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Magellan Health Inc (MGLN)
Q1Â 2019 Earnings Call
May. 02, 2019, 7:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Welcome and thank you for standing by for the First Quarter 2019 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 let's turn the meeting over to Joe Bogdan.
Joe Bogdan -- Senior Vice President, Corporate Finance
Good morning, and thank you for joining Magellan Health's first quarter 2019 earnings call. With me today are Magellan's Chairman and CEO, Barry Smith; and our CFO, Jon Rubin.
The press release announcing our first quarter earnings was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through June 2nd, 2019. The numbers to access the replay can be found 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, Thursday, May 2nd, 2019, 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 2019 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 cost 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 1st, 2013, to exclude non-cash 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 financial measures.
I will now turn the call over to our Chairman and CEO, Barry Smith.
Barry M. Smith -- Chairman & Chief Executive Officer
Thank you, Joe and good morning everybody. In today's prepared remarks, I will summarize the financial results for the quarter provide an update on our margin improvement plan. Share our perspective on the current regulatory environment and comment on the recent settlement agreement with Starboard. Where the first quarter of 2019 we reported net revenue of $1.7 billion, net income of $0.4 million and EPS of $0.02. Our adjusted net income was $9.6 million and adjusted EPS was $0.40 and we achieved the segment profit of $45.6 million. Overall our healthcare results were solid and our pharmacy results for the quarter were impacted by some unfavorable out of period and timing items related to network costs.
Given the non-recurring nature of the items affecting pharmacy this quarter we believe we're still on track to achieve our full year earnings target. We are affirming our 2019 earnings guidance ranges, but modestly lowering our revenue guidance to a range of $7 billion to $7.2 billion. John will provide more details on the first quarter results and our 2019 guidance later in the call. As a Company, we remain focused on our multi-year margin improvement plan as initially outlined this past December. During the quarter, we made progress in each of our three major initiatives in healthcare, pharmacy and at the enterprise level.
Our long term goal is to increase our adjusted net income margin to over 2%. Within our healthcare segment, we continue to strengthened our managed care fundamentals by lowering our cost of care while improving quality. In Magellan Complete Care of Virginia, we made progress with our care initiatives including the appropriate utilization of behavioral health outpatient and physical health inpatient services. Our claim payment integral reviews are also providing recovery opportunities. Overall, we reported MLR in the mid 90s, consistent with our Medical Action Plan.
In Magellan Complete Care of New York, we posted a small profit in the quarter and we expect further improving margins for the remainder of the year as we realize the benefit of anticipated rate increases, quality incentive payments and care management initiatives. As we mentioned in the fourth quarter call we are continuing to dialogue with the state regarding a potential retrospective risk adjustment for the state fiscal year and at March of 31st, 2019. Finally, our behavioral and specialty health portfolio performed well with care management in line with our expectations.
In our pharmacy segment, we continue to focus on the retention of our specialty carve-out contracts, growing our PBM and lowering our cost of goods sold. Let me provide you with some additional depth on each of these items. Our new comprehensive sales approach to selling our carve-out specialty pharmacy solutions is resonating in the market and helping us build deeper relationships and create more savings for customers. This includes bundling services such as medical pharmacy with formulary management and leveraging our clinical expert network to support clients with rare disease management. We're pleased that our work to solidify the specialty carve-out book of business is on track.
In addition our PBM posted a record number of new members through sales at the start of 2019. While the previously announced loss of the health plan customer due to an acquisition in our planned reduction in Medicare Part D resulted in a sequential decline in total net membership. We believe that our PBMs level of service, flexibility and clinical expertise will continue to fuel growth.
Finally, we are continuing to improve the cost of goods sold for our pharmacy customers. We recently executed a new drug wholesaler deal effective April the 1st and are finalizing negotiations with our major retail network pharmacies to improve supply chain economics. From an enterprise perspective, we remain committed to driving continuous operational improvements for administrative efficiency. We are realizing these savings through both organizational redesign and process optimization. For example, we flatten the organization by increasing span of control a consolidated customer care teams to leverage best practices and increased scale.
From a technology perspective, we've also been active. For example, we've enhanced quality monitoring systems promote first call resolution and to eliminate rework in support areas. We've also improved our workforce management system for our resource planning and forecasting and increased self-service on calls and Web tools for both providers and members. We are confident that these efforts will help us to remain competitive and contribute to our multi-year margin improvement plan.
With a start of the presidential campaign, we believe Medicare for all, but remain an issue, but not likely to congressional legislative initiative. We are concerned over the disruption that some of the proposals would cause, but we share the common objective that all Americans should have access to affordable and comprehensive health insurance. At this point, we do not expect any material impact on our operations for the foreseeable future. Congress in the White House have also given a great deal of attention to the issue of high drug costs and drug pricing. We believe the current proposals do not address the fundamental issue
of high drug prices, which will result in significantly increased cost based on CMS's estimates and faced a difficult legislative process. As a result, we expect any near-term changes to be modest. On March the 29th, we announced an agreement with Starboard Value regarding the composition of our board of directors and creation of a Strategic Committee of the board. The committee is working with management toward the goal of creating an incremental share value -- shareholder value. Relative to board composition under the terms of the agreement four new independent directors joined the Magellan Health Board in March. Following the annual meeting the board also intends to decrease its size From 13 down to 10 directors. Our four new directors, were in financials, operation, technology and healthcare experience that we believe complement our existing board and we are already benefiting from their perspectives and contributions.
In addition our directors Matt Simas, Eran Broshy and John Agwunobi notified the company of their intention to retire from the Magellan board as of the Company's upcoming 2019 annual meeting on June the 21st. I want to personally thank Matt, Eran and John for their dedication and service to Magellan. I'm pleased with the continued focus of our leadership team and our progress to date on our multi-year margin improvement plan. I remain confident in our mission our team and our ability to deliver sustainable growth and value creation over the long term.
I'll now turn the call over to John to provide a more detailed financial review of the quarter. John.
Jonathan N. Rubin -- Chief Financial Officer
Thanks, Barry, and good morning, everyone. For the quarter revenue was $1.7 billion which represents a decrease of 3.6% over the same period in 2018. This decrease was mainly driven by our MCC Florida and Medicare Part D footprint reductions as well as a previously discussed PBM healthplan contract loss due to an acquisition, partially offset by growth in MCC of Virginia and new PBM employer business.
Net income was $0.4 million and EPS was $0.02, this compares the net income an EPS of $11.5 million and $0.45 respectively for the first quarter of 2018. Segment profit was $45.6 million for the first quarter compared to $55.6 million in the prior year quarter. Adjusted net income was $9.6 million and adjusted EPS was $0.40. The adjusted net income decreased $11.2 million from the first quarter of 2018 mainly due to lower segment profit and a higher effective income tax rate.
For our healthcare business segment profit for the first quarter of 2019 was $45 million. Segment profit decreased $0.9 million versus the first quarter of 2018 driven by the MCC Florida footprint reduction and lower margins in New York partially offset by margin improvements in Virginia. Turning to pharmacy management we reported segment profit of $8.3 million for the quarter ended March 31st, 2019 which was a decrease of $7.2 million from the first quarter of 2018. This year-over-year decrease was primarily driven by specialty formulary management contract losses, non-recurring items, and lower PBM membership.
I had note that pharmacies first quarter segment profit includes $8 million of normal unfavorable seasonality in our Part D business, $3 million of accruals for prior year network guarantees and $3 million of accruals for 2019 network guarantees which we expect will reverse later in the year. Regarding other financial results corporate costs inclusive of eliminations, but excluding stock compensation expense totaled $7.7 million compared to $5.8 million in the prior year's quarter
This change was largely due to lower discretionary benefit expenses in the prior year quarter. Excluding stock compensation expense and changes in fair value of contingent considerations. Total direct service and operating expenses as a percentage of revenue were 15.1% in the current quarter compared to 14.5% in the prior years quarter. This increase was also largely due to lower discretionary benefit expenses in the prior year quarter. Stock compensation expense for the quarter ended March 31st, 2019 was $9.6 million an increase of $2 million from the prior year's quarter.
The change is primarily a timing issue related to vesting of certain equity awards. The effective income tax rate for the quarter ended March 31st, 2019 with 56% compared to a 1% tax benefit rate for the prior year's quarter. The tax rate for the first quarter of 2019 is higher than the federal and state statutory rates primarily due to book-to-tax differences in stock compensation expense. Income tax for the prior year was materially impacted by the stock options exercised during the first quarter of 2018. We anticipate the 2019 full year tax rate will be approximately 30% as book-to-tax differences in stock compensation become proportionately smaller with the anticipated growth in earnings.
Our cash flow from operations for the quarter ended March 31st, 2019 was $35.4 million versus $81 million in the first quarter of 2018. The prior year's quarterly cash flow was unusually high due to the favorable timing of working capital. As of March 31st, 2019, the Company's unrestricted cash and investments totaled $194.9 million which represents an increase of $64.5 million from the balance of December 31st, 2018 primarily due to the collection of certain outstanding receivables approximately $88.4 million of the unrestricted cash investments at March 31st, 2019 is related to excess capital and undisputed earnings held at regulated entities.
Restricted cash and investments at March 31st, 2019 of $468.8 million reflect a decrease of $58.8 million from the balance at December 31, 2018 due to timing. During the quarter we repurchased approximately 61,000 shares for $3.7 million dollars. As Barry noted, we're maintaining our 2019 earnings guidance as follows. Net income for 2019 in the range of $52 million to $79 million which equates to a diluted EPS range of $2.14 to $3.25. Adjusted net income in the range of $90 million to $114 million and then adjusted EPS range of between $3.70 and $4.69 and segment profit in the range of $270 million to $290 million.
Now I'll provide some additional context to bridge the first quarter 2019 segment profit results to our full year earnings guidance. As discussed previously, our first quarter 2019 pharmacy segment profit was impacted by seasonality in Part D earnings accruals for prior year network guarantees and accruals for network guarantees in the first quarter that we expect to reverse later in the year. Adjusting for these items would result in a normalized quarterly segment profit run rate of approximately $22 million.
In addition to this adjusted run rate for pharmacy we expect to see steady growth in segment profit throughout the balance of 2019 due to the following items. First, lower cost of goods as we finalize our network pharmacy agreements and implement our recently negotiated wholesaler agreement which was effective on April 1st. Second improvement in negotiated rebates. The majority of this improvement is due to the three months lag in recognizing the actual value of significant term changes which were implemented January 1st. Third, expected new business to be implemented after first quarter nearly 70% of which has already been sold and fourth, normal margin seasonality in our PBM business. In healthcare, our behavioral and specialty health reporting unit posted a strong quarter and we expect to maintain these results through the year. In MCC, we expect continued incremental improvements in margins throughout the year as a result of anticipated midyear rate changes, membership growth consistent with past experience expected performance revenue based on emerging metrics reflecting the results of our quality initiatives and the ongoing impact of our medical action plans. As an example, these initiatives have already improved our Virginia MLR from approximately 100% in 2018 to the mid 90s currently.
These increases are partially offset by targeted MCC investments. As Barry mentioned, we're lowering our 2019 revenue guidance to a range of $7 billion to $7.2 billion. This includes the accounting impact related to a large new PBM customer a portion of the revenue for which we'll be booking on a net basis. We previously expected to record revenue on a gross basis for the entire contract. This has no material segment profit impact.
In summary, the fundamentals of our business remain strong and we're focused on continuing to execute our margin improvement plan for the balance of the year. I remain confident in our long-term growth strategy and look forward to updating you on our progress next quarter.
I'll now turn the call back over to Barry for some closing comments. Barry?
Barry M. Smith -- Chairman & Chief Executive Officer
Thank you, John. I'm pleased with the actions we've completed during the first quarter of 2019 which represents significant progress toward achieving our margin improvement plan. In pharmacy, we are reducing the cost of goods sold through the entire supply chain including network, wholesalers and manufacturers. In healthcare, we have made significant progress in our Virginia cost of care while maintaining strong quality for our members. I'd emphasize that many of the items that John mentioned in the bridge from the first quarter results to the full year earnings guidance represent initiatives we've already implemented.
Contracts either already in place or are scheduled to be implemented this year or seasonality consistent with our historic experience and industry norms. We're seeing the benefits of the strong leadership place that team we put in place over the last six months particularly in our MCC segment. We have a clear path to achieve our full year earnings guidance and I'm confident in the team and our ability to execute.
I'll now turn the call over to the operator for questions. Operator?
Questions and Answers:
Operator
Thank you. (Operator Instructions) Our first question comes from David Styblo with Jefferies. Please go ahead sir.
David Styblo -- Jefferies -- Analyst
Hi there. Good morning and thanks for the questions. Wanted to start out in the pharmacy business and appreciate the bridging color there as you ramp up from the first quarter to the rest of the year. I think the seasonality and the PDP of $8 million it makes sense for us. Can you -- I think what is new is the $6 million of accruals in those two buckets. Can you elaborate a little bit more on what those are -- and I think you were trying to say that both of those items fully reverse, but I want to make sure I understood -- that's true and how the mechanics of that work for the rest of the year?
Barry M. Smith -- Chairman & Chief Executive Officer
Yeah, David. Thanks for the question. The way I described the overall picture is and I think we've discussed this in previous quarters. As we've grown as a PBM and we've been successful both in increasing scale and penetrating larger markets. It's put us in a better position to negotiate more favorable deals with network pharmacies and as we've talked about in past quarters we've really been on a mission this past year to capitalize that and improve those contracts. On the timing of that as we've talked about that -- you took us a little bit longer than we expected, but at this point -- we negotiated the -- renegotiate the vast majority of those contracts somewhere still in the process of finalizing the tapering of -- but they're largely negotiated at this point in time.
As part of that negotiation, we got more favorable rates going forward, but also settled some past network guarantees or have at least negotiated them and again they're in the final stages of being settled. And some of that relates to past years 2017 and 2018. And of course you know there's some trade-off when you're negotiating between you know settling some items where there is disagreement in past years. So that three of the $6 million is literally network guarantees that we're in the process of settling that relate to past years and obviously that wouldn't repeat that's one time.
Secondly, we identified another $3 million of timing in the quarter relative to the network guarantees, what that literally is the timing of when we're able to implement the rates and earn spread on the business. Many of the negotiated terms are effective 1/1, but it would be implemented retroactively and you know we manage Max schedules through the year and we're able to capture and record even the benefit that is retroactive the first quarter fully in first quarter, but expect to capture it over the balance of the year. So that's the other $3 million out of the $6 million.
David Styblo -- Jefferies -- Analyst
Okay. That's helpful. And then staying in the pharmacy. Can you give us an update on the competitive landscape. Obviously last year you guys in the second quarter disclosed that you'd lost a few accounts especially in the pharmacy especially pharmacy carve-out. Seems like that business is stabilized, there really hasn't been more pressure, but curious what that environment looks like. Are you continuing to see competitors trying to pressing over there, and if so are you having to renegotiate your own pricings such that it's putting any sort of economic pressure on your own business?
Barry Smith -- -- Analyst
Yeah, thanks for the good question, Dave. We haven't seen, we've been, the market is of course, it needs to be competitive out there. But we haven't seen an escalation if anything we've seen more of a rational post pricing. Over the last several quarters we've had no further large contract losses on the specialty business. We did lose those too, we've tried to proactively go to each of our clients, our larger clients particularly and renegotiate in some cases providing better terms for a longer-term contract. So we've made a lot of progress and having more secure longer term contracts within the specialty business particularly.
We've been very effective in the PBM side of gaining a lot of employer business we recently talked about a large employer that we gained over 100,000 lives and so we continue to gain traction we had our largest incremental life implementation as of the first of this year. And you could even see some great success with the employer population.
We have seen historically over the last, I would say six months or so a lot of MCO specific competition and pressure on pricing. That has lessened to some degree. We saw, in fact and heard in the CVS call about the pressures that they saw on the -- and end PBM pricing. We haven't seen the same level of aggressiveness on the part of CVS. We still see some others that are out in the marketplace being very aggressive on pricing and we remain very solid in our commitment, not to go below the quick in terms of going negative on margin on these deals. We think that's just wise. So while the pricing has been competitive, it's probably lessened a little bit. It remains competitive and again we haven't seen any deterioration of our contracts on the specialty side.
David Styblo -- Jefferies -- Analyst
Okay. That's great. And then maybe just a -- an update on the relationship with Starboard and obviously they're adding to the board. I'm curious to hear, what sort of initial planning or action, strategies that might be going on with them on board and the new perspectives that they have in mind and share. And should we expect any sort of update either operationally for cost savings or new initiatives that you guys might be coming together with and outlining at some point or is this more then coming in to help just execute the blocking and tackling of improving some of the core operations?
Barry M. Smith -- Chairman & Chief Executive Officer
Well as I mentioned in the call we're very pleased with the additions to the board that Starboard brought and I just think that the quality of the individuals, I think they're all very high quality and they do add a lot to our perspective and both operationally, financially and just general industry experience. We've established a strategic committee of the board that looks like how we can more quickly realize shareholder value and the committee is hard at work working with the management team on that front.
And so we're trying to do all the right kinds of things to build shareholder value. There is some incremental operating talent that was brought in by the Starboard members we think that we already had some very strong operating talent. But their perspective is very, very helpful and so we've been grateful for their assistance and continued participation with us. We would expect to see the same initiatives that we've launched really later last year. As you recall we made some pretty strong changes and we think very effective changes to our senior team particularly on the healthcare side, which allow us to be -- to see the kind of benefits we're seeing today the results and we think that'll continue to play out over 2019. So we're grateful for Starboard, we think that they're a great addition to the team, they're directors and we think that's going to incrementally help us achieve our goals in 2019.
David Styblo -- Jefferies -- Analyst
Okay. Thanks so much. Just the last housekeeping one for John. You guys have previously talked about earnings seasonality about 40% landing in the first half. I'm curious to see, is that a still true? Or is that mixed change that all with the 1Q result now being out?
Jonathan N. Rubin -- Chief Financial Officer
We are not expecting it to change significantly, Dave, so you know as we've talked about before you know you can pick and certainly bounce around a little bit, but I'd say you know high 30's, you know 40 -- low 40's is where we'd still see that range.
David Styblo -- Jefferies -- Analyst
Okay. Thanks. Step back.
Barry M. Smith -- Chairman & Chief Executive Officer
Thanks, Dave.
Operator
Thank you. Our next question comes from Kevin Fishback with Bank of America Merrill Lynch.
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
Great. Thanks. Wanted to get a little bit on the Medicaid side, you know it sounds to me like you're making some progress on Virginia. Can you just talk a little more about where exactly the savings are coming from and how you think about that pace since additional margin improvement?
Jonathan N. Rubin -- Chief Financial Officer
Let me take that -- Barry can certainly add color. Kevin, as we think about Virginia we had been running 100% lost ratios through most of last year, we're just below hundred in fourth quarter and you know we're in the mid 90's on first quarter. So we have seen progressively good emerging results as we gone through the year, those have really come from a number of different areas, but the -- the ones that are been most significant have been on inpatient expenses and managing to appropriate levels of care and improving quality to lessen readmissions as we go forward. Outpatient behavioral health has been an area we've seen good improvement and the claim over payment recovery, claim integrity initiatives we saw improvement in fourth quarter and we've continued to see results come in as we've turned the corner into this year.
We also have the initiatives to really tighten up the consistency and appropriateness of managing that demand as long term care benefits and that's something we think will drive incremental improvement as we go through this year. So, yeah in Virginia, those are really the key areas where we're seeing improvements, but we do think you know we're on a good path. We believe the -- that again the mid 90s we saw first quarter will continue to gradually improve through the year and we're targeting to be below that by the end of the year and back you know toward where we need to be profitable.
So again very good progress as Barry said we've put some real good leadership and experts in place to help the team on the ground there to drive the initiatives we need and you're starting to see the yield of that, I don't know, Barry is there anything else you need add that.
Barry M. Smith -- Chairman & Chief Executive Officer
Yeah, just a couple of things. I just to kind of underscore John's comment about leadership. We brought on Chrissie Cooper who is a very experienced Medicaid operator, who's just done a stellar job with us. I just, I can't say enough good about her and her entire team. Ashok Sudarshan, who came in as COO within healthcare so we just have a lot of great talent in place that we've enhanced and we've had great people historically, but this is another level that really gives us the ability to execute more consistently.
We've implemented far more detailed granular metrics for operations that we monitor and manage to again teams not only at the top, but throughout the organization this led to some very specific benefits in terms of progress on behavioral health and physical health medicine, where we're able to reduce the short stay admissions further and make them -- have them more be in the observation beds status, to reduce inpatient costs the whole management of mental health skill building cases. We want to make sure we're taking care of people, but again if someone's been on services for over 24 months does that make sense to continue those services.
Just the kinds of things that don't detract at all from quality in fact in virtually all these cases the increased quality, doing the right thing, but also making our service more cost effective to the state. So it's the right thing to do. On the claims integrity we've also made tremendous progress there. In 2018, we cover, I think it was some $4.9 million in recoveries, and we got another $3 million over the course of 2019 balance of the year, we expect to collect. So again there some very fundamental blocking and tackling that we've been engaged in that have really upped our game tremendously. So, just in terms of the membership just give you a quick update. We had -- I know people were asking about the Medicaid expansion, what that meant to us. We've basically saved about 22.2 expansion members. That's still growing. We are receiving prolated membership from those expansions. And they expect the max not for us specifically but in the market about 10,000 per month. So that will incrementally grow revenues and our operations there in Virginia, again that helps us with overhead. We've got the platform in place.
Last year was a difficult year because we implemented three different new plans. So the overall membership we plan for basically about 75,000 total lives and we're at about 75,000 total lives, and so pretty much things are on target to be where we hoped they would be, earlier, clearly last year versus this year, but we're feeling pretty good about how things are rolling out in 2019.
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
Okay. And then, you talked about New York, I guess New York the rate increase was that's April 1, rate increase right so that you've got visibility into that rate update now as far as improving MLR and I guess can you talk a little bit about the quality dynamic as you expect to see a benefit from what is your visibility into achieving that is there improve performance that has to still happen to get there? Or you already at those levels?
Jonathan N. Rubin -- Chief Financial Officer
Hi, Kevin. It's John. I'll take a shot at that. So with New York, one as has been the past practice in New York. Normally, the rates don't come out until the second quarter, so we do not yet have final rates for April and the biggest component of the rates built into the assumption is the update of risk adjusters. What we do have those, we have data from the state as of November, we've sort of indicated where we are on -- our risk adjuster versus the market and therefore you know if things don't change what we'd expect as part of the April update.
We've continued to improve our risk adjusted metrics through many of the initiatives we've put in place. So we believe that you know the assumption we have that's based on the data from November you know shouldn't -- shouldn't be worse and then you know what's built into our forecast as we go forward. So we've got -- we don't have the final rates, but we've got data that you know we think is a good indicator of what to expect and we're obviously, trying to be measured in terms of how we forecast that, but we'd expect again hopefully within second quarter or shortly thereafter that we'd get rates from New York which would be retroactive to April. The other thing now is New York is also working to finalize the retroactive piece if you remember the risk adjusters were not updated last year when the data came out in November. The state had put a freeze on it based on some sort of data inconsistencies. They are working through that and from what we understand they're going to be dealing with that issue in the near future you know before the 2019 rates come out. So there's potential upside there, that's not built into our forecast. You know if you recall that was something that negatively impacted in the fourth quarter the fact that update didn't go through and is still pending.
In terms of quality in New York the issue is really -- the quality metrics are measured and then you're put into a tier of quality in the incentive you earn is based on the tier. What I can say is you know we sort of just missed the next year, last year we've seen our quality metrics improve materially since then and believe we'll get to the next tier level and that's what's assumed in our forecast and again based on the results and the metrics we've seen to date we have confidence.
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
And then maybe just last question. Do you guys have a -- heard, I think, a retention number for us on the PBM side?
Jonathan N. Rubin -- Chief Financial Officer
We don't -- I don't know that we've ever mentioned any retention number we would expect to see a retention and at least the 85% range for 2019.
Barry M. Smith -- Chairman & Chief Executive Officer
Yeah, normally, it's in sort of 85% to 90% range, as we talked about last year as we entered this year we saw the pricing be a little bit more competitive so we're likely to be at the lower end of that 85% to 90% range, but that's typical of what we'd see in the market we're in which is largely the sort of middle market on the employer side which you know the retention is always a little bit lower than for the larger market.
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
Yeah, it's interesting -- CVS came out with a little bit lower retention than we're used to Cigna today, you know it was better than CVS, but still maybe a little bit lower than was previously, but I guess both maybe make some sense given the deals going on there, you've got to know that lower retention levels. So it's interesting I guess then, does that just leave united as the one who's gaining share at this point? Or is there any other competitor in the market that you highlight?
Jonathan N. Rubin -- Chief Financial Officer
Yeah, what I'd say is -- is I think that the market was particularly price sensitive this year given the competitive mix in the pricing. So, I think what you may see is everybody having lower retention meaning more business moving than typical you know like move to some of the same folks that are losing business. I think there's just a little bit higher churn than usual. I don't -- I'm not sure that any one person benefiting from it.
Barry M. Smith -- Chairman & Chief Executive Officer
Yes, I think we are all trading clients unfortunately and it's been a particularly competitive pricing environment. I would expect that actually to settle down over the next year and you'll likely see retention go up for everybody. Normally the PBM benefit is a very, very sticky benefit. It's true at the state level, it's true in terms of changing over providers on the public sector, Medicaid. It's true also for employers people just don't like to change a benefit that impacts every single employee in the entity. So you'd normally don't see a lot of churn. So we've seen far more than normal, but we would expect to see that to go back to more normal-ish measures, probably 95% -- 90% to 95% in that range over time. But we'll see how it plays out.
Jonathan N. Rubin -- Chief Financial Officer
The other thing I'd just note quickly Kevin, is while this -- while your question is focused on retention, we actually had a very positive sales year a new business so that just underscores again a little bit more churn, but we've also been very successful in winning business from competitors.
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
That's helpful. Thanks.
Jonathan N. Rubin -- Chief Financial Officer
Great. Thanks, Kevin.
Operator
Thank you. Our next question comes from Scott Fidel with Stephens.
Scott Fidel -- Stephens -- Analyst
Thanks. Good morning. First question just with the retrenchment in Part D that you had this year just interested in how the initial results seemed to be tracking for the business or early here in the first quarter?
Jonathan N. Rubin -- Chief Financial Officer
Yeah, Scott. The initial results are literally right on what we had forecast coming into the year. So we talked about seasonality in the script that 100% normal seasonality. So in terms of the results, the membership and the mix of
members between the auto assigns and low income and voluntary, is literally spot on our forecast within a very, very small margin. So we're feeling good about where we are at this point in the year.
Scott Fidel -- Stephens -- Analyst
Okay. And then a follow up to that, just you know how you guys are thinking about participation in Part D for next year and in that context maybe your updated views on the HHS rebate proposal and the latest CMS guidance that they gave around tightening the risk adjusters for the risk corridors for on for the party market next year and how much you think that could mitigate some of the risk in the market related to the proposal.
Barry M. Smith -- Chairman & Chief Executive Officer
Those are great. Everybody's guessing right now how they're going to participate next year. Obviously there have been two possible ways, modes that we're in preparing for pricing with and without safe harbor implications. It's clear that with the proposed rule that there likely will be impact we think and we're all trying to figure out exactly what the impact will be. So the risk corridors will take down some of the risk associated with the Safe Harbor being retracted and then the party pricing kind of going into a new mode and so we're all very anxious to kind of see how this ultimately plays out. Our feeling is that it's likely that something will happen and that we will see a change. We are preparing two bids right now one with and one without. We do think that the risk corridors will help mitigate risk going forward. And we're just very anxious to see how that plays out.
Scott Fidel -- Stephens -- Analyst
Okay, and just on the $6 million that you flagged on the network guarantees, the revenue, did that all drop in terms of earnings headwind or were there any offsets that ?
Jonathan N. Rubin -- Chief Financial Officer
Those were -- segment profit impacts, Scott. So that is bottom line.
Scott Fidel -- Stephens -- Analyst
Okay. So both revenue and segment profit. Okay. Thanks.
Jonathan N. Rubin -- Chief Financial Officer
Great. (inaudible)
Operator
And thank you our next question comes from Ana Gupte with SVB Leerink. Please go ahead.
Ana Gupte -- SVB Leerink -- Analyst
Thanks, good morning. Just following up on some of the discussion on the pharmacy benefits competitive landscape. In the employer market, we do have beyond the deal anthem now coming in with Ingenio, and talking about integrated to the cost of care you know to a smaller extent perhaps, but it seems like brokers are talking about Humana as well coming into the mid-market and play a market. Do you see them making a dent here, Anthem won quite a bit of -- fully into a business, it's hard to say whether it was -- kind of what's the the fully -- with the Ingenio or not. And beyond maybe Cigna and Optum, have you -- perhaps, I have heard anyways that had been pricing aggressively and we see anything here?
Barry M. Smith -- Chairman & Chief Executive Officer
Well it's clearly both the anthem and Humana are a very capable MCOs with the great capacity. We have a -- we've seen, of course, Anthem with Ingenio launching kind of getting into the business. We haven't seen them in any material way in the marketplace. Typically, they played more within the Blue's environment and within their own population but we would expect to see that launch in a more substantial way in the future, although I think it's difficult because of channel conflict and because of just the competitive nature of the market and to really be a major player although overtime you never know what will happen. But they're clearly very capable so we have great respect for them. And then Humana is interesting because Humana clearly has not played in this -- these kinds of markets in this way it's entirely possible that they'll get in with a more material offering there in the mid-market, but again we see that as less of an impact than would be ongoing competition from express you know Cigna, Optum and CVS as well. So again, we think there'll be introductions, but we don't think that, that will materially change the competitive landscape.
Scott Fidel -- Stephens -- Analyst
Okay. Okay. And on the point of sale rebates just you know looking at what's going on with CVS and Optum moving rebates to the point of sale now in the commercial market. What is your visibility into what's going on more broadly and anything that you may be looking to do to adapt to what they're trying to do ahead of what the potential regulatory or legislative environment may evolve to? And I understand that Safe Harbor is going to be hard to legislate, but just kind of a market force driven to lower.
Barry M. Smith -- Chairman & Chief Executive Officer
Well, it's very interesting on to see how this is evolving. We also are very open and do and can provide rebates at point of service. Of course this whole issue became a significant political issue because the high cost deductibles that health (ph) plan deductibles that people have and they became aware of that first dollar coverage for these very expensive medications. And of course those rebates certainly help the entire health plan whether it's the health plan, whether it's employer or the state for that matter. But it doesn't necessarily help the individual that's paying the big out of dollar -- out of dollar number at the pharmacy counter.
And so we think it's a reasonable approach to go and have those rebates being given to the actual individual that buys the drug that generates the rebate that just makes economic sense I think goes a long way in solving the political problem that's out there with drug pricing relative to rebates specifically. I think that the ultimately on the rebate front we're going to have a really interesting process of roll out relative to how it will impact the commercial market overall.
Just as a little competitive insight, one of the challenges that we've seen historically on the MCO front relative to the rebates is that you will see very competitive pricing and then you'll see that some of the larger players come in with very significant checks sometimes in tens of millions of dollars saying that at the 11th hour here's an incremental $10 million or $20 million and that's how they compete. The reality is and they'll say this is an incremental rebate check. The reality is from our calculations it goes far beyond what a normal rebate is and in fact on the specialty side it's multiples of what the specialty rebate is per script.
So we think that the rebate monitor has been used to introduce overly competitive pricing so we think it's good that they're -- it becomes more of a rational world relative rebates its entire whatever an employer, whatever a payor, the MCO would like to do relative to distribution of the rebates is fine by us. We are able to administer any form they'd like to. And in some cases they'd like to distribute that across the entire plan membership, in an MCO case or employer the same way. And sometimes they want to offer directly to the recipient, the enrollee of the plan. Again, we can go anyway. I don't know that, that will materially impact profitability from the standpoint of different ways that employers and plans will compensate us. They're still going to have the need for the various clinical programs that we offer. There's still going to have the need to negotiate with manufacturers. And there is this notion that somehow if rebates are done away with, then you can take a look at the PBM retention of those rebates. It's a very minor number in contrast with the total price of the drug.
So if you simply reduce the take out the rebate and take out negotiation with manufacturers, there's absolutely no assurance that manufacturers will lower the list prices. And that's really we believe where the folks need to be on the list prices of these pharmaceuticals, which has just gone up enormously. So that was long-wooded way to answer you're very fully featured question, but hopefully that's helpful.
Ana Gupte -- SVB Leerink -- Analyst
That's helpful. So the $70-ish million odds that you have going to your bottom line correct me if I'm wrong, as there are some pilots and other approaches that Express Scripts and at least Optum or any other at least disclosing around administrative fee-based contracts and clinical programs and so on are you doing any of that. Do you see that $70 million-ish odd moving into a different business model and preserving profitability in the low to mid-single-digit margin range?
Jonathan N. Rubin -- Chief Financial Officer
Let me -- Ana, it's John, let me just be clear on one point the 70 million I believe you're referring to are is sort of the net rebates for specialty carve outs segment. So that's what -- we're identifying in the queue as you know sort of the specialty rebates. So that rebate is anything we retain for the formulary management program is essentially payment for services we're providing. So these are things like again formulary development with without plans it's helping to lower the net cost of drugs through driving you know the most effective you know market share to the most effective cost to drugs. It's clinical programs, we've got a number of clinical programs that we offer to health plans for things like improving their Medicare stars rating and we've seen great success which has significant upside from a financial standpoint to the health plans. So to get to the crux of your question, if the model were to change, the services we are providing are very valuable to the health plans and we'd find other ways through fees or risk fairs or other types of financial mechanisms to be reimbursed or compensated.
Barry M. Smith -- Chairman & Chief Executive Officer
Ana, as Jon is talking here, I just think back to my earlier days with the PBM world. This is exactly how we did business. We charge for these incremental services which were good high margin services and we just didn't have any reliance on the rebate mechanism at all. So in some ways, it's kind of back to the future where we will charge for these different services that we offer, as Jon mentioned, these clinical services, which reduce the overall spend pretty dramatically in pharma world. We think that our medical pharmacy management capabilities is going to be a huge benefit and advantage in the marketplace because we cover more lives. I think than anybody else in the marketplace 14.5 million plus, we just gained a few extra clients in that space. And people pay us for the services sometimes they pay us via the rebates that we receive when we negotiate the net of those two and sometimes they pay us directly. So we think if the world goes to that place which I think is somewhat likely we'll have a real advantage we think in the marketplace.
Ana Gupte -- SVB Leerink -- Analyst
Okay. Very helpful. Can I follow up then on the health plan side on the PBMs as you point out. It has become competitive, some game of musical chairs it feels like at this point with -- may be started by Anthem in a bit, pulling the PBM in-house and then Centene now doing the same and in future with WellCare and Cigna now moving it back to Express and all of that? But you've always had a view that you have a value proposition of certain health plans that don't want to be in more of a competitive arrangement -- I mean, in arrangement with the PBM supplier that's also a large competitor. How is that evolving for you specifically? And then how is the broader health plan landscape looking? And is there segmentation by the large Blue -- across Blue Shield who perhaps don't use Prime Therapeutics, but you've expressed in CVS, may be others smaller regional that are looking for specific more customized medical pharmacy approaches. And what is their response to it just completely transformed supplier landscape on the PBM side.
Barry M. Smith -- Chairman & Chief Executive Officer
Hi, you know it's interesting how the market is evolving. I break it into # distinct decision points before MCOs. There's no doubt that it's a very competitive pricing environment. So price is clearly an important consideration. The second thing is as you mentioned the channel conflict issue. We are getting a lot of -- more shots on goal than ever before because we're looked at as an independent player that has great capacity and so that's been helpful to us. In the third element is service. And when I say service, I mean both customer service to both the plan and to the member and the reporting that we do, but also in terms of the service how we think about the members and our relationship with the members in a very customized friendly way. And so on those things price continues to be a major driver. The channel conflict is a -- is an issue and I would say that if price is overwhelmingly advantageous that becomes the primary driver, but the channel conflict is an issue and indeed if it's close, we typically get the nod based upon that, and on the service side we are distinctively different than most of the larger guys in terms of our ability to customize programs and do the work that Jon talked about a moment ago on the clinical side.
We are unique in that way and that is just a much higher level of service. It's not that you could do a lot through automation and the PBM -- with a PBM transaction through the network of with AI. But it also takes a level of personal touch, for example, if someone's on oncology here, human growth hormones, autoimmune drugs or you're working with the physicians office the family and the patient. It's just a much higher level of service that really just means a great deal on these very high cost drugs.
And so in that third category, we think that we're unparallel in the industry and people buy from us for that reason. It's both a service it allows people to do things they wouldn't ordinarily be able to do, but it's also has an important cost impact reducing cost. So when people are just simply spreadsheeting on price, AWP minus x and a certain rebate number. We encourage them and fortunately many, many do to include the clinical cost savings that we can generate given this very personalized high service approach.
Jonathan N. Rubin -- Chief Financial Officer
Yes, the other thing on it just real quickly, it's Jon, I'd add is that when you segment the health plan market where our focus is predominantly on the lower end of the market. You know we're looking at local and small regional health plans where again the service the clinical approach and to some extent even the you know sort of sensitivity on the channel conflict play to our advantage. And of course the pricing also is more rational in that segment than when you get to a larger health plan. And we -- while we had opportunities we've in some cases chosen not to chase some of the middle or larger size health plans because the pricing is not favorable for us.
Ana Gupte -- SVB Leerink -- Analyst
Very helpful. Then as one final one. With clearly human loss, there was a lot of consternation at one point and I think some PBMs may have been caught flat-footed with entry of changes, how do you see the pharmaceutical industry responding, given they are in the crosshairs as well and want to look good with the regulators? How is that likely to impact you and other PBMs and most like that?
Barry M. Smith -- Chairman & Chief Executive Officer
Well, it's so interesting, Ana, to see the lobbying that's going on today that the pharma industry spends $200 million a year in lobbying, and so they have a lot of money and they're out getting the rest of the industry and they'd like to point out the PBMs as being the problem. The challenges of course is that's just not true. The economics are largely driven by list prices from pharma. And I think that will continue to be highlighted because it can't help not be. So even if you did all of these things and reduced the total price it's literally less than 15% on Part D, for example the rebate issue. So pharma, the list prices are the issues -- is the issue. And so pharma ultimately must respond in a value way and in a way that is responsible relative to list prices. So if you, again, took the PBM completely out of the equation there is no mechanism that would have pharma reduce their list prices or not increase their list prices. But I think it would be in the opposite direction. So I think that pharma irrespective of the very significant lobbying will likely remain in the crosshairs for quite some time to come because the numbers are just too large.
Ana Gupte -- SVB Leerink -- Analyst
Very helpful. Thanks for taking the questions.
Barry M. Smith -- Chairman & Chief Executive Officer
You bet. Thank you, Ana. Well thank you everybody for your participation in today's conference call. We look forward to speaking with you again in July, where we will discuss our second quarter 2019 results. Good day.
Operator
Thank you. This does conclude today's conference. We do thank you for your participation and you may disconnect your lines at this time.
Duration: 60 minutes
Call participants:
Joe Bogdan -- Senior Vice President, Corporate Finance
Barry M. Smith -- Chairman & Chief Executive Officer
Jonathan N. Rubin -- Chief Financial Officer
David Styblo -- Jefferies -- Analyst
Barry Smith -- -- Analyst
Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst
Scott Fidel -- Stephens -- Analyst
Ana Gupte -- SVB Leerink -- Analyst
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