Centene Corp (CNC) 2007 Q3 法說會逐字稿

Good morning.

My name is Tamara, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Centene third-quarter 2007 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).

I would now like to turn the call over to Mr. Kroll, Senior VP of Finance and Investor Relations.

Please go ahead, sir.

Thank you, Tamara and good morning, everyone.

I'm Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene Corporation.

Thank you for joining today's Q3 earnings call.

You should have a copy of the press release that's been issued this morning.

If you have not received it, please call [Libby A. Bell] at 212-759-5665 and it will be sent to you immediately.

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

We've included that table for comparability purposes because it allows us to present our 2007 results excluding the FirstGuard activity.

We will refer to those non-GAAP amounts at various points during this call.

Michael Neidorff, Chairman and Chief Executive Officer of Centene; Eric Slusser, Executive Vice President and Chief Financial Officer, and Per Brodine, Senior Vice President and Chief Accounting Officer of Centene, will host this morning's call.

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

A replay will be available shortly after this call's completion, also on our website at Centene.com or by dialing 800-642-1687 in the U.S. and Canada or 706-645-9291 from abroad.

The access code is 161-08117.

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

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's Form 10-Q dated October 23rd, 2007 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, we specifically disclaim any obligation to do so.

With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you, Ed.

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

Let me make some overall remarks and then I will turn the call over to Eric to comment on the financials.

Consistent with last quarter, we have several other key members of our senior management team here this morning to help fully answer your questions.

In addition to Per Brodine, we have Chris Bowers, Senior Vice President of Health Plans; Patti Darnley, our Senior Vice President, Operations; Bill Scheffel, Executive Vice President of our Specialty Business Unit; Dr. Mary Mason, our Senior Vice President and Chief Medical Officer; as well as Jesse Hunter, Senior Vice President of Corporate Development.

I'm also pleased to be able to announce the appointment of Mark Eggert as Executive Vice President, Health Plans.

His extensive experience in both contract and health delivery systems in a managed care environment, as well as his critical thinking skills, bring an invaluable perspective to enable the continued success of our health plans and will allow me to leverage myself.

To summarize, the quarter's results show solid improvement in operating metrics and indicated a capability to achieve our targeted pretax margins of 46%.

Overall results for revenue, membership growth and earnings were consistent with our expected levels and our HBR improved by 160 points sequentially.

As we have guided previously, investors should expect the HBR to fluctuate due to seasonality, the addition of new business and the addition of new members.

More importantly, we continue to see strong opportunities for growth in our existing book of business, as well as in future new businesses, with a focused and disciplined approach.

South Carolina, Florida, and Texas each provide strong opportunities for further development.

We expect South Carolina to begin to enroll to fuel full risk in late 2007 and we are also preparing for the full risk conversion in Florida in 2008.

The Texas Foster Care contract is now scheduled to go live on April 1, 2008.

Year-over-year membership declined primarily as a result of the conclusion of our operations in Kansas and Missouri, offset by increases in Georgia, Ohio, South Carolina and Texas.

In Texas, we increased our membership mainly due to growth in the SSI program and core Medicaid and SCHIP, primarily in Corpus Christi, Austin, and Lubbock.

We recently received a rate increase in the state of Texas of 13%, including the state's flu settlement, which resulted in increased reimbursement to doctors.

Of the 13% rate increase, 11.1% is passed through directly to our physicians and will have the effect of increasing both our revenue and medical cost lines by approximately $80 million annually.

The net Texas rate increase was 1.9%.

In Ohio, the ABD rollout is on track from a membership standpoint.

We continue to be optimistic that our medical management efforts will improve from a somewhat higher medical cost trend going forward, particularly as the 90-day continuation of care provisions will have expired for all members in Q4.

In Georgia, we concluded the quarter with 286,200 members.

We expect our Georgia membership to continue to fluctuate between our guided range of 270 and 290,000 lines.

Our Georgia cost trends continue to moderate.

In September, Michael Cadger joined as President and CEO of Peach State Health Plans.

With more than 30 years of relevant industry experience, we believe he will make important contributions to the ongoing success of the Georgia plan.

We are still awaiting final numbers from the state on the rate increase, which we anticipate will be in the low-single digits.

Recognizing the plan is just 16 months old, we continue to work with the state on the transitional issues that can arise, including rates, assignment of membership, fee-for-service payments via two physicians, etc.

The expected membership declines in Wisconsin and Indiana are primarily due to adjustments made to our provider network.

We are now working to rebuild that membership from the current base.

As discussed on our Q2 call, we do not anticipate rate increases during the second half of the year in any of our other markets.

Our specialty company, as you can see through the earnings release, continues to perform and meet expectations.

With that, I'm going to turn the call over to Eric for a financial review.

Thank you, Michael and good morning, everyone.

To recap the highlights of the 2007 third quarter, revenue was $749.9 million, an increase of 18.8% compared to the $631.2 million in the 2006 third quarter.

That increase is driven primarily by our Texas, Ohio and Georgia markets, offset by the absence of FirstGuard revenue from the prior year.

Our Health Benefits Ratio for our core Medicaid and SCHIP population was 79% for the three months ending September 30, 2007 compared to 82% for the same period in 2006, a decrease of 3%.

The decrease in the current year is primarily attributable to increased per-member premium yield and the effect of higher premium taxes combined with a moderating medical trend.

On a sequential quarter basis, our Medicaid and a SCHIP HBR decreased from 80.6% in the second quarter to 79%, also a result of higher premium yield in the continuation of a moderate medical cost trend.

The improvement in our HBR also reflects the progress we are making in our Georgia market as a result of our medical management initiatives.

On a net of premium tax basis, the 2007 third quarter Medicaid and SCHIP HBR was 81.5% compared to 84.0% for the same period in 2006.

For the third quarter of 2007, the HBR for our SSI population increased from 84.1% in the third quarter of 2006 to 89.6% in this quarter, reflecting the new business in our Ohio and Texas health plans, partially offset by the effect of higher premium taxes.

As with any new market, we expected to see higher than normal medical costs as we transition these members to a managed care environment.

We're starting to see trends in those markets improve, consistent with our expectations.

Turning to general and administrative expenses, our G&A for the medical managed care segment as a percent of revenue increased to 13.6% in the third quarter of 2007 compared to 13.1% in the same quarter of 2006 because of the effect of higher premium taxes and startup costs for our South Carolina and Texas Foster Care operations.

Our 2006 third quarter G&A had also included a FirstGuard intangible asset impairment charge of $6 million.

Achieving better leverage from our G&A spend will be a significant point of emphasis for us as we move through the fourth quarter and the 2008 planning process.

In the third quarter of 2007, the specialty services G&A ratio was 15.1%, a decrease over last year's same quarter ratio of 17% and is attributable to the overall leveraging of expenses over higher revenues with the additions of Bridgeway and OpticCare, as well as completing the transition of all of our health plans to our pharmacy benefit management platform.

Investment and other income for the third quarter 2007 increased $1.7 million over the same period in 2006, primarily as a result of larger investment balances.

Our investment portfolios are conservatively positioned, which has shielded them from the negative effect from the sub-prime market issues.

Interest expense increased $1.1 million in the third quarter due to higher debt levels.

Our effective tax rate for the three months ended September 30, 2007, was 36.9%.

Our year-to-date results include an overall tax benefit resulting from the deductions associated with our FirstGuard stock abandonments.

We expect our annual effective rate to approximate 37.5% to 38%, excluding the FirstGuard transactions.

Earnings per diluted share, excluding FirstGuard activity, were $0.37 for the third quarter 2007 compared to $0.31 in 2006.

Balance sheet highlights at September 30, 2007 included cash and short-term investments of $323.1 million and long-term investments of $316.4 million.

At September 30, 2007, cash and investments held by our unregulated entities totaled $45.9 million.

Our total debt was $202.1 million and our debt to capitalization ratio was 33.1%.

Our medical claims liabilities totaled $316.6 million, representing 49.2 days in claims payable, reflecting a 2.5-day increase from the prior quarter.

For the quarter, cash flows generated from operating activities were $104.9 million.

Our third-quarter revenues, general and administrative expenses and related financial ratios continue to reflect premium taxes on a gross basis, consistent with our past reporting practice.

However, effective with the reporting of our results for the fourth quarter of 2007, Centene intends to report premium taxes on the face of the statement of operations, both as a component of revenues and as a component of operating expenses.

In addition, we will define our Health Benefits Ratio as medical cost divided by premium revenues only and our general and administrative ratio as general and administrative expenses divided by the sum of premium and service revenues, effectively a net of premium tax calculation presentation.

You will note we provided a table in our press release that shows our quarterly Medicaid and SCHIP ratios on both a gross and net basis for comparative purposes.

We're doing this to increase the transparency of changes in our HBR and G&A ratios as we move forward.

That concludes my comments on the third-quarter financial results.

Before we open the call up for questions, I have a couple other items I want to cover.

First, in September, we announced the signing of a letter of intent to relocate our corporate headquarters to downtown St.

Louis.

We intend to participate in the development of that project as a joint venture partner, for which the related debt will be non-recourse to Centene.

Lastly, I would like to update you on our fourth-quarter guidance.

Our guidance for the fourth-quarter revenue in the range of $770 to $780 million and earnings per share of $0.46 to $0.51 and a full-year revenue of $2.915 billion to $2.930 billion and full-year earnings per share of $1.36 to $1.41.

As mentioned in the second-quarter earnings call, our 2008 guidance will be announced in early December.

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

(OPERATOR INSTRUCTIONS).

Scott Fidel, Deutsche Bank.

First question, just on the services line, it looks like there was a slight decline in the revenues sequentially.

Then also a bigger decline in the cost of services, down around 19% sequentially.

Just wondering if you could highlight any specific factors that might have been driving that, then whether we should expect both revenues and cost of services to start increasing again in the fourth quarter.

Per?

Yes, the decline in the services revenue is primarily attributable to our external revenues at U.S. Script, our PBM.

That decrease occurred as a result of the focus that we had on converting our internal businesses to that platform.

We now are devoting a significant amount of attention to increasing that external revenue and expect to see that increase in the future.

Okay.

And then just on SCHIP and can you talk about how you think the temporary authorization that they passed in the Congress will affect the business and just how enrollment levels in that business you think should track over the next couple of quarters until we might see some bigger reauthorization.

And we've seen some press reports in Georgia recently just talking about they may need to tighten eligibility and cut dental benefits; and just how you think sort of the SCHIP run rate will look in fourth quarter.

Yes, I think the continuing resolution really is not adequate.

Will they need more than that?

I think it gets us -- it gets [realized] to states through November.

It may help a little bit in December.

But I also expect that you will see some compromise in the Congress.

I learned yesterday there are a record number of Republicans that jumped over and reported with the Democrats on the veto, so there's a lot of pressure to get it resolved, Scott.

Absent something more than continuing, it obviously will have an impact on the funding for SCHIP and some states may be required as a situation to tighten some eligibility.

We also have a range we've been operating in, in Georgia, 270 to 290.

We're on the higher end of that range now, so overall it's -- there's not much work.

We said until the Congress acts and the President signs.

Okay.

And then just last question just around days claims payable and cash flows, just updated expectations for fourth quarter.

DCP did rise nicely in the quarter.

Is that sustainable or do you think that comes down a bit?

And also just on cash flow from operations under $5 million, a bigger number than we were looking for.

Any timing of receipts that benefited that, that should reverse in the fourth quarter?

The biggest impact is if you remember back in second quarter, is the timing of the Wisconsin premium payment, so that is something that flips from the second quarter to the third quarter.

That's about a $26 million number.

Then as we've talked about in the past, typically as we go on in the second half of any year, you see it's more typical to see our accruals increase that are annual-based.

And then those accruals get paid out in the first half of the year, so it's a detriment to first half, a benefit to the second half.

And we continue to see the benefit from the stock abandonment, first start stock abandonments and that will continue through the end of the year.

And the claims payable issue -- days in claims payable issue, we expect that that percentage will moderate up and down over the next quarter in the 45 to 50% range.

Our original guidance was 40 to 45 days.

We have seen it.

We do expect it to trend back down.

Our primary driver of that increase quarter over quarter is some pended claims in the Ohio marketplace that are being processed downward.

We expect as a result of that, it will continue to trend down but we'll basically fluctuate in the 45 to 49, 50% range for the interim.

Okay, and is that what drove the slight improvement in the claims inventory [per member] of the paydown of Ohio or was that also continued paydown of Georgia in the third quarter?

For the continued paydown in Georgia, the pended claims is what actually increased the overall cost per claim.

The pended claim is why you would see the balance has increased there.

And then we expect to pay down the Ohio claims as we move through the third, I'm sorry, the fourth quarter.

Okay, got it.

Thanks.

Doug Simpson, Merrill Lynch.

Good morning.

I know you're going to give more detail of the '08 guidance with the fourth quarter, but I was just wondering if you could talk to the range you've laid out for Q4 and how that annualized.

And then, maybe why that is or is not a good starting point for '08 because I would annualize I think to about $1.85 to $2.

And just curious, what are the moving parts we need to think about with that number?

Well, part of the -- as we stated in the press release, we've tightened that range up for the fourth quarter based on our expectations that are coming out of Georgia for a rate increase.

Certainly, there is some seasonality in our business.

We are not obviously prepared to talk about '08 at this point, but certainly that is -- we are not ready to certainly commit to that being a run rate just because of the seasonality and the impacts.

We've certainly got to examine impacts still for next year's rate increases in our markets.

And we will be looking at that; starting tomorrow, we will be going through several weeks of planning for '08 and as we previously stated, we will be announcing that '08 guidance in early December.

But beyond that, I'd rather not comment any further about expected trends for '08.

Okay, and maybe just a broader question, if you could talk to kind of what you're seeing with the level of competition in the market for new business, are you sensing any noticeable change or is it steady -- steadying consistent, the way you've seen in the past?

Yes, because I think it's pretty much business as usual.

We continue to do well.

We see the competition as we have, but it's such a large business, we consider it -- we really consider it much more peer group.

There's a minimum two required.

And some of these markets are so large it's just not proved to be a problem.

Most states want to see balance between two or three plans.

It's a large enough market for us.

So I think -- I don't see that as problematic.

Okay.

Thank you.

Greg Nersessian, Credit Suisse.

My first question was just a comment you made on the SSI MOR.

I think you mentioned that you saw some of the trends there improving.

I guess should we consider this 3Q MLR north of 89% as kind of the highest level and expect that to trend down going forward or, as that matures?

Or what are your expectations there?

Mary, you want to --?

Sure.

I think that one of the most promising things with the aged, blinded, disabled population is looking at (technical difficulty).

And we continue to see the generic utilization of drugs go up.

We are -- we've started around 61% in Q1.

We are up to 67% for Q3.

So we really see those trends moderating and we're really getting a handle on the business.

And as we get more and more members into case management, then we're going to start seeing those trends moderate.

Okay.

Great.

And then my second question was on the South Carolina conversion to risk.

Could you give us some sense of how exactly that works.

Is that going to be on a voluntary basis at first or mandatory?

I guess my question is at the end of the -- when you report the fourth quarter, is all of your South Carolina membership going to be risk or is there going to be a blend of still some ASO and risk in there?

I'll ask Jesse to respond to that.

Right, well there's really two pieces.

One is what the state is doing and the other piece is what we're doing with respect to our PhyTrust acquisition; I think you're focused on the latter, so I'll start there.

What we acquired was a medical home network, so approximately 30,000 members within that network.

Our process with the state obviously is focused on member choice, so we have to give the members a choice to select their plan, which would include moving over to Total Care, [ArniCare], our full-risk HMO subsidiary.

So there will be member choice involved, so you would not see all those numbers move over in one kind of lump sum into full risk.

So it will also be county by county, so we expect to see some kind of -- some timing associated with that transition.

And we've always anticipated some form of attrition through that choice process, so all that is reflected in our numbers that you are looking at.

Okay.

That's fair.

And then could you just repeat what you mentioned about your expectations on the Georgia rate increase?

I didn't quite catch you.

We said low single digits.

That's built into your guidance for the fourth quarter?

Yes.

Yes.

Okay.

Thank you.

Joshua Raskin, Lehman Brothers.

Hi, thanks.

It's actually David Shulman sitting in for Josh.

My question, my first question surrounds sort of the Foster Care contract.

Now with a start date of April 1st, how should we think about sort of revenues rolling in on that?

I know you are not prepared to talk about sort of 2008 guidance, but you had previously said 225 million.

Should we just think of that as three quarters of that number in 2008?

Yes, that is a 4/1 start date.

That effectively, all the members will start on that date, so we still see the membership consistent with our past estimates; so three quarters of that number should be a good estimate.

Okay that is helpful.

And then in terms of the access health investment, have you received any notification in terms of insurance approvals or expectations for a date on that front?

No, we're working through the regulatory approval process with both office of insurance regulation and the Medicaid department [archive] on the full risk side there as well.

So we're going through that process.

We have I think pretty good visibility with how that would work and we expect that to be completed and transitioned -- start to transition members in '08.

So that's as specific as we can be at this point.

In '08.

Okay, and in terms of the financials there, what share of those revenues and earnings would you have -- how much would you have to feed sort of towards access health [on that]?

Our investment is 49%.

I'm not sure if that specifically answers your question though.

No, that's helpful.

That's helpful.

Thank you very much.

Matthew Borsch, Goldman Sachs.

Good morning.

This is Darren Miller sitting in for Matt.

Just a quick question on Georgia rate increase; is there an effective date on that now?

No, we have not received any notice yet.

Chris, do want to add anything to that?

I would just add that we do expect to hear within the next week or so from the state with regards to the rate increase.

And expect to hear at that point in time the effective date of the rate increase.

Okay.

Can you size approximately the revenue magnitude of that rate increase for '04?

Or sorry, Q4?

I think that's -- go ahead, Per.

You want to --?

If you think about the size of the business, that Georgia business on an annual run rate, it's about a $650 million business.

So if you work from there, that ought to help you.

And it depends on the effective date, of course.

Yes, it's kind of -- we can't help you much until we know the effective date and how they're going to treat it.

Are they going to retro it?

Are they going to pay it over nine months, whether it be 12 months, just what their overall approach will be.

We've not been given any indication of what they are going to do on that.

So I guess just in terms of your guidance, just was trying to quantify what was your expectation in that number.

Our expectation -- it's reflected in the range of our guidance.

Okay.

I guess just responding, the rate increase we expect to be low single digits.

Okay, thanks.

But changing gears, expectations for fourth quarter Texas SCHIP and Star Plus enrollment?

Did you continue to see growth there?

Chris, do you want to comment?

Sure, I'll take a shot at that, Michael.

We do expect to see some improvement in the SCHIP membership.

However, it should be taken into account that the state is going through a significant transition with their eligibility enrollment brokers over the course of the end of the year.

So that will add some variability into how the membership looks in the fourth quarter.

Thanks.

How much improvement we see will be a function of how fast we are able to deal with it.

But that's all been considered within our guidance.

Great, thanks.

Matt Perry, Wachovia Capital Markets.

I just want to clarify if I can a couple more things on this Georgia rate increase.

So if I understand it correctly, you're not quite sure the timing of when it will become effective, whether it will be retroactive or just kind of ongoing and the size of it, but you have received confirmation from the state that you will actually get a rate increase?

Yes.

We have heard that -- we expect some time, it could be as early as Friday; it might be later that -- but they will tell us what the amount of the rate increase is.

We have had discussions with them over the past months, Chris and his people, as to the timing and how they're going to deal with it.

Okay?

And it probably -- we expect it will be some aspect of it will be retroactive or will consider the fact that the rates have been delayed by a quarter.

So, I mean Matt, it's kind of hard to say.

You have a new state -- you have a state in transition.

And they're really trying to sort through how they're doing some of this.

It's the first time that they gave a rate increase.

So should we --

That's part of the dilemma.

We have no history [to look at it].

Right, so would you expect this would become like an annual timing of the rate increase in Georgia as it goes forward would be October?

Or is this just kind of a catch-up and we might expect a mid year rate increase next year as well?

I expect it's going to be -- they're going to stick with a July 1 date.

That's the contract date and we expect that they will stick with that.

This was a first-year transitional type thing, where they decided because of some of the issues, to take a second look at it with a new actuary.

You can't argue that approach with somebody who's trying to be methodical; there's a lot of things they are sorting through.

We have seen other states try and bring on a million lives within a quarter or two have really significant problems.

So despite of the issues we're facing there and some of these transitional things, I think they've done a pretty good job trying to sort through it.

Sure.

And on Georgia, in your press release and your comments, you talked about continued improvement and cost trends.

Can you drill down into a little more detail on what specific items of medical costs expense improved?

And maybe if you are willing to give us an MCR for the Georgia business in the third quarter?

I think we can help you on some of it, but not all of it.

I'll ask Marion Mason to help you with some of the things that we see mitigated or reducing.

Well, in early September, we put in our preferred drug list, which was optimized and we saw an average cost of prescription drop by 4%.

Since that went in, generics hit over 80%.

So that is one thing that we see is very positive.

We also have an optimized prior off list; and in Georgia, radiology, including the high dollar exams, including CT, PET, MRIs are also being reviewed and we're seeing some appropriate denials of inappropriate tests that have been requested.

Also we continue with the O/B case management, reaching out to these pregnant mothers as soon as we can in pregnancy, following those children once they go out of the NIC Unit through the first year of life.

All of this is coming together and we're seeing moderation of the trends.

Okay and could you comment on maybe what the medical cost trend is looking at, looking like right now?

I think we see it continue to improve.

I mean on a sustainable basis.

So while I'm not giving you specific numbers, Matt, what we are really saying is that we talked how we saw it moderating and coming down.

We see it continue to moderate and we believe what we're seeing, that moderation will be sustained and will continue as it gets normalized.

Okay, thanks.

That's all I had.

Carl McDonald, CIBC.

Just one more clarification on Georgia.

The rate increase that you are talking about, is that a gross rate increase or a net rate increase?

In other words that low single digits, do you think that will be offset by rate increases to providers or is that going just to you with no provider rate increases?

That'll be just to us.

It is passed through to us.

Okay, so got it.

The lower full-year guidance, or at least taking, I'm sorry, same full-year guidance but taking down the top end, was that just the fact that you had assumed a rate increase in Georgia in the month of October that hasn't happened yet or were there some other states that played into that as well?

It was primarily Georgia and as we refine the expectations around that rate increase.

Okay.

And what was the loss ratio in Georgia this quarter relative to the roughly 94% in 2Q?

We did not give a specific.

Improved.

The momentum built, it improved.

And we just -- on earnings calls, we just are not going to get into the GAAP and the statutory reports, but you will see an improvement in it.

Okay.

And then, Eric, more of a philosophical question around how you think about new market profitability.

I think Centene historically, has, whenever entering a new market, has taken a more aggressive medical loss ratio approach initially and then later had to come back with a higher medical loss ratio.

So going forward in new markets, do you think that will continue to be the trend or do you think you will move more to some of the other competitors that tend to record a very high (multiple speakers)?

I would argue that in the beginning, some of our competitors said they thought it would be aggressive in their medical management from the beginning.

We said we would book a 90% for the first three quarters.

And I think that's typically what we do and will continue to do.

If for some reason we see where its SSI or something, we think should be higher.

But we typically, until you have the data, we book a 90% medical loss ratio.

We always have.

And if anything I thought we saw some others start to recognize that later.

Now, you book 90 and it comes in at 91 or 92 in one particular quarter, that can happen.

But we like to call it the way we see it.

We think 90 was the appropriate.

If we average out where it's at, it could be there or below over the course of the period.

And to clarify on the rate used for Georgia, if you look at the filings for Georgia that even in the current year that provide the data on '06, the amounts booked for '06 have held up very well.

So that amount at which we reserved was appropriate.

We had some increased trends earlier in '07, but the MLRs we booked in '07, that was for '07 business, not '06 business.

Got it.

Okay, thank you.

Brian Wright, Jefferies & Co.

Yes, a little further clarification on Georgia.

With -- if I take a 2% rate increase on that $650 million annualized, and assume half of it gets passed on to providers, that's about $0.05 a share and that would equal kind of the difference between the top end of the year guidance range from fourth quarter and the bottom end.

So are you saying that you are assuming that all of that flows through the provider, so without that, the guidance range would be like $0.37 to $0.42 for the fourth quarter?

What we said earlier, Brian, that none of it is being passed through to providers, in direct fee, in fee.

We are not decreasing any fees, but we're not increasing the fees.

It's management of -- it's utilization management.

I think you heard Mary talk about improving the utilization -- the MLR there, HBR.

But no, that's comes through to us.

The rate increase for half a year we are looking at or three months, that's the -- how they handle it, how they state -- when we get the letter, how they phrase it, the accounting rules are relatively clear how we will be able to recognize it.

Okay, so the net impact would be about -- the impact would be about $0.09 then in the fourth quarter?

No, we're not going to get into the specific details of the impacts.

We gave you the revenue.

And, again, without knowing what that percentage is, you can do calculations using various percents, but when we don't know what that is, I don't want to speculate on impacts.

Okay.

And then if you could just help us on the quarterly progression third quarter to fourth quarter, on the absolute G&A spend?

The absolute G&A spend --

Can you repeat that, Brian?

Sorry, we had a little --

Repeat the question?

Yes, if you could just help us out as far as the sequential absolute G&A spend from third quarter to fourth quarter?

Were there -- because in the second quarter I believe there were about $3 million and onetime charity expenses.

And so just going from third quarter to the fourth quarter, how should we think or were there any one-timers in the third quarter?

And just basically how should we think about the absolute dollar SG&A spend progression from third quarter to fourth quarter?

Yes, as far as third quarter, there were no significant one-timers that are similar to the impacts of that charitable contribution in Q2.

We would expect the fourth quarter to remain relatively flat.

As I indicated earlier in my comments, we have rigorous focus going on around G&A spend and better leveraging G&A.

And so we are looking at that as part of our '08 planning process and as part of the fourth quarter.

But at this point, based on our expectations is that that should be a fairly flat percentage quarter over quarter.

Okay.

And then in Ohio, I know the rates aren't finalized, but your initial look, how I calculate it, it looks about a 2% rate increase for next year.

Is that about right?

We have not -- we've not really been -- we've speculated or suggested what that might be at this point, Brian.

Okay, all right.

Thank you.

If we're in a position to do something when we do our [times] for next year, we will be glad to.

(multiple speakers)

Thank you.

They've given us some draft rates, but I don't want to talk about draft rates until we have something firm.

I think we've all been through that before, haven't we?

Doug Simpson, Merrill Lynch.

I'm okay.

All of my questions have been answered.

Thanks.

Tom Carroll, Stifel Nicolaus.

Good morning.

Could you provide us an update perhaps on the Arizona long-term care program and how that might relate to SNP development in other markets.

And then secondly, maybe just give us a sense of your Ohio ABD operations and how those are progressing.

Sure.

Bill, you want to comment on the ABD in Arizona and --

I'll talk about the long-term care.

Long-term care.

In Arizona.

Right now, we have about 1400 and some odd members.

And it's actually going relatively well.

Around $50 million in revenue I think is the run rate for 2007.

We expect it to approach $100 million in 2008, somewhere in that ballpark.

HBR is fine; running was in the expectations.

We are approved to have a SNP, special-needs plan in Arizona, effective January 1, as we are in several other markets.

And we will get some membership out of that, but we don't expect that to be significant to start with.

It's been pretty much a -- a slow build, but a successful build in Arizona.

It's not how fast, how well; it is going well.

Do I wish it was 70 million or do we have wishing thoughts?

Yes, but it's -- the success we're having, I think is very solid, very sustainable.

As Bill said, we see it trending I think differently in '08 and we will give you more guidance on that on the next call.

On the Ohio, I've made some comments in terms of how we are optimistic that it will continue to moderate in Q4.

As we've demonstrated in the past, you start managing it and as, I think Mary commented how the drug spend and the generic utilization and things come, really take hold.

And so we're very comfortable with the projections in the opportunity to be successful with the Ohio ABD.

Great, thank you.

At this time there no further questions.

Mr. Neidorff, are there any closing remarks?

No, we just thank you and we'll see you in another quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.