Centene Corp (CNC) 2009 Q3 法說會逐字稿

Good morning.

My name is [Chrissy], and I will be your conference operator today.

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

Thank you.

Mr.

Kroll, you may begin your conference.

Thank you and good morning, everyone.

I am Ed Kroll, Senior Vice President-Finance and Investor Relations for Centene.

Thank you for joining our Q3 call today.

Michael Neidorff, Centene's 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 about 45 minutes and may also be accessed through our website at Centene.com.

A replay will be available shortly after the call's completion, also on our website, or by dialing 800-642-1687 in the US and Canada, or 706-645-9291 from other countries.

The access code for both of those is 30957978.

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, October 27, 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.

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

Michael?

Thank you, Ed.

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

Before I begin to discuss the highlights of the quarter, as has become our practice, I would like to take a few minutes to provide updates on our view on healthcare reform, overall medical cost trends, H1N1 flu, and the rate environment.

Speculation about healthcare reform and its potential impact on the managed-care sector continues to dominate investors' and analysts' discussions and comments.

The resulting uncertainty has continued to weigh on the nation's consciousness and all stocks in our group.

At Centene, we continue to believe that the federal health reform should focus on expanding access to the uninsured and under-insured quality enhancements like DRE and increasing overall efficiencies.

Whatever the outcome, we firmly believe our Company is well positioned to successfully operate in a post-reform environment.

We have a competitive advantage that our multi-line strategy affords us through diversity, innovation, and cost-effectiveness.

Congress still has much work to do to sort through the mirage of various bills in the Senate and House.

It is still too early to know what the specific outcome will be.

However, many proposals do read positively for Centene with the opportunity of membership growth.

For example, expansion of state Medicaid programs or creation of exchanges in states to help citizens gain easier access to affordable quality health plans are both pertinent to us.

Our extensive Medicaid health plan business and unique exchange or connective experience in Massachusetts should serve us well in any reform scenarios like those.

The inclusion of Drug Rebate Equalization legislation, or DRE, is another favorable item for us.

DRE will allow the MCOs the ability to manage the all important therapeutic side of patient care while yielding significant savings to both the federal and state budgets by ending the exclusion of managed care from the Medicaid drug rebate.

Other aspects of the reform debate are not so favorable, such as talk of a $6.7 billion excise tax to possibly be borne by the managed care industry.

It is still unclear if Centene and other Medicaid managed care organizations will be subject to this proposed tax, given concerns about actuarial soundness or in fact if the proposal will survive the debate at all.

We continue to monitor events in the Washington D.C.

closely and work with our trade groups as well as through our own Washington office.

Next, I would like to address another concern among investors and analysts, that of deteriorating medical loss ratios.

At any given time, there will be something that affects or impacts the health benefits ratio, and it becomes a function of the severity and how it is managed.

One can simply report it or attempt to manage and influence it.

We prefer the latter.

Our sequential HBR increase is clearly explained in our earnings release.

It has been noted that elevated loss ratios are due to the following reasons -- pent-up demand for healthcare driven by newly unemployed people joining Medicaid health plans; secondly, revenue enhancement schemes (inaudible) perpetrated by providers in Medicaid that seek to offset their recession-related commercial shortfalls; third, the H1N1 flu; and finally, a difficult rate environment due to tight state budgets.

I would like to take time to State Centene's experience on this matter.

The H1N1 and the rate environment are viable issues.

We are vigilant in preparing and coordinating with the state and local health departments, providers and other members to mitigate the effects of both the fear and actual incidence of H1N1.

Centene's proactive awareness-building program, Fluvention, is underway with a special outreach to high risk groups for H1N1.

These include pregnant women, children from 6 months old and up to 24-year-old adults, as well as adults with chronic health conditions.

We will provide more information on fluvention in a separate press release over the next couple of days.

As Bill will mention shortly in his comments, we have further bolstered our reserves to cover the anticipated greater flu costs in Q3.

While we have considered increased flu costs in our year-end guidance, we are not forecasting at the widespread pandemic level.

While incidence of flu is expected to be materially greater, the severity of a case has been generally projected to be milder.

It is our philosophy that reserves or for what has happened in guidance is for what you believe will happen.

The fact that the rate environment is tight is not a new concept for us at Centene.

We have been working with our state partners for some time to help them gain more efficiencies on the cost side of Medicaid, including by greater use of our cost-effective multi-line specialty companies.

For 2009, our average rate increases are in the low single digits.

Our rates were recently finalized at 2% to 3% level in Texas and Florida, both effective September 1, and Georgia retroactive to July 1.

Our early read on 2010 is to continue to expect a tight rate environment.

Some states will be better than others, but on average we believe that SMAP should maintain rate stability in 2010 and our average rate increase should remain in the low single-digit area.

However, the assertions that pent-up demand and provider upcoding or bundling are industrywide, in the intimation these are new phenomena that all MCOs will ultimately succumb to is another matter.

The geographic footprints of the Medicaid MCOs are not identical, and management discretion and execution are critical to successful medical cost management.

The pent-up demand for medical care for new members has always been a factor in our business and something that we have used -- and are used to when we enter new states.

We have taken a comprehensive look at our claims data and are not seeing any meaningful change in the historic pattern, nothing more than a few basis points here and there.

Now, I will bifurcate that and distinguish between new markets with members not having any prior coverage, where we took the lead years ago by booking in new markets at a conservative 90% HBR for anywhere from two to four quarters.

Our new members in existing markets have historically proven to be higher than average utilizers and we reserve for them accordingly, but we have not seen any meaningful change in the historic pattern in existing states on either front.

One change we have noticed recently is that our members seem to be staying with us a bit longer, possibly due to the recession.

For example, we have seen an almost 10% increase in members with us at least nine months.

This longer retention could help smooth out HBR by spreading the cost over a longer period.

Our IBNR methodology is done using date received, also used by certain of the larger MCOs.

This has taken years to develop and we find it to be superior to paid claims triangles.

Finally, on provider upcoding issue, this is not a new phenomenon.

It has been around a long time.

We have not seen a recent increase in these activities from historic levels.

Contracting methods can be significantly different among MCOs.

For example, Centene has predominantly fixed-rate contracts for inpatient and generally avoids percent of bill charges inpatient (inaudible) contacts, which are especially volatile and difficult to predict.

Also, we generally use only two tiers of emergency department claim coding for two-thirds of our ED volume, unlike other companies that use five, which is subject to greater exploitation.

Finally, our internal PBM gives us real time to update it that can serve as an early warning sign of outpatient utilization trend variances.

We use code review systems and are recognized by providers for it.

These are constantly updated and in fact we are rolling out a previously scheduled new version as we speak.

This, combined with activities of our fraud and abuse department, help mitigate the issue.

We want to be managers of medical costs, not victims.

I will now 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.

Our third-quarter results demonstrate that our focus on fundamentals approach continues to drive positive operating momentum.

Operating revenue was strong at 18.1% year-over-year, and our risk membership grew in all states.

Sequentially, we added over 97,000 at-risk lives across all markets.

Year-over-year, we grew risk lives by over 18%, adding over 215,000 members.

Our consolidated HBR increased 150 basis points to 83.7%.

This year-over-year increase was due mainly to increased flu activity across our business and a rate adjustment during the first quarter of 2009 that aligned our rates and cost structure for the CHIP/Perinate product in Texas.

HBR increased sequentially by 60 basis points, mainly due to higher flu and growth in new markets.

Note that we did not record a Georgia rate increase in Q3.

The entire six months of Georgia rate increase will be booked in Q4 and a Q3 portion will serve as part of our offset for higher flu costs.

Turning to our General and Administrative expenses, the third-quarter G&A ratio of 13.2% declined 100 basis points year-over-year.

This significant improvement demonstrates the benefits from our continued focus on G&A leverage, especially in IT, and occurred despite some offset from ongoing new business initiatives.

We have completed an upgrade of our business systems, but other investments are ongoing as we enhance our systems at a manageable pace.

We have increased our web presence and are using wireless devices for member outreach as well as improved service.

Further automation of claims processing is a constant focus, along with enhancing detection of fraud and abuse.

As our specialty companies, they contributed another solid result in the quarter, in line with forecast.

We will continue to focus on external sales opportunities, providing valued services to our internal plans and achieving ongoing operational efficiencies within the unit.

Now, I'd like to highlight some of our new growth opportunities.

The conversion process to at-risk membership in Florida is continuing to run smoothly.

Sequentially, 62,100 at-risk members were added in Florida, and about 60% of those were previously medically managed by our Access plan.

Bill will provide some more detail on this in his comments.

This state serves as a prime example of our low-risk market entry strategy to partner with existing players, in this case Access, and to create smoother growth ramps.

The third quarter was our first quarter of operations for our Celtic Health Plan subsidiary.

Effective July 1, we began serving Commonwealth care members in the Boston, central, northern and southern regions of Massachusetts.

This is for low-income working adults up to 300% of the federal poverty level who are not eligible for Medicaid or employer-sponsored insurance.

CeltiCare has a successful launch and at September 30, we served 500 members in the state.

While this number is below our original expectation, it is consistent with the delay in auto assignment in the state that we discussed in our Q2 call.

Our relationship with the state continues to develop, and as we previously announced, we will have three contracts with Massachusetts by early 2010.

Effective October 1, CeltiCare began managing the legal immigrants in the Commonwealth Bridge Program.

In early 2010, CeltiCare will also provide services to Commonwealth Choice members.

This program targets individuals, families and small groups who do not qualify for public health programs such as Medicaid, Medicare or Commonwealth Care.

These programs are consistent with Centene's strategy to offer innovative, affordable coverage solutions to increase the continuity of coverage for all Americans as their income fluctuates over time.

We continue to believe that our participation in Massachusetts will provide us with the appropriate knowledge and skills to both enhance our Medicaid expertise and create innovative new products, thus helping Centene to serve the ever-changing healthcare needs of our state partners, especially with federal healthcare reform looming.

We announced in a press release October 24 that we will move forward with the sale of our New Jersey health plan.

We are pleased to bring this closer to the strategic move.

But as a reminder, it is our long-standing policy to not comment on pending transactions.

Lastly, I want to make note that we are carefully evaluating the many new growth opportunities that currently exist.

We will continue to build on our multi-line strategy, coordinating efforts between our health plans and specialty companies.

This strategy is key to driving product innovation, our status as a low-cost producer, enhancing health outcomes and winning new business.

As always, we remain conservative and selective in our pursuit of these opportunities.

We will also continue to focus on making our Company more efficient through greater G&A leverage.

Our runway as long, and we will be prudent as we navigate it to the best benefit of our shareholders, customers and employees.

We appreciate your support and interest in our Company.

With that, I will turn it over to Bill for the financial details.

Thank you, Michael, and good morning.

To begin, I would like to mind everyone that the results of operations for our New Jersey health plan are classified in the financial statements as a discontinued operation as a result of our intent to sell the business.

Accordingly, the financial results discussed throughout this call will be in the context of continuing operations and therefore exclude our New Jersey health plan unless noted otherwise.

For the third quarter of 2009, premium and service revenue grew to $987.3 million, an increase of 18.1% over the third quarter of 2008.

Earnings per diluted share from continuing operations were $0.51 per share this quarter, compared to $0.41 per share for the third quarter of 2008.

However, the third quarter of 2008 included a $0.06 write-down related to our investment in the reserve primary fund.

The increase in revenue was a result of premium rate increases, as discussed by Michael, membership growth in all states, including in Florida the conversion of approximately 62,000 members on September 1, 2009 from Access to our full risk plan, Sunshine State Health Plan.

As an aside, it should be noted that 60% of these members had been previously medically managed by Access under the successful PSN model, and both Access and Sunshine have contracts with the major hospitals in the reform markets.

There was also a 3% rate increase for the reform areas effective September 1.

We believe that, based on Access' prior history in these areas coupled with our contracting strategies, we will be successful in managing the medical costs at an acceptable level.

Additional revenue growth contributors were the commencement of our Arizona acute-care contract in October 2008 and the consolidation of Access Health Solutions beginning January 1, 2009.

For our Georgia health plan, the same as last year, we did not record any revenues in the third quarter -- related -- to a July 1 rate adjustment.

The state has modified its reimbursement methodology and rate structure beginning July 1, 2009 to pay a separate payment for certain higher-cost birth events of approximately $82,000 each.

We believe this change will help better match revenue with the costs in this area.

The state has now finalized the rates, and we expect to receive, in the fourth quarter, an additional $3 million of revenue related to rate changes for the period from July 1, 2009 to September 30, 2009.

Premium taxes increased in the 2009 third quarter to $50.9 million from $22.9 million in the 2008 third quarter.

Approximately $22 million of the increase in premium taxes relates to a pass-through hospital assessment in Wisconsin.

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

As we noted on last quarter's earnings call, we expect that Wisconsin's hospital assessment will continue at a normalized rate similar to what we experienced this quarter.

Our consolidated health benefits ratio, or HBR, was 83.7% for the third quarter this year.

This compares to 82.2% for the third quarter of last year and 83.1% in the second quarter of this year.

We've provided a table in our press release to help better understand these changes.

The increase in the third quarter of 2009 over the comparable period in 2008 was the result of an expected rate decrease effective March 1, 2009 in our CHIP/Perinate product in Texas, which has now increased the health benefits ratio to be more in line with our normal range for that product, and also the impact of additional costs related to flu.

We've also experienced improvement in the performance of our ABD product, particularly in Ohio, which has mostly been offset by the effective changes in performance in other markets.

Sequentially, our consolidated HBR increased from 83.1% in the 2009 second quarter to 83.7%.

The higher HBR is a result of additional costs related to flu and the growth in new markets where we record a higher HBR at the beginning of our operations.

As we look at our medical costs in more detail, there are a couple of key things to mention.

In the second quarter, we indicated we had experienced an increase in outpatient costs offset by lower inpatient and pharmacy costs.

That trend has continued in the third quarter with flu costs continuing to increase this quarter as one would expect.

We have been tracking the additional costs related to flu, and we estimate we incurred $5.9 million in flu costs this quarter compared to $2.5 million in the second quarter.

These costs include pharmacy costs related to influenza agents and outpatient costs for flu tests and office visits.

To put these costs into perspective, we spent $980,000 for influenza agents in the third quarter of this year.

We have seen the scripts filled for influenza agents spike from state to state over time with Georgia peaking in early September and Indiana more recently.

With respect to emergency room costs, we have seen modest increases in utilization but we have not experienced significant increases in the cost per claim.

As Michael said, about two-thirds of our ER volume is contracted using a two tier rate structure, non-urgent and urgent, which gives more cost protection than a five-level structure.

Turning to our General and Administrative expenses, the G&A ratio for the third quarter of 2009 was 13.2% compared to 13.9% in the second quarter of 2009 and 14.2% in the third quarter of 2008.

The reduction in the G&A ratio reflects improved leveraging of our costs over a higher revenue base and the impact of revenue from new business in Arizona, Florida and South Carolina.

Our third-quarter investment in Other income of $3.8 million increased $1.1 million year-over-year.

Investment in Other income in the third quarter of 2008 included a $4.5 million charge for the reserve primary fund loss.

Excluding this loss, investment in Other income for the third quarter of 2009 declined $3.0 million year-over-year.

This decline was due to an overall decline in 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 effective tax rate for the third quarter of 2009 was 33% compared to 40.2% in the comparable period in 2008.

However, excluding the effect of the non-controlling interest, which is taxed at the member or partner level, our effective tax rate would be 35.3% for the third quarter of 2009, consistent with our expectations.

The decrease was primarily due to lower state taxes and the fact that we wrote off certain state net operating loss carry-forwards in the third quarter of 2008.

Earnings per diluted share from continuing operations were $0.51 for the 2009 third quarter compared to $0.41 in the 2008 third quarter or $0.47 before the reserve primary fund write off.

Balance sheet highlights at September 30, 2009 include cash, cash equivalents and short-term investments of $434.8 million and long-term investments of $504.2 million.

At September 30, 2009, the carrying amount of our investment in the reserve primary fund was $4.0 million.

Based on the most recent estimates, we may receive distributions up to $3.2 million above our carrying amount upon liquidation of the fund.

At September 30, 2009, cash and investments held by our unregulated subsidiaries totaled $27.6 million, and our regulated subsidiaries held cash and investments of $911.4 million.

Additionally, we held regulated cash and investments of $26.8 million from discontinued operations.

At September 30, 2009, our regulated subsidiaries, including New Jersey, had aggregate statutory capital and surplus of $451.6 million, compared with the minimum required aggregate statutory capital and surplus requirement of $283 million.

We estimate our risk-based capital percentage to be 363% of the authorized control level.

Our total debt was $277.3 million, and the debt to total capitalization was 31.9%.

Our medical claims liabilities totaled $411 million at September 30, representing 47.1 days in claims payable.

This is a decrease of 0.4 days from 47.5 days at June 30.

The sequential decrease was driven by payment of annual provider bonuses, partially offset by the expansion in Florida.

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

Third-quarter cash flows generated from operating activities were $114.9 million, approximately 4.8 times net earnings from continuing operations.

The large increase in net cash provided by operating activities this quarter reflects $38 million from the collection of four payments from Wisconsin in the quarter and the increase in Ohio's October capitation payment received in September, along with other working capital changes.

During the second-quarter call, we discussed the formation of a joint venture that is developing a real estate project which will include our new headquarters.

This project is consolidated in our financial statements and is progressing as planned.

We expect to see increases in our debt balances related to this in the fourth quarter of 2009.

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

We expect premium and service revenue in the range of $3.85 billion to $3.9 billion, and earnings per diluted share of $1.91 to $1.97.

Our guidance has been prepared to include additional cost for flu than we are experiencing at this time but does not include widespread pandemic level costs if such costs were to occur.

As Michael indicated, we have not increased our guidance number for Q4 for the Georgia rate increase applicable to Q3, but we are considering this as an additional offset for flu costs in Q4.

At this time, we plan to give our 2010 guidance the week of December 14.

However, this could change depending on the status of healthcare reform in Washington, D.C.

and an evaluation of the impact of any such changes on 2010.

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

(Operator Instructions).

Daryn Miller, Goldman Sachs.

Good morning.

A question -- can you give us a sense for how much flu-related costs are included in your guidance that you think you might see in the fourth quarter?

Right now, we put in there more than we put in in the third quarter, based on what we were seeing.

We've got the drug information for most of the month of October at this point for example, but I don't think we want to put a specific number in there.

And third quarter was $5.9 million?

Yes.

I think what's important is that we have -- within that forecast, said we recognized it as a major flu incidence of increasing flu, and we recognize that in what we see going forward, but we also have offsets, one of which Bill commented was that Georgia rate increase that we are not recognizing in the guidance.

So what we've done is we've said let's take an acceptable level of increases, expecting it to be significantly greater than Q3, but I cannot -- we cannot sit here and say there is clear evidence of a widespread pandemic.

We also see that the flu incidences more and more are being treated by physicians by telling people to stay home and do certain things.

It tends to be a milder version of the flu.

I will also add one more thing.

I had a board dinner last night, and we have a couple of board members, as you know, that know a lot about this.

We were talking about that there were 1000 deaths so far from this flu.

I was reminded that, in the United States in the average flu season, there are 36,000 deaths.

So while the paper is playing up to 1000 as a tragedy, we have to keep things in perspective as we look at this.

We believe we are managing the business.

Mary Mason has a Fluvention program in place and it has been there for some time.

So these are things we are proactively doing that [endow] us, we believe, to give you a reasonable sense of how we see the quarter, versus a -- I don't know where it is in a doom-and-gloom version -- because we think that it could be a little bit less.

That's helpful.

Thank you, Michael.

One more question -- can you remind us what your long-term target growth rates are, both revenue and earnings?

Then just in addition to that, when we look at the current dialogue around healthcare reform, expectations for Medicaid expansion and what that could potentially do to your long-term growth rates?

Bill, do we want to talk about the growth and (multiple speakers)?

Right.

I think as we've said and particularly in the investor day when we made presentations, 15% revenue growth and 15% or better bottom-line growth.

I think --

You 15% to 20% we said in the bottom line.

Relative to where it has gone, I think we see an incredibly long runway.

I have jokingly said to investors that it is long enough for the space shuttle to touch and go.

So it's just an incredible number of opportunities and calls we are getting.

There's a certain amount of element where the states want to wait and see what reform ultimately looks like, but a lot are in the planning stages with us.

So, we see a lot of upside there, and I can't be more specific for obvious reasons.

Any comment on upside on ABD programs?

Sure, that's all part of it.

I mean there's states talking to us about ABD.

I think they are recognizing the success we are having, our ability to manage that population.

Now, you look across our whole book of business, when you get the state -- the regulatory financial state statutory filings I'm trying to say, you'll see them and it is called managing the business.

Thank you very much.

Brian White, Collins Stewart.

Could you talk a little bit about the unique foster care contract?

Has that led to discussions as far as any other states recently?

Yes, we have multiple states that have approached us at various meetings and discussions with them, some of which are current states, some of which are new states that are very interested in talking about how it works and the unique capabilities we have.

I am saying "unique" in that we are able to say "Yes, we have done it; here is the result." So it's not a "I can do it." This is very much "Here is what we have done, and talk to Texas about their level of satisfaction."

In fact I think, in some cases, [Jesse].

the state regulators have told other regulators that they ought to take a look at it at their state meetings.

That's correct.

Great, thank you.

John Rex, JP Morgan.

A couple of quick things -- I guess just first, as you evaluate things like the current Senate Finance -- what was in the Senate Finance proposal for Medicaid expansion going to 133% FPL, and you look at your kind of existing footprint, how do you size kind of the member opportunity on that, if indeed that occurred, kind of assuming consistent share and such?

Well, you know, you can look at your current footprint, and sure there is a material increase.

There are some states that are already there, so it doesn't have a whole lot of impact.

But I think the impact that we see is more states looking at the connector or exchange model as it relates to that.

So what they see them doing by going to the funding to the 133 level is the opportunity to then talk about what do we do up to 300, as Massachusetts is doing, to cover the uninsured and how to do it?

So it has multiple impacts.

Have you sized, though, like a specific membership number in terms of if it were put into effect as it is?

So maybe in just the exchange probably a little harder to size in terms of how that would play out?

I have not put out a number that we are prepared to talk to, but we will probably when we do our '10 call, can give you a little more insight because it will be clearer what they are going to do.

Okay.

Then speaking of that, your '10 call, I understand you are not giving guidance until mid-December, but just discuss for us what would be the reasons that, in 2010, potentially, that you wouldn't achieve your long-term targets?

If your long-term target is 15% to 20%, tell us maybe kind of the headwinds you would expect in terms of why you wouldn't achieve that kind of earnings growth rate next year?

Well, I think one of the things we have to talk about is what is the impact of flu in Q1.

You know, there's the Type A flu and type -- in Q1 we are looking at and putting in our plans now as to what should we be doing to get ready for that.

Not allow people to get so focused on H1N1 which is real, present, an issue in Q3 and Q4.

But I think Mary will tell you that there's a lot of school of thought that we should be concerned about how we are going to deal with that.

So I think that would be an issue.

So what the states do with reform is going to have a major impact on what states do.

So there is some state -- pardon me -- Jesse, you wanted to add to that?

Yes, I mean one thing in particular, in the face of federal healthcare reform, to the extent that there are federal policies and legislation that is put in place, states may take more, as Michael referenced, a wait-and-see attitude.

So there may be things that outside of federal reform that would be in the pipeline that may be deferred or delayed on some level, pending the implementation of federal reform.

It depends how they fund it, too.

There's a big issue there.

How much are they going to, John, are they going to fund at what level, and when are they going to fund it?

Those kinds of issues could impact it.

I guess assuming, though, that none of the reform initiatives really take place in 2010 or are effective in 2010, and absent flu, then is there a reason you wouldn't beat your 15% to 20%?

Obviously, we said we expect to be at 15% to 20%.

(inaudible) we move those major issues and we expect to be at 15% to 20%, or else we would have changed it.

Okay, great, thank you.

Tom Carroll, Stifel Nicolaus.

Good morning.

A question on Access Health in Florida -- given that you've managed I think you said 60% of the book, is it fair to assume that the medical claims on that 62,100 people are relatively mature?

Bill?

I think we've had a very successful PSN program in Florida with Access Health -- they have had for a number of years in I think five counties, all of the counties in the reform.

So we have a very broad experience with this, and the PSN model in effect rewards medical savings.

If you're doing the right things in medical management, it rewards it.

That has worked out well for Access.

From our standpoint, we do have a good running start in terms of being able to medically manage these members in a tradition that Centene would be used to

I guess what I'm getting at is medical expenses.

Were medical expenses appropriately matched to that revenue that came in, in the third quarter because that block of business which to risk?

Did you accrue it at 90%?

It was considered a new block of business that we recorded at 90%, yes.

Okay, excellent, that was my question.

And then a follow-up on the flu.

Is it fair to say that you are seeing perhaps more flu but lower severity?

So far, in many ways, yes.

Okay, thank you.

Let me ask Mary Mason.

Yes, this is Mary Mason.

Yes, we are actually seeing what we would expect.

We are seeing some pregnant women being admitted, as what we would expect.

About half are children and then the other are adults.

Some are healthy; some have comorbid conditions.

But it's exactly what we would expect and we are managing it.

Right.

Then I just let me sneak one more in.

Bill, you mentioned -- you had a comment about the Georgia retroactivity is hitting in fourth quarter.

Then you matched that to a comment about increased flu on the fourth quarter.

So if I just kind of look at you guidance and look at the fourth-quarter number, you are basically guiding to like to a $0.55 number on Q4.

Is that $0.55 number inclusive of both extra revenue from Georgia plus higher costs from flu, or are we going to kind of break out two pieces next quarter?

I believe that just looking at our annual guidance and subtracting out the first three quarters, you'd be seeing a $0.50 to $0.56 Q4.

Correct.

So pick whatever point within that range.

I think what we are seeing is we have not increased -- we earned $0.53 last year in Q4, so we are seeing -- we have not upped our guidance for this year's Q4 for an additional $3 million, which would be about $0.04.

We've basically held that back to off set the potential of additional flu costs along with other increases we've estimated for flu.

But we had booked within the guidance, that's kind of --

What we would be considering, right.

Yes, we have booked additional expectations on flu, but we also wanted you to know that we have this Georgia retroactivity sitting there, that if the flu turns out to be less than that, it will affect where in the range we fall.

It's just an additional conservative offset we are holding.

Okay, thank you, that's more clear.

Thanks.

Greg Nersessian, Credit Suisse.

Good morning.

Bill, you guys provide these claims inventory data on Page 8 of your press release.

I guess, in each of the last four quarters, your average claims inventory has declined sequentially, but the period-end inventory has been going up.

So I'm just wondering.

Why are you consistently seeing a build up of claims right at the end of the quarter?

I think one of the reasons that the -- we had Florida at the end of this quarter for example, which helped increase the period-end inventory.

And I think some of the average is just we have been trying to process some of the high-dollar claims quicker and get those through to reduce interest, and that has some of the impacts on the averages.

I wouldn't read too much into the individual numbers, because it fluctuates from month-to-month and I think maybe 10% of our reserves are rarely represented by claims in-house, not processed yet.

Okay, but it just seems like a strange pattern that, right at the end of the quarter, it seems to be going up.

Yes, and I think this quarter's particularly was just Florida.

Florida, okay.

(multiple speakers) all of those member September 1.

Right, right.

Okay.

Then the fee-based revenue came in a little bit higher than we've seen recently and we were expecting in this quarter.

I guess what was driving that?

Is that the new, should we consider that a new run rate, kind of $27 million going forward, or any sense of how to model that?

I think some of the stuff, with the consolidation of Access now, they've got additional service revenue in their numbers, which is what is driving most of those changes.

We are consolidating Access.

Since they are doing a non-risk basis, their revenue shows up as service revenue.

Okay, but most --

So the answer is it should decline over time because those members are transitioning to Sunshine State Health Plan, so you'll see that sort of peak and then decline.

So we should think about 4Q being closer to kind of the first-half run rate, or even below that?

Maybe even a little bit below that, given that we moved so many members over on September 1.

Okay, okay.

And then tax rate -- you should expect that to go back to normal 35%-ish range in the fourth quarter?

Well, I think it is that the normal 35%, 35.3% range in the third quarter.

I think that you have to look at the issue with respect to what I call minority interest or non-controlling interest.

We don't pay taxes on an LLC or an LLP.

So particularly if you look in our 10-Q, I think we spelled this out a little more in the discussion of the tax rate.

But you should add back the non-controlling interest where we provide no taxes for it on the face of the income statement, and then consider what the tax rate is before consideration of that.

So, we are really looking at the net earnings attributable to Centene and what the taxes are related to that.

So it is more of a mathematical issue, I think, the people trying to do the taxes divided by earnings including the non-controlling interest portion.

That number gives you a lower number, the 33% number, but when you really factor out the fact that's partnership type income, the true numbers, what I would say is 35.3% and we've been talking about 36.0% or something as our true effective tax rate for the year, plus or minus.

Josh Raskin, Barclays Capital.

Good morning.

Two questions on sort of growth opportunities -- I guess the first is Amerigroup.

It sounds like they are going to be leaving the Ohio ABD.

I'm curious about the timing and the opportunity, as you are one of the two plans there for I guess the 8000 lives up for grabs.

Then the second question and that's on Massachusetts -- how does that membership come in?

Is that sort of ratably renewed throughout the year or are there bigger periods of enrollment at certain times during the year?

I will answer the Ohio.

Obviously, with them pulling out and I think there's two plans left, the state will work through some algorithms to assign them.

And whether we get 3000, 5000 depending on what people select and what is left for auto assign, we will get our share.

I have not given a lot of thought to it.

Whatever we get, we will just continue to manage as we always have.

I think that is a first-quarter 2010 issue.

Yes.

Thank you, Bill.

Jesse, do you want to talk about how Massachusetts (inaudible)?

Right, so I will break it out.

Michael mentioned in his initial comments the three various products within Massachusetts -- the Commonwealth Care Program, the Commonwealth Bridge Program and the Commonwealth choice Program.

The Commonwealth Care and Commonwealth Choice programs, both of those do have an open enrollment period at the beginning of the fiscal year for those programs, so there is probably a little more waiting on the front end of those open-enrollment periods.

But a lot of people can come on both through -- those that are eligible can come on both through Choice and under normal circumstances in the Commonwealth Care Program could come on through auto assignment.

But as we talked about, that has been temporarily suspended for the Commonwealth Care program.

On the Commonwealth Bridge Program for the legal immigrants, that -- it was a unique population where we were selected to serve the totality of those members statewide for a limited period of time.

So, those are rolled in over -- beginning in September -- beginning of October, excuse me -- over the course of the end of 2009.

So that contract, as it is structured, is only in place through June 30, '10.

So that is a separate contract.

Okay, great.

Then I'm sorry, just a quick follow-up on the ABD -- there's no selection process for the members; they are all going to be auto assigned, is that right?

No, these are members -- they usually get a choice period.

But you don't think any revenues until 1/1/10?

Probably, maybe (multiple speakers)

For that additional region in Ohio.

1/1 or 2/1?

(multiple speakers) it is 2/1.

Scott Fidel, Deutsche Bank.

The first question is just on the ABD loss ratio, which obviously bounces around a lot each quarter.

Just if you can update us on what you think a good, normalized long-term loss ratio range is for the ABD.

I think it is in the 84% to 86% range.

Maybe a little higher.

It could go up to 87%.

Okay.

Then just a follow-up, just on this marketshare tax that they are talking about in Washington.

Obviously I know it's early here, but have you guys gotten any sense or any feedback on just how they are thinking about structuring this for Medicaid MCOs?

Do you think this would be straight across premiums looking at all of the different product segments, or has there been any feedback that they might discount it for the Medicaid MCOs or use any different type of formula?

I think I really don't have a sense for where they are going to end up on it, if they do it.

Some of these things, every time they float an idea, we hear something.

But we've not spent a lot of time on it because what they talk about now, where they end up, can be so different that we are spending our time thinking about the Q1 flu issues and how we are going to manage those.

Then just one last question, just on the cost of services ratio -- and it looks like that dropped down to 58%, which sounds like it is just a function of getting that Access Health revenue.

So would you expect that normalizes as well to sort of the run rate you've seen in prior quarters as the Access revenues come in, as you convert those members?

Yes, we think that ratio will be closer to 78% to 80% without Access included.

We expect that to come down quite a bit over the next several quarters.

Okay, thanks.

Carl McDonald, Oppenheimer.

I'd just be interested in the latest understanding of where things are within Mississippi RFP, and then separately if there's any early indication about how Wisconsin is thinking about structuring their RFP for the Milwaukee area.

Jesse, would you like to talk about those two issues since you're the closest to it?

Sure.

So, on the Mississippi RFP, we have submitted those.

There's been a couple of updates.

I think the state has requested amendments to the RFP, etc., so the ball is in their court I guess is what I would say.

Everything that we have -- that all of the bidders have been requested has been provided to the states, so they have that information.

We and I'm sure others are awaiting the response on that.

On Wisconsin, I'm not sure what the specific question is in terms of the structure.

I don't know -- unless Mark (inaudible) can add some clarity in terms of where that's going.

I don't know we have any new information with respect to structure on that.

The RFPs aren't out yet.

Right.

The RFP is not out yet.

In Mississippi, is there a specific date that the state is targeting for an award, or is it still open-ended?

Well --

I think it is open-ended at this point.

Thank you.

(Operator Instructions).

Matt Perry, Wells Fargo.

Good morning.

Can you hear me?

Michael, you mentioned that potential $6.7 billion industry fee.

I just want to delve into that a little more deeply.

I know you and members of your team have a lot of interaction with governors and state legislators, and people in the various -- like Medicaid offices.

Are those people aware of this fee?

I mean, is it on their radar screen?

Because if it isn't, that would be something that maybe concerns me.

I think they are aware of it, and we don't support it.

We are working through the industry and when we get questions about it, we don't support it.

I think everybody is aware of it, but they raise the actuarial soundness issue and the impact and what it does to it.

So it's an idea out there right now, Matt, and so it comes and goes.

It is kind of like a tide, the ebb and flow.

Right now, I'm not sure that anybody is aggressively talking about it, but we are not sure if it's going to -- it may not affect Medicaid.

There's some talk that the Medicaid plans will be exempted from it.

So it's the kind of thing, until you have somebody really firmly saying "Here's what we are going to do", it is hard to have any specific opinion except to say we don't support that kind of tax.

Maybe this is just asking too much of a what-if question, but do you think it's the type of thing that, if it was put into law, the states could use the premium tax mechanism that they use to draw down federal funds to help the managed-care companies offset it?

I think the states would look at what they can do to maximize their revenue from the federal government and minimize any actuarial soundness issues.

So they will look at every alternative and we will support them in it.

Okay, great, that's all I had.

Thank you.

(Operator Instructions).

There are no further questions at this time.

Well, we thank everyone for calling in and we will talk to you at the end of the year.

Thank you.

This concludes today's conference call.

You may now disconnect.