Centene Corp (CNC) 2013 Q3 法說會逐字稿

Good morning and welcome to the Centene Corporation third-quarter 2013 financial results 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. Edmund Kroll, Senior Vice President Finance and Investor Relations.

Please go ahead, sir.

Thank you, operator, and good morning, everyone.

And thank you for joining Centene's third-quarter earnings call.

Michael Neidorff, Chairman and CEO, and Bill Scheffel, Executive Vice President and CFO of Centene Corporation, will host this morning's call.

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

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

The playback number for both of those calls is 10033731.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the 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, October 22, 2013, and also 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.

As a reminder, our next investor day is Friday, December 13 in New York City.

Please mark your calendars.

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

Michael?

Thank you, Ed.

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

During the course of today's call we will discuss our solid third-quarter results, including continued progress towards our margin expansion objectives; future growth opportunities; and state updates including recent RFP wins.

I will begin by discussing highlights of our third-quarter results.

We are pleased with our third-quarter results.

We continue to produce strong revenue growth and once again showed sequential improvement in our pretax margin.

This increased by 50 basis points in the third quarter to 2.95%.

The improvement was due to a better HBR.

Solid expense control at the G&A line was partially offset by higher performance-based compensation and start-up costs in new markets.

Margin improvement is a strategic priority for Centene and our long-term goal continues to be 3% to 5% on a sustainable basis.

Membership increased 4% year over year to 2.6 million covered lives.

Premium and service revenues grew 24% year over year to $2.7 billion.

The faster premium growth relative to membership growth was driven by the continued shift in mix towards higher acuity beneficiaries.

For example, long-term care membership increased almost 300% to 31,600 lives.

Additionally, our average revenue PMPM has increased 16% year over year.

The increase in high acuity membership is consistent with Centene's strategic priority to diversify its product lines to maximize cost savings for our state customers.

Long-term care growth should continue over the next several quarters as our new Florida contract ramps up.

The HBR improved 560 basis points year over year and 110 basis points sequentially to 87.7%.

The HBR for our existing business improved 210 basis points sequentially to 86.3%.

As a reminder, changes in the mix of new and existing businesses can cause variability in the consolidated HBR.

Bill will provide additional detail on this topic.

During the third quarter we continued to experience a modest reduction in medical trends across our existing business.

I would now like to discuss future growth opportunities.

Our targeted pipeline remains extremely robust at $130 billion through 2016.

We expect to continue our recognized success in winning new business.

We will diversify by geography and product line with the goal of driving profitable growth.

We already have visibility on 2014 revenue growth in excess of 20% excluding exchanges.

This compares to our previous estimate of 15%.

We will provide full details at our December investor day.

I will now cover state contracts and rate updates.

Florida, our new and expanded Florida long-term care contract started on schedule on August 1. This program is proceeding as planned with enrollment to be phased in by region through March of 2014.

We added an additional 7,000 lives during the third quarter due to the expansion.

In September our Sunshine Health subsidiary was awarded a new and expanded contract for nine of the 11 regions under Managed Medical Assistance program.

Enrollment is expected to begin in the second quarter of 2014 through October 2014.

The contract is subject to challenges and contract readiness reviews.

Therefore it is premature to comment on membership and revenues.

Sunshine Health was the only plan awarded a foster care contract statewide for the Child Welfare Specialty Plan.

The current foster care population in the state is approximately 30,000 children.

Ohio -- our Ohio subsidiary began operating under a new and expanded statewide contract in July.

Our enrollment increased 9% sequentially in the third quarter.

We previously noted that the ramp up of additional lives had been slower than expected.

We continue to work closely with the state on this matter.

The enrollment ramp should continue into 2014.

Massachusetts -- last month CeltiCare health plan was awarded a contract to participate in the MassHealth CarePlus program in all five regions.

This is a significant win for Centene as it provides an entry point into the Commonwealth Medicaid program.

This contract is expected to begin on January 1 of 2014.

California -- earlier this year our core California Health and Wellness subsidiary won two Medi-Cal contracts in California.

Under the first contract we will serve members in the state's Medi-Cal managed rule expansion program in 18 counties.

Under the second contract Centene will begin serving Medi-Cal beneficiaries in Imperial County.

With the benefit of being the only county selected plan, enrollment is expected to commence on November 1 of this year for both contracts.

New Hampshire -- we expect to begin serving TANF and ABD beneficiaries on December 1.

Texas -- in September we were awarded a contract to serve an additional STAR+

PLUS recipients in two rural service areas.

Enrollment is expected to begin during the second half of 2014.

Dual eligibles -- the demonstration projects in Ohio and Illinois are expected to commence in 2014.

We continue to work constructively with both states and CMS on rates and other contract terms.

Centurion -- in July 2013 our joint venture subsidiary, Centurion, began operations under a new correctional contract in Massachusetts.

This contract provides comprehensive healthcare services to 11,000 individuals incarcerated in the state's correctional facilities.

In September of 2013 Centurion began its second state correctional contract in Tennessee covering 20,000 prisoners.

And last week Centurion executed an agreement for a third state correctional contract in Minnesota covering 9,000 offenders.

This latest award is expected to begin in the first quarter of 2014.

Next a quick comment on the rate outlook.

We continue to expect a composite rate increase of approximately 2% for 2013.

In Texas we received a net rate increase of 4.2% which includes risk adjustment.

This rate increase was effective September 1. Georgia and Florida are in the process of finalizing rate updates that will be retroactive to July 1 and September 1 respectively.

All these rates are exclusive of the ACA industry test which is being negotiated separately.

Switching gears, let me make a brief comment on the ACA opportunity.

The ACA is an important opportunity for Centene, but only one part of our overall growth pipeline.

We have taken a selective approach to our participation in health insurance marketplace.

We have launched our Ambetter brand on a limited basis in nine of our current states.

The legacy book of individual policies it's selling is in runoff mode.

We have repositioned Celtic to support our exchange growth strategy.

We have scalable infrastructure and the overall bandwidth to effectively manage the Medicaid expansion in our participating states.

Now a brief comment on Kentucky.

As you know, we exited Kentucky July 5. We are winding down operations which will be substantially completed by the end of this year.

We cannot comment regarding the ongoing litigation with the Commonwealth on this call.

In closing, our view of 2013 and 2014 remains positive and upbeat.

As Bill will discuss in more detail, we are raising our 2013 guidance to a range of $2.77 to $2.87.

Thank you for your support and interest in Centene; we look forward to seeing you at our next investor day on December 13 in New York City.

I will now turn the call over to Bill.

Thank you, Michael, and good morning.

To begin my comments this morning I would like to reference you to the table on page 3 in our press release detailing the components of our third-quarter earnings numbers, particularly for the third quarter of last year.

Excluding the impact of Kentucky operations and certain gains recorded last year, our diluted earnings per share was $0.88 in Q3 this year compared to $0.81 in last year's third quarter.

I think this provides a good comparison of our ongoing operation between years, although the improvement is much greater when considering that this year includes a normal level of performance-based compensation compared to no performance-based compensation in last year's third quarter.

We expect to classify the Kentucky operations as discontinued for reporting purposes at some point in the future.

This could occur at December 31 or for the first quarter in 2014 depending on the level of remaining claims reserves at those dates.

For the third quarter Kentucky is still included in all of our numbers as a normal operation.

And as Michael indicated in his comments, we ceased operations in Kentucky as of July 5 and our ongoing wind down efforts primarily consist of paying any remaining claims going forward.

For the third quarter of 2013 our premium and service revenues were over $2.7 billion compared to $2.2 billion last year, an increase of 24% year over year.

The $500 million increase results primarily from the start-up of the Kansas contract on January 1, the impact from the membership expansion in Mississippi last December 1, increases in membership and rates in Texas between years, and the Acaria acquisition on April 1 offset by the elimination of the Kentucky revenue after July 5.

Premium taxes were at a more normal level this year at $70 million for the third quarter.

Last year's amount of $236 million was impacted by a separate payment to us from one state of $180 million which we immediately passed through to providers.

Our consolidated health benefits ratio declined to 87.7% this quarter compared to 93.3% last year and 88.8% in the second quarter of 2013.

As we indicated last year, our consolidated HBR without Kentucky in the third quarter of 2012 was 88.7%.

The improvement in our HBR without Kentucky year over year and sequentially is primarily a result of rate increases in Texas, as well as a continued level of moderate utilization resulting from a combination of our medical management efforts and overall low trend levels.

For the third quarter the portion of our premium and service revenue derived from new business has declined to 14% this year compared to 32% last year.

The HBR for our new business has decreased to 96.5% compared to 106.5% last year.

The HBR for our existing business has improved year-over-year by 70 basis points from 87% to 86.3%, favorably reflecting the absorption of the significant increases in new revenue generated in 2012.

Our general and administrative expense ratio was 9.3% in Q3 of this year compared to 8.2% in the same period last year and 8.7% in Q2 this year.

The increases in the G&A ratio reflect the additional performance-based compensation recorded this year and an increased level of business expansion costs.

Our business expansion costs were $0.12 in Q3 this year, this compares to $0.07 in Q3 last year and $0.17 in the second quarter of this year, although Q2 included $0.07 per share for the Acaria transaction costs.

Our third-quarter business expansion costs included Centurion's start-up in Massachusetts and Tennessee during the third quarter; costs in Florida related to the long-term care expansion; preparation for the start-ups in California and New Hampshire later this year and the exchanges beginning January 1; plus our normal RFP and business development costs.

Investment income was $4.9 million in Q3 this year compared to $23.2 million last year.

The third quarter of 2012 included $19.4 million of gains from the sale of certain investments which we discussed last year.

Excluding these gains our investment income increased due to a higher level of invested assets.

Interest expense was $6.6 million in the third quarter this year compared to $4.9 million last year.

The increase between years reflects the cost of the additional $175 million in senior notes issued in the fourth quarter last year.

Our income tax rate for the third quarter this year was 39.1% excluding the effects of non-controlling interest.

During the third quarter of last year we recorded an overall income tax benefit of $9.5 million comprised of the benefit from a pretax loss for that quarter and a benefit of $4.6 million from certain state tax items.

Our GAAP diluted earnings per share was $0.87 compared to $0.07 for last year.

As I previously indicated, the third-quarter EPS numbers adjusted for Kentucky and the 2012 gains are $0.88 for 2013 versus $0.81 for 2012.

At September 30 we had cash, investments and restricted deposits of $1.7 billion including $38 million held by unregulated entities.

We continue to maintain our risk based capital in our regulated subsidiaries in excess of 350% of the authorized control level.

Our debt at September 30 totaled $521 million and there were no borrowings drawn under our revolving credit agreement.

Our debt to capital ratio, excluding the $73 million nonrecourse mortgage note, was 27.4%, a decline from 29.8% at June 30.

Our medical claims liability totaled $1.1 billion at September 30 and represents 42.9 days in claims payable.

Cash flow from operations was $131 million for the third quarter which is 2.7 times net earnings for the quarter.

Our 2013 updated guidance is premium and service revenues $10.6 billion to $10.8 billion; diluted earnings per share $2.77 to $2.87; consolidated health benefits ratio 88.5% to 89%; general and administrative expense ratio 8.8% to 9.2%; and diluted shares outstanding of 56 million to 56.5 million shares.

Our guidance assumptions include the start-up of operations for California on November 1 and New Hampshire on December 1. Business expansion costs are expected to be $0.60 to $0.65 for all of 2013.

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

(Operator Instructions).

Josh Raskin, Barclays.

I would say congrats, but I would really be talking about the Cardinals, so we will start there.

So a question about 2014; you guys said you had visibility into 20% revenue growth or premium and service growth for 2014 and that excluded -- it sounded like that excluded exchanges.

Did that also exclude the Medicaid expansion?

Yes.

Okay and is it fair to assume -- I mean I don't know what your assumptions are on Ohio, but is it fair to assume -- we have with Ohio is still only about $250 million in revenues, without Ohio maybe $100 million.

Would you expect the impact from the ACA, the Medicaid expansion to be pretty modest?

Bill, do you want to --?

Well, I think at this point in time we don't know enrollment numbers for exchanges.

And for Medicaid expansion we are looking at a couple of states, particularly I think Washington, Massachusetts and Ohio has just recently talked about that yesterday.

So I think the 20% -- in excess of 20% revenue growth we talked about will further be updated on December 13 at our investor day.

We may know more about exchanges at that point in time and can talk about that; right now our number excludes that.

And, Bill, would -- is it fair to assume that the exchanges are a bigger impact in 2014 than the expansions?

I think that's -- we will have to wait and -- that will be seen as we get a little farther along.

I think both of them have potential for larger numbers and we don't really have much visibility into the enrollment process yet for exchanges.

So we will have to see.

There is no good proxy out there yet.

Yes, that is fair.

The 3% pretax margin that you guys talked about, so I am curious, do you think that is an achievable number for 2014?

And maybe even if you just look at existing business, business that -- if you take your 2013 book and roll it forward would you assume that you can at least get to the 3% on your existing book?

Or do you think you can even get there on the overall next year?

Well, I mean, right now we are at 2.95% for Q3 and I think it's possible we get there.

It's going to be a function of new and existing mix.

I think the expansion costs that we will incur in 2014, for example, Florida Medicaid, that expansion will need to be considered.

So I don't know at this point in time we have a pretax margin number for 2014 that we are ready to lock onto.

We obviously will have that for this December 13 meeting, but certainly it's our goal over time.

Whether we achieve that in 2014 we will have to wait to discuss that later.

I think what is important is we're trying to do it -- we want to try and show that it is sustainable.

And as the HBR gets controlled, G&A -- we think it is very achievable, that the timing will have better insight as we unfold the 2014 budget.

So just one quick question following up on that and then I will jump off, Bill.

Are you insinuating that the start-up costs, including Florida and all the others next year, will be greater than the $0.60 to $0.65?

Were you insinuating that is sort of a headwind for next year?

We haven't totaled everything up, but I would certainly think that our expansion -- our growth continues and with growth comes the expansion costs.

So I would expect each year that those numbers would continue to grow.

I don't have a specific number yet for 2014, we will give that in December.

But certainly one of the big numbers will be the Florida Medicaid expansion, which will primarily hit in 2014 versus 2013.

All right, thanks, guys.

Peter Costa, Wells Fargo Securities.

I won't congratulate you being from Boston here.

We will wait a week or two.

Can you talk about the premium tax?

You talked about it being separate still from your rates and negotiating still with states.

Are there any states that have agreed to compensate you for that or where do we stand on that now at this point?

There are a lot of discussions taking place.

Florida has indicated they have a budget line to cover us.

Texas is talking about mechanisms that they're going to use.

Some of it may be a retro look and then an adjustment.

And we are talking to the accounting firms about it; they do that when revenue is recognized.

So there is still a lot of moving parts and that is one of those -- we are at that tenuous -- not tenuous, but at that point in time when we are close to the annual budget numbers and be able to give you some guidance for 2014.

But I would like to wait and be just a little bit more specific; with the passage of time to December 13 I think we should have more visibility.

I think we are encouraged by the discussions that we are having with our state partners.

And I think the actuaries that are involved in this process seem to all recognize the need to include in our rates an adjustment for this.

And so that is moving forward and with the discussions with all -- the variety of states and we are encouraged by those discussions at this point.

Are you still talking about that adjustment being on a grossed-up basis or is it just the premium tax itself?

No, we are talking -- I mean the actuaries, everybody recognizes the need for the gross up.

The fee is non-deductible for tax purposes, so we have to achieve a similar amount at the revenue line to cover the after-tax cost (multiple speakers).

The states understand that.

Okay.

And then can you talk about your 20% growth in revenues that you talked about for next year?

Are you including anything in that for growth in members in your state, your Medicaid contracts that you have existing today in terms of people who may sign up that perhaps qualified before but have not actually signed up for Medicaid?

We -- outreach is an ongoing effort, day in and day out in the various markets.

So we of course always look to take advantage of that and you lose some as well.

So there is a combination in that mix.

But once again, we'll give you much more clarity.

We thought -- we spoke of the increase in long-term care; we talked about the new contract in Florida -- those things we have some visibility on to where we are comfortable talking about the 20% versus 15%.

That number is primarily consisting of new awarded contracts or expansions that we are aware of.

It doesn't include anything for the woodwork effect, for example, that people have talked about or anything like that.

Okay, thank you.

And then can you just tell us how much performance-based comp there was in the quarter?

I think that we're probably around $0.20 of performance-based comp in this year's quarter.

Thank you very much.

Sarah James, Wedbush.

You talked a little bit about the legacy Celtic contracts being in run-off as you switch to Ambetter.

Could you talk to what retention might look like on the existing book and if margins would look similar under the new formula compared to how you ran it as Celtic?

Rone, would you like to comment on that?

Yes, with respect to the legacy block, it is really not something that we view as strategic to the future.

That is a block of business that was underwritten, largely acquired through brokers, typically upper income individuals.

And as we talked about in the past, our individual insurance and exchange strategy is to focus on lower income subsidized members that's an extension of where we have traditionally operated on the Medicaid plans.

So as a result of that this is not a block that we've taken a lot of steps to enhance the product line in compliance with the changes contemplated by the Affordable Care Act for 2014, although we will continue to offer a product in a number of states.

So we expect this block to continue to decline throughout 2014.

And the nature of a run-off block like that is it typically doesn't throw off great margins, so it's going to be something that is not going to be a big contributor one way or the other with respect to the bottom line.

Got it.

And now that pricing data has been released for the exchanges, how do you think about your competitive positioning for the Ambetter product?

I think a lot of people expected that -- and you are seeing a great deal of variability in the rates in 2014 on the exchanges.

And the expectation [isn't] that the rates are going to compress more in future years.

With respect to our position for 2014, it really varies quite a bit.

In some states and counties we are very competitive; in other states and counties we are less competitive.

I can tell you that we had a very consistent and disciplined approach to how we priced that we applied across all the different states and service areas that we're serving for 2014.

So we where we see ourselves from a position standpoint really reflects the specifics of the competitive environment in the states as opposed to any difference in terms of how -- philosophy how we apply to our pricing.

That's helpful.

And last question here is on the Centurion business.

The win in Minnesota was very impressive as you dislodged an incumbent with a lower price point bid due to the advantages that you provide in vertical integration and medical management.

So seeing that there clearly is an appetite for the type of product offering you have, can you talk about the scope of contracts that are coming up in the next 12 to 24 months?

How many other opportunities are there in the near term?

Jason?

So, Sarah, good morning.

We continue to evaluate a number of different states that have potential RFPs that will be forthcoming in subsequent months and years ahead and have a fairly robust pipeline.

So we will continue to evaluate those on a case-by-case basis depending upon the market and the nature of the opportunity.

But we do see a robust pipeline for our partnership with MHM and this joint venture Centurion as we move forward.

But no specific number of contracts that are coming up in the industry for a rebid over the next few (multiple speakers)?

No.

No, I think that would be --

No.

-- no.

Justin Lake, JPMorgan.

First question, I just wanted to follow-up on the industry tax.

Can you walk us through the mechanics of how you expect the states to get you this rate increase that would allow for the tax?

Do you just expect it to be 1-1 or do you expect it to happen after that and there will be some kind of retroactive [adjustment] going on?

It is going to vary state to state.

Bill, do you want to make a comment on what we have seen so far and --?

Sure.

There are a couple of different ways that it could be done and not all states will be the same.

In some cases it could be built into our rate starting January 1 and it would be included there.

For the expense side of that we expect it will be -- we will estimate it beginning January 1 and we will have an expense each month for this.

The revenue that we would have to offset that could be coming through a rate amendment that we get currently, it could come through a rate amendment that just says we will get a one-time payment, maybe that would be in September.

But it could -- as long as we have the rate amendment we would be able to recognize the associated revenue with that at the same time we are recording the expense.

Some of this will be dependent on getting these rate amendments with each of the states.

So it will just vary as to when the cash flow -- we won't pay the money until the third quarter or a little later even, September to October range of next year.

But we do expect the revenues from the states to come in either pro rata as part of a monthly premium or as a onetime payment.

We also continue to work in Washington for a legislative alternative there.

So there is a lot of various approaches being taken at this time.

Okay.

And would those amendments -- or the rate increases, would they be publicly available in terms of state making an announcement so we would know which states have decided to make these amendments and which haven't and when?

Or do you (multiple speakers)?

I don't know the answer to that question yet as to whether those will be public or how those will be publicized.

But we are having discussions with each of our states at this point in time in terms of the mechanics of how to achieve this.

And each state has a different approach on how they are looking at responding to this.

And we will work this out over the next couple of quarters I think.

Okay.

And I think one of your peers had mentioned that they saw about -- they had indicated that about 25% of their states had thus far agreed to kind of pass through the rate.

Is that -- do you have any number there in terms of what percentage of your premiums for instance or what percentage of states have given you that level of confidence?

I think it would be a little premature to talk about it at this point.

Let's see where we are on December 13.

Okay.

And just last question on this.

Can you tell us what you would estimate the grossed up number you need to get to be made whole on this industry tax?

What number should we be looking for for you guys?

Generally speaking I think some of the rates that we have seen is our tax would be roughly 1.4% of the premiums.

So if you gross that up for federal and state taxes, and that is different state-by-state, you are probably in the 2.2% range as you need to get paid to get a 1.4% after-tax number.

And so, those are the kinds of the numbers we're working with right now in our discussions with the states.

Okay, great.

And then one other question on duals.

Can you give us an update on what you are thinking there for 2014 and what -- where you are in kind of your major states in terms of negotiations for rates on the dual side?

Jesse, do you want to comment on it?

Sure.

Justin, Jesse Hunter.

So very much a work in progress in both of our markets where we have been awarded the dual demo contracts in Ohio and Illinois.

So there is a dual track, at least a dual track with respect to both the rates and the contract term.

So we are continuing to work down on both paths.

And there are some challenges that we continue to work through in the rate setting process.

So we are working with the states and CMS respectively to work through those issues.

And we will talk more about the implications of that as it gets into our 2014 guidance in December.

Anything that you could share with us in terms of what the major two or three kind of hurdles are to getting these rates done given they seem to be dragging out in terms of negotiations?

Sure.

I think at a high level -- I can't give too many particulars here, but at a high level on the Medicaid side it's the same process that we would work through, particularly if you have a population that is moving from an unmanaged setting into a managed setting.

So what are the variables with respect to things like managed-care savings, what are the assumptions and where that is coming from and making sure that we understand both the actuarial and then our kind of relevant experience, how those translate into what we believe to be rate adequacy.

And on the Medicare side, a lot of this comes down to the relative acuity of the dual population versus a traditional Medicare Advantage population.

And so, that is what we are working through as a consistent theme.

Great, thanks for all the color.

Chris Rigg, Susquehanna International Group.

I want to come back to the new MLR guidance for this year.

Can you -- was there something obvious coming online in the second half now that you didn't expect back in July when you put out the old guidance?

Or is there something on the medical cost side more directly in Florida or some other state that is pushing up the low end of the target for this year?

I don't know that we see any changes there.

Bill, do you want to --?

I think the basic issue that you have there is we have sort of -- looking at the whole year at this point in time we have tightened the ranges for where we are on an overall basis.

And so, what we are providing now is what we think is where we are going to come in for the whole year.

And it is -- instead of taking 100 basis points I think we're down to 50 basis points in terms of range.

And so that is something that when you look at our year-to-date numbers is something closer.

We are at 88.9 year to date for nine months and so where we are really reflects the fact that you've got three quarters of the year already behind you.

Okay.

And then just with regard to Florida and Georgia specifically, can you give us some sense for what you are expecting in the fourth quarter, at least from an earnings contribution from those two catch-up or retroactive premium adjustments?

Those discussions are in process right now.

I mean I think we are looking at an overall modest amount, nothing that I think that will be overly significant for us in terms of the consolidated numbers.

We have commented that we see it at 2% on the year.

So --.

For overall.

Yes, overall.

Composite.

So therefore -- you can't see where it's going to have a big dramatic impact, but it is not -- we are in discussions with it and it's not something we talk about publicly until it is resolved.

Okay.

And then just clarifying a question on the compensation spending.

Is that $0.20 pretty stable quarter to quarter or does it vary from period to period?

It is pretty stable as a proportion of revenues.

Okay, great.

Thanks a lot.

Kevin Fischbeck, Bank of America-Merrill Lynch.

Okay, great, just wanted to see if you had -- I know it is early, but do you have any comments at all about how the enrollment process is going on the public exchanges?

I think we have seen nothing that different than what you are hearing about.

Rone, you are closest to it.

Well, I think as Bill mentioned, it is premature to draw any conclusions about the enrollment volumes that we are seeing.

We are in nine states for 2014, seven of those are on the Federal facilitated marketplaces and we are certainly being affected by the same issues that are pretty well-publicized about challenges with consumers being able to get access and get through the shopping experience with respect to the federal exchanges.

We are also on two state-based exchanges, Washington and Massachusetts.

And it is pretty well-publicized that Massachusetts is having better experience and we are certainly seeing that reflected as well.

So not clear when things are going to -- the fact that the Washington exchange is working well I think gives some room to think that the problems are not intractable that we are seeing in some of the other areas.

But again, it is premature to really draw any conclusions at this point.

Okay, that's helpful.

I guess you mentioned that there is not a lot of precedence for something like this, so it is hard to tell.

I mean my assumption would be that enrollment would be back-end loaded towards the deadline in December.

But is there a point in time where you look at it and say that if things are still not working at some point in the future you start to get worried or more worried about adverse selection or how do we think about the delays and what a good time for you would be for things to be up and running again?

Well, I think that we, as the lead up to October 1 and some of the expectations about a bumpy October became more widespread we certainly adjusted our expectations that October was going to be more of a slow ramp as opposed to a big bang in terms of enrollment.

I think at this point in the context of the six month open enrollment period there is still lots of time to be able to get back to whatever level of expected national enrollment or statewide enrollment that people were expecting.

As we get into November it becomes a little bit more concerning because we are bumping up against the December 15 deadline to get coverage effective January 1. But even then there is still -- it is unclear how much of the enrollment that might have originally been expected in the fourth quarter can still get shifted into the first quarter of next year.

But November becomes a somewhat critical month in terms of looking to see that things are working better than they are right now.

There is no reason to believe that it is going to affect the selection side of it, the acuity one way or the other.

Someone that is high acuity will have the same difficulty as someone with lower acuity getting through the system.

Yes, I guess I just fear that someone who has high acuity is going to keep trying whereas someone else might get dissatisfied and move on.

It is hard to speculate on that.

Yes, okay, so just shifting topics.

It was helpful to get the business update.

And I just wanted to drill down into the targeted pipeline that you mentioned of $130 billion.

That is all new business; that doesn't include just the contract that you kind of lifted off as kind of coming online over the next year, is that correct?

Right.

Yes, yes it is.

Jesse?

Do want to comment, Jesse?

Well is there any way to break it out more color between like just Medicaid -- core Medicaid business, duals, Centurion, any other buckets that you think about as to kind of what makes up that $130 billion?

Yes, so the little bit of color we can provide right now, Kevin, is that that is the same orientation that we have talked about recently in terms of the -- there is the macro pipeline across Medicaid kind of broadly defined, Medicare, duals, exchange, etc.

And then this is the subset of that that we are viewing as kind of a targeted Centene pipeline which would cut across all the things that you shared.

And I think we would be in a position, as we have in the past, to give a little more color on that in December as we talk about how we look at 2014 and forward.

Okay.

And then maybe just last question.

I think you mentioned a couple times that you saw trend moderating slightly.

But did you -- I didn't hear it if you did, but any color on what exactly was kind of driving the moderation?

Is it any particular bucket of cost trend, inpatient, outpatient, drugs?

Mary, would you like to comment on that?

Sure, if you look at ER, for example, we are seeing slight downward trends in the TANF ER utilization, both for our same-store and also for our new plans year over year, but also Q3 to Q2.

And inpatient is another good example.

With TANF, for example, we're seeing some slight increased seasonality, mainly due to some increased deliveries but very moderate, and for inpatient days if you look Q3 to Q2.

But we see decrease in trends year over year for all the plans.

Okay, great, thanks.

Scott Fidel, Deutsche Bank.

Just first question just to follow up on the exchanges.

Just curious on whether you have seen any enrollment data come in yet from the federal exchanges?

Rone?

Yes, we've seen enrollment data come in for pretty much all the federal states that we are participating in.

Okay.

Are you seeing any of the issues in terms of data integrity with the 804 files, or are those looking pretty clean so far?

Yes, I think like a lot of other issuers, we have done a level of outreach to people that we have gotten enrollment files for, and pretty much confirmed that the 834 files we are getting reflect the members they intended to enroll, the plan that they expected to select, whether or not they are eligible for APTCs, so the rates are accurate.

We are not seeing kind of random problems with respect to the quality of the data that we are getting.

There is two or three specific issues that we're kind of seeing on a systematic basis that we have raised with the exchange authorities, and are working through those with them.

So we are not seeing -- and with those, we can accommodate those at this point through fairly easy workaround.

So those are being worked on we know to fix.

So we are not seeing enormous problems right now with the actual quality of the data that we are getting through the federal exchanges.

Okay, thanks, that is helpful.

I had a follow-up question just on the visibility into the 20% revenue growth that you have now.

Is that still excluding Florida?

It sounds like you said you weren't ready to opine on that just yet, so just wanted to make sure that that excludes the expanded Florida contracts?

(Inaudible).

I think that the 20% number includes Florida Medicaid expansion; we've got a wide range right now included in there on the Medicaid side of that.

Okay and then just a question on the specialty earnings.

Looked like those were down pretty meaningfully year over year.

You had nice margin improvement on the Medicaid side, but just interested on what was driving down the specialty earnings year over year.

Bill?

There are really two components.

The primary component there is that we have performance-based compensation included in those numbers this year and there was none last year.

And we have got some additional shifts in margin, particularly in the pharmacy area, between our health plans and the specialty companies.

Okay, what does that mean, Bill, in terms of shift in margin from the specialty plans into the health plans (multiple speakers)?

Generally -- we have lower margins this year than last year that we have on the pharmacy side.

Those costs are pushed through to benefit the health plans.

But it eliminates in consolidation but when you are looking at it on a segment basis it is a slight shift in the margin dollars.

Okay and then just one last question.

Just on the new business, MLR, that was up around 580 bps sequentially.

Is that just the start of the Florida LTC business in the quarter or was there something else going on?

With respect to the new business?

Yes, the MLR that was up around 580 bps.

Yes, the primary thing in new business right now is Kansas.

And then we have got a little bit of the Mississippi expansion which occurred on December 1. The Florida long-term care new rollout is very small so far through September 30.

It doesn't weight in there very much.

Okay, so the Kansas MLR that -- you have seen that rise throughout the course of the year then?

Yes, I think Kansas is operating in the upper 90s and that is where -- we are 96.5 for the overall new business HBR.

Okay, got it.

Thank you.

Ralph Giacobbe, Credit Suisse.

Obviously a lot of new business sort of coming on next year.

And you did talk about sort of the business expansion cost potentially even being more than what it was this year.

I guess given sort of the commentary around the change in the mix of the business as well can you maybe remind us or walk us through how you think about the margin ramp of that new business?

I think that the information that we provided since I think December of last year where we split out the new and the existing, you can see as we sort of absorbed that large revenue growth in 2012, and you've seen the impact on that as we have been able to -- as it has rolled over from new into existing we have been able to get that to more normal margins.

So we are looking at a 12-month period we are able to take that business on and get into the normal range.

And as you can tell by the existing HBR numbers that we provide, those numbers have continued to be in the 88% range, I think 87%-88% range in a lot of cases which reflect our ability to keep it with what we would consider to be normal margins overall.

And so, I think our absorption period tends to be from six to 12 months to be able to take new business on dealing with things like the continuity of care provisions, a little initial margin build up in the new -- the start-up of operations and things like that.

We have always -- historically we have always said new business we book at a higher MLR in the 90s.

And the type of business it is and how virgin the territory is impacts how fast it comes down.

So splitting out kind of the new store same-store, new business same business is just to give you more color and ability to look at it versus saying that it has a blended new business margin in it of 90%, 95%.

So the overall approach hasn't changed, just a little more transparency on what we are doing.

Okay, all right, that is helpful.

And then I guess just back to the Centurion business.

Can you give us a sense at all of how we should think about the margins there?

Any different than the base business?

And if at all we should think of sort of this just in terms of a total sort of revenue like the PMPM.

Is it the same as we should think as you expand into more states or are there nuances by state within these programs?

Jason?

Sure, so when we talk about kind of the revenue per inmate or per offender it can vary fairly significantly depending upon the market that we are going into, what the underlying costs could be for care provided outside the walls to what services are included, whether pharmacy is carved into that particular opportunity or not.

So there could be fairly significant differences.

But we have given some revenue and some inmate population numbers for the markets that we are moving into or are already in.

So you can kind of back into a per-inmate per-day type of a rate and it can, again, vary significantly depending upon the market.

But generally speaking, I think the margins in the correctional business we think are as good or better than what we see in the Medicaid business.

That's right.

Okay, all right, that is helpful.

And then last one if I could just on Ohio, you had noted obviously in the past that it is slightly behind expectations.

Any update there on sort of the ramp of additional lives under that contract, when you would expect sort of some of that to pick up?

I think I said in the prepared comments that we continue to work with the state and we see it continue to ramp up through 2014.

So to get more specific at this point before the December meeting with investors would probably be -- we're probably better to just wait and have that kind of insight -- that additional insight.

Fair enough.

Thank you.

Dave Windley, Jefferies.

I wanted to come back to Chris' question on MLR.

If I understand correctly, you said that trend was a little lower than you expected.

It looks like MLR in the third quarter was a little better certainly than we expected.

I guess I am trying to understand again why the guidance is being squeezed at the high end of the range.

Is that a function of some revenue that is now in guidance that wasn't in the guidance prior?

Could you elaborate please?

Sure.

I think I would say that the primary issue is just math.

When you look at -- you have got three quarters of the year already in at 88.9%.

And if you just factor in a fourth quarter similar to what we are running in the third quarter you are going to be between 88.5% and 89% for the whole year.

There's really nothing unusual in there that we are expecting.

We expect the trends to continue as we have in the third quarter.

It is really just the weighting that you have given that we are already at 88.9% through three quarters; the whole year is going to come in in the 88.5% to 89% range.

Okay, and clarifying for your retroactive rate updates for Florida and Georgia, do you include those in your revenue and MLR calculations for guidance or are you waiting to see how those turn out?

We have estimates that have been built in.

Okay.

And final question.

On the SG&A range, could you talk about what items in the fourth quarter could swing you from the low-end to the high-end of your SG&A ratio targets?

I think the primary item is business expansion costs and if -- how much we spend there has a bigger impact.

The rest of it tends to be more as expected and less variability in it.

It is business expansion costs, RFPs, things like that that we get involved with.

(Multiple speakers) As I said, a new RFP could fall.

There is not absolute certainty when a state will drop an RFP to be (multiple speakers) completed, so it is that type of thing.

Right now we are not anticipating a large amount of, for example, business -- of expansion costs in Florida for the Medicaid product because that is going to be primarily 2014.

But that could get ramped up a little earlier in terms of adding some facilities and people and things.

So it could impact the fourth quarter.

But, as I say, right now we think that is primarily going to be 2014.

Okay, thanks.

And if I could just slide in one more.

On Kentucky, can you quantify what the drag -- kind of the total year-to-date drag for Kentucky has been and therefore kind of the tailwind that we could see from that for 2014?

I don't know if we have got the year-to-date numbers for Kentucky.

It has not been significant because we accrued for the premium deficiency reserve in 2012.

And so, the amounts that we have expensed in 2013 tend to be just some of the litigation or legal costs and some of the operating facility costs that we have.

Some of those costs were not accruable in advance and you can't accrue shutdown costs for facilities and things like that until you are actually out of there.

So I think we said early on we would expect to have I think it was $3 million or $4 million of costs that we would incur after we left there.

And I think those numbers -- $0.03 or so a quarter would continue into 2014 for litigation and other things like that for a while.

Okay, thank you.

Brian Wright, Monness, Crespi & Hardt.

Could you give us an update on the Texas rate situation as far as -- I thought there was just the normal year update for September/October.

Did you discuss that?

Yes, I think we said there was a 4.2% increase including some risk adjustment that was put in there.

Okay.

And then -- that was September 1?

Yes.

Yes.

Okay.

And then what -- how should we think about the Florida long-term care MLR at least initially?

Is that kind of the normal 90s or more mid-90s initially?

I think the initial rates for the Florida long-term care we think are going to be in the upper 90s.

It's higher acuity.

And it is going to take some time to get that into, as I say, a lower 90s ultimately.

Okay, and that's in the guidance for that year and that may have an impact as well, right?

That is in our guidance for 2013, yes.

And we don't expect that to have a significant variability at this point given our insight into where that is.

Just if you could remind me what was the utilization reduction assumptions that went into the Florida LTC bid pricing?

We usually don't get into that level of detail in terms of what our bid amounts are on terms of things like managed-care savings.

Okay.

And then lastly, since you do have exchange kind of files data to talk about for the public exchanges, can you give us what percentage of the enrollment that you have seen so far is subsidized?

Rone?

Yes, actually I don't have the answer to that question.

We are starting to look at our actual enrollment information now and trying to analyze it looking at things like that.

So I don't have an answer for you.

Okay, all right.

Thank you.

Carl McDonald, Citigroup.

With the new business that you're adding next year it looks like the new business revenue as a percent of total will be somewhere in the 20% to 25% range for next year.

Is that a reasonable estimate based on what you know today?

I think we said that we could see a 20% increase in our revenue at this point in time.

We will have more specifics, Carl, when we get into the December 13 call.

Yes, I think, Carl, that the percentage of new and existing, we'll have that estimate in December.

I do think it will be higher than the 14% you are seeing right now for the third quarter, yes.

Okay.

And as you look at those contracts that are coming on, anything that stands out in terms of why the initial loss ratio would be different on that new business relative to what we have seen in the past?

So you just gave the example of Florida long-term care being high 90s, but that is probably not long-term care, probably not a huge piece of that 20% growth.

So just anything that stands out that would be vastly different than what we have seen in the past?

I don't know of anything, Bill, that we would call out on that.

It's --.

Not at this point.

Not at this point.

We might be able to provide some more color on that in December at the investor day.

And there are some RFPs still coming in 2014 as well.

So I mean it is a -- there are some variables that are not yet known.

Okay.

And then last question I had is just the fourth-quarter assumption around the flu.

Our assumption built into the guidance is we would have what we would consider to be a normal flu season.

Mary, do you want to --?

Last year was abnormal.

Mary?

Right.

We are experiencing what we would consider a very normal flu season, low levels of flu testing and prescriptions.

But we all know flu can be unpredictable.

So we continue to closely monitor that data.

Okay, thank you.

And, ladies and gentlemen, that will conclude our question-and-answer session.

I would like to turn the conference call back over to Michael Neidorff for his closing remarks.

Well, we thank you for tuning in, so to speak, and look forward to seeing you all on December 13 for our investor day.

Take care.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.