Centene Corp (CNC) 2014 Q2 法說會逐字稿

Good day and welcome to the Centene Corporation second-quarter 2014 earnings call.

(Operator Instructions)

Please note, this event is being recorded.

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

Mr. Kroll, the floor is yours, sir.

Thank you, Operator, and good morning, everyone.

I'm Ed Kroll, Head of Investor Relations for Centene Corporation.

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

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

The call is expected to last about 45 minutes and may also be accessed through our website at the Investor Relations section of www.centene.com.

A replay will be available shortly after this call's completion also at our website, or by dialing 877-344-7529 in the United States and Canada, or in other countries by dialing 412-317-0088.

The access code for both of those playbacks is 10048780.

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

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

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

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

As a reminder, our next Investor Day is Friday, December 12 in New York City.

Please mark your calendars for that.

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

Michael.

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's second-quarter 2014 earnings call.

During the course of today's call, we will discuss our strong second-quarter results and provide updates on Centene's markets and products, the ACA and the impact of new hepatitis C therapies.

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

We reported second-quarter diluted earnings per share of $0.79 or $0.95 when excluding the $0.16 impact of the ACA health insurance fee.

We continue to expect to recoup the entire impact of the fee during the course of this year.

Second-quarter membership increased 23% year-over-year to 3.2 million covered lives.

Premium and service revenue grew 49% year-over-year to $3.7 billion.

The HBR improved 40 basis points sequentially to 88.9%.

This reflects normal seasonality and our ongoing medical cost management efforts.

Bill will provide further HBR detail including the new and existing business mix.

We continue to see stable medical cost trends, consistent with our expectations.

Now onto market and product updates.

First, we will discuss recent Medicaid activity.

Florida.

In May, we began phasing in regions in Florida's MMA program.

As of June 30, five of our nine regions had gone live.

In addition, we commenced operations as a sole provider to the child welfare specialty plan, Florida's new foster care program.

As at June 30, 6 of the 11 regions had gone live.

We expect to have 20,000 foster care beneficiaries when all regions are fully operational.

The implementation of these two contracts is proceeding according to plan.

They are the primary drivers of our 36% sequential membership growth in the state.

Both programs will continue to be phased in by region through August of 2014.

Illinois.

In July, our IlliniCare subsidiary began a five-year contract with the Cook County Health and Hospital systems to serve approximately 100,000 new members under the county care program.

Under the contract, we will provide administrative services and specialty services including care coordination, behavioral health, pharmacy and vision.

The size of the program is expected to grow as county care enters additional state Medicaid programs.

Mississippi.

Also in July we began operating under a new state-wide managed care contract to continue serving members in the MississippiCAN program.

Mississippi is moving to expand the program by an additional 300,000 beneficiaries.

The roll-out of the expansion is expected to commence at the end of 2014 and continue through the second quarter of 2015.

Moving into dual eligibles.

We have successfully completed the launch of our dual eligible demonstration projects in Illinois and Ohio.

At June 30, we had nearly 10,000 dual eligible members in these states.

Membership will continue to increase throughout the remainder of 2014 in both Illinois and Ohio.

We continue to expect Michigan, South Carolina and Texas to go live with their dual demonstration projects during the first half of 2015.

Shifting gears to the M&A front.

On July 1, we completed a transaction that has significantly expanded our membership in Louisiana.

Under this agreement, Community Health Solutions, CHS, has signed its shared savings contract covering approximately 200,000 beneficiaries to Centene's Louisiana subsidiary.

The Louisiana Department of Health and Hospitals, DHH, recently announced planned changes to the Bayou Health program.

This includes a consolidation of its two models into one risk-bearing MCO [model].

Consistent with the state's proposed changes, we are working with DHH to transition these members from the non-risk program to our full-risk health plan in early 2015.

The total purchase price is estimated to be between $110 million and $140 million, contingent upon retained membership.

Separately, Centene and CHS have entered into a business development partnership to pursue other Medicaid managed care opportunities in new markets.

Next, I will discuss our investment in Ribera Salud.

Last week we completed the purchase of a non controlling interest in Ribera Salud, a Spanish health management group, highly regarded for its ACO-like public/private partnership healthcare model.

Our recent or initial investment for a 50% interest was approximately $16 million.

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

The transaction represents our initial entry into the government-sponsored healthcare market in Europe at a modest investment.

Now a brief update on the ACA.

First, the health insurer fee.

As of today, Centene has received signed agreements from 15 of our 17 applicable states which provide for the reimbursement of the ACA health insurance fee on a grossed-up basis.

This represents approximately 60% of the total amount.

We fully expect to receive 100% of the gross-up reimbursement from our two remaining states in 2014.

This is reflected in our guidance.

Next, health insurance marketplaces.

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

At June 30, we had 75,700 enrolled and paid exchange lives.

This is slightly ahead of our previous projection of 70,000 lives.

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

The demographics of our enrollees continued to be in line with our pricing.

Members are predominantly lower income and over 90% are eligible for premium subsidies.

Now Medicaid expansion.

We ended the quarter with approximately 155,000 expansion lives in four states.

Longer term, we continue to view this as a growth opportunity as more states adopt expansions.

As to the woodwork effect, we saw only a modest impact in the second quarter.

There are multiple factors that impact Centene's membership [group], including program changes, eligibility determinations, service area expansions and Medicaid expansion, among others.

Given the number of variables, it is difficult to attribute membership growth directly to the woodwork effect.

Our updated 2014 guidance reflects Centene's continued expectation for a limited impact from the so-called woodwork effect.

Now hepatitis C therapies.

We continue to manage the utilization of our new hepatitis C drugs in a responsible way on behalf of our state customers.

Our experience to date has been consistent with our estimates.

The net cost impact to Centene in the second quarter of 2014 is $13.7 million.

This compares to $4.2 million in the second quarter of 2013 and $7.3 million in the first quarter of 2014.

Please note the incremental spend is on a higher membership base.

The higher cost of new therapies is clearly recognized by all of our state partners.

We continue to have productive discussions to ensure that the new therapies are properly managed and fully reflected in our reimbursement.

A quick comment on rates.

We expect the 2014 composite rate adjustment to be relatively flat.

This is reflected in our updated guidance.

In conclusion, we are pleased with our operating and financial performance in the first half of the year.

We reported second-quarter revenue growth of 49% and membership growth of 23%.

The insurer fee is being dealt with in a proper manner by our states.

Our states have also acknowledged the need to provide for adequate reimbursement for the new hepatitis C therapies.

And our pipeline of future growth opportunities remains robust.

We expect to maintain this positive momentum in the second half of 2014 and are raising our financial guidance accordingly.

Thank you for your interest in Centene and I will now turn the call over to Bill.

Thank you, Michael, and good morning.

For the second quarter, our premium and service revenues increased 49% between years to over $3.7 billion.

Our diluted earnings per share increased to $0.79 or $0.95 excluding the impact associated with the health insurer fee in the quarter, this compares to $0.71 in 2013.

The 49% increase in premium and service revenues is a result of the additions of new operations in California, New Hampshire, Centurion, the health insurance marketplace and US Medical Management.

Expansions between years in Florida, Ohio and Washington and growth in the AcariaHealth business.

Our service revenues component increased by over $300 million between years to $410 million, primarily reflecting the growth in the AcariaHealth business along with the addition of US Medical Management.

Our consolidated health benefits ratio was 88.9% in the second quarter compared to 88.4% in the second quarter last year and 89.3% in the first quarter this year.

The increase of 50 basis points between years is due to increased levels of higher acuity membership.

Sequentially, our HBR is down by 40 basis points reflecting normal seasonality.

For the second quarter, 26% of our revenues came from new business and 74% came from existing business.

The portion of our revenues from new business is higher both year-over-year and sequentially.

Our HBR for new business was 91.8% in the second quarter compared to 90.4% last year and 93.1% for the first quarter of 2014.

As Michael indicated, our cost in the second quarter related to hepatitis C drugs increased by approximately $6 million from the first quarter, which was consistent with our expectations.

We continue to discuss programs with all of our states on ways to ensure we are appropriately reimbursed for these costs going forward.

At this point, we are confident that the programs being established by the states will provide for adequate reimbursement.

Our general and administrative expense ratio was 8.6% this quarter, an improvement of 30 basis points from last year and 20 basis points from Q1 of 2014.

Last year's second quarter included $0.07 of AcariaHealth transaction costs, and the first quarter of 2014 included $0.06 of US Medical Management transaction costs.

Excluding transaction costs, our G&A ratios has been relatively consistent at between 8.6% and 8.7% for these periods.

And for the second quarter, we recorded $30 million of revenue related to reimbursement for the ACA health insurer fee.

At quarter end, we had signed agreements from 14 of the 17 applicable states, covering the reimbursement on a grossed-up basis for income taxes.

Subsequent to June 30, we added an additional state leaving California and Texas as the two remaining states for which we have not yet received signed agreements.

We continue to work with our two remaining states and fully expect to receive agreements on this issue in the second half of this year.

Investment income was $7.3 million in the second quarter, compared to $4.1 million last year.

The increase reflects higher investment balances and earnings on our equity method investments.

Interest expense increased from $7 million last year to $8.6 million this year, as a result of higher average borrowings on our revolver and the issuance of $300 million of 4.75% senior notes in April of this year.

Our effective income tax rate was 48.7% in the second quarter, excluding the effect of non controlling interest.

This compares to 39.2% last year and reflects the impact of the nondeductible ACA health insurer fee in 2014.

Our diluted earnings per share was $0.79 for the second quarter, which includes a $0.16 impact from the ACA health insurer fee.

This compares to $0.71 of diluted earnings per share in the second quarter of 2013.

Our second quarter of 2013 included $0.07 in transaction costs related to the AcariaHealth acquisition.

Diluted shares outstanding were 59.7 million shares for the second quarter, compared to 59.4 million shares in the first quarter.

At June 30 we had $2.4 billion of cash, investments and restricted deposits including $50 million held by unregulated entities.

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

Our total debt was $891 million at June 30, including $70 million of borrowings under our revolving credit agreement.

Our debt to capital ratio, excluding our $71 million nonrecourse mortgage note, was 35.5%.

Medical claims liabilities totaled $1.4 billion at June 30 and represented 42.9 days in claims payable.

Cash flow from operations was $159 million in the second quarter, and $412 million year to date.

This was 3.3 times net earnings for the second quarter and over 5 times net earnings for the first six months of 2014.

Our full-year 2014 guidance numbers have been updated to reflect our second-quarter results, the start-up of our Illinois contract on July 1 in Cook County, the assignment of the CHS contract in Louisiana and the acquisition of a non controlling interest in Ribera Salud in Spain.

We expect premium and service revenues $15 billion to $15.5 billion, diluted earnings per share $3.70 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 49.5% to 50.5%.

And diluted shares outstanding 60 million to 60.4 million shares.

We've increased our revenue guidance by $700 million to $800 million for 2014 as a result of increased membership in Medicaid, Medicaid expansion and health insurer marketplace product lines, the addition of the Cook County operations and growth in AcariaHealth revenues.

Our EPS guidance numbers are GAAP numbers and include absorbing approximately $0.12 of transaction costs related to Louisiana and Spain in the third quarter.

Our business expansion costs for the year are estimated to be $0.60 to $0.65 and include approximately $0.18 in transaction costs related to completed transactions.

$0.06 in Q1 for US Medical Management and $0.12 in Q3 for Louisiana and Spain.

This concludes my remarks and Operator, you may now open the line for questions.

(Operator Instructions)

Josh Raskin, Barclays.

Two top line related questions.

I guess the first one is at your Investor Day a month ago or so you guys talked about visibility into an $18 billion top line next year without any additional wins, et cetera.

Sounds like there's actually been a couple of wins or new entries since then.

Did that $18 billion include what we've already seen or is that number already higher today?

Bill.

We knew at Investor Day these transactions were coming online, so they pretty much included the two transactions which we've completed already in July.

Okay.

But the Cook County start for the duals in Ohio as well, that was all in there?

Right, we started Cook County, July 1, so obviously in the middle of June we were well prepared for that start up.

Okay and then a second question on the duals, I think Michael said that you've got 10,000 duals in Illinois and Ohio.

I guess according to the CMS reports, which I understand are not perfect representations of your market, you only had about 2,000 or so at the end of the second quarter.

So what's the differential?

Is some of that you're just serving the Medicaid side of things or they're not full duals?

And maybe how many full duals would you expect in Illinois and Ohio this year?

Yes, actually in Ohio in the dual program they're enrolling Medicaid members first.

So a substantial amount of the membership is Medicaid only in Ohio.

In 2015, they will start passive enrollment of the Medicare portions, so there will be a little bit of a delayed impact.

But the estimate for the full duals you put out is not too far away from where we are at this point.

Okay.

And that was actually a combination of Illinois and Ohio, I think Ohio was --

Right.

1,000, Illinois a little bit below that.

That's about right, yes.

Okay, got you.

And then last question, the increase in the premium taxes on a sequential basis, was there something in there specifically?

I think we have sometimes additional payments received in a couple states and I think we had two states that paid us additional amounts in the quarter for us to pay out to providers or back to the state, either one.

Okay.

And that was all past, it looked like the expense line went up just --

Right, right.

Okay, all right.

Perfect.

Peter Costa, Wells Fargo Securities.

Hi, could you help us understand what's going on with the service line revenues, in particular Acaria and how do we forecast that going forward?

It seems to keep running faster and faster, so hopefully you can tell us how that's working going forward.

Excuse me, this is the Conference Operator.

We do ask that you please stand by, we've just temporarily lost connection.

One moment.

Thank you for standing by, everyone.

Sir, you may proceed.

I didn't think that question was that hard.

Yes, I'm here, if you can hear me.

Apparently it was.

You want to try again.

You faded out at the end.

Yes, let me try again.

The service line revenues, can you talk about the trajectory on that line and in particular AcariaHealth and what we should expect going forward from that?

Well, I think the service line revenue increases I indicated is primarily AcariaHealth plus, the addition of US Medical Management in 2014.

AcariaHealth includes the -- a significant amount of hepatitis C therapies that they provide as part of their programs and we see that plateauing at this point in time for the rest of the year as that product slows down in the second half of the year.

So primarily I would say 60% to 70% of the increase is coming out of Acaria.

Okay, thanks.

And then can you speak about the reasons for the change in guidance on the tax rate?

Sure.

I think that's something that everybody should be -- should understand.

Our normal tax rate is roughly 40% and then the non deductibility of the health insurer fee causes it to increase by over 900 basis points, I think.

And so what happens is that number, the amount of the non deductibility, that stays the same during the course of the year.

And if our earnings grow absent the health insurer fee, you won't see a corresponding increase in health insurer fee impact.

So the effective tax rate will actually go down as a result of that, so you'll see more of the 40% and less of the increase of the health insurer fee.

So it's really nothing more complicated than that, than the blend of the two, as you add in more earnings from our regular operations.

So to be clear, the lower guidance for tax rate is due to the fact that the rest of your business improved operationally better?

Right.

The health insurer fee is static and the earnings are increasing on our normal business.

Perfect.

Thank you very much.

Kevin Fischbeck, Bank of America-Merrill Lynch.

First, you guys did close a couple of deals during the quarter.

Wanted to understand if you could give us a sense of what the accretion from those transactions was, if any, how much of the guidance raise was organic versus deals?

Sure, Kevin.

I think the deals that we closed were in the third quarter in July and so we want to make sure that both the Louisiana transaction and the Spain transaction were done this month.

We provided, for example, the transaction cost associated with those deals so everyone would understand that, pick that up in their understanding of the third quarter.

And also for purposes of understanding our change in guidance that we've got $0.18 of transaction costs baked in for the full year so far for transaction costs.

With respect to the accretion question, we have included in our updated guidance our estimate of the earnings and the impact of Cook County and Louisiana and for Spain.

Most of those operations don't have a significant impact in the second half of the year as we do certain amount of transition and start-up costs with those.

But -- and we do have the amortization of intangibles associated with some of those transactions that we have to start dealing with.

So for the most part, nothing significant in the second half from accretion.

It's not material.

Okay.

Because I look at the guidance and if you add back the transaction costs, it seems like at the midpoint you're raising the guidance by like $0.17 and we should beat consensus by $0.07 at the quarter.

So it seems like the second half of the year you're raising guidance by about $0.10.

But you're saying that not much of that is due to deals, it's mostly the core business continuing to show better results.

Yes, I think that's a fair analysis.

Okay.

And so I guess trying to understand a little bit about -- I know you don't have a huge amount of new expansion business, but trying to understand how you feel like that business is coming online?

How you feel like the rates were set and whether the new experience is showing any unusual new pent-up demand there.

I think our newest operations include California, New Hampshire and marketplace and a few other things with duals which some of those are a little early to really know.

I think the two states we've added are performing probably above our expectations at this point in time.

In marketplace also we've been pleased with the medical cost trends up to this point.

We added a lot of the membership for marketplace in the second quarter, so it's still -- we still have some time to have to develop, but at this point we're -- all three of those sectors seem to be performing well.

Yes, we don't want to get overly aggressive on it because as Bill said, it is very early.

Okay.

Do you have any comment on the three Rs?

I think with respect to the three Rs, it's almost a moot point because we're not at the point where we're in a position to record any significant amount for risk corridor or for re-insurance at this point.

We would, if we were into those levels to record a corridor or large cases for re-insurance, but at this point it's been rather insignificant.

But philosophically, we would record the risk corridor and the re-insurance amounts based on our actual experience in 2014 and year-to-date.

With respect to risk adjustment, we don't have enough information to know how our population compares to others and whether we -- how much any payment would be going either way on that, so we've not recorded anything.

And would not intend to record anything on risk adjustment unless we got a lot more information on how our book of business compared to everyone else.

Okay.

All right, great.

Thanks.

Matthew Borsch, Goldman Sachs.

Wondering if you could maybe drill down a little bit on what you're seeing in terms of utilization trend?

And maybe in the context of what we're seeing on a macro level which is strong prescription volume trends were relatively weak numbers for physician office visits.

To be clear, that's at a very macro level, I'm not referring to Centene.

So looking for a little more granularity beyond stable trend.

Bill.

I think at this point in time our medical cost trends have been pretty consistent with both our original expectations and what you've said.

They're different components, so clearly the cost of drugs go up every year in terms of the pricing for both brand and generics.

The utilization for inpatient and outpatient has been relatively stable.

And so when you look at it all, we've seen relatively minimal increases in overall utilization.

And the changes in our HBR as I talked about at our Investor Day in June relate a lot more to changes in mix.

When we add higher acuity membership that has a higher built-in HBR you'll see a slight increase in our HBR as that mix changes and that's what we're actually seeing at this point in time.

So in terms of cost trends, I don't think we're seeing any different than what you said and nothing really of any surprising nature.

Yes, we're calling the trends relatively flat as I said in my comments and see nothing that changes that, Matt.

I'm sorry if I missed this but what's the update on Sovaldi and the costs that you incurred in the second quarter?

We --

It was a $6 million roughly increase over the first quarter.

Okay.

But we had also as you know significant additional membership compared to last year.

New states and new products.

New states, new products, so --

And where are you with not -- are you absorbing that at this point or where are you with additional reimbursement or kick payments for that?

We're talking to states and we're at different points with different states relative to pass-throughs and the various methodology for reimbursing.

And that becomes more of an issue at the end of the year, early next year with some of the new products.

We feel that the current Sovaldi tends to be plateauing out and has been absorbed within the numbers we gave you and with what the states are doing for us.

So we don't see it as a material issue at this point, particularly with the discussions we're having with the states where they recognize the issue and are being very constructive.

Is that fair, Mary?

Yes, it is.

All right.

I'm good.

Thank you.

Justin Lake, JPMorgan.

Couple quick questions.

First, can you give us an update -- obviously a lot of growth in Florida, can you give us an update in terms of what you're seeing in the membership there in terms of the ramp and how costs are looking versus expectations?

And then can you specifically delineate for us long-term care and the long-term care roll out and what you're seeing there?

I think a lot of it is very early at this point in terms of the timing of the roll out.

You anything you want to add, Bill?

Well the Medicaid roll -out is in process right now and will continue on for several more months.

And I think the long-term care roll out is complete and we have close to 30,000 members I think in Florida in long-term care and absorbing that product nicely.

The Medicaid will continue to be added.

It's too early really to give any indications of anything on an HBR.

So we seen nothing at this point in time to say that what we've seen with our membership we've added in the new program it's any different than what we expected it to be.

Okay, great.

And then most companies have indicated that rates and performance on members from Medicaid expansion have been running really strongly both in terms of the performance of the membership and also how the rates were set initially on Medicaid roll -- Medicaid expansion.

So I'm curious how to think about rate setting process for 2015 and whether you think there may be any reset of margins lower here or are those margins running in line with typical targets?

I think that the rates that were set for Medicaid expansion were indicative of the fact that there may be a higher HBR for that population than what typically is seen, whether you say that's pent-up demand or whatever.

And so that -- we've seen that in some cases, but in relationship to the rates and the actual costs, they're in line with the HBR target.

So nothing there of any surprise.

With respect to 2015, it's too early to call in terms of what the rates might be on the Medicaid expansion portion of that and I think the states will review the actual cost data to determine whether they make any substantive changes in had that.

I don't know if they'll have a lot of information, new information to make substantive changes to that, so I'd expect it to a great extent to carry over into 2015, similar to 2014.

And the states also will be getting 100% reimbursement from the Federal Government.

So that allows them to be very realistic in their mind.

Got it.

And when does that get communicated?

You're talking about rates for 2015 or what?

Yes, the rates for 2015.

Each state has a different time line for when they go through rates, so I don't know that there's a specific date at this point.

It's state by state.

Yes, we have tended on the earnings call after the rate's been established to discuss it at that point.

Great, thanks for all the color.

Chris Carter, Credit Suisse.

First to follow up on Peter's question, can you quantify for us how much of a benefit you're seeing from Sovaldi on the service revenue side?

Well I think I would say that it's a substantive amount of the revenues on the service line income, but it's a low margin product.

What -- could you help -- how should we think about the margins directionally, when you say low margin?

No, I don't think we really want to get into that level of detail for a specific product of a specific subsidiary.

Okay.

(Inaudible) competitively.

Got it.

And then next question.

The new business revenue increased to 26% in the quarter from 20% last quarter, but the MLR went down.

Can you walk through the puts and takes in terms of what's driving the MLR lower?

Well every new business has a different mix and so included in new revenues still would be the new products we added, new states we added, California and New Hampshire.

They're as I said performing reasonably well at this point in time.

You also have the health insurance marketplace which is included in there and that runs at a lower average HBR than our normal business, the Medicaid business.

So you'll see when you blend that in you'll have a lower HBR for new business than you might typically have seen.

And then I'm guessing Florida's in there now?

Florida is long-term care and Medicaid expansion are in there also.

Got it.

All right, thank you.

Scott Fidel, Deutsche Bank.

First question, interested if you have any updates in terms of how we should think about seasonality of EPS in the 3Q versus the 4Q.

I know you mentioned the deal costs that you'll have in the 3Q.

And then around the recoupment of the remaining two states, we've been modeling that all flowing through in the third quarter.

Is that a reasonable estimate or do you think we should maybe have that a bit more broken out between 3Q and 4Q?

So basically if we look at consensus right now, consensus has us split at around 53% EPS in 3Q and 47% in the fourth quarter.

Interested if you're comfortable with that?

I think, Scott, I think if you go back to what we said at the -- on the last call, we said that it would be in the second half and that it could easily slide into the fourth quarter, some of it, recognizing that states like Texas have a fiscal year September 1 until we work through some of these things.

We forecast at that point in time it could go into the fourth quarter.

I would say absent timing for the health insurer fee, I don't know that there's anything unusual with our seasonality in Q3 or Q4 compared to our normal trends.

So I would say we would expect that to be similar to prior years in that regard.

Okay.

So on the remaining insurer fee, like probability wait the remaining two states versus the 3Q and the 4Q?

Right now I would say to hedge our bet, I would put more of it in Q4.

Yes, it would be appropriate, prudent, conservative to say Q4 because we can -- we're concerned -- not concerned, but what's important is that it get done and get fully reimbursed, fully grossed-up.

And the difference between September 1 and October 1 is not as important to us.

Then had a follow-up question on Kentucky and I know you guys can't talk too much about that since the litigation is still ongoing.

But does look like in the 10-Q you did have an update on some communications that the Commonwealth had around their projected exposure for the state and for CMS.

To the extent that maybe you can comment on those estimates that were provided in the 10-Q and basically give us an update on how the litigation's developing here.

Scott, when you're in the middle of litigation that's moving through the courts effectively, it's very prudent to do nothing more than rely on what was written and that's on the base of some very good advice from very good counsel.

So I'm going to take a pass on trying to amplify it or describe it any more than what's been described.

Okay.

That's fair enough.

Then last question on operating cash flow.

That was again, that was well above my forecast.

Bill, I didn't hear you update the operating cash flow guidance for the year.

Is that still the same or do you think it could be a bit better here given the trends in the first half?

Well I think our normal view has been 1.5 to 2 times.

We've obviously exceeded that for several of our years.

And so wouldn't surprise me we exceed that for this year given how strong we have been through the first half.

Okay were there any specific timing issues in the 2Q that reversed in the 3Q or was that all a clean number there in the second quarter?

I think it was relatively clean.

Okay.

Thank you.

A.J. Rice of UBS.

Maybe a couple specific detail questions.

I appreciate the commentary around the deal cost as part of the $0.60 to $0.65 in total start-up costs.

Can you comment on the $0.42 to $0.47 remaining start-up costs?

Have you incurred most of that already or is that -- how much of that is still left to be incurred in the back half of the year?

I think that our deal costs are -- when you peel out the transaction costs, tend to be relatively consistent.

So I think that we're probably slightly more in the second half than the first half, excluding transaction costs, but maybe $0.04, $0.05 worth, not a lot.

Not more than that.

Okay.

And now that CHS is basically done, can you give us any feeling for what your thoughts are on the range of potential accretion for next year?

And of the 200,000 or so lives we're talking about, what is your thought in terms of bracketing the percent that might convert to full risk to you?

Yes, we typically will give you guidance for 2015 in December and we've been pretty consistent in not trying to get ahead of ourselves and we'll have more data at that point in time.

You want to add anything, Jesse?

Yes, the only thing I would say is we've consistently provided a range of the potential outcomes on the price which is consistent with our past experience going through these types of member transitions which are subject to member choice and under the process, working constructively with the state.

So I think we can't -- as Michael said, we can't give you anything more specific.

But I think our history has guided the structure of the transaction and the range of potential outcomes which is reflected in the range of value that we've consistently disclosed.

Okay and then last technical one, on the Spanish deal, where are you going to report the results of that going forward?

At this point we're thinking we're going to likely record that as part of the Specialty segment.

Okay.

All right.

Thanks a lot.

Sarah James, Wedbush.

I wanted to circle back on 2015 revenue.

I understand that Ohio has lags in dual MA enrollment by design but in other markets like California opt-outs running at 15% to 20%.

So if I were to extrapolate that and say market-wide that's where opt-out is on a fully ramped full year duals allocation for Centene it could be over $500 million I was estimating.

So I'm wondering how much of that is already baked into the $18 billion number for 2015?

I think that's hard really to pull apart, that number at this point in time.

We've added in the different product lines and the growth from the different states.

It's not overly scientific in terms of the specific opt-out percentage that we've calculated.

At this point we use more round estimates, I would say.

Okay.

And then Georgia and Florida added Sovaldi to the NPDL with prior approval in April.

So can you talk about the change in coverage for Georgia and Florida, how much of that contributed to the $6 million billed in Sovaldi cost Q over Q?

And then if you could comment in your discussions in general with rate setters what the intention is for handling Sovaldi in the rates as they anniversary?

I'm not sure if it's going to be baked in or more likely a separate payment.

Thanks.

I think that as has been reported by many, the state by states have taken different positions.

Florida's intention is to bake this in starting May 1 first on the new Medicaid program with a kick payment.

That's already been assumed in our guidance and other things like that.

Texas, it hasn't yet been add to the PDL.

We expect that to occur and we'll get reimbursed for that.

So I don't think we want to go state by state through 20 states to say where each state is other than in general we're pleased that the states have all understood the impact of this -- these therapies and what the costs are, particularly going forward, and are working on mechanisms to make sure that we're fairly reimbursed for these costs.

I guess I was more talking about as it anniversaries, so not this first year but next year if it moves from a kick payment to being baked in, if there's any kind of protection that you have if the amount of the script changes?

Yes, let me try and help in the sense, Sarah, that these drugs tend to be curative and we see it plateauing off.

And so we're having discussions with the states on utilization and all the different alternatives that are open to us now.

Sovaldi's one that's been in the market by that time for a year.

There's the new ones coming out and I would take a different approach, and Mary you're in the middle of all this.

And it's good to see with all the productive conversations that we are having with the states, they do recognize and are discussing the new drugs that are fast-tracked for FDA approval later this year.

So I think you almost have to really bifurcate it.

Sovaldi is one issue that's plateauing out and its utilization is there.

Then you have the new drugs and the states and realize people maybe have been warehousing and it's considering all those factors.

And so they don't plan to see that rest on our backs.

They recognize the issue and they're working constructively.

And if we saw some concerns, we'd raise them for you.

Okay.

Thank you.

Tom Carroll, Stifel.

A couple follow ups.

I want to return to the services revenue line.

I'm not clear on where you think that might end up on a full-year run rate basis.

So if -- and I think you mentioned this quarter the revenues were somewhat peaking there.

Does that imply a $1.5 billion line item for the full year?

Are you comfortable with that?

I think that I would say they're plateauing as much as peaking and I think that $1.5 billion is probably a good, round number for where we think we'll be for the year.

So about $400 million on a quarterly basis for the remainder of the year?

Right, exactly.

May not be equal Q3, Q4, but something like that in total.

Total.

So thinking about that line item into next year, I think you said Sovaldi and hep C spending was a substantive part of that growth.

If hep C spending is going to either continue to grow into next year or if the payer community comes together and competes it down, will this line item move as hep C and specialty drug spending will move?

I guess that makes sense, right?

I think Tom, we'll be in a better position to discuss that in our December call when we're talking 2015.

And we've always been hesitant to get ahead of ourselves for all the years we've been doing this.

So we're going to stick pretty much to the same, we'll talk to you about that in December.

Okay, I'm looking for a proxy for that line item to think about it into the next couple years.

But it sounds like--

Well there's certainly a correlation that you stated, so -- but I don't know that it's a perfect correlation.

Yes and then secondly, I wonder if you would provide some further comment on your outlook on rates overall?

And I believe your prior expectation was for flat to up 2%.

And it sounds like you're leaning more towards flat now for the next 12 --

That's correct.

Can you add a little more to that, please?

Yes, I think we expect that across all the rate adjustments for this year, we expect it to be flat.

I'm not sure what more I can add to it.

And I think that's consistent with what we said in June at the Investor Day.

Yes, it is.

How much do you think of the flat leaning rates into next year is related to a squeezing of the balloon, if you will, on the part of states?

They've got other stuff they're looking to fund right now so as it comes back to establishing routine rates that we've done for years and years, do you think that's driving the flat rates?

I really think that's very little portion of that because I think what we're really seeing as it relates to cost trends, inpatient levels, et cetera, we've got minimum HBRs in several states, experience rebates.

When you factor all those things together, there's really no impetus to have a large rate increase.

I think that's why flat seems to be the norm and it's really now because the states are trying to drive the rates down for unusual reasons.

The states see the utilization, we see the utilization.

As we've talked about, systems tend to be real time and we're seeing flat because we don't see the arguments for something else.

Okay.

Great.

Thank you very much.

Chris Rigg, Susquehanna International Group.

Wanted to follow up on a couple earlier ones.

First, related to the Medicaid expansion lines, can you give us a sense to level set expansion members versus traditional members, anything on inpatient days per thousand, ER visits per thousand, doc visits, something to give us a sense for the relative difference between the two populations?

Mary?

Obviously it's very limited experience at this time but it's all within expectations.

But is the expansion population running meaningfully different than the traditional population or you just don't have enough info at this time?

I think that from an HBR standpoint it's probably the same, similar, but we're getting higher rates.

Sure, sure.

So as a result you say it's a higher cost than what the typical population has been.

Whether that continues, we'll just have to see over time.

You would think what would happen is they would be come together.

Okay.

And then my follow up again is on hep C. I want to be clear, peaking versus plateauing.

When we think about the net cost in the second quarter, I think you said $15.7 million.

Is that number expected to go down in Q3 and further down in Q4 or how should we expect total net costs to run for the year?

I think the number that was stated by $13.7 million.

Okay.

Which was an increase of $6 million, net cost of $6 million year over -- quarter-over-quarter.

And at this point in time we think it's plateauing.

Whether -- how much, if it stays high, that high, we'll have to wait and see but certainly we've seen the number of starts reduce things like that.

And so we think until the new drugs come on later in the year and first next year, we don't expect it to see the same level of growth.

I think Mary, you commented to us in meetings that the starts are flattening.

Right, so you're not only seeing a lower number of starts but you're also seeing people who are started earlier in Q1 and early Q2 completing their course of treatment.

So we are seeing it be very -- it is plateauing.

So let's call it a plateauing, leave it at that.

Okay, great, thanks, guys.

Andy Schenker, Morgan Stanley.

To talk about the exchanges and marketplaces, earlier you said that demographics were in line with your expectations.

Could you talk about how that's feeding into your pricing expectations for next year and you how you're positioning yourself?

A few news reports of some declines in a few states, obviously probably a few increase as well, could you follow up on positioning for 2015?

The membership demographics are as you indicated in line with what we expected.

We continue to target the lower income, Medicaid churn population and that's why so many of our members are eligible for subsidies as well as our average age is within the range of expectations.

For pricing for 2015, it's really too early to give any across the board indications.

It's very much state by state.

And I think that we'll see -- we go through a state by state analysis and where we come out on pricing will depend on the specifics that we see.

But I think it's too early to know until later when prices are revealed in October.

And to follow up on that, then.

In general obviously you're actually slightly ahead on enrollment this quarter than what you've suggested towards last quarter.

Are you generally happy with your enrollment numbers and, therefore, looking for maybe stable enrollment as the markets expand or any views on trying to increase your penetrations in some of our markets or is it just each market's so different than it's hard to generalize?

Again, we're viewing the marketplace as an opportunity where in states where it can be complementary to our Medicaid population.

So we think we will see some growth as the market grows, but it's still going to be a relatively modest part of our business going forward.

Okay.

Then maybe going back to the business expansion cost there, I want to make sure I'm understanding this right.

So you've now targeted $0.60 to $0.65 for the year versus $0.55 to $0.60 which was your guidance last quarter, but you added $0.12 of transaction costs.

So net-net, is it right to think you lowered by $0.06, $0.07 the base expansion cost outlook for the rest of the year or were there other moving parts I'm not properly factoring there?

I think your point is that we didn't increase the business expansion cost by the level of the transaction costs we talked about for Q3 and I think that's a fact and that they're slightly down in terms of our estimate for our business expansion costs, excluding transaction costs.

So -- but not by a lot.

Okay.

Thank you.

Ana Gupte, Leerink.

Wanted to follow up mostly on your rate changes by state and your outlook that's flat.

Any thoughts on how states that are expanding Medicaid might think about the rate increases for the expansion lives relative to the base population given the full federal subsidy around it, are they thinking about it that way at all?

Have you seen anything?

No, I think states will go through their normal process of looking at rates for the Medicaid expansion population and go through the same actuarial analysis eventually based on the experience.

So I don't think there'll be anything unique about how they'll approach those rates compared to how they do on the core Medicaid business.

Yes, I think it's important, our numbers in terms of the rate trends for 2014 are flat.

We're not giving any rate trends for 2015 at this point.

So it could be a positive rate change at this point.

You're not saying that 2015 is flat?

We're not saying anything.

We're really, Ana, we're really saying we're working on them now, they're having discussions and by December 15 we expect we'll be able to give you a good indication.

Okay.

Well I want to follow up again on the CHS transaction.

I think a couple people asked [to task] on the accretion for next year.

Trying to ask it a little bit differently perhaps then, if you take your mid [80s] MLR in Louisiana, maybe your SG&A shy of 10%, if you assume the risk -- the move to risk lives, what is the time line for a transition to get up to the max accretion you could get on that transaction?

I think that there's still a lot of things to happen in Louisiana with respect to this transition, et cetera, and so we're not prepared to talk about 2015 numbers for either membership or for the accretion that might come out of there.

We have experience in a number of states where we have added the membership to an existing plan, that's generally gone well for us.

But we're not quantifying that at this point in time.

And as Michael indicated in our Investor Day in December, we'll probably have a lot more -- be a lot farther along in this process and be able to give a little more better answers on where they are.

Yes I think people who know us well enough that if we try to do something now we're going to be conservative beyond what really one would be in December, we'd have a good view.

And to mislead in that direction is just as bad as being too optimistic.

So it's just a little early.

Okay, fine.

Then moving on to duals, looking at the experience that you have so far but you didn't say that you're break even for 2014 and what would be the time frame to get to that 3% to 5%-ish margin outlook in light of the savings that are being the same scheduled that being stipulated?

I think right now our duals experience is fairly limited in terms of the amount of time we've been doing this in the Illinois and Ohio areas.

So we're not giving any projections in terms of when we would get to normal run rates, et cetera.

We'll see.

But do you still think 3% to 5% is achievable at all or is there any reason to back off from that?

Well, I think the 3% to 5% we talk about are for our overall book of business and individual pieces can vary from that.

And so I think we'll have to wait to see how our experience shakes out on the product over time and see.

But we stand by the 3% to 5% for the overall book of business.

But the individual pieces, I don't think we really want to speak to.

And then the final question on the exchanges again, final follow up on the 2015.

Looking at your rate changes for 2015 in several of the states that disclosed it, there were some of your peers that have at least said that they've had some adverse experience in the first quarter, maybe even the early part of the second and their rate increases are quite substantial for 2015.

Yours have not been, is that a way to -- it can run into (inaudible) but that would mean that your 2014 experience looked more favorable perhaps?

Or again positive margin experience you're looking more to gain share at this point over worrying about the margin for next year.

Well I think part of that is where you're coming from and so depending what your initial rates were in 2014.

And others were much more aggressive than we were in terms of the rates, so Rone can speak to this in more detail.

But I think we're pretty happy with where we started from and we're making our adjustments from that base.

Great, thanks.

I think Bill said it well, that the -- our -- in most states we are fairly conservatively priced and that was reflected in our competitive position.

That's clearly what our starting point is as we look at our rates for 2015.

And again, as we said previously, there have been no real concerns or surprises based on our experience so far.

But it's very early as well with the exchanges.

You have to look at our target which was the low end, our current net worth, that type of thing.

So (inaudible) the margin, I think you talked about, I forget now your MLR, you said something [gauge] which was quite a nice result and you're sticking with that since then, no changes there.

Yes, I think we were talking about low 80s for the original HBR for the marketplace and well our pricing had one thing built into it and then we were putting in our guidance mid-80s.

Thank you.

Steve Halper of FBR.

Two quick questions.

The non regulated cash on the balance sheet, was that $50 million?

Yes.

Or $15 million?

$50 million.

$50 million, thank you.

And then going back to the Texas process to get the ACA fee, is that wrapped up in rate discussions for the coming year or is it a separate category?

Each state has their own process to go through to deal with this particular issue and so the state of Texas is working through their process as we speak.

And when it's all concluded will depend on how much time they need to do the review and deal with it.

Right.

But is it --

It's hard to --

But is it -- you're discussions with the state, is it wrapped up in a normal rate discussion?

It's really separate.

It's separate.

To my knowledge, they have separate discussions going.

Same people, separate discussions.

Yes, that's fair.

Thank you.

Dave Windley, Jefferies.

T follow up on Steve's question there, can you talks about what the gating factor is in the Texas process?

Is it around the way that they will make that payment or is it they need a fiscal year deadline to push them to a decision?

Is there -- I guess why is their process taking longer than other states, is essentially the question?

No, it's just that you have various states, you have different politics, you have different elections taking place, you have a lot of different issues getting people to focus on as much as anything.

The people we're talking to are discussing it.

They're working it through their process.

They have a whole process where they budget variations that are involved.

And as we saw when we were talking rates in the Hidalgo Valley and others a year ago, they have a way of getting through it.

It's not how fast but how well.

Okay.

Separately, on utilization, were you able to tell --

I want to make a point that up to this point, Texas has always been a responsible, good partner you can talk to these things about, so we're comfortable with it.

Very good.

So on utilization, were you able to tell in the second quarter if any of your utilization experience showed any kind of bounce back from the weather depression in the first quarter?

In other words, if not for that, would MLRs have been even better?

Mary?

No, we did not see any of the bounce back from the weather.

Okay, great.

And then last question, I believe CMS has taken up an initiative to look at how states are setting rates, looking at the overall rate setting process and the adequacy of that.

Are you aware of that and how long do you think that kind of study will take and what the outcome of that might be?

Rone may want to add to it.

CMS has always had to sign off under state rates, so that part's not new.

Yes, we're not particularly seeing anything notable or significant based on the actions they're taking at this point.

Okay.

Thank you.

Brian Wright, Sterne, Agee.

The number of employees accelerated, you've been hiring a lot given your growth, but in the most recent this quarter it was up 10.5% sequentially and that's versus 8% in the prior quarter.

I'm assuming this is an anticipatory kind of employment growth.

Is there any chance that that slows down a bit for the back half of the year?

A lot of those is new programs we added during the quarter since.

so Florida's had a lot of activity, for example, and we've added a lot of people in Florida for the expansion for the Medicaid program.

And that's -- when you see jumps like that, it's typically because of new products being added.

Could be duals, could be Cook County where we're anticipating that starting July 1 and Florida, that's --

Yes and it's going to be product specific too.

You have a lot more case workers when you're dealing with duals and long-term care.

And so it will be quarter-by-quarter, based on what we see the growth to be.

You always have to try and bring them on a little bit ahead of time.

So it's a function of predictive a quarter or two ahead of what you're going to see then?

Is that the best way to think about it?

It's aligned with the start-ups.

Yes, when the start up will be.

Okay.

Thank you.

Kim Purvis, Cross Current Research.

I'd like to approach the Medicaid expansion from a slightly different angle.

Can you give us any additional color on the demographics of that group?

Male?

Female?

Age?

Anything would be appreciated.

Thanks.

Rone, do you have any --

I don't have anything really to specify the distinction of the Medicaid expansion group from what we're seeing elsewhere in terms of it other than depending on the state by state previous eligibility standards.

What income levels they're coming in at compared to the previous ones.

But it's generally tracking based on my understanding what we're seeing broadly in the Medicaid programs.

But it wouldn't be the typical [tenant] population.

I'm assuming it's going to be more single adults, more individuals, along that line.

No, it is more adults than children, there's no question about that.

But with respect to more specifics demographics than that, I don't think, again, other than what you generally see with income, we're not seeing a dramatic difference.

Okay.

Thanks.

Carl McDonald, Citigroup.

Had a bigger picture specialty pharma question.

So it seemed like the industry got caught off guard by Sovaldi and specific to the Medicaids as we know weren't able to get it into rates ahead of time.

Given the pipeline of specialty pharma drugs that's coming over the next couple of years, are there -- maybe Sovaldi's the unique situation, but are there ways that you can get in front of that and get states to incorporate these things into rates ahead of time so that we don't have to constantly go through this?

Can we get it into rates after the fact and potentially lose money in the process?

I think we're taking that point to the states.

I think the states are as well.

They're learning from the experience and what we established for the next line of hep C drugs we see for other drugs coming in the future.

And once again, it's going to be the size of the population.

There's some smaller populations that have some specialty pharma that are even more expensive but it's a smaller group and it may not be curative.

It may be ongoing therapy.

So what it is, it's going to determine how we work with the states.

And it's not one size cuts all.

It's not a cookie cutter.

You have to look at it and show your flexibility and work with them effectively.

And to follow up on a response Mary had to one of the prior questions, when you said you didn't see a bounce back from the weather, were you saying that utilization levels in 2Q were similar to 1Q or are you saying 2Q utilization returned to normal, you just didn't see any pull-through of the 1Q utilization on top of the normal amount?

Right.

What I was referring to with the bounce back is I know there was a concern because of those days, I believe it was the end of January, early February, that we would be seeing a lot more utilization in the coming months which we did not see.

As we said with utilization, there really were -- it was very stable utilization trends, flat ER, maybe a decrease in inpatient trends.

So everything really looked very stable.

I think within Q1, that might have been higher -- that could see that in March, we saw the weather was early in the quarter so if there was any deferred impact it would have -- a lot of that would have showed up in March.

Second quarter stood on its own with normal seasonality compared to prior years.

Great, thank you very much.

Well at this time, we have no further questions.

We'll go ahead and conclude today's question-and-answer session.

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

Sir?

Yes, I just want to thank everybody and I look forward to reporting Q3 to you.

Thank you.

And we thank you, sir, and to the rest of the Management team for your time today.

The conference call has now concluded.

We thank you all for attending today's presentation.

At this time, you may disconnect your lines.

Thank you and have a great day, everyone.