Centene Corp (CNC) 2003 Q3 法說會逐字稿

Good morning.

My name is Katie and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Centene third-quarter financial results conference call. (OPERATOR INSTRUCTIONS).

Ms. Wilson, you may begin your conference.

Thank you.

Good morning everyone.

I'm Lisa Wilson of Centene's Investor Relations Department.

Thank you for joining today's conference call.

By now, you should have a copy of the press release issued by the company yesterday after the close of market.

If you have not received it, please call Donna Renner at 314-725-4477, and it will be faxed to you immediately.

We have with us today Michael Neidorff, President and Chief Executive Officer, and Karey Witty, Chief Financial Officer of Centene Corporation.

This call is expected to last approximately 45 minutes.

The call may also be accessed through the company's Website at centene.com.

A replay of the call will be available shortly after today's call's completion by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad.

And entering access code 320-4094.

Any remarks that Centene may make about future expectations, plans and prospects for Centene, constitute forward-looking statements for purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene's form 10-Q for the period ending September 30th, 2003 and year-end report on Form 10-K for the period ending December 31, 2002 -- both of which are on file with the SEC.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so.

Now, now I would like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

Good morning everyone and thank you for joining today's conference call.

The third quarter of 2003 marked our 17th consecutive quarter of increased earnings.

Karey Witty, our CFO, will go through the results in more detail, shortly.

While it was a very busy quarter, where we had many achievements, it was also another predictable quarter.

Membership, as of September 30th, 2003, was 467,100 -- an increase of 58 percent from the year-ago quarter, of which 28 percent is organic, and 30 percent is from acquisitions.

We showed growth across the company, with New Jersey stabilized, as predicted.

We have now added 5 additional counties in New Jersey, and are in 20 of the 21 counties, statewide.

For the third quarter of 2003, revenues were up 70 percent to $198.4 million, and our earnings per diluted share of 44 cents compares to 34 cents in the year-ago quarter -- net of the onetime dividend.

Sequential revenues were up 6.5 percent, and EPS was up 11 percent on a pro forma basis.

We are proud to be able to continue to produce consistent and predictable results.

Our model continues to produce savings for the states in which we operate, and better (indiscernible) members -- both of which are critical in today's more-challenging economic and legislative environment.

I would like to spend the next few minutes highlighting the accomplishments of the quarter.

We began the quarter with the filing (ph) and subsequent pricing of a (indiscernible) offering of 3,450,000 shares of common stock at $25 per share, which includes the exercising of the over-allotment option.

Lehman Brothers, SG Cowen, Thomas Weisel Partners, and Stifel Nicolaus led the transaction.

The proceeds of the offering were for general corporate purposes, including enabling us to pursue acquisition opportunities.

It was an appropriate time in our growth to raise this capital.

We are now better-positioned to pursue a number of compelling acquisition opportunities in both the Medicaid and specialty services area.

As previously discussed, we have a full pipeline in both areas, and are pursuing them with appropriate diligence.

On September 30th, we signed a definitive agreement to acquire the Medicaid-related assets of Family Health Plan, Inc.

This agreement will allow us to enter our fifth state, Ohio, and gives us the right to serve up to 24,000 members in Toledo, Ohio -- to our newly-created subsidiary, Buckeye Community Health Plan.

With close to 1.1 million Medicaid-eligible recipients in the state, we believe there is a substantial opportunity to grow by adding members through expansion into other counties.

We look forward to working with Diversity (ph) Health Partners and their physicians -- a group that is committed to delivering high-quality and cost-effective health care.

Importantly, this acquisition falls within our stated internal rate of return criteria of 25 percent or greater.

We look forward to closing this transaction in the first quarter of 2004, and we will keep you informed of our progress.

During the quarter, we made several key management appointments.

This added depth and strength of management, which will allow us to execute and deliver on our long-stated goal of being a Medicaid-focused multi-line managed care provider.

Joseph Drozda, M.D.

Dan Paquin were appointed to the newly-created positions of Executive Vice President in Operations and Senior Vice President, New Plant Implementation and Development, respectively.

Dr. James Van Halderen joined us as President and CEO of NurseWise and Script Assist.

Dr. Van Halderen will direct the day-to-day activities of these divisions.

Each of these individuals brings a solid level of expertise and a track record.

Finally, Beth Mandell assumed responsibility in October as Chief Executive Officer for GPA.

She has over 20 years of health care, marketing, and behavioral health experience.

We look forward to the contributions these individuals will make to the highly-focused team at Centene.

Turning to each of the states in which we operate.

Our growth was in line and consistent with our expectations.

In Texas, we added, organically, 3700 members versus last quarter, and 1700 members from the acquisition of HMO (indiscernible) Texas.

We expect Texas will continue to provide significant growth opportunities.

Both Indiana and Wisconsin showed strong growth during the quarter.

In Wisconsin and Indiana, we added 4600 and 3100 members, respectively.

During 2004, we anticipate 6 additional counties with Indiana will convert to mandated enrollment.

As noted in our press release, issued October 15, we decided to exercise our option to acquire the remaining 20 percent of the equity of University Health Plan of New Jersey, reflecting our continued confidence in this market.

UHP serves 52,700 Medicaid members in 20 counties throughout the state.

New Jersey has a strong membership potential, with approximately 805,000 members, or Medicaid recipients.

The press continues to call attention to the challenging fiscal environment in the states.

In spite of these challenges, we continue to be a source of financial relief to the states in which we operate, and are exploring opportunities to leverage our successful approach in additional markets and states.

At our recent analyst luncheon in New York, Marie Glancy, our Vice President of Government Affairs, highlighted that these many headlines really foster positive action on the parts of the state.

One example is Texas, where it has been identified that 24 percent of the population is uninsured.

The state is now exploring strategies to overcome this difficult problem, and is considering changes to its Medicaid eligibility in order to include more of the uninsured members of this population.

At the luncheon, I also presented an actuarially certified model plan that Centene developed for all our states to consider.

This would enable them to cover more of the uninsured lives.

We are offering a pilot study to one state in which we operate to exemplify how we could reduce its expenditures.

If all the initiatives in the pilot plan were implemented, it would save this state approximately $350 million.

We will provide this data prior to the legislative session, which begins in January.

Last quarter, I mentioned that Congress appropriated an additional $10 billion to help state governments pay for Medicaid programs and protect their rates to help plan providers.

These funds, which represent a substantial increase in Medicaid matching funds -- as states receive from the federal government -- were part of the Jobs and Growth Tax Relief Reconciliation Act of 2003.

The states are now starting to receive the funds, and I remind everyone that each states' allocation depends on the amount that the state spends on Medicaid.

The funding was available only if a state did not restrict its Medicaid eligibility requirements after September 2nd, 2003.

Turning to rates.

In Texas, resolution of the SCHIP (ph) benefit plan, we have confirmed the increase for Texas at 7.5 percent, excluding a 2.5 percent reduction in the physician fee schedule.

This included a rate increase in each of our contracted service areas.

As mentioned on our last call, effective September 1, the state reduced the benefits to the SCHIP program by carving out most behavioral health services, dental, vision, and chiropractic services.

This reduced GPA's revenue by $100,000 in the quarter, but also removed the expenses from Centene for the superior health plan in Texas.

Governor Perry has already announced that the state will reinstate certain behavioral health benefits, pending federal approval.

We are currently in the process of negotiating rates for 2004 and 2005 for Wisconsin and Indiana.

When you pay claims as quickly and efficiently as we do -- by waiting until now to discuss the rates in relation to our margin protection programs -- the claims data are more fully developed, and therefore more credible.

Rates for our newest state, Ohio, were granted in July at a 5.6 percent increase.

In New Jersey, we received a 6.2 percent blended (ph) rate increase.

During the quarter, the state took actions, which we fully endorse, and with which we agree, (indiscernible) its current benefit and premium levels.

New Jersey carved out the pharmacy component for SSI members without Medicare.

Our composite SSI premium, which affects approximately 4300 of the SSI members, was reduced by $160 per member, and our medical costs by a corresponding amount.

New Jersey has also converted approximately 1300 of our family care members to a non-risk, or ASO, product and frozen enrollment in this category.

These numbers were high utilizers and not profitable for UHP.

Importantly, the state has now approved our emergency department policy and practice, which is working successfully in our other states, in terms of reducing inappropriate ER utilization.

The state has also approved our preferred drug list, or PDL, which will allow us to more-effectively manage the pharmacy benefit and associated costs.

The state has put us in a position to work with it in managing its benefits and costs.

We are pleased with the momentum in New Jersey, and believe that operating in this state offers significant opportunity for growth.

Regarding our specialty companies, you will note that our segment reporting -- that service revenues increased by $750 million for the immediate preceding quarter -- from the immediate preceding quarter.

This reflects a $100,000 reduction in premiums for the SCHIP benefit changes in Texas, which we previously discussed, and $200,000 in seasonal declines in GPA school revenue-related programs to school summer breaks.

The remaining balance reflected management fees in GPA, related to issues prior to our owning the plan.

Management does not view these as material, as it is not Ongoing; it is the kind of small issue that will happen from time to time, as a result of the acquisition program.

The implementation of our specialty companies' strategy has now taken root.

We are responding to various RFPs and are actively working our services to other health plans.

We look forward to adding more members into this specialty services mix.

Our health benefits ratio, at 82 percent, reflects the bottom end of our range, and takes into account the escrow adjustments for periods prior to when we owned the New Jersey plan.

It is important to note that our days in claims payable increased by 50 basis points, or .5 days, while inventories dropped materially.

Once again, I want to condition everyone that this is the normal course of action in a company that is growing and inquisitive (ph).

As we have discussed now for the last several quarters, we remain committed to financial transparency and disclosure.

As a further commitment to this, a board resolution requires all senior officers and board members to sell stock only under a 10b5-1 (ph) plan.

Therefore, when you see any of us have sold some stock, you can be assured that it was a predetermined event.

Although not technically a third-quarter event, we completed the listing of our common stock on the New York Stock Exchange two weeks ago, under the symbol CNC.

We were very proud to have achieved this important milestone in our company's history, and we look forward to the opportunity and exposure that being an NYSE-listed company will provide.

I would like to also thank all our dedicated employees and board members for their ongoing contributions to the success of Centene.

I now would like to turn it over to Karey Witty.

Thank you, Michael, and good morning everyone.

To recap the highlights of the third quarter of 2003, membership increased 58 percent over the same period last year to 467,100.

Organic membership increased 28 percent, year-over-year, while growth from acquisitions was 30 percent.

New Jersey membership was stable, as predicted, and we saw strong organic growth in Wisconsin and Indiana.

In our Texas market, we experienced 70 percent organic growth and 55 percent acquisition growth versus the same period in prior years.

In the third quarter of 2003, revenue was 198.4 million, an increase of 70 percent, compared to 116.4 million in the third quarter of 2002.

Net of acquisitions premium revenue increased (technical difficulty) million, or 33 percent, versus the same period last year.

Services revenue decreased $750,000 from the 3.3 million reported last quarter, 100,000 of which relates to the behavioral health benefits carve-out of the SCHIP product in Texas.

While Michael mentioned our understanding of the states' intent to reinstate at least a portion of the SCHIP benefits, which were reduced, it is unclear at this point, when and to what extent, this will occur.

Regardless, we anticipate that services revenue will be in the range of 3.1 to 3.3 million for the fourth quarter of 2003.

Our consolidated health benefits ratio for the third quarter, which reflects medical costs as a percent of premium revenue, was 82.0 percent, compared to 82.2 percent for the same period of 2002.

The consolidated health benefits ratio was within the company's targeted range of 82.0 to 83.5 percent.

We experienced a decrease in the Medicaid portion of this ratio in the third quarter to 81.3 percent, partially due to a distribution from our escrow account for costs incurred prior to our acquisition of UHP.

The net effect of this distribution reduced medical services costs in the quarter by approximately $700,000.

This, combined with the reduce services revenue, resulted in virtually no bottom-line impact on the quarter.

For the 9 months ended September 30, 2003, our Medicaid health benefits ratio was 82.0 percent, compared to 82.2 percent for the same period ended September 30th, 2002.

For the third quarter, the health benefits ratio for the SSI group remained stable at 102.9 percent from 103.3 percent for the 2nd quarter.

Our at-risk SSI membership was relatively constant at 4,300 members, and continues to represent a significant growth opportunity.

Turning to general and administrative expenses, our Medicaid-managed care segment G&A, as a percent of revenue, was 10.1 percent in the third quarter, a decrease of 80 basis points from 10.9 a year ago, and a 20 basis point improvement from the sequential quarter of 10.3 percent.

For our specialty services segment, which we implemented during the first quarter of 2003, our G&A expense ratio was 32.0 percent, and relatively constant, compared to that of the second quarter.

On a combined basis, our G&A expense ratio was 11.3 percent.

Regarding our acquisition in Ohio, we are moving forward according to plan, and anticipate closing during the first quarter of 2004.

We expect to incur approximately 600 to $700,000 in startup costs during the fourth quarter to gear up for a January 1, 2004 effective date.

We will not generate any revenue in 2003 from this acquisition.

Investment and other income for the third quarter of 2003 was 1.2 million, which was essentially equal to that of the prior quarter.

While interest income increased approximately $100,000 over the second quarter on proceeds from our follow-on offering, realized gains decreased by the same amount, resulting in a constant sequential quarter.

As a reminder, our third quarter 2002 results included a onetime dividend of 5.1 million, from a captive insurance company in which the company maintained an investment.

Earnings from operations for the third quarter of 2003 increased 57 percent to 12.6 million.

Net earnings were 8.7 million, or 44 cents per diluted share.

On a pro forma basis, earnings per share were 41 cents, adjusted for the follow-on offering.

A reconciliation of this pro forma measure of EPS to reported EPS is included in our press release, posted on our web site yesterday, and filed on form 8-K with the SEC, prior to this call.

Excluding the onetime dividend of 5.1 million, net earnings in the third quarter of 2002 were 6.1 million, or 34 cents per share.

At September 30, 2003, the company had investments in cash of 258.3 million, of which approximately 132.5 million was free from state regulatory requirements.

These amounts include net proceeds of 81.4 million from our follow-on offering that was completed on August 13, 2003.

Our medical claims liabilities total 91.7 million, representing 52.5 days in claims payable, which is within our guided range of 50 to 55 days.

Our period-end claims inventory is at historically-low levels, and one should not be surprised to see this move up during the fourth quarter.

As we as previously discussed, in July of 2003, we took advantage of the opportunity to purchase the building in which our corporate headquarters are located for an aggregate purchase price of $12.6 million.

We financed a portion of this purchase price through an $8 million non-recourse mortgage loan arrangement.

The mortgage bears interest at prevailing prime rates, less 25 basis points.

Additionally, effective August 15, 2003, we acquired the remaining 36.3 percent interest in GPA for approximately $800,000, of which $600,000 was in the form of a note.

As a result, minority interest and earnings no longer appear in our statement of operations.

For the 9 months ended September 30th, 2003, cash flows generated from operating activities were 22.3 million, compared to net income of 23.6 million.

For the quarter ended September 30, cash flows generated from operating activities were 12.9 million, compared to net income of 8.7 million.

Operating cash flows for the quarter were approximately 1.5 times that of net income.

With respect to our guidance, we anticipate revenue for the fourth quarter of 2003 in the range of 204 million to 206 million, and net earnings in the range of 34 -- I'm sorry -- 43 cents to 44 cents per share, based on 21.5 million fully-diluted shares outstanding.

Consistent with our guidance policy, we would like to provide you with our initial outlook for 2004.

We expect revenue in the range of 940 to 950 million, and earnings per share in the range of $1.86 to $1.95, based on 21.5 shares outstanding.

Organic membership growth is expected to be in the range of 10 to 12 percent.

And, with that, we can open the call up to any questions.

(OPERATOR INSTRUCTIONS).

Josh Raskin, Lehman Brothers.

Thank you guys, once again, for the helpful press release -- always very informative.

A couple of questions Greg and I have this morning.

The first one is just on -- in Ohio.

Two questions there -- the first is -- how does the competitive landscape look in terms of neighboring counties and -- as you go said, there are other potential counties that you're looking at, in terms of the Medicaid players there?

Is it fragmented, as we typically see in these markets?

Or is there one or two plans that seem to be dominant in the area, etc.?

That is the first question?

It is fragmented with one of the large players -- CareSource (ph), which has about 350,000 members, statewide.

After that, it is fairly fragmented, Josh.

Our model has always been to establish our footprint in the state.

And then, methodically and carefully, as opportunities exist, to grow organically.

So, it is the same opportunity.

That is helpful.

And in the six new counties -- okay -- I guess -- okay -- Ohio that is easy.

In New Jersey -- I guess, the 5 new counties in New Jersey -- and there are 6 new ones that you guys are looking to go into in Indiana?

Right.

What is the total membership opportunity for those?

I'm going by memory.

I think Indiana is approaching 100,000 lives in those 6 counties, which we will, obviously, share with another plan that is there.

And in New Jersey, I believe it was 300,000, Patrick, that -- within those 6 counties that would have access to (indiscernible) in the past.

Okay.

That is also helpful.

Two more questions -- just on the claims processing times -- you guys usually give those metrics.

It just looked as though the claims inventory was particularly low at quarter-end.

Was there some sort of reason why you guys were paying down the inventory there quickly?

Well, we are paying around -- from the date received until the date the check goes out the door is about 6 days.

So, we are committed to following that pattern.

And the claims shop continues to perform.

Now, I think what's -- part of the conditioning we likely (ph) provide people on these calls is that -- when we were at (indiscernible), we thought that was where it would be.

So, one should not be surprised if we bring on a new plan and other things happen -- we introduce new systems at some point in time -- to see it pop up a couple of days.

So, we will always be in that kind of range, though, Josh.

Okay. (indiscernible) continuing to make the operational improvements there.

There was not, sort of, a onetime paydown at the end of the quarter?

No.

No.

It's just a very efficient operation.

Our turnover in the claims shop, the last we looked, is 8 percent or less.

So, I mean, it is a very positive environment in which to operate.

Okay.

That is helpful.

On the CapEx -- there was a spike in the CapEx this quarter.

I was just wondering what that was.

The bulk of that, as I mentioned in my prepared comments, the acquisition of our corporate headquarters -- the building.

0h okay (indiscernible) I apologize.

That is helpful.

And I apologize.

One more question -- I will get back in queue;

I promise.

In terms -- in Indiana, with the new mandating in the new counties there -- the 6 new counties -- is there a potential -- are there any other counties, I guess, that are mandated that you are not in, in Indiana?

And, have you -- I know you guys talk to the regulators, obviously, very frequently.

Have they suggested that they are looking at other counties, potentially?

I think, when we had our conference here last year, they were talking about 11 counties, initially.

And in working with them and the other plan, we came up with these 8 at this point in time.

So, there are more.

But, any county that is mandated, we do operate in.

Okay.

So you guys are in all of those counties?

All right.

Thanks, guys.

Steve Halper, Thomas Weisel Partners.

On the 600 to 700,000 in start-up costs for Ohio, are you just going to include that in your income statement?

Or are you going to break that out as kind of a non-recurring charge?

How are you going to treat that?

Those costs will the expensed as general and administrative expenses(inaudible).

Okay.

So your 43 to 44 cents for Q4 includes those start-up costs?

Correct.

Great.

Thanks.

John Szabo, CIBC World Markets.

The question on the SSI operations -- could you just give us an assessment of where you think you are with that?

I know that it's a huge market opportunity.

But, the loss ratios are fairly high.

Are you thinking about, sort of, how long you're going to continue with these high-loss ratios before, maybe, changing the strategy?

Or do you sort of look at this as an investment in a big market opportunity?

Where do you think you are at --?

I think when we -- on previous calls, when we entered this, we said that this was an investment (indiscernible) new market with low membership.

We would have to start to build a process business-critical mass.

It was an investment in a new business.

I have personally participated in demonstration models many years ago in Indiana, and know it can be a very successful business.

So, it is very much part of our strategy.

There is no surprise here.

We have a predictive model we use on acquisitions.

This was expected to be there and I have given guidance it will be several quarters more before you see it come down.

But, you will also see that we have put in place the PDLs and some other things -- that we are building a lot of momentum in New Jersey.

So, we are very much into sustainable adjustments.

And, we are much happier to see it come down 10 basis points, 30,50 basis points and then it will accelerate -- then see it -- you know, spikes and valleys.

So it is very much, John, where we fully expect it to be.

Okay.

And then, in New Jersey -- I just want to make sure I understand -- Michael, you said 5 counties, 30,000 members -- did I get that right?

There are 5 counties we have entered, and (indiscernible) members is approximately 30,000 lives there that we would now start to participate in along with a couple of other plans that are there.

Okay.

On the escrow payment -- was that because the reserves proved to be understated -- that you received in that acquisition?

Or, was it because the cost trends ended up being higher?

I just want to make sure I understand that.

Karey can add to this.

It is really neither.

It is a prior period expense -- before we owned the plan.

But, you are right, John.

It is -- your first comment of inadequate reserves when we acquired the plan.

It was related to that, yes.

Okay, so the reserves were understated?

Correct.

So in terms of expanding in New Jersey, you feel comfortable that everything is sort of in place?

That you can go from here?

That there is no sort of structural issue in New Jersey?

That is correct.

And just a couple of details here -- You said 7.5 percent rate increases in Texas, excluding the 2.5 (indiscernible) -- is the right?

Yes.

Importantly, we got that increase.

It varied across -- every contracted service area got an increase.

But, I'm going by memory, 3.5 percent in El Paso.

Other markets where we saw we needed -- where we could demonstrate the need -- we had taken over some new memberships -- where we may needed 10 percent in one market.

So, we go off this -- we work carefully with data-driven; we talk about margin potential (ph) to states and how we can manage that.

And they tend to be the appropriate level of adjustments.

Okay, does not imply that, to the extent that some of your contracts may see lower cost of the effective rate increases -- a little bit higher than 7.5 percent?

Or, should I not look at it that way?

No, that is right.

You include the reduction in the Medicaid fee schedule -- yes. (multiple speakers)

It would be higher than 7.5 on an effective -- ?

Correct.

Okay.

Great.

Thanks a lot.

Ed Kroll, SG Cowen.

A couple of quick ones here.

First, on the minority interest -- I just wanted to make sure I understand a couple of things.

So, starting in Q4, the next quarter will no longer have a minority interest adjustment on the income statement?

Is that right?

That is right Ed.

We did not have one in this quarter, and we will not have one going forward, unless we enter into another partnership or other type arrangement.

Okay.

If you did have one this quarter -- I guess, what I really want to know is -- how is the profitability or the loss in New Jersey for the quarter?

I guess that had been the main driver of that minority interest adjustment.

That is right.

That is right.

The total market for New Jersey, Ed, is essentially earnings-neutral for us -- for the third quarter.

So, is that the health plan plus your specialty add-on?

Exactly.

That is correct.

Okay.

And that is how we look at it.

We don't just look at the health plan.

We have to look at the -- when I say total market -- you're right, that encompasses all of the ancillary contract that we enter into to service (inaudible). (multiple speakers)

Once again, it is where we expected to be.

All right.

And, what is the effective date of the buy-in of the additional 20 percent of New Jersey?

Of the remaining 20 percent of New Jersey, I should say?

That transaction closed around the middle of October.

Really, it had no impact on our income statement for the quarter, but it was a mid-October close.

Okay.

And, let's see -- the tax rate came in a little bit lower than we had modeled.

I an just wondering -- for your Q4 -- Q4 of this year and your 2004 guidance, what kind of tax rate are you assuming?

And what should we be using?

For '04, Ed, I think we're still looking at about a 38 percent tax rate.

Certainly it was less than that in the third quarter that we have reported.

For the 9 months ended, though, it was around 37.8.

So, we have talked a fair amount a bit about the planning and strategies we have done.

We have spent a fair amount of dollars in tax planning so that we're seeing some of the benefits of that.

But, Q4 -- we're still in the range of, let's see, 37.5 and 38; certainly no higher than 38.

Okay.

And then, last question -- Does your '04 guidance include the Ohio acquisition?

Yes.

Effective January 1.

And no change -- effective January 1, and no change in the prior guidance you gave as to have accretive that should be?

No.

The same.

I'm sorry, one more.

On the cash flow -- you swung nicely back into about a 1.5 times cash flow versus net income.

Right.

Are you on-track, do you think, for the full year '03 to be about 1.5 times net income for your cash generation?

Certainly for the fourth quarter, Ed.

But, one thing that I will make you aware of -- effective July 1, New Jersey increased its supplemental delivery, or maternity payments, by 50 percent to about $10,000 per delivery.

Since there is a lag that exists between the actual delivery that occurs and the time that the state reimburses us for that delivery -- so we are seeing some lag.

Roughly, delivery claims increased during the current quarter by about $3.2 million, primarily driven by this change in how New Jersey is now reimbursing us for deliveries.

So, while we did achieve 1.5 in this current quarter, it could have been higher, had this change not been incurred.

But, nonetheless, for Q4, we still see about 1.5 times.

It is all primarily going to be driven by the timing of our receivables.

So, such that, if we do not meet 1.5 for the full year ended '03, certainly '04 should be probably higher than that because of the timing of the receivables.

There's kind of this onetime drag.

There may be a onetime adjustment, but we won't know until we get further (indiscernible) to support it.

Okay.

Very good.

Thank you.

(OPERATOR INSTRUCTIONS).

Tom Carroll, Legg Mason.

A couple of questions -- the pilot program that you mentioned at the beginning of the call -- what state is that in?

Tom, I did not disclose that, because we are the middle of discussing it with the legislators and the --

I'm hoping it is New Jersey.

-- and the regulators.

And we don't want to --

Got you.

The dividend payment of 5.1 million -- is that from Bankers Reserve?

It was not from Bankers Reserve, but it was from a --

Could you walk through that once more.

I was fading out when you described that.

It related, Tom, to our termination in investment in a captive insurance company that we used for reinsurance purposes.

When we acquired Bankers Reserve, it gave us the internal capability to provide reinsurance to our owned subsidiaries.

So, in doing so, again, it enabled us to terminate our investment with this captive.

And in that termination, we did receive a $5 million -- onetime dividend.

Okay, so that is onetime.

I think what is important is -- when we went into this, it was always intended to be a two-step dance.

We wanted to enter the reinsurance business.

The captive allowed us to do it in a shorter timeframe.

We then bought Bankers Reserve, got it where it needed to be, and made that step.

It was always anticipated from the time we first did it.

Okay.

Very good.

The P&L in New Jersey that you mentioned -- does that exist in other states where you have prescription drug risks?

Yes.

All right.

Thank you.

Steve Halper, Thomas Weisel Partners.

Relative to New Jersey, you said it was earnings-neutual for the quarter.

I am assuming that, after the management fee, that the plan pays to the corporate holding companies -- is that correct?

Yes.

That is right.

Okay.

Thanks.

John Szabo, CIBC World Markets.

Just on that maternity payments in New Jersey -- is that included in the rate increase that you guys got in mid-year -- I guess, July?

Or, is that in addition to the overall rate increases?

It was effective July 1, so it would be in that number.

Okay.

It was not necessarily, John, an increase in the delivery payments.

What I mean was, it was a shift from -- they had previously included the dollars, relative to the kick in our monthly premium payment.

They moved the dollars to a kicked payment.

Okay.

Got it.

Just one last question on New Jersey.

Did you guys contribute any capital to that subsidiary this quarter?

Or do you expect to downstream any more capital to that subsidiary through the rest of the year?

During the current quarter, we contributed 500,000.

But, ongoing, nothing material is expected, certainly.

Okay.

Great.

Thanks.

Todd Allen, Kenny Securities.

Could you talk at all about expectations of SSI lives (ph), going forward -- at risk SSI lives?

Historically -- we did not say anything this time.

We just -- we consider it critical mass -- about 12,000 lives -- to get away from some of the law of small numbers.

And we said that would -- at the time we said 3 to 4 quarters, so we are still a couple of quarters away from -- 2 or 3 quarters away from seeing that.

Okay.

And if you could refresh my memory -- I just missed it in the (indiscernible) of the call.

What is the free available cash, currently?

132.5.

Okay.

Thank you very much.

At this time, there are no further questions.

Mr. Neidorff, are there any closing remarks?

No, we just thank everybody, and we look forward to another boring predictable call next quarter.

Thank you.

This concludes today's Centene third-quarter financial results conference call.

You may now disconnect.