Centene Corp (CNC) 2010 Q3 法說會逐字稿

Good morning, and welcome to the Centene Corporation's third-quarter financial results 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.

(Operator Instructions)

Please note this event is being recorded.

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

Please go ahead, sir.

Thank you, and good morning, everyone.

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

Thank you for joining our third-quarter earnings call for 2010.

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

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

A replay will be available shortly after this call's completion.

Also on our website, Centene.com, or by dialing 877-344-7529 in the US and Canada, or 412-317-0088 from other countries.

And the playback number for both of those is 444970.

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 today, October 26, 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.

A reminder, something hopefully that you already have on your calendar, our Investor Day next year is on June 14, 2011, in New York City.

If you don't have it on your calendar, please mark it there.

And 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 third-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.

In addition, I would also like to provide some preliminary information on Centene's prospects for 2011.

The midterm elections have garnered much attention this year.

Many pundits have speculated as to what happened and the results to healthcare reform that was signed by the President earlier this year.

We recognize that it is possible for significant Republican gains in Congress.

We also note that the Congressional Budget Office now estimates the cost of reform at $1.3 trillion, with some estimates nearing $2 trillion.

It seems likely to us that the current law will be scaled back.

However, we will take a glass-half-full view if this is the fact.

Regardless of what happens with healthcare reform in Washington DC, states still have major budget deficit and need our help now.

States will be under even more pressure when the extra FMAP funding comes to an end in June 2011.

We have consistently stated that we believe this will present Centene with additional opportunities, as states will have increased urgency to move away from fee-for-service and move towards adopting the cost-effective managed-care model.

Let me now offer some early indications of what 2011 should look like for Centene.

As has been our practice, we will give formal 2011 financial guidance later this year.

We have had an exceptional year in 2010 of new business wins.

We have had -- we therefore want to update the previous 2011 growth outlook we gave you at our Investor Day back in June.

At that time, we said we had visibility of 11% to 13% top-line growth for 2011.

This reflected new health plan business in Mississippi, the Dallas (inaudible), expanded behavioral business in Arizona and a full-year contribution from our Carolina Crescent and Nova Systems acquisitions.

We now have visibility in excess of 15% revenue growth in 2011.

This increased growth reflects Illinois' ABD product, Healthy Indiana and Healthy Texas, as well as our pending Citrus acquisition in Florida.

In addition, as has been publicly reported, we are well-positioned to go live in Louisiana when the state is ready.

There is an unprecedented demand by states for Medicaid products and services such as ours.

We are currently anticipating opportunities in 20 states, including (inaudible) procurement in some of our existing states.

This represents over 11 million total members and over $30 billion in total estimated revenue.

We expect an HBR in the 84% to 86% range in 2011, consistent with our initial guidance.

Our Medicaid plans are exempt from minimum HBR rules, and the impact on our Celtic business should be negligible.

We expect continued G&A leverage in 2011, though with some offset from startup costs for new businesses.

In summary, our view of 2011 is that it should be a strong growth year for Centene on both top and bottom lines.

Now I would like to turn to some of the third-quarter highlights.

Let me begin by saying I think our third-quarter operating results were solid on virtually every metric.

Third-quarter Premium and Service revenue grew by 9.5%, with net organic membership growth of 6.1%.

All of our markets showed year-over-year and sequential growth except Georgia (technical difficulty), flat versus last year, Wisconsin, due to the partial reduction of our service area, and Texas.

In Texas, we did retain 75,000 members, or 53% market share, as the state added a second rural service area vendor in September.

Also, Mississippi has delayed the start of our contract into early 2011.

As you know, this is not unusual in our industry.

As Bill will discuss, we have lowered our 2010 revenue guidance slightly to reflect this delay.

On the rate front, we have received notification of a 5.6% rate increase from Texas.

We are awaiting approval for our Georgia and Florida rates, and, as is our policy, we do not comment on specific rates until they have been fully approved.

The anticipated increases in Georgia and Florida, together with those already received, will yield an average increase of 1.5% to 2.5%.

Our consolidated HBR increased by 50 basis points year-over-year and 40 basis points sequentially to 84.2%.

In general, our reserves have been appropriate and utilization came in as expected.

We have seen a year-over-year decline in utilization throughout a majority of our states.

Days and admits per thousand have decreased measurably in these markets as well.

For example, in Georgia, inpatient days declined 6.5% year-over-year and admits were down 11.7%.

In Ohio, days and admits declined 7.3% and 8.6%, respectively.

Across all markets, our NICU days per thousand births were down 2.3% year-to-date.

We attribute this to our focused medical management initiatives, which use our predictive modeling and claims drill-down tools to targeted members for intervention.

As a reminder, in 2009, we did not see the level of increased utilization that some of our peers experienced.

Therefore, it is important to note that our utilization results are measured against a more stable and consistent base.

The HBR results were adversely impacted by our Florida health plan, which underperformed in the third quarter of 2010, causing a 90 basis point increase in the consolidated HBR.

The margin issues are in the so-called reform counties, where rates have not consistently matched cost trends.

Using our analytical tools, we have concluded that we must exit two of our five reform counties effective January 1, 2011, resulting in the reduction of 7000 members.

Working with the state and using our analytics, we believe the issues in the remaining re-reform counties can be corrected, similar to what we did in Ohio in two years.

Florida remains an important market in the Centene portfolio, and we will work with the state in taking necessary steps to improve our operating performance.

The G&A ratio for the third quarter of 2010 was 12.2% compared to 13.2% in the third quarter of 2009.

We will continue to focus on G&A beyond 2010, while ensuring that we are investing in areas that build efficiency on an ongoing basis.

We had very strong operating cash flow in the third quarter, as the timing issues of the first half of 2010 reversed to our favor, as had been expected.

During the third quarter, we were required to write down the value of our current investment in a medical management software company.

We continue to believe in the value of the software tools being developed by this company and therefore plan to increase our ownership in this strategically important asset to a control position.

This move will allow us to effectively participate in the management of the company.

It will also ensure that the product is satisfactory for all potential users.

The company's tools enhance the ability of our health plan nurses and physicians to see a comprehensive summary of medical utilization at the patient level, as well as the integrated care plans with case and disease management.

We believe this is a critical part of our ongoing effort to enhance medical management IT tools and to do so in a responsible fashion.

Next, I would like to update you on our ongoing efforts to expand beyond Centene's traditional Medicaid-only focus.

According to the US Census Bureau, the number of uninsured Americans rose to 50.7 million in 2009 from 46.3 million in 2008.

We are committed to providing affordable coverage for this escalating uninsured and underinsured population, as well as the growing Medicaid population.

Our Medicaid experience, along with Celtic's individual and small-group skill set, provides us with a competitive advantage.

We were able to effectively serve the populations that move in and out of the Medicaid eligibility, from fully-subsidized to partially-subsidized and even tax-subsidized small-group plans.

Our experience in Massachusetts, Arkansas, Healthy Texas, Healthy Indiana will serve as a key differentiator as we continue to talk to more states about setting up exchanges to manage along the entire continuum prior to 2014.

We look forward to the future opportunities that healthcare reform will bring, but for now we remain focused on 2011 and '12 and the growth opportunities in our current pipeline.

We are pleased to have announced three acquisitions, which together are expected to offset the $0.20 per share dilution from the January 2010 offering, using roughly half of the capital raised.

We will continue to be opportunistic on the M&A front, with targets that are consistent with our strategic goals and that meet our strict financial criteria.

We are committed to being a total low-cost producer, and firmly believe that our analytical capabilities that we have worked very hard to develop will help achieve this.

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

Thank you, Michael, and good morning, everyone.

For the third quarter of 2010, Premium and Service revenues grew to almost $1.1 billion, an increase of 9.5% compared to the third quarter of 2009.

This year-over-year increase was driven by several factors -- rate increases received between years and an increase in membership of 6.1% in our health plans.

This includes approximately 32,000 additional members in Florida, 44,000 in South Carolina and 34,000 in our Massachusetts programs.

Our overall membership growth was impacted by the reduction between years of approximately 48,600 members in our Texas rural CHIP contract, as a second vendor was added by the state effective September 1.

We served 75,000 members in this program at September 30.

Also, in Wisconsin, our southeastern region contract for BadgerCare members was not renewed, and membership declined in Wisconsin by 27,000 members during the quarter.

Last, in July 2010, we completed the acquisition of certain assets of NovaSys Health, a leading third-party administrator in Arkansas that complements our existing Celtic business.

On the rate front, we received a rate increase from Texas at 5.6% effective September 1.

For Georgia and Florida, the rate increases are still subject to CMS approval.

Consistent with prior years in Georgia, no rate increase was recorded in the third quarter, but we expect to record the increase related to the period from July 1 to September 30 in the fourth quarter.

A similar situation exists in Florida, where the September 1 rate increase is expected to be finalized and recorded in the fourth quarter.

Based on the rates implemented so far this year and the tentative rate increases for Georgia and Florida awaiting CMS approval, we estimate the overall composite rate increase to be approximately 1.5% to 2.5% for 2010.

Also, I would like to point out that the 9.5% increase in revenue between years was moderated by the effects of the pharmacy carveouts in Indiana and Ohio, which took effect at the beginning of 2010.

These two carveouts reduced third-quarter 2010 revenue by approximately $48 million compared to 2009.

Excluding the pharmacy carveouts, Premium and Service revenues in the third quarter would have grown by 14.4% year-over-year.

Our consolidated health benefits ratio was 84.2% for the third quarter of 2010 compared to 83.7% in the third quarter of 2009.

The 50 basis point increase between years was primarily due to our expansion in the Florida market, which raises our consolidated health benefits ratio by 90 basis points.

As Michael indicated, we have taken several actions to address the higher health benefits ratio which exists in the reform counties in Florida.

First, we have given notice to exit two reform counties effective the end of the year.

These two counties have approximately 7000 members and added approximately $0.03 of expense for all of 2010.

Second, we have made adjustments to our provider network, which will reduce our ongoing costs.

And third, pending CMS approval, we anticipate receiving a mid-single-digit rate increase in the reform counties retroactive to September 1.

And last, we are continuing to work with the state to ensure that the rates in the reform counties are actuarially sound and appropriately cover the cost of care.

Our general and administrative expense ratio for the third quarter of 2010 was 12.2% compared to 13.2% in the third quarter last year.

The 100 basis point improvement in the G&A ratio is primarily a result of the leveraging of our expenses over higher revenues and decreased levels of variable compensation.

Our third-quarter investment in other income was $700,000, a decrease of $3 million from last year.

During the third quarter, we recorded an impairment charge of $5.5 million, or approximately $0.07 per share after tax, related to our investment in a software company that is developing a medical management system for our health plans and other third parties.

We are in the process of making additional investments in this company, which will give us majority control and result in our consolidating these operations on a go-forward basis.

In the quarter, we also recorded gains of $2 million from the sales of securities and a gain of $300,000 from additional distributions from the reserve primary fund.

During the quarter, we changed our policy to reduce our limit on individual securities to $5 million.

In accordance with this, we sold amounts of individual securities above that level.

The net amount related to the writedown of the software company investment and security gains recognized during the third quarter reduced pretax earnings by $3.2 million, or $0.04 a share after tax.

The increase in the third-quarter interest expense reflects borrowings on the construction loan associated with our headquarters expansion projects, which was placed into service in the third quarter of 2010.

Accordingly, we ceased capitalizing interest during the third quarter.

Excluding the effects of noncontrolling interests, our third-quarter tax rate was 37.0% compared to 35.3% in the third quarter of 2009.

The increase in effective tax rate between years was primarily related to a decrease in tax-exempt interest and an increase in state income taxes, as we discontinued providing a tax benefit from net operating loss carryforwards in the state of Georgia.

Effective July 1, 2010, the state of Georgia replaced state income tax with a premium tax for Medicaid managed care organizations.

Our diluted earnings per share was $0.44, $0.48 from operations, less the $0.04 from net investment write-downs, compared to $0.51 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.

At September 30, 2010, we had cash, investments and restricted deposits of $928 million, including $895 million held by regulated entities and $32 million held by our unregulated entities.

Our subsidiaries had aggregate statutory capital and surplus of approximately $525 million compared with the minimum aggregate statutory requirements of approximately $280 million.

We have estimated our risk-based capital percentage to be in excess of 350% of the authorized control level at September 30, 2010.

Our total debt was $264.2 million and our debt-to-capital ratio was 24.7% at September 30, compared to 33.2% at December 31.

Our medical claims liabilities totaled $457.1 million, representing 47.1 days in claims payable.

This is a 1.1-day decline from the second quarter of 2010, and a reconciliation is provided in our press release.

For the third quarter, cash flow from operations was $72.6 million, which is 3.2 times earnings for the quarter.

Year-to-date, operating activities used cash, resulting in negative cash flow from operations of $25.7 million.

As previously discussed, cash flows from operations in the nine months ended September 30, 2010 were negatively impacted by the timing of receipt of monthly payments, including a $38.7 million decline in unearned revenue from December 31 compared to September 30 and a $68.1 million increase in premium and related receivables from December 31 to September 30.

We received the Georgia September capitation payment in October, and thus received only eight payments from Georgia in the nine months ended September 30.

We should continue to expect potential volatility in our cash flow provided by operating activities, as states may decide to delay or prepay payments based on their cash position or other timing issues.

I will now discuss updated guidance numbers.

We expect Premium and Service revenues of $4.25 billion to $4.35 billion.

This number reflects the adjustment of the Mississippi start date to January 2011.

We expect diluted earnings per share from continuing operations to be from $1.86 to $1.80 (sic-see press release).

Our EPS guidance is updated to reflect the third-quarter actual results, which includes the $0.04 charge for net investment writedowns and for additional startup costs to be incurred in the fourth quarter related to recently awarded new business of $0.03 to $0.05 per share.

We continue to expect the health benefits 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.

Operator, you may now open the line for questions.

(Operator Instructions) John Rex, JPMorgan.

Just a couple things.

First, on med costs, can you kind of give a similar view for [a likely size] for Florida in terms of the impact there, the 90 bp impact, if you'd gotten -- if the Georgia rate increase had been in for the full quarter, if kind of all those rates had been there for the full quarter, what would have been the beneficial impact on loss ratio?

Do you kind of have a broad sense for that?

I think our consolidated ratio, if we had picked up the rate increases from Florida and Georgia at the time they were applicable to, would be about another 30 basis point decrease.

Okay.

A 30 bp impact there.

And then how much development did you have in the -- how much reserve development did you have in the quarter?

We really don't get into that specific number.

I think we show in the press release the development that we had over the last 12 months, and that is about $60 million, if I remember right.

And we've done nothing to change our reserving methodologies or the relative conservativeness of our reserve [settings].

Maybe so I understand that, maybe just was the reserve development favorable in the quarter?

What we do is, we look at it --

Yes, so I mean, again, if you tracked our 12-month reserve development over the last years, it has been $40 million to $60 million.

So (multiple speakers).

What we do is we -- we look on a rolling four quarters, as you know, John.

And what that does is it confirms that what we booked at that point in time was correct.

And we use the same conservative approach to doing it, so nothing changes in how we do it, and it just (inaudible).

It serves us well.

We've not seen wild dilutions in the reserves.

So for in the Q itself, if I kind of had just a quarter reserve development table, I would see it as favorable?

Yes.

Okay, and then just -- do you have -- you gave some good commentary on the cash flow outlook.

But what is your full-year 2010 cash flow outlook right now?

Where do you think that should come in?

And you can size that -- even if you want to size that percent of net income, that's fine also.

The difficulty is trying to predict what the states are going to do -- what they say and what they do sometimes are two different things -- and then what's going to happen in the last week of December, whether you get paid or you don't get paid.

If you recall last year, we had $92 million, I think, of payments in December related to January, which certainly -- and that is part of the cash flow issue today.

They paid us in December for January, and so we don't show that this year; it was in last year.

So I think we expect to have positive cash flow for the year.

Some of the states are talking about making extra payments this year; we will have to wait and see if that actually happens.

But generally, we will be in positive cash flow for the whole year.

I want to add, John, if we get paid December 31 or January 2 (inaudible) the same company, this is not a bad debt or questionable receivables type issue.

It is just a matter of the timing of when the states do it.

I think -- the way we like to look at it, and we encourage people to, is that if you look at in on a long-term basis, it's been consistently 1.5 to 2 times net income.

And quarter to quarter, you are going to see gyrations in the states' fiscal approach, and nothing more or less.

But we (inaudible) collectible; it is a good cash flow business.

It is a -- we don't have questionable receivables out there.

Okay, great.

And then just the last thing.

Has Georgia given you any update in terms of the likelihood of there being an RFP process next year, kind of a rebid during 2011 for 2012?

Yes -- Mark can add to this -- but this will be the sixth year coming up, as I recall, on '11, and so there will be -- we expect (inaudible) in '12.

Mark, do you want to comment on that?

Well, the latest we've heard is the state will issue an RFP in February for a July of 2012 reprocurement.

And is your sense that will include some expansion also?

Possibly.

Again, it is not certain, but it is being considered.

You have the variables of a change in government and a lot of reduction is taking place.

I would say they had --- if we hadn't had a change, I think, predict one specific -- some specific changes in the space of a conversation.

But what happens come January with the new administration, how they choose to -- they could accelerate expansion or they could not.

So we'll just stay in line, just work with them when they are ready.

Great.

Thank you.

Tom Carroll, Stifel Nicolaus.

Your sound quality just dropped a little bit, just FYI.

But maybe it's just us.

Who knows?

Question on your SG&A.

It was a lot lower than we expected this year, especially given your solid revenue growth, Mississippi costs that were going to be shifted into second half, and then the M&A you've done this year.

Could you maybe give us a little more color on your variable comp reductions and why they were necessary?

And then a second question.

Michael, in your opening statements, you mentioned that you expected Republican traction in Congress out of the elections and said that reform could potentially be pared back a bit.

I'm wondering what you mean by that, if you could give us a little color on that as well.

Thanks.

Sure, I'll be glad to.

First, let me comment that analysts are never -- it's never their fault.

So if you're going (technical difficulty).

I'll comment on that and then I will turn it over to Bill to talk about the variable (inaudible) aspect.

As you saw, when the bill was passed, they said it was around $900 [billion] cost over the years; it was going to bring down the deficit.

It is now -- the Congressional Budget Office looked at it.

The people had started to say that study was wrong to be used.

The President himself made some comments on a West Coast tour that there's dogs and cats in there that have to come out.

So I am anticipating that just from a sheer cost standpoint, they are going to start to look at how it is constructed, what the benefits are, what they want to do, how they can mitigate the costs and what the sharing will be with the states, and just kind of a rethink on some of those key factors.

Now, what shape that takes is going to take a function of what kind of negotiations take place (inaudible).

I think -- we're anticipating (inaudible) a positive outlook to see a cooperative environment where there is going to be at least one of the Houses in Republicans' hands, is the pundits' strong belief.

And so if you accept that, then he's going to have to work -- the President will work, hopefully cooperatively, and figure out how they get the bill right.

It is just something to be expected and we are going to work through it and we're well-positioned to work in Washington, as we've demonstrated this past year, and (inaudible).

With respect to our G&A ratio, I think, as I said, we benefited from additional leveraging.

There were less startup costs in Q3 -- for Mississippi since it didn't go live in the fourth quarter.

With respect to variable compensation, we have several plans that are calculated at the business unit level.

In corporate, we have to make adjustments for those, based on the estimated results for the year, and adjust those on a year-to-date basis.

So at 9/30, we've adjusted our accruals to reflect our current estimate for the performance of each of the business units for the year.

Comparables, particularly the incentive part, has really tight guidelines (inaudible).

So if the revenue is down, it may be no fault of ours, but so be it.

So that's going to impact those payouts.

If revenue is up, then it is an improvement.

So the comp committee, the Board, ourselves in management have said we are not going to try and [deal] with it to try and make it favorable when (inaudible).

Hopefully, we responded to your question.

Can you hear us okay?

I'm here, but it is tough to hear you.

But I'll follow up with you off-line.

Thanks.

Chris Rigg, Susquehanna.

Actually it seems to be a little bit worse right now, but --.

Can you hear me now?

Is this any better?

I can hear you.

You commented on the 15% top-line growth expectations for 2011.

I was wondering if you could give us some color in terms of your rate expectations for next year.

We anticipate rates still in the low single digits as we've seen now.

Okay.

And then as to the question earlier on the G&A, can you give us a sense for what would be a reasonable G&A target as a percentage of revenue over the next -- over the near-term next 12 months or so, where we think that would come out?

I think -- part of it is -- of course, we give you a consolidated number based on specialty companies, which is G&A, very little health care costs and the health plans.

So based on the timing, when the plans go live, that is going to influence it.

So we typically -- we've said typically that it is in the 12.4 for full-year '10 to [12.9 '13] has been the guidance we gave.

And so we work hard to stay within that.

We are improving, and some of it is the timing of new opportunities.

But as we give guidance on the full year, towards the end of the year, we will better understand some of the timing and can go -- and we can give you more color.

Right, right.

But is it safe to assume that we should see at least some -- you said leverage, so it should come down at least on the extremes, at the high extreme, as a percentage of revenue.

We're going to work to bring it down.

But if we get three, four new opportunities in one quarter and we are bringing things up quickly -- we all know there is a lot out there; we have a very full, robust pipeline -- that could impact it.

So we are willing to sacrifice a little G&A to bring on lots of new business that will give us the impact of earnings a quarter, two quarters later.

So yes, I would hope -- our goal is to continue to focus on it.

And we've seen the kind of improvement we've shown you, and anything we can do to manage that, we will.

Sure.

And then just a couple quick points of clarification.

The Georgia and rate updates, you have embedded an assumption into your guidance for the full year, or you're not assuming anything right now?

Our guidance includes an assumption that we will receive the rate increase that we've been discussing with the state in the fourth quarter.

In Georgia, for example, it will cover the periods of July 1 to December 31 in this fourth quarter, as we've done in the last three years, I think -- similar situation.

For Florida, that same assumption for the rate increase applicable to September 1 to December 31, that will all be reported in Q4.

Okay.

And then similarly, on the startup costs of $0.03 to $0.05, did you say that was all -- that is what you are expecting in the fourth quarter?

Yes.

The number that I gave of $0.03 to $0.05 means that as a result of the new business wins which Michael referred to, we will have additional fourth-quarter startup costs to absorb of that amount.

Okay.

And then finally, just one.

On the interest expense, the $4.9 million that you saw in the quarter, is that a good run rate going forward?

I think so, because our building was completed at the beginning of the third quarter.

So the run rate for the third quarter should be a reasonable one.

Okay, perfect.

Thanks a lot.

Brian Wright, Collins Stewart.

On the Florida situation, with the two of five counties that you are exiting, is Florida being driven mostly by ABD, given the ABD MLR being 480 basis points higher year-over-year?

Or with the specialty up 740, what exactly -- what part of the population is driving that in Florida?

Let me speak to that.

Number one, Florida is covering both Medicaid and ABDs -- or SSIs.

So that is embedded in those rates on an overall basis, so you can imagine if you took Florida out, those ratios would be much better.

Overall, we said it is a 90 basis point impact, meaning that all of the rest of our business, we would have been at -- what was it 83.3; and Florida raised the total up to 84.2.

With respect to the Specialty ratio, that really has increased as a result of additional costs in our acute care business in Arizona in the quarter.

That is what - and a little bit this whole year -- and that is what has driven that rate up.

(Inaudible)

(multiple speakers) it's one county in Arizona.

Okay.

I'm just trying to understand the magnitude.

So we basically are talking 90 basis points.

You are exiting 7000 members.

If I attribute a good chunk of that cost to those members, we are talking nearly -- over $50,000 a life.

So I'm just trying to understand what happened, from a more granular level.

Because clearly, it is not about -- as you said, that is why you are exiting -- it is not about just the premium.

So something happened.

I think what you (multiple speakers).

You really have to look at it and say, we do some predictive modeling on it.

We look at the network, the contracts, everything in its totality and the ability to affect the cost.

Now, in the other counties, we believe, working with analytics in the states and the network and all the things we do, the predictive modeling, getting those cases managed, that we will be okay.

Those other 7000, we did not -- we could not see -- we didn't have visibility on that same capability there because of network size, some of the analytics that showed us the cases.

So we said to the state, absent that, we have to exit.

Okay.

So it wasn't like -- at this point, you can't say there was a bunch of end-stage renal disease lives that hit you or something like that -- kind of like in the past, where it had been neonatal?

I think what we have seen is the issues have been across reform in all five counties.

And that is 90,000 something members that we have in reform.

So I wouldn't apply that to just the 7000 members.

As Michael said, we could take actions with providers and with the rate increase and other things we saw.

Three of the counties we thought would get closer to where we needed them to be.

Two of the counties, we couldn't get there, so we have given our letter to the state to exit those two counties effective at the end of the year.

And I think we believe the combination of all the actions that we are taking with the three remaining counties will get us to a lower HPR, but one where we still need to work with the state to make sure that the rates are appropriate.

(inaudible) we want to comment that we still have a very positive relationship with the state.

They understand it, and they are working forward with us.

Jesse?

I would say there has been a very long experience working with [OCA] on this point, so our decision to exit the two counties is not taken lightly from an analytical perspective or in terms of our relationship with the state.

And it was not a surprise to the state when we provided our notice to exit those two counties.

Okay, and then on two separate notes, the out-of-period kind of rates that you are going to get in the fourth quarter, what is that going to be impact-wise on the fourth quarter for favorable to the MLR?

We really haven't addressed that or calculated it specifically.

I think that it is similar to what we saw last year, because we got the rate increase in Georgia for -- related to Q3 and Q4.

And so I don't expect it to have much -- be much different than last year in that regard.

Okay, all right.

Finally, can you guys give us -- and I apologize if I haven't recalled this -- but could you give us some details on the kind of revenue and kind of breakout premiums versus ASO for the NovaSys business?

I think the revenues for NovaSys are fairly small in terms of total, so we haven't disclosed revenues for individual businesses, other than maybe at the time of acquisition, when we were giving an idea of annual run rate.

In the NovaSys case, I don't think we have given any external numbers at this point.

We look at it -- when you look at NovaSys, you should look at it two ways one.

One, it gives us some experience in yet another state, (inaudible) Arkansas, it gives us some experience there.

Two, they have some distinct capabilities that blend in very well with our hybrid product, and makes us even more efficient on that product over the next 12, 18 months.

So that was kind of the genesis of why that happened, if you look back at it.

Okay.

I was just kind of throwing in a plug here.

I am hoping when you give your December kind of guidance call if you could just give us some info on how to model it.

That would be much appreciated.

Okay.

Matt Borsch, Goldman Sachs.

Can you just give us a bridge from your prior guidance -- well, I realize you're not giving earnings guidance at this point -- but the revenue growth rate of 11% to 13% now in excess of 15%, can you give us any granularity on the factors driving the higher outlook?

I think as Michael indicated in his remarks, early in the year, we had visibility on the 11% to 13% revenue growth rate, from the acquisition -- from the new business we had been awarded, we had Mississippi, and we had the Dallas Star Plus award at that point in time.

Since that time, we've had additional things, including Illinois, including Healthy Texas, Healthy Indiana, the Citrus acquisition in Florida, the Behavioral Health Award, and the additional area in Arizona, which started late this year.

So all of those things are now in our pipeline on a more or less confirmed basis.

And then there is other thing -- like a Louisiana, where we don't know exact start dates on some of these things, other than we expect them to be included in 2011.

And is there any reason directionally that we shouldn't think about the earnings being at least in excess of 15%, as well, when we think about next year?

I think -- we will have a lot more color and guidance on that in December when we give you the full guidance.

But there was always the early startup.

But I think what we will try and focus on a little bit for you is the run rate, as it gets up and running and normalizes.

And there is no reason to believe that once we do the businesses we are quoting, you will not see the kind of growth rate that you would be expecting out of it -- in earnings as well as revenue.

But I mean, it is just not -- (inaudible) to revenue, that is a March 1 through something, or April 1.

Well, you are going to have startup costs, you're going to have the higher health benefits ratio, HBR, things of that nature.

And then the stuff should normalize and you'll get the benefits over the bottom line.

But [we can work out] and it will be clearer to us in some of these situations, hopefully, over the next six weeks.

We are in the middle of our budget process right now and will be for the next month or so.

So I think until we have that completed, we are not really prepared to give an earnings per share range for next year.

I think what we wanted to do is -- we work hard to avoid surprises.

And we really wanted you to understand that we've had a lot of wins this year that are impacting some of that, we have a very robust pipeline for next year.

There are some others we know that potentially could come out of our (inaudible) and we are staffed for it.

We have the bandwidth to manage it.

We've anticipated systems-wise.

And all the systems things we are doing will put us in a position to manage it more effectively at an earlier point in time.

So we just want to give you that kind of futuristic look at it, and we will try and be a little clearer later in December.

When you talked about now contemplating the $0.03 to $0.05 startup costs in the fourth quarter, where you didn't have that reflected in your guidance previously, is it -- do you consider that effectively, therefore your operating earnings guidance is $0.03 to $0.05 stronger because you are offsetting that?

Or is that not the right way to look at it?

I think you could look at it in a variety of ways.

That would be one way.

But quite frankly, with the volume of new business that we've had historically and what we expect to continue to have, that is kind of our ongoing costs that we have to carry in each quarter.

So we expect to absorb that amount in Q4 within the numbers that we gave you for the annual guidance.

We've been absorbing a lot of startup costs year-to-date, without going to specifics.

But we wanted to give you some insight into it, because we have startup costs in Mississippi and elsewhere which we should have -- had it come online earlier than anticipated, we would have had the revenue from that, which we don't.

So once again, we are just trying to help people understand that the businesses -- the metrics are in good shape.

It is predictable.

We understand it.

We have the understanding where the issues are, whether it be in Florida, and we are just dealing with it.

And I think there is a lot of confidence around that.

Just lastly on Florida, to come back to the earlier question, to make sure I understand it.

The 90 basis points impact to the MCR was for more than just the two areas that you've decided aren't viable.

Right, right.

But you should see those other areas, you believe you can manage the costs (multiple speakers).

Right.

You got it, Matt.

The three counties that we are staying in are large counties, and we believe everything we are doing there, we can start to normalize it and work with the state to do what has to be done.

And they are working with us on it.

The other two, we just did not have that visibility, the state understood it and the best thing we could do was to exit it.

I think -- what I said originally was that the 90 basis points was sort of with and without the whole state of Florida.

Within Florida, you have two books of business almost, non-reform and reform.

The non-reform businesses performed very well, and we are in fact going to see increases in the non-reform membership between now and the end of the year, where we convert additional members over from Access and we have the Citrus acquisition, which is non-reform.

So overall, I think that it is a good state for us and will continue to be, and one where we are working hard with the state to get it taken care of in the reform.

The acquisition of Citrus will add to that in the next year.

That is non-reform as well as long-term care.

So it is -- I think when we look back on it, we will be very pleased with what we've done in Florida.

Okay, fantastic.

Thank you.

Charles Boorady, Credit Suisse.

On the 15% revenue growth for 2011, what is your assumption on acquisitions, and how much will the full-year impact of acquisitions you made this year impact the year-over-year revenue growth next year?

We will be able to give you more of that in December, when we give the full values.

I mean, you will have the full year for Crescent in South Carolina, you will have the full year for NovaSys, which is not that large, but it is important strategically.

We have the Citrus acquisition, will be the full year.

So we will be able to give you some insight into that.

We do not put in other acquisitions until they are done.

In other words, what that number is is things that are visible and it is not predicated on additional acquisitions unannounced.

When I look at your new full-year guidance for 2010, for your EPS guidance, about how much are you incurring in startup and other sort of one-time related costs this year that we shouldn't expect to recur on an ongoing basis?

We have not disclosed a lot of that, but mainly because now that we anticipate the earnings growth out of this business.

There will always be some ongoing, nonreocurring expenses that we will be incurring for the new businesses we are bringing out.

Right.

I understand next year you're going to have new startup-related costs (multiple speakers).

In fact, one of the things we've worked hard to do is to -- with the exception of some very large plans coming up that it is difficult to anticipate the full magnitude earlier of when you get it -- but the smaller ones -- I think we brought up the Massachusetts plan last year, some of these other things we are bringing up -- we work to contain that within the existing guidance.

And then when we have something exceptional, we will call out that $0.03 to $0.05 in Q4, so that you have some visibility on it.

(multiple speakers) startup costs in 2010 about the same as it was in 2009, or did you have more or less?

It was higher.

We had more wins and things in 2010 than we did (multiple speakers).

It will be for the whole year higher than 2009.

And I think in 2011, it will be just as high as it was in 2010 and greater by the proportional from a revenue standpoint.

But it's an ongoing cost of doing business, particularly when we enter these new markets on a de novo basis.

But we will have increased earnings, we anticipate, out of the businesses we've started up now and see them normalized, and we'll start to get that kind of momentum going.

And that is what we are working towards.

The big difference is the analytics we have now, the predictive modeling, gives us a little earlier insight into some of these cost (technical difficulty).

Mary, is that --?

(inaudible) is very, very (inaudible).

And how should we think about the FMAP extension?

You talked about it as a positive.

If we don't get another FMAP extension, the states will be forced to move more lives into managed care and that could drive top-line growth for you.

Is there also a risk of states getting into the kind of fiscal situation where they might need to put some existing contracts out to rebid or take other measures that could offset the revenue growth with lower margin?

I think that the states that we have now understand the value we are bringing and would not want to jeopardize the value we are bringing.

I think what I was commenting on is we saw them weaning the states off the FMAP; it has been reducing over time.

Olympia Snowe and some of her colleagues that moved that in the last time, they understood that the federal government is running out of money to do these things.

There is more than enough money in the system, and we are showing the states saving and we could achieve [it].

And that is what is going to accelerate it.

Now, in some states, we told them last year had they done it, they would be in better shape now.

They are starting to see it.

So I think the political will has started to move more to managed care is increasing as the financial budget (inaudible) are increasing.

I didn't mean to put those words in your mouth, but my inference from how you characterized it, but am I right that you would view it as a positive if the additional FMAP funding is not extended beyond June?

I would rather put it in terms that I see it as a reality, that states have to wake up to that fact.

In Illinois, they cited they are going to save $200 million savings over five years in -- what is it -- five counties, Jesse, we're in?

Six counties.

Six counties, and a small population of SSI.

They are looking to save $200 million.

Now, once we show them what we are doing there, it doesn't take a lot of imagination to see them consider rolling it out.

Because this is something we know how to do, working with everybody, getting better access, better quality of outcomes; when they see that, that is what it's going to be all about.

I understand it may be a reality.

I guess what I'm trying to understand is, is the reality better with the additional federal money to the states or without it?

Because I guess I see your point on higher revenue growth.

But in a tough fiscal situation, what will states do when they simply don't have enough funding?

What -- can they put contracts out for rebid, for example?

They could, but I think the states we are talking to are saying, let's increase -- let's move more members into the managed care arena.

We saw this eight years ago in Indiana, where they rolled out an accelerated rollout of TANF across the whole state.

And I think you're going to see states more aggressively increasing what part of their populations are covered under managed care.

If they don't have SSI, they will start doing it.

If they don't have long-term care, they'll start doing it.

The critical realities are such that they have no choice.

And those pundits who would be against it -- and don't ask me to get into who that would be, because there's no need for you to cross that bridge.

But (inaudible).

They will have a smaller voice.

All right.

Thanks.

Scott Green, Bank of America.

So one or two more on Florida first.

The counties you plan to exit with 7000 lives, does that include non-risk membership, or is there more enrollment there that won't be converted now?

It is just the reform.

It is all at-risk.

Okay.

And the Citrus rate increase this year, is that projected to be in line with what you might receive or substantially higher or substantially lower?

Jesse?

The rate increases for the market are on a kind of county-by-county basis.

So Co citrus is in non-reform markets, as we indicated.

So the Citrus rate increases, I would expect to be in line with the geographic non-reform markets in which they participate.

All right.

And even excluding the counties you plan to exit, it seems like there is still plenty of room for MLR improvement over time.

So what do you see as a sustainable local market MLR in Florida?

And then understanding the dynamics today, what is a realistic time frame to achieving that?

Jeff, can you comment on that?

I don't know that we comment on market-specific HBRs.

Our objective in working in the market, reform, non-reform, including our discussions with the state is that there should be actuarially sound rates when we look at the business in totality, it would achieve normalized markets.

We referenced you back to Ohio, where we had 104% MLR, Mary, as I recall, and we normalized it to an 84% to 86% range, and it probably took 12 to 18 months to get there.

And what we will work very hard to do is do it on a sustainable basis.

We are not looking to float in more volatility in it.

We brought it down a few hundred basis points at a time, and that is what we expect to do here.

We will use the same disciplined approach that we used in that market, that we use in all of our markets.

(inaudible)

(multiple speakers) One last question, if I may, switching subjects.

Driving SG&A leverage beyond 2010 has been a very consistent theme in your prepared remarks this year.

So I guess trying to ask a question a different way, based on just the current revenue growth you've outlined of greater than 15% -- and you mentioned startup costs might be in the same ballpark next year as they were in 2010 -- do you think another 50 basis points, which was the minimum improvement you expected this year, would be achievable next year?

Well, we had 100 basis points and 50 of it went for the Mississippi startup (inaudible).

So I think, once again, it is going to be the timing of the startup, and when the revenue comes in versus the upfront costs.

Anytime a state delays us a quarter or a few months, we have the expense without the revenue.

We've seen that for years.

So that is why it is very hard at this point in time to sort of [ration out] and give you specific numbers.

Our goal will be to continue to drive a normalized G&A.

And (inaudible) if the states kept up -- if they said you are going to bring Mississippi up (inaudible), I could answer your question.

But they didn't, and we don't know that that won't happen in other states as well.

It tends to.

I think we've had a lot of improvement this year in our overall G&A ratio.

I don't know that we have that same level of improvement in 2011.

I think the range that we gave, 12.4 to 12.9, until we come up with a different range I think is a good number.

(inaudible)

Okay.

That's helpful.

Thank you.

Scott Fidel, Deutsche Bank.

Just a question on the software company that you said you are going to now take a controlling position in.

What actually is the name of that company, and will there be any impact on either revenues or expenses on the P&L from taking the controlling interest?

We haven't disclosed the name of the company at this point in time.

The transaction hasn't been completed.

And so we would prefer not to do that until that happens.

I'm sure you can understand that.

Overall, it is not a material amount to Centene as a whole when we are looking at $4 billion to $5 billion in revenues.

It is important to us from the standpoint of just having the medical management system, which is really the backbone of our operation.

So that is why we've gone down this path.

It is a very positive system.

Everything -- I ask people (inaudible) looked at, it really congregates all the data and populates all the data from all sources into a file that makes it actionable for the nurses, the doctors, etc.

So what we will do is as it gets online, that would probably be a good reason to have another mini Investor Day to show you how this works.

Okay, and that just wanted an update on Louisiana.

And just maybe if you can update us on the latest communications that you received from the state in terms of when you think that new program will launch now.

Jesse?

We've obviously been active in Louisiana, and there was an announcement that came out recently about a potential delay from an April 1 start date -- anticipated April 1 start date.

So we have been in active communications with our people on the ground there.

It would not be appropriate for us to comment about the nature of those discussions.

I think our position has been, continues to be, we think it is an interesting market with a lot of opportunity.

We are well-positioned for that, and we will be ready when the state is ready.

Okay.

And then just had one last question.

Just on the Illinois contract, just interested if you can talk about what might give you comfort about this particular contract, that the operating environment in Illinois might be a bit more favorable than what we've seen historically.

Obviously, as you know, some of your other competitors historically did have a tough time in the Illinois environment from a political and legal and regulatory perspective.

Just what do you think changed there that makes it a better environment now?

(inaudible) we were one of the earliest entrants, probably about -- probably eight, nine, ten years ago in Illinois.

And when they didn't move to a mandated product, we sold the members we had in (inaudible) because it did not meet our criteria for markets we'd be in.

Well, this product is a mandated product.

It will be auto-assigned.

So (inaudible) accuse anybody of (inaudible).

We had claims data that we could run through our predictive model, and we could see the premium adequacy against what our programs are to deal with it.

So it was an opportunity to go in and do it the right way in the right environment.

The policies, the practices that the state put in place are appropriate for this, and they are working to make it work.

It's a little bit different than when you had a voluntary program and there are all kinds of sales incentives.

We stayed far away from those markets, always have.

Got it.

So at the key, it is a mandatory, auto-assigned (multiple speakers).

Yes, sure.

We wouldn't be here if it wasn't.

And just for clarification quickly, a lot of states have a voluntary period for a 30, 60-day period.

But that moves very quickly to mandatory.

I want to clarify -- there has to be a mandatory component for any of our subsidiaries to be involved.

Carl McDonald, Citigroup.

The individual business, with the sort of low 60% loss ratio, looks like it would be a good candidate for rebates next year.

Although digging into it, it does look like the enrollment is pretty dispersed.

And I think maybe Florida may be the biggest market with 10,000 or 11,000 lives, which means you guys would get some fairly significant (inaudible) adjustments.

So any updated thoughts on what the negative impact from rebates would look like next year?

It is such a small business that you're not talking about anything material (inaudible).

The value of it is the skill set it has given us to participate in Healthy Indiana, in the connector model in Massachusetts, in the Healthy Texas program.

And that is really how we look at it.

They've sold some other programs.

They are keeping their core business.

But it is so small, Carl, that it is really not material.

Thank you.

Sarah James, Wedbush.

I wanted to circle back to the $30 billion growth opportunity that you mentioned earlier, Michael.

Can you give us any color on what the time horizon is for some of those opportunities and what the product mix is, whether it is mostly ABD and how much is in the commercial Medicaid hybrid space?

We will give you more detail on our call in December, but Jesse, you may want to just add a little color to it.

Yes, I would say that it is everything that you can think of.

So it would be existing markets and new products.

It would be new markets with our existing products and new products in new markets.

So it covers the full continuum of CHIP through long-term care.

There are hybrid opportunities that are included in there on, obviously, a broad geographic basis.

Michael referenced 20 plus states, and obviously more than one opportunity in some of the states.

So it is, I would say, a broad and deep pipeline of opportunities.

The other thing is, Sarah, you don't want to forget that we have also demonstrated capability to (inaudible).

So it is really the full gamut, as Jesse said.

And I think to answer your question about time horizon, I think there are some that are more near-term that we have visibility on.

There are some that, frankly, will become opportunities pending the outcome of the elections next week.

So those -- the ones that are going to become opportunities obviously have a longer time horizon.

So we are really looking at this -- you could call it a 36-month window.

Obviously, we have more visibility on things that are more near-term.

Just to follow up on that.

Can you highlight any that you think are pending on elections, ones that may be influenced?

No, we can't.

I'm not going to get into that one.

Okay.

And I guess the last question is just on the Healthy Texas contract, is there any details that you can give us there as far as your expectations of (inaudible)?

I think we could get into some of the other estimates as we talk about next year.

What I would say is we would anticipate starting that program in the fourth quarter of 2010, so we can provide more color on that in future calls.

Thank you.

We will take the next call.

We do want to let you all get back to your desks to work, so we're going to limit the remaining people to one question each.

Operator?

Josh Raskin, Barclays.

I guess if I've got one, maybe we could talk a little about the cash flow timing issues.

I know you talked about it in the prepared remarks.

But I guess if I look over the last -- call it seven quarters, it looks like you guys are running maybe a little bit below sort of that historical average.

So if you think about a normal fourth quarter, would you expect net income, plus D&A/comp expense, plus a little positive working capital?

And then as we think about 2011, any reason why there wouldn't be a normalized sort of that back to 1.5 times range?

I think that still is a good metric to be utilizing.

I think that when we look at the cash flow for 2010, you shouldn't forget that we got paid $92 million in December of 2009 for 2010.

So in some ways, it seems like people are thinking we're being penalized because we got paid early, which obviously is a good thing, not a bad thing.

It is just hard to predict what the states are going to do at the end of any one quarter, particularly December 31, in terms of cash payments and what their processes are in that regard.

So from quarter to quarter, I think you can have that volatility.

We believe Q4 will be a very positive cash flow quarter for us.

For the year, we will be in good shape in our normal metrics.

But we don't control when they actually make the deposits into our account.

So we are a little hesitant to predict exactly where that's going to be for any specific quarter.

All right.

That's fair.

I guess maybe on a related topic around cash, just in terms of uses of cash, you guys have a big growth year obviously again coming next year.

But you're debt-to-cap is still relatively low, I think, relative to where you guys want to be.

So do you think there is any need for capital next year or do you think you guys are all set on that front and could possibly use that if you needed to?

Based on what we are doing right now, we have debt capacity.

As you said, our debt-to-cap is low.

We have the revolver; so basically a lot of capacity there.

We have bonds that are highly rated.

So we have all kinds of alternatives, and it is going to be a matter of what the cost of capital is when we need it.

Based on right now, there's no major, gigantic need for it.

Based on what we see on the business opportunities we've been awarded and what we have in play, we think we can we -- are in a great position to finance that and fund it.

Dave Windley, Jefferies & Company.

My question was asked.

Thank you.

I have no other questions in the queue.

Thank you very much.

We look forward to the year-end call.

Take care.

Thank you.

The conference has now concluded.

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