Centene Corp (CNC) 2012 Q1 法說會逐字稿

Good morning and welcome to the Centene Corporation 2012 first-quarter earnings webcast and 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 Mr.

Ed Kroll, Head of Investor Relations.

Please go ahead, sir.

Thank you and good morning, everyone.

Thank you for joining us on today's earnings call.

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

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

A replay will be available shortly after this call's completion also on our website at Centene.com or by dialing 877-344-7529 in the US and Canada or 412- 317-0088 from other countries, and the playback number for both of those dial ins--10011606.

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 24, 2011, and other public SEC filings.

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

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

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 first-quarter 2012 earnings call.

We delivered strong top line growth of over 40% in the first quarter.

First-quarter 2012 earnings per share came in at $0.45, compared to $0.46 in the first quarter of 2011.

While it is not our policy to provide quarterly guidance, we did note at our December 2011 investor day that we expected first-quarter earnings per share in 2012 to be relatively flat compared to the first quarter of 2011.

In fact, on our fourth quarter 2011 earnings call, I said in part, and I quote, year-over-year flat would be good, recognizing the new business and recognizing the start up costs.

We view these quarterly results as mixed.

With a solid HBR came in 20 basis points higher than the top of our guided range.

This was due to the continued elevation of the HBR in Kentucky market, Texas seasonality in March, as well is an uptick in medical costs in our South Carolina market driven by the neuro virus.

Additionally, we incurred $0.15 of startup costs in the quarter, which came in higher than our previously expected $0.10 to $0.12.

This increase occurred as a result of greater business expansion activity, including costs associated with enrolling additional lives Texas.

In Texas, we received 300,000 members in March and an additional 70,000 in April.

While not intending to set a new precedent, by disclosing membership data prior to the current month, we believe that it is appropriate in this case due to the G&A impact on the current quarter.

At the end of the first quarter we had 811,000 lives in Texas.

Including the March expansion in Texas of approximately 300,000 lives and the before mentioned addition in April of 70,000 lives.

Superior's planned subsidiary has the largest market share in the state.

Our view of 2012 remains positive.

Actually, as Bill will discuss, we are raising our full-year 2012 guidance due to the following items.

The larger than expected Texas expansion and the commencement of operations in Washington and Missouri in Q3.

While the first quarter was mixed, I want to remind you that historically there is increased volatility in the first quarter and higher medical costs in new markets can take three to four months to normalize.

Before I provide more color on the quarterly financials, I would like to touch upon some other important topics.

First, state updates.

Mississippi and Illinois, both of which commenced during 2011, are ramping successfully and performing in line with our expectations.

Kentucky.

We entered the first quarter in 2012 with 145,700 lives.

While the 90-day enrollment period has expired, it is still possible that additional shifts in membership may occur.

We continue to work with the state to develop sound public policies on a range of items.

The first quarter HBR in Kentucky was approximately 100%.

We expect a higher HBR to continue throughout 2012 which is reflected in our guidance.

Louisiana.

In February 2012, our subsidiary, Louisiana Healthcare Connections, commenced operations in the first of three of Louisiana's geographic areas.

This subsidiary is a joint venture between Centene and Louisiana Partnership for Choice and Access.

We had 51,300 lives in the state at quarter end.

The second enrollment phase occurred on April 1.

Ohio.

Earlier this month we were disappointed that our Ohio subsidiary, Buckeye Community Health Plan, was not awarded a contract to continue serving the state's Medicaid members.

This is to be effective January 1, 2013.

We have filed a formal protest contesting this contract loss.

It is our policy not to comment on ongoing appeal processes, however, I would like to stress that we do not believe this Ohio result is a proxy for future RFPs.

All RFPs are unique and have distinctive aspects.

Next our recent contract wins.

In January of 2012 Centene subsidiary, Coordinated Care Corporation, was selected as one of five plans to contract with the Washington Health Care Authority to serve the roughly 840,000 Medicaid beneficiaries in the state.

This includes 700,000 TANF and CHIP lives as well as 100,000 non-dual SSI lives and 40,000 low-income adults.

Centene is the only statewide vendor in Washington.

Operations are set to commence in the third-quarter of 2012.

Our initial membership expectation for this is a range of 70,000 to 80,000 lives, though certain items remain open.

In February, 2012, it was announced that Centene subsidiary, Home State Health Plan, was one of three brands elected to serve roughly 425,000 Medicaid beneficiaries in Missouri.

We will provide coordinated healthcare and behavioral health services in all three regions of the state.

Operations are set to commence in the third-quarter of 2012.

Though still subject to change, our initial membership expectation is for a range of 50,000 to 60,000 lives.

In New Hampshire we are pleased to be one of three companies going through a contract approval process.

This opportunity reflects the transition from fee for service to managed care, inclusive of pharmacy, behavioral, and long-term care.

Now on to the dual eligible opportunity.

We are well positioned to serve the dual eligible market, which includes more than 9 million individuals currently receiving both Medicaid and Medicare benefits.

Our experience with high acuity population provides us with the tools necessary to provide quality care for the duals.

Additionally, our behavioral health subsidiary, Cenpatico, provides us with a competitive advantage, as dual eligible beneficiaries are high utilizers of behavioral therapies.

Lastly, the upcoming Supreme Court ruling in June.

I do not want to spend a lot of time on the topic as it is impossible to predict the outcome.

What I will say is that, whatever the results, we believe it will be limited to a Wall Street event.

The decision will not change or impact our states who need to improve efficiencies and to provide quality healthcare to a vulnerable population.

Now some brief comments on first-quarter financials before Bill goes into further details.

As I noted earlier, first-quarter 2012 premium service revenues increased 41% year-over-year to $1.7 billion.

On March 31 we had 2.15 million lives representing an increase of almost 40% over the first quarter of 2011.

The first-quarter HBR increased 330 basis points year-over-year to 88.2%.

This increase is primarily due to additional new markets, especially Kentucky, which we continue to record at higher HBRs, seasonally In Texas, and the virus I previously mentioned in Carolina, and our individual health business which has been underperforming.

On the rate front, we continue to expect to composite rate adjustments of minus 1% to plus 1%.

Please note that we have an initial indication in South Carolina for a mid- single-digit increase that is subject to final approval.

This would be effective April 1.

Before I turn the call over to Bill, in summary, membership increased almost 40% year-over-year to 2.15 million lives.

We added more membership in Texas than previously forecasted, making us clearly the largest Medicaid health plan in the state.

Revenues increased 41% to over $1.7 billion.

Kentucky, like other new states from time to time, has volatile medical costs.

We are aggressively working through the issues as we have done historically in other states which will take more time to improve.

We also integrated new health plans successfully in Mississippi, Illinois and Louisiana.

We significantly expanded our Texas operation, including the carve in of pharmacy and in-patient costs.

We are also ramping up for operations in our newest states, Washington and Missouri.

Importantly, we raised our revenue guidance to a range of $7.7 billion to $8.1 billion, and our earnings guidance by $0.04 to a range of $2.64 to $2.84.

As new business comes online during the year and the Texas expansion matures, we expect a ramp up in earnings will occur the back half of 2012.

We remain focused on the successful execution in our existing markets as well is managing our growth in 2012 and beyond.

We look forward to updating you at our June 14 investor day in New York.

Thank you for your interest in Centene.

I will now turn it over to Bill.

Thank you, Michael, and good morning.

For the first quarter of 2012 premium and service revenues were almost $1.7 billion compared to $1.2 billion last year, which represents a 41% increase between years.

This increase is driven by a 39% increase in membership between years coming from the addition of four new states, Illinois, Kentucky, Louisiana, and Mississippi, and a significant expansion in Texas effective March 1, 2012.

In addition, revenue increased from the pharmacy carve ins, which occurred in Ohio last October 1 and in Texas March 1 and also from the addition of inpatient services for the Texas Star Plus product on March 1.

As a reminder, last year we did not recognize revenue or medical costs for Mississippi in the first quarter due to CMS approval requirements.

We recognized the revenue and medical costs for the January 1 through June 30, 2011 period in the second quarter last year.

Our consolidated health benefits ratio was 88.2% for the first quarter this year compared to 84.9% in the first quarter of last year and 85.9% in the fourth quarter of last year.

Our HBR increased from the third quarter last year as a result of higher health benefit ratios in certain markets along with a mix change resulting from adding higher acuity membership and from reserving at higher levels in new markets.

As Michael indicated, we continue to experience an HBR in Kentucky of approximately 100%.

We also experienced a higher HBR in Texas between years as a result of the impact of the September 1 rate decrease and higher medical costs in March, higher seasonal costs in South Carolina, and an increased level of medical costs in our individual health business.

Sequentially, our HBR increased by 230 basis points, reflecting increased utilization in Texas and the fact that the HBR in the fourth quarter of 2011 benefited from recording premium from retroactive rate increases for two states in the fourth quarter.

We had previously indicated that we expected to have a higher health benefits ratio in 2012.

First, as a consequence of the substantial increase in our higher acuity membership, which carries a higher HBR, and second, from the impact of reserving at higher rates in our new markets, including Louisiana and the Texas expansion area.

For the year we still anticipate a consolidated HBR between 87% to 88%.

Our general and administrative expense ratio for the first quarter was 9.8% compared to 12.0% in the first quarter of 2011 and 11.0% in the fourth quarter last year.

The reduction in the G&A ratio between years reflects the increased leveraging of our expenses over a higher revenue base and reduced amounts of variable compensation expense recorded in the first quarter of 2012 offset by increases in business expansion costs between years.

We spent approximately $0.15 per share in business expansion costs in the first quarter.

This was higher than originally planned as a result of the additional cost related to the Texas membership expansion which occurred on March 1 and again on April 1.

Also, in the first quarter of 2011, we recorded G&A costs for Mississippi without any corresponding revenue which increased our G&A ratio in the first quarter of 2011 by 50 basis points.

Our investment and other income was $5.3 million for the first quarter of 2012 compared to $3.7 million in the first quarter last year, reflecting a higher level of invested balances.

Interest expense was $4.8 million in the first quarter of 2012 compared to $5.7 million for the first quarter of last year.

The decrease between years reflects the refinancing of our senior notes last May and the impact of the associated interest rate swap agreements.

Excluding the amounts attributable to non-controlling interest, our first-quarter income tax rate was 33.5% compared to 37.6% in the first quarter of 2011.

The decrease in the effective tax rate this year was primarily related to lower state taxes as a result of certain discrete tax events and the recognition of federal tax benefits from disqualifying dispositions of incentive stock options.

Our diluted earnings per share for the first quarter was $0.45 compared to $0.46 a year ago.

The 2012 results are calculated using 53.5 million shares outstanding, which has increased by 1.7 million shares between years.

On March 31, 2012 we had cash investments and restricted deposits of $1.13 billion, including $35 million held by unregulated entities.

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

At quarter end our total debt was $350 million, and our debt-to-capital ratio was 21.8% excluding our nonrecourse mortgage note.

And in March the rating on Centene was upgraded by Standard & Poor's to BB with a positive outlook.

Our medical claims liabilities totaled $709 million at March 31, a $101 million increase from year end and represents 44.7 days in claims payable.

This is a 0.6 day decline from December 31 and primarily reflects the reversal of a higher DCP level at December 31 due to the holiday processing schedule.

Our targeted range for DCP remains at 39 to 44 days.

Our first quarter cash flow from operations was negative $32 million.

And, as we discussed during our year-end call in February, during the first quarter of 2012 one of our states delayed payments of $71 million in premium payments, which was actually better than the $150 million originally planned by the state.

We expect cash flow from operations for the full year to be in our target range of 1.5 times to 2 times net income.

With respect to our 2012 financial guidance, we are not including any impact from the potential loss of the Ohio business in our guidance numbers.

Absent a successful appeal, we would expect to record an impairment charge in 2012 of $43 million for the goodwill and intangible assets recorded on our balance sheet.

We now expect premium and service revenues of $7.7 billion to $8.1 billion which reflects a higher level of revenues associated with the Texas expansion and the anticipated startups in Missouri and Washington during the second half of 2012.

We are raising our earnings per share guidance from $2.60 to $2.80 to $2.64 to $2.84 for the year which reflects first quarter actual results, the additional Texas expansion membership, and the addition of Missouri and Washington in the second half.

We are continuing to guide the health benefits ratio from 87.0% to 88.0% for the year.

We expect our consolidated G&A ratio to be between 9.5% to 10.0% and diluted shares outstanding of 53.8 million shares.

We expect our effective tax rate to be between 39.0% to 39.5% for the remainder of the year, which gets us to an effective rate of 38.0% to 38.5% for the full year.

I also would like to add that we are expecting a continued higher level of business expansion costs in the second quarter as we prepare for the startup of operations in Missouri and Washington.

We estimate that we will incur $0.13 to $0.15 of business expansion costs in Q2, similar to what we experienced in the first quarter.

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

Thank you, sir.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator Instructions)

Josh Raskin, Barclays.

I have two questions.

First question is on the guidance -- the $0.04 boost to earnings per share.

Is that just simply adding in the new markets -- the two new markets plus the Texas expansion?

Or is that adding earnings for the new markets and then subtracting for slightly lower earnings in the core business?

Just trying to figure out what drove the actual increase.

Bill, you want to take that?

Yes, I think what we do is, we go through a review of all of our business for the remainder of the year and sort of re- forecast.

And this is a result of that process.

So I'd say it is a combination of taking the actual results for the first quarter, and then where we expect things to see for the rest of the year.

Clearly, the additional revenue that we are adding to our guidance numbers of $500 million on each end is a big driver of the earnings increase, and which obviously makes up for the first quarter shortfall, let's say, and for the additional earnings from the new business.

As we've talked about, we see a second-half -- a [choke] to the second half, as Bill just indicated, as this new business comes online and we get past the continuity of care -- that type of thing.

So, there is a number of factors that affect the new business, and we still will continue to focus, of course, on the legacy business which we expect to perform within normalized ranges.

So, not to put words in your mouth, but it sounds like these changes were all incremental to the new states and, as you termed, the legacy markets.

Bill, was there any change to the forecast on the legacy markets?

I would say there would have been changes, Josh; in most of our markets there will be updates.

When we put our guidance numbers together initially, we are making estimates of what membership levels are going to be, what member mix, what rates, et cetera.

As we get further into the year, obviously, we are able to fine-tune those and come up with better estimates.

So we have run that across our whole book of business, and there are pluses and minuses in terms of the whole portfolio.

But, overall, we do expect to see a significant ramp in the later quarters of the year as we benefit from the additional membership coming on.

And, again, first quarter usually has higher seasonality, and we expect that to taper off.

Each plan -- on a monthly basis, we forecast our business looking at all the factors impacting it.

And, if we identify an issue, we deal with it.

If we see some good things happening, we do what we can to accelerate it.

Okay.

And then just on taxes, on the cross trends -- you guys speak about the dashboard and breaking down the cost trends and seeing real-time data.

So I guess the two questions are, what specifically drove that?

Is that the new membership?

Was that the carved-in benefits of in-patient and Rx?

And then just looking at the flu data, it looks like there was obviously a spike in Texas that week of March 17.

It hailed off pretty quickly -- have you seen sort of a reversion back to normal levels in April yet?

Our dashboard is really helpful.

When you have that bolus of new membership coming in, in one month -- 300,000 lives -- it takes a while for all of it to settle down and start to normalize so we can have some confidence in it, Josh.

That's like taking -- we have some states that aren't that big -- so that was a big bolus to come in.

Jesse, would you and Mark maybe want to add to that in terms of --

Sure, Josh, Jesse Hunter.

With respect to Texas, I think there is a combination of factors, and you referenced a couple of them.

With respect to our existing business, we did see some higher seasonal costs, so particularly in areas like respiratory, for example.

And we've seen that before in Texas, and we've seen that also be limited to the first part of the year.

What we have also seen is with our existing business but with new benefits.

So, bringing on pharmacy across the board in Texas obviously was a big undertaking.

We have got some continuity of care and other requirements with respect to that.

But also bringing on in-patient for Star Plus for March 1 was a driver.

So we did see some higher in-patient costs, but it was in the Star Plus population.

So existing members but a new benefit; so still new to the program.

So those things that we are seeing -- what we can use the dashboard for -- are related to our existing business, and we have identified those areas quickly, and we are obviously taking action against those.

And what we don't see right now are things that we think would be persistent in Texas legacy business over the course of the year.

We have a very experienced Management group there that has been running our big business and has the skill sets for a bigger business.

I would also add that when you see that large membership coming on, and accelerating to levels beyond what your initial expectations were, there was a lot of G&A costs that was added -- a lot of temporary help and other things -- so that we were able to absorb it and service that membership well.

So there is a combination of things, Josh.

But nothing there that says it won't normalize at a reasonable rate.

Okay.

Perfect.

Charles Boorady, Credit Suisse.

Just a couple of questions.

First, on medical cost trends -- can you give us some details behind the key drivers of trend, and maybe what the overall underlying industry medical cost trends are that you are seeing?

And then, what you are seeing as a company in terms of the trend -- i.e., how much are you bending that industry cost curve?

I think with respect to Q1, particularly, I am not sure this is an issue of medical cost trends across the Company versus some issues in specific markets.

For example, in South Carolina, where we saw -- particularly early in the quarter, January and February -- was this neuro virus which impacted the costs in that market but had subsided quite a bit by the month of March.

And, in Texas, as we just talked about, there were some additional respiratory costs and things like that.

So, overall I do not think we are seeing anything that would say we are seeing anything different in medical cost trends at this point in time than we've talked about in the past.

I think they're relatively stable.

In any one market in any one month you may see some increases or decreases, but I wouldn't call that a trend.

As we are guiding for, for the rest of the year, we still think that our overall guidance for HBR of 87% to 88% is the right range for us.

If you think about it, you take Kentucky, and we said that, that is going to be higher, and we are booking that at close to 100%; and you take the other new markets, and we have always classically said, for the first three quarters they are at 90% to 95%.

It's appropriate, how new they are to managed care.

You take that with the kind of membership we've been adding -- you could see where that would put pressure or elevation in the HBR.

The fact that it is where it is probably speaks to the fact that the rest of it is predictable and manageable.

You are suggesting that the growth in medical costs for the industry -- for your end markets -- are pretty consistent this year with what you saw last year.

Yes, I think there will be some -- we see some pressure upward, and we've said that all along.

But that is not the key or in any way the largest driver of what you saw -- that 230 basis point jump.

That was more than new markets with some seasonality.

We were pleased that, that neuro virus stayed in South Carolina.

I don't know how they shut down the borders around it.

Kentucky -- you talked about Kentucky.

We knew cost trends were higher previously, so I just want to understand if there is a real surprise factor there.

According to the stat filing that we pulled, it looks like you booked 106% loss ratio in the fourth quarter, and you said you booked around 100% loss ratio in Q1.

Is that the kind of improvement sequentially that you expected in Kentucky, or did it come in a little bit above where you were hoping to get it in Q1?

I will start off, and then I'll turn it over to Bill and Jesse.

But I think, if you think about it, there is a lot of volatility in the membership -- a lot of shifting of membership taking place, so that some of the tools that we typically depend on were not as effective when you have that kind of shifting.

Bill, do you want to talk about the things that really impacted the growth?

I think one thing to keep in mind, particularly when you look at the statutory financial statements is, we might have a slightly improved consolidated HBR in a market like Kentucky after we consider our specialty companies.

Because there is margin in the specialty companies which, when we consolidate that with the individual states, show a lower HBR than what the statutory financial statements might show.

Which basically shows the benefit of having our specialty companies and the ability to use those across all of our health plans.

We charge our sellers market rates.

In other words, we charge our sellers what we would sell to any to any other health plan in that market.

Margin on our pharmacy business and things like that, like they would be if they used anybody.

Got it.

So the 106 versus the 100 -- not apples to apples basis?

What was the sequential change in the Kentucky loss ratio?

And was it as good as you expected it would be, knowing it takes time to get down to your target?

It was pretty flat because, as I said, the membership has been bouncing around.

We think it is going to take two, three or more quarters to get this normalized.

It was virgin territory.

They had not had managed care, and we are working through it.

And we have seen this before in other states, if you all go back and think about it.

And we'll normalize this.

Got it.

Last question -- as I look at your guidance for the full year, it seems to imply an improvement in the loss ratio.

Am I right in inferring that improvement is coming from legacy market, since I assume new enrollments are going to have a higher loss ratio coming in?

And if I'm right about that, what are the drivers of the improvement in the legacy loss ratios?

Once again, I'll start and then ask Bill to pick it up.

If you think about it, the legacy markets, we have said, have predictable trends.

We are working through them.

And the end markets will vary market to market a little bit.

Some of the new markets with higher medical trends in the early quarters will start to normalize.

And we will bringing on some new markets -- Washington and Missouri for example -- that will have higher trends.

So it is a shifting mix as we grow the business.

And, from where we sit, it is a high level good issue to have to deal with.

You have a very viable growing business with the tools to manage the costs in the way we should.

The shifts are really more a function of cost than any other factor.

Bill, anything you want to add?

I would just say, when we give our guidance, we try to give a full year guidance with respect to our medical loss ratio.

So 87% to 88% is not unusual.

Particularly in a first quarter, you might be outside that range, where we are at this point -- 20 basis points over that.

But for the rest of the year, obviously to get back into the 87% of 88% range we would run less than that to get the whole year there.

And that is clearly our expectation what we would have forecast initially.

As the new business matures, we will see and expect to see lower loss ratios in the second half of the year, because it will be more seasoned and we will not have to provide additional levels of margin on that new business.

So clearly for the rest of the year we will see the ramp, as we said, in particularly the second half of the year as we have got Missouri and Washington online.

All of the Louisiana membership will come online April 1 and June 1.

Texas is on March 1 and April 1.

So the benefit of all that will certainly accumulate in the third and fourth quarters and expect to be significant contributors.

I would like to point out what I said in my remarks how Mississippi and Illinois came on in 2011.

They are normalized.

They are contributing in line with where we expected to see it.

And this is high acuity populations; this was basically the ABD and some foster care in Mississippi.

So there is a good model of where we brought it on early last year, and it's normalized today.

Great.

Thank you very much.

Peter Costa, Wells Fargo Securities.

Could you talk a little bit about the rate in Texas?

There was a lot of puts and takes on the rate with the rate cut and the carbon and the partial month and just the partial quarter.

Membership -- can you kind of talk about where the PMPM rates are going in Texas, and what they are right now?

I think in Texas we had the rate decrease on September 1 of last year, which has flowed through; but then we had additional adjustments on March 1 for all the new areas.

And then I think on September 1 we will have another rate change.

So right now, we believe the rates in Texas are reasonable and fair.

I think we work well with the state from an actuarial soundness standpoint.

And the issues that we have in there right now tend to be more just things like seasonal respiratory costs, rather than they are an underlying rate problem, or really an ongoing utilization problem.

So at this point we would expect the rates to be reasonable for the rest of the year.

I think you will remember we have been rebating a lot of funds back to states over the years, so we have that incremental room there -- we probably won't be rebating as much this year as we have historically.

There is a lot of member mix issues that come into play with that type of the membership that we have.

So how many members are in Star Plus, and now with Star Plus having inpatient rates carved into it, Pharmacy carved in across the board.

So it is a different ball game on March 1 than it was previously in terms a lot of these factors.

Could I just add, I see it as a real positive to have a lot of large numbers come to play as the year unfolds.

It's a nice place to be.

All right, that's kind of what I was trying to nail down -- is what exactly is the change in the PMPM rates.

If you could kind of give us a percentage change or some metric?

It's kind of -- I think what Bill said.

That's hard to put that number out there right now.

We have one membership came on of April 1.

We now have ABD, we have carved in rates for the inpatient in Star Plus --

Pharmacy.

We have Pharmacy coming in.

So I want to be careful not to mislead and give you some sense of that.

You usually try and trend that, and that would not necessarily be the way to go.

I will say that with respect to our revenue guidance increase, over half of that is from Texas.

Okay.

That's helpful.

Carl McDonald, Citigroup.

I wanted to talk about the specialty Business.

It looked like earnings in the first quarter nearly doubled versus where they were a year ago, which was a little surprising given the commentary that you had on the individual Business.

So could you talk about what the factors were that drove specialty earnings in the first quarter?

If there were any one-time benefits, or if you think $20 million is a reasonable go-forward earnings projection?

Bill, and then if, Jesse, you want to add something--

I think the primary contributor there would have been from our PBM US Script in terms of the incremental change from last year.

Between years we've added Pharmacy in Ohio, Kentucky, and Texas --Texas still only for one month in the quarter, but still it was pretty significant.

The Celtic Business, our individual health Business -- I think what we have a lower performance there than we would really like to have.

But that is small part of our Business.

One of the things we are trying to explain, if you see the individual health benefit ratios in our press release, there is a significant increase in our specialty HBR.

That really is driven by the Celtic individual health Business, not from our behavioral health Business and other things that are included in there.

And we would expect to continue at some level -- similar level -- for the specialty Business on an ongoing basis

I think it is just once again the benefit of being a multi-line company.

Thank you.

Matt Borsch, Goldman Sachs.

I was hoping that you could give us a little more detail on the Celtic Business that you alluded to.

Was there some pressure on the results -- just geographically where you are seeing it?

Is it more on the rate side or more on the utilization side?

Jesse?

Yes.

So, Matt, there's a few drivers that we can speak to and obviously talk about what we are doing about it.

It is fairly targeted from a geographic perspective, so there are certain markets where we are seeing higher utilization.

So where we are as a result of that, in addition to things we are doing directly, we are also looking at targeted rate increases in those specific markets, and those would be geared toward the second half of 2012.

In addition to that, we are looking more broadly at unit costs, so even though it is not specific to those particular markets, we believe there are opportunities to get unit cost savings which would benefit the entire book.

So as we are looking at that Celtic portfolio and the multiple states where we do business there, we see opportunities to pick that up again.

That would benefit the second half of the year.

All right.

Thank you.

Separately, could you just give us a comment - -an update on the Ohio Medicaid contract situation?

I think, as I said, we really do not want to comment on something that is under appeal.

We are going through the process.

We believe we have strong appeal.

So I cannot speak to the timing, because the state has a lot of flexibility on how long they take to get back to us.

All right; thank you.

Chris Rigg, Susquehanna.

I just want to go back to the loss ratio comments.

I hear you on the second half improvement.

But I guess, sequentially, when you have a full quarter's worth of Texas, does that exert upward pressure on the consolidated number relative to Q1?

Or should we still expect some improvement in the second quarter overall?

I think you will see an improvement in the second quarter overall.

We generally see second and third quarters are fairly low -- they're good quarters for us in terms of the MLR.

And we expect that the seasonality things that we saw in Q1 will abate.

And we really do not think the expansion membership -- we will record that at a 90% or so HBR to start with, but that is planned in our forecast.

It was all along in our forecast that way.

We really expect to see an improvement for the rest of the year.

It is kind of a bridge to the second half.

Got you.

And then, in terms of the startup costs -- $0.13 to $0.15 in the second quarter -- is there anything implied in guidance for the second half of 2012?

All other things being equal, no new business one?

I'll start off and Bill and others can jump in.

If you think about it, in the case of Missouri and Washington, by example, we have all of the hiring and recruiting, the placement, the office setup, the systems -- all those expenses without revenue.

So that is the issue.

And, as you get the revenue coming on, you get the offset.

I would just say, comparing first half to second half, we have a much greater amount of business that is coming on, between Louisiana, which started February 1, the Texas expansion on March 1, and then Washington and Missouri on July 1.

Those kind of accumulate to a large number for the first half.

In the second half, we are anticipating fewer states to start up.

We are building into our guidance some startups for, let's say January 1 of '13.

So we would have some fourth-quarter startup costs which we've included in our guidance and our estimates, but at substantially reduced level than what we were seeing in the first and second quarters.

One thing to add, if you broaden the definition to business expansion costs, we do expect a reasonable amount of activity in the second half of the year, and that would be incorporated into our broader business expansion cost definition.

That is a continued run rate in terms of activity in some of those areas.

Okay.

Thanks a lot.

Scott Green, Bank of America Merrill Lynch.

First, can you talk a little bit about your experience on the new Texas markets, like the Rio Grande Valley -- maybe how that fared, versus your existing membership base in Texas?

Yes, I think, If you think about it we have one month with (inaudible) part of the membership in the month of March.

To try and say more than we have about it, would just be hazarding some guesses.

We are getting a better feel of it.

We have another 70,000 lives that came on April 1, so you add 370,000 lives over two months.

We are going to take a little more time before we start hazarding those kinds of guesses.

We'll give you more facts as our dashboards and other things come into play.

Okay.

Seems like there were two issues you called out in Texas -- the Star Plus inpatient, and then some flu-related costs, if I am summarizing correctly, Were those kind of spread out evenly throughout the state or was there an isolated region where you saw those issues?

Scott, it's Jesse.

First, just to clarify -- we were focused on respiratory issues which are not specifically flu but are still seasonal in nature.

I wouldn't comment at this point about the kind of a geographic concentration.

At Star Plus we have a broad book of Star Plus business.

Inpatient was new in all of those regions.

And so we're seeing that more broadly, and I wouldn't narrow it into a particular geographic area within Texas.

And the respiratory things is very consistent in the year where some parts of the state are subject to people using the various fuels to heat their homes and things.

And it just has that impact on us.

That is standard and is to be expected.

Okay.

One last one on Texas -- is it a bit surprising for the inpatient cost to be higher than expected, considering you were managing these members already?

So it's not really that the member came from unmanaged fee for service to managed care that you --

No, we were not managing the inpatient side.

The inpatient was outside our purview.

We're dealing with a physician at that point, outpatient services.

When you pick up the whole new inpatient side, there is a curve on that, obviously.

Okay.

Could you quantify what you estimate is the seasonal impact on the MLR in the first quarter?

So if it is respiratory issues, and then to the extent leap year had an impact.

Could you try to quantify that for us?

We really do not have a specific number we are going to give, other than to say we obviously were impacted both in several markets by the seasonality.

It was not across the company; it was South Carolina and Texas more than anything on the seasonality side of it.

We expect that to abate in Q2.

And Leap Year the extra day --

Okay -- so you are assuming it gets better.

You cannot share by how much it will get better, because of those two issues.

Again we are staying with our guided range for HBR of 87% to 88%.

In the first quarter we were above that, at 88.2%, but we do expect obviously to be back in that range for the whole year.

So obviously we do expect improvement, which we would have through the reduction of the seasonality.

When I think about the impact of Leap Year, it is kind of simple just to think about one divided by 90 days or so.

But is the impact -- would it be a lot less than that if some of your cost to providers were capitated so that pass through -- is there any way to think about the impact of what Leap Year might be?

Most of the costs are not going to be capitated.

You really have an additional day where our members can go through the pharmacy drugs filled; an additional day of hospitalization; additional day of office visits, specialty, you name it -- I think your initial math is similar to what we have looked at it as an additional full day of medical costs that occur as a result of that day.

It is what it is.

I think it would be better if Leap Year was in July or August.

One last one -- you talked about Missouri and Washington coming on -- it sounded like contributing to the higher guidance.

Are new markets like that immediately accretive out-of-the-box?

We said earlier that we will book new markets at a higher MLR.

Market by market, it depends.

Based on the data book and our review of what the rates are and expectations, et cetera.

If we thought the HBR was going to be at 90%, for example, it would be accretive, because our G&A load incrementally is going to be less than that and it would add in.

So, as we look at these two markets coming on, we do expect them to contribute for the second half of the year.

We will incur the startup costs in the first half of the year, but then, once they start generating revenue, there will be an immediate change in terms of the contribution level.

That contribution will get stronger over a period of time as it becomes more managed.

Is there a point where 90% is not as conservative any more for a new market, if your current business is over 88% at this point?

I would say that, when we look at each market, we have to take into account what our expectations are in terms of the long-term HBR -- how we might have bid the rates in a particular case.

And then we book what we would consider to be a reasonably conservative HBR in the initial six months or more of operations.

Whereas we said, in Kentucky, we are running around 100%, so we are not booking 90% in Kentucky.

We are higher in some of those markets where we see that, that would be more appropriate.

Overall, we think in normalized markets, 90% should be about the right number.

Okay; thank you.

Scott Fidel, Deutsche Bank.

I just had a question on Ohio.

Maybe if you could help us think about the contribution you are expecting from Ohio in 2012 as a percentage of earnings?

And, if you are not comfortable going into that level of detail, maybe just talk about some of the margin assumptions that you are building in?

And really what I'm trying to get at is, clearly Ohio, for most of the companies there, have been operating at very attractive margins, at least in 2011, due to some of the rate increases and cost improvements.

So were you assuming that the margins in Ohio were already going to start to normalize pretty significantly in 2012?

Or are you still assuming that is going to be an above-average contributor to earnings in 2012?

Each state is different in terms of their individual contributions.

In Ohio, the state has been performing well.

The health plan is been performing well for several years now, and has been a meaningful contributor to the company.

We are not going to get into specifics of percentages, totals, or things like that.

It is a well-run operation.

They have high quality marks, and overall they're a good performer.

Is it fair to assume, though, that because of particularly the consolidated margin coming under pressure this year due to all the new business startups, that there would be a fairly richer margin assumed in that Business right in 2012 relative to the consolidated margin?

Well, clearly the more mature Businesses -- and I would call Ohio as mature -- contribute more than the new Businesses, which are booking at higher margins to develop margins and dealing with things like continuity of care and normality.

I think that is a good assumption, yes.

Okay.

I just had a follow-up question back on Kentucky.

As you think about the factors that have driven you to underwrite that business at a materially higher loss ratio initially, whether it is 100% or 105% compared to that 90% traditionally.

Can you help us think about how much of a factor pricing is, as compared to some of the mix changes you are seeing, as compared to the just that the cost trends are higher because it is an unmanaged market where we did have managed care before.

Yes, I think it is a combination of factors there.

It was a situation where there was a competitive price, so clearly pricing is a factor.

I think, as a result of the process there where you have got different prices across the three incumbents now, that is a factor in terms of the actions, reactions, et cetera.

Those kind of go hand-in-hand.

I think the fact it has been an unmanaged market is clearly a meaningful factor.

You have got a number of populations that have been brought into managed-care.

You've got -- including high acuity populations.

So that is kind of normal, I would say, in terms of that fee-for-service to managed-care transition, although a little more volatile in Kentucky than we have seen in some of the other markets.

And I would say, in addition to that, you have some Kentucky-specific factors -- things like prescription drugs overutilization, oversubscribing -- things along those lines that we have seen and that we are working aggressively with the state and with the provider community to address.

So, it is really combination of all of those things that are resulting in what we are seeing now, and obviously we are working hard to improve that.

I think if there any parallels to other states that we have gone into that are really virgin territory, where they've had no managed care, this plan came up very quickly.

In a matter of five months or so from start to end, we were up and running.

So some of the educational things you are doing up front, relative--that's why we're booking ahead -- once again we feel that over the term of the contract, margins will be normalized and we will work out well.

So you think a good analog is what we saw with Ohio back in '04, when that was initially launched?

But with a faster implementation time that was required for Kentucky then, that plans have for Ohio initially?

Yes, that might be a good proxy to look at.

In our own staff meetings and things we often look back at some of those states.

The issues were not dissimilar, if we were talking to you then about it; and now we are talking about the margins -- the positive aspects of Ohio.

You are right on, Scott.

One last quick question, just on Kentucky again.

It is probably a tough exercise for you guys to have done, but has there been any way to parse out the utilization or acuity profiles, or the trends you saw with the staggerers -- essentially the membership that you still have -- post the membership dip in the first quarter, as compared to the leavers that exited to other plans during that open enrollment period?

I don't think we have a lot of data on that.

We are looking at that, but I would say right now it is not something that we really want to comment on.

We tend to be more on the speculative side.

Okay.

Thank you.

Sarah James, Wedbush.

I believe that Ohio is looking for a better partnership for the [bill of] contract that has a Medicaid contract in the state, so in the event that the protest is not overturned, would a partnership with one of the two smaller awardees be something you would be even open to?

I think, if we were going to be thinking about it, I would not talk about it at this point.

(laughter) You can take that either way, either yes or no.

It's a fair question but not one that I'm going to comment on.

Thinking, in theory, if someone was to pursue a partnership, would logistically is it even possible, seeing that the due date for the dual contract is at the end of May, but we don't really know when the protest award is going to be decided?

But it is probably after dual contract is due.

Logistically, is that even possible?

I think it is really better to say that we have the capability to do these things within our total market basket of skills and capabilities.

Never say never.

But I am not saying we are ever going to do it, either.

Okay.

On the Celtic uptick in costs -- I was wondering if that is more of a utilization uptick, or something that might be influenced by consumer demand for healthcare services?

Or if it's more of an acuity or pricing issue?

Yes, I think, Sarah, as we mentioned before, we are seeing an increase in utilization; so I think that's the principal driver.

I think there may be some of those other macro factors -- economic drivers, changes in the regulatory environment, and other things which could be a precedent factor that would be driving higher utilization.

But I think the end result is higher utilization

Thank you.

David Windley, Jefferies.

Wanted to come at the HBR a little bit differently.

If I'm interpreting your comments about Kentucky correctly, I would guess that your revisiting or re- forecast of the year would carry little bit higher cost than maybe where you were at the beginning of the year.

Your Missouri and Washington assumptions are new to your guidance, and so would seem that at least those three factors would have an upward bias to your consolidated HBR.

You are keeping that constant.

So I am interested in what the offsetting factors are to keep that constant.

What are the elements that are better than your previous assumptions?

You are correct, in the sense you have to look at the overall mix to say how that gets weighted.

I think, as I said, over half of the increase in the revenue guidance comes from Texas.

I think that is probably going to be the offset that you are looking for.

I would agree that we have added -- we go and we look at every market when we do the re- forecast for guidance.

And there are ups and downs.

Kentucky continues to be at a high level.

Missouri and Washington are not anything, I would say, that are drastically different than where we would've been coming up on average for the whole year.

In Texas, addition really probably is offset that to get it back in the range.

On your comment on Missouri and Washington -- are you planning to initiate those, or upon implementation you would accrue those at appropriately conservative levels as you normally do so -- north of 90%?

I'd say they are two different markets.

I do not know if they are north of 90, but they will be appropriately conservative, yes.

Final question, I think your guidance on investment in investment income -- this is kind of off the beaten path here -- but investment income is about $16 million to $17 million.

You're on a $20 million run rate in the first quarter.

Anything we should know there?

I do not think there is anything particularly worth mentioning at this point in time.

I think some of those are different investment products that we have that could be -- are offsetting other investment -- other liabilities we have in deferred comp, and some things like that where we've tried to match up some of those programs.

Okay.

Thank you.

Michael Baker, Raymond James.

I was wondering if you could update us with respect to the birth rate which you are seeing there -- how that trended?

And then, historically how closely you've seen that tied to the economy?

Mary.

Mary Mason.

When we look across our markets, we may be seeing a slight decrease in our birth rate, but this is something -- it goes up goes down, but it is staying pretty flat.

Thanks a lot.

Melissa McGinnis, Morgan Stanley.

You touched briefly on Centene's positioning for the duals in your early prepared commentary, and I believe health plans had to submit letters of intent by state to CMS in early April.

Can you confirm which states it is that Centene is most interested in participating, and has participated a letter of intent to CMS?

This is Jesse.

Obviously, we are particularly interested in the duals opportunity.

I won't go through the laundry list of states where we submitted, but I guess what I would say is, when we look at the criteria for our participation there, in our existing markets you should expect that we would participate in those opportunities in our existing markets or pending markets, if you will.

There are other markets which -- where we either think that the markets are potentially attractive, or the duals opportunity specifically is attractive, and we would have submitted our intent on that basis.

Okay.

Great.

I guess, not to belabor a point, but just to really understand the MLR seasonality as we think through new businesses and core business, as we get into the second half of the year, it would seem like in Q1 MLR came in a little high.

You did have bigger Texas for one month.

Two months of a third of the Louisiana contract, but it seems like you will have a lot more new business coming on in Q2, when Texas has been for a full quarter, and then we'll also have Washington and Missouri in the back parts of the year.

Are you expecting maybe MLR improvement in the back half in your legacy business because of rate improvements?

And if so, are you seeing in conversations with the states that maybe certain things in your core business will be tracking better relative to expectations on the rate front or costs front?

I'm just having a hard time understanding the new business versus core business pattern there.

Couple things -- on rates, I think Michael mentioned in South Carolina we are working with the state for an April 1 rate adjustment.

They should be finalized in the near future to help with regard to that state.

Other rates -- there's a few states we have July 1, September 1.

Those are -- we are not expecting anything particularly significant in terms of rate adjustments for the remainder of the year in our states, but we are working with each state where that is applicable to make sure they are actuarially sound.

I think the other thing I would point out, with respect to the new business, the MLR impact of when we bring those on is, we might record, we'll say, a 90% HBR for that new business but we will also benefit from the specialty companies and the margin that we will generate in the specialty companies.

So on an overall basis, we will not be as high as 90% in those markets when you take that into account.

I think there is contribution from the specialty companies was also an important aspect of that.

If you look at historic data, you go back you will see that other markets, when they were new, we said the same thing -- we said it's going to be in the 90% to 95% initially; and we said it could be for two or three quarters, and how quickly we are able to bring it in is a function of the network, how used to managed care they are in a number factors.

But every market that we go into and the rates that we use, we've done some actuarial studies, and know that we are capable of bringing it in to a normalized margin over time.

There is no magic wand it just takes it from 95% instantly, because we are more concerned in doing things so it's a sustained level.

We do things that are very methodical way that we're able to sustain it.

And if we see some uptick, it tends to be because of some seasonality -- a flu season, a respiratory thing -- something of that nature that can be market specific.

We'll just continue down that same cadence in our new markets, and they'll come on stream and start to deliver.

I think somebody mentioned earlier, like Ohio -- getting a lot of the same questions about Ohio as we are getting about Kentucky, three or four years ago.

It is a good plan today.

Okay great.

And then final question -- if we think about one of the near-term pipeline opportunities is the Kansas RFP.

And I think Kansas a little bit similarly to Kentucky, is pretty price focused on the contract.

How is Centene thinking about their positioning for the Kansas RFP?

And then, maybe thinking about the Kentucky experience out of the gate and that price competitive bid -- how you might approach the Kansas RFP maybe differently?

I have to answer this in traditional fashion -- that, until the state announces who is participating, we do not presume that we are going to be there.

Or talk about it in that context.

We always believe that it is up to the states to announce who is going to be there and who is not.

But if we're in states, whether it be Kansas or Kentucky, where there is a price bid, we get the data, we run it through our predictive models.

We work with our actuaries -- our consulting actuaries, our internal actuaries -- and we come up with rates that we believe will protect normalized margins over the course of the contract in a reasonable period of time.

We are not trying to grow the topline without seeing longer-term benefit to the bottom line.

There is just no -- as I said, there is no magic bullet that you go in, the day you're in you are profitable.

It takes a little time.

Okay great.

Thanks.

Brian Wright, Monness, Crespi, Hardt

I must be getting slow in my old age punching in those star-ones.

If you could help me out with the Texas Star Plus rates.

Embedded in those rates was an assumption for utilization levels.

I was just curious -- what were those assumptions?

Were they fee for service utilization levels, or was there a discount to fee-for-service utilization levels in those assumed rates?

We do not have our actuaries here for that.

I cannot comment specifically, Brian, on what was included there.

But, in general, when states go through that process, and what states have done -- what the state of Texas has done, broadly, is that they would look at their historical experience, and they would apply a series of adjustments.

As you recall, the state of Texas set the rates so they are working through -- they work through their actuaries to get to all of the various factors, which would include generally some form of managed care savings as part of that rate setting process.

And that would be true on the inpatient carve-in as well?

I think it would be true for all aspects of the business that they are -- that we are contracting with the state of Texas.

Okay.

And then on a follow-up.

In the Texas existing business, you highlighted the respiratory, which sounds very seasonal.

But were there other categories of medical costs that were also elevated?

Nothing that really popped out, or that would indicate anything market by market.

What we normally see -- nothing more.

Okay.

And then on the reduced variable comp costs in the quarter -- what was the impact on G&A?

How much higher would G&A been had the variable comp been as expected?

We do not really try to quantify what that is.

At this point, it is just built in -- it's part of our G&A expenses at the beginning of the year.

If we do well, we accrue that.

If we do not, we do not accrue it.

It's a function of how in the quarter the shareholders always come first.

I'm only going to be able to take one more question, because we have annual meeting coming up, a board meeting, and a couple of other things.

We would like to sit here all day and answer questions.

So, Brian, if you have nothing else we will move to one more person.

I did have one more.

On the DCPs -- on that guidance for 39 to 44 for the year -- you were 44.7 for the first quarter.

How should we think about that progressing through the year, considering you are adding on a bunch of new business?

I think as the reconciliation shows, the DCP tends to go up when we have large increases in new states that we add, or Texas expansion -- for a while, until it normalizes, but then it will come down.

I think as we said last year at Investor Day, we are seeing increasing rates of electronic submissions and auto adjudication.

We do believe, as the claims received normalizes, that we will see a decrease in DCP, because we are seeing a decrease in the time it takes to receive and process the claims.

And the percent of auto adjudication and percent of electronic filings --

-- continues to grow

It continues to grow.

Cash is king to everybody, and they've figured out we pay fast when we get the claims fast.

I am just a little surprised, because given the amount of new business that is coming on throughout the year, given the initial favorable impact of the DCP is why the range would still be significantly below where you are now.

Again I think directionally that's where we think we're going to be heading over time.

In any one quarter you could have a particular issue as a new state comes on.

As I said, our targeted range continues to be 39 to 44.

We believe that is correct.

Any one quarter could be an exception, because we just brought up a new state.

You know we give you the detail in the news release and you can go back and see over time what the impact has been.

Okay, great.

I will take one more question.

Mr Neidorff, at this time we are showing no additional questions, and the queue is already routed back to you for closing remarks

Well, see I can be magnanimous and say I'll take one more, but there are no more.

I want to thank everyone and look forward to seeing everyone on Investor Day, and have a good quarter.

Thank you.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.