May 1, 2014
Executives
Kate Sidorovich - VP, IR Gary Lauer - CEO Stuart Huizinga - CFO
Analysts
David Styblo - Jefferies Tobey Sommer - SunTrust George Sutton - Craig-Hallum Capital Group Steve Halper - FBR Kevin Kopelman - Cowen and Company Jason Mitchell - Bank of America Merrill Lynch Adam Klauber - William Blair Hesham Shaban - Hedgeye
Operator
Good day ladies and gentlemen and welcome to the First Quarter 2014 eHealth Incorporated Earnings Conference Call. My name is Denise and I will be the operator for today.
(Operator Instructions). I would now turn the conference over to Kate Sidorovich, Vice President, Investor Relations.
Please proceed.
Kate Sidorovich
Good afternoon, and thank you, all, for joining us today either by phone or by webcast for a discussion about eHealth Inc's first quarter 2014 financial results. On the call this afternoon, we will have Gary Lauer, eHealth's Chief Executive Officer; and Stuart Huizinga, eHealth's Chief Financial Officer.
After management completes its remarks, we will open the lines for questions. As a reminder, today's conference call is being recorded and webcast from the IR section of our website.
A replay of the call will be available on our website following the call. We will be making forward-looking statements on this call.
That includes statements regarding future events, beliefs and expectations, including those related to the lifetime economics and profitability estimates for all members. Opportunities that we see now for core Medicare and IFP markets.
Our opportunity to scale our subsidy-eligible business, our expectations regarding the approval rates and applications submitted during the quarter. Our growth expectations and forecast for individual membership base, projected demographic trends and the impact on demand for Medicare products.
eHealth’s value proposition for young to seniors, the estimated lifetime value for our Medicare supplement products, the intended benefits of our relationship with Aetna. Our plans to work with strategic partners, the future financial impact of member application submitted in the first quarter of 2014.
Our estimate of the number of revenue generating our IFP members. Our belief regarding the impact of the Affordable Care Act to now a churn rate and current churn estimates for the first quarter for 2014.
Our expectations regarding submitted applications, marketing and advertising expense and revenue growth rates. Our estimates of various components of our membership and our 2014 guidance with respect to revenue, EBITDA, stock based compensation expense and earnings per share.
Forward-looking statements on this call represent eHealth's views as of today. You should not rely on these statements as representing our views in the future.
We undertake no obligation or duty to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in our forward-looking statements.
We describe these and other risks and uncertainties in our annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which you may access through the SEC website or from the Investor Relations section of our website. We will be presenting certain financial measures on this call that will be considered non-GAAP under SEC Regulation G.
For a conciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, please refer to the information included in our press release and in our SEC filings, which can be found in the about us section of our corporate website under the heading, Investor Relations. And at this point, I will turn the call over to Gary Lauer.
Gary Lauer
Thanks Kate. Thanks everyone for joining us today as we report our first quarter 2014 results.
The first quarter was another dynamic quarter for our Individual & Family Plan business but consumer demand on our eHealth platform fast escalating as we approach the end of the open enrollment period. As a reminder the first open enrollment period under the Affordable Care Act concluded on March 31 of this year.
With the exception of limited state and carrier specific deadline extensions. Similar to the fourth quarter of 2013 the volume of the Individual & Family Plan application submitted in the first quarter of this year exceeded our expectations.
We also observed strong demand for Medicare products offered on our platform which we believe was driven by favorable demographic trends and our successful execution in this important business area. Our first quarter margins reflect a meaningful year-over-year increase in marketing and advertising spend as a result of high submitted application volumes in both the individual and family plan and Medicare businesses.
As we did in the fourth quarter last year we made the decision to spend in a strong consumer demand and pursued membership growth at the expense of quarterly earnings based on the favorable lifetime economics we estimate for these members. What I would like to do today is summarize our financial results for the first quarter, discuss our performance of the second half of the open enrollment period and provide some pertinent metric for Individual & Family Plan business.
I will also make some comments about our Medicare business and what we’re seeing outside of the main Medicare selling season. First quarter revenues were $50.9 million and 18% increase as compared to the first quarter of 2013.
GAAP loss per share was $0.08, EBITDA was $700,000 and cash flow from operations was negative $5.4 million. Our balance sheet remained strong with $98 million in cash and no debt as of March 30, 2014.
During March our Board of Directors authorized a $50 million share repurchased based on the opportunities that we see in our core Medicare and Individual & Family Plan markets as well as for the adjacent business areas including private exchanges. Once our program is put into place we can begin repurchasing our shares in the open market.
Now I would like to discuss our Individual & Family Plan business. First quarter Individual & Family Plan submitted applications grew 34% compared to the first quarter of 2013.
Consistent with the first half of the open enrollment period less than 10% of submitted applications came from existing eHealth members applying for new plans. Importantly during the quarter we processed over 10,000 applications from subsidy eligible individuals as we worked through government exchanges.
While these applications represented just 5% of total submitted application volume for the quarter we see this as meaningful progress in our ability to assist subsidy-eligible consumers. I would like to note that the majority of the individuals enrolling into subsidy-eligible qualified health plans which are the plans they enrolled through with the subsidy on our platform during the first quarter required telephonic support.
We continue to push hard with healthcare.gov and states to create a more streamlined and online enrollment process for web-based entities like us and consumers which would allow us to scale our subsidy eligible business. Younger Americans once again represented meaningful share of eHealth applicants.
During the first quarter consumers between the ages of 18 and 34 accounted for 45% of individual selecting non-subsidized plan through eHealth. I would also like to note that we expect the approval rates on applications submitted during the quarter will be meaningfully higher than our historical rates given that the first quarter was the first quarter during which all of our Individual & Family Plan applications were for guaranteed issue products.
Interestingly first quarter demand was even more backend loaded than we originally expected. With 50% of total applications coming in the last two weeks of the quarter.
Due to a lag between the time an individual applies and is approved for policy and when eHealth receives it's first commission payment the majority of first quarter applications did not contribute to first quarter revenues or the estimated number of Individual & Family Plan paying members as of March 31. I would like to make some comments regarding retention within our existing book of business.
Based on the most recent data including commission payments that we have received from our carrier partners so far, our current estimate of churn for the first of 2014 falls well within the range that we assumed in our 2014 annual guidance which we had provided in our last earnings call. So we continue to forecast growth in our individual membership base in 2014 with new member inflow more than offsetting the estimated impact of churn.
I think it's important to note however that because consumer buying behavior matched to the open enrollment dates and because the next open enrollment period starts on November 15th and ends of February 15th of 2015, we expect to see strong membership growth from the open enrollment period they just completed to the end of the next open enrollment period. We’re pleased with the strong demand for the individual products on our platform during the quarter.
Given that we expense virtually all of our customer acquisition cost up front the exceptionally strong demand generated during the quarter resulted in a meaningful year-over-year uptick and our reported first quarter marketing and advertising cost and Stuart will provide more insight into our custom acquisition expenses later during this call. Now turning to our Medicare business, in the first quarter submitted applications for Medicare advantage products on our platform grew in excess of 80% compared to the first quarter of 2013, an applications for all Medicare products grew in excess of 100% for the same period.
As you know consumers are allowed to buy Medicare advantage and prescription drug plans when they turn 65 even if their birthday occurs outside of the annual enrollment period. And it's projected that over 3 million Americans will turn 65 years of age this year which could potentially drive significant demand for Medicare products outside of the fourth quarter annual enrollment period.
We believe that eHealth has an exceptional value proposition for these younger seniors with a broad offering of well recognized Medicare brands, consumer friendly online interfaces and highly trained customer care professionals ready to assist in finding the products that best meet the individual’s needs. We also saw a very good traction with our Medicare supplement products which have an estimated lifetime value similar to Medicare advantage and can be sold year around.
First quarter submitted applications for Medicare supplement products grew over 130% compared to the first quarter of 2013. First quarter 2014 total Medicare revenue was $14.3 million, a 41% increase compared to the first quarter a year ago.
First quarter Medicare commission revenues grew 49% as compared to the prior year. Finally during the quarter we continue to make progress in expanding our presence in the private employer facing [ph] exchange market.
In March we announced that our high profile business relationship in this area. eHealth is partnering with Aetna to provide health insurance solutions for employers transitioning their retirees from a group to individual coverage which is currently the largest segment of the private exchange market.
The relationship is well aligned with our go to market strategy it will give eHealth potential access to certain Aetna’s corporate customers. In conclusion, we’re pleased with our execution across our key business initiatives during the quarter.
We continue to pursue Medicare and Individual & Family Plan membership growth and our first quarter year-over-year membership growth across all product lines speaks to our success in these areas. The expected lifetime profitability of the new members we’re generating is very attractive as we’re laying down the foundation for future earnings growth and margin expansion.
I would like to note that we had achieved -- had we achieved the integration with healthcare.gov we were seeking during the open enrollment period and being able to do volume enrollments of subsidy-eligible individuals online the individual payment application growth might have been meaningfully higher in the first quarter than we have already experienced. While we processed over 10,000 applications for subsidy-eligible consumers we were not able to address a significant amount of demand we had for subsidized qualified health plan business.
That’s why creating an efficient consumer friendly experience for subsidy eligible consumers is a top priority for us this year. And our private exchange business we plan to work with our strategic partners on winning corporate accounts and starting initial technology deployments.
I’m enthused about the opportunities that we see for eHealth in this growing market and at this point I would like to turn the call over to Stuart.
Stuart Huizinga
Thanks Gary. Good afternoon everyone.
Our first quarter results reflect strong demand on eHealth platform across all major product areas including Medicare, Individual & Family Plan, and ancillary products as well as meaningful growth in operating expenses required to capture and convert this demand. Our first quarter 2014 revenue was $50.9 million, an 18% increase compared to the first quarter of 2013.
Commission revenue for the first quarter was $45.6 million representing 19% year-over-year growth. Commissions from Individual & Family Plan and ancillary products grew by 11% compared to Q1, 2013 while our first quarter Medicare commission revenue grew by 49% year-over-year.
Other revenue which include sponsorship, e-commerce on demand and non-commission Medicare revenue was $5.4 million in the first quarter, an increase of 8% compared to Q1, 2013. The increase was driven primarily by growth in technology licensing revenue.
Turning to membership metrics, our Individual & Family major medical plan submitted application volume grew 34% compared to the first quarter of 2013. As Gary mentioned at the beginning of the call this growth was very backend loaded and came in above our earlier expectations.
Based on our initial observation we’re seeing a significant increase in approval rates for Individual & Family Plan applications submitted during the quarter compared to historical levels reflecting the impact of the guaranteed issue provision of the Affordable Care Act. For example approval rates for application submitted in January were close to 8% compared to the high-50s to the low-60s percentage rates historically.
At the same time due to the backend loaded nature of the first quarter of application volume many of the application submitted during the quarter have not flowed through the approved member and paying member metrics that we reported for Q1 and are instead expected to positively impact our Q2 membership once we have received the initial commission payments. Our estimate of the number of our revenue generating Individual & Family Plan members was 800,000 as of March 31, 2014 up 8% year-over-year reflecting an increase as we expected in estimated Individual & Family Plan churn during the first quarter relative to our historical rates and the offsetting impact of new member inflow driven primarily by significant demand that we generated during the fourth quarter of 2013.
As a reminder our estimates of member churn are based on commission payments that we receive from insurance carriers since carriers don’t specifically report membership or cancellation to us. Typically our view of churn is based on a six month look back period, however given the significant changes that have occurred in our industry as a result of the Affordable Care Act, we have taken additional steps to make our first quarter churn estimates more current.
Specifically we incorporated more recent data than we normally would particularly around the transition from December 31, 2013 to January 1, 2014 the first date on which new plans became effective for members making a transition of pre-Affordable Care Act plans. Based on commissions we have collected year-to-date in 2014 we looked at the percentage of members for whom we had a commission payment in December that no payment in January and compare that to our historical sequential membership change between these two months.
As expected we saw an incremental amount of churn above historical levels between those dates and reflected that increment in our membership estimate as of the end of Q1. Based on our analysis our current estimate of the first quarter churn is well within our target range and we’re pleased with the results of the member attention efforts we have undertaken throughout the open enrollment period.
We believe that the impact of the Affordable Care Act on churn in our individual member base is most pronounced in the first quarter given the unique transition point from pre-ACA to ACA compliant plan that Q1 represented. At the same time we are not going to have a full view of churn that occurred during the open enrollment period which ended on March 31, until later in the year.
Our total estimated membership at the end of the quarter for all products combined was approximately 1.29 million members which represents 22% growth over estimated membership reported at the end of the first quarter of 2013. The estimated number of revenue generating Medicare members was a 111,700 up from 75,300 at the end of the first quarter of 2013 or an increase of 48%.
We estimated the number of members on ancillary and small business products was over 374,000 at the end of the quarter reflecting 56% annual growth. Now I would like to review our operating expenses for the quarter, during the first quarter we continued to pursue membership growth initiatives which drove our marketing and advertising and customer care and enrollment cost.
We also carried on with our planned investment in enhancing the enrollment experience for subsidy-eligible individuals and the development of eHealth’s private exchange capabilities as reflected in our technology and content expense. First quarter 2014 non-GAAP marketing and advertising expense which excludes stock based compensation expense was 44% of revenue compared to 33% in the first quarter of last year.
Our marketing cost are largely variable and are directly tied to application volumes each quarter. As I described earlier during the quarter we generated very strong submitted application growth in our Individual & Family Plan and Medicare businesses resulting in a meaningful year-over-year increase marketing spend.
The lifetime economics we estimate for our new members are very attractive. At the same time commission revenues from these members are recognized over the lifetime of each member well the acquisition cost or expense upfront as incurred.
This creates margin pressure during high application quarters all other things being equal. First quarter 2014 non-GAAP tech and content expense which excluded stock based compensation expense was 19% of revenue up from 15% of revenue in Q1, 2013.
During the quarter we continue to invest in website enhancements, improvement of the online enrollment process for subsidy-eligible consumers and have also begun to step up our private exchange spending. First quarter 2014 non-GAAP customer care and enrollment expense which excludes stock based compensation expense was 19% of revenue up from 16% of revenue in Q1, 2013.
The year-over-year increase reflects our decision to retain a larger number of our customer care professionals following the conclusion of the Medicare, annual enrollment period which ended December 7, of last year. This decision was driven by higher demand for Medicare products than we expected to see outside at the annual enrollment period and also by our initiative to provide a solution for subsidy-eligible consumers shopping for non-Medicare Individual & Family Health Insurance products on our platform.
Because we’re not well integrated with the government exchange as yet these individuals required significant telephonic support from our customer care representatives. Higher spend in these areas was slightly offset by the decline in cost of revenue and G&A as a percentage of revenues compared to the first quarter year ago.
First quarter non-GAAP operating loss excluding stock based compensation and the amortization of acquired intangibles was $300,000 compared to non-GAAP operating income of $5.9 million in the first quarter a year ago. EBITDA for the first quarter of 2014 was $700,000 compared to EBITDA of 6.6 million for the first quarter of 2013.
First quarter of 2014 non-GAAP earnings per diluted share was $0.01 compared to non-GAAP earnings per diluted share of $0.17 in the first quarter a year ago. First quarter a year ago, first quarter 2014 GAAP loss per diluted share was $0.08 compared to GAAP earnings per diluted share of $0.11 in Q1 of 2013.
Our cash flow from operations was negative $5.4 million compared to negative $500,000 in the first quarter of 2013. Capital expenditures for the first quarter of 2014 were $1.1 million in addition during the quarter we paid approximately 4.5 million in cash to purchase an important internet domain name Medicare.com.
Our cash balance was approximately $58 million at March 31, 2014. In respect to guidance and based on information currently available we’re reaffirming the revenue, EBITDA, stock based compensation expense and earnings per share guidance for the full year 2014 that we provided on our fourth quarter of 2013 earnings call.
I also want to make a few comments on certain sequential trends we expect to see this year. In our individual business we expect that submitted application volume will decline in the second and third quarters both on a year-over-year basis and relative to the first quarter of this year.
Only certain consumers will be allowed to buy Individual & Family major medical insurance products outside of the open enrollment period. In order to do so they must have experienced qualifying trigger events which include income fluctuations that impact subsidy-eligibility, birth of a child and certain other changes in their life situation.
However the majority of consumers in the individual market will have to wait until the next open enrollment period which is expected to start on November 15, 2014 before enrolling into a new policy for the following year. Consequently we expect a significant sequential step up in demand for individual products in the fourth quarter compared to the second and third quarters.
In the Medicare business we expect to see strong annual growth in submitted applications for the rest of the year driven by continued favorable demographic trends of seniors aging into Medicare and our growing presence in this important market. Of course the volume of applications in non-annual enrollment period quarters will continue to be meaningfully below expected fourth quarter levels when the annual enrollment period takes place.
Based on these expectations for quarterly demand fluctuations we believe that our marketing and advertising expense will hit it's highest level in the fourth quarter followed by the Q1 and we will decline meaningfully in the second and third quarters relative to the first quarter levels. Given the recurring nature of our commission revenues we expect to see relatively similar annual revenue growth rates in all quarters of 2014.
I will remind you that these comments as well as our annual guidance are based on current indications for our business which are subject to change at any time. We undertake no obligations to future update our guidance.
And now I would like to open up the call for questions. Operator?
Operator
(Operator Instructions). Our first question comes from David Styblo with Jefferies.
Please proceed.
David Styblo – Jefferies
First one just a housekeeping is, is when can begin your share repurchase program?
Gary Lauer
We do under the auspices of 10b5-1 program which is going in the place currently and it is typically a cooling off period. So you’re 30 to 60 days out.
David Styblo – Jefferies
From today?
Gary Lauer
Correct.
David Styblo – Jefferies
Okay. Then more at the heart of the matter here, in terms of IFP and all the moving parts going on.
I guess that would have -- I understand there is going to be a strong spillover into the second quarter, should we expect. Is there any sort of guidance you can provide us and where membership should actually fall out?
Stuart Huizinga
Well I think the only guidance to give there is just like to our annual guidance for revenue. We kept that consistent with what I gave last quarter which is at the midpoint 17% growth for our total revenue for the year and IFP makes up more than 70% of our revenue.
So I think that would give you just a general sense of membership growth for the year but also know that we expect to see our commissions for member on new sales as well. That is also bolstering that growth.
Gary Lauer
It's also important to notice as we said that over 50% of these Individual & Family Plan applications transacted in the last two weeks of the quarter and as you know there is a lag between the application but we actually have a member so that would impact membership you saw in the first quarter and then new quarters after that.
David Styblo – Jefferies
Okay so to think about those, that surge, those folks would be generally under the guaranteed issue. We would expect a higher conversion rate of something upwards of 80% on that base?
Stuart Huizinga
Yes that’s right, we saw in January the first kind of full month of conversion that we have in-house.
David Styblo – Jefferies
Okay. And then kind of stepping back rolling forward from the fourth quarter to the first quarter I guess I would have thought that maybe all of the submitted apps that happened in December and late in the year would have benefited you perhaps but little bit more since your churn was more within your expectation.
Can you help us reconcile the surge that happened at the end and perhaps why we didn’t see as much of that flow through to membership in this first quarter?
Stuart Huizinga
Sure. Yes, the Q4 applications were not as backend loaded as we saw in Q1.
We saw a surge in applicants at the beginning of the open enrollment period October 15, and then another peak in December but it was more even throughout the quarter and so Q4 benefited to a greater extend from a timing standpoint than what we just saw in Q1. There is much more severe backend loading in Q1.
So in another words I guess we got more of the benefit during Q4 to our membership and less of a spillover effect than we expect to see here in Q1 into Q2.
David Styblo – Jefferies
Okay. And then lastly, I hope I didn’t miss this but could you get into why membership and Medicare declined sequentially?
Stuart Huizinga
I didn’t make a specific statement but if that’s the function of the annual enrollment period for Medicare, most of the volume happens in the annual enrollment period and members sign up for annual policy and so people that we lose from that pool of consumers that are in the renewal phase in annual enrollment period we will lose them, to the extent we do lose the member. It's going to be a January 1, that we lose those.
So Q1 is the biggest quarter of the year for churn.
David Styblo – Jefferies
Okay so that wasn’t a surprise, that’s what you expected.
Stuart Huizinga
No.
Gary Lauer
Yes.
Operator
Our next question comes from Tobey Sommer with SunTrust. Please proceed.
Tobey Sommer - SunTrust
How is eHealth ranking in search for Medicare now and what would you expect the purchase of Medicare.com to do -- take advantage of those 3 million Medicare people becoming Medicare eligible? Thanks.
Gary Lauer
Well, I’m not looking currently but we are typically ranking well during the annual enrollment period. Medicare.com is a really important property which we were frankly delighted to be able to acquire.
Obviously the government exchange is healthcare.gov and in fact if you go to Medicare.com you will see that it's operated by us and in fact we have been running it now for several weeks. Although we weren’t running it -- even with those strong application growth volumes that we have in the first quarter, most of that was without Medicare.com.
That’s a very recent acquisition and something we just started. That certainly -- we think that’s going to have some really positive impact of this Medicare business throughout the year as well as during the annual enrollment period and I can’t tell you at the moment where we’re ranking in Medicare but we certainly source a growing volume of applications from search.
As Medicare.com is going to help us significantly there as well.
Tobey Sommer - SunTrust
Just a housekeeping detail, you mentioned the purchase price but I didn’t quite catch it, could you repeat that for me?
Stuart Huizinga
Yes it's 4.5 million in cash and $300,000 of forgiven [ph] receivable from them.
Tobey Sommer - SunTrust
And then from a lifetime perspective of your customers, have you noticed any changes in the duration of how long the customer wise is -- I know that’s an integral part to the business model and the economics. Thanks.
Stuart Huizinga
I think it's too early to report anything on the lifetime. You said the lifetime of the member?
Tobey Sommer - SunTrust
Yes, correct.
Stuart Huizinga
I think it's too early to see that. I think that we’re expecting to see somewhat of a slowdown in the initial churn that we normally would see in the early months just given the open enrollment periods that people would more readily hold their products from open enrollment period to open enrollment period.
But then there would be larger churn after year one, when you hit that open enrollment period. So much moiré like Medicare.
That’s our expectation.
Tobey Sommer - SunTrust
With the open enrollment period dates for next year, are we going to see a shift in your seasonality where the higher marketing expense and application volume is likely to be kind of in the January, February period? I know it's a little bit far away and it's a change but just wondering what your updated thoughts might be on the change to seasonality as a result of those dates?
Stuart Huizinga
We think it will probably be both quarters. We think we will see a surge of people in fourth quarter who are looking for calendar year, no gap in coverage.
We want to make sure they have a January 1st coverage date but then also we could see a surge in the first quarter as more people come in to meet the mandate. Some of the penalties get larger next year and we may see more people coming in for that.
Gary Lauer
So what we saw on this open enrollment period was interesting, really the first wave of enrollees in the first 90 days which was October 1 to December 31 where people who really had pent up demand to get in, had chronic conditions, couldn’t previously because of the guaranteed issue, were typically older and in many cases just were anxious to enroll. Then what we saw in the first calendar quarter which was the second half of the annual enrollment period, January 1st to March 31st was consumer behavior that we frankly thought was even more pronounced than we were expecting it to be but we thought it could be which was that consumers procrastinating and waiting right towards the end.
Tobey Sommer - SunTrust
And then my last question, I will get back in the queue, is kind of a broader one. You have had two quarters with significant growth opportunities and you have spent to take advantage of that growth.
The market is dynamic and you could be confronted with several more quarters in that regard. Are you comfortable that you’re going to be able to respond to the changes in growth opportunities and still kind of preserve the EBITDA that you’ve conveyed to us here today?
Stuart Huizinga
That’s why we made some of the comments about the seasonality we expect in between open enrollment periods. We would expect our marketing to decline fairly significantly in Q2 and Q3 relative to Q1 and Q4.
And so yes, we still need to see the seasonal patterns play their way out but our best estimates right now obviously trend towards the EBITDA numbers you put out there.
Operator
Our next question comes from George Sutton with Craig-Hallum. Please proceed.
George Sutton - Craig-Hallum Capital Group
I wondered if you could talk about your conversion rates during the quarter relative to your expectations. It would appear that the traffic was very good and that you didn’t bring all those folks in and I’m assuming part of that is or large part of that maybe the subsidy-eligible portion?
Gary Lauer
George, we’re pleased with the conversion that we saw especially with the non-subsidy-eligible. We have been disappointed right from the beginning and healthcare.gov’s ability to be able to allow us to connect in an online fashion.
Frankly, we (indiscernible) rig some things and got creative which allowed us to enroll over 10,000 subsidy-eligibles. But we did most of that in kind of a sudo [ph] phone online way.
We’re working with and pushing hard right now to connect so that we can have an online experience for subsidy-eligible consumers that’s like what non-subsidy-eligible people get. I think I’ve made the comment had we had that capability we think we could have seen a much higher conversion rate on a per unit basis so a much more favorable cost of acquisition.
We had a very large volume of subsidy-eligible consumers coming to us and sadly we couldn’t address their needs and I say sadly for a couple of reasons, one they want to get coverage and we can do it expeditiously and secondly every time we do it, it doesn’t cost tax payers money. Every time it's done on a government site it cost tax payer money and it's just among other things.
We just don’t think that’s the best way for the government to be spending money. We can be helping here and we’re pushing on it and we’re hearing the right things but they are still very challenged from a technology standpoint.
So on the conversions to summarize it, we very much like what we saw with the non-subsidy-eligible population, especially the age demographic, 45% of these people are 18 to 34 years of age. What we’re seeing reported by government is some place around 25%.
This is the most sought after demographic, this is the real sweet spot of what keeps everything in balance and we could have made a very significant contribution to that. We think with subsidy-eligible as well.
But we like what we’re converting and we think there is a lot of headroom to have much better conversion here as well.
George Sutton - Craig-Hallum Capital Group
And I’m curious how you’re going to be running the ancillary part of the business during these off seasonal periods? It would seem like that may get more of a focus in those periods but I’m curious how that might change the way you run that part of the business.
Gary Lauer
It's a good question because the ancillary products dental, vision and accidents do not come under the auspices of the Affordable Care Act interestingly. So you can buy them at any time.
And that’s become a very important business for us, it's a really good margin generator. It's one that we’re being very aggressive about and have been like the Medicare business as well.
So there is a lot of business activity for us outside of the individual open enrollment period and that’s this ancillary products and the Medicare products.
Stuart Huizinga
I think I will also add that short term product seem to be attractive to people in the offseason. Short term products also fall outside of the ACA and I think some people have probably woken up and found out that they should have done something, didn’t do something when they could have during OEP and I think for many people that’s the solution at least kind of a stop gap solution.
Typically we have seen people hold on to those plans for only 3 to 4 months but in the new environment they may hold on to it out through the open enrollment period for a longer lifetime that usual.
George Sutton - Craig-Hallum Capital Group
Lastly for me you mentioned that you were working with partners on the SMB opportunity that exchange, can you give us a sense of the types of partners you’re working with and how broad you’re working with them?
Gary Lauer
We think the private exchange business as we have commented previously is going to be a really I think interesting new business category in this industry and in this market place. Through Aetna and another partner we’re going after the transition of retirees.
We’re doing it for few others, we’re working with Aon right on part-timers and contract employees. We have got several of their smaller partners where we are to be going to the small business environment which I think is going to be a really interesting one.
The employer mandate for the Affordable Care Act which goes into effect January 1st of 2015 does not apply to businesses with less than 50 employees. We think many of these businesses may choose to just fund their employees to buy individual products.
We like the idea a lot of being able to provide them an exchange to make this really efficient and quite simple for them. So we got a and I think we got, we got a multiple of initiatives underway in this area and there is a lot of interest in it and not just in the part of partners but potential business consumer and customers as well.
Operator
(Operator Instructions). Our next question comes from Steve Halper with FBR.
Please proceed.
Steve Halper - FBR
So I just want to clarify the statement around the second quarter and third quarter, you said that individual IFP applications, the growth would be negative year-over-year and sequentially? Is that accurate?
Stuart Huizinga
That’s correct.
Steve Halper - FBR
If you look at Q2, it will be down year-over-year versus Q2 a year ago?
Stuart Huizinga
That’s correct.
Steve Halper – FBR
And then Q3 will be down versus Q3 a year ago?
Stuart Huizinga
That’s correct.
Steve Halper – FBR
And both of those Q2, Q3 will be lower than the Q1 submitted application number?
Stuart Huizinga
That’s right.
Gary Lauer
And Steve the reason for that is that you cannot buy a total care compliant plan outside of the open enrollment period.
Steve Halper - FBR
But does that apply to non-subsidized individuals?
Gary Lauer
Yes.
Steve Halper - FBR
And is that really the result of health plans, you’re pulling out of the market basically during that plan because of the risk pull that because is that the way to think about it?
Gary Lauer
No it's the law. What the Affordable Care Act requires very simply is that you can purchase these product whether your subsidy-eligible or not, the compliant products during the open enrollment period.
Outside the open enrollment period it's called the special enrollment period, SEP and to qualify there you got to have a life changing event, divorce, birth of a child, moving from one state to another, so just a few exceptions. That’s why the vast majority of this business and the spend that we have been talking about is going to occur during this open enrollment periods.
Steve Halper - FBR
So just driving down, so your spend on the marketing side will be lower in the two quarters, which is going to drive the bottom line and you will get that pick up in applications and beginning November 15, it will drive and obviously your operating expense will be higher. So even though you don’t get the full benefit of the revenue in Q4 and earnings will can just put the pieces together right?
The fourth quarter earnings number will be -- should be lower than the second and third because of the high acquisition cost and then you get the benefit of the higher membership beginning in 2015? Am I thinking about that all right?
Stuart Huizinga
You’re thinking about that right.
Operator
Our next question comes from Kevin Kopelman with Cowen and Company. Please proceed.
Kevin Kopelman - Cowen and Company
I was wondering if you can give us any more color on trends in commission revenue per member and what you’re expecting going forward there and if you could help us think about that in terms of Medicare members and also IFP and other kind of separately? Thanks.
Stuart Huizinga
Yes, but we’re expecting but it's still early but we’re seeing a fairly significant increase in premiums as I think everyone expected year-over-year. We benefit from that to a certain extent, little bit over 50% of our carriers pay us a flat fee and a little less than 50% pay us on a percentage of premium.
So as those premiums go up we do benefit from a portion of that. So we do expect our commission per member on new members that we’re selling to increase this year.
Kevin Kopelman - Cowen and Company
Okay and on Medicare?
Stuart Huizinga
On Medicare at this point I expect things to be fairly stable with what we have seen in the past.
Kevin Kopelman - Cowen and Company
And if you had to translate the new individual kind of how you expect that to play out as a percentage, what do you think you’re kind of effective commission rate would be?
Stuart Huizinga
I would say flat to up over the year, it's what we’re projecting. We’re talking about per approved and paying member.
I also want to just for others sake mention that this close ratio is definitely making each submitted application more valuable to us than it's been in the past. As we move from what I described as mid-50s to 60% close ratio, it's upto a 80% on that we have seen roughly, a 30% to 35% increase in the value of a submit, just based on that close ratio change and then we’re attacking on a little bit of a premium increase as well.
Gary Lauer
And so when you think about effectively what we’re spending on a per unit basis per cost of acquisition we’re getting a much more attractive conversion rate there and an improved cost of acquisition which frankly we had anticipated because of the guaranteed issue provision [ph] that’s in the Affordable Care Act.
Kevin Kopelman - Cowen and Company
I mean you say January that’s mostly reflective of the people who are submitting at the end of December and then--
Stuart Huizinga
No, actually when I say I’m lagging things back to January submits. So I’m talking about January submits and what percentage of the January submits we have seen close.
Gary Lauer
We like 80%, that’s a very healthy close ratio.
Kevin Kopelman - Cowen and Company
And then just a question on expenses on G&A, I’m not sure if you mentioned it but it kind of went up little bit quarter-over-quarter and I think last year there were some onetime things and was there anything onetime in there this year?
Stuart Huizinga
No. I can’t think of anything onetime.
Q1 is a little bit elevated because that’s when the annual audit is done and that’s a fairly significant chunk of G&A. But that’s just year-over-year that doesn’t really change things a whole lot but sequentially it definitely does.
Operator
Our next question comes from Nat Schindler with Bank of America Merrill Lynch. Please proceed.
Jason Mitchell - Bank of America Merrill Lynch
This is Jason Mitchell here for Nat Schindler. I was just curious as the Affordable Healthcare website kind of improved over the course of like last three months, did you see any change in your traffic applications coming to website and from the applications you got the last three months where a lot of those current customers switching to Affordable Healthcare or ACA complaint plans or mostly new customers?
Gary Lauer
Well I will just start with healthcare.gov, all I can tell you is we saw record volumes coming to us during the last three months compared to any other period like that in terms of consumers visiting the site, what we call quoted sessions when someone actually looks at a product applications I mean all the way through and I think most interestingly is that we saw very large volume of subsidy-eligible people coming to it there as well. The only place they can really get this subsidy was on healthcare.gov although as I indicated we engineered some ways to be able to help people and got over 10,000 of them enrolled or at least submit with their applications and presumably enrolled.
So there is clearly and I’ve been saying this for several years, there is a new competitor in the marketplace and that’s government with government exchanges. We certainly haven't seen anything that has been in any way upsetting to our business, its just the opposite.
We think the Affordable at work -- the beneficiary of the Affordable Care Act and that’s one out in the volumes that we see here and we just keep working every day to make the consumer experience the interface better.
Stuart Huizinga
And on your second question the submitted applications less than 10% of our submitted applications were from current members.
Jason Mitchell - Bank of America Merrill Lynch
Just on the private exchanges, how did the economics workout for those exactly? Is it still the same where you’re getting a commission fee for the -- planning to go through those private exchanges?
Gary Lauer
I would characterize the partnerships we have today as commission based with, yes the commission rates that we enjoy with the products that we just sold them one on one. Typically the arrangement is that we will do some kind of a commission share with the partner but we will take the gross commission as revenue and then there is a cost of revenue which is the commission share.
And I wouldn’t take them at -- everything we do in the future is going to be situated that way but that’s how they are currently and that’s what most of the discussions that we’re having.
Operator
Our next question comes from Adam Klauber with William Blair. Please proceed.
Adam Klauber - William Blair
Couple of questions, I’m not sure if you said this but was there any traction on the TurboTax relationship and how much was that hindered by execution issues with the federal hub?
Gary Lauer
Yes we had some traction with Intuit and as you might imagine we have been working very closely with them right to April 15th and after as well. A number of the Intuit consumers that we would be introduced to like other partners maybe subsidy-eligible.
So the impact there is on the subsidy-eligible portion of that segment and how we can help them and we focused a lot of our efforts on some of those partner subsidy-eligible people that are part of those 10,000 that we enrolled. I just want to be clear.
We have got to get these better connection with these government exchanges. It's not us it's on the government exchanges that the technology there just doesn’t -- what it needs to be for us to be able to connect.
We’re hopeful and optimistic with many of them including healthcare.gov that we’re going to have a connection before this next open enrollment period so we can do this the way people want to do it when they come to us which is online and that would certainly pertain to Intuit.
Adam Klauber - William Blair
And just a follow-up on that, for the deadlines for (indiscernible) to be up and running is more like mid-summer. How are they doing on the intermediate deadlines?
Are they doing better than the last contractor?
Gary Lauer
I’m just not qualified to talk about that I don’t know. We have got our own focus which is just to connect into them from a -- with the right plumbing so that this will all work but I just can’t speak to where they are within any of this.
I don’t any more than what anybody else knows from what they read and so on.
Adam Klauber - William Blair
As you mentioned that churn was elevated but within the range of what you expected for the first quarter. With the first quarter being so busy, can we expect an elevated level of churn in the second quarter also?
Stuart Huizinga
I expect that churn would likely slowdown in the second quarter on an ongoing basis until the next OEP. We could see a little bit of churn off of just the straggling completion of Q1 but all-in-all I would expect it to slowdown.
Gary Lauer
You know this is an important point that we have made here about churn and the way we calculate it. What we talk about here and what we look at is internally is product churn and product retention, not necessarily member churn or member retention.
So we will give you an example, somebody who make churn off of a product and will actually look at that and will essentially report that in some of our metrics but they made churn off a product and by another one underneath this. So the product churns but we don’t lose the member.
In theory and let me emphasis in theory, in theory over the next six months there shouldn’t be as much of that because you can’t churn off a product and then go by another one because the Affordable Care Act won't allow you to do that until the open enrollment period. So in theory we should have less churn in that category of retention and in theory we should have more demand coming November 15th, for those who do want to churn out of the product who are holding into a new one but don’t want to lose coverage.
If you churn off a product today, if you’ve got a compliant product you start making payment you terminated, you’re going to go uninsured. You can’t go get another product unless you qualify for one of the special enrollment exceptions if you will which is divorce, birth of child or moving from one state to another.
So we think theoretically that that’s going to have a positive impact on the kind of churn we have seen traditionally?
Operator
Our next question comes from Hesham Shaban with Hedgeye. Please proceed.
Hesham Shaban - Hedgeye
So I know it's a little early in the year to be asking this but the MCOs are expected to start submitting raise for 2015 and I’m wondering if you’ve had any conversations with them regarding rates for next year?
Gary Lauer
Are you talking about the actual premium prices?
Hesham Shaban – Hedgeye
The MCOs are going to be submitting their premium prices but I’m wondering if you’ve had any conversations with them regarding rates, commission rates for 2015 on the IFP product?
Gary Lauer
Historically commission rates have not changed on an annual basis. The only significant change we have ever experienced was a result of the mandate in the Affordable Care Act in 2011 when the medical loss ratio was required to be 85% on these products and we had a roughly a 35% commission reduction as a result of that.
There were some expectation that we may see commission rates change coming into this first open enrollment period and as we commented in our last earnings call and I think Stuart reaffirmed it today, our commissions are flat to up compared to a year ago. We have no indication of any commission rate changes coming up, we think this is already built in and assumed in the medical loss ratio that the carriers operate with.
We have contracts with most of them. Many of them are month to month, some of them are longer term but we certainly don’t anticipate any significant changes and I can tell you that we’re not in discussions currently about any kind of changes on commission rates at all.
Operator
We have no further questions. I will now turn the call back over to Gary Lauer, CEO for closing remarks.
Please proceed.
Gary Lauer
Sure. I would just like to thank everyone for the time today and look forward to talking with many of you over the next coming days and weeks.
Operator
This concludes today’s conference. You may now disconnect.
Have a great day.