Centene Corp (CNC) 2004 Q1 法說會逐字稿

Good morning.

At this time, I would like to welcome everyone to the Centene's first quarter 2004 results conference call.

[OPERATOR INSTRUCTIONS]

I'd now like to turn the call over to Lisa Wilson, Vice President of Investor Relations for Centene.

You may begin.

Thank you.

Good morning, everyone.

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 CEO and Karey Witty, CFO of Centene Corporation.

This call is expected to last approximately 45 minutes.

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

A replay of the call will be available shortly after today's call completion by dialing 800-642-1687 in the U.S. and Canada or 706-645-9291 from abroad and entering access code 6572189.

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 the forward-looking statements as a result of various important factors including those discussed in Centene's Form10-Q for the period ended March 31, 2004, and the company's other SEC filings.

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 I'd like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

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

I am pleased to report another predictable and strong quarter.

Karey Witty will go over the detailed results shortly.

The first quarter of 2004 marked our 19th consecutive quarter of earnings growth and we achieved our internal goals.

Membership, as of March 31, 2004, was 522,400, an increase of 25% versus the first quarter of last year.

Of which 15% is organic and 10% is from acquisitions.

For the first quarter of 2004, revenues increased 27% to $225.5 million and our earnings per share of -- per diluted share of 47cents compares to 40 cents a year ago.

We continue to see solid Medicaid industry trends.

According to a report published recently by CMS, Medicaid covered a record 42.4 million people in 2003.

Numerous opportunities exist to continue to drive our business both through acquisitions and organically to meet the health needs of those eligible for Medicaid and to enroll more eligibles in our programs.

We continue to work with the state and they are working in cooperation with us to enroll more recipients in our programs.

Recent analysis of our data reaffirms that our margin protection program, which combines rate protection with policy initiatives at reduce cost and improve health outcomes has helped to reduce unnecessary emergency room visits and direct more routine medical visits to primary care doctors.

For example, in Wisconsin, the savings to the state -- to the state increased $65 million under Medicaid managed care in 2003 versus $56 million in 2002.

I'd now like to review the progress in each of our core states.

In Indiana, membership growth was 19.7% and opportunities for future growth continue to be strong.

Two new counties converted to mandatory status on March 1, and four more will convert on July 1 of 2004.

Additionally, we received a 4.2% rate increase effective January 1 of 2004.

In Wisconsin, quarter over quarter growth increased 18.7% and we received a rate increase of 4.6%, which will become effective on May 1 and will remain in effect until the end of the year.

The state has worked with us to implement policy changes that are significant for our margin protection programs.

Wisconsin also allows us to pay the lesser of bill charges for Medicaid fee schedule.

It has recently accepted our preferred drug list.

We are pleased that we will also begin working with the state's SSI population beginning in September when it starts to enroll members on a voluntary basis.

This has been a long-standing objective.

The program will change to mandatory status in early 2005.

Our progress in New Jersey continues.

Our membership remains stable and our programs in the SSI population are taking hold.

We are actively working with the state to expand the SSI programs beyond the one county that we are in presently.

As I indicated last quarter, New Jersey has accepted our preferred drug list, allowing us to more effectively manage the pharmacy benefits and associated costs.

Turning to the state of Texas, in the first quarter as compared to the fourth quarter of 2003, we experienced a sequential decline in membership due to administrative policy changes imposed by the state.

Now Texas requires SCHIP members to reenroll every six months as compared to an annual basis.

The state has implemented a 90-daywaiting period for enrollment.

You may remember that in the first quarter of 2003, we experienced a similar situation in Indiana when the state required Medicaid recipients who were also welfare recipients to reenroll in person.

We're confident we can be successful in reaching out to our members' and reenrolling them and advising them what to do through these outbound calls.

While we are already recouping the members, we expect the process will take longer in Texas than in Indiana.

We are demonstrating to the state that the savings that we generate for them will enable them to expand the enrollment base within existing budget levels.

We do this as part of doing business.

To work through these kinds of issues to the benefit of everyone and consider it to be part of the normal volatility.

Importantly, the reduction in SCHIP membership that we experienced was pro-rata for the state's overall loss in membership.

The state has also increased the SCHIP member premium from $15 per year to $180 per year.

It is unclear that this impact or how this will impact membership.

But it will provide us with an opportunity to structure some research or attempt to structure such research that shows the effect of increased premium tabs on SCHIP participation.

We previously advised you that we have been holding 12,000 custodial lives in Texas until a second plan could be brought into the market.

We expect these members to begin migrating to a second plan in the June or July timeframe.

This is worked well and serves as an example of how we are able to work with the state effectively to everyone's benefit.

Our acquisition in Ohio is completely integrated and membership held steady in the first quarter.

The opportunity of service area expansion and growth prospects in the state continue to be excellent.

We remain focused on building our provider network in additional markets for future expansion.

In the interest of transparency and insuring realistic expectations, I want to point out that the state of Ohio has an elongated process for enrolling members in new service areas.

We're making important progress in this regard in this state.

Regarding rates, Ohio is now converting to a calendar year and had previously given a 5.6% rate increase to managed care providers in July of 2003 and has given a 2.3% rate increase effective January 1 of 2004.

This equates to a cumulative increase of 8% in order to move managed care organizations to a calendar year renewal.

Furthermore, we have assumed responsibility for managing the behavioral health benefits in Ohio for our members.

Turning briefly to other financial metrics.

Our consolidated health benefits ratio was 81% with the Medicaid component at 80.6% and the SSI of 99.3 compared to 83.4 in 2004.

Excluding the tax -- Texas premium tax, our health benefits ratio was at the low end of our band at 41 -- at 81.4% and reflects the successful implementation of our marginal protection programs.

Turning to G&A., our Medicaid manage care segment, G&A, reported a 10.4% under GAAP.

On a non-GAAP basis, our G&A run rate within the Medicaid market segment for the quarter was 9.9, consistent with our on going target for a single digit ratio.

On a consolidate the basis, our G&A was 12.6% and continues to be impacted by the Texas premium tax and the higher overall G&A in our specialty business segment as previously discussed.

We want to remind you we continue to calculate the SG&A conservatively by not including interest income, new revenue line by including the depreciation and amortization expense.

Regarding management appointments, let me begin by congratulating and welcoming Lisa Wilson, the newest member of our Senior Management team.

As many of you know, Lisa has been working with us since our initial public offering in 2001 and has made significant contributions since then as our -- into our investor relations program along with building awareness of Centene with the Wall Street investment community.

We look forward to her continued contributions as rebuilding grow Centene and believe her experience as an equity analyst will be important as we execute our M & A strategy, for I will continue to present at conferences and meet with investors for one-on-one, I want to encourage you to use Lisa as your first line to investor relations resource.

We also welcome John Roberts, Executive Director of Civic Progress to our board of directors and to Centene's audit committee.

Prior to 1998, when he retired, he was a regional managing partner for Arthur Andersen and serves on two other New York stock exchange boards and audit committees.

His perspective on corporate governance and financial transparency will be invaluable as we continue to build Centene to conform to the highest standards.

I am also pleased to report that we culminated in the past week an agreement with Jim Donovan to join us on or about October 1, 2004 as Senior Vice President, New Product Development.

He and his wife Jane will be relocated to St. Louis.

Most recently he was Vice President with Texas at a Mayor Group.

I believe it is imperative that we have the people in place in order to continue to build our successful organization.

I would like to update everyone on the status of our M & A pipeline.

As I have said over the past several quarters now, we are sensitive to you wanting to know more in the pipeline is full.

And we remain aggressive.

I believe you know that it is our policy not to discuss the status of any particular acquisition opportunity -- of opportunities that are being considered.

I can say that there continue to be a number of opportunities in the marketplace, but our goal, first and foremost, is to focus on and identify those that are consistent with our criteria.

They must be accretive in the first year, they must be able to convert to our system, and they must be in mandated states.

Acquisitions could be an entry into a new state, add ons, or tuck ins, and existing markets, or service area expansions, or businesses consistent and complementary with our multiline specialty company strategy.

Recent acquisitions in the industry would suggest that there has been some creep in the price paid per member.

However, we believe that considerable opportunities exist and remain there for the discipline purchaser.

Finally, I'd like to advise you that on a tentative basis, we have scheduled Wednesday, June 2, in New York City, for our second annual analyst day.

Lisa will be sending the invitations out shortly.

And she will provide relevant details.

We look forward to seeing you there.

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

Thank you, Michael and good morning everyone.

To recap the highlights of the first quarter of 2004, membership increased 24.6% over the same period last year to 522,400.

Year over year same store membership increased by 62,300 representing a 14.9% organic growth rate.

Membership growth in Indiana, Texas, and Wisconsin was strong and New Jersey membership was stable as expected.

We're also reporting on Ohio for the first time, completing the first quarter with 23,800 members.

For the first quarter of 2004, revenue was $225.5 million, an increase of 27.1% compared to 177.4 million in the first quarter of 2003.

Net of acquisitions, revenue increased 27.1 million or 15.3% versus the same prior year period.

Our health benefits ratio, which reflects medical services cost as a percent of premium revenue was 81.0% compared to 83.4% for the same period in 2003.

Excluding 1.1 million in premium revenue attributable to the Texas premium tax, which we discussed last quarter, the HBR was 81.4% for the current year quarter, essentially at the low end of our target range of 81.5 to 83.5%.

The ratio was influenced by the continuing benefit of our margin protection program, which has resulted in fewer emergency room visits and significantly reduced pharmacy costs.

For the first quarter of 2004, the HBR for our SSI population improved to99.3% from 104.2% in 2003 and compares to 98.9% in the sequential fourth quarter.

Our at risk SSI membership was relatively stable at 4,400 members.

Turning to general and administrative expenses.

Our GNA as a percent of revenue was 12.6 in the first quarter of 2004 and compares to 10.9% in 2003 and 12.2% in the sequential fourth quarter.

This increase reflects both the implementation of the Texas premium tax as well as our entry into the specialty services business segment.

In total, our G&A was 12.2%, excluding the premium tax.

For the Medicaid managed care segment, G&A as a percent of revenue was 9.9% excluding the premium tax and compares to10.5% a year ago.

For our specialty services segment, our G&A expense ratio was 52.9% and includes an increase in the provision for un-collectable accounts of $450,000 related to write off in the quarter associated with transition certain activities within our specialty services segment.

We have been working to restructure certain contractual relationships to improve our billing and collection capabilities.

These write off reflect the effects of these activities.

As a reminder, our specialty company G&A will be significantly higher than our Medicaid segment ratio and will vary from product line to product line.

Earnings from operations for the first quarter of 2004 increased 44.7% to $14.7 million and net earnings were $10.1 million or $0.47 cents per diluted share compared to $7.2 million or $0.40 cents per diluted share for the first quarter of 2003.

The weighted average share count increased by 3.8 million shares year over year, primarily reflecting our follow on offering.

Investments and other income for the first quarter of 2004 was $1.5 million, an increase of 536,000 over the first quarter of 2003, and our tax rate for the quarter was 37.0%, both in line with our guidance.

Balance sheet highlights at March 31, 2004, include cash and investments of $288.7 million of which $119.1 million was free from state regulatory requirements.

Our medical claims liabilities totals $109.8 million representing 55.4 days in claims payable and reflects the expected decrease from 59.0 days in the immediately preceding quarter.

As anticipated, the period ending inventory levels were significantly reduced during the quarter and drove this change in dates.

For the quarter, cash flows generating from operating activities were $12.4 million, compared to net income of $10.1 million.

We remind you that our cash flow generation during the first half of the year is affected by the timing of certain payments, for example, income taxes.

Additionally, we contractually pay physician bonuses during the second quarter of each year.

The effect of these bonus payments will lower our cash flow generation during the second quarter and temporarily lower our days and claims payable measurement.

Regarding guidance, we anticipate revenues for the second quarter of 2004 in the range of $230 million to $232 million and EPS in the range of $0.48 cents to $0.49 cents.

We are updating our guidance and anticipate 2004 revenue in the range of $940 million to $950 million and net earnings of $1.91 to $1.96 per share.

This does not include the potential impact of any acquisitions that we may undertake during 2004.

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

[OPERATOR INSTRUCTIONS].

The first question comes from the line of Steve Halper with Thomas Weisel Partner.

Hi, relative to the health benefits ratio coming in at 81.4% excluding the tax premium.

Do you think, you know, at some point you might have to reconsider what your long term, you know, targeted range is?

Could you expand upon that a little bit?

Steve, I think the range still holds.

Okay.

You know, and I was reminding people, it can bounce around 30, 40 basis points in any given quarter and that's not going to or anything else, it's just the kind of things that happens by the nature of the business.

We have a lot of programs that have tended to take effect and keep it at the low end of the range but I don't see making any material changes to it.

Okay.

Great.

Thanks.

Our next question comes from the line of Eric Veiel with Wachovia Securities.

Thank you just a couple quick questions.

Michael, can you give us an update on any new state or opportunity from de-nova perspective that you might be seeing and where those opportunity stand?

Yes, I won't be specific.

I will tell you that there are several de-novo we are looking at.

And I think when you see some states have not had plans before and I think they are probably the obvious ones and I just want to be just very cautious as we look at them to insure that the state really understands what sound policy amounts to.

There's one thing to say they are moving towards somewhat to do it right way.

We saw places like Tennessee and what can happen when it's not done right.

So I think from a going back and not blaming the current administration, but if you go back to when they first initiated 5, 6 years ago.

So it's that kind of thing, Eric that we're looking at and for that reason I won't comment beyond that.

But we are looking at the local startups.

Okay, that's fair.

Just to make sure I interpreted your comment about Ohio properly in terms of the lead-time to bring new members on and service area expansion, so should I interpret that to mean don't expect much in terms of new membership there until we get to the four more counties?

Yes, I guess, you know, the clear answer is we have networks developing in multiple counties beyond where we are.

That is the sequence.

From the point of time you get the network in place and then you go to the state and you get certified and everything else, there is a four-plus month period of time until they start to roll the first members into.

But we can do everything precisely right today to get there and we are.

But we will be methodical about it making sure we have the right network, size, scale, that's appropriate for a particular county.

And once that is all done, though, some states, you show it to them, you can start to receive members in 30 days.

That's not the case in Ohio.

So all I was trying to do with my comment was tell everybody, you know, we are doing everything we said we would do in Ohio.

The strategy of having the footprint in Toledo still makes sense to us, was the right way to go.

And now the expectations will be you will see it start to grow but don't look for it tomorrow, so to speak.

Okay and I actually confused my last question with that question I apologize.

And then going to Indiana, the four additional counties that come on 7/1.

Can you give us a sense of the size of those counties compared to the two counties that convert at March 1?

They're smaller in stature.

The state has been converting counties over the last now roughly 2 years.

And starting with counties such as Indianapolis, so the ones that remain are certainly smaller relative to the Indianapolis.

Okay.

Great.

Thanks very much.

The next question comes from the line of Gregory Nersessian from Lehman Brothers.

Hi, thanks good morning.

A couple quick questions on Texas first.

How much chip membership do you have remaining in Texas and I guess for how long do you expect this enrollment in that program to serve as a drag on the Texas enrollment?

And then my second question in Texas is just with the switch -- or the loss of the 12,000 lives in Travis County, do you anticipate that to be the extent of the loss in Travis County?

Or from that point further will you see continued attrition there as more membership shifts to the second carrier?

Greg, we have roughly about 18,000 chip lives remaining in Texas.

Certainly we're doing as Michael indicated everything we can to educate our members and work with our members and the state to curtail any further loss in that market.

But we're just going to have to take a wait and see attitude.

We are doing outbound calls to our chip members, insuring that they are educated on how to reenroll, etc., etc.

So, you know, point is we're doing everything we can to maintain our membership for chip in Texas.

Then relative to the Austin market, the 12,000 lives, I think it's -- we've been talking about this for roughly 18 months now, at least.

You know, it should be no surprise to anyone.

We've always characterized these lives as lives that we would eventually lose to a second carrier.

Having been serving the market, having served 100% market share in that market, Texas did get a waiver from CMS for some period of time as they worked through this process to get a second carrier.

So they knew -- they now in fact have that second carrier.

They will be entering as Michael said in the June/July timeframe.

And relative to -- delivered with the 12,000 or whatever, it may not, but that doesn't bother me I mean, I like competition.

In previous lives or consumer package goods, nothing is compared to the analgesics like Alka Seltzer, cough cold, antacids.

I think really sometime when there are two players in the market, it can help it to grow because there is that much more activity and more awareness that grows, Greg.

So I don't see that as a negative, but too responsible players in the market, which the federal government mandates.

I view that as a positive

One last quick question.

In Michigan, the two plans, I'm sure you're aware, were in rehabilitation, preliminarily have entered into agreements to be acquired.

Did you look at either of those two plans?

And if not, what is it about the Michigan market that you're -- that did not meet your criteria?

You know, I -- I'm not going to comment whether I looked at it or didn't at this point.

I will tell you that I have a lot of respect for the people that entered there.

And they have their approach to the business.

Our approach is --tends to be much more find good plans that we can make better.

And so we have a little different strategy.

I'm not trying to say that one is better than the other.

More than one-way to get there.

It's just we take a very different approach of saying we would rather find something that has higher medical loss ratio where our programs can bring it inline, that is accretive in the first 12 months.

We laid the guidelines out.

We're working hard not to disappoint anybody.

So beyond that, I think those people that brought the plans there will probably be better to comment on it than us.

Okay.

Great.

Thank you very much.

Thank you.

Our next question comes from the line of Joe Franti (ph) who is with Bank of America.

Thank you.

I have two questions, Michael, both related to Texas.

The new rules for SCHIP lives, were they all affected simultaneously and when were they effective?

It was simultaneously and went into effect I think January 1 or thereabout.

And you mentioned, if I understood correctly, the enrollment is currently in the SCHIP lives are 18,000?

Yes.

What was it at the end of the year?

Let me look that up.

During the sequential quarter, Joe, we lost roughly about 4,000 to 5,000 in chips.

So, you know, chip as a percentage of our total Texas business is not a huge chunk.

That's great.

Thank you.

Your next question comes from the line of Todd Allen with Kenny Securities.

Good morning.

Congratulations on the good quarter.

Thank you, Todd.

I was hoping you -- you mentioned this in your prepared comments.

But could you repeat what you said about rate increases by states?

I was a bit behind you in my note taking.

Then I was also hoping you could address the sequential uptick in G&A, you mentioned an allowance for bad debt related specialty business.

Could you just cover some of those items again and give us a feel for where G&A may be turning in the coming quarters.

I commented that we received 4.6% in Wisconsin. 4.2% -- I'm going my memory, I'm going back to my notes, 4.2% in Indiana.

We received a cumulative because of what they did in January in the previous year, 8% in Ohio, which will then be effective until next January.

I also commented that rate increase in Wisconsin is effective May 1.

And then they'll be eligible to sit down and talk to them again in January.

Okay.

The G&A -- some normal upticks on timing on investment, organization development, things to be expected.

And though some write-offs on -- we converted and Karey can give more detail.

We converted to a -- we outsourced some receivable handling for one of our specialty companies.

So when you do that, you clean up the books.

It is easier to take a write-off.

It was that order of magnitude that I think we should get, what, 10 basis points.

You know, once again, you know, it's not a magic formula that keeps it steady, Todd, as you know.

Right.

I mean it can be up and down 10, 20-basis points.

So in terms of what is called a normalized level going forward, something that looks like the last quarter and all consolidated basis, something in the low 12% range is a reasonable assumption?

Karey?

We're actually looking at it even by business segment, Todd.

You know, we've maintained the Medicaid piece in the single-digit range.

Right.

The specialty segment piece has been bouncing around a bit.

But we told you it was higher in the fourth quarter for certain reasons.

And it did settle back down in this quarter.

So reality is, as we continue to grow our specialty business, that number is going to bounce around depending on which program is rolled into the specialty segment.

I think, you know, another comment.

So much of these things are timing.

If we made an acquisition in the third quarter of a month closed on it, you'll see a different kind of SG&A if we closed on it maybe in the first month of the quarter.

It's timing and how we do it.

I mean there is -- there were no surprises there for us.

And, you know, we -- and it just -- it's just part of the -- I mean the business costs are well under control.

We know where our costs are at.

Okay.

Great.

Thank you.

Thank you.

Your next question come from the line of Jim Lane (ph) with Arguers Partners (ph).

Hi, good morning.

I had a very big picture question.

I was just wondering if you could, you know, help us understand.

Last year I believe it was midyear the federal government put through about $10 billion of extra funds available to the states to fund Medicaid programs and in various areas, not all towards Medicaid HMO's, of course.

I'm just wondering, as that anniversary, how we should think about how that business -- how that additional $10 billion positively impacted or didn't impact your business and, so, as that anniversary, is that something we should be, you know, aware of and looking into further?

You know, before investing in the company.

I'm trying to understand how that actually financially impacted --

Sure.

That's a good question.

You know, I think if we remember, last year there were three states, and I'm giving you approximate numbers, Jim.

Sure.

There were three states that forecasted that they be would at or better than their anticipated revenue for the year.

Last numbers we received shows it at something like 23 states that have given us presentation that are at/or expecting to exceed -- expecting to exceed their revenue.

There is another 10 or so that expects to be under revenue forecasts.

So I think as the economy has turned, that $10 billion served its purpose in the stopgap and becomes less essential to my mind.

And what I really like about the current environment and why I am so optimistic and not changing guidance or anything else on that is that tough times create better economic public policy.

So the real answer is that this past year has created a more positive environment in this industry because if you look at our margin protection programs, where the State of Wisconsin moved in things like the lesser of bill charges for Medicaid PRG's.

Now that's a lot better than another incremental rate increase because it bakes into the system the kinds of responsible actions that create a long-term opportunity, so I would say that as you look at that, you know, you have to look at it in a broader context that the federal government gave $10 billion.

Well, and also, do -- so do you think that the -- the budget improve -- or the revenues relative to budgets have improved enough such -- along with these structural changes that you're suggesting occurred or you're indicating occurred as a result of the revenue short falls last year would -- would make the lack of another $10 billion, you know, one-time or two-time subsidy sort of a wash?

Is that sort of how you think it will impact your business?

The states in which we operate, those that we're choosing to operate, we think have the budget cape -- capacity to deal with these issues.

Absolutely.

Okay.

I mean if its there, it's going to accelerate.

The whole issue is this --You know, why - where are additional funds coming from.

Not so much the day in and day out of our business.

But there are 43 million uninsured Americans.

That is a national embarrassment.

And so, if they have incremental money in the state, if the state get incremental money, they're judge the eligibility to bring in more of the working poor and uninsured.

Wisconsin had all kinds of in the press budget issues.

What did we have, 18% growth year over year as they continue to find ways to bring in more people.

So I think, you know, what you're reacting to is the headline volatility.

But as you dig behind the numbers, you're going to see the states continue to provide insurance for the industry.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Seth Peek (ph) with Apex Capital.

Good morning.

I'm wondering if you could comment a little bit more on the specialty business and the bad debt charge and what the normalized operating results would look like, please.

I think Michael addressed this briefly in Todd's question.

Essentially, we did make some changes to our billings.

And our outsourcing our billing for behavioral health services.

You know, I don't -- I don't want to make a big deal of this.

There was $450,000.

It's behind us and when we go to -- continue running our business like that.

I just don't want to make a big deal of the 450.

As far as a normalized rate, as I've said, as far as the specialty, if you're comparing our specialty G&A first quarter '04 versus first quarter '03, you know, keep in mind that we only had the BHO company as well as the medication compliance company for one month in the first quarter of 2003.

So it's not necessarily an apple to apples comparison.

We have added lots of infrastructure on the specialty side, which is increased the G&A costs on that specialty side, which will support growth going forward.

Great.

And in the state of Texas, some of the publicly traded hospitals have mentioned that there was not only just started policy changes but some design -- benefit design changes.

I think one of the top hospitals specifically said Texas is leaving $1 billion of federal matching funds on the table.

So I was curious to know how --why you're so confident that the decline in membership in Texas is just related to the re-enrollment versus people actually being booted off of Medicaid?

Sure, if you look at all the headlines, you'll find that governor Perry publicly stated that he thinks it's an embarrassment to the state to have 1.2 million lives uninsured.

Two, they are looking at the Medicaid policy.

Now people at health care conferences have heard us talking about the fact that we have been providing states with what we call the basic plans that eliminates some benefits that are rather wasteful and that can even be reasons for fraud -- I mean pediatric chiropractic care, for example.

I'm not trying to pick on the chiropractors, but there is a benefit for pediatric chiropractic.

Now the state eliminated that benefit.

I think that is an important change.

Not a -- not an adverse change and we have been working with this state.

I have come to learn that what we suggested as the basic plan the governor is now incorporating into his Medicaid reform.

So once again, when you are a leader and you act like a leader, you work with the state responsibly as we are, to structure the benefit to the benefit of recipients and for cost savings to the state.

I think also in the text earlier today, you heard us say we're showing the state that as they save money in PDL's and a lot of different things, that money goes back in to the match.

And goes back in to covering more eligibles.

So once again, it goes back to what I said earlier.

This is a good environment and forces states to make the right tough decisions.

I see that as the glass half full or more than half full for that opportunity because they're very receptive to constructive ideas.

Great.

Thank you.

Your next question comes from the line of Ed Kroll with S.G. Cowen.

Good morning.

Good morning, Ed.

I have got a couple of big picture questions myself.

And then just a kind of a housekeeping one.

On the uninsured, I guess looking at that population long term as an opportunity for you to, you know, do something about that public embarrassment, national embarrassment, as you call it, how -- how hard would it be to reach those people, to change existing programs to accommodate them?

I guess how different are they than the, you know, the current population?

And it may vary by state, Michael, if you could give us your overall impressions.

Would it have to be dramatic policy change at either the federal or some of the state levels to get some movement on getting coverage for these people?

How dramatically different would the programs have to be?

I'm wondering how, you know, is this a really, long, long, long-term opportunity for you or something that could -- you could tap into in the nearer term?

I think -- let me say, I think what is important is that he scale it on a methodical basis.

They're not trying to dump in as many as they can as fast as they can.

The (inaudible) say, look, here's what they did it (inaudible) in Wisconsin.

One approach to it was constructive.

They said if a child was SCHIP eligible then the parents could come in.

There was a slight premium and a different benefit level.

What you're seeing is, what I call the working poor.

The growth in this country right now is coming from the smaller employers.

We still have the large companies with their layoffs.

Smaller employers are not offering benefits.

So now you have households that maybe no longer meet eligibility but going without insurance.

So we're going to work with the states to say how do you adjust that eligibility level gradually?

We can't do it all at once.

Start to bring them in.

And, you know, we like the way that's been done in Wisconsin.

And we're talking to other states about it.

We're talking to Indiana at the legislative level.

Because what we like about it is, you know, we know the differences.

In that case, it becomes much more pharmaceutical in ambulatory care initially because it's a younger population than it is the in-patient side.

You structure the benefits to deal with that.

I think, Ed, and I'm not trying to -- I'm trying to give you -- I'm trying to answer this from the 25,000-foot level.

But I think what you're going to find is that gradually more and more of these people will be brought in to that system and the programs that we have in the states, like Wisconsin, state by state, we see the Barger care in similar programs, not quite block grants but where the minimum benefits have to be covered and how it's done.

In Texas, governor Perry has legislative session coming up now, a special one.

You know, I think he's going to find more money within the system to do it.

On one hand, cutting one end of the chips and talking about enrolling some other members.

And they started to realize if they can find the right initial membership, it saves them the most money that generates more funds to go back into the program.

Because, you know, if these individuals do not have managed care, you're going to have disproportionate payments to hospitals.

You have all kinds of things that are going to drive it.

The system has a lot of money.

Ohio, we're only first getting into that.

But, you know, those membership of most of people are on a fee for service.

We see an opportunity there and if they save money, we'll work with them to bring in every increase in numbers.

Indiana, I did -- I think I mentioned Indiana.

You know, we're working there showing them how just with some drug -- through some PDL changes, they can save hundreds of millions of dollars to bring in more people.

New Jersey, once again, we have heard all about the budget wows, but somehow they continue to find money to give us the rate increases to keep this industry vital.

We're working with them saying let's expand the SSI, a lot of money and better outcomes.

Wisconsin has now accepted the idea of moving the SSI population.

I will finally tell you -- I'll give you one more insight that may be helpful.

A lot of these states, you know, we do everything on an incurred basis and we worry about claims on hand.

The states do things on a cash basis.

So one of the things we're trying to help them solve is when they move to a prepaid program from the cash basis, there is a quarter or two where they take a double hit.

So we have to work with them and start to help them figure out how to gradually move that along.

So there is a whole series of things.

In case you can't tell it from our voice, this is what I find really exciting.

It's an opportunity to be a leader and to move constructively through the process to cover more and more of the uninsured.

Thank you.

That was very insightful.

Long-winded, I know.

You got me wound up.

Thank you.

That's exactly what I was looking for.

And I'm glad that you sound optimistic about that.

The second question, this one won't be as long, I promise.

Just a notion of the federal matching funds.

Where do you see that evolving over the long term?

Just in the answer to the previous question, you mentioned block grants.

Do you think ultimately that's the direction we go in as regard to the federal matching funds for the state Medicaid programs?

You know, I don't think it's going to be a -- this is as speculative as it gets.

I have no magic crystal ball on this one.

But I really believe it's going to be a mix.

It's not going to be a full block grant where money moves around, you don't have to worry about how it is controlled.

The system -- to control it, can be as onerous as anything.

But I think you'll see a mix.

I think you'll see incremental funds given to chips.

Here is money for chip.

Now structure your benefits if you want.

Come back for our approval.

And you can cover the parents of SCHIP kids like they did in Wisconsin.

So you're going to see a mix there.

I'm not looking to see full block grants.

Okay.

And then really quickly, what tax rate should we be using for the full year '04?

I think on our year-end call, Ed, we said 37 to 37.5.

We came in at 37 for this quarter end.

So I think those are still good metrics to use.

Okay, great.

Thanks very much.

At this time there are no other questions.

I will now turn the call back to Mr. Neidorff.

Thank you, everybody.

We look forward to talking to you another 90 days for an update and look forward to seeing you when we're on the road.

So thank you.