Centene Corp (CNC) 2004 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Centene Corporation Third Quarter Earnings Release 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, Vice President, Investor Relations.

Please go ahead.

Thank you.

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

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

If you have not received it, please call Libby (Abelt) (ph) at (212) 759-5665 and it will be faxed to you immediately.

We have with us today Michael Neidorff, Chairman 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 atwww.centene.com.

A replay of the call will be available shortly after today's call completion by dialing (800) 642-1687 in the US and Canada or (706) 645-9291 from abroad and entering access code 1093292.

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 Form 10-Q for the period ended September 30, 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 would like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

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

I'm pleased to report another predictable and strong quarter.

Karey Witty, our CFO, will review the results in greater detail shortly.

The third quarter of 2004 marked our 21st consecutive quarter of consistent earnings growth and we continue to achieve our internal goal of being a leading multi-line Medicaid company in the government services category.

Membership as of September 30, 2004 was 641,600, an increase of 37.4 percent versus the third quarter of last year.

Of this increase, 32.3 percent is organic and 5.1 percent is from acquisitions.

For the third quarter of 2004, revenues increased 27.7 percent to $253.7 million and our earnings per diluted share of 52 cents compares to 44 cents a year ago.

Medicaid industry trends remain strong and our margin protection program continues to produce cost savings for the states in which we operate.

We believe that Centene will continue to be the leading industry player and we are working with our states to deliver core Medicaid services and provide quality care for our recipients.

At the same time, we are continuing to roll out our specialty company strategy, which will further expand the product offerings to our Medicaid recipients.

For 2005, trends indicate that state budgets will have stabilized and improved.

I'd like to review the programs in each of our five core states, starting with Indiana.

Membership growth was 33.8 percent and opportunities for future growth continue to be strong.

The state has converted a total of 6 additional counties to mandatory in 2004.

Discussions with Indiana State regulators indicate that they will convert another 5 to 7 counties in 2005, based on the ongoing success of existing mandated managed care programs.

In addition, we are currently working with Indiana on 2005 rates.

We feel that with our cost controls in place, that the rate increase will not need to be significant.

As anticipated and previously discussed, we expect new entrants in the state as a result of the RFP process that commenced earlier this year.

We recognize that these additional players in the market and the resulting competition creates a healthier and more responsible environment and actually tends to grow the category.

In Wisconsin, quarter-over-quarter membership for Q3 increased 9.7 percent and the 4.6 percent rate increase that we received in May 1, 2004 is in effect.

On a sequential basis, membership declined due to changes that the state imposed in May regarding verification requirements for eligibles in its BadgerCare Program.

The decline is mainly due to changes in administrative and procedural practices such as the failure of applicants to return employment verification forms or to provide other verification of eligibility.

It is important to recognize that administrative practices or some other factors may affect sequential growth in any given quarter.

We want to encourage everyone to look at the overall trend patterns for the entire book of business.

As many of you will remember and are aware, we have experienced similar short-term variances in other markets in the past, namely Indiana and Texas, and we are working with the State of Wisconsin to re-qualify the recipients.

This temporary change is part of the normal course of doing business with our states and did not affect our prospects for ongoing organic growth of 10 to 12 percent.

The state continues to work with us as a partner to implement policy changes that are significant for our margin protection program.

Our efforts to enroll the state's SSI members on a mandatory basis during 2005 are under way.

New Jersey membership was flat, as expected.

However, we have been, and continue to be, profitable in this state and we are working with it to expand our programs in the SSI population in the remaining 19 available counties.

We expect the process to take longer than originally anticipated due to the current situation in the New Jersey governorship and the impending change in leadership the middle of next month.

As we discussed on our last conference call on July 1, we received a composite 5.3 percent rate increase for fiscal 2005 and the state imposed a 1 percent premium tax effective September 1, 2004.

They increased the rates again an additional 1 percent to offset that tax.

These rate increases, together with the previous related policy changes, meet all our expectations.

Turning to the State of Texas.

We announced in May that the state awarded an exclusive provider organization SCHIP contract to the subsidiary Bankers Reserve Life Insurance Company.

We had anticipated this contract would have become effective in the fourth quarter, but I am pleased that we were able to support the state by enrolling these members September 1, 2004.

The 94,500 lives in 170 predominately rural Texas counties, encompassing 16,000 providers, is maturity greater than we initially expected.

Had the enrollments taken effect in the fourth quarter when scheduled.

We expect the membership to come down to the levels originally anticipated for Q4 or closer to 80,000-plus lives.

The state regulators will be working during the new legislative session, which begins January 1, 2005, to identify available funds to grow this market.

This contract clearly validates the strong relationship we have with the State of Texas and reflects our ability to benefit and service the members as a low-cost provider.

In August, we completed our submission of an RFP under the procurement law that exists in Texas and are awaiting the outcome from the state on service area expansion for our current markets.

We expect to remain the incumbent in our existing territories and believe the RFP process creates opportunities for us to expand into other service areas and stimulate awareness for potential Medicaid recipients.

It is important to note that the RFP process is done to re-certify the existing plan and is the normal course of doing business in the state.

In Ohio, membership was flat, as expected, in the third quarter.

However, opportunities for service area expansions continue to remain strong and we anticipate new service areas early in '05.

We recently held a state-issues retreat with our plan presidents to discuss the challenges and opportunities facing Medicaid managed care.

One consistent theme from these meetings was that sound public policy has been, and should continue to be, driven by the recent budget constraints and the outcome of the upcoming election will not change the increasing expectation of providing insurance for the uninsured.

Moving on to our financial ratios.

Our HPR declined, as was projected it would on the last conference call.

The 20 basis points sequential quarter increase in G&A ratio was clearly a function of the accelerated enrollment of the Texas EPO contract.

I'd also point out that the HPR in Q4 is anticipated to remain at or below the target range due to the success of our margin protection program and in Q4, G&A expenses will include $900,000 in costs associated with the integration of FirstGuard.

The third quarter was highlighted by several other important events, which are consistent with our planned growth objectives.

We announced the realignment of our specialty companies into a subsidiary called CenCorp Health Solutions which is a multi-line Medicaid-focused specialty platform concentrating on behavioral health, nurse triage and treatment compliance.

Group Practice Affiliates, one of our specialty company subsidiaries, was renamed Cenpatico Behavioral Health in recognition that it is not a group practice.

The primary reason for this reorganization was to clearly delineate the arm's-length relationship between Centene and Centene CenCorp, allowing us to offer programs to unrelated entities, as well as our own health plans.

We also hired Sam Donaldson as Chief Executive Officer of Cenpatico whose significant experience will help us to grow this business segment.

Dan has built an extensive career in behavioral health and his experience will be critical to working with and managing the SSI population where 40 percent of the treatment costs are related directly to behavioral issues.

We also announced other key additions to staff, which responsibly builds the organization in support of the solid growth we are experiencing and will continue to experience.

On the acquisition front, as most of you are aware, we signed a definitive agreement on September 28 to purchase FirstGuard, a health plan entity serving 136,000 members.

This marks our entry into two additional mandated Medicaid states, Missouri and Kansas, where FirstGuard serves over 94,000 Medicaid and CHIP members in Kansas and 42,000 members in Missouri.

More importantly, there are a total of 1.2 million Medicaid eligibles in both states, as well as an additional 120,000 SSI eligibles.

This acquisition met all of our discipline criteria, including our most important metric, the internal rate of return.

FirstGuard has an IRR of 21-plus percent which is acceptable to us and it was in our target range of 20 to 25 percent, particularly when a plan holds the dominant position in its market, has organic growth opportunity and is a multi-state platform.

The transaction will also be accretive in the first 12 months and will allow us to leverage our local approach.

Importantly, it also offers us opportunities for future growth, including the potential for service area expansion and inclusion of the SSI population into our programs.

A final comment regarding the status of the M&A platform and pipeline, as I have said over the past several quarters now, we remain aggressive and we will be disciplined purchasers.

We are actively pursuing a number of opportunities, which are at various stages of development.

Finally, as noted in a press release, we filed a Universal Shelf with the Securities & Exchange Commission last night, which will permit us to offer and sell securities up to an aggregated value of $300 million.

This gives us flexibility going forward with an ability to raise equity and/or debt.

There is a window at this time and we're able to take advantage of the opportunity.

This must be viewed in the context that we have talked about in the past of being a boring and purposeful company.

Finally, the Company has entered into an agreement to acquire additional land adjacent to our corporate headquarters which will allow us, if necessary, to plan for our growth and expansion in a methodical way.

It will be funded, in part, through our non-recourse loan.

I'm going to turn this call over now to Karey Witty who will take you through the financials.

Karey?

Thank you, Michael, and good morning, everyone.

To recap the highlights of the third quarter of 2004, membership increased 37.4 percent over the same period last year to 641,600.

Year-over-year same-store membership increased by 151,000 representing a 32.3 percent organic growth rate.

This includes approximately 94,500 members within the Texas SCHIP EPO contract, which was effective on September 1, 2004.

Exclusive of the EPO members, our organic growth rate was 12.1 percent year-over-year.

As expected, membership in New Jersey and Ohio was stable, while membership in Indiana and Texas was strong.

As Michael previously mentioned, Wisconsin experienced a sequential quarter decline in BadgerCare membership, while the Medicaid membership continued to increase.

For the third quarter of 2004, revenue was $253.7 million, an increase of 27.7 percent compared to $198.8 million in the third quarter of 2003.

Net of acquisitions, the revenue increased $40.6 million, or 20.4 percent, versus the same period -- same prior year period.

The EPO contract, which became effective on September 1, 2004, ahead of schedule, added an initial $7.6 million in revenue for the quarter.

The addition of these members reduced our consolidated revenue per member per month to $144.70 due to the lower SCHIP premium.

I want to emphasize Michael's previous comment regarding the Texas EPO contract.

When we agreed to the September 1 effective date, we were fully aware that the member base would be reduced throughout the balance of 2004, and at least until the next legislative session convenes during the first quarter of 2005 to identify funds to grow this market.

Our health benefits ratio, which reflects the medical costs as a percent of premium revenues, was 80.7 percent compared to 82.0 percent for the same period in 2003.

Excluding premium taxes, which were imposed beginning September 1, 2003 by Texas, and July 1, 2004 by New Jersey, the HPR was 81.2 percent for the current year quarter, essentially at the low end of our target range.

As we mentioned on our second quarter call, we expected this ratio to come in slightly below our target range, primarily due to the success of both our margin protection and utilization management programs.

Let me also re-emphasize that when FirstGuard is consolidated into our financial statement, you should also expect the HPR to recalibrate back into our banded range of 81.5 to 83.5 percent.

For the third quarter of 2004, the HPR for our SSI population improved to 92.8 percent from 102.9 percent in 2003 and compares to 97.8 percent in the sequential second quarter.

The potential for volatility in the SSI HPR is driven by the fact that there are only 4,500 full-risk members at this time.

Turning to general and administrative expenses.

Our G&A as a percent of revenue was 12.7 percent in the third quarter of 2004 and compares to 11.4 percent in the same quarter of 2003.

This quarter-over-quarter increase reflects the effect of the Texas and New Jersey premium taxes, one-time startup costs related to our Texas EPO contract and due diligence expenses for our specialty segment that were written off for an acquisition that we decided not to pursue.

You should likewise expect that the fourth quarter will reflect one-time integration costs of $900,000 related to the FirstGuard transaction.

Excluding the premium taxes, our G&A ratio was 12.2 percent.

For our Medicaid managed care segment, G&A as a percent of revenue was 10.0 percent, excluding the premium tax and compares to 10.1 percent a year ago.

Investments and other income for the third quarter of 2004 was $1.7 million.

We had a slight increase in interest expense resulting from the increased non-use fees tied to our new $100 million credit facility which closed on September 14.

Earnings from operations for the third quarter of 2004 increased 30.3 percent to $16.5 million.

Net earnings increased $11.4 million, or 52 cents per share, compared to $8.7 million, or 44 cents per share, for the third quarter of 2003.

Balance sheet highlights at September 30, 2004 include cash and investments of $323.6 million of which $123.3 million was free from state regulatory requirements.

Our medical claims liabilities totaled $126.4 million, representing 57.3 days in claims payable and reflects an increase from 53.5 days in the immediately preceding quarter.

As you would expect, this increase reflects higher claims inventory levels primarily resulting from transitioning the EPO members to Centene effective September 1.

For the nine months ended September 30, 2004, cash flows generated from operating activities were 57.5 million compared to net income of $32.3 million.

For the quarter, cash flows generated from operating activities were $27.4 million compared to net income of $11.4 million or 2.4 times net income.

Lastly, our fourth quarter of 2004 guidance is in the range of $265 million to $267 million and we anticipate net earnings of 52 cents to 53 cents per diluted share.

This anticipates incurring the previously mentioned $900,000 in startup costs in preparation for the FirstGuard closing.

For 2005, we anticipate revenue in the range of $1.22 billion to $1.24 billion and net earnings per diluted share of $2.39 to $2.47 per share.

Since the FirstGuard transaction is subject to regulatory approvals, our guidance excludes any impact related to the transaction.

In addition, this guidance does not include the effect of any pending changes to the accounting treatment of stock options.

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

(Operator Instructions.)

Gregg Nersessian, Lehman Brothers.

I guess my first question is just on the Medical Claims Table in the quarter.

Do you have a figure for what that would have been if you backed out the impact of the Texas CHIP contract in the quarter?

You're looking for a days claims table number, Gregg, or --

Sure.

Sure.

It essentially would have reduced our overall claims liabilities, essentially taking in $7.6 million in premiums for the month of September.

We paid very few claims.

Again, if an individual went to a physician's office early in the month, most likely we didn't receive the claim until the latter part of the month, so you can see that as the month would progress, we would receive very few claims.

So of the $7.6 million, you could back out roughly 85 percent of that out of the claims liability.

Okay.

Thanks.

And then the next question is on the shelf.

Just if you could give us a little bit more detail about your M&A pipeline, you know, what the filing of the shelf says about your M&A pipeline and I guess sort of how you view the timeline in terms of the integration of FirstGuard?

And would you be willing to pursue another acquisition while you're still in the integration process or would there be a lag before we could expect Centene to get back into the, you know, into the M&A market?

Okay.

Let me respond to these.

There are several questions there, Gregg.

First the shelf, it's a timing thing.

I mean, you know there's a lot of regs about when you can and can't file shelves and thiswas a very propitious time to do it.

You also know that there is -- you have to have an intent to use it within a given 2 -year period of time and so there are some restrictions.

It's also universal so it gives us the opportunity to do debt as well as equity.

You also know that we had about $225 million of available cash.

We spent $93 million on SafeGuard (sic) where we're throwing off cash to the Company and so that, you know, we are not dependent on that shelf or the approval of it to do our next deal.

At at the same time, the SEC goes through its reviews and it's just very propitious, the word I used earlier, to get it completed, have that review and have it available when appropriate and necessary in either form, equity or debt.

I think the other side of it is, FirstGuard and the way we do our deals, the day we close, if we close January 1, you can expect February 1, within that first 30 days, we'll be paying the claims on our system and it will be virtually integrated from the operations side, the systems, the finance, the close, those types of things.

So the ability to do another deal will not be impeded by that particular side of the business.

We have two sides of the business.

We have specialty; we have the health plan side.

Both sides have equal M&A capabilities and we'll be in a position to do either one as appropriate and necessary.

The pipeline, it is very full and I figure -- as I've said before -- I think I said on the last call I'm not worried about disappointing investors in that line.

I still am not concerned that our investors will be disappointed in the quality and the type of acquisitions we do.

Okay.

And then just a last quick question along those lines.

In terms of the deal you terminated, do you have any -- could you give us any details about the type of deal?

It sounded like it was a specialty deal.

Any specific type of an organization you were looking at?

You know, I'd rather -- to avoid speculation of the other side, I'd like to avoid that.

Okay.

I'll only tell you that I think we've said to you and all our investors and analysts, -- the buying side essentially that we've always felt the first dollar lost is the best dollar lost. .

Um-hmm.

As we go through it, wewill spend the money to do the deal, the due diligence, the legal expenses and things.

If it does not meet our criteria, what we did this time, write off $350,000 and move on.

Okay.

Great.

Thanks.

Thomas Carroll, Legg Mason

Hello?

Are we there?

Mr. Mason has withdrawn his question.

Your next question comes from Eric Veiel, Wachovia Securities.

I don't know if you guys can hear me.

I can hear you now, Eric.

Okay.

The question I had and I'll just repeat it again.

I'm not sure if you heard it before.

Can you walk us through the State of Texas and what'scausing them to reduce the EPO members?

Is this a county eligibility issue?

Is it a state budget issue?

Why are those members going down?

I think it's a combination of things.

We know from time to time, the states, when they've been expanding these , they have been under some pressure and they are just looking for ways to reduce it and save some money and there's also, in my judgment -- there's a lot of politics involved and I won't go much beyond that but adding -- trying to secure funds for the SCHIP program is -- should be an easier process in the legislative year, particularly if he shows he had to cut back and it just makes it that much easier to push to add more money for that particular fund.

So there's a certain amount of that taking place.

We saw the last time there was a legislative session, they announced that they were going to eliminate the SCHIP program, and then some legislators stepped in and said, we had cut it back to nothing so now we're going to add to it.

So we took it back up.

So there's some politics being played there, simpleas that.

The point of the question was just to get some comfort around knowing that the attrition stops at about the 80,000 life market.

Is there some assurance that you have from the state that that's where the attrition ends?

I mean, we've had conversations.

We've looked at it, you know, and it's -- we try to be reasonable in what we provide you in terms of guidance and that type of thing, and if we've said 80,000, well, we have comfort zone.

Is it 78,000 or 84,000?

I mean, you know, it's approximately 80,000, Eric, and we have a comfort zone at that number based on discussions, our local market people's opinion as to what they see happening and they're dealing with it day in and day out.

And so I'll kind of rest it on that and we'll see how it shakes out next quarter.

Okay.

Second question, can you give us some additional color -- I think you mentioned on Ohio, there's some service area expansion potential in '05. .

Can you just add a little bit of detail around that, Michael, in terms of, you know, size, timing, etc.?

I'm not going to give you a lot of numbers on size.

I will tell you that the organization has its office opened now in Columbus.

We have a very strong contracting team on the ground.

They're making some very good progress.

There's a lot of (indiscernible) in Ohio and I expect Q1, we should start to see some service area expansions and approvals with members coming on, so, you know, there's $1.2 million.

There's another plan there with 300,00 lives, some other smaller plans.

The state has incredible budget constraints right now and we've talked to legislators and regulators that want to see this at a commission they appointed to take a look at the whole managed care.

There's some strong recommendations that came out of that in terms of moving aggressively in the managed care with this population.

They talk about SSI in probably '06 as part of their solution so I think we have the environment in which -- where we can do well.

Okay.

Great.

And then just a last question.

As we think about the timing of the Texas RFP process from here, what'll be the next milestones in terms of feedback that you'll get from the state and then be able to pass onto us?

I think what they'll tell us is -- and they'll post it so everybody will get it -- here's who's been awarded which service area and then they'll go through and do their readiness reviews where they come in, they look at the office, they look at the -- how well we're set up, how we're going to manage it, and as an in-force player that's -- I mean, they know what to expect when they come into our office.

So -- and then we'll sit down and talk about the rates in the service area early next year.

Any idea on the timing of when they're going to post that?

Every time I try to get them on that they -- there's something that changes.

I expect it sometime in December probably.

Great.

I'll jump back in the queue.

I think there were some problems with the other people getting questions.

Ryan Stewart, Piper Jaffray

Just a quick question relative to specialty and CenCorp and then just maybe one or two follow-ups.

You know, in looking at FirstGuard, it looks like they have some pretty interesting specialty capabilities with their nurse line and some DM programs in place.

As you realign CenCorp, would it be your expectation or should we expect that some of these value-added assets might be, you know, integrated or elevated out of FirstGuard and centralized into CenCorp?

Well, I think there's two elements to that.

First, the NurseWise and that would ours in terms of (indiscernible) .

That tends to be on our side of the ledger and what capability, if any, that they would have there would integrate into ours.

I think what you may be thinking about is Swoop Enterprises.

That was the -- and is, though, the owner of FirstGuard -- had some capabilities in behavioral health and others within their health sets.

So they would stay there and our CenCorp company would then contract with them as providers.

So that's what you should look for.

If Swoop Enterprises has some capabilities, we'll contract with them.

Okay.

And as far as FirstGuard's, you know, Nurse line , it would -- you would look to roll NurseWise in there post-acquisition?

Yeah.

I think what they're using is they're using Access or some other outside service.

Okay.

So their nurse line of course, when appropriate, it would become part of our NurseWise.

Great.

And then just continuing, one last thing on specialty, a private venture, Doctors On Call, is out with some interesting data this morning with some work that they did in South Carolina where they actually drove down ER visits by 24 percent.

There's a lot of endorsements out there by, you know, the government, Oklahoma.

I guess it was -- the study was done by the University of Oklahoma.

There's a lot of endorsements around this type of, you know, your NurseWise capability to help with ER visits.

Is this something that you would look to add to or do you think you have enough capability in NurseWise to have that scale to the extent you expect it to scale in years to come?

Well, we have -- everything we do is -- we do things that are scalable.

I mean, we have 622,000 lives and we could go to 1.2 million tomorrow on our system just by adding disk drives and we could get to the next level fairly quickly.

But on NurseWise, we have that capability.

We have the similar experience.

I mean, clearly when this population doesn't know who to call or where to go, they go to the emergency room and our programs have had a lot of the same impact.

We've had material changes over the last 4, 5 years.

This was not new news to us.

I mean, I haven't seen that study.

No, absolutely. .

I just -- in looking at -- thinking about kind of the M&A pipeline, you have the core capability.

There's no reason to look to be adding from just a pure scale perspective in that area.

I'd say we have the scalability right now.

Okay.

Great.

And then just one last quick question on, you know, relative to New Jersey.

Do you kind of constitute the dynamics there as just change of control or also looking at the, you know, the $5 billion or so deficit that they have in the state relative to dynamics as you look out over '05, you know, with Governor Cody now coming in, post-McGreevey and having to deal with the $5 billion deficit?

Well, you know, I think they were both very pro-managed care --

Yeah.

-- from everything I've seen.

So I see that as a positive.

I think that any state that has those kinds of deficits, Ohio and others and those kinds of problems, that's an opportunity for more sound public policy and less politicking around these issues.

So I see it as a very positive environment that can only drive the SSI and other memberships to very responsible managed care.

That's great.

Okay.

Thank you.

So I view it as positive.

Thanks for your comments.

Tom Carroll, Legg Mason Wood Walker, Inc.

Can you hear me?

Now we can hear you.

Very good.

Technical difficulties are great.

Question on the Texas SCHIP business, the EPO business, could you provide a couple of examples of what Centene is doing operationally to learn about the population, as well as the providers, in order to best manage this business that seems to be pretty scattered all around the state?

Yeah, I mean, I think one, we've done SCHIP for some period of time in Texas and elsewhere, so in terms of learning the population, I've commented, Tom, that typically, you know, in the rural markets, this tends to be acute care versus chronic care.

Some -- a child that has a high-intensity illness, you will find more in the urban setting.

Obviously, if we identify somebody, we get them to an urban setting where those kind of services are available.

We're working with the network.

We use an outside network in some parts of it in the Valley where there's a big concentration of its membership, a 4 -county area.

We have people developing our own contracts down there and so it's really just practicing what we've done with other SCHIP members.

It's a little more telephonic.

You don't send a nurse out to a hospital 500 miles away when there's a tonsillectomy or something, you know.

But , as I said, these are acute care, but you monitor it, and if there's a more -- a higher intensity, you make sure they get to the best center available.

Okay.

Just a quick follow-up on the BadgerCare Programs.

Would you suggest that BadgerCare enrollment decline should slow from here or even start to grow again given that it looks like attrition in the program has been more than the state anticipated?

Yeah, you know, I mean, the states have done things -- we saw Indiana and Texas, and then you say you change something and this is the impact.

Gee, that surprises us and we'veheard that a lot.

Meanwhile, they've overcome a temporary budget issue for 2 weeks.

So what we've seen in every other case is it comes back and then starts to grow.

We heard about Texas cutting back the SCHIP and we had, oh, 20 percent attrition there and now it -- then they bring in the EPO product and I think once the legislative session is back in, we should see some of these things start to grow.

Okay.

Thank you very much.

And by the way, I just want to add, I don't think they'll grow instantly.

We'll watch them over time as the politics plays out.

Bob (Editt) (ph), Principal Capital

I was wondering if you could talk about Indiana.

You mentioned that -- I think it was 6 more countries went to mandatory enrollment in 2004 and then essentially more -- some --o I think it was 5 additional counties could be converted in '05.

Any sense of the relative sizes and sense of, you know, total population, relative population in those county areas or are these just, you know, in terms of -- can you help us size it?

I don't have that all in front of me.

I'll be glad to get it for you but --

Okay.

The counties that -- they're starting to move down the -- as you look -- as you move down the food chain, these tend to be the smaller counties --

Right.

-- as you'll see.

But, I mean, this is still -- it's still sizeable and you heard Karey give 10 to 12 percent organic growth across our whole book next year --.

Right.

-- from a much higher base this year.

So we're still looking for Indiana and all our markets to contribute to that.

And so, you know, we still see good opportunities.

I guess we have probably 30 percent of the market now or 25 percent of what's there.

I have to go back over those numbers.

But --

This is within the State of Indiana?

Yeah.

I'm talking Indiana, too.

Right.

But there's still some growth and, you know, and the other thing is that I keep trying to remind people is -- and through the RFP process, if some other people come in -- I'm kind of reminded back to my Consumer Practice Group days when there was one of us in the market trying to create all the outreach and the noise and everything; the market would grow at a given pace.

You'd get a couple of people doing it, the category itself starts to grow.

There's 13 million people according to CMS numbers that are eligible for Medicaid that aren't signing up.

Now what percentage of those are in Indiana, I don't know.

But there has to be some of them.

And so I think we'll still see come category growth, too.

And can you just -- on FirstGuard, you had mentioned you're now into, you know, you'll be in on a closing into Kansas and Missouri.

Did you say there were two -- were there other large plans in that state that participate in that marketplace?

In Kansas, it's us and the modified fee for service plan that's there.

But we have a contract with 1,800 doctors of the -- I think we announced when we did the deal and had some calls.

We have like a 10-year contract with them, an exclusive contract.

In Kansas City, we're the number two plan and then there's a large plan.

I guess Coventry is the large plan on this side of the state.

So they are a dominant player in the markets in which they operate --.

Great.

-- which is important.

Right.

Thank you very much for your time.

Jason Williams, (Indiscernible) Brown Asset Management

My question has been answered.

Thanks.

Steve Halper, Thomas Weisel Partners

It's George sitting in for Steve.

Can you just try to give us some color on what was the medical loss ratio for the new Texas lives that you guys brought on for -- in September?

Do you want to pick it up, Karey?

I somewhat alluded to that in the first question, George, which was when I was talking about the claims liabilities.

It was about 85 percent was our loss ratio in the first month.

Okay.

Do you expect that to continue at about that rate and drive the mix up a little bit over time or do you expect to be able to moderate that?

No, we expect -- as we've often commented, we're generally pretty conservative in our claims liability estimates and that's with a new product, that's with a new acquisition, and that just runs the gamut, so I think that continues to be our posture for this as well.

So we would see that coming down.

.

Ed Kroll, SG Cowen Securities Corporation

On the cash flow, which was very strong in the quarter, any particular item or items that made the cash flow so robust or was it strictly related to the claims on the Texas?

It's a recurring theme, Ed, but it was the EPO contracts again coming on September 1.

We just didn't receive a lot of claims from providers.

So there were very few claims that were actually paid.

So there is a big number for claims liability estimates that's driving that number up.

I would say net of that drive up for the EPO product, it would be about 1.8 times is where it would have normalized.

Okay.

So -- and if you could just remind me, were there any payments in Q3 from customers that were either catch-up or paid in advance?

No, none to speak of.

Okay.

And then will we see more claims payment in the fourth quarter?

I mean, might we expect cash flow to not be as robust from operations in Q4 relative to the Texas EPO?

Yeah, we -- in previous years, we've talked a lot about the sequatality (ph) of our cash flow and it's generally weaker in the first half of the year and stronger in the back half of the year, the second half of the year, but I do think that yes, you will see some catch-up as it relates primarily to the EPO in the fourth quarter.

That could drive that down a bit.

Now, you know, we're working diligently on the FirstGuard close.

You saw what happened to our claims inventory and liabilities when we closed UHP on a December 1 date.

You know, we're working hard and working diligently on FirstGuard.

We're anticipating a Q1 close, but there is a possibility for a Q4 close.

Okay.

Great.

And then the $900,000 that you'll be paying in Q4 will be in the G&A line you said?

Right.

Is that pre-tax?

Yes.

Thanks for that.

And then finally, the '05 guidance, what kind of tax rate are you assuming to get to that?

We're still assuming 37 percent, Ed.

Very good.

And then a final question on the '05 guidance.

So off of the new base or what you end '04 with, you still think -- you're projecting 10 to 12 percent organic unit growth in '05?

That's correct.

Tom Carroll.

One other question I had here.

In your prepared remarks, you mentioned a meeting that you had recently and I think it was with policy people from each of your subsidiaries.

Is that correct?

Yeah, we had our -- policy people had --

Just to talk about the state fiscal --

Yeah.

We had our Washington office represented.

We had Marie Clancy, who runs our government affairs, was there and other corporate people to talk about what we see in '05 and what our initiatives would be.

Yeah, what were -- I mean, what were a couple of key takeaways from that?

I think you made some higher level comments, but anything more specific that either sticks out as being a positive thing in your mind or a negative thing from a -- from the states' perspective of where you are right now, the states you're in, that is?

No, I think they just went through state-by-state and we talked about just very specific initiatives , whether it be what we'd like to see (indiscernible) or include within the space, and I won't go into any more details than that, for obvious reasons, you know.

You don't show that hand until you've talked to the legislators.

Right.

But, you know, it's just the kinds of things that a leader does.

And we -- you know, if you're going to be a leader, you act like a leader and so we put together the policies and the papers and the white papers, so the people who work on this with us are in a position to -- so we outlined who would write what white papers and get ourselves lined up to ensure proper coordination, Tom.

Okay.

Great.

Yeah, that's what I was looking for.

And one other administrative note here.

Did -- since we last spoke, did any further SSI membership transfer from full risk to ASO?

No, Not that I know of.

Karey, you know of -- I don't know of any.

No.

The answer is no.

Okay.

Thank you.

Joe France, Bank of America

Actually this is Mahilian stepping in for Joe France.

We had a question about the EPO contract, why it was, I guess, taken on ahead of schedule or what caused that to come on ahead.

On the -- (indiscernible) incumbent, their contract was up the end of August and there was a lot -- they wanted us to get it as fast as we could and so we originally thought it would take a little longer.

We asked -- we were working on a longer timetable and when the state said, "Can you step up to the plate?"

We said, "Yes."

Our people did a sensational job in getting ready.

Okay.

Great.

Thank you.

At this time there are no further questions.

Mr. Neidorff, are there any closing remarks?

Yes.

I have one more bit of guidance I feel very obligated to give, particularly to our friends in Boston.

It's St. Louis in 6 or 7.

And with that, I'll wish everyone their -- may their favorite team play well, but we look forward to the next call.

-- today's Centene Corporation Conference Call.

You may now disconnect.