Centene Corp (CNC) 2013 Q4 法說會逐字稿

Good morning and welcome to the Centene Corporation fourth-quarter 2013 and year-end financial results conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Ed Kroll.

Please go ahead.

Thank you, operator.

Good morning, everyone.

I'm Ed Kroll, Senior Vice President of Investor Relations for Centene.

Thank you for joining us on our fourth-quarter earnings call.

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

The call is expected to last about 45 minutes and may also be accessed through our website at 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 code for both of those calls is 10039178.

Any remarks that Centene makes 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 October 22, 2013, and other public SEC filings.

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

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

As a reminder, our next Investor Day is Friday, June 13, 2014 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 fourth-quarter and full-year 2013 earnings call.

During the course of today's call we will discuss our solid fourth-quarter and full-year 2013 results, market and product updates, future growth opportunities and a brief update on the ACA, including the insurer fee.

I will begin with highlights of our fourth-quarter financial results.

Fourth-quarter membership increased 12% year-over-year to 2.7 million covered lives.

Premium and service revenues grew 31% year-over-year to $2.9 billion.

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

For example, long-term care membership increased 345% year-over-year.

The HBR improved 260 basis points year-over-year to 88.1%, reflecting rate increases and effective medical cost management.

We are experiencing a normal flu season thus far.

The most recent CDC data suggests the flu season has peaked, which is consistent with Centene's data.

Our Fluvention program continues to stress flu vaccination and urgent treatment as required.

Last year we experienced a more intense and prolonged flu season.

Aside from flu, we see 2014 medical cost trends as consistent with those of 2013.

Now on to market and product updates.

First, we will discuss recent Medicaid activity.

Florida, the long-term care program is proceeding as planned.

At year end 5 of our 10 regions had been phased in.

During the fourth quarter we added 6,200 additional lives due to this expansion.

Separately we were successful in 9 out of 11 regions in the state's new and expanded MMA program.

We expect the state to begin phasing in regions during the second quarter of 2014.

California, in November 2013 we commenced operations in California under two separate contracts.

Both contracts are ramping in line with our expectations.

Membership at December 31 was 97,200.

New Hampshire, we lost our health plan in December of 2013.

Thus far the performance is consistent with expectations.

Membership at December 31 was 33,600.

Massachusetts in January of 2014, we began operating under MassHealth CarePlus program in all five regions.

This is also ramping as expected.

Mississippi, we were recently informed that we will be retaining our contract in this state.

This was assumed in 2014 guidance.

This new procurement includes some expanded service areas.

Next some comments on Centurion.

We are successfully expanding our Centurion business launching three contracts in just six months.

Our last contract commenced in Minnesota during January 2014.

We continue to view Centurion as an attractive growth driver.

Our joint venture with MHM provides a compelling alternative for state governments to address their correctional healthcare needs.

Now on to dual eligibles.

We are participating in demonstration projects in four states thus far.

Centene has won RFPs in Ohio, Illinois and South Carolina.

We recently signed an agreement to purchase a majority stake in Fidelis Secure Care of Michigan.

Fidelis was one of six brands selected by the Michigan Department of Community Health to serve dual eligibles in Macomb and Wayne counties.

These four demonstration projects are expected to commence in 2014.

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

As for future growth opportunities, our targeted pipeline remains extremely robust at $138 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.

Now I will briefly comment on the ACA, including an update on the insurer fee.

First, health insurance marketplaces.

We continue to expect the health insurance marketplace to have a minimal impact on our 2014 financial performance.

In January 2014 we began operating in nine state marketplace.

Enrollment is trending at the low end of our previous guidance which was 70,000 to 140,000 lots.

We had approximately 21,000 enrollees and paid marketplace members effective January 1.

The demographics of our enrollees are generally in line with our pricing expectations.

The average age is 44 years old.

Members are predominantly low income.

Over 80% are eligible for premium subsidies.

It is still too early to comment on the acuity level of our marketplace members.

While we continue to take a measured approach towards our participation in health insurance marketplaces, we believe our early participation will give us valuable experience for longer-term marketplace opportunities.

Next, Medicaid expansion.

The majority of our states are not participating in 2014.

Therefore this will have a relatively minimal impact on our 2014 growth.

However, longer term we view this as a growth opportunity as more states adopt the Medicaid expansion.

Last, the insurance fee.

Ongoing discussions with our state partners continue to reflect our expectation of grossed-up adjustment.

There is general agreement as to the need for the actuarially sound rates.

A majority have committed to fully cover the fees on a grossed-up basis.

We are confident that the remaining states will do so.

Our understanding is that CMS and the Academy of Actuaries are supporting reimbursement of the ACA insurance fee on a grossed-up basis.

The ACA is currently only one part of our overall growth strategy.

Our performance in 2014 is not dependent on a meaningful contribution from ACA components.

However, we remain cautiously optimistic in our outlook for 2015 and beyond.

Bill will go into further detail on this topic.

Next a quick comment on rate.

Our composite rate increase for 2013 was 2.7%.

We continue to expect a composite rate adjustment of 0% to 2% in 2014.

This is exclusive of the insurer fee which is being negotiated separately.

In conclusion, we expect to maintain to positive operating momentum Centene established in 2013 into 2014 and beyond.

Thank you for your interest in Centene.

I will now turn the call over to Bill who will provide further details on our fourth-quarter and full-year financial results.

Bill?

Thank you, Michael, and good morning.

I would like to begin my comments this morning by noting that we are presenting our fourth-quarter and year-end results with the Kentucky operations now classified as a discontinued operation.

Accordingly we are presenting our financial results focusing on continuing operations with severed disclosure of discontinued operations for Kentucky.

At a summary level, both 2013 and the fourth quarter performed well and increased significantly over 2012 results.

Fourth-quarter premium and service revenues were $2.9 billion, a 31% increase year-over-year.

Our premium and service revenues for the full year were over $10.5 billion, a 37% increase over 2012.

For the fourth quarter, our diluted earnings per share from continuing operations was $0.84.

For the full year, earnings per share was $2.87.

And this would be $2.95 if we add back the $0.08 of AcariaHealth transaction costs.

Our actual results are at the high end of our original guidance range given in December 2012 of $2.60 to $2.90 a share.

I will now give a more detailed discussion of our performance.

Our premium and service revenues increased by over $2.8 billion in 2013.

The increase is a result of several items -- the addition of new or expanded operations in the last two years in Texas, Florida, Mississippi, Louisiana, Kansas, Missouri and Washington; the April 1 acquisition of AcariaHealth; the start up of our Centurion joint venture contracts in Tennessee and Massachusetts; and rate increases across our markets between years.

And during the fourth quarter we began health plan operations in California and New Hampshire.

Our health benefits ratio was 88.1% for the fourth quarter, which was a increase of 30 basis points sequentially from the third quarter.

This increase is due to normal seasonality and start up of new operations in California and New Hampshire.

For the full-year our 2013 HBR was 88.6%, compared to 89.6% in 2012.

The 100 basis point decrease between years primarily reflects improvements in Texas and in our individual health insurance business.

With respect to new business information, for the fourth quarter approximately 17% of our revenues came from new business, those in operation for less than 12 months.

And the HBR in the fourth quarter was 86.6% for existing business and 95.4% for our new business.

Last winter we experienced a higher than normal level of flu costs both in the November/December period and the January/February time frame.

For this winter our experience has been in the normal range for a flu season.

While there are certain areas that have experienced higher flu levels at times, overall we have not seen anything out of the ordinary so far this season.

Our general and administrative expense ratio was 8.9% in the fourth quarter of 2013 compared to 8.4% in the fourth quarter of 2012.

The increase between years is primarily due to incurring a normal level of performance-based compensation expense this year.

For the full year our G&A ratio was 8.8% for both 2013 and 2012.

This reflects the AcariaHealth transaction costs and an increased level of performance-based compensation this year offset by the benefits of the additional leverage we have generated through our higher level of revenue and our efforts to control costs.

We incurred business expansion costs of $0.19 in the fourth quarter and $0.57 for all of 2013.

This compares to $0.44 in business expansion costs incurred in 2012.

Our spending in the fourth quarter was slightly lower than anticipated as we adjusted our spending downward for the health insurance marketplace due to the enrollment issues experienced in November and a lower level of membership now expected for 2014.

Investment and other income totaled $5.4 million in Q4, compared to $3.2 million in the fourth quarter last year.

For the year investment and other income was $18.5 million in 2013 and $35.3 million in 2012.

The primary difference between years relates to the $19 million in gains recorded in the third quarter of 2012.

Interest expense was $6.7 million in the fourth quarter compared to $6.1 million last year.

Interest expense for 2013 was $27 million and $20.5 million in 2012.

The increases for both the fourth quarter and full year represent the interest costs for the $175 million in additional senior notes that we issued in November 2012.

Our effective tax rate in the fourth quarter, excluding non-controlling interest, was 41.6% and 40% for the full year.

Diluted earnings per share from continuing operations was $0.84 for the fourth quarter and $2.87 for the year.

This compares with $0.35 for Q4 of 2012 and $1.65 for 2012 in total.

Results from discontinued operations were $0.09 in diluted earnings per share in Q4 and $0.07 of earnings for the full year of 2013.

During the fourth quarter we recorded a favorable development related to the medical reserves that had been previously established for Kentucky.

We have wound down operations in Kentucky since our July 5 exit date and have classified the Kentucky results as discontinued in our income statement and balance sheet.

At December 31 we had cash and investments of $1.9 billion, of which $45 million was 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.

Debt at year end was $669 million and included $150 million of borrowings under our revolver at December 31.

During the fourth quarter we funded approximately $135 million to our insurance subsidiaries for tax benefits utilized on the consolidated return.

Our debt-to-capital ratio at December 31, excluding our non-recourse mortgage note, was 32.4%, compared to 32.7% at last year end.

Our medical claims liability totaled $1.1 billion at year end and represented 42.4 days in claims payable.

Cash flow from operations was $171 million for the fourth quarter of 2013 and $383 million for the full year, which represents 2.3 times net earnings for 2013.

Now I want to update our 2014 guidance numbers and cover the assumptions we are using in their preparation.

First, the guidance numbers have been adjusted to represent continuing operations, consistent with our year-end 2013 financial results presentation.

We have also updated our guidance to include the acquisition of US Medical Management, which closed on January 6, and our estimate of the ACA insurer fee for 2014.

Our 2014 guidance numbers are -- premium and service revenues, $13.18 billion to $14.3 billion; health benefits ratio 88.7% to 89.2%; G&A expense ratio 8.5% to 9%; effective tax rate 50% to 51%; diluted earnings per share, $3.50 to $3.80; and diluted shares outstanding 59.7 million to 60.2 million shares.

The updated guidance numbers reflects several changes.

First we have added revenue, expenses and additional shares related to US Medical Management now that the acquisition has closed.

And this includes approximately $0.06 in transaction costs incurred in the first quarter.

We have also decreased the expected membership for the health insurance marketplace to 70,000, which is the low end of the membership range discussed in December.

And we have now included the ACA insurer fee in our updated guidance numbers.

We continue to believe that we will be reimbursed by our ongoing state customers for substantially all of the ACA insurer fee on a grossed-up basis.

As others have commented, the states are moving forward to include the reimbursement that is part of a contractual arrangement.

Each state has its own process to follow before signing an agreement or contract amendment.

Therefore it may take time to complete this, such that revenue recognition related to the reimbursement of the ACA insurer fee may not occur until later in 2014.

This would have the effect of lowering earnings in the first half of the year and increasing earnings in the second half, but have no impact on our overall 2014 annual guidance.

A substantial majority of our states have committed to reimburse us for the ACA insurer fee.

We are working with all of our states to obtain the appropriate documentation through signed agreements and/or contract amendments.

As Michael indicated, our understanding is that both CMS and the American Academy of Actuaries are supporting the reimbursement of the ACA insurer fee on a grossed-up basis on the basis of actuarial soundness.

Lastly, our business expansion costs for 2014 are estimated to be $0.50 to $0.55, including the $0.06 in USMM transaction costs.

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

(Operator Instructions)

Josh Raskin, Barclays.

Hi.

Thanks guys.

Good morning.

Question on the fee in terms of -- and I think, Bill, you were starting to address this on the revenue recognition.

I'm curious what is your policy as to the timing of that revenue recognition?

Do you need a signed agreement for the state?

What is your anticipation around how many of these states have signed agreements by the end of the first quarter?

I guess I'm trying to look at is it possible we see whatever a breakeven first quart or something like that with a real backend loaded 2014 EPS result?

I think our policy will be generally consistent with what I think you heard others say.

We will need some sort of signed agreement with respect to the way the state's going to reimburse us for the fee.

We are working with each of the states right now with respect to that documentation.

You know, we're in early February right now.

It's a little hard to predict exactly what we're going to have in hand by the time we get to March 31.

At this point in time it would be probably overly optimistic to think we would have it all done by March 31.

But you know I think we are working with all of our states.

We don't really have a number right now as a specific percentage we'll have at the end of the first quarter.

It's moving along very well Josh, I mean -- but the documentation with states takes time.

Each one is a little bit different, their approach to it.

So it's not like you have a boiler plate document you can give them and mark up.

Okay.

That's fair.

Would you say you guys are optimistic you'll have at least half of your revenues by state signed up to reimburse for the fee by the end of the first quarter?

I think at this point we're not ready to present a specific number or range as what we'll have at the end of the first quarter.

We still have almost two months to go and complete these.

We'll give you an update --

And the difficulty is we're working with every state, Josh.

And where you get 2 or 3 of the big ones and you're there.

Right.

You get six of the -- eight of the smaller ones and you're still trying to get to that 50% number.

We see nothing that is a barrier or it were.

Comments have been made that this will not be resolved to our satisfaction.

Okay.

That's fine.

And then the second question, you made the comment that the Medicaid expansion was going to have a minimal impact.

And I understand the majority of your stated that you happen to be in are not expanding, at least not for 2014.

But --

I think its 3 out of 19 or something are expanding.

A small amount.

But we continue to hear about this sort of woodwork effect, and there's states that are talking about potentially even double-digit increases in Medicaid enrollment, even in states that are not expanding.

So I'm just curious, have you gotten any January enrollment rolls and have you seen any pick up in some of your states?

It's been a while since we've seen real organic Medicaid growth, so I'm just curious what you're seeing in your state?

Bill, do you want to make a comment?

Yes.

We have yet to see any real visible significant signs of the woodwork effect in the states that we're operating in.

Certainly in some of the states where there's been large outreach associated with Medicare -- Medicaid expansion we're seeing some signs based on the state's statistics.

But overall it's not something that is emerging yet in terms of the enrollments we've seen early in 2014.

Okay.

And then just a last one.

Hep C costs, I'm just curious, there's some nervousness around specifically the Medicaid population and treatments there.

Have you guys started to see -- was there any sort of backlog of patients or anything like that that's starting to come through in January?

I know you guys have --

I'll ask Mary.

Good morning, Josh.

As we would with any new drugs, we're always focused on rigorous review of the requests, making sure they meet FDA guidelines.

I can tell you since the approval of Sovaldi as well as the Olysio in the beginning of December we've had 22 approved requests.

And we're focusing on those patients, getting them into case management and making sure they have compliance so they have the best outcome.

Okay, so you have 22 total out of your 2.7 million lives?

That have been approved requests, yes.

That's very helpful, thank you.

Ana Gupte, Leerink Partners.

Hi.

Thanks.

Good morning.

I want to follow-up on -- and I know Wellpoint and the contrast between how you are guiding for 2014 relative to other guiding.

I get it that they're blue and diversified and very different from you.

But still I think the differences aren't quite stark, if you will.

So the first one is that they're guiding and the baseline to not getting any gross up on the fee.

And they generally sounded pessimistic about it I'd say on the call where as you and others are sounding very optimistic.

I'm just trying to get a sense to that.

And then secondly on the other end of it and on exchanges they're guiding towards a 3% to 5% tax margin and you're guiding breakeven.

I get it that your positioning may be different, but is that related to your pricing and the number experience that you're guiding to breakeven?

Do you expect that to expand in terms of margins and growth in 2015 and beyond?

Bill, you want to talk about the --

I think it's hard for us to speak about other companies earnings calls and guidance and we do -- have looked at those things.

I think in general the companies that have come before us have had a similar discussions with regard to confidence on the ACA insurer fee being reimbursed.

And on a grossed up basis and that it will take a little bit of time for that to happen and the right documentation has to occur.

So I think as near as we could tell everybody's pretty much on the same page on that.

With respect to exchanges, as we said in December I think we have lowered our membership and we have expected to have a breakeven to a small loss in that book of business.

Doesn't mean we priced it that way, we've just put that into our guidance to reflect potential for higher acuity levels than maybe originally anticipated

If I may just add to it without -- I can't comment on what they're seeing.

I can only comment on certain differences and we've had a very small level of individual participation outside of Medicaid.

They've always had some of the larger carriers, commercial carriers, have had a large individual book.

The law of larger numbers will apply.

I think we're going to do very well with our churn approach bringing in those that we want and the fact that 80% are getting subsidized says this strategy is on track.

And we prefer to be cautious and say it's breakeven and place a lot of expectations as we work through it.

Rone, something you were to add to that?

Yes, we have priced the product and we do believe that it can generate 3% to 5% of the tax margin over time.

We have taken a cautious approach for planning and guidance for 2014.

We've also assumed that we're not going to be able to accrue for any kind of risk adjustment in 2014.

So that also has had an impact on our specific outlook for this year since we think that a risk adjustment accrual is probably going to require waiting for the data to come in and be able to be booked in 2015 for 2014 experience here.

I can be firm enough to say that my involvement, whether it be with CMS, with other levels within the company and the industry, I see nothing that says we're not going to see these rates grossed up.

If I did I would say so.

But all conversations to date tend to show that their rate -- there's a federal law that says they have actuarially sound.

And the federal government, the states all recognize that.

But it's not been an issue in our discussion.

Great, thanks.

So that's very helpful.

Just to follow-up on your risk adjustor comments, do you think that the risk corridors would be trued up for 2014 despite the timing issue on the risk adjusted -- at least on an estimate basis?

I think that what we're saying is that our calculations would assume that the risk quarter is in place for 2014 and the reinsurance aspect is in place for 2014.

Risk adjustment, while it's in place is not going to be reasonably estimable in 2014.

It will be 2015 before we would have any estimate to whether that would have a significant impact to us.

Great, thanks.

That's very helpful.

Sarah James, Wedbush.

Thank you.

Just one quick follow-up on the industry fee.

I know you belabored point --

I'm sorry, can you speak up, Sarah?

We can't hear you.

Yes, sorry.

Can you hear me now?

Yes.

I know you've belabored the point of the industry fee, but I just wanted to make sure I have the right count of anyone that you have gotten a signed agreement for yet.

So can you tell us which states have actually signed the agreement so far?

At this point we have some, but we really haven't gotten into the list out which -- where we are in each state because we still have ongoing discussions with most states.

I think at this point we're just working with all of them.

We have like three or four that we have already signed some agreements but --

I guess I'll add there.

They're at various stages, Sarah.

We have three or four that are signed.

We have some where the language, whether it be a contract amendment or a specific letter of understanding, have been discussed, negotiated and agreed to waiting for signature and counter signatures.

So it's moving from day to day, but it's all moving in the right direction.

There is no one who has said they're wrong.

They've all engage with us on this discussion.

Three, four in the tank so to speak already, and others moving along.

Got it.

And then you've talked about --

And by the way I might add when you get one or two or three or four states recognizing it, that also is very supportive, that the CMS and everybody else has worked with those improving their rates for that.

It's precedent setting.

That's helpful.

Thank you.

And you've talked about USMM savings in two sample cases in the range of 8% to 14% on existing business and that there is a current overlap of about 150,000 members on your high acuity.

Is it feasible to see this level of savings that were pointed out in those examples on your high acuity overlap?

How long does it typically take to ramp up to that level of savings?

Sarah, let me help you.

We had this past Friday all our CEOs and the plans met with USMM.

It's not been quite a month that we closed it.

A lot of pre-planning has gone into it.

Different states had different products, you're going to see different across duals, across long-term care, across SSI, across Hana.

And to try and put a fixed number on it, we have our internal numbers that we're measuring and working against that gave us the ability to give you some accretion.

But to try and take that and apply it to some percentage of our 2.7 million growing membership, I think that would be -- if I did it you should worry that I did it.

Just a little bit more on USMM.

We obviously are estimating savings in 2014 sufficient to cover the additional shares that we issued with respect to the acquisition and the debt costs.

I think that there are -- we gave some accretion numbers early on when we announced the acquisition, and that was excluding transaction costs.

So in our 2014 guidance what we have absorbed in the fact, which is we retained the original 350 to 380 per share, is that we had $0.06 of transaction costs plus the accretion that we think we will get during the course of the year, which effectively absorbs all of the shares that we're issuing.

So we did not adjust our guidance downward as a result of the net of those two things, rather we've absorbed that within our range, $0.30 range in our EPS guidance.

Thank you.

Chris Rigg, Susquehanna International.

Good morning.

Thanks for taking my questions.

Just want to come back to the HBR guidance for the year.

It's not a big increase, but it's about 20 basis points.

I was hoping you could walk us through the change there?

I think the biggest change from what we gave in December to today is that we have a lower membership number for the health insurance marketplace.

And overall the health insurance marketplace has a lower HBR than the average for the Company.

So by having less of that, we have a slight increase in our HBR from that mix change, let's say.

So it's really nothing in terms of an acuity difference or anything that we're seeing.

It's really a folding in of less membership from the health insurance marketplace that causes that.

Okay.

Just one follow-up on Josh's question earlier about the woodwork effect.

Just to be crystal clear here, if that quote-unquote woodwork effect were occurring, you would already have a pretty good idea if you were seeing a bump in the rolls for January?

I think that the thing that I would say on woodwork is the states control the enrollment process.

And so each state has their own way to determine eligibility and when they get assigned to Medicaid and how it works through an auto assignment process.

So that's something we don't necessarily have a lot of visibility in it each state all the time, in terms of what their backlog might be in that regard.

So we may see increases over the course of the next six months, but at this point in time through January and February we've not seen any appreciable change that we would attribute to being so-called woodwork effect.

Okay, great.

Thanks a lot.

Dave Windley, Jefferies.

Follow-up on HBR.

Is it -- in thinking about your buckets of existing and new, is it right to think about the existing being about flat year-over-year or consistent with what you've been seeing, maybe down a little?

And the new moving up into the high 90%s.

Is that how we should think about those buckets moving?

I think that that's generally okay.

Consistent.

I think our existing also is impacted by the acuity level.

So for example we're going to put on a lot of long-term care business in Florida, which has a higher HBR that our average typically.

So you end up now having that rolling into the new buckets.

So that will continue to be in the mid- to upper 90%s.

On the existing, Kansas will roll into existing starting January 1 of 2014.

So we'll have that impact in 2014.

Okay, thanks.

And on G&A you obviously continue to get very nice leverage there.

I'm wondering with all the new business that you have been bringing on and will continue to bring on, are there any step function costs that we should be anticipating?

Be it in care management-type resources or IT investments, data centers, things like that that we should be aware of that might affect the progression of your SG&A overhead levels?

I think some of you have been out and have seen our data center.

It's been really -- the new one we built has been structured that it can triple our size by adding servers.

It's very marginally -- has not been a lot of overhead, it was done the way I think those that saw it said it made a lot of sense.

So we anticipate that.

There is always a little incremental addition of people when you add a new product, you add a long-term care to Florida, or something.

Your basic infrastructure's there, your presidents, your CEOs, your medical management people but you're adding some nurses and case managers.

Our systems are case net and another things that we've added over the years that allow us to you incrementally add people.

We are very supportive of taking on additional business and being able to leverage it through the system.

So I think it's going to be a mix.

Now whether we go on to an entirely new state, as we've shown in the past, there's additional costs associated with that.

But if there is an additional cost that tends to be very transitory until we bring the plant up and get it running.

In the past historically costs have seemed to go up from the G&A standpoint, new plans, where you are opening up a new state, you staff to be ready for a given date and the state delays it.

Overall there is nothing in our pipeline that would say we would have a drastic change in our G&A costs or anything new that we would be bringing online that would have that impact.

It's all incremental and I think we will continue to enjoy the benefits of scale as we continue to grow.

Okay.

Bill, you had expected -- last one for me -- you had expected $0.60 to $0.65 in start up costs in 2013.

Did the number fall out at that level?

And where will that go in 2014?

I think what I said was $0.57 for 2013 is where we ended up.

And one of the reasons we ended up there is because we consciously pulled back on some of our costs for the health insurance marketplace, given the membership issues.

We thought that would -- marketing and other costs might roll out earlier and it didn't.

So we ended up a little lower than what we originally anticipated.

And then I think one of my last comments was that we estimate to be $0.50 to $0.55 for 2014, which includes $0.06 for the transaction costs for USMM.

I think right now we tend to be in the we'd say $0.45 to $0.55 the last several years in terms of business expansion costs.

I expect that to continue over time.

But as we grow that probably gets to be less of a percentage of the total.

Got you.

Thank you.

Kevin Fischbeck, Bank of America.

This is Steve on for Kevin.

I wanted to come back to your guidance, particularly for G&A.

I would have thought that including the industry fee now would've raised G&A by maybe like 90 basis points, instead it's only coming up 20?

I also would've thought that including that would've lowered your MLR rather than raised it.

So I was hoping to understand that a little bit better?

Sure.

That's a good question.

Right now we are expecting to treat the ACA insurer fee similar to the way we're treating premium taxes.

In other words we'll break that out as a separate component, either as part of premium taxes or separate but excluding it.

We tend to talk about premium and service revenues as our revenue number, excluding premium taxes.

We would expect to probably continue to do that and excluding the ACA insurer fee reimbursement from our revenues is our discussion when we talk about our growth.

Similarly the actual expense we would expect to be treated like premium taxes are in our G&A cost.

And our G&A ratio does not include premium taxes.

So therefore when we fold in the ACA insurer fee in our updated guidance numbers there's really -- we're not changing our premium service revenues because it's considered premium tax.

We're not changing our G&A ratio because we're considering that to be outside G&A expenses.

We are changing our tax rate.

That changed from roughly 40% to 50% because of the fact that the fee is nondeductible and you have to factor that in.

But those are the main impacts from the change the guidance from adding in the fee.

Okay, thanks.

That's definitely helpful.

And then just to switch back to the exchanges for a second.

You said your enrollment assumption now is closer to the bottom end of your original range of 70,000.

I was wondering whether you've seen anything in January that makes you confident you'll be able to ramp up from the 21K that you reported?

And then also do you the same look for margins, breakeven to slight loss despite your overall lower level of G&A?

Does your pull back in spending give you confidence that you'll be able to achieve that still?

Yes.

We did see, as the market saw some pick up in the rate of enrollments towards the end of December, and we've continued to see steady rates of enrollment through January.

We think that's going to continue and potentially again have another surge period before the end of the open enrollment period.

So everything is fairly steadily proceeding since the end of December.

And we'll see where we end in the open enrollment period.

We do think that we should be able to get some additional enrollment outside of the open enrollment period given the small number of people in the exchange.

And the number of people that are turning off of Medicaid and other insurance plans, looking for exchange eligibility throughout the rest of 2014 also.

Okay.

Thanks.

Andy Schenker, Morgan Stanley.

Hi, it's Andy Schenker.

So just a couple quick questions.

On the duals, can you update us on how the discussions are going with the states and CMS?

And are there any thoughts you have on timing as these conversations are progressing?

Do you think we're going to hold for the current expected timelines for those states?

Jesse?

So we have obviously state specific discussions and the broader discussions with CMS.

And there continues to be some movement on the timelines.

But we're working with each of the states on an individual basis to see how those things progress.

There has been momentum, I would say, over the last quarter or so, on moving those things forward.

So as we get closer into some of the states, Illinois as an example, we have a lot more visibility on how some of those things are progressing.

Ohio I think would be kind of next in line, if you will.

Some of the other states that are kind of further down the pike, we've talked about South Carolina and then Michigan via our investment in Fidelis.

Those are just earlier stage right now so there's a little less visibility on where we'll end up from a timing standpoint.

Okay.

Then changing gears here, just thinking about acquisition and investment pipeline.

Obviously you guys have been active, Fidelis being the most recent one.

Any changes or thoughts now that we've got the initial rollout of the exchanges and Medicaid ramping up on your acquisition strategy thing?

We still have a aggressive program looking at opportunities within our guidelines on IRR and accretion, et cetera.

And so when the right one is there you'll hear about it.

I can't talk about specifics because you'll just make it very expensive.

Okay thanks.

Justin Lake, JPMorgan.

This is Mike Newshel in for Justin.

A question on hep C. You said the guidance includes it.

I know you're able to give us a dollar estimate in terms of what's included in guidance?

I think that as every year there's going to be new drugs that come out.

And so we have -- we knew this hep C drug was coming out so we have adjusted our estimates accordingly.

But we're not going to get into specifics of how much.

I think that we -- we'd have the costs and our health plans of members utilizing the drug and we have the benefits from AcariaHealth, which is a supplier of the drugs also.

So we have a little bit of offset.

We told you there's 22 cases so far since it's come out.

I think if you try and get any more granular that could be misleading.

Right.

And of those 22 approval requests can you say how many total requests you have in terms of both how they're rejected because they don't meet guidelines or how many still might be pending?

There's a reasonable number, but I don't have that in front of me.

Okay, thank you.

Peter Costa, Wells Fargo.

Good morning.

The G&A was probably lower this quarter than you would've expected given that you delayed some of the spending on the exchanges, probably by at least $0.03 of earnings impact.

Can you tell us where did that -- what's the offset to that, that caused your earnings to be about in line?

Did your -- according to my model your MLR was a little bit higher.

Was there a higher medical expense in the fourth quarter than you otherwise would have anticipated?

And what caused that?

I think that there's a combination of things in the G&A.

We were lower on our spending for the business expansion costs, which includes the rollout for the health insurance marketplace.

But we did have other activities that we were investing in during the quarter which wouldn't qualify as quote business expansion costs.

And so some of that's -- nothing in particular, but I would say our medical costs were in line as we talked about 30 basis points increase I think quarter-over-quarter.

And so I think it's really just other G&A items that we were spending money on.

Okay.

And then can you talk a little bit about if you've seen anything from any of the states regarding eligibility tightening?

Is that creating somewhat of an offset in terms of the membership that your enrolling in Medicaid?

Again the states control that process and each state's a little different and each state uses a different enrollment broker at times.

And they can be in different stages of annual recertification and things that, how long it takes to get re-enrolled.

There really isn't any general comments you can make other than it's a state-by-state case.

It's not unusual for us to see fluctuations in membership in any state as a result of eligibility changes or enrollment, broker activity et cetera.

What we've seen so far we would say is normal.

I was going to say there's nothing in the areas you were questioning, there's nothing that's abnormal about it.

It's a normal course of business.

We have 20 states and there will be variations across them.

That's helpful.

And last question, can you talk about your $138 billion in pipeline out there?

Can you break that down by core Medicaid, dual eligible, exchange membership?

Jesse?

Yes.

We were talking kind of broad strokes over the last year or so at our various investor conferences around the split.

And if you think about kind of the core Medicaid piece represents the -- I would say the majority of the opportunity of that pipeline.

This would be your existing Medicaid -- or products on the Medicaid side within our existing markets.

So if you think about ABD, long-term care, expansion, things along those lines.

And then I'd say the next biggest category would be on the dual eligible opportunities, again focused on our existing markets.

And then further expansion on the marketplace front.

Just a follow-up to the other question too, just in general.

One of the things on the G&A front we did increase in the fourth quarter some of our performance-based compensation amounts.

Because that's based on earnings as earnings did well in the fourth quarter and for all of 2013 there was an increase there too.

Okay, that's helpful.

And regarding the $138 billion, was there any change in terms of the relative pieces of that?

No, I think that $138 billion was the number that we used in our December conference and that's something obviously we continue to monitor.

And I think we'll have a revised view of that when we talk again in June.

Okay, thanks.

Scott Fidel, Deutsche Bank.

Thanks.

First question, just any help you can give us on the breakdown of what you expect in terms of the percentage of earnings between the first half and the second half?

Looks like in 2013 you turned it at around 60% in the back half and given the impact to the industry fee, any thoughts on how it might look in 2014?

I think it's difficult right now to peel out the impact of the ACA insurer fee on the first or second quarter pertaining on the level of progress that was made in the documentation side.

I think that -- excluding that I would expect that our progression of earnings would be similar to some prior years and that the -- seasonally you're lowering the first quarter and then the third and fourth quarter picks up.

So I think that's still the case.

I think you almost have to look at with and without the ACA insurer fee for purposes of making those estimates now.

Okay.

Then I had a second question.

Just interested if you're seeing any impact on the expected timing of the rollout of the Florida MMA due to the contract dispute and some of the litigation around the Prestige Provider Service Network?

Doesn't sound like that from the prepared comments where you talked about it going live in 2Q, but just interested if there's any effect from that?

Scott, I think probably the best thing to say is that we're working very closely with the state to make sure that we do our best to keep things on track from a timing perspective.

Okay.

Then just --

Everybody is interested to see that from their budgetary and ours as well.

Okay.

And then just the last question, just interested in your thoughts on what type of impact you're maybe seeing in the first quarter just around some of this extreme weather that we're seeing in a number of areas in the country?

I would assume for you guys that might be most relevant to some of the Midwest markets and whether you think that's going to be more of a positive or negative on utilization?

Mary.

I would say this is a normal -- what you would normally expect in January, normal flu season, normal for RSV, really nothing unusual.

I think that utilization numbers are still to be determined from all the weather and the weather that gets -- some things may be deferred but then picked up later.

Somebody misses their appointment on January 31, they may pick it up on February 5. But the point is there'll be some swings but over the quarter we've seen nothing really meaningful.

Okay thank you.

Matthew Borsch, Goldman Sachs.

Good morning.

Maybe back on the industry fee one more time.

I just want to understand, are you talking to the states about one-time recruitment mechanisms or is it something they're going to blend into the rate?

And I guess I was interested in that question and I assume that they're not making or aren't planning on making a rate change that would apply to everyone in the market because then they would be over-compensating those not-for-profit plans, assuming there are some in the market that are exempt.

You've hit the issue.

Some states, depending on the number of not-for-profits they have, have said well we'll wait to the end of the fiscal year and we will just reimburse you, gross up and reimburse you what is owed.

And then once that's signed, Bill and Jeff and the team can start accruing as appropriate.

That's the issue.

There's no boiler plate.

Each state is taking a little different approach in how they look at it and go about it.

Some are grossing up their fees, some are building it into their fees.

I see nothing one time.

This is an ongoing issue that will have to -- because as the business grows, the fee will grow and it has to be compensated.

A few states, in particular some that don't have any not-for-profits in managed care, are building into the rates.

But that's probably the small minority.

I think most of them are probably going to do it through a reconciliation and true-up process in the September time frame for purposes of actually making the payment.

Again, the documentation we would -- trying to get right now which would allow us to accrue for that over the course of the year.

Got it.

And just on a different topic one more which is you mentioned the hep C new drug patient load being very, very small.

What reason would you have -- given the efficacy of the drug, and I'm obviously not an expert on it but, I would've expected a much bigger number there.

I'm just curious if you can elaborate on that?

It's a very good question.

And right now genotype 2 and 3, which is a much smaller percentage of the -- genotype 1 is the most common, which is about 80% of cases.

Really only for genotype 2 and 3 is there an all-oral, interferon-free treatment.

So that's really probably why you're seeing it.

Okay.

You got me with that one.

Thank you.

(laughter)

That could be a whole phone call.

Don't feel bad, Matthew, she gets us on lots of those things too.

Brian Wright, Monness, Crespi & Hardt.

Last quarter you had showed the DCPs at 42.9 days, but in the -- it looks like there may be a recast this quarter because now you're showing the September ending quarter at 40.2 days.

So if you could just help us out with that?

Sure the reclassification of Kentucky as discontinued results in the medical claims liability account to be adjusted to carve out the Kentucky piece.

So we recalculate the DCP and in the page in the press release I think we show five quarters worth of the DCP from continuing operations like almost every other number in there.

That's really the cause of the change, is just without Kentucky.

Okay.

And then just one follow-up.

Was there any benefit in the quarter from retro rates in Georgia or Florida?

Well I think that in both cases we received the rate amendments in the quarter.

So certainly that was anticipated for the whole year and --

So it was in the prior guidance.

It's always been in the guidance for the whole year and it came in consistent with that.

Is that around $6 million or something like that or more?

I don't think we quantify usually the amount of a rate increase for a particular state so --

Okay.

It's included in 2.7% I think, which is a composite rate increase that Michael gave earlier for 2013.

Okay, thank you.

Steve Halper, FBR.

Hi.

Just two questions.

The enrollment for the exchange products, we're coming in lower than your expectations.

What does this mean in terms of how you evaluate that line of business as you consider participation in 2015?

Because those decisions need to be made in the first half of this year.

And then what were your expectation for 2015 in terms of a -- adding a state or two from what you see right now?

I guess I'd comment that what we're looking at primarily is the strategy and we've articulated from the beginning that our focus would be on what we call the churn.

Those that gain and lose Medicaid membership and go in and out.

And that appears to be the case, Steve.

So we'll continue to monitor that and if it's working in that case, in that basis, we'll continue down the line.

We'll look at the overall financial results, all the things that one looks at this type of thing.

Anything you need to add, Rone?

I think also we've consistently said that 2014 we viewed as our major goal to get a smart launch off into the exchanges and that we viewed this as a longer term opportunity over a series of years.

So I think that what we're seeing in 2014 to date doesn't impact our long-term view about the potential that this could be a meaningful opportunity for us.

And we'll look at -- we are looking at additional geographic expansion and additional service areas in our existing states and in additional new states.

I'm sure we will do some service area expansion and the level will depend on how we assess our experience and our success in feeling like we can come out with a competitive product and network in those additional service areas.

Just the second question in terms of the visibility into potentially adding other states away from the -- not relating to the enrollment, the exchange business?

Right.

We obviously had somehow intelligence tells us that some new RFP's being contemplated by states.

We'll monitor those.

When they come out we'll make determination as we always do, the size, the scale, the opportunity for it and make that decision once we get their fat book and information.

So it's kind of hard to sit here and get too specific, Steve.

Great.

Thanks.

Thank you.

Carl McDonald, Citi.

In states where you do compete with not-for-profits, do have a preference for how the state treats the industry fee?

Just thinking about from a competitive perspective, maybe if we use like Texas an example.

If you do $4 billion in Texas revenue and fully implemented the industry fee is maybe something around 4% of premium, that's $150 million, $160 million a year.

So over a 10-year budget window you're talking about $1.5 billion using a for-profit versus not-for-profit.

So maybe you could just walk through, maybe there's a matching impact from the federal government or just sort of how states are thinking about that?

What the states are looking at is that they will -- Texas or most of them say, we're not going to give you a rate adjustment across the board that the not-for-profits benefit from.

What we will do is we'll look at a actual reimbursement.

They'll sit down a little bit earlier, they'll look and see what our costs were, and at the end of their fiscal year they'll write the check and they'll work with CMS from their side on what federal reimbursement they get.

Right.

I'm just thinking about if you're a state and you're looking at a 10-year budget window and you say if I choose a not-for-profit the cost is $1 billion or $1.5 billion lower than choosing a for-profit, how will they think about that?

Over time I don't think that's a criteria that they're looking at.

They're looking at the overall capabilities of planning the outcomes and what we're delivering them in savings.

There are some -- there was one governor I remember made a comment that these big not-for-profits are costing me money.

It's the for-profits that are saving me the money.

Appreciate it.

Thank you.

At this time we show no further questions.

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We thank you for taking time for this call.

We look forward to the first-quarter results.

Have a good day.

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