Centene Corp (CNC) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to Centene Corporation first-quarter 2008 financial 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).

At this time, I would like to turn the conference over to Mr.

Ed Kroll, Senior Vice President of Finance and Investor Relations.

You may begin your conference, sir.

Thank you, Jennifer, and good morning, everyone.

Thank you for joining today's call.

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

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

Michael Neidorff, Chairman and Chief Executive Officer of Centene, and Eric Slusser, Executive Vice President and Chief Financial 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 Web site at www.Centene.com.

A replay will be available shortly after this call's completion, also on our Web site or by dialing 800-642-1687 in the U.S.

and Canada, or 706-645-9291 from overseas, and entering access code 41656800.

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 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 today, April 22, 2008, 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.

I also want to remind everybody once again that our 2008 Annual Investor Day is in New York City on June 3.

We hope to see you all there.

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

Mike?

Thank you, Ed.

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

The start time of our earnings call today is 30 minutes earlier than usual for Centene.

We changed it to avoid schedule conflicts and accommodate our stockholders, other investors and analysts.

We expect to return to our usual day and time for the next quarterly report.

I will briefly review the highlights of the quarter, and then turn the call over to Eric for his comments on the financials.

Consistent with our policy over the last several quarters now, we have the members of our senior management team available to answer your questions.

As we have indicated in our March 19 press release, higher-than-expected medical costs in Ohio ABT population and a heavy flu season across all of our markets adversely impacted our HBR in the first quarter, and we missed the low end of our $0.59 to $0.64 guidance range by $0.02.

CDC reports coincide with ER and pharmacy costs consistent with a flu epidemic.

But aside from these items and an extended full-risk enrollment ramp in South Carolina, our other markets and products performed generally in line with expectations.

We were also encouraged that, in March, we did offset part of the $0.03 to $0.04 shortfall from January and February that we indicated was an issue in the March 19 release.

The flu has subsided and should not affect our second quarter.

Our primary focus for now is improving the margins on our existing book of business.

Ohio ABD negatively impacted our performance in the first quarter, and we are taking aggressive and appropriate actions in Ohio to improve the margins in our ABD population, including exiting the Northwest region and streamlining our network in the Northeast.

But I, however, want to make one thing clear.

We remain committed to serving the health access and management needs of our customers, but are also committed to doing so in markets and with products that produce consistent and adequate returns for our stockholders.

We will take further actions in Ohio and elsewhere to achieve this primary goal.

Next, I will comment on new opportunities.

With several new growth initiatives already underway, Texas foster care, Florida and South Carolina, we can and should be selective in choosing new growth projects to bid on.

For example, of the three visible RFP opportunities currently in play, we chose to bid only in Arizona.

This is a state we already do business in and a market we know.

We did not bid on Tennessee's latest procurement, as the cost and rate structure in Tennessee did not conform with our return requirements.

We also did not respond to the Florida Healthy Kids RFP, though we see opportunities in other Florida programs with our Access Health investment there.

We will be focused and disciplined in pursuing new opportunities.

Our recent Celtic Insurance transaction is an important strategic move for us.

It has become clear in the current political climate that there will be various government programs offered for the 47 million uninsured.

Celtic gives us an ability to help states solve lack of coverage problems for all categories of the uninsured.

To put this in perspective, while about 20% of the 47 million uninsured are Medicaid-eligible, 80% or 38 million are not.

Celtic gives us the products and capabilities to address the full continuum of the uninsured from below 180% of the poverty level to those above, as well as small group uninsured that fall into this category.

Celtic will be a nice complement to our existing Medicaid health plans and offers additional opportunities for our specialty business.

We look forward to completing this transaction in the third quarter of 2008.

The pending Celtic transaction will be more fully discussed on the webcast later today of our annual shareholders meeting.

Let me comment on a few other highlights before I turn the call over to Eric to review our financials.

One, we're very pleased to have started our innovative Texas foster care contract that I just referred to as expected on April 1.

Two, we are also pleased with our Access health investment in Florida that has grown to 92,700 members, and we expect to begin the transition to a full-risk health plan later this year.

Three, the recent momentum in South Carolina has shifted to the positive for Centene.

We are now approved in 29 counties and anticipate significant growth in full-risk lives in Q2.

Finally, our new business pipeline is full and affords us the luxury to be selective and prudent in maintaining our growth, as I said a moment ago.

With that, I will turn it over to Eric.

Thank you, Michael, and good morning, everyone.

Before I recap the highlights of the 2008 first quarter, I'd like to point out a change in our reporting format that is part of our ongoing effort to provide greater transparency in our financial reporting.

Effective with this quarter's results, we are reporting and guiding to a consolidated HBR, a change that many of you have requested and which should make your financial modeling of Centene more user-friendly.

I would also like to remind that the first-quarter 2008 results include $20.8 million in revenue and $0.28 of diluted earnings per share for the retroactive 2007 rate increases and adjustments in Georgia.

Revenue, net of premium taxes, grew to $794 million which represents 22.8% growth compared to the first quarter of 2007.

This increase was primarily driven by overall membership growth in Texas, ABD growth in Ohio, and previously announced rate increases, including the $20.8 million of Georgia revenue recognized in the quarter as discussed previously.

Our reported, consolidated health benefits ratio, or HBR as we call it, was 83% for the 2008 first quarter compared to 84.6% in the 2007 first quarter and 85.4% in the 2007 fourth quarter.

However, if you were to remove the $20.8 million of Georgia revenue recorded in this quarter from the HBR calculation and put it in the appropriate quarters in 2007 that it related to, our HBR actually trended upward approximately 100 basis points compared to the 2007 fourth quarter.

I will be using that increased trend as a basis for the remaining HBR discussion, as it is more reflective of the first-quarter medical cost trends.

The increased medical costs in the first quarter resulted primarily from the continued underperformance in our Ohio ABD markets, particularly in the Northwest and Northeast regions, and a much worse-than-expected flu season.

The first-quarter increased HBR trend was partially offset by rate increases in Wisconsin, Indiana and Ohio, and modest medical management improvements in Georgia.

During this quarter, the gross margin contribution for the Ohio ABD markets was significantly lower than our expectations.

Due to the continued underperformance in the Ohio ABD markets, we have taken the following actions with respect to ABD operations in the Ohio market.

First, effective July 1, we will be withdrawing from ABD coverage in the Northwest region of Ohio, which serves approximately 4800 members.

We do not believe this region can produce an adequate positive contribution even with a future rate increase, given the high unit costs and utilization in the region.

Second, in the Northeast region, we have terminated a high unit cost provider and will now be performing on-site case reviews at all hospitals in the region, along with taking other medical management steps to reduce costs and utilization.

We will continue to monitor performance in the Northeast region and our other Ohio ABD regions, and will take appropriate action if performance does not improve.

In our core Medicaid business, medical costs were up in the first quarter as a result of expected seasonality and the effects from a flu season that exceeded all expectations.

While it is difficult to measure the exact impacts from a flu season, we do know that it had a significant impact on the first quarter above and beyond the effects of normal seasonality.

Specifically, we have seen increased emergency room utilization from flu-related diagnosis, increased pharmacy utilization, including the drug Tamiflu, and increased inpatient admissions for flu-related symptoms.

The flu incidence has subsided in April, and our medical management teams continue to focus on effective case management for high-cost members, including more extensive on-site reviews by medical management personnel, preventing hospital readmissions, and reducing emergency room visits by providing specialized care to members.

We remain confident that the medical management initiatives we've put in place will gain better traction in the balance of 2008 and help drive HBR improvement.

Turning to our general and administrative expenses, the general and administrative expense ratio for the first quarter of 2008 was 12.5% compared to 13.4% in the first quarter of 2007.

This decrease in the G&A ratio reflects our continued focus on better leveraging and reducing G&A costs, as well as the positive effects on the ratio from the Georgia rate increase recorded in the first quarter.

The G&A ratio decrease is offset by increases related to startup costs for our Texas foster care contract, and for Florida and South Carolina operations.

Our 2008 first quarter effective tax rate was 37.3%.

The lower rate for the quarter results from some one-time state tax credits received in this quarter.

Earnings per diluted share from continuing operations were $0.57 for the 2008 first quarter compared to $0.26 in 2007, an increase of 119% or 11.5% excluding the effect of the Georgia rate increase.

Balance sheet highlights at March 31, 2008 include cash and short-term investments of $324.8 million and long-term investments including restricted deposits of $352.1 million.

At March [38], 2008, cash investments held by our unregulated subsidiaries were $25.8 million.

Our total debt was $216.2 million, and debt-to-total capitalization was 32.8%.

Our medical claims liabilities at March 31 totaled $347.5 million, representing 49.3 days in claims payable, essentially unchanged from 49.1 days at December 31, 2007.

For the quarter, cash flows generated from operating activities were $26.7 million, approximately one times net earnings from continuing operations.

Cash flows were impacted by the timing of approximately $47 million of Ohio premium payments that were expected in March but were not received until early April.

That concludes my comments on our first-quarter results.

Before we opened the call up to your questions, I'd like to turn the guidance for the 2008 second quarter and update our 2008 full-year guidance.

For the second quarter, we expect revenue in the range of $822 million to $832 million, net of premium taxes, and earnings per share of $0.38 to $0.42.

This guidance reflects normal seasonality, the April 1 startup of our Texas foster care contract, lower overall market startup costs, moderate improvement in our Ohio ABD HBR, and lower investment yields.

For the full-year 2008, we are adjusting our previous guidance.

We know expect revenue in the range of $3.3 billion to $3.375 billion, net of premium taxes, and earnings per share of $1.87 to $1.97.

The reduction in guidance is primarily due to lower investment yields resulting from actions taken by the Federal Reserve, as well as the impacts of the performance in the Ohio ABD markets.

As I indicated earlier, going forward, we will be guiding you to a consolidated annual HBR.

For 2008, we expect that HBR to range from 82% to 84%.

Finally, I want to spend a moment talking about guidance In general.

As Michael pointed out last month, we have been reviewing our policy around guidance and have decided to change or policy after the second quarter.

Going forward, we will no longer issue quarterly guidance consistent with our Medicaid peer group.

We will, however, continue to issue annual guidance and update you accordingly.

With that, we can open the call up to questions.

(OPERATOR INSTRUCTIONS).

Greg Nersessian, Credit Suisse.

Thank you.

Good morning.

I just wanted to sort of bridge the growth rates for the first quarter versus the full year.

If I back out the Georgia revenue, I think you mentioned the first-quarter EPS growth was about 11.5%, and if I do it for the full year, I think it's just under 20% growth in EPS for the full year.

So as I look at the second quarter, third quarter, and fourth quarter, how do we bridge -- if we look at the separate components, you know, obviously, the nonrecurrence of the flu, but then there's also some Texas foster care startup costs in 1Q and some other moving pieces in there.

Is there a way to break that out, and you can kind of parse out what components of the accelerating earnings growth come from, the nonrecurrence of those issues that impacted 1Q?

Yes, Greg, this is Eric.

As I mentioned in my discussion there, clearly the flu season we don't expect to reoccur after the first quarter, so there's that bridge.

The Ohio ABD, we're taking those actions, we are exiting that Northwest region.

However, that doesn't happen until July 1, so we still expect some performance concerns in the second quarter.

We've taken that into account in our guidance but certainly that will lift us after the second quarter.

You have the Texas foster care contract that you get a lift by the fact that we don't have investment in Q1 -- excuse me after Q1.

Also, you have the startup of foster care which is in our numbers, starting in Q2.

There is a higher lift from foster care in the third and fourth quarter as we get fully established.

I mentioned the Ohio ABD exit.

Also, we continue to stay on top of our G&A and those ratios, as I talked about our annual guidance call, are lower in Q3 and Q4.

Finally, you've got the Georgia rate increase and the Texas rate increase.

Those are the items, the big pieces that bridge you from Q1.

Okay, that's helpful.

You mentioned the lower investment income expectations for the year.

Could you quantify maybe what you're expecting for investment income for the year or what?

Well, what I will do is I will quantify the change in guidance for the year.

Approximately $0.09 of that is attributable to the changes in the rates.

Okay, about half of it, okay.

Then just a couple of quick ones then -- just the higher specialty services MLR in the quarter, was that the higher flu costs or you know, on the pharmacy side, or if you could just talk to the higher specialty MLR.

And then any change in your tax rate assumption for the year?

Yes, that was specialty which again supports a lot of our businesses.

It was driven by flu costs.

Beyond that, there was nothing else significant of the higher drivers, along with the seasonality that we get in the first quarter with all our businesses.

So beyond those two things, nothing else in that MLR.

A tax rate -- yes, I believe that we guided to an annual range of 38.5%.

We would still expect it to be in that 38% to 38.5% range.

As I indicated, this quarter was due to one-time tax credits.

We expect it to be back up closer to guidance in the rest of the quarters.

Josh Raskin, Lehman Brothers.

Thanks, a couple of quick ones.

Northeast ABD in Ohio, how many lives is that, the region?

Yes, give me a second here.

Northeast is about 30 -- approximately 3800.

Close to 4000, just under it.

Perfect.

Okay, thank you.

Second, I know Greg was touching on this and I know we go through this sort of every quarter, but just first quarter, $0.29 excluding Georgia, and then sort of a midpoint of $0.40 in the second quarter, so you know, obviously there's a decent ramp there.

Is there any way to quantify the amounts, just how much was foster care startup and other investments?

How much was flu?

Is there are a way to get there?

Well, I will quantify one of the pieces because, in previous guidance, we said we had expected around $0.09 of investment in Q1.

Our actual amount incurred was closer to $0.07.

We would expect that to come down significantly in the second quarter.

Our only remaining really startup costs today will be in the Florida buildout, which will continue to incur it.

But it will moderate, so we will have some but certainly not nearly the magnitude we've had in this quarter.

Josh, let me add here.

Without getting into a lot of specifics, I think one of the key things is, if you think about all the expense we had around getting set up to take on the foster kids program, now we have the revenue from that offsetting that.

I indicated in my comments that the tide is turning our way in South Carolina, so for the second half of the quarter, we expect to see that continue to improve.

That's going to offset the G&A we had getting ready for that.

So you have a series of things there.

Plus, the improvement in not having a flu season.

You add up those pieces and it becomes a very reasonable ramp from the $0.29 (multiple speakers).

Investments was more than half, so that's helpful.

Then just the last question, I know you're going to talk about it I guess at your shareholder meeting, but at the Celtic acquisition, I was just sort of wondering.

From a strategic standpoint, in terms of the ability to improve what may have been slightly underperforming assets, I'm just curious what's sort of the expertise that Centene brings?

What's sort of the synergy or is this just sort of we're going to let the company run as-is and hope that, in terms of long-term future regulation change, we're going to be able to take advantage of new populations?

I think that -- I can't be specific, but there are opportunities where the states are trying to cover -- Indiana is an example of it -- where they have a program that goes at 180% of the poverty level, and then it goes to the next tier.

It's more of an individual indemnity type program like Celtic offers.

We are going to see more and more states talking about that.

As those becomes available and we can [avail] ourselves of it now, where we could not before without that expertise, the underwriting, the whole adjudication, the whole system requirement for that.

We see it really putting us in a stronger position, relative to the other 38 million uninsured.

So that's the strategic value of it.

We said "Don't expect a lot today." In this year, we said "It's going to be neutral to this year's earnings, but it does not take very much of that new business to make it accretive and profitable.

Anything else you want to add to that, Jesse?

No.

Does that help, Josh?

Yes, that's perfect.

Thank you.

Scott Fidel, Deutsche Bank.

Thanks, good morning.

The first question just around Ohio -- and can you actually quantify what the MLR was in the first quarter in that market?

Or if you're not comfortable doing that, maybe talk about what the sequential change was in the MLR from the fourth quarter?

Yes, this is Eric.

If you look in our press release, we still -- despite going to a consolidated HBR, we still disclose our SSI membership, HBR, and in there, we've disclose that HBR was 97.5%.

I won't get into the specifics of Ohio but in those two regions, I will just tell you that in was north of 100% HBR, which is why we are taking the actions that we are.

It drove that 97.

Yes, it drove the 97 high average because of those two markets.

Okay.

Then maybe if you can just touch on the CFC business, and maybe an update on how things tracked there relative to your expectations in Ohio.

For the first quarter, based on expectations, CFC performance was impacted by the same things -- the flu, the seasonality.

If you look at the CDC stats, the region that Ohio was in was one of the worst for flu season around the country.

So, it was an HBR of higher than our expectations, but at least today and based on the trends we've seen, we believe that is all related to seasonality and flu and that it will be back second quarter more closer to our expectations.

I think, Scott, when you consider the flu, and as Eric said, though the CDC numbers was episodic, we also had a -- well within our normal bridges, we had a little increase in the neonate rate there, so these are things that we relieve view as more episodic as opposed to a trend and expect it to come back.

Okay.

Then I had a follow-up question just in terms of deciding not to bid on the RFPs for Tenncare and Florida Healthy Kids.

Maybe if you could just elaborate a little bit on maybe what you saw in those bids that you thought particularly was not appealing, and was it any specifics around level of competition, or the pricing or the benefit structures?

Some color there?

I would comment that you will seldom see this company not do something because of competition.

We feel we can be as competitive as anyone.

I will ask Jesse to talk about the specifics.

So, this is Jesse Hunter.

We will split those two, the Tennessee and the Florida Healthy Kids.

You know, Florida Healthy Kids first, that really is more of a timing issue I would say than anything.

Obviously, we're working through the regulatory approval process.

There were some specific requirements for that bid that it would be premature for us to pursue that.

Certainly, we are interested in participating in all products in all markets, so we would expect that to be the case in Florida going forward.

That would be at some point in the future.

Tennessee, you know, we can spend a while talking about that, but I will try to keep it brief.

Obviously, we bid on the central region a couple years ago.

Our experience on that was that we had to be at the low end of their actuarial price range in order to be competitive.

You know, we spent a lot of time in the market, particularly in western region.

Our experience was that that market had historically low utilization, based on all of our conversations with the state providers and other community leaders.

We felt like the combination of historically low utilization and some pressure on the hospital costs, both with respect to methodology and the unit costs, created an environment where we did not feel -- that we did not see the visibility to being -- achieving our target profit levels and other kind of key performance metrics at the low end of the range.

So based on that, we had decided to allocate our resources to other opportunities that we think provide the better combination of probability and profitability.

Yes, it's not like we were lacking opportunities.

Right, that's helpful.

Then just one last great follow-up, but do you have an updated expectation for your enrollment for the full year in South Carolina?

We have not commented on that.

The only thing we've said to this point is we expect to see the conversion start to move ahead.

Jesse, are we in the 29 counties now?

Right.

We've previously said earlier this year that we expected in the range of 15,000 to 20,000 of the members from the medical homes to convert to full risk.

We still feel comfortable with that, that range.

We expect that to happen in second quarter.

We also expect to continue to participate in their rollout of Medicaid Managed Care state-wide.

I think, Scott, the other aspect is, when you look at the history of states and their rollout plans, I'm not sure (inaudible) a gain right now except for us to internally plan for it and build our cost structures around what might be.

Just one other thing to add, and just so everybody, as a reminder, that is not -- the South Carolina, the state rollout is not an '08 item, so that's going to be continue to rollout in 2009.

Okay, thank you.

Carl McDonald, Oppenheimer.

The first question, which is if there's any way to give us a sense of how much of the increased medical costs in the first quarter was flu-related versus Ohio ABD-related?

Yes.

As I said in the message, you know, it makes it very, very hard to quantify that number, and surely to quantify it, you would just about have to review every case in the quarter.

We did, have done quite a bit of work in looking at it.

I just hesitate to quantify something that it's really just estimated, but we do know that, from looking at all of the statistics and sampling a variety of cases, that it did have a significant impact.

Some of it, the ABD, a lot of it is flu-related.

I mean, when you have chronic illnesses -- and I don't know if, Mary, if you want to comment.

When you have chronic illnesses, when you've got a flu epidemic, it's that much worse in that population.

That's correct.

This is Mary Mason.

What we do see with the flu is that those who get the most complications are those with chronic illness, also children, pregnant women.

So it did hit us hard.

and also, part of this playing into it was that the flu vaccine only covered 44% of the strains going around.

But we know it peaked in week 8 and we know that this will not affect Q2.

Is it safe to say, I mean, based on the comments around the 100% plus loss ratio in ABD in the seasonality you talked about in the first quarter, that more than half of it though would have been Ohio relative to the flu?

I think, related to flu seasonality, it would be safe to say that, yes.

Okay.

The second question was you mentioned the Georgia rate increase.

Any early estimate in terms of where you think that rate increase will fall on June 1?

Yes, I will ask, I will ask Mark Eggert to comment on that.

Thank you, Michael.

We are currently in discussions with the state right now over the rate increase.

The state has indicated there will be a rate increase effective July 1 and they are working hard to actually have it in place by that date although they are making no commitments.

In terms of the size of the rate increase, we don't really have visibility into that yet.

We expect low single-digit type rate increases in all our markets.

Okay, thank you.

John Rex, Bear Stearns.

Just on Texas foster care, I just want to get an update on kind of your view as you look at the remaining three quarters of the year.

Is your updated view that that will still be a positive contributor, and kind of would your expectation be that you would be able to get operating margins kind of in line with traditional Medicaid business?

I just wanted to see kind of if you had any update on that.

Yes, John, this is Eric.

Yes, especially obviously it's ramping this quarter.

We expect some moderate margin in the second quarter but in the third and fourth quarter, we do expect a return in line, and I know there's been questions on this in the past.

One of the things that may help you bit this is this was a little different process than going into most markets in that our team worked very close with the state on this.

In most markets, as you know, when you enter into a business, the state it's putting it out to companies like us at a full risk.

When they do that, there's usually are a reduction in the rates, so that the state could save money.

The good thing about Texas foster care is the rates were built around the historical performance and when we agreed and settled on final rates, there was no reduction in those rates.

So that gives us comfortability that we're going to achieve that consistent margin with what we would expect with other businesses.

When you looked at that population, actually even when you were bidding that, how much of that care occurs maybe out of network, as that population seems to move around quite a bit, sometimes out-of-state even for brief periods of time?

Is it a very significant out-of-network component.

How did you approach that piece?

I'm going to have Mark Eggert respond to that.

Thanks, Eric.

The network build in Texas for foster care was very extensive, and it was watched very closely by the state, so we feel we have a very good and very adequate network in Texas and actually don't anticipate a lot of out-of-network care.

It's state-wide; our network is state-wide.

So we do have a state-wide network, so as they move around.

Is there much that occurs out-of-state for brief periods if some of these get sometimes end up out of state for a few months at a time?

We haven't seen that yet.

I mean, we are only three weeks into it.

Okay.

Okay, great.

Thanks.

Daryn Miller, Goldman Sachs.

Thank you.

Can you guys provide some more color on regarding the timing on the Arizona bid?

Jesse?

Jesse?

Yes, the bids were -- the final bids I guess I'd say were due the end of last week, and we expect to have an announcement at the end of May.

Great.

Your current enrollment in South Carolina on a risk basis?

At the end of --

Yes.

What we had I think reported for Q2 (inaudible).

It was 2000 members.

Yes, about 2000.

At the end of Q1.

Great.

Then when we think about your decision to exit one region in Ohio and then to kind of go through some different strategies in the other region, can you kind of walk us through how you come to those decisions, what you exit and what you actually decide to stay in?

Well, we sat down; we met with the provider group.

We talked about the rates of doing a small component of it.

We talked about the medical management criteria we had to start there to implement to reduce the length of stays.

You look at the average length of stay where it is appropriately medically managed versus other.

If you can't get the policies right -- it's not just rates -- we told them we would be left with no choice but to exit.

Other markets, we would [prune] some of the hospitals, we've achieved the medical management we were looking for.

There was a concurrent review of case management, etc.

So we thought that we would be able to -- we should work at the northeast to correct it.

There's a whole series of criteria.

Mark and I spent quite a bit of time up there personally working for that the past month.

I would just add to that, as I've pointed out in my previous discussion, that we will continue to monitor all of those markets and again take action accordingly.

We have opportunities to do other things with those markets.

Again, the performance has to improve; if it doesn't, we will continue to take action.

Great, and one last question.

Your overall HBR of 82% to 84% -- how would that compare to prior guidance, if you were to have provided that metric?

Probably, up -- yes, you know, it's slightly up due to the first-quarter results, but not remarkably different.

We think, based on our previous guidance, we would have still fallen in that range, just maybe a slightly lower mark.

I could add -- I mean the numbers I saw say we would be within that range.

Yes.

It's a consistent range.

Bill Georges, JPMorgan.

Good morning.

I just was wondering if you could try to help us out with the sequential improvement in MLR from first to second quarter.

First of all, is it safe to assume that the impact of the flu will update entirely by the second quarter?

Yes.

We know it peaked at week 8 according to the CDC, in the east-North Central region for Indiana and Ohio, Wisconsin markets are, the ones that were hardest hit.

We are seeing it subside.

Okay.

Then I guess, in terms of the timing of the Ohio exit, it looks like you are essentially going to be responsible for that membership through the rest of the second quarter.

That's correct in the one.

But we have also implemented the enhanced medical management (multiple speakers) so we would expect to get some mitigation there as well.

Is it fair to frame, then, that the sequential improvement in MLR from Q1 to Q2 then in the 75 to 100 basis point range?

Is that a good ballpark?

I would say that's probably a little aggressive, given the continued Ohio -- again, we clearly can see that the first quarter was due to flu seasonality, but that population has been problematic in the fourth quarter where we did not have seasonality in flu.

So as Michael pointed out, as I pointed out, we are taking significant medical management steps to reduce the impacts from that, but 100 basis points might be a little on the aggressive side, based on what we are expecting.

What's important is we're trying -- particularly in the Northeast and other parts and anywhere we have SSI -- it's doing things that are sustainable.

So, we really want to see it come down on a sustained basis.

That's how that gives us all confidence it can be maintained.

Okay.

If I could just ask one quick follow-up?

There's been a pretty substantial level of press reports lately discussing state funding pressure.

I'm wondering what are you seeing in the states that you're operating?

Most notably in California, where obviously you guys do not operate, but are you seeing any issues in terms of funding issues going forward?

I think what you are going to see, obviously with -- for property values and property taxes, things coming out, it puts the states under pressure.

But the way that they manage those costs is with managed care.

So the states in which we're operating in, while I think there is pressure on it, we have to continue to demonstrate that we are a lower-cost producer and have to strive to do that.

I believe that it provides more of an opportunity than a risk to us longer-term.

Okay, great.

Thank you.

Matt Perry, Wachovia Capital Markets.

Just a couple of questions, and one a little bit of a follow-up on the prior question.

You know, as you're talking to your state government partners about the rate increases you would anticipate to get in midyear '08 or third quarter '08, I mean it sounds like you are not anticipating kind of any change, relative to history, in that you still think low to mid single digit rate increases, even though the state budgets in some of these markets might be pressured.

Am I interpreting that correctly?

I think -- I know I said we are anticipating low single-digit rate increases.

Now, we also know they all have a fee-for-service component in their markets.

They do not raise those fees to physicians and the DRGs, for hospitals, etc., at a faster rate than they raise our rates.

If anything, they keep them constrained to some degree.

We've seen where we've gotten growth from that.

So I think you're going to see that they will implement programs that keep their costs in line with the rate increases as well.

Of course, we have to continue to demonstrate our ability, but they are more willing to look at the preferred drug list, the PDLs, and look at other policies and practices that are cost containment.

So we have what -- we used to talk about our margin-protection program.

That's where we ask for policies and practices that protect the margins as an alternative.

Those are the kinds of things we continue to work on.

Would you expect or anticipate that states might make the kind of recertification or enrollment process a -- I don't want to say more of a challenge, but do you think they may try to hold enrollment in line or allow some attrition to save money in their programs?

We have seen historically -- I think you know that answer.

We have seen historically where states will change their enrollment process from month to month to try and save.

We saw (inaudible) Indiana (inaudible) one time.

So I mean, you see that all of the time; there's always something.

Our trick is to try and stay on top of it and mitigate it, but that the business we are in.

Sure they're going to -- some states we're going to see an issue and say "You know, if we change this enrollment and these people -- until they realize that these people still go to the ER and they are going to be covering some of those expenses through other programs.

So, sure, I would not be surprised.

I could not sit here and say you won't see somebody try that.

Right.

And then just one final question -- in Texas, you know, I think you received kind of a large rate increase, but partly due to a lawsuit that increased payments to providers.

I'm wondering if, since that rate increase took effect, whether you've seen any change in margins in that business -- I mean in that market, either positively or negatively.

In other words, have you seen an increase in utilization due to this increase in provider payments, or is it kind of business as usual for Centene?

I will ask Eric to add to it, but it's everything I've looked at in our matrix and management reporting; it's business as usual.

Yes, I agree.

I mean, that action was strictly just a pass-through to them, so it went into their unit costs, but we're not seeing any material changes in utilization or activity as a result of it.

So like I said, Michael said, business is usual and normal.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS).

Tom Carroll, Stifel Nicolaus.

Good morning.

A quick question on the flu season again, given that it was such a unique season this year.

Is there any way you could provide us with some type admits per 1000 statistic that illustrates how the flu impacted hospitalizations this year?

Yes, I'm going to ask Mary to participate in this, but I think admits is one thing but there's also ER utilization, the ambulatory care side of things, the pharmacy side of things.

So Mary, you may want to comment.

It goes beyond admit.

What I would say, at least I think one of the best indicators can look at is Tamiflu, which is the gold standard antiviral medication.

For example, in our Georgia market, utilization was up 121% Q1 2008 versus Q1, 2007.

So I think that gives you a good indicator of what we were seeing.

I was just thinking that hospitalization and hospital is the biggest part of the medical dollar.

There's no admissions number that you can maybe provide us?

You know, it's a very complicated number because those patients can be admitted under a number of (multiple speakers).

Okay, I see.

Just related to that, do you feel like you've captured appropriate reserving estimates for runout claims related to the flu?

Yes.

Okay, a clear answer.

And then quickly in Ohio, does your new guidance include any costs that perhaps would be incurred if you were to further limit your exposure in the state?

So if you pull out of somewhere else, given continued medical cost deterioration, (multiple speakers) thinking about that at all?

Yes, we feel that we have captured it because clearly, if the trend continues, that we believe the savings we will achieve from exiting will cover the costs related to it.

Okay, great.

Thank you.

At this time, there are no further questions.

I would now like to turn the conference back to Mr.

Neidorff for closing remarks.

I want to thank you for participating in this call.

We look forward to talking to you at the end of Q2.

Don't forget our investor day on June 3 in New York City.

I'm looking forward to that as well.

Those of you who have some time, we have an Annual Meeting coming up at ten o'clock Central, eleven Eastern and that will be webcast as well.

Thank you so much for participating.

This concludes today's conference call.

You may now disconnect.