post hearing submissions by October 21 and are required to file their responses to the opposition’s post hearing submissions by October 29. After this occurs the administrative law judge is expected to make her recommendation to the Arizona Department of Administration within 20 days after which the ADOA has three days to accept, reject or modify the recommendation.
Earlier this month, State Healthcare Exchanges began their open their open enrollment period. The process has deferred across the states depending on the technology and type of exchange either federal, federal-state partnership or state.
The exchanges will provide a marketplace for expanding coverage to millions of individuals beginning in 2014. We have been studying how this will play out in various states and its impact on our business.
As we continue to work with our existing customers regarding their participation on the exchanges, our early indications are that many of them are looking for a low cost solution to help defray the cost of complex services. To-date we are supporting a large number of existing health plan customers as they enter the public exchanges in both behavioral health and radiology benefits management carve outs.
In the pharmacy area, we see potential opportunity as a commercial PBM carve out in the private exchanges as they gain momentum with employers over the next few years. This is an exciting and dynamic time at Magellan as we continue to transform the company and position it for the changing healthcare market and for future growth.
The recent developments in our specialty plan in Florida and in AlphaCare in New York as well as the acquisition of Partners Rx clearly show that we are willing to make the investments necessary to further our growth strategy. Jon Rubin will now provide details on this segment and our outlook for the next year after which we will take your questions.
Jon?
Jon Rubin - Chief Financial Officer
Great, thanks Barry and good morning everyone. Net income for the third quarter of 2013 was $47.2 million or $1.70 per share on a diluted basis.
For the third quarter of 2012, net income was $66.3 million or $2.36 per share on a diluted basis. The decrease in net income between periods was mainly attributable to a decrease in segment profit and a higher effective tax rate.
The tax rate reflects the impact of a lower level of tax contingency reversals in the current year quarter than in the prior year quarter. The reversals result from the closure of statute of limitations on federal and state tax years.
Revenue in the third quarter of 2013 was $873.6 million, which was $75.2 million higher than in the third quarter of 2012. The revenue increase resulted primarily from new business and an increasing membership from existing customers, which was partially offset by lost revenues associated with terminated contracts.
Our segment profit for the third quarter of 2013 was $59.2 million compared to $69.4 million for the third quarter of 2012. I will now review each of the segment’s results and growth opportunities.
Segment profit for commercial behavioral health was $25.7 million, a decrease of $7.3 million over the third quarter of 2012. The current year quarter includes approximately $5 million of severance relating to planned contract terminations.
The bounce of the decrease was mainly due to terminated contracts and unfavorable care trends, which were partially offset by new business and favorable rate changes. We previously mentioned that one of commercial health plan customers with annual revenues of approximately $200 million has informed us that after competitive evaluation process they have decided not to renew their contract when it expires on December 31, 2013.
In order to provide an orderly transition to the new vendor our current estimate that this contract will be extended through mid-2014. In addition we are in discussions with several of our health plan and employer customers whose contracts were up renewal in 2014.
None of these customers have initiated competitive procurements. We continued to have a steady pipeline of 2014 and 2015 commercial behavioral health opportunities including interest from regional plans, new federal and military programs, employers and other health plans that we can support in their Medicaid expansion, ACO and exchange initiatives.
Segment profit for public sector was $34.8 million, an increase of $9.1 million from the prior year quarter. This increase was mainly due to favorable prior period claims development in the current year quarter including adjustments of block funding to providers resulting from our annual reconciliation process, which is partially offset by unfavorable care trends.
The state of Nebraska’s conversion to a risk-based behavior health contract with annual revenues of approximately $100 million went live on September 1. In addition, we’re continuing our implementation efforts for the Commonwealth of Virginia Behavioral Health Services Administrator contract that are on schedule for December 1, 2013 go live date.
This ASO contract is expected to generate annualized revenues of approximately $20 million. On our last call, we discussed the ASO contract with the state of Iowa for statewide behavioral led health homes for approximately 26,000 adults with SMI and 16,000 children with serious emotional disturbance.
This contract is expected to have revenues of approximately $30 million in 2014. Phase 1 of this contract went live in our existing five locations on July 1.
There has been a slight delay in Phase 2 with the surrounding counties now scheduled to go live on April 1, 2014, and the rural countries on July 1, 2014. Regarding the public sector pipeline, there has been delays in RFPs for carve out contracts in New Jersey, Texas and Marilyn while these states focus on Medicaid expansion and exchanges.
We now expect these RFPs to be released sometime in 2014 with start dates in 2015. In our radiology benefits management segment, third quarter 2013 segment profit were $15.1 million, a decrease of $1.3 million over the third quarter of 2012.
This decrease was mainly due to net unfavorable rate changes in care trends partially offset by favorable prior period care development and the net impact of new business. Expectations of expanding Medicaid population and new exchange lives are significant factors fueling growth in our radiology segment.
We signed a new regional Medicaid health plan under a full risk arrangement for January 1, 2014, and we anticipate new risk membership in several markets where one of our MCO customers has been awarded new coverage areas. In addition, we’re actively planning for new risk in ASO lives through exchange programs being offered by several current customers in 2014.
We are also in discussions with several of our health plan customers whose contracts are up for renewal in 2014. None of these customers have initiated competitive procurement processes.
Interest in our pain management product continues and we recently signed the contract with the health plan which will begin on January 1, 2014. Our pipeline includes several other active pain management opportunities.
Our radiology contract with Coventry which was acquired by Aetna runs through December 31, 2015. Aetna currently uses multiple RBM vendors then they have recently issued in RSP for all of their RBM’s business effective after the exploration of our contract.
We plan to participate in that procurement process. Third quarter segment profit for the pharmacy solution segment were $15.8 million, a decrease of $3.3 million over the third quarter of 2012.
This decrease is primarily due to implementation cost incurred in the current year quarter to support new business. During the quarter, two of our health plan specialty customers notified us of their intent not to renew their contract upon exploration.
Both contracts one with revenues at $68.2 million through September 30 and other with revenues of $43.3 million through 2013 will be terminating on December 31, 2013. They are both primarily specialty dispensing contracts and we believe these decisions were made to consolidate specialty distribution into the core PBM services.
This underscores the importance of our pharmacy strategy to provide a full range of pharmacy products including a robust commercial and Medicaid PBM as well as specialty and medical pharmacy management. Our pharmacy pipeline contains many opportunities in both the Medicaid and commercial segments.
Within our specialty products, we’re seeing strong interest in medical pharmacy from large health plans. There is significant market competition for specialty distribution particularly among large clients.
However, we’re seeing continued interest from small to mid size health plans and from employers. Specifically for the PBM product, the acquisition of Partners Rx gives us an expanded presence in the commercial market and the pipeline of employer opportunities is robust.
For our fee for service Medicaid product, there are number of state Medicaid point of sale RFPs that have been released and we are anticipating an increase in opportunities as several states have delayed procurements from earlier this year. Regarding other financial results, corporate cost excluding stock compensation expense were $7.4 million greater than the third quarter of 2012.
This increase is primarily due to higher discretionary benefits, legal fees and other one-time cost partially offset by investments in our growth initiative, which were included in corporate expenses in 2012 which are reflected in the individual business segments in 2013. Excluding stock compensation expense, total direct service and operating expenses as a percentage of revenue were 17.4% in the current year quarter as compared to 16.4% for the prior year quarter.
This year-over-year increase is mainly due to the higher one-time administrative expenses previously discussed. The effective income tax rate for the quarter ended September 30, 2013 was a negative 29.2% due to the reversal of federal and state contingency reserve in the current year.
The tax benefit reflected in the current year quarter due to these reversals is approximately $24.8 million compared to $35.8 million of reversals in the prior year quarter. Accordingly, we now expect our full year tax rate for 2013 to be approximately 25%.
Turning to cash flow and balance sheet highlights, our cash flow from operations for the nine months ended September 30, 2013 was a $171.3 million compared to cash flow from operations of $111.7 million for the prior year period. Cash flow for the current year period includes the positive impact of a shift of restricted cash into restricted investments in the amount of $33.6 million, which is reflected as a source of cash from operation and the use of cash from investing activities.
Cash flow for the prior year period included the negative impact of shift of restricted investments through restricted cash in the amount of $27.4 million. Absent these transfers cash flow from operations for the current year period totaled $137.7 million compared to $139.1 million for the prior year period.
As of September 30, 2013, the company’s unrestricted cash and investments totaled $355.9 million, which represents an increase of $53.6 million from the balance of December 31, 2012, approximately $49.4 million of the total unrestricted cash from investments at September 30, 2013 related to excess capital and undistributed earnings held the regulated subsidiaries. The company’s restricted cash and investments balance of September 30, 2013 up $363.1 million reflects an increase of $15.6 million from the balance of December 31, 2012.
Most of this increase is due to restricted cash requirements for new Medicaid contract. Relative to 2013, we are now revising our full year guidance for new revenue in the range of $3.5 billion to $3.7 billion, net income of $118 million to $136 million and segment profits in the upper half of our range up $245 million to $265 million.
Taking into accomplish the impact of share repurchase activity through October 21, 2013, but not considering any potential future share repurchases, our guidance range for fully diluted EPS is estimated to be $4.28 to $4.93. This updated 2013 guidance now includes the impact of the Partners Rx acquisition which closed on October 1 and an additional quarter of the Maricopa contract.
Our 2013 guidance assumes fourth quarter restructuring cost of between $8 million and $12 million associated with the potential loss of this contract. We continue to expect same store normalized cost of care trends for the 12 month forward period of 6% to 8% for commercial behavioral health, 0% to 2% for public sector, and 3% to 5% for radiology benefits management.
We are working on our business plan for 2014 and we’ll provide detailed guidance in December. In advance of that I will now provide some initial commentary.
To start, our current 2013 guidance range for segment profit includes proximately $15 million of net favorable out of period adjustments including approximately $6 million in retroactive rates and membership adjustments and customer settlements, $28 million in favorable prior period care development, and $19 million dollars in unfavorable administrative costs mainly for severance and other contract termination charges. After adjusting for these net favorable out of period items, our 2013 guidance range would be approximately $240 million to $250 million.
As compared to this adjusted guidance range for 2013, we currently expect that we will have moderately lower segment profits in 2014. This expectation primarily reflects previously announced contract terminations with revenue of approximately $900 million including the assumed expiration of the Maricopa contract at March 21, 2014 and continued margin impression – margin pressure primarily in our radiology segment.
These unfavorable items are expected to be partially offset by the impact of the full year of Partners Rx, which is expected to have an accretive impact of approximately $0.20 cent per diluted share. The annualization of new business sold during calendar year 2013 and the impact of expected new business effective in 2014.
We believe that by the end of 2014, we will have a more stable customer base from which we can achieve earnings growth in the future years with significant contribution from Magellan Complete Care and the pharmacy solutions initiative. Again we will provide more detailed guidance during our December call.
In closing we are pleased with sour results for the third quarter and our continued progress on our strategic growth initiatives. Barry and I are now available to answer questions and I will turn the call back over to the operator.
Operator?
Operator
Thank you. (Operator Instructions) Our first question comes from Dave Styblo from Jefferies.
Dave Styblo - Jefferies
Great, thanks for taking the questions guys. So I just circle back on the ’14 guidance, it sounds like the midpoint $245 million is where we should begin to think about it.
Can you – when you mentioned the moderately lower earnings can you better bracket that for us to give us a sense for the pressure? And then what is included in terms of Maricopa are there going to be any additional exit costs that are part of the guidance for next year or is that all recorded in the quarter?
Jon Rubin
Dave this is Jon, I will give you a kind of the broad answer to that, but again we will provide more detailed guidance as we get to December. First, your interpretation of the run rate in 2013 is correct after adjusting for the non-recurring items.
In terms of the (indiscernible) again we are at a point yet where we have the details sufficiently nailed down to give you a more precise directional indication than we have point. I will just point to a couple of things that we noted.
One, the contract terminations of $900 million that we previously disclosed would certainly be the largest item to consider in the year-over-year picture. But again we also have the impact of Partners Rx going the other way as well as a new business.
So again we will get more specific as we get into December and we will do the call then. Relative to the question on the transition – the transition and severance costs.
At this point our assumption is that the vast majority of that will be recorded this year and as described that’s the roughly in the fourth quarter $8 million to $12 million plus we’ve also recorded some severance this quarter $5 million on the commercial side and another $2 million to $3 million flows through corporate, so all those you really can consider part of the kind of net one-time expenses that are incurred in 2013.
Dave Styblo - Jefferies
Got it and just to be clear you are including guidance reflects or contemplates a full quarter of Maricopa, right?
Jon Rubin
At this point yes in sort of the directional guidance obviously as we learn more and at the point where we are in December we will update that to the extent that’s appropriate.
Dave Styblo - Jefferies
Okay. And then if I can just shift over to the segments quickly, the – I may have missed this in the commercial comments here but the margins fell to 13.5% from the high- and clearly there was some favorable development in the prior quarters, but can you elaborate more and what’s going on there, if this is the new run rate kind of a mid to low teens level or is there something going on unusual for the quarter right now.
Barry Smith
Yes, the only thing I’d note there, David is what we’ve noted before and what we’ve always shown in our queue. We did have some favorable adjustments in prior quarter customer settlements in second quarter that we are in the $6 million to $7 million range and conversely as we noted we had about $5 million of severance cost in the commercial segment this quarter.
So, if you normalized for those I think you get a lot closer to what the run rate is.
Dave Styblo - Jefferies
Got it, great. Thanks for the questions.
Operator
Thank you. Our next question comes from Josh Raskin with Barclays.
Your line is now open.
Josh Raskin – Barclays
Hi, thanks, good morning. first question on partners RX, when you – I’m just trying to figure out sort of the financial implications here, it sounds like you are obviously including it in the guidance for 2013 directionally you mentioned at the positive 2014, any sense of what the segment contribution would be and I heard the $0.20 of accretion, but I don’t know sort of the DNA numbers that go into that.
I’m just curious what the contribution to second profit is a 4Q and in what the expectations next year.
Jon Rubin
Yes, Josh, it’s Jon, in terms of fourth quarter, I mean, it’s relatively modest, I mean because we’ve got obviously some earnings coming through but also some integration expenses build in. So, it’s relatively modest in the fourth quarter.
In terms of the $0.20 accretion again I wouldn’t – I think most of that you can view as operating earnings less taxes, I mean, there is not a lot of other costs above or below the line you need to consider.
Josh Raskin – Barclays
That’s like somewhere in the ballpark to $6 million bucks. Is that attenuating you paid a $100 million for $6 million of income is that way we should think about it.
Jon Rubin
Again I look at it sort of after that is being after taxed and will be more specific in terms of the range when we get to December, but that’s the ballpark number and sort of in all in after tax basis.
Josh Raskin – Barclays
Okay and then just the next question is in terms of the actual quarter, Jon, I guess a lot of moving parts in terms of one timers is there sort of a net, net number in terms of sort of total out of period and/or one-timers like severance and things like that.
Jon Rubin
Yes, I mean, there is things obviously going in both directions, but in terms of severance as I noted earlier there is about – there is $5 million in commercial and another couple of million in corporate to give you in an overall sense and then we also had some other one-time expenses is noted in corporate things like legal fees which were higher than normal during the quarter because of various activities that we are managing. When you – but then on the other side in public sector we had some favorable prior care development including the annual update we do on the block funding so it tends to net to a relatively small number when you look at it in total, call it $3 million favorable in the quarter overall.
Josh Raskin – Barclays
$3 million favorable, and then last question, you mentioned the 100,000 lives of in terms of potential in Florida and said that your goal would be at least 20% penetration. What are the other 80,000 people go?
Is that plans that aren’t SMI targets where they just going to tough to find and not necessarily (indiscernible).
Jon Rubin
That’s correct, yes, so we are the only SMI specialty plan that was approved and will be operational in the state on next year, but in each of the counties where we are operating there will be other health plans, the other MCOs general Medicaid plans that theoretically can compete for those members.
Barry Smith
Hey, Josh, this is Barry here. We are also working through with the state the enrollment process and we haven’t completed that yet and so, we really can’t give any indications as what we would expect with the next couple of years, but it could be very positive.
We don’t want to forecast that and we really know what their intention is.
Josh Raskin – Barclays
It’s conceivable they would start auto assigning or something like the plan that meet the needs right now down.
Barry Smith
It’s absolutely possible Josh, and the good news is the shapes been great to work with and working with us through the criteria to identify. We clearly have a lot of experience to stay with the SMI population.
We have great date and experience from the state on both the physical medical and the pharma pieces and it and they are various methodologies that we can use to identify the population and then the question becomes how aggressively will the state work to have those assigned to our plan. We believe we are going to be able to offer just exceptional quality of care and service of these individuals.
So we think it’s a great upside from a quality care standpoint. We also think by integrating the Behavioral Health and Physical Medicine, we can work very effectively with the state to control costs.
So we think that they are going to be very enthusiastic about working with us and moving forward but again, we don’t know yet that what that result is.
Josh Raskin - Barclays
Okay, perfect. Thank you.
Operator
Thank you. Our next question comes from the Scott Fidel from Deutsche Bank.
Scott Fidel - Deutsche Bank
Thanks. First question, just can we get an update on medical cost trends in each of the business segments.
Jon, I don’t think I heard you say that in the prepared remarks, so we assume that everything was stable there? And then can you give us a preliminary look around 2014 in terms of whether you are expecting any meaningful changes on cost trends in any of the key business segments?
Jon Rubin
Yes, Scott. The current trends in terms of our outlook have not changed.
So they are still at the levels that we have talked about over the last quarter. In terms of 2014, we will give kind of more specific updates when we get to December.
At this point, I would just say directionally cost trends should continue at relatively similar levels to what we believe we are seeing currently, but we are going to be evaluating that and giving sort of specific outlook at our December call.
Scott Fidel - Deutsche Bank
Okay. Then the second question just on the positive tax items in the quarter and it looks like now in each of the last two quarters, you have had some big positive reversals during the third quarter and just wondering as we move into 2014 whether you expect that this will be sort of an annual update that we have in the third quarter or are those reserves largely being depleted at this point and we shouldn’t expect meaningful positive tax reversals in 2014 and beyond?
Jon Rubin
I mean, Scott to answer the question first, I would say these are tax contingencies that we put up for various reasons. So it’s very hard to predict what will actually play out year-to-year, which is why it makes it difficult to forecast.
Having said that, we saw reversals last year of $35 million plus this year in the $24 million, $25 million range. There is a potential for these reversals to continue over the foreseeable future, but you can tell from the pattern in the last couple of years, it is sort of a declining pattern.
We have remaining the opportunity of about and you can all update this as we file the case for the full year. We have about $32 million of remaining opportunities over future years.
And again, the pattern should be declining over the years.
Scott Fidel - Deutsche Bank
Okay, got it. Thank you.
And then just interested if you can give us some more details on the risk-based radiology contract that you discussed that’s effective Jan 1, 2014, is this commercial or Medicaid customer and any sense on the number of lives that you are going to manage there?
Jon Rubin
Yes, I mean at this point, we don’t give customer level details unless it kind of meets the threshold for material contracts, but we’ll say that we feel very good not just about that particular contract, but about the other wins that we have talked about. Some of which have been on the commercial side, some of which have been on the Medicaid side as well as the fact that we believe we have got great opportunities going forward both in traditional radiology, but also in new products such as pain management that I talked about.
But again, unfortunately we don’t give any additional details on some of the less material contracts.
Barry Smith
And Scott, Barry here. I would say that Tina Blasi, who has been the CEO of our RBM business for years at this point in time is just an exceptional leader both in terms of delivering the quality of care.
The MLR has been managed to our customers benefit and high-quality of care and also has just exceptionally well connected to the marketplace. And so we have over the last many years has had great success in all segments of this business and we anticipate the same in next year as well.
Scott Fidel - Deutsche Bank
Okay. And then just one last question just on the large commercial $200 million annualized customer that extended for six months next year.
Should we just assume sort of a similar run-rate there, so we assume around $100 million contribution in the first half of ‘14 and then that goes offline or are there any meaningful changes in the revenue run rate for the first half of next year?
Barry Smith
Yeah, I mean, at this point, this is an estimate we don’t have kind of formal notice of exactly when the contract may sent to but that is our working assumption and I wouldn’t project any major changes, I mean, that the contracting services were providing, we’ll continue to be as we’ve always done up until that point.
Scott Fidel - Deutsche Bank
Okay, thank you.
Operator
Thank you. Our next question comes from Michael Baker from Raymond James.
Michael Baker – Raymond James
Yeah, thanks a lot, I was looking interested in some color around you, thoughts on the private exchange obviously focusing on self funded employers. So, it gives us a sense of your thoughts around the phase of change that you would anticipate and which whether or not there would be a change in funding option.
In other words if you are seeing them up to move from sort of risk some thoughts around that first.
Barry Smith
Well, I would just generally save the world, this is a new area for us all and that the providers out there our sales included we’re all trying to figure out what it means and the rate of adoption it clearly the whole exchange movement is off to a bit first a slow start when it comes to both federal and state exchanges. But we do expecting to be material to us overtime.
In terms of the again we can’t say we just haven’t seen yet this really roll out from a timing standpoint. Relative to the risk versus ASO one of the things that’s happening is that we are seeing a greater interest in this integration of behavioral health at physical medicine and so it’s not the same as in past years where would have simply – a simple carve out.
What we are able to do we demonstrated in our own products with our Magellan complete care, we are able to do either ASO risk and be very effective. We are hopeful that on exchanges and with our clients particularly that will be able to more risk contracts to be able to provide them and more predictable path in terms with the cost structure and how were embedded in the products so we go to market directly.
So, again we haven’t seen a real trend one where the other at this point.
Michael Baker – Raymond James
And then in terms of the partners RX, can you give us a sense of what their model has been up to-date, I believe there has been an affiliation component to it or an equity piece and then it sounds like there was the restricted stock purchase was that primarily just management or did you also target some key customers around that dynamic.
Barry Smith
Well, I’ll start with the first question the purchase of stock was by key management executives at partners they have a real confidence in both their ability and our ability to work together and are very bullish about future so, they meet a big investment in Magellan and our collective success for the future. Now relative to their basic model they’ve been very focused on the TPA market that brokers or consultants and but moving upstream from the smaller accounts represented in their TPA book of business to larger employer accounts.
We as we mentioned in the script have not had a strong presence with brokers or consultants which is really material and key towards success as we move into the middle market employer into larger employers so, their expertise in selling and messaging to the smaller and middle sized employer market is key. They are very – they have been very successful at high retention rate of their client base, very high levels of service and are very different kind of a model that’s far more transparent then the traditional PBM.
They have been very profitable and we expect that to continue and they just –they again – they are very well connected in the TPA broker consultant community and so that’s a real ad for us here at Magellan.
Michael Baker – Raymond James
And then just finally it sounds like they have had historically high retention as you look to 2014 don’t anticipate any meaningful change there.
Barry Smith
No, no, we really don’t it’s just a great model. I think the clients are so – are very satisfied because the level of service that also the economics for the clients are very strong as well so we would expect any difference going forward.
Michael Baker – Raymond James
Thanks for the update.
Barry Smith
You bet.
Operator
Thank you. Our last question comes from Carl McDonald from Citi.
Carl McDonald – Citi
Great, thanks. First question for Jon, just the comments you made about 2014 given you a good base that you grow into 2015, as I think about the quarter of Maricopa next year and then the half year the Horizon contract next year that gets something into the scenario of about $30 million in EBITDA so may be a bit more than 10% where the ‘14 guidance.
So are you saying you think you are going to be able to grow through that EBITDA hit in 2015?
Jon Rubin
Carl, I will look in my comment at this stage is being more of a run rate comment, where we think we’ll be at the end of the ‘16 and I’m sorry end of ’14 and being able to build from there. We obviously aren’t in a position yet to be able to give specific commentary on 2015.
Having said that remember also there is a lot of things going for us as we go through 2014. Barry talked very specifically about some of the developments in Florida as an example which obviously will not start and will not ramp up rates at the beginning of 2014.
We’ve got very good momentum on pharmacy with sales activity both within partners RX and things going on in our organization. So, we feel very good about being able to grow from the point that we jump off in 2014, but again we’ll give a lot more specifics on it as we get through the next year.
Carl McDonald – Citi
Okay, and then a question on Florida the Medicaid behavioral health contract that you have I think it’s about $130 million revenue. Can you just talk about that will transition as the new Florida program starts up.
Barry Smith
Yeah, the Medicaid contract will come to an end as the managed care components going to play in Florida. We again did for eight counties there in Florida which represents the majority of the counties in Florida, the populated counties in Florida and so the revenues we feel we’ll grow quite substantially there and we’ll have complete management of both the physical medicine and health of these individuals.
We really – since we don’t have the ramp yet for how the state will work with us on enrollment to what that process will be. It’s hard to forecast how one how effective the ramping up of our new contracts will affect the kind of the difference between the losing of that Medicaid contract and the ramp-up of the new business.
I will say that the opportunity in the upside is significant much, much larger than the state (indiscernible) carve out contract. They’re not even close.
So, we think it’s going to be a net incremental significant positive for us.
Carl McDonald – Citi
And then the big picture question for you, Barry, which is as you move into the full suite of offerings, can you just give us a sense of how you think about the potential conflict with existing customers so like in a situation like Florida where you focused specifically on severely mentally ill, yeah, I think it’s fairly straight forward to differentiate and sort of what you are doing is different versus your competitors who were also in some cases of your customers. When you start bidding for Medicare advantage plans that are for sale or some of the things that you do or going to be doing in New York?
It puts you sort of more in conflict with the customer so it should be interested in your thoughts on how that plays out.
Barry Smith
Well, Carl, I’d answer two ways, one is that we have been – we would love to do partnerships and work with our existing clients wherever we can and we do that and will continue to do that. We are also going to be very selective and we’re going to talk to our clients about where we are going, but we’ve been very selective about where we go sort of we are indirect – typically indirect competition with our clients.
Having said that, we also have a very specific focus as you pointed out to the SMI’s special needs population so while we might be in the same state as an existing client we aren’t going largely for the same – gives us clearly we are going at the subset to manage the most difficult of these release that they have. There is even a point that could be made that in states where we are going into where the clients – where we currently had clients they may well want us and typically what I would think to work with these difficult to manage medically and to the SMI population so that we can enhance their performance in those states so we haven’t seen the major complication.
We are very sensitive to the issue and want to make sure that we work with our clients in a very cooperative fashion.
Carl McDonald – Citi
I appreciate, thank you.
Barry Smith
You bet.
Renie Shapiro - Senior Vice President, Corporate Finance
Well, we thank you for the participation in today’s conference call. We look forward to speaking with you all again in December when we’ll provide details of our 2014 guidance.
Thank you for joining us today. Take care.
Operator
Thank you. That concludes today’s call.
You may disconnect at this time.