Centene Corp (CNC) 2004 Q4 法說會逐字稿

Good morning.

My name is Tracy and I will be your conference facilitator.

At this time I would like to welcome everyone to the Centene Corporation fourth quarter earnings release conference call. [Operator Instructions].

Thank you.

Ms. Wilson you may begin your conference.

Thank you.

Good morning, everyone.

I'm Lisa Wilson Senior Vice President Investor Relations at Centene Corporation.

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 Abel (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 and 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 completion by dialing 800-642-1687 in the U.S. and Canada or 706-645-9291 from abroad and entering access code 3279-480.

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-Q/A for the period ended September 30, 2004 and the companies 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 turn the call over to Michael Neidorff.

Michael.

Thank you, Lisa.

Good morning, everyone and thank you for joining us.

I'm particularly pleased that we are going to have this call today so we can further discuss during the course of it, that which we have become so accustomed to living with over the past four or five years regarded to the budget constraints and things of that nature.

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

Karey Witty, our CFO, will review the fourth quarter and full year results in greater detail shortly.

The fourth quarter of 2004 marked our 22 consecutive quarter of consistent earnings growth.

This progression is very much in keeping with our current theme initiated with our 2003 annual report of reaching for the summit.

We define this action as striving for excellence that is never ending and every action we take as a company is driven by this commitment and spirit.

We enter 2005 with the resources, determination and persistence to build a multi-line Medicaid company.

Having said that, I'm very proud to state that we completed 2004 having reached our internal goals.

Membership as of December 31, 2004, was 772,700, an increase of 57.8% versus the fourth quarter of last year.

Of this increase, 25.3% is organic and 32.5% is from acquisitions.

For the fourth quarter of 2004 revenues increased 39% to $288.1 million and our earnings per diluted and split effective share of $0.27 compares to $0.23 a year ago.

On a pre-split basis our earnings per share were $0.54, which was above our internal expectation and guidance.

As I'm sure you have noticed and that is clearly an understatement, there's been ongoing press release recently concerning potential changes or reform of the Medicaid system being proposed at the state and federal level.

We have been a proponent of change, but we believe that many of these proposals still have a long way to play out.

Investors such as you shouldn't presume that everything that is said is going to happen.

It is a political process and we are quietly and effectively participating at the state and federal level in that process.

We do not believe that any potential changes will affect our ability to provide requisite services or work with the states to offer solutions to their budgetary issues.

We recognize that money is tight and there will be cuts, which creates a need for better public policy and a constructive environment for us to work with the states.

Some of our plan presidents (ph) are approaching the respective State Legislatives and regulators to discuss our margin protection program whereby with some policy changes, we may reduce the premiums received.

For example, in Indiana where we have been consistently below our target range of health benefits ratio we have suggested a possible rate reduction effective July 1 of 2005, in return for some very important and very specific policy changes that strengthen their program.

This will also allow them to protect current levels of eligibility and potentially expand them.

We are in the process of working on similar proposals for other states.

In some cases rate increases are still necessary until the programs take effect.

We remain confident that programs like those offered by Centene will continue to be the solution for individual states and that there will be continued emphasis on Medicaid, managed care as a way to provide healthcare to the uninsured.

Moreover, we are striving to expand our core product offering into other arenas such as specialty services and disease management that will provide additional services to our recipients and bring in potential new eligibles.

Our expanding suite of services coupled with our drive to be a low cost producer in the industry and the effectiveness of our margin protection program are all key components for Centene's ongoing success and growth in the category of Medicaid managed care.

I would like to review the programs in each of our seven states by starting with Indiana.

Membership grew during -- membership growth during 2004 was 26.1% and trends for ongoing growth are positive.

In 2005 based on our discussions with Indiana state regulators we anticipate that the state will convert another five to seven counties as a result of the ongoing success of existing mandated managed care programs.

As you may recall, in 2004 the state converted six additional counties to mandatory status.

There are several new entrants in the state as a result of the RFP process that commenced earlier this year.

This will expand the category, and as long as all of us work together on public policy and act responsibly the markets are viable and eligibility will expand.

In Wisconsin quarter-over-quarter membership for Q4 increased 5.1%.

We also recently received 2005 rates from the state for which on a blended basis we will receive an average of 3.1% rate increase effective February 1, 2005, which the state moved up from May 1 of last year.

The rates vary by region.

They reflect what we asked for based on data in each region.

For example, in Milwaukee market, the increase will be 3%, but in the rural markets where additional rates were needed they are greater.

What's important about this is, we go to the state, ask them for what we need by region using meaningful data to justify it, and receive it.

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

And we are evaluating additional alternatives with them to address their future financial constraints.

Finally, our efforts are ongoing to enroll the state's SSI members on a mandatory basis during 2005 and we anticipate this will occur in the second half of the year.

You should expect a slow process that will become meaningful over time.

New Jersey membership is relatively flat, excuse me -- but we call for -- but we call your attention to the continued improvement in the health benefits ratio for the SSI, which is now in our normalized range at 84.7% for the fourth quarter.

The HBR must be viewed as borrowed though because of the small numbers.

However we remain encouraged about the expansion by the SSI population statewide, have demonstrated our clear ability to manage it in our own ongoing discussions with the state, we believe, will be successful.

The state's 5.3 composite rate increase for fiscal 2005 is in effect including an additional 1% that was granted in the third quarter of 2004 to offset the premium tax imposed by the state in July.

Here too we are also evaluating opportunities on how we might help the state in a tight budget year.

We are pleased with our strong growth in the state of Texas.

The fourth quarter brings membership to 244,300.

As a result of the EPO SCHIP contract that we were awarded in May and became effective in September we are now statewide with approximately 87,500 SCHIP lives under management.

As we indicated on our third quarter conference call we had anticipated and still expect this EPO SCHIP population to decline, leveling off somewhere between 75,000 and 80,000 member life.

Now that the legislative session is under way state regulators are working to identify funding to expand eligibility for the SCHIP market.

We believe the outcome of these sessions will ultimately result in a positive impact for the SCHIP population.

In addition, we are awaiting the award of membership distribution to be made by the state under the RFP process that was completed in August.

We understand this may occur in February although it is possible that the state will delay matters further.

As I have discussed on prior calls we expect to remain incumbent in our existing territories in which we currently operate and believe the RFP process creates opportunity for us to expand into other service areas and stimulates awareness for potential Medicaid recipients.

The Ohio membership was flat for fourth quarter.

While we anticipate organic growth to return to Ohio this is a good time to remind everyone as we look at all of our states that not every state grows every quarter.

You have to look at it across the whole book of business.

Recently we announced a definitive agreement to acquire the Medicaid related assets of SummaCare based in Ohio, Akron.

We signed a long-term provided contract with the hospital and the hospital physician group that owned and operated it and we are very pleased about that.

It's a solid relationship.

This transaction when closed, we had approximately 39,000 new lives to our subsidiary, Buckeye Community Health Plan and make us one of the leading providers in the state.

We will be in two markets Akron and Toledo.

This acquisition met our stringent criteria including an IRR of 20% to 25%.

It's accretive in the first 12 months and has significant strategic value on top of meeting the financial criteria.

It also provides a strong foothold in Ohio from which we believe we can expand into new service areas in 2005 and beyond.

I want to point out that the markets' growth in Ohio has been somewhat slower than expected partly because of the children's hospitals and others have been pushing for global contracts.

This is where you give the hospital 90% of premium and in return they give you a contract to manage the G&A to 6%.

We won't do that.

Many of you remember the last time industry players tried this and the negative results.

It is our belief that the risk is not worth it.

We are not going to give up that level of management.

Moreover, it is just part of the discipline that we have.

We don't want to add a service area that long-term can be problematic.

We are still confident in the short and longer term of the opportunities we do have in Ohio.

In December we closed our acquisition of FirstGuard marking our entry into Kansas and Missouri and bringing the total number of states in which we operate to seven.

We are pleased with the organic growth prospects that both states will afford us along with the potential opportunity to manage the SSI lives.

In Kansas it is approximately $400 million in SSI expenditures, in Missouri there is $1.8 billion of expenditure, which offers opportunities for potential service area expansion and inclusion of a greater number of SSI population into our program.

Regarding rates, Missouri just notified us that they gave us a 7.7% rate increase effective January 1, 2005.

The state of Kansas gave as a 5.8% rate increase effective September 1, 2004.

The fourth quarter was highlighted by other events that are consistent with our planned growth objectives.

We continue to make progress in growing our specialty companies and recently announced two transactions in Kansas and Ohio that support this effort.

The state of Kansas awarded our CenCorp subsidiary, a contract for approximately34,000 SCHIP members statewide.

This opportunity is consistent with our strategy to develop a multiline company offering core Medicaid and specialty health services.

It is also consistent with our belief that we can partner with our states to move more members in managed behavioral health programs.

Our Ohio subsidiary Buckeye Community Health Plan is working with the Ohio department of jobs and family services to serve approximately 1,900 enhanced case management lives in one county in Ohio.

While these transactions are recognizably small in size and aren't expected to produce significant revenue in 2005, they serve as a foundation, as part of Centene's approach to methodically and sustainably develop and build an infrastructure and build the business.

We also continue to actively implement management programs that discourage inappropriate utilization of the emergency room as a primary source for medical care.

We have seen savings towards 2% in this policies and appreciate the responsible approach state regulators have taken in recognizing the need for them.

Additionally, we now have in place upper respiratory disease and preemie prevention programs that provide for a more comprehensive coordination of care for our Medicaid recipients.

We will be reporting results of these initiatives as there id credible data available.

Moving on to our financial ratios, our consolidated HBR declined to 80.3% for the fourth quarter as was projected it would on the last conference call.

We make these ratios comparable to the non-GAAP numbers we previously reported, one must add 50 basis points to the GAAP HBR to reflect the Texas and New Jersey premium taxes for the current quarter and 40 basis points for the prior year period.

Over time our consolidated HBR will be affected by the entry into SSI and additional markets.

We expect the ratio in the Medicaid segment to re-calibrate back into the targeted range of 81.5% to 83.5% during the course of 2005.

Now that first star (ph) has been integrated.

The increase in our G&A ratio was the result of 1.4 million in startup cost associated with FirstGuard in our (inaudible) facility plus severance cost associated with jobs eliminations.

The results also include an additional $1.3 million related to our year-end performance bonuses under our compensation program.

We should start to see a decline of G&A in the first half during more normalized rates.

In a final comment, regarding the M&A pipeline, as I have said in the past several quarters we remain aggressive and we will continue to be disciplined buyers, not participating in auctions.

As is to be expected, we are actively pursuing a number of opportunities which add various stages of development, the pipeline is full and we continue to establish priorities to identify the best opportunities.

I'm going to turn this call over to Karey Witty, who will discuss the financials.

Thank you Michael, and good morning everyone.

To recap the highlights of the fourth quarter of 2004, membership increased 57.8% over the same period last year to 772,700.

Year-over-year same store membership increased by 123,900 representing a 25.3% organic growth rate.

With the close of our FirstGuard acquisition effective December 1, two new Medicaid mandated markets were added along with over 135,000 members.

For the fourth quarter of 2004 revenue was $288.1 million an increase of 39% compared to $207.3 million in the fourth quarter of 2003.

Net of acquisitions revenue increased $48.3 million or 24.2% versus the same prior year period.

Our health benefits ratio which reflects medical costs as a percent of premium revenues was 80.3% compared to 81.2% for the same period in 2003.

As evidenced by our press release we are no longer reporting on a GAAP and non-GAAP basis.

For purposes of comparison with prior years the effective premium taxes decreased our HBR by 50 basis points for the current year quarter and 40 basis points in the prior year quarter.

As we have discussed on prior calls in the short-term we expect this ratio to remain slightly below our target range primarily due to the success of both our margin protection and utilization management programs.

Over the next few quarters with the implementation of SSI in certain markets and a full quarter of FirstGuard, we expect to see our consolidated HBR re-calibrate back towards our banded range of 81.5% to 83.5%.

For the fourth quarter of 2004 the HBR for our Medicaid category was 80.2% compared to 80.7% in the prior year quarter.

Our SSI ratio improved to 84.7% from 98.9% in 2003 and compares to 92.8% in the sequential third quarter.

We are pleased with this progress we have shown in this category and certainly we look forward to utilizing our expertise in additional markets.

Turning to general and administrative expenses.

While we continue to break out expenses by business segments, my comments are focused on the consolidated total.

G&A as a percent of revenue was 13.5% in the fourth quarter of 2004 and compares to 12.2% in the same quarter of 2003.

The Texas and New Jersey premium taxes increased our G&A by 50 basis points in the current year quarter and 40 basis points in the prior year quarter.

Additionally, the current quarter's results include approximately $1.4 million associated with the start-up of both the FirstGuard markets and our Montana claims processing facility plus severance cost related to job eliminations.

The quarter's results also include an additional $1.3 million of compensation costs related to performance bonuses.

Investments and other income for the fourth quarter of 2004 was $1.9 million.

Our interest expense increased as a result of borrowings under our credit facility related to the purchase of FirstGuard.

Earnings from operations for the fourth quarter of 2004 increased 26.4% to $17.4 million.

Net earnings increased to $12 million or $0.27 per diluted share compared $9.7 million or $0.23 per diluted share fort he fourth quarter of 2003.

For the year ended 2004, revenues increased 30% to $1 billion from $769.7 million in 2003.

Our HBR for 2004 was 80.7% compared to 82.4% in the prior year.

G&A as a percent of revenue was 12.8% compared to 11.5% in 2003 reflective of my previous comments.

Earnings from operations increased 37.5% to $64.5 million from 46.9 million in 2003.

Net earnings improved to $44.3 million or $1.02 per diluted share.

Balance sheet highlights at December 31, 2004 include cash and investments of $317.4 million of which $46 million was free from state regulatory requirements.

Our medical claims liabilities totaled $166 million representing 66.5 days in claims payable.

The increase from 57.3 days at September 30, 2004 primarily reflects the FirstGuard acquisition.

A reconciliation of our change in days claims payable from the immediately preceding quarter is included in our release.

Lastly our debt to capital ratio as of year-end 2004 was 14.9%.

For the year ended December 31,2004, cash flows generated from operating activities were $99.4 million compared to net income of $44.3 million or 2.2 times net income.

Normalizing the effect of our increased in days in claims payable, cash flows from operating activity for the year would have ranged from 1.5 to 1.6 times that of net income.

Lastly, our first quarter of 2005 revenue guidance is in the range of $332 million to $335 million and we anticipate net earnings of $0.30 to $0.31 per diluted share.

For 2005, we anticipate revenue in the range of $1.47 billion to $1.5 billion and net earnings per diluted share of $1.36 to $1.42.

This guidance doesn't include either our pending acquisition of SummaCare or the effect of new accounting rules requiring expensing of stock options.

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

[Operator Instructions].

The first question comes from the line of Gregg Nersessian with Lehman Brothers.

Good morning.

My first question is budget related.

In the federal budget proposal yesterday there was some language in there regarding provider taxes in the way that the federal government reimburses states and managed care organizations and possibly some adjustments to that methodology.

I was wondering if you could talk to that a little bit and maybe potentially how that might impact the Centene margin protection plan going forward, if there are any, you know, reforms to that program.

I think, Gregg, that we know how the states have used these taxes to generate higher reimbursements and in turn then use that tax for their share of the under 64 (ph) or whatever the split was.

There has been a lot of talk for a long time that the appropriateness of that and it doesn't concern us if that is eliminated.

It says that the states are going to have to be more careful with the rate increases that they provide.

The rate increases we need with our margin protection program are less.

You can see with our HBR at the low end of the range it's not like we have pressures.

We still have a full arsenal of policy changes that have significant savings associated with it that our plan presidents are talking to the states about.

Indiana, I think I tried to allude to, we are at the point that we could say to the states, you know, a couple more changes and you can give us a little less money and free that up for more eligibility.

So, it is matter of working with them and I don't see it as a threat to us at all.

I see it really as just creating a tough environment and that will create better economic policy.

It says that carve outs some drugs that -- self-referral for chiropractic and podiatry care which we would lobby for it so as to avoid restrictions will now go away.

I don't think the quality of outcome of health care of any worse for the recipients.

It will be better when it is managed in a greater fashion.

Okay.

But regardless, I guess of the -- the bottom line in terms of rate increases you are going to be able to hold the states up to actuarial soundness so even if they were to come back and say you were going to lose a, you know, a provider tax or premium tax, you know, the underlying changes would be made to the benefit design or eligibility but would not be just an across the board cut?

No, I don't see that.

Okay.

And --

There are lots of opportunities for benefit design changes.

In fact, you may recall two years ago we gave every state a model plan and showed them what the savings would be.

Indiana is one of the top of mind because a few of them questioning us about it.

We showed them are they spend $4 billion. 1.6 is their share and we showed them how they can save $400 million, now $500 million, which would more than offset their deficit.

Go ahead, I'm sorry.

No, that is very helpful.

My second question is in terms of the Texas RFP, which you alluded to, there's a significant chunk of SSI membership debts that is being moved into Medicaid, managed care.

How do you guys sort of view the opportunity there?

Is there a limit to the extent that you would be willing to add SSI lives?

And what is in the guidance currently, how much additional membership are you factoring into your current guidance?

I will let Karey talk about the membership.

I will tell you that I have said in a lot of presentations that managed care is really designed for the chronically ill.

If it is mandated and we get a balanced membership across all the various segments, that we are looking forward to taking it on.

I think we did that in New Jersey plan and there were a lot of people concerned about the 105% or 112% MLR and we said we know how to manage it, we bring it down on a very sustainable basis and I think this last quarter results demonstrate that.

Now I want to be careful to say you get one heart transplant case and that 10 points it can go back up but it still shows that in an normalized population, large numbers, we can manage that.

So we are very interested in driving that membership.

We have experience in it.

We have a team of product managers, so to speak that know how to do it and we are ready for it.

Karey you want to talk about the guidance?

Gregg, relative to our guidance as it relates to SSI, I think on our last call we mentioned organic membership growth in the same 10% to 12% range is what we guided for 2004.

That 10% to 12% organic membership growth does include some amount for SSI albeit a pretty small number.

Michael alluded to the state of Wisconsin going into, allowing us to go into SSI.

It will initially be on a voluntary basis for some period of time and then convert to a mandated program.

And I think we have talked about where the state of Texas is.

But the point being there's modest inclusion for SSI for 2005.

I might add that the state of Wisconsin understands that we recognize that it needs to be voluntary.

But mandating the population is one of our predications in participating.

And that's why away know it's going to happen.

They want us there.

Okay, great.

Thank you very much.

The next question comes from the line of Joseph France with Bank of America.

Thank you, Mike.

I just wanted to ask a little bit more about FirstGuard.

The deal was so immediately accretive, I'm curious, how you were able to get it at such an attractive price and given the profitability of the unit already what you plan to do to grow it to make it more profitable going forward.

Sure.

I will be happy to talk about that.

One, I think we paid a very fair price.

Some people thought it was a high price and I just reiterate and I look at one number and see IRR.

And if that falls in that range, if the terminal value is the same as the entry value, I like to see why that discount changes, that is our number.

And we will pay whatever -- we will pay a high number if it meets that.

But if I could buy it for $25 a member and it has a 10% IRR we won't do it.

So part it is, it predicated on that.

I think people understand it, I think people understand why we don't go in auctions.

And it was just a comfort with their management and ours.

And it is a relationship that continues to be very positive with the seller who also is a big provider to us now.

So, we see opportunities at SSI, we see opportunities in some minimal organic growth in Missouri in that particular market.

But there is room for service area expansion.

In Kansas the membership had been capped and our predecessor owner didn't really work to uncap it because that would have meant a lot more capital for statutory requirements.

That cap we are now working to have it removed, which will give us that opportunity to grow it significantly.

This behavioral health program we (inaudible) with 34,000 chips statewide gives us a lot of exposure to a lot of new providers and members that will also give us an opportunity to enhance that.

So, you should expect to see within total FirstGuard some organic growth in 2005.

Thank you.

Similarly, can you talk about what you plan to do with SummaCare when it closes?

It is first quarter close, right?

No, Ohio has their way of doing things and I think that I'm making it maybe early third quarter.

I would rather be a little more conservative on that as we work through that process.

And once again we have now re-contracted with virtually 90% of all of the doctors over there and we have a great contract with and a solid relationship with the Children's Hospital.

So, I think with the relationships we have, we expect to see the membership start to grow.

Once again, SummaCare, which is looking to exit the business, had not taken a lot of action toss grow it.

They kind of maintained it.

So, now that we are in there and we have the resources, I think that in itself will start to add some organic-- then we will start looking at service areas and how we close the gap between Akron and Toledo and some of those kinds of things.

The re-contract is mostly just like to clean up the language or to cut the payments or --

It was really just case of moving them to our contract language, the fee schedules where appropriate, our model one contracts and things.

Just -- what we do is, we like things very standard and we like to do for one what we would do for everybody.

I'm not going to give one group of doctors a premium over Medicaid in one state fee schedule that I won't do for somebody else, some of those things.

So we just got that all cleaned up and normalized it within our total system.

Thank you very much, Michael.

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

Just a quick follow-up to the earlier question about Wisconsin and SSI.

When would the program go from voluntary to mandatory?

What is the time line on that?

We are talking about probably a quarter or two from the time that they first initiate it.

If they started, say, in the second quarter, by year yearned I expect it to have -- by year-end I expect it to have gone mandatory.

As we think about some of the markets and growth from the different markets, can you compare the Indiana opportunity, the five to seven new counties, with the six that converted in 2004?

Yes, I think the -- I'm not sure that it will grow at the same rate in those counties as I see some growth opportunities were in our existing counties -- and, Karey, you may talk about the population but a lot of them are in the southern part of the states and -- maybe some of you may recall that is where a company called Maxicare had a horrendous situation there.

There are a lot of doctors still -- going back and talking about percent over Medicare allowance -- I think they are help looking to have somebody else make up on the last one, which we of course won't do.

I think it will be a little slower in the south.

We have some doctors signing up and in some hospitals but I'm in the looking for the same level of penetration we have.

But, Karey, you may talk about some of the size and scale we have.

Eric, for about seven counties that would convert initially in Indiana there would be about 38,000, roughly, eligibles in those seven counties of which about 34,000 would today be in the PCCM.

So those would be the members that you would expect to flip in the Medicaid and Medicare arena.

Okay.

Karey, do you have a sense of how many other players are in those counties now?

Whether or not they have adequate provider networks that the state has allowed them to be licensed in those counties, I don't have that information.

Just a final question, Michael, maybe you could sort of characterize the discussion as you guys are having discussions with the states, their sort of level of angst, does it relate to Bush' budget, are they sort of gearing up for a big fight or how would you characterize the way the states are viewing the President's proposed changes, since you guys, have had, I assume a lot of conversations with them?

I think when we talk about the state, I think, when we talk about the states, I they are hearing from their political leadership, what every analyst -- I'm hearing on the news media talk is that this thing has a long way to play out.

They are not fully expecting everything that he has said he is going to do to become law at any level of his budget cuts, not just in the Medicaid side.

So I think they are relying on that.

I think what we are counseling them is, things are going to be tight.

I mean there's no getting away from it, that budgets are going to be tight and we acknowledge that and we have learned it and we live with it.

So they are more receptive to some of the ideas that we have to kind of reduce their costs and eliminate some things.

And they are going to be a little less tolerant of some of the lobbying efforts of pharmaceutical companies and others.

And I know in one state they are saying, if you want to write a check for $500 million to overcome some of our shortfall, we are willing to not put in a preferred drug list.

And of course they can't do that.

So what I'm hearing from them is, a clear movement as we have talked about of sounder public policy and less of a tolerance for some of the lobbying groups.

Are there any sort of one or two proposals embedded in the president's overall plan that you are getting a lot of feedback from the states that they view as a nonstarter or something along those lines?

Well, no, I mean I -- the proposals have only been out a day or so in terms of what someone is really definable and our presidents have been meeting before this and I know one president had a long conversation with the Secretary of Health and Human Services in their state yesterday.

I haven't gotten all the debriefing on it yet, and they had a board meeting yesterday.

But I just see it as no particular angst.

I think I have shown everybody at conference, I think you are there.

We have 49 governors for sure on our side to develop responsible Medicaid programs.

I enjoyed reading yesterday's "Times" article in Mississippi.

They have fought managed Medicaid forever.

Some doctors, you know, have just pushed it.

Now you are hearing them say we have no choice, we have to do something.

That's a good example.

Great.

Thanks.

The next question comes from the line of Tom Carroll with Legg Mason.

Hi, good morning.

Quick question on your--the SSI membership ratio.

It has steadily declined from 4Q 2003 to fourth quarter of 2004.

I wonder if there's been any policy changes along the way to that, that is affected it in such a drastic way.

Similar to, I think what you did in New Jersey, taking, you know, risk SSI members and making them non-risk.

That was reflected in some of the very early drops, you know, going back three or four quarters was where we took the homeless out.

And we did that before we went into the state.

We had an agreement with the state that the homeless go -- it is kind of hard to manage somebody that you don't know where they are from night to night .

And they show up in the yard and you have no way to manage that.

So they agreed to take them out.

They carved out the pharmaceuticals, which we would rather see it in for more continuity of care.

So, no, there's been -- there's been no material big policy changes.

In fact, that was just the case of the medical management programs, utilization programs that Karey talked about applying our systems to it.

Okay, good.

So it just pure volatility in a small population?

Well, I think it came down sustainably and it's where it should be.

But what I tried to guide is that when you have 4,000 lives and one point is still $50,000 of medical expense and if you've got one or two severe cases it could go back up in a quarter, but that does not mean that the fundamentals that we have installed are flawed.

And this whole organization -- I knew we could do it.

A couple of senior people here knew how to manage the SSI population.

What is great about this now is, across this whole company there's been a thought transfer and comfort zone that we know how to do this and we know how to do it well, we had the advocacy groups working with us and we can't wait to get more membership.

Understood.

What are most of your SSI members today?

And then as a follow-up where do you expect to see the biggest growth in SSI members, as you look out across your state markets right now and considering the changes that are underway?

Right now the (inaudible) business is only in New Jersey, one county.

We are working with New Jersey to expand that into other counties based on the success there and I think other players in that market would like to see that, too.

Wisconsin is coming on line.

Texas has said they are going to be included this year when they do their re-up coming up any time.

But who knows when.

We know that other states are now looking at it sooner than later.

Indiana is talking about maybe some pilot programs and doing some things with those areas.

Ohio is doing the same thing.

But for 2005 it is Wisconsin and Texas expansion hopefully in New Jersey than look for the other states to start to come on in 2006.

Now, the seven states we are in , reflect about $14 billion in expenditures.

The SSI part.

Okay.

That would just give you an order of magnitude across that.

Any idea what's your best guess on when we are supposed to hear on Texas?

I had heard it was this week.

I heard it was this week too but I heard in January it was January and in December it was December.

And the regulators could say no, we have delayed it another week or two and then tonight post it.

That happened with the, with our EPO product.

It was delayed, delayed, delayed then they said it was done and they said we are going to implement later in the year, we thought it would be maybe November or December.

And then they called us and said how about taking on a September one?

And they asked us to do it and we had a little G&A if you recall in Q3.

But we also knew that the membership would drop off as they worked through it, which is why we wanted to wait until December until it all cleared up.

But they have their way of doing things and they are our clients.

Such as your business.

Right.

Thank you very much, gentlemen.

Thank you.

Your next question comes from the line of Steve Halper with Thomas Weisel.

Good morning.

Recognizing that your SSI population can be volatile.

Two questions.

Number one, what's the long-term medical loss ratio for this population and what percentage of your overall membership would you like to get to with this population?

Steve, it's volatile but it's not problematic to the bottom line because it is small membership.

So we are not worried about it affecting our margins and profitability at this time.

I just -- we look at every matrix and I like them to be aware of it.

The normalized range is 84 to 86.

We published that some time ago and we still see it there.

It is really flowing down to the lower end of it already.

The longer-term probability I think was your question?

Yes, longer-term percentage of what your membership will comprise SSI.

It's going to be a small percentage.

And then we have -- I can give you Wisconsin and I can get more data and numbers by state if you want.

In Wisconsin I think it is something like 20,000 lives and $700 million expenditures.

So, we have right now 150,000 lives in Wisconsin.

So, if we got it all, it would still be a small percentage but a big part of the revenue because the revenue differs.

Does that help you?

Very much, thanks.

Your next question comes from the line of Patrick Hojlo with CSFB.

Good morning, guys.

From reading my notes, your last EPS guidance was slightly lower than your new guidance, you raised it a little bit.

I had $1.35 to $1.38, now it is $1.36 to $1.42 on the same revenue.

So is this a slight change in expense assumptions there?

With the advent of the Q4 G&A expense clearly we are saying that to some degree that is an anomaly so you should expect that to normalize.

So a penny I would not suggest there's a huge swing either way.

But clearly we are saying that the G&A would come down Patrick, over the next couple of quarters.

I think you also heard me say that we want to be boring and predictable and historically the guidance we have given we have tended to be pretty close to this.

People shouldn't expect wide swings.

If we see it will be a little bit higher we will put it in as quickly as we see it.

Fair enough.

Getting back to the Indiana topic, it is clear there's a lot of opportunity still there and you mentioned that your existing counties may have some more opportunity than the new ones given the competition you are seeing.

Has there been any big change in your sort of allocation of resources in that state?

Have you backed off those southern counties to such an extent that you have reallocated some people and said let's focus on our current ones?

I mean, one, I think -- I don't tend to get that specific.

I'm not even sure that I know how our localized present CEO's are allocating that kind of resource.

They have a budget and a membership growth number, and they have relationships with various doctors groups across the state and there's a clear plan on how they are going to do that, Patrick.

So, all I can really say is, I expect us to meet our growth targets.

We are -- we still, I think I said in my earlier comments, optimistic on the opportunities there.

We still see that.

So, I'm not going to really say that we have backed off of it.

I'm not sure we back off anything.

I don't think that has ever been the mentality of this company.

It not that you can't get adequate provider presence down there.

You are just seeing more folks buy it on the higher rate than you had hoped for?

No, what I'm saying is if somebody else in Southern Indiana wants to pay a physician group 100% or 135% of some number because they are chasing the volume down there, I'm not going to do that.

I'm not saying that it has necessarily happened.

There are some indications that it may.

I haven't heard it specifically.

Because it sends a heck of a signal if the state is looking at cutting back physician fees and things a little bit and then they do that.

So, what I'm saying is, we have a very strong network and I think I have told investors before in a re-contracting it's been where we have been in existence it has been virtually 99% re-contract.

Okay?

So we are going to play to our strengths and not do something that is not sustainable longer-term.

Now, as I said, I have no confirmation that any of that is happening.

I'm just giving you some insight as to what we would or would not do.

Fair enough.

It makes sense.

Also in Indiana the slight rate reduction that would be one or 2% perhaps?

Or any other.

The local people are doing that and they are working with the governor's office and others on what makes sense.

So if something makes sense where we can still maintain our margins, maintain eligibility, get some policy changes, work all that out, then I will let the state announce it.

But I'm just trying to give investors a sense that we are managing our total business.

The last three or four years a lot of these calls we have had some of the same issues every January where people worry and I'm trying to give people a sense that this is not new to us, that we are very confident, I have said for a long time that tough economic times creates better public policy.

And the more effective and real public policy is, the better we'll do.

I get excited.

I'm very motivated.

No, it all makes sense.

I have one more question, but on Texas you are saying 75,000 to 80,000.

Now your target on the EPO contract, I think you are saying 80,000 last quarter.

I know I mean how can you be exact of course, but I am more interested in the timing do you think that will be two to three more quarters before(inaudible) and are you comfortable with that?

We are looking at Q1 we will have a better sense of where it is.

And I think I said maybe April but I have always been pretty consistent on that because I like ranges.

I never really give a point, very seldom.

I like to give people a sense that it is 75, 80, something like that.

So I have been pretty consistent with that.

But just for the record I never hate any analyst.

Well I appreciate it.

Thanks for the answers.

Very, very helpful.

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

Good morning.

Good morning.

Just a quick follow-up on that Texas EPO question.

Can you tell us of the Texas lives at 12/31/04 how many were EPO?

87,500.

87,500 thanks.

And then switching to more of the big picture here, if I can go back to the president's budget proposal from yesterday which you have already discussed to a certain degree, are you comfortable -- well, first of all, it seems like the proposed changes are going to occur over a 10-year period that's my understanding and it is more backend-loaded but there are some proposals that would take effect in fiscal 2006.

Are you comfortable that you will be able to move quickly enough with your state customers to deal with those changes based on what you know right now?

Well, yes.

Because I think as you and the others know, this is not something we just started to do this week.

This has been an ongoing program with the states in the past three or four years and one that we have had success with them.

There are some of the things we are doing now, which I won't go into a lot of specifics where the states asked if we could do it for them or show them how we do it for a fee for service.

So I'm very confident that we can work with the states very effectively ongoing.

Now, it's going to take a little longer in Missouri and Kansas where we've (inaudible) but our plan president has long-term relationships.

So, once she understands how this works with our staff here she will start to implement it there as well.

So I'm very confident on that.

But it not something we just woke up this morning and said let's do.

Sure, Okay.

Thanks for this.

Finally, at the state level it certainly seems to be growing momentum for I guess some people think this is a bad word, I don't, privatization, using companies like yours.

Two states, fairly large ones that have made recent announcements towards that end, Tennessee and Georgia, just curious if you have any thoughts about those, I know you had historically thought that the old old Kenn care model was flawed.

I think you are right, but now they are looking to scrap that and I wondering what your thoughts on those things.

I think that -- we have a governor down there that was in managed care.

I think at the right time we will find ourselves talking about some alternatives.

I'm still -- the provider network has been so burned down there, as I told you before, that we are always going to be very cautious with that one.

And in some states it's better to be second in, not necessarily the first.

On Georgia there's been a lot talk about it.

I think you know, we cannot do talk a whole lot about what we are going to do but we would much rather talk about what we have done and I will tell you just for the -- we have talked about this already, people should expect some G&A for us having a team on the ground in Georgia for the past short while and we are looking at it, we understand it.

But nobody has told me what the rates are yet.

And as soon as somebody can tell me what the rate adequacy would be and they also had a failed program once before.

And I will tell you how aggressive you should expect us to be there.

But we've a team there and if there's a sound opportunity and the state has good policy and I have confidence that states are trying to do things the right way had time, but well see, we will be there with bells on.

Okay.

Thanks for this update.

[Operator Instructions].

I thank everybody for a chance to discuss these things with you at this time.

I will be on the road a lot, as you know from the press releases and look forward to continuing this dialogue.

And we look forward to the balance this year being kind of boring and predictable again.

Thanks.

Bye everyone.

Thank you for participating in the today's Centene Corporation fourth quarter earnings release conference call.

This call will be available for replay beginning at 11:30 a.m. eastern standard time to 11:59 p.m.

Eastern Standard Time on Tuesday February 22, 2005.

The conference ID number for the replay is 3279480.

Again the conference ID number for the replay is 3279480.

The number to dial for the replay is 1-800-642-1687 or 706-645-9291.

Thank you for your participation.