Centene Corp (CNC) 2006 Q2 法說會逐字稿

Good morning. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Q2 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Ms. Wilson, you may begin your conference.

Thank you. Good morning everyone. I am Lisa Wilson, SVP, Investor Relations at 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 Ebelt at 212-759-5665 and it will be sent to you immediately.

Michael Neidorff, Chairman and CEO, Per Brodin, CFO, and Karey Witty, SVP Health Plans of Centene Corporation will host this morning’s call.

The call will remain open until all of your questions have been answered. We are also using slides this morning which are posted on our website at centene.com. A replay of the call will be available today shortly after the calls completion by dialing 800-642-1687 in the US and Canada or 706-645-9291 from abroad and entering access code 1800936.

Any remarks that Centene may make about future expectations, plans and prospects for Centene constitute forward-looking statements for the 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 dated July 24, 2006 and other public company filings.

Centene anticipates a subsequent events and developmental causes estimates to change. While the company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligations to do so.

With that, I would like to turn the call over to Michael Neidorff.

Thank you, Lisa. Good morning, everyone and thank you for joining us. I want to start this call by saying we are disappointed and regret the factors that impacted our second quarter and required us to lower our guidance.

We are also going to use some charts today to provide as much clarity as we can on the issues. For those of you who have dialed in, please go to our website at centene.com if you wish to view those slides.

Today’s call is the start of the long road back to restore confidence for our investors. Some human errors and cost issues have come to light that we are addressing. We feel there are no barriers or deficiencies that limit our ability to grow. The fact is, in hind sight, we had issues in our first quarter that caused a mis-estimation of medical costs. We believe these issues based on everything that we know today, were confined to the quarter. In fact, on June 30, there was some positive development. Karey Witty, who was sole CFO when we closed Q1, will take you through how the prior development happened and a discussion of the cost drivers. Per will take you through a list of very specific corrective actions that we are taking at both corporate and health plans to protect against issues of this magnitude in the future. He will also take you through the numbers and the costs for Q2 in the guidance.

As a result of factors which impacted our first quarter results, we have taken a charge of $9.7 million, the first time since 1998 that we have had a negative prior period development. We didn’t book extra reserves above and beyond those which are consistent with our current and general policies.

As it relates to our operations, this past quarter has been a wake up call. Several things were mis-estimated that shouldn’t have. We made some personnel changes and have continued to drill down on costs, line item by line item. If you add back the $0.14 to the reported $0.11 earnings per diluted share, and put it back into this quarter we would have achieved $0.25 for the second quarter which is at the low end of our stated guidance. Thus, the majority of the issues that we saw related to Q1.

We believe that we have isolated the issues that did not allow us to identify these trends and are proactively dealing with them. We have also used this knowledge to examine and re-examine those issues relative to the second quarter close in an attempt to ensure that our estimates are reasonable. We are also making further changes to correct these issues.

Turning now to the second quarter, membership as of June 30, 2006 was 1,101,500. An increase of 33.5% verses second quarter of last year. For the second quarter of 2006, Revenues East increased 41.7% to $495.3 million. Importantly, we can now discuss rate increases from the following states, in New Jersey we expect to receive a 7.6% blended rate increase effective July 1, 2006. Kansas we should receive a blended 4.9% rate increase effective July 1, 2006. And Texas, has given a blended 9.6% increase effective September 1, 2006. These new rates are now being factored into our guidance.

We are pleased with the Georgia launch. Operations went live on June 1, 2006 and our Georgia Subsidiary Peach State Health Plan began managing care for 216,000 Medicaid and HISCHIP members in the Atlanta and Central regions. The Southwest region is expected to go live in September 2006 and we are still booking an HBR of 90% until we have more utilization data.

Contracts have been awarded to our Texas subsidiary superior to serve both Star and Chip members in the Corpus Christi service areas, with membership operations to commence in September 2006. We also were awarded a contract to provide managed care for SSI recipients in the San Antonio and Corpus Christi markets effective January 2007. Our Specialty Services segment has experience significant year-over-year growth.

In May, we received notification from the Arizona Healthcare Cost Containment System that SynCorp Health Solutions had been awarded a long-term managed care contract that will begin October 1, 2006 and which includes the geographic service areas of Maricopa and Yuma/LaPaz counties. We expect revenues of $100 million to $150 million from this contract.

Two recent acquisitions significantly expanded our disease management capabilities. In May, we acquired Cardium Health Services Corporation, a Connecticut based chronic disease management company that focuses on individuals diagnosed with coronary artery disease and congestive heart failure and diabetes.

Our acquisition of The Managed Vision Business of OptiCare Health Systems Inc. in April expands our specialty capabilities to include vision benefit management and further our goal imploded in multi-line enterprise.

Our Medicaid and SCHIP HBR from June 30, 2006 was 84%, an increase of 3.1% over the comparable 2005 periods. These increases were due to the increases noted earlier for cost and utilization trends, primarily in Indiana and Texas, which accounted for 2% of the impact. The remainder of the increase was pharmacy related costs in Indiana.

With respect to general and administrative costs, our Medicaid managed chair G&A ratio was 12.3% compared to 10.5 last year. These numbers are also impacted by the premium taxes in the Georgia G&A expenses.

With that, I am going to turn this call over to Karey Witty, who will take you through factors which impacted the Q1 estimates. Karey?

Thank you, Michael, and good morning everyone. I will be walking you through the increase in our medical costs related to the first quarter of 2006. What I plan to do is comment on the overall development and then drill down on the 2 markets contributing 61% of this adjustment, Indiana and Texas.

Let me start by saying that this issue relates to the first quarter of 2006 only. Our 2005 and prior claims liability estimates remain intact and are developing slightly favorable to amounts accrued for the year ended December 31, 2005.

Overall, our claims liability estimates for the first quarter of 2006 have adversely developed by a total of $9.7 million. The month of March alone accounts for 7.1 million or 73% of the total.

We experienced an unfavorable change in estimate in each of our major accrual classifications. Hospital inpatient, hospital outpatient, professional physician, emergency department, and the other category. Importantly, while we highlighted pharmacy costs as being an issue on our first quarter 2006 earnings call, none of the $9.7 million relates to drug spend as these costs are captured virtually real time. Furthermore, Indiana and Texas contributed $3.7 million and $2.2 million respectively to the overall total.

Causes contributing to this adjustment overlapped markets and let me address this now. My comments will align with slide number 2 for those of you viewing the presentation on the webcast.

First, increased physician costs. We experienced an increase in both utilization as well as the cost per unit, primarily driven by an increasing provider network and an increase in obstetrical and related services.

Another common theme is unidentified changes in member demographics, resulting in changes in utilization. For example, in our Texas market, we have seen a 17% increase in our newborn category and a 9% increase in the pregnant women category. We have also seen an 8% decline in our SCHIP membership exclusive of the EPO. With these changes, we have experienced an increase in obstetrical and related care including deliveries, radiology, NICU, and home health costs.

With increased deliveries and NICU, we have also seen a significant increase in injectable drug compounds, specifically SYNAGIS, the RSV prevention drug. Much of this utilization has been found to be included within our profession physician cost versus that of our specialty pharmaceutical vendor, a change from prior billing code practices.

Lastly, during the first quarter close, we under estimated 913 inpatient hospital days, representing $1,078,000 or 11% of the total. Approximately 70% of these days are attributable to complex cases, which worsened in the second quarter, beyond our expectations. An estimated length of stay is factored into our close based on known clinical data at that time.

Select cases far exceeded our estimates due to deteriorating health conditions. Included in the 913 missed days are 165 admissions, which were excluded from our accrual. To put this into perspective, we had 87,000 inpatient bed days for the first quarter, accounting for $102 million in medical costs.

Also related to inpatient costs was an under estimation of unit costs. Hospital rate changes were not fully identified, contributing to $798,000 of the total.

I would now like to drill down on the 2 markets highlighted. Slide 3 summarizes Indiana's results, which accounted for $3.7 million or 38% of the $9.7 million.

Indiana experienced the largest under estimate of inpatient bed day utilization, contributing 728 days to the previously mentioned total of 913. Of these 728 days, 13 complex, high-cost cases contributed 394 days of this increase due to declining clinical conditions for those specific members.

Overall, the hospital inpatient adverse development for Indiana was $848,000. The single largest cost trend driver in Indiana was the growth in membership that came as a result of adding to our physician network late in 2005. Further analysis has identified that the per member per month cost for professional services associated with primary care physicians who have recently been added to the network are significantly higher.

A comparison of all professional services shows an increase in PMP costs for all regions. 19% in the Central region, 11% in the North, and 21% in the South. The HBR for these new physicians is approximately 10% higher than existing physicians. This increase contributed $1.3 million of Indiana's $3.7 million total.

The hospital outpatient and emergency department subtotals adversely developed to a total of approximately $500,000, largely attributable to an increase in observation days, tonsillectomies, and other ENT procedures.

Lastly, the other medical category accounted for $1.1 million of the development due to higher costs for injectable drugs such as SYNAGIS, Somatropin, and hemophiliac blood factors.

Slide 4 summarizes Texas which accounted for $2.2 million or 23% of the $9.7 million change in estimates. As I previously mentioned, we are seeing a movement of certain membership categories out of the primary care case management model and into Medicaid managed care.

The increase in pregnant women and newborns has generated higher obstetrical and related costs affecting many of our cost classifications. Nonetheless, in Texas the hospital inpatient category developed slightly favorable to our estimates. Hospital outpatient contributed approximately $488,000 to the development, as we see increased cost in imaging, operating rooms and anesthesia.

The increase in professional physician cost is significantly attributable to an increase in the number of pregnancies and deliveries. Again an over lapping item that we have seen in Texas is the use of SYNAGIS coming through our Professional Services category. These items selectively generated adverse development of $1.4 million in this category. Two catastrophic newborns and an increase in speech therapy significantly increase home health cost generating $495,000 in adverse development in the Other categories.

I will now turn the call over to Per who will walk you through certain of our process improvements as well as our second quarter results.

Thank you Karey and good morning. I would like to highlight several of the process improvements we have or are in the process of implementing with respect to our IB&R estimates. First we have already begun retraining our staff nurses on the bed day estimation process and system reporting. We will also require daily rounds by staff nurses at our significant hospitals to enhance their familiarity with the inpatient inventory. We have increased the scrutiny placed on the estimated inpatient days required for significant cases by medical management and finance personnel.

We now require our health economics unit and health plan controllers to evaluate the financial impact of proposed changes to hospital contracts. Each health plan will maintain provider rate summaries that identify contract rate changes for all providers. Our health plan controllers, plan finance directors, medical management, and contracting personnel will conduct face to face meetings to ensure the most current information is used to evaluate unit cost estimates. And finally we have enhanced our monthly review of member demographics for each health plan.

And now moving to the 2006 second quarter. Our membership increased 33.5 % over the same period last year to 1,101,500 members while revenue increased 41.7% to 495.3 million compared to 349.6 million in the 2005 second quarter.

Our health benefits ratio for our core Medicaid and SCHIP category which reflects medical cost as a percent of premium revenues was 84.0 % compared to 80.9% for the same period in 2005. This quarter's HBR primarily reflects the effect of the 9.7 million of adverse development and estimated first quarter medical claims liabilities. Karey Witty just discussed the drivers of that development. The remainder of the increase in Medicaid and SCHIP-HBR was caused by increased cost associated with higher utilization and cost trends.

The higher utilization was due to a shift in membership that had more significant maternity related costs, higher costs in Indiana associated with the membership added in late 2005 and the year-over-year increase in pharmacy costs and higher cost for injectables such as SYNAGIS and Somatropin.

On a sequential basis the Indiana drug costs have stabilized and as recent as last week we had the PDO approved in that state that we use on a go forward basis.

The 2006 second quarter Medicaid and SCHIP-HBR would have been 20 bases points higher if the effect of the Georgia plan had been excluded.

For the second quarter of 2006, the HBR for our SSI population was 87.6% versus 85.2% in the second quarter of 2005. The 87.6% second quarter 2006 rate is consistent on a sequential basis with the first quarter 2006 rates. While the SSR-SSI-HBR is approaching our target range we continue to highlight that there can be expected to be some quarter-to-quarter volatility due to the small membership base.

Our specialty segment HBR was 83.7% for the current quarter versus 86.3% for the same period in 2005 and includes the behavioral health contracts in Arizona and Kansas. The 2005 comparable period results included only the first 6 months of our behavioral health contract in Kansas.

Turning to general administrative expenses our G&A for the Medicaid managed care segment as a percent of revenue was 12.3% in the second quarter of 2006 and compares to 10.5% in the same quarter of 2005. This increase reflects implementation costs in Georgia with only one month of associated revenues, the adoption of SFAS-123R and the effect of new premium tax enactments.

Premium taxes increased our G&A ratio by 1.3% and 1.1% in the 3 and 6 months ended June 30, 2006 respectively compared to 0.4% in the 3 and 6 months ended June 30, 2005.

Investments and other income for the second quarter of 2006 increased 1.4 and 2.8 million for the 3 and 6 months ended June 30, 3006 over the comparable period in 2005 as a result of increase in market interest rates.

Interest expense increased due to higher borrowings under our credit facility. Earnings from operations for the second quarter of 2006 decreased to 6.3 million versus 22.3 million in 2005. Net earnings were 4.9 million or $0.11 per diluted share compared to 15.3 million or $0.34 per diluted share for the 3 months ended June 30, 2006 and 2005 respectively.

Balance sheet highlights at June 30, 2006 include cash and investments of $349.4 million of which $25.5 million was free from state regulatory requirements. Our June 30, 2006 receivables include approximately $30 million for Wisconsin's June premium and 2.8 million for Texas's June delivery payments which was delayed over the holiday weekend.

No additional receivables were recorded in the second quarter from Model One contract deficits and we are making progress with providers toward collecting the 3.2 million receivable that was booked in the 2006 first quarter.

Our medical claims liabilities totaled $187.2 million representing 42.6 days in claims payable. This reflects a 4/10ths of a day decrease from 43 days in the immediately preceding quarter primarily attributable to a 2.8 day increase for our new health plan in Georgia offset by decreases in claims inventory, Model One contract bonus payments and the conversion to U.S. script as our pharmacy benefits manager.

As we continue to convert our other health plans to U.S. Script, we expect that further decrease in our days in claims payable. In addition, because of other claims payment improvement initiatives and their proportion of claims from the Georgia plan expected to be paid electronically, we expect further decreases in our days claims payable.

Our debt to capital ratio at June 30, 2006 was 30.7%. For the 6 months ended June 30, 2006, cash flows generated from operating activities were 14.4 million compared to net income of 13.7 million or 1.1 times net income.

Our cash flows reflect the delay in receiving the Wisconsin premium payment for June, the Texas delivery payment delay and Georgia’s change in premium remittance schedule. Georgia’s original remittance schedule indicated that we would receive both the June and July premium payments in the 2006 second quarter, however that schedule was revised such that the July premium payment was received in the first week of July

Our third quarter 2006 revenue guidance is in the range of 615 million to 620 million with net diluted earnings per share of $0.29 to $0.32. Our fourth quarter 2006 revenue guidance is in the range of 670 million to 690 million with net earnings per diluted share of $0.35 to $0.41. This guidance reflects managements updated assumptions regarding the Company’s health benefits ratio for the remainder of the year which has been adjusted as a result of the higher cost and utilization trends that we experiencing. This guidance also includes the effect of all recent acquisitions and contract awards and anticipates that the operations for the Southwest region of Georgia will commence on September 1st. Start up costs associated with the Arizona long-term care contract and the Ohio and Texas expansions are expected to negatively affect the 2006 third quarter by approximately $0.04 to $0.06.

With that we can open up the call to any questions you have.

Operator?

[OPERATORS INSTRUCTIONS]. Your first question comes from Bill Georges of JP Morgan.

Good morning. Based on your guidance and the way that I’m modeling out the third and fourth quarter, the MLR doesn’t seem to improve meaningfully for the balance of the year and with competitors who experience one time spikes in cost trends, their MLR seem to return to normalized levels roughly within a quarter, so I’m wondering can you give us any more color in terms of both the magnitude and timing of improvement?

I think our guidance reflects an assumption that we will continue to have some pressure on our HBR and essentially reflects a steady state from an HBR standpoint on what we believe our Q2 run rate is without the adverse development continuing through the remainder of the year.

Okay, so basically backing out the adverse development and then assuming a steady state for the back half, is that, is that a fair characterization?

That’s, that’s right.

Okay.

As you heard we’re doing a lot of things to contain costs and improve them and as those, as we clearly see they’re working and of course we’ll give you that as well.

Okay. And if I can just ask a follow-up, your PMPM revenues on Medicaid seems to be tracking up but consolidated PMPM, at least in this quarter, dropped by almost 4% sequentially. Is that a trend that we should expect and can you just give a little color on what’s going on in terms of membership mix shift and so forth?

I’m not sure where you’re seeing the decline. We’re, in the back of the earnings release in the supplemental data; we’re showing Q1 to Q2 an increase from $157 per member to now $159 per member.

And that’s on Medicaid alone, correct?

That’s correct.

Okay. Well it’s just that on a calculated basis, I noticed the consolidated PMPM on all membership dropping sequentially, so I mean obviously there’s something going on with the non-Medicaid membership and I was wondering if you could give any details around that?

Based on your calculation is that might be driven by the fact that Georgia from a member month standpoint is only in the quarter for one month out of the quarter.

Okay.

So that would be one factor that may drive that down.

And so increase is your denominator but you only have revenue for one month, Bill.

Got it. Maybe that’s what it is then. And so it’s not mix shift then from other membership lines then?

No, I think it’s that. But not only from the one month of Georgia membership.

Your next question comes from the line of Doug Simpson of Merrill Lynch.

Good morning. Just wondering basically it-- everything in June everything was, you guys were tracking well or so it seemed and then July, you know, second, third week in July you, you kind of discover this problem. I’m just wondering, you talked about the systems and the improvements your making, what gives you comfort, I’m just trying to get a sense for, -- it took a long time for these issues to present themselves, and how do we know in a month your not going to have issues with April and May?

Well we have, you know, based on the development we experienced in the second quarter, we certainly did, what I’ll call it a super scrub or, we certainly scrubbed the numbers at the end of the second quarter, we would do that in connection with any quarter close. Some of these process improvements that we discussed, you know were put into place in connection with the second quarter close and based on the information that we have, we believe that we have made appropriate estimates of our medical claims liabilities at the end of June.

Doug, let me add to that just a little bit, if you look at the granularity we gave you, you can see where there was some inpatient loss and some things there that obviously all the corrective plans are putting in place to enhance the potential for not having those kinds of estimate issues.

We also saw a new submission pattern for the SYNAGIS where doctors were slipping it through CPT codes in their practice versus an avoidance of preauthorizations, so we obviously looked to see if that pattern had continued and second quarter SYNAGIS falls off, but we are also locking down the CPT codes and how that is done and we’ll deny it.

I think the other thing is we have a team now looking at those kinds of issues. In fact, this is the first time we have seen that and we have been looking at those kinds of issues to say what other codes could they be trying to do this with, what other drugs and substances, and I think also having U.S. Script fully engaged on this will be an added safety net. While Caremark as the preauthorization of SYNAGIS, we have improved the backup. So, clearly, when we saw what happened in Q1, in the retrospect look and how it kind of tricked us. In doing that we are also enhancing some system capability of how we look at lags. So there is a series of things, and I think I refer to this as a wake-up call. It is kind of regrettable in the order of magnitude, but I think the estimates were based on what we had previously seen and we are now using that knowledge, not just to look at what happened this quarter in those areas but for the organization to think through what happened and where else could it happen.

In just stepping back, just be curious your thoughts about the company's direction in general. You have this massive Georgia rollout. You’ve got the service areas in Texas and Ohio. You are bidding for, I believe, for TennCare. You have some business in Arizona. You made 3 acquisitions and now you have got these issues. How does this quarter affect your strategy? Do you think maybe it makes sense to maybe take the foot off the gas a little bit and then focus more on these types of issues as apposed to continuing such rapid expansion?

That is a very fair question. We have spent a lot of time in QA management in the boardroom and elsewhere talking about that very issue. I think – one, I want to stipulate that the specialty companies are in a separate business unit, so the acquisitions that were made there are very set. The acquisition we made in MediPlan in Ohio was a [tuckette]. We had the organization in place, we had the systems in place, the claims loaded it was in place. Now, you did not hear us say we had a claims shop problem. There are those things that operationally impact additions of business. What you heard us say is that there was a way that some of the information was kind of tricked, the way it went in on CPT codes which is not the typical fashion with submitting injectables. So, that part we could lock down -- and that is why we gave such granularity to what the issues were. I think you can see, that whether it be the inpatient log and things, those are correctable issues given the knowledge we have in the systems. As I said, there is nobody who regrets this more than the people sitting around this table here today along with all of you, but this is the first time since 1998. It was a wake-up call and we have tightened all those things, so if you think about the long-term care, you think about adding in Texas in long-term care in October and January the timing has been planned from a systems standpoint and we will work on those priorities. Tennessee, for example, if we were fortunate tomorrow or whenever it is announced to hear that we are a winner, that goes live next April so we have factored all of these kinds of things in to our planning and in dealing with it.

And then maybe just one more numbers question. Could you just walk us through your capital position, specifically the capital requirements for Georgia and some of these other initiatives you are pursuing. I think, if we were looking at it right, it looks like debt picked up by about 30 to 35 million in the quarter, which was about in line with what it did in Q1. Just trying to gauge, how are you in terms of, just talk about funding the subs and the needs for some of these rollouts and these expansion initiatives.

Well, as we disclosed in our 10Q, we have our $200 million revolving facilities. We also have the $300 million universal shelf. The requirements that we foresee with respect to Georgia and other, Arizona plan and Texas and any other needs we believe will be fully met by our capital capabilities without expanding that.

Okay. Thanks.

On the escrow from operations and the other things that one does to just test, to make sure not only that we have adequate capital but the free board safety nets that we all would expect to have in this environment.

Your next question comes from Scott Fidel of Deutsche Bank.

Yes, thanks. A couple of question. The first one, just if you could update us on your expectations for cash flow from operations for the year since you only tracked around $14 million so far in the first half.

I think, as we have discussed in the past, that cash flow is volatile and from a quarter to quarter basis. In fact, if you look back at the second quarter last year, I believe we would have had negative cash flow, primarily driven by some claims issues or claims things and physician bonus payments. However, in the current year we are continuing to believe that we will be in the 1.5 to 1.7 times net income and that is what we had previously stated and still expect to achieve that.

I think also, Per, we have talked internally that -- depending on the earnings where they are now relative to some of the other cash opportunities that is a more than reasonable expectation and we will work with all of you to keep you informed.

Okay, I am anxious to follow-up. It seems like there has been some negative mix impact from the previously unmanaged populations that are coming onboard. For example, in Texas and I am just interested in how you can proactively approach Georgia just given that this is just going to be an entirely unmanaged population that is coming in from Medicaid fee for service, which has historically had higher than average utilization.

I think, we have commented how booking the 90% MOR for the first really 7 months of operation, until we see that utilization has come down. We are tracking it. Now, some of the things you do learn from past estimate issues and one of the things we’re doing now with our temper contracts there, we are really able to, very proactively and I just saw a report, which I’m not going to get into because a couple of weeks of claims does not a year make. But we’re tracking on an ongoing basis by example, what, what percent of Medicaid these claims are coming in at and we’re tracking where we are versus what our estimates were. And obviously the things that we saw here in Q1 would just be locked down in Georgia as well. We went live with U.S. Script with Bar Behavioral Health System from the beginning. We use our hospital contract templates where virtually every contract is loaded. I think there was 8 or 12 contracts carried, they said they would be loaded yet this week and then it’s a 100% contract loaded. So there’s a lot of things there that are putting us in the strongest position at this point in time to help to mitigate. I mean -- this is now becoming almost a contest, who can find a way to bill something. Now you all read the article in the “New York Times” it was probably Saturday on what pharmaceutical companies are doing to drive off label utilization. You heard us talk about that in Indiana. Well we have our preauthorization now. We went to the, we went and got the preferred drug list. So it’s all those kinds of things that you do to try to get ahead of that and maintain the vigilance on it now. As I said they’ll do it to you -- it was done to us once and we are, we are going to be more vigilant and we’re being -- we want to be realistic and reasonable in how we go with this going forward for some of the reasons that you raise.

Okay and then just relative to your underwriting spreads at this point, it sounds like you’re going to get some rate relief in the back half of the year, but just interested in currently what you saw in the second quarter between premium yield versus what you estimate as your underlying medical cost rate. because I know in the first quarter your deposit rate increase only average around 2.3%. Is it generally stable or have you already started to get some better rates?

I mean our rate increases really, primarily were effective either early in the year or were effective in the second half, so in the second quarter was not meaningful lift from that prospective.

I think from the spread standpoint, we -- the Q1 prior period and the issues that drove that really kind of skew it little bit in my mind and so we will continue to, as we always do, we’ll track it on an ongoing run rate basis and obviously these rate increases will do it. And I think we typically still expect over time probably a 4 to 5% cost trend and comparable rate trend. That’s kind of the macro view we take, am I right, Patrick? As we looked at it. That type of thing. So, I got a, I got a nod on it.

Okay, just one last question, then I’ll hope back in queue. Just a relative to your comfort with the current claim reserves position, just, you know, wondering whether, what type of estimates you have about underlying cost trends that are built into the claims reserves? I mean, is this based now on the updated cost trend outlook or are you still sort of running the same factors that you were running previously?

We have factored in, an additional 3 months worth of data into our cost estimates and that’s factored into our liabilities as well as our estimate for our HBR going forward on our expectations. So we have factored that in. We have, you know, we factored in what second quarter utilization was, as well as cost trends.

Okay, so net-net you’re comfortable with the current medical claims positioning at this point?

Right

Your next question comes from Josh Raskin of Lehman Brothers.

Hi, thanks and good morning. Question about -- I guess the medical loss ratio and the expectation for the second half. As we sort of do the math, and I think you said 84% for the Medicaid for the first, I’m sorry, for the second quarter. If I back out the 9.7 million, I get a number just at 82.0 and if I put that into the first quarter, the 9.7 million into the first quarter, the MLR is close to 85 and ¼, so I guess I’m curious, what gives you comfort that the actual MLR in the second quarter was 300 and something basis points lower and why is the second quarter a good run rate for the second half as opposed to maybe a first half number?

I think it’s something I just alluded to in the previous question was on utilization. We saw actual utilization come down in the second quarter so some of that decrease is attributable to that utilization as well as some seasonality, this issue we discussed with respect to SYNAGIS is a really -- is it a seasonal type of a respiratory compound such that any members utilizing SYNAGIS their final injection should have occurred in April if not March. So that immediately takes the pressure off of that piece of our medical cost. So that with respect to the other trends we’ve seen, give us comfort that we have identified an appropriate reserve balance as we’re leading to an appropriate MLR for the second quarter as well as that, which is driving our expectations going forward. It’s just to clarify, if you think about the run rate, one of the things that we looked at and we do look at in evaluating our MLRs, if you look at it net of the premium tax effects that actually would show that in some of our expectations we have some increases on a go forward basis built into our thinking.

I think, Josh, what -- we looked at Q1 and the SYNAGIS -- there would have been expenses there. I mean, lets say they had billed it the right way. There still would have been SYNAGIS, increased SYNAGIS utilization so we would have the preauthorization to make sure when it’s used it’s really appropriate not, “the child coughed once, let’s give him some SYNAGIS and that’s an overstatement obviously. But that kind of thing. Two, the pricing would have been better. So there’s, there’s certain things that are mitigated. Some of the, now there were I think it was 5 cases in Indiana. I know 3 accounted for 254 days after the close. I raise that to give you an idea on the granularity that we’ve gone through to look at this. Now those cases were estimated to leave the hospital sometime in early April. These are babies that went south and some of -- there’s a couple still in and those numbers now reflect the longer term. Something we’re doing to try and mitigate that, just by example, typically a neonate who’s born, let’s say at 28 weeks. You would plan a 26 weeks -- you would plan that that baby would be in the hospital to about a 10 day gestation and we would level the care in the ICU and things of that nature. When you now have 20 and 22 week babies that two years ago, three years ago clearly would not be viable and they’re now --which is I guess a, not guess, I know that is a good thing. They are now able to make them viable. But we’re recognizing that it is not a 38 week gestation period where a baby that young that’s born. And so maybe we have to plan on a 42, 46 week gestation period. So what -- part of the change that this brought to light in the medical managing and everywhere else, was that kind of granularity Now, I -- when we look at and we have not had that number of neonates. You heard me talk about what we got in the states and we are working with the states to move some of those to SSI particularly for the ongoing care after we can demonstrate -- because they do qualify for that. But the mother has to or the parent has to request it. And so there is a series of things so it would be, we don’t have enough information to say the MLR should be 81.5 or 83 right now on a going forward basis. We are looking and saying that it is a reasonable estimate going forward, this 82 based on what we learned from Q1 what we are doing about it, how we are driving down those costs that can be driven down and working to figure out how best to manage the other ones.

I guess two follow ups, one I think Per had mentioned there was an impact on premium taxes. If you could just run through how that works, I am not sure I understand that and then also one thing that we’re sort of ignoring here is the Georgia premiums if we are booking, something in the magnitude of 20% of the overall premium revenue in the second half at 90%, you know, just implicitly doing the math you would expect that 82% to at least come up at least 10, 20, 30, 40 basis points.

I think what I was alluding to is we do expect to see an increase in the premium taxes say within the base of premium revenue in the second half of 2006 and a lot of that is driven by Georgia. Georgia has a premium tax in the 6% range so it’s, a pretty significant amount. What I am saying is if you look at our HBR net of premium taxes, then you’re looking at what I would call a pure basis and that absent the effect of premium taxes we actually show going forward a slight up tick in our HBR expectation. I look at it being seasonal. However if you just look at it, if we modeled it simply on gross premiums basis inclusive of premium taxes that rate would be relatively flat.

And [as states], there is a time we tried looking at how you sort it out, but more and more states are adding different premium taxes. And that also impacts G&A, Josh.

Yes, so you book both the revenue and the SG&A, then.

Right--

Right and then with respect to your the second part of your question. For Georgia as we disclosed the Georgia effect was actually a 20 basis point improvement to our HBR in the current quarter and the when you take into account that 6% premium tax, if you book at 90% excluding that premium tax that immediately takes you down to an 85% HBR. And then if you factor in as we’ve discussed before the fact that there is margin on our inter-company business, it pulls it down lower than our overall HBR and that is why it gives it a slight net benefit.

Okay, I think I understand that. And then this last question, could you guys help us through the timing, you guys spent a lot of time over the last year or so really explaining about the claims aggregation and as I sort of look back through some of the data points you gave last fall for me from the Investor Day. It looks like between months 1 and 2 that you paid somewhere between 81 and 90% of your total claims. I’m just curious as to when did the recognition of this issue come about with it really lost more of process paid and then reviewed claims. I am sort of trying to get a timeline in my mind.

Yes, I would say that we really fully recognized the issue about a week ago Monday afternoon, late, when we -- though, I had -- they said that they were going to have some finalized numbers and I was away and I came back early to go over it Monday morning. We went through, we continue to push on and test it because what happens is the first time we saw a lot of different numbers and it’s something that you had never seen before, you have to spend a lot of time and people were working literally, some of them probably like 24/7 trying to drill down testing all of the elements, find out all of these things here and see were they real. So, we really were able to confirm the mis-estimation late Monday afternoon. That is when we spent the next six hours, eight hours getting a press release ready.

I guess my point -- what were the trigger then was it you guys were paying claims that you hadn’t accrued for -- I’m just curious because you guys typically see close to 90% of your claims received within the first two months, so where did the claims cost come from?

Well we, because of the -- what we saw in late June on the May numbers saw this prior period development that we have not seen historically. And nobody believed it because, as Karey said, it was across all the line items, so everybody said hey wait a minute. And we had moved from Amisys to Amisys Advance which we had tested or we thought was right, but when you see something that you have never seen before you really have to take the time to confirm it and so we saw it and it took them several weeks to just drill down all the data medical economics, you should see it, a lot of work went into it. So that was the first hint of it.

Okay, that’s all. Okay, thanks.

And by the way that is why now as we looked at the second quarter claims, we went back over and looked at those issues -- if I was looking at it with an x-ray machine, I would have treated with radiation, so to speak.

Your next question comes from Steven Halper of Thomas Weisel Partners.

Hi, this is Julia [Seese] in for Steve. Just a quick couple of housekeeping questions most of my questions have been answered. Number 1 just assuming that of the delayed payments from Wisconsin and Texas that those were collected in July and then also kind of going over again, trying to remember the option expense impact and I am assuming its still the $0.15 for the full year and maybe if you could just provide the dollar amount that was in G&A this quarter?

Sure. With respect to your comment or question on those receivables, yes we did collect those in the first week of July so that’ one of those type of issues we talked about in the past where your quarter end metric gets skewed but from an overall cash-flow stand point, it can just be a few days and over a weekend type of a situation which is what we experienced with these two issues.

With respect to our stock option expensing, increment relative to that booked in the second quarter was $2.5 million and yes, our expectation is still approximately $0.15 for the year.

Your next question comes from Carl McDonald of CIBC.

Thanks. In to relation to the 9.7 of unfavorable development you mentioned Indiana and Texas, where should we think about the remaining $4 million coming from?

Trying to spread out on little bits and pieces across the other markets -- we tried to give you the sense -- some may say a couple of these same issues in other markets but to a far lesser extent.

Alright, so should we think other markets being something less than a million dollars though?

Yes, some, absolutely. Some a couple hundred thousand units to go.

I just wanted to clarify in Georgia, the medical loss ratio. So what your are saying is that your booking 90% medical loss ratio excluding the premiums associated with the premium tax, so if we were to look at this on an income statement perspective, your really booking the Georgia medical loss ratio inclusive of everything at more like an 85% medical loss ratio. Is that the right way to think about it?

Yes, it is.

Last question is any consideration to using some of the share repurchase authorization in the third quarter.

There are plans out there. Right Per?

As we disclosed in the past, any purchases we make, need to be made in accordance with the 10B5-1 type of a plan and we have a plan in place and that plan will operate as it’s programmed.

Okay, so it wouldn't be anything -- this would be in according to the formula that you have set up previously.

Right, we can't do anything above and beyond that, because of, you know, all those things that we have going on from an insider trading type of a situation.

I mean if we heard that we were going to get something on a new market or something in the next week or so is looking good, and we went in and bought some stock and -- So the only way to do it and be clean and above board is on a 10B5-1.

Your next question comes from Matthew Borsh of Goldman Sachs.

Thank you, good morning. Just drilling down a little bit more on your guidance for the back half of the year, so I understand this with the Georgia situation we should actually think about the MCR moving higher relative to second quarter excluding Georgia for the remainder of the year.

It’s really relatively flat, slight movement--

It’s relatively flat with let’s say with slight movement up quarter-by-quarter net of premium taxes.

Okay and help us with your guidance on the operating costs, can you give us, some kind of range of an absolute dollar amount that you expect on the SG&A side for third and fourth quarter?

Well, I mean, we have some of those numbers, but, a lot of it's tax impact, I think we looked and saw that there’s a -- when you see the increase and Per can jump in here, but when we looked at the increase you have, part of it is the tax, and that is about half of it, it’s about 9, 10 million dollars in tax increases, as Georgia comes in, and all the other markets,

Premium taxes.

Correct.

Yes, premium taxes, you then have the OptiCare, some of the specialty company acquisitions, so you get some of that revenue, but you‘re going to pick up 5 maybe 6 million G&A through that which just gets added, while the top line goes up and then we have the initiatives in the long term care product which will add -- not just that, but the things we're doing in Texas, the expansion in Ohio, that will probably add another, 3 to 5, maybe $3 million there, so that kind a gives you the chunks that you’ll see coming up in the increase, because when I first saw you know, 18 million or what ever it was of increases on the quarter and what we looked at, I said ”wow,” and you break down the pieces and you realize it’s--

I guess another way to look at it is on a sequential basis, Q2 to Q3, we think the G&A rate on a consolidated a basis will be relatively flat to slightly down, and the reason, the two things driving that is as Michael mentioned the premium taxes, and these investments in some of these new areas such as Ohio and Texas, and Arizona. We see most of that ending in the third quarter, and in the fourth quarter you see the G&A rate trend down as a percent of revenue.

Okay, and so would it be fair to sort of think about an up tick of sequentially, maybe, in the $15 to 20 million range between second and third quarter and then maybe up another 5 to 10 in the fourth quarter?

When your talking with taxes and all in, I mean, yes.

Yes.

I mean the taxes because even Q4, we did ask, we have talked to [U.S. C and O’s] about how we wish that tax could be a deduction from revenue, but they didn’t see it that way.

And, I would say your comments about the sequential third quarter is correct, we don't see the increase that large in the -- sequentially from Q3 to Q4.

Okay, and let me just ask you a question on the rate increases that you went over at the beginning of the call. Are those pure rate increases, if you like, in other words, is that reflecting pure trend or is that impacted by a change in the mix of membership or services?

That's a pure rate.

There is some -- in the mix, there are stratifications, but it is just a pure rate increase.

And Texas, just seems particularly high. Is there, is that partly in response to issues that you and others have had in that state.

We believe it is.

It is.

We think based on some of the enrollment issues, we think that’s been a driver in the cost trends there, and they seem to have recognized that and put that in the rate.

I think one of the things that, I think it was Josh who was talking a lot about this, but some of what we're seeing is, there is a change in the members, and who’s coming in, so we have picked up a lot of PCCM members in Texas and some of the members have dropped off, so there is some changes in the mix of those cities, these rates reflect it as best as we, and I think we, we’ve commented how we’re looking at the profile, the demographics of the membership now with a different slant in cut now then we did. Because of some of these changes we’ve seen.

And, last question, help me understand how did, if I understood it correctly that Georgia for one month had a positive impact on your medical cost ratio or your HBR? Is that correct?

Right. As I mentioned, if you were simply to take the Georgia premium and backed off the premium tax, you’d be at a 85% HBR from 90%.

Right.

So if you did the math, if you said you had a $100 premium, you booked 90% that’s, there’s your 90. You add 6 to the 100 and compared to your 90, you’d be at 85%. So that’s kind of the net, that’s what you’ll see, in the plan itself. Then as we’ve mentioned before, we have contracts with some of our specialty businesses, with the Georgia plan and we have margin on those contracts, so our -- that margin was sufficient enough to take the rate below the quarterly rate and bring it down by 20 basis points.

Just recognize there that we had that adjustment in Q4 too. In Q -- we had the recognition in Q2 of the prior period, that 9.7 which brought it up so you compare that to that, that’s how you get there.

Okay. shouldn’t we be when we’re talking about the margin on the specialty businesses, I’m just trying to should, should, should the true MCR in Georgia be putting that stuff back in, that margin back in?

Yes.

Well we look at it internal and external.

Right. Like, you know, we’ve mentioned on the statutory basis we’re at 90% but as we report our, MLR or HBR on an external basis, the amount you’re seeing is net, what we call net of internal companies, so you see what the true medical cost is irrespective of what our specialties companies would be charging the health plans and that we’ve represented in the past as potentially what we believe at an arms length rate. And so that’s the appropriate amount to reflect in the plan itself and that’s -- those amounts are -- those contracts are approved by the state, so we believe it is appropriate to reflect those, you know, in our plan by plan basis but then from an external consolidated standpoint that all gets netted out.

So in generally, when you do your stats, these are things that we would be buying outside if you weren’t doing it?

Yes, sure.

So it’s a cost. But with GAAP reporting, you have the eliminations of inter company sales, so we’re trying to do in the abundance of transparency and clarity, that is give you that, that combination. Okay? So that as people try to work, you really can’t get back to it all because of the, the detail and how it flows. But essentially what we’re saying is that going forward, I think people have done some calculations, it’s --we’ve, we’ve booked a kind of 82%. And I want to be careful that we use that number again with all the taxes and things on the top because if not we do all those other calculations to get, to see where we really are at with the external/internal and measure the performance of the health plans as they should be measured. Having said that, with the changing tax profiles we’re seeing by the states and more and more are doing this, there will be confusion on everybody’s model, you just don’t take the revenue we give you, the HBR and go from there.

Okay. Just, a last request, if you guys could make the slides available, I think that would be appreciated because we’re not able to actually print them from your webcast and I think there’s some important detail for investors there. Thank you.

Okay.

Okay, we, I have, we’ll check with Council. You know historically Council’s not like us to issue some, put our slides out there though it could mean we publish them and we’ve showed them. Let me see what I can do for you.

Or we may just be able to compile the data via a AK type of a filing so that information is available on Edgar, we’ll, we’ll look at that, both aspects.

Okay. We put it out there because we want you to have it so it’s not like a --.

Your next question comes from Gregory Nersessian of Credit Suisse.

Hi, good morning. I’m sorry if I misunderstood, but did you say, Michael, that you did or you didn’t book excess reserves in the quarter?

--I said we used our standard booking. In other words, I’ve been in environments which, which was appropriate, I’m not questioning it, I mean, were you, you’re not sure you booked [this a whole lot]. We were able to go through, build all these new costs in and then book reserves in our same consistent basis. With the same margins and everything we book, so. I wanted to make the point that when they saw this it was not like we put in a lot of excess reserves because we didn’t. We just use our standard booking and someone else asked the question, obviously the reserve we booked did reflect the kinds of increased estimates we were making on our costs going forward.

Okay then that makes sense. I just didn’t see it in the DCP table that you had in there, so I just wanted to verify.

No, we -- the data stays there, but we said -- we showed how it’s down and we’ve tried to and if you, if you heard what Per said, as we switch more to, as we switch more to U.S Script because with U.S. Script it becomes a receivable because it’s inter company versus a medical payable. Okay?

Right.

And therefore that, that brought it down and as we add more plans to it, that’s going to impact the DCP and that’s why we give you that granularity on how it’s built up and down. Georgia, if they ever achieve their electronic claims submission and the requirement for electronic funds transfer the next day, that’s really going to impact all the plans, not just all of us that are there, the DCP thing, and once you [inaudible] having had that issue that once before, I am, you’re going to hear this adnauseum in terms of helping people understand how it shifted and how we’ll manage it.

Okay.

I might also add, just in the interest of full transfer of reserves, additional reserves, recognizing Georgia was not [on it].

Sure.

These factors.

And maybe, just add one more point to that is I’ve commented on the fact that we expect to have more electronic payments in Georgia ultimately, but given that Georgia was in it’s first month of operation, we clearly had a high number of liability booked versus the amount of claims that actually came in were able to pay, so, that 2.8 day up tick you saw in days-claims-payable that occurred just on a normal payment basis just going and normalize and come down and then we would expect there to be even continued downward pressure based on electronic payments.

Okay. I understand. My next question is just on the, on the revenue and the MLR guidance. I know we’ve through this in some detail but, but if I look at the sequential 2Q to 3Q up tick in revenue, my understanding is the bulk of that comes from Georgia, the exist -- having the existing Georgia membership for the full quarter plus the September roll out plus you have a little bit of Texas in there so if I’m looking at the 3Q sequential uptake that’s principally all premium revenue, but as you look out to the fourth quarter, you’ve got the full quarter of the business that rolls out in September, you’ve also got the Arizona right, which is October 1st. Looks like that’s what 25 to 35 million, is that, that would be fee based revenue? Is that right?

Not Arizona, no.

It’s a full risk contract.

It’s a full risk contract.

Okay, so all of that is, all of that is full risk and all of that sequential increase is in premium revenue. You would expect your, well I guess, what is the impact of OptiCare and Cardium? I’m just trying to get the break out between premium and, [inaudible] revenue.

A mixed roll in this, this first 6 months.

Bad,

Okay, so it’s all premium revenue? Okay.

Potentially. I want to make one other point, just once again because it’s going to come up from time to time and I just want to, [inaudible]. There, the Georgia membership from these two regions does have some upside potential based on July, because I think we had said in previous calls and discussions that were web cast now. There were some that had not been assigned and we might pick up a few members in July that have not previously been assigned, so. There’s some of that there too.

Okay. I wanted to ask a couple of --.

I won’t report those numbers until the next call. Go ahead.

Okay. I just wanted to ask you a couple of more detailed questions on the medical costs. The first one is just in Indiana, you’ve talked about your Model One contracting in that state and the benefits that, that provides you in terms of visibility and predictability and obviously the cost issues with this SYNAGIS and some of these other things, would not be consistent with a Model One contract. It doesn’t make any sense for a physician to up code if they’re in a quisi-capatated contract so it seems to me that you had maybe less success in negotiating Model One type contracts in the expansions areas that you went into last year. Is that a fair characterization?

Very.

And maybe you could say why?

Very. And I could not have said/stated it better, and it was not just that but there was, there was a – in the Southern region. You know, we’ve said before that it was a fee for service, we picked up more doctors and members then what we really were anticipating or expected to get there. And I have numbers that show the cost per doctor, the increased number of units, and you can see it throughout the whole southern part of the state and new service areas expansions. And this is a group of doctors that we don’t expect to go to Model One and that’s part of why we really were not pushing, we got more docs then we expected. And more members then we expected in the Southern region.

So if the state were to move away from the linking the membership to the physicians, is it possible that you would eliminate some of these, the providers in your network?

I would say that one we have been very successful with both models. I don’t want anybody to think one model is more essential then the other to be successful in Indiana or anywhere. But I obviously, as we re-contract, if we have some high utilizers, or somebody that gains the system. I have -- we have said forever, we’re prepared to be smaller in the market and more predictable and have better margins and we’re chasing the bottom line not the top line and so, yes I would say it’s fair to say if there’s some high utilizers, we would use any opportunity and if not given one, we would still have -- use our out clauses with those physicians as we have historically.

Okay. And then my last --.

If that’s a lot of words to say, yes you got it.

Okay, thank you. And then in Texas you’ve talked in the past about how you guys had utilized a little bit more re-insurance in that state and so the a little bit confused by the catastrophic claims that you’re seeing in that state. I would think that the re-insurance, at least your outside re-insurance would, would have protected you a little bit better from that, so. I guess my question there is, what happened first and then second of all, does that make you rethink your strategy of, plowing more of you re-insurance or your internal subsidiary particularly as you go, you move towards higher costs, higher variability of cost enrollment in those states and that’s all.

I think, remember there’s, there’s a level of re-insurance, that’s fully restructured and like we’ve always on our balance sheet, there’s a time when people are trying to examine it and we said “hey that goes through the income statement, it goes through the balance sheet every quarter.” It’s in the IBNR; it’s in all those things. So if we experience these kinds of catastrophic cases in Texas A market, the first cut is always going to be to our re-insurance company. And I suspect that while the, and it’s something we looked at with great regularity, while maybe it costs us more in terms of what we had to absorb, on balance over the year with the premium differentiation, it’s still the way to go. And we will look at how much we take inside and outside, we do it all the time Greg.

And Greg, just to clarify. Similar to the discussion that we had on HBR, when we talk about a Texas market as we did today on an external basis that reflects our re-insurance company experience. So any thing that was above and beyond that that went external, that would be net of recovery but as we report Texas and discuss that with you today anything that we say ran through our re-insurance company is reflected in these Texas numbers as we, for context.

We, we wanted to see where, we want you and everyone to see as clearly as possible and, and as reasonable just what the real cost were and where.

Okay, and just a last quick one. Did you, did you give us a dollar claim in inventory at quarter end? If not, could you give us that number?

We did not. A buck 62. 162.

162. Okay, great. Thank you very much.

Your next question comes from Ed Kroll of Cowen and Company.

Good morning, it’s Ed Kroll with Cowen and Company. Got a couple of questions here for you and just to clarify, I know we’ve been beating this to death, but the, the medic -- the HBR that your guidance for the second half presumes on a reported basis is somewhere between 82 and 83%?

Yes, it’s around 82 going forward, Ed. 82.1, I mean it’s in that range, right Per?

Correct.

Yes, right, I look better, that was rhetorical.

Alright, underneath the $0.04 to $0.06 of Arizona ramp costs, would that mean a new contract. Is that in the guidance? Is the $0.29 to $0.32 net of that $0.04 to $0.06?

The $0.04 to $0.06 that, in my remarks, that included startup costs associated with Ohio, Texas, and Arizona – it was $0.04 to $0.06 and yes the guidance is net of that expense.

Okay. And then I think somebody asked this before, I will just maybe ask it a little differently. If you look at the total consolidated admin spend for Q2, how much of that is recurring. What is the run rate G&A spend at this time.

What are you talking, you are talking about Q?

Q2, yes.

We had, as we disclosed, approximately $4.7 million of startup costs associated with Georgia.

Right.

However, on a one-rate standpoint, a large portion of that relates to the period prior to having any premium, so as we call it startup, but still a fair portion of that is in the run rate on a continuing base.

I see it is still there and we have revenue now. Is it still, you are not seeing the falloff on these quick because of the anticipated states move into balance regions we're in September 1, so we are still working to get that one.

Alright. So, in terms of thinking of the, you call it one time or whatever you want to refer to it as in terms of G&A with respect to Georgia. The startup costs are not your classic one time that will just simply come out, it will really come out of the rates because now it will have associated revenue. There is still some continued ramp with respect to the Southwest region, but that is much less than we had in the first quarter and going back to 2005 with respect to getting that plan up and running and getting the people in place prior to the true membership operations beginning.

Your next question comes from Chris [Basini] of Eagle Asset Management.

Good morning. I was wondering if you could talk a little bit about whether or not, at this point, you believe that you have made sufficient investments in all the IT that you need, especially as you ramp up for all these additional members. And in addition, do you believe that you have sufficient numbers of people to oversee all the clinical utilization.

Okay, I think there’s , two things. No, I think we said there is some incremental G&A for these ramp ups. We are continuously updating, upgrading, adding to the IT function. In fact, we were all in here Saturday morning for 3-4 hours looking at all the priorities in IT and the resources needed as a management team. We went as far as to say there is probably 3-4 people that are going to be an isolated group that work on the futures and the systems and things that help us maintain reasonable estimates and things of that nature. Okay? So, no. We are continuing -- there will be incremental spend. The number of people to oversee the clinical – Do we have them all in place for the October 1 start today? No. I have not seen the exact numbers and know we have aggressive recruiting and growing going. I know that we have a core base in Arizona because of the other businesses we have in Scottsdale and that area. So it is not like it is a standing start, but some of these incremental G&A is just that. Ramping it up over the next 3 months to achieve that, but the core base is that.

So, are you implying then that despite what happened this quarter that you believe that you don't need necessarily more bodies on a per member basis or on a group of members basis that you need incrementally more eyes on the clinical utilization. Almost like an additional function or a fixed expense to administer and be proactive in terms of seeing what the cost trends are?

Oh. No, that is not what I said. I was responding to the new markets. And now existing markets?

Yes.

We are adding individuals. We are adding more case managers, more OB case managers. We are adding more large case oversight at the corporate as well as regional in other basis just because of those issues. So, absolutely, that is part of what we have been doing and are continuing to do to mitigate and keep things reasonable going forward.

Another question I have is -- It seems to me that the core of your business centers around managing physician behavior and proactively managing the unforeseen serious cases that crop up from time to time that can be incredibly expensive to manage in light of better medicine today. So, out of curiosity, how many physicians do you currently have under contract.

I don't have that number right at hand, but it's in probably thousands and thousands.

Okay.

Now, keep in mind, there are two elements that of course, there is the primary care side and working with them and then there are some specialists that we contract with that see fewer patients. Now, what we do though, in that direction, is that we have neonatologists that work for us and we are adding to that capacity who work with the neonatology groups and perinatologists and pediatricians, say doctor to doctor to manage that going forward. I think we said earlier, that there we have seen some of this case mix and we have adjusted and will continue to adjust to that to manage that and to – the reporting we have now and some of the systems for doctor utilization that is in the process of being enhanced, recognizing what you are saying so that the people on the ground can work with the doctors and the outliers and help to understand it.

Secondly, the high to higher risk cases are being managed as that and we are attempting to recognize when it is going to happen. Now, some of the things and some of the issues we have dealt with is another way you have to – there is another element that you haven’t mentioned that needs to be added to it and that is working with the state where we got several sets of twins in Missouri that delivered prematurely at 22 weeks or something gestation eleven days before we got them -- just assigned to us. Now, we had a meeting with the state and we talked with other states, no company can put in place systems to manage somebody who is virtually in preterm labor with twin neonates. So it goes beyond just the medically managing the risk, identifying the risk, but in this segment of the business, unlike commercial, you don’t have the same opportunity in all cases to work with the member because of when they are assigned to you as an expectant mother. That’s one of the risks and what you do is work with the state and work with them to rate for that. You get them to carve out sick payments and then OBs are separate that adequately handles the normal delivery and a reasonable number of neonates and things of that nature. But these large catastrophic cases that you get handed -- we will work with the states on alternatives.

Wisconsin we have had success over the years. Any baby that is 1200 grams or less is carved out. They recognize that there that we cannot manage that. Any baby that is on a vent 30 days or more or expires while still in the hospital within 30 days is carved out and the state absorbs the cost. It’s going to take those kinds of programs to keep these systems viable.

Your next question is from Matt Perry of Wachovia Securities.

Good morning, I’ve got a question that is a point of confusion for me. If I look at your prior guidance the midpoint your prior full year 2006 guidance, so it was about $1.60 and now the new midpoint is about $1.00. Obviously, $0.14 - $0.15 of that is related to Q2 but that leaves $0.40 - $0.45 of lower guidance. And I try to combine that with your comments about the second half MCR being around 82% which is right in the middle of your prior guidance, so I am confused about where the $0.45 went. What specifically has changed in your new guidance relative to your prior guidance?

I think, Matt the biggest piece is as we had discussed earlier in the year that we had undertaken some HBR improvement activities, those are still underway and had built some of that lower HBR rate into our expectations for the second half of the year and so a 100 basis point movement, I am just using that as an example, has a big effect on EPS so moderating our assumption on our ability to improve HBR has really the most dramatic effect on the majority of that swing that you are talking about.

Okay, so I can think of the 82% expectation now for second half MCR as being somewhere around 100 basis points higher than your prior expectations?

No, I just threw out the 100 basis points as an example. If you take that on our second half revenues it’ll give you an idea of how dramatic of an effect 100 basis points can have and that would still be within our range. So you can take it down to the low end. You can do the math. It is a dramatic affect when you have a $1.2 billion of revenue in the second half.

Okay. I know you don’t give out traditionally your IB&R, but if I look Q1 verses Q2 excluding any contribution to IB&R from the new Georgia business, did the dollar amount of your IB&R go up in Q2 verses Q1?

Sure. As we said earlier without giving you dollar amounts, we said that the reserves reflect the higher trends that we saw.

Okay. And if I look at this quarter and I look at your second half and I know you booked Georgia at a lower margin than your core business, but is there a time frame around which you think you can get back to an EBIT margin similar to what you ran at in 2004, 2005 or is there a new kind of lower EBIT margin that we should expect on an ongoing basis?

Obviously our goal is to continue to improve it and there’s a lot of very specific programs to get there. But I am prepared to give you the kind of estimates that we think are reasonable going forward based on what we’ve seen the first half of this year. Then, as we see that the program’s taking hold; that is the time to say where it is at. What we are being -- we are trying to find an abundance of realism going forward and recognizing that there’s a lot that is there when you saw what happened to the estimates in Q1 and how quickly and all that I am trying to be very realistic with everybody because I think that is appropriate right now.

Okay. Two more questions and then I will let you go. If I look at your 4Q Guidance, 4Q 2006, $0.35 - $0.41, I think, is that perhaps an appropriate run rate where we should start to think about 2007?

Yes, that is where I would, to this point in time, sure. I mean some incremental things will happen in the full year and some things in 2007. But, that’s a good -- and we’ll give full guidance for 2007 as we always have on our Q3 call, that is our approach.

Right.

In the absence of that, I am not going to tell you not to do that.

Okay.

Matt, the one incremental thing that wouldn’t be in Q4 that we are aware of and know will start effective January 1st is the Texas SSI or StarPlus business.

Right. As I think about the higher costs we saw in Q1, 9.7 million and basically your thinking is that those have not recurred in Q2. And I can understand that around SYNAGIS and perhaps inappropriate coding and then some seasonality with that that those costs may not recur. But, can you tell me, have you seen a return to normal volumes of NICU and births in general in Q2 verses the higher volumes you saw in Q1?

Yes.

Yes we have. Matt, yes we have on the NICU. I want to come back to the SYNAGIS. So, while we saw this increase, going forward, in those seasons where it’s there, one thing we’re identifying is that there will be more SYNAGIS used. There was some though that got coded, that’s in the way they did it, avoided the preauthorization, in that quarter that may have eliminated some of it. And it also went to other suppliers that were more expensive than if it had gone through our supplier. But I don't want you, I don't want to give the impression that all that SYNAGIS expense would disappear. It is a factor out there, it is being utilized rather extensively. That will also start to, [inaudible] actuarial things we show states when we talking about rates.

Your next question is from Joe France of Bank of America Securities.

Thank you. Just quickly, for the physician receivable is that in litigation?

No, we’re working with our providers and collecting, and continuing to work with them on our 2006 activities and providing the reports we typically do under that program, and --

In Q1 after we identified and talked about it, February we saw all the numbers got it all finalized, the Plan management and others sat down at the docks, went over the data, giving in reports, and Karey there --doctors are signing the agreements, we got a check, [inaudible] already from a large group so, it’s a performing receivable.

That's great, thank you.

Your next question is from Alex [Kain] of Bank of America Securities. Hello Mr. Kain your line is open, please go ahead.

All my questions have been asked, thanks.

Your next question is from John Rex of Bear, Sterns.

Thanks, I wonder if you could just us a little deeper into some of the markets that may be sized for us that pose after Indiana and Texas, the next two biggest markets in terms of contributors to the development and then maybe differentiate what were the key elements of those two markets.

We’re pulling out these sheets here,

Sure John, I'll address that. I think Michael has indicated, that they were on a smaller scale so just to give you a range, Kansas was $1 million, down to the bottom of that range of Ohio at 200,000. So that would be the range of the balance. We highlighted on the slides the recurring themes and those recurring themes again would have been increased professional costs, certainly the [miss in bed days] effected us in Kansas as well, but you could largely apply those common themes across the majority of the markets. Then you are going to get to the same answers.

And you cited Missouri in comments a few minutes ago, was that not a particularly big dollar amount though?

We have 36,000 lives.

Right, but the NICU cases weren’t particularly that meaningful.

Those were the ones we talked about, right Karey.

Right and --

Those were known.

As Michael indicated, there have been meetings with the state on these micro premies that they came into our mix very late in the gestation. So, as Michael indicated, our ability to manage those cases is non existent.

I was talking about those cases back in June [inaudible]. So it’s another example once we saw something, as quickly as we saw something that was impacting our estimates, I was talking about those in June.

Your discussions with the state on that, so your discussions are more into how do you change the reimbursement methodology , the excludes?

We have talked about, is it appropriate that we get these cases in that time frame, should we be doing anything. They are not legally obligated as we continue to push on them, and we had some in Indiana as well, and so obviously until you know, that they’re willing to think about doing something, you have no option but to book it.

And as you look at your markets right now, are there any that you would contemplate, you’d start thinking about exiting at this point?

I am on record with the state investors [indiscernible] Missouri, either somethings change or, there’s [no reason], we, the Kansas market is why we bought [ThursCo]. Missouri, if we could get it right, would be some added benefits, and Missouri, I wouldn't hesitate at all to tell them that we need to exit. At 36,000 lives-- Missouri is the only state in the Union that has a -- and I have talked to the governor about this, that has a ballot initiative to restore Medicaid spending on their November ballot. So I mean there's a -- we've said all along, it’s a, I think I used words like mess and things like that, in different conferences, but just that we would do that, and it would not effect us in Kansas which is a very strong state for us with 1800 doctors. It’s 9, 8 ½ -9 years exclusive contract. They’ve been very pleased with some of the initiatives and testing we’re doing on electronics pharmacies, and so it's a -- I want to make it clear that whatever we do in Missouri, does not impact us in the other half.

Your next question is from Jeffrey [Wimerand] of SAB Capital.

I guess the first question, I was just wondering what portion of the costs from the second quarter have you paid or are already adjudicated and sent to be paid maybe by month would be helpful?

This is a claims development, just looking to see what percent --

Just to see how much of it you know versus how much is estimated?

Just going back to the March piece?

No, just from the second quarter so try and understand like how much of what you booked for April, May, and June is actually been paid out versus how much is estimated?

Yes. In terms of April we're at a lag factor that we have seen approximately 88% of the claims for May, 77%, and June 28%.

Okay, great. And that in terms of SG&A just thinking about the run rate, I am guessing that your somewhere between 13 ½ and 14% operating costs in the fourth quarter, is there anything one time in that or anything that would be different as I look out to try and bill out an 2007 estimate for you guys.

I think by the fourth quarter, most of the startup activities will essentially be over. There will be a little bit in there potentially for the second regional expansion in Ohio, I don’t think it’s worth, changing an estimate for, enough to call out, but Bridgeway out in Arizona, that will be up and running in terms of any start up costs that’s all in Q3, most of Ohio is -- will be done by the end of Q3 as well as any Texas start up so for the most part there may be some Texas SSI start up in there as well but again not a significant amount. Because those are in an existing markets where we’ve got the underlying infrastructure built up, it’s not quite a tuck in but a lot of the resource are already there.

You also have the, the mix especially companies, core businesses and where specialty companies have more G&A so it’s a moving target in that sense as well.

But so in terms of, in terms of run rate really the only that would change for 2007 would be some small modest inflation factor off that dollar amount. Is that fair to say?

Sorry, would you repeat that? I don’t have the --.

Well, you mean, in terms of just in a dollar amount really the only change for 2007 would be some modest inflation factor and that would be about it.

Well as it stands today with the businesses we have on the books today.

Correct.

Okay, but there is the incremental tax for Kansas in other states that as we get these premium increases we get, so -- with that understood, yes, we in a steady state -- please frame it where it is now and obviously over time those, those expenses outside the modest investment in IT and things we’ve talked about before relatively speaking, but there is leverage there that we’ll be taking advantage of relative to the existing businesses and so I would expect because of that base that as it’s grown and the future businesses will require a smaller percentage of it.

Your next question comes from Jeffrey Harris of Sirius Capital Management.

There’s been a lot of discussion about Georgia loss ratios and so forth, but I just like to ask a simple question. Will Georgia contribute positively to net income in the third and fourth quarter? In other words, does it have a positive net margin after all MLR and SG&A expenses?

On a net basis going forward, yes.

So it’s a positive contributor in 3Q and 4Q? Not withstanding start up expenses, etc.?

Correct.

Okay. And I was wondering whether if we take your third quarter earnings and add back the, the one time charge, we’re starting at a base of what $0.25?

Right.

Roughly. So, I was wondering if you could just in simple math bridge us from the 29, excuse me, from the 25 up to the new -- the range of 29 to 32? So how much is coming from existing operations, how much is coming from Georgia, and then net in cents per share and then, we’ve also got start up costs I guess in Arizona, Ohio and Texas that the net against that, but what are the pieces that off the existing run rate of this quarter $0.25 bridge us up to 29 to 32 in the third quarter?

I think one of the biggest add backs is Georgia, if you eliminate the start up costs, what we call, the pre-operating expenses for Georgia that occurred in the second quarter.

How much was that per share, roughly?

That was $4.7 million or roughly $0.07 a share.

So X Georgia start up costs of the second quarter and X your charge, the quarter would have been $0.32?

Correct.

Okay. Anything else that, so can we go through the same analysis again to bridge from 2Q to 3Q?

You mean from 2 to, you mean from 3 to 4?

I mean 2 to 3. We saw where –

Right. So you got to, so you get to seven –

Yes.

Then essentially you’ve got some of the start up costs associated with these 3 new areas that we discussed, the Arizona, Ohio and Texas –

But those affect third quarter to so the two and a quarter six cents or that was affected second quarter?

Those affect the third quarter.

To $0.04 to $0.06.

I’m saying as you walk Q2 to Q3 there going to be a walk down then what you would expect it of that run rate we were just talking about.

Well if, if you net that against it you now have $0.01 to $0.03. Okay?

Yes because we’re starting at 32 now for 2Q and we’re taking off 4 to 6 so that gets us to 28 to 26 to 28, right?

We’re going to have a penny or two out of med assist and U.S. Script we’ve previously talked about.

That, that are added to this?

Correct.

Okay.

Yes and there’s some rate increases in the markets.

Okay, so in order, so, just, I don’t want to put words in your mouth but in order to get to your 29 to 32, it doesn’t sound like you need much if any improvement in the core business. In other words, just eliminating the Georgia costs and getting a couple cents from these acquisitions, gets you to the range. Is that fair?

Yes I think what we’ve said is, we, we held flat the medical loss HBR across the balance of the year, while we watched and deal with these programs kick in for some improvement. So we said, we said the base at that 82% for the sake of argument the keeping that flat. You do these add ins and add backs. And you get, you get to the range. Absolutely. And if we get, if we realize improvements then our estimates would change.

Your next question is from Melissa Mullikin of Piper Jaffray.

Morning. Most of my questions have been answered, but I do have a couple of housekeeping ones related to the specialty services revenue line. I think you mentioned you’re expecting about 100 to 150 million in revenues related to the Arizona long-term care program. Is that your expectation for the annual run rate starting on October 1?

That is a -- I’ll just explain how that transitions in. The, and we have mentioned some of this before but, with respect to the two regions that we received contracts in Arizona, we are an exclusive provider in the Yuma/LaPaz region, those two counties and expect to have membership in the 630 to 650 member range. We’re the exclusive provider of the transition in the Maricopa County region is a little more complicated. We are not the exclusive provider and there is an incumbent that will be allowed to retain their existing membership and have that membership atrit over time. We are still discussing that transition plan with the State of Arizona so while we think the ultimate run rate of that plan is $100 - $150 million. It’s not going to be as if we take on all the membership that we expect on October 1st that will be true with respect to Yuma/LaPaz, but the Maricopa County members will come in on a more gradual basis.

So, what is your expectation for the second half of the year related to that population in terms of revenue?

I'd say $50 million is probably a more accurate – I mean from our second half standpoint, is probably what we are expecting there.

Okay, and that is going to appear in that specialty services revenue line?

Are they the specialty services line? Karey?

I'm sorry?

The question was, were those going to show the specialty services line?

Yes.

Okay. And then, can you give us what Cardium revenues were for 2005?

We had a -- I mean it is not a significant amount.

Okay. So, not going to be –

No, that was, I think as we had mentioned –

I characterize a lot of this as I did our – what is now a simpatico, how the first year was like 12- 14 million, look at it today. So this is a matter now, we are putting AirLogix and Cardium together in terms of quality cross market. So, that is going to be much more of a 2007 event.

Your next question is from Vince [Mallet] of RiverSource Investments.

Thanks for taking my call. I just want to make sure I understand the Q2 to core MLR. You reported 82 and if I back out an MLR of 85 in Georgia it seems like it is 81.8 in the core business ex-Georgia. Is that a safe assumption?

I was talking, the question was--?

I'm sorry, what was the question?

So, just the core MLR ex-Georgia seems to be 81.8 backing out an 85% in Georgia with the flatter tax than the $9.7 million negative development from Q1.

Yes, I mean, yes. We’re booking 85, you could parse it down. We have some other add-ins. So, for the difference of that 10 basis for us. We encourage you to just think about it as a core business of 82.

So, the core business improved 350 basis points sequentially?

Well, yes. Between Q1 and Q2, yes. When you push back – If you push back that $9.7 million into Q --?

Into Q1.

Michael Neidorff Q1 do you see that –

Into Q1 you see that 18.5, 85 points.

Then, you see that sequential improvement in Q2. And we are taking that rate and carrying it forward on the balance the second half of the year.

Just on the reserves? So if you push that $9.7 millions into Q1 claims inventory it boosts Q1 and lowers Q2. Can you give us the exact impact of kind of timely payment and how much reserves have been taken down? It just seems counter intuitive that with the cost issue you would taking down reserves as opposed to taking them up.

I didn't say we were taking them down.

Well, they have gone --. So, how much of it has been –

These claims, days claims payable

Yes, have gone down.

That there were some claims deficiency in Q2, that was 1.2 days improvement. Okay and that is with some inventories and that is on the inventory side versus yet to be received side.

So, if I add back the 9.7 into Q1, I get the 182.5 and if I back out the Georgia claims inventory – the claims in Georgia in Q2 I get to 175, so claims seem to have gone down on an absolute basis as well as on a days basis. I was just kind of circling back to that notion that if you have a cost issue, how can claims and MLR be going in the same-- opposite directions of the cost issue.

I think mainly because they were paid.

But, you are not accruing new ones?

Yes, and there was a conversion of pharmacy benefits at the cost of day too. There is a payment of bonuses, if you go to page 6 of our release.

And the speed with which we are paying claims has simply increased.

No, I understand that. I understand that you are paying claims faster and the pharmacy benefits have brought claims down, but you had a cost issue Q1. It just seems like you want to fill the claims to – the reserves possibly have a buffer against continued cost issues. But, it seems like the way the company is handling them, Q1 was anomalous relative to the past 4, 5, 6 quarters and it is just going to continue as it was before.

Well, we said that those, that the reserve estimates reflected some of that higher cost for one quarter as it gets baked into the run rate going forward. So, there is recognition within the reserve estimates for the fact that there was a more expensive quarter there because that is baked into the run rates. Now, that does not say you take it up to the 85.3 MLR basis, but that’s why my comment was that we were consistent and used consistent methodology which recognizes that kind of up quarter.

Your next question is a follow-up from Ed Kroll of Cowen & Company.

Thank you and thanks for taking all this time to answer the questions.

At some point here, I am going to have to go to a board meeting. Go ahead.

I'll be brief, just two quick ones. You say that the Indiana issue on pharmacy stabilized in Q2 and you expect it to improve in Q3. Is that strictly as a result of your actions or has there been some change in the State's formulary methodology?

The improvement is one, we saw it stabilize. But we now--we got approved last week, the long awaited PDL preferred drug list. And, you may recall we said we had to get approval and there was the first month they did not have a quorum. In the second month if they did not have a quorum, it got approved. I don't know if they had a quorum and they got approved, I think they did. They had a quorum and it got approved. Had there not been a quorum, it still would have gotten approved. So, that is now in place, Ed, and that is something that you can throw that switch on very quickly after they’ve said “yes you could preauthorize these drugs” and, it’s half a dozen drugs that would drive a lot of that cost we talked about.

In other words, generic substitution and other –

Well it was more off label use of [inaudible] which is those high cost drugs and so, I forget which one it was, it was one very high cost drug that they were using as a sleep aid or something like that. We shut that down. And that was a lot of money.

And so now you have the flexibility to do the right thing relative to those drug costs in Indiana. Okay, that’s good.

And then the other question, I guess a lot of people, we sort have been dancing around this reserve issue. It almost seems to me like, if you had wanted to you, you’d already pre-announced disappointing results that, if you wanted to you could have had for lack of a better term, you know, a free pass to, to create a buffer or cushion above and beyond your current medical costs trends in your reserves and you chose not to do that and I’m just wondering, and I understand that you’ve increased the -- what you assume is a cost run rate for your level of reserves, but I’m talking about something extraordinary above that, it seemed to me like you, you kind of had a, would have had a free pass to go ahead and do something like that and you choose not to, is that a function of the strict methodology that you adhere to relative to your reserving or perhaps the visibility that you feel you have going forward and the scrubbing that you’ve done that there’s not some other shoe out there that could drop on the cost side? Just trying to get --.

You know, you know, Ed, I guess, yes, I appreciate that. And there’s a time historically I think a lot of companies would have done that. I think what’s important is that these are point estimates at a point in time that we use everything available. Now there were some things that we carefully laid out and scrubbed out that showed what happened. And I think this Company’s approach should be, we will reserve based on a kind of a rigid, strict approach that we take to it. We have explicit margins and things that are built in. And so we have three, we have three actuaries who look at it every time. But, you know, if, if we said, we had a bad Q3 or Q4, but we made the earnings by taking down reserves, I don’t think, as we manage the business, that would change because we would still feel obligated to say, we took down reserves. As I told you we always will do that. But I guess what we said is, let’s measure, let’s insure that we’ve recognized what caused it, that we have things in place to mitigate that which we can control, let’s ensure we’re putting our cost controls in, let’s ensure that those things that happened before and other things that we might identify don’t happen again, but you know, we have learned now that with the shifting population that there are changes from quarter to quarter and I’m willing and, I mean, it’s our approach to put it out there and explain why. The thing that we want to maximize and, or I should say minimize the risk of and I can only say minimize because these are estimates, they’ve been estimates forever, but I want to minimize the estimates of a prior period basis. Now if we, if we look at it, had we, with the knowledge we have today, we probably would have announced a Q1, and if with that knowledge we had today and looking at today’s earnings for Q2, it recognizes what we’ve learned in estimating. And, and so I just think that’s, I want people to have confidence that we’re going to show you what it is.

And said another way if we did, you know, if we took the previously known as big bath and then either reversed a big chunk in the future, that would be transparent, if we tried to leak it out that would also be transparent and the things we talk about when we look at the quality of our earnings, and look at cash flows, that’s not a discussion we want to have in the future. It’s, we want to do what’s appropriate under the circumstances and that’s we believe we’ve done.

And I think, Ed, and I want, I want to be careful, Ed, if we felt that the scrub down still left a lot of doubt and I can’t guarantee that there’s not something out there, I want to be careful. Nothing in this world is bullet proof. But if we thought there was, if there was some things we thought we didn’t know, then I would have no trouble saying, you know there’s some things that we think may come back as we look at it today and we have built something in for it.

And if I could –

That’s a long-winded answer, go ahead Per.

If I could step back to one of the previous questions on the Arizona contract, I was, a mistake of math in my head on that, would be really the second half piece of revenue is more in the line of $20 million as we look at that and as you think of, you know, when it fully ramps, you know the quarterly run rate would be 25 and up from there, depending on how that ramped up, so that really we’re looking at Q4 in the 20 million plus range.

Thank you.

Thank you, Ed. I hope I responded it.

You did, you did, thank you.

Your next question is a follow-up from Jeffrey Harris of Sirius Capital Management.

Hi, just, just a quick follow-up question. If we take your operating cash flow in the quarter and add the Wisconsin receivable and then add the, the premium, I think you got premiums from Georgia in July, what would the number have been?

I mean July was with July.

Right for July, we had anticipated a potential, I’d say fronting, you know, a prepaid of the revenue. Wisconsin, that’s an approximate, I’ll just you know round them approximately $30 million. Wisconsin is approximately $30 million, there’s Texas delivery payment was 2.8.

Have you collected that?

Yes.

2 8. Okay. So your balance sheet as of today, fast-forwarding just from the end of the quarter, have you collected Wisconsin yet?

Yes.

Okay, so your balance, so you’ve collected in the operating cash if we add all that together it’s 68 million?

62 million.

63, 62.8.

Michael Neidorff 30, 30 and 2.8.

Okay, so your cash balance is, I assume, have gone from 25 to 80 or something?

Well our cash balance has increased by that $62.8 million, those, you know, within our regulated subsidiaries, it doesn’t all go to free cash.

Okay. I guess the only quick follow on to that is so, as we, you, you had some timing issues that made the second quarter cash flow look a little lower then what it is when you add these things. When we roll into the third and fourth quarter, how does the timing of the Georgia payments and Wisconsin play out, do you think they will, when you report your quarters do you the cash flows from operations will look better?

I think if they get them here as they historically do, the early part of the first of the month they will be in there. Now really, the whole thing in this business and where people have to normalize it; if somebody sends us a check June 30th or July 1, it doesn’t affect the operations, just that statistic. And I think that people are starting to normalize that now and recognize that it really falls into the quarter that it should.

And with respect to Georgia, as I mentioned the schedule that we have now from them is that we will receive the quarter end payment for their premium in that month such that if we get it according to schedule at the end of, for instance when we are on this call talking about this December we will have received payments from Georgia through December. Similarly, Wisconsin typically only holds this payment over a month end in June because this relates to their fiscal year end and we believe its one of a budgetary thing game they play, if you will.

Every year?

Every year.

Lisa.

Thank you. I just want to remind everybody that we are not hosting the analysts’ day tomorrow in New York City, so anyone still intended to go; we are not conducting that meeting as a result of other conference calls that that meeting would have conflicted with. Thank you very much.

Talk to you next quarter.

Ladies and Gentlemen this concludes today’s conference call. You may now disconnect.