Centene Corp (CNC) 2011 Q2 法說會逐字稿

Good morning and welcome to the Centene Corporation second-quarter 2011 earnings conference call.

All participants will be in 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 of Centene.

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 for joining our second-quarter earnings call.

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

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

A replay will be available shortly after this call's completion also at Centene.com or by dialing 877-344-7529 in the US and Canada or 412-317-0088 from all other countries and entering playback number 10001393.

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 10Q dated July 26, 2011, today, and other public SEC filings.

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

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

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

Thank you, Ed.

Good morning, everyone and thank you for joining Centene's second-quarter 2011 earnings call.

We delivered another solid performance in the second quarter producing strong top and bottom line growth.

We also achieved continued success in the area of new-growth opportunities, most recently evidenced by our Kentucky and Louisiana contracts.

I would first like to touch on some topics of interest as well as our growth pipeline.

As expected, June 3 marked the expiration of the enhanced Medicaid FMAP payments to states.

The loss of these funds is likely to put some additional pressure on state budgets.

However, we continue to view the current rate environment as rational and actuarial sound.

States have been operating under a tight budget environment for the last few years.

During this time, we've been able to meet or exceed our financial targets.

Our medical management capabilities and IT investments have been instrumental in keeping our costs in check.

Centene has experienced the steadiest HBR among peers throughout this time period.

Some states are contemplating Medicaid budget reductions through provider-rate scheduled cuts.

Our provider contracts are generally tied to these fee schedules.

As a result, these cuts are largely a past-due item for Centene resulting in only a minimal impact on our margins.

Our latest read of the rate environment suggests a net composite rate adjustment for 2011 of 0% to minus 1%.

This new range reflects the provider-fee cuts I just mentioned and updates for those states that renew in the second half of 2011.

While this is lower than our previous expectations of a low single-digit rate increase, we are confident that our aggregate rate will be sufficient to cover medical cost trends and maintain actuarial soundness.

There is no rate increase that will overcome ineffective medical management.

Our new composite rate expectation is reflected in our updated 2011 financial guidance.

On the state budget front, there continues to be evidence of improving conditions.

The July 2011 Rockefeller Institute report shows that state tax revenues grew by 9.3% year over year in the first quarter of 2011.

This is the fifth consecutive quarter that states reported growth in collections on a year-over-year basis.

Preliminary figures for April and May 2011 showed year over year collection growth of 12.5% in 45 earning reporting states.

While conditions appear to be improving, collections do remain below 2008 levels.

The debate over the debt ceiling has caused concern over the possibility of cuts to entitlement programs such as Medicare and Medicaid.

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

States still have to provide health care coverage to individuals in these programs.

Over the past few years, states have responded to budget pressures by moving their Medicaid beneficiaries into cost-effective managed-care programs.

Our market opportunity has not changed and we remain a total low-cost producer in this arena.

For example, we rebated money back to Massachusetts last year even as our rates were at the lowest end of the curve.

We continue to encourage states to move their highest security beneficiaries into managed care.

Our technology and care management systems have proven to be key contributors in successfully managing these high-cost populations.

Now some discussion on our growth pipeline.

During 2011, we will enter 3 new states and, so far, have won renewed or expanded contracts in 3 other states.

To reiterate, we commenced operations in Mississippi on January 1st serving ABD and foster care members under the Mississippi Can program.

At June 30, we served 30,800 lives in Mississippi.

This program is performing in line with expectations.

We commenced operations in Illinois on May 1st, providing services to the state's ABD members across 6 counties.

There were approximately 40,000 total eligible lives across the 6 counties.

On June 30, we served 700 members.

However, we expect a third-quarter ramp with 18,000 to 20,000 members by the fourth quarter of 2011.

CeltiCare Commonwealth Care, and Bridge contracts each received extensions this year.

Both contracts commence on July 1.

Bridgeway was recently awarded renewed and extended contracts to deliver long-term care services in 3 geographic service areas in Arizona.

We expect this to increase our Arizona long-term care membership by approximately 50%.

These contracts are set to commence on October 1.

We recently were awarded a contract with Kentucky to serve beneficiaries in 7 out of 8 regions in the state.

Our subsidiary, Kentucky Spirit Health Plan, will be providing integrated health care, behavioral health, vision and dental services to Medicaid recipients in the state.

The contract has an initial 3-year term with the potential for 4 - 1-year extensions.

I'd like to provide some clarity on the financial impact of this contract.

We expect Kentucky to be accreted in 2012 and, over the life of the contract, consolidated pre-tax margins will be consistent with our previous stated 3% to 5% rate.

Yesterday, we were selected to provide services to Medicaid beneficiaries in 3 geographic service areas in Louisiana.

Our subsidiary, Louisiana Health Connections, is a joint venture between Centene and the Louisiana Partnership for Choice and Access.

The contract has a 3-year term with the potential for a 2-year extension.

This marks Centene's entry into our 14th state.

Its RFP was quality-based, while the Kentucky RFP included a meaningful price component.

This demonstrates our flexibility in pursuing winning RFPs based on a variety of metrics.

We are optimistic about our ability to win new business given our solid track record of RFP wins.

As discussed at our investor day, and updated for our recent Kentucky and Louisiana contracts, we have won all 5 of the contracts that have been in balance thus far in 2011.

The RFP pipeline remains robust and we will continue to be prudent and selective when evaluating all opportunities.

Now for second-quarter financial highlights.

Second-quarter premium and service revenue grew by more than 21% year-over-year to $1.3 billion.

Our consolidated second-quarter HBR improved 80 basis points compared to last year's, reflecting lower levels of utilization in 2011.

We continue to believe this lower trend will return to more normal levels in the second half of 2011.

The G&A ratio for the 6 months ended June 30, 2011 increased 40 basis points compared to the same period last year.

Calculating the G&A using the 6-month time frame is more meaningful as the timing and recognition of the Mississippi contract will have no impact.

The increase reflects additional business expansion cost.

We remain committed to improving G&A efficiency over the long-term.

However, it is also important for us to make the necessary investments so that we can continue to pursue and win profitable growth opportunities.

Our return on these investments is the highest evidence by our solid track record of RFP wins.

Earnings per diluted share increased to $0.54 compared to $0.45 in the second quarter of 2010.

The $0.54 includes a $0.10 per share charge for debt extinguishment cost as well as the benefit of the $0.07 per share from the recognition of first-quarter Mississippi earnings.

Our strong operating performance in the first half of the year has allowed us to maintain our earnings guidance even as we absorb the additional startups, a new rate outlook and charge relation to the debt refinance.

Thank you to investors of Centene.

I will now turn the call over to Bill, who will provide additional detail on second-quarter results and updated 2011 financial guidance.

Bill?

Thank you, Michael and good morning, everyone.

I want to start this morning by summarizing our second-quarter results.

We reported $0.54 in earnings per share, which includes a $0.10 per share charge for the debt extinguishment costs related to the redemption of our $175 million in Senior Notes in May and $0.07 per share benefit from the Q1 earnings related to the Mississippi operations.

During the second quarter, the contract effectiveness provisions for the Mississippi contract were amended to allow for the recognition of the revenue and medical expenses from January 1, 2011 through June 30, 2011.

As a result, $0.07 in earnings, as discussed during our first-quarter call, were recognized in the second quarter related to the first quarter of Mississippi operations.

For the second quarter of 2011, premium and service revenues were almost $1.3 billion compared to $1.05 billion last year, a 21.6% increase between years.

The primary driver of the premium and service revenue increase is the recording of $100 million in revenue for the Mississippi contract for the period from January 1 through June 30 this year.

The increase also includes increased revenue between years from our acquisition of Citrus Health Care, the conversion of the remaining members from Access Health Solutions in December 2010, Cenpatico's expanded service area in Arizona effective December of last year, the February 1 commencement of the Dallas service area STAR+PLUS Program, the May 1 commencement of operations in Illinois, and rate increases between years.

Our consolidated health benefits ratio was 83.0% for the second quarter of 2011 compared to 83.8% in the second quarter last year and 83.0% in the first quarter of 2011.

Our HBR improved 80 basis points between years, primarily reflecting lower utilization levels experienced in 2011.

During the second quarter, we continue to see lower levels than normal of inpatient and outpatient utilization, consistent with our first-quarter experience.

Our general and administrative expense ratio for the second quarter of 2011 was 13.0% compared to 12.7% in the second quarter of 2010 and 13.8% in the first quarter of 2011.

For the 6 months of 2011, our G&A ratio was 13.4% compared to 13.0% last year.

I would focus on our year-to-date G&A ratio, as this includes the full effect of Mississippi operations for the first 6 months.

The year-to-date increase from 13.0 to 13.4% between years reflects additional business expansion costs, including RFPs, network development and startup costs.

Our investment and other income was $2.9 million in the second quarter of 2011 compared to $4.1 million in the second quarter of last year, reflecting continued low interest rates.

In May, we redeemed our $175 million 7.25% Senior Notes and wrote off unamortized debt issuance costs.

The debt extinguishment costs totaled $8.5 million or $0.10 per share.

We then issued, $250 million of 5.75% non-callable Senior Notes due June 2017, priced at a discount to yield 6%.

At the same time we issued the new Senior Notes, we entered into interest rate swap agreements for a notional amount of $250 million.

Under the swap agreements, we receive a fixed payment of 5.75% and pay a variable rate of 3 months' LIBOR plus 3.5%, which allows us to adjust the $250 million notes to a floating rate.

Interest expense was $5.3 million for the second quarter of 2011 compared to $3.9 million for the second quarter of last year.

The increase between years reflects increased borrowings on the revolving credit agreements as well as borrowings on the mortgage loan associated with the real estate development, which includes our corporate headquarters.

And prior to June 30, 2010, we capitalized interest on the real estate development.

Excluding the amounts attributable to noncontrolling interest, our second-quarter income tax rate this year was 36.7% compared to 42.9% in the second quarter of last year.

The year-over-year decline was driven by a higher rate in 2010 resulting from the write-off of a deferred tax asset of $1.7 million during the second quarter of 2010 as a result of changes in state tax regulations enacted during that period.

In 2011 the tax rate was lower as a result of benefits from the exercise of incentive stock options as well as a benefit from changes in state tax laws during the quarter.

During the second quarter, we reached a tentative settlement with the IRS related to the audit of our 2006 and 2007 tax returns.

The tentative settlement is not expected to have a material impact on the consolidated financial statements.

Earnings per share from continuing operations for the second quarter was $0.54 compared to $0.45 per share a year ago.

The 2011 second-quarter results are calculated using 52.5 million shares outstanding, which has increased as a result of additional shares related to our outstanding stock options due to the increase in our stock price.

The 52.5 million shares represents a 3.2% increase in shares outstanding compared to the second quarter last year, equating to almost $0.02 in dilution and earnings per share.

At June 30, we had cash investments and restricted deposits of $1.1 billion, including $1.06 billion held by regulated entities and $37 million held by unregulated entities.

Our subsidiaries had aggregate statutory capital and surplus of approximately $567 million compared with a minimum aggregate statutory requirement of $324 million.

We have estimated our risk-based capital percentage to continue to be in excess of 350% of the authorized control level at June 30, 2011.

At quarter end, our total debt was $340 million and our debt-to-capital ratio was 23.0 %, excluding the $79 million in non-recourse mortgage notes.

We had no outstanding borrowings on our $350 million revolver at quarter end.

Our medical claims liabilities totaled $483 million at June 30, 2011, an $11 million sequential increase.

This represents 44.4 days in claims payable, consistent with the March 31, 2011 level.

As I noted during our investor day in June, we have lowered our targeted DCP range to 40 to 45 days from the prior range of 43 to 48 days due to the increased level of our auto-adjudicated claims and electronic submission rates.

Our second-quarter cash flow from operations was a use of $41 million.

For the first 6 months of 2011, our cash flow from operations was positive $53 million, which is approximately 1.0 times year-to-date earnings.

I would now like to update our 2011 guidance.

We expect premium and service revenues of $5.0 billion to $5.2 billion and earnings per share of $2.03 to $2.13.

For the full year, we are guiding our health benefits ratio to 83.0% to 84.0% and our consolidated G&A expense ratio from 12.8% to 13.3%.

We estimate diluted shares outstanding will be 52.5 million shares for the full year, which reflects a continued increase in outstanding shares for the second half of 2011 over the 52.2 million shares used in the 6-month calculation at June 30.

Our revenue guidance has been increased to reflect the Kentucky operations, which are expected to commence in the fourth quarter.

It also includes a rate outlook for the second half covered by Michael.

Our HBR guidance has been lowered to reflect the lower levels of utilization experienced in the first half of 2011.

For the second half, we expect more normal levels of utilization and we will also experience higher HBR levels from our new businesses, including Mississippi, Illinois, and Kentucky where we reserve at higher levels in the initial periods of operations.

Our G&A ratio for the year has been increased to include a higher level of business expansion costs and startup expenses for Kentucky and Louisiana.

We currently estimate incurring from $0.12 to $0.15 in Kentucky and Louisiana startup expenses for the remainder of this year, two-thirds of which are expected to be incurred in the third quarter.

Overall, we have maintained our EPS range of $2.03 to $2.13 provided from our first-quarter call.

However, our updated guidance now incorporates a net $0.07 charge for the year from the refinancing of our Senior Notes and the $0.12 to $0.$0.15 in Kentucky and Louisiana startup expenses expected to be incurred in the second half of 2011.

With that operator, you may now open up the line for questions.

(Operator Instructions)

Our first question comes from Ken LaVine at UBS.

Good morning.

Thank you for taking my question.

Given your sizeable recent RFP wins in Kentucky and Louisiana, which could add 20% plus to revenues, just wondering how you would think about pursuing future RFPs and any sort of prioritization that might be there, just given any sort of capacity issues that might be present.

I think what's important is, and I'll start off, and Jesse can jump in here as well.

We anticipated several years ago that there would be a real increase in the stream of RFPs that are coming.

We have staffed and prepared for that very methodically over the past couple years.

So, as these come online, we see ourselves to continue to be in a position to respond to additional RFPs.

And as long as the RFP is structured in a way that makes reasonable financial sense for us, we'll be in a position to do it.

Jesse, anything you want to add?

A couple things to add, Ken.

As Michael said, this is not unexpected for us in terms of the volume of activity and we want to presume success on those RFPs given our track record and be prepared to implement those.

We talked during the investor day about our recent implementations and we had done 9 implementations over a roughly two-quarter period.

So, we have a lot of experience in doing multiple, simultaneous implementations.

We take that into account as we're evaluating capacity and things along those lines.

The last point that I would say is not all these things happen simultaneously.

So, there's a staggered implementation date so it becomes more ordinary course for us continuing to look at implementations.

The things that we have won recently take us through roughly the first quarter of 2012.

So, as we look at other opportunities to have future implementation dates, that gives us another lens as we look at capacity.

Another important issue is that if we took you into our new systems facilities -- they have been staged to handle growth considerably beyond where we are today just by adding some disc drives.

Great.

That's helpful.

Appreciate it.

And just to switch gears for a second, just wondering how the new tech, the DVD live that came on in February is tracking and also your expectations given one of your competitor's commentary here last week.

I suppose it looks like there's a bit of an uptick in your overall ABD Medicare HBR that was reported in the quarter.

Thanks.

I think the uptick primarily relates to Mississippi coming on board, that's included in that category.

I think with respect to the Dallas STAR+PLUS operations, that is performing to our expectations.

I think that when we looked at that originally, we knew there would be certain issues with the provider network and we were prudent in how we built out the network.

At this point in time, it's operating in accordance with our operations.

You may want to comment on how our systems capabilities, the predictive model, everything, have helped you prepare to manage some of this.

Right, and as we talked about it at investor day, our set intelligence, which allows us to use a very customized predictive modeling tool, helps us to figure out who is high risk and quickly triage them to either case management, disease management, or care coordination.

So, we can expect and predict what we're going to do.

Great.

That's helpful.

Thanks very much for the time

The next question comes from Charles Boorady at Credit Suisse.

Thanks.

Good morning.

My question -- just very modest declines, but still declines in some of the states sequentially.

I'm wondering what the driver is of that.

Did people lose eligibility?

Is it from an improvement in the job market in those states or what's driving those declines?

Mark, do you want to take that?

Yes.

Sure.

This is Mark.

It's different by state.

In some states we are seeing some modest decline in overall eligibility.

Ohio and Indiana are examples of that.

In other states it's driven by our network strategy.

So, examples there would be Florida and South Carolina, where we have been taking steps over the last 6 months or so to improve our unit costs and maybe trim the networks to some degree and that's had some impact on membership.

Do you know what the loss ratio is of the lives that were lost?

I mean they have been generally at a higher loss ratio.

So, just an example, South Carolina our HBR year-over-year has improved about 300 basis points there.

That's partly a result of the change in the membership mix.

Got it.

And where do those live go?

Do they wind up at another Medicaid HMO or do they go back into the state's fee-for-service program?

Both, depending on the state.

Some states are mandatory.

So, it would go to a competitor.

Some states there's a fee-for-service option.

Got it.

My next question is just on days claims payable.

Can you talk about the trend there and what the IB&R component was how that's been trending?

The DCP number is 44.4 for the second quarter, consistent with Q1.

I think we showed the components in the press release in terms of some of the new business and in some of the payouts that have been done.

I don't think there's really anything unusual there to really talk about.

We expect those numbers to continue to decline over time due to the auto adjudication rates.

But really, it's an ordinary quarter in that regard.

I think what's important is if you look at that table where you show the shifts in percent of partial days -- it will show you that in any -- even though it's the same number, there are moving parts within there that you have to manage and work through.

Okay.

Great.

Thanks

Our next question comes from Tom Carroll at Stifel Nicolaus.

Good morning.

Could you comment -- actually two questions.

Could you comment on utilization across the different categories of service?

So, maybe a bit more detail on inpatient, outpatient, physician, et cetera.

I think you've already mentioned Texas, specifically.

And then secondly, given the awards that have been just announced and the ones that are still out there, maybe you could give us, and you did a little of this, but refresh us a bit on how you look at startup activities and costs for those activities.

Kind of what I'm getting at here is, from the beginning of the year your G&A is up about 80 basis points, which equates to like $40 million or so, which is $0.$0.50 a share.

So, maybe a bit more on where that money gets spent.

Maybe contrast that against your $0.12 to $0.15 number that you provided.

It seems like the G&A imbeds a lot more than the startup cost you're actually going to incur.

That's a lot, but maybe let me stop and let you respond.

[Bill] why don't you take the first one.

I'll ask Jesse to pick up the second one.

With respect to utilization, we have seen decreases below the normal levels both in inpatient and outpatient.

We don't have specific percentages that I think we're going to get into.

Overall, bed days are down between years.

And consistent with what you have seen elsewhere reported in terms of hospital reports and others, we see that also.

Mary, anything you want to add to that?

It was actually, as far as the Q2 when you look flu season and synagis, we did not have an intense or an extended flu or synagis season.

So, that was also very good and helped utilizations.

Jesse, you want to talk about start-up costs?

Thanks, Michael.

So, Tom, we go back to the question -- I think at least the first part of it was, what are the components of the startup costs as we look at multiple implementations.

We can talk certainly at a high level about those and then maybe you can follow up with anything specific beyond that.

There are generally a few categories of cost that we look at as we are approaching a market.

Obviously, there are the, what I would call, the internal costs.

So, systems and things along those lines that would be specific to transitioning our systems for a -- on a market-specific basis.

Those are the kinds of investments we made significant -- had a significant focus on in the last few years.

That is a component of adapting our system on a state-specific basis.

So, that would be one.

Building out market -- networks in particular, markets is obviously a big category.

We have continued to make investments internally to do that, but we also have flex capacity on that, which we can look to externally as well.

And then a key component, obviously, is on the staffing front.

One of our differentiators in the RFP process has been our local approach.

That includes having a lot of people adding jobs in the markets that we will serve.

So, recruiting and then hiring for those people in the new markets is a meaningful part of the startup equation.

The other thing I would add is we earlier in the year we talked about having, I think $0.08 to $0.12 in startup costs with the early Mississippi, Dallas STAR+PLUS, and Illinois I should say.

And now we're saying now we have $0.12 to $0.15 in the second half of the year, particularly for Kentucky and Louisiana.

But some of this stuff is incremental.

In other words --last year we had startup costs and in our guidance numbers originally, we had seen certain levels of business expansion costs.

Some of this is just how much incrementally is over what we had originally experienced or planned.

I think also another factor one has to keep an eye on is if the state says the startup is October 1, and we're ready for it, and we have the staffing in place the expenses in place, and for some reason they delay us, that can increase the startup cost.

That's not something we've done, it's just the environment.

But we have to assume when they say -- or presume, I should say, when they say we're going to start October 1 to be ready for them because they do readiness reviews.

That's great.

Thank you very much.

The next question comes from Chris Rigg of Susquehanna.

Thanks.

Good morning.

First question just a high level.

Can you give us a sense for why you would pursue a joint venture model in Louisiana versus your more typical model for you guys?

Jesse?

Sure.

Part of that is the function of the efforts that we undertook on the business development side in Louisiana a long time ago.

So, it's a market that we've spent the past couple years evaluating.

At one point in that process, the state was seriously considering not doing an RFP, for one and then having a requirement for provider ownership for people to participate.

So, because we were early adopters, if you will, in that market, we started down that path and identified a very strong partner, which is an association of federally qualified health centers who serve a significant portion of the Medicaid population in that market.

So, that's the reason we started down that path and we obviously maintained that path as the program developed over time.

We think it's an attractive model for us.

I think it will be highlighted in the release.

We will continue to manage the operation, leverage our specialty companies where we can, and then we have a statutory joint venture.

I may comment that we had to go back over time, our initial entry in Texas, way back when, was on a joint venture model.

Eventually, they wanted to monetize their share, but they are still actively involved at the board level and others.

So, it's a very viable model.

We have gained a lot of mutual respect within that group as a result of it.

Okay.

And then sort of a follow-up to a previous question, comments from Michael.

Is there a chance that given the rapid ramp-up of Kentucky and Louisiana, do you think there's a chance that those start dates get delayed a little bit?

(technical difficulty) anything that states may or may not do.

Sometimes they get delayed, other times they don't, but my only comment is we have to be ready when they are.

I have to presume that the startup date is the startup date.

Now, in Louisiana they have met every deadline.

In Kentucky, they're on a very short cycle and they have met those deadlines.

So, I have to believe that they will be able to do it.

Bill, you want to add something?

I just think from the standpoint of our guidance numbers, we have very little earnings from Kentucky in the fourth quarter that we're really counting on so it got pushed back, it would have a more minimal impact and no revenue in Louisiana, obviously for 2011.

We're not prepared to give 2012 guidance yet.

Right.

This is not [a maneuver] I just want to -- as has been our practice, we want you to know how we're looking at it.

But when we can give you more transparency, we want to.

No, and I appreciate that.

Last question is on the rate.

Could you possibly break the rate outlook into a little more detail?

Maybe give us a sense for what the actual composite rate update was for the first half of the year and now what you're predicting for the second half of the year?

And also possibly give us a sense for what you're looking for in your two big states, Texas and Georgia, again in the second half of 2011.

Overall, our composite rate has probably gone down by maybe a 0.5% during the course of earlier this year.

Clearly, we look at the second half rate changes that will occur.

We expect to see some decreases in some of our markets in Texas.

That's incorporated into our guidance, our numbers.

A lot of that is pass-through costs through provider fee cuts, so overall as Michael said in his remarks, all the provider fee cuts tend to get -- end up being passed through to us, although we are marginally impacted.

And that really is what's changing our overall composite down to the 0 to minus 1 area.

I think, as I tried to say, we look at -- these are minimal adjustments to it.

We have maintained a mentality for a long time now that you really -- what influences the outcome is the medical management side of things, far more than 0.5% of rate.

So, it's a matter of just continuing to be tenacious in that area that will make the difference for us.

Okay.

Thanks a lot.

The next question comes from Scott Fidel at Deutsche Bank.

Thanks.

First question just if you can talk about the accounting mechanics in Louisiana just relative to the JV structure and just whether you'll be consolidating 100% of the revenue in earnings in the P&L, given the 51% ownership.

The operation in Louisiana, as Jesse has talked about -- we will be the 51% owner of the statutory entity.

But we will have a management contract with the statutory entity and we will be providing all the operating support for that business.

So, we will have that contract plus whatever specialty businesses that we utilize in Louisiana on an ongoing basis and generating margins off of all of those.

At this point in time, 100% of the revenues will be included in our consolidated results, because we will have a majority ownership and we will consolidate that operation.

From an overall earnings standpoint, I think the earnings will be a little less than you might normally see if we had 100% ownership, but I don't think it's going to be dramatically different.

Okay.

then just a follow-up question on Louisiana.

Can you talk about what type of penetration rate you're assuming for the managed-care program when you establish your membership in revenue estimates relative to the shared-services program?

I think the state had assumed a 50/50 split but, really there could be additional savings if you see a higher penetration rate in the managed care program for the state.

Jesse?

This is Jesse.

I think -- what we would see under the numbers that we put into the release obviously assumes an equal distribution of membership across the different models.

I think we will be undertaking discussions with the state to get more of their perspective on how they see the program rolling out.

So, that could obviously change over time.

But based on the numbers and what we're assuming now, assume a pro rata distribution based on the number of players and not the type of players

Okay.

And then just a question on the updated rate outlook and how those rates may be affected by inclusion of the Kentucky rates.

Probably doesn't impact your year over year comps since Kentucky is just starting up, but basically if we look at the new guidance of flat to negative 1% -- is that effected by Kentucky or is there no change if you were to exclude it?

Kentucky is really minimal with one quarter over.

There's no impact from Kentucky because it's not in the base when we're talking about the change from year over year.

Got it.

Then just one last question just on Kentucky again and appreciate you giving us your long-term view on the returns that you expect in that market.

Just interested in sort of how we get comfort with the pricing structure in Kentucky with this 3-year rate lock in.

Specifically, if medical costs do end up coming in higher than expected, what type of options would you have with the state to address rates if they prove to be insufficient relative to this 3-year rate lock?

How do you get comfort?

I would encourage you to look back when we went into the Connector in Boston last year, we were at the lowest end of the curve, as we said.

Everybody said, how are you going to do it, and we ended up refunding them on money on top of it because, through managing and having predictive models and the information we have to manage the care.

We think that's going to make the big difference.

And relative to, if there are particular issues, it's kind of hard to say what would you do until you know what that issue is and to try and project all the what-ifs would really just be very difficult to do.

We have always found when there's something that -- if there's something where there's an error on somebody's part, usually people can talk about things.

But we're comfortable--.

We looked at the rates.

Our actuaries, several sets of actuaries looked at the rates And we're very comfortable with where we came in on them.

Okay.

Thanks

Our next question comes from John Rex at JP Morgan.

Thanks.

Good morning.

Just wanted to come back to your commentary on utilization.

So, I guess the first point -- Give us a little more precision on what you're seeing in terms of bed days.

Could you give me a year-over-year percentage change in bed days per thousand, inpatient bed days per thousand?

Mary, you want to comment?

Cary?

I think that, as we said, it's down about 4% between years in terms of bed days.

That's something we have seen relatively consistently throughout this year, so far.

We're down in pharmacy in the second quarter, we're down in outpatient in the second quarter.

And our NICU continues to decrease year-over-year.

So, overall, we're just seeing utilization decrease across the board.

And can you help me -- when you think about the 4% year-over-year, tying into the NICU commentary.

How much of that do you attribute to OB and lower birth rates?

Mary?

When you take into account we have over 60,000 pregnancies per year.

When we focus in on reducing the micro-preemies, those less than 1000 grams, or less than 1500 grams, we continue to see statistically significant decreases.

That's definitely driving the inpatient utilization down.

Would you hazard a guess that lower birth rates are worth 50% of the lower bed days you're seeing?

John, we're not going to hazard guesses on that.

If it's specific information, we'll get it out.

I think what Mary's saying is, we have Healthy Start and we have Healthy Rewards and various programs that are driving the premature birth rate down.

And we're seeing the gestation periods are getting longer.

We're getting fewer micro-preemies which are incredibly expensive.

But outside the cost, we're getting healthier babies and that's really what our goal is.

If you drive towards healthier babies, the other things seem to come in line.

That's really the orientation and focus we take.

I guess what I was trying to tease out here is what is secular -- in terms of we have got lower birth rates going on in this country -- versus what is company action?

In terms of the impact you're having in NICU, and if there's a way of helping us understand order of magnitude.

I would have to do some work on that for future calls, but it really moves back and forth.

But, also our programs -- I think we're making a difference.

I mean there's a material difference we see market over market when we put them in place.

But, I'd have to really do some digging to try to give you anything that's credible.

Okay.

And maybe this is perhaps just a little topical of the moment, but have you seen any shifts in surgical volumes?

No.

Mary?

No, we have not

Okay.

And then, just last thing.

I don't think I heard on the previous question.

Can you update us on your expectation for your Georgia rate update?

With respect to rate increases in the second half of the year which would include Georgia, Florida, and Texas, we're in discussions with all of the states.

Nothing is final at this point in time.

We have had these initial discussions and understand directionally what they are looking at.

That is incorporated into our guidance in the overall composite rate, but it's going to be a while before those are finalized.

Mark, you're the one who is going to direct your team and direct negotiations.

Do you want to comment any?

Right, what I think Bill primarily covered it there.

For Georgia, for example, and Florida, we don't even have draft rates from the state yet.

So, we're negotiating with them and we're setting expectations.

We're still waiting for the rates.

Okay.

Great.

Thank you.

Thank you

Your next question comes from Peter Costa at Wells Fargo.

A couple of questions.

Did you have lower bed days in the ABD population as well or just in the town population?

We do.

A lot of this goes back to the predictive modeling of being able to get the patients and manage them correctly and then prevent admissions and readmissions.

Can you contrast exactly what the percentages were in the ABD population versus the [tenant] population?

I don't think that's a level of detail we're going to get into.

Okay.

Talking about the rate increase for the back half of the year.

Is it right to assume that the rate increases or the rate decreases, I should say, are going to be mid-single-digit range, given that some of these rates don't take effect until September?

What we said is, we expect the overall rates to be from 0 to minus 1 for the entire year.

For the entire year, but to average out from what you had which were higher mid single-- or low single-digit rates in the beginning part of the year to get to drop to a negative or potentially negative rate (technical difficulty) is more substantial.

We had what, 70% of our member months already recorded through the first 9 months of the year.

We reflected those rates.

So, it's still a small portion of it

I think generally these have been small changes in our composite rate outlook.

As I said, it's about 50 basis-point swing that we've had from earlier in the year to now.

I think also, very important, we have tried to emphasize it up front.

It's one thing if they say, everything stays the same and we're dropping rates.

But you see when provider rates, which we are tied into, are being cut, and then that's a path through to us.

So, there is a sort of an equilibrium there that comes in play.

It will affect some of the revenue line, but not necessarily the cost line, same level.

So, most of this is tied to what they have done to the provider rates.

Okay.

Thank you.

The next question comes from Doug Simpson at Morgan Stanley.

Thanks for taking my question.

Any color you can give us on broadly what you're seeing in terms of competition for RFPs and how would you expect that to change, if at all looking into 2012 given the awards this year?

I think, what was it some of you reported?

There were 11 or 14, some very large number going after Louisiana?

Yes.

I don't see any reason why competition will decrease any.

But, I view this as, it's pure, it's a large business.

I think, we view this as we're competing against ourselves.

I think so far we're 5 for 5 this year.

You saw the record last year, the last 3 years.

So, we continue to be cautiously optimistic that we can compete effectively.

You look at each RFP as a discreet document and you deal with it, and different people will come at a different time have different things at stake.

I'll just rest on the records to date over the last 3 years and say we're not going to win 100%.

Not projecting at that, be nice if we did, but we probably won't.

But we're winning the ones that we believe have counted this year.

Okay.

And then just to make sure I understood your comments on the rates and the fee schedule offset.

It sounds like, obviously you have that [pass through] dynamic.

Is there any way you can help us think about-- what is the 5% rate do to your G&A opportunity versus a 0% rate?

Is there any way to help us think about sizing G&A leverage with respective rates.

We tell everybody that we influence medical costs and we control expenses.

We are on an ongoing basis looking at our G&A.

The systems enhancements and things continue to allow us to improve on it.

But as you look at it, the order of magnitude of the rate impacts is not at a level that's going to mature the impact, the G&A number.

We keep pressure on G&A.

What it's going to affect more is the medical costs because the provider rates are coming down, commensurate with the rate increase.

Anything you want to add, Bill, or anybody else?

I just think mathematically if we take a 5% fee cut -- the provider takes a 5% fee cut on the schedule, there's also an impact on the dollars that we receive for G&A costs of maybe 40 to 50 basis points.

But it's incumbent upon us, then to do better management and not allow that to really fall to the bottom line, figure out ways to be more productive.

So that's been a constant challenge for us to make sure that we make sure our G&A costs stay in line with the revenues from each of the states.

And the provider fee cuts, if those go through, that we're able to neutralize those at our margin level.

I think what's important, Doug, is that we're maintaining pressure on G&A, irrespective of the rates.

We need to -- our job is to constantly, every day, to turn those pennies, look at them, use our systems, and leverage the systems.

We have talked to some of you about the level of investment we made and now, this is where it comes into play.

This is where we're -- it gives us what we need to medically manage, and also to start to reduce some of our other costs.

I might also add that just some of the law of large numbers, when you think about the growth we're seeing and you start to look at the corporate expense and others that that's absorbing, there's a reduction there as well.

I mean, you guys know the P&L as well as I do.

So, it's a matter of multiple factors coming to play.

Okay.

Thank you.

Your next question comes from Brian Wright at Citadel Securities.

Thanks.

Good morning.

Two real quick questions.

The first is just on the rates one more time -- that 0% to down 1% for full year.

That seems like that's a net number before -- net after assuming a pass-through on the provider cuts.

What's that on a gross basis?

You are correct.

That's our net calculation of after pass-throughs.

We don't really have it broken out on a gross basis versus how much the net fee scheduled reductions are versus what we would have on our side.

Overall, the net effect to us is the 0% to minus 1%.

Okay.

So if you had provider cuts, then the gross would be a bigger negative than that.

As we gave in the example earlier, if there was a 5% cut in the fee schedule, which is not unusual these days, that we would be impacted by some, say 40 basis points to start with, depending on our ability to manage down or G&A costs in accordance with that.

And just on a completely different topic, are either Kentucky or Louisiana going to require some upfront statutory capital contributions?

I think, last year Mississippi did.

Every state we go into has some upfront -- do you want to take that Jesse?

Sure.

You just started to say it Michael.

I mean every state has requirements, obviously, and state insurance law is different and obviously our expectations will be to be compliant with the statutory requirements.

That will be sized, obviously once we have a little more clarity on the membership and revenue levels in those markets.

When will the timing be so that when you'll know from the state regulators in those states whether you'll have to do a more up front than --because states vary.

Some, Mississippi, I thought, required a little more than usual at the beginning

It's a function of the membership that we would get in the beginning.

As that comes in, we'll size it with them.

Our goal is to move to the 250% of this base capital level over time.

So, it's something that you look at when you get the information and you have the available capital and it just moves from one spot on the balance sheet to another.

So, there's no -- you wouldn't be required to raise any debt or equity because of all the premium (multiple speakers)?

We will not go back out for any new debt or equity as a result of these two states.

Okay.

Thank you.

The next question comes from Scott Green at Bank of America.

Hi.

Thanks.

So, just to make sure I understand, because I get confused on gross versus net rates.

How much range of the change in your composite rate guidance from low increases to a range of 0% to negative 1% is due to an updated view of provider rate cuts?

It's a function of what will we see and what we're seeing some of the states looking at for providers going forward.

Bill, do you want to add some?

I don't think there's anything new this year versus prior years in terms of the changes to the fee schedules in each of the states.

This is something that's gone on for quite a few years in terms of states adjusting those.

I think in this particular case, we see in the second half of the year that there are going to be provider rate schedule decreases in several of the states.

We work through those with our side to make sure that those are pass-throughs in terms of the net effect to us.

We've been generally pretty successful in achieving that.

Right, so I'm just thinking how much of the change in your composite rate guidance would reflect a new view of provider rate cuts that are mostly pass-throughs versus the state now saying we are expecting trend to be a lot lower going forward?

We don't really have the breakout between those two components.

There's certainly discussions that occur every year with regard to the rate-setting process and what's happened with utilization trends and unit costs increases or decreases, and that's all taken into account when the rates are set.

We have very active discussions in each of our states, actuary to actuary and with the state.

So, I would say that's all part of the process

Some of it is some policy changes the states may give us, as well.

We talked about our margin protection programs.

A set policy change on the part of the state can have a positive impact on our costs.

It's a whole series and it's a state by state thing.

When I look at it and where we are, to my way of thinking, we have gone on and said, our overall guidance on the year is not changed, is not being impacted by this or some of the growth factors we have.

At the end of the day, I think we're managing through these issues and I think the team here is doing a great job in doing it.

Okay.

So that's how you put the kind of actuarial soundness into perspective when you spoke about that earlier in the call that the combination of this rate update includes some provider rate cuts which are passed through to through program changes and whatever view on rates.

You think that is an adequate rate to achieve some target pre-tax margin going forward.

Our guidance is-- you have to keep in mind -- it's others.

So we have new states coming on board; we have Mississippi which will book at a higher level.

It's prudent, I think appropriate to use a higher MLR until you get some history there.

We're going to have that in Kentucky, we're going to book at a higher level as we have with other new markets.

It's an evolutionary thing where you work with the network.

It's as much having new providers who have not worked in this kind of environment, work with them to evolve their systems and programs, to bring them under control in a very responsible, sustainable way.

Everything we do has to stand the test of sustainability.

And I think that's part of it.

I remind you that one of the charts we had that showed over the past two years, 8 or 10 quarters now, we have maintained our HBR within a couple hundred basis point range.

And that's that combination of all these factors.

We continue to feel we will be able to do that.

We tightened up -- we used to give you a 200 basis point range.

We've said going forward it's going to be 100 over the course of the year, the balance of the year.

So it's really a good [disabilia].

That's what we see here today.

Okay.

And I had a question about the Louisiana RFP scores.

It looks like Centene got a perfect score in the added value to Louisiana category by including the most provider incentive payments and additional member benefits beyond what's covered in your monthly premium.

I think the map on that was around 400 basis points of provider incentive payments and additional member benefits as a percentage of premiums.

I guess ideally that pays for itself by lowering utilization.

That amount was about double your peers.

I was curious any insight you could provide on what kinds of extra benefits they are or is there something unique in Louisiana that would help you achieve so much lower cost trends to fund those extra benefits?

Jesse?

Yes.

Scott, there's a couple parts of that.

Maybe we will break out the number in the provider side of the equation.

On the provider side, one clear benefit is the relationship that we have with our joint venture partner.

That was a function of part of the economics of that relationship.

We fall into the category that's included in the calculation there.

I think that's a meaningful portion of the provider side, which I think is unique for us in the joint venture.

I think on the member side, it's interesting, because a lot of the things that we have on the list there -- so, long list of programs and other clinical and other intensive programs, things along those lines are things that we do in our ordinary course.

We do in each of our markets today and have had a lot of positive impact.

Dr.

Mason has shown the impact of those over time on the investor day, et cetera.

I think what's unique about Louisiana is they asked for delineation and an actuarial value for those programs, which we got credit for.

Okay.

Great.

Thanks.

Our next question comes from Joshua Raskin of Barclays.

Thank you.

As you guys think about -- I know you're not giving 2012 guidance, is it fair to say just based on already known wins and then (technical difficulties).

It's hard to hear that question.

You were breaking up.

Is that better?

Yes.

Much better.

Sorry about that.

Looking at 2012, and forgetting guidance for a second, but just known contract wins as well as the full-year impact of some of the ones that you have already won earlier in the year.

Is it fair to say that top line growth is going to be above that 20% threshold that you guys have talked about long-term?

We have given no guidance on 2012 at this point.

We do that towards the end of the year.

I want to be very careful we do not set a new precedent here for you.

We're working through the numbers.

In December we expect we'll have a investor type day and give you all the color on that.

Let me ask a different question, then.

As I look at 2011 as a base year, it seems like you have got this one-time debt extinguishment cost of $0.10 or so and then you have got a whole bunch of startup costs.

I know you talked about the $0.12 to $0.15 that's somewhat new and then you had some in the first half, as well, you talked about that.

As we think about the run rate for 2011, is it fair to say if nothing else happened, if you just sort of maintained the contracts you have already won and didn't have any major expansions, that you'd expect to see margin expansion in the future off of where you're currently running?

If you had did nothing -- if you had no additional investments in current markets, just a steady state, just said we're adding nothing, no people, nothing.

Of course you are going to get some expansion.

But that's not the reality of how it goes.

There are system investments we are making.

There are new markets.

There are new RFPs that will be coming out.

We have not thought about the steady state, we just keep looking at the incremental.

We put it together.

We'll give guidance for '12 on that.

Obviously, we expect some payout on these investments.

We're in an unusual cycle where there's additional opportunities to continue to invest in growth in a very responsible way.

Got you.

I certainly appreciate that, Michael.

What I'm getting at is including some of the new guidance, it looks like your pre tax margins are going to be closer to 3% than 5%.

As we think about the future, we'll be understanding that you guys will grow the top line significantly.

Just trying to figure out when we start seeing that translate into bigger bottom line growth.

Certainly not upset, obviously, with this year's growth rate, but just thinking more about as we transition.

This has been a particularly strong year for you guys in terms of top line wins.

Just curious when that manifests in the bottom line.

Over the course of '12, I expect to see it start to manifest.

You're going to have, initially we said, those 2, 3 quarters where we'll book 90% until it's clear it's coming down.

That's that standard policy we've talked to you historically about.

That hasn't changed.

We'll continue to leverage the G&A structure where we can at the corporate level with that increased volume.

We'll work to -- there's not going to be additions here at the same level on a one-for-one basis.

We expect to leverage that.

We will continue to invest in new RFPs as the right ones come along.

You all know as well as we do that there's a strong pipeline coming, yet to come the balance of this year, maybe next year.

So there are all those things.

Over time we have the objective to expand margins.

Every business wants to do that.

But we're not going to -- we have to strike a balance between that and seizing the opportunities that are for growth there, because these opportunities don't come around every single day.

And so you -- we've been prepared for it historically and took our margins down a bit by adding the staff necessary and now we're starting to reap the benefits of that.

Got you.

Perfect.

Just last question on Texas.

Obviously, that's the next big one.

Is your expectation still a mid-August contract award?

Have you guys heard anything?

Mark?

Yes.

Mid-August is still our expectation.

We haven't heard a hard date from the state

We're hopeful we're hear.

I'd like to see them announce it and we can all go on vacation.

(laughter) But that's my objective for them

All right.

Me too, then, Michael.

I'm with you.

Thank you.

Thank you, Josh.

Any other questions?

We thank you all.

We look forward to doing this again in another 90 days or so.

Thank you, everybody.

Have a good summer

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