Centene Corp (CNC) 2014 Q4 法說會逐字稿

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

(Operator Instructions) Please note this event is being recorded.

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

Please go ahead.

Thank you, operator, and good morning, everyone.

Thank you for joining us on our fourth-quarter 2014 earnings call.

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

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

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

The playback code for both of these calls is 10058403.

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 October 28 of 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, June 12, 2015, in New York City.

Please mark your calendars.

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 fourth-quarter and full-year 2014 earnings call.

During the course of this morning's call, we will review our strong 2014 performance and provide updates on Centene's markets and products and recent M&A activity.

I will begin with highlights of Centene's 2014 achievements.

Our 2014 financial performance was very strong, capped off by the fourth-quarter results we reported this morning.

In 2014, we added 1.2 million members, surpassing the 4 million mark.

We grew revenues by almost 50% to $15.7 billion and diluted EPS by 55% to $4.45.

This compares favorably to our initial 2014 revenue guidance of $13.8 billion and EPS guidance of $3.65 at the midpoint.

Note that these 2014 growth rates exceed Centene's five-year CAGR of 32% for revenue and 18% for EPS.

Our shareholders benefited from this strong financial performance.

Centene's stock increased 76%, and our return on equity was 18% in 2014.

Our expanding market cap placed us into the mid-cap equity category, as evidenced by Centene's inclusion in the S&P 400 Mid-cap and Russell 1000 Indices.

We successfully navigated the first year of the key provisions of the ACA.

Centene selectively participated in Health Insurance Marketplaces in nine states.

Consistent with our forecast, we secured reimbursement for 99% of the health insurer fee in 2014.

We also enhance our diversification by product and geography, including our initial entry into international markets.

Centene continues to create jobs across its enterprise.

The number of our employees increased by over 50% to 13,400 in 2014 alone.

Over 85% of these employees are outside Centene's headquarters; this is consistent with our local approach.

Next I will turn to market and product updates.

First we will discuss recent Medicaid activity.

Louisiana.

On February 1 we began our new statewide contract.

Under this program, Centene is covering all its members on a full-risk basis.

We expect to be at the high end of our prior guidance of 320,000 to 350,000 lives and anticipate more than doubling our revenues in Louisiana, approaching a $1 billion annual run rate.

Mississippi.

During the fourth quarter we began providing services under the MississippiCAN program to TANF children.

While the initial group of members were enrolled in December, most will be enrolled during the second and third quarter of 2015.

Separately, we began operating under a new contract serving CHIP beneficiaries in Mississippi during January 2015.

Texas.

The state will begin carving in nursing homes services for its STAR+

PLUS programs on March 1. This will be in addition to the home- and community-based services Centene currently provides its STAR+

PLUS beneficiaries.

Indiana.

In December, Centene was selected by the state to begin contract negotiations to serve ABD Medicaid beneficiaries under Indiana's new Hoosier Care Connect program.

This additional program will serve a total of 84,000 enrollees and will commence in the second quarter.

Last week, Indiana received CMS approval for an alternative Medicaid expansion plan, HIP2.0.

This membership ramp will begin in February and continue throughout 2015.

We had previously included this in our 2015 guidance.

Arizona.

Also in December, our Behavioral Health subsidiary was selected to provide services under an expanded contract for the states newly formed Southern Region.

Cenpatico Integrated Care, a partnership between Cenpatico and the University of Arizona health plan, will bring the integrated care model to members in this region.

This contract is expected to commence in the fourth quarter of 2015.

Moving into dual eligibles, at the end of December we had over 16,000 members in Illinois and Ohio dual demonstration programs.

Passive enrollment in the Medicare coverage began in January for Ohio Medicaid members participating in the state's dual program.

On February we began our dual demonstration program in South Carolina.

While initial membership is modest, we will continue to ramp up over the course of 2015.

We were scheduled to begin additional dual contracts in Texas in the first quarter and Michigan in the second quarter 2015.

Now Health Insurance Marketplaces.

At December 31, Centene had 75,000 exchange lives.

The demographics remain in line with our pricing.

The financial performance of our exchange business was slightly ahead of our projections for 2014.

We began participating in the Illinois and Wisconsin health choice marketplace on January 1. Early enrollment indicates we are tracking to meet our 2015 membership projections across our original nine states and two new states.

Next, Centurion.

We continue to successfully expand our correctional health business.

On February 1, Centurion commenced its fourth contract, providing medical and behavioral services in Vermont.

Switching gears to recent M&A activity, last week Centene signed a definitive agreement to acquire Agate Resources, which serves 87,000 Medicaid and 3,500 Medicare Advantage beneficiaries in Oregon.

This transaction is expected to close in the third-quarter 2015 and be accretive in the first 12 months.

Our entry into Oregon will Mark Centene's 23rd state of operation.

During the fourth quarter, Centene further expanded its reach into international markets.

We made a small investment in a UK health management company, Group Practice.

This company provides primary-care community-based and utilization management services for the National Health Service.

Next, I'll provide a brief update on flu.

Centene's most recent data suggests that the flu season peaked in late December.

This is consistent with the CDC's finding.

It is, however, too early to draw an absolute conclusion.

By example, we still saw flu activity in January.

While it will not impact our annual guidance, it could have a mitigating effect on the first quarter.

Our Fluvention program continues to stress flu vaccination and early treatment.

Aside from flu, we anticipate stable medical cost trends in 2015.

Now on to hep C, or hepatitis C, therapies.

Our hepatitis C cost experience in 2014 was consistent with our expectations.

The net cost in the fourth quarter increased sequentially.

This was expected as new therapies were approved.

We remain engaged in constructive discussions with our states to ensure that new treatments are properly managed and are fully reflected in our reimbursements.

A quick comment on rates.

The 2014 composite rate adjustment was 1%, slightly better than our expectation.

We continue to project a 2015 composite rate adjustment of flat to 1%.

In conclusion, 2014 was a banner year of profitable growth and diversification for Centene.

We expect to maintain positive momentum in 2015 and beyond.

Centene continues to benefit from its robust pipeline of growth opportunities, while remaining focused on margin expansion.

Before I turn the call over to Bill, I would like to draw your attention to the 2-for-1 stock split we announced this morning.

This will be distributed February 19.

The stock split enhances liquidity for our shareholders, in line with Centene's market cap growth.

Thank you for your interest in Centene.

Bill will now provide further details on our fourth-quarter and full-year 2014 financial results.

Bill?

Thank you, Michael, and good morning.

This morning I will cover both our fourth-quarter and full-year 2014 results.

On the top line for 2014, our premium and service revenues totaled $15.7 billion, an increase of 49% over 2013.

Our fourth-quarter premium service revenues were $4.4 billion, a 54% increase over the fourth quarter of 2013.

On the bottom line, diluted earnings per share for 2014 was $4.45 per share, compared to $2.87 for 2013, representing a 55% increase between years.

For the fourth quarter, diluted earnings per share was $1.74, compared to $0.84 last year.

The fourth quarter EPS this year benefited significantly from recording the full-year accrual for the revenue from the Texas health insurer fee that we announced on January 2 in a separate Form 8-K.

In more detail, our premium and service revenue grew by approximately $1.6 billion in the fourth quarter year-over-year as a result of: expansions in a number of our states between years; full-quarter revenues from California and New Hampshire, which began operations in Q4 of 2013; Health Insurance Marketplace revenue, which was new in 2014; growth in the AcariaHealth business; and revenue from U.S. Medical Management, acquired at the beginning of 2014.

In 2014 we benefited from approximately 201,000 members added in Medicaid expansion programs as of December 31.

In addition, we experienced membership growth in traditional TANF programs of almost 200,000 members, part of which might be considered as woodwork effect related.

For the full year, we recognized $195 million in health insurer fee revenue, which represents 99% of the total reimbursement amount for the year.

California is still in the process of providing a binding agreement for the reimbursement of the health insurer fee.

We paid $126 million for the health insurer fee in the third quarter.

Our health benefits ratio was 89.3% in the fourth quarter, compared to 88.1% in last year's fourth quarter and 89.7% in the third quarter this year.

The increase of 120 basis points from last year is primarily the result of the higher level of complex care revenue, which carries a higher health benefits ratio, along with a higher level of flu cost incurred this year.

Sequentially, our health benefits ratio decreased by 40 basis points from the third to the fourth quarter.

The decrease reflects favorable amounts recorded in the fourth quarter related to retroactive rate increases and revenue related to performance measures received in several states, offset by the impact of the start of flu season.

For the fourth quarter, 30% of our premium and service revenues came from new business, compared to 17% in the fourth quarter of 2013.

The health benefits ratio for our new business was 89.4%, and 89.2% for our existing business in the fourth quarter.

The lower HBR in the fourth quarter this year for our new business is primarily the result of favorable year-to-date adjustments recorded in the fourth quarter related to our Florida long-term care business.

Our general and administrative expense ratio was 8.2% in Q4 this year.

This compares to 8.9% in last year's fourth quarter and 8.0% in the third quarter.

The 70 basis point decrease year-over-year is a result of additional leverage achieved related to the significant revenue growth.

Sequentially, our G&A ratio increased by 20 basis points, resulting from additional costs incurred in preparation for new business expansions.

Business expansion costs of $0.19 were incurred in the fourth quarter, and $0.59 for all of 2014.

Investment and other income was $10 million in the fourth quarter, compared to $5 million in the fourth quarter last year, reflecting a higher level of investment balances in our statutory insurance entities.

Interest expense was $10 million in Q4 this year versus $6 million last year.

The increase reflects the expense related to the $300 million of senior notes issued in the second quarter of 2014.

Our effective income tax rate in the fourth quarter was 46.4%, and 42.9% for all of 2014.

The fourth quarter rate is consistent with our third-quarter comments and reflects the nondeductible nature of the health insurer fee.

The full-year rate includes the benefits of approximately $0.24 per share from the reversal of amounts recorded in prior years related to the IRS rules issued in September.

Diluted earnings per share was $1.74 for the fourth quarter, and $4.45 for the year.

This compares to $0.84 for the fourth quarter of 2013 and $2.87 for full-year 2013.

Our cash and investments totaled $3.1 billion, including $85 million held by unregulated entities at year-end.

Our risk-based capital percentage continues to be in excess of 350% of the authorized control level.

Debt at December 31 was $893 million, including $75 million of borrowings on our revolver.

Our debt-to-capital ratio, excluding our nonrecourse mortgage note, was 32.1% at year-end, compared to 32.4% at December 31, 2013.

Our medical claims liability totaled $1.7 billion at year-end and represented 44 days in claims payable.

Our DCP number has been higher this year than normal due to the significant growth in new business, and I expect the DCP number to be more in the 39- to 43-day range in 2015, subject to the new same business impact.

Cash flow from operations was $369 million in the fourth quarter and $1.2 billion for the full year.

The full-year amount represents 4.6 times net earnings.

Our 2015 guidance numbers are the same as we presented at our Investor Day in December: premium and service revenues, $20.3 billion to $20.8 billion; diluted earnings per share of $5.05 to $5.35; our HBR, 89.2% to 89.6%; G&A percentage of 8.0% to 8.4%; effective tax rate, 48% to 50%; and diluted shares outstanding, 61.5 million to 62.0 million shares.

We continue to expect to be reimbursed for the health insurer fee on a grossed-up basis in 2015, and business expansion costs are estimated to be between $0.45 and $0.50 for 2015.

As noted in our press release, the Board declared a 2-for-1 stock split to be distributed on February 19 to holders of record on February 12.

Our Form 10-K, which will be filed later this month, will present all share and per-share information on a split-adjusted basis.

With that, operator, you may now open up the line for questions.

(Operator Instructions) Joshua Raskin, Barclays.

Hi.

Thanks.

Good morning.

First question, just on the retroactive Florida payments, could you quantify that, just so we can get an estimate what the impact was in the fourth quarter?

I don't think I ever gave a specific number.

I think we've been working with the state of Florida for some time to try to deal with some of the long-term care rate issues.

We had anticipated that we would get that concluded in the fourth quarter in our guidance numbers; and that effect, in effect did occur.

Okay.

Then I guess looking at the same-store versus the new-store MLR, those numbers are actually very similar this quarter, which -- a little bit surprising in light of the fact that the new membership, I would assume, is coming in at much higher levels of acuity and, as you call it, complex care.

So my guess is Florida has something to do with that.

Is that impacted by the Texas reimbursement as well?

I guess I am just curious, as you think about going (technical difficulty) you guys had a ton of new starts in January.

Would you expect those MLRs to be similar going forward, or would you expect a divergence in 2015?

I think that's a good question, Josh.

For the fourth quarter, there's no question.

For the quarter, the new business HBR was much better than we would normally expect it to be because of the Florida retroactive rate increases, which went back for a whole year.

So I think that going forward into 2015 we would expect to see a more normal spread between new business and existing business, which we said could be particularly 300 to 500 basis points.

So I would expect that to occur going forward.

And going forward, there will be some impact of the increasing denominator as well.

So there'll be that to consider.

Okay.

Then just lastly on hep C, with some of the new therapies coming in, I'm just curious how you guys are thinking about formulary management.

Are you seeing any discounts from the manufacturers?

Are you guys thinking about one drug over the other?

We have a -- our distributor, of course the Company has one of the exclusive distributors, Acaria, that works with all the manufacturers.

And so we will take advantage of that based on what our providers are looking for.

This is a good time to remind everybody, right now 90%, 90%-plus of those costs we have agreements with the state for reimbursement.

So we work with them on guidelines, and we supply some knowledge and information we've gleaned from having Acaria as part of us, and we'll provide that background to states as they develop their guidelines.

That's perfect.

Thanks, Michael.

Chris Carter, Credit Suisse.

Thanks, good morning.

Just on the flu, could you give us any color around how much that impacted the 4Q, and then maybe what you are assuming in guidance for the first quarter?

Without giving specific numbers, I think flu in the fourth quarter was at a higher level than we saw in the 2013/2014 season.

And that season was a relatively normal to below-normal year for flu.

So we saw it bounce back up, particularly in December; and also in January we've seen that through.

But we think it's fairly well decreased at this point in time, but it could have a small impact on Q1 versus other periods.

But I think that's nothing to impact our overall guidance for the year.

I think the key thing is the guidance for the year is intact, but we are anticipating it could mitigate Q1, depending on how it spikes.

Flu often can spike again, and that's the kind of thing we will consider when we look at Q1.

Okay.

Then maybe just on that point, I know there's a lot of moving parts this year with the industry fee.

I guess, how should we be thinking about the EPS progression for 2015, or maybe directionally how we should think about 1Q?

I think that as we look at that, the way -- if you take the health insurer see and sort of flatten that out in 2014, I think the relationship of the earnings by quarter in 2014 will be similar in 2015.

Got it.

Okay.

Then just last question.

The Oregon acquisition, am I right that that's somewhere in the range of $400 million in annualized revenues?

Jesse?

Yes, that's right.

So for 2014 there'd be a little bit in excess of $400 million in annual revenues based on a combination of their Medicaid and Medicare government business.

Okay.

Any thoughts on purchase price there?

We didn't disclose anything on purchase price.

We didn't do it in the release, and so we are not going to change that position.

It was fair to us and to them.

Okay.

All right, thank you.

Sarah James, Wedbush Securities.

Hi.

This is Michael Ha talking for Sarah James.

Thank you for having us.

My question.

I know you talked about the flu, but how much did the flu actually contribute to the increase in existing business MLR?

And was that the only driver of the increase?

In Q4?

Yes.

Yes.

It was sort of hard to hear the question.

If you could repeat.

Yes, sorry.

Let me repeat that.

How much did the flu actually contribute to the increase in existing business MLR?

And was that the only driver of the increase in Q4?

I think what we said for Q4 was we benefited from certain retroactive rate increases and also performance measure adjustments that we received from some of the states, offset by the higher level of flu costs.

So I think net it sort of offset each other; but certainly it was there.

We had some transaction costs in there, too, in [Florida].

Okay, thank you.

Just one more question.

Is there any update you can provide on when the Florida formulary can be changed?

Initially it looked like it could be done at the beginning of the year; but comments by the Medicaid director indicated that they thought a delay was being considered.

We are -- people in Florida continue to work with them on what's the appropriate and effective formulary.

Growing that like it's (multiple speakers) --

It's certainly a topic of ongoing discussion with the state, but there is no specific date that we can point to at this point when there might be a change to managed care plan formularies versus the state formularies.

So that's the current situation.

And as we did last year, we anticipated that and we've priced that into our guidance.

Okay, great.

Thank you very much.

Chris Rigg, Susquehanna Financial.

Hi, good morning.

Thanks.

Just on premiums for the Medicaid expansion membership, do you guys have any sense for how they are tracking year-to-year?

Has there been -- did the states have enough information to adjust rates (technical difficulty) 2015 at this point, or is it still too early to tell?

I think that our experience in 2014 was generally very favorable, which would indicate that the rates that were originally set for the Medicaid expansion business were at the high end.

And so we would expect over time that those rates will be adjusted.

Most of those books of business have minimum HBR calculations that we have to pay back to the state the -- anything below that; and we have several states where that in fact did occur.

So I think most of the rate adjustments we see in 2015 will probably just be to true up to where the regular -- the normal run rates would be and would basically offset what we set up as a payback under the minimum HBR calculations.

Okay.

Then just with regard to Indiana, the new program there, the new Healthy Indiana -- and this is more of a big-picture question.

But what do you guys -- how do you guys think about membership when there's premiums and co-pays?

How does that impact utilization in the Medicaid population?

And then, do you know if hospitals or other third parties are allowed to pay premiums in the new program?

Thanks.

Rone?

Well, there are two parts to the program: one where there is more cost-sharing, one where there is not cost-sharing.

So it depends a little bit on how the ultimate mix of membership plays out in terms of that.

But I think that we don't expect that we are going to see a significant impact on expected utilization one way or the other, with respect to how that plays out.

So I think that we expect this pop we have experienced in other Medicaid expansion populations around here, and we think that that will be a good indicator of what we expect for the Healthy Indiana program as well.

I don't think, with respect to third parties paying premiums for members, I don't think that that's something that's really contemplated.

I haven't heard of that as being anything that's being put in place.

That has not -- that was something that was an issue that came up with respect to exchange enrollment, and it's really not played out as a significant factor at all in the exchange market.

Okay.

Thanks a lot.

Andy Schenker, Morgan Stanley.

Thanks.

Good morning.

Just maybe on the exchange business here, it sounds like you said it's running -- 2014 ended slightly better on performance than you expected.

Maybe if you could talk about how that maybe could carry over into your 2015 expectations for that book of business.

And then maybe just related to that, any updates about growth in that business as it relates to the de minimis rule for taxes?

Thanks.

Well, we do expect that with respect to the 2015 performance on exchanges, we priced to be able to achieve our 3% to 5% pricing margins, so we do think that we are going to see that emerge in 2015.

We will have some additional scale, which will help spread some of our fixed costs that we think is going to improve our margins a little bit versus 2014 in the product line.

We are -- we do feel that we can manage the growth of this product line, and we do intend to and stay below the de minimis rule with respect to the tax issue.

Okay, great.

Then just a little one here on the favorable reserve development.

Just looking at the roll-forward table, it looks like on the trailing 12-month basis it actually declined about $6 million sequentially.

Anything just worth mentioning there or driving that change?

Thank you.

I wouldn't say there's anything specific.

Those are numbers -- 12-month developments for the reserves, and I think they are pretty healthy in general.

A $6 million swing is nothing of any consequence.

Okay.

Thank you.

Justin Lake, JPMorgan.

Hi.

This is Mike Newshel in for Justin.

You said the potential drag from flu in the first quarter doesn't change your full-year guidance.

Is that because the impact is small enough to fit within the original range?

Or is there something, some new incremental offsetting factors that weren't in guidance before?

I think we anticipated the flu in our annual guidance.

And we anticipated that while it was starting to peak in Q4, we still anticipate that we could see another spike in Q1 and which could have an impact, but not impact the overall annual guidance, as we built that in for the year.

So if flu continues to trend down, then you'd -- then it will end up more aligned with your expectations?

It wouldn't be a drag in Q1?

We still see the flu could potentially be what you call a drag, what I call anticipated higher level, if it spikes.

But we tend to look at it from an annual standpoint.

And our annual guidance is intact.

Got you.

Is the specific timing of Indiana's Medicaid expansion in line with what you assumed in guidance?

Or given that it launched so quickly on February 1, is there incremental there?

Are you talking about Indiana, or --?

Yes, Indiana.

Yes.

We considered that in our original guidance.

I think that was the plan, and they were able to successfully achieve that, as they announced recently.

Yes.

So the timing is no different from what you assumed?

Correct.

Okay, great.

Thank you.

Matthew Borsch, Goldman Sachs.

Thank you.

This is Bo Brandt on for Matt.

Just following up on Indiana, can you provide any details on assumptions for market share?

Are you assuming that you are going to maintain market share into the Medicaid expansion population?

Rone?

We're one of three players in the program, so that's roughly correct.

We would expect roughly the same kind of market share as we have in the Medicaid program.

Okay, great.

Then a quick follow-up.

Commentary on the Medicaid rate-setting process.

Going into 2015 and beyond into 2016, are the rates going to be continued to be separated regarding the rate negotiations?

Or will they eventually combine and you'll start looking at more of a composite rate-negotiation process?

Are you speaking about Medicaid expansion versus the other Medicaid rates?

Is that your question?

Yes, exactly.

Yes, I mean, we don't see any signs at this point that there is a movement towards consolidation across Medicaid expansion and the other rates.

The populations and the experience I think people will want to track separately, and that's our expectation going forward.

Right.

The states are reimbursed differently for that book of business, so they have to be kept separate for those calculations.

Okay.

So that will continue into 2016/2017?

Yes.

Presumably so.

Yes.

Okay, thank you.

Dave Windley, Jefferies.

Sure, thanks.

It's Dave Styblo in for Dave Windley.

First question was just coming back to the MLRs.

Just to make sure I understand all the comments called here, the MLR was close, at the higher end of your guidance range.

I heard you say there was an impact of higher flu, and then there's an offsetting factor from rate increase adjustments.

Can you reconcile those two a little bit with a finer-tooth pencil there?

Well, I think with respect to the fourth quarter, which I think is what you were referring to, our HBR was 89.3%.

I think when you look at that, we benefited in the fourth quarter from some retroactive rate increases in performance measures that were recognized in several of our states; but it was mitigated somewhat by higher flu costs in the fourth quarter.

So overall, I don't think the HBR was that far out of our range of what our expectations were, because those two things offset each other.

Okay.

So the net, though, we're just pushing a little bit towards the higher end of your previous full-year (technical difficulty) range, so --?

Yes, again, directionally we've talked about the complex care revenue and the growth of that part of our business, which has a higher health benefits ratio to begin with.

And certainly you see that over time increasing our consolidated HBR, which is as predicted.

And, as we talked on our Investor Day, is a combination of having a higher HBR but a lower G&A ratio.

Okay, that's helpful.

Then looking forward on a couple of new businesses coming online, for your acquisition of Agate there, can you talk a little bit more about the rationale?

I don't think there is an RFP in the pipeline and expansion has already happened, so is it more of a situation of you improving upon an asset or just trying to expand your geographic scope?

Then similarly, on the Arizona contract win, is there any new networks that you're going to have to work through?

Or just walk us through the preparation in anticipation of -- I think that's something like $500 million to $600 million of revenue coming online.

Jesse?

Yes, we'll talk about that.

Thanks for the question.

We'll talk about Oregon first.

I think first of all, we are not generally in the business of buying into turnaround situations, so that continues to be the case here.

Agate is a well-performing business, and it really is about giving both geographic expansion -- but it's a large Medicaid market, but it's fragmented and it's got a unique model.

So when we do our tours, if you will, around the country, the Oregon model is something that comes up all the time.

So participating directly in that model will give us some unique credibility to speak to what makes sense and what doesn't make sense in terms of best practices or the best fit with Medicaid programs for other states and other products around the country.

On Arizona, we are -- we have been in the behavioral health of the [re books] in Arizona for a number of years; call it 10 years.

So we've got a lot of experience there.

The state has re-architected that program in a couple ways.

One is geographically, into the different regions -- and we've obviously been successful in the southern region -- but also in terms of the program design, integrating some of the physical health coverage into the program.

So the changes that we are working on, there is some geographic expansion opportunity.

We will be working with, as we indicated, our joint venture partner with the University of Arizona.

And then we'll also be working to expand services to integrate the physical and behavioral health for the people who need it most.

The other thing I would add is incrementally we have about $250 million of behavioral health business already in Arizona.

So it would be the $300 million plus or minus increase starting in the fourth quarter.

Thanks.

Scott Fidel, Deutsche Bank.

Hi, thanks.

This is Shawn Bevec on for Scott.

Do your state agreements to cover the industry fee carry over into 2015?

Or is this a process that will need to be repeated for this year?

We believe that all of our state agreements are -- that we have cover 2015 also.

So the revenue recognition should be more linear in 2015 as opposed to being as lumpy as it was in 2014.

Correct.

The only thing we have outstanding at this point still is California.

Okay, thank you.

Kevin Fischbeck, Bank of America.

Hi.

This is Steve Baxter on for Kevin.

I have a question about operating cash flow.

For the full year it was 4.6 time net earnings; historically, it hasn't been anywhere near as high.

So I guess, can you provide a little color on why it was so high this year, and what you think a more sustainable ratio is going forward?

I think that the biggest impact this year is the increase in our just general business to revenue.

So we have a large increase in our medical claims payable amount, and some of the other payables that were associated with the minimum HBR that we have to pay back as returned premium.

So that was -- the growth really drove that as much as anything else.

I think over the long haul, we don't really expect to be at the 4.6 times net earnings level.

We've said 1.5 to 2 is our target, but actually we've beating that for the last several years.

And I think a lot of that has to do with the growth.

So if we have a heavy growth year, we will probably be in excess of 2; and if we had 15% growth, you might be 1.5 to 2 times.

But we haven't seen 15% growth in a long time.

Okay, thanks.

Then just another question on USMM.

When you guys were joined through the deal you talked about it being $0.20 to $0.25 accretive in 2015.

I guess, how is that tracking versus your expectations?

I think that the objective in buying USMM, to direct those activities in our Medicaid business, is in process.

And we expect that in 2015 they will perform as we anticipated, basically, when we went through our analysis in buying the company and how it would perform.

Okay, thank you.

Ana Gupte, Leerink Partners.

Yes, thanks.

Good morning.

First question, I was just curious on the G&A guidance for 2015.

You did see about a 70 bp year-over-year improvement with the OpEx leverage, and I get that you had the business expansion costs.

But is there any conservatism there, or something unique about 2015 that you might not see that with the kind of revenue growth you are projecting?

I think we continue to see that we'll have the benefits of leverage from the revenue growth.

Two things that went the other direction were obviously the acquisition of USMM, which has a higher G&A ratio because it doesn't have a health benefits ratio; and then also from the impact of the exchange business, which has a higher G&A ratio.

So those two items increase our G&A ratio, versus the benefits of scale and leveraging.

And as we go forward into 2015, I would think that we'll have growth in the other -- in all of those areas.

So we expect to still see benefits; they may just not be as significant.

I mean, a higher-acuity population, as we've said before, also impacts the G&A.

Got it, got it.

Okay.

So there's not as much upside --

Well, there is a floor at some point, too.

Yes.

So should one interpret this as there is upside but not as much expansion or improvement as 2014?

The denominator keeps getting larger, so that's going to impact it.

Yes.

To have a 70 basis point improvement is a little more difficult going forward, because there is a minimum level you'll still have.

On Agate, just follow up on someone else's question earlier.

Was this opportunistic that there was Medicare Advantage in there?

Or is there something in there around the potential ability of a plan that MA and Medicaid to have better dual margins?

We have perfectly expressed in MA.

So the fact that they had MA was a positive, and that is something we continue to look at and find the appropriate entry point.

Okay.

So this [end] may be more targeted from a geographic perspective and you look -- does that seem to have been your strategy?

Not turnaround assets, more local within the state, private?

Exactly.

Okay.

Got it.

Then finally, are there any update on the Georgia rebid?

The ABD population does not look to have been included there.

I was just wondering what you think might happen on the existing contract as far as the bidders that have been qualified.

Will there be one or two?

And how will that transition occur?

And then any timing on ABD?

Well, it was supposed to have been out, and they have delayed it.

And I'd rather not speculate on what their plans are and how they'll go about it.

Regardless of what they do, we will be ready for them.

Okay.

All right.

Thanks so much.

Brian Wright, Sterne, Agee.

Thanks.

Good morning.

In the press release announcing the Agate acquisition, it seemed to indicate there were some other businesses that weren't Medicaid and Medicare.

Just wanted to understand if there was anything of significant size in that, and exactly what those other businesses may be.

Yes, Brian; this is Jesse.

I think what Agate is -- really a holding company for a couple of different pieces.

I'd say that for purposes of the analysis and the go-forward, really we are thinking about this as primarily a health plan opportunity.

There are a couple of other pieces that are more historical in nature than prospective in nature.

So former IPAs tied into the provider community and the like.

But most of the go-forward opportunity is going to be centered around their government health plan business.

Then could you just give us a -- how was the transaction structured?

How is that going to be financed?

I think we expect it to be closed in the third quarter, and we are looking at specifically how we want to finance those payments.

We have debt capacity if we decide to use it.

That's right.

We have $75 million drawn on our revolver at year-end on a $500 million line.

So we have flexibility.

So it's solely debt and nothing -- no stock on to the Agate shareholders, then?

I think that's something we'll continue to look at and determine over the next six months before we close, how we optimize the consideration.

Okay, okay.

Thank you.

Tom Carroll, Stifel.

Hey, good morning.

Just a quick question on seasonality.

With all the new growth that you've had in chronic population, duals, and the like, the adjustment to taxes, etc.

I wonder if -- how would you expect quarterly EPS to progress in 2015?

Should we expect any changes?

Maybe you could provide some details in terms of how much is coming in first half, back half or whatever, however you'd like to characterize it.

Thanks.

Sure, Tom.

I think the basic -- what I would do is take 2014 actual; adjust it for the health insurer fee; and normalize that.

Once you do that, that percentage of earnings in each quarter in 2014 is an amount that I would think would be reasonable to look at it for 2015.

It's a good starting template.

Okay.

So nothing -- I just wondered if there is anything in future quarters that you -- already on your radar screen right now, that just could help us build out the year (multiple speakers).

Again, normally what we would see is more rate increases in the second half of the year, so we get some lift in the second half versus, say, the first half.

You have flu in the first quarter, which you really don't have until again until a little bit in the fourth quarter, which we did see this past year.

So the second and third quarter benefit from better seasonality in that regard.

So I don't think there's anything new that I would throw in the mix for the quarterly calculations.

I mean, it's fair to say we constantly are looking at things, and as soon as something is consummated we'd announce it and what the impact is.

So I mean, it's not to say we're not looking at things.

There is nothing that we've announced that should be included in the quarters.

Great, thank you.

(Operator Instructions)

Well, if there's no further questions, we thank everybody for participating in this call and look forward to talking to you in April and reviewing the first quarter.

Thank you.

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