Centene Corp (CNC) 2008 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Centene Corporation Q2 2008 financial results conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

I will now turn the conference over to Mr.

Edmund Kroll, Senior Vice President Finance and Investor Relations with Centene Corporation.

Please go ahead, sir.

Thank you, Crystal, and good morning, everyone.

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

Thank you for joining our earnings call for Q2 this morning.

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

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

Michael Neidorff, Chairman and Chief Executive Officer, and Eric Slusser, Executive Vice President and Chief Financial Officer of Centene Corporation, 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 US and Canada or 706-645-9291 from abroad and entering the access code 51471537.

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 segments as a result of various important factors, including those discussed in Centene's Form 10-Q dated today, July 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.

With that, I would 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.

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

As was the case in Q1, we changed it to avoid scheduling conflicts and accommodate our stockholders, other investors and analysts.

We expect to return to our usual time next quarter.

We are pleased with the progress our Q2 results show, especially at the HBR line.

Our goal is to continue to make our earnings growth more predictable and visible to you while maintaining an appropriate level of topline growth.

Our team is focused on enhancing profit margins to move us back into our long-term target range of 4% to 6% on a pre-tax basis.

Our disciplined portfolio approach to managing our existing and potential growth opportunities should at the same time allow us to continue to fully participate in the growth of the Managed Medicaid category.

To emphasize these points, I want to reaffirm some strategic comments I made at our investment day last month.

Centene's corporate strategy is based on a disciplined and sustainable approach.

We remain focused on margin expansion, diversification of our product lines and both organic growth and growth through selective acquisitions.

We are committed to long-term investors who recognize we have a long runway for our business model.

However, we do recognize that the market and the street sensitivity to the short-term, and we will provide guidance in a manner that minimizes volatility and enhances visibility.

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, we have the members of our senior management team available to answer your questions following our comments.

As we have indicated on our Q1 conference call, we have taken aggressive and appropriate actions in Ohio to improve the margins in our ABD population.

On July 1 we exited the Northwest region, and we also streamlined our network in the Northeast by terminating a high unit cost provider.

In addition, we are rationalizing our provider networks in the remaining regions.

We're pleased with our Ohio margin improvement in the second quarter.

But we also believe that an improved rate structure in that state is necessary to ensure appropriate access and outcomes for beneficiaries and the long-term success of the program.

Eric will speak more fully to this in his comments.

We remain committed to serving the health access and management needs of our customers.

But we are also committed to doing so in a manner within markets and with products that produce consistent and adequate returns for our investors.

Next I will comment on the status of the Foster Care initiative and the Celtic Insurance acquisition.

On April 1 we commenced operations under our Texas Foster Care contract.

The launch has gone smoothly and the contract performed as expected in Q2, including membership of approximately 32,000 at June 30, which is within the expected range of 29 to 32,000.

It is important that you know you should expect to see movement up and down within that range.

On July 31 we closed the acquisition of Celtic Group Inc.

for $80 million, which was partially funded to our $300 million credit facility.

Importantly, Centene received regulatory approval from the Illinois Division of Insurance to realize an extraordinary dividend of $31.4 million from Celtic and still maintain a very conservative capital structure.

This dividend has paid down our revolver balance.

So on a net or cash-on-cash basis, the actual cash outlay for Celtic was approximately $48.6 million.

This transaction is an important strategic move for us.

It has become clear in the current political environment that a mixture of public and private-based coverages and those initiatives will emerge as state and federal workers and state governments diligently work to address the issue of the country's 47 million uninsured.

This critical issue will remain a top priority for our nation regardless of the outcome of the 2008 general election.

Celtic gives us the ability to assist states with designing coverage solutions for individuals and families who will qualify for government-sponsored programs outside the traditional Medicaid system.

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

Celtic completes our universal coverage solution and provides Centene with the products and capabilities to address the full continuum of the uninsured, regardless of income disparities.

Celtic complements our existing Medicaid health plans very nicely and offers new growth opportunities for our specialty businesses.

We are also pleased that Fred Manning and his entire team are remaining in place as we build the business.

Let me comment on a couple other highlights.

Our positive enrollment momentum in South Carolina continues.

We now have -- we are now approved in 39 of 46 counties and have 22,500 risk lives, giving us the number two market share on an address basis, number one among our publicly traded peers.

We continue to work with a provider community to expand our presence into the seven remaining counties.

We're focused on strong operational execution for the members we currently serve and are prepared for a continuing membership growth in South Carolina.

In Florida we remain pleased with the performance of our investment in Access Health Solutions, which has grown its membership approximately 10% since our initial investment.

We continue to work closely with the regulators on their licensure process and expect to receive all necessary approvals in 2008.

We look forward to the startup of our new plan in Arizona on October 1.

We're proud to have been selected as the only new entrant in this reprocurement.

This is the third contract award for Centene by the state of Arizona unit.

Our Bridgeway unit currently provides long-term care services in the Maricopa and Yuma, La Paz service areas.

And Cenpatico Behavioral Health of Arizona currently provides behavioral health services in Yuma, La Paz, Pinal and Gila counties.

Finally, in Georgia, the state appears to be making good progress on finalizing our rate increase for the fiscal year ending June 30, 2009.

The proposed rate has been submitted to CMS for approval, which did not occur last year until November, putting the state well ahead of last year's rate timetable.

With that, I will turn the call over to Eric.

Thank you, Michael, and good morning, everyone.

Before I recap the highlights of the 2008 second quarter, I would like to remind you that the first-quarter 2008 results included $20.8 million of premium revenue and $0.28 of diluted earnings per share for the retroactive 2007 rate increases and adjustments in Georgia.

This is important to keep in mind when comparing our sequential quarter performance.

Now I will discuss the second-quarter results.

In summary, we are pleased with the quarter's financial performance, largely driven by continued Companywide discipline, HBR improvement and new business initiatives.

While we still have work to do to get to our consolidated -- to get our consolidated profit margin firmly within our 4% to 6% target range, the groundwork we have laid in terms of better controls, new management additions and greater efficiencies is increasingly giving us confidence that we will get there and produce a more predictable profit stream going forward.

Revenue net of premium taxes grew to $837.9 million, which represents 18.4% growth compared to the second quarter of 2007.

This increase was primarily driven by three main factors.

First, the April 1, 2008 startup of our new Texas Foster Care contract.

Second, rate increases in our health plans, especially in Georgia.

And finally, membership growth in our Texas, South Carolina and Ohio markets.

Our reported consolidated Health Benefits Ratio, or HBR as we call it, was 83.3% for the second quarter of 2008 compared to 83.6% in 2007 second quarter and 85.2% for the 2008 first quarter after adjusting the 2008 first quarter for the effect of the previously mentioned Georgia rate increase.

Including the effect of the Georgia rate increase, our reported first-quarter HBR was 83%.

The improved HBR year-over-year in the second quarter resulted primarily from better medical management results in Georgia and rate increases across all health plans, partially offset by the results from our Ohio ABD markets and the commencement of our Texas Foster Care contract in the second quarter.

The April 1 launch of the Texas Foster Care was very successful, and it performed in line with our expectations during the second quarter.

Total Foster Care membership at June 30 was approximately 32,000 members.

We're monitoring the program diligently to ensure strong performance and working closely with state agencies to identify and address any issues.

We expect Foster Care membership to fluctuate from period to period within a range of 29,000 to 33,000 members due to volatility in the eligibility enrollment process which is not uncharacteristic of a new program.

When you exclude the Georgia rate increase recorded in the first quarter of 2008, we had sequential improvement in our HBR.

The HBR improvement reflects our ongoing medical management efforts in Ohio, slightly offset by the launch of Texas Foster Care.

The launch of Texas Foster Care adversely affected our sequential HBR comparison as we book all new contracts at conservative HBR levels in their early stages.

In addition, we saw not only expected seasonality during the first quarter, but also a very tough flu season that subsided in April, all of which contributed to a higher HBR in the first quarter.

As Michael indicated, we have taken the previously disclosed actions with respect to ABD operations in the Ohio market.

First, effective June 30 we exited the Northwest region of Ohio where we served approximately 3600 ABD members at June 30.

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

The provider termination resulted in the loss of approximately 1200 ABD lives in the Northeast region, but has had a positive impact on HBR for the region.

In addition to the Northwest exit and the Northeast provider termination, we're pleased that our medical management efforts in Ohio have favorably impacted our HBR in the second quarter where we saw a significant reduction in the HBR versus the first quarter of 2008.

Ohio is a very important and valued customer for Centene, but the rate environment in the state remains challenging.

We believe that improved rates for the January 1, 2009 contract cycle will be needed to bolster our margins to an appropriate level.

We look forward to continuing to work with the state on this matter.

Turning to our general and administrative expenses, the G&A ratio for the second quarter of 2008 was 13.5% compared to 14.4% in the second quarter of 2007.

This 90 basis point decrease in the G&A ratio reflects our continued focus on better leveraging and reducing G&A costs.

You should note that the first quarter of 2008 G&A ratio of 12.5% benefited from the positive effect of the previously mentioned Georgia rate increase reported in the first quarter.

Our 2008 second-quarter investment in other income was $5.6 million, a decrease of $1 million over the 2007 second quarter and a decrease of $2.2 million sequentially.

As we indicated on our first-quarter conference call, we expected lower investment yield as a result of actions taken by the Federal Reserve.

Our 2008 first-quarter -- excuse me, second-quarter effective tax rate was 38.2%.

The lower first-quarter tax rate of 37.3% resulted from some onetime state tax credits received in the quarter.

The second-quarter tax rate of 38.2% has returned to a normalized level.

Earnings per diluted share from continuing operations were $0.41 for the 2008 second quarter compared to $0.23 in 2007, an increase of 78%.

Balance sheet highlights at June 30, 2008 include cash and short-term investments of $427 million and long-term investments, including the restricted deposits of $282.9 million.

Our June 30, 2008 cash and investments held by our unregulated subsidiaries were $29 million.

Our total debt was $222.1 million, and debt to total capitalization was 32.6%.

Our medical claims liabilities totaled $363.7 million at June 30, representing 48.5 days in claims payable, a decrease of 0.8 days from 49.3 days at March 31, 2008.

The decline was driven primarily by the change in our provider bonus accruals in the second quarter and overall reduction in claims inventory this quarter and the impacts from bringing on Texas Foster Care where the program runs at a lower days claims payable than the Centene average.

For the quarter cash flows generated from operating activities were $60 million, approximately 3.3 times net earnings from continuing operations.

During the second quarter, we changed our banks used for short-term cash, management and money market fund investing, effectively separating it from our bank that handles our operating accounts.

Because the cash management and operating accounts are with separate banks, checks that have been issued but not yet presented to our bank for payment are required to be reclassified to accounts payable under generally accepted accounting principles.

This reclassification creates a onetime positive impact to cash flow from operations of approximately $28.9 million.

I will now make some brief comments on the rate outlook.

First, we received supplementary rate adjustments in Ohio effective July 1 of approximately 3.5% for our remaining ABD members and approximately 5% for our CFC population.

The ultimate effect of these higher rates was a net increase of approximately 0.9% for ABD and 0.3% for CFC since most of the increase was absorbed by provider pass-throughs, benefit enhancements and premium tax increases.

We estimate the pretax earnings impact from the rate increases to be approximately $250,000 per month.

Finally, we are in ongoing rate discussions with the state of Georgia for the July 1, 2008 through June 30, 2009 contract year, and the process is significantly ahead of the prior year.

We understand that the draft rates have been submitted to CMS for approval, but it would be premature to speculate on the timing of the rates being finalized.

Until the rates are finalized, we cannot comment on the impact of any rate increase, other than we expect the increase to be retroactive back to July 1.

That concludes my comments on our second-quarter results.

Before we open the call up for your questions, I would like to update you on our 2008 full-year guidance.

As a reminder, we discussed on our last quarterly call that we have changed our guidance policy and no longer issue quarterly guidance.

We will continue to issue annual guidance and update it as needed.

For the full-year 2008, we're increasing our revenue guidance and maintaining our previous earnings per share guidance.

We expect revenue in the range of $3.36 billion to $3.41 billion net of premium taxes and earnings per share of $1.87 to $1.97.

The change to revenue guidance results primarily from the Celtic acquisition and the new Arizona contract.

As we indicated previously, we do not expect Celtic to have a material impact on earnings in 2008.

Earnings from the Arizona contract in the fourth quarter are offset by third-quarter startup costs for the market.

For 2008 we continue to expect the consolidated HBR to range from 82 to 84%.

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

(OPERATOR INSTRUCTIONS).

Josh Raskin, Lehman Brothers.

Two questions for you.

One, the Texas membership, even if I take out the sequential increase from the Foster Care, I think it was up a total of 58,000.

It sounded like 32 of that was Foster Care.

That looked a lot stronger than we were looking for.

What were some of the drivers of the Texas growth?

Eric, do you want to pick up some of that?

Or Mark?

Other than Foster Care, most of the membership growth was in SCHIP and care needs and it was strong.

That EPO product showed a lot of growth.

But there was no change in sort of the competitive landscape or anything like that in the environment that you could point to?

No.

Okay.

A second question just on Foster Care, you had mentioned obviously the impact on the HBR as you accrued at conservative levels.

I think you have talked about sort of that 90% range back when we were talking about Georgia in the first couple of quarters.

Is it fair to say that Foster Care is somewhere in that ballpark?

We booked it at 90%.

That is pretty much our model.

(inaudible) would we expect to book any new product less than 90%.

So that is kind of the --

-- model we used for the first six months until we get adequate claims experience.

Perfect.

And then just a last question on the increase in revenues, how much of that is Arizona versus Celtic?

Estimated about we took it up $60 million.

It is about up 48 and 10, 50 to 10 type split.

50 to 10, okay.

(multiple speakers) 50 million -- 50 to Celtic, 10 to Arizona approximately.

Tom Carroll, Stifel Nicolaus.

My questions were primarily on Texas as well; also on New Jersey, just two quick ones.

Maybe give us on the Foster Care business give us a sense of how medical costs are actually coming in?

Is there anywhere that it is outside of your expectations in terms of one particular service line or another?

And then secondly, could you maybe just chat a bit about New Jersey?

I know you have had some challenges there and maybe how that market continues to ramp this year just in terms of your relationship with State, changes they are making there?

Yes, a couple of things.

Let's start with Foster Care.

I think it would just be, Tom, very premature to make any assumptions based on 45 days of claims data that has come into the shop by this point in time.

So really I think it is just way too early.

The only thing I can tell you is that we have our Passport product, which is electronic medical records, and the number of hits we are seeing on that says it is working very well for us in that regard.

So I think that gives us the potential for better health outcomes and the expected costs.

But other than that, I cannot -- I would be afraid to speculate on the cost.

You are right about New Jersey.

It continues to have its challenges.

You can see from the numbers we were maintaining the membership relatively speaking without a lot of swings at this point.

And our challenge is that the margins on it, we're not realizing at the level we want.

So we continue to work through it.

It is under a full management review now as to what is the appropriate steps to take, and we will probably have more indications of what we're doing on our Q3 conference call.

Okay, great.

You just said on your Passport product the number -- you said the number of hits.

Does that mean providers?

Yes, the providers who are using it.

We see it as a very positive indication that the structure is appropriate.

Daryn Miller, Goldman Sachs.

Eric, I was wondering if you could give us a little color in terms of how much the Ohio market improved on a MCR basis, and then maybe if you could spike out how much of that was improvement because first quarter had flu?

And then how much is due to some of the efforts that you have been doing in that market?

Yes, as we looked at it, that measuring the impact of flu is very difficult.

So trying to quantify that is next to just about impossible.

But what I can tell you is, quarter-over-quarter the HBR improved in the 10 percentage points range.

So using an example, if it was 103 average last quarter, it is down to 93 this quarter.

Those were not the actual numbers, but so that you understand what I meant by percentage points.

We did see a pretty substantial reduction.

Certainly there was seasonality in the first quarter.

We see it, we see it every year.

We saw it in the flu season.

But we believe that given the level of focus and the new medical management efforts, the termination of the region, the termination of the provider in the Northeast; all of those we can clearly measure and show that the change in membership from those and the change that has taken place since those steps have had a positive impact.

So we would like to believe based on what we're seeing that a significant amount of it is due to those increased medical management efforts and case management efforts that we were talking about and the programs that were put in place in Q1 based on the results that we saw.

I think, Mary, did you have some (inaudible) you want to give to us?

Right.

Especially with the intensive case management and the prevention of admissions and readmissions, if you look at Q2 2007 and compare it to Q2 2008, admissions per 1000 are down 14.6%, days per 1000 are down 12.3%.

So we feel all our efforts in strengthening the core processes around care management and case management are working.

Scott Fidel, Deutsche Bank.

(inaudible) questions.

First, how do you plan to report the Celtic enrollment on the membership schedule, and how many members did you actually end up acquiring from that that will show up in the 3Q results?

We're not ready to announce the membership yet, but that will be reported as a component of our Specialty segment, so it will roll up to the Specialty segment.

And as we get to the third quarter, we will discuss in more detail Celtic since it will be integrated with the business and consolidated to that point.

But for now we will just wait until we get the third-quarter results before we give a lot of specifics around that, a lot of additional specifics.

Okay.

And then just relative to the Foster Care contract, you mentioned that that runs at a bit of a lower DCP.

Is that because you process more of the claims electronically or maybe just talk about the reason for that?

And what type of DCP does that business run at relative to the aggregate DCP?

Mainly just because of the rules around the program and Texas pays faster than generally the rest of our Centene entities, really no more than that.

Okay.

And then just thinking about EPS in the back half of the year, I know you're not giving quarterly guidance, but anything seasonally that we should think about in thinking about the 3Q relative to the 4Q in terms of maybe any budgeted investments or costs that you have or in terms of how the revenue streams that come online in terms of how 3Q might look relative to 4Q?

Well, we talked about the revenue streams from both Celtic and the new Arizona market.

As we sit here today, there are no unusual large things.

We continue to invest in our systems infrastructure that we talked about in our investor day.

As always, there is that fourth quarter we start to see some seasonality ramp that we saw last year.

Certainly last year we saw it more than in previous years, but I think you have to as you move into the cold and flu season, especially with your ABD population, you have to be concerned about that.

But beyond that, the only other things out there, again as I talked about, Georgia rates.

We will also have our Texas rate increase, but that does not come until September 1, so there's nothing really to report on that right now.

But those are really kind of the remaining impacting things as we move forward into the third and fourth quarter.

There are some small minimal costs associated with the startup of the Arizona plan effective October 1 at which we will be reflecting expenses in Q3 but are baked into and all part of our existing guidance (inaudible) around that.

And then just with the Celtic, does that look in terms of seasonality like what we typically see within individual commercial plan in terms of with the deductible ramp and then you see that, you know the pickup in utilization after people burn through the deductibles, and is that something to think about in terms of seasonality maybe more for '09 in the back half of the year, or is it just not that big enough to really move the needle much?

Jesse, do you want to --?

Yes, this is Jesse Hunter.

I think we are still working with Celtic on the impact and the comparison to the rest of our business with respect to the seasonality and other factors.

What we do know is that Celtic has continued to be -- has a history and continues to be conservative in the way that they quote their medical expenses.

So we have not seen anything adverse with respect to their performance in Q1.

And we are also now starting to work with them on other products and opportunities that tie into the uninsured population.

So some of what you traditionally have seen is the seasonality may shift a little bit.

Carl McDonald, Oppenheimer.

Could you comment on the M&A environment in Medicaid?

So willingness of sellers to sell in the current economic environment, where evaluations expectations are and where you would be willing to take the debt to cap?

Yes, this is Jesse Hunter again.

Obviously the acquisitions are an important part of our criteria, our growth criteria.

And yes, we continue to look at that in a disciplined way.

We have been through a handful of these various economic cycles in the past.

While there is some moderation I would say of activity in a downcycle, we do not -- we have not seen our pipeline dry up by any means.

We continue to have as we had said for a number of quarters now more things to evaluate than we can reasonably execute.

So we have not seem any adverse effects from the economics.

And, as we have talked about before, there is a possibility for increased (inaudible) membership and further growth opportunities in Medicaid in a down economy.

So we think that that continues to create opportunities longer-term.

This is Eric.

Just let me address the debt to equity or debt to cap question.

We talked about this at our investor day.

Certainly if an opportunity presents itself, we're not going to hesitate to do that.

In the short-term, we're willing to take on the necessary debtload for a transaction if it makes sense with the plan in the long-term to most likely when the stock gets to a point where we would issue equity to balance that back.

But certainly today we would not plan on as I indicated at the investor conference to issue equity given where the stock price is at.

But going forward as we look at deals again, we are not going to pass up anything that we see as a good opportunity.

So we're willing to take the short-term leverage on any type of transaction.

Alright.

And could you provide an update on the timing of the Amisys Systems realignment?

Sure.

That is in process as we speak.

A variety of things going on around that, including the conversion of multiple versions of Amisys to one version and then upgrading to the current version of the software.

That is ongoing, but it is expected to be completed by the end of Q2 2009.

So it is about a 15 to 18-month project all-in.

Greg Nersessian, Credit Suisse.

My first question was just the admin fees were down a couple of million bucks sequentially.

Is there something seasonal in there, or was there something contractual?

I guess what is the appropriate run-rate going forward for that?

You say admin?

Are you talking about G&A, just so we are --?

No, the admin fees, the service fees, they were $20.5 million in the first quarter, and they were 18.5 in the second quarter.

Hang on just the second.

The fee-based revenue.

Oh, service fees.

I'm sorry.

Excuse me.

You know nothing.

We have continually seen some decline there, mostly as we have lost a couple of corporate customers, large corporate customers in one of our specialty businesses that we continue to see some decline that is driving the year-over-year decline in that.

Is it the pharmacy piece?

No, mostly it is Nurture I believe, our health management business.

Okay.

Okay, and then there was an increase -- (multiple speakers)

(multiple speakers) if I may, that Nurture is still in the [steed] category, small business.

But we expect some volatility as we change and get our products right.

So that is not a -- that is to be expected somewhat.

So is that 18.5, that seems about right for a run-rate going forward?

Yes.

Okay.

And then there was a jump in the accounts payable on the balance sheet just sequentially.

Does that have to do with this change in the banks or (multiple speakers) what was that?

Yes, that is the -- approximately $30 million of that is due to that issue.

Because when we had to reclass that account, you basically increased your cash and accrue it in your accounts payable line item.

So $30 million of that change is due to that entry we had to make at the end of June.

Okay.

And then my last question was just I guess bigger picture.

We're starting to hear some rumblings about a second stimulus bill that includes an FMAP adjustment for state Medicaid agencies.

I guess if you could just comment on, in your conversations with the states currently, in the absence of any of that kind of federal relief, are you seeing states contemplating any changes to eligibility levels or anything like that that may impact your enrollment going forward or any benefit design changes that are worth mentioning?

No, the only thing we're hearing is more and more discussion about alternative approaches to covering the uninsured.

And there is a very high -- there's a lot of activity in that.

There is 25, 30 states that have some various legislation they are looking at in that area.

So the country, I think they are starting to figure that out, and I think we continue to be viewed by the industry as a part of the solution of saving some money.

So we have not heard anything specifically on states marketing are you aware of?

No, at this point we have not heard anything as detailed as a changing eligibility or benefit structure.

I think it is a little too early.

John Rex, JPMorgan.

Couple questions here.

First, could we have your early thoughts on the rate renewal process for Texas?

I guess that is coming up here, so non Foster Care Texas and just what your expectations are in terms of the net increases there?

Well, we don't tend to talk about the amounts.

We're in negotiations with the state at this point in time, and Eric, Mark, anything you want to add?

No, nothing else to add.

It is just ongoing negotiations, but we expect them to be ready by September 1.

And we have had the ability to work with the state constructively and with the (inaudible) approach they take.

We find that to be a very constructive approach, so we will just continue to work through as we have historically.

And then on Georgia, so I guess with draft rates in, if you are aware of those and with the net impact, is that sufficient to improve the loss ratio there?

Is it maintained?

Just kind of what is the broad view on the impact on loss ratio in that market with the rates that you have seen so far?

You know, there will be -- we're anticipating some improvement but modest, and we're still negotiating with the state.

So it is a little early yet to know how we're going to come out.

So I want to make sure I understand that correctly.

You said the rates are in CMS for approval, but then you said you're also negotiating the state.

Help me understand kind of where it is in the process.

Well, we have not been presented an amendment from the state, so there is no final agreement about what the rates will be.

We're still negotiating with them.

If it requires returning to CMS, then we expect that to happen.

I think what is important is the rates always helped, of course.

I mean it is (inaudible).

It is the medical management and the other things we have been doing in our state that makes the material difference in the margin.

So I think it is a combination of things, John, that (inaudible) and this is -- I mean it is all built into the existing guidance.

Okay.

And so it is fair to say then whatever you have seen in the draft rates in Georgia are consistent with what you had built into your expectation?

I would say -- we tend to look at it -- the benefit of the portfolio is.

I'm not going to disclose how we feel about what the state is talking to us about until we resolve it and finalize it.

I mean that is not a signal I want to send, that we want to send.

But I would say across our whole book of business, our average rates are reflecting our expectations.

And what is the last in South Carolina in terms of the fee-based businesses membership that you acquired there?

So it's kind of rolled -- this is all risk bases you are showing it now and I think we had fee-based before.

Help me understand kind of what is left to run that side?

Jesse?

Yes, as you recall, we acquired a couple of the fee-based or risksharing agreements.

At this point all of those members have been fully converted to risk, so there is no remaining fee-based business.

Okay.

So this is it.

And has there been -- when you think about that membership that you acquired, do you have a sense on kind of what you converted?

And then I assume this is a combination of conversion from what you acquired and also just new enrollment that you have added.

Is that fair?

That is fair.

I mean obviously -- (multiple speakers)

How would you think about what effectively converted from the acquisitions?

Well, I think we have talked about this at the investor conference a month or so ago.

And basically what we looked at is in the neighborhood -- I don't remember the exact numbers -- in the neighborhood of 18,000 members that they converted.

And when we looked at it, we also talked about what that meant from a net price perspective in terms of the acquired membership, which was 475,000 members.

Alright.

Okay.

Great.

Do we wish we had more?

Yes, but it turned out to be a very efficient way to enter the market.

(OPERATOR INSTRUCTIONS).

Matt Perry, Wachovia Capital Markets.

Just a couple of questions.

First, you have received a rate increase in Ohio, and it sounds like you're in negotiations in Georgia and Texas.

I know you don't want to disclose how those negotiations are going, but can you comment at all on whether the weak economy has had any impact on rate discussions in those states or any other states as you see it now?

You know, I was going to add to this, but typically we're focused on our utilization, on encounters and data, and what is required to maintain actuary sound rates.

And that is the focus we have been taking.

I think the state tends to be looking at it in that manner.

And so we're not seeing -- obviously we're sensitive to the economic environment.

A lot of the -- some of the income tax issues will continue to hit the state.

But the property taxes and things tend to hit more at the county and city level.

Some of the sales taxes at the county and city level.

So there's a combination of things there, but once again when you're part of the solution, that tends to help.

And then just the second and final question I have is Congress passed I think it was last week a Medicare bill which was previously thought might be very challenging to pass.

Do you have any kind of renewed optimism or a change in outlook about a SCHIP build getting passed anytime in the next several months?

I think to speculate -- our planning assumptions are that to do that pre-election may be difficult.

So we're not building a lot of SCHIP expectations into our planning assumptions.

At this time there are no questions in queue.

Well, I want to thank everybody for your time, attention and look forward to talking to you in another 90 days or so.

Thank you.

This concludes today's conference call.

You may now disconnect.