Centene Corp (CNC) 2009 Q2 法說會逐字稿

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

At this time I would like to welcome everyone to the Centene Corporation second-quarter earnings 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 will now turn the call over to Mr.

Kroll, Senior Vice President of Investor Relations and Finance.

Mr.

Kroll, you may begin your conference.

Thank you, Michele, and good morning, everyone.

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

Thank you for joining our second-quarter earnings call this morning.

Michael Neidorf, our Chairman and Chief Executive Officer, and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call.

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

A replay will be available shortly after the call's completion also at Centene.com or by dialing 800-642-1687 in the US and Canada or overseas at 706-645-9291.

The access code for both of those is 15407585.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the 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, July 28, 2009 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.

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

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's second-quarter earnings call.

I will briefly review some of the highlights of the quarter and then turn the call over to Bill Scheffel who will walk you through the financial details.

But first I would like to take a moment to briefly discuss Centene's view of the ongoing federal health-care reform process in Washington, DC.

We continue to believe that budget realities will ultimately limit reform driven changes to those that are affordable.

One cannot help but notice the influence of the conservative Democrats in the House and the moderate Democrats in the Senate to slow down the process and act responsibly in a financially disciplined and policy centric manner.

Recent public opinion polls show increasingly that Americans are wary of too much government intrusion in healthcare and of the higher taxes that would be necessary to fund it.

The focus must be access to affordable care for all.

Centene is an agile organization and we believe that we are well-positioned, as any managed care organization, to work effectively in a post-reform environment given our focus on helping underserved, vulnerable populations gain better access and cost efficient healthcare through our wide array of products due to our unique multi-line strategy.

Our new contract in Massachusetts offers evidence of our ability to meet the needs of different markets and customers in a dynamic fashion.

We are well versed in operating as a government contractor and, while there are no guarantees, it is difficult to imagine a type of health reform under which our skilled flexibility and focus will not be valued.

Importantly, if there is no [meaning] reform enacted under our current strategic plan we see a very long runway ahead of us to reach our growth targets and deliver better outcome at lower cost to our state customers.

As capital markets remain volatile we continue to stress the importance of being prudent balance sheet managers with a focus on liquidity and capital adequacy.

Strategically we will continue to build our multi-line strategy, coordinating efforts between our health brands and specialty companies to drive product innovation, continue to become a low cost producer, enhance our members' health outcomes and win new business.

We have significant new market opportunities; however, it is essential that we continue to maintain an abundance of conservativism and remain selective in our pursuit of these new opportunities.

Now back to the second-quarter results.

The quarter's performance demonstrates that the actions we began taking last year in an effort to produce more predictable earnings and achieve financial targets are working.

We had solid revenue growth in the quarter at 16.1% year over year and our risk membership grew in all states.

We added almost 42,000 risk lives in quarter two across all markets and have started to see a modest lift from higher unemployment and expanded CHIP eligibility.

We continue to expect average rate increases for this year in the low single digits and believe that increased FMAP funds should maintain rate stability in 2010.

We understand the strain this economic environment places on our state partners and we are committed to working with them to maintain access to quality care in the most cost effective manner.

Our consolidated HBR improved 40 basis points sequentially to 83.1% which is consistent with our usual seasonal pattern and essentially at the midpoint of our long-term expected range of 82% to 84%.

We did see an increase in outpatient service utilization for flu testing in the quarter due to swine flu concerns.

This was decidedly driven by a concern and not actual cases as nervous citizens reacting to media coverage visited their doctors.

Lower inpatient and pharmacy costs as well as ongoing medical management efforts offset these moderately higher outpatient costs.

We will be vigilant and proactive on the H1N1 front as CDC warns of a possible recurrence later this year.

Centene has a detailed response plan in place that was developed in 2006 during the bird flu pandemic to manage major disease outbreaks which allows us to be proactive rather than reactive in our actions.

We communicate and coordinate with providers, state and local agencies and our members as we continuously monitor the disease incidence in our markets.

A swine flu vaccine is likely to be available in time for possible recurrence and, if so, we will put all our efforts in to get our members vaccinated.

Turning to our general and administrative expense; the G&A ratio for the quarter was 13.9%, a year-over-year increase of 40 basis points and a 30 basis point sequential increase.

We maintain our focus on achieving G&A leverage, but the increase this quarter was due to the Massachusetts ramp up costs, the consolidation of access for a full quarter and the Celtic acquisition which only affected the year-over-year comparisons.

Now I'd like to highlight our newer growth drivers.

In February 2007 we began converting managed care membership in Florida from Access Health Solutions to our new subsidiary, Sunshine Health Plan on an at risk basis.

We began operations in South Carolina in 2007 where we first employed the strategy of converting lives to full risk.

The conversion process continues to go well in both of these markets, but, as we noted on our Q1 call, as expected, we experienced some member attrition in Q2 in both markets due to occurrence of a choice period for members.

Also as indicated on our Q1 call, we expect growth ramps in both states to resume late in the second half of 2009 as additional counties convert to risk.

We are pleased to announce that our CeltiCare Health Plan subsidiary had a successful launch and began serving low income Massachusetts residents enrolled in the Commonwealth Care program July 1.

Prior to go live Caritas Christi elected to withdraw from the CeltiCare joint venture.

Despite Caritas departure as equity holders they will remain an important healthcare provider in CeltiCare's network and a key stakeholder in Commonwealth Care.

Like most other states, Massachusetts is facing tremendous budgetary pressures as a result of escalating healthcare costs and broader economic conditions.

As a result the state recently announced to the healthcare reform program that it will initially slow the membership ramp for CeltiCare.

As a result we expect minimal enrollment in Massachusetts for the remainder of 2009.

CeltiCare was also awarded the Connector seal of approval for the Commonwealth Choice program.

Commonwealth Choice targets individuals, families and small groups who don't qualify for public health programs such as Medicaid, Medicare or Commonwealth Care.

This product line is consistent with Centene's strategy to offer innovative, affordable coverage solutions that will increase the continuity of coverage for all Americans as their income fluctuates over time.

CeltiCare is now participating in two of the three health coverage programs in Massachusetts.

We continue to believe that our experience in Massachusetts will provide us with a competitive advantage.

In Texas we recently were notified that we would be retained as a vendor for the rural CHIP program in that state.

The new contract is still subject to negotiations with the state, but will be or should be effective September 1, 2010.

Until that time we will maintain our status as sole vendor to Texas under our current rural CHIP contract.

As a reminder, we will not comment on our New Jersey transaction with AMERIGROUP as it is our long-standing policy to not comment on active litigation.

We appreciate your support and interest in our company and with that I will turn it over to Bill for the financial details.

Thank you, Michael, and good morning.

As I begin I would like to remind everyone that the financial results discussed will be in the context of continuing operations and therefore exclude our New Jersey health plan and also include the consolidation of the operations of Access Health Solutions in Florida beginning January 1, 2009.

Prior to January 1 Access was presented under the equity method of accounting and earnings were included in other income.

I would like to point out that beginning this quarter we have presented a subtotal for premium and service revenue in our income statement to better enable the readers to understand our revenues before the impact of premium taxes.

Premium taxes are an item we don't control and can vary from state to state, as I will discuss later.

We believe calculating the Health Benefits Ratio based on premium revenue and the G&A ratio based on premium and service revenues is a more conservative and representative presentation of these ratios.

For the quarter ended June 30, 2009 premium and service revenue grew to $931.3 million which is an increase of 16.1% over the second quarter of 2008.

Earnings per diluted share from continuing operations were $0.47 for the second quarter of 2009 compared to $0.40 in the second quarter of 2008.

This represents a 17.5% increase year over year.

The revenue increase was driven by significant membership growth in each of our states; the acquisition of certain assets of AMERIGROUP South Carolina on March 1, 2009; the initial conversion of Florida Access Health Solutions members to the full risk Sunshine State Health Plan model beginning on February 1, 2009; the commencement of the Arizona acute-care contract in Yavapai County on October 1, 2008; the July 1, 2008 acquisition of Celtic, the health insurance carrier focused on the individual health insurance market; and premium rate increases which have been in the low single digit range.

As you may know, premium taxes increased significantly in the second quarter from $21.5 million in 2008 to $108.2 million this year.

$84.7 million of this increase represents a pass through hospital assessment in Wisconsin which we recorded in the second quarter.

This assessment is in turn paid by us to hospitals in the state.

The second-quarter amount represents the total amount related to the state's fiscal year ended June 30, 2009.

We expect that the hospital assessment will continue in the future, but at a more normalized quarterly rate of approximately one-fourth of this quarter's amount.

Our consolidated Health Benefits Ratio, or HBR, was 83.1% for the second quarter this year, this compares to 83.0% for the second quarter last year and 83.5% in the first quarter this year.

The 40 basis sequential decline was a result of normal seasonality.

Although we did see increased outpatient expense attributable to swine flu concerns in the second quarter, it was offset by lower inpatient and pharmacy costs.

As indicated in the Health Benefits Ratio table provided in our earnings release, the Medicaid and CHIP health benefit ratio increased from 81.6% last year to 83.7% this year.

The increase between years is primarily due to a decrease in premium taxes in our Texas CHIP product.

While the premium declined our margin was not significantly impacted after consideration of the premium return to the state of Texas through their experienced rebate calculation.

The ABD and Medicare Health Benefits Ratio declined between years from 88.5% to 82.6%, which reflects improvements we have made in Ohio, such as exiting the northwest ABD market, and growth in other states, particularly South Carolina.

Turning to our general and administrative expenses -- the G&A ratio for the second quarter of 2009 was 13.9% compared to 13.5% in the first quarter of 2009 and 13.6% in the second quarter of 2008.

The 40 basis point increase from the first quarter is a result of the previously discussed start-up costs associated with the CeltiCare Health Plan in Massachusetts and transition costs incurred in Florida related to the upcoming conversion of members.

The 30 basis point year-over-year increase reflects the acquisition of Celtic, the consolidation of Access Health Solutions, and start-up costs associated with the CeltiCare Health Plan.

Our second-quarter investment and other income was $4.4 million, a decrease of $1 million year over year.

The year-over-year decline in investment income was due to an overall decline in market interest rates as well as the change in classification of Access Health Solutions' earnings which was included in other income under the equity method of accounting in 2008 and is now presented on a consolidated basis in 2009.

Our 2009 second-quarter effective tax rate was 37.2% compared to 38.9% in the 2008 second quarter.

The decline is consistent with the discussion during our first quarter earnings call where we indicated we expected a lower effective tax rate for 2009 as a result of lower state taxes and the effect of consolidating Access Health Solutions.

We expect this lower rate to continue in the second half of 2009.

Balance sheet highlights at June 30, 2009 include cash, cash equivalents and short-term investments of $445.7 million and long-term investments of $408.9 million.

At June 30, 2009 cash and investments held by our unregulated subsidiaries totaled $27 million and our regulated subsidiaries held cash and investments of $825.8 million.

At June 30, 2009 our subsidiaries, including New Jersey, had aggregate statutory capital and surplus of $431 million compared with the required minimum aggregate statutory capital and surplus requirement of $267.4 million.

We estimate our risk-based capital percentage to be 362% of the authorized control level.

Our total debt was $288.8 million and debt to total capitalization was 33.0%.

Our medical claims liabilities totaled $394.8 million at June 30, 2009, representing 47.5 days in claims payable.

This is an increase of 2.2 days from 45.3 days at March 31, 2009.

The sequential increase was driven by the timing of checks being processed for mailing as well as an increase in our claims processing inventory.

We expect days and claims payable to continue to fluctuate within our previously discussed range of 45 to 50 days.

For the quarter cash flows generated from operating activities were $38.7 million, approximately 2 times net earnings.

During the second quarter of 2009 we executed an agreement as a 50% joint venture partner in a real estate development entity, Centene Center LLC, for a development project which will include a new headquarters building to accommodate our growth.

In accordance with accounting standards we will consolidate the financial statements of this entity in our ongoing results.

The debt and property balances will continue to increase as the project progresses over the next 12 months.

With respect to guidance, we are increasing our estimates for 2009.

We expect premium and service revenue in the range of $3.75 billion to $3.85 billion and earnings per diluted share of $1.88 to $1.96.

During the second half of the year we are scheduled for rate increases in several states including Georgia and Texas.

While these adjustments are not yet finalized, we anticipate increases in the low single digits.

These rate increases will have more of a positive impact on the fourth quarter as the rate increases should be in place for the entire fourth quarter while only partially in effect in the third quarter.

In addition, as Michael indicated in his comments, during the third quarter we expect additional conversion of members from Access Health Solutions to Sunshine State Health Plan.

We expect the membership conversions to have more of an impact in the fourth quarter as more revenue from additional member months will be in place for the fourth quarter versus the third quarter.

With that we can open up the call to questions.

Thank you, Bill.

Michele, we're ready for questions.

(Operator Instructions).

Daryn Miller, Goldman Sachs.

Good morning.

A quick question -- I'm sorry if I missed this.

Did you buys make any comments on the duration effect?

Some competitors are seeing higher utilization and new lives coming to the Medicaid program?

We took a look at it and while there are a few basis points here and there in some markets there is nothing meaningful there.

We just -- we have not seen it to that extent.

I'll bifurcate that and distinguish -- where we have a brand-new market we enter, of course there you have a case of new members having not had any healthcare, a lot of pent-up demand there and that's why we book at 90% MLR for anywhere from two to three, four quarters.

But in the existing markets the additions we've seen, we've taken a look at it and we're not seeing it to any meaningful effect.

That's great.

Again, sorry if I missed this.

Did you guys comment on Georgia rates?

We did not.

We're still in negotiations with it.

We believe that the state is working hard to try and resolve it earlier all the time, but I'm not prepared to say if it's going to fall this quarter or next quarter.

But we should see it before the end of the year.

Would you expect that to be retro to July 1?

Yes, it will be retro to July 1.

Great, thank you very much, guys.

Gregg Genova, Deutsche Bank.

Good morning.

Can you talk about Wisconsin?

I know the state's talked about making some changes there, including changing -- putting the program out to bid next year.

Can you talk about what's going on there, what you guys are expecting?

We've been in discussions with them; the industry has been in discussions with them.

Nothing has been stated in terms of what they actually will do.

The last thoughts were an RFP to be effective for July of '10, which that's fine.

I mean, a lead of the states we have procurement where we do RFPs on an ongoing basis.

So that's what it is now.

Mark, is there anything you'd like to add to it?

Mark Eggert who heads up Health Plans.

The only thing I would add is the informal discussions we've had have centered on the southeast portion of the state.

So discussions of a reprocurement only for the counties in the southeast.

Okay, and is that a decent part of your membership there or not really?

It's probably somewhere just under [50]% of our total membership.

Okay.

And then can you talk about the new revenue guidance behind that, if there are certain markets, maybe Texas, that were strong or the reasons for the increase in revenue guidance?

Bill.

I think if you look at our second-quarter actual and you start annualizing that and look at the rate increases we expect to have in the second half of the year from Georgia and Texas, additional membership coming from conversion of members in Florida -- all of that is what leads to the numbers that we're currently giving out.

Okay, great.

Last one would be in com care, you said I think enrollment is going pretty be pretty much stagnant for the rest of the year.

Do you have maybe an enrollment that you have right now?

It's probably just a few thousand lives I guess, but maybe just where you guys are right now even though it's obviously very early.

It's very early, it's July 1 effective.

Of course we normally discuss membership at the end of the quarter, but Jesse, do you want to add something?

Right.

Gregg, I think Michael referred to some changes that are happening at the state level with respect of -- the biggest one being the temporary suspension of the auto enrollment feature for the com care product.

So that obviously has an impact on us as a new plan and as a low bidder where there was a preference for auto enrollment.

So at this point we're well under 1,000 lives.

Okay, thanks, guys.

And I want to come back to you on the Wisconsin thing.

The basket could be half full or half empty, it also gives us an opportunity to, if they do it to maybe see a narrow in and pick up more membership.

So it's a two edge sword, Gregg.

Thanks, guys.

Tom Carroll, Stifel Nicolaus.

Good morning.

A couple quick comments here.

Are you guys doing anything differently this year in preparation for a potentially higher utilization flu season related to H1N1?

I think we're doing a couple things.

One, we have our programs that we've had in place and we used earlier this year where the plans work with the physicians and a whole series of pandemic things I mentioned we did with the bird flu a couple years ago.

And so we are continuing those programs, we monitor it, work with the CDC as everyone does to understand where it is and put it in place.

We cannot forecast specifically, nobody can, what the total impact will be.

We can only be ready, have things ready, ensure that the Tamiflu and other things are properly used when needed, and be sure those that need it get it.

We're going to work on the vaccination programs and as the government defines how it's done, if it's through government offices we'll make sure people get there.

If it's through other locations just ensure that our population gets it.

The other thing we're doing that's really important is we've had in place policies and practices for our own offices if somebody gets exposed to the swine flu.

If somebody reported -- has happened in one of our markets.

We had the isolation program and just how to handle it so as to minimize disruption to our operations as well.

So we're ready to the extent we can.

We see normalized flu that comes in place late third quarter, fourth quarter and some in the first quarter next year and beyond the normalized type flu, which is built into our forecast but there's not a whole lot more we can do with that.

We need to consider there may be a little bit more testing.

We try to consider those kinds of things.

But based on what we saw this year it was minimal.

We looked at what the impact was in our markets and looking at CDC there were 12,000 -- approximately 12,500 incidents in our specific market that they report of confirmed flu.

But we saw the greatest impact in people who had concerns going for testing because they thought they might have it.

And our calculations looking at the CPT codes and things during that period was it was about $1.5 million of expense incurred there across all our markets.

And with the majority of that in Texas as the border state that people have the greatest concerns.

So we've looked at that every way we can and we're going to continue to do it in that fashion, Tom.

So it's fair to say that it's perhaps on the radar screen a bit more intently this year than it has been in prior years, is that fair?

Oh, sure.

It's there and what's important to us is we have to continue to estimate what's the impact of the testing.

Somebody thinks they have it, they're going to go get tested, it's probably $100 per test or something of that nature.

So you just kind of think that through and try to anticipate a reasonable level.

But beyond that just be ready.

And just as a clarification on the comment you made about Georgia and Texas, you said there were going to be rate increases, you just didn't know what they were yet.

But you are expecting a positive number, is that correct?

We're looking for modest single-digit rate increases in Texas, which is effective September 1 and to have a real impact in Q4 as to Bill's comments.

And Georgia is July 1 and the one year of course where we got really -- they didn't sign the papers until January, we'll never forget that one.

But this past year they got it in earlier, they recognize the impact it had and so we expect we'll see it late Q3, but as we think it through we see it in Q4 probably retro.

But again, the states have given you comfort that it will be a positive number as opposed to a slightly neg (multiple speakers)?

Yes.

Okay.

Mark, you've been in the negotiations.

Yes, I mean the discussions we've had with Georgia involve increases in the rate, very modest, as Michael said.

We're still working through it, we don't have any final numbers.

Excellent, thank you.

Greg Nersessian, Credit Suisse.

Thank you.

Good morning.

Just the increase in the premium taxes this quarter -- sorry if I missed that, but did you isolate I guess what state that's from or what that relates to?

Wisconsin -- Bill, do you want to comment, please?

We said Wisconsin instituted a hospital assessment.

During the quarter we recorded $84.7 million for that which essentially represented the entire amount for the state's fiscal year ended June 30, 2009.

We expect this to continue going forward, but we expect it to be on a more normalized quarterly basis where we would get roughly one-fourth of that amount each quarter going forward.

Greg, I'd comment that's why for several years now as I recall we have always reported medical loss ratio, G&A, net of those premium taxes and net of interest income because some states have varied amounts.

And so we want to be able to be as transparent as possible so that you can really see it and it's no different than ensuring that medical expenses are in appropriate coms, that type of thing.

So what would be the normalized run rate for premium taxes going forward?

Not just Wisconsin, but the whole -- the consolidated amount?

It will vary, it will vary by the states and the products of those states.

Some states still have -- I think there are some still with no premium taxes included in there.

Right.

And some states have 5% to 6% rates and some start, some stop.

But if you look at what we recorded this quarter, I would say three-quarters of the $84 million was from prior periods and that they paid us in the second quarter.

So that would be a more normalized amount.

So add that -- a quarter of the $84 million to what your previous run rate of premium taxes were?

Or take second-quarter's actual and take three-quarters of the $84 million out.

Okay.

If you think about it and you just -- if you just remove the premium tax from the calculations as we've given you the information to do it.

If we grow membership in Wisconsin or Georgia at a faster rate were there are higher premium taxes that's going to affect that column.

So if we grow faster in a state that has no premium taxes it's going to pull it down.

That's why it's hard to say the normalized amount; that's not something that we control.

Yes, I mean I was just trying to ballpark it.

It doesn't really affect the numbers anyway, so -- but I was just trying to ballpark at a model going forward.

Second question, the prior period reserve development and the roll forward was significantly higher, it looks like about $26 million higher sequentially on the rolling 12 month basis.

I guess could you isolate what that relates to?

That is I guess the highest level we've seen in some time.

Right.

I think that first of all I'd remind everyone that what does is we're demonstrating the reserve adequacy as of June 30, 2008 looking at it a year later.

So we think that the number has been higher than normal for two reasons.

First, that at June 30, 2008 we had reserves initially established related to new products for foster care and South Carolina and so those were conservatively set and have obviously developed positively since then.

Then second, what we've seen is we received a much higher level of payments from third parties for coordination of benefits.

We've been -- we've increased our efforts here over the last year to increase the payments that we receive from third-party payers.

And this has resulted in a significantly higher amounts of these payments which were not originally anticipated.

And so we would expect that going forward that our efforts to collect on third-party payer ordination of benefit amounts will continue and that really is what represents a lot of the increase between what would be a normal amount and what was recorded this quarter.

So, was it -- I guess could you quantify how much of the reserve development you reported this quarter you would characterize as not recurring as kind of a one-time benefit either related to those new markets or the coordination of benefits item -- that you wouldn't expect to continue on a normalized basis on a run rate basis?

I think -- and Bill, jump in here.

But if you look at it, what we've tried to do using the rolling four quarters is no different than if one looks at investments over quarters.

This is, as Bill started out, this is a look back at 2008 and it's just a confirmation that our reserving has been conservative.

And that does not impact specifically what we do this quarter, we don't look at that and say well, we have -- what it can do.

We just use the same methodology every quarter on how we reserve.

And so we will have a look next year at this time that will confirm that what we did in our normal methodology, because these are all estimates we do all the time, that, yes, we were adequately reserved at that point in time.

Bill, anything you want to add to that?

Yes.

Clearly with respect to the coordination of benefits those efforts are ongoing.

I think we probably benefited higher at this point in time because as we initially started those efforts they went back -- farther back than where we could recover since Medicaid is supposed to be the payer of last resort.

And so that amount is probably higher now than it will be going forward.

But that does not influence what we booked this quarter.

No.

We used the same methodology we've always used; we have three actuaries look at it; we have our -- so it has not changed at all.

The days claims payable [grew up] several days.

Those are discrete separate calculations -- one is just this look back as a confirmation.

And all it said is, gee, we were conservative and we understand why back in that period it was so much higher.

I guess my ultimate other question is you went into some new markets last year, which you know you had to appropriately identify, you had to be very conservative, you set your reserves in a conservative fashion and it's turned out that you were right, that those reserves were set conservatively and you've got the benefit of a look back period here now where you can say we didn't need that level of reserve conservatism and you're making an adjustment in this period.

I guess my question is that you're not viewing that as sort of a one-time thing related to those new markets?

You think that this level of reserve development is sustainable going forward?

Well, no, I think what we're saying is that we have a methodology we use every quarter for our reserving.

Now, a year from now we'll say how well we reserved this year.

And what we look at next quarter will be still a four quarter rolling average as opposed to one snapshot.

Right.

Okay?

So it does not impact -- we don't look at that and determine how we're going to reserve this quarter.

We book our reserves for this quarter based on what we see, on our [lag] tables and everything for this quarter and our IBNR.

And then later on, subsequent to all that being done, we run that number and that tells us, hey, we were good -- it's just a reassurance that we were more than conservative -- we don't know what it's going to look like for the next three quarters until we run it again next quarter.

And that would say it could continue, we may see it come off if we had turned out to be a little less conservative.

So it's -- Bill?

We continue to reserve on a conservative manner in new markets as we go into Florida and do these things, that's continuing.

And so which new market we're in in any one year changes, but the methodology continues to be the same and we would expect that to continue going forward.

We don't look at that at all.

You can't look at that and say gee, you had excess reserves a year ago so you can take it down now because we've been reserving every quarter since then.

And so, if you tried to make a judgment on what you did four quarters ago, you would be -- you could create real problems for yourself this quarter.

So you use the same methodology, that's nothing more than a confirmation of a year ago, that's the only value it has for us and for all of us that says we did a year ago what we told you we did.

Okay, thanks.

Matt Perry, Wells Fargo.

This is [Nicole Niesmith] in for Matt Perry.

All of my questions have been asked.

Thank you.

(Operator Instructions).

John (sic) Raskin, Barclays Capital.

It's Josh this time.

I apologize if I missed the question, but just wanted to hear swine flu, any impact that you saw in the second quarter and then any expectations for a more than normal or a higher than normal flu season in the fall?

Good morning, Josh.

We commented that we had looked and saw 12,500 incidents of flu in -- the CDC reported in our markets.

We looked at it and the only thing that we were able to find of any magnitude, other than normal medical expense, was about $1.5 million of expense that was coded as testing for the flu.

So there was nothing to show in the second quarter.

Going forward we commented that we have all our pandemic and epidemic policies, practices in place.

The medical management people are trained to work with the providers, they expect -- they know what to expect from us as we identify it.

And we have gone further, we have a program for the Company employees that works to do everything we can to protect them, our staff, and ensure continuity of service to providers and members.

And the $1.5 million coded as testing, did that come through as provider -- as physician claims or was that (multiple speakers)?

Yes, (multiple speakers) came through as physician expense.

Okay, so you've already (multiple speakers)?

And some lab expenses.

So you've already seen the visits though, so there would be no additional expense to be -- even if this was mostly in June you wouldn't expect more to come through?

It sounds like it was (multiple speakers).

I mean, it would be within the normal lags that we've built in there to reserve it and we've done for it.

We're cognizant that there will be a -- that they're saying there could be a worse flu season this year, maybe going into the second year.

But until things -- these things mutate or anything else we have some real experts on our Board, Tommy Thompson and others, that really have dealt with this for a long time.

So we're taking their advice on just how to go about it.

Perfect, perfect.

And then just a second question on the M&A environment.

I think a lot of reform discussion has talked about Medicaid expansion and I don't think there's anything certain in reform, but it certainly feels like most of the proposals include some form of growth and opportunity in the Medicaid space.

Do you see some of the smaller competitors of the local plan looking to access your scale, your size in terms of opportunities for the future?

Do you think there will be a more active M&A environment I guess over the next couple of years?

I think there's always a chance that we might be able to consolidate some of them.

But right now we have such a runway with opportunities and the knowledge we're gaining in working with the connector in Massachusetts really puts us in a strong position to talk to other states about how it works.

We think it's a model that makes a lot of sense because of the continuity of care and the continuum as people move through the different products, to be able to keep the same network is a real -- is a significant opportunity to contain cost because they're not changing doctors or something because they're in a different network.

So it's -- I think it puts us all and a very strong position, all this puts Centene where we would like to be.

Okay, thanks.

There are no further questions at this time.

You may go ahead with your closing remarks.

We thank you and we'll talk to you at the end of Q3.

Thank you.

This concludes today's conference call.

You may now disconnect.