Centene Corp (CNC) 2006 Q4 法說會逐字稿

Good morning, my name is Luwana and I will be your conference operator today.

At this time I would like to welcome everyone to the fourth-quarter earnings release 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).

Ms. Wilson, you may begin your conference.

Good morning, everyone.

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

Thank you for joining today's call.

You should have a copy of the press release issued this morning.

If you have not received it, please call [Libby Avelt] 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 morning's call.

Our press release this morning includes a table reconciling our GAAP financial statement presentation to non-GAAP amounts.

We have included that table for comparability purposes because it allows us to present our 2006 results excluding the FirstGuard impairment and exit costs.

Michael and Per will refer to those non-GAAP amounts at various points in their prepared remarks.

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

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

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results my differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene's various 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, we specifically disclaim any obligation to do so.

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

Michael?

Thank you, Lisa.

Good morning, everyone, and thank you for joining this morning's call.

Let me make some overall remarks and then I'll turn the call over to Per Brodin to comment on the financials.

To summarize, our year-end results are consistent with our expectations.

Overall we had strong growth in Texas, Ohio and Georgia and our Medicaid and SCHIP HBR was 82.1%, consistent with our guidance.

With respect to general and administrative costs, our Medicaid managed care G&A ratio for the quarter ended December 31, 2006 was 12.7% compared to 10.3% last year.

These G&A numbers were impacted by premium taxes and FirstGuard exit costs.

Net of premium taxes and the FirstGuard exit costs the G&A ratio would have been 9.3% or 10.4% net of the premium tax.

Going forward under the new FASB guidelines we will net premium taxes against revenue in 2007.

We continue to deal with and are making progress in addressing the challenges in Indiana on high professional physician and pharmacy costs.

Although we are starting to see the HBR trend move in the right direction, these two issues are still a material focus for us and will be.

We have gained some cooperation from the state on the pharmacy side and, to address the physician component, we have been reviewing the network of doctors with whom we have contracts.

We are in the process of recontracting with doctors with a prudent and disciplined approach focusing on quality of care and profitability.

As a result during the quarter we saw a decrease of 15,000 members for this reason and due to the fact that the state made a decision to implement a one month freeze on assigning members into new plans.

In Texas we saw strong membership growth as more members coming out of the PCCM enrolled in our plan.

On the maternity side we've experienced a high-level of delivery rates.

Through our medical management group we have programs in place, such as our maternity dashboard, which are intended to identify pregnant mothers early and evaluate high risk cases which enables us to begin to intervene earlier in the member's pregnancy.

This helps to reduce premature births; extensive NICU or OB stays, and gets them enrolled in our care program.

For example, using our ScriptAssist program we are supporting physicians' efforts where they wish to help in putting recipients on 17P, a drug frequently used to prevent premature labor, to help a mother bring the baby to full gestation.

Importantly, the company wide medical management initiatives that we put in place earlier this year are giving us added transparency and enabling us to further evaluate and initiate steps to more effectively control and manage these costs.

The STAR+PLUS program launched in Texas last week and that's going to continue to grow our SSI membership Through this quarter and into '07.

Our Georgia business is performing well, including membership which was ahead -- again ahead of our expectations and we ended the year with 308,000 members.

Over the next couple quarters we expect that number to move around and settle in the range of 290,000 to 300,000.

We entered the Southwest region in September and, as previously indicated, it is still too early in the process to have a clear history of claims development patterns.

We are seeing clear evidence of the moderation of the HBR as expected in our June to September membership.

Owing to the timing of the new members in the more rural Southwest market, we continue to book a 90% HBR and are comfortable that this is the appropriate level.

Regarding our claims payment in Georgia, as I have previously discussed, late sign up by some providers and a large number of contracts that came in at the last minute caused a delay in getting these providers into the system.

The result was we were unable to get those contracts loaded in a timely fashion as we would have liked to and this delayed the payment of those claims.

Currently we are paying new claims in a timely manner and expect any backlog on the older claims to be fully cleared up by the end of February.

Additionally, there was a state requirement that physicians submit the Medicaid number on the claim, and when they didn't we were sending the claims back.

At the states' requests we have now modified this program so that it allows us to pick up that number and put it on the claim.

In Ohio we entered the Northwest region and added 21,000 members sequentially.

Overall we're tracking in line with our expectations with respect to the addition of new members.

The Ohio ABD rollout is on track and commenced in the Northeast region in January and in the Southwest region on February 1.

The Northwest and East Central regions will rollout beginning in March and April of 2007, respectively.

We are now in the process of finalizing the exit of our operation in Kansas and have taken a charge of $0.10 reflecting the closing of that business.

The sale of the Missouri Plan to HealthCare USA closed on schedule, February 1st.

In Wisconsin our membership results were as expected and forecast.

Our specialty company segment is performing well and now represents about 16% of our total revenue before eliminations, up from just 1% two years ago.

The Arizona long-term care contract is on track in Yuma and LaPaz counties and we are working with the state regarding the transition of the members in Maricopa County.

Turning briefly to our organizational efforts, we've further strengthened our management team.

Keith Williamson joined in the newly created corporate position of Senior Vice President, Secretary and General Counsel.

Keith will serve as the chief attorney for Centene's legal department and will be based at our headquarters in St. Louis, Missouri.

Pat Liebman joined as Plan President and COO of our Indiana subsidiary, Managed Health Services, and reports to Karey Witty.

She will be based in the Managed Health Services corporate offices in Indianapolis and will oversee all aspects of the health plan there.

I'm also very pleased to welcome our newest board member, Richard Gephardt, a nationally recognized leader who during his political career and today in his consulting practice is committed to efforts assuring access to high-quality, cost-effective healthcare to everyone in this country.

With that I'm going to turn the call over to Per Brodin who will take you through the Q4 results.

Per?

Thank you, Michael.

Good morning, everyone.

To recap the highlights of the 2006 fourth quarter, our health plan membership totaled approximately 1.3 million inclusive of 139,000 FirstGuard members, an increase of 45% from last year.

For the fourth quarter of 2006 total revenues were $697.4 million compared to $423.2 million in the fourth quarter of 2005, a 65% increase.

FirstGuard revenues represented $79.6 million of that 2006 amount.

Diluted earnings per share were $0.31 for the quarter and include $0.10 of FirstGuard exit costs.

Accordingly, EPS was $0.41 excluding the FirstGuard exit costs.

Our health benefits ratio for our Medicaid and SCHIP population increased 10 basis points on a sequential quarter basis to 82.1% for the three months ending December 31, 2006.

The HBR for this period did not include any overall adverse medical cost development related to prior periods.

In addition, the ratio would have been 82.3% if we excluded our Georgia operations.

For the fourth quarter of 2006 the HBR for our SSI population was 91.4% versus 84.1% in the 2006 third-quarter.

This sequential increase is caused primarily by our operations in Wisconsin and reflects the expected volatility from a small membership base.

We expect the volatility of our SSI HBR to diminish as we commence SSI operations in Ohio and Texas in 2007.

In addition, we expect the Ohio and Texas operations to experience an SSI HBR around 90% during their initial start-up phases.

Our specialty segment HBR was 80.2% versus 82.9% in the 2006 third-quarter and reflects our continuing diversification of this segment's product mix.

Turning to general administrative expenses, our G&A for the Medicaid managed care segment as a percent of revenue was 12.7% in the fourth quarter of 2006 and compares to 10.3% in the same quarter of 2005.

This increase is primarily due to an increase in premium taxes, FirstGuard exit costs and the adoption of SFAS 123R for stock compensation expenses on January 1, 2006.

For specialty services the G&A ratio was 14.4%.

Sequentially our overall G&A increase spend was primarily caused by a $3.6 million increase in premium taxes and a $2 million increase in our IT infrastructure costs.

Premium taxes for the quarter totaled $17.4 million and had the effect of increasing our G&A ratio by 2.3% for the three months ended December 31, 2006.

On a sequential basis both investment income and interest expense were consistent between the 2006 third and fourth quarters.

Our medical claims liabilities were $280.4 million representing 46.4 days in claims payable.

The increase from the 45.3 days in the 2006 third quarter is caused by an overall increase in claims inventory.

For the year ended December 31, 2006 revenues increased to $2.3 billion from $1.5 billion in 2005.

Our Medicaid and SCHIP HBR for 2006 was 82.6% compared to 81.8% in 2005.

Medicaid managed care G&A expenses as a percent of revenues increased to 12.6% in 2006 compared to 10.5% in 2005.

Our 2006 loss per diluted share was $1.01 including FirstGuard impairment and exit costs, our 2006 diluted earnings per share were $1.03 excluding those impairment and exit costs.

Balance sheet highlights at December 31, 2006 include cash and investments of $508.7 million of which $28.9 million was free from state regulatory requirements.

Our debt to capital ratio as of year end 2006 was 35%.

For the year ended December 31, 2006 cash flows generated from operating activities were $195 million, reflective of a $108 million increase in medical claims liabilities, $86 million of which related to Georgia, Ohio and Texas where we had significant new operations in 2006.

For 2007 we expect cash flows from operations to be at least 1.5 times net income.

Finally, our first-quarter 2007 guidance calls for revenues of $635 million to $645 million with earnings per share of $0.24 to $0.27.

Full-year 2007 revenue guidance is 2.7 to $2.8 billion with earnings per share of $1.51 to $1.61.

Our revenue guidance reflects our previously announced intent to begin reporting our revenue net of premium taxes.

We expect our 2007 effective tax rate to approximate 38%.

Our 2007 guidance excludes any additional FirstGuard exit costs, the expected gain on the FirstGuard asset disposition, and the potential tax benefit for FirstGuard Kansas.

We expect the FirstGuard gain and tax benefit total to be in the range of 30 to $40 million.

Our earnings release issued this morning includes a sequential reconciliation of fourth-quarter 2006 EPS to our first-quarter 2007 guidance.

The amount referred to in that table as reallocated corporate overhead represent centralized resources formerly needed to support the FirstGuard operations that will now be used to support our 2007 growth.

Essentially we will grow back into that infrastructure in early 2007.

Our expected 2007 quarterly EPS increases during 2007 reflect our expectation that our medical cost ratio in our newer markets such as Georgia, Ohio and Texas will moderate over the first year of their respective operations.

With that we can open the call to any questions.

(OPERATOR INSTRUCTIONS).

Matthew Borsch, Goldman Sachs.

My first question is regarding the FirstGuard impact.

As I understood it just going back to the last conference call, you guys had said FirstGuard had annual revenues in 2006 of about $250 million with a mid single-digit pretax margin.

What I'm just trying to understand is it looks like the earnings contribution from those numbers suggests it would be about $0.20 to the full year.

And yet the walk across table to the first-quarter '07 guidance suggests that FirstGuard, depending on if you include the corporate overhead or not, is either in the range of $0.60 or $0.80 if you include the whole thing.

I'm just trying to understand what I'm missing there.

From a net perspective, I think when we talked on the call and issued our release regarding FirstGuard we discussed the fact of what the impact we saw as of a year-to-date basis I think the six months of 2006 and what our expectations were overall for the year.

Those comments indicated that we expected the profitability to increase as the year went on since we received a midyear rate increase in Kansas.

I'm sorry, I'm still confused.

I guess it's just -- I'm struggling.

So your run rate on profitability for FirstGuard is really more like $0.60 to $0.80 on an annual basis?

That would suggest a 15 to 20% pretax margin unless the revenue assumption of $2.40 annually is way off.

That amount would assume that we have no centralized infrastructure costs associated with that business, which we do.

So if we were to conclude we had $0.20 of run rate that would say that we don't need any infrastructure to run that business which is not accurate.

As we talked throughout most of our presentations, we have a centralized approach to claims payment, finance, IT and some other items.

And with each business there is a chunk of G&A that goes along with supporting new markets, new business lines and such that we added I'd say centrally as well as in the local plans depending on the nature of the expansion and/or new business.

Michael, does that help you get to on a crossover?

If you look at it, we had the rate increases we talked about when we were shutting it down.

So that did improve the margins in the second half of the year.

But we also had all that infrastructure that gets backed out, and that's how you get to the rate that we talked about on the call.

There was some improvement in the margins in the second half of the year owing to that rate increase which we forecasted at the time and said it could occur.

So that's how you get there.

(multiple speakers) we were still in the single digits on a pretax --.

Let me ask it from a different direction which is can you help us to understand the ramp on earnings that you see in 2007 to get to your full-year guidance range from the first quarter EPS?

Why don't you start off?

As I mentioned in my comments, we expect our profitability or our margins to improve in the markets after we start seeing more experience with the medical management in those markets.

Those markets include Georgia obviously which we went live in 6-1 and in Michael's comments he mentioned the visibility we're getting on our experience in the June through September claims.

And then as we gain more experience and more insight into the Southwest we would also expect to see those moderate similarly in the SSI or ABD products in Texas and Ohio.

We expect to book at a conservative level to begin the year and then for those costs to moderate as the year unfolds.

Let me take another approach to it.

If you look at the fact we're adding the SSI business in Ohio, and as we give guidance we're going to give you what is the most realistic look at the time we have it.

Ohio, they may delay a month here or there; there's a history of states doing that kind of thing, and so you take that into effect.

But we have Ohio, we have the Texas, we have the Maricopa County (inaudible), we have the Georgia coming online strong and showing moderation as we expect where we've had it for three or four months looking back and coming down, but not something I'm going to forecast in all the new markets there until we get there.

So what we tried to give you this buildup table, because what it really says is that between the SSI and Ohio, the SSI and Texas, the long-term care and the overall growth we're seeing in some other markets, that should offset the Kansas.

It will help absorb the overheads in Kansas and we attribute about a nickel of that corporate overhead that would be picked up.

Just picking that up going forward you can see how we could start to move back to the kinds of numbers we're talking about.

So all we have to do is use all the new opportunities with reasonable margin to offset the Kansas business in the last three quarters of this year and get to the kind of run rate you would expect to see to achieve our annual guided range.

And the range reflects how fast we're able to improve the MLRs in all these businesses.

So this is not a hockey stick.

If we had not shut -- if Kansas had not closed down you could see just the impact, just take the Q4 rate and just go from there.

Got it.

Thank you.

Does that help, Matt?

It does.

It does.

And I'll come back with more questions maybe at a low point, we'd want to work through some of the numbers.

Thank you.

And I just (indiscernible) on a call -- when we did this there's sensitivity to that on our part.

And that's why we tried to put this table in to help you understand what the components were and help you see how we have all this other revenue coming in that will help offset that.

I understand the trajectory.

Thank you.

Doug Simpson, Merrill Lynch.

Michael, could you just walk through how you guys are thinking about the progression of MLR and how are you thinking about the sensitivities there in what markets and just if you could give us any sense for baseline numbers given the change in premium taxes.

The premium we gave (indiscernible) just the premium taxes so far represent about 2.3% (multiple speakers) of G&A -- I'm sorry, premium.

It's probably I think, Per, about 200.

Yes, 200 to 220 basis points on the MLR -- at least we are whatever we're calling it today.

You can see how that impacts it.

But then we see it continuing to moderate.

The programs we put in place -- we have confidence we'll continue to move in the right direction.

At any given time one market could have some epidemic or something, that's the nature of this business.

But clearly if you look from the time we had the prior period adjustment we've been able to identify what caused it, we didn't book a lot of extra reserves saying that we don't know what it is.

So what we've done is we just continue to manage through that and we see the trajectory in the normalized range.

Now that range will adjust reflecting the fact that we've lowered the premium number, but we really like that because now you'll be able to see clearly apples-to-apples across markets where you've got up to (indiscernible) in our numbers and we were pushing to do that for about two years.

We feel kind of blessed that we're finally there.

So just as a starting point, as we're thinking about running this through the model, Q4 was 82.2 so it sounds like maybe that number starts the year at kind of mid 84.5 or something thereabouts.

And the G&A was 14.2, it sounds like maybe that starts the year at like 12.

Are those in the ballpark?

Per, you have some numbers there?

Let's say Q4 is not as high as 84.5 and it's in the 84.3 to 84.4 range.

But you're in the ballpark and then on a Q1 basis we start in the mid 13 range and then trend down from there.

I think on the G&A you would really serve yourself well, to the extent that your model will accommodate it, to look at the health plans, net G&A, the core business separate from the specialty companies because the specialty companies in SG&A -- it's going to vary on the product mix.

We get a big account in one particular segment of it, it could shoot it out but it doesn't have the health cost.

And then as you're -- well just looking at the seasonality of the MLR -- HBR, excuse me, would you expect that because you have some conflicting things.

You have the SSI which pulls it up, but then you've got some of these programs which would tend to pull it down.

So if we start at somewhere in the 84.3, 84.5 over the course of the year what would you expect the seasonality to look like on that?

Okay.

The SSI is less impacted -- there's some impact by seasonality obviously, but it's more the ramping up of the new members and bringing them in.

You'll recall that in Wisconsin when you get new members there's that 60-day continuity of care provision that we can't do anything but pay the claims and get ready to change it.

And so as that gets laddered in it takes time to bring it down just for that reason.

That's not seasonality.

So the faster we were able to grow that business the higher -- the more volatile it may appear, but be trending down.

So I think as you look at it we typically would say probably 84 to 86% range for the SSI is a reasonable number longer-term trend to be expecting.

And then you'll see the (indiscernible) of an SCHIP probably in the 83 type range, a little bit more.

Okay.

Great, thank you.

And I'll clarify one thing too on this new business just so everyone has a perspective on -- a little more perspective on the Ohio SSI population.

That premium is approximately 1100, just a little less than that PMPM.

And 30 to 40% of that is expected to be prescription drug spend.

So it's a very high percentage of that premium.

So a large portion on that will be managed by our U.S. script specialty business, but also helps mitigate some of the costs or keep the margin within the Company that would otherwise be going to a third party.

Matt Perry, Wachovia Securities.

A little more detail as we think about how it's going to ramp from the earnings from Q1 to Q4.

I guess first, are you modeling in further improvement in the Indiana cost trends from recontracting and lower drug costs into that '07 ramp?

We see it continuing to trend flat to slightly down.

We're not getting overly aggressive.

In the guidance we have for the year there are no overly aggressive assumptions in there on MLR and that type of thing, Matt, in Indiana or anywhere.

Reasonable expectations are sustainable improvements based on all these programs we're doing.

But as far as the ramp, if you just -- and I'd like you to just think about the fact that if you take the $0.20, $0.19 to Kansas and the new business as it starts to replace the overhead and some of that margin going forward, I think you can see where as we get it in Q2, 3, 4, it doesn't take a lot to make that up -- start to make that up and get the ramp where it needs to be.

Well, can you help us understand -- I mean, if we look at Georgia, you've been in that market since June of '06 and you've talked about consistently booking a 90% MCR and some improvement in '07, which I think is understandable maybe after three or four or five quarters in that market.

But if I look at Ohio and Texas ABD population just starting in Jan 1, Feb 1, March 1 of '07 is it realistic to expect improvement in those MCRs in mid and late '07?

I think it's fair to expect over two or three quarters to start to see some moderation of it.

I tried without getting so granular as to confuse everybody, but we're seeing it already in the June through September numbers.

For Georgia we're seeing some moderation of the cost.

So we said it's going to take probably two to three quarters to get it, but it's not a coal mine or a cliff either, it's something that will come down over time, Matt, and then start to normalize over three, worst-case four quarters.

The other item that can impact the SSI population a little bit differently is that you have this continuity of care for the initial 60-day issue upon transition for those members.

So after that 60-day period expires then we do see an overall impact in that starting just past that and then continuing after we begin the other factors.

We do operate in those two markets, so we think that also gives us a little more insight into or visibility into how those trends might play out.

And if I could just drill down just a little bit more into Georgia if you're willing to go that far.

If I look at your full-year EPS guidance and revenue guidance, it implies an EBIT margin of somewhere around 4, 4.5%.

Do you think that the Georgia -- the margin in that market can approach the overall company margin by end of '07?

I think it can in the market.

Okay.

And then just one last question.

You mentioned in the press release I think this Texas foster care program.

Can you talk a little bit more about that?

The press release mentions it's a tentative award.

And in Texas when those tentative awards are announced they are subject to a negotiation with the state, so we don't consider it final.

The nature of the product is a statewide product which is meant to manage the medical care for all the members in their foster care program.

So it's a medical managed care program for their foster care participants.

The state posted it on their website, so we, in interest of transparency and disclosure, mentioned it.

But then until we reach the appropriate contract with the state there are various predications in there.

So it may or may not get done.

So I just wanted -- we wanted to acknowledge it's there.

I can say we are at a $250 million revenue approximate -- that's a very approximate number.

But we'll have to finalize that contract and we're doing nothing that doesn't keep us consistent with how we're going to medically manage things.

And just one final question.

The CapEx spend in '06 was $50 million.

Is that a good run rate or did that include some onetime items to invest in IT after the mid-year spike in cost trends?

We have our plans for capital spend in '07 really have a fair amount of investment anticipated for IT both from supporting our new product lines as well as our existing product.

So we still expect our spend to be in the 2% of revenue range.

Okay, thanks a lot.

Greg Nersessian, Credit Suisse.

My first question is on the inventory backlog.

In Georgia you expect to pay that down fully I think by the end of February.

If I look at the period and claims inventory, what percentage of that would be related to claims backlog in Georgia and how should we think about days claims payable trending in the first quarter when you report the first quarter and obviously that backlog is gone?

I would say from an overall standpoint we would expect the days claims payable to trend down as we obviously pay a large number of claims.

We also had some carryover claims that were in-house toward the end of the year.

I think as we discussed on the call 12 months ago there was some backlog in just getting claims out over a couple days in that holiday period.

We experienced some of that again this year and then we also have the backlog in Georgia.

But we would expect that as we pay down those claims to get back into our range.

The counter to that is that as we start up the operations in Ohio, the Ohio ABD and Texas SSI or STAR+PLUS, we would expect that with new providers in some of those products that we'll also have some delays that would tend to drive the DCP up a little bit until we get into a normal cycle with all of our providers.

Could you remind us what the range was that you've given?

40 to 45.

Okay.

And then my second question was on the SSI population.

I guess if you think out to the period in time where all of this new business is pending or rolling out over the first half of the year, it's fully integrated -- I guess what percentage of your revenue do you think will be generated by the SSI or long-term care population and how should we think about the SG&A ratio associated with that?

Obviously it's probably going to be higher on an absolute dollar basis per member than a TANF member, but I guess in what magnitude should we expect SG&A to trend lower as a percentage of revenue as that membership comes on?

But from a -- the new contracts coming on and from an annual run rate, the Ohio contract we expect to be in the $250 million range if we get our share of members.

And the --

Is that annualized or in '07?

That's annualized.

And from the Texas STAR+PLUS, that annual run rate should be in the 125 to 130 range -- $125 million.

Both of the -- the nature of both of those products is that they do have a higher absolute dollar of G&A required to support those businesses, primarily at the medical management level with case managers.

However, on an overall G&A ratio standpoint I think will not have a significant effect on our G&A ratio due to the high premium.

So we expect it to operate overall on a consistent ratio with our other business.

Okay, it just seems to me -- I mean, if you're assuming a 13% SG&A ratio on a $1000 PMPM in Ohio on the H bonded (indiscernible) it seems like a very large number on an absolute dollar basis relative to the TANF members.

Is that all attributable to the higher med management?

Are you talking about the plan level or overall I guess?

At the plan level.

It will not been at 13%.

The higher G&As that you saw in Q4 had the premium tax and other things in them.

But now as we talk about G&A, Greg, we're going to be using a formula that takes -- we're going to be booking at net premium.

Okay, right.

So it would be closer to the core G&A, the 9.3% core G&A?

It may be 9.5 because it's new but it's (inaudible) --

I got it.

Okay, thank you.

And then could you just talk about -- the Georgia membership came in I think significantly higher than your expectations, but you expect it to back off a little bit.

Could you just talk about the dynamics in that market, what's going on from a membership standpoint?

In the Southwest we really did very well -- I guess we had, what? 70,000 lives or so there.

So we have a very large share of market.

But anyhow, I just, once again, when you get this [fullness] of members in there I think -- and as it moves around in new markets I'm just trying to be conservative in looking at it and saying we've always said we thought 100 to 250 and it ended up now at 307.

So it just says that it's prudent to give guidance and think about it that if it's maybe 290 to 300 as people shift around and we pick up some new ones and some move out and the state as it changes its administration -- it's just such an early program, I'm just trying to be cautious.

It's also reflective of the high marketshare we got in the Southwest to our just asking whether or not do you maintain that high marketshare or as members are able to shift will they elect to do so?

Okay, but it's not as though you've exceeded the thresholds and all the new members will be going to somebody else.

No, no, that's not it.

I'm just saying that when you get -- and I've used the word fullness a lot over the last few months.

But when you get that new membership don't think it's going to continue to go from there, it's possible it could settle down a little bit.

So we've seen from month to month some shifts in existing areas as people lose enrollment don't understand how to re-enroll.

So as I said, it just seems prudent to create that expectation of 290 to 300.

Okay, and then the last quick one, the Wisconsin and Indiana rate increases, could you remind us what those were?

Wisconsin was 3.4% and Indiana, the way it's blending out after our first month of receipts is closer to 10%.

Okay, thank you.

Josh Raskin, Lehman Brothers.

What was the overall earnings contribution from FirstGuard for the full year?

I don't have that right in front of me.

I was focusing on the Q4 to help you do a sequential walk forward, but let me see if I've got that handy.

Okay.

Maybe I'll just ask another question in the meantime.

Any favorable prior period reserve development?

I'm sorry, where?

You guys have said no negative development from prior quarters, but was there any favorable booked in the quarter?

I would say we had our typical favorable development.

If you look at the table in our press release I think for the rolling 12 months we were at 12.2 million or so of favorable development overall.

So certainly a piece of that was recorded in Q4.

Josh, you see some movement back and forth -- up, down, across -- but nothing really that's noteworthy or material in that sense.

Any of that relate to FirstGuard by any chance?

FirstGuard --

There's probably some from every market.

Okay, that's fine.

Next question, just on the premium taxes.

What was the total premium taxes for the full year?

Do you guys have that number?

It was $42.5 million.

Could you just remind us which states -- obviously Georgia is a big one, but which states have the premium taxes now?

Georgia, Texas, Kansas, New Jersey and Ohio.

Okay, that's helpful.

And then just last question, unless you get the FirstGuard earnings for the full year.

The claims runout from Kansas, are you guys expecting -- I think you had said 1.5 times net income for cash flow next year.

I know there are a lot of moving parts and you'll be building claims in some of the new markets.

But any runout expected in 2007 from the Kansas plan?

And is there any way to quantify the amount on the balance sheet in terms of payables that are still remaining for that plan?

Well, that's something that's in the range of 25 to $30 million of reserve relative to those markets at the end of the year.

So you will see those being paid out in 2007 because we obviously retain that liability for FirstGuard Kansas and in Missouri we are -- our transaction was structured the same way.

So that will certainly decrease the cash flow from operations for 2007, as you say, but then that will be counterbalanced by some of the other items such as the new markets in which we're operating in Texas and Ohio.

And then I assume most of that will be in the first quarter?

The majority in the first and some in the second.

Okay.

Thanks.

Scott Fidel, Deutsche Bank.

First question, if you can talk about the rate renewal cycle coming up in '07 in terms of which states you're expecting rate renewals this year?

Rate renewals or contract renewals?

Both.

Texas we received the rate this past September, it doesn't mean that we won't sit down and negotiate again in September; we have the right to do that.

New Jersey will have a -- and that's a mid-year July adjustment.

We could sit down, we can expect something there.

Ohio moved to an annual January adjustment, as I recall.

So that's not there.

Wisconsin is January.

Indiana was January.

So we won't see a lot of rate renewals.

On the -- there are no RFPs scheduled with these plans moving forward in '07, so we just continue to roll on those.

What you're seeing in rate ex Jersey is what you should expect on the year.

Okay.

And speaking of RFPs, any new market RFPs that you're planning to submit during '07?

I think everybody on this call has heard everybody talk about all the RFPs and we see all those as well.

And we continue to evaluate them all and we've had the policy, Scott, of not talking about it until the state releases them.

But obviously, sure, we're looking at all that -- not just in the core businesses' health plan area, but in our specialty companies as well there's a lot of RFPs.

We have a very robust opportunity out there.

We have a full team.

I might add, organizationally we have now consolidated the M&A, the RFP response and all the growth and development -- new product introductions into one areas so we can really ensure there's great coordination and resources going at it.

So we have a very full pipeline.

Okay.

And then just thinking about obviously we're seeing all the budget proposals coming out from the governors.

First, just wondering if within your states you're seeing anything within the budget that you see as a particular opportunity or risk.

And then just also more broadly, obviously we've all been seeing just the huge flood of state coverage proposals being launched by a lot of the presidential candidates, a lot of that seems to work through Medicaid and just interested if any of those proposals you see as particularly driving interest and potentially entering those markets?

This is our Board weekend and I had a -- we had a Board strategy meeting for most of Sunday afternoon and most of it was talking about new product opportunities.

And I have a couple people on the Board and former Secretary Governor Thomson to people like Dick Gephardt that had some really solid comments.

There are big opportunities for states who are looking for solutions and we see ourselves well-positioned to avail ourselves for that.

There will be some that will try some very unusual things and we will probably stay away from the very esoteric considerations people have.

But you're right, it's going to create a big opportunity for all of us.

And I'll just preemptively talk about the fact that we know the present budget has cuts.

He's talking about in Medicare primarily, but a little bit in Medicaid and I think that has a long way to play out in the Congress that we have.

So we just continue to hammer along.

But as you saw, the short answer is all these things that the governors are willing to look at I think puts us in a position to really have some serious discussions on higher quality, better outcomes, lower-cost.

Okay.

And then just one last question, just going back to the claims inventory.

It looks like from the fourth quarter -- from the second quarter then that's gone up around 35% in terms of inventory per member to around 0.23 from 0.17 in Q2.

And just interested if there are any particular factors that are driving that increase in claims inventory or whether that's Georgia, new markets or any other markets?

Some of it would be Georgia, that which we're cleaning up has a lot to do with it.

And it is a big membership there and there's some new market activity.

But it's moving around and I would expect, as we said, Georgia is going to be cleaned up by the end of this month.

We've already calculated what it all is and we know what the dollar liability on that is.

So I think you've had a good range going forward because just in the last year it's trended from 0.17 up to 0.26; would you think somewhere in the mid-point of that is sort of a good normalized strange?

That's a good -- that's reasonable on a sustained basis.

Okay, thank you.

We give you a lot of transparency on that so that you understand it.

Melissa Mullikin, Piper Jaffray.

I have a couple of quick questions.

With Arizona long-term care contract coming online in October, I had expected an uptick on the services revenue line.

Are you booking that in the premium line and I'm just missing something?

That is in the premium line.

Okay, that explains that.

And then for your Wisconsin membership, I know you had spoken previously about how it had been ticking down due to some administrative eligibility issues and that you had expected it to rebound.

When do you expect to start adding membership there?

And then also, do you expect to be able to get back to the mid 170,000 range that you had been at previously?

Well, we have seen the eligibility issues moderate; however, we have taken some actions in Wisconsin with respect to certain of our provider contracts, so we actually anticipate a slight decrease in membership in 2007 in Wisconsin.

So previously you had thought you might rebound off the administrative issues, but now you're because of these provider recontracting you're actually -- that's going to offset some of that?

It's a little bit like Indiana.

We saw some contractors that the rates were such that their expectations we could not meet and we thought they should live without us for a while.

Okay, so the ramp --

I'm not looking for a large amount of growth over where we are now.

There may be some.

We'll continue to work on it.

These things evolve.

They usually have a long way to play out.

But over 2007 you would expect it to be flat to down?

Let's call it flat, let's be conservative and call it flat.

Sounds good.

Thanks.

Bill Georges, JPMorgan.

A question on the claims backlog in Georgia.

Even though, obviously, the claims remain unpaid, do you have a sense for what the liability would be.

In other words, what rate are you booking those claims?

We've been through it.

Our medical economics people and everybody have been through it, and we have fully identified what that liability is.

So that is all in the calculations that you have.

So no surprises?

Any surprise should be a good surprise, and if it is a good surprise, it is going to be a really small one.

I agree.

Okay.

We are going at everything with belts, suspenders and super glue.

Then a question on the days claims payable.

Would you be able to give us a sense for what that would be excluding the Georgia claims backlog?

We would be in a range, but we would still be up toward the high end.

Of the 40 to 45?

The high end of the 40 to 45.

Okay.

All right, great.

Thanks very much.

Brian Wright, Jefferies.

Good morning.

Can you tell us the number of voluntary enrollers in Georgia, if you could break out your membership in Georgia by voluntary and mandatory?

I know that we were achieving 85% of those as voluntary signed in the Southwest region.

That was the most recent one, Brian.

I think we achieved 85% of the voluntary, and I don't know -- I mean, I don't recall anymore the early ones.

If it is important to you, I can get it.

So 85% of the voluntary or 85% of your Southwest was --?

85% of the voluntary people, those that voluntarily signed up.

Okay.

Then has your medical economics group been able to determine if there is a differential between voluntary and mandatory MLRs?

We would like to know that, but it is a little bit early.

A little bit early, okay.

I was just going to add, Brian, that in the Atlanta and Central regions we saw our voluntary more in the 40% to 50% range.

Then I think you lose visibility to that as you start to churn the members.

So in the Atlanta and Central, the total Atlanta and Central region membership was 40% voluntary?

Of the voluntary piece.

I know others have asked, so I will voluntarily tell you that I think we spent $500,000 in total marketing expenses.

Okay.

Thank you.

Tom Carroll, Stifel Nicolaus.

I have a question on mechanics of the Georgia claims that are piling up.

Could you explain why the lack of provider contracts early on in the market caused the claims to pile up rather than not just be denied and cleaned out of your system?

I don't understand that.

You were hard to hear.

Could you repeat that?

My question is, why is there a surplus of claims piling up in Georgia, so to speak?

I don't understand why a lack of a provider network or a lack of provider contracts early on in the program would cause the claims to pile up.

Why wouldn't they just get denied and cleared out of the system?

Is there some extra step of analysis that you're putting into it?

Let's understand that they are no longer piling up.

The past few months, every claim that comes in is being paid, adjudicated, accurately.

In the early stages in the Central and Atlanta regions, a lot of providers waited until the last minute to make sure that they were really going live to submit contracts.

And we did a less than good job in getting those contracts into the system.

And when that happens, you had a lot of claims and then we identified some are not being paid accurately.

So rather than just deny them so they come back in and you get a false sense, we worked with the (indiscernible) provider networks, we gave some advances.

We did things to keep it together, because we had a good network, still do.

And then said, we will fix these the right way.

We made the changes to the contracts in the system, so these claims are now going through and will be cleaned up by the end of the month.

So they piled up, to use your terminology and parlance, Tom, in the early months.

That was a combination of factors.

But one small one by example that I alluded to in my prepared text; the state in our contract with them had a requirement that the provider has to put his/her Medicaid number into the claim form.

So if we did not have -- in a certain spot -- if we didn't have it, we denied it.

And this is what our contract with the state mandates.

We like to be in compliance.

Well as the state realized that, they said, no, it is okay.

Because we had the Medicaid numbers in [credentia] and other files.

They said if you can bridge that, go ahead.

So once we had their agreement to do that, we were able to bridge it, and all of those claims that would have been denied and piled up were no longer happening.

So a series of things is going to happen in new markets.

I'll acknowledge we did a less than good job on it, but I'm also proud of how the team jumped on it and are now fixing it.

And the fact that we have been paying accurately for the last couple of months gives us a great deal of confidence.

Were there providers that you worked with that ultimately did not contract with you where there's some type of reconciliation that needs to take place?

So you guys were maybe paying them or coming to a middle ground, and then ultimately they didn't sign up with you?

No, there was none of that.

This is a case where if they did not sign up with us, then there is a Medicaid fee schedule, hospitals you could pay 90%, the Medicaid DRGs, and there's outlier provisions.

I mean, it is not just a clear-cut thing, so that was not the issue.

These were providers that did sign up, and we had some model contracts and template contracts and until we got them entered into the system the right way, because we did get this large group in the last minute.

Just trying to understand the nuances as best I can on this new market.

Do you understand it now?

Yes.

A follow-up question, is there an incumbent for the foster care program in Texas that you mentioned?

No.

It is a brand-new program?

Right.

And you said it is statewide?

Correct.

Any idea what the average age?

Is it all predominantly kids?

I guess it would be.

Yes, most foster kids are kids.

Right.

Then you made a comment earlier that with respect to Georgia medical expenses that they are "moderating" relative to the June/September data set.

Is that June to September related to, what, October to December, or do you mean from June to September?

I'm saying the membership that we got in June, as the year is unfolding and we're getting a look at the numbers, clearly in the June period, as you'd expect, brand-new members a little bit higher, but we're seeing it moderate as we go through the balance of the year.

You mean into December.

Yes.

Okay, that's it.

What I'm really saying is what we expected and it confirmed that the 90% that we used initially was an appropriately conservative number.

Very good, thank you.

If I could clarify just one thing on some of those denials with respect to the provider numbers.

We did not arbitrarily deny simply on a technicality.

Because the state had put that requirement into the contract, we programmed our claim system such that it would look at one particular place on the claims form so that it would find the provider number there and process the payment accordingly.

So when the providers were putting numbers in other locations on the forms, we ended up with a large number of denials and ultimately reprogrammed our claim system such that it would look in other places for that number.

Joe France, Bank of America Securities.

Thank you.

You've probably indicated this before but I've just forgotten.

What month was Indiana's new enrollment canceled for a month?

December.

December.

Are there any other states doing similar kinds of things for budget gimmicks?

This was more of their transition to their new program; there's a new contract effective January 1st, so this was consistent with their new contracting and they had a couple HMOs that left the market and a couple new coming in.

They have a desire to have three plans in the state of equal size across the state.

So if you have 400 or 500 and some odd thousand members they want to have three plans with similar amounts -- 180,000 lives.

That's fine.

That's great.

Thanks.

Doug Simpson, Merrill Lynch.

Just one clarification based on what we were talked about earlier.

On the cost of services line, could you just -- given kind of the moving parts, just directionally, what should we expect that to do?

It looked like it was about $61 million in '06.

And could you just remind us what's driving that and how -- would that go up or down in '07?

The biggest piece of that is our U.S. script subsidiary and the services -- I'm sorry, the products they sell externally.

So we expect to see growth in that number, but not as significantly year-over-year as you saw in '06.

Okay.

Great, thanks.

Thank you.

There are no further questions.

Are there any closing remarks?

I just want to thank everybody and we look forward to doing this again on the Q1 results.

Thank you.

This concludes today's conference call.

You may now disconnect.