Centene Corp (CNC) 2005 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to Centene's Second Quarter 2005 Earnings 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]

Miss Wilson, you may begin your conference.

Thank you.

Good morning, everyone.

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

Thank you for joining today's call.

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

If you've not received it, please call Libby Abell at 212-759-5665 and it will be faxed to you immediately.

Michael Neidorff, Chairman and Chief Executive Officer, and Karey Witty, Chief Financial Officer of Centene Corporation will host this morning's call.

The call is expected to last 45 minutes and may also be accessed through our website at Centene.com.

A replay of the call will be available today shortly after this call's completion, by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad and entering access code 7237632.

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 of the Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene's Form 10-Q for the period ended June 30, 2005 and the Company's other SEC filings.

Centene anticipates that subsequent events and developments will cause these 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.

To say the least -- it's allergy season with this humidity in St. Louis.

To say the least, I've been looking forward to this call for the past week or so.

And I do want to thank you for joining us.

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

I will guide you now that you will hear a lot today.

As we told you last quarter, I think what we're going to see is that everything came in line with what we said would happen when we last spoke.

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

The second quarter of 2005 marked our 24th consecutive quarter of consistent earnings growth and the business continues to grow on a solid and predictable basis.

Membership as of June 30, 2005 was 825,400, an increase of 54.8% versus the second quarter last year.

Of this increase, 21.1% is organic and 33.7% is from acquisitions.

For the second quarter of 2005, revenues increased 49.7% to $349.6 million, and our diluted earnings per share of $0.34, compares to $0.25 a year ago.

Our membership growth was consistent with our previous guidance.

We experienced some organic growth in Indiana and Wisconsin on a sequential basis.

Our membership grew 57% in Texas year-over-year, or 3.5%, exclusive of the EPO contract.

New Jersey was flat again, as expected.

Ohio membership's growth was solely due to the consumer care acquisition.

Kansas, as we had discussed and predicted, while not measured as part of our organic growth until we have owned the plan for a year, showed some significant growth.

Finally, Missouri also showed the expected deterioration.

Now turning more specifically to Indiana, membership during the second quarter of 2005, grew by 15 points or 15% year-over-year.

As you are aware, the State recently elected to convert the remaining counties to mandatory status, adding another 150,000 eligible members.

As a reminder, these numbers exclude the eligibles in the South, where we elected not to participate for reasons that, I think, are becoming more obvious to our investors.

We have begun to grow and add some of these members in the Central and Northern regions and expect to have very meaningful growth in Indiana in 2005.

In Wisconsin, membership increased 3.6% over the prior year quarter, to 173,400, which occurred as a direct result of organic growth and the start of the state's moving the SSI population into managed care programs.

These figures will become more meaningful as we move towards mandatory enrollment by the end of this year.

Regarding Texas, now that the state's Legislative Session has been adjourned, we have clarity on the resolution of several of the issues that have been of concern to investors over the last several months.

First and foremost, the outcome of the service area expansion was once again consistent with what we had discussed with you over the last several quarters, that the service area expansion was not at risk and that the opportunities for growth remained strong.

Our subsidiary, Superior Health Plan, was recently re-awarded the STAR and CHIP Membership in all of our existing service areas.

Furthermore, the State removed the primary care management model from Lubbock, El Paso and San Antonio, which will give us an opportunity for additional growth.

In addition, tentative contracts have been awarded to Superior to serve both STAR and CHIP Members in the Corpus Christi service area, marking a new service area for Centene.

This is another outstanding opportunity to continue to grow organically.

The other remaining item was related to how the state would resolve the STAR Plus or SSI membership in Texas.

We believe that Texas State Commissioner, Hawkins, found an appropriate political solution to what we view as a political process.

We are pleased with the outcome and the fact that there has been a good solution.

The issues surrounding the upper payment limit has been approached to resolve it.

The Commissioner will strive to achieve cost savings of $110 million by allocating costs across 8 service areas.

In Dallas, the integrated care model will be implemented and the Commissioner will hold hearings to determine which models will be selected in the remaining service areas.

As a result of the service area expansion awarded in Corpus Christi, and the ongoing service area expansion in our existing counties, we are poised for strong ongoing growth in the State of Texas.

For planning purposes, we anticipate the [Tannifin] and CHIP Service Areas to be effective in the third quarter 2006 and the SSI in the fourth quarter of 2006.

In Kansas, one of our newest states, the removal of the membership cap contributed to sequential growth in the quarter of 8.5%, and we are working with the state in its consideration of the inclusion of SSI.

In Missouri, as we discussed in the Q1 conference call, we told you that the state was taking steps to reduce the number of Medicaid recipients, in order to balance the fiscal budget.

In the quarter, we experienced a sequential quarter membership decline as these changes started to take place.

As we indicated last quarter, we estimate a loss of membership of approximately 3,000 members in the current contracted service area.

Ohio membership increased significantly due to the SummaCare acquisition.

The state is preparing to roll out additional service areas and implementing an SSI program.

Organic growth will be a function of the timing of these programs.

SSI is not anticipated until Q3 of 2006.

New Jersey membership increased slightly sequentially, and we're still working with the State and hopefully to roll out SSI beyond the current service level.

Our cost trends in the state continue to be stable, and we have not experienced some of the issues that other plans have talked about in recent days.

We also have details for you on the states which have upcoming rate changes.

The following rates were effective July 1.

In Indiana, we received a 2/10 of a percent decrease, as anticipated and suggested in the last call and discussed with you, and consistent with our margin protection program due to the rollout of all the state's mandatory counts.

With New Jersey and Texas, we received a 5.2% rate increase for both states.

Missouri is awaiting CMS approval at 5.9% provider tax increase, which will increase our premium and increase our SG&A equally.

This is scheduled to be effective July 1st, but still does not have CMS approval.

Regarding our newest State, Georgia, just last week, we announced that our subsidiary, Peach State Health Plan, was awarded Medicaid contracts by the State of Georgia in two of its largest service areas, Atlanta and Central Regions, representing approximately 650,000 eligible members.

Georgia represents a significant opportunity to expand membership and positions us for strong organic growth in 2006.

When the RFP was initially released, we determined our areas of focus would be the Atlanta and Central regions as the most compelling ones and where we would put our emphasis.

These regions have the highest concentration of recipients, but what was important to us is the urban nature of these markets.

When dealing in a new state, it is important in the initial 12 to 24-month period to be able to concentrate your efforts to ensure better control of medical management costs.

Importantly, these two areas will be rolled out at one time in January of 2006, and will leave us in a position to consider other new opportunities outside of Georgia without the distraction throughout the balance of the year for the rollout.

I also want to point out the strength and depth of the organization that we put in place to manage our entry in Georgia.

Key positions have been filled and others are in the process of being filled.

Shifting to our specialty company, consistent with our strategy to build a multi-line Medicaid Services enterprise, last week we announced the acquisition of AirLogix, an industry leader in respiratory disease management.

This acquisition also expands our specialty services within Cencor Health Solutions and will allow us to better serve our expanding SSI membership.

AirLogix also give us a platform to expand into more disease states.

In the past, we have discussed our margin protection program and the Chinese wall we have built between our core businesses and these specialty companies.

The entry into disease management is a further enhancement or modifier to these two strategies.

I remind you by example that we started with a $1 million fragile child program in one school in Tucson, Arizona, and were able to turn it into a broader behavioral health system in that state.

This takes patience, as we are committed to maintaining the profitability of this business while building it.

Companies have difficulties when their organizational structure and systems are behind their growth curve.

We have proactively taken measures over the last several years to prevent these kinds of difficulties.

For example, our processing facility in Great Falls will be on stream in August and fully able to deal with our growth in the October/November time frame.

We have been training the core staff since January and they are now processing claims at that location in temporary offices.

Moving on to our financial ratios, our consolidated health benefits ratio, which reflects medical costs as a percent of premium revenue, was 81% for the second quarter and consistent with the first quarter, which is at the lower end of our target range.

We expect this ratio to recalibrate back into the lower end of the targeted range of 81.5 to 83.5% during the quarter, or during the course of 2005.

We have, in fact, indicated one of our goals is to ensure that we maintain it at that level over time.

The HBR and the SSI population was 85.2%, within our 84 to 86% target range.

We continue to remind you that as the membership grows, so will the stability, as the larger numbers kicks in.

We continue to remind you that we feel that we have clearly demonstrated the ability to manage the SSI business and continue to be excited about its ongoing expansion.

I'd like to take this opportunity, in light of the events of the past week or so, to remind you of some key principles, that at times, differentiates us and this management team and the principles under which it operates.

One, our margin protection program, which removes some of the pricing cycle aspects and gives us a lot of predictability.

Two, we build the organization to build the business.

One of my personal mentors many years ago, an individual named George Davey, early in my business career, demonstrated the value of this -- prevents you out growing your ability to manage it.

Three, we will not chase growth at all costs and, therefore, will contract in a fair and equitable way with all providers, but will not pay 150% of Medicaid Fee Schedules or exorbitant signing bonuses, which potentially expose doctors to Safe Harbor issues for the sake of growth.

Four, we will not sign global contracts with hospitals, which restrict the ability to manage the business short and longer-term.

Five, we will continue to focus on operational excellence and we will continue to be a leader in terms of transparency and data to our investors.

Six, we will not sign a contract that cannot be administered on our system.

Seven, we operate locally.

If it touches a member, a provider, a regulator, or a contractor, it is done on a local basis and that keeps the local management in touch with their business.

Finally, recognizing the business we're in, this Company's approach is to avoid using offshore claims processing and other services which could embarrass a government services business in short and longer terms.

In the interests of transparency, and to be certain that we have informed investors, in the early fall, we will provide a seminar at Centene's headquarters on Contracting 101 and IB&R Calculation 101, so that you can clearly understand how we do it.

We are proud of how we do it.

We are proud of the visibility we have at IB&R.

That is why we have been able to tell you, historically, that today's claims on hand will go up in Q1 and why, that day's claims on hand will be coming down in quarter 2 and why; give you the calculation day-by-day why they came down.

So that you clearly and unequivocally, those of you that are able to read the data and the supplemental information, will clearly understand that we are not playing games with day's claims on hand, that this Company is committed to the integrity of the information and operational excellence.

Changing subjects, with the expanding geography of our Board members, and we continue to build a very strong Board, we will, with future earnings releases, release them at 6:00 a.m. on the fourth Tuesday of the month, following the close of the first 3 quarters and on the fourth Monday in February, with the year-end results.

This allows some cushion, should there be bad weather or other delays in Audit Committee members' travels.

In all instances, we will maintain our conference call at 8:30 a.m.

ET.

During the G&A, we will continue to provide you with segment reporting on G&A, our core business and specialty companies, and will not include interest income in the revenue line and leave in depreciation and amortization -- a more conservative approach.

As we indicated on the Q1 call, a growing number of states are round-tripping money to the premium tax.

As we are required to expense the premium tax in G&A, we recalibrated the G&A range to 10.5 to 11%.

During the quarter, our Medicaid segment of G&A was 10.5 and consistent with our expectations.

We will continue to give you guidance on when you should expect to see it move into the normalized range, as it relates to adding new businesses.

We continue to have a full M&A pipeline and are confident that our specialty companies and core businesses and we will continue to expand the footprint of all these businesses.

This business expansion will occur to both small and large acquisitions, to winning new contracts, but always on a very disciplined basis, being very careful to choose which states we decide to enter.

Ladies and gentlemen, in closing, I want to reassure you that at Centene, this is a management team, which has, in most cases, worked together for a very long time, has the experience, system insight and integrity to manage the data and the information that we provide you.

Now, I'm going to turn this call to Karey Witty, our CFO, who will discuss the finances.

Thank you, Michael, and good morning, everyone.

To recap the highlights of the second quarter of 2005, membership increased 54.8% over the same period last year, to 825,400.

Year-over-year same-store membership increased by approximately 113,000, representing a 21.1% organic growth rate.

Sequential quarter membership was strong in Kansas and Wisconsin.

During the second quarter, we entered the Wisconsin SSI market, ending the period with approximately 1,000 at-risk members.

For the second quarter, revenue was $349.6 million, an increase of 49.7% compared to $233.6 million in the second quarter of 2004.

Net of acquisitions, revenue increased $37.4 million or 16% versus the same prior year period.

Our health benefits ratio, which reflects medical costs as a percent of premium revenues, was consistent at 81.0% period-over-period.

For the second quarter, the HBR for our SSI population was 85.2% and within our target range of 84% to 86%.

This compares to 97.8% in the prior year quarter.

While our SSI membership is growing, the potential for volatility in the SSI HBR is high, given the relatively small member base.

Our trend in healthcare costs continues to be in line with our expectations.

Turning to general and administrative expenses, our consolidated G&A as a percent of revenue was 12.7% in the second quarter of 2005, and compares to 12.1% in the same quarter of 2004.

As we had previously guided, our current quarter G&A ratio increased, primarily due to the incurring implementation cost of $1.3 million associated with our Arizona contract.

Our Medicaid segment G&A ratio was 10.5% for the current quarter and compares to 10.2% in the prior year quarter.

We expect this ratio will be maintained in the range of 10.5% to 11%, adjusted from time to time for startup or transition costs related to the new business implementation.

Earnings from operations for the second quarter increased 40.1% to $22.3 million compared to $15.9 million for the second quarter of 2004.

Net earnings increased to $15.2 million, or $0.34 per diluted share compared to $10.8 million, or $0.25 per diluted share for the same prior year period.

Balance sheet highlights at June 30, 2005, include cash and investments of $287.9 million, $27.4 million of which is free from state regulatory requirements.

As was discussed on our prior quarter call, the State of Wisconsin held our June capitation payment of approximately $29 million over their June 30, 2005 state fiscal year end.

This created a significant increase in our premium and related receivables on a comparative short-term basis.

As expected, both the June and July Wisconsin premium payments have now been received.

During the quarter, we borrowed $10 million on our credit facility, related to the close of our SummaCare deal.

Including all borrowing outstanding as of June 30, 2005, our debt-to-capital ratio was 14.2%.

Subsequent to quarter end, we borrowed an additional $35 million to fund our recently announced acquisition of AirLogix and currently have $75 million in total borrowings outstanding on the facility.

Our medical claims liabilities totaled $153.6 million, representing 49.5 days in claims payable.

Let me emphasize that this reduction in days was fully anticipated and, in fact, we had guided on our first quarter call to expect our days in claims payable to be within our normalized range of 50 to 55 days.

This guidance was net of any good faith payments made in an effort to settle a legal proceeding with a hospital provider in Wisconsin.

Exclusive of this event, our days claim payables were 50.7 days.

Should they occur, any further settlement payments on this liability would cause a further reduction in our days in claims payable metrics.

We will continue to provide you with updates on any resolution.

The 10.2-day sequential quarter decline also reflects a significant improvement in the number of claims held in inventory at quarter end.

Again, as we highlighted on the first quarter call, issues related to physician billing codes, which were experienced during the first quarter, would be resolved during the second quarter, causing a reduction in claims inventory levels.

We also remind you that our annual performance bonuses related to [annualtory] capitation payments were always, and are always paid, during the second quarter.

Look at the data.

I think we are providing a significant amount of data that supports this.

In the release, we are disclosing in comparative claims statistics, claims liability rolled forward, and days claims payable rolled forward and a new insertion this quarter is we're actually breaking out our both free and regulated cash.

Let me just reiterate that we have the systems in place to know our business.

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

For the 6 months ended June 30, 2005 cash flows used in operating activities were $7 million, compared to net income of $15.2 million.

This primarily reflects both the previously mentioned increase in receivables, as well as the decrease in medical claims liabilities.

We expect full year 2005 cash flows from operating activities to be approximately 1.5 times net income, exclusive of any Georgia implementation costs.

Lastly, we are updating our guidance to include anticipated implementation costs related to our Georgia contract win, as well as our acquisition of AirLogix.

As indicated in our release, we expect to spend between $7.5 million and $10 million over the third and fourth quarters, as we prepare for a January 1, 2006 start date in Georgia.

Both the Atlanta and Central Regions go live on this date.

With that, for the third quarter of 2005, we expect revenue in the range of $398 million to $403 million and net earnings of $0.32 to $0.34 per diluted share, inclusive of Georgia implementation costs.

For the full year 2005, we anticipate revenue in the range of $1.51 billion to $1.54 billion and net earnings of $1.25 to $1.34 per diluted share, again inclusive of George implementation costs.

A full reconciliation of our revised earnings guidance, on both a gross and net basis, is included in our release.

Now, I think with that we can open up the call to any questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Tom Carroll with Legg Mason.

Good morning, just a thought on the New Jersey cost pressures that we've heard from some other folks that operate in that market.

What is it that Centene does that others perhaps don't do in that market to keep costs more predictable and in line?

Maybe a little more color in what you think you do versus--?

Well, I think we do a lot of things.

One, I think we talked for about 4 years about margin protection.

One of the things that we talked about was our preauthorization and things like OxyContin in New Jersey.

We said a lot about that, so we dropped our costs from $222,000 a month to $22,000 a month; worked with the states on the providers who over-prescribed; do things of that nature.

Two, though we're not chasing volume, if we can't do it with the right kind of contract with the hospital, we don't do it, and there are some big hospitals along the way that canceled contracts on us and then ended up coming back and recontracting.

So, I guess what we're doing, Tom, is we're just maintaining in every market a principle that we're prepared.

It's not how fast you grow, but how well.

This is a Company, that in a market like New Jersey, is prepared to be smaller, but very profitable.

It's meeting every one of our profit goals.

Health care margins are where they should be.

We predict them and they continue to be there.

Because I think, and this is not just Jersey, but in other states, I think that what you see is when people get on this treadmill of growth and they are just chasing growth, and they're giving whatever contract it takes to get the growth, then I think what you end up doing is when they first run into trouble, then there's problems.

We recognized that when we went in to Jersey.

And that's why we've said it hasn't grown as fast as we ideally would like it to, but it has been very profitable.

It gave us that laboratory for SSI.

We really knew how to do that.

We demonstrated to you and the market we do and that has just been the approach.

Does that help you?

Yes, it does.

A second question, could you provide on the reduction in claims inventory that you provided, the dollar amount, $18.1 million?

Kerry gave some good details on that.

I wonder if you could -- is it all the physicians' billing issues?

Maybe some more details on that number, if you could.

Yes, sure.

And Karey will jump in here and please add to it.

With the physicians' billing, there was a lot of it.

We had First Guard come in and there were some issues there and some contracting claims getting that right between that down.

So, if you go back to the supplemental data, Tom, that we provide and you look at the jump that took place in the medical -- in the claims inventory that we put in there, from Q4 of '04 to Q1 of '05, it jumped from 150,000 claims or .19 period end per member to .29 and 227,000, in Q1.

That was a big jump and at the time, when the claims jumped up to 59 days, if you go back to last quarter's script, we talked about that.

So, now we got that cleaned up.

We paid a lot of claims, which is a good thing, okay, so that we have much happier providers when they get paid quickly and right, so once again, we wanted to pay them right, so we told the doctors, "Here's the issues and we're going to get it right," and we are still working on it.

There are still things where we continue to do that.

I think if you look at some of the data that we have on the time when the claim comes in to when it's paid, it went from like 7 days, it jumped up to just under 10 days at one point.

So there's a lot of data there.

It was basically those issues on the claims payment side, as substantiated by these inventory numbers.

We have been giving this transparency for, what, 10, 12 quarters now, because we want you to understand, because we have the ability to manage it this way.

Tom, I would only add that -- and I'm quoting from the transcript of the first quarter call, and it's my quote that says, "Upon completion of this process" -- and we're talking about cleaning up the billing codes -- "during the second quarter, we expect days in claims payable to normalize in a range of 50 to 55 days."

This is not a surprise to us and, I think, shouldn't be a surprise to you.

It wasn't, Karey.

In fact, we talked about that just last night.

Also, to your credit, if I look back over the last 2 years your days in claims payable, while I think that is somewhat of not a completely great metric to look at, but it does decline first quarter to second quarter over the last 2 years.

It just seemed like a large number this quarter.

I'll stop there.

Thanks for the additional detail.

Your next question comes from the line of Scott Fidel, of JP Morgan.

Hi, thanks.

Good morning.

First question is how to do with a couple of your competitors last cited two specific cost drivers.

One, some higher flu-related incidents, and then, two, some higher NICU/ maternity costs, and just wondering whether you've seen either of those developments in any of your markets?

I want to be careful how I say this.

I don't want to see anybody have problems that some people have had.

In the 8 years I've been here, I haven't seen a flu season yet that has moved the needle on our HBR.

I think once again, probably it's in the way we contract with docs for the same.

The second part, NICU, we have -- I don't think we saw any exceptional increase in that either.

We [inaudible] -- once again -- and we inventoried 8.

We take a very conservative approach on how we look at hospital days.

In fact, we use an incurred basis, so if we had a neonate that was a March 31 neonate, we would book the full estimated cost of that whole case in that month.

So, we are very conservative how we do it.

We haven't seen that at all.

So anything, Karey?

I would totally agree.

Just philosophically, it would seem to me that the Medicaid population relating to flu, would actually be less exposed, just given a younger demographic profile.

Is that something that historically has been your experience?

Well, I think, yes, you don't get -- we hear in the Medicare population, flu becomes much more severe and hospitalization.

But, I think that flu is acute care in the majority of cases.

Acute care is habitual care and the doctors are taking care of it.

I don't see that as a -- I just don't see that as a very big issue here.

We have some other things we do in neonatal.

We have preemie prevention programs and a lot of things that we are doing.

I don't know what else to say.

I mean, it's not been an issue for us.

Okay.

And then just a second question on the AirLogix acquisition, just interested first in terms of as you were looking to do an acquisition in that space, just how robust the asset opportunities or acquisition opportunities into these management were that you saw.

Then also just now that you've added respiratory, any other disease states that you might look to add relative to your current offerings?

I think there were others, fewer left now.

We're seeing a lot of commercial players are moved into some of this disease management and so what was important, AirLogix was on the screen for a little while because they are kind of a -- the best of class for what they do.

We were impressed by some of the management that was there and [inaudible].

We see a platform that we could build into other areas.

And we will continue to build into areas that focus on the SSI population and our population in general.

So, one should not be surprised if we look at other respiratory-related things beyond what they do now, if we look at some diabetes and things, if we talk start to talk to them about is there any opportunities to do any more good in preemie prevention.

Now, I'm just giving you philosophy.

I'm not saying specifics at this point, Scott.

Okay?

But it has the ability with that platform to move it in that direction.

And it just comes back to managing costs, and it enhances and takes what we have been doing to yet another level, because we striving to be a total low-cost producer.

I think when we look at our MLRs and the pattern of predictability, that's what we are trying to -- that's what we're working to maintain.

Okay.

Thank you.

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

You were talking about Indiana, where you actually got a very small, weak decrease in exchange, not necessarily [true], but in the light of what will probably be very strong volume growth, what is the impact on your medical loss ratio in the State of Indiana and did you have any ability to help the states change their Medicaid fee schedule?

I think, Steve, I'll start and Michael can add.

But, I think one thing we've always said is, we don't ask for what we don't need.

And I think you may recall, on a prior call, we actually said that we would propose going to the State of Indiana to ask for a rate decrease.

So there again, I don't think--we're not surprised and you should not be either, that we did in fact, get a very small rate decrease.

What this means, on a go-forward basis, as we roll out the new lines, is we expect our loss ratio in Indiana to be status quo with our existing population.

We're not expecting any significant up tick in that market.

But you may find, I guess as we've talked about, if there is any up tick, it may be for a very short period of time while we get the new network in place and people trained.

But we're doing that as we bring them on board.

So, I think it's still just going to be more of the same, [our testing Indiana].

So, just to clarify, based on your expectation on your cost trend in Indiana, no change in your ratio, even with the very tiny rate decrease?

Right.

If we needed more of a rate increase we would've definitely told you.

I think on the last call we talked about how we had margin protection in Indiana, as [unintelligible] highlighted, if we don't need any rate increase, then maybe even could consider a decrease.

But we're not giving anybody 150% of Medicaid fee schedule.

What do you think that rate decrease does for the competitive environment in Indiana?

I haven't thought a lot about that.

Well, I've thought a little bit about it.

But, I guess I'm saying, we have our cost under control.

We're contracting in a responsible, sensitive way and we can go to the State and manage within these numbers.

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

Karey, if I could just follow-up on Tom Carroll's question.

As I understand it, nine of the 10-day decline in your days claims payable was from paying claims and paying physician bonuses.

If you had paid 20-days of claims, it wouldn't have had any impact on earnings, is that correct?

That's correct.

Great.

Look, using your definition of organic growth, the one-year that you've owned the plan one year, it looks like that you've added about 14,000 lives year to date, is that correct?

I looked at it, on a sequential quarter basis, yes, since January--.

I have 5,000, Mike, in the first quarter and 9 in the second.

Your goal, if I use 10 to 12%, if I understand it correctly, would be then 75,000, say, roughly, to 95,000, which implies you'd add an average of 30,000 to 35,000 lives in each of the next two quarters.

And I was just wondering where that growth might be coming from?

Again, it's the timing of the Indiana rollout.

Really, it's all backend loaded from the State of Indiana.

So you're going to see membership increases coming in both the third and fourth quarter, fairly sizeable increases, largely out of Indiana.

There'll be some others though.

We have some more SSI coming out of Wisconsin and we have some opportunities.

Anything we get in Kansas and December would, of course, count.

But look at it this way, Joe.

There's 150,000 lives coming due in Central and Northern Indiana and we have just north of 30% share of market there.

So if we maintain just our share of market, that's somewhere around 50,000 lives.

Any incremental we get just adds to it.

So, you can see if you take what we've added, take the 50,000 from SSI and other [little] membership there, we're at the bottom end of the range.

So, if we do better in Indiana, then it just moves us to the high end of that [10 to 12].

I'm just trying to give you enough granularity on it that you can see that it's not just kind of a wish and a hope.

Didn't mean that it was.

The last question I had was just in Georgia.

Do you expect it to be profitable in the first year?

We're going to give more guidance on our Q3.

We'll give the full year.

In our Board meeting, we had a dinner last night, we talked a lot about this.

And what I want to look at is, in the first couple of quarters, any time you move into a new market like this, just the total management of it and getting the doctors on board.

We [even] have to write contracts.

Getting them in the systems.

And you don't want to penalize providers who really are making some honest mistakes.

I'm not sure what their numbers are going to look like in Q1-Q2 yet.

I'm trying to give you as much candor as I can.

I think over the course of the years, no doubt it's going to be profitable.

But I've not seen new businesses of that magnitude that just right out of the shoot doesn't have a higher MLR.

We are looking at it.

We're examining it.

In our Q3 conference call I'll be able to give you very specific guidance on it.

Great, looking forward to that.

Also, you mentioned that Contracting 101 and IBR 101 that you're going to do that in the Fall?

Yes.

Patrick Hojlo with CSFB.

Karey, could you tell us if there was any impact from Suma Care on the days claims payable number?

Nothing worth noting, Patrick.

It was ordinary course.

They came on May 1, so you have May and June in the month, but nothing out of the ordinary.

Patrick, there was a delay, from the time we signed the bid until it closed, we had a chance to get all our things right.

I think we did not experience [unintelligible].

These are experience here that we were paying faster than Suma had historically, so there was an offset there, Pat.

Okay.

So even though you only had two months, the medical claims on your income statement, and of course, the entire balance of days claims on your balance sheet, because you were able to pay those down pretty quickly, wasn't the normal impact of a mid-quarter acquisition.

Is that fair?

Yes.

You gave some great detail on the days claims issue and I applaud you guys for doing that.

The [unintelligible] schedule you gave, do you want to tell us what the prior [unintelligible] development was this quarter?

I know you gave it [unintelligible] on a rolling basis.

How much impact was there this quarter, any material?

The reason we provide the rolling four-quarters is, starting at Q1 it may be tough to predict exactly, with a great degree of confidence what we think at the end of March 31, for example, what we think the over-reserving was as it relates to 12-31.

So, we're not looking at it on a quarter basis.

We're actually looking at it over a full 12-months.

So that's why we include that roll forward.

Fair enough.

Last question, on G&A, if you exclude the 1.3 million in spending for Arizona, the G&A ratio actually fell impressively, sequentially.

Was there anything unique there, anything special and should we expect the G&A ratio to maintain that level?

Again, we've highlighted there, on the Medicaid basis, it should be in that 10.5 to 11%.

Michael mentioned the potential of premium tax coming out in another State, 5.99%.

There again, that's going to skew it.

But if that does happen, we'll certainly let you know.

Excluding those premium taxes, it should maintain the current level?

Right.

Again, we have the Georgia implementation costs.

Again, we'll be able to carve that out for you.

I just want to add that in any given quarter there'll be movement within that range.

We might buy a new system.

Some of it's expense, some of it's capitalized.

We may be adding some new facilities, anticipating the growth.

But, we try to write these things off as we can.

Dan Veru with Palisade Capital Management.

Michael, I wonder if you could update us on your new claims processing facility in Montana.

Has that gone live yet and how does that position the Company in terms of either looking at--is lives the best way to measure in terms of additional lives you can handle on the system?

With that infrastructure, how big of a company can you support?

Right now we have about 845,000 lives, most of it being supported out of the Farmington plan.

We have brought that on line.

We're paying some claims.

We move into the new building mid-August.

I was up there three or four weeks ago in dedication of Centene Ballpark.

We took the naming rights of the ballpark.

And it's on line, it's on schedule.

The core [unintelligible] are being trained.

I anticipate we'll probably have somewhere between 80 and 100 people fully trained in the November-December period.

So, we'll be able to support easily another 700,000 lives within that.

But we have the ability to ramp it up if needed and add to the second floor and finish it out.

It's very planned and methodical [inaudible].

We anticipated this in view of Georgia and other M&A activity we have that we'll fully be able to support and develop into this Company.

Great.

Switching over to Georgia for a second.

Could you talk in some detail, what are the components of some of the startup costs, given that this is, in essence, a greenfield startup for you, versus some of the other ways that you've grown through acquisition.

How's the money going to be spent to get this up and running?

The significant piece, Dan, is going to be in, essentially, salaries and wages.

I mean, as with any service industry, that's where we spend the majority of our--it's the single largest item, as it relates to G&A anyway.

The State will come in over the balance of the year to do various readiness reviews.

So part of the charges that you'll see us incurring are essentially getting our staff, which is fairly sizeable for a health plan of this stature.

But getting that staff in and trained during the balance of this year, such that we are ready to go live on January 1.

Given the population density in the areas that you'll be servicing, could we look at your business as having better margins in these areas?

I think you should.

Longer term [inaudible].

I think as we look at it, it's going to be within our normal markets.

I was just thinking that you'd have a higher efficiency ratio, giving that you're servicing a population a little bit more dense.

There are some elements of it, but I think for conservative planning purposes at this point, it is new and we've seen where you start up something new there's a running time and it takes time to start to realize some of those efficiencies, Dan.

So I'd be happy to work--at the end of the year, let's say if we're within our normalized operating measures, I would consider that a success.

And then we'll be introducing these management programs to AirLogix and things, very quickly in there.

And those kinds of things will be the kinds of things that will help drive and improve the margins.

And one final question on free cash flow generation.

Could you talk about--this was a little bit lower from a cash flow standpoint this quarter.

Could you talk about that in some detail and what we should expect for the second half?

We released our Q last night also and in our Q we include, in anticipation of what we will spend in capital the balance of the year.

Again, Georgia's going to come into play as it relates to free cash, because we do have some--on top of those dollars that we will be expensing, there will be a fairly sizeable use of free cash as it relates to capital and readying for the January 1 start date again.

So, that will certainly come into play.

I want to add to just part of your question.

One, if you look at what happened this quarter, once again, and go back to the last quarter's scripts and things, and you'll see we said Wisconsin is going to drag their payment that one day, for that one month, out of June, into July, and that was $28 million.

So, you take that, you look at the increased claims payment that we had.

For what the cash position was in Q1 and how much greater it was than net income.

We said at the time, it will normalize in the second quarter, because we're paying the bonuses, we're paying the claims.

So, it's just a little bit of a timing thing.

It's not like free cash was hurt, because of things we didn't know were coming and all the sudden now we have two months' premium in July.

And as it relates to Georgia, we're just being conservative.

We believe, net of Georgia, we will have no less than 1.5 times net income, our historic matrix.

As we looked at the Georgia, we're just going to be spending 7, 5, to $10 million in there without the premium.

But that's just a great investment for what we think will be a very large business for us.

So, we want to see how that affects the overall cash flow, because we're going to have the expenses without the premium again, Dan.

I'm not telling anybody who doesn't know, but we'll give a lot of strong guidance on just what it looks like in Q4 and the balance of next year, when we give the guidance for all of '06.

Have I answered your question?

Yes, that was very helpful.

That's all I have.

I just wanted to tell you, you presented the materials very clearly in what was a little bit more of a complicated quarter.

I think what's important, and that's what I was--if I sounded fairly firm about it, it's like I tell our management team here, none of us like surprises.

Okay?

And if somebody wants to have a problem, wake me up in the middle of the night if you think I'm going to be surprised when I come in in the morning.

Because I don't want to be surprised.

Everything that occurred in this quarter, every matrix that you saw, if you went back and did a little homework on what we said last time, should not be a surprise to anybody.

It came in line with what we expected, of days claims payable, from free cash, the normalization.

We have systems and predictive modeling.

I have a reasonable sense of what--we know sitting here now what this month looks like.

We have a good sense of what the quarter's looking like, based on some of our predictive modeling.

Thank you, Michael.

Matt Perry with Wachovia Securities.

Hi, guys, and I also just want to echo the sentiment that I appreciate the level of disclosure you've given on days of claims payable.

But I do have one question.

If I can get a little bit more detail regarding the 6-day decline due to lower claims inventory.

Did you give, earlier, some comments that said it was at least partially due to a higher than normal level of claims in the first quarter due to FirstGuard?

And if so, do you care to quantify how much of the 6-days was related to that?

No, we didn't talk about FirstGuard.

I mentioned there may have been a little FirstGuard in there, as well as there was physician claims on [hold], but not a material part of it.

So, of that 6-days, would it be fair to say the majority of it was the billing change you talked about in the first quarter?

Yes, absolutely.

In the interest of [unintelligible] somebody said was it 100% that?

Well, when somebody asks me if it was all that, I'm going to say well, there may have been a little bit of something else, but you take that out and that's the majority of those 6-days.

Okay, that's helpful.

And then I guess on another tact, you've done a couple of specialty deals.

Can you just talk maybe about your philosophy of M&A and for your future M&A activities, how you look at specialty versus health plan acquisitions?

We look at them with equal importance.

In other words, the scale and size has been different.

But we're building this multi-line Company, multi-line healthcare enterprise.

If you look at the priority, the first thing we always want to do is we always try and do an in-market deal.

They tend to be more accretive.

They're additive.

We like those.

It doesn't change the risk profile as much.

We then like the health plan deals, because it's a business, there's risk, it's large and we're leveraging a lot of our infrastructure.

We have two separate teams and we structure the Company with core business and health plans under one group of management.

We have the specialty companies and its management.

Two different groups work on the M&A.

They talk to each other and work together in the marketplaces.

But it's very focused.

And then we have the core management; the finance medical management things that cut across.

So, when you look at that, when you look at the M&A for specialty in this separate scene, we can do both at the same time, because of the way we're structured and developed the management to do it.

But, as we see other specialty companies that help us better contain our cost and drive our cost proposition on a core business, we'll do those.

We'll use them to drive that and give them a laboratory to improve everything that they do in our business and then they're also selling it outside on wholesale and retail.

So, it's really a multi-line approach, Matt, that we're going at.

Can you give a sense, if you look out longer-term, what percentage of your total revenue could come from specialty revenue?

I think I've said [unintelligible] I used to say 3 to 4, more like I'd say about 25% of it from specialty.

A question on the Texas SSI, you said you expect that implementation of that expansion toward Q '06.

Do you have an idea on when the State may make the announcement of the contract winners?

He's going around holding hearings. [Unintelligible] sure when he scheduled the hearings yet.

I haven't heard.

But, I just really--we have so many things going, with our local approach, it's really kind of good, because we can let them manage that process for us while we're working on Georgia and a lot of other things.

I just really said, let him work through the process through the hearings.

We'll be responsive, help to get where they need to be.

And beyond that, our conservative estimate of Q4 of '06, that's about as far we've gone, Matt.

Okay.

And just one kind of housekeeping issue.

Could you tell me what the dollar amount of premium taxes were in the quarter?

I don't have that off the top of my head, Matt.

You can follow-up with me.

Gregg Nersessian with Lehman Brothers.

Michael, in response to an earlier question you mentioned that Centene's policy is if they're in a market where they can't get favorable terms with a provider system, that Centene will walk away.

Could you specify, in each of your markets, what the State's policies are for services that are provided in out-of-network arrangements with systems?

In other words, what's the default reimbursement methodology for out-of-network?

As I recall, and I can do some more research, in the case of in-patients, it's the Medicaid DRGs.

There may be some outpatient or new fee schedules and things.

There may be some percent of bill charges, but that tends to be on very specific things.

ER tends to have a flat rate; the ER side for outpatients.

Physicians tend to be a fee schedule across our markets.

And of course, we negotiate in markets, for per diems and other things of that nature.

Okay, so even including your newest markets in Kansas and Missouri, where the out-of-network charges for in-patient are based on discountable charges?

I don't believe that there's any percent of [bill charges function].

Now, we may have--and I specify this.

Let me clarify.

There may have been, in a new acquisition, some contracts that we've taken, where the previous management signed percent of bill charges contracts with a hospital.

Once we buy them, one of the directions they have are to convert those contracts at renewal and they tend to be in those cases, not the long-term contracts we sign.

We convert them to per diems or DRG contracts.

Now, if you look at what we did in Ohio, with SummaCare and Mercy, there, before we closed the deal, including the Children's Hospital contract, which slowed up the signing of the SummaCare deal, we insisted on having that five-year contract risk-based on per diems and DRGs and things, with that hospital.

So, in Ohio, for example, those contracts in the new plan with the hospitals that drive our cost are all on that basis.

Okay, that's very helpful.

And then, my next question--.

That's what gives us so much of the predictability.

You work on percent of bill charges and you're guaranteed that as they raise their chart register, your costs are going to go up and it's going to be faster than the premiums.

Are there any markets in which you operate in which your ability to transfer contracts to per diems and [case] rates has become more difficult recently?

In other words, hospital systems are pushing back a little bit more and [inaudible] percent of those charges?

I would say, I've not heard of it.

The issue is this, we work in a very decentralized approach in contracting.

We give our plan [President] COs and their VP of contracting COs very specific direction.

And that is that we don't do percent of bill charges contracts.

They have to be administered on the system.

We don't do [unintelligible].

We give them those guidelines.

They know that if they wanted to do something else, that requires senior management here at St. Louis, approval.

And I've had no requests the last 12-months.

They have done some--they may do a percent of bill charges contract into new markets, which have a not to exceed the DRG.

Which is a protection for us, because it says we're paying the lesser of something of bill charges for the DRG.

So, when a plan came to be one time and said can I do that, I said, why not?

Okay, that makes sense.

And then my second question was just, on the new business from the acquisitions and the Arizona contract, kind of the specialty business you have rolling in over the second half of the year, I'm getting to a number of around $46-47 million of additional revenue over the second half of the year.

Could you break that out, first maybe Karey, how much of that revenue is premium revenue versus fee-based revenue?

And then how do we think about the MLR sort of in response to the portion of it that's premium based?

What would the impact on the MLR be just based on the Arizona contract and the AirLogix acquisition?

I think, Arizona--well, in both cases, when we announced the deals, we basically included annualized revenues.

So, I think it's fair to say that you can essentially prorate our annualized numbers that we gave, over the balance of the year.

AirLogix is a little bit unique, in the sense that it was a true non-month-end closed, so we will begin consolidating AirLogix as of July 22nd.

So, keep that in mind as you're doing your [proration].

As far as where we're going to classify this, Arizona is true premium revenue.

That's something that we're going to have to breakout for you on a go-forward basis.

AirLogix, more along the lines of services revenues.

As far as health benefits ratios, I think they're going to be--at the end of the day, the margins are going to be about the same as what we're experiencing on our existing business.

It'd be fair to model the similar metrics as to what we're already generating.

So, in terms of getting up to the 81.5 to 83.5, that's not going to be a function of these acquisitions operating at a higher MLR moving [inaudible]?

No.

I think, what we've always said and what you've always seen us do, and then Michael has already alluded to it in some regards, is the fact that generally, we are always very conservative in our estimates in the early periods of a new deal, of a new contract, etc., etc.

That has not and will not change.

I think you'll see us being very conservative in Arizona until we get a better handle on what exactly our costs are running.

I think you'll see us being very conservative and I'm thinking about '06.

You'll see us being very conservative in '06 as it relates to Georgia, again, until we have a true sense of where costs are running.

I just want to chip in.

We always do a lot of predictive analysis, we do a lot of sensitivity analysis.

This Company's attitude has always been, we work very hard to under-promise and over-deliver.

But, we also try to be very close to the numbers.

We're not trying to have a blowout.

If we see something's really going to grow dramatically, we'll give you the guidance ahead of time and say we expect it to be greater the next quarter or something.

Ed Kroll with SG Cowen Securities.

Good morning.

I wanted to follow-up on Dan's cash flow question.

For the remainder of 2005, on a GAAP operating cash generation basis, you should have--because that would be before any CapEx related to Georgia or anything else, you should have a pretty robust Q3, if nothing else, because of that extra Wisconsin payment.

And that would help get you to the 1.5 times net income.

Is that a fair statement?

Absolutely.

It was all timing.

So, absolutely.

We'll have potentially four [capitalization] payments in the quarter for Wisconsin.

That just goes back to what I said earlier.

There's nothing systemically wrong with the way it came out.

It was a timing issue.

We saw it coming.

It was not a surprise to us.

And it's the normal course of business when one has this kind of business and one expects these kinds of things.

We knew ahead of time it was coming.

Okay, great.

And then on the days, not to beat a dead horse, but would you still say that your normal range of days is somewhere between 50 and 55?

I think you'll see it hover around the low end.

Again, if we make any payments towards this litigation settlement, that will bring it down.

But again, as I said in my prepared remarks, if we do in fact make any of these payments, we'll be able to let you know that.

Well, ex any of those additional payments, just on a normal operating basis, if your claims inventory is down, you're processing more efficiently than you had been, and we see the admin ratio results from that as well, improved results as well, that would be why maybe the new normal area is in kind of the low-50s as opposed to low to mid?

I think that's probably fair, yes.

But once again, we giving you all those matrices in the supplemental, so that you an everybody can look and see.

And if you go to that data and you look at the days claims on hand, the average claim per member and those things, you can very quickly say--you should be able to look at it and say, I expect the days to be here or here, on that basis.

That's what we're trying to do is give you those insights.

Got it.

And then the final question, now that Georgia has awarded its contracts to you and two others, do you have a sense that other States may be--that that may be a trigger for some other States to try to mimic that comprehensive RFT process?

Can you shed any light on that?

If you look at the number of States that don't have mandated plans already, there's not a whole lot left.

There's some;

North, South Dakota, Wyoming, Montana, probably don't make sense to, because of the sparse population. [Unintelligible].

Of those remaining ones, I think if Mississippi or Alabama or somebody tried to move more in that direction, that might be a model they choose to follow.

That's fine with us.

We played it, we played well, I'm pleased with it.

We would see nothing wrong with it.

But the other States, I think they'll just continue to build out what they already have.

If I may, let me address an earlier question about premium tax in the current quarter.

That number is 1.7 million.

[Conan Lockland] with [DTL] Capital.

Can you give us the revenue number from SummaCare in the quarter?

Again, I think the easiest thing to do is to take our annualized guided revenue that we provided when we announced and it was two months in this current quarter.

Okay.

And then, is the MLR on that business, is that sort of in line with the rest of the business?

Is it higher, lower?

It was fully rolled into our Buckeye health plan, Buckeye Community Health Plan business, in line with what we were experiencing in that market.

That kind of goes back to the discipline of how we do deals and having the contract with the Summa hospitals and Children's, of getting the numbers right in the contracting before you do the deal.

Okay.

And then on the incremental G&A spend associated with Georgia, if I do the math, it looks like it's about $6 million in the fourth quarter, so say $24 million run rate.

Is that a--how much of that is kind of one-time in nature, versus kind of a go-forward G&A spend and is that fully loaded from a people standpoint for Georgia for '06?

All of our business goes live January 1, so it is a fully loaded.

By the time we get to Q4, that is a fully loaded G&A number.

There clearly will be some adds, maybe November-December timeframe, so we might get a full cost of that employee base in the fourth quarter.

But there will be some consulting charges in there that would go away.

So perhaps that's probably offsets.

Okay.

And then last question, just to follow-up on Ed's day stuff, and not to beat this down, but have you guys provided or can you provide color around what the IB&R reserve level is on a day's basis?

And so if that hasn't changed over quarter to quarter, kind of what that level is?

What we can assure you is that our process has not changed.

The way at which we go about estimating our claims liability is prepared on a consistent basis.

So, with that in mind, we're not seeing any movement in the number.

Tom Carroll with Legg Mason.

Just a quick follow-up question.

What percentage of physician bonuses went to doctor practices in Indiana?

I would say a significant piece of the $9.3 million comes out of Indiana.

I would say probably in the range of 60 to 70%.

Tom, we've been enjoying our quality incentives there for a long time.

It's a very successful program.

I remember that.

I remember back when we first started chatting with you, it was pretty significant.

These guys sign agreements on what they're going to do for us and it's a well thought out program.

That's why you guys are dominating that market.

I applaud our local management [unintelligible] [Johnson Mills] and others just do an outstanding job.

Joseph France with Bank of America.

Karey, I just wanted to clarify one thing.

Claims inventory does not include IB&R, is that correct?

That's correct.

And it's not really an estimate, it's a sum of claims that are like piled up in a corner?

Well, the point is, it's not an estimate, it's a known number?

It is a known number, absolutely right.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Neidorff, are there any closing remarks?

I just want to thank everybody and I hope a lot of you can--when we put this little seminar together here, are able to come out and attend.

Because, we're very proud of the fact that we manage this data; the days and the IB&R we use a date-received methodology which is very consistent and avoids wide swings.

And we look forward to sharing that with you.

We hope you can attend, because I think it will just continue to build the credibility this management looks for with you as our investors.

And I thank you for the questions today and look forward to another boring quarter.

Thank you.

Thank you for participating in today's Centene Second Quarter 2005 Earnings Conference Call.

This call will be available for replay beginning at 11: 30 a.m.

Eastern Standard Time today, through 11: 59 p.m.

Eastern Standard Time on Tuesday, August the 9th, 2005.

The conference ID number for the replay is 7237632.

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

Thank you.