Centene Corp (CNC) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Centene Corporation first quarter 2011 earnings 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, operator, and good morning, everyone.

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

Thank you again for joining our call this morning for Q1 earnings.

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

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

A replay will be available shortly after this 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 numbers, the playback is 449378.

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, April 26, 2011, 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 quick reminder that our next investor day is 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 first quarter 2011 earnings call.

Our continued focus on consistency and fundamentals drove another solid performance.

We achieved strong top and bottom line growth in the quarter.

We also continued to expand geographically in both new and existing states, and diversified through new product offerings.

Before I discuss the quarterly results, let me review some other important items.

While a little longer than usual, these include an important update on state budget considerations, a recap of our recent new business starts, and our pipeline of new opportunities.

As has become our practice, let me begin by addressing state budgets, and concerns around future managed care rate adequacy.

Some state budgets continue to remain under pressure, and the extra FMAP funds will come to an end on June 30, 2011.

While many are worried, we view this situation as a glass half-full.

A recent Rockefeller Institute for Government preliminary report showed state receipts up 9.5% year-over-year for January and February 2011.

While still tracking almost 7% below comparable 2008 figures, this puts Q1 of 2011 on track to be the fifth consecutive quarter of better budget in-flows.

As I have said before, difficult economic times make for sound public policy decisions.

Medicaid budget shortfalls have become a large part of public discussions on the overall economy.

We continue to work with states on clinical and administrative policies that support actuarially sound rates.

We currently have known rates representing approximately 70% of our projected 2011 member months.

We continue to forecast a composite full-year 2011 rate increase to be low single-digits.

We have demonstrated that our culture is grounded on the belief that we are managers, not victims.

Over the past 2 years, we have met or exceeded our financial targets with the low single-digit rate increases, and fully expect we will continue to so.

During that time, we have reported study results, including an HBR that stayed within a range of 120 basis points.

At the federal level, it is too early to know if recent federal budget proposals that include changes such as block grants will be retained in final versions.

The courts and many other factors will determine what federal health reform ultimately looks like in 2014 and beyond.

We are focused on 2011 and 2012, and helping states cover their low income populations, with quality programs that save money.

Switching to new business, while the notes that we have seen this morning generally summarized the issues about Mississippi, let me reiterate.

On January 1, we began operating through the MississippiCAN program.

At March 31, 2011, we served 33,100 ABD and Foster Care members in that state.

We have received monthly premium payments from the state, and have been paying claims.

However, as we discussed in our press release this morning, this contract is being subject to CMS approval.

Thus, under generally accepted accounting practices, we have not recognized revenue of $54 million and the associated medical costs.

This resulted in a delay in reporting approximately $0.07 of earnings per diluted share.

To be clear, the $0.46 of diluted earnings reported for Q1 does not include the $0.07 of earnings.

Upon CMS approval, the revenues, medical costs and related earnings from our Mississippi operations will be recognized in our consolidated statement of operations.

The acquisition of CeltiCare and NOVA Systems have provided us with the full range of tools needed to address the needs of individuals and other under-insured and uninsured low income populations, who gain and lose Medicaid eligibility.

In January, we began operating under the Healthy Indiana plan, Indiana's coverage solution for uninsured adults who earn less than 200% of the federal poverty level.

As of March 31, we had 500 Healthy Indiana plan lives.

We now have hybrid or exchange-based contracts up and running in 4 states, including Indiana.

It is important to note that in order to respond to Indiana's 2010 RFP, the state required health plans to have both Medicaid and hybrid capabilities.

While the Healthy Indiana program had only a small number of lives in history, we could not have been eligible for over 200,000 Medicaid lives without it.

Based on inquiries we have received from states at a growing interest level, we have foreseen more states implementing these types of programs ahead of the final stages of health care reform in 2014.

Centene continues to view the authority to work across the range of Medicaid and low-income, under- and uninsured populations as an important growth targets.

In February, we started 2 new contracts.

We began operating under an agreement with Pima Health Systems in Arizona, to administer their long-term care program on a non-risk basis for their 4,300 members.

We also commenced operations under an additional STAR+PLUS contract, serving 20,200 ABD recipients in the Dallas service area of Texas on February 1.

On March 31, 2011, we served a total of 57,800 ABD lives in Texas, and over 150,000 lives across all of our markets, including Mississippi.

Our next contract startup will be Illinois.

We expect to commence operations there in the second quarter of 2011, and will be providing services to the state's ABD recipients in a 6 county area.

The total eligible population in this area is approximately 40,000.

Illinois has recently passed a law, that at least half of the 2.8 million Medicaid-eligible be enrolled in a care coordination program by 2015.

Having been chosen to serve the initial program, we believe we are well-positioned to expand our business in the state.

We continue to encourage states to move their highest-cost [beneficiaries] into managed care to maximize savings.

Among other things, our demonstrated systems capability in managing high-acuity populations make this another area with excellent growth opportunities for Centene.

We have recently renewed our Commonwealth Care contract in Massachusetts, effective July 1.

We continue to be a low cost option to the program.

Our experience in Massachusetts has demonstrated that we can be the low-cost producer in the insurance exchange and meet our internal financial targets.

In spite of being a low-cost producer, we have provided significant (inaudible) under the premium refund calculation.

Based on this experience, we are comfortable at the low end of the range in the new contract deal.

Now I will discuss recent RFP activity.

We see acceleration of the RFP pipeline.

More states are recognizing that the managed care progress we offer are solutions for budget deficit issues.

(inaudible) Texas recently released the largest RFP in the current pipeline.

This is a combination reprocurement and expansion.

Texas is rebidding contracts totaling 1.9 million lives and transitioning an additional 900,000 beneficiaries from fee-for-service to managed care.

These 900,000 new lives include both TANF and ABD members and represent a significant opportunity for us.

The state is also planning to carve in pharmacy and an in-patient coverage to STAR+PLUS.

In total, these 2.5 million lives represent approximately $10 billion in annual revenue, $5 billion for the 1.5 million lives being rebid and an additional $5 million for the 900,000 new lives in additional services with the full membership to be covered.

While these modifications and expansions are included in the budget of the State Texas House and Senate, we know that certain of these modifications are subject to approval by either the legislature or CMA.

I remind you that about 50% of our planned Texas business has already been procured.

In Arizona, the state is reprocuring its entire long-term care program.

This program represents approximately $1 billion annual revenues.

We are encumbered with about $125 million in annual (inaudible) revenue, and see an opportunity to expand our footprint, if we get the chance.

Winners are scheduled to be announced in May.

The new 5-year contracts are scheduled to go into effect October 2011.

In Georgia, our latest information is that the state plans to issue an RFP in early 2012.

This will be to reprocure the existing program, and likely expand it to the ABD population, as yet-to-be-determined effective date.

This RFP will represent approximately $4 billion in annual revenues, including an incremental $1 billion related to ABD expansion.

Furthermore, Georgia is considering giving incumbents the opportunity to go statewide.

In addition to the states discussed above, other new states include Louisiana, which recently issued an RFP to move approximately 890,000 TANF and ABD lives into managed care of fee-for-service.

This RFP represents about $2 billion in annual revenue.

We have previously stated that Louisiana is (inaudible) for Centene, and we believe we are well-positioned should we decide to [start].

Also, Indiana issued an RFP implementing Medicaid managed care state-wide for approximate 815,000 TANF and ABD lives.

This RFP represents almost $3.5 billion in annual revenue.

[technical issues] Success in the RFP process is a critical component of our growth strategy.

We have demonstrated a solid track record of new contract wins.

Now for first quarter financial highlights.

First quarter premium and service revenues grew by more than 15%.

With Mississippi included, our first quarter premium and service revenues would have grown by more than 20%.

On a consolidated first quarter health benefits ratio, improved 100 basis points year-over-year and 30 basis points sequentially to 83%, which excludes Mississippi.

The improvement was due to our medical management efforts, rate increases, and lower utilization.

I remind you that our revised HBR range for 2011 is 83.5% to 84.5%, and assumes a normal level of utilization.

It would not be prudent to extrapolate the lower trend experienced through the first quarter to the remainder of the year.

The first quarter G&A ratio increased 50 basis points year-over-year to 13.8% due to the inclusion of general and administrative expenses in the Mississippi operations, without recording associated fee and revenue.

As Bill will discuss shortly, we must make the necessary investments to pursue profitable growth opportunities in the unprecedented pipeline.

I'd like to remind everyone that our ninth annual investor day, which is held in New York City on Tuesday, June 14, [is in the air].

We hope we can join us.

Before I turn the call over to Bill, I would like to comment on several organizational changes announced in a press release issued last month.

Jesse Hunter, Centene's Executive Vice President of Corporate Development, has been made Chairman of a new operating committee which will include our Health Plan Business Unit, led by Mark Eggert, and our Specialty Business Unit, led by Jason Harrold.

This move will allow me more time to focus on Centene's growth and strategic objectives.

We have also continued to add to our senior team, as evidenced by some key recent hires.

We appreciate your support, and interest in our Company.

I will now turn the call over to Bill.

Thank you, Michael, and good morning everyone.

Recognizing the importance and the need for clarity related to our Mississippi operation, I want to reiterate some of Michael's comments, and expand upon the accounting for our Mississippi contract.

Our Mississippi health plan, Magnolia Health Plan, began operations January 1.

We have received our monthly premiums, which totaled $54 million for the quarter, and paid claims during the quarter.

However, the Mississippi contract has a provision requiring CMS approval, which prevents revenue from being recognized for accounting purposes until such approval is obtained.

Accordingly, we have not recognized revenue or the associated medical costs in our first-quarter financial statements, but we have expensed the general and administrative costs for Mississippi.

The net effect of these items is to defer the recognition of approximately $0.07 in earnings until CMS approval is received.

In the quarter CMS approval is obtained, we will recognize the revenues and associated medical costs, retroactive to January 1.

It should be noted that the $0.07 represents a combination of the reimbursement for G&A costs plus the margin for Mississippi's first-quarter operations.

As a result, our reported numbers this morning, except for general and administrative costs and cash flow, exclude the Mississippi operations.

For the first quarter of 2011, premium and service revenues were $1.18 billion, compared to $1.02 billion last year.

This represents a 15.4% increase between years, and is a result of the following items.

Our at-risk membership grew 4.8% between years.

This includes our acquisition of Citrus Health Care and the conversion of the remaining members from Access Health Solutions, both in the fourth quarter, the acquisition in June of Carolina Crescent Health Plan and the addition of an expanded service area for our behavioral health business in Arizona, effective last December 1.

We have also received rate increases between years.

Our consolidated health benefits ratio was 83.0% for the first quarter of 2011, compared to 84.0% in the first quarter last year, and 83.3% in the fourth quarter of 2010.

Our HBR improved 100 basis points between years, which reflects lower utilization levels in 2011, resulting from lower in-patient costs and the effect of severe weather experienced across many of our markets, which also lowered utilization levels.

Sequentially, the 30 basis point decrease in our HBR from the fourth quarter reflects these lower utilization levels just discussed.

Also, excluding the Mississippi operation, had the impact of reducing our HBR by 30 basis points for the first quarter from 83.3% to the reported 83.0%, since we reserve our new market at 90% during the initial period of operations.

Our general and administrative expense ratio for the first quarter of 2011 was 13.8%, compared to 13.3% in the first quarter of 2010, and 13.0% for the fourth quarter last year.

The impact of including the Mississippi G&A costs in our results, but not recording revenues from Mississippi, has the impact of increasing our G&A ratio by 60 basis points in the first quarter.

The first quarter also included expansion costs related to Illinois and Dallas STAR+PLUS.

These were less than previously anticipated for the first quarter by approximately $0.02 per share, as the Illinois operations will now start later in the second quarter.

These costs will still be incurred, but shifted from the first-quarter to the second quarter.

Our investment & other income was $3.7 million in the first quarter of 2011, compared to $7.1 million in the first quarter last year.

And in last year's first quarter, we recorded $3 million of income related to distributions from the reserve primary fund.

Interest expense was $5.7 million for the first quarter of 2011, compared to $3.8 million for the first quarter of 2010.

The increase between years reflect higher borrowing levels, and the effect of no longer capitalizing interest for our new corporate headquarters development, which ceased when the building opened July 1, 2010.

Excluding the amounts attributable to non-controlling interests, our first quarter income tax rate was 37.6%, compared to 38.4% in the first quarter of 2010.

The decrease in the effective tax rate this year was primarily related to the recognition of tax benefits from disqualifying dispositions of incentive stock options.

Consolidated earnings per share from continuing operations for the first quarter was $0.46, compared to $0.41 a year ago.

The 2011 results are calculated using 51.8 million shares outstanding, which has increased as a result of additional diluted shares related to our outstanding stock options, due to the increase in our stock price.

The 51.8 million shares represents a 6.3% increase in shares outstanding year-over-year, which represents almost $0.03 in dilution in earnings per share.

At March 31, 2011, we had cash, investments, and restricted deposits of $1.13 billion, including $1.1 billion held by regulated entities, and $32 million held by unregulated entities.

Our subsidiaries had aggregate statutory capital [and] surplus of approximately $541 million, compared with the minimum aggregate statutory requirements of $318 million.

We have estimated our risk-based capital percentage to continue to be in excess of 350% of the authorized control level at March 31, 2011.

At quarter-end, our total debt was $305 million, and our debt to capital ratio was 21.4%, excluding our non-recourse mortgage note.

In March our debt rating on Centene was upgraded by Standard & Poor's to BB.

Our medical claims liabilities totaled $472 million on March 31, 2011, a $15 million increase from last year-end and represents 44.4 days in claims payable.

This is a 1.2 day decline from December 31, and reflects continued improvements in our payment processes, and the impact of increases in the percentage of claims auto-adjudicated.

For example, our auto-adjudication rate increased from 77% in the fourth quarter to 82% in the first quarter.

It also reflects lower claims received during the quarter, as a result of the lower utilization experienced in the first quarter.

Given the increases we have experienced in our claims auto-adjudication and electronic submission rates, we are reviewing our targeted range for days and claims payable, and we will discuss this further during our investor day on June 14.

The first quarter cash flow from operations was $94 million, which is 4.1 times earnings.

At March 31, 2011, we had received advanced payments of $127 million, which are classified as unearned revenue on our balance sheet, compared to $117 million at December 31.

As we have previously discussed, our cash flow in any quarter can be impacted by the timing of states payments.

While we have $127 million in advance payments at March 31, this can fluctuate from quarter to quarter.

I would now like to review our 2011 financial guidance.

We expect premium and service revenues of $4.9 billion to $5.1 billion.

We are raising our earnings per share guidance to $2.03 to $2.13, which reflects our first-quarter actual performance and an increased level of investments we are making related to future business expansion.

We are guiding the health benefits ratio to 83.5% to 84.5% for the year.

We do not expect the lower level of utilization experienced in the first quarter to continue throughout the remainder of 2011.

Rather, we expect to experience more normal levels of utilization during the rest of the year.

We are guiding our consolidated G&A ratio to be between 12.4% and 12.9%, and diluted shares outstanding of 52 million shares.

As we've previously said, we expect startup costs of $0.08 to $0.12 during 2011.

In the first quarter, we incurred about $0.02 a share less than anticipated for our Illinois start up.

We expect this now to be incurred in the second quarter.

Consistent with our approach to be balance sheet managers, we expect to start the process of calling our $175 million 7.25% senior notes.

We anticipate issuing new notes at an improved rate, subject to market conditions.

We have the capacity on our revolving credit agreement to cover the payoff of the existing notes.

As part of the process, we will incur costs of approximately $0.10 per share in the second quarter, which consists of the call premium and the write-off of unamortized issuance costs.

And these costs are not included in our guidance numbers.

I will cover the impact of this further, during our Investor Day presentations.

I would also like to mention that we are continuing to review our classification of medical costs in the light of the NAIC's medical cost definition developed last year.

It is possible that we would reclassify certain costs that we currently classify as general and administrative costs, to medical costs.

We are now considering making this change for the fourth quarter, if such a change is made, and I will discuss this further during our Investor Day.

Operator, you may now open the line for questions.

We are now beginning our question-and-answer session.

(Operator Instructions).We will pause momentarily to assemble the roster.

Operator?

Yes sir, we do have one question from Chris Rigg of Susquehanna.

Please go ahead.

Thanks, guys.

Just when are you assuming the Mississippi contract will be approved?

I think the state is working with CMS on one particular issue, and we are not really in a position to hazard a guess when.

We expect it to occur in 2011, so therefore our guidance for 2011 includes the assumption that all this will be appropriately resolved during the course of this year, we're just not sure we will be done in the second quarter or not.

We all know that CMS has a lot of waivers, a lot of heavy workload of things they are looking at, and we just can't get an indication of where this is in the queue.

We don't doubt that it will be approved and signed off on, but there's no benefit in hazarding a guess.

Okay.

And then for the G&A guidance -- you brought that up -- on the low end, 40 BPs and 50 on the high-end.

Can you give us some color as to what is driving that increase?

The primary increase is due to additional investments we're making in our business expansion area.

There are a number of RFPs that are out there that we're looking at, and spending money on, and in a lot of cases those also include network development to be able to be in a position to bid the contract.

So we've really just increased the amount that we think we're going to be spending in that area, as the primary difference.

The network development, the RFP preparation is not inexpensive.

But when we see the size of the opportunities, it's not a lot in that context.

And just to be clear, over and above the $0.08 to $0.12, that's officially in your guidance as startup costs?

Yes.

I'll just make a distinction, when we talked about startup costs, we were really talking about what I would argue are pre-opening expenses.

In other words, we have to have the staff hired and in place and trained, ready to go, anywhere from 30 days to 90 days in advance of revenue starting on any contract.

So when we give startup costs numbers, we generally are talking about what those costs are before we actually open up for business.

And some of these other costs I'm talking about are really development costs relating to RFP preparation and provider networks that were being built out for the RFP.

And then, last maintenance-oriented question, what are you expecting the tax rate to be for the balance of 2011, or what is the tax rate expectation?

I think it's going to be around 38%.

Okay, great.

Thanks a lot.

Our next question is from Joshua Raskin of Barclays.

Please go ahead.

Just to get back to Mississippi again -- so just so I can understand the earnings impact, the $0.07 in lost earnings.

Is that just simply the gross margin, right after you take the $54 million, you take a 10% gross margin (technical difficulty) -- is that the right way to think about it?

You can get there either way, yes.

Basically, if you take revenues less the medical costs, it's gross margin.

In our case, since we expensed the G&A costs, it's effectively every dollar for revenue, you get some of that reimbursement for G&A costs.

So we have not considered that or recognized that aspect of it.

So it's the gross margin or it's the sum of the G&A costs plus the profit margin left on the business.

Okay.

(technical difficulty) I'm calculating that's somewhere in the ballpark of, call it $0.08 or something like that.

So is it fair to say as with most startups, the plan is not fully profitable?

Well, that's fair.

But in our calc, I think we put in the press release we believed it would be $0.07.

I think what we're seeing there is the impact on G&A costs is adding in the revenue.

Since the G&A costs are already included in the income statement but the revenues are not, if you would pro forma to add the revenue to the denominator, that would give you the 60 basis point reduction in the G&A costs.

Right, okay.

Simply stated, $0.07 per share (technical difficulty) CMS had approved (inaudible)?

Yes.

Okay.

And then the second question, on CommCare in Massachusetts, I saw the new rates were out.

I noticed there were two plans that were able to hit the low-end.

It looked like those rates were down in the mid-teens or so.

Can you give us your perspectives on what's going on with that plan and how you guys plan on maintaining profitability in that state based on (technical difficulty)?

Josh, this is Jesse.

So a couple of things.

The context is important when we look at the bid process for CommCare through the connector.

So we've obviously been -- this is our third bid going into the rate setting perspective.

We have had, I would say, positive experience based on the rates that have been in place in the market and we have been actively working with the connector over our tenure, being an incumbent, on how best to establish an appropriate rate for that for the market.

When we went through this process last year, there was a floor that was put under the rate setting process that they would not allow us to go lower than we did.

Had we had the opportunity, last year we would have gone lower, based on our experience.

And I think what we have seen, and what I think the public comments from the connector would support is that we have helped to bring costs through the CommCare program down.

And I get think the good news from the state's perspective is that there is a company at the floor, at the bottom of the range.

Based on our experience, we said in -- I think it was Michael's comments -- in the first year, we gave back money through the risk corridor program that the state has.

We have taken that experience into account when we were looking at bidding the rates, and based on those things, we have confidence in our ability to be at the lower end of the range and hit our internal financial targets.

(Technical difficulty) you say you meant you would have gone below the floor last year, right?

Correct.

Right.

Last year, we did not have the opportunity, the way the bid was structured, to go lower.

I think what we have seen is based on our couple of years of experience, the connector has taken that into account, as they were establishing the floor for the fiscal year that starts July 1 of 2011.

Josh, if you will look back over the years that we've been public, I don't think anybody can point to any state or any rate where we went below what believe to achieve margins.

We tend to use an abundance of conservatism, is I think the phrase I like to use.

So I think that's true here, we believe it can be met at those numbers.

Is it fair to say you'd expect a significant share gain in the second half, just based on where your rates are vis-a-vis the market now?

I think the way the program is structured there is a benefit for the low-cost plans.

So we would anticipate to increase our market share within the CommCare.

Obviously we have multiple products within Massachusetts, but within CommCare particularly, we would expect to pick up share based on our bid.

Okay.

Perfect.

Thanks, guys.

Thank you.

The next question is from Scott Green of Banc of America.

Please go ahead.

Hi.

Thanks for the question.

So question on your comment, that it would not be prudent to expect these utilization patterns to continue going forward.

I'm curious why -- I understand you want to have some conservatism, but why would utilization vary so much from the first quarter going forward?

It seems like in Medicaid, flu is definitely a big variable to the annual medical costs.

You seem to have had a normal flu season, and generally there is pretty consistent claims patterns after that, in terms of seasonality going forward.

So what leaves you more cautious on utilization patterns now?

I think I'll start off and some others can add.

I think we came within 50 BPs of our guidance range, as Bill commented.

Part of that was Mississippi not being included, in the medical expense.

We have new businesses we're bringing on, in Illinois and elsewhere, which typically costs more.

And we book at a higher number in the first few quarters of it.

So when you start all that, add all that up, we're saying we're going to be within our range of 83.5% to 84.5%, but one should not presume we're going to be below the range for the balance of the year, when you consider those factors.

Yes.

I would just add that it was below normal in the first quarter, and we don't think that that's going to carry forward.

We expect it to be normal in the next three quarters.

Okay.

All right, fair enough.

Then I guess a question on Georgia, about the Makena drug, Georgia put out a position statement implementing what seems to be a pretty strict prior authorization guideline in supporting 17-P administration, consistent with the FDA guidance.

Have you seen similar stances from your other states?

Hi, Scott.

This is Mary Mason.

Yes, we've been in communication with all of our states, and you're right.

What Georgia put out was a very strong statement.

We are mirroring that in our clinical policy.

And I think with the whole Makena whole issue, it's really been an overall win for Centene.

We've been using this for years, have had great results.

Since the FDA announcement, we have had full network.

We're still getting it at what the cost was before Makena was approved by the FDA.

And we also have increased awareness with the providers and the patients.

So we are moving full steam ahead with this.

And at this point, we have had no requests for Makena.

We had our own -- our position has been of pretty rigorous guidelines for pre-authorization on it up to this point.

So we're simply maintaining this stance.

That's correct.

We use what Georgia put out.

It's a very good strong statement.

Okay.

All right.

That's helpful.

And then, I know South Carolina had a proposal to move, I think, 80,000 lives to incumbent managed care plans.

Can you give us an update on where that stands?

Do you still expect enrollment gains associated with that?

Hi, Scott.

Mark Eggert.

Yes, that's underway, now.

It started April 1, the first part of the rollout, it is a 12 month rollout.

And we do expect membership gains as a result.

Okay, and what's your market share there or what's your expected growth there?

We'll we certainly expect to bring our membership at least as much as our market share and perhaps more.

We've got some plans in place and underway to encourage the membership to choose us.

Our current market share is --

Yes, so we're around, I think it's 12%, something in that ballpark.

We'll double check that, Scott.

It's around 12% of the market.

We're number two on the full-risk plans.

Okay, and then just quickly, lastly, is it too early at this point to say your continued confidence in the low single digit rate increases is based on preliminary discussions that you're having with some of your larger states?

Or is your confidence just based on normal expectations associated with states wanting to retain valuable managed care services in difficult economic times?

I think right now that we have been engaging in discussions in the states, usually a couple of the quarters before an effective rate takes effect.

And so at this point in time, we continue to believe low single digits, based on an informed discussion with our individual states.

There will be pluses and minuses in each of the states, but overall we think -- we try to follow a portfolio approach to this, and we expect it to be in the low single digits.

I would remind people that have been following this for some period of time, that we have a margin protection program for the states where we work (inaudible) actuaries with the states.

Sometimes there are some policy changes that can be considered to have the same impact, and so we have confidence that we will achieve and maintain that approach.

Okay.

Thank you.

This question is from Scott Fidel of Deutsche Bank.

Please go ahead.

First question just following up on the rate discussion.

Do you have what the composite rate increase was in the first quarter, and then can you just remind us in terms of the 30% of the member months that have still yet to be priced for 2011, which markets those are?

I think that the composite rate increase in the first quarter was near zero.

At this point.

And the 30% of the member months which are yet to be priced include Florida and Texas as of September 1, and also Georgia, which is July 1.

Okay.

And then just on the lower utilization, just wondering if there are any metrics you can possibly share with us to help frame that, so if you have bed days per thousand or physician visits, any metrics you can share on year-over-year PM/PM utilization trends?

Hi, Scott.

This is Mary.

As far as utilization, one thing we can look at is NICU days per thousand.

We continue to have a decrease in NICU days per thousand.

They have leveled out at about 400 bed days per 1,000 births, and we continue to watch flu, watch RSV, watch our admissions in ABD and in our TANF population.

What I can say is going forward, we have very strong medical management tools in place to predict who we need to focus on with case management and disease management.

So really, it's just basically doing what we're doing, have been doing and will continue to do it, and watch the utilization.

I think another thing we saw in the early part of Q1 was the severe weather -- we think kept some of the office visits down.

And we saw a little tick-up in March of the office visits, which is even another reason why one should expect more normal utilization.

So there's some of that as well, Scott.

And if we had to frame it a little bit, would you say just slightly negative on utilization trends, let's say bed days, or are we more sort of down mid-single digits year-over-year in the first quarter?

I don't think we have specific numbers we're going to give in terms of admissions.

I think what we saw was pretty consistently across all of our markets, lower utilization, particularly in January and February, and more normal utilization, maybe a little higher at times, even in March, from the fact that it was lower in January and February.

It's fair to say, Scott, that while we don't want to get into details, that it changes from month-to-month so much -- that it's been pretty much across the medical expense.

Okay.

Then just a question on Florida.

I wonder if you have an update on how the plan performed in the first quarter.

You had some MLR issues in the back half of last year, in a couple of counties, and just how costs have trended since those actions were taken and then an update on how the integration of the Citrus acquisition is going so far.

This is Jesse.

As you know, we took some meaningful actions in the back half of last year to address the cost pressures that we saw particularly in the reformed markets.

What we have seen so far, again it is still relatively early on some of those actions, including the exit of two counties effective January 1, and the addition of the membership through conversion of access numbers, and the addition of the Citrus transaction; those have performed consistent with our expectations, given the changes that we were contemplating and why we're contemplating those changes.

We continue to work on a series of efforts with the state of Florida, including with ACA, with respect to rates and policies and some of the other things that Michael mentioned.

So, I would say, our work is not done in Florida, but we have made good progress, both with respect to cost trends, and with respect to the integration of Citrus.

So from our perspective, we are integrated and we are operating as an integrated health plan for Sunshine in Florida.

I might add that is not just in Florida or Georgia.

All the states, it's not really a point-in-time issue.

It's a process where our actuaries are talking to the state's actuaries on an ongoing basis, and as you know, our systems have a lot of realtime information.

So there's a lot of credibility in what we're showing them, and that we are not trending at all.

There's trends in some of it, but we can show them what the experience was through last night and talk about it today.

So it's a process we go through, and where we continually communicate with all of them, our actuaries keep them informed of what we're seeing.

Okay.

Then just one last question.

Just going back to the Mississippi delay, how unusual is this for CMS to have sort of stalled out this process?

The Mississippi program has been in development for a long time now, and would you say that it is just more bandwidth issues and everything CMS is taking on, or is there a specific programmatic issue that's holding up the certification by CMS?

From what we can tell, the CMS, a lot of you remember a few years back where in Georgia they didn't sign things in a timely fashion, the impact really was just a normal course of action.

CMS, it is a bandwidth, I'm sure right now there's a lot going on there.

And if they ask questions, they may have some questions about some parts of the program.

[But] we see nothing that's going to stop it from getting eventually approved, but it's just a matter of timing and you cannot rush them.

If you try to put a little pressure on them, they don't respond well.

So it's just a matter of working through it, carefully and methodically, being conservative in how we have book it, following GAAP, and keeping you informed with a lot of transparency and what it means, and just kind of go forward from there.

But if we saw something that was distressing about the whole thing, we would be calling it to your attention ahead of time.

Okay, thanks.

Thing is question is from Ken LaVine of UBS.

Please go ahead.

Hi, guys.

Thanks for taking the question.

On the MLR reclassification, to kind of bring it more in line with what the NICS has in mind, have you given sort of a ballpark range of what the shift might be in terms of reclassing SG&A into MLR?

We're not going to give a lot of guidance on that until we sit down.

We're working through it all now, and we want to be able to walk you through the two sides of it, so what has changed and the impact at the investor day.

It's not that we don't want to answer the question, but we're working through that.

We have all learned that there are not a lot of benefits to hazarding guesses.

We would much rather work from the factual database as we have it.

And it has given me a sense, but it's too early to have any confidence it means anything.

Okay, got it.

On the non-controlling interest line item in the quarter, it looks like it actually flipped over to be a positive contributor to earnings, but what was that related to?

Non-controlling interests in the first quarter of this year is primarily related to our investment in Casenet, which is our medical systems developer.

Okay.

So why would that flip to contribute to earnings (inaudible) the negative there?

Operation a lot of times will generate losses while they're in the development stage and working on a lot of their IT systems.

And so essentially what that is, we've consolidated 100% of that company because we own about 67%, 68% of it.

So we have all of that included in our numbers, and then the non-controlling interest is the portion of the loss that's attributable to the 32% that we don't own.

Got it.

Okay.

Great.

That's all I had.

Thanks, guys.

Thank you.

The next question is from Charles Boorady of Credit Suisse.

Please go ahead.

Thanks.

Good morning.

Just a couple of clarification questions on the guidance.

When you talk about your rate assumptions, what are your assumptions for fiscal 2012 and when will we start to hear about those rate increases?

We're not in a position, really, to give much guidance with respect to 2012 at this point.

The State situations are as Michael described.

So I'm not sure we're having any great expectations in terms of rate increases going out that far.

But at this point, we really haven't quantified anything.

I guess I'm thinking for the states with the fiscal years ending June, so what's embedded in your guidance for this calendar year, based on your fiscal 2012 assumptions for states with June years.

I would say we're just entering into discussions.

What we have typically done --- and we've said this historically -- is because we like dealing with realtime latest data, we tend to get a little closer to the date which we're now in that frame, so towards the end of April or early May, where we sit down and start getting really serious on what we've seen to this point, and get into discussions.

So we'll have a lot more clarity by the time when we get to our -- we should by the time we get to our Investor day.

I think with respect to what's in our guidance numbers and assumptions for states whose fiscal years begin either July 1 of this year or September 1, which includes Georgia, Florida, and Texas, we have low single-digit assumptions in those on a net basis.

Which means that if there are provider cuts, pass-throughs, other things that happen -- so it's a net number.

Got it.

Okay.

And then in terms of Florida, I'm not sure if I missed this or not, but did you give the MLRs there, and how they're trending relative to your expectations and any plan in place for further improvement?

We haven't given specific MLRs by state, and we normally don't do that.

I think that as Jesse said, the actions that we took in Florida, particularly in the fourth quarter last year and in the addition of the additional non-reformed members with Citrus and the Access Solutions remaining membership, have reduced our MLR and it has improved.

The actions that we took basically produced the results that they thought they would.

We still have open issues in Florida, that we're working with the state on and will continue to do so.

I think we -- we've given you a guidance for the rest of the year, and it's predicated on a steady-state right now, of what we have now.

And if it gets materially better, than we will be in a position to comment at that time.

But right now, we like to be conservative.

So it looks as if this is where we are now, and we do have some open issues that we are working through and we are still engaged very much in discussions on this.

And just on the sequential trends in enrollment, Florida down around 6,000, Indiana down, South Carolina, Georgia, Massachusetts, it looks like the sequential changes are slight drops.

Do you know if that's attributable to an improvement in the economy and the jobs market, or some other factors that are at play?

This is Jesse.

So I think there is a obviously combination of things that go in, and a number of those things are going to be market-specific.

But at a macro level, I would say some of those are going to be specific actions that we took.

We talked about Florida.

So in Florida, exiting a couple of counties is directly attributable to the drop there.

In the ordinary course of business, we are working on our network on an ongoing basis, and so that is going to -- that's going to have an impact in certain cases, as well as we're working on cost management and other initiatives, access and cost management, kind of balancing those two parts of the equation.

So I would not use that as a read-through right now for impact of the broader economy and improvements on employment and the impact on Medicaid enrollment.

Right.

Got it.

Was it pretty consistent in all these states that the enrollees that you lost were kind of higher than average costs?

Enrollees that you would want to lose?

I wouldn't characterize it in exactly that way.

I would say to the extent that we are taking actions, whether it's on the network or other things, we are taking those actions for a reason, and the intended effect of those would be to achieve results that are in line with our overall expectations.

Got it.

Thank you.

Our next question is from Sarah James of Wedbush.

Please go ahead.

Thank you.

I wanted to circle back to the topic of utilization.

[technical issues]

You're breaking up.

We can't -- you're not coming through.

I wanted to circle back to the topic of utilization.

Mary had mentioned a decrease in bed days per thousand to about 4,000 bed days, and I was wondering where that was last year, and if you could speak to trends in readmission rates.

Sarah, this is Mary.

What I was mentioning was the NICU days per thousand births, which we have showed you every year at investor day.

And last year for 2009, it was about 411 NICU days per 1,000 births.

In 2010, at the end of the year, it was 400 NICU days per 1,000 births.

So you can see we're starting, really with our program, really we've gotten to a point where we're starting to level off a little bit.

So we just want to be conservative.

We have very good tools, but I think it's important in this business to realize that -- especially with new business, when you get new patients, it takes a little bit of time to get a handle on them.

Okay.

And outside of NICU, is there anything you can comment on as far as bed day trends or readmission rates?

What I can tell you is that we just continue to have very strong medical management, especially with our executive dashboard, our predictive modeling, and our very strong case management, disease management.

And we are just seeing trends of what we would expect.

Okay.

And switching topics, I just wanted to follow up on some of the phasing in or evolving programs.

Can you give us an update on where your Dallas STAR+PLUS and Healthy Indiana enrollment stands as of today?

We've commented that Healthy Indiana is about 500, but we didn't expect big growth.

We did it because we couldn't have gone after the 200,000 Medicaids unless you can do both.

And I think we've said in STAR+PLUS we've got 20,000 lives and change.

So it's meeting our expectations.

And when that's fully phased-in, how large do you expect that to be?

We have the share of about half of the market in Dallas, and so we could see some marginal growth.

It's a state with more people than Indiana and the Healthy Indiana program.

But I'm not looking for large growth in either of those [instances].

Thank you.

Our next question is from Doug Simpson of Morgan Stanley.

Please go ahead.

Hi.

Good morning, everyone.

I apologize if you mentioned this earlier, but we'd just love if maybe we can step back a little bit.

Just think about sort of the competitive environment as you're looking out a year or two.

Are you picking up anything on the ground related to the larger diversified plans?

Are they getting more interested in this space?

Any evidence that they're maybe taking a different tack, what you've learned from (inaudible - background noise) and prior RFPs.

Just any sort of color on their level of interest and if you're picking any of that up directly in the market?

I think there's a couple of things.

One, in the past year we saw the largest companies looking at the RFPs.

So if you look in Illinois, we have a large player beside us, in Mississippi we have a large player beside us.

So it's kind of been a consistent thing.

The existing company in all of the RFPs have come out with various partners or people beside us -- can't be partners, but other peers beside us.

And if you looked at the who shows up at the RFP hearings, there is a wide range of people showing up.

But showing up there, and having the capability to be successful, that's an issue.

But we're looking at $40 billion of potential procurement over the next short while.

So give us our 10%, 20% of it, we'll go away happy for a while.

But you have to look at it in the context that it's a very large market.

So we should expect it to attract a variety of players.

Time to talk about success.

Jesse?

The only thing I would add, Doug, is that based on, as Michael indicated our recent RFP experience, we've demonstrated that we can compete well against the national players and/or the more government-focused companies.

Okay.

Is it fair to characterize their interest as lying more maybe with the new RFPs as opposed to the business where they'd have to battle an incumbent or can you not draw that conclusion?

I really don't think there's any conclusion you can draw from that.

We look at this as, the analogy I use is the golf game, where you're handicapped against yourself.

You play against yourself.

We very much take the attitude that we're really doing the best we can playing against our capabilities, and that particular approach has been successful the past four or five years.

Okay.

All right.

Thank you.

Thank you.

The next question is from Brian Wright of Citadel Securities.

Please go ahead.

Thanks.

Good morning.

How are you?

Good.

How are you?

Good.

Good.

Just a real quick question on fiscal 2000 (sic) expectations for July and September 1 renewals.

That level that you expected was on a net basis.

Can you tell us what you expect on a gross basis?

I think each market is different in terms of how each state is looking to handle their particular budget issues.

And so some of them have changes in their Medicaid fee schedules or provider reimbursements.

And it's just a wide range.

So I don't think we can really comment with regard to any specificity on that other than overall, we obviously work with the states.

So if there are provider cuts, we try to make sure those are passed through in our reimbursement.

And so that the overall - our margin stays reasonably close to where it was.

And really when you think it, Brian, I think it's the net number that really counts.

And Brian, this is Jesse.

The only thing I would add -- the only conclusions we can really draw as we go through this kind of legislative process and budget process is, where these proposals start is generally not where they end up.

And so it is very much an iterative process as you go through the legislative session.

So I don't think it would be really fruitful for us to make those kinds of gross rate assumptions at this point.

That's what I was trying to get that because historically there's been a progression from the initial proposal to what you ultimately get.

I was just trying to get a sense of whether you were expecting that kind of growth rate to be positive, flat, or negative.

Just kind of a broad category.

It's going to be a matter of composite, cash-flow soundness, there's a lot of things going into that mix, Brian.

And so anything we say there would be hazarding a guess.

We know the people we're talking to.

We know that our actuaries are talking, and we believe that we will be in the low single digit adjustments on a net basis.

Okay.

And then when would you get the Texas rates after you've submitted the RFPs?

They usually come in late July, early August, for the September 1.

Okay, great.

Thank you so much.

This concludes our question-and-answer section.

I would like to turn the conference back over to management for any closing remarks.

Thank you and we look forward to talking to you on the results of Q1.

Have a good day.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.