Centene Corp (CNC) 2010 Q2 法說會逐字稿

Good morning and welcome to the Centene Corporation second-quarter 2010 earnings conference call.

All participants will be in a listen-only mode.

(Operator Instructions) After today's presentation there will be an opportunity to ask questions.

Please note, this event is being recorded.

I would now like to turn the conference over to Ed Kroll.

Please go ahead.

Thank you and good morning, everyone.

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

Thank you for joining us on our Q2 earnings call today.

Michael Neidorff, 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 at Centene.com or by dialing 877-344-7529 in the US and Canada or 412-317-0088 from other countries; and for both of those, the playback number is 442132.

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 July 27, 2010, today, and other public SEC filings.

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

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

We would also like to announce that our next annual Investor Day will be held June 14, 2011, in New York City.

Please mark your calendars.

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 second-quarter 2010 earnings call.

As has become our practice, I would like to take a moment to discuss certain timely topics for our Company and industry before I begin to comment on another solid quarter.

First, I would like to reinforce our commitment (technical difficulty) part of our strategy that we have been communicating to use for this past year.

In order to be responsive to the needs of our state customers, we have expanded beyond our historic focus on managed care.

Centene is now offering cost-effective healthcare coverage for under- and uninsured low-income populations, significantly expanding our addressable market.

It is the combination of Centene's Medicaid experience and Celtic's individual and small-group skill set, recently enhanced by Nova systems, that gives us the ability to leverage our networks and infrastructure by offering hybrid health plan solutions.

We can effectively serve these populations as they move in and out of Medicaid eligibility, from fully subsidized to partially subsidized and even to tax-subsidized small group plans.

We have been talking to states and are seeing more and more heading in the direction of setting up state-based exchanges or other coverage solutions for their uninsured and underinsured populations.

Our first experience with the state-based exchanges is with the Massachusetts Connector Authority.

We have built on our initial efforts in Massachusetts; now have a hybrid plan in place in Arkansas; and in 2011 will commence Healthy Indiana, the state-mandated participation in this Healthy Indiana program and its recent Medicaid reprocurement.

We foresee others states following suit in the future.

In summary, this experience gives us the ability to serve both Medicaid and exchange-based populations of approximately 32 million people in 2014.

Next, let me discuss some state budgets.

State budgets remain under pressure, and the big concern right now is the expiration of extra FMAP funding at December 31, 2010, and whether or not it will be extended through June 30, 2011.

If it is not extended, it will likely serve as a catalyst for states to move more quickly to embrace cost-effective managed care solutions.

While I cannot answer whether or not the FMAP funding will be extended, I can say at Centene we are proactive and have already reached out to our state partners with scenario planning that assumes no FMAP extension.

We are managers, not victims, and believe it is important to plan for all eventualities.

Our medical management tools including predictive modeling and the dashboard allows us to demonstrate to states where there is an opportunity for cost savings while enhancing quality.

This is how one becomes a total low-cost producer while maintaining fair reimbursement for providers.

There are a few states that are considering linking the status of some programs to FMAP solutions or extension.

For example, Massachusetts is reviewing whether it would continue our Commonwealth Bridge contract for legal immigrants without the extension.

We are currently working with the Commonwealth on alternative ways to continue the program in the event of no FMAP extension.

On the rate front, as we have discussed before, we have known rates representing approximately 70% of our projected 2010 member months.

We have previously said that once the other 30% of the book was finalized, we expected the overall rate increase of zero to 2% for 2010.

However, our most recent discussions with the states that represent the remaining 30%, while not yet finalized, have been more constructive than previously expected.

So we now believe that our 2010 overall rate increase will be in the range of 1% to 3%, up from the prior zero to 2%.

This offers fresh evidence of rational pricing environments despite strained state budgets.

Our ability to deliver measurable cost savings to states while enhancing quality of care makes us a good partner; and as such we seek only to offset medical cost trends and maintain actuarial soundness.

Now I would like to discuss some of the highlights of the second quarter.

In May 2010, our Texas health plan was awarded a new ABD contract in Dallas service area, subject to final contract negotiations.

This new contract is expected to commence on February 1, 2011.

In May 2010, we announced the acquisition of certain assets of Nova Health Systems LLC, a third-party administrator in Arkansas.

That will complement our existing Celtic position by adding back-office skills and regional PPO capabilities that we believe can be leveraged and expanded as part of our overall strategy.

Nova Systems manages a hybrid program in the state of Arkansas for employees of small businesses.

This acquisition closed on July 1, 2010.

On June 1, 2010, we completed the acquisition of certain assets of Carolina Crescent Health Plan, the addition of which gives us a total of 92,600 at-risk members in South Carolina at June 30.

In June of 2010, our Indiana plan was selected and into contract negotiations for a statewide managed care contract effective January 1, 2011.

Upon completion of the contract, we will have to serve -- we will continue to serve Hoosier Healthwise members as well as being -- in serving Healthy Indiana Plan members on January 1 of 2011.

Healthy Indiana is Indiana's hybrid program for underinsured adults who earn less than 200% of the federal poverty level, do not have access to employer-sponsored health insurance coverage, and have been uninsured for the previous six months.

Now we will discuss the financial highlights of the second quarter, and Bill will provide additional details in his comments.

Second-quarter Premium and Service revenue grew by 12.8%, driven by at-risk membership growth across all states as well as the continued conversion of members to the at-risk plan in Florida.

Our consolidated second-quarter HBR increased 70 bps year-over-year and improved 20 bps sequentially to 83.8%.

Our long-term consolidated HBR guidance remains in the range of 84% to 86% based on the inherent volatility of this metric.

But as Bill will discuss, we have narrowed our guidance for the second half of 2010 at a slightly improved rate.

Turning to General and Administrative expenses, the G&A ratio for the second quarter of 2010 was 12.7% compared to 13.9% in the second quarter of 2009.

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

We reported $0.45 of earnings per share from continuing operations for the quarter.

This number was impacted by higher share count from our 2010 follow-on offering and the previously mentioned drug carve-out in Ohio and Indiana.

Before I turn the call over to Bill, let me offer some final comments.

We continue to be successful in a difficult economic environment.

We continue to increase the diversity of our enterprise by both product and geography.

Our growth drivers are multifaceted.

New business in existing states; new states -- for example, Mississippi will be our 11th state; and prudent M&A.

We also use legislative changes like DRE as a catalyst for going or doing more business in our existing states.

There is an active M&A pipeline with ample acquisition opportunities available in the current environment.

We are pleased to have already 50% of the run-rate dilution from our offering in January by deploying just 25% of the offerings proceeds.

However, we remain selective, prudent, and cautious about every project we evaluate.

We will not take unacceptable risk in order to grow our top line.

Protecting our earnings stream is crucial, and we will continue to be bottom-line focused.

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

Bill?

Thank you, Michael, and good morning, everyone.

For the second quarter of 2010, Premium and Service revenues grew to $1.05 billion, an increase of 12.8% compared to the second quarter of 2009.

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

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

At quarter end, we served 113,100 members on and at-risk basis, while Access served 46,800 members on a non-risked basis.

Second, the commencement of operations in Massachusetts under the Commonwealth Bridge and Commonwealth Care programs at June 30, 2010, CeltiCare Health Plan of Massachusetts served 30,100 members.

Third, in June we completed the acquisition of certain Medicaid assets of Carolina Crescent Health Plan, which serve 40,000 Medicaid members in all 46 counties in South Carolina.

This acquisition brought our South Carolina membership to 92,600 at June 30, representing 13% of the state's eligible Medicaid population.

It should also be noted that the 12.8% year-over-year increase in revenue was moderated by the effects of the pharmacy carve-outs in Indiana and Ohio, which took effect at the beginning of the year and reduced revenue by approximately $48 million in the second quarter of 2010 compared to the second quarter of 2009.

Excluding the pharmacy carve-outs, Premium and Service Revenues would have grown by 18% in the second quarter, consistent with our at-risk membership growth.

Our consolidated Health Benefits Ratio was 83.8% for the second quarter of 2010 compared to 83.1% in the second quarter of 2009 and 84.0% in the first quarter of 2010.

The 70 basis point increase between years was primarily due to new markets reserved at higher rates, which accounted for 60 basis points of the increase.

The 20 basis point sequential decline in HBR is primarily due to normal seasonality.

Our General and Administrative expense ratio for the second quarter of 2010 was 12.7% compared to 13.9% in the second quarter of 2009.

The 120 basis point improvement in the G&A ratio reflects the impact of our ongoing efforts to contain costs and our ability to leverage our expenses over higher revenues.

For the second quarter, we did not incur the level of startup costs in Mississippi that we had previously anticipated, which benefited the quarter by approximately $0.03 a share.

This is primarily a shift from the second to the third quarter as we ramp up our efforts for a fourth-quarter startup.

Our second-quarter investment and other income was $4.1 million, a $276,000 decrease year-over-year.

The decrease in investment and other income reflects decreased investment balances.

Interest expense of $3.9 million declined $291,000, reflecting the reduction in debt outstanding.

Excluding the effects of non-controlling interest, our second-quarter tax rate was 42.9% compared to 36.3% in the second quarter of 2009.

This increase was primarily driven by legislation enacted in the second quarter in the state of Georgia, which replaces the state income tax with a premium tax for Medicaid Managed Care organizations effective July 1, 2010.

As a result of the new legislation, we will be unable to realize the future tax benefit from deferred tax assets related to state net operating loss carryforwards.

Accordingly, a deferred tax asset of $1.7 million or approximately $0.03 per share was written off during the second quarter of 2010.

As a result of this writeoff, for the full year of 2010 we expect our tax rate to be approximately 40%.

Our diluted earnings per share is $0.45 this quarter versus $0.47 a year ago.

The 2010 results reflect the dilution from the additional shares issued as part of the stock offering in the first quarter of 2010.

For our discontinued operations, we recorded a pretax loss of $316,000 related to New Jersey health plan operations in the second quarter as we wind down operations and pay the remaining claims.

Regulatory capital will be returned over the next 12 months after receiving regulatory approval.

It is currently estimated that statutory capital to be transferred to the Company's unregulated cash will be approximately $10 million.

At June 30, 2010, we had cash and investments of $852.4 million, including $813 million held by regulated entities and $39.4 million held by unregulated entities.

Our subsidiaries, including New Jersey, had aggregate statutory capital and surplus of approximately $480 million compared with the required minimum aggregate statutory capital and surplus requirements of approximately $280 million.

We have estimated our risk-based capital percentage to be approximately 360% of the authorized control level at June 30, 2010.

Our total debt was $252.8 million and our debt-to-capital ratio was 24.5% at June 30, 2010, compared to 33.2% at December 31, 2009.

Our medical claims liability totaled $455.4 million, representing 48.2 days in claims payable.

This is a 0.5 day increase from the first quarter of 2009,(Sic-see press release) and a reconciliation is provided in our press release.

For the second quarter and the first half of 2010, operating activities used cash, resulting in negative cash flow from operations of $59.8 million for the second quarter and $98.3 million year-to-date.

As we mentioned on our fourth-quarter call, certain states prepaid their January 2010 capitation payments in December 2009 in the amount of almost $92 million.

These prepayments caused a decrease in our cash receipts in the first half of 2010, as reflected in the lower amount of unearned revenue at June 30 of $5.7 million.

In addition, there were $57.7 million in receivables related to state capitation payments at June 30, 2010.

Since June 30 is the fiscal year-end for many states, several of our states deferred their June capitation payment for all managed care companies in their state until July.

All of this $57 million was received in early July.

We expect our second-half 2010 operating cash flow to be strong, although the level of premium payments received prior to any quarter-end may vary from period to period.

Now I will give some updated guidance numbers.

For 2010, we expect Premium and Service revenues of $4.35 billion to $4.45 billion.

We are increasing our earnings-per-share guidance from $1.75 to $1.85, to now $1.78 to $1.86.

We expect an HBR ratio of 83.5% to 84.5%; a G&A ratio of 12.4% to 12.9%; and 50.5 million shares outstanding for our earnings-per-share calculation.

The HBR ratio for the year has been decreased to reflect the actual results incurred in the first half of 2010 and the impact of a fourth-quarter start date for Mississippi operations.

Operator, you may now open the line to questions.

(Operator Instructions) Daryn Miller, Goldman Sachs.

Good morning.

Thank you for taking the question.

Was wondering if you can remind us what states are remaining this year that you are expecting to see rate increases on; and what would the effective dates of those rate increases be?

Texas, September 1.

Florida, September 1 -- Jesse?

And Georgia, which is July 1 and always retroactive.

Great.

Can you comment on the higher claims inventory at the end of the quarter?

Yes, I think that that is really just a function of the processing at the end of a quarter.

We try to pay the high-dollar claims and get those out quicker.

And the level of inventory can vary from month to month end.

But nothing special about it.

Okay.

Then lastly, which states deferred their payments from June into July?

I think we had -- Georgia?

Georgia and Wisconsin were the primary ones.

And again, I think we received all of that by July 7.

Great.

Thank you very much.

Brian Wright, Collins Stewart.

Thanks, good morning.

Can you help us with the quarterly premium tax levels going forward?

Yes, I think a couple things to maybe mention there.

The volatility in the premium taxes is one reason why we focus on Premium and Service revenues as our measure of revenue growth.

In the second quarter of 2009, for example, Wisconsin paid us about $84 million for what they call their hospital tax assessment, which we then turn around and pay out to the hospitals.

That was almost a year's worth of payments received in the second quarter of 2009.

And in the second quarter of 2010 they paid us even less than the normal run rate that we would have anticipated.

So a lot of that is just dictated by when they pay us the amounts.

So Wisconsin has a higher rate than most other states, so that has -- shows some volatility in the premium taxes; and going forward we would expect them to go back to their normal process and run rate.

But again, that is subject to actually how they manage that.

Yes, it is really a direct pass-through.

It has absolutely no earnings impact.

That is why we -- really when you look at our statements we look, as Bill said, the revenue [net of it].

No.

Yes.

No, no, absolutely.

I just wanted just for modeling purposes, and I know it doesn't matter to EPS, but just wanted to see clarity on that.

So I guess it is closer to the first-quarter levels then for the back half of the year?

I think that is a reasonable -- somewhere between the second- and third-quarter amounts.

Okay.

No, thank you.

Then can you give us some help on breaking out the Massachusetts enrollment, between the Bridge and the Celtic, exchange based lives and everything?

Jesse?

Yes, I would say, Brian, that we have got three products at this point between the CommCare program, the Bridge program, and the CommChoice program.

As you know CommChoice is the most recent and therefore the smallest population.

CommCare has continued to grow because we are the low-cost producer within that product.

And Bridge has been relatively stable.

So as it stands right now I would say Bridge is the biggest, but not really growing.

The growth that we're seeing is in the CommCare product.

Okay, thank you.

Another question.

The Carolina Crescent, that was an asset purchase.

So there was no additional medical claims payable that came over from that, correct?

Yes.

Great, great.

Then one last one -- or actually two more, sorry.

The NovaSys, how many lives is that going to be on closing?

How will we break out between risk and non-risk?

Not sure we measure that with lives on the NovaSys side.

Nonrisked?

Right.

So that is something you will see adjusted in our tables for that.

Okay.

So it will be just total fee revenue then?

Right.

Yes.

Okay.

Then lastly if I can, the Ohio and Texas pharmacy carve-out, has there been any movement recently on getting those carved back in?

It's fair to say we are in ongoing discussions.

We don't expect to see anything immediate, but some of it may be based on their fiscal year.

So we just continue to talk to them, respond to their questions [as we're doing].

All right, well, we look forward to hearing more.

Thanks.

Tom Carroll, Stifel Nicolaus.

Good morning.

A couple quick ones.

First, on the Mississippi costs, what was the primary rationale to shift them into third quarter?

Then will the cost be higher in third quarter than prior expectations?

Or is this a scenario where setup costs were just lower than you expected?

I think that the costs will be higher in the third quarter because we didn't incur the cost in the second quarter.

But we have been working with the state on the startup date and all of the functions that need to be ready to go at that point in time.

And until they had done a couple of things on their end we weren't actually ready to ramp it up.

That is now in full speed ahead, so that is all occurring right now.

So there will be the costs that you normally incur prior to the first day you are generating revenue, which is you have to build the staff and have the offices ready to go in advance of before you generate revenue.

So those will all be incurred.

Higher level, the $0.03 that we benefited in quarter two, we expect to spend in quarter three along with other amounts that we have previously intended.

Okay, great.

Then, Michael, a follow-up on your comment about FMAP extension.

As you have reached out and talked to states, do you believe that states have a Plan A versus Plan B, if you will?

That they -- would they rather just have more money?

Or are they really going to do something if FMAP is not extended differently than perhaps you expect right now?

I think a lot of it depends on the state.

The governors and the election timetable -- are they up for reelection in November?

Are they on a different cycle?

There's a lot of variables there.

But I think clearly they recognize that the FMAP will -- they have to wean themselves from it.

The states we are talking to clearly recognize that time and are talking more aggressively about moving to managed care as the alternative to save the necessary funds.

Is the fact that this FMAP extension is not finalized yet, is that preventing you from making further comments about upcoming rates, like Texas, like Florida, like Georgia?

I think you given us a little more clarity on second quarter about rates.

No, I don't think that is the issue.

We are really just working with the states.

What we are finding is, because of some of the systems and the fact we have real-time data virtually every day that we can look back on, we are supplying this to the states.

Our actuaries are working with theirs and trying to get to the right answers.

So I don't think it's FMAP.

Also CMS -- they have to submit rates for approval by CMS, ad they have to go through a process.

Until that is all completed we really don't have final rates.

It's never done till it's done, but all indications are that it is more rational than what some people recently thought.

Last quick one.

Will the tax rate of 40% continue into out years?

Well, I think that the 40% tax rate is our blended rate for 2010, which reflects the $1.7 million in writeoff we took on the Georgia NOL.

So if you took that out of there we think our underlying tax rate would probably be closer to 38%, 38.2%, somewhere in that range.

So that is probably the rate that we would expect to see, for example, in the second half of the year.

But for the whole year, it will be close to 40%.

So in 2011, we should go back to your more normalized run rate?

We believe that the write off was a one-time event.

Perfect.

Thank you.

If you have a good window on what all taxes are going to do '11 --

I don't.

We would all love to hear it.

Chris Rigg, Susquehanna Financial Group.

Thanks, good morning, guys.

I was wondering if you could just talk a little bit about the Healthy Indiana program and how we should expect that to ramp.

And a little bit of the specifics there, whether there is an auto-assignment component to it, or people have to select you guys to utilize your plan.

Mark, you want to take that?

Yes.

So there is going to be an open enrollment period in fourth quarter for the January 1 start date.

So members will have to choose us.

We are the new player so we are going to be engaged in a lot of activities to encourage that choice.

But I think we expect it to be a fairly slow ramp.

Okay.

How big is Healthy Indiana today?

How many?

Approximately 45,000 total in-state.

Okay, okay.

Then just looking at the P&L here in the quarter, the Service revenues had ticked up sequentially; and it looks like the cost of those Services had come down sequentially.

I am just wondering if you can explain the dynamic there and what happened on the cost side in particular.

The primary thing there is we receive -- Access Health Solutions receives certain performance incentives based on the results of their medical experience in Florida.

That is usually on a 9- to 12-month lag.

So they receive some of their performance bonus money in the second quarter, which there would be no associated costs with that.

So that was the primary reason for the increase on the Service revenue.

Okay, okay.

Then I guess my last question again goes back to FMAP.

Michael, you had commented that you have obviously been having proactive discussions with the states and I guess what you would do in the event you don't get the monies renewed.

In your opinion, having a 6-month fix, if you just get something through June, does that really materially solve the problem?

Or do you think that the states need a longer-term solution?

If they need to be weaned off that money, how much time do they need to get to where they need to be?

Or at this point it is just --?

It's a great point, because we've been saying for some time now that that money will come to an end.

And when some of the states that are recognizing, see the activity in, hard dealing with that.

But I think they would need a minimum of six months to start to -- to get things in place.

If they started right now from a dead start it would probably be a minimum of 6 months.

But some of these states we have been talking to, they haven't been sitting still.

They have been starting to work through a process.

We talked to one state where they said they are looking at RFP and things of that nature.

Okay, all right.

Great.

Thanks a lot.

Scott Fidel, Deutsche Bank.

Thanks.

First question, just in Massachusetts, how much of your enrollment up there is in that immigrant program that may be not be extended because of FMAP?

The current enrollment is a little over 20,000 members.

Okay.

Then second question, just on just some more color on the change in view on the rates.

It looks like you have three major states that are still yet to be finalized, and you have a bit of a better view on rates there.

Is it that all three of the states you think might be looking a little bit better?

Or is there one or two of the states that are sort of driving that better view of 1% 3% rates?

I think they are all showing a responsible approach to dealing with the data.

Okay, so it is all three of them look a little bit better than what you initially were thinking?

Yes, some; some are better than others.

It's just what we are seeing is they recognize when we show them the data we have that there are some issues.

So we are not asking for -- in all cases asking [to pay] the rates.

We just want a -- here is what is a responsible rate to keep things in a actuarially sound position.

Okay.

Help us think about what you think the underlying medical cost trends right now are in the TANF business?

Obviously there's a lot of mix shifts in the business.

But if we just break out TANF and you think about that underlying trend versus the 1% to 3% rates, and break that out in terms of what you think underlying unit cost trends are right now, relative to utilization.

It is really in that same low single-digit area.

Is it low single digit for both the unit costs and utilization?

Yes.

Okay.

Then just one last question.

Just thinking about the hybrid products which are probably going to be a bigger mix of business for you over the next couple years, can you talk about what PMPM premiums are in that business relative to, let's say, a traditional TANF member and how you think about the margins?

So as we think about modelling this longer-term how should we think about the premium trends in that business?

Jesse?

I would say -- it is hard to tell, obviously, at this point given the variability of benefit designs and some of the other things in these programs.

But by definition these are going to be somewhere in between a Medicaid program and a commercial program.

I would expect that the premiums would be somewhere in between a Medicaid paying a premium and a commercial premium.

So you think somewhere like 150 to 200 PMPM?

It is hard to put a number on it, I would way at this point.

For a richer -- if a state is going to design a richer benefit, I would expect the premiums to be higher than that.

So they will be (multiple speakers)

(multiple speakers) cost sharing they do, it is just really -- we are calling it a hybrid because it is really, just as Jesse said, between the Medicaid and commercial.

And it is how they decide design and what features they put in will drive that, Scott.

Okay, so maybe more like 200 to 250.

Then just on the margin side, you think about that again, sort of running in between what you think if we think about Medicaid margins maybe being 3% to 6% pretax, and commercial at least traditionally being sort of mid to high single digits -- that the hybrid would be somewhere in between that?

Or would it be closer to Medicaid?

I guess.

We typically -- we have said that we see margins going forward in the 3% to 5% range.

So I think they will contribute in that range.

Okay, thank you.

Scott Green, Bank of America Merrill Lynch.

Hi, thanks for the question.

Could you update us on your interest in the Louisiana market?

There is no RFP there, so I think health plans need to start building networks there sometime soon, if they are interested.

Go ahead, Jesse.

You're doing development.

Yes, I would say that we are intimately aware of the activities in Louisiana, and we continue to look at all states and evaluate if these are good opportunities for us.

Okay.

Do you think Louisiana is a good opportunity for you?

I think generally we would not -- we don't comment on our decisions to enter states before we actually enter the state.

We usually let the state announce who has entered.

That is just the safest position to take.

It avoids a lot of speculation.

Okay.

Then a follow-up question on Massachusetts.

Was the Commonwealth Care auto-assignment suspension lifted or is that still in place?

It is kind of both, I would say.

So there was a removal -- or reinstatement of auto-assignment in the second quarter of -- calendar second quarter of 2010.

At this point in the context, as Michael mentioned, of the state budget, they are reevaluating the auto-enrollment for the current quarter.

So third quarter of 2010.

Okay, so maybe could you help us out directionally on just your enrollment outlook in the state there?

Do you think it should continue to slowly rise like it did this quarter?

Any outlook?

I would expect continued -- given our cost position in the market, I would consider (technical difficulty) consistent, slow but consistent increase in (technical difficulty) CommCare enrollment.

Okay.

Then lastly just to clarify, so is your Bridge contract good through year-end now?

And then maybe longer depending on what happens to FMAP, but at least through year-end?

Yes, the current contract was renewed from July 1, 2010, through June 30, 2011.

We are working with the state on the funding for that contract and any implications on time.

But your understanding is now it is still in place and it should be in place through the end of the year at least?

As a planning assumption, that is what we are working with the state on.

Okay, thank you.

I want to emphasize though it is 20,000 lives, so we are working with them on it.

We are putting attention to it.

But it is 20,000 lives on a lower premium product.

Okay, thanks.

John Rex, JPMorgan.

Thanks.

Could you just step me through again the cash flow?

So thinking about the first half, can you roll me through where we are in July?

Just I want to see where we are now.

So I think you said for about $100 million negative in operating cash flow for the first half, you said I think you got a $57 million cat payment early July, right?

Right.

Two things, I would say.

The states paid us in advance in 2009 so we had a very strong cash flow from operations in the fourth quarter of 2009 and for all of 2009.

I think it was like 2.8 times earnings in 2009.

So obviously if we got the $92 million in 2009 that was not paid to us in this year at the June 30 quarter end.

The $57 million was deferred from June until July.

We received that in the first few business days of July; and that is all in the bank I think by July 7.

The real question on cash flow is what the states are going to do at any quarter-end.

So September 30 or December 31, will they pay us in advance or not?

I have no way of telling whether December 31, 2010, we would receive another $92 million at year-end like we did last year or whether we got it the first week of January.

So that is the issue is just the variations at any quarter-end in terms of what the states will do.

I think an important factor, John, is that this is not a matter of payment that is in dispute in any way.

This is non-disputed cash, which is essential.

It is just the states deciding on the timing.

I know last December -- I remember in January we talked on the year-end call that we had gotten all the strong cash flow, that it would impact the first half of '10 and maybe longer.

So it is the same time -- if we get paid June 30, as you know, I am not telling you anything don't know.

If we get paid June 30 or July 1, it is how it is reported on the quarter; but it is still the same Company with the funds in the bank.

And this is applied equally to all managed care organizations within a state.

It is not just us.

Right.

But if you look at yourself through where we are in July right now, are you still ahead on payments for calendar 2010?

That is sort of behind [us], so that is -- shouldn't you be evening out here?

We will even out in the second half of the year, we believe.

We've got the $57 million we said which was not paid at June 30.

But again, the $92 million we received in 2009 related to 2010 was benefited in 2009.

Yes, I'm not forecasting this will happen; but if one of the states, a Georgia or a Texas, somebody says -- we are going to pay you October 1 instead of September, it is not something we really control.

It is part of the states' budgeting system.

In all honesty, we would prefer they push it back a week or something rather than have lower rates.

So it's (multiple speakers)

So if you are on a normal payment pattern, let's say you get on a normal payment pattern over the course of the 3Q, are you going to be in a meaningfully positive cash flow position by the end of 3Q?

It still seems like you would be lagging even with a 3Q on a normal payment pattern.

Well, we are minus $100 million roughly going into the third quarter, so we would have to make all of that up.

We do expect to have a strong cash flow quarter, but whether we make up the whole $100 million that we were short for the first six months we will have to wait and see on that.

If we got that $100 million, plus all normalized payments for the quarter and they didn't drag any others, it would be a strong quarter.

Okay.

If we get $100 million and they drag $50 million of it, it is still a good quarter.

You just can't -- it's just not something easy.

A lot of it has to do with how their tax revenue comes in.

As I said I think at Investor Day, this is really -- it's not even an economic issue because it is a matter of days that they defer the payments in most cases.

So it is really more just the metric for cash flow that is impacted.

Okay.

Then back on your rate commentary, so based upon the discussions you're having with the states that remain in 2010, is your expectation that you won't get a flat rate update from any of those major states?

That they will all be somewhat in positive territory at this point?

Obviously, we have commented that we went from a zero to 2% to a 1% to 3% based on 30% of the (multiple speakers).

So yes, we expect that there will be -- all the states we are talking to will show positive movement.

When will Georgia be done, is your expectation?

[I'm trying to] -- when will that?

Well, they did better last year than they did the year before.

So where would you put it in how far along?

Are you 80% of the way there in terms of being done?

You know, I think they are ready to seek CMS approval.

How long that will take is unclear.

I would hope and expect to see it in the third quarter, but can't be positive.

With CMS approval they can drag their feet.

The person can be on vacation.

This business -- what is important is that we get the rate, that they approve it, and they will retro it to July 1 which will help cash flow.

Has Georgia given you any indication yet how the RFP process is going to work?

I guess this contract renews in 2012 for the first time since you won it.

Is that right?

Yes, that is correct.

So is your expectation that they will be putting out an RFI or anything at the end of this year?

Or will that lag into 2011 when you see that?

Have they let you know if that will be a full-blown re-procurement?

John, you have an election.

The governor has termed out, and you have an election coming up, and you'll have a new governor absolutely for certain come January.

And he will probably have some new people working for him.

And that is when you find out how they want to go about it.

Anything I speculate now would be probably premature.

Is at a given, though, that it needs to be -- that it has to be -- do they have an option to extend another year?

Or is it a given that it has to be re-procured at this point?

Sure, Mark?

I believe they do have an option but I would expect that they will re-procure.

Okay, great.

Thank you.

(Operator Instructions) Josh Raskin, Barclays Capital.

Hi, thanks.

Question around exchanges.

As regulations are going to get put in place over the next few quarters or years even, you guys have a little experience obviously in Massachusetts.

So what should we be watching out for as the regulations come out around exchanges?

What are some of the key important facets of a successful exchange that you guys are looking for?

You guys have been more than obvious about your intent to at least attempt to participate.

I just want to make sure as those regs are coming out that they are right moving on the right pace.

What should we be looking for?

Yes, Josh, this is Jesse.

I think there's a few things we talked about a little bit at Investor Day, but just kind of a refresher on some of the highlights.

I think as we are looking at the structure, I think in a lot of the exchanges are we talking about -- what is the platform, if you well?

Is it going to be primarily a Medicaid platform or a commercial platform?

So I think that one of the big variables there is the composition of the network and the reimbursement of the network.

So network is going to be one of the key variables I think as we look at the model, and particularly in the context of how do you try to manage costs within the exchange program.

So obviously there are certain network strategies and network reimbursements that would impact the underlying cost structure.

Benefit design and flexibility of benefit design is going to be another key variable.

So what is going to be articulated by the state or the entity who is managing the exchange?

And then what is flexible and what it's available for the participants in the exchange to create or modify the benefit design?

So I think those are the two that I would put towards the top of the list as we are looking at the various states and alternatives in the discussions that we are participating in, in this state-based exchange rule-making process.

I think what I will add to that is at some of the Governor Association meetings, that governors have approached us to get our thoughts.

We have talked to them about some benefit design depending on the percent of the poverty level; about carving in the pharmacy; carving in behavioral and other things; how -- the alternatives around that.

So we are trying to -- participating, but it's -- and they are drawing on some of our experience.

We have a voice in it.

But ultimately, they will decide what they want to carve in, what they want to carve out, and just how they want to go about it.

Okay, that's all.

Then I know Michael, you said some of the states were already working towards that.

I know the states have an out, I guess, if they want to sort of punt it and put it to the Feds to create the exchanges.

I know we are still a couple years away, but it doesn't sound like there has been a ton of progress yet.

Do you think there is a chance that some of these are federally run?

Or do you think this will all be done at the state level?

It's really interesting, because I think there's 12 or more states that have referendums that are saying they don't want to participate at all in the state program.

Missouri is one of them; there is a vote August 3 that they are looking at.

Polls are what they are worth at the moment, snapshots.

But -- so I think that states want to be able to manage it themselves without the federal help, unless the federal government is going to guarantee they're getting all the money they need long-term.

What they are worried about is unfunded mandates.

Yes.

Just switching gears to Dallas ABD, what is the total membership opportunity there?

220?

200?

No, in Dallas-Fort Worth, ABD is about 45,000.

I may have it here.

What do you think is reasonable share for you guys?

What are there, two players?

Well, there's two other players.

I'm sorry, I am looking at my notes.

It is 50,000 potential in the region.

Two other players.

We are still working on developing the network there.

It's a little hard to anticipate what membership we will get at this point.

Okay; but a third is not an unreasonable --?

No, we tend to do well with the networks we put together and how we manage it.

Got you.

Then just lastly the Indiana.

I guess you guys have been invited for the contract negotiations.

What is the timing on that?

When do we get final resolution on that?

Well, the state is still talking with all the plans, so I would think in the next several weeks.

But we don't have a hard date.

I mean the states -- while they get fussy on how you articulate it, the reality is they are sitting down and just talking through how to make it work; showing us what they want.

We are looking at the language; they are looking at the language.

You're in the summer months, and we typically see in other states -- because I ask the same questions, Josh.

When are we going to know that it is done?

And they say well, you're heading into August.

They don't have a sense of urgency.

They are dealing with all in-force players, all three.

So it is really a re-up of the three, so it's just a matter of getting through the technical side of it.

All right.

Thanks.

Doug Simpson, Morgan Stanley.

This is Melissa McGinnis in for Doug Simpson.

I guess going back to the rate environment, in those three markets where you are currently having rate discussions, how is the uncertainty around FMAP factoring into those negotiations?

How are those states thinking about the non-extension or the extension of FMAP and what they would do to offset any loss in FMAP funding?

We're not seeing where they are talking about it in that context.

I think I said earlier that these are states that have had plans, recognize the savings.

And it is no secret, for example, Georgia has talked about putting in an SSI membership and maybe doing an RFP in that sometime.

They are looking at their alternatives to expanding the markets and they are focused on the medical cost trends and actuarial soundness.

Okay, thanks.

Then I guess more broadly, how should we think about potential margin pressures in 2011 or 2012?

Given that states will have to eventually be weaned off of this incremental FMAP at some point in the next 12 to 24 months.

I think we are seeing the weaning process now as we just talked about in these states.

We did take our guidance on margins from 4% to 6%, to 3% to 5%.

They want to see the plans be actuarially sound.

You have to have given reserves.

So they recognize that the insurance division talks to HHS and says, keep these people healthy or else we are going to have far bigger problems.

So it's fairly iterative, and there will be pressures but I don't think it's any different than what we're seeing right now.

Okay, great.

Thanks.

Gentlemen, at this time I show no other questions in the queue.

Well, we thank you and we look forward to the Q3 call.

Have a good summer.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.