Centene Corp (CNC) 2012 Q2 法說會逐字稿

Good morning and welcome to the Centene second quarter 2012 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) Note, this event is being recorded.

I would now like to turn the conference over to Ed Kroll, please go ahead.

Thank you operator, and good morning everyone.

Ed Kroll, Senior Vice President, 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 should last about 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 at Centene.com, or by dialing 877-344-7529 in the US and Canada, or from other countries, 412-317-0088.

The playback code for both dials ins is 10015829.

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 most recently filed Form 10-Q dated today, July 24, 2012, and also our 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 would like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael?

Thank you Ed.

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

I wanted to spend most my time this morning providing you with a progress report on Centene's return to profitability in June.

Additionally, how we are back on track after a confluence of events which caused us to lower our 2012 guidance last month.

Bill will discuss and walk you through the details of our second-quarter financials and then we will answer your questions.

The second quarter results came in as we projected at our June investor day.

Premium and service revenue growth was very strong, increasing 61% year-over-year mainly due to the Texas expansion and the new states, including Illinois, Louisiana and Kentucky.

As we indicated in our June 11 press release, medical costs in Kentucky, the Texas expansion area and our Celtic individual health business are considerably higher.

This resulted in an operating loss of $0.16 per diluted share in the second quarter.

Which is consistent with our revised projections as discussed at the investor day.

This loss excludes a non-cash $0.52 per diluted share impairment charge related to Celtic.

It also reflects a return to profitability in the month of June, which was also included in our guidance.

The issues that caused the second-quarter loss were state specific, market or product related issues.

We view these as episodic and correctable through a combination of rate increases, medical management initiatives and policy changes at the state regulatory level.

Historically, we have demonstrated our capability to correct these types of issues in states including Ohio, Florida and Georgia.

To be clear, the balance of Centene's portfolio continues to perform within our normalized ranges.

I will now provide you with an update on these specific three markets and their issues.

First, let us discuss Texas.

We won the expanded Texas contract in October of last year.

Which was not a competitive bid process as the rates in Texas are community rated.

The state developed rates using significant managed care savings targets.

In May, it became clear that these targets were inconsistent with actual trends.

We were also limited in our ability to manage medical costs due to the 90 day continuity of care period.

Further, unprecedented demand in many of the non-inpatient service categories became evident resulting in an HBR above 100%.

Texas has a long history with managed care and a solid track record of working towards properly aligning rates with cost strength.

After actively engaging with Texas on a corrective rate, we have agreed to a 3.7% statewide increase which includes a blended 7.6% increase for the Hidalgo service area.

The new rates will be effective September 1. The continuity of care concessions expired in the second quarter and our medical management initiatives are already gaining traction.

Therefore, we anticipate achieving margins in our normalized range for Texas in Q4.

On to Kentucky.

The difficulties in the Kentucky market are not limited to Kentucky Spirit.

They are problematic issues that require leadership from the state to develop solutions.

Subsequent to our June 14 investor day, we have had a bit involved in ongoing contact with the state on these matters.

These include direct engagement with state actuaries on review of their data book, retroactive membership assignment and the methodology for risk adjustment.

While there will be a series of actions required to create a successful and sustainable program, we have seen some recent progress.

Effective September 1, the states will change the assignment process for retroactively eligible members.

We will reduce the magnitude of our costs associated with these members.

We also received a 1% rate increase per our contract effective July 1. Additionally, Centene's action plan dealing with policy changes with respect to ER and NICU, among others, went into effect on July 1. We expect the combination of these actions to help improve our cost structure in Kentucky.

However, these actions are not sufficient.

As I said earlier, success in Kentucky will require changes in state policies and practices to insure a sustainable Medicaid Managed Care program.

On to Celtic.

With Celtic, we have experienced a high level of medical costs in our legacy Celtic national individual health business which we purchased in July 2008.

Earlier this year we reached an agreement under which 17,000 members were converted from an existing carrier to Celtic policies.

This combination led to a material underperformance from what we had historically seen.

The upholding of the Affordable Care Act further limits the profitability of the individual health insurance business because of minimum medical loss ratios, guaranteed issue requirements and increased competition in the exchange market.

During the second quarter of 2012, we evaluated the long-term prospects of this business.

And performed an impairment analysis which resulted in the non-cash charge I previously mentioned.

Centene's expectations for the future growth and profitability of the individual health business are lower and reflected in our revised guidance provided in June.

With respect to our action plan, we have tightened our underwriting guidelines, changed our national network provider effective July 1, and implemented rate increases in four of our largest markets effective July 1. We anticipate additional rate actions throughout the remainder of 2012.

Let me now summarize our rate outlook for 2012.

The composite 2012 increase is a range of 1.5% to 2%.

This includes a 6.7% increase in Wisconsin effective January 1, a 3.2% increase in South Carolina effective April 1, a 1% increase in Kentucky effective July 1, and a 3.7% increase for Texas effective September 1. Which as I said earlier, includes a 7.6% increase for the Texas Hidalgo expansion area.

We are still in discussions regarding the July 1 rate update in Georgia and a September 1 rate update in Florida.

Now I will shift gears and talk about our growth prospects.

Our growth outlook remains robust with a $45 billion pipeline through the end of 2013.

The issues we have seen are unique and do not deter us from pursuing disciplined and profitable growth.

States continue to face budget pressures.

We are seeing several new states transitioning into managed-care from fee-for-service to improve health outcomes while lowering costs.

Several states, which have already been using managed care are expanding coverage to high acuity populations, other unmanaged populations and adding new programs.

For example, we commenced operations in Missouri and Washington on July 1. Initial indications suggest that both markets have had an effective implementation and smooth transition.

We expect to have approximately 45,000 lives to 50,000 lives in Missouri and expect to ramp in Washington during the second half of 2012 to between 50,000 and 60,000 lives.

Most recently, Kansas awarded Centene a contract to serve TANF, CHIP, non-dual ABD and long-term care recipients statewide.

This program should begin in the first quarter of 2013.

We are set to commence operations in New Hampshire for the first quarter of 2013.

Lastly, we were awarded a small portion of the Florida Healthy Kids procurement, a new product for Centene in Florida.

We were also awarded an additional six counties in the nursing home diversion program.

Bringing the total number of counties Centene serves to 26.

We are quite pleased to be adding new products and expanding our presence in Florida, a very important state for us.

There is a major focus on caring for higher acuity populations.

As many dual-eligible demonstration projects are expected to commence in 2013 and 2014.

As a result, we have added a new table showing the number of duals to the earnings release.

Centene has a competitive advantage, as we are a multi-line company.

And at arms length we contract with our specialty companies at market rates.

Our behavioral business provides us with a key benefit, as dual-eligibles and high acuity populations have significant behavioral needs.

There continues to be attention around the exchange hybrid market as the ACA was recently upheld.

Centene is well-positioned to care for these populations as we continue to gain experience as evidenced by our growth in high acuity exchange markets.

For example, Centene's ABD recipients increased 73% year-over-year.

Our long-term care members increased 71%, and our hybrid exchange programs increased 36%.

We believe we will pick up at least one region in the Ohio dual eligible procurement, subject to a final announcement in August.

This product is set to commence in the second quarter of 2013.

Finally I will make a brief comment on the Supreme Court decision regarding the Affordable Care Act.

As I highlighted at our investor day, there is still the test of the election before the fate of the ACA can be fully determined.

But in any event, we believe we are well-positioned to maintain significant growth by helping states improve health outcomes and reduce expenses.

As they move their beneficiaries into additional managed care programs.

In summary, we believe the corrective actions I have noted above in the Texas expansion area, Kentucky and Celtic will allow us to return to profitability in the third quarter with further improvements in the fourth quarter.

We look forward to updating you in October on our third-quarter 2012 earnings call and we thank you for your continued interest in Centene.

With that I will turn it over to Bill.

Thank you Michael, and good morning.

As a recap of our second quarter, we reported a loss from operations of $0.16 per share and a $0.52 impairment charge related to our individual health business and Celtic Insurance Company.

The $0.16 loss from operations is consistent with our disclosures that we communicated during our investor day on June 14.

Our 2012 revised guidance reflected a decrease of $1.19 in our EPS estimates.

And our slides indicated that 60% to 70% of the reduction or $0.71 to $0.83 per share would impact the second quarter.

And these slides continue to be available for viewing on our website.

The revised EPS guidance included in our press release this morning shows our 2012 guidance both including and excluding the impairment charge recorded in the second quarter.

But otherwise, the guidance is consistent with the expectations we provided on June 14.

Now to review the financial results in detail.

For the second quarter of 2012, Premium and Service Revenues were almost $2.1 billion, compared to $1.3 billion in 2011, representing a 61% increase year-over-year.

The $800 million increase reflects the addition of the Illinois, Kentucky and Louisiana operations between years, along with the Arizona and Texas expansions, the Ohio pharmacy carve-in, and overall membership growth.

Our Health Benefits Ratio was 92.9% for the second quarter, compared to 84.8% last year and 88.2% in the first quarter of this year.

The increase compared to last year reflects a number of issues.

First, increased medical costs in the second quarter in Kentucky resulting from the retro assignment of members and a high level of non-inpatient claims receipts during the quarter.

Second, for Texas we experienced a high level of medical costs related to the March 1 expansion area.

Third, a high-level of medical costs in our individual health business at Celtic Insurance Company, especially for policies issued since January 1, 2012, related to members converted from another insurer.

Excluding the impact of these three items, the second quarter HBR would have been 88.5%.

Which reflects an expected increase in the HBR related to other new business added between years which has a higher loss ratio in the initial periods of operations.

And also the impact of the additional pharmacy revenue between years, which has a lower margin compared to the total.

Sequentially the HBR increased 470 basis points, which reflects the increased medical costs for Kentucky, Texas and Celtic that I just described.

Michael will discuss the actions which are being taken in these three areas and I will comment further when I discuss the assumptions utilized in preparing our 2012 revised guidance.

Our general and administrative expense ratio was 8.2% for the second quarter, compared to 11.2% last year and 9.8% in the first quarter of 2012.

The decrease in our G&A ratio between years reflects the leverage gain from our 61% increase in revenues, along with lower performance-based compensation expense, which lowers our G&A ratio in the second quarter by approximately 80 basis points.

We spent approximately $0.11 a share on business expansion costs in the second quarter, primarily related to the July 1 startups in Missouri and Washington.

Our investment and other income was $4 million in the second quarter, compared to $2.9 million last year, reflecting higher levels of invested balances.

Interest expense totaled $4.7 million this year, compared to $5.3 million last year.

The decrease reflects the lower rates experienced after the refinancing of our senior notes last year, and the execution of the related interest rate swap agreements.

For the second quarter we recorded a tax benefit of $8.6 million on our pretax loss of $47.4 million, which takes into consideration the $25 million portion of the impairment charge which is not tax-deductible.

Our loss per diluted share was $0.68 for the quarter, $0.16 from operations and $0.52 from the impairment charge.

The shares used in the second quarter and year-to-date EPS calculations include -- exclude the impact of stock awards as the shares will be anti-dilutive.

At June 30 we had cash, investments, and restricted deposits of $1.239 billion, including $40.6 million held by unregulated entities.

We have estimated our risk based capital percentage to continue to be in excess of 350% of the authorized control level at June 30, 2012.

At quarter end, our total debt was $409 million, which included $55 million of borrowings under our revolving credit facility.

This was subsequently repaid in early July.

Our debt-to-capital ratio was 25.9% at quarter end, excluding our nonrecourse mortgage note.

The medical claims liability totaled $859 million at June 30 this year, an increase of $251 million since December 31.

Our days and claims payable totaled 41.4 days at June 30, compared to 44.7 days at March 31.

The 3.3 day decrease primarily reflects three items.

First, a full quarter impact of the pharmacy carve-in in Texas, which pays approximately 70% faster than non-pharmacy medical costs.

Second, improvements in the payment cycle as we have increased the percentage of claims received electronically and have seen a reduction in time between date of service and date the claim is received.

For example, the time from date of service to date received has decreased on average from 29 days in the first quarter of 2012 to 26 days in the second quarter of 2012.

This has been primarily driven by faster receipt of claims in the Texas expansion area where the state facilitates a portal for claims submissions.

And third, our DCP increased due to the timing of check runs at the end of the period.

Based on the change in mix of our medical costs associated with the pharmacy carve-in, and the addition of the Texas expansion area where we are receiving claims faster, we anticipate a continued decline in our DCP number going forward.

While we are within our targeted range of 39 to 44 days, we believe the factors I just mentioned may result in reducing that target range later this year.

Our cash flow from operations was $22.2 million for the second quarter.

Of note, at June 30, the State of Georgia owed us $221 million.

$167 million for monthly capitation payments, and the remainder for items such as delivery receivables.

The state has indicated that they will attempt to catch up on their payment schedule in the second half of 2012, but this may not happen by year end.

Our revised guidance for 2012 includes premium and service revenue of $7.7 billion to $8.1 billion, diluted earnings per share, excluding the impairment charge, of $1.45 to $1.65, diluted earnings per share, including the impairment charge, of $0.95 to $1.15.

A consolidated health benefits ratio of 89% to 90%.

A general and administrative expense ratio of 8.5% to 9%.

And diluted shares outstanding of 53.6 million to 53.8 million.

The assumptions used in preparing our revised guidance numbers include the following.

For Texas, we will receive a 3.7% overall rate increase, including 7.6% in the Hidalgo service area, effective September 1. We will continue to make progress in reducing the higher utilization levels experienced in the March 1 expansion areas.

For Texas, we have received a 1% rate increase effective July 1. We will have a reduction in the number of months retroactively assigned beginning September 1, as the state changes their assignment methodology, and we will see modest reductions in cost due to the application of appropriate medical management initiatives.

To put this in context, we have experienced statutory HBR of 109% since inception.

And we are forecasting an improvement of 200 to 300 basis points for the second half of 2012.

And for Celtic we have assumed a reduction in medical costs as a result of a new network contract which took effect July 1, and we will have rate increases for certain states where we have filed for rate increases which take effect in the second half of 2012.

I also want to note that the impairment loss represents a $0.52 loss for the second quarter.

However, this would calculate to a $0.50 charge for the entire year as the diluted share count for the year is expected to be 53.6 to 53.8 million shares, versus the lower level used in the second quarter due to the anti-dilution impact.

Our guidance also includes business expansion costs of $0.20 to $0.22 in the second half including start up costs for Kansas and New Hampshire.

Operator, you may now open the line for questions.

(Operator Instructions)

Charles Boorady, Credit Suisse

Thanks.

A question on guidance.

You talked about the rate action in the state of Texas, and specifically in Texas, what are your assumptions on what you can do to improve the cost trend in the state?

And specifically in Hidalgo?

Yes, I think we have been going through and doing our standard medical management programs from healthy start for your baby through every aspect of what we do at every other part of the state.

And I just remind you that the first 90 days was our continuity of care.

Right.

We could do nothing.

We are now doing the pre-authorizations.

We're looking at medical necessity for procedures as opposed to just simply having to pay what the state had already authorized.

So it is really turning from a non-management to now a full-blown medical management program that we use in every other market.

Yes, and so based on that, you have done this for many, many years.

You've been through the continuity of care period and then been able to -- once they untie your hands, actively manage the care.

So you have got a lot of experience at what that can do to impact the trend.

And so, are you assuming a similar experience in Hidalgo now?

And can you quantify that for us?

I am commenting in terms of, we said it's already gaining traction, we saw in the month of June.

We see by the third quarter, by the fourth quarter, full normalized margins within Texas including in Hidalgo County.

So it would fall within our normalized medical loss ratio, G&A and other ranges.

Yes, but that improvement in trend, Michael, if you could just quantify, is it a 5%, 10%, 20%?

I'm just trying to get a magnitude.

Bill, do you want to give me a ratio?

Yes, we have not given specific numbers in terms of the improvements, but obviously, the impact of these initiatives as they gain traction will increase over the course of the second half of the year.

Certainly where we are now authorizing all of the treatments, we have a standard template that we are using for consistency across the membership.

And we are applying that and looking in medical necessity criteria.

It has been a different pattern of usage in the Hidalgo usage area versus the rest of the state, and so we are doing everything we can to bring to bear on that problem.

But I do know that we quantify specifically how much that will impact the second quarter.

We do see it in an normalized MLR, which we have stated in the guidance is what -- 86% to 88% at this point.

Well it is a little higher in the guidance.

But I think that the, because our guidance number for HBR is 89% to 90% for the year.

But I think that we do expect to improve the trends at Hidalgo, but we still expect them to be above the statewide averages and it will take some time before we achieve all of the managed care savings that I think were initially anticipated by the state.

And that could be an 18 month period I think before those are into that range.

Without giving us the exact percent improvement then maybe could just give us more qualitatively, will it be-- is your guidance -- are you highly confident in your ability to hit those targets based on your experience post the 90 day continuity of care period in other regions?

Yes, I think will --

Stretch target or?

I will unequivocally say yes.

We would not put it out there as guidance if we did not believe at this point in time that it was achievable.

So it reflects what we know we have done and as we said earlier, as we said at the investor day, this was really a great issue which was why the state took the action that they did.

And we see already some traction coming.

So yes, we have a high level of [continuity] -- we have a very experienced management team down there.

It's a big book of business.

They have a great track record of delivering on those expectations.

And I am trying to stay away from a specific quarter-to-quarter number, but over the short and longer term, I see it continuing to be a high-performing state for us.

Got it, thank you.

Hope that helps.

Melissa McGinnis, Morgan Stanley

Good morning.

I just had a quick question.

On the MLR where you were excluding your three sort of problem markets of 88.5%, how do we think about that in context relative to the initial guidance range that you gave earlier this year for a consolidated MLR of 87% to 88%?

Is that just some of the other new markets still pressuring the core MLR up?

Is there any sign of cost trend acceleration in your core book?

Any color there would be helpful.

Thanks.

Sure.

I think that the 88.5% for the remainder reflects the fact that we do have new operations in several states including Louisiana for example, where that ramps up and we have a higher loss ratios in initial periods of operation and we can also have some continuity of care issues and we have margin build in the first part of that.

So I would say that's -- the numbers we gave in the past for 87% to 88% was the average for the whole year and we knew in the first half of the year it would probably be larger, higher rates in the second half, it would be lower as we gain traction in these new markets.

Now again, we are adding some newer markets in Missouri and Washington in the second half, but those tend to be a little smaller compared to what we added in the first half of the year.

And also they were managed care markets.

So the run-in period will not be as difficult in working with the providers and the educational process.

Great, great.

And then switching focus a little bit.

I noticed in your 10-Q there was a disclosure that you did in fact run a premium reserve deficiency analysis at the end of the quarter and did not feel like that was necessary yet.

But then, there was some commentary about the fact that while we are making progress in Kentucky, it sounds like there is still a way to go.

Can you help us understand at what point, or what would have to happen in Kentucky for you to at some point consider doing a premium deficiency reserve in that market?

We do analysis in several of our markets on a regular basis to make sure that -- both, we do that for statutory purposes and for GAAP purposes.

So the analysis that we performed at the end of the second quarter, particularly for Celtic in Kentucky, were done in accordance with the particular methodology that is required to do that.

In both cases, no premium deficiency reserve was needed at that point in time for those two markets.

So I think in Kentucky, that's a three-year contract.

We do believe over the long term of the contract we will make appropriate margins so that we -- at this point in time the analysis does not indicate that we need a premium deficiency reserve.

In order to the improvement, we were applying the, in those areas that we can manage we're seeing it starting to normalize and has been normalizing.

The issues that are still confronting us in terms of the retro assignment of members.

We are still getting an occasional member from November with the bills and a little bit of premium.

And until we correct those kinds of things, we will not see it fully normalized and we hope it starts to dissipate over time.

But we are working with the state on it.

As we said, they are taking some initial actions to make it more balanced in the assignment of these members, which is good public policy.

It affects all plans equally.

And we're talking now about how they do it and the fact that they really should hold us accountable from the time we learn that the members are -- so there's things that they're doing.

I think when we get through with the analysis of the data book, it will put us in a position to demonstrate what they need to do that was not included in the data book.

Okay great.

Thank you for the question.

Justin Lake, JPMorgan.

Thanks, good morning.

First, I was hoping with those Hidalgo rates, obviously helpful, but wanted to see how that broke out between the Star and Star Plus membership.

Can you tell us how those rates shook out specifically?

I will let Bill talk about that because there is still a lot of shifting members.

We're picking up another 5,000 members or so, Bill, as we understand it.

So it is difficult to try and give you that with the shifting members because it becomes a weighted thing.

I was specifically talking to Hidalgo there, guys.

I apologize.

Right.

With respect to Texas, in the Hidalgo service area it's a blended 7.6% increase and it's obviously much higher in the Star Plus category.

I think importantly though, looking at the whole state, we've got a 3.7% increase across our whole book of business.

And our whole book of business is north of $3 billion in annual revenue.

So we think that this is a meaningful rate increase for us.

And we believe working with the state, we are in a reasonable position at this time.

There's a lot of public information out there on it.

And our hesitation is just simply as I alluded to, we just learned that there's another 5,000 members coming over to the Superior HealthPlan down there.

So that is going to change that weighted mix.

So rather than -- because once we say something today, then it is going to mandate constant updating that.

So I'd rather just say, this is how it is at the point in time.

This is what our guidance is based on.

And I think that is a better position to say it.

Okay.

And you noted that there's a big difference between the Star and the Star Plus?

Yes.

The Star being -- looks like it's down year-over-year from some records we got from the state.

So can you give us any color in terms of what the MLR is looking like in Star?

And how comfortable you are that -- it looks like the state has expected you to get to further cost savings than even was baked into the initial rates?

And how comfortable you are with that?

Yes, I think when you look at it on balance, we are comfortable with the balance we have in the rates now.

And where we saw the biggest deficiency, obviously, was in the Star Plus.

And they've worked hard to get it to where we believe it needs to be.

The Star rates we have been comfortable with, and that balance reflects where we are across the whole state.

Bill, anything you want to add to that?

I think that in these discussions was usually are actuary to actuary, the individual components are discussed.

For example, there may be a belief that the inpatient portion of the costs could be further reduced in Star, compared to something else.

So all of that is driven into the individual rates by the -- between Star and Star Plus for Hidalgo.

Overall at 7.6%, I think that is a meaningful increase for us.

Okay just last question on the overall state.

You talked about the 3.7%.

And if we're doing just some rough math correctly, it looks like the ex-Hidalgo rate was up more than 2% year-over-year.

Is that correct?

I don't think we have broken it out --

Hidalgo --

We haven't really broken it out into individual pieces like that for this discussion.

I think the weighted number is 3.7% for the whole state and we will leave it at that.

I'm just trying to figure out though, how does that look year-over-year?

Because if I remember correctly, the rate was down 2% or 3% last year.

Is that correct?

Yes, September 1, 2011 the state did reduce the rate, so this certainly -- the increase that we have for September 1 this year improves the whole state.

Okay great.

Thank you very much.

Thank you.

Josh Raskin, Barclays Capital

Hi, thanks.

Just shifting gears a little bit to Kentucky.

The membership is actually down sequentially.

I know you guys were suggesting that you are getting a lot of retroactive assignments?

I'm just curious what was going on with your membership that offset some of those assignments.

And then should we be reading into this sort of change in procedure that you are expecting a further decline in your membership as we get into September and through the end of the year?

I will let Jesse talk to that one.

Speak to that one.

Yes, Josh, Jesse Hunter.

I think a couple of things in Kentucky.

Obviously we have, in every state there is ongoing eligibility determinations so there will be people that can come on or come off of Medicaid eligibility at any particular time, and you've got membership choice and other factors that could impact some movement up and down.

So I would not over read to your first question -- I would not over read the movement in Kentucky along those lines.

But specifically for retros, we do believe that we have had a disproportionate share of the retros.

We've received a disproportionate share of those.

So with this rebalancing that will be effective on September 1, we would expect to get less new members via retro assignment and it could have a small impact on the membership side, but an important impact on the cost side in Kentucky.

I guess I was just under the impression that you guys were continuing to get a lot of these retroactive assignments.

(technical difficulty) so I understand (technical difficulty).

You are breaking up a --

Josh, we're having a tough time hearing you.

How about that?

Is that better?

Yes.

Jesse can add to this, but I think what you are saying, I understand, but we you are still getting each month, the adds.

We still get a larger number through the retroactive process than what we would see in any other state.

It has been as high as 52%, I haven't looked at this month.

But it is probably staying way up there.

Directionally, roughly half of our members -- our new members are coming in through retro signing versus, as we talked about in June, in the low single digits as an average across our other markets.

And as a reminder, what we have seen is for that period prior to the time we have had an opportunity to manage the care for these individuals, we have averaged a 200% HBR.

Once we have the opportunity to manage the care, the HBR goes way down.

Right, now that make sense.

I guess I was just thinking, it just sounds like you must have some pretty big offsets in terms of member choice and/or changes in eligibility to end up with a net decline in membership.

Is it your understanding that the entire state eligibility has gone down then?

No I think the membership in aggregate has been reasonably stable.

I think Josh, though I would not expect it to be broader.

Our market share has been relatively flat since the state has gone through their changes in the end of the choice period that happened earlier this year.

So we are going to see some changes, say slight changes from month-to-month, quarter-to-quarter as it relates to the eligibility process, member choice, et cetera.

What we are talking about is those members that initiated their eligibility process long ago and all the way back to November we continue to see some of those members come is, and while small in number they are big in impact.

Okay.

It's only 2,000 lives sequentially, so not a big deal if those are going somewhere else.

Second question, when I look at the second half earnings run rate, just using the midpoint of your full-year guidance, obviously excluding the goodwill impairment, gets a number of about $1.26 in terms of EPS.

So that annualizes to $2.50 of earnings.

I understand there's some seasonality, but obviously, you have got some big start up costs and a bunch of new markets and things like that.

So maybe if you could talk just without specific numbers, headwinds, tailwinds for next year.

Would you expect earnings to be better or worse than that run rate?

And maybe if Bill, you could give us a little bit of color on the third quarter?

Should we say 3Q '12 is up on a year-over-year basis or not quite there yet?

Sure Josh.

I think you hit on the one thing which I did want to make sure we cover which is third quarter versus fourth quarter.

So that as you calculated the math for our earnings for the second half of the year, there still is the impact that the Texas rate increase goes into effect September 1. So we'll have full benefit of that in the fourth quarter and only one month benefit of that in the third quarter.

So we do believe that you will see a meaningful difference as the numbers that are out there show for Q3 and Q4.

And so I think if you look at Q4 run rates and then try to look at that into 2013, I think that is a better indicator of where 2013 would start to look at.

And obviously, we have not done anything in terms of putting together 2013 guidance at this point, but we do think that the run rate in the fourth quarter is probably a good starting point for 2013, given the fact that we also have Kansas starting in January of 13 and New Hampshire.

And a full-year of couple of other states.

And two things.

Part of it in response to the earlier question, obviously, we believe there's premium adequacy in Texas or we would not be saying that we have agreed to it.

We would probably still be in discussions.

And we have that relationship in Texas.

Secondly, I think as you look at it, Kansas is a new state, has had managed care.

They're adding some new populations.

But it is still a state that we had some great success in previous times in Kansas with a group of doctors and hospitals that understand how to do it.

The other plan that we are starting up in the first quarter is New Hampshire, it's a smaller plan.

So the ability to have impact one or the other is somewhat less.

So I think what Bill said in terms of looking at what we're talking about, a more normalized fourth quarter, carried through with increasing populations, full-year populations for Missouri and other plans that we have been adding, Washington.

I think you can see how '13 will start to shape up and we'll give you that guidance in the middle of December.

Got you.

So just so I make sure, and those are great points, Michael, that I understand.

Bill you alluded to some of the estimates being out there.

I assume that was consensus.

There's like a $0.70 number for the street, if you annualize that obviously you get to $2.80.

Is that what you are saying in terms of a better starting point than the $2.50 that I alluded to?

I'm not going to do the math for you, I think directionally that is what we're saying yes.

Okay that's perfect.

Thanks guys.

We will give you a hint.

That's all I was looking for.

I appreciate it.

Thanks.

Scott Fidel, Deutsche Bank

Good morning.

First question just on Kentucky.

Any sense from Kentucky from the state in terms of how they're taking into account some of the higher medical costs and higher acuity that you saw with those retro members in terms of determining your forward risk scores?

Clearly, you were negative there in terms of having to pay into the other plans and any sense on whether that can start to get more back to neutral?

Go ahead, Jesse.

Scott, Jesse Hunter.

So, a couple points.

First on the risk adjustment.

Obviously, that is a quarterly calculation as we talked about before.

Our risk adjusted rates for 7-1, our risk score if you will, is consistent for the July 1 rates with what we had for April 1. So we do not expect any changes associated with that for the third quarter.

And I think as you look more broadly, in terms of where the state is, some of the things that we're talking about, both risk adjustment and then what the action that the state is taking with respect to the distribution of retros are both in the zero sum category.

So that is shifting, the membership is shifting costs across the MCOs.

I think our discussions with the state, as Michael alluded to in his comments, are really at the programmatic level.

And we think right now the issues affect all plans and the program in totality is not on the successful and sustainable path.

So in our conversations with respect to policy changes and other actions that both we can take and that the state can take, it's in respect to getting the program where it needs to be.

I think Scott, where we commented that the actuaries are talking with each other about the data book and what is in and what is not in and looking at how to get that data more accurate.

Because we're interested in sound public policy.

And as Jesse alluded to, we are not asking for anything specific for Centene.

We are saying that these are program changes that should apply to the three plans that are there and put everybody on a level playing field.

And allow us then to manage the risk in a more normalized fashion, what we call normal business practices.

So that is where we hope we are headed with the state.

Okay.

And then just to clarify it in terms of the change in how the state is approaching the retro assignment.

Are they essentially now -- they are going to be shifting some of those retro assigned members that you received into the other two plans?

Or is it that the state has actually reevaluated some of their eligibility in terms of lowering the amount of members coming into the managed care program?

Scott, it's Jesse.

At this point, what they are doing is reallocating the retroactively eligible members across the three plans, effective September 1. So this will be a go forward change.

Not changing broadly the eligibility process, but changing the distribution.

As I mentioned previously, we are getting a disproportionate share of those and we would expect going -- effective September 1 to be getting a proportionate share of those numbers.

Got it.

And Jesse, do you have an estimate in terms of if the percentage -- what percentage of the retro members overall Centene was receiving prior to September 1, and then going forward what percentage that will be?

Unfortunately Scott, we're not a position to share some of that.

Those are some the conversations that we are having as we go with the actuaries through the data book and other processes.

So we're not in a position where we can share that at this point.

But we are confident that we are getting a disproportionate share.

It's fair to say we are asking some of the same questions, Scott.

Okay.

Then I just had one last question, just on Louisiana.

Michael, I know when you ran through some of the rates you did not mention them, and it looks like there was a negative 3.7% cut there.

Can you talk about the environment on the rates in Louisiana and what opportunities if at all you have to offset that with --

Sure we have had some solid discussions about it and Jesse will fill you in on it.

Sure Scott.

So with respect to Louisiana there is some moving parts.

And as we talk on a lot of these things, we want to make sure we have kind of finality if you will, to the rates before we talk about those.

But there obviously has been discussion broadly about the rates in Louisiana.

As we saw -- as we've seen in a number of markets recently, there's a question of both the gross rate impact and the net rate impact.

So what the state is contemplating in conjunction with some of their discussions with CMS on federal matching rates et cetera, is also adjusting the state fee schedules.

So there will -- we anticipate changes to the state fee schedules that would be generally commensurate with the changes in our rates.

And so we can obviously provide more specificity to that as we get more specificity and finality to it.

But I don't think it is fair to say that we would be expecting a net 3.7% rate decrease in Louisiana.

Okay got it.

Thank you.

Thank you.

Peter Costa, Wells Fargo

Hi guys.

Getting back to Kentucky again.

I believe at the investor day you said something like 8% of your inpatient costs was tied to retroactives in November when we were in December and then by May that had risen to 20% of your inpatient costs.

So where do you see that going at this point?

Is it above 20% now for say the month of November at this point?

Or if we project forward to September when they start reallocating these members on a more even basis, does that 20% fall say back to 12% or some number like that if it is spread evenly?

That is yet to be determined how that comes out in terms of the future months, and particularly after they change the retro assignment methodology.

I think you are correct.

What we said is, initially, in the month of December, we recognized 8% of our inpatient costs were from this and then by the time we got into May and June it was 20%.

So I think the amount that we have got after that, while we still get some has tailed off quite a bit.

We're not saying that all of our retro assignment members are going back to November today, but they go back many months, not just 30 days which is typical in other states.

So I think that overall, we are encouraged that the state is changing the methodology, it should improve our situation, it is hard to quantify how much until they actually do it.

Let's try it another way.

You guys said you were 109% loss ratio in Kentucky I believe and you expect that to improve 200 to 300 basis points in the second half.

1% or 100 basis points of that would come from the July rate increase, presumably the rest is from the one quarter of the retro.

So maybe if we doubled that, the remaining 100 to 200 basis points, it is 200 to 400 basis points of improvement, sort of on a run rate basis in the fourth quarter from the retros, is that what we are looking at?

Or were there other improvements that you were expecting to get in that fourth quarter from say the continuity of care stuff going away and improving managed care?

There is other things taking place.

We talked with the state and we mentioned earlier that when you look at narcotics and other drugs and things, we've been significantly bringing it in line.

And our inpatient is in line.

We also have, I alluded to with my comments, our NICU and emergency room policies and practices.

So we are avoiding being a one trick act here and applying everything we can to bring it back in line.

I think what is key is that once we get the retroactivity issue, we can get it resolved and build a kind of the standard of practice we see in virtually every other state, then you would see that things would be normalized.

That's why we've said it has not been a rate issue, it is a policy issue that needs to come into play.

And let me just -- what I said in my comments was that for guidance purposes, we have been running 109% at a statutory level since inception.

And what we have forecasted for the second half is a 200 to 300 basis point improvement, which obviously takes into account the 1% rate increase in July and the impact of reduced retro assignment of eligible members and some medical management initiatives.

We've tried to be somewhat conservative in forecasting marked improvements in Kentucky at this point in time.

Hopefully we will do better but we have not baked in anything greater than what I indicated of the 200 to 300 basis points.

So if I'm generous even with my numbers, I get to say 104% or 105% run rate, in the fourth quarter for your loss ratio, why then do you not assume that you would take a premium deficiency charge at this point?

Are you counting on those program changes to come through from the state at this point or just hoping for them to come through, should I say?

What gives you confidence that you should not take a premium deficiency charge or walk away from the state altogether?

There are a couple of things.

One is in doing that calculation we include all the business that we do in Texas or in Kentucky, including our specialty business and there's certain costs that are not included, the fixed costs are not included in the premium deficiency calculation.

It's only direct costs.

Right.

So we think that over the term of the contract, we will be in a favorable situation such that we would not have a net loss.

And so in making that calculation, you are not assuming any program changes at this point?

Some minor ones, but not major.

Until the state has agreed to it, I'm not going to -- we're not going to show that optimism.

As I said, we're going through the data book and what that demonstrates will have a lot to do with what position we take with the state going forward.

Okay, thank you.

And then just last question, can you go through where we stand with the Georgia RFP timing?

It has been delayed.

They've added -- they've renewed it for an additional year through July of next year.

Yes, Peter, this is Jesse.

Just to add to that, there is not I would say total clarity at this point with respect to what the state is going to do.

We know what they are not going to do, which is -- they've obviously come out and said that they are going to delay.

There are some other questions with respect to potential populations and timing which are very much open at this point.

So it would not be appropriate for us to give any more specificity than that.

Exactly, so they haven't given you any clarity at this point about what the timing will be for when that RFP will come out?

No (technical difficulty) we would speculate on.

Okay, thank you.

Chris Rigg, Susquehanna

Good morning.

I just want to ask you -- on Kentucky, when I think about the business prospectively, if the retro assignment members fall more into line with norms in other states, does that mean the data book errors that you guys think may have occurred would go away, essentially implying that your rates would be unchanged and your fee schedule going -- the rate increases prospectively would remain as is?

Yes, I'll start with that.

If we choose not to speculate until we have been through the data book, or the actuaries have talked about it and we understand what is there working with the state.

We could do 1,000 what-ifs, and it becomes a mental gymnastics to some degree.

Because we have to see what that data says.

Jesse.

I would just add to that that as we are having these conversations Chris with the state and the actuaries with respect to the data book, those two conversations are not limited to retros.

Okay.

And then in Texas, the rate increases that you guys are targeting or highlighting, are those net of fee schedule changes?

Or can you just remind us how you're rates change relative to the fee schedule?

Or how much you rates are tied to the fee schedule?

Sure.

In Texas, that can change from year to year depending on what actions the state is taking.

I think at this particular time, the rate increases we are quoting are net increases.

Okay.

All right, great.

Thanks a lot.

David Windley, Jefferies.

I wanted to turn to the G&A ratio which in the 2Q dropped a lot and below your guidance for the full year, so Bill, wondering how we should expect that to trend over the balance of 2012?

And in 2Q I guess I am wondering if 2Q benefited from unwinding some 1Q incentive comp accruals?

The second quarter did benefit a little bit from unwinding some longer-term comp accruals that we had.

And what we have given in our guidance is the estimated G&A ratio for the whole year.

Sure.

So we do got a couple of plans adding in the second half of the and things like that.

Right now we are sticking to what is in the range.

Yes, we commented that there are some costs in there bringing up the new plans in Kansas and New Hampshire.

So you can't say it is all comp -- there are some pluses and minuses in there.

Got it, okay.

Would be possible just to kind of give us a picture of how you are entering 3Q?

Would it be possible to give us a picture of what June looked like?

For example, what was the difference in MLR between the first couple months of the quarter and the third month of the quarter?

I think what -- we've been very -- we gave you an indication -- we felt it important for you to know that we returned to profitability.

But we are going to stay away from any precedent in going month-by-month and talking about it.

Because it can change from month-to-month.

Seasonality, so many different things that we are better talking quarters.

We want to be transparent for you and help you, but I'm afraid we might be doing a disservice to everybody trying to go to that granularity.

There can be a difference between a 31 day month or a 30 day month and how many Mondays are in there.

Holidays.

Or holidays and things, so in individual months, HBR in is not as important as a 90 day would be for a full quarter.

And what we thought would be important is for you to understand that the episodic issues as we referred to them in the three markets, the management, the approach we're taking and how we are doing it, did allow us to return to profitability.

And I'm not saying just one penny, but some reasonable profitability in June.

Okay.

Clarification on Kentucky.

The 200 to 300 basis point improvement that you are expecting, I think 1% of that is coming from the rate improvement.

Is that comparing second half to first half?

Or second-half performance versus where you started at inception?

Or what should we deem the comparison to be there?

Right what I said we would run 109% inception to date.

I think what we have had to do is pick up additional accruals for these retros, so we think the inception to date is probably the best way to look at it at this point in time.

Because that is about an eight month period.

And given that that has been average run rate for the first eight months, we are expecting it to be 200 to 300 basis point better than that in the second half.

Okay.

And then final question, as I think about the savings that you are garnering from your G&A actions in 2012, how should I think about those say being reinstated moving into 2013?

Two parts.

One, I think that the leverage that we are getting this year from the additional revenue and spreading the costs over a wider base will continue into 2013 and should accelerate given the additional volume.

However, I think the benefit that we had this year from the absence of some of the performance-based compensation will reverse.

Because we would expect to build that back in for 2013.

We indicated that is about 80 basis point impact in the G&A ratio in the second quarter, so for next year we would add that back in as a starting point.

Okay thank you.

And like we said, we understand that you are working to analyze '13.

And we are holding off to December because we will have a better view of it because there will be other new opportunities that will surface between now and then.

So we will be in a better position to say when it comes to G&A what is the development for other plans and that type of thing as well.

Very good.

Understand, thank you.

Carl McDonald, Citigroup

Thanks I'm interested in what the underlying second quarter loss ratio would have been if we excluded unrelated development related to Texas, Kentucky individual business if there was if any there.

So what would that 93% have looked like?

Well, we really don't get into trying to break out the amount of development in any particular month or quarter at this point.

Obviously, what we have said is in the second quarter, and particularly in May, we recognized additional costs with respect to the Kentucky retro assignment issue.

In Texas we did not start until March 1. So there was not a whole lot of anything going backwards in Texas.

That was just recorded in the second quarter based on our own experience.

Okay and then a related question.

If we look at the first half loss ratio of 91%, to get to full-year guidance, you'd have to do something around 88% in the second half.

So that 300 basis point improvement, how much of that would you say is things you know already?

So Texas rate increase, some of the changes in Kentucky versus how much of that is things that you still need to see happen?

I think most of it, I mean, it's out there because it's things we see happening.

We are not speculating in saying, gee, if we ever push this through and get this approved.

No, that is all based on what we see.

Will happen.

Sarah James, Wedbush.

Thank you.

Circling back to Josh's question earlier.

As I think about 4Q, Texas MLR should be down with the full quarter rate increase, Kentucky MLR is expected to come down 200 to 300 basis points in the second half, maybe a little bit better in the fourth quarter than the third.

Washington, Missouri should be starting to normalize as we come out of the quarter.

So if I were to use that as a general run rate starting point, does that imply, based on how you see contracts now for pricing costs as a starting point MLR for annual -- MLR for contracts like Kansas or the potential one region in Ohio as being lower than this year's startups?

So maybe back to the standard 90% to 100% range for the first year of operations as opposed to the 110% that we have experienced this year?

Yes, I think it's fair to say that's how we see --

Yes, I think that Kentucky was a special situation and I would put that over that to the side.

I think even Texas for the full year will turn out to be fairly reasonable.

And the new markets in general that we get into, I would start it in 90% HBR plus or minus, probably 100 to 200 basis points, in those ranges, each of the individual states.

I think as Michael indicated in several of these, they are already in managed care.

So there is less of that issue to have to deal with.

And we think the new markets we're entering are accurate on the 90%.

And picking up some of the dual-eligibles in Ohio, it is a market that with new service carriers with a contract, so there will be some mitigation there of that.

But we really have to look at it in what have we done there, what is managed care.

If there has been managed care, as opposed to what we saw in Kentucky where they have had no managed care and very provider friendly type environment.

And that makes a difference there.

Thank you.

Thank you.

And at investor day you mentioned one-half to two-thirds of the shortfall in Hidalgo could come from rates.

The rest from medical management.

So I'm just wondering, how the Star Plus rates -- I know it's still a range now because of those 5,000 members, but how that compares to what you thought you might get from closing one-half to two-thirds?

I think based on the fact that our guidance has stayed consistent, I would say that it has fallen as we would expect it in the various markets.

Last, just a quick clarification.

You mentioned earlier on the call that specialty business in Kentucky is just one of the reasons in favor of staying in the state.

Could you just remind us on the size of your specialty business in Kentucky?

I don't know we have a specific number, but obviously in Kentucky we have our PBM.

We have our behavioral health business, which are two of the larger components.

We also have the health and wellness and our nurse triage line.

Nurse triage line.

There's a whole series of them.

We have pretty much all of our normal specialty companies are being utilized in the state of Kentucky.

Thank you.

Thank you.

Michael Baker, Raymond James.

Thanks.

Michael you indicated the importance of behavioral health in addressing the duals.

In your conversations with states, to what degree are they recognizing that?

I know obviously Arizona is very far along that path.

And to what degree do you think they will kind of follow in that direction in terms of how they establish RFP criteria in select vendors?

So Michael, this is Jesse Hunter.

I think states, even at the state level and at the CMS level, I think there is a broad and strong recognition of the importance of integration of the behavioral health benefit.

When you look at these integrated demonstration programs, it is both the integration of products across Medicaid and Medicare, but also across benefits.

So behavioral pharmacy and other pieces.

So we think that that will be consistent and I think it will be one of the criteria that states will look to as well as experience.

But also the assets and capabilities that companies like Centene have.

Thanks.

Scott Green, Bank of America Merrill Lynch.

Hello, thanks for the questions.

I think at investor day you implied that the Hidalgo MLR might be around 110% in the second quarter.

Is that how it wound up?

I think we're in that ballpark.

Okay.

And then, you had previously disclosed that you would expect it to wind up in the fourth quarter where it would have in original guidance.

So does that imply somewhere around 90% I guess?

And so the makeup there would be the 7.6% from the rates?

And then the other 13% or so or 12% for medical management?

Bill?

I'm not sure exactly the nature of the question.

You were saying that if it is 100%.

I was asking if it was 110% now and it is in the low 90% by year end, I guess the way you get there is a 7.6% reuptake in the fourth quarter and then the other 12 points or so would be medical management, to get to 20 points total?

Some of it is medical management, some of it is just the absence of the continuity of care provisions.

So we will benefit from the fact that in that 90 day period we were running higher, which was a lot of the second quarter.

And the 110% is probably even a little high for the quarter itself.

But the rate increase of 7.6% in the Hidalgo area will certainly bend that trend quite a bit.

And then the absence of continuity of care, and then we are now authorizing the treatments across the board.

So we do see the utilization trending downwards.

As we apply our criteria.

Overall, we still believe the Hidalgo service area will trend down to the more normal areas by the third and fourth quarters.

We are now directing care, so that improves costs.

We have utilization, major issues over there historically.

And if we had a lot of time, we'd give you a lot of examples that are anecdotal of things that were done which were just incredible, why the state wanted us to come in and the plans come in.

So, you take the utilization, you take the ability to control the pricing on some of these things by directing some care.

The other overall savings we do, it starts off by reducing the premiums.

There is a lot of that that brings -- that's all in play now.

And as we said we're getting traction on it.

As we said also several times today, the rates were wholly appropriate as we negotiated them and agreed to with the states.

Okay.

That's helpful.

And then I just had one question on the dual-eligibles.

So just thinking about how rates might be set at some discount versus fee-for-service, I know you are launching a number of Medicare SNF products next year for duals.

I was hoping if you could tell us if your bids were below the fee schedule, the Medicare fee-for-service mark?

No, Scott, it's Jesse.

We haven't gotten into the specific guidance with respect to our pricing on the Medicare side.

So we wouldn't be prepared to comment on that.

I will, I mean for competitive reasons amongst others, there's no reason to comment at this point.

Directionally, as we have said before, the Medicare SNF business where we have five states this year, moving to six next year, we still expect that portion to be a -- that product to be a small portion of the overall portfolio.

And we've got significant focus on the duals opportunities across markets.

Okay.

And then one last question.

Just trying to reconcile to previous comments.

I think the answer to the one question, you seemingly implied that $2.80 might be a rough the starting point for next year.

But then to another question you suggested that around $0.50 of incentive comp would be added back.

So would there just be incremental growth next year so you comfortable $2.80 is an appropriate starting point?

Or should we be thinking about $2.80 minus some incentive comp?

I think if we had wanted people to consider less than that, we probably would have said something different than we did.

Okay,

So I think the information we gave is pretty clear from a starting point.

Obviously, it is at all-in starting point.

Okay thank you.

By the way that is not my starting point, that is some of yours.

But I'm not saying that it is not a decent starting point.

Okay, thank you.

Tom Carroll, Stifel Nicolas.

Thanks.

Yes, just a clarification.

I think Peter got most of my line of questioning on Kentucky.

But, Michael, I just wanted to make a clarification.

You very specifically stated within your prepared remarks about Kentucky that the state really needs to make changes in order to kind of fully put that market into longer-term profit expectations.

I think you said it twice.

Should we assume that if no changes are made at the state level, that Centene will withdraw from Kentucky?

Prior to the end of its contract?

I would make no assumptions.

We signed the contract, and in the absence of a breach on their part, we live up to our contracts and we'll manage through it.

We are in 18 states now and headed for even more over the next few years.

So we are not just going to walk away unless they are in breach and don't take the corrective actions.

That is consistent with the ethics and philosophy of this Company.

Okay, so corrective action.

Again, is corrective action synonymous with making policy changes that you are alluding to?

Right, absolutely.

In other words, the question for the state of Kentucky that we've posed to them very directly, is if you want to have a sustainable, long-term program as these contracts evaporate and go away, if you want to have people willing to come in and continue participating, then these are the things you have to do that make sense.

We are not asking for anything that is not sound public policy.

They are smart people down there.

They have experience.

So I have no reason to believe that they will not consider and make the changes, to get the kind of sustainable program they want.

If you have people that don't understand what needs to be done, then you have an entirely different environment.

But here I have to believe that they are smart and capable and experienced enough to get it done.

Okay, and then on Washington State, I think you mentioned that you expect second half enrollment to approach 50,000 to 60,000?

Yes.

Is that considered a starting point?

We had estimated the number of good BPs higher than that just given your contract status.

So is that kind of a fully annualized number for the foreseeable future there do you think?

I'd say it is a good starting point.

We look at it, we're going into states where plans are already have been there and it takes time to build our reputation and see this shift take place.

So it is just what it is.

Jesse, you want to add some?

Yes, I think it is important to know Tom, that they had -- while we were awarded the statewide contract, in the context of our building out our network and working with the provider community and working with the state, there was one county, a large county, which we did not enter.

Because in the context of discipline on the contracting side, we could not come to terms of an acceptable and sustainable contact with some of the key providers in one of the larger markets.

So as a result, our membership has been -- is lower as a starting point than what we had previously contemplated and what you or others may have estimated.

But we think that that was obviously an appropriate action for us to take given our long-term interest in the market.

And as Michael indicated, that we think that that 50,000 to 60,000 is a good baseline and we see opportunity to grow from there.

Great.

Okay, so that explains it.

Network development is the answer I was looking for.

Thank you.

Justin Lake, JPMorgan.

Thanks, I just had one quick follow-up.

Regarding the acquisition of Amerigroup by WellPoint, your now two largest competitors are going to be united in WellPoint.

Large companies, tremendous amount of scale, unlimited kind of ability to invest and come up with cash for future growth.

How do you think that changes the competitive dynamic relative to let's call it the last couple of years where you had United, but then a bunch of smaller kind of Medicaid focused plans?

Do think that is going to have any impact in terms of how the states view this business?

Or what kind of partners the states are looking for?

And how does that kind of change your view of the world going forward?

Thanks.

That is some (inaudible) historically.

There are other larger players who have looked at from time to time.

And we don't see that kind of change.

We're very comfortable with where our capabilities are.

I remind people, we did the original Celtic in the base plan because it gives us the ability to do exchanges, hybrid products, and we use them very effectively that way.

It's some of the legacy business that has been the issue there.

So this Company with its specialty companies and where it is, I think we are very comfortable with it.

And I've commented historically, I see it being bifurcated with ourselves and a couple of the larger players, being in a strong position to be able to deal with it.

We're pushing 2.5 million lives now in this business.

We are in 18 states, it is diversified and it has a lot of specialty companies.

So I'm comfortable with it.

I've said in the past that we have a runway that is long enough for the space shuttle to touch and go as I've often joked about it, we still have a very long runway there.

I think we have the capabilities to continue to do it.

And I think as we come out of the issues that we faced in Q2, it just further demonstrates that the capabilities of the team and the staff.

We're able to go in two or three days after what we saw as an issue and it's Company policy to always disclose as quickly as we know something.

We are able to go into investor day within a few short days of that and give you updated guidance.

And know where we were at and now here we are 30 or 45 days later, able to confirm that guidance.

So I think it says what our overall capabilities are.

That is a long-winded answer, but yes, I think we can continue to compete effectively.

That's the Cliffs notes.

That was a long-winded question.

So thanks Mike, I appreciate it.

Thank you.

I thank you for the questions because it gave me a chance to ask them.

Are there any -- operator, there any others?

That concludes the question-and-answer session.

I like to turn the conference back over to Michael Neidorff for any closing remarks.

So we thank you very much and we look forward to talking to you at the end of Q3.

Have a good rest of summer.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.