EHTH

Business Context and Reporting Period

Company: eHealth, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: eHealth is the leading online source of health insurance for individuals, families, and small businesses in the U.S. The company operates an ecommerce platform allowing consumers to compare and purchase plans from over 180 carriers. In April 2010, eHealth acquired PlanPrescriber, Inc., expanding its presence in the Medicare market. Revenue is primarily derived from commissions paid by insurance carriers, with additional revenue from technology licensing, lead referral fees (primarily Medicare), and online sponsorship advertising.

Key Financial Metrics (Year Ended Dec 31, 2010)

Debt & Liquidity: The company reported no bank debt, lines of credit, or other borrowing arrangements. Working capital was $128.4 million. The company completed a $30 million stock repurchase program in January 2011 (authorized in July 2010), having repurchased approximately 2.03 million shares during 2010 for $26.2 million.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 19% year-over-year. Commission revenue grew 14%, driven by a 7% increase in estimated membership (778,300 members in 2010 vs. 728,000 in 2009) and a one-time $6.0 million commission payment received in Q4 2010. Other revenue surged 60%, primarily due to growth in Medicare lead referral fees and technology licensing contracts with the federal government.
• Expense Increases: Marketing and advertising expenses rose 11% to $60.1 million, largely due to increased online advertising costs for Medicare plans. Technology and content expenses increased 23% to $19.2 million due to personnel growth and platform enhancements. General and administrative expenses rose 20% to $24.1 million, reflecting acquisition-related costs for PlanPrescriber and increased professional fees.
• Acquisition Impact: The acquisition of PlanPrescriber resulted in $1.1 million in amortization of acquired intangible assets and added goodwill of $14.1 million to the balance sheet.
• Interest Income Decline: Interest and other income dropped to $9,000 from $0.9 million in 2009 due to lower yields on investments and a reduction in higher-yielding marketable securities.

Guidance, Outlook, and Risks

Management Outlook:

• 2011 Revenue: Management does not project revenue growth in 2011 compared to 2010. They expect commission revenue to decrease in absolute dollars and as a percentage of total revenue due to reduced commission rates from carriers.
• 2011 Earnings: Earnings per share are expected to be substantially lower in 2011 than in 2010.
• Expense Trends: Marketing and advertising expenses are expected to decrease in absolute dollars in 2011. However, cost of revenue, customer care, technology, and G&A expenses are expected to increase.
• Commission Rates: Implementation of medical loss ratio requirements (effective 2011) has caused carriers to reduce commission rates. Management estimates the average base commission rate for individual and family plans declined from just over 10% to just below 7%.

Key Risks & Contingencies:

• Health Care Reform: The Patient Protection and Affordable Care Act (signed March 2010) mandates medical loss ratios that force carriers to reduce commissions. This is expected to materially impact revenue starting in 2011.
• Carrier Concentration: Three carriers (Aetna, UnitedHealthcare, WellPoint) accounted for approximately 43% of total revenue in 2010. Agreements are non-exclusive and terminable on short notice.
• Medicare Business: Success depends on regulatory approvals (CMS), carrier relationships, and the ability to navigate complex, changing regulations. Most Medicare revenue is seasonal, occurring in Q4.
• China Operations: The company has significant operations in China (149 employees). Risks include regulatory changes, intellectual property protection, and the renewal of insurance agency licenses.

Investor Verification Checklist

• Commission Rate Reductions: Verify the actual impact of the estimated drop in commission rates (from ~10% to ~7%) on 2011 revenue, as this is the primary driver of the negative outlook.
• One-Time Revenue: Confirm the sustainability of the $6.0 million one-time commission payment received in Q4 2010, which inflated 2010 results.
• Medicare Lead Referral: Assess the concentration risk in Medicare lead referral revenue, noting that most 2010 revenue came from a single purchaser of leads.
• Carrier Relationships: Monitor the status of contracts with Aetna, UnitedHealthcare, and WellPoint, which collectively represent a significant portion of revenue and have the ability to amend terms unilaterally.
• Stock Repurchase Completion: Note that the $30 million repurchase program authorized in July 2010 was completed in January 2011, indicating a shift in capital allocation strategy.