Centene Corp (CNC) 2005 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Centene third-quarter 2005 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Ms. Wilson, you may begin your conference.

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 this morning. If you have not received it, please call Libby Aveld (ph) at 212-759-5665 and it will be sent 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 about 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 1255588.

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 for the period ended September 30, 2005 and the Company's other SEC filings.

Centene anticipates that subsequent events and development will cause its estimates to change. While the Company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so. Now I'd like to turn the call over to Michael Neidorff.

Thank you, Lisa. Good morning, everyone, and thank you for joining us. To say the very least, I have been looking forward to this call for the past several weeks to help all of you understand what we have said for a long time, we have and continue to have a consistent and predictable business which has good visibility. I also want to emphasize what I said in the past, that it is our long-term policy not to reiterate guidance.

We have operational competency as a company; in other words, we know where the business is and we are managing it. Importantly, to you as investors and analysts, our medical cost are under control. Our claims system is operating superbly as will be demonstrated by numbers Karey Witty will give you. The business is growing. There is a full pipeline of acquisition opportunities and we continue to attract and retain capable staff.

There was a time six or seven years ago when our Company experienced some of the problems you're seeing in the industry today, recognizing that these types of issues are multifaceted and are usually masked by rapid growth which hides underlying problems. We did a stand down on growth knowing that you don't want to heap more members on a weak platform. At that time we fixed the fundamentals -- we looked at contracting, reporting, staffing and our networks.

What we saw was inconsistent reporting and claims processing and we took several difficult steps to correct the problems and establish the most consistent and conservative procedures and practices. We learned from that and we continue to do these things today. It is a discipline that we bring to the business and one which we believe distinguishes us from some of our peers.

It starts with the contracts, the contracts have to be right. We standardize our contracting process while allowing for some flexibility to our health plan to respond to a particular nuance or needs of their individual marketplace as long as the contract can be administered on the system. It's aimed at giving providers confidence that they will be paid quickly and have managing cost trends so that we provide quality outcomes while maintaining control of our healthcare costs.

On the IBNR we use the most conservative methods. Not a single physician claim is paid on the basis of discounted bill charges. Approximately 97% of our healthcare spend was paid on the basis of preferred methodologies. Less than 3% of all hospital contracts and a smaller percentage of charges are paid as a percent of bill charges with no fixed rate maximum.

It is important for you to recognize that for the days claims on hand there is a direct correlation between claims and inventory. The average cost per claim and the number of pended claims. We are continuing to provide more transparency on this so that you can clearly understand that when you are paying claims accurately and timely the days claims on hand will be lower. Karey will demonstrate very clearly this correlation in his presentation.

Turning to membership, as of September 30, 2005, was 847,700, an increase of 32.1% versus the third quarter last year. Of this increase 3.8% is organic and 28.3% is from acquisitions. On a sequential basis we added 22,300 new lines and experienced organic growth in Indiana, Kansas and Wisconsin. For the third quarter of 2005 revenues increased 57.9% to $400.6 million and our diluted earnings per share of $0.27 compared to $0.26 a year ago.

I'll go through details for each of our states. In Indiana membership during the third quarter grew by 17.5% year-over-year. As you are aware, the state has been converting its remaining counties to mandatory status and commenced with the first tranche of members in July. Starting in November the remaining lives will be transition into managed care. The competition for these lives remains strong, particularly in the south where we elected not to participate.

In addition, we are not willing to pay on a fee per service basis significant premiums over the Medicaid fee schedule to grow the business. The state has also advised us that their blended rate increase for 2006 is 4.1% which we think is fair and very adequate recognizing our cost trends.

In Kansas the state had sequential growth in the quarter of 4.5%. Starting in December we will have owned the plan for one year and it will convert over to being included in the organic growth calculation. We are also working with the state regarding the inclusion of SSI. In Kansas we have received a 5.2% rate increase effective July 1.

In Texas our membership was lower primarily due to the expected decline in the EPO lives and Katrina-related problems with the state's enrollment agency. Starting late in the third quarter and continuing into the fourth quarter the state has removed staff which normally would have been processing Medicaid applications and moved them over to processing food stamp applications for refugees coming from Louisiana.

As a result there has been a backlog of Medicaid applications processed. We believe that the state's intent is to retroactively process these applications. Year-over-year Texas grew by 6,300 lives or 4% exclusive of the EPO contract and longer-term we expect the EPO product to stabilize.

The service area expansion awarded in Corpus Christi and the potential for ongoing expansion in our existing markets gives us further opportunities for growth in the state of Texas. For planning purposes we anticipate the new service areas to be effective the third quarter of 2006. Effective September 1, excluding the EPO, we received a 1.9% rate increase in Texas.

In Missouri our membership declined as expected. As we have discussed for several quarters now, the state has been taking steps to reduce the number of Medicaid recipients in order to balance their fiscal budget.

New Jersey's membership declined mainly as a result of the state's enrollment broker, ACS having issues with the processing of default members. This problem has now been resolved and we expect the membership to be back on track and increasing during the fourth quarter.

In Ohio membership declined slightly as expected, we recently changed the management plan to address these issues and others and are confident that we will see growth in 2006. Furthermore, the state has issued an RFP which we believe will create additional opportunities for growth and the state is planning to implement an SSI program late in 2006. Organic growth will be a function of the timing of these programs.

In Wisconsin membership increased 5.6% over the prior year quarter to 173,900 which occurred as a direct result of organic growth in the state's ongoing efforts to move the SSI population into managed care programs. We expect these figures will become more meaningful as we move towards mandatory enrollment by the end of this year.

As we have stated in our press release, we settled the litigation between Wisconsin subsidiary MHS and the Aurora hospital system. We are pleased to have resolved this and protected a relationship that is important to us and the hospital group. This is a solid example of the importance of making sure and being certain that your contracting is right.

Regarding Georgia, the state has delayed the commencement of the membership operations until April 1, 2006 with the enrollment period to begin December 1, 2005. We have continued to proceed at full force as if the membership were coming on January 1 so as not to lose momentum. When dealing with a new state it is important that the initial 12 to 24 month period that you are able to concentrate your efforts to ensure the appropriate medical management controls are in place being dealt with.

Shifting now to our specialty companies which provide an opportunity to execute on our strategy to build a diversified multiline business. We are finding that more and more of our states are interested in the suite of services that we can now provide to them through these channels. To that end, we are extremely pleased with the acquisition of AirLogix.

Not only is AirLogix the leader in COPD asthma disease management field, but we now have the opportunity to broaden this platform to cover other disease management states. This acquisition also expands our specialty company services within CenCorp Health Solutions and will allow us to better serve our expanding SSI membership. Finally, our Arizona behavioral health contract is meeting all our expectations.

Turning to the health benefits ratio for the third quarter which reflects medical cost as a percent of premium -- was 81.7% for TANF and SCHIP, at the low-end of our guided range of 81.5 to 83.5 net of the impact of the onetime 4.5 million charge for the settlement of the Aurora lawsuit. The Arizona contract operates at a higher health benefits ratio of 88.5% as defined by the state and contributed 40 basis points to the overall HBR.

There was an increase in our HBR for the SSI population to 96.2% during the quarter which still has the potential to be volatile due to the small membership -- we've discussed this before -- and reflects the inclusion of new members from Wisconsin who are coming out of an unmanaged style setting. Overall we are pleased with our ongoing cost trends which remain in line with our expectations and our ability to manage them consistently.

Turning to general and administrative costs, our G&A is 13.1 compared to 12.7 last year. I want to remind everyone that it is an ongoing -- on an ongoing forward basis we expect the business to grow and we continue to invest in systems and people.

Turning to acquisitions -- there remains a host of ample opportunities to grow this business. However, we will remain disciplined purchasers and will incorporate those opportunities that we identify which benefit our existing book of business. With that I'm going to turn this call over to Karey Witty, our CFO, who will take you through the financials.

Good morning, everyone. To recap the highlights of the third quarter of 2005, membership increased 32.1% over the same period last year to 847,700. Year-over-year same store membership increased by approximately 24,700 representing a 3.8% organic growth rate. As we have discussed on previous calls, this reflects the predicted 13,000 member decline in our Texas EPO contract over the period.

Membership growth was strong in Indiana and Wisconsin. In New Jersey we experienced a slight membership decline resulting from the suspension of membership auto assignments as the state transitions to a new enrollment broker. This issue has now been resolved and we expect that our New Jersey membership will increase during the fourth quarter. Note that while we do disclose our specialty membership, it is not included in our membership tables.

For the third quarter of 2005 revenue was 400.6 million, an increase of 57.9% compared to 253.7 million in the third quarter of 2004. Net of acquisitions revenue increased 53.7 million or 21.2% versus the same prior year period.

As highlighted in our earnings release earlier today, the $4.5 million onetime charge for Aurora affects many of our metrics that we discuss starting with our health benefits ratio which reflects medical costs as a percent of premium revenues. Excluding the onetime charge our Medicaid and SCHIP HBR was 81.7%, within our guided range of 81.5% to 83.5%. Our net consolidated HBR for the current quarter was 82.5% and it compares to 80.7% for the same period in 2004. This increase reflects the implementation of our behavioral health contract in Arizona.

As Michael mentioned, the Arizona HBR will run at approximately 88.5% as defined by the state contract and account for a 40 basis point increase in our overall HBR. The remainder of this increase results from an anticipated expansion in our Indiana market where we added members that were coming from the unmanaged PCCM setting as well as an increase in our SSI and HBR to 96.2% reflecting a conservative estimate for our added members in Wisconsin.

While our SSI membership is growing, the potential for volatility in the HBR is still high given the relatively small member base. Our overall trends in healthcare costs continue to be in line with our expectations and we continue to experience a steady NICU admission rate ranging between 10 to 12% of total admissions. For the nine months to date our inpatient hospital costs are trending at approximately 1%.

While I am discussing our HBR and medical trend, I would like to go ahead and address our change in days in claims payable. Our medical claims liabilities totaled $148.9 million representing 41.4 days in claims payable. I will now go through the details in order to provide you enough data to help you better understand this 8.1 day sequential quarter decrease. Let's start with the Aurora settlement.

During the quarter we paid Aurora $9.5 million to settle this lawsuit of which $5 million was accrued for as a medical claims liability. This accounted for a 1.4 day sequential quarter decline. Now let's move to the Arizona behavioral health contract which began July 1st.

It is important to understand that we pay a majority of our behavioral health providers in Arizona under a block payment format. This has much the same effect on days as, for example, a capitation reimbursement methodology. By this I mean that utilization is estimated for a period and payments are made to providers based on this estimate. These payments are reevaluated quarterly based on actual utilization. As a result of the block payment methodology this product will reduce our days in claims payable since very few dollars will remain as a liability at the period end. Our behavioral health contract in Arizona accounted for a 1.5 day sequential quarter decline.

Lastly, over the quarter a significant effort was placed on improving the efficiency of our claims payment process. As I will note in our G&A discussion, we invested additional dollars during the quarter to ensure that this occurred. Let me walk you through some of the specifics. We paid $251 million in claims during the quarter, this is a record for us and was $17 million greater than that of the last quarter. In addition, our appended claims, claims on hold awaiting further clarification, fell to a level not seen since September of 2004.

In September our pended claims totaled 21,000 whereas they were 54,000 in June. All high dollar claims are pended for a review before they are released for payment. As such, the average cost per pended claim is much higher than a clean claim held in inventory. Therefore a substantial improvement of pended claims is expected to greatly reduce our overall liability. In fact, our average cost per claim held in inventory at September 30 was $144 and it compares to $204 at the immediately preceding quarter end.

Additionally, while our ending inventory shows an increase compared to the June 30 period end, our average inventory was reduced substantially demonstrating this process improvement throughout the quarter. While the current quarter end fell on a Friday, the prior quarter end fell on a Thursday. On average we receive approximately 20,000 more claims on Friday than on Thursday. This explains the increase in our period end inventory.

Lastly, the lag between the date that a claim is received and the date the claim is paid decreased by 1.8 days to 7.5 at September 30. In our current book of business we expect that days in claims payable will continue to be within the range of 40 to 45 days. A full reconciliation our days in claims payable from the immediately preceding quarter is included in our release this morning.

Now to continue with our statement of earnings comments. Our general and administrative expenses as a percent of total revenues was 13.1% in the third quarter of 2005 and compares to 12.7% in the same quarter of 2004. As we had previously guided, our current quarter G&A ratio includes $2.5 million of implementation costs associated with our Georgia Medicaid contract.

Additionally, we increased spending on our information systems process improvements, especially related to pended claims, and increased contributions to our charitable foundation. This spending was funded by tax benefits that were recognized during the quarter which I will detail for you in a moment.

Due to the onetime charge and increased G&A spending, earnings from operations for the third quarter decreased 8.1% to $15.1 million compared to $16.4 million for the third quarter of 2004. During the quarter income taxes provided a unique opportunity for us. Two notable things occurred during the quarter which reduced our effective income tax rate to 27.8%. Specifically a New Jersey tax law was passed which allowed us to benefit our tax provision by approximately $1.2 million.

This relates to a 2003 net operating loss carryforward that had been fully reserved. Additionally, we favorably resolved certain Wisconsin state returns under examination benefiting the quarter by approximately $1.2 million. This cumulative $2.4 million gross of federal taxes was reinvested back into the business through the increased G&A spending as I have mentioned previously.

Net earnings increased to $12.1 million or $0.27 per diluted share compared to $11.3 million or $0.26 per diluted share for the same period in the prior year period. Balance sheet highlights as of September 30, 2005 include cash and investments of $332.8 million, 27.7 million of which is free from state regulatory requirements. Additionally, we closed our AirLogix acquisition effective July 22, which added $31.2 million to goodwill and $35 million to long-term debt.

As was discussed on prior quarter calls, the state of Wisconsin held our June capitation payment of approximately $29 million over its June 30, 2005 state fiscal year end causing a significant increase in our June 30 premiums receivable balance. Both the June and July Wisconsin premium payments were received in July normalizing our receivable balance at September 30.

At quarter end we had $75 million in total borrowings outstanding under our credit facility. And during the quarter our credit facility commitment was increased from $100 million to $200 million with its syndicate of lending institutions.

For the nine months ended September 30, 2005 cash flows from operating activities were $44.9 million compared to net income of $41.8 million. As was mentioned earlier, the timing of the June Wisconsin premium payment significantly increased cash flow during the current quarter resulting in cash flows of $51.9 million or 4.3 times net income. Continued spending in Georgia in advance of any revenue coupled with experienced rebate payments in Texas will slightly lower our cash flow target to approximately 1.2 to 1.3 times net income for fiscal year 2005.

In anticipation of adopting statement of financial accounting standards number 123R on January 1, 2006 we recently accelerated the vesting of 260,000 out of the money stock options. This has the effect of avoiding $3 million in expense in future periods after adoption. I want to emphasize that the individuals affected did not include any of our directors, executive officers or other employees at the vice president level or above.

Regarding guidance -- for the fourth quarter of 2005 we expect revenue in the range of $415 million to $420 million and net earnings of $0.30 to $0.32 per diluted share. Our preliminary outlook for 2006 includes revenue in the range of 2.03 billion to $2.18 billion and net earnings of $1.72 to $1.87 per diluted share. This guidance incorporates an April 1 effective date for the Atlanta and central regions of Georgia and a December 1 date for the Southwest region.

Additionally, this assumes a September 1 effective date for our new service areas in Texas. Our EPS guidance excludes the effect of adopting Statement of Financial Accounting Standards number 123R on January 1, 2006. With that I think we can open the call up to any questions.

(OPERATOR INSTRUCTIONS). Patrick Hojlo, CSFB.

Karey, can you talk about the revenue guidance for the fourth quarter, why it's a little lower than what you gave out last quarter?

I think it's a result of the comment that both Michael and I made relative to, for example, we're having issues with enrollment brokers on a couple of states. Michael mentioned Texas, I mentioned New Jersey. The reality is membership is going to come in, it's just a product of timing. Will it come in in Q4, will it come in in Q1? The state of Texas, as Michael mentioned, has said that they will retro these members that they have not been able to enroll having now redirected certain of their state employees to processing food stamp applications. So there's some hedge on that. If it comes in or if it does not, it's just a product of timing quite honestly.

Got it. Now this claims payment process improvement spending was in your guidance previously. Can you give a little bit more color on what exactly it was and what prompted you to spend that money -- besides that fact that you've got some extra tax returns?

And that's certainly a big driver of it. The fact that we did have the dollars available through this -- through these couple of tax items that came our way early in the quarter allowed us some flexibility I'll say to reinvest these dollars back into the business. Obviously having contributed a penny a share essentially to our foundation, but more specifically some of the process improvements -- particularly focused around improving the pended claims.

As I noted in my prepared comments, we saw a significant improvement in our pended claims. And the efforts here in the quarter were truly a root cause fix. What causes a pended claim and how do we prevent pended claims? So that's really where the dollars were aimed -- at drilling down, finding out what causes a pended claim to prevent going forward.

Now your guidance for days claims payable previously was 50 or 55 and you hit that 50 number last quarter. Your new guidance 40 to 45 sounds like the factors that came down to this level, though, was a little bit unexpected by you. You said you've made some good improvements in the pended claim area. What else about this quarter's trends were unexpected to you? What is it that really drove this days claims payable number down in a little more detail?

Sure. I think as I mentioned in my prepared comments, there is a table in our release -- so you really have to look at all of the items that we've indicated here. The Aurora settlement obviously; we told the market that was coming, that was not a surprise. The behavioral health contract, that's just a product of how the calculation works. The effect of the 1.5 days is essentially stripping out the effects of that behavioral health contract. So net of that contract our days would have been 1.5 days higher than the 41.4 reported. And then of course, the balance are the process improvement items that we just spoke of. So that makes up the essential eight day (multiple speakers).

I'm most interested in that last bucket. Is it reasonable to say though that that was a bigger improvement -- the process improvement had a bigger impact than you would have anticipated?

Yes. Certainly the fact that we knew about the claim -- the tax benefit early in the quarter afforded us the opportunity to again spend some of those dollars to do just that. So certainly this is a significant improvement in our pended claims most definitely.

So you wouldn't have seen such an improvement if you haven't hadn't spent that money?

No.

All right. I'll get back in queue. Thanks.

Greg Nersessian, Lehman Brothers.

Good morning. I just wanted to follow up on that last question. I guess, Karey, you mentioned that there was a lower cost per claim among your pended claims in the quarter and I just wanted to get a little bit of a better understanding of That. Does that suggest that you had a lower acuity level on your pended claims in the quarter? Is that something that took you by surprise? And I guess as you booked your IBNR reserves are you factoring in a lower cost per claim into your IBNR than you have historically based on some of these trends?

First, Greg, let me say that this really is not a product of IBNR, this is not a change in IBNR at all. These are known claims in house. So by definition incurred but not reported. These claims in-house have no impact on our IBNR estimate. So with that as a background, essentially the numbers that I quoted, the average cost per claim held in inventory again was $144 and that would compare to $204 for the June 30 quarter end.

The improvement -- what I am trying to get across in my prepared remarks is the fact that pended claims represent on average high dollar pends. We pend every high dollar claim for a subsequent review. It may be reviewed for medical records, it may be reviewed to compare to the contract, but every high dollar pend -- high dollar claim rather is pended.

So what we're seeing is the fact that pends came down significantly -- obviously if those pends -- well, in fact those pends are high dollar claims -- the fact that those claims are significantly reduced during the quarter is going to obviously lower our average cost per claim held in inventory and that's an average across clean claims as well as pended claims. So pulling down the pends it's going to significantly reduce the average dollar per claim held in inventory.

What we're trying to do, Greg, is just try to give you another metric that gives you the added confidence when you have the number of days involved in bringing down those pended claims was because we used that G&A money to really focus on how to streamline the process and bring them down and it worked. What's left in inventory now, the average cost of claims is down which would explain why that number of days was impacted in doing it. So we were just trying to give you one more number that supports the credibility of what we're telling you.

But I just I'm just still a little bit confused. I mean the average cost per claim was $204 so I guess what you're saying is you paid down more of the high-cost claims so the ones that are left are more of the low-cost claims?

That's right.

The pends are at an all-time low we said. So the pended claims are the high-cost ones. Sorry, Karey.

I was just going to reiterate, again, this average is over the high dollar pends as well as the clean claim pends or clean claims held in inventory. So I just wanted to reiterate that fact.

Okay. So I guess going forward would we expect the average cost per claim to remain in this -- of pended claim expected to remain in this range of $144?

Yes. Our revised days in claims payable guidance would include that, yes.

And then I guess just on -- again, just getting back to the IBNR component of it. I mean it sounds like -- so you're paying the higher cost claims faster but you're not -- are you assuming you're not necessarily seeing a higher incidence or a lower incidence I should say of higher cost claims?

No.

So you're seeing your claims pattern is consistent with historical levels?

Definitely, yes.

We could give you some numbers -- we could see what the MLR did. We've been trying to get MLR up for the TANF and SCHIP. For the last three or four quarters I've been complaining about it being too low and we're working to find ways to get it up and we've said first-quarter and other things would do that, Greg. So our cost trends are very steady.

Okay. And then my next question was on Georgia. I guess could you talk -- first of all, what do you expect to be -- in terms of your guidance what do you expect to be the admin costs that are going to be in the first quarter of '06 that obviously won't be offset by any revenues? And how will that impact the progression of EPS during the course of '06? And then I guess if you could give us a ballpark range of in your 172 to 187 guidance for next year, how much of that is Georgia?

Let me start with your quarter question. We're not at this point, Greg, prepared to talk specific quarters in '06, but let me reiterate again that Q1 of 2006 we will have only G&A spend for Georgia and no revenues. So as you model out the Georgia you should expect to see a much lower EPS in Q1 than in Q2. Q2 we go live in Georgia, we will have spent all of the dollars to ready us for that April 1 start date. So beginning April 1 it should be a clean operation.

Would you expect that the run rate in G&A would be -- in the first quarter would approximate what the G&A start-up costs are in the fourth quarter of '05, that guidance that you had given us?

Yes.

I would like to emphasize one of the things you think about Georgia, our conservativism mandates that in the early quarters of operations, and some of that's reflected here, that the MLR be booked at a higher level because you have no experience. So we tend to be very conservative in when we do that, so when we looked at the guidance we gave you, we wanted that conservatism to come through, Greg. And then as we get the experience in the second, third quarter of it, then we are able to talk more authoritatively as to just where it is going. But I've talked about this, and historically in a new book of business, you always come at it conservative because you are dealing with an unmanaged population up to this point in time.

So that explains kind of the wide range, just the wider than normal range in guidance?

Yes. We want to be conservative, and that is really why we have done that.

I don't want to take up too much time. One last quick one was on the Indiana rate increase, I thought you had mentioned that you thought you were going to get a rate decrease in Indiana, and now it sounded like -- did I get the number wrong -- a 4% rate increase there?

We actually had a 0.2% decrease this year, which we had talked about with the state, and that was fine. They came through this rate increase, and it was -- it's really community rated. I think probably some other players needed that, and so we will benefit from it as we have historically. We are still working on margin protection programs.

And that is effective 1/1, right?

Yes, sir. It is more than adequate; I can't emphasize that enough.

Okay, great. Thank you very much.

Matt Perry, Wachovia Securities.

Another question on days of claims payable, and I appreciate the level of detail you have given so far, but can you talk about your IBNR and possibly give us your days of claims payable in IBNR in the third quarter versus 2Q '05 and maybe a year-over-year change in that number?

I think, Matt, what I will highlight for you is the fact that -- and I said this last month at a conference -- but one thing I will highlight, that our reserving methodology has not changed, the level of conservatism has not changed, and we apply this estimation methodology on a consistent basis. So while I may not break out all of the bits and pieces of our IBNR number for you, of our claims liability estimate for you, what I am going to say is nothing has changed, the methodology has not changed, and we're doing it the same today as we did last month, as we did last year.

Okay. So if the methodology hasn't changed, is there any reason to think the dollar amount of IBNR would have changed significantly?

Certainly dollars are going to change relative to growth, relative to how quickly we are paying claims, etc. So I'm not going to say numbers don't change, but what I am saying is that same level of conservatism is there, the same methodology is there, so --.

Okay. Can you talk maybe following onto Greg's question about Georgia, can you give any kind of range around expectations there for either margin or EPS contribution in '06?

I would say as Michael indicated, and what we've said on other calls as it relates to deals, as it relates to new markets, as it relates to new products, always our mantra is that we're going to be very conservative in the very early month. So we are going to book a pretty high loss ratio in the first quarter of operations until we can actually see what this market is going to run as we get into Q3 and more clearly in Q4. We are not going to break out by markets what our guidance is. It is an all-inclusive number. Just keep in mind that Q1 has no revenue, Q2 is going to be very conservative because it's -- we will almost be booking a medical loss ratio, and then we will be able again to see what the claims trends really look like in Qs 3 and 4.

Let me ask then just a slightly different way, I guess. In Georgia as you look at your expectations there in '06, is it a situation where you have significantly less visibility, hence the wider range in EPS; significantly less visibility on that business than you would an expansion within your current market or an M&A transaction?

Let me respond. Absolutely. In other words, what we do is, if you think about it, we are going to add X hundreds of thousands of lives at one specific date, Matt, so April 1. So we are roughly 15 weeks later, we are going to have to book a number for the IBNR. Now, if we have a brand new plan and you have a network you're working with, now somebody may not have followed a procedure. You're not going to be punitive in the first quarter. You're going to work with it as an educational process. We have seen it in Indiana and elsewhere where we bring on a new book of business, the MLR goes up, and then you bring it down. So we have a sense historically what to expect, but we will book it very conservatively, and then as the quarters unfold, we will be looking at how fast the claims come in.

Now, in Georgia they are providing for electronic claims and electronic claims -- electronic funds transfer for payment. So as we get the experience with that, we will get more visibility and we will give guidance to it. So that is why we put out a wider range to say '06 is shaping up to be a great year for this company, and showing -- we see a lot of upside, but let's keep everybody's expectations on Georgia realistic. I can't sit there and say it is going to have normalized margins when it is a brand new market.

Okay. Just one final question if I can. If I heard correctly, you talked about management changes in Ohio. If I heard that correctly, can you elaborate on that and how that might help your growth?

We sat down with -- we had some individuals than when we sat down with them, we came to a mutual agreement that maybe this was not the right environment for them and the company there, and they are working with us in a consulting capacity. We put in some other experienced people we had, and we are seeing a major improvement in the operations. That is not to say anything negative about the others. It is just a matter of somebody having experience with a startup and merging these two companies together. We have some people that can do it better.

And you expect that to translate over time into enrollment growth there?

Absolutely.

I will get back in the queue then.

Steven Halper with Thomas Weisel Partners.

This is Julie in for Steve. Most of my questions have actually been answered. I was just wondering if you could quickly comment on the tax rate going forward, whether or not it is going to go back to that 37% range?

Yes, we do expect even in Q4 our tax rate to be back up to 37%.

Great, thanks.

Dan Veru, Palisade Capital Management.

Good morning. I am wondering if you could, Michael, talk about -- you have stated over and over again that the environment for acquisitions has been very robust and that you are obviously looking at a lot of things. I am wondering if given the recent events by some of your competitors, whether that helps the landscape, helps valuations, since some of those companies might rethink the aggressiveness to the way that they grew their business in terms of membership growth, and whether you think that is an opportunity for you in this environment?

That is an interesting question. I think there is two things. I tried to allude it so people understand the expectations, but we have kind of always had our game plan that we stick to. We have our IRR calculations and criteria. We don't go into auctions; all those things still apply. Now I would suspect -- I mean I can't speak for others -- I know that when we were far smaller, we had 100,000 lives when I first took over this company, had a meltdown. And when Karey came in and the team of Patrick and others that are still with us that helped us go through that. We have what we call Operation Forward, recognizing that if you think it's only one factor that is affecting you in that kind of environment, when you have prior period claims, that is probably usually not the case.

So we did a stand down, and so I know my board at that time if I talked about acquisitions in that environment, I probably wouldn't be talking to you today, because they understand that you have to get things right as you grow. What their problems are, I don't know. I hope they correct them. As we all talked about, we don't like to see anybody in this sector have issues. I hope they are able to identify them and correct them in all due dispatch, but I would suspect that the values that this sector has as a result of that has to be impacting how people think about the companies they are selling. And we have a very full pipeline and we are just continuing down our track evaluating those that make sense for us. I have said historically, the last thing I am concerned about right now, the absolute last, is disappointing anybody and our ability to do good acquisitions. Did I answer your question?

Yes, yes. Additionally, could you give us an update on your Montana facility and what that does for you in terms of your ability to support a larger enterprise?

It is actually completed. As soon as I can find a day, I am going to go up and cut a ribbon and do this big ceremony. We have probably between 70 and 90 people last time I looked, working up there. We are already starting to think about the next phase of construction, the next wing. The thing was configured so that we could add incremental wings when we needed for growth, but it has come online. It is performing superbly. The turnover rate for a new operation, I think it is around 15% when last I looked. I am giving an approximation. Our other claims shop operates with an 8% turnover rate, which is really unheard of in this business.

So it is coming on very well. It gives us the capacity when Georgia comes online, had it come on January 1, we would have been able to process all of the claims as fast -- meet that seven-day criteria we are operating to now. And so it really just put us in a spot to continue to have control, because when you get the claims in that fast and you have the right contracts and you have the things we are doing, Dan, that is what gives you the confidence in your numbers and the control of your cost because you identify a trend very quickly. If you will, I was thinking about the fact that the data we get out of the claims shop, they can tell us precisely today the count of claims that came in yesterday and how that impacts the inventory. It is having that kind of control data that I think makes the difference in this kind of business.

Obviously, you never want to say never, but clearly the likelihood that you would be surprised by changes in utilization is substantially less of a risk in your company?

Sure. I mean, you can always get incremental utilization. There could be an epidemic. I mean there are things out there that every generation seems to have some epidemic. There are conditions. I mean we have joked and talked -- not joked, but we've tried to talk about snowstorms and how that has an impact on us in Wisconsin. There has been things of that nature, but we see that, we know it. And once again, if you have your claims coming in quickly, you have the medical economics, the actuaries that we have demonstrated at conferences, then you get a hold of it and you can identify the trend.

By example, I mean we saw a little tick in our drug trend at one point. So you very quickly drill down and you find out it is OxyContin. You preauthorize it and you end up saving you a lot of money. We've seen that in other markets where some of the drug trends have ticked up. That is what the business is all about. You have the data, you have the ability to look at it and then deal with it.

Thank you very much.

(OPERATOR INSTRUCTIONS) Patrick Hojlo, Credit Suisse First Boston.

On Texas and the rate increases you received there, I want to make sure I have them right. I believe I have them on my notes from prior conversations of 1.9% without the EPO, and 0.6 with the EPO. Are those right and if so, can you talk in a little bit of detail about how that data is an adequate rate increase, what's going on reimbursement-wise and trend-wise, and perhaps some cutting of benefits to make it an adequate rate of increase?

I'll start it and if somebody else wants to jump in. If you recall, we have been -- we talked about booking money we we're going to pay back to the states because of our margins. So it becomes a deduction on premium. And if you go back to scripts of prior quarters, you will see where we have talked about that. So we have more than enough money to protect our margins there, and the fact that this rate increase comes down just means we will be giving back less money over the next year. And that's fine. We have worked with the (indiscernible) saying we don't need it. So it means that those just back -- they'll get less of a refund compared to what they did this past year. So it is more than adequate. Probably reflects more what other people need than us.

Fair enough. One last question on the claims issue. Just curious, are you perhaps seeing more improvement in the processing times in some of your recent acquisitions, and do you expect to see some more impact from the Montana opening on your days claims going forward?

Well, I think as we see it now at 40 to 45, I mean the big one was seizing the opportunity of those tax dollars to accelerate getting the pends down. That was a root cause, as Karey said.. We got that. So I'm not going to sit here and say I see it going materially below that today because of that. The Montana facility just ensures that we don't get a backlog of claims as we bring on all of this new business, because essentially our policy is every claim that comes in the door today, electronically or by mail, has to be entered by the end of business today. So if somebody calls, a provider calls and something comes up, they can access that claim digitally with anyone in the Company that has authorization to look at it. So all this does is ensure we have the capacity, the trained personnel, to adjudicate these claims and maintain that metric of we have said six to seven days, and it could go as high as eight, depending on volume on occasions.

Now I also want to emphasize that we could make that lower if we did more than one checkwrite a week. There is other things that impact it. If there is a month that has five checkwrites in it because there is five weeks the way it hits. So there's different variables that could impact it. But I think you can expect it to be in that 40 to 45 day, and the only thing that will impact it, Patrick, as you forward -- that's why we try to give you all these guidelines now, so people can understand it and know ahead of time when we talk about it that it is not something we're just grabbing from the air. It is all very real data. If the behavioral health business grew dramatically, if we tripled that business, then obviously that is going to impact the days claims on hand for the same reason because of how the state contract requires us to book the HBR. So it's those kinds of things. Does that help clarify?

Absolutely. The one detail I was driving at, in addition to what you just gave me which was helpful, is might there have been the greater frequency of high-dollar pending claims at some recent acquisitions and might that be why you had a run-out of some of these sort of all of a sudden?

I would say there was probably some of that, but we -- some of it may be that we just had policies that pended claims and the training of people. But the First Guard which was the last major, I mean it is so integrated now that the single biggest thing here was just cleaning up the process. And I will give you one more bit of color on this without keeping everybody here forever. The issue is this, that as we grew -- I brought a censure in last November, December, because I knew that as you grow and get bigger, you just can't do more of the same and add more people. So we brought in some outside people to work with us and say how do we streamline the process so that we can continue to maintain the element of control we have on the data. You do it now; you plan now for what you have to do when you are at $3 billion. You don't wait until you are at 2.9 billion. So they helped get us there, and then they had this lined up and we said, let's implement it sooner because we had the ability to do it. We brought some people in and did the things we had to to get it cleaned up, and it's a good feeling to have it at that level.

Fair enough. Very helpful. Thank you.

Ed Kroll, SG Cowen.

As you look at the guidance you gave for 2006, I mean I guess as I look at it and as I look at the first-time guidance you gave for '05, for example, it seems like it's a pretty conservative guidance range to me. And I was just wondering if you could comment on that. I have heard you during this call use the word conservatism several times, but just also wondering the swing factors other than Georgia that would move that towards the higher end of the range, let's say, or even beyond. Other than Georgia, what might be some other significant swing factors?

Sure, Ed. Ohio, Michael mentioned Ohio doing an RFP. We are going to see some growth out of that market in '06. We have -- again, in my prepared comments I stated that we expect the new service areas in Texas to come on September 1. The state could do those earlier, but we I think are being conservative saying we think it is going to be the start of their fiscal year, September 1, before we see those new service areas come in. So a couple of items. SSI growth, continued growth in SSI in the markets. And we still continue to work with New Jersey to expand their program beyond their one county. Those are some thoughts for you.

I think I would hope we start to get recognized for our conservatism beyond anything we do. Ed, I think it is a wider range. You heard some of the explanations, the whole thing on Georgia, the MLR. We have never wanted to be somebody that gives you a number and then you blow through it in a material way. So at this stage, it seemed wise when Karey and the whole team sat down to talk about that range, to be conservative. Then as we go throughout the year, we can tighten it for you.

Okay. Then just quickly on the options that were accelerated. You said it is nobody on the senior team. I am just wondering, do you worry about retention of any of the people that now have those options that are now vested?

You know, I don't think so. I think none of the senior team, but I would like to think that right now the individuals, the amount of stocks that they had was not necessarily enough at that level to be handcuffs. We are finding that our turnover rate, the environment, and I think if you will the surveys and the things we are doing that people have a satisfaction that they're doing things right, they're being successful. That is probably going to keep them here faster than any options. I don't know if it's the people we are able to attract, new people we have coming on now, the new CIO and others we have brought on. It is just really solid. So I don't think that will impact us.

Okay, thank you.

There are no further questions at this time. Do you have any closing remarks, sir?

I just want to thank everybody. Last year on this call, I was trying to make a prediction on the World Series, and I don't have to do that this year. So I will just thank you all for joining us and look forward to the year-end call in January, February. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.