Nov 4, 2017
Executives
Joe Bogdan - Investor Relations Barry Smith - Chairman and Chief Executive Officer Jonathan Rubin - Chief Financial Officer
Analysts
David Styblo - Jefferies Michael Baker - Raymond James Anagha Gupte - Leerink Partners
Operator
Welcome, and thank you for standing by for the Third Quarter 2017 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 Joe Bogdan. Please begin.
Joe Bogdan
Good morning, and thank you for joining Magellan Health's Third Quarter 2017 Earnings Call. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin.
The press release announcing our third quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through December 1.
The numbers to access the replay are in the earnings release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, Wednesday, November 1, 2017, and have not been updated subsequent to the initial earnings call.
During our call, we'll make forward-looking statements, including statements related to our growth prospects and our 2017 outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the risk factors discussed in our press release this morning and documents we filed with, or furnished to, the SEC. In addition, please note that Magellan uses certain non-GAAP financial measures when describing our financial results.
Specifically, we refer to segment profit, adjusted net income and adjusted EPS, which are defined in our SEC filings and in today's press release. Segment profit is equal to net revenues less the sum of cost of care, cost of goods sold, direct service costs and other operating expenses and includes income from unconsolidated subsidiaries, but excludes segment profit from non-controlling interests held by other parties, stock compensation expense, special charges or benefits, as well as changes in the fair value of contingent consideration recorded in relation to acquisitions.
Adjusted net income and adjusted EPS reflect certain adjustments made for acquisitions completed after January 1, 2013, to exclude noncash stock compensation expense resulting from restricted stock purchases by sellers, changes in the fair value of contingent consideration, amortization of identified acquisition intangibles, as well as impairment of identified acquisition intangibles. Please refer to the tables included with this morning's press release, which is available on our website for a reconciliation of GAAP financial measures to the corresponding non-GAAP measures.
I will now turn the call over to our Chairman and CEO, Barry Smith.
Barry Smith
Thank you, Joe. Good morning and thank you all for joining us today.
Before we begin, I'd like to acknowledge the unfortunate series of events across our country that have transpired since our last call. Several hurricanes, wildfires, and the mass shooting in Las Vegas and yesterday's tragic events in New York, have once again brought behavioral health issues and the emotional toll of such events to the forefront of our national conversation.
I am so proud of the way our company responded in the face of such tragedy. Many of our associates donated their time and money to organizations that are helping victims of these incidents.
In addition, we offered free confidential 24-hour counseling and referrals to local community resources, leveraging our unique expertise in behavioral health management. In the face of such devastation, it is reassuring to see our 10,000 Magellan Associates stepping up to help individuals striving to lead healthy, vibrant lives.
In my comments this morning, I'll review the third quarter results, provide an update on the Senior Whole Health acquisition, highlight activities within the healthcare and pharmacy segments and share our priorities for the remainder of the year. Then I'll turn the time over to Jon to discuss the financials in more detail.
With the third quarter, we reported net revenue of $1.4 billion, net income of $32.5 million and EPS of $1.32. Our adjusted net income was $40.4 million or $1.64 per share, and we achieved segment profit of $87.7 million.
As we announced yesterday, we completed the acquisition of Senior Whole Health. Senior Whole Health has an outstanding management team and reputation, a strong track record of growth and extensive experience facilitating high-quality, cost-effective health care for its members.
Expanding our footprint and expertise in this high-growth area of healthcare helps to accelerate our strategy. I would also like to note that Senior Whole Health's 2018 Medicare plans recently earned a 4.5 star rating, which underscores the company's commitment to quality care for their membership.
Integration planning is on track and we are still targeting approximately 10 million in synergies once complete. We are updating our full year 2017 guidance to reflect the closing of Senior Whole Health, lower segment profit in the healthcare business and an improved effective tax rate.
Jon will provide more details later in the call. Before I move on to our healthcare business, I'd like to provide an overview of the work Magellan is doing to help address the opioid epidemic.
Last week, the President declared this a national public health emergency, which helps direct and focus federal and state resources. Magellan has solutions that address the epidemic in three distinct phases: before opioids are needed, when an opioid is prescribed and when opioids are misused.
We're utilizing evidence-based best practices such as medication, assisted treatment, office-based opioid treatment and psychosocial services, including computerized cognitive behavioral therapy as well as medical management tools such as clinical edits [ph] and dosing limits to help individuals with opioid use disorder and prevent misuse or diversion among individuals whose pain is being clinically managed with opioids. Leveraging our background of behavioral health, we also have peer support and individualized care management programs to help people on their path to recovery and resiliency.
The severity of this epidemic requires the entire healthcare continuum to reflect upon its current role in a person's journey from opioid misuse to recovery and find new and innovative ways to help people get and stay healthy. Next, let me provide you with an update on our sales process in our commercial healthcare business.
One of our largest specialty healthcare contracts conducted a competitive procurement process. Not only were we able to renew the contract, but the customer also expanded the scope of our relationship to include the management of physical medicine.
Our healthcare pipeline remains strong and converting these opportunities into signed contracts is a top priority for us. As we continue to work through the sales process, we are seeing some delays in new sales and the timing of customer limitations beyond 2017.
During our second quarter 2017 earnings call, we discussed improvement plan - our improvement plan regarding 2 commercial healthcare accounts. I'm pleased to report that progress on these accounts is well underway, which has helped us to achieve improved operating results versus the second quarter.
Now I'll provide some updates on our government business. In Virginia, membership in the Commonwealth Coordinated Care Plus program is scheduled to phase in from August 1, 2017, to January 1, 2018.
To-date, we have successfully launched in three initial regions. In addition, we received approval to launch in all remaining localities by January 1, 2018.
With respect to our SMI plan in Florida, we recently submitted our bid response to the Agency for Health Care Administration and anticipate a decision on the award during the second quarter of 2018. This has been an exceptional partnership with the state to create the nation's first Medicaid specialty plan focused on persons with serious mental illness.
We look forward to moving ahead into the next phase, but of course, there are no guarantees in any procurement. I would like again to acknowledge our team's impressive response to our members impacted by Hurricane Irma, particularly in light of their own challenges and recovery from the storm.
Turning to our Pharmacy business. We continue to provide a differentiated approach to pharmacy benefits management in the market.
We focus on full-service capabilities while emphasizing specialty drug and medical pharmacy benefit management. We continue to see evidence that our value proposition is resonating in the market with these sales, including a large employer and two new health plans.
In August, we hosted our 14th Annual Specialty Summit, which brought together industry experts, clients and pharma to discuss key issues in the specialty drug space. Over the years, this has become a must-attend event across the industry, reflecting Magellan's thought leadership in this area.
In addition, we recently released the second annual Medicaid trend report, which highlights the dramatic double-digit growth at specialty drug spend in the Medicaid fee-for-service space. These findings pinpoint the growing need for states to be more engaged and innovative when it comes to pharmacy management and sets Magellan RX apart with robust clinical and cost management tools to help customers address these rising trends.
For the balance of the year, we will remain focused on the implementation of our Virginia program and the integration of Senior Whole Health. Success in these major initiatives fuels future growth and fulfills our mission in leading humanity to healthy vibrant lives.
At this time, I would like to turn the call over to our Chief Financial Officer, Jon Rubin. Jon?
Jonathan Rubin
Thanks, Barry, and good morning, everyone. In my comments this morning, I'll review third quarter results, share additional details on the acquisition of Senior Whole Health and provide an update on Magellan Complete Care of Florida capitation rates.
I'll then discuss our revised outlook for the full year and provide some initial commentary about our 2018 business plan. For the quarter, revenue was approximately $1.4 billion, which represents an increase of 10% over the same period in 2016.
This increase was mainly driven by net business growth and the annualization of revenue from prior year acquisitions. Net income was $32.5 million and earnings per share was $1.32.
This compares to net income and EPS of $25.5 million and $1.06 respectively for the third quarter of 2016. Adjusted net income was $40.4 million and adjusted earnings per share was $1.64.
This compares to adjusted net income of $33.3 million and adjusted EPS of $1.39 from the prior year quarter. Segment profit was $87.7 million for the third quarter, compared to $82.8 million in the prior year quarter.
For our healthcare business, segment profit for the third quarter of 2017 was $57.6 million, which represents a decrease of 4% compared to the third quarter of 2016. This decrease is mainly due to the prior year quarter, including $13 million of favorable out-of-period adjustments, partially offset by improved results in our government healthcare business.
Our healthcare results this quarter reflect the progress we've made in addressing the commercial account pressures. Specifically, we've made rate adjustments and begun initiatives to improve medical costs.
While progress has been slower than originally forecasted, we still expect to have the issues resolved by the end of the year. Turning to pharmacy management, we reported segment profit of $38.7 million for the quarter ended September 30, 2017, which was an increase of 20% from the third quarter of 2016.
This increase was primarily due to PBM new business, improved margins and earnings from the Veridicus acquisition, which closed in December 2016. Regarding other financial results, corporate costs inclusive of eliminations, but excluding stock compensation expense, totaled $8.5 million in the current quarter compared to $9.4 million in the third quarter of 2016.
This decline is due to a decrease in the discretionary benefit expenses. Total direct service and operating expenses, excluding stock compensation expense and changes in fair value contingent consideration, was 15.4% of revenue in the current quarter compared to 17% in the prior year's quarter.
This decrease is primarily due to the suspension of the Health Insurer Fee and business growth and mix. Stock compensation expense for the current quarter was $10.3 million, an increase of $1.1 million from the prior year's quarter.
This change is related primarily to higher vesting of employee stock awards. The effective income tax rate for the nine months ended September 30, 2017, was 34.4% compared to 51.9% in the prior year period.
Last year's tax rate was impacted by nondeductible losses at AlphaCare. In addition, the current year-to-date effective rate is lower due to the suspension of the nondeductible Health Insurer Fees and the favorable tax impact of stock option exercises.
Our intention is to merge the Senior Whole Health New York and AlphaCare subsidiaries, which we anticipate will result in a fourth quarter reversal of tax valuation allowances recorded against the deferred tax asset for historical net operating losses in AlphaCare. As a result of these items, we now anticipate a full year effective income tax rate of approximately 30%.
Our cash flow from operations for the nine months ended September 30, 2017, was $112.7 million. This compares to cash flow used in operations of $7.6 million for the prior year period.
The prior year was impacted by the portion of contingent consideration payments related to the CDMI acquisition that we recorded in cash flow from operations and the initial buildup of Part D receivables. As of September 30, 2017, the company's unrestricted cash and investments totaled $480.5 million compared to $293.9 million at December 31, 2016.
Approximately $125.6 million of the unrestricted cash and investments at September 30, 2017, related to excess capital and undistributed earnings held at regulated entities. Restricted cash and investments at September 30, 2017, grew to $347.7 million versus $315.9 million at December 31, 2016.
This increase was primarily due to growth in Magellan Complete Care of Florida and Virginia. Year-to-date, through October 27, 2017, we repurchased approximately 226,000 shares for $17.2 million.
We have $57.6 million remaining in our share repurchase authorization program, which runs through October 26, 2018. During the third quarter, we completed an inaugural $400 million public bond offering.
The notes were issued on September 22, 2017, at a public offering price of 99.8% and bear interest at 4.4%. We also took advantage of the favorable financing environment to enter into a new banking facility that includes a $350 million 5-year term loan at LIBOR plus 150 basis points and a $400 million revolver.
The proceeds from the public note and the new banking facility were used to retire the previously existing banking facilities and provide additional working capital. As we disclosed yesterday, we've completed the acquisition of Senior Whole Health.
For the two months of 2017, Senior Whole Health is expected to add approximately $5 million in segment profit, which is net of approximately $5 million of associated transaction costs. With respect to our MCC Florida business, we received final base capitation rates from the state for the twelve months effective October 1.
The impact of these base rate changes varies by geography and capitation category across the state and average to an approximate 10% decrease based on Magellan's current membership mix. A portion of this rate decrease was due to reduction in the state fee schedule that largely passes through to providers.
Note this decline in the base rates is consistent with our previous expectations. It's also important to note that the state has not yet released the risk adjustment model that gets applied to a plan's base rates.
The state has advised health plans that the risk adjustment model will be released in late November. Once rates are finalized, we anticipate that our pretax margins will be more in line with typical Medicaid health plan levels in the low to mid-single-digits.
We're updating our full year 2017 guidance to reflect the closing of Senior Whole Health, lower segment profit in the healthcare business and an improved effective tax rate. The change in the segment profit outlook reflects our updated view on the timing of corrective actions in commercial healthcare and the impact of delays in new business sales that Barry discussed.
The full year 2017 segment profit guidance is a range of $320 million to $330 million. We now estimate revenue of $5.75 billion to $5.85 billion, adjusted net income of $133 million to $143 million and cash flow from operations of $210 million to $230 million.
We're also revising our 2017 guidance for the full year net income to a range of $100 million to $110 million. We now expect 2017 adjusted EPS to be between $5.45 and $5.86 and EPS to be between $4.10 and $4.51 based on average fully diluted shares of 24.4 million.
This share count reflects share repurchases and option exercises through October 27, but excludes any potential future activity. We're finalizing our business plan for 2018 and will provide detailed guidance in early December.
In advance of the 2018 call, I'll now provide some high-level commentaries. To start, our updated 2017 guidance range for segment profit needs to be adjusted by three factors to arrive at a normalized run rate.
First, our year-to-date results include approximately $9 million of net favorable out-of-period adjustments. Second, as noted above, Senior Whole Health is expected to contribute a net $5 million to segment profit in 2017.
Finally, the restoration of the Health Insurer Fee in 2018 will have an approximately $18 million favorable impact on segment profit and an approximately offsetting impact on taxes. After adjusting for these three items, our 2017 normalized segment profit would be in the range of $324 million to $334 million.
As compared to this normalized rate for 2017, we currently expect that we will have modest segment profit growth in 2018 before the incremental contribution of Senior Whole Health. The primary drivers of this growth are as follows: anticipated new business effective in 2018, the annualization of new business sold during calendar year 2017, same-store growth within existing contracts, the absence of Virginia startup losses in 2018, the full year favorable impact of our commercial healthcare initiatives and the expected favorable impact of pricing and formulary changes in our Part D plan.
These favorable variances are expected to be partially offset by the anticipated capitation rate reduction for MCC of Florida. Now in addition to this year-over-year organic growth, we estimate that the Senior Whole Health acquisition will be accretive to net income by approximately $0.60 per share and to adjusted net income by approximately $1 per share as previously disclosed.
In summary, we're focused on continued execution for the balance of 2017, including the integration of Senior Whole Health and look forward to providing more details of our 2018 outlook for growth in early December. With that, I'll now turn the call back to the operator and we'll take your questions.
Operator?
Operator
Thank you. The first question on the line comes from Dave Styblo from Jefferies.
Your line is now open.
David Styblo
Hi there good morning, thanks for the questions. I just want to come back to this year's guidance to start with and understand the moving parts there.
So if we back out the Senior Whole Health contribution, it sounds like the core part of the business, especially the healthcare side, earnings are coming down. And that sounds like it's largely due to a delay in the new business sales as well as the fix on the two customer accounts, if I have that right.
Are those both drags there? And at another part of the earnings of the call, I think you had mentioned that the two customer fixes were a little bit slower than expected, but still to be completed by the end of the year.
Jonathan Rubin
Yes, David, it's Jon. I think that's absolutely right.
So the reduction in the current year is due to those two factors. The fact that while we've made significant progress on the corrective actions in second quarter for the healthcare accounts, we're a little bit behind where we expected to be.
Similarly on the new business sales, we're continuing both to have good sales results and very strong pipeline as Barry alluded to. It's just that some of the sales in some cases, sales that we've even got signed contracts for are being implemented a little bit later.
So the key point I'd make there is both those items are really timing and although they affect the current year, we expect by the end of the year and into 2018 to be fully on track in both those areas with where we expected. So really, it's a current year item.
David Styblo
Okay. And then as we look at the bridge from 3Q to 4Q segment profit, I guess, that implies about a $25 million pickup.
I think $5 million of that is - again is from Senior Whole Health. And I know you guys typically receive and recognize your performance payments in the fourth quarter, maybe you could help us quantify what that typically is for this year or what you would expect that to be.
And what the rest of the bridge is going to be? Does that contemplate additional improvements in those two customers, including perhaps a retroactive rate fix on those customers?
Or what else is it on the numbers basis that can help us get comfortable about the back - about the fourth quarter?
Jonathan Rubin
Yes. So I would say that you hit the majority of the items.
So you have Senior Whole Health coming on for the two months. And then the balance, I'd say, is split between 3 different areas, relatively equally weighted.
One being the incremental improvement in the commercial healthcare results as we're continuing to make progress in getting increasing momentum there. Second is actually new business growth, meaning across our businesses, we actually have continued to implement new sales in third and fourth quarter and we'll get sort of a full quarter's run rate of that in fourth quarter.
And then third is the timing of customer settlements across our businesses. So I would say, if you take out the Senior Whole Health, the balance of the improvement is split relatively evenly between those three areas.
David Styblo
Okay. And I know, kind of going back to the fourth quarter of '16, I know you guys have been sprinkling in comments about delays and new business starts.
Can you elaborate more on what's happening there? Is that specific to one or two accounts that have continued to push out and affected the top line and segment profit?
Or is it just new accounts that come up and they're not quite ready to get going but you guys again feel confident that, that's coming back in the fourth quarter? Any color there just to give us a better sense of what's happening with the delays?
Barry Smith
Dave, Barry here. Thanks for the question.
It's as - as you point out there, we do have ongoing - a very ongoing robust pipeline. And clearly, the clients have a lot going on right now with the change issues that are happening in the marketplace today.
They have a lot of operational things to implement over the course of this year going into the next year and some uncertainty. So I think it's been basically a lot on their plate.
Now having said that, they're also looking for robust solutions that we provide that allow for increased savings and allow them to achieve what they need to achieve this next year. So it's more an issue of just, I think, a lot on their plates and simultaneously going on, both with the public markets and the individual markets going on.
David Styblo
Okay. And then the last one I had was just about the early comments on 2018.
I think one of the areas of the bridge that I didn't hear was the Virginia MLTSS. I think you guys are on track for guidance embedding $15 million to $20 million of losses this year.
I want to make sure that, that's still on track. And then is that not a tailwind as you go forward for next year that would be sort of outsized and something to call out?
Jonathan Rubin
Yes, Dave, I think I did mention that or at least I intended to as one of the factors. I called the absence of startup losses in Virginia because of that $15 million to $20 million this year that we hope that, that is one-time in nature.
So that is one of the factors.
David Styblo
Okay. And I'm sorry, maybe I did miss that.
So that -- I think you guys said the normalized stepping off point for '17 is $324 million to $334 million. And does that include the impact of Virginia in there?
Jonathan Rubin
Yes.
David Styblo
Okay, thanks.
Barry Smith
You bet.
Operator
Our next question on the line is from Michael Baker from Raymond James. Your line is now open.
Michael Baker
Yes, thanks a lot. I was just trying to get some color on how Part D utilization is progressing in light of the formulary change.
And typically, when you make changes to the formulary, when do you see a pickup if that occurs? Is it late December?
Or would you start to see those type dynamics now?
Jonathan Rubin
Yes, it's a good question, Michael. In terms of the formulary change, I mean, the impact, the major impact doesn't go into effect until 2018.
Now whether there's a little bit at the end of the tail end of the year, higher utilization, we'll see. More than anything, though, we are expecting to see some disenrollment as a result of both the formulary changes and the pricing changes that we've implemented for the 2018 year.
And while it's very early, we are seeing some initial disenrollment that's at least consistent with our expectations. Which, again, because we were - had a wider formulary than many in the market, our expectation is that many of the members that will disenroll will be those that might have been higher utilizers of certain medications.
So still a lot to play out for 2018. We haven't really seen any material change in utilization in third quarter and we'll see in fourth quarter how that plays out.
Michael Baker
That's helpful. And then I had a second question.
And Barry, I don't know if you touched on this already, but I'm sure you saw that the Express Scripts bought eviCore. And I was wondering if you could just help us understand some of the differentiating features that you've been successful in building already that you might anticipate that they look to follow with.
And I understand that you also have Magellan Complete Care, which is totally separately different. But I'm talking mainly about or what I'd be interested in your color on mainly about, is the marrying of specialty benefits with pharmacy benefits.
Barry Smith
Yes, Michael, we view that acquisition as a real compliment to our strategy. We think we're several years beyond where they are today clearly expresses a very robust, capable company at eviCore.
John Arlotta, I know him well, who is the CEO of eviCore. Great company, great guy.
We've been very competitive with eviCore and Express clearly in our segment of the market for the last many years. We wouldn't expect that to change dramatically.
We do think that intelligently combining the pharmacy with medical specialty benefits is a smart thing to do. And again, we've been doing that for years.
And if you think about our medical pharmacy capabilities, we recognize the fact that the spend in the pharmacy world, you've got to link it back through the medical benefit. So we're very robust in our solutions and our capabilities.
We think that, that's a great combination for them and we think that's a fine strategy for them. We do think there'll be disruption likely in the market over the next year or so as they figure out how to work together and we think that presents opportunity for our solutions.
Again, we've been very competitive in the marketplace - particularly, eviCore has been historically very strong in, for example, RBM management. We're very strong on RBM management.
We have excelled, I think, beyond anybody in the market, including eviCore, in musculoskeletal. We have over 7.5 million of lives in musculoskeletal and growing.
Again, that's been our new business for the last couple of years. So we think that this combination of both the pharmacy and the medical specialty side is a smart combination.
We like to think again that we're fairly far along in that strategy. MCC, as you point out, is the ultimate culmination of that, where we utilize all the attributes and all the capabilities we have in Magellan and apply them to the whole individual.
We said years, I guess, two or three years ago, we decided to form Magellan Complete Care. Then if you looked at Magellan's offerings before establishing a health plan, we provided 70% of the special population's needs already.
So we have the capacity and we've been able to realize it, Magellan Complete Care, of integrating these benefits in a very unique way in the industry. And we think that's a great strength.
Michael Baker
And then just on another competitive dynamic that seems to be cropping up here. As you know, Anthem appears to be trying to leverage CVS to take the PBM in-house and compete with Prime.
As you know, neither of those two have the specialty benefits add-on to it. So what I'm just trying to get a sense of is, do you see the opportunities in light of that competition of picking up or unseating some Blue's business?
Jonathan Rubin
Yes. We've been very successful in the Blue's world.
And in fact, a little known fact, many, many years ago before I was born, just kidding, maybe not before I was born, but we were actually started by a consortium of Blues. Again, 30 years plus ago, so it has obviously changed over the years.
But because of that fundamental base and understanding, we have a lot of really great Blue's partners. And in terms of the specialty and medical specialty, we're the strongest, I think, in the field within the Blue's market already.
Now the combination of Anthem and CVS and - or all these other combinations you're referring to, all will still require this expertise in medical pharmacy. So yes, we do see a robust opportunity for these solutions that we feel we can provide uniquely in the industry.
Michael Baker
Thanks a lot.
Jonathan Rubin
You bet Michael.
Operator
The next question on the line is from Ana Gupte from Leerink Partners. Your line is now open.
Anagha Gupte
Hi, thanks, good morning. A couple of questions just on the earnings and the commentary on '18, and then I just have some other questions I'd love to get your perspective on.
The first one is, I think, you said on the Florida rates that the risk adjustment model is still not determined. And I have a recollection that it came in better than expected at one point in time.
And might that change your expectation of this modest growth rate or whatever in your net of that capitation rate adjustments for next year off of the $324 million to $334 million jump off.
Jonathan Rubin
Ana, it's Jon. A couple of things.
One, with risk adjusters, just by their nature, the risk adjusters themselves move with the population. So in a perfect world, the risk adjusters reflect changes from period to period in utilization.
Having said that, in terms of the - our best estimates of the model, we build our best estimates into our outlook that we gave high-level commentary on for 2018 and we're really not expecting any material diversion from that. So, while things can be higher or lower than we expected by small amounts, it won't impact the overall picture that it describes.
Anagha Gupte
And what is - would you say modest is kind of low single, mid-single? Off of that baseline?
Jonathan Rubin
I'm sorry, we're still finalizing the plan. So we're comfortable we'll have the modest growth.
But in terms of dimensioning it, you'll have to stay tuned. And again, in early December, we'll give a lot more detail.
Anagha Gupte
Okay, got it. All right.
Then a couple of questions I had just - as you look at your Complete Care and behavioral assessments, there's a lot of controversy right now around, firstly - the first question I had was just what are your thoughts around the Executive Order and what that does to essential health benefits? Does it weaken that?
And does it weaken the enforcement of mental health parity on a go-forward basis?
Barry Smith
Well, Ana, I'll address the second part of the question first. We think mental health parity has been in the marketplace for many years.
Much of that regulation is state-based, and so that really won't change given the federal initiatives and/or Executive Orders going forward. Relative to the impact on mental health parity or essential benefits, clearly, as health plans are approved through the legislation that is proposed or the Executive Order that Trump asked his agencies to consider, it will have an impact on some short-term policies that will last up to a year.
We think that those policies are typically designed for a portion of the population that likely would not be as focused on behavioral health. And we also feel that if someone did have someone with serious mental illness in the home, likely they would be looking at policies that were not those short-term policies.
They were more long-term oriented. So while we think that the legislation is intended to provide greater access to coverage by more individuals, particularly - in the individual market, we don't think it will have a major impact on our segment of the business relative to either Magellan Complete Care or the SMI population and the benefit for serious mental illness.
Anagha Gupte
And what about substance abuse? Maybe that's not the biggest thing for you, but would that weaken coverage, you think?
Which is probably not - it's more aligned with short-term policy type holders I would think.
Barry Smith
The recent announcement in terms of additional focus on the emerging terrible tragedy with opioid abuse and the taking of lives across this country, it's a huge issue. Now clearly, the President's direction and focusing attention is a great thing and we applaud him for doing that.
Clearly, the funding is the issue. And if you take a look at some alternatives from the other side of the House, you see some rather substantial requests for funding to address the opioid epidemic.
It won't be addressed in a robust fashion until it is funded. We do have unique capabilities and we do - we are part of the dialogue and are very happy to help - continue to help understand and also provide solutions that will help the population and hopefully legislation going forward.
As it stands right now, though, there is not a lot of incremental funding so, therefore, we think that the short-term impact will be minimal.
Anagha Gupte
Okay, great. Then one final one on behavioral, if I may.
On length of stay, we've been hearing controversial feedback from both the public and then some channel checks around privates and not for profits and they talk about pressure from managed Medicaid around length of stay. How do you see that?
Is that a trend? And can this continue?
And is it likely to have a natural floor somewhere? As a behavioral health provider, what are your thoughts and what are you seeing in the marketplace with your competitors and yourself?
Jonathan Rubin
Yes. Ana, this is Jon.
Other than potentially some isolated issues with competitors, we're not seeing anything. I mean, we're not seeing anything material at all.
Our length of stay, as we've managed it, has been pretty stable. And in fact, in some areas, we've been able to drive improvements.
So we really haven't seen that in our own book of business.
Anagha Gupte
Okay, great. Can I just switch to just pharmacy?
Can you give us your thoughts on the CVS-Aetna potential deal? I mean, I know it's hypothetical at this point, but what kind of value that would add in terms of drug pricing and/or utilizations, specialty pharmacy with the Aetna contracts or home health?
Future views or whatever, I guess, as you do this yourself.
Barry Smith
Well, Ana, I'll just share some global thoughts. And of course, your guess is as good as mine in terms of its likelihood and what this would mean.
When you take a look at a deal like that, you have to say that this is clearly a strategy to provide a benefit of a more complete healthcare delivery system that would include the ability to drive volume, not only to the pharmacy, but also to [mini clinics] and other services that would be outpatient-based. I think from that standpoint, it's a very interesting strategy.
And clearly, if you're not - if you don't have to invest in buildings to house patients that they can contract at a very - as Aetna does, at a very effective rate, a lower rate, it can be a very interesting play on outpatient care generally. In terms of its impact on specialty drug, clearly, CVS is a major player and has access to specialty drug medication management.
Again, from our standpoint, we don't know that it really changes the game much at all. People talk about Amazon, for example, getting into the business and others.
It's just the world today in flux. We just don't think that, that merger, if it happens, would have a major impact.
The reality is players like Aetna, players like Anthem, these are major, major entities that have massive buying capacity. And so they're not typically our clients in that - obviously, they dwarf our size and capabilities in terms of volume.
And so when you think about CVS as a provider in the pharmacy world, it means something maybe for the wholesalers. Clearly, they're so large.
If you think about Walgreens and CVS that they bypass the typical wholesaler system. And so it has more impact on the supply chain than I think it does on us as an independent PBM.
I think it's an interesting play and we'll be all very curious to see where it ends up.
Anagha Gupte
Great, that's most helpful. And one final one.
You alluded to Amazon. Would you see you as a PBM that perhaps even goes to risk or other captive PBMs wanting to partner with Amazon?
And if they chose to, what would the retailers do? Would they feel like they need to drop out to try to prevent Amazon and force a narrower network?
Or would this remain channel agnostic, you think?
Barry Smith
Well, first of all, I'm a big Amazon fan. And if you saw my doorstep, you'd see a lot of boxes inbound.
So I think what they do is tremendous. I do think it's fundamentally a different model.
They're tremendous in terms of supply chain delivery. And I think that's a great strength.
When it comes to partnerships with the existing entities out there, it's safe to say that everybody's talking to everybody and any potential larger player at all, to try to figure out how this fits together. I don't think that - Amazon clearly has great buying capacity, but so does CVS and so does Walgreens.
So from that standpoint, it really doesn't change the game materially for guys like us. We are clinically-based, focused on the cost of medications in terms of therapeutic - proper therapeutic use.
So we don't think that the entry of Amazon is inherently positive or negative. And in fact, in some ways, we can see it as a big positive for delivery and being able to get what we do to the client's home in a very express and cost-effective way.
So we just don't see that Amazon really impacts us. We do think Amazon has the - maybe the ability to impact larger pharmacy entities like CVS or Walgreens, but even there, I would think that Amazon would partner with them.
So who knows?
Anagha Gupte
Yes, very helpful. Thanks Barry, your perspectives are always useful.
Barry Smith
You bet Ana, thank you.
Joe Bogdan
Operator, this is Joe. Do we have any other questions?
Operator
Currently, sir, there are no further questions.
Barry Smith
Great. Well we thank you all for joining us today on our call.
We look forward to talking again and giving you our view of the first quarter of 2018. Good day.
Operator
And that concludes today's conference call. Thank you very much for your participation.
You may now disconnect at this time. Have a great day.