Centene Corp (CNC) 2014 Q1 法說會逐字稿

Good morning and welcome to the Centene Corporation first-quarter 2014 financial results conference call.

All participants will be in a listen-only mode.

(Operator Instructions).

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Ed Kroll, Senior Vice President, Investor Relations.

Please go ahead.

Thank you, operator, and good morning everyone.

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

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

The call should last approximately 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 access code for the playback is 10041412.

Any remarks that Centene may make about future expectation, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in Centene's most recently filed Form 10-Q dated today, April 22, 2014 and other public SEC filings.

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

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

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 first-quarter 2014 earnings call.

In the course of today's call we will discuss our strong first-quarter results, market and product updates, and bring you up to date on how we are dealing with issues associated with the ACA and hepatitis C in the normal course of our business.

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

We recorded first-quarter diluted earnings per share of $0.57 or $0.79 when excluding the $0.06 of USMM transaction costs and $0.16 of net cost for the ACA health insurer fee.

We expect to recoup the $0.16 during the course of this year.

First-quarter membership increased 13% year-over-year to 2.9 million covered lives.

Premium and service revenues grew 38% year-over-year to $3.4 billion.

The faster premium growth relative to membership growth was driven by the continued growth in higher acuity than the (inaudible).

Our average premium per member per month increased 17% year-over-year to $355.

The HBR improved 90 basis points year-over-year to 89.3%.

This reflects a lower level of flu costs compared to the first quarter of 2013 as well as reduced utilization associated with the severe weather.

We continue to see underlying 2014 medical cost trends as consistent with our expectations, similar to 2013.

Now onto market and product updates.

First, we will discuss recent Medicaid activity.

Florida; we completed the rollout of the long-term care program during Q1.

The phase-in of this program was consensually orchestrated by the state resulting in a smooth transition of our expanded membership.

Centene is now the largest long-term care in the state of Florida.

We entered the quarter with 29,700 long-term care lives.

Separately we continue to expect the MMA program to begin phasing in by region during the second quarter of 2014.

We anticipate an equally smooth transition for this [bracket].

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

Both contracts are performing in line with our expectations.

Membership at March 31 was 118,100 lives.

This represents a 22% sequential increase.

We continue to see future growth opportunities in that space.

New Hampshire; we launched our health plan in December of 2013.

Thus far the performance is consistent with expectations.

Membership at quarter end was 37,100 lives.

Massachusetts; in January we began operating under Massachusetts or MassHealth CarePlus program in all five regions.

Membership at March 31 was [32,400] which excludes our Centurion and exchange membership in this state.

Moving to dual eligibles.

We continue to view dual eligibles as a significant growth opportunity.

We have successfully completed readiness reviews in Illinois and Ohio and expect a ramp up of members during the remainder of 2014.

South Carolina and Michigan are expected to go live in late 2014 or early 2015.

Next some comments on Centurion.

We successfully launched our third state correctional contract in January in Minnesota.

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

At March 31, we covered 41,000 inmates.

Shifting gears to the M&A front.

We closed on our 68% investment in US Medical Management in early January.

This allows Centene to move from influencing healthcare costs to managing them.

USMM is a critical tool in serving the complex needs and costs of Centene's high acuity populations.

Next I will discuss our proposed investment in Ribera Salud.

We recently signed a definitive agreement to purchase a noncontrolling interest in Ribera Salud as a Spanish health management group located in Valencia.

Ribera Salud is highly regarded for its ACO-like public-private partnership healthcare model, known as the Alzira Model.

This transaction is a good strategic fit as it closely aligns with our core competencies including systems and medical management for Spain's government-sponsored healthcare programs.

Diversification has always been a key element of Centene's growth strategy.

This transaction represents an opportunistic entry into Europe.

Our initial investment for the 50% interest is less than $20 million.

This excludes letters of credit and will be issued at closing.

We clearly have the bandwidth to deal with this opportunity.

It will not impede our ability to continue to pursue the ample growth opportunities in the US.

The management team of Ribera Salud is extremely capable and our equity partner, Banco Sabadell, is a financially strong and well respected institution.

We expect this transaction to close in the second quarter.

I will now comment on the ACA.

First, the ACA health insurer.

As of March 31, Centene has received signed agreements from 13 of our applicable states which provide for the reimbursement of the ACA health insurer fee on a grossed up basis.

This represents 60% of the total.

Ongoing discussions with our four remaining states are positive and we continue to believe that the fee will be covered in a similar manner.

CMS has been supportive in working with states on this matter.

We remain confident that we will receive 100% gross of reimbursement for the ACA health insurer fee in 2014.

This is fully reflected in our guidance.

Bill will go into further detail on this topic.

Next, health insurance marketplace.

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

In January, we began operating in a subset of counties in nine states.

We have approximately 39,700 enrolled and paid exchange members at March 31.

We continue to expect marketplace enrollment to be in the vicinity of 70,000 lives by the end of the second quarter.

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

The average age is 43 years.

Members are predominantly lower income; over 80% are eligible for premium subsidies.

It is still too early to comment on the acuity levels of our marketplace membership.

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

Now Medicaid expansion.

We ended the quarter with approximately 100,000 expansion lives in four states which was above our 65,000 expectation.

As we have previously noted, the majority of our states are not participating in Medicaid expansion in 2014.

Longer term we view this as a growth opportunity as more states adopt expansion.

Now I will comment on the new hepatitis C drugs.

We are pleased that new curative therapies have been approved for the treatment of hepatitis C. We will manage the utilization of these drugs in a responsible way on behalf of our state customers.

The high cost of these drugs has raised investor concerns about our potential adverse effect on our HBR.

Let's look at factors that determine when drugs are appropriate as well as the benefits of our specialty pharma capabilities which is part of our integrated strategy.

Acaria has experienced that we have leverage to develop guidelines for patient compliance.

Some states, including Texas, do not yet have new drugs on their preferred drug list.

It is anticipated that when the new drugs are added we will be compensated for the additional cost.

Additionally, Centene has limited risk in our correctional business through contractual protection.

The all oral medications are FDA approved for 16% of the total hepatitis C population represented by genotypes 2 and 3. They are also recommended in cases where progressive cirrhosis and advanced liver disease (inaudible) as suggested by the World Health Organization.

We have implemented medical management practices to ensure compliance with appropriate and recognized guidelines.

The cost impact to Centene in the first quarter of 2014 is $7.3 million.

This compares to $4.7 million in the first quarter of 2013.

An incremental $2.6 million is on a higher membership base.

As with all cost categories, our guidance includes an updated estimate of the incremental cost of the new hepatitis C drugs.

Our experience to date has been consistent with our estimates.

We are working with our states on an ongoing basis to ensure the cost of new therapies is properly reflected in our reimbursement.

It is important to note these new therapies are curative, thus it is possible that longer-term savings will be realized from reducing other medical costs associated with hepatitis C. It is still too early to quantify these possible savings.

A quick comment on rates.

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

This is exclusive of any appropriate reimbursement for the ACA health insurer fee and hepatitis C which are being negotiated separately.

In conclusion, our solid first-quarter results have 2014 off to a strong start.

When evaluating our progress on a year-over-year basis, one can really see the impact of our growth and diversification strategies.

Centene became the health plan with the largest long-term care membership in Florida.

In addition, we won nine out 11 regions in Florida's MMA program.

We added two important specialty companies, Acaria and US Medical Management.

We enter two new states, California and New Hampshire.

We now manage medical costs in correctional facilities in three states Tennessee, Massachusetts and Minnesota.

Centene began operating in health insurance marketplaces in nine states and we have multiple dual eligible contracts.

We remain confident in our strategic approach and look forward to the remainder of 2014 and beyond.

I will now turn the call over to Bill.

Thank you, Michael, and good morning.

As a recap of our first-quarter results release this morning, we reported significant increases in both revenues and earnings.

Premium and service revenues increased 38% over last year's first quarter and diluted earnings per share was $0.57, $0.79 if you add back $0.06 in US Medical Management transaction costs and $0.16 impact from the ACA and health insurer fee for the first quarter which we expect to recoup later in the year.

At a more detailed level, our premium and service revenues were $3.4 billion this quarter compared to $2.4 billion in the first quarter last year.

The 38% increase between years is a result of new operations for California, New Hampshire, Centurion and health insurer marketplace, expansions in Florida and Ohio, and the addition of AcariaHealth and US Medical Management.

Service revenue increased by $248 million year-over-year to $281 million.

This primarily reflects the addition of the AcariaHealth business acquired on April 1, 2013.

The consolidated health benefits ratio for 2014 was 89.3% compared to 90.2% in the first quarter of 2013 and 88.1% in the fourth quarter of 2013.

Compared to last year's first quarter, the first quarter this year benefited from lower flu costs and lower utilization due to the effect of inclement weather in many of our markets.

In addition, the effect of the ACA parity payments increased our HBR by 20 basis points this quarter due to recording of approximately $68 million of revenue and medical expense for amounts received from the states.

Sequentially our HBR rose by 120 basis points primarily due to the impact of recording a higher HBR in the initial periods of operations for California and New Hampshire, the Medicaid expansion membership in four states, and the Florida long-term care business.

For the first quarter, approximately 20% of our revenues were from new business compared to 37% in last year's first quarter.

The HBR for new business was 93.1% compared to 88.3% for existing business.

For last year's first quarter, the HBR for new business was 93.7% and 88.2% for existing business.

Our general and administrative expense ratio was 8.8% this year compared to 8.4% in last year's first quarter and 88.9% in the fourth quarter of 2013.

Business expansion costs in the first quarter were approximately $0.13 a share this year including the $0.06 of US Medical Management transaction costs compared to $0.09 last year.

The additional business expansion costs had the impact of raising our G&A ratio in the first quarter by approximately 20 basis points compared to the first quarter of 2013.

In the first quarter of this year, we recorded approximately $30 million of revenue related to the reimbursement of the ACA health insurer fee.

We received signed agreements from 13 of 17 applicable states covering the reimbursements on a gross debt basis for income taxes and we recorded revenue representing approximately 60% of the total expected reimbursement amount.

The 60% is slightly higher than we disclosed in our Form 8-K earlier this month as a result of additional clarification received from certain states regarding the amount of premium revenue defined as long-term care revenue.

Long-term care revenue is excluded from the calculation of the health insurer fee.

Of the remaining amount of revenue to be recognized, the Texas operations represent approximately 38% of the 40%.

As we previously indicated, we believe that we will receive reimbursement for the full year from our ongoing state customers for the ACA health insurer fee on a grossed up basis.

Importantly during the first quarter, CMS has been providing assistance to the states in structuring appropriate reimbursement arrangements.

Moving on, investment income increased from $4.3 million last year to $4.7 million this year reflecting higher investment balances.

Interest expense increased from $6.6 million to $7 million between years.

The increase in interest expense is due to higher balances on our revolving credit line during the first quarter.

Our effective income tax rate was 50.5% excluding the effects of noncontrolling interest.

Without the impact of the ACA health insurer fee, our tax rate would have been 40.9% compared to 39.4% in the first quarter of 2013 and our diluted earnings per share for the first quarter this year was $0.57 compared to $0.41 last year.

Diluted shares outstanding were 59.4 million shares for the first quarter compared to 57.1 million shares for the fourth quarter of 2013.

The increase is primarily due to the 2.2 million shares issued for the US Medical Management investment in January.

At March 31, we had cash investments and restricted deposits of $2.2 billion including $49 million held by unregulated entities.

Our risk-based capital continues to be in excess of 350% of the authorized control level excluding any temporary statutory in fact related to the ACA health insurer fee during the year.

Our total debt was $817 million at March 31 this year including $295 million of borrowings under our revolving credit agreement.

Our debt to capital ratio excluding our $72 million nonrecourse mortgage note was 34.4% compared to 32.4% at December 31.

Medical claims liability totaled $1.3 billion at quarter end and represented 42.6 days in claims payable compared to 42.4 days at December 31.

Cash flow from operations was $252 million for the first quarter which is almost 8 times net earnings for the quarter.

We continue to expect cash flow from operations to be in the 1.5 to 2 times net earnings range for all of 2014.

In early January, we closed on our investment of a 68% interest in US Medical Management.

US Medical Management's operations are included in the consolidated financial statements since January 6. The cost of the investment was $215 million which was financed through the issuance of 2.2 million shares of Centene stock and $82 million of cash.

Our 2014 guidance numbers have been updated to reflect our first-quarter results.

We expect premium and service revenues $14.2 billion to $14.8 billion; diluted earnings per share, $3.60 to $3.90; consolidated health benefits ratio, 88.7% to 89.2%; general and administrative expense ratio, 8.5% to 9%; effective income tax rate 50% to 51%; and diluted shares outstanding, 59.7 million to 60.2 million shares.

We have increased our revenue guidance by $400 million as a result of additional revenue from dual eligible membership, Medicaid expansion membership, and AcariaHealth.

Our EPS guidance has increased by $0.10 reflecting our favorable first-quarter performance.

Our guidance numbers are GAAP numbers and include the $0.06 of US Medical Management transaction costs.

Retroactive to January 1, we expect to be reimbursed on a grossed up basis for the impact of the ACA health insurer fee for all of our ongoing states.

We have also included an updated amount for hepatitis C related costs for the remainder of the year in the 2014 guidance.

Lastly, our business expansion costs for 2014 are estimated to be $0.55 to $0.60 including the US Medical Management transaction cost.

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

(Operator Instructions).

Josh Raskin, Barclays.

Thanks.

Good morning.

First, clarification on the hepatitis C costs.

So what do you do in a state like Texas where it is theoretically not on the formulary and you are not getting paid for it at this point?

When the state isn't growing their formulary, it has got to cover the expense, Josh.

In discussions with states know that and at the same time we are having discussions that when they do decide to [exclude it], if they have their own guidelines for using something, they are paying the cost.

So if a Centene member has hepatitis C and is prescribed Sovaldi and incurs $84,000 in cost and then you receive the claim, what happens there?

One, it is just not paid, it is a denied benefit.

It is not a covered benefit in the state of Texas.

The state of Texas knows it is not on the formulary and we are obligated to follow state guidelines.

Okay, that is fair.

Then the doctor has to figure it out from there, is that the idea?

Yes, they work it out and I am sure the state is working through it.

We will follow the state guidelines and then we will manage it consistent with appropriate guidelines as we have done everywhere else.

Okay, okay.

I think we also have to keep in mind that if you think about the number of requests a [pharma gives] you, you take the 16% of the total population that is all hepatitis and [they are qualified exclusive] (inaudible) and then you take those that are never where they need it, the numbers may not be quite as large as it might seem in our population.

Okay, okay.

Second question, state of Washington obviously the growth was way above what we were looking for.

I know it is an expansion state and I know you guys have done well there historically.

But I am just curious, is there anything specific to Washington just from a sequential membership perspective?

I think we are doing our normal process and Rone, would you like to add something?

I think Washington is one state where the impact of Medicaid expansion has been very significant but also it is I would say broadly if you look at our membership statistics, we can't see broadly the impact of the Woodwork effect that has been talked about but I do think that in Washington there is some clear signs that the Woodwork effect has had an impact there as well.

Then the third piece of it is that there has been some meaningful enrollment in the exchange product in Washington also.

So all three of those have contributed to the sequential increase in membership in Washington.

Okay, so just sustainable growth there.

And then just a last question I guess as you take a step back, your net margin was just under 1% maybe 1.25% if you exclude the impact of the fee.

As we think about longer-term getting into that 1.5% to 2% or maybe even 2% to 2.5% range on the net margin basis, how should we think about the timing of that?

I understand when you are growing the top line at 30% plus it is going to be difficult to see that.

But is 2015 a possibility or do we think this is 2016 and beyond once the growth normalizes?

I think we will see more normalization this year.

But, Bill, you may want to comment on that.

Yes, I think the first quarter is usually a little tighter quarter on the margins and I think as the year goes on, we will see continued expansion of the margins.

Because we have a lot of new business in areas like long-term care and we are recording at higher levels of HBR in the initial period of operation so as the year progresses, I think that we will put some of that behind us.

It was about 2% pretax this quarter and we are looking for to move it to the 3% level and that is still our goal to continue to improve margin as Bill said, Q1 tends to be an unusual quarter.

Okay.

Thanks, guys.

Peter Costa, Wells Fargo.

A couple of questions.

First on the ACA fee, you had talked about that being $150 million and less than that this quarter run rate.

So do you expect that to continue to grow through the year?

First question.

So the health insurer fee is what we have said is we recorded approximately $30 million of revenue related to the reimbursement for the health insurer fee and we also expensed about $30 million.

Right now what we said is we've -- originally I think I had said we expected the year to be around $135 million of total costs for 2014 and I think based on some of the refinement of the splitting out the long-term care revenue in a couple of our markets, that number has come down to a little below $130 million for the year.

So again, we continue to feel that we are required to expense the fee on a quarterly basis and record the revenue when we have the signed agreements and we expect this is a timing issue within the year when this will take care of itself.

And the service revenues looked considerably higher than I expected them to be.

Some of that is USMM but what else is driving that?

No, I said that was primarily AcariaHealth that was driving that.

So it is primarily AcariaHealth in that number?

Okay.

Correct.

Year-over-year.

Just on the Sovaldi costs, when you said that that would be in line with your expectations but Texas you are not paying any scripts there so it is like 40% of your revenues where you are not paying for those scripts.

So were you saying in line overall or are you saying in line even with that being excluded?

I think we are forecasting what we expect we will see from Texas and all of our states throughout the course of the year.

And in the case of Texas for example, we are in discussions now on the coverage of it and the reimbursement of it.

So all the things that we know today to be factors in it, we have put it in our revised guidance.

Okay, thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, great.

I just wanted to go back to one of the prior questions there about the service revenue.

You said Acaria is a year-over-year increase but sequentially it was up pretty dramatically.

And I think that the US Medical was only supposed to do about $240 million annually so that doesn't seem to explain the sequential increase.

No, Acaria of course is one of the largest providers of the hepatitis C drug and other specialty pharmas and so we are seeing some of the benefit of that but it is a mix of specialty pharma.

You may recall that when we entered that business as a strategic entry, we saw with specialty pharma would be moving to 40% of the pharmacy spend and growing from there.

So it is really all a case of just anticipating that and seeing it come true across a mix including the hepatitis C drugs.

Okay.

And then I guess when you mentioned the revenue increase you mentioned the services revenue.

You mentioned duals.

I forget there was one more, was it Medicaid expansion, is that the third reason?

Yes.

The increase in our guidance on revenue was due to all of those factors.

And I think you mentioned duals first.

Is that from order of magnitude the biggest driver?

I think that is probably true.

I think what we said remember when we started the year in our early discussions in December, we didn't have a lot in there for duals and as we have got farther into 2014, those start dates have crystallized a little better and so we have been adding that revenue in particularly in the second half of the year.

And long-term care, we have talked about in Florida the expansion.

There is a lot of positive -- appropriately positive results.

We have more Medicaid expansion memberships than we originally anticipated, a few things like that that have driven the increase in the revenue guidance for the year.

Okay and the next question.

The MLR -- I guess versus our model anyway, it was definitely better and you mentioned that you got a benefit from weather disruption, flu being down year-over-year but the guidance for MLR didn't change for the year.

Are you forecasting either that costs go up or that weather pushes volume into Q2?

It sounded like you thought you might start to see some improvement on some of the new business as the year goes on so it doesn't feel like that is going to be the pressure.

I think there is improvement in the stuff that is already on but in Florida, we have a pretty significant expansion coming in in the Medicaid business and so again, we will probably have additional reserves and an initial period of operation for that as one of the drivers in the next couple of quarters.

So Q1 wasn't just big enough to impact the annual guidance?

Right.

(multiple speakers) offset?

No, and I think also, the new revenue we are talking about putting on, by the increase in our revenue guidance, on the duals we are pretty conservative in what the HBR is going to be on that in the initial period also.

Kevin, we have used the words abundance of conservatism.

We want to be reasonably conservative as you look at some of these new businesses.

Okay, great.

Thank you.

Chris Rigg, Susquehanna.

Thanks.

Just to clarify on the hepatitis C again.

So if the drug is not on the formulary or approved drug list, one would assume if it gets on the list then you would be remunerated for that.

So is there essentially very little risk here or am I thinking about that incorrectly?

No, I think what we have said is that we expect that if Texas includes it, the discussions we are in, we expect that there will be some incremental compensation to cover it and that is based on discussions we are having.

And in other states as it starts to grow, we are watching it, we are talking to them so we are also taking a very responsible approach to it because as we also alluded to, there are some savings we think that can occur because the hepatitis c patient does accrue medical costs in patient and others throughout the course of the year.

So we are working very carefully with the medical management people, the health economics to over the total effect and we are talking to states about it in a very responsible way and we are really taking advantage of the data warehouse and information we have real-time to show them the overall impact and so we expect it to be compensated appropriate.

Historically it always has.

Understood.

And then on the new ACA expansion membership, the 100,000 or so, is there anything to highlight on the utilization front?

I guess people have been concerned there would be some pent-up demand from these types of new members.

Anything that you could talk about there or is it pretty much relatively in line with what you see traditionally?

I think there are two factors.

One, we said that some of the acuity it is kind of hard with the limited amount of time to say absolutely.

But this population is 80% is subsidized population and so we have to look at it because I am sorry -- I'm confusing you.

Yes, the Medicaid expansion population is (multiple speakers) still early but those rates were generally separately calculated and so -- and usually higher than the normal rates that we receive.

So there is nothing that we have seen at this point in time on Medicaid expansion membership, the 100,000 members, to say that those -- the HBR there would be out of line at this point.

Sorry, I was mixing it with the exchange numbers.

Thank you, Bill.

Understood.

Thanks a lot.

Chris Carter, Credit Suisse.

Good morning.

Thanks for taking the question.

I guess just the first one, can you just give us some color, update on the progress in Texas and your discussions there on getting reimbursed for the industry fee?

We have had the ongoing discussions with them and they are engaged, the actuary is engaged with our actuaries.

Everybody is looking at it.

We have stated historically that one of the things they are looking at is a reimbursement of what that tax is once it is known at the end of their fiscal year which is September 30, or September 1 when the new year starts, August 31.

And so we are working with them on that alternative and we have no reason to believe that it will be anything but approved.

If you think about it, when you have the number of states that have already done it because it is logical, appropriate and necessary to maintain actuarily sound rates, it would be pretty difficult for any one state at this point to say our state can do it and still be actuarially sound.

So we are working with them in a very responsible way.

Texas has always, as we have talked about historically, always worked with us based on the kind of data we have had and we see no reason to think it would be different this time.

Okay, thank you.

And then just -- I know we talked about the service revenue a few times but is the $280 million number in the quarter, is that a good run rate for the rest of the year?

I think that that is a good run rate for the year at this point in time.

I think it includes both the acquisition of Acaria and US Medical Management in that line item now and a few other things.

But I think if anything it probably will increase over the rest of the year.

Okay, thank you very much.

Thank you.

A.J. Rice, UBS.

Thanks.

Hi everybody.

Maybe a couple of quick things here.

On the public exchange commentary, so you have 39,700 which you think you could be at 70,000 members by the end of the second quarter.

I guess is that 39,700 not as of March 31 and why would you have that incremental growth like that?

Second, as you start to think about 2015 on the public exchanges, any early read?

I know you don't have that long to think about your bids but do you think you will be more active on the exchanges as a result of what you are seeing this year and so forth?

The comment on the exchange membership growth, the 39,700 as of March 31, again that is paid membership just to clarify on it.

But basically to be effectuated by that date, you had to select a plan by February 15 so the way the deadlines work.

We along with a number of others I think you saw a fairly significant surge of enrollment ahead of the March 15 date and then that continued up to the April 1 and then there has been some kind of people that have been in line that have continued to enroll after that April 1 date as well.

So basically the view on the second quarter reflects that significant surge of enrollment that we have seen since the February 15 date which is the cutoff date to have effectuated membership for the March 31 number.

And we have seen that already with respect to our April 1 membership and we expect to see that with the May 1 numbers and we think that we will be reporting something in that vicinity when it comes time for the second-quarter earnings call that we have.

In terms of 2015, we are looking to continue to be in the states and the service areas that we are in today and we are looking at what I would characterize as a modest level of expansion in some of the states that we are in today.

And we may or may not expand the number of states that we are in but if we do, it is going to be very modest in terms of what we look to expand them at this point.

Okay.

All right.

Thanks a lot.

Sarah James, Wedbush.

Thank you.

I appreciate all the detail on Texas especially because it is your largest market.

But I wanted to take a more holistic view so could you tell us what percentage of your book is in states where Sovaldi is not currently on the PDL?

Good morning, Sarah.

We have right now Texas and Kansas.

However, most states have placed us on the PDLs.

There are others that are in the process through state P&T committees that are reviewing these agents for their ultimate positioning.

So for the states that are on the PDL, have you had any conversations with them where there is an indication that you will get reimbursed retroactively for the states where it currently is on the PDL?

I think those conversations are ongoing in all of our states where obviously we are not the only ones impacted by this and when you have high-cost items, there is always going to be discussions on how to include that in the rates for actuarial soundness purposes or whether it is going to be carved out and covered separately by the states.

So each state looks at their own program to figure out how to handle that and those discussions are ongoing and I think everybody recognizes that this is a little different situation in terms of the magnitude of the cost and so I think it will be worked out.

I think over the long run, it will be included in rates.

How it goes through 2014 is still to be determined on some of these but as we indicated, Michael's comments gave me the amount of the hepatitis C drug costs for Q1 this year and last year and I think you've got to remember that we had hepatitis C costs in the past too so it is incremental impact that has to be considered.

Right.

And we have the right for prior authorization working with the states and you can see now how such like states of California, Ohio, Indiana now are putting in initiation of therapy for only for advanced liver disease.

And we continue to have very active discussions with the state on the development of those PA policies.

It is very important to get it right because this is not the last time we are going to be looking at hepatitis C and other drugs where (inaudible) may apply.

So we work very hard establishing the database with the state that you use in a responsible way and it really will smooth the way for future negotiations as well.

So we are taking a very holistic -- we are taking it not only a holistic, we are taking a very long-term look there.

And just to clarify, did you say that California was only going to pay for advanced liver disease or is that where the hurdle was?

Yes, actually if you start looking through the prior authorizations many states now are following the New World Health Organization guidelines that really calls for the initiation of treatment only members with advanced liver disease such as cirrhosis end stage liver disease.

And then last question here is if you could just update us on California, some of the new memberships coming on line if there has been any Woodwork affect just any update on that market would be great.

I think in California it is going well.

We are in two areas of the state in Imperial County in the South and 17 counties I think in the North.

We have gotten just good membership growth since we have come in there.

It has been a good state for us.

Nothing I think of any consequence that -- nothing out of line with our expectations.

And Imperial has been very strong.

Great.

Thank you.

Andy Schenker, Morgan Stanley.

Good morning.

You raised expansion cost estimates back up again by $0.05 there.

Maybe you could just walk us through the kind of quarterly progression on the $0.55 to $0.60 and also how we should think about maybe some of the leverage in the system as duals and others enter the markets and how that is going to maybe be an offsetting pressure on SG&A as the year progresses.

Thanks.

I think right now the business expansion costs tend to go up a little bit in the second quarter as we add Florida in and then lesser in the second half.

But still because we are adding duals in other places, they will continue to be there.

I think the nickel increase that we added is primarily due to the additional revenue that we have added coming on.

We expect the duals to have an impact in the second half and so we have added some expansion costs, start-up costs related to that.

Okay.

Then is there any offsetting benefits from the leverage of the extra revenue running through as the year progresses that we should be contemplating in the ratio?

I think over the year, I think we will continue to have a lower G&A ratio as we get some of these start-up costs behind us and once the revenue starts, it obviously helps us quite a bit.

So I think we have seen quite a bit of leverage on our G&A ratio over the last couple of years based on our revenue growth so we expect that to continue although obviously the larger it gets, a little harder it is to make those dramatic increases.

But we continue to see that benefit coming forward in 2014.

Okay, thanks.

Switching gears here to the HBR, so you included the exchanges in your (inaudible) HBR there of 86.9.

Is there any way you can maybe break out the exchange impact in there?

Is it still your assumption throughout the year that is going to be lower than the historical Medicaid ratio?

Yes, I think that is true.

Right now we don't have a lot of experience to really zero in on what the run rate is going to be for that as we are adding a lot of membership in the months of March, April and May, as Rone went over.

So we are still probably in the mid-80s in terms of our estimate for the exchange HBR.

Okay, great.

And then just lastly, Specialty Services HBR, is that 87.7% a good run rate for that business similar with the increased revenue there?

I think some of that differential comes from adding in the additional service lines from the correctional business.

Okay, but that is a good run rate going forward?

It may be a little lower for the whole year but it is close.

Okay, great.

Thank you.

Justin Lake, JPMorgan.

This is Mike Newshel in for Justin.

My first question, I just wanted to clarify on Sovaldi for your guidance.

Are there any states where the drug is on the formulary you are currently covering it that you are assuming you are going to get some retroactive rate adjustments or a carve-out?

In our numbers and guidance numbers, we have not presumed any retroactive adjustment at this point in time.

As we indicated, the incremental cost in the first quarter of that was $2.5 million on a $3 billion plus of revenue in the first quarter.

So it wasn't particularly significant.

Now that can grow as additional members are added to this drug but I think as we have talked about, the discussions with the state are to be able to include that in the rates in some fashion going forward.

Okay, thanks.

My next question is just on the MLR seasonality.

So the full-year range is below the first quarter and you talked about all the duals business coming on.

What is the duals MLR relative to the combined business that you are assuming?

In the duals I think we are in the high 90s right now in terms of our estimates for the initial periods of operations, usually the first six months and so --.

It is in the new business category so we bifurcated new business and now which we've had on the books for a year so it would fall into the new business and that tends to be in the high 90s in some cases.

So it is normalized over the course of the year and by the time we considerate it, it is no longer new.

So the improvement in the consolidated MLR and guidance in the remaining three quarters, is that just seasonality or improvement in the underlying same-store business?

I would say it is primarily seasonality.

It is not unusual for us to have a higher HBR in the first quarter and then lower in particularly the second and the third quarters due to the seasonality.

Thanks.

My last question is on pricing for exchanges for 2015 given the new policy on risk corridor and CMS wanting to hold it budget neutral.

How are you thinking about it in terms of the impact of 3Rs and how you are accounting for that and how they are going to price 2015?

Well, we are certainly going to reflect what the changes are in the reinsurance program, what we think about the scenarios for the risk corridor program in terms of how we price for 2015 and we are in the thick of that kind of right now leading up to the filing dates which are basically pretty much around the end of May.

So we will have to see how all of that plays out in terms of looking at how our rates land for 2015.

It is really too early for me to judge at this point.

And for 2014 for exchanges, are you accruing any benefit from either risk adjustment or risk corridors in exchanges?

I think what we are doing is not accruing anything on risk adjustment because that is still unknown but we are applying the other 2Rs in terms of the reinsurance and the risk corridor to follow those guidelines.

But again, it is very early in Q1 to have any idea on where the overall HBR is going to end up for the year because we are still going to add this membership.

It is important we gain experience from it.

We have experience in the divisional Celtic business where we (inaudible) gaining more experience.

But I remind you, it is under 40,000 lives of a business that has close to 3 million lives in it so it would take a lot to move the needle.

That is it for me.

Thanks.

Scott Fidel, Deutsche Bank.

Just wanted to follow up to clarify the question before on which states don't have hepatitis C Sovaldi on the PDL yet.

I think you mentioned Texas and Kansas that did not have it but there were a few other states that are in process of adding it but that sounds like it wouldn't have been there yet in the first quarter.

So can you just update us on which of those states are in process, didn't have it in the 1Q but are adding it now?

As I said, Texas is probably the one that everybody is focused on.

All the states are looking at this and everybody is in different stages of looking at this.

I think the key thing too is just working with the states on the prior authorization, making sure that it is strong clinical policy and when we are evaluating this drug.

Okay.

So it sounds like the majority of states were actually still in process, right?

That there are only a few states that had finalized?

No, no, no, no, no.

No, we are paying for these.

Texas is the only one where it is not on the PDL where we are not paying claims.

There are other states that are still having them go through.

It is not on the PDL and I think Kansas is a good thing, we are paying claims but it is really the prior authorization piece that we are working with that state on.

Okay, that is what I wanted to clarify.

The second question just on any -- can you give us an update on any states where you still have to have your rate updates for 2014 established?

It looks like in the Q, it mentioned that the composite rates were down around 0.1%.

In 1Q, you are guiding for zero to plus 2%.

So it sounds like you are expecting in some of the remaining states that you might see some rate increases?

We have Texas that comes due at the end of the year.

We have Georgia, I think is July.

We have Florida is September 1. Florida is a big portion of our membership comes due in the second half of the year.

Okay.

Then just had a question just on --

I might also add these are all states that have good actuaries and work with our actuaries so it is not an unknown negotiation to us.

Okay.

Then just had a question just on the specialty earnings relative to the Medicaid earnings, the segment earnings.

I think the Medicaid earnings were up quite substantially year-over-year but the Q showed the specialty earnings were down year-over-year and cited lower margins in the pharmacy business.

Is that a function of the changes in mix as all of the revenues from the specialty drugs ramp up or is that essentially a lower margin business or just talk a little bit about the pharmacy margins year-over-year?

I think it is all of the above.

I think what we have done is we have tightened our margins with some of our internal business and we have added in the AcariaHealth specialty pharmacy business which has a lower margin in general.

It is just the higher volume that we have quite frankly giving us a lower margin.

Okay if I could just sneak one last question in too.

Just on the exchanges, I know that the claims date is still very limited but I've had a couple of the PBMs have put out some releases highlighting some of the initial claims activity they are seeing and seeing much higher specialty drug utilization amongst the public exchange members.

And just interested if that is what you are seeing as well in your exchange business or if you are seeing a different type of pharmacy claims trends?

As Bill mentioned, it is still early to give an overall judgment about what we are seeing in terms of claims on the exchange members but on the pharmacy claims data, we are not seeing anything unduly concerning at this point in time so there is more real time.

We are seeing basically below level of costs for pharmacy than we might have originally anticipated from this membership.

Again a lot of this membership is just coming on.

One thing I will point out, I think that some of the comparisons have been against a commercial population that you have seen.

We did not anticipate that the acuity of this population would be in line with commercial populations.

We priced for something that was higher morbidity than that.

So in some ways what we are seeing is not out of line with what our expectations are and certainly nothing concerning at this point.

Okay.

Thanks for the color.

Matthew Borsch, Goldman Sachs.

Thank you.

Not to beat a dead horse here but just back on Sovaldi for a second, can you quantify how much that benefited your specialty pharma operations in some way and maybe give us a sense to the extent Acaria has visibility on where the drug is being used.

Is it turning out to be more usage on the commercial side of the business as opposed to Medicaid from what you are seeing?

I think I want to be very careful on that.

I understand the question but I think it is up to Acaria and its client companies to talk about that utilization versus us.

I want to be respectful of that because we have a very strong Chinese wall between especially companies in our health plans.

Right.

Okay, got it.

Maybe if I could ask this question -- two questions.

One, can you give us -- I know you have in the past give us an update of how many members you have taking that drug regimen and maybe some have already completed it.

So how many since the beginning of this year?

Just overall, do you expect that hepatitis C will impact -- is it impacting the guidance in any material way for the whole year?

I think as we said in our comments, our anticipated utilization of those drugs has been updated and built into our guidance.

We have taken a look at what we expect, we gave you the numbers on the beginning and we have moved away from the number of patients as it (inaudible) costs because of the shifts in how states are going at it.

And I want to be very careful, we want to be careful because one could easily start to mislead if we are not careful.

And so we want to be careful on that but it is not a material issue.

Maybe last one if I could slip this in.

There was some attrition in the Medicaid enrollment in a couple of states, Louisiana and Texas.

Can you just talk to that?

Particularly in Texas, I think we have seen an overall decline in the market but our market share has stayed the same.

So each state goes through their own enrollment process and sometimes the employment levels both increases in unemployment and decreases in unemployment can have an impact on the overall statewide membership.

And so in Texas at this point in time, we don't see anything unusual because as I said, we have kept our same market share.

And in Louisiana I think it is a question of just going through some open enrollment processes and members have shifted a little bit to some shared risk plans.

Got it.

Okay, thank you.

Ana Gupte, Leerink.

Good morning.

I wanted to follow-up on the Spanish acquisition that you just did.

You said that it doesn't impact your ability to invest elsewhere, and it's $20 million on 50% interest.

Just trying to get a sense for is this purely about diversification?

Is it something around capabilities as well?

And as you go through and you have a framework for how you evaluate various opportunities, how are you thinking about it?

We're only thinking about it that, one, as we said, it has a very strong management, well respected in that marketplace.

It is giving us some early experience in working in an international market, using our capabilities to supplement their capabilities from a system standpoint.

And it is an ACO type product that they have there, a fully integrated system.

So it is really a case of gaining some of that experience.

And as it grows, there may be opportunity to expand it there.

That is going to be really managed at the local level.

And we are in a joint venture with a very valuable partner, a strong partner in the bank, well respected.

So it just was the right opportunity to gain experience in that particular market.

In my own background in prior lives, I was international with Alka-Seltzer, One-A-Day, (inaudible) consumer products, and new Spain to be a strong responsible market.

They have not had the same issues as others with sovereign debt.

It's been more an overbuilding in the construction area.

So it just was the right opportunity, Ana.

So, Mike, is this more about then you are looking to build out a presence in Spain, or is this kind of a one-off thing and you are primarily going to be focused domestically?

No, our focus domestically does not change.

This is a large market.

There is no absence of opportunities which we continue to take advantage of.

If there is opportunities to continue to build out in Spain and start to develop some of that, I think that is important.

I've come to the conclusion that I think it is important if you are going to be a leader in your field to have some kind of global perspective.

And we as a management team have come together in that and said that is essential to really developing a true leadership role in anything you do in the world we are in today.

Rone, anything you want to add?

No, okay.

Okay, thanks.

Then switching gears onto exchanges, my understanding I think from a question that was asked earlier is you are expecting mid-80s MLR.

So that would translate to assuming you are not changing your outlook for the rest of the year on exchange margins, just given where you are guiding on your HBR and you haven't changed that.

Does that now mean that you are looking at this as a, given where you've priced, sort of a low positive single-digit margin opportunity?

It sounded like at your Investor Day and 4Q '13, you were guiding to something more of breakeven to negative, if I was mistaken.

I don't think that has changed.

I think we are just saying that the HBR is in the mid-80s for this population right now and the G&A costs are higher for managing the exchange population and different aspects of it.

So we haven't changed our overall view on the exchange results for the year at this point, and continue to believe it would be breakeven to a small loss.

So the SG&A would be substantially higher than given the mid-80s MLR projection (multiple speakers).

It is much larger than our overall G&A ratio.

Got it.

And then finally on the -- not, again, beating a dead horse.

On Sovaldi, is it about 54 cases or so still?

I think you mentioned a number like that in March, and is it the same?

And in correctional care, is that excluding or including correctional care?

You did say you had some contractual protection on that.

In the correctional care, obviously there is the -- at least there's the feeling that there's a higher propensity for hep C in that environment, but we are protected on that.

We saw that kind of thing and that's according to rates.

Regards to the total numbers, (inaudible) growth, the numbers go up, but our ability to manage this can change and improving.

So I am getting away from the numbers.

What we have given you I think is important, this $2.6 million increase year-over-year on a larger membership base.

So that says it's well within our guidance and it's being well-managed.

Thanks.

That is helpful; it is impressive.

Because when I done the estimate, I came up with something like 300 cases for you, assuming IMS group data was right, just allocating.

With United, it was exactly in line roughly with their 100 million, so you are definitely doing the tighter job of managing the treatment it looks like.

Okay, thank you.

Dave Windley, Jefferies.

Sure, it is [Dave Siblow] filling in.

A couple questions.

First one is I would like to come back to the rates for this year.

How much of this year's premium do you already know for rates?

It was about 40% --.

Well, no, I think we are probably in excess of 70% at this point in time.

I don't if we have that particular calculation at our fingertips, but the second-half rate increases are the ones that are still open.

And obviously, Texas is large for the four months of the year where that's still to be determined.

And Florida.

Florida, the rates -- I think the initial rates are known for the Medicaid expansion, so not as much an issue.

Okay.

On SG&A, you guys are already at your -- basically at your midpoint of your full-year guidance.

And I think the way we think about this is probably expecting that to improve over time as you gain some scale.

I know you flagged out a couple of items that may make it be a little bit higher as you have some new business rollouts.

But is it fair to think about your SG&A guidance actually biased at a lower end of that range?

I think what is important is it is a range.

The new business has cost us money.

But what Bill said earlier I think is critical.

We have seen significant improvement over the last couple years and we've had the revenue growth.

Of course, now when you're pushing forward to between, call it, $14 billion, up from $10 billion, it is harder to leverage.

You continue to leverage it, but you don't realize the same kind of percentage improvement.

So we are going to continue to leverage it where we can, but it kind of -- like one year from year to year we had a 1% plus improvement.

I would not look for that kind of improvement.

It is a range.

It is going to be a function of startup time.

If things start up on schedule -- we know that states do delay these things, that's the history of it -- that's all going to impact it.

Is there anything else you want to add?

Yes, I think what we expect to see is as we gain scale and add revenues that our G&A ratio will continue to come down.

We expect it to come down quarter by quarter throughout 2014.

And we will update every quarter as to where we think our guidance is for the year as we learn more.

Okay, understood.

The last one here was just if you could help us understand what is happening in the new and existing business HBRs.

More specifically as we look sequentially, and I know there is some seasonality there, but the new business HBR improved over 200 basis points as you added revenue.

And then your existing business HBR was actually up 170 basis points.

So I'm just struggling to understand or reconcile what is going on in those two lines as we split those apart?

I think the primary shift is at Kansas, which started January 13, moved into the existing business for the first quarter of this year.

So when you add in the ratios, the HBR for Kansas, that is what the primary change is between the two.

Okay, great.

Thanks.

Michael Baker, Raymond James.

Thanks a lot.

Just on the incremental costs that you saw on the hep C side, does that factor in any potential Acaria benefit?

No.

Acaria is a separate --.

And then on Acaria as we think about the margin profile of that business which you kind of spoke to generally speaking, as we see more hep C flow through that business, should we expect the margin to stay steady or be pressured?

It is going to -- I would say -- Bill, I mean I see this fairly steady at this point.

Yes, I think that that's -- we are not sure there is major changes coming from anything.

Okay, I appreciate it.

Yes, I think what is really important, and I think the differentiator is having Acaria gives us a clear insight and understanding as any of their clients would get, and the impact from these specialty drugs and what is happening, what the appropriate use is, working with the clinical people.

So it is a nice place to be.

Thanks for the update.

Carl McDonald, Citigroup.

Thanks, was wondering if you could quantify the benefit that you saw from weather in the first quarter.

And also give us a sense of how much visibility you have into the underlying claims data for the quarter at this point.

I don't think we can quantify the impact, I mean dollar impact of the weather.

Obviously, there were quite a few markets that were impacted.

In Georgia there was almost a week at one point where they were shut down to a great extent, and so you have lower utilization during those periods.

Some of that will come back later on, but not all of it, so we were net ahead in that regard.

And then I think that the second part was -- oh, the Q1, it is the same as every other quarter.

We have got our methodologies applying for the HBR which have stayed the same.

You can see the amount of development we recorded for the first quarter of last year in our roll forward in the press release, and I would say it is normal.

Clearly, what we have is we have real-time pharmacy data, so we know those numbers.

We have an inventory method for inpatient claims where we keep track of who has been authorized and who has been admitted, an estimate of what the cost of that is going to be.

And then there is more of a lag then in the other categories -- physician specialists, things like that, outpatient.

Okay, thank you.

Thank you.

Tom Carroll, Stifel.

Good morning.

Just one last quick one here.

If you could just tell us the number of Sovaldi claims you received in the quarter and then the total number that you actually paid as clinically appropriate; just to get a sense of what demand may look like as claims mature throughout the rest of the year.

I don't have those numbers at hand, Tom.

And the numbers -- we've really moved to disclosing dollars because the next thing someone says you can get so detailed by state, how many, and it is just cumbersome to try and get into that level of detail.

I'm trying to get a sense of what the demand is like from the Medicaid population earlier on.

Is it a --?

Well, I think we have said that it moves -- some people might say it's almost relatively flat year-over-year, the expense, because of the increased membership.

Now we said it went up $2.6 million.

Now that's a -- I think that's an important number if you went up $2.6 million to $7.3 million, was it?

So I think that says something.

And then you start looking at what the increased membership was, it says it's really relatively flat.

And we just continue to manage it.

What we have emphasized, everybody is worried about Sovaldi.

It is 16% of the total hep C population that we are talking about that is appropriate for genotype 2 and 3.

There are some in genotype 1 that have some very severe cirrhosis where the World Health Organization might say it is appropriate with (inaudible) and a lot of other things.

But my job is not to become a medical expert when it is done and when it is not, but just look at the overall criteria.

We are glad the drug exists for those people that need it.

We see it as a curative thing.

We see it having some real long-term benefits.

We have talked to our states; the states understand the cost.

We are sharing with them the data that we need, not just the cost of the drug but what we think over time as we get the data will be the savings.

Because hep C patients are expensive to begin with.

You get a hospitalization, you get something, it becomes very expensive.

So if you are now curative at three months period of time, that is a nice offset.

There is so much data that out there that we could be misleading if we say it is this number.

The next time it is down, will it definitely be denied more?

No.

It's just every different population applied.

So is it fair to say that you didn't see a huge demand for the drug in the first quarter; that you then whittled down based on your clinical guidelines?

I would say that we saw a reasonable demand.

We saw a demand that was relatively expected to see based on responsible outside guidelines, not just our guidelines, world health organizations, other groups, the FDA, other guidelines that are out there we use.

These are not just internally developed guidelines.

We are using national and internationally recognized guidelines.

That is really what the states expect us to do.

Thank you.

This concludes our question-and-answer session.

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

Well, I think as I said, it has been a strong quarter.

We thank you for your insightful questions that you asked.

I hoped we would answer them.

We look forward to seeing you on June 13 for our next Investor Day, and I'm sure we will have more information and more things to share with you.

Thank you, everyone.

Take care.

The conference has now concluded.

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