Centene Corp (CNC) 2015 Q3 法說會逐字稿

Good morning, and welcome to the Centene Corporation third-quarter 2015 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, Head of Investor Relations.

Please go ahead.

Thank you, Emily.

And good morning, everyone.

Thank you for joining us on our third-quarter 2015 earnings call.

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

The call should last approximately 45 minutes, and may also be accessed through our website at centene.com.

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

The playback access number for both of those dial-ins is 10073458.

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, October 27, 2015, and Centene's registration statement on Form S-4 related to the proposed Health Net transaction, dated September 21, 2015, and in 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 18 in New York City.

Please mark your calendars.

And 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 2015 earnings call.

Before I discuss details of our third-quarter results, I would like to provide an update on Centene's pending acquisition of Health Net.

We are making significant progress towards completing this transaction.

On August 12, we announced early terminations of the waiting period required under Hart-Scott-Rodino, after just three weeks, clearing a key antitrust hurdle.

Second, on September 21 our definitive joint proxy statement became effective.

Third, regulators in New Jersey, Texas and the Cayman Islands have approved, or not objected to, this transaction.

Fourth, most recently on October 23, shareholders of both Centene and Health Net voted overwhelmingly to approve the merger.

Approximately 99% of Centene shares voted were in favor.

We appreciate the mandate of our investors, as they recognize the value of this transaction.

Lastly, state approvals are still pending in Arizona, California and Oregon.

State filings are essentially complete.

Integration planning is under way, and moving according to our schedule.

While the transaction remains subject to the satisfaction of the remaining conditions, we continue to expect to close the deal in early 2016.

Health Net employees are fully engaged in the process, and look forward to being part of the combined Company.

We believe this transaction best positions Centene for continued growth in 2017 and beyond.

Uniting Centene and Health Net will create a leading platform to service government-sponsored healthcare programs.

We will be the largest Medicaid managed care organization in the country.

We believe that the addition of Health Net's Medicare expertise creates significant opportunity across our existing markets.

Their Medicare Advantage focus is our low-income seniors, which is complementary to Centene's strategy of providing high-quality, affordable healthcare to Medicaid, uninsured and underinsured populations.

Over 65% of Medicare-eligible individuals are at or below [400%] of the federal poverty level.

The low-income Medicare opportunity across Centene's existing markets is in excess of $150 billion.

Additionally, approximately 78% of Health Net's Medicare Advantage members are in four-STAR-rated plans, indicative of their commitment to quality.

Medicare's STAR ratings are increasingly important to maximize reimbursement and enrollment growth.

Centene has recently achieved three STARs or better on its special needs plans.

We are encouraged, as this is not easily obtained in the special needs population.

Furthermore, we are pleased to add additional product capability in the commercial and federal service lines of business.

We believe these offerings are complementary, and complement our goal of providing high-quality, low-cost health solutions [across products].

Finally, today's call is about Centene's third-quarter results and outlook.

I ask that you please limit your questions to third-quarter results, for which I thank you in advance.

Now, on to third-quarter financial highlights.

We are pleased to report another strong quarterly performance.

We added over 930,000 members, compared to the third quarter of 2014.

This represents a 24% increase to 4.8 million beneficiaries.

Third-quarter premium and service revenues grew 31% year over year to $5.5 billion.

The HBR improved 70 basis points year over year to 89%.

This is primarily attributable to significant growth in Centene's beneficiaries enrolled in Medicaid expansion programs.

At September 30, we served approximately 443,000 members enrolled in Medicaid expansion programs, representing year-over-year increase of about 250,000 members.

Bill will provide further HBR details, including new and existing business mix.

Importantly, we continue to see, as well as anticipate, overall stable medical cost trends.

We reported third-quarter diluted earnings per share of $0.75, or $0.84 when excluding $0.09 of cost related to the Health Net acquisition.

This compares to $0.67 reported in the third quarter of 2014, or $0.61 when excluding the $0.08 impact of health insurer fee, $0.03 of transaction costs, and an income tax benefit of $0.17 related to prior periods.

Recognizing our commitment to margin improvement, the third-quarter pre-tax margin, excluding merger-related expenses, increased 50 basis points year over year to 3.6%.

The 3.1% pre-tax margin in the third quarter of 2014 excludes transaction costs, and adjusted for the impact of the health [insured].

Our full-year 2015 guidance reflects higher margins compared to (inaudible).

Next, market and product update: First, we will discuss recent Medicaid activities.

Indiana: During the third quarter, the auto assignment process commenced with the state's Hoosier Care Connect program.

At September 30, we served approximately 20,000 [ABD] members in Indiana, adding 16,000 over the second quarter of 2015.

Mississippi: An anticipated [expansion of tenant] beneficiaries resulted in significant membership growth in the third quarter in Mississippi.

We added more than 32,000 members over the second quarter of 2015.

This is on top of the 100,000 we added in the second quarter.

We will begin managing inpatient services in Mississippi starting in December of 2015.

Florida: On October 1, we commenced operations under a new state-wide contract with the Florida Healthy Kids Corporation managing healthcare services for children ages 5 to 18 in all 11 regions of the state.

This full-pay program is for children who do not have access to a parent or guardian's employer health programs, and do not qualify for Florida's Medicaid or [a substitute].

Though it is still early, the contract is proceeding as planned; we expect to serve 15,000 to 20,000 members in this program.

Arizona: Also in October of 2015, Centene's behavioral health subsidiary, Cenpatico Integrated Care in partnership with the University of Arizona health plan, began providing services under an expanded contract for the state's newly formed southern region.

While it is still early, this contract is ramping as expected.

We anticipate more than doubling our membership to over 400,000 lives.

Washington: In August, Centene was selected by the state of Washington to serve children in foster care and adoptive service programs or support programs under the Apple Health Foster Care contract.

Centene is the sole state-wide provider for this program.

We anticipate serving over 20,000 foster care members under this new contract, which is expected to commence in early 2016.

Oregon: In September, we completed the acquisition of Agate Resources Inc., which we will be operating through Agate's Trilliam subsidiary, which provides Medicaid, Medicare Advantage and marketplace services to Oregon residents.

At September 30, we served approximately 100,000 beneficiaries in the state.

The entry into Oregon marks Centene's 23rd state.

Georgia: Also in September, Centene's Georgia subsidiary, Peach State Health Plan, successfully reprocured its Medicaid contract.

We are pleased to have been selected to continue providing healthcare services to Medicaid recipients in Georgia.

The new contract is expected to start on July 1 of 2016.

Texas: In October 2015, Centene's Texas subsidiary, Superior HealthPlan, was awarded a contract by the state to serve STAR Kids Medicaid recipients in seven delivery areas, more than any other successful bidder.

This new program will be the first Medicaid managed care program specifically serving youth, age 20 and younger, who receive disability-related Medicaid benefits.

The addition of STAR Kids makes Centene the only managed care organization in Texas to participate in all of the state's Medicaid product lines.

This contract is expected to commence in the second half of 2016.

Moving on to the duals, at September 30 we serve 27,900 members across our dual demonstration contract in Illinois, Ohio, South Carolina, Texas, and Michigan.

This represents an increase of 8,200 members over the second quarter of 2015.

The dual demonstration projects are in the early stages.

We continue to work with our state providers and CMS to make these programs successful and [sustainable].

I remind you that we have always taken the view that dual demonstration programs will not be a significant near-term growth driver for Centene.

Shifting gears -- our rate outlook.

We now have visibility on all our 2015 rates, and continue to project a 2015 composite rate adjustment of flat to 1%.

In conclusion, Centene's fundamental momentum continues to remain strong.

As this quarter illustrates, we're executing on our strategic objectives, including margin expansion.

With our growing portfolio of integrated health solutions, Centene continues to expand our leadership position in government-sponsored healthcare, the highest growth category in the industry.

We are committed to providing high-quality, low-cost solutions across product lines, including our ongoing commitment to the federal TRICARE and Veterans' Administration programs, and the continuation and commitment to a commercial business in California.

Our pipeline remains robust.

We see numerous opportunities in the near term and long term, and are well positioned to continue to be a strong, diversified, and growth-oriented health solution company.

We look forward to the remainder of 2015 and beyond.

As a reminder, our investor day is December 15 in New York City.

We thank you for your continued interest in Centene.

Bill will now provide further details on our [current quarter's financial results].

Thank you, Michael, and good morning.

Our third-quarter results demonstrate our continued strong performance in 2015.

Membership is up 24% year over year.

Premium and service revenues have increased 31%.

And diluted earnings per share of $0.84, excluding the Health Net merger cost, represents a 38% increase over last year, after adjusting for certain items in last year's quarter.

And we have also increased our 2015 full-year earnings guidance again.

In more detail, premium and service revenues increased $1.3 billion over last year, and reflect program expansions between years in many of our states, particularly Florida, Illinois, Louisiana, Mississippi, Ohio and Texas.

Our health benefits ratio was 89.0% in the third quarter, compared to 89.7% in Q3 last year, and 89.1% in the second quarter of 2015.

The 70-basis-point improvement between years reflects the impact of stable medical cost trends that we continue to experience in 2015, and the growth in Medicaid expansion membership, which has more than doubled between years, and runs at an overall lower HBR.

This growth in Medicaid expansion membership also contributed to our HBR for new business having an 88.6% HBR this quarter, which is lower than our existing business HBR of 89.1%.

The primary drivers of this result are the Florida Medicaid business moving to existing business for the third quarter, leaving new business with a higher proportion of the Medicaid expansion business, which carries a lower health benefit ratio.

With respect to the 3Rs related to the health insurance marketplace, we continue to be in a payable position for the risk corridor, risk adjustment, and minimum loss ratio components.

The recent discussion on the ultimate collectibility of risk corridor receivables does not impact us, as we have no receivables recorded for the risk corridor for any of our states for any year.

Our general and administrative expense ratio was 8.2% for the third quarter, excluding Health Net merger-related costs, compared to 8.0% last year, and 8.5% in the second quarter of this year.

The increase of 20 basis points over last year reflects a higher level of variable compensation costs, while the decrease from the second quarter represents the benefit of increased scale.

Also, during the third quarter we experienced higher-than-anticipated opt-out rates in member attrition for the Michigan dual demonstration program resulting in a reduction to our membership forecast.

As a result, we reduced by $27 million the amount of contingent consideration payable that was previously established at the time of the acquisition in the second quarter.

We also reassessed the amounts recorded for the goodwill and identifiable intangible assets based on the new membership levels, and reduced these values by $28 million.

The net effect of $1 million in expense is included in G&A expenses.

Business expansion costs totaled $0.05 this quarter, excluding merger costs, compared to $0.07 last year.

Investment income was $8 million in this quarter, compared to $6 million last year, reflecting a higher level of investment balances.

Interest expense was $11 million in the third quarter, compared to $9 million in the third quarter last year.

The increase reflects the additional borrowings outstanding.

The effective tax rate for the third quarter was 48.3%.

This compares to approximately 46% in last year's third quarter, after adjusting for the effect of the benefits recorded related to the change in the limitation on the compensation deduction.

Our diluted earnings per share from continuing operations was $0.75; $0.84 before Health Net-related merger costs.

This compares to last year's $0.67, or $0.61 after adjustment for the effect of the health insurer fee acquisition transaction costs and the income tax benefit.

Diluted shares outstanding were 123.1 million shares, compared to 121.4 million shares last year.

As of September 30, we had $3.9 billion of cash, investments and restricted deposits, including $91 million held by unregulated entities.

We continue to maintain risk-based capital in excess of 350% of the authorized control level.

Total debt was $1.3 billion at September 30, including $275 million in borrowings under our revolving credit agreement.

The debt-to-capital ratio was 37.1%, excluding the $68 million non-recourse mortgage note.

Medical claims liabilities totaled $2.1 billion at September 30, and represented 44.5 days in claims payable.

Cash flow from operations was $62 million for the third quarter, and $457 million year to date.

For the nine-months, cash flow from operations represents 1.9 times net earnings.

Our updated full-year 2015 guidance numbers are as follows: premium and service revenues, $21 billion to $21.3 billion; diluted earnings per share, excluding Health Net-related merger costs, $2.84 to $2.90; consolidated health benefits ratio, 89.2% to 89.4%; general and administrative expense ratio, excluding Health Net-related merger costs, 8.2% to 8.4%; effective income tax rate, 48% to 50%; and diluted shares outstanding, 123 million to 123.5 million shares.

Our guidance numbers do not include any merger-related costs related to Health Net, which we expect to close in early 2016.

Business expansion costs are estimated to be between $0.25 and $0.27 per share for the year, excluding Health Net costs.

This includes our normal enrollment cost for 2016 Health Insurance Marketplace membership, which will add an incremental $0.05 a share in G&A costs for the fourth quarter.

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

Thank you.

(Operator instructions)

Our first question is from Josh Raskin of Barclays.

Please go ahead.

Hi, thanks good morning guys.

Good morning Michael.

First question, on your June investor day, you guys talked about a run rate of $24 billion of premium and service revenue.

You guys have obviously added a bunch of contracts since that time.

If I annualized 3Q, it's maybe 10% growth off of that.

And if you look at the implied fourth quarter premium and service revenue growth is less than 5%.

So, would it be fair to say you guys are running well north of that?

And any chance you'd give an updated run rate without any new wins, where 2016 revenues look like?

We'll give you a full update on December 18.

We will give the full guidance for 2016, Josh.

Okay but fair to say that you guys have added significant contracts since June?

As we said back in June, that the guidance we gave was initial with what we had visibility at that time.

And that it tends to be above with what that number is by the time it unfolds in December.

So yes is fair to say that there's an upside.

Okay and just a second question.

You guys have talked about better HBRs for your expansion lines.

Any sense on where rates have come in for those expansion lines in 2016?

Would you expect MBRs to normalize?

And I don't know, was that 90%?

Or how should we think about the reversion back to the means for next year?

You want to see something about that Bill?

Well I think that certainly Medicaid expansion rates are going to be trued up against the experience.

And the experience is emerging.

I think that in several states, the Medicaid expansion programs are in a rebate position.

So, you've got to look at rate changes on a net basis in the context of where the programs are against minimum loss ratios.

So, we do not expect a significant adverse movement or deterioration in HBRs in Medicaid expansion going forward, based on what we're seeing at this point in terms of rate changes for the programs.

I think, when you think about them and you just add to it, when the rates are inadequate, we expect to see to make the adjustments.

And there are isolated instances where they are high, we would not complain or have any concern with them adjusting it accordingly.

So it's a matter of having a fair balance rate.

Okay that's fair.

And last question, excluding Health Net, thinking about the Medicare opportunity.

Did you guys file for any new County expansions in 2016 for MA plans?

No we did not.

The filing date for that would have been some time ago.

And we did not file for any expansion.

Except for minor expansion in our dual special-needs plan in Arizona for [certain] service counties.

Okay.

Perfect.

Thank you.

Our next question is from Peter Costa of Wells Fargo.

Please go ahead.

First, can you explain the drop in [base plans] payable.

Is that the rebates being paid back to the states?

Or is there something else going on there?

That's primarily -- we transferred dollars out of the medical claims payable to accounts payable.

Based on certain amounts we have to pay back to a couple of our states, for a variety of programs including the rebates.

Okay.

And then, can you talk a little bit about the dual demo programs?

We broadly saw those decline last month.

And, throughout the industry you talked about it not being an important part of your driver of growth.

Then, also we've seen, in the State of Virginia saying that they're not going to extend their dual demo contract.

And, California has talked about wanting some changes for the dual demo contract going forward.

What is your perspective on how the dual demo program is going to work going forward from here?

I think, and others here can add to it.

But I think generally it's recognized some adjustments need to be made to it.

There is higher disenrollment rate in what the states and CMS would like to see or expect.

But these are demonstration models.

We expect that there's some change.

We've heard the same things in California as you have.

But once again, we've been very clear from the beginning, that are short-term growth is not dependent on that.

So we will work with the states and the CMS's trying to improve it where we can.

And most likely roll into it.

I just wanted to add that Virginia is actually an exception in not intending to extend their dual demonstration program.

I believe all of our states, and actually California filed letters of intent.

So, I think there's still certainly the desire to want to give these programs more time to be able to improve and develop.

That's shared across the state that we participate in.

Thank you.

Can't states save more money by pushing more of their Medicaid dual population into state specific Medicaid-managed care programs than using these dual demo coordinated care programs through the federal government?

And if the states did pursue that, would you guys not see an extra benefit from that, in terms of more contracts for long-term services and supports type contracts?

It's Jesse, I think it's a fair point.

I think what you've seen already in the states making their determinations about what kind of policy direction, some of that is working with CMS on a more integrated dual demonstration model.

There are some states who have bypassed that demonstration approach and gone directly into a managed LTSS program.

Some of you will continue to see some variability on that.

Our objective is to work with the states to meet their policy objectives.

So as they're working to determine whether they work through CMS, or work through that directly, we want to help.

And I think we're in a position to help them both directions.

Thank you.

Our next question is from Brian Wright of Sterne Agee.

Please go ahead.

Thanks good morning.

Could you help us out?

In the prepared remarks, you said the state filings are essentially complete.

Could you give is a little more definition on what you meant by that?

What we're saying is that we have completed filings for the state.

And the word essential is there because that does not mean that they cannot come back and ask for another -- make a request for one bit of information or something.

So that was just a [not absolutely complete], Brian.

They are complete but it left room for a state to ask a question obviously.

Okay.

And just a follow-up on that, are we expecting a hearing in California and Oregon and I think Arizona or?

I don't want to talk about as I commented at the beginning, I don't want to talk a lot about this whole process.

But, where the states require hearings they are being scheduled.

And we will follow all the process to completion.

That's probably all I should say about it at this point.

Okay fair enough sorry I missed that, I apologize.

No worries.

Our next question is from Kevin Fischbeck of Bank of America.

Please go ahead.

Great thanks.

Can you provide an update on how Florida MMA is going?

Florida MMA is improving in terms of its performance.

The state did set new rates for the program, effective September 1, and those rates have helped move the program to a more sustainable kind of level where it should be, closer to the state rating.

Also, we have continue to push initiatives to improve our HBR, so we are seeing some good improvement in term of the MMA program in Florida.

Are there still things you are trying to do around -- getting approval for pharmacy medical cost management around pharmacy and things like that?

Yes the management of the pharmacy remains one of the bigger issues that's still outstanding.

We are trying to continue to have a dialogue with the state about the best way to go forward from the states' perspective, and the managed care organizations' perspective, so that remains a key issue.

I think it's important that they have made significant progress.

And Florida has demonstrated in the past where there is a demonstrated need and it's substantiated.

They will work with us on it.

So we're encouraged.

Okay and just make sure I understood the issues around Michigan, it sounds like that was a net $1 million expense.

And that was not excluded from you numbers?

That's kind of a one-time thing that you included in your EPS?

Your number?

Correct we absorb that $1 million.

Okay.

And then, you talked about the Medicaid expansion rate side, I guess two things.

When you talk about rates for next year, if you have a Medicaid expansion rate cut, are you going to talk about that as a net number?

Because when you say 0% to 1% this year, are you going to be talking about that as a net number when you give guidance around rates next year?

Yes.

Will have to evaluate that and provide a level of detail to explain it clearly.

We will have that background on the 18th

Okay.

That was one area that was pretty clearly an area of pressure.

Are there any other outstanding issues where you're in negotiations with the state around major issues either positive or negative?

I think to say yes or no is difficult.

At any given time when you have the number of contracts we do, I think we have 280 solutions right now across our 23 states.

You're always going to have something.

But the benefit of having the diversity we do is we have offsets to it.

Right now, as we look at it there is no major issues that raise a concern.

Okay.

Great thanks.

Our next question is from Dave Windley of Jefferies.

Please go ahead.

Good morning it's Dave Stiebel in for Windley.

I just wanted to get a little more color on the guidance raised.

If you could just tease out what's driving that?

Because it looks like relative to what you had said last time for business expansion costs, a the little bit more in their SG&A ratios picking up a little bit for the guidance MLRs steady.

Is it a just a function of revenue?

The higher revenue coming online, that's just profitable?

What is that revenue from?

I think that, clearly our guidance suggests for this quarter is, after three quarters or even full year so you can pretty much focus on that differential being the fourth-quarter.

And so we've tightened a number of those ranges.

Just because it's pretty wide for just one quarter.

Overall, the increase reflects the third-quarter results, which were good.

And above our original expectations.

And I think Q4 includes, as we said, about $0.05 of G&A costs related to additional enrollment costs for the 2016 Health Insurance Marketplace.

So, it's a combination of increase in revenues and the costs.

And we've added Oregon, in effective the beginning of September.

So there's a variety of things that make up the total.

Nothing specific I would point to.

Okay.

On Georgia.

Obviously you got there re-procurement there, at the same time there was a fourth plan that's added.

Do you have visibility or plan from the state yet about how they are going to split up the membership?

I think it, my understanding was that up to about 15% of existing membership might go over to this new plan, but wasn't sure on the timing or if that plan had actually gone through.

So helpful to hear how that membership may shakeout over time here for you.

This is Rone Baldwin.

The clarity on that is still not accomplished with the state.

Again, the program will not be effective until July of next year.

And the expectation is the membership to the fourth MCO will build over some time after that.

So it's not clear at this point.

Okay.

And then lastly, it seems like the RFPQ is sort of ramping up.

And pipeline seems to be ramping up again with opportunities from Pennsylvania, Nebraska, Oklahoma, and especially North Carolina were about $15 billion is going over to manage Medicaid.

So, curious to hear -- what is your strategy or how do you think about positioning in these markets?

Especially for something like North Carolina where we're years away.

But about positioning for those markets?

What we're not going to give away our whole position.

But Jesse do you want to make some comments you simply can without giving from a competitive standpoint.

Yes.

It certainly a fair point, with respect to the magnitude of opportunities that are coming up.

We started to highlight a little bit of that in June at our investor day.

In these earlier stage programs that are either going through a legislative process, or the pre-RFT activities.

I think the best consistent answer, is that every market is different.

So our approach to every market needs to be reflective of what that state is trying to accomplish.

You've got, with respect to the different dates with you mentioned, different populations that are going to be coming in over different periods of time.

Statewide, regional you got of number of variables.

We need to understand those and take all of those into account to figure out what is going to be our best go to market approach, that will again help the state achieve their policy objectives.

You have some that are re-procurements, and then you have the North Carolina so it would be brand-new.

It's going to take as Jesse highlighted, a different approach.

Okay thanks for the question.

Our next question is from Andy Schenker of Morgan Stanley.

Please go ahead.

Thanks.

Real quick, just on the specialty MLR declined about 200 basis points year-over-year, and this quarter it was up in the first half of the year, year-over-year.

Anything driving the big swings in that one?

And how should we be thinking about that metric going forward?

I don't think there's anything special.

There's a little bit of seasonality that we have from time to time in the specialty companies, but nothing that changes it overall.

Okay so is that year-to-date number a reasonable place to be thinking about for that line going forward?

Yes, I think that would be a reasonable way to approach it.

Okay.

And then on the $48 million related to minimum MLRs, any states you want to call out there?

And then similarly anything else within development between states that you're willing to call out?

No nothing that I think that's special.

We've certainly seen a lot more in the more recent years of dealing with the minimum HBRs in the states.

And a lot of the new programs have those.

It tends to be the ones that the Medicaid expansion are well-funded.

So we tend to have more payable back to the states on those programs.

And we kind of like it, in the sense that these rebate programs where we get actual [sound] rates and then [highest] reports shows a high-quality.

And we show we are efficient through the refunds.

So it's a good combination.

And that's one of the reasons we presented that $48 million number.

Is so people understand that when we have positive development, it doesn't necessarily all go back into earnings.

It's actually comes because we're the conservatives and we have an initial reserve setting.

And then at some level, that's payable back to the states for these programs.

We just thought that was good disclosure.

I appreciate that.

Is there any one or two states that are really driving it?

Or that you're willing to disclose?

I'd say there's a lot of Medicaid expansion programs that contribute to that.

You've got a go back a year and figure out which programs were doing that at that point in time.

But I'd say Medicaid expansion is good chunk of it.

Fair enough.

And then lastly, exchanges or highlighting an increase in enrollment costs in the fourth quarter here.

So thinking about 2016 obviously had success in 2015.

What are your plans for exchange next?

Have you expanded your participation ahead of Health Net here?

Any new state, any new markets, new pricing?

Anything you can highlight there?

Some of that's a detail that would be more appropriate on December 18, but Rone, do you want to make some preliminary?

Is in terms of new geographic expansion, the only new state we've entered is New Hampshire.

That's related to the states' transition from having Medicaid expansion to want to move it over to a private option type of solution in 2016.

So other than that, a little bit of geographic service area expansion.

And that pretty much is what reflects our participation for 2016 compared to 2015.

Okay.

Thank you.

Our next question is from Michael Baker of Raymond James.

Please go ahead.

Thanks a lot.

Bill, I was wondering if you could give us some color around the service revenues?

How they perform relative to what you expected and maybe give us an update on some of the key drivers in that line item.

Sure.

I think one of the significant items in that line is going to be our specialty pharmacy business, which has a lot of HEP-C product there.

And that, as we've seen, is also somewhat plateauing in terms of the -- we saw significant growth last year in those products.

Those have sort of plateaued this year.

Then there's a little bit of seasonality in some of the different lines that are included in there.

Nothing unusual other then HEP-C flattening out.

Okay.

And Michael, the question I had for you is maybe you, can give us a sense as you near the closing of what's an important acquisition for the company.

Can you give us a little bit more color on who's heading up the integration effort, and then we've seen other players that face mergers.

Give us a sense of management changes et cetera.

Are there any other additional management changes we should look for?

Or if you're not ready to say that at this point, is that more of a December update?

I think you will get much more detail in December.

Cindy Brinkley is heading up the integration.

I think, speaking on behalf of the whole management team, the Board, we are very pleased with the progress at how it's going.

As I commented in my remarks, the Health Net people are fully engaged in participating.

It's moving down the line very well, and we expected to hit the ground running when it closes.

Thanks for the update.

Our next question is from Chris Rigg of Susquehanna Financial Group.

Please go ahead.

Morning.

Just to come back to the rebate or claw back mechanisms in the expansion states.

Do you have that in every state?

Or is it only in a handful?

And if it's only in a handful can you tell us with states have the rebates in place?

I'd say it's the most states.

That have these in their products, and almost all of him.

It's across the board.

Typically, those programs are funded by the federal government.

And we're generally running at or below the minimum HBRs in most of those states.

So we have to accrue the amounts payable back on that.

Okay.

(Inaudible)to take that approach.

Right.

And I guess, some of the states have had mechanisms like this in place for a while pre-ACA.

Can you give us a sense, for how a state like Texas for example, had tended to view these type of things, where you're running an excess profit in a given year.

How they look at prospectively?

Do they normally try to make a quick adjustment to get the rebate, or the profits back to where they want them to be?

Or any color as to how they tend to look at rates prospectively would be helpful.

Thanks.

Yes I think that Texas is an unique state, given the size of the state and the size of our business.

We have some advantages in Texas because of our scale.

So we can produce a larger payable back to the state at times.

Which may or may not impact others in the state.

And so, the state has to be cognizant of how they look at the whole state and all the players, and then how they establish rates for actual soundness purposes.

Rone do you want to add?

I think what Bill said is the important point.

That the way a state is going to look at the rates, is they're going to look at the overall program across all the -- and experience of all the MCOs.

And the fact that we may be in one position related to the rebates does not necessarily mean that all the participants in the market will settle.

So it's going to be program-wide that they are going to actually reflect it in the actuarial rates going forward.

But we like the fact that we can show how efficient we are.

Because we have high -- it's gained us a lot of balance within the states.

Got you.

Thanks a lot.

Our next question is from Ralph Jacoby of Citi.

Please go ahead.

Thanks good morning.

Can you give a sense of the new business?

How much is Medicaid expansion related so, what percentage of that new business maybe this year relative to last year?

Don't really have a percentage of the total how much of the new 21% or whatever is Medicaid expansion or not between years.

Other than to say, clearly between years, Medicaid expansion continue to grow.

Some of that rolls into existing after a year, but a lot of the new stuff continues to be added.

And with that low HBR, it has the impact of -- for this quarter having the phenomenon of our HBR being lower for news business than existing.

Which is the first quarter we've actually experience that.

In my prepared remarks I commented that a year-over-year increase of about 250,000 members.

Okay that's helpful.

And then the exchange book I guess at this point -- can you give a sense of where that's running?

Obviously you're in payable position for the three R's.

Is that fair to assume that your margin levels of that are already within the 3 to 5 percentage points that you had targeted there?

Or is that not fair assumption?

I think that's a fair assumption.

I think as we said, probably several times, the exchange business, we were very conservative going in.

And it's performed better than our expectations, both for 2014 and 2015 at this point in time.

And we are in a payable position back on all of those components that we talked about.

Okay that's fair.

And then, it may be early for this.

But any early read on flu, and maybe help us understand what's baked into your expectation relative to what we saw last year?

We don't really have any reading at this point in time.

I would say on current flu levels or anything.

It's always a fourth-quarter phenomenon when it starts up.

So, we do allow for a certain level of that in our forecast or guidance numbers to occur.

Again, I can't tell you sitting here today weather it's going to be heavy or light season for flu.

I might add there's been some early indications that they've guessed right what strain to put in the extract, at least of one of the two extracts that are available.

Ken is there anything you can add to that?

No, just what you said Michael.

Okay.

Thank you.

So take your flu shots.

Our next question is from A.J. Rice of UBS.

Please go ahead.

Hello everybody.

Just a couple quick questions if I could ask.

First, we're hearing now, that the Medicaid managed care role probably is going to get pushed off until next year or early first-half.

I wonder if you have any updated thoughts about either the significance of the role to you or the timing?

The role we've probably stated, we think it's balanced and appropriate.

Without the actual soundness of the rates by sales.

So I'm not going to say is negative or positive.

We were in favor of it, and we have supported it.

So as soon as they do it the better.

Okay.

On the --

Anything you would add to that?

I would say that timing is in line with what our understanding is also.

Okay.

Maybe just to ask on the specialty pharmacy, I appreciate the comments about the HEP-C drugs.

I wonder, with [newswire in] specialty drugs coming down with obviously a lot of turmoil in the speciality arena right now.

Is that creating any opportunities or anything worth highlighting that is the next areas of focus for the group?

I'll answer that and then Jesse can answer it.

I think we demonstrated we know how to work with the state in determining the proper reimbursement when it should be carved out, and when included in the rates.

So, the turmoil is not something we're concerned about.

We feel we can help provide some direction to it.

Jesse?

I would say from an opportunity standpoint, AJ, that Gary has demonstrated the ability to work with the manufacturers to participate in the proliferation of a rollout of some of these new drugs.

So, as you said, there's a lot of activity there.

And I think we're -- we and the carrier team are squarely in the middle of that.

And hopefully that will translate into future growth opportunities within the specialty pharmacy segment.

Okay all right thanks a lot.

I next question is from Gary Taylor of JPMorgan.

Please go ahead.

Hi good morning.

Just had a couple questions.

First, I just wanted to go back to the Georgia rebid where there was an additional plan added.

Has the membership allocation methodology been finalized yet there, so that you have visibility on what your retention rate is expected to be?

Yes we spoke a little bit earlier that the allocation methodology has not been determined.

You've got to just keep in mind at the new program is not going to be effective until July of next year.

The way these things normally work is membership builds over some period time, but it's too early to tell.

And you asked, (technical difficulties) one which is larger than the others and so how do you deal with that?

Is yet to be determined as well.

So I think the 2 at 30% we're in a better position rather than those at 40%.

Sure.

Sorry I missed those comments earlier.

My other question, is just going back to base claims payable.

The 1.9 days on the transfer.

I mean a 1.9 days would be closer to a $90 million amount, you highlighted the $48 million related to the prior period HBR transfer.

What would be the other amount related to within the current period?

What that is, is that is a build up over probably 18 months.

In some cases, in several of our states of amounts due back to the state for certain programs, particularly for services that the state paid for on our behalf.

And so we were to reimburse the state for that.

They haven't yet a bill, quite frankly, for it.

But it's getting close.

We have reclassified that out of medical claims liability, and set it up into accounts payable.

Because we think that's a better place going forward.

I'm sorry, that's the amount above the $48 million that you call that?

Your calculation of $90 million something is reasonable in terms of how much we've reclassified from medical claims to accounts payable.

And we didn't restate prior periods for DCP.

If we would've taken it out of prior periods, it would've reduce the DCP for all periods if we would've re-classed that.

At any one point in time.

Okay.

Because I know you in the 2Q, you had called out $65 million re-class related to prior period, but I guess it's fair to assume that the total amount that might've been re-classed in the 2Q was larger than that $65 million as well?

Those are probably two different things.

Number one, in the roll forward of our reserve, we are rolling forward the reserve from a year ago.

And so we're saying, of that development that occurred, in this quarter it shows I think $177 million of positive development.

That $177 million does not roll into earnings or any way.

Because up to the extent at $48 million of that is actually re-classified as a payable back to the state.

And I think we have a separate line item on our balance sheet for return premiums to the state.

And in it goes into that line item.

The amount that we talked about this quarter for the DCP change was really re-classified into accounts payable, not a return premiums payable.

Because it's really reimbursement for services that they've paid for on our behalf, which are covered under our contracts.

So, they are slightly different items.

But the effectively represent the reclassification of items.

Out of medical claims liability into separate classifications to put them in the right place for when we're going to pay them in the near future.

Okay I think I understand that.

Thank you.

Sure.

I next question is from Ana Gupte of Leerink Partners.

Please go ahead.

Yes, thanks good morning.

The first question I have is about the retrospective analysis of what you saw in Iowa and Michigan and Georgia.

Is it mainly an issue of incumbents in the way the states are evaluating the bidders?

Or is there something else going on?

Can you tell us what the criteria might have been for United Amerigroup and AmeriHealth Well Care of getting it and not you in Iowa?

Jesse?

Yes I think that you mention a few states there, so obviously each state and each process is unique.

We are still in an administrative review process, there is a limited amount that we can speak to with respect to that at this point.

So, I would say probably broadly, and is probably premature to share a lot of our observations.

And obviously something that some of that would be speculative with respect to the state's decision-making process, which is really under review at this point.

Okay, and in the second question I have is you have 89% loss ratio at this time.

You cite the Medicaid expansion as one of the [make shift] things there, as one of the favorable drivers.

As you look at all the pushes and pulls, with the make- shifting to expansion lives to exchanges.

Then you're also growing obviously in long-term support services, and with that 85% average federal regulation out there with the rates, what would be your long-term outlook for your loss ratio?

Should we consider 89% as still having some opportunity to improve it further?

Yes, I think that the weighting of the various books of business have a big impact on what the consolidated HBR is.

If we grow our exchange business, the exchange business has a lower HBR generally, but a higher G&A ratio.

And so the Medicaid expansion has a lower HBR than our average, let's say.

And so depending on how those books of business are our growing, that can influence the total weighting.

Then, when we added, as we did, a lot of long-term care business over the last couple years, that's increasing our consolidated HBR.

So, it's hard to say where the future in the next two years the HBR is going on a consolidated level.

Without understanding which books of business are going to have the greatest growth.

I don't think we're really in a position to speculate on that particular issue.

Other than, we try to provide as much transparency as we can, with respect to the levels of HBR during the periods when we have our calls.

Thanks.

One last one.

On the exchanges, you've said you were doing well with the 3% to 5% margins.

It seems as though the Medicaid players are -- and there may be an obvious answer to this relative to the diversifieds.

Is this more you're getting Medicaid Plus members?

Is more mixed related or that you're building it off in Medicaid network contract chassis or something else like medical management?

Why do you think that diversified's are having --?

I think it's a combination of issues.

And part of it is, our overall conservatism.

Anything you want to add Bill?

I think we've had a disciplined strategy on exchanges that we've stuck to.

And its focus on the low income individuals subsidized Medicaid [churn] population.

We're going to continue that, and continue to try to make sure that we can grow this business.

But make sure it's a consistent contributor.

So, it's work so far for us.

And that's all we can say I think.

Thanks.

Appreciate you taking the questions.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Michael Neidorff for any closing remarks.

We thank you for your continued interest and thoughts.

And look forward to December 18 and then the subsequent year-end conference call.

Happy Holidays.

The conference is now concluded.

Thank you for attending today's presentation.

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