Centene Corp (CNC) 2006 Q3 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 Corporation third-quarter earning results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you.

Miss Wilson, you may begin your conference.

Thank you.

Good morning, everyone.

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

Thank you for joining today's call.

By now you should have a copy of the press release issued 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 Chief Executive Officer, and Per Brodin, Chief Financial Officer of Centene Corporation will host this call.

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

A replay will be available today shortly after this call's completion by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad, and entering access code 657-3810.

Any remarks that Centene may make about future expectations, plans and prospects for Centene constitute forward-looking statements for purposes of the Safe Harbor provision under 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 October 24, 2006 and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the Company may elect to update these forward-looking statements at some point in the future, Centene specifically disclaims any obligation to do so.

Now I'd like to turn the call over to Michael Neidorff.

Michael?

Thank you, Lisa.

Good morning, everyone, and thank you for joining us.

I'll take you through the main drivers behind our Q3 results and then turn it over to Per for the financials.

The third-quarter came in where we expected it at several levels.

First, we made solid progress since Q2 in addressing many of the issues that impacted our results, and the outcome of these continuing efforts is reflected in the financial results that we reported this morning.

As discussed on the Q2 call, we went back to basics -- essentially, blocking and tackling -- and reviewed and scrutinized our internal processes and procedures to reevaluate where the risks are in our business and where we missed the Q1 estimates.

We reviewed our medical management practices, including in-patient levering of care procedures, conducted a review of our preauthorization list of all injectables, made a substantial improvement in early identification of high-risk pregnancies, and increased on-site review to estimate possible length of stays more accurately.

This level of scrutiny and evaluation gave us greater influence over our medical costs.

We also made an organizational change and added a new position, a Vice President of Financial Quality, who reports outside Finance into the same area as Compliance and Internal Audit. [Bill Manquist], a seasoned financial executive with specialization in health care cost analysis and reporting, has been appointed to this position.

His role is simply to provide a second opinion on our medical cost reserving methodology and help [identify] existing management on ways to improve our process.

Membership as of September 30th, 2006 was 1,169,700, an increase of 38% versus the third quarter of last year.

For the third quarter of 2006, revenues increased 57.6% to $631.2 million.

Overall, we saw strong increases in our Georgia membership, in our maternity revenue, and we're pleased with the new Ohio membership, which was ahead of our internal expectations.

Importantly, the increase we experienced in maternity revenue did not translate into NICU-related issues, one indication that our medical management programs are producing some results.

Furthermore, we saw no overall adverse development in our medical claims reserves.

And the results reflect no recognition of positive development from the first half of 2006.

Physician costs in Indiana, and to a lesser extent New Jersey, remain higher than we would like.

Drug costs in Indiana specific to behavioral drugs, and to a lesser extent in Ohio, while trending down, are still being worked through.

Under the Indiana reprocurement, we believe that we should be able to address some of these issues as we recontract our network in Q4.

We are currently establishing and testing new models which we believe will drive appropriate and effective drug utilization.

The Georgia launch has gone well.

As you recall, operations went live on June 1, 2006 in Atlanta and the central region and on September 1st in the Southwest region.

We are now managing care for 252,600 Medicaid and SCHIP members, a figure beyond our expectations and initial guidance of 150,000 to 250,000 members.

That membership also includes members in the Southwest region that self-selected our plan.

We received more than 85% of the members who made a health plan choice and more than 60% of the total market in the Southwest region.

The state began assigning members to plans in October in the Southwest region.

Thus, we are changing our prior guidance in Georgia to 280,000 to 290,000 members by year-end, despite a lower total membership base in the state.

We are continuing to book a 90% HBR in Georgia until we have more substantial history of claims development patterns.

We have had some issues regarding the payment of claims with our providers resulting from how the contracts were set up in our system.

This was caused by providers signing contract at the last minute.

As with any new market, this isn't atypical and we're working through it with substantial progress having been made.

We will continue to monitor the progress on this issue.

On another front, we continue to make progress towards the collection of our Indiana model I position receivables and have a remaining balance of $2.3 million down from $3.2 million.

Other membership growth in the quarter came from Texas.

We commenced operations serving 10,500 Medicaid and CHIP members in the Corpus Christi service area in September.

And we also began serving new Medicaid members in the Lubbock market and CHIP members in Austin.

Our contract to provide managed care for SSI recipients in San Antonio and Corpus Christi markets is still expected to go into effect in January 2007.

In Ohio, we began serving members in the East Central region, where we received 15,800 members, ahead of our expectations.

After the end of the quarter on October 9th, we received a preliminary award notification for the ABD contract in Ohio for the four regions in which we bid and look forward to the commencement of services to these members in 2007.

As many of you know, we were extremely disappointed about the state of Kansas decision not to renew our existing service contract.

We are presently in the courts and are working to overturn this decision, which we believe was extremely arbitrary and capricious.

We are engaged in the evaluation and strategic alternatives for our Missouri business as I speak.

In Wisconsin, we experienced a decrease in membership caused by the administrative eligibility issue.

This is a system issue caused by the Deficit Reduction Act, which we expect to self-correct over the next couple of quarters.

Our Specialty Services segment continues to grow.

On October 1, we commenced operations of our Arizona long-term care contract in Maricopa and Yuma/LaPaz service areas.

Our Medicaid and SCHIP HBR for the second quarter ended September 30, 2006 was 82%, consistent with our guidance and the Q2 rate, excluding the Q1 adverse development and a decrease of 1.1% over the comparable 2005 period.

With respect to general and administrative costs, our Medicaid Managed Care G&A ratio for the quarter ended September 30, 2006 was 12.1% compared to 10.6% last year.

These numbers also are impacted by the premium taxes and the Georgia G&A expense.

With that, I'm going to turn to call over to Per Brodin, who will take you through the Q3 results.

Per?

Thank you, Michael, and good morning, everyone.

To recap the 2006 third quarter, membership increased 38% over the same period last year to 1.2 million members, while revenue increased 57.6% to $631.2 million, compared to $400.6 million in the 2005 third quarter.

Our Health Benefits Ratio for our core Medicaid and SCHIP category, which reflects medical costs as a percent of premium revenues, was 82.0% compared to 83.1% for the same period in 2005.

The decrease in our HBR for the three months ended September 30, 2006 was caused by rate increases in certain market, an increase in maternity delivery revenue, our [kick] payments that we receive from our states, and the effect of the 2005 third quarter Aurora settlement, partially offset by a 9% increase in average in-patient days and higher physician costs.

The HBR for the three months ended September 30, 2006 did not include any overall adverse medical cost development.

On a sequential basis, our Medicaid and SCHIP HBR was relatively flat if the $9.7 million adverse development is excluded from the 2006 second-quarter costs.

Our third-quarter HBR would have been 40 basis points higher if we exclude the effect of our Georgia plan.

For the third quarter of 2006, the HBR for our SSI population was 84.1% versus 96.2% in the third quarter of 2005.

We expect the volatility of our SSI HBR to diminish in 2007 as our SSI membership is expected to grow due to the recent Texas and Ohio contract awards.

Our specialty segment HBR was 82.9% for the current quarter versus 87.2% for the same period in 2005, and includes the behavioral health contracts in Arizona and Kansas and the third-party business of OptiCare.

Our G&A expenses for the Medicaid Managed Care segment as a percent of revenue was 12.1% in the third quarter of 2006 and compares to 10.6% in the same period of 2005.

The increase is primarily due to premium taxes or similar assessments enacted in certain markets, as well as expenses for additional facilities and staff to support our growth, the adoption of SFAS 123(R), partially offset by the leverage of higher revenues.

Premium taxes had the effect of increasing our G&A ratio by 2.1% and 1.5% in the three and nine months ended September 30, 2006, respectively, compared to 0.4% in the three and nine months ended September 30, 2005.

Investment and other income for the third quarter of 2006 increased 1.8 million and 4.6 million for the three and nine months ended September 30, 2006 over the comparable period in 2005 as a result of an increase in cash and investment balances and market interest rates.

Interest expense increased due to higher borrowings under our credit facility.

Due to the events in Kansas, we conducted an analysis of our intangible asset values that resulted in a non-cash pretax earnings charge of $87.1 million.

The majority of that charge consisted of nondeductible goodwill, for which we have not recorded an associated tax benefit.

This charge reduced net earnings per diluted share by $1.96 in the 2006 third quarter.

Because of the significant impairment charge, we reported a loss from operations in the third quarter of $66.6 million.

Excluding the non-cash impairment charge, earnings from operations for the third quarter were $20.5 million versus $15.1 million in the 2005 third quarter.

Net earnings were $13.8 million, or $0.31 per diluted share, excluding the non-cash impairment charge, compared to $12.1 million or $0.27 per diluted share for the third quarter of 2005.

Balance sheet highlights at September 30, 2006 include cash and investments of $440.1 million, of which $29 million was free from state regulatory requirements.

Our September 30, 2006 receivables reflect a sequential decrease of $10.7 million, due to the receipt of the June premium payment from Wisconsin in July, offset by increased maternity delivery receivables.

Our medical claims liabilities totaled $246.7 million, representing 45.3 days in claims payable.

This reflects a 2.7 day increase from 42.6 days in the immediately preceding quarter, primarily attributable to a 0.3 day increase for Georgia and Texas claims, a 2.7 day increase in claims inventory, and a 0.3 day decrease due to the conversion of pharmacy benefits for USscript.

Because of certain claims payment improvement initiatives and the proportion of claims from the Georgia plan expected to be paid electronically, we expect future decreases in our days claims payable that may reduce our expected range.

Our debt-to-capital ratio at September 30 was 35.6%.

For the nine months ended September 30, 2006, cash flows generated from operating activities were $124.6 million.

Our increased cash flows reflect receipt of a June Wisconsin premium payment and an increase in medical claims liabilities, primarily associated with the commencement of operations in Georgia.

Our fourth-quarter 2006 revenue guidance is in the range of $685 million to $690 million, with net earnings per diluted share of $0.38 to $0.43.

Our preliminary guidance for 2007 has revenue in the range of $2.73 billion to $2.83 billion, and earnings per diluted share of $1.51 to $1.61.

The 2006 fourth-quarter and 2007 guidance excludes any potential exit costs for our Kansas health plan that would be necessary if our efforts to retain that contract are unsuccessful.

The 2007 guidance excludes the effect of any Kansas operations and includes the estimated effects of initiating our Texas Star+ SSI operations effective January 1, 2007 and the preliminary Ohio Aged, Blind and Disabled award, which is expected to transition throughout 2007.

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

(OPERATOR INSTRUCTIONS) Josh Raskin of Lehman Brothers.

Thanks and good morning.

Just a couple of quick questions here.

First on the Georgia MLR, it's kind of like you are still booking 90%.

Is that calculated using the premium taxes in the revenue amount or is that just off of the core premium?

That includes the premium in the revenue -- I'm sorry -- net of the premium --

Net of the tax -- that is net of the tax.

Let me ask more specifically.

If you get $100 of premium and there's $6 of premium tax, are you booking $90 or are you booking 90% of $106?

We're booking 90% of 100.

Okay, got you.

That is helpful.

Second question, did you say, Per, that the MCR excluding Georgia would have actually been 40 basis points higher?

Correct.

We had said on the second-quarter call that the effect of Georgia was approximately a benefit of 20 basis points.

And for the third quarter, with a full quarter of operations, it was 40 basis points.

That is net of any internal company profits generated with our specialty companies.

Okay, I see what you are saying there.

And just the last question.

In the previous quarter, you guys had sort of talked about higher maternity or, I guess, neonatal ICU costs, and it sounds like that is still there; the physician costs are still there to some extent.

You also talked about the injectables, both on the utilization and unit side and then the hospital bed days.

And I was wondering if you can just sort of run through those and maybe spend a little bit more time on the physician costs and what is driving that.

Sure.

We -- I'll start and Per, you want to -- I'll start and Per can add to it.

The neonatal, we're still seeing it, but we're not seeing the same level relative to the number of deliveries we're seeing.

And we are levering the care and we are managing the cases a little bit differently.

We're estimating the costs differently.

So the nurses and the local people are really engaged.

We're looking at each case as a case, as opposed to just adding up the number of days.

So we've kind of gone back to basics on that [care].

The physician costs, it's primarily Indiana and it is some of the new service areas that we added in the South.

And we're going through there, evaluating it, doing virtually P&L by doctors, working with them, and in the recontracting process for January 1, taking that into consideration.

The bed days and how we manage that, I think I spoke to.

So it's just really back to the fundamentals and basics on managing the care.

We're levering the NICU cases, which is very important.

Anything you want to add to that, Per?

I think the main thing is I alluded to the increased revenue relative to the delivery payments, which reflects we had a high incurrence of overall bed days and those were driven by the increase in maternities.

But what was important, as Michael alluded to, is the fact that we were able to maintain a relatively constant NICU percentage.

And those within the NICU, we were able to manage those two less acute levels so that our costs were lower.

And was the key in managing that overall cost despite an increase in maternity-related costs.

I see.

And then just lastly, in the '07 guidance, the EPS number.

What does that include for an MLR expectation?

That is relatively consistent with where we are right now in guiding for Q4.

Maybe some slight improvement.

Slight improvement from second half or from fourth quarter -- I'm sorry?

Slight improvement from third quarter.

Okay, that is helpful.

Thank you.

Matthew Borsch of Goldman Sachs.

Good morning.

A question about the claims inventory increase -- and sorry if I missed this.

But what was the driver behind that -- is that Georgia?

Some of that is Georgia and some of that is other markets.

We have a higher incurrence in some of our pended claims.

We have an initiative underway addressing some of those pended claims issues, and that is why I mentioned that we expect that level to come down in the fourth quarter relative to that issue.

And that as we get further into the Georgia implementation, we would also expect that the payment throughput relative to Georgia is going to continue to improve.

Would you be able to give a broad side to the barn quantification -- is about half of it from Georgia, would you say?

The increase in DCP?

It could be up to half; it's not more than half.

Okay.

And in other markets -- could you just elaborate on the pended claims issue that you referred to?

It's simply claims that we're reviewing for proper billing procedures to ensure that our providers are billing us properly and that we're not paying more than our contracted rates.

Okay.

Are you guys --?

Matt, it kind of goes back to what we talked about before, that we're really reviewing a lot of these codes.

And it's not just -- we're not just talking [synergies] any more; we're saying what else could there be.

It's all part of that program, just to be very tenacious about it.

You know, I'm just recalling -- well, as I'm sure you know, a competitor, large company had talked about an upcoding trend that they were seeing in a couple of their Medicaid markets.

Is that something that you guys have been seeing as well or does this sort of fit into a different category?

I think this is more a case of just reviewing codes to make sure they are correct, particularly injectables and some of these others, Matt.

We see some -- we said Indiana we've seen that higher level than what we like.

But I can't say that we have the same issue at this point.

And we certainly monitor it and have people that look at that daily, but we have not seen it to the extent where it's a topic we're discussing and making an initiative for.

Okay.

Just one last question on this is that are you still following the practice of booking these pended claims at full charges or how are you handling that?

We're handling that consistent with the way we've always done that.

And is that booking it at full charges or how are you doing it?

At our full or estimated charge, right.

Okay.

I'm just curious, because when you say estimated charge, you mean the amount that you expect to pay or the amount that it's billed?

It's essentially full charge.

Okay.

The (indiscernible) estimate comes in.

Obviously hospitals are not your estimating days, and until you get the bill, not (indiscernible).

And the estimated charge is based on your fixed rate.

If we know on a hospital charge that you're not going to pay 100% of that, then you're going to use some normalized estimate, but not an optimistic, "I think I can get this reduced by X percentage."

It's based on the agreement.

Right, okay.

With every case in the hospital, if we have a case and we have a per diem, the nurses are estimated, how long that person is going to be in, at what cost.

That would be a realistic estimate.

But it's still an estimate until the bill comes in.

Right, got it.

And last question, if I could, on operating cash flow in the quarter.

Again, maybe you covered this.

But were there timing issues related to the operating cash flow this quarter?

Well, there is the item we've talked about for the last couple of years that flipped from Q2 to Q3, that being the Wisconsin June premium, which they pay in July.

That is about a $30 million number.

And our medical claims liabilities that have increased 60 million quarter-to-quarter, and that's primarily driven by the ramp-up of Georgia.

As we ramp any business, you're going to see that phenomenon.

If we're unsuccessful in our efforts to retain Kansas, you'll see the opposite effect, as we pay out claims and wind that business down.

But the biggest drivers were the Wisconsin premium payment and the increase in medical claims liability; to a lesser extent, reductions in accounts receivable and increases in accounts payable.

Okay.

Sorry -- if I could sneak one last question in.

With the exit from Kansas, what do you think your experience -- your results will look like as you exit?

Do you think it will be sort of results consistent with how you performed in Kansas or is there any reason to expect that results would deteriorate as you are exiting out of it?

I think -- I see no reason -- we realize that if the court is not effective, we have some retention policies for key people.

We have other people that will be managing it as people exit and we wind it down.

So I have no reason to believe that there will be a material deterioration.

But if there was a marginal one, that wouldn't surprise me, Matt.

Okay.

All right.

Thanks, guys.

Greg (indiscernible) of Credit Suisse.

Good morning.

Per, my first question is just on the balance sheet, it looks like the premiums receivable were down about $10 million sequentially.

I'm wondering were any of -- these kick payments that you referred to, were any of those payments related to costs that you had incurred maybe in the second quarter, where you didn't book the revenue until the third quarter.

No, we book the revenue as the babies are delivered.

So we have noticed by the time we close any period any of the deliveries that have occurred in that period.

So the receivables that we've recorded with respect to Q3 primarily reflect the September receivables, and to some extent, some of the prior months in the quarter.

But regardless, we would be booking the revenues in the month that those deliveries occur.

Okay.

So if a delivery happens at the end of the quarter, where you are not sure if you're going to get the kick payment or not, then you book the revenue and then make an adjustment later -- if you do get it?

Well, where are contractually entitled to that kick payment.

If there is any history of not receiving something and we don't believe it is realizable, we would reserve for that.

But it is not really a significant issue.

Okay.

And then could you just remind us how many employees you have in Kansas currently?

We operate the Kansas and Missouri plans out of a shared office.

And they have slightly more than 100 employees that cover both of those plans.

Okay.

And then a couple of quick ones.

Could you just remind us the dollar per claim in inventory at the end of the quarter?

And then also, if you have any sense of what your rate increases are going to look like in Wisconsin, Missouri and Indiana for fiscal '07.

The cost per claim in inventory is approximately $222.

And with respect to those markets and rate increases, we don't have a real good crystal ball on that right now, so we're looking internally at 4% or so.

Okay, great.

Thanks.

Melissa Mullikin of Piper Jaffray.

Good morning.

Just a couple questions here.

The $87 million impairment charge includes your Missouri operations, is that correct?

It is calculated based on the reporting unit that includes Missouri and Kansas.

The impairment charge is primarily driven by the events in Kansas.

Okay.

So does your 2007 guidance -- I understand it excludes Kansas -- does that include or exclude Missouri?

Includes Missouri.

Okay.

The court date that you have on October 26, what are the two potential outcomes of that?

Are you seeking an injunction to prevent the implementation of the new plans?

Yes, that is correct.

Okay.

So if you don't receive that, we would expect that you would ramp down in Kansas starting on January 1st?

I think if we don't receive that, we'll evaluate what alternatives we have.

As I said, we believe it's pretty arbitrary and capricious.

I'm not holding a lot of hope that it's going to happen or not happen.

We're staying very balanced on it.

And we have all the plans in place -- there's requirements to give notice to employees and that.

And we would follow all those things to protect the Company and the employees' interests.

So if you do receive the injunction to prevent the implementation of the new plans, what are the next steps then?

We will sit down with the state and talk about how we can continue to help them going forward.

Okay.

And then one last question.

Can you give us a little bit more detail on what your expectations are for the Texas Star+ SSI rolling out on January 1 in terms of membership or impact on your business in Texas?

Overall, we look at that as potentially being a $100 million to $125 million business for us, depending on how successful we are with enrollment.

Okay.

And that is the annual run rate you would expect once you are ramped up?

Right.

Okay.

Great.

Thank you.

Scott Fidel of Deutsche Bank.

Thanks.

First question, could you just talk about potentially sizing up the impact of the Kansas exit next year if you do have to exit that market?

It's already been -- it's been excluded from our guidance for '07, Scott.

Right.

So if you did have to bake that in eventually, what the additional costs would be?

I'd say it --

Well, it's a 240 or so million dollar revenue business for 2006, and we received a rate increase in the second half.

So it would be north of that, if you were to add in revenue for Kansas.

And we've said that it's a 5% -- 5% to 6% pretax business.

Okay, so the revenues for Kansas are still incorporated into your 2007 guidance?

No --

No, no, no --

No, it's been removed.

Okay.

But I was just referencing more to the costs, the onetime costs, essentially, of exiting out of the market.

Okay.

The exit costs we don't see as being significant.

There would be some severance, as we discussed, and some other exit costs, such as leases.

You know, we don't have significant facilities that we own; it's primarily winding down some employee costs as well as some leased facilities.

Okay.

And then a follow-up.

Just relative to the Arizona long-term care, could you size the potential revenue contribution for that in 2007?

I think we gave guidance of what -- $100 million, thereabouts.

The Arizona long-term care.

Right, that one -- we originally had given some guidance, I think, in the $100 million to $150 million range.

The current transition of that plan, we have received fewer members initially in Maricopa than we were expecting.

So we are working with the state to clarify exactly what their transition plans are for the Maricopa members.

We did receive all of the Yuma/LaPaz members that we had anticipated.

So that ramp-up is probably going to be a little slower than we might have anticipated.

But ultimately expect to get to that type of run rate at some point in 2007.

Okay.

And then just thinking about the '07 revenue guidance overall.

So, a 4% rate increase -- that sounds like a good average for us to use across the markets?

Yes.

Okay.

Thank you.

Douglas Simpson of Merrill Lynch.

Good morning, everyone.

I just -- I have two questions.

The first is just the simple math of the MLR.

The consolidated MLR came in at about 82%, and I think you had said that if you excluded Georgia, which was put on at 90, the MLR would have been higher, like 40 basis points.

Right.

How does that work?

Because the 90% rate that we book is at the health plan level.

Any internal company profits that we generate with business between the health plans and our specialty businesses still ends up in our consolidated results.

So when we report our consolidated HBR, it is net of that internal company profit.

So it reduces the HBR, it reduces it at each plan and on a consolidated basis.

So, you put this on at 90%.

And is that 90% apples to apples with the 82% in terms of premium tax treatment?

The 82%, yes.

Okay.

So, can you explain why -- so that drops down.

I mean, if that's, just mathematically, if 82.1 goes up by 40 bps, if you exclude that, then you have to be [floating] on Georgia --

No, no, no --

No, no.

The apples to apples is 85 versus 82.

Okay.

That would tell you that you need to take that 85 down, subtract the intercompany profit; that would somewhat pull the HBR down to 82.1%.

Okay.

So the 90 that you are putting on, I'm just trying to think -- is that really coming on in the mid-80s?

We're saying that if you -- the 90 is net of the premium taxes that we have in Georgia.

Georgia has a 6% premium tax rate, so it has a significant effect.

Or if you gross the revenue line up, it takes the HBR down to 85%.

Then if you remove the intercompany profit, it reduces the HBR in Georgia an additional amount.

Okay --

Just for the interest of maximum transparency, we're giving you insight to the fact that the 40 bps there, that is reflected on the margin of the intercompany specialty (indiscernible).

Okay.

So, but going forward, if the expectation is -- as I think all along, it sounds like your expectation has been that over time that 90 would come down once you can develop kind of a track record that market.

Is it fair to say then that you expect Georgia to ultimately be much more profitable than the rest of that -- I mean, if it's already better than average and you are being conservative, I mean --.

I'm trying to gauge what are you expecting from Georgia when you talk about '07?

We've not booked anything -- we are -- and when we give guidance at the end of the year on a quarterly -- on Q1 and then the balance of the year, we will be in a position at that point, we will have more visibility of how the claims are coming in, what the costs are.

Now the reason why I'm saying that is we are adding a lot of members in Q4.

And so when you ladder in those members, they are going to be at 90% for a period of time.

So it's not just --

But it's really like an 85%.

Yes.

But --

I mean, the 90% that is thrown out doesn't really have any bearing on the 82% that you are reporting, right?

I mean, it's not an apples-to-apples number.

No, but we speak of it that way to demonstrate that if you're talking about your core costs, the 90% is the more relevant number in terms of thinking about what you are recording with respect to where the costs would be coming in.

It gets masked by that 6%.

So, yes, you are correct in that apples to apples, it's, say, 85 versus 82, before you eliminate the intercompany profit.

But in terms of thinking about how we are booking it and reserving, and we're really reserving at what we consider a 90% level.

Okay.

And then just one last question.

On the physician side, you have $2.6 million in receivables due from the docs.

I'm just wondering as we're thinking about that, it sounds like physician costs are running a little bit higher in -- if I heard you correctly -- Indiana and New Jersey.

And if you've got this receivable built up -- and it sounded like, I think, in your comments you said through recontracting and reprocurement you're hoping to knock down those physician costs.

I am just wondering how do you manage that.

Because those guys have taken a hit already.

And it sounds like now you are going to maybe work to skinny down those rates a little bit more.

How do you see that process playing out?

I don't know that they've taken a hit.

They receive, under our Model I, payments in excess of what the agreement was.

So that money is due back to us.

So that is a separate issue.

Okay.

But it's two issues.

It's what was owed for the prior period, which we will be tenacious in going after --

The 2.6?

Two points --

2.3 (multiple speakers).

2.3, it's down.

But to be fair to those that have stepped forward, signed the agreements to reimburse us, etc., we will be tenacious on what is left.

That is a separate issue going forward on new contracts for '07.

Okay.

And some of the doctors, who if they do not work with us in terms of their utilization, then maybe we won't recontract with.

And throughout this contracting process, it's, as Michael mentioned in his remarks, we are trying to look at approaches that are beneficial to the physicians such that they are incented to reduce their costs, but still achieve the profitability that they are looking for, as well as helping us control the costs that we are trying to achieve.

Okay.

Thank you.

Bill Georges of JPMorgan.

Good morning.

Still have a question on the MLR.

I think you said during the Q&A that you were looking forward to improve even further over this quarter.

So are you looking for an '07 MLR below 82?

For the purposes of planning, we're using the 82 level.

As Georgia comes down, that will have some impact on it.

We are talking bps here, so we're trying to be very accurate.

In our planning assumptions, we see that -- I mean, that is still below the midpoint of what our typical range is, of 81.5 to 83.5.

So at 82, in that range -- and I've always said that we will move around a little bit on it from quarter to quarter.

And if you look, it was an 82% -- when you push back the prior period in Q2, it was an 82% MLR.

So we see it staying fairly consistent with that.

What will influence is what happens with Georgia going forward, (multiple speakers) membership come in.

I mean, originally we wanted -- 250 was the absolute high end of the range and now we are looking at 280 to 290, and a lot coming in in October, November.

So that is going to impact how we look at next year.

And we will have more visibility on it, obviously, when we close the year.

I guess then that that 82 number includes the continual onboarding of higher MLR SSI members?

So you think you are able to bring those on board and maintain the stable 82 range?

We do report those -- yes, we report it separately.

Our expense right now with the increased numbers, which is consistent with what we've said before it and with the rate increase and everything else added in there, it's 84.1 this last quarter for the SSI portion.

So we've given a range historically -- if you go back to our presentations on the road shows -- where we say it's going to be 84 to 86.

So once again, you bring on a lot of new members, it's going to go up some.

But we'll have that guidance in the next quarter.

And that is why we've given you a range on '07 earnings and revenue, to reflect what we see happening now in Georgia.

And where it comes in is going to be a function of how fast we bring that MLR down from the 90.

It's a new market, but we're being very methodical about this at this point.

Okay.

Quick question on Kansas.

Can you just sort of give a little bit of color in terms of what the nature of the appeal is?

I don't think you've spoken to that, have you?

Well, when things are in the courts, you really --your lawyers say to stay fairly stealth relative to what you say about it.

I'm sure the court proceedings and things will be available later this week after the hearing.

So let me follow my counsel's advice.

I'd like to talk about it, but I'm not sure it's prudent.

Okay.

Can you give an update on negotiations with the state of Missouri?

We don't see them making the changes that we expect or what we are looking for.

We have ongoing meetings with them -- one later today.

And absent that, as I said, we are pursuing our strategic alternatives.

But it's a small business. 37,000 lives are not [making] anything, and it's probably down a little bit now from that 37,000 -- 32,000.

So it's not you know, the question is do you maintain it?

We might.

There's reason to think if they make a couple of changes we could grow it and do well.

So we're just looking at all those alternatives in a very methodical way.

Okay, great.

Thanks very much.

Steve Halper of Thomas Weisel Partners.

Good morning.

Just two housekeeping questions.

What was the option expense in the quarter?

And what was the share count used in the $0.31 calculation that you provided?

The option expense was $2.7 million in the quarter, slightly above what we've seen the last couple quarters.

So ultimately for the year, we're probably really running at $0.16 impact for 123(R) due to some updates in our estimates on forfeitures.

And the share number that we used for $0.31 is approximately 45 million.

Okay.

And on the 2007 guidance, do you assume option expense in line with the 2006 level?

Yes.

Great, thanks.

Matt Perry of Wachovia Securities.

Good morning.

First, just one other housekeeping issue.

Could you just tell us the dollar amount of premium taxes in the third quarter, and if you care to make an estimate of what it will be in the fourth quarter when you add more Georgia members on?

In the third quarter it was 13.8 million.

There will be some additional ramp in Q4, could take it up more in the $15 million range, maybe 16.

Okay, that is helpful.

And then I don't want to put the cart before the horse, but if I look at your '07 guidance on revenue and EPS and choose about the midpoint of each, it implies a net margin maybe of around 2.5%, I think, if I'm doing my math correctly, which is improvement over the third quarter and the second quarter of '06, but it still quite a ways below what you ran at in '03, '04, '05.

Is there any timeframe under which you think you can move that margin back up closer to where you were in '04 or '05?

I mean, will it exit '07 at a rate more similar to those rates?

I think longer-term, I see this as a 5% pretax margin.

I presume when he's talking about 2, you're talking about after-tax?

Yes.

And I tend to think about it pretax.

I think this should be longer-term a 5% on average pretax margin for business.

As Georgia comes in and as we get that, there's such a big bonus there coming in, we'll be at a position to look and see what our healthcare costs are, and that's going to help drive it.

And that's why the range and how we're looking at it.

I think it's fair to expect longer-term that kind of margin in this business.

Okay.

And if you were to end operations in Missouri, would that -- other than costs of exiting, I guess are you profitable on kind of on a run rate basis in Missouri, or is it more like breakeven?

It's breakeven on a good day.

That is not a -- I wouldn't be looking at all the strategic alternatives if it was probably looking at growing it and other alternatives.

It's an environment and --.

Then just last question, I know it's early on Georgia and you continue to book the 90% MCR.

Any color on how costs of actual claims that have come in have developed relative to your original estimates?

You know, sure, we look at that.

I have that information;

I'm comfortable with it.

But I don't want to say anything, Matt, that gets us ahead of ourselves on it.

Because when you have this number of members coming in -- and I alluded to it -- we had some -- what happened is the way the state delayed this, a lot of providers that didn't want to see managed care come in -- that was very obvious down there -- held off to the last minute.

And then when they saw it really was going live and started [dumping] in the contract.

And so we put a bolus of contract loads in, which we have under control now we believe, and moving ahead.

So until I get better representation, I don't want to jump to a conclusion.

Okay.

And then just last question.

If you could give any more detail on the '07 guidance, what type of SG&A ratio are you thinking about for '07?

Well, we have to think about it -- with premium tax, that's always a variable.

But net of the premium tax.

On a consolidated basis, in the mid 14s.

Yes, that's with the specialty and everything.

Right.

Okay.

All right.

Thanks a lot.

Tom Carroll of Stifel Nicolaus.

Good morning.

Most of my questions have been answered.

I was wondering if you could provide some clarity in terms of the guidance on what you are expecting for your recent Ohio ABD win, as well as the Texas SSI expansions?

So said differently, what is the impact on '07 guidance --?

I think we're going to give -- we will give more and more clarity, we will give more detail on that --

Ohio has not yet even said how they plan to roll out the regions or which will start.

There are eight regions in Ohio.

We will be doing business, if we're successful in having those preliminary awards ultimately awarded to us, in four.

And those four could begin in the beginning of '07 or they could begin in late '07.

We really don't have any more insight from the state on that at this point.

We're just starting to meet with them on their plans.

And in Texas, as we mentioned, we see that as a $100 to $125 million plan.

Okay.

I mean, you said you concluded it in your '07 guidance, so you must have some idea.

Yes.

That is why we also called it preliminary, Tom.

We said this is our preliminary, these ranges out there.

We want to have you the clear sense that we have a sense of the direction it's going, where it is and our confidence level.

But I'm going to stay preliminary on the new businesses.

And as Per just said, particularly in Ohio, where they haven't given us the ramp-up yet.

Okay, good.

We'll check back fourth quarter on that.

One last thing.

Could you provide maybe some comments just on -- since Texas SSI is something we haven't looked at in a while -- maybe just give an update in terms of what are you expecting in terms of enrollment growth there?

And Per, I think you just gave a revenue expectation -- in terms of maybe when it will be rolling in?

They're talking about a January 1 -- I'm not Per, but I'll (multiple speakers).

They're talking about January 1 initiations -- do we put them all in one month or do they roll it over several?

That is to be determined.

And in addition, it's a relatively low number of members, because as with these SSI programs, the premium is higher, so we generate that membership -- I'm sorry -- that premium revenue based on a lower membership base.

Okay, so still some unknowns there, then, it sounds like.

That is all I have.

Thank you.

Absolutely.

Ed Kroll of Cowen & Company.

Good morning.

Back on the HBR, if I could.

Just to kind of sum it up.

In George, you are booking for the health plan only a conservative 90% MLR.

And it's the specialty businesses, when you factor those in, that cause the reported number in George to be a lower for HBR.

Is that right?

That is correct.

If we instead bought those services from an outside party, which is the level at which we record those at the plan level, then it would be 85%.

Got it.

Okay, great.

I guess two things I just wanted to make sure I understand.

A, so 90% is a conservative number that you are booking for the health plan -- at least I think it is.

And B, longer-term going forward, because of the buildout of Specialty Services that you have that is unique to Centene that your peers do not have, longer-term, shouldn't your reported MLR be slightly lower than your peers, assuming all are managing medical costs to about the same level -- and maybe with a slightly higher SG&A.

Is that a fair statement longer-term?

I think that could happen.

I mean, we've had a -- I mean, some people have questioned why we have a lower MLR than some of them now.

And that has something to do with it.

But over time, yes, we've talked about as this goes, the G&A is higher.

But it's also going to be impacted as the specialty companies continue to sell to third parties as well.

USscript has a third-party business.

OptiCare and AirLogix is more third party probably than (indiscernible) -- I don't know -- just thinking about it, it's close.

So the point is there will be that kind of balance brought to bear as well.

As well as the diversification that it brings to our business.

Yes.

Sure.

Okay.

And then if you could remind us on days of claims payable and operating cash flow generation, are you still thinking in terms of the same kind of ranges there, low to mid-40s for days and around 1.5 times reported net income for operating cash flow generation?

From a days claims payable, right now, we think that will still bump between the 40 to 45 day range.

I did mention that we expect to see that come down a bit and we'll need to continue to monitor it.

Once we're fully up to speed and paying claims in Georgia and believe that we're paying at a high EDI level, ultimately that may even come down below 40.

But I would suspect that it's going to be closer to 40 moving forward than 45.

You know that chart that we put in every month, in the press release, that shows that days claims on hand where it started the previous month and what changes (multiple speakers)?

Okay?

As you said there, as we brought on the pharmacy, it did come down; we've been saying that.

If you look back a couple of years, you could almost walk through the acquisitions, just what has happened there.

So there's a lot of transparency in terms of what we're saying happened; you don't see anything that's not accurate.

How much of the claims end up being paid with electronic funds transfer in George is going to impact it.

I mean, the world we would love to get to is claim comes in today, auto adjudicated, cash out tomorrow.

It gets in the medical economic system instantly.

That is not a bad place to be.

Then to your cash flow question, for the year, we are probably, because of the ramp-up in Georgia and some of these other things, we're probably now going to end up closer to a three times type of the number, when you exclude the impairment charge.

But as I also mentioned, we would expect, if we do lose the Kansas business, that in '07, that would come down as we pay out the claims that are sitting as a liability, on which we have no '07 earnings.

Got it.

But as you think -- X an event like Kansas, just on a regular day-to-day operating basis, is it still roughly 1.5 times at this point?

1.5 to 2.

Very good.

I missed Steve Halper's question, the answer to it.

The reported net income to get to $0.31, was that $13.8 million?

And how many shares did you use to get the $0.31?

It was -- the diluted shares we used to get to that number was 44.1 million.

Got it.

And it's about $13.8, the net income X the charge?

Correct.

Okay, thank you.

Joe France, Banc of America Securities.

Thank you.

I just have two quick questions.

The Kaiser Survey last week said that 26 states will expand Medicaid eligibility next year, and 12, I think, are going to improve benefits.

First question is what opportunities do you see there?

And second human, you mentioned your new, I believe, Financial Quality VP.

Would you tell me the kinds of reviews he or she will be doing?

Yes, I think -- well, first of all, we are looking at all -- we have profiles at every state, Joe in our growth and development area.

So they will look at each state, state by state, as they come up and make an assessment.

What we're doing is the existing people for years have done it right, get it there.

What we've done is we've said we want the plans to really start making sure that they are recognizing the financial impact in management of every case that in the hospital.

This person is working with the plan VPs of finance, the people in the field, on what the bookings are for the plan, for the inpatient side, and taking responsibility for that.

We are then working -- he then works with health plan accounting people here and the planning controllers located in St. Louis on the IBNR, the date received data.

It's just another set of eyes as it comes in.

So I view it as we've had (indiscernible) suspenders.

But we had a wake-up call in that with the Q2, in the prior period, which we hadn't seen since '98.

So we said let's add some super glue.

It's just one more just one more look at the same data.

Okay?

Yes, that is fine.

And the second was just about your Financial VP of Quality, what are some of the metrics or reviews they're going to be making?

Well, that is what I was just talking about, Joe.

When he goes in there, he's looking at the dates claims data, the IBNR, the calculations.

He's looking at the inpatient expense by plan with the plan financial people.

He's looking at the inpatient logs with them.

Just a doublechecking of data.

Because the natural tendency is to get conservative; we've always been conservative.

But his job is to make sure that we don't go either way, that it's just accurate information.

That is fine.

Thank you.

Dan Veru of Palisade Capital Management.

Good morning, Michael.

I'm wondering if you could sort of summarize, based on the new strategies or your back-to-basic strategies, sort of if you were to sort of think about it in terms of percentage of completion, how much is left to do in terms of getting the Company's internal operations where you want to see them be?

No, I'm going to put a 80-plus percent number on it, Dan.

And I want to be careful to emphasize I don't think it will ever be 100%.

I don't think we ever want to stop again not pressing, pushing, and thinking about how better to do some things.

Reviewing and trying to figure out what is the next synergist that is out there or something of the nature -- what is the next program.

So we are in the 80 plus percent.

I mean, I think the results are starting to show up in our confidence level.

But I'm not willing to say.

We have some things we still have to do.

And the remaining 20%, what sort of areas of the operation do you still think need improvement?

Well, we're looking at some of the -- I alluded to in my opening remarks -- we're looking at some of the abilities and new programs to better control the pharmaceutical costs, the drug costs.

We have some ideas we're working with in specific markets and testing some programs where we work with the doctors on how best to manage the proper level, using our USscript technology.

We're looking at the early identification of OB cases and some methodology there and how we can use everything we have to get the prenatal vitamins in their hands early, and how we can do the OB assessment to identify high risk.

I like to use the example that if you knew someone was at risk of delivering at 20 months -- so you'd be looking 18 months early.

It might be -- 18 weeks -- 20 weeks, not 20 months, excuse me.

Twenty weeks versus 38 weeks.

It might be worthwhile to think about putting that person at bed rest; may cost you $75,000 in a hospital room and board.

And put somebody in the home for another 60 grand to take care of any kids.

So it's that kind of programs that starts to identify where there is a high risk and how to manage it.

And there's a lot of other things, some are of which are a little proprietary, that we are doing that we think are going to make a material difference in the long term.

I'm looking at everything being sustainable.

Are you getting any cooperation from the states?

It's clearly in their best interest to want to encourage companies like yours to participate and manage these cases.

Are they cooperating with you in getting better data sharing with you and things of that nature?

Yes, well, I think what they're willing to do -- I mean, they want the data for their encounters and actuarial soundness calculations and things like that.

Okay?

But they are willing to sit down and listen to some of our ideas on some programs that can help manage it, yes.

But on balance, most of them say, look, we want to make sure we're paying [actually] sound rates and then we want to hold you accountable for managing the quality and the outcomes.

And that is okay -- I mean, that's not a bad balance to bring to it.

Great.

Thanks a lot, and nice work.

Thank you.

Carl McDonald of CIBC.

Thank you.

Could you walk through the RFP calendar as you see it for 2007 at this point?

For existing plans.

In terms of our existing plans, there is nothing that has been announced.

We really had kind of a spate of RFPs on existing plans, but we do not see anything on the near-term horizon that will affect any of our other existing plans.

And any states for new opportunities?

Well, there are some states.

And as we mentioned, we monitor those and look at them as those calendars play out.

And as those calendars play out, we determine whether or not we are interested in those states and whether, based on the economics of those respective states, it makes sense to make a run at the business.

But we don't typically comment on individual states at which we plan to propose.

Are there any states that you are aware of that has specific RFPs out there on the calendar at this point?

I'm trying to think through this -- we've heard a lot of talk but nothing specific -- Indiana every once in a while talks about what they want to do with their SSI, and other states.

But specifically, I'd have to go back and look at their (indiscernible).

There's nothing that just pops out of mind.

We have programs we're looking at in various states, and some things we're initiating.

That's why I'm positive I'm not going to comment on that, because we've had some ideas we've presented to states that they're looking at.

Got it.

Thank you.

Brian Wright of Jefferies & Company.

Just a couple of questions.

Can you tell us what percent of your Georgia medical costs are capitated?

It's in the 10% to 15% range.

Okay.

And then what percent of Georgia medical costs are for behavioral, pharma, dental and vision?

I'd have to pull that out for you, Brian.

Okay.

I'll just kind of go to the next one.

You know a large competitor has talked about issues in Arizona.

And I knew you guys just started the long-term care contract there October 1st.

But could you tell us a little bit about assumptions as far as outlier payment thresholds?

We have some protection from the state on the outlier cases, so that if they hit outlier status at certain points, then the state assumes the risk for those members.

Okay, great, great.

And then --

(multiple speakers) the mix of dual (indiscernible) or non-dual, it's a -- we could spend a half day talking.

Okay, and then just last question.

Your Southwest region members on September 30th, please?

It was approximately 45,000 -- no, no.

I think it was in the 22,000 -- as I recall, about 22,000.

22,000, okay.

That was only the self-select portion.

Okay.

And then I guess off-line I can get the Georgia behavioral, pharmacy, dental and vision as a percent?

Right.

Okay, great.

Thank you.

There are no further questions at this time.

Mr. Neidorff, do you have any closing remarks?

I just want to thank everyone everybody for calling in.

I'll quietly tell you all we're in red ties here, because there is a baseball game tonight.

Thank you.

Ladies and gentlemen, this concludes today's Centene Corporation third-quarter earnings results conference call.

You may now disconnect.