Centene Corp (CNC) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Centene Corporation Q3 2008 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 Ed Kroll.

Thank you, Patrick and good morning, everyone.

I am Ed Kroll, Senior Vice President, Finance and Investor Relations at Centene Corporation and thank you for joining our earnings call this morning.

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

If you have not received it, please call Libby Abelt at 212-759-5665 and a copy 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 approximately 45 minutes and may also be accessed through our website at www.centene.com.

A replay will be available shortly after the call's completion also on centene.com or by dialing 800-642-1687 in the United States and Canada or 706-645-9291 from abroad.

The access code is 63471844.

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 October 28, 2008, today, 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.

Thank you, Ed.

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

The start time of our earnings call today is back to our usual time of 8.30 a.m.

Eastern time.

Our reporting date will remain in our historic pattern of the fourth Tuesday of the month following the end of the quarter, except for the year-end call.

We have posted these futures Centene reporting dates on our website for your convenience and to avoid future conflicts.

Before I comment on what we believe was a very solid quarter, I would like to offer some perspective on the US economy and financial system and state budgets and how Centene's business model and long-term financial prospects will be affected by both.

These are certainly extraordinary times that our nation is going through.

Financial markets have been roiled to a degree unheard of for almost 80 years.

The bursting of the housing bubble that has caused the disruptions in our financial system now seems to be pushing out our entire economy into a recession.

State budgets have already been feeling the pressure of lower tax revenues in tougher times.

What does this mean for a Medicaid-focused health plan company like Centene?

In times like these, we can add the most value to our state partners by managing benefits and services effectively and efficiently.

It means our state customers need us more than ever to help stretch their budget dollars further.

We are a lifeline, a safety net to ensure that disadvantaged people, and there will be more of these in a recession, have access to quality healthcare services in the most efficient cost-effective manner.

This is especially true in hard times.

Our team is dedicated to providing better health outcomes at lower cost.

This is not just a slogan.

It is our mission statement.

So we are rolling up our sleeves and will continue to work to fulfill our mission by helping our state partners meet their healthcare obligations to their citizens with innovative new products like foster care among others.

At the same time, we will make the case for appropriate and actuarially sound rates that, along with good medical management and G&A efficiencies, will enable us to produce consistent and adequate returns for our investors.

As Eric will indicate in his comments shortly, our balance sheet is strong, our cash flow robust and we are well-capitalized.

Economic slowdowns are never fun, but our business model is built to grow in good and bad economic times and we expect to do so in 2009 and beyond.

Now back to our third-quarter results.

We are pleased with the continued progress that our results showed this quarter in terms of better medical management that drove an improved HBR and our operating cash flow, which continues to be robust with the exception of all measures of earnings quality favorable.

It is gratifying to see the operating traction that our team has gained over the past two quarters and we are working hard to ensure these positive momentums will be maintained in 2009 and beyond.

Our revenue growth was once again solid in Q3 at almost 20% year-over-year.

It was mainly driven by full-risk enrollment growth that exceeded 10% on a year-over-year basis.

Our Celtic acquisition and rate increases across our book of business added to this.

On the subject of rate increases, we now have a fully-executed, amended contract with the state of Georgia that is approved by CMS and is retroactive to July 1, 2008.

So unlike last year, we will be able to fully recognize the first benefit of the first six months of the rate increase associated with the amended contract in the year it was intended for.

In this case, 2008.

Our consolidated HBR improved both on a sequential and year-over-year basis to 82.4%.

In addition to the improved medical management I just mentioned, in Ohio, we completed the previously announced appropriate steps to improve our margins there.

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 have been rationalizing our provider network in the remaining regions.

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'll comment on our recent Celtic acquisition.

After realizing an upstream dividend of just over $30 million concurrent with the July 1 close of the acquisition, Centene's net cash outlay for Celtic was approximately $50 million versus the original announced $80 million purchase price.

Our first quarter with Celtic as part of the Centene family has gone smoothly and as expected.

We continue to believe that this strategic acquisition positions us to be a leader in state-linked individual insurance programs.

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 solutions 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 system very nicely and offers new opportunities for our specialty businesses.

Now I will briefly discuss Texas foster care.

The second quarter of operation for our innovative foster care program is going quite well with enrollments slightly above our projections.

We continue to book this program at a 90% HBR and our objectives are being met as we anticipate continued performance within our expectations.

We are proud to have partnered with the state of Texas in creating this new operating model and its high-tech health passport, which allows providers and caseworkers to follow a child's medical care to a secure community health record.

We foresee our Texas foster care effort as a template for possible future launches in other states.

Our new Arizona contract commenced October 1 on schedule.

The early status reports are consistent with our expectations.

Before I turn the call over to Eric, let me revisit some important points about strategic fundamentals I made at our Investment Day back in June.

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

We remain focused and committed to enhancing profit margins to move back into our long-term target range of 4% to 6% on a pretax basis.

We want to continue to diversify our markets and products and grow both organically and through selective acquisitions.

We will continue to provide guidance in a manner that minimizes volatility and enhances visibility.

We appreciate your support and interest in our Company.

With that, I will turn it over to Eric.

Thank you, Michael.

Good morning, everyone.

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

While we still have work to do to get our consolidated profit margin firmly within our 4% to 6% target range, we believe that we are starting to gain traction on achieving our margin goals.

The groundwork we have laid in terms of better controls, new management additions and greater efficiencies are giving us confidence that we will achieve our margin goals and produce a more predictable profit stream doing forward.

Revenue, net of premium taxes, grew to $873.5 million, which represents 19.8% growth compared to the third quarter of 2007.

This increase was driven by several factors.

First, 2008 includes revenues from the April 1, 2008 startup of our Texas foster care contract; second, premium rate increases received in our health plans; third, membership growth in our Texas and Indiana markets; and finally, the recent acquisition and inclusion of Celtic in our financial statements.

Celtic, which closed on July 1, 2008, is included in our specialty services segment.

Revenue for the 2008 third quarter also benefited from a September 1 rate increase in Texas.

Centene received a gross rate increase in Texas of approximately 4.85%.

However, the majority of the rate increase was for state fee schedule changes.

Centene's effective annual rate increase after state fee schedule changes was less than 1% across all products.

Revenue for the 2008 third quarter does not include the effects of a planned Georgia rate increase that we had expected to be effective July 1.

The July 1 Georgia rate increase was approved subsequent to September 30 and therefore, the associated revenue for the 2008 third and fourth quarters will be recorded in the fourth quarter of 2008.

The amount of the annual rate increase after the effect of fee schedule changes was approximately 1.3%.

Our consolidated HBR was 82.4% for the third quarter of 2008 compared to 83.4% in the 2007 third quarter and 83.3% for the 2008 second quarter.

The 100 basis point improvement in HBR year-over-year in the third quarter resulted primarily from increased premium yield across all health plans, better medical management results in Georgia and Ohio, the exit from Ohio's Northwest ABD region as of July 1 and the first time inclusion of Celtic, which operates at a lower HBR than our other existing businesses.

The launch of Texas foster care adversely affected our year-over-year HBR comparison as we book all new contracts at conservative HBR levels in their early stages.

The April 1 launch of Texas foster care was very successful and it continued to perform in line with our expectations during the quarter.

The Texas foster care program had approximately 34,100 members at the end of September 30, 2008, slightly above our expectations.

The HBR improved 90 basis points sequentially from 83.3% in the 2008 second quarter to 82.4% in the 2008 third quarter.

The sequential decrease is consistent with the year-over-year drivers of improvement in that it reflects moderating medical cost trends, focused medical management efforts in Ohio, the exit from Ohio's Northwest ABD region on July 1 and the acquisition of Celtic.

In addition to the positive impacts from the exit of the Northwest ABD region in Ohio and the provider termination in the Northeast region, we are pleased that our medical management efforts have favorably impacted our HBR in Ohio in the third quarter.

We experienced moderation in our medical costs for the quarter with our overall Ohio HBR improving from the second quarter.

This drop in HBR was aided by an increase in our Northeast region risk score as we are the only ABD plan in that region.

We are in the process of working with the state in evaluating the proposed rate increases for January 1.

We anticipate that we will be able to continue to operate effectively in Ohio.

Turning to general and administrative expenses, the G&A ratio for the third quarter of 2008 was 14% compared to 13.7% in the third quarter of 2007.

This 30 basis point increase in the G&A ratio is primarily due to the first-time inclusion of Celtic, which carries a significantly higher ratio as a consumer-focused health carrier and certain ramp-up costs for our new Arizona contract were included in the quarter.

The G&A ratio increased 50 basis points sequentially due to the same factors.

Our third-quarter investment and other income was $2.2 million, a decrease of $4.2 million over the 2007 third quarter and a decrease of $3.4 million sequentially.

The sequential decrease in the third quarter was due to a loss on investments of $5.2 million.

As previously announced in an October 14, 2008 press release and 8-K filing, the loss on investments represented less than 1% of Centene's investment portfolio as of September 30, 2008 and were primarily related to investments in the Reserve Primary money market fund whose net asset value fell below $1.00 per share due to its holdings of securities of Lehman Brothers Holdings Inc.

Redemptions from the Reserve Primary Fund have not been distributed, but we expect to recover approximately 95% of our Reserve Primary Fund investments and have more than adequate liquidity to fund operations in the meantime.

In addition to the $5.2 million loss on investments, the year-over-year decrease in investment income reflects overall declines in investment interest rates due to Federal Reserve actions offset by favorable earnings of unconsolidated subsidiaries resulting from our investment in Access and overall higher investment portfolio balances.

Our 2008 third-quarter effective tax rate was 40.4%.

The increased tax rate in the third quarter resulted from higher state taxes due to a change in the estimated benefit to be realized from certain state net operating loss carryforwards.

Earnings per diluted share from continuing operations were $0.41 for the 2008 third quarter compared to $0.37 in 2007, an increase of 10.8%.

As we previously disclosed, the $0.41 was reduced by $0.07 due to the $5.2 million loss on investments recorded in the third quarter.

Balance sheet highlights at September 30, 2008 include cash and short-term investments of $435.7 million and long-term investments, including restricted deposits of $319.1 million.

At September 30, 2008, our holdings in the Reserve Primary Fund are classified as short-term investments.

These holdings are spread across several of our regulated subsidiaries as part of each subsidiary's diversified portfolio, negating liquidity concerns in any one subsidiary.

At September 30, 2008, our investment portfolio consisted of approximately 53% high-quality municipal securities, 19% money market funds, 12% of US government or government-sponsored obligations, 11% investment-grade corporate fixed income securities and 5% of equity investments and insurance contracts.

As we have previously announced on October 14, our current exposure to securities of financial services entities, such as banks, broker-dealers and other non-bank financial firms, is approximately $15 million.

Of this amount, less than $2 million represents securities of financial sector names that are experiencing unusually high levels of stress, idiosyncratic risk and/or funding pressures in the current market.

We continue to monitor these securities for divestiture or impairment.

At September 30, 2008, cash and investments held by our unregulated subsidiaries were $26.8 million.

Our regulated cash and investments were $728 million.

We have estimated our regulated capital and surplus to be at approximately 335% of risk-based capital or RBC requirements.

Our total debt was $250 million and debt to total capitalization was 34.4%.

Our medical claims liabilities totaled $379.9 million, representing 49.6 days in claims payable, an increase of 1.1 days from 48.5 days at June 30, 2008, mainly due to the Celtic acquisition.

For the quarter, cash flows generated from operating activities were $39.8 million, approximately 2.2 times net earnings from continuing operations.

That concludes my comments on our third-quarter results.

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

Despite the effects of the loss on investments in the third quarter, we will not revise the lower end of our previous 2008 EPS guidance range.

With one quarter of reporting left in 2008, we are tightening the previous EPS guidance range and we currently expect 2008 fully diluted earnings per share to range from $1.87 to $1.92.

We expect the revenue in the range of $3.39 billion to $3.41 billion net of premium taxes.

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

Finally, I want to make a couple of comments about 2009.

We plan to provide our 2009 financial guidance in December consistent with last year.

We will be scheduling the guidance release call at a later date.

I also want to remind everyone that the $20.8 million of premium revenue and $0.28 of diluted earnings per share that Centene realized in the 2008 first quarter from the 2007 Georgia retroactive rate increase should not be part of the 2008 earnings run rate that one would use as a starting point to develop 2009 financial estimates.

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

(Operator Instructions).

Josh Raskin, Barclays Capital.

Hi, thanks, good morning.

Eric, you mentioned -- sorry, Michael, good morning.

You mentioned the Georgia retro rate increase, so you're going to get, it sounds like, two quarters of revenue in the fourth quarter.

Obviously, that all pertains to this year, so I would consider that run rate for the year, but what is the expected impact in terms of revenues and EPS, I guess, for the fourth quarter?

I think, on a gross basis, the per-quarter revenue -- yes, it is around $3 million a quarter on a gross and remember, in my discussion, I gave you the net impact.

That equates to around $0.02 per quarter EPS.

Okay, perfect.

I'll figure out the math after.

And then second question, just in terms of the Celtic acquisition, anyway to quantify some of the impact in the quarter in terms of maybe a revenue number?

Obviously, an MLR would be great or even a pretax contribution and if it was accretive.

Yes, let me start with revenue.

Revenue for the quarter was around $21 million.

As we previously disclosed, we did not expect this thing to have a significant earnings impact.

However, I will tell you it was profitable in the quarter.

The MLR runs at a much different level, in the 65% to 66% range in that individual business and as I indicated before, the G&A runs significantly higher primarily because they pay commissions, which are included in G&A.

I would say, Josh, it is meeting our expectations.

Okay, so sort of everything is coming in line at this point?

Yes.

And then just one last question on the investment portfolio, was there any unrealized loss position at the end of September, other than, obviously, the realized amount that you took?

Yes, well, there is actually unrealized loss and unrealized -- we have a net unrealized gain.

We actually disclosed this in our Form 10-Q this time in the footnotes given the sensitivity around this area, so you will find a full disclosure in there.

But it nets -- with the unrealized gains, unrealized losses, they net to about a $500,000 positive unrealized gain.

Wow.

Okay.

That's very helpful.

Okay, thanks.

Brian Wright, Banc of America.

Thanks, good morning.

Can you update us on the number of Celtic members?

It is right around 30,000.

Great.

And then just one quick question on the premium taxes in the quarter.

Why is it higher in the medical cost side than on the revenue side?

Yes, that actually has to do with Celtic also.

Celtic, because they are not funded by a state, they don't have premium tax revenue; however, they do pay a premium tax expense.

So with an inclusion in Celtic in our financials now, you're always going to have a slightly different amount on the expense side.

Okay great.

Brian, in the interest of transparency with Celtic in these economic times, you will find that the membership is constant and growing, but they are selling less expensive products.

So that is why you will see where the membership can grow, but the revenue will be impacted.

So the PMPMs will probably be coming down then?

Well, I think they have to the level that they will be, but just in terms of creating the expectation, its membership is solid, but the product mix changes based on economic times.

Okay, all right.

Thank you.

Tom Carroll, Stifel Nicolaus.

Hey, good morning.

A couple quick questions.

Could you tell us what your starting point in terms of enrollment is in your new Arizona business?

And then secondly, as we start to think about next year, what is the status of the Texas EPO business that you guys have had for a couple of years?

Do you have a sense of what Texas wants to do with that into next year?

Yes, I will talk about the membership.

About 14,000 lives is the starting point.

The EPO is out, so an RFP is required.

It will be our business through 2009 and they are talking about an effective date for the new contract is probably Q2 of '10.

It is quite -- they are talking about possibly two participants as opposed to one, but that is still yet to be determined.

So we are responding to the RFP.

We have a strong history having done well there with providers in the state and we are confident we will continue to be a strong participant (inaudible) beyond 2009.

Thank you.

Greg Nersessian, Credit Suisse.

Hey, good morning.

My first question was actually on US Script.

The cost of services line this quarter -- I usually look at that as a percentage of the service fees -- and it declined sequentially to 71%.

It was 78% in the prior quarter, but there was a decline in the third quarter last year as well.

Just wondering, is there seasonality to that ratio and I guess on that business, what is an appropriate sort of run rate for maybe pretax contribution from US Script going forward?

Do you want to ask Bill Scheffel on that?

I don't think we really give numbers on pretax contributions by subsidiary, but the basic difference in the cost of services between quarters is a slight decrease in the external customers' revenue and there is some seasonality to that, but some of that is just loss of a few customers.

But the actual ratio declined significantly sequentially, so does that mean you are losing some of the higher-cost customers or is that a seasonal effect?

There could be some seasonality to what the margins are by quarter and the [brand and generic splits].

Okay.

And then it looks like you have about -- maybe a little under $70 million of debt out on your revolver, but it sounds from your press release that maybe you are more inclined to use that excess capital to buy back stock.

Could you talk maybe a little about capital deployment and your thought process between buying stock or paying down some of your --?

Let me first off -- the comment about -- the outstanding revolver is approximately $40 million.

You have our bonds and our debt portfolio of 175.

We have some small real estate loans and then the revolver is right at $40 million.

Deployment of capital in this environment -- we talked about how we are deploying capital at our Investor Day and we're continuing to monitor.

As we said there, we believe we have sufficient cash flow to fund all of our internal capital requirements and any small acquisitions that we might make.

There has really been no change in that plan.

We believe we have access to funds through our revolver as needed and again, sufficient cash flow for operating purposes moving forward in this environment.

Okay.

And then just my last question on -- looking at the claims inventory data that you provide, looks like the average inventory increased significantly on a sequential basis, but the period-end inventory actually declined.

So was there a significant paydown of Celtic claims during the quarter and how might that have impacted cash flow?

There has been no significant paydown per se of Celtic claims.

It fluctuates quarterly, but really nothing specific.

We have had no reduction of claims reserves as we talked about in the days claims payable.

Celtic does run a much higher days claims payable, upwards of around 90, which is what drives the impact in the days.

Okay, thank you.

Carl McDonald, Oppenheimer.

Thank you.

First question was just around the capital in terms of what you expect from subsidiary dividends in 2009 and what you think you will actually have to use from a deployment perspective and net of what needs to stay in the subs for the enrollment growth.

Yes, as far as 2009, we haven't made any decisions around dividends.

In 2008, we had basically two dividends -- a $17 million dividend from Wisconsin and then the dividend that Michael referred to from Celtic postclosing of approximately $31 million.

But again, we don't necessarily anticipate them at this point for '09, but we will look at activity across the business and make those determinations as necessary next year.

And then the second question is just an update on the systems.

I will call it a conversion exactly, but where we stand there?

Yes, and I talked about this at the Investor Day, so let me kind of set the framework of that.

At that time, we talked about really three operating systems' projects that we had either started or were getting ready to start.

The first of those was a new provider contracting system, which was underway and was being essentially implemented at the time in the first market, first one of our business markets.

The second system was a new provider data management system, which was really just in the early planning stages at that time.

The third is our Amisys, what we call upgrade and conversion of multiple versions down to a single version, which, at the time, was in the very, very, very early starting phases.

We initially, when we looked at these, had talked about a completion somewhere around mid-2009.

As we have gotten into this and we have looked at it, especially around the Amisys upgrade project, and look at how these three big projects intersect with each other, how they impact the business in order to ensure a successful implementation of all of these and minimize the risk on the business, we have pushed the timeline out for the Amisys upgrade where some of the smaller markets will now be pushed out to the first half of 2010.

And of those 14 systems that you started with, where are you at this point?

Well, the Amisys is still in the early -- it's still in the planning phase.

We started that, literally the planning, which involves a lot of different components of this project and so that was just started at around the Investor, so we are in the planning -- we are still in the planning and design.

There has been no implementations at this point.

I think what is important, Carl, we learned a long time ago it is not how fast, but how well, and we are going to do it market by market as opposed to trying to do a full, one-time system.

We watched -- some of you will remember when some other companies tried that.

They threw the switch and the lights dimmed.

So we are being very cautious and being fairly upfront.

So it may take an extra six months, but we are confident it will be done that much better.

Great.

Thank you.

Scott Fidel, Deutsche Bank.

Thanks, good morning.

First question, it just looks like Indiana enrollment showed a pretty nice spike sequentially, up around 7%.

Any particular factors driving the enrollment increase there and have you essentially completed the corrective action plan that you had around some of the provider re-contracting in that market?

I will ask Mark Eggert to respond to that.

Yes, we have made a concerted push for membership growth in Indiana and it is primarily driven by reaching out to additional primary care providers and contracting with them.

Was that in any particular regions of the state or pretty much across the state?

Across the state, a little more in the South, but across the state.

Okay.

And then just on the capital position, do you have the actual absolute numbers in terms of where your total capital stands and then relative to that minimum statutory requirement?

And just to clarify, was the 335% of minimum RBC, was that at the end of the third quarter or is that your expectation for the end of the year?

No, that was at the end of -- that is the end of the third quarter measured at September 30.

Okay.

And then any color on the absolute numbers?

The actual numbers was $368 million.

Of total capital or excess?

Statutory capital.

Okay.

And then just a question -- I know on '09 you are not giving guidance yet, but do you have any visibility into essentially how many of your member months or your states, at this point, have established the rates for 2009?

At this point, as I mentioned in my script, the only ones that we're having early discussion with at this point is Ohio given the circumstances there.

Beyond that, we have no visibility into any other '09 rates at this time.

Then just one last question just around Ohio sticking in the Northeast ABD market.

Have you had a chance to look at essentially how your membership profile in that market compared to WellPoint and WellCare, who are both exiting in terms of -- do you expect any real shifts in the demographics of the members or do you think all three of those books look pretty similar?

I think -- I'll let Mark add to this, but us being the remaining plan, they now have fee for service and ourselves right, Mark?

Correct, that's correct.

So that a lot of that membership probably shifted to the fee for service, which is fine.

Okay, thank you.

John Rex, JPMorgan.

Good morning.

Just thinking about the '08 run rate again, so your comments on George, Georgia activity, are there any other items that you would spike out in terms of kind of headwinds, tailwinds and thinking about the appropriate run rate for '08 so that has become maybe a drag from Texas or Arizona startup systems integrations, any things that you would spike out there?

No, that's really -- everything is kind of assumed in the guidance range that we have revised.

I would think if you would look at third quarter, obviously, you have got the $0.07 you are going to add back.

I think this one-time tax NOL would come out of a run rate-type of calculation.

And then, obviously, the shifting of the impact of Georgia from Q3 to Q4, you would take that into account and then finally, then you have got to take in seasonality of the fourth quarter against that run rate number.

Would you pull out any drag from Texas or Arizona startup for '08?

Yes, Arizona was so insignificant and Texas has been started, so nothing -- it's just not a significant impact.

Okay, great.

As we have talked about, John, in the past, smaller opportunities we are building into our planning process.

We have heard what people said, so within our numbers, it is planned and it is there.

I guess I just want to make one other comment.

I have seen some of the items this morning and I understand in some of the comments, my revised guidance was $1.87 to $1.92, but given the $0.07 impact people have taken and added $0.07 do that, I understand how they got there.

I just want to remind everyone that when we post year-end results, if you keep those upper guidance ranges that have added $0.07 to my number, you will need to add that $0.07 to my annual results to compare to your range.

All right.

So kind of given what you said and how you have guided for the 4Q, I guess we should be thinking about kind of your run rate for the '08 as around about $1.70 or so.

Does that sound about right?

That would probably include the $0.07.

You have got to take the $0.07 out I think.

I guided to $1.87 to $1.92 all in.

Okay.

And I was just pulling out -- I am pulling out the Georgia retroactivity.

Yes, I understand.

Okay.

And then if you think about opportunities for '09 that you are looking at, maybe I'd actually appreciate just a little color on some of the things you are seeing for '09, and then in light of the current economic environment, are you still comfortable with your 15% to 20% long-term growth outlook?

I will ask Jesse to respond to that.

Yes, I think I'll take the second one first.

We talked at the Investor Day about our long-term view of 15% plus growth and we have continued to spend a good amount of time focusing on that.

I think we have talked before about where we are with respect to that target based on the things we know today.

So we continue to be targeting 15% growth and that is true in '09 and we will continue to target that thereafter.

In terms of opportunities, I think Michael alluded to some of this in his opening comments.

We certainly see -- on the development side, we certainly see this as an opportunity.

I think the pain that states are feeling on the economic side today is going to, I think, create more demand for our products and services going forward.

So I think some of those things will have a little bit longer time horizon on them, but I think we certainly are continuing to pursue discussions with our existing state customers and potential new state customers based on the broad array of products and services that we can provide.

And we are excited about the prospects that they can provide, not necessarily how we get there, but I think we are excited about where we could end up.

Okay, thanks.

(Operator Instructions).

Daryn Miller, Goldman Sachs.

Good morning.

Eric, a question for you.

I know we saw improvement in Ohio.

Can you provide a little bit of color just in terms of sequentially how much MCR improvement we saw?

Yes, give me a minute here.

I can give you a little color on that.

On a HBR percentage, we are down -- I am just looking at my numbers here to get you a consolidated is the way we look at it.

We saw fairly significant improvement from Q2, around 300 basis points.

Great.

And can you provide any updated expectations in terms of enrollment in South Carolina and Florida for year-end?

Yes, I think, for Florida, we are still in the discussions with the states and not prepared to comment on that given kind of status of those discussions with respect to year-end.

South Carolina, we are just under 27,000 at risk, full risk lives.

In the third quarter, we expect to continue to see modest, consistent growth on that number going forward.

I think we have talked before about long-term targets in South Carolina, 10% to 15% of market and I think those -- we continue to be comfortable with those long-term targets.

What would the actual enrollment number be at 10% to 15%?

Well, the total market there is approximately 650,000.

Okay.

And then Jesse, another question just as we look out at some of the opportunities you see maybe with existing state customers or new states, can you spike out some of the more interesting or likely opportunities you see one to two years out?

Not anything that would kind of wet your appetite.

I think the one thing that I would continue to say, consistent with what we talked about at Investor Day, the demand that we see from our state customers is more focused around the higher cost populations.

So I think we continue to see opportunities on the managed ABD and long-term care side.

That is an opportunity in a number of our existing markets and I think we are seeing that in new potential markets as well.

Do you think we are more likely to see that in your existing states?

I think that is a pretty broad kind of demand that we are seeing at this point.

Great.

And then Eric, one more question for you.

The Texas rate increase, is that effective 9/1?

Yes.

Perfect.

Thank you, guys.

This will be the last one, operator.

Tom Carroll, Stifel Nicolaus.

Hey, just a quick follow-up on Greg's question, I think it was on the claims inventory.

If I look back to 2007 and look at the trend from second into third quarter, your average inventory of claims rose sizably last year, as well as it did this year.

So I guess could you chat about what seasonally is creating that increase in the average inventory?

Is it an average dollar size per claim that maybe hits a certain threshold that causes you to [pend] it to evaluate them a little further or something like that?

Well, I can speak to this year.

Certainly, you have got growth of business and membership drives this, but we did see a spike in pends this quarter.

With the implementation of the MPI process, we saw a significant number of providers that had challenges filing claims under the new MPI process that went into effect in the late part of the second quarter.

As a result of that, we saw significant spikes in pends and pend activity, so that is attributable to the issue here in this quarter along with, like I said, just general increases because of membership increases.

Okay.

So you wouldn't suggest that the average dollar value per claim has gone up by some large, unusually large percent?

No.

No, we wouldn't.

Okay, thank you.

Thank you, everyone for participating and your interest and we will see you I guess the first weekend of February on our year-end call.

Thank you.

This concludes today's conference call.

You may now disconnect.