Centene Corp (CNC) 2003 Q4 法說會逐字稿

Good morning.

My name Latasha (ph) and I will be your conference facilitator today.

At this time I would like to welcome everyone to Centene's year end 2003 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Lisa Wilson, Director of Investor Relations.

You may begin.

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 481-4536.

Any remarks that Centene may make about future expectations, plans and prospects for Centene constitute forward-looking statements for purposes of the Safe Harbor provision under 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-K for the period ended September 30, 2003 which is on file with the SEC.

Centene anticipates that subsequent events and developments will cause its expectations 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 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 fourth quarter of 2003 marked our 18th consecutive quarter of increased earnings.

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

It was another predictable quarter and we are proud of our achievements.

Membership as of December 31, 2003 was 489,600, an increase of 19.5 percent from the year ago quarter of which 15.3 percent is organic growth and 4.2 percent is acquisitions.

This calculation of organic growth includes New Jersey, which in Q4 demonstrated that it has now started to grow.

For the fourth quarter of 2003, revenues were up 46 percent to $207.3 million and our earnings per diluted share of 45 cents compares to 38 cents in the year ago quarter.

Our growing multiline company continues to deliver predictable results based in a large part on our geographic diversity across several states and our increasing business diversification from the implementation of our specialty company strategy.

I remind everyone of our dual growth strategy which continues to emphasize expansion of our core business as well as our entry into the specialty businesses.

I'd like to spend the next few minutes reviewing the significant accomplishments of the quarter and the year.

We completed the acquisition of the Medicaid related assets of Family Health Plans in Toledo Ohio slightly ahead of schedule.

And the membership became effective on January 1, 2004.

As most of you are aware, this marked the entry into our fifth mandated Medicaid state.

The Toledo operation is fully integrated, operating on our systems and staffed.

Additionally, we have now opened our office in Columbus, the state capital.

We are confident that Ohio offers a significant opportunity to grow organically.

There are close to 1.2 million eligible lives in this market and we are laying the organizational foundation and have identified those service areas with the most significant opportunities to build on our membership base.

We are pleased with the relationships we've established with state regulators and Mercy Health Partners who are working with us to maximize the potential to benefit their Medicaid population.

I look forward to reporting on future details on the Ohio and the progress we're making there.

On October 16, 2003, we listed the company on the New York Stock Exchange.

We are proud to have made the transition to a specialist based market and believe that it was an important step in the company's growth and in reducing our stock's volatility and increasing our market depth.

Based on data provided by the NYSE, for the period one month pre listing compared to one month post listing, intraday volatility decreased 4 percent and market depth increased 32 percent.

During the quarter we announced several important new management appointments and key promotions.

It is our ongoing continued premise that we need to build the organization in order to build the business.

We added several individuals to direct the expected growth of our specialty companies, including Dr. Aron Halfin as medical director for specialty -- Centene's specialty division, and Dr. James Van Halderen as President and CEO of NurseWise Script Assist.

Richard Frederickson was added as Vice President of SSI Product Development.

Other appointments included Dr. Michael Lynch from our Wisconsin health plan to his corporate position in St. Louis, and adding William Scheffel, a seasoned financial executive, as Senior Vice President and Controller.

I would also like to congratulate Cary Hobbs on her promotion to Senior Vice President, and Chuck Mangene, Pat Rooney (ph), Jay Belew and Robert Sanders on their internal promotions to vice presidents.

These appointments ensure that we have a deep experienced team in place to meet the requirements of an evolving and growing organization, and will be critical to our ability to execute and achieve the next phase of our growth.

Each of these individuals brings strong experience in his or her respective area of expertise and I look forward to working with them as we continue to build the company.

I'm also very proud of our ability to attract and retain these qualified people that are building the business.

Turning to each of the markets in which we operate, our growth continues to be in line with our expectations and demonstrates that our penetration of these markets is strong.

Wisconsin, Texas and Indiana posted strong membership growth over the prior quarter and for the full year.

In Wisconsin, growth was 18.7 percent, Indiana was 13 percent, Texas 34.2 percent including acquisitions, and New Jersey has started to grow with 2.1 percent.

Two new counties in Indiana turned to mandatory enrollment in the quarter and we added one new county in Wisconsin.

We are executing on our business plan in New Jersey and expect to continue to experience sustainable growth.

There are over 800,000 eligible lives in New Jersey and we are working with the state to identify ongoing opportunities to benefit their members.

We have now added additional counties and have enhanced member and provider relations programs.

I would now like to remind you of our consistent thesis regarding state budgets.

Despite recurrent headlines that states will continue to experience budget pressures, at Centene it is business as usual.

We believe that current data with respect to state budgets clearly illustrate that state budgets are rebounding and are considerably stronger than last year.

According to the state budget update report, over 21 states reported that revenues per fiscal year 2004 are above the original forecasted level.

Revenues on a -- are on target in 13 states, and 16 states report their revenue collections are below estimates.

Last year these numbers were 310 and 37 respectively.

Furthermore, of the five states in which we operate, New Jersey, Ohio, Texas and Wisconsin, reported no budget gaps for fiscal year 2004, and while Indiana, New Jersey, Texas and Wisconsin reported no budget overruns for fiscal 2004.

Looking at state's plans to cut eligibility, the data indicates that states are finding ways to continue to keep eligibility intact or restore funding to various programs including SCHIP and SSI.

At a particular point in time any state may implement a procedural change that will restrict membership for a quarter until the system has resolved these matters.

Some of you may recall that we experienced this situation in Indiana in Q1 last year and we fully recovered in Q2.

We view it as part of our business to work through these kinds of issues to the benefit of everyone and we consider it to be part of normal volatility.

As I reported in the third quarter conference call, Governor Rick Perry of Texas has taken action to restore the funds to the SCHIP program for mental health benefits that were previously cut from fiscal year '04 and '05 budgets.

On October 20th of 2003, the governor promised to restore $16.9 million in funding of which $11.6 million is federal matching funds.

On our last conference call we updated our shareholder on rates for Texas and New Jersey.

I want to reiterate for all of you that this is the rate performance that we talked about on the last call.

The confirmed increase in Texas is 7.5 percent excluding a 2.5 percent reduction in the position fee schedule and the impact of a new 1.75 percent premium tax, which I shall discuss in more detail shortly.

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

For New Jersey we previously reported that we received a 6.2 percent blended rate increase, the state also approved major aspects of our margin protection programs including emergency department policy and practices which successfully reduced inappropriate ER unitization.

New Jersey also approved our preferred drug list for PDL which will allow us to more effectively manage the pharmacy benefits and associated costs.

Rates for our newest state, Ohio, were granted this past July at a 5.6 percent increase over the prior year.

To date Wisconsin has maintained its 4 percent rate increase enacted January 1 of 2003 by paying 2003 rates for the first four months of 2004.

But is implementing policy changes which are significant for our margin protection program.

By example, they will allow us to pay the lesser of those charges or the Medicaid fee schedule to hospitals.

The state is also picking up first hour coverage for babies born prematurely and weighing 1200 grams or less.

This is known as the NICU auto exemption.

In Indiana we received a rate increase of 4.2 percent which is supportive of entering the new counties where at times initial cost trends may on occasion be higher.

An issue that may cause some initial confusion around our HBR and G&A ratios is the newly enacted 1.75 percent premium tax in Texas which has only impacted -- or first impacted us in Q3 of '03.

I'm going to now walk you through this in some detail as it is important.

You may recall that Texas is one of the states that used this approach to recapture part of the incremental rate increases they provide to health plans through the federal government matching program.

In other words, they gave us a 7.5 percent rate increase and respectively took 1.5 percent of it back as a premium tax.

Applicable generally accepted accounting principles requires that the premium tax be included in G&A.

We believe however, that deduction of the premium tax from premium revenue would result in a clearer apples-to-apples presentation for investors.

By not deducting the tax from the revenue line the impact is to increase the revenue line which results in deflating the HBR and to increase G&A both in dollar amount and as a percent of premium.

For purposes of managing our business, we view it as more important to regard this premium tax as a deduction from revenue rather than an additional G&A.

On this non-GAAP basis, our G&A run rate for the market segment for the quarter was 9.8 percent consistent with our target for single digit ratio.

On Medicaid G&A, while reported at 10.2 percent under GAAP, is, we believe, more meaningfully reflected at the 9.8.

In the HBR, while reported at 81.2 under GAAP is in our view more aptly considered to be 81.6 which brings it down slightly below our targeted range.

Importantly, the contracting process, the rate increases and particularly the reduction in physician fee schedules in Texas has created this lower HBR phenomenon.

Therefore, in the continued interest of transparency for investors, we will provide you quarterly with pro forma G&A and HBR numbers which reflect the net impact of the premium tax.

This is important to ensure comparability from state to state and to remove the impact this tax has on these calculations in our growing Texas business.

We will also, of course, continue to issue our reports that are appropriate to current accounting literature and standards.

Karey in his guidance will discuss the changes we will be making in our HBR target range due to these influences.

I also want to remind you that we continue to calculate our SG&A conservatively by not including interest income in the revenue line and by including depreciation and amortization as an expense.

The premium tax is different in that it is returned directly to the state.

I appreciate your ongoing confidence in Centene.

We look forward to updating you on the continued progress the next quarter.

Now I'd like to turn the call over to Karey Witty.

Karey.

Thank you, Michael, and good morning, everyone.

To recap the highlights of the fourth quarter of 2003, membership increased 19.5 percent over the same period last year to 489,600.

Organic membership increased 15.3 percent year-over-year while growth from acquisitions was 4.2 percent.

We experienced strong organic membership growth in Texas, Wisconsin and Indiana.

In the fourth-quarter revenue was 207.3 million, an increase of 46.3 percent compared to 141.7 million in the fourth quarter of 2002.

Net of acquisitions premium revenue increased 55.2 million or 38.9 percent versus the same period last year.

Our consolidated health benefits ratio for the fourth quarter, which reflects medical costs as a percent of premium revenue, was 81.2 percent compared to 82.5 percent for the same period of 2002.

As Michael indicated, our health benefits ratio was influenced by the newly enacted Texas premium tax.

Excluding the premium revenue dollars attributable to this tax, the HBR for the fourth quarter was 81.6.

As a result of the effects on our current book of business, we are changing our metric.

Therefore, our new target HBR range is between 81.5 percent and 83.5 percent.

We will continue to update you on this metric with any changes in products and/or member mix.

For the fourth quarter the HBR for the SSI group improved to 98.9 percent from 102.9 percent in the third quarter.

Our at risk SSI membership was relatively consistent at 4400 members and continues to represent a significant growth opportunity.

As a reminder, this is still a small population base and this ratio will likely fluctuate and may be volatile on a quarterly basis.

Michael has made the point at recent industry conferences that $50,000 is 1 percent of the health benefits ratio for SSI; therefore, a $500,000 case can swing the HBR by 10 percent.

On a consolidated basis this is not material.

We consider this a small investment against the large opportunity that SSI represents for Centene.

Turning to general and administrative expenses, our G&A as a percent of revenue was 12.2 percent in the fourth-quarter and 10.2 percent for the Medicaid managed care segment as compared to 10.8 percent a year ago.

This ratio was also affected by the Texas premium tax.

Excluding the tax, our total G&A was 11.8 percent and the Medicaid segment was 9.8 percent.

While we anticipate this metric to remain below 10 percent, it will fluctuate particularly in light of our accelerating M&A activity.

For our specialty services segment our G&A expense ratio was 53.5 percent and reflects increased expenses associated with moving our GPA subsidiary from Atlanta, Georgia to Austin, Texas, and also reflects costs incurred for gearing up for contracts in our Wisconsin and Ohio markets.

I'll remind you that our specialty company G&A will be significantly higher than our Medicaid segment ratio and will vary from product line to product line.

As expected, our Ohio acquisition generated no revenue during 2003.

Our fourth-quarter results reflect start up costs of approximately $400,000 in preparation for the January 1, 2004 effective date.

Earnings from operations for the fourth quarter of 2003 increased 43.8 percent to $13.8 million.

Net earnings were $9.7 million or 45 cents per diluted share compared to $6.8 million or 38 cents per diluted share for the fourth quarter of 2002.

For the year ended December 31, 2003, revenues increased 66.8 percent to $769.7 million from $461.5 million in the year ended 2002.

The health benefits ratio of 82.4 percent compares to 82.3 percent for the year ended 2002.

G&A expenses as a percent of revenues increased 11.5 percent from 10.9 percent, primarily reflecting our entry into the specialty services segment.

Earnings from operations increased 48.5 percent to $46.9 million from $31.6 million in 2002.

Net earnings improved to $33.3 million or $1.73 per diluted share.

At December 31, 2003, the Company had cash and investments of $285 million of which $127 million was free from state regulatory requirements.

Our medical claims liabilities totaled $106.6 million representing 59 days in claims payable and an increase in sequential quarter period end inventory levels from 59,000 to 131,000.

We remind you that we have historically provided this transparency on claims inventory and days in claims payable to highlight the correlation between these two data points.

With the exception of Texas, all of our state performance metrics remained relatively constant and within defined performance expectations.

However, Texas HIPPA rules, which became effective during the fourth quarter of 2003, delayed our ability to quickly and efficiently process physician claims due to inaccurate and incomplete billings and represented approximately four days of this increase.

We provided education to the physician community on the new requirements for billing and received any needed clarification from the state regarding these new guidelines.

We continue to work with our clearing house toward bringing all processes in line and expect our days in claims payable to normalize within our previously guided range of 50 to 55 days during the second quarter of 2004, although most likely at the high end of that range.

For the quarter ended December 31, 2003, cash flows generated from operating activities were $33.7 million compared to net income of $9.7 million.

Balance sheet items affecting the quarter include a $1.8 million decrease in premium and related receivables, a $14.8 million increase in medical claims liabilities, and a $3.6 million increase in unearned premiums reflecting the receipt of Ohio's January premium payment during late December.

Operating cash flows for the year of $56 million were approximately 1.7 times that of net income which exceeded our target range of 1.5 times.

As a reminder, while cash flows were very strong during the fourth quarter, they are typically lower in the first and second quarters primarily as a result of physician bonuses and income tax payments.

With respect to guidance, we anticipate revenue for the first quarter of 2004 in the range of $220 million to $222 million, and net earnings in the range of 46 cents to 47 cents per share.

For full year 2004, we expect revenue in the range of $940 million to $950 million and earnings per share in the range of $1.89 to $1.96.

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) Tom Carroll of Legg Mason.

Good morning.

A couple of quick questions here for you.

Administratively can you run through your top five outpatient drugs if you would?

Sure, Tom.

Let me just do this by therapeutic class not drug specific.

Our top five by number of scripts would be anti-infectives; antiasthmatics; analgesics; cough, cold and allergy; and then anti-inflammatory drugs.

Great.

Secondly, the premium tax initiatives, the one you're describing in Texas, we're seeing this in some other states as well.

Are there any other states out there that -- states that you guys currently operate in -- that you're aware of this occurring over the next 12 months?

We don't know of any.

It's talked about from time to time.

Wisconsin has talked about it at one time and backed off it.

The states in which we operate beyond Texas we're not hearing much talk about.

That doesn't mean tomorrow morning we won't wake up with somebody who tried to try it, Tom.

Very good.

Thank you.

I think I just want to add to that, what's important about it is that's why we're taking this approach at how we look at the matrix because it gives you that comparability from state to state when you net out because -- I guess it's what some people call round tripping of funds -- we're not --.

John Szabo of CIBC World Markets.

Good morning.

Just a follow-up on that question.

Do you think that the federal government will start taking a harder look in terms of the -- what the premium tax and sort of the mechanism through which they're trying to increase the match funds?

Or do you think that it's still such a relatively small amount that it really hasn't attracted too much regulatory interest at the federal level?

With the exception of maybe the first President Bush, they're all governors and probably sat around thinking about ways to do it themselves for many years in the administration.

So that’s a very realistic look at it.

The answer is, if they don't give them the money through this mechanism, they're going to get it.

Indigent people in this country are going to get insurance.

In the absence of companies like ourselves doing it, that end up in the emergency room and you have a different kind of higher cost and lower quality in terms of the continuity care.

They get good care in the ER, but -- that particular episode -- but you don't get the continuity you get through the primary care.

Our data shows that our system is delivering more preventive care, more primary care visits and less ER utilization.

So, I think, John, the answer is through one mechanism or another, as we saw last year with the additional funds put in, they will get it.

Sunday's New York Times, Saturday's New York Times, Trist (ph) was talking about how we have to cover more of the uninsured in the next budget year.

I think there's a consistent theme here.

They'll scream, they'll holler, they'll have budget problems, they'll have -- the National Governors Association will have the Heiser (ph) Foundation do a study, they'll publish it, and then they'll put some more money in.

I just have one other question on the HIPAA rules in Texas.

Did the state of Texas do something different in terms of HIPAA versus other states that would have explained that -- why it happened in Texas versus the other states?

They didn't do anything differently.

But what is unique about Texas are the number of what I'll call home grown codes that the physicians use.

So it was a very painful process of trying to map those home grown codes now into the new HIPAA code sets.

That unique attribute is what caused the issue, John, in Texas.

Who's your intermediary there?

The state of Texas uses the network called then Texas Health Insurance Network.

And then would it be fair to say also -- well, let me ask you, are you relatively more or less capitated in Texas versus the other states?

Can that have explained it as well?

Certainly capitation is more prevalent in our Indiana market, but there is a fair amount of capitations in our Texas market.

It's regional, John.

In some of the markets we have more than others.

And have you already seen that come back down then year to date?

Yes.

Thanks.

I'll just add, John.

If you think about it, we want to pay, we want to get our rates back up to where we're paying the doctors in that six days and the day the claim comes in we see that it goes out.

They're still being paid well within more than -- quicker than any acceptable levels.

And the fact that we show you the inventory in the days claims just -- we believe makes it very transparent.

Thank you.

Todd Allen of Kenny Securities.

Congratulations on a good quarter.

Just quickly, could you go over the portion that was free cash again, I think I might have missed that in the conversation?

127 is the number.

And could you also give us some guidance, in light of the premium tax, what you think a reasonable level would be going forward for general administrative expenses as a percent of revenue?

Sure.

I've given guidance in conferences that were webcasted -- essentially said, I think it's -- we're not going to try and push it too much below the mid 9's.

And keep in mind how we calculate it, leaving the -- not putting the revenue or interest income into the revenue line and leaving depreciation and amortization in.

So that's already a very conservative number.

I think if you get too far below that you're not really considering the update of systems and continuing to update the infrastructure to manage the business.

So mid 9's would be on the traditional basis for the Medicaid managed care portion without the presence of the premium tax?

Right.

Also, I think, Karey, you might have made a comment about M&A activity accelerating, could you comment on the pipeline and its composition?

Are we talking -- sorry for asking the same question I always ask -- but can you comment as to whether we're looking at maybe new states or specialty business or all of the above?

What's on the near --?

It's really all of the above.

The pipelines are fuller than ever.

The five people working M&A are going full tilt.

I've commented on some conferences, when you're working with -- particularly smaller entities like you've seen us do, sometimes getting through to the definitives takes a longer period of time.

You're working, you're bringing them along, you're helping them understand, you're getting comfortable, they have new lawyers that typically have not done these transactions.

It takes a little longer, and I'm prepared to take a little bit longer because at the end of the day when you do it and do it right you're going to continue to live with that party afterwards.

Probably in the case of Ohio, that's a hospital we have a long-term contract with, and we're going to be working closely with them.

So we like the fact that they were comfortable on how we did it.

And so it may take a little longer but it gets done right.

And I remind everybody that when you do a bad deal you live with it for a long time.

So we just continue to be methodical, and I think people will start to -- should be getting a sense of the cadence of how we do these things and that they will come.

Thank you.

Just one last question.

The new guidance for medical loss ratio or health benefits ratio, 81.5 to 83.5, had that previously been 82.5 to 83.5?

82.0, Todd, was the low end.

82.0 to 83.5?

Right.

Okay.

I was curious about the expansion of the range a little bit.

Do you expect increased volatility?

Obviously it's going to change directly as a result of the premium tax.

Yes, but I think some of that has just been some of the programs we've put in place, our ER program, the PDL's.

The reality is that these things are taking hold fairly quickly.

Karey, do you want to add anything to that?

I think the only volatility that we've truly experienced is the Medicaid ratio is relatively stable, certainly we've talked a lot about the volatility in our SSI ratio.

Great, thank you very much.

Mark Assilente (ph) of Alliance Capital.

Good morning.

Just wanted to check, does the guidance -- the guidance doesn't include acquisitions I would assume?

Correct.

And then on acquisitions, I guess, is one of the impediments that there's multiple people at the bargaining table trying to bid on the same things and the prices aren't cooperating, or are people now seeing that the coffers are filled and they want more than their properties are worth?

What's the factors?

I think it's clearly known, this company does not go into auctions.

There are three players out there and at any given time two might be interested, if we're not going to go into an auction that leaves one, and I think the sellers clearly recognize that.

Two, we've not changed our guidance materially over what we're willing to pay.

We've said as low as $50.

Why?

Because we've paid that.

And I can't say 150 or 200 if I've already paid only 50.

We’ve said probably 450 at the upper end and that used to be 400.

We're not finding that the pricing is the issue for us.

We focus on one number on the core businesses.

And that's the internal rate of return, and the hurdle rate is 25 percent, and we've said at every healthcare conference that we use a terminal value -- same price as the entry value, unless somebody can show us a clear reason that that discount should be adjusted.

So, if it doesn't -- I don't want to get on the phone on a core business and talk to a potential client if we can't get within that.

It always seemed though that the companies thought there were ample attractive acquisition candidates out there, and -- trying to connect the dots here.

Are there or are they scarce?

I've looked at a lot of good acquisitions.

There's one I looked at that the price was at the high-end and there was -- we could see virtually no organic growth, it was a highly penetrated market with very few very large players.

I think we're on record of not going into markets where there's not -- where we don't see organic growth in the core business.

Right.

I wouldn't consider that attractive.

But are there attractive ones out there?

Yes, there are.

Look at what we just did in Ohio, small, but a very attractive market, we established our footprint in it and there's other like it, there's others within markets.

I'm very comfortable that there's more than enough to fuel this.

There are 43 million people uninsured.

There are over 400 various entities, it's just a matter of working through.

And it's kind of interesting, in my prior lives at Miles (ph) Laboratories and elsewhere, I could call another major player and say, gee, I'd like to buy this division; and he says, now you talk the price businessman to businessman.

This process has other variables.

There's (indiscernible) remorse at times comes in.

It's their product that they've grown.

It's just working through it and doing it the right way.

We have good, solid 10 to 12 percent organic growth in this business.

We have a full pipeline of both specialty companies and core businesses, and we're just going to work through it one at a time or five at a time.

So at any one time there's more than one in the pipeline.

There's five, eight, whatever.

Last question, would you be willing to give some sort of bare bones you expect to acquire X amount of lives or X amount of dollars this year in revenue?

The last two years we've been public, I've always refused to do that, only for one reason.

I think this company has recognized everything we've ever said we're going to do, we do.

I don't want to put any sense of pressure on people in the M&A team, that I promise that by the end of Q3 we will have added another state or another 50,000 lives.

I think that's how you make bad decisions.

Fair enough.

Thank you.

Greg Nersessian of Lehman Brothers.

Good morning.

A couple of quick questions.

On the increase in payables, it looks like it was all just inventory.

Was there any IB&R component in the quarter maybe related to the flu season or anything along those lines?

Greg, a quick walk down would be essentially the four days that I mentioned for Texas, an increase in the physician bonuses which is about 1.1 days, and then the balance being the turnaround time.

Okay.

We -- flu, there was a lot of headlines on flu this season.

Our inpatient days didn't feel that at all.

There was a slight uptick in physician costs and maybe a small uptick in pharmacy, but you can see in our loss ratios that flu was essentially a non event for us.

Great.

Next question on -- just on Texas membership.

My sense is that there's going to be some sort of comings and goings this year.

You've got the county where you're kind of managing lives -- I believe that's Stratus (ph) County -- you're managing lives on an interim basis, maybe picking up some membership in the SCHIP program there.

Can you give us an update on the timing and the magnitude of the membership ins and outs?

And then also, I believe they're putting out an RFP in Texas on all of the Medicaid managed care lives, can you update us on the timing and the process there?

I think the last I heard is it's started back working -- has been working backwards.

I think the timing I've heard is in September, that's their renewal period.

And we're going through strategically, looking at this where we want to be and where it makes sense to be.

And so, we see no issue.

We're strong, we're dominant in El Paso, Austin, San Antonio, we expect there will be two players in markets because that's the way it's structured and we understand that and that's not a problem.

There's good responsible players, big strong markets.

The other part of the question is the 12,000 escrow lives that we've been holding will obviously if another player were to enter that market then we’ve agreed with the state that that moves over as part of the procurement.

And that's fine, I think people should expect it.

The whole idea of looking forward on these things is people know what's happening, they know it's not a problem, it's just a normal course of business.

In other markets, they're talking about some products in the valley of Texas in rural markets for SCHIP and that.

That's a negotiating process, Greg, and when you're working through that, I don't know if it ends up being a Q2, Q3 membership, that's a function of when they get it and what states are feeling (ph).

And the reason why I have to be less than precise is some of these states, while they have their budget issues, that's really staffing issues for them.

Some of these departments are reducing personnel, they're not adding people they think they need for this growing management of it, so it kind of slows them down.

Great.

And then last question, you mentioned you're opening your office in Columbus.

Is that -- can we read into that that you're looking at that market in Ohio is going to be your next area that you plan to look at --?

I'm not going to encourage you to read something into it or not read something into it.

It's obvious that Columbus is the state capital.

In a new state where we haven't had the presence, a la in Wisconsin where Madison used to have us always being in Milwaukee.

If you think about it, in Austin we have an office, we have an office in -- we've talked in Trenton but that plan has always been a newer company.

So, when you're in a new state it makes a lot of sense to have an office in the state capital.

And at the end of the day, if it also turns out to be a good Medicaid market, it can serve two purposes.

Do you have any sense of what the size of the Columbus market is compared to the Toledo market?

There's probably about in the 70,000 plus range of eligibles compared to 50 in Toledo.

Great.

Thanks.

It's a reasonable sized market.

Okay, great.

Thanks a lot.

Steve Halper of Thomas Weisel.

With respect to the Texas premium tax, does that expire at some point or does it have to be renewed?

Could you just expand on that?

We don’t know sunset on it.

So, I mean it's there and I suspect at any given point in time, wherever their budgets are, what they think they can get by with, there are waivers and things.

The Federal Government knows they're doing this.

So, they may at some point -- there was an earlier question, it came I think from John, that it may -- somebody may say don't do this any more, we're willing to give you more money in other ways.

I don't know.

And then on Wisconsin, do you have some clarity as to when you would get a 2004 rate increase?

Your comment was that they're paying a 2003 plus some reductions in physician fee schedules.

Any visibility as to what happens in --?

I think they're probably talking in Q2.

But that lesser bill charges or Medicaid fee schedule and the -- any neonate, any premature birth less than 1200 grams going direct to them.

In many ways we're very pleased with those kinds of policy changes.

So net net in the first couple months of '04 you think your margins are preserved in Wisconsin?

Yes, I think they've come a long way.

As we've talked about, this is not a new concept for us.

We like working with the states in this space.

Because then it gets baked into the program and you benefit for a long time.

Right.

So these --.

They are material, Steve.

Right.

So, if you get your rate increase in Q2, it sounds like you're confident that some of these changes will stick as well which only increases the margin going forward?

Yes.

Because when we've talked about -- is we've gone to the states -- and we've been talking widely about this for two years, over two years, about margin protection which is where we're getting the unit growth which is the best way.

We don't need just rating to get topline growth.

And so, we said to them if you give us these programs that might be worth X percent -- I don't have all the calculations in front of me -- of rate increase.

So therefore, we'll take a rate increase in April, May, whenever, and it can be a little bit less if you leave these things in place, which they, of course, didn’t put them in just for four months, Steve.

So it's all good things.

Thanks.

Ed Kroll of SG Cowen.

Good morning.

I've got a couple of questions.

First, not to beat a dead horse, but on the M&A pipeline situation, I wonder if you could just maybe tell us your priority relative to entering a sixth state through an acquisition or doing a fill in, let's call it, or an in market -- in state expansion in one of your five existing states?

I think -- we always look -- when the tuck-ins are there or the in market, that's always a nice thing to do.

We have the systems, you have everything there, and as you've seen in Texas, elsewhere, they're very accretive and the risk is much more minimal.

I always like that, it's just (indiscernible) is just pure organic growth.

I mean it's -- in some markets we've had the network in place and all you had to do was add some member services people and flip the membership over.

So that's always a nice strategy.

We then look at the states and we have a whole array of states, and they kind of move around a little bit, Ed.

I'm trying to give you a sense.

The Ohio one, we probably first looked at it a year ago, had some conversation, and they said nah, we don't think so, we think we still like it.

Then one day they wake up and they call us and say we'd like to talk to you.

If you want to that's fine, we don't do auctions, we understand that.

We then sat down, and you have those discussions and then you get the term sheet done, and you move through it.

So we'll do all that and there's a whole series of those and we look at rate adequacy, we look at the policies of the state, we look at the size, we look at the concentration of membership in an urban area.

All those things come into play and we look at the systems, can we convert the system in 60 to 120 days?

The day we pushed a button in Ohio we were on the system, it's done.

It is fully integrated to where that's no longer a barrier to doing the next one.

And we're very comfortable in the -- it's just working nicely.

So we look at the ability to do that.

At any given time there's probably 5 to 7, pick a number, a range of states and opportunities we're looking at in that business, Ed.

And they come along at different times, and -- we're looking forward to being in six states or more.

We've said there's 24 states still out there that we have various degrees of interest in.

We're not landlocked.

Thanks for that.

And then on ramping your -- or for lack of a better term -- insourcing the mental health specialty, what two states did you say you're ramping into?

I missed that.

Was it --?

And I want to make the point that these are not in-house, these we keep as freestanding companies that could sell also wholesale and retail outside, so it's not just for our own purposes.

We went into Wisconsin and, of course, Ohio is a new state, we're going in there.

In Indiana as well.

We're now moving that company GPA into Indiana.

Okay.

So Ohio and Indiana are the -- where you're ramping GPA --?

Right now, right.

Got it.

And then just kind of a housekeeping -- final couple things.

The tax rate and the investment income for Q4, '03, can we consider those the 37 percent and the slightly higher investment income, are those good quarterly run rates now?

Let me give you a range, Ed, on a tax rate which we believe would fall between 37 and 37.5 going forward.

As far as the income, or the investment income, 1,700,000 was certainly a strong quarter for us.

Depending on what the market does that number could come down.

I would say it's -- it should be right around that number, say 1,500,000 to 1,700,000.

And it could also come down through the acquisitions, right?

We do our next deal --.

Fair enough.

And then finally, the MLR range, the new range you gave, that's on a GAAP basis, right?

Right.

Okay.

Thanks very much.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

Are there any closing remarks?

We just want to thank you and we're looking forward to the Q1 conference call.

Thank you, everybody.

Have a good day.

This concludes today's Centene conference call.

You may now disconnect.