Centene Corp (CNC) 2014 Q3 法說會逐字稿

Good morning and welcome to the Centene Corporation third-quarter 2014 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ed Kroll, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us on our third-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 may also be accessed through our website at centene.com. A replay will be available shortly after the calls completion also at centene.com or by dialing 877-344-7529 in the US and Canada or in other countries by dialing 412-317-0088. The playback number for both of those numbers is 10052334.

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 our most recently filed Form 10-Q dated today October 28, 2014, and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change. While the Company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

As a reminder, our next investor day is Friday, December 12, in New York City. Please mark your calendars.

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

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

During the course of today's call we will discuss our strong third-quarter results and provide updates on Centene's markets and products and our view of the Affordable Care Act. I will begin with highlights of our third-quarter financial results.

We reported third-quarter diluted earnings per share of $1.34, or $1.22 when excluding the $0.15 impact of the ACA health insurance fee and $0.06 of transaction costs and an income tax benefit of $0.33 related to periods prior to the third quarter of 2014. We added 1.1 million members year over year in the third quarter. This represents a 42% increase to 3.7 million covered lives. Premium and Service revenues grew 53% to $4.2 billion.

The HBR increased 80 basis points sequentially to 89.7%. This reflects an increase in new business primarily attributable to the increase in high acuity membership. Bill will provide further HBR detail, including new and existing business mix. Overall, we continue to see, as well as anticipate, stable macro trends.

Now on to markets and product updates. First, we will discuss recent Medicaid activity.

Florida. In August, we completed the phase-in of Centene's nine regions under the state's MMA program. At September 30 we had approximately 355,000 MMA lives in the state. Also in August we completed the phase-in of all 11 regions as the sole provider for the Child Welfare Specialty Plan, Florida's new foster care program. And as of September 30 we had approximately 24,000 foster care beneficiaries in the state.

These two contracts are the primary drivers of our 31% sequential membership (technical difficulty) in Florida. The MMA and foster care programs are performing according to plan, which is at a higher HBR than historical levels. This is consistent with [our] (technical difficulty). Medical costs, including pharmaceuticals, are in line with our expectations.

Illinois. In July we began operating a new administrative and specialty services contract with the Cook County Health and Hospital assessment. This contract serves nearly 100,000 new members under the County Care Program. The size of the program is expected to grow as County Care enters additional state Medicaid programs.

Also in September, Centene began serving additional members under Illinois's current Medicaid program and Medicaid expansion.

Mississippi. The rollout of MississippiCAN expansion of an additional 300,000 lives is expected to (inaudible) at the end of 2014. This will continue through the third quarter of 2015.

Louisiana. This past Friday the state announced a notice of award for a pre-procurement of its Bayou Health program. We are pleased that our Louisiana subsidiary was recommended for a contract.

As part of the reprocurement, all beneficiaries will be placed in a full-risk health plan. We anticipate serving 320,000 to 350,000 lives under the new contract. This will more than double our annual revenue in the state. We expect to have this contract in place early in the first quarter of 2015.

Texas. In September we successfully launched a new contract to serve STAR+PLUS members in two Medicaid rural service areas.

Moving on to dual eligibles, at September 30 we had 16,400 dual eligible members in Illinois and Ohio. Membership will continue to increase slightly throughout the remainder of 2014 in these two states. We continue to expect Michigan, South Carolina, and Texas to go live with their dual demonstration projects during the first half of 2015.

Now a brief update on the ACA. First, the health insurer fee. Centene has received signed agreements from 15 of our 17 applicable states which provide for the reimbursement of the health insurance fee on a on a gross sub basis. This represents approximately 60% of the total amount.

CMS recently clarified that states should factor in the health insurer fee in setting rates paid to Medicaid managed care clients. We expect to receive a contract amendment from Texas in the fourth quarter of 2014. This is reflected in our guidance.

Next, health insurance marketplaces. At September 30 we had 76,000 enrolled and paid exchange lives. The demographics of our enrollees continues to be in line with our pricing. Members are predominantly lower income and over 90% are eligible for premium subsidies. The financial performance of our exchange business is in line with and slightly ahead of our expectations.

Lastly, Medicaid expansion. We ended the quarter with approximately 193,000 expansion lives in six states. Longer term we continue to view this as a growth opportunity as more states adopt expansion.

Now hepatitis C therapies. We continue to manage the utilization of hepatitis C drugs in a responsible way over half of our state customers. Our medical management capabilities and Centene's political policies, in addition to sound state guidelines, have enabled us to successfully manage hepatitis C costs.

Our experience to date has been consistent with our estimates. The net cost impact to Centene in the third quarter of 2014 declined sequentially. However, future costs are likely to increase as new therapies continue to be approved.

In early October, an all-oral hepatitis C drug was approved for genotype 1 patients. We are engaged in ongoing discussions with our states to ensure that all new treatments are properly managed and fully reflected in our reimbursement.

A quick comment on rates. We continue to 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 during the first two quarters of the year. We expect to maintain this positive momentum in the fourth quarter 2014 and beyond. We are raising our 2014 financial guidance accordingly. It is important to note that excluding the tax benefit we recognize this year we still have increased our EPS guidance by $0.14 at the low end and $0.09 at the high end.

We look forward to seeing you at our December 12 investor day in New York City. Thank you for your interest in Centene. I will now turn the call over to Bill.

Thank you, Michael, and good morning. As I begin this morning, let me first recap our third-quarter EPS results. Our press release laid out the components of our results in the table on page 1.

First, our GAAP EPS was $1.34 per diluted share. Similar to the first two quarters of 2014, there is a $0.15 impact related to the health insurer fee and our acquisition transaction costs were $0.06 in Q3. The final item is a tax benefit of $0.33 related to the reversal of amounts accrued in prior periods related to the limitation on compensation deduction applicable to certain health insurance issuers.

In late September, the IRS issued final regulations on the application of the limitation on compensation deductions. Based on our analysis of the final regulations, we now believe that we are not subject to the limitation for 2013 and 2014. Therefore, we reverse the amounts previously recorded for 2013 of approximately $0.24 per share and $0.09 per share for the first half of 2014 for the total benefit of $0.33 per share.

The net of these adjustments is $1.22 per share for the third quarter of this year compared to the $0.88 per share reported in the third quarter of 2013. Additionally, the third quarter this year also benefited by approximately $0.06 per share from not having to record the tax expense related to the limitation.

Going now to our normal discussion of results, Premium and Service revenues approached $4.2 billion in the third quarter, an increase of 53% over the third quarter last year. The premium increase results from expansions in Florida, Ohio, Washington, and Illinois, and the addition of the California, New Hampshire, and health insurance marketplace operations between years.

Our service revenues increased by $265 million between years, reflecting the growth in the carrier health and the addition of US medical management. Our consolidated health benefits ratio was 89.7% this quarter, an increase of 190 basis points from last year's third quarter and 80 basis points sequentially. The increase between years and sequentially is primarily attributable to the increase in higher acuity membership.

As discussed during our investor day in June, the higher acuity products, like long-term care and dual eligibles, have higher targeted loss ratios. This results in an increase in our consolidated HBR when the portion of our revenues from higher acuity membership increases. But then we also benefit from a lower G&A ratio due to the higher premiums received for these members.

For the third quarter, 27% of our revenues came from new business and 73% from existing business, similar to our second-quarter split. The HBR for our new business was 91.4% in the third quarter and 89.0% for our existing business.

Our general and administrative expense ratio was 8.0% this quarter compared to 9.1% last year, an improvement of 110 basis points. This year's third quarter includes $0.06 per share of acquisition transaction costs.

Sequentially, we are down by 60 basis points from the second quarter. The continued reduction in our G&A ratio primarily reflects the benefit of the leverage we are receiving from our higher revenue base.

For the third quarter, we recorded $32 million of revenue related to the reimbursement of the health insurer fee. And in September we paid $126 million to the IRS for our 2014 fee. For Texas, our largest state, we continue to expect to receive a signed agreement before year-end. And for all of 2014 we believe that the health insurer fee will net out and will not impact our overall results.

Investment income was $5.7 million in the third quarter compared to $4.8 million last year. Interest expense was $9.3 million this year compared to $6.6 million last year, reflecting a higher balance on our revolver and new issuance of the $300 million of senior notes earlier this year.

Our effective income tax rate for the third quarter, excluding the effects of noncontrolling interest, was 24.8%, which reflects the benefit of the final compensation deduction regulations discussed earlier. Excluding the favorable impact from prior periods, the third-quarter rate would have been approximately 46%, a rate we expect to apply to the fourth quarter this year as well.

Our diluted earnings per share for GAAP purposes was $1.34 compared to $0.88 last year. Diluted shares outstanding were 60.7 million shares for the third quarter compared to 59.7 million shares in the second quarter.

At September 30 we had $2.9 billion of cash, investments, and restricted deposits, including $70 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 health insurer fee during the year.

Our total debt was $955 million at quarter end, including $140 million of borrowings under our revolving credit agreement. Our debt-to-capital ratio, excluding our $71 million nonrecourse mortgage note, was 35.0%.

Medical claim liabilities totaled $1.6 billion at September 30 and represented 43.1 days in claims payable. Cash flow from operations was $442 million for the third quarter and $854 million year-to-date, both of which were over 5 times net earnings for each of the respective periods.

Our full-year guidance numbers had been updated to reflect our third-quarter results. For 2014, we expect Premium and Service revenues of $15.3 billion to $15.8 billion, diluted earnings per share $4.35 to $4.50, consolidated health benefits ratio 88.9% to 89.4%, general and administrative expense ratio 8.2% to 8.6%, and an effective tax rate for the year of 40% to 42%. Diluted shares outstanding 60.0 million to 60.4 million shares.

We have included a table in our press release reconciling our EPS guidance provided as part of our second-quarter press release to today's updated guidance.

Our 2014 guidance assumes we will receive the signed health insurer fee agreement in Texas, our most significant state in terms of dollars, in the fourth quarter. As a result, we believe there will be no significant impact to the Company for the full year related to the health insurer fee.

For income taxes we have recognized a $0.24 benefit during 2014 related to prior years and acquisition transaction costs are expected to total $0.12 per share for all of 2014. We also believe that based on our 2014 revenue estimates we will not be subject to the additional tax related to the limitation on compensation deduction in 2015.

Our business expansion costs for the year are estimated to be $0.55 to $0.60 and include $0.12 in acquisition transaction costs for US medical management Louisiana and [Spain]. Third-quarter expansion costs were approximately $0.14, which is less than we previously estimated due to a lower amount of acquisition costs.

This now concludes our prepared remarks and, operator, you may now open the line for questions.

(Operator Instructions) Joshua Raskin, Barclays.

Thanks, good morning. So the question just around the tax rate, I just want to make sure I understand. Is it a permanent change that will -- it sounds like you are expecting it, Bill, to continue in 2015, but what exactly changed around the deductibility compensation expenses?

And I think you said it was revenue dependent, i.e., should we think about this 45% to 46% tax rate for eternity or is there something that can change that would put you back up towards that 50% tax rate?

The final regulations, which were issued in September, laid out the calculations in terms of how this is to be done and essentially what happens is there is a one-year lag. So the 2013 revenue amounts are calculated, and depending on where those fall, they dictate whether you would be subject to this limitation in 2013 and 2014 in that case, because that was the first year of the tax.

And so the tax is calculated based on -- I will use a broad word like commercial revenues divided by total revenues. And there's a limitation on how much that can be, whether you're subject to the tax or not. We are below those de minimus tests in 2013 so therefore we didn't have to pay tax for 2013 and 2014. And based on our 2014 revenues, we don't think we will be applicable -- we have to pay this tax in 2015.

This is a year-by-year calculation and it will depend on our operations going forward, but obviously it is something we would be looking at very closely.

Just to give us a sense, Bill, are you guys close to hitting the commercial limitation? Would you have to exit some exchange business to make sure you don't hit that? Just in terms of likelihood of this actually persisting.

Well, I think right now it's hard to have a good crystal ball forever, but as I said, we don't think it's going to be applicable to us for 2013, 2014, and 2015. And I will leave 2016 to some other time.

All right. And then just, you didn't mention Florida but after some [comments on healthcare] last quarter, curious if you've got any more color on Florida specifically.

Sure. I think in Florida we've got three new products effectively going in there, including long-term care, the basic Medicaid program, and the foster care program.

I think with respect to long-term care, we are working with the state on finalizing the rates for September 1 and dealing with some of the issues there in long-term care, and we expect that to be done later this quarter. I think the other programs, quite frankly, are performing near our expectations and what we originally contemplated when we prepared our bids and submitted those to the state.

I would just add, Josh, just to reinforce that the MMA, the foster care, as I said in my prepared remarks, is consistent with our expectation, our pricing. Pharmacy costs are in line. We have real-time pharmacy costs from our PBM, so we are comfortable with Florida.

We are comfortable we are working through any issues that come up in Florida as we have been very responsible partners at every level.

Okay. And then I am sorry to sneak in a last one, but any commentary on 2015 revenues? I think you guys previously suggested $18.5 billion if you didn't win anything, etc., at the investor day. I assume obviously that has gone a little bit higher based on some of the contract wins, but is there a starting --?

Yes, and I guess some people may try to figure out where it was going from there, but we are going to wait till December 12 when we just give a very complete picture of how we see it, Josh. And that's probably when we would even say we see it up by how much or something of that nature.

All right, I'll wait.

I do expect it to be stronger, I will tell you that.

Okay. All right, thanks.

Chris Carter, Credit Suisse.

Thanks, good morning. Just on the MLR, a little bit higher than we expected. It looked like the new business MOR was down sequentially, so pretty good, but the existing business MLR was up. Can you just give us any color in terms of what is driving that, maybe?

I think the primary thing, as we talked about, is the higher acuity business. When the state rates each of these products, they have a targeted loss ratio. You are usually in the 90%s for things, a lot of SSI products, a lot of long-term care and the duals, among other things. And so as that mix shifts towards more of that you will see an increase in the consolidated ratio.

We did not see an increase in medical costs trends or utilization really. I would say it is pretty much all mix at this point in time and nothing that was unusual from our vantage point.

But I guess did anything else really move into that bucket in the quarter?

You have got stuff that was long-term. Some of the regions from long-term care in Florida would have moved into that bucket because they started last year in August, but only a little bit.

Okay. And then just I --.

I would say, I think importantly it's performing in line with expectations and, from a general trend standpoint, it is doing just fine.

Okay. And then just on the Louisiana contract. I know you guys said you think you can hit kind of 320,000 to 350,000 members next year. I think that implies a pretty hypertension rate of the CHS lives, I guess.

How do we get comfort that you guys can pick up those members as opposed to them being assigned to the new entrant or even -- United I think that was the shared savings program?

I'll let Jesse respond to that.

Sure, Chris. I think what the state has laid out I think with some clarity, kind of the process, if you will, for how members will move under the new contract. So as it stands today we have two contracts, one full-risk and then the CHS shared-risk contract.

So the formula that the state has laid out includes, first and foremost, member choice and so we -- that is always the starting point. But the other two criteria include primary care continuity, so having the same primary care from one program or one product to the other. And then really the MCO history, if you will.

So when we look at our experience, having now operated the shared savings contract for a period of time in 2014 and then the very strong primary care network overlap that exist between our risk product and the shared savings product, yes, we do have confidence with a retention rate for the CHS business that is reflected in that 320,000 to 350,000 member range under the new contract.

Okay. Thank you.

Sarah James, Wedbush Securities.

Thank you. You mentioned in the prepared remarks that you expect Texas to update the contract for the health insurance fee by year-end, but I believe their session doesn't start until January 15. So if you could talk about what gives you confidence that there will be a resolution (multiple speakers).

Well, I think there's two issues. I think there's the issue of when they sign the agreement and when they fund it. And what's important is that it be signed this year. We can recognize it. And then if they fund it in -- it becomes receivable -- if they fund it in the first quarter, January, February that is fine.

So you have to draw that distinction, Sarah, between the signed agreement and the actual payment. And we're talking about being able to recognize it in the fourth quarter.

Thank you. Then last question here is on the expansion eligible population. I know that last quarter there were some states that were still working through their backlog. In particular, I believe California had about 600,000.

Can you update us on the progress of those backlogs in your expansion states? And should we think about expansion enrollment increasing through the end of the year or are you about where you expect to be on that?

Rone?

We have seen continued increases in enrollment in our Medicaid expansion states, especially Washington and California; to some extent Ohio. We have seen states get through a lot of the backlog, as you mentioned.

Plus with respect to [Woodwork], we have identified Woodwork as being a factor in the states where we have seen Medicaid expansion. So we continue to think we will see some growth in enrollment, but probably the bulk of it has happened through the three quarters at this point for 2014.

Got it. Thank you.

Matthew Borsch, Goldman Sachs.

Thanks, this is Bo on for Matt. Quick question on service revenue. It was down sequentially; is that a product of flattening Sovaldi?

I think that is the simple answer that we did see in the third quarter. As we said -- at the end of the second quarter I think we said we thought we would see some plateauing of those costs and revenues in effect. And then the fourth quarter we expect to see that reverse with the new products.

Okay, got it. And with these new products are there any new agreements, or can you provide any commentary on what some of the states are working on for potential carveouts or reimbursement?

I will start off and ask Mary she wishes to add something or if Rone. But we are working with them now and we are following the same general procedure we did with the initial hepatitis C products and so we see ourselves continuing on what was a very effective course.

Rone, would you give more color?

Well, we have been working on this issue with the states and since the beginning of the year, both for Sovaldi as well as for the new therapies that are coming on. States have recognized the need to make an adjustment for these new therapies. The majority of our states have put in place -- are putting in place either a carveout program or a kick payment or some sort of reinsurance, or we are not covering pharmacy in that actual state, so that covers the majority of our states. The others have put in place some form of rate adjustment for 2014 and going forward.

So in aggregate we think the states have responded with fairly meaningful programs to mitigate the costs of these -- the existing therapy as well as the additional therapies going forward. But this is something we continue to work with the states on as well as the experience with these drugs emerges.

Will this be a continual rate negotiation with the states on a go-forward basis, or have they made the adjustment and this will be applicable for 2015 going forward?

Again, it varies a little bit by state. For the states that have put in some of the risk mitigation programs I mentioned previously, it is not a rate dependent issue. For the states that are relying on this more on a rate basis, there is an aspect where they want to look at the actual experience and then reflect that in the rates. So it's a mix.

Okay. Thank you very much.

Andy Schenker, Morgan Stanley.

Thanks, good morning. Just maybe a quick housekeeping one here. Looks like for the two recent -- the transaction costs for the deals here you only booked about $0.06 in the quarter. I thought originally it was supposed to be $0.12. Did anything change there or maybe that is going to be fourth quarter? Anything we should be thinking about there?

I think that our estimate we gave in July tended to be high. We actually came in at $0.06, so lower than what we thought we were, after we did all of our purchase accounting and ran all the transactions through.

Okay, great. Then thinking about your investments and expectations for startup costs in 2014, can you kind of remind us how those ramped and progressed through the quarter year to date and maybe how should we be thinking about some of those costs into 2015?

I think that they are generally equal for each quarter, depending on the acquisition transaction costs. So we had that in the first quarter and then somewhat in the third quarter. It's not unusual with some of the product startups that we will have a higher level of fourth-quarter costs as we get ready to do a couple of those. But I don't know that there's great variability from quarter to quarter other than what occurs as a result of the acquisition transaction costs.

Okay, so it's still the $0.60 to $0.65, I think you called out, is that still what it is?

I think I said $0.55 to $0.60 in my script.

Sorry, sorry about that. Okay, thanks. Then, for next year, how should we maybe just big picture be thinking about that? Thank you.

We will be talking about that on December 12.

The only thing I would say is we always expect to have business expansion costs. Now, as our revenue grows, as a percentage of our revenues it probably doesn't grow. It probably gets smaller, but it's still half the amount in terms of cents per share.

Okay, thank you very much.

Scott Fidel, Deutsche Bank.

Thanks, this is Shawn Bevec on for Scott. Question about the MLRs. Obviously higher acuity membership mix is likely to continue to grow, which will continue pushing your MLRs higher. Do you think that MLR trends going forward will be in that low 90% range?

I think it depends where we end up from a mix standpoint. I would say they will get closer to 90%. I don't know that they will get to 90% on a blended overall basis yet.

Okay. Then one question on the exchange business. I know it is small for you guys, but can you talk about any of the three R's accruals that you've been making this year?

At this point in time we don't have any substantive dollars for the specific three R accruals. We are continuing to develop information with respect to things like risk adjustment, etc., and there is a little bit of reinsurance as a result of claims over the certain dollar amounts, but nothing of any great consequence.

All right, thanks guys.

Justin Lake, JPMorgan.

Good morning. This is Mike Newshel in for Justin. First, just one clarification on the tax benefit. I think you mentioned that in addition to the $0.33 of prior-period benefit in this quarter there's also $0.06, and so that basically will give you a $0.12 benefit from -- for the fourth quarter?

I think that is correct, right. I would say, rough numbers, is $0.24 related to 2013 and before; $0.27 related to 2014.

So essentially from the EPS number for the quarter, excluding the tax benefit from the prior periods and the quarter itself, comes to about $0.95, is that right?

Well, we reported $1.34, so it understand your math, which pieces you take out and which ones you add in, but that is -- I'll leave that to you.

Okay. And just one more thing on the premium tax. You didn't mention California. Do you expect to be reimbursed there, or is it just because it is so small that it is negligible either way?

The state had a letter earlier in the year indicating they were going to reimburse it. It wasn't of sufficient nature to actually record the fee at that point in time, but fully expect to receive that.

In our case, we only had two months of operations in 2013 that would have been subject to tax for this year, so it's very immaterial for us.

Okay, great. Thank you.

Steve Halper, FBR.

Just regarding the Texas fee in the fourth quarter, what does the accounting look like? Is that just one big revenue adjustment in the quarter?

Essentially yes. (multiple speakers) We obviously didn't record it in the first three quarters, so I think we reported an impact of $0.16 for Q1 and Q2 and $0.15 in Q3. So that would all reverse in the third quarter if we received the Texas one, so we would have all four quarters.

Thank you.

Dave Windley, Jefferies.

Thanks for taking the question. I was hoping you can talk a little bit about rates, coming at it from a couple of angles. On the one hand, we are seeing some surveys that suggest that more states are adding benefits to Medicaid programs looking into 2015, so that would obviously be a need for an increase in your rates to cover that.

On the other hand, I am wondering to what extent, probably particularly in Medicaid expansion, where rates were high in year one in anticipation of pent-up demand and higher utilization for new populations. How do we think about blending those types of things together into a composite rate outlook for 2015?

So I'm not sure if everybody caught all of that or not, but with respect to new benefits that are added, that is generally covered by additional rates that are paid by the state. That's a normal process that occurs all the time that's almost like a pass through in many cases.

And then, with respect to the new Medicaid expansion rates which were higher, let's say, because there was some concept of pent up demand, that's all being discussed with the states as we move forward into 2015. And there is really no -- nothing new there at this point in time to say that that rate adjustment will be very significant.

So, Bill, do you have a view on a rate, a composite rate? Should we expect something around flat like it was for -- or like you are anticipating for 2014, or is it too early to really think about a point estimate number?

Yes, I would say it is fairly early. We don't expect to have significant rates increases in any cases. We've always said it's rather modest, particularly net of changes in the Medicaid fee schedule. We will talk about that more on December 12 at our investor day when we specifically cover 2015.

It tends to be a state-by-state negotiation review and then we will see how it all rolls up and we will give you the number on the 12th.

And maybe a follow-up question. On your G&A ratio, is there a floor on that? To the earlier question about MLRs moving up as higher acuity populations move into the mix or grow in the mix, obviously I would think that your offset would be leverage on SG&A. Is there -- what is the level at which you have kind of achieved full leverage and that number can't go any lower?

That's a good question, I'm not sure I have an answer on that at this point. I think that obviously it continued to go lower. We had 8.0% for this quarter, but we had $0.06 of transaction costs included in that number, so obviously if you factor that out it would be lower than 8%.

So I think clearly it can be in the 7%s. How much -- where in that, I don't know yet. But I think we do obviously see the benefits where we are just adding additional revenue and the fixed costs that we have are spread out over a wider base.

It goes back to products mix, because if you think about it in Louisiana we are adding the standard Medicaid type population there; in other states the high acuity. So it's how all that mix comes together.

Sure. Thank you.

Chris Rigg, Susquehanna International Group.

Good morning. Hopped on a little late here, so apologize if these are asked or covered already. But I think some states still have in the traditional Medicaid managed care bucket rate increases in the second and third quarter, like Georgia, Texas, Florida. Were there any notable rate actions or lack thereof in the period?

It's interesting because this year has been rather quiet in that regard and so the rate adjustments for July 1 in Georgia or September 1 in Texas are rather modest on both sides -- both cases.

Okay. But no material impact in third-quarter results?

Nothing in the third quarter. As I said earlier, I think in Florida we are working on long-term care rates, which we expect to get resolved in the fourth quarter, but obviously that would have been a September 1 effective date. So it's only one month that would've been in the third quarter anyway.

Okay. Then on the increase to the revenue outlook for the year, is that primarily coming from one cohort of membership, or is it pretty broad-based?

I would say it is pretty broad-based.

Across the business.

Okay. And then just lastly, when I look at the core increase in guidance of the $0.09 to $0.14, that is all operations, correct? The tax impact are the numbers below that, the $3.84 to $3.99; is that correct?

I think that if you look at the table we put in the full tax impact in there. The $0.51 I think was subtracted out. That is the full impact for both last year and this year, so it excludes the impact of any -- the favorable tax adjustment, so --.

Okay. And I'm sorry, maybe I'm just not getting this. But just to be clear, the $0.27 is for all of the 2014 not just the first three quarter catch-up, is that fair?

Yes, correct. I think that's right. What we tried to provide in the last pages of our press release on the guidance tables was a reconciliation and that is for the full year. We always give guidance on a full-year basis.

So what we have done is broken out the tax benefit calculation into the two parts last year and this year, so on a going-forward basis obviously the $0.27 is just -- we would've previously thought we were going to accrue for that and now we are not. So you can throw that into the run rate numbers and do whatever you choose to in terms of your models.

Got you. Okay, thanks a lot.

Kevin Fischbeck, Bank of America.

This is Steve on for Kevin. I wanted to come back to MLRs. So I appreciate the shift towards higher acuity overall in your book, but it looks like sequentially the MLR for the Medicaid CHIP, foster care, and exchange business is up about 190 basis points and the ABD, long-term care, and duals MLR actually declined about 100 basis points. So I was just hoping you could give some color, maybe what's driving the sequential increase in the lower acuity book.

I think one of the things that has a big impact is in Florida the MMA business is in the first line for Medicaid. And I think that as Michael indicated I think in his remarks, the HBR for the MMA business in Florida is at a higher rate than was traditionally incurred in Florida, so year over year you would see an increase. That was consistent with our expectations and what we put in the bid documents, but year over year you would see that type of adjustment.

It was a big population, but importantly, I can't emphasize it enough, it didn't come as a surprise. Everything is coming in as expected.

Okay. So the shift from Q2 to Q3 was largely driven by the growing population in Florida, that is continuing to come in around the same MLR for the new program. Is that the right way to think about it?

Right. (multiple speakers) The new MMA business is at a higher rate than the old Medicaid business was in Florida.

Okay, thanks. And then, just looking at the MLR guidance then, it came up a little bit. Is that driven by a certain segment performing differently than maybe you expected, or is the mix just coming in a little differently?

I think it is generally mix that -- those have gone upward as we have continued to grow. And we continue to see duals growing.

Okay, thanks. Then just on the trajectory for guidance, I was just wondering if you could help us, maybe if there's any puts and takes that we should be kind of thinking about as we build our model for the fourth quarter. If I kind of just carry the same MLR to the fourth quarter I'm coming in kind of towards the top end of your range, so if there's anything we could be thinking about there that would be great. Thanks.

I don't know that there's any specifics on the fourth quarter that we have to offer. I think that at this point the guidance we gave for the full year you should be able to get some idea where the fourth quarter falls out and we will leave it at that.

(Operator Instructions) Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Neidorff for any closing remarks.

I think you all for joining us. We look forward to continuing what you have seen through the first three quarters into Q4 and beyond, and we will be talking to you in the near future. Look forward to December 12 when we'll give you a lot of information that you've been looking for. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.