Centene Corp (CNC) 2010 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Centene Corporation first quarter 2010 earnings call.

All lines have been placed on mute to prevent any background space.

After the speakers' remarks, there will be a question and answer session.

(Operator Instructions).

Thank you.

I now turn the call over to Mr.

Ed Kroll, Senior Vice President, Investor Relations.

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

Our first quarter 2010 earnings call.

Michael Neidorff, Centene's Chairman and Chief Executive Officer, and Bill Scheffel, Centene's Executive Vice President and Chief Financial Officer will be hosting 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 our website, or by dialing 800-642-1687 in the US and Canada, or 706-645-9291 from other countries.

And for both enter access code 63527302.

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 April 27, 2010, and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

I would also like to remind everyone that our Annual Investor Day is on June 2nd this year in New York City.

And that is a Wednesday this year.

Normally we do is on a Tuesday, but Memorial Day falls on a Monday, so please contact Libby Abel in our New York office to RSVP to this event.

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

Michael?

Thank you, Ed.

Good morning, everyone and thank you for joining Centene's first quarter 2010 earnings call.

Before I begin to comment on another solid quarter, I would like to take a moment to share my thoughts on Centene's position in a healthcare reform era.

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

Healthcare reform legislation, as we all know, was signed into law on March 23, 2010.

Many of the details of this reform have yet to be determined, and more importantly, regulations have to be written and employees for the multitude of new government departments have to be hired.

We recognize the importance of our role in facilitating the expansion of access to affordable quality coverage for an additional 30 million Americans.

This expansion will be accomplished by extending Medicaid eligibility and creating exchanges in the states.

These exchanges will help working poor and other underinsured and uninsured individuals gain access to healthcare insurance via subsidized coverage.

Reform presents a large growth opportunity for us, providing effective quality coverage to this vulnerable population as a low cost producer is at the core of Centene's competency.

We have the systems and infrastructure in place that will allow us to be ready as reform continues to unfold over the next three to four years, and believe we are extremely well-positioned to benefit in this new era.

As you know, beginning on January 1 of 2014 Medicaid eligibility in all states will increase to 133% of the Federal Poverty Level, or FPL, for all non-elderly individuals.

This will add 16 million new Medicaid beneficiaries, more than half of the total expected coverage expansion.

From 2014 to 2016 the Federal government will pay 100% of the incremental costs of the new beneficiaries.

This will come down to 90% by 2020, and will reach a more normalized 55% level by 2024.

The increased F-map over the 2014 to 2024 time period will provide extra help for state's Medicaid's budgets, and the support needed for the additional Medicaid lines.

As we have discussed for the past 18 months, we have been working on repositioning Centene from a Medicaid-focused company, to an organization that provides products and services to all individuals that fall within the underinsured and uninsured spectrum.

We have begun, or began this endeavor with the purchase of Celtic in July of 2008, which allowed us to tap into the underinsured and uninsured market.

Celtic was important in terms of having the systems and capabilities to cover individuals and small groups.

In July of 2009, our CeltiCare subsidiary began serving low income working adults up to 300% of the Federal poverty level through the Commonwealth Care program in Massachusetts.

And in October 2009, CeltiCare began managing the health program for legal immigrants through Commonwealth Bridge program in Massachusetts.

Additionally, we were aware and awarded a contract for the small group Commonwealth Choice Program, which began during the first quarter of this year.

We are currently the only public managed care organization participating in the Massachusetts Connector Authority.

This unique exchange experience will be very important as reform is implemented, as it provides us with an opportunity to demonstrate our capabilities with the individual and uninsured populations.

Also, the passage of the Drug Rebate Equalization Act, known as the DRE, along with health reform, has moved a financial disincentive for states to carve out pharmacy benefits.

DRE essentially levels the playing field with respect to manufacturer rebates, and will allow states to focus on the clinical and other financial benefits of an integrated approach to medical and pharmacy management for our membership.

Now I will discuss some highlights from the first quarter, a quarter with numerous achievements.

In January of 2010 we raised $104.5 million through a follow-on secondary offering of 5.75 million additional shares of common stock, at a public offering price of $19.25.

In addition to strengthening our balance sheet, the proceeds provided us with the liquidity and flexibility to take advantage of acquisition targets which meet our strict accretion and return criteria.

In February of this year, we announced a definitive agreement to acquire Columbia-based Carolina Crescent Health Plan, CCHP.

CCHP serves a more than 40,000 Medicaid members in all 46 Counties across the state.

I am happy to say that upon closing this acquisition we will expand our South Carolina membership to approximately 90,000 members, or 13% share of market.

It is expected to close in the second quarter of this year, and add revenues of approximately $60 million, and $0.02 to $0.03 earnings per share for 2010.

In addition we expect approximately $125 million in revenue, and $0.09 to $0.11 EPS on an annualized basis.

In March of 2010, Moody's upgraded our debt rating to BA2 from BA3 with a stable outlook, reflecting favorably on our financial strength.

Also in March, we completed the strategic sale of our New Jersey Health plan, University Health Plan, and subsequently recorded a pretax gain of $8 million to discontinued operations in the first quarter of 2010.

In March, 2010, we also announced that our specialty company Simpatico Behavioral Health was awarded an expanded by the Arizona Department of Health Services.

Simpatico currently manages behavioral health services in four counties of Arizona.

In addition to renewing the contract in these counties, the new agreement expands Simpatico's coverage to an additional four counties effective July 1, 2010.

Finally, we were disappointed that our southeast Wisconsin contract was not renewed, which would have been effective November 1.

The resulting 2010 financial impact is immaterial to us, given the current margin environment for that region.

Now for first quarter details.

First quarter premium and service revenues grew more than 12%, driven by at-risk membership growth across all states, neat premium rate increases, and a conversion of members to our at-risk plan in Florida.

Both the Indiana and Ohio pharmacy carveouts went into effect the first quarter of 2010.

As we have previously stated, these two carveouts will reduce our full year 2010 revenue by $185 million.

Excluding the carveouts, the first quarter revenues would have grown by 17% exceeding our 15% long-term growth target.

Our consolidated first quarter HBR increased 50 basis points year-over-year, and 10 basis points sequentially to 84%, the low end of our guidance range.

Improvement in our existing markets were offset by new market reserved at higher rates, and the impact of the pharmacy carveouts.

Turning to general and administrative expense.

The G&A ratio for the first quarter of 2010 was 13.3% compared to 13.5% in the first quarter of 2009.

This 20 basis point improvement reflects improved leveraging of our costs over a higher revenue base, and the impact of additional revenue from new business.

Partially offsetting this was startup costs, and a $4.6 million increase over last year's contribution to our charitable foundation.

Note that the start of our Mississippi contract has been pushed out to October 1, resulting in a slight reduction in our revenue forecast, and moving the bulk of the associated startup costs to Q2 and Q3.

Further G&A reduction beyond 2010 remains a top priority, and our ongoing systems improvement should enable us to accomplish this goal.

A quick comment on the rate environment.

As we previously discussed, our early 2010 rate changes came in lower than historically experienced.

We currently have known rates representing approximately 70% of our projected member months.

We continue to forecast low-single digit rate increases for the states, which adjust in the second half of the year.

Overall, we now expect full year 2010 rates to increase in the range from flat to 2%, slightly below our previous 1% to 2%.

We continue to work with our state customers to provide them with proactive solutions for the tight budget environment they are currently working in.

While the US economy is slowly recovering, state budgetary pressures and high levels of unemployment do exist.

States will continue to have a need for our products and services, and we are well-prepared to meet the needs of both our current and future customers.

We are confident that the diversity and effectiveness of our multiline strategy, will allow us to successfully operate and maneuver in a reform environment and are very excited about the abundance of growth opportunities to come.

In the meantime, our pre-reform pipeline is full, and we expect strong growth in the years leading up to 2014.

Finally, I would like to remind everyone of what Ed mentioned earlier, our 8th Annual Investor Day will be held in New York City on Wednesday, June 2 at eight o'clock AM, and we hope you can join us.

We appreciate your support and interest in the Company, and I will now turn the call over to Bill.

Thank you, Michael.

And good morning everyone.

For the first quarter of 2010, premium and service revenues grew to $1.02 billion, an increase of 12.5% compared to the first quarter of 2009.

This year-over-year increase was driven by several factors.

First, membership grew in all of our states, particularly in Florida with the continued conversion of nonrisk managed care membership from Access Health Solutions to Sunshine State Health Plan on an at risk basis.

Second, the commencement of operations in Massachusetts under the Commonwealth Bridge and Commonwealth Care programs, and then last it should be noted that the 12.5% increase in revenue was moderated by the effects of the pharmacy carveouts in Indiana and Ohio, which took effect in the first quarter, and reduced revenue by approximately $35 million in 2010 versus 2009.

Our consolidated health benefits ratio was 84.0% for the first quarter of 2010, compared to 83.5% in the first quarter of 2009, and 83.9% in the fourth quarter of 2009.

The 50 basis point increase between years was primarily due to reporting higher costs in our new markets, particularly Florida, of approximately 100 basis points, offset by improvements in our existing markets of approximately 50 basis points.

With respect to flu costs in the first quarter, we experienced a relatively mild flu season this year, and recognizing their immateriality, we will not be separately reporting these costs going forward unless flu costs materially rise in the future.

Our general and administrative expenses ratio for the first quarter of 2010 was 13.3% compared to 13.5% in the first quarter of 2009.

The 20 basis point year-over-year improvement in the G&A ratio reflects the leveraging of expenses over higher revenues, partially offset by a small amount of business expansion costs in Massachusetts and Mississippi, as well as a $4.6 million increase in our contribution to our charitable foundation.

$3 million of this contribution was funded by the gain on the reserve primary fund distribution, which was reported as other income.

Excluding the year-over-year increase in charitable contributions, our first quarter 2010 G&A ratio would have been 12.8%, which is relatively flat compared to the 12.7% reported in the fourth quarter of 2009.

Our first quarter investment and other income was $7.1 million, a $3.4 million increase year-over-year.

The increase in investment and other income reflects increased investment balances as well as $5.4 million in distributions from the reserve primary fund received in January of this year.

A gain of $3.0 million was recorded for the distributions received in excess of our adjusted basis, and as I just mentioned an offsetting $3 million contribution was made to the Company's charitable foundation.

Excluding the effects of noncontrolling interests, our first quarter tax rate was 38.4%, compared to 36.5% in 2009.

The increase was primarily due to higher state taxes as a result of a change in the estimated benefit from New Jersey net operating loss carry-forwards, and a decrease in tax exempt rate, interest.

For the full year of 2010, we expect our tax rate to be approximately 38%.

Our diluted earnings per share is $0.41 this quarter, versus $0.43 a year ago.

The 2010 results are $0.04 less as a result of the dilution from the additional shares issued as part of the stock offering in the quarter.

We also benefited by approximately $0.02 during the quarter by not incurring the level of Mississippi startup costs in the first quarter, as previously estimated, as a result of the shift in the start date to October 1.

I would like to now review our discontinued operations and the recently completed sale of our New Jersey health plan.

During the first quarter of 2010 we recorded a pretax gain of $8.2 million related to the New Jersey sale.

Overall, New Jersey contributed $3.9 million in aftertax earnings, or $0.08 per share which is classified in discontinued operations.

At March 31, the New Jersey statutory capital totaled $10 million.

Over the next 12 months, as we pay out the remaining claims and subject to receiving regulatory approval the majority of the capital will be transferred from the statutory entity.

At March 31, 2010, cash investments held by our unregulated subsidiaries totaled $51.3 million, while regulated cash investments and restricted deposits stood at $917.9 million.

We have estimated our risk based capital percentage to be approximately 350% of the authorized control level.

Our total debt was $232.7 million, and our debt to capital ratio was 23.7% at March 31, compared to 33.2% at December 31, reflecting the additional equity and paydown of the revolving debt balance with proceeds from the stock offering.

Our medical claims liabilities totaled $444.8 million, representing 47.7 days in Claims Payable.

This is a 2.4 day decrease from December 31.

As I discussed on our year-end call, our Days and Claims Payable were higher at December 31 as a result of the holiday schedule the last two weeks of December, thus as expected and predicted at March 31st, the medical portion of our days and Claims Payable decreased by 1.5 days, reflecting the additional processing days at the end of this quarter.

Also, the pharmacy portion of the medical claims liability decreased by almost one day, as a result of the impact of the pharmacy carveouts implemented during the quarter.

For the first quarter, operating activities used cash, resulting in negative cash flow of $38.5 million.

This was primarily caused by a $73 million decrease in unearned revenue from December 31 to March 31, as a result of the timing of receipt of monthly premium payments.

As we mentioned on our year end call, certain states prepaid their January 2010 capitation payments in December of 2009.

These prepayments caused a decrease in our cash receipts in the first quarter, as reflected in the lower amount of unearned revenue at March 31 of $18 million.

Excluding this timing issue, cash flow from operations would have been a positive $34.8 million, or 1.7 times net earnings.

We still expect full year 2010 operating cash flow to be strong, and in the range of 1.5 to 2 times net earnings.

Now I want to discuss our updated guidance numbers.

At this point, we have updated our revenue and earnings guidance to reflect first quarter results, the impact of the Arizona Behavioral Health award, the loss of the Wisconsin southeast region, and the shift in timing of the Mississippi contract start date to October 1.

We have not included the pending acquisition in South Carolina in our guidance numbers, since that transaction has not yet closed.

Also during our guidance call in January, we indicated that we would be incurring startup costs for Mississippi in the first half of 2010, but since the start date changed to October 1, we did not incur a significant amount of Mississippi startup costs in the first quarter.

We still anticipate incurring the same level of expenditures for Mississippi startup costs now in the second and third quarters of $0.06 to $0.09 a share, which has been adjusted for the additional shares from the offering.

Excluding the pending South Carolina transaction, we expect premium and service revenues in the range of $4.30 billion to $4.40 billion.

Consolidated HBR of 84% to 86%, and a consolidated G&A ratio in the range of 12.4% to 12.9%.

Our estimated diluted shares outstanding for 2010 is 50.5 million shares.

And the 2010 earnings per diluted share are expected to be in the range of $1.73 to $1.83 for 2010.

Last, I would like to point out that our calendar of earnings calls for the remainder of 2010 has been established, similar to our pattern the last several years, and is available on our website.

Operator, you may now open up the line to questions.

Hello?

Operator?

Yes, sir, would you like to go into Q&A now?

Yes, please.

One moment while I compile the Q&A roster.

Your first question comes from the line of Daryn Miller.

Your line is open.

Good morning, thank you.

Good morning.

I was wondering if you could just talk a little bit about what is going on in Florida, and maybe some of the opportunity there given some of the potential political changes?

I will ask Jesse to do that, as he has been managing us through that process.

It is obviously a fluid process in Florida right now , so what we say at this point could change very quickly, but there has been a lot of momentum in this legislative session from both the House and Senate to expand Medicaid managed care, different ways to get there, but both proprosals would represent a meaningful expansion of the Medicaid managed care model both geographically and to transitioning fee for service into managed care, and the potential to add some other products.

Obviously that is something that we are following very closely, it is something that we are supportive of, and we will see where it ends

Great.

And second question, I am not sure if you had commentary around the flu.

Seemed like first quarter flu activity was pretty light.

Your thoughts around what you saw, and your approach towards reserving in the first quarter regarding flu?

One, we saw very light and as you know from our data we showed you our dashboard, and assistance and things, so we are confident with the numbers, and of course we use the same methodology quarter after quarter for booking our reserves, and we are comfortable that we are adequately reserved for flu, or any other medical expense.

Would you say you reserved then for a lighter flu season, or did you reserve given how much visibility you have at this point for more of a standard flu season?

I would say we reserved based on the experience we had, what our assistants tell us which should, which reflects a more normalized flu season.

Great.

And one last question.

Seems like there is a good amount of new business opportunities coming up, and it seemed like there was a good amount of ABD opportunities.

Does it seem like there is being a shift towards more ABD moving toward managed Medicaid at this point, or is this kind of at a level that we have seen historically?

We have been encouraging states to move in that direction as this is their highest cost area, and they need the help.

Jesse, anything you want to add to that?

We have been talking about it at our Investor Day the last the couple of years, so it seems consistent with our expectation.

Great, thank you.

I might also add that our experience in ABD is solid, and something that all these systems I showed you really are very supportive of helping us manage it.

Your next question or comment comes from the line of Scott Fidel.

Your line is now open.

Thanks.

First question just interested on what you are seeing with the duration of your members at this point, and just interested if they are seeing the members stay on the platform longer, just as unemployment remains at elevated levels, and whether you have started to see some benefits from lower utilization because of that.

Obviously last year we saw a lot of pent-up demand as the uninsured came onto the Medicaid system?

First, just to be consistent, we never experienced that same level of pent up demand that others seemed to.

Two, we did report historically we see an increase of about 10% of our population, Bill, has that been --

Who were members for more than nine months, yes.

Yes, so people are staying on longer.

We have had very flat demand across the membership, Scott.

Okay.

Then second question, just on the industry fee piece of health reform, and I know that there is a lot of efforts by Medicaid MCOs to work with the states, to try to get an exemption from that.

Just if you can give us an update on how I guess those lobbying efforts are moving forward at this point, and whether you are seeing receptivity from lawmakers in DC?

We are obviously keeping a lot of pressure on it.

We have a active group who demonstrated their capabilities to the DRE and other things in the Bill, but there are so many areas that have to be understood and worked on, that it is just one of many things, and we just continue to maintain the pressure.

It doesn't come in for a few years, so they did reduce the amount.

You have to look in Canada as I look at the Bill, I think when they passed the Senate Bill, it was the only one they could, it was still a work in progress, and had not been fully completed.

We have to work with everybody across the whole Bill, and all of our constituencies to see if we can't make some sense out of them.

Then just a question on the New Mexico behavioral contract that is being taken out of Optum and rebid.

Just an update on what type of opportunity you think that might be, and is that something that Centene would be interested in, or Simpatico, in bidding on?

We typically don't respond to what we are going after until the state discloses it.

Anything of that size I would expect that Simpatico people to look at.

They will make a decision as to the opportunity starting with returns and profitability on it, reasonable profit on it, and we will go from there.

Obviously it is something that we are looking at, and if we decide to bid on it, and the state discloses that, you will know then.

Okay.

And then just one last question, maybe for Jesse, do you have an estimate at this point of how many independent Medicaid operators there are in the US, and how much share of the Medicaid managed care market they have, maybe in terms of total Medicaid managed care enrollment, or just the market share of the independent operators?

We have got those things that we track generally, Scott.

We can provide an update on some of those things at the Investor Day.

Okay, thank you.

Your next question or comment comes from the line of Brian Wright.

Your line is now open.

Thanks.

Good morning.

Can you give us a little update on Massachusetts, post all of the upheaval in the news, and the small group market there.

Has that had any meaningful change post-March 31 on enrollment?

Brian, this is Jesse.

I will take that one.

We have seen obviously a lot of activity particularly in the commercial market with respect to the Department of Insurance, and rate setting there.

That has not impacted us.

So we were one of I guess the relatively few people who did not get any pushback from the, we have approved rates, and everything looks fine for us from that perspective.

It is a little early to tell, I would say in terms of the membership impact from that.

Where you would see the preponderance of that would be in the Commonwealth Choice program, which is new for us.

We are enrolling members into that, but it is early stage, so we are seeing the impact just generally of being the low cost health plan in Massachusetts.

I mean I am comfortable that I think the state sees us bending the curve for them, and we are the low cost producer, and the only one to my knowledge at this point that has approved rates going forward.

Low choice, that is right.

Low choice.

You are not willing to tell us whether you have actually enrolled anybody as a result of all of the upheavals from your competitors in that market?

We do not have high expectations for the Commonwealth Choice program in the near term.

So as we said before, we don't expect that to be material.

We just started enrolling people at end of the first quarter, so is early for us to give something specific about the impact of that.

Okay.

And then I guess could you talk about general kind of RFP likelihood of activity going forward?I think there are some people out there that are saying, oh look at Florida, looks like some of the political intricacies of the Florida market, and they are saying well, look, Florida may not happen, this was one of the markets that was going to be one of the first of the expansions that we are all looking forward to.

Could you just talk as to whether Florida is indicative of other states maybe slowing their rate of managed Medicaid expansion?

I think we expect there is going to be a consistent flow of activity between now and 2014.

Every market has its own dynamics.

Take Florida for example.

There is uncertainty it is a relates to what will happen in this session, but I don't think there is long-term uncertainty that something will happen.

Positive.

Right, so I think there will be activities.

I think it is all still, as Michael indicated in his opening comments, I think it is still early with respect to the details of healthcare reform, but I would expect states who are not doing anything today to move in a Medicaid managed care direction between now and 2014.

I think Brian here, in regards to Florida I would not generalize from that specific.

I think everybody has been reading the political issues that are taking place there, which are playing on all of this, and, a more unusual approach to politics at this point.

I guess the takeaway here is what you see as future backlog hasn't shifted outward as a result, your review of that ex-Florida isn't that it is shifting outward?

No.

We continue to see a very full pipeline of RFP activity.

Great, thank you.

Your next question or comment comes from the line of Tom Carroll.

Your line is now open.

Good morning.

A question on the change in pharmacy rebate that we have seen as a part of reform.

It sounds like the changes could encourage more states to carve RX back into the cap rate.

However we have seen Ohio and Indiana carve it out recently as you discussed.

Will it come back at some point into Centene, and do you expect to see other markets where you don't have pharmacy risks come back in?

I think, one, they carved out before the Act was signed, okay.

And they were states that were scrambling for pennies, and did not take any risk on that.

But obviously I think there are clear incentives to carve in, and I think states are taking a good hard look at it.

I expect some to carve it back in, or carve it in.

It is a matter of economics versus political will, and we are just going to continue to work on it, have confidence.

We have our own PVM.

We have the tools to make it work for our state clients that want to do it, and we can be supportive of it.

So in the near term you don't see any sort of one or two year visibility on reversal on those two states?

I am not going to, in the absence of them saying they are prepared to do it now, in a political year where there are elections coming up, particularly in Ohio you have a highly contested gubernatorial race.

I am not pushing them on it, but they understand where we are at, and we have had pre-carveout discussions about their evaluating, and considering strongly carving back in once DRE was in place.

I am not going to sit here and say they have told me that they are going to do it until they have.

Great.

Question on Celtic.

You established a nice Massachusetts presence there, and that certainly should help you in the future.

Outside of Massachusetts, how much revenue does Celtics have right now?

It is about $80 million.

$80 million annualized outside of Massachusetts.

Is that correct?

Correct.

Okay.

Thank you so much.

Your next question or comment comes from the line of Kevin Fischbeck.

Your line is now open.

This is [Scott Green] in for Kevin.

Thanks for the question.

My first question is on MLR seasonality.

On the 2010 guidance call you emphasized that 1Q is seasonally higher in part due to flu trends.

Given a week of flu in the period, is it fair that we might not see that same seasonality this year, or what should we considering thinking about MLR going forward?

I think in Q1 we had a more normalized flu season, and you can see how we adjusted our annual guidance, which probably gives some indication that the Q1 results and the MLR that we reported at the low end of our range was a better than expected year, okay.

And now I expect, having recognized that improvement in Q1, we will march along the balance of the quarters with it will put into range the 4 to 86 range.

Obviously Q1 was impacted by the pharmacy carveouts and so there is sort of a re-alignment of what the ratio will be, and so that is why we are at 84.0 for the quarter.

Last year we did incur sizeable amounts of H1N1 flu costs in particularly the third quarter and the fourth quarter, and so the absence of those costs for this year if that comes to pass would obviously help bend the trend in that regard.

And I think as you look out we have new businesses coming on which impact.

We always reserve a minimum of 90% MLR for a new book of business.

We have Mississippi and the new business coming on in South Carolina, and we expect we are in operation there, to be able to quickly normalize, but it is still a higher medical cost experience there.

All of those things come into play.

Okay.

That is fine.

And can you talk about the outlook for the Commonwealth Bridge program?

Is that a contract that you think you will be able to extend during the year, what is in guidance?

I think it was supposed to be a temporary program?

Jesse?

There is not of lot that we can say.

That is in active procurement as we speak.

Not a lot we can do to comment about kind of where things stand on that.

Okay, can you --

But they have funded it.

It has been funded.

They originally had funding, withdrew for a period of time, but the decision has now reupped the funding for it, so we expect it to continue.

Okay.

So it is in your guidance that it will be continued?

What we had said previously so outside of either procurement stuff, we had said previously there was some level we were expecting to retain some level of the contract.

Okay.

And then last question, it looks like you revised or adjusted your reimbursement rate outlook at least slightly.

Did you actually receive any new rates that--

No.

--that drove that decision, or is it just general macro factors being considered?

I think it is macro, and we like to talk about the abundance of conservatism that we apply to things, we think we will be able to manage through it.

You see where our guidance has been in spite of that.

Why not create the realistic expectations that some states could be flat.

We are just starting to enter into negotiations with a couple of states.

We have seen no rates from here so why, it is a better spot to be in our judgment.

Okay, great, thank you.

Your next question or comment comes from the line of Josh Raskin.

Your line is now open.

Hi, thanks.

Just following up on Jesse's comments around Florida and the legislative process that is going on this week.

I guess my understanding is that legislature gets out at the end of this week, so is your thought that there is still a chance that there could be an expansion for 2011, or do you think that is really not necessarily too realistic just based on timing?

With the timeframe and the air of political pressure, I wouldn't be surprised if nothing does get out but it doesn't mean that we are going stop talking to people, and attempt to work through that.

How it turned around a little bit short-term, I wouldn't be surprised if they let it sit for the next legislative session.

It is not the end of the world.

We are more concerned that it be done right than quickly, because we have all seen what happens when it is done quickly.

Right.

But it is fair to characterize this legislative session, Florida as being the closest that we have seen for a statewide expansion, right?

It seems as though I think you mentioned momentum there.

As we think about next year it seems like we are closer than we have been.

Is that fair?

Yes, and I don't think the people involved in making that decision are term limited out.

You will have a lot of the same leadership in the legislature that we have now.

So that says something too.

Right.

It is just a matter of timing.

A little bit like the media's question on medical loss and the various states, and the rates, what we have to look at, and we keep coming back to a very much a macro view of all of these things.

We are optimistic, we are comfortable, we are able to increase guidance a few cents.

Why?

Because that is how we see it in spite of all these issues, and so we are always going to give you our best thoughts on that at the time we can see it.

The same thing here, Josh, on Florida.

Makes sense, okay.

And then just a last question you guys break out 87,000 lines as ABD/Medicare, and I know Medicare standalone is relatively small within that total.

As you think about the minimum MLR requirements, and I know it is not until 2014, but is your sense that the ABDs or the DULAs could potentially be subject to a MLR, or do you think because that is on the Medicaid side it would not be part of the Medicare/MLR?

Josh, on some of these things the people that will be helping to write these regs, there is not a lot of track record oh them, to try and guess.

We will put forward our cases what we think should be done.

I expect there will be some consistency in how they want it done, we are working through trying to get that.

We have people in place that can make our position well known, and I think we will come out of it just fine.

Okay.

Thanks.

Hard to give a real specific yes or no to some of these questions.

Right.

Okay.

(Operator Instructions).

Your next question comes from the line of John Rex.

Your line is now open.

Thanks.

So just first thing, post-Wisconsin ending and the resolution of that RFP, are there any other significant contract rebids due up in 2010 at this point?

We have an Indiana contract RFP we are preparing a response to right now.

And when do you expect the decision on that?

Approximately June 1.

Somewhere early June.

And kind of in that one in terms of kind of the direction they are moving on that, is there expected to be a consolidation of vendors, or expansion or what is your view on that?

Well, they are requiring you would be able to quote on both business.

Right.

The state has given no indication that they are looking for consolidation, but they are merging two programs, their Medicaid program, and their Healthy Indiana program, so bidders have to participate in both.

They are having several, an important part of our ability to bid on that.

A decision is due June 1?

Approximately June 1.

Great.

And then --

And there is always the chance the state will be on time.

Right.

Speaking of timing, should we expect kind of the annual late Georgia rate update?

I don't know if there has been a year that has been on time, so that is kind of our expectation that is kind of similar this year, or do you feel like they are further along and we should get it timely this year?

I think each year they have done better.

I think my earlier attempt at humor I actually clarified that no states are under some of the same pressures as everybody else are, trying to get the data, and get it in and trying to get some CMF.

There are so many factors that they can have the best intentions of putting something out June 1, but if CMS has not responded to them in a timely fashion, or wants more information, that type of thing, it is pretty hard too guarantee that anybody will be on time.

I guess again I am just trying to get a sense, get a year of visibility on that one in the process.

Are we still extremely early stage, or is your sense that we are far enough along to get this in on time?

That would give me a better sense of where your visibility is on the process?

We have not received draft rates yet from the state.

We are still on about the same time table I would say, as we are last year, except our hope is that the issues will be a little simpler this year.

Last year the state creating a new payment methodology for the low birth weight infants which delayed the rate approval by CMS.

It is still early in the process.

We don't have draft rates yet, so it is very difficult for us to estimate when that process will be.

And then the last thing, back on the kind of excise tax issue, and I know this is a long ways out.

Maybe in your key markets, maybe focusing on Texas because I think Georgia is less relevant on this aspect, how prevalent are the tax exempt MCOs in a market like Texas?

Roughly what kind of share do you see them having?

Right now at the moment they are exempt from the excise tax.

The preponderance in Texas seems to be the for profit health plans.

Do you have sense of the tax exempt MCOs, so some of these are going to be provider sponsored I am sure.

John, it is small.

You look at we are the big provider, you have the other public companies down there that are major players, or at least players.

You look the at the EPO, one of those plans in general, those types of things.

I think that it is not a big presence.

Do you have any markets where there is a bigger presence?

I think probably Minnesota.

I think Michigan has a bigger presence.

I was thinking kind of markets where you guys are in?

I think Florida.

You have -- Ohio.

Ohio is one.

Massachusetts.

Massachusetts has a lot.

Right, okay.

You probably have as much information as we do on that.

Yes, okay.

Great, thanks.

Your next question or comment comes from the line of Tom Carroll.

Your line is now open.

Hey guys, thanks for taking a second question.

I was thinking a little more about your reserving levels, and what you reported this quarter and just the timing of things.

I guess I expected to see some positive development in the quarter, given flu and kind of some of the medical cost trends that the industry has been battling through over the last year, and you have managed the challenge as well.

So I guess two quick questions.

Do you feel comfortable with your current level of reserving?

And secondly, did any PPD kind of impact the income statement this quarter?

I will start, and then ask Bill to jump in here.

I think it is important that we have said publicly, we have three people looking at the reserve level.

Our internal people, an outside actuary, and that expertise, and we have our accounting firm's actuary.

We have three views of it, so we are comfortable with what we have booked, and that we maintained the same level of that we have on every conservativism that we have.

Nothing has changed really in our reserving practices.

The total value of our medical claims liability changes every quarter based on the two weeks before, of the end of the quarter how many claims were processed, a little bit there in terms of numbers of days and it shifts around a little bit.

If you look at the press release, for example, and what we have sewn over the past three or four quarters the amount of prior period development is included in there, I think it is $49 million for last year at this time, so that has been pretty consistent over the last four quarters.

We don't think we have changed anything.

We think we have the same level of conservativism as we are establishing reserves for the more current periods, and so we don't think that really impacted our income statement in any material way in the quarter.

I am back to what I said historically, the past couple of quarters.

One, we have some systems.

We have that dashboard we have tried showing people.

We have some predictive modeling that we showed people in New York that give us another cut at where we are.

The dashboard gives us realtime based on if I turn it on today, it is going to have some claims paid last night, realtime type information which makes a major difference.

And we are managing it.

We use date received versus paid triangles, that is one of the companies that has acknowledged that is how they do it.

I think a lot of it is systems have been consistent, and if you go back over the years the negative surprises I think we had one that I can think of in the years that we have been public.

2006.

2006.

Now that was the pharmacy thing and I will never forget it, it was Indiana and Ohio, increased use of I think it was.

Pharmacy issue , in terms of how they were using some drugs, and they putting some things that should have gone through one system through the other claim system, so we closed that

Sounds like you are comfortable there.

Thanks for the clarification.

Sure.

(Operator Instructions).

If there is no more questions we thank you for participating, and we will see some of you at various conferences, and others we will talk to another quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.