Centene Corp (CNC) 2016 Q2 法說會逐字稿

Good morning and welcome to the Centene Corporation second-quarter 2016 earnings 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 of Finance and Investor Relations.

Please go ahead, sir.

Thank you, Denise and good morning, everyone.

Thank you for joining us on our 2016 second-quarter earnings results conference call.

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

Today's call may also be accessed through our website at centene.com.

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

The playback number for both dial-ins is 10088567.

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

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q dated today, July 26, 2016 and our most recent Form 10-K dated February 22, 2016 and other publicly available 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.

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

Michael.

Thank you, Ed.

Good morning, everyone and thank you for joining Centene's second-quarter 2016 earnings call.

During the course of this morning's call, we will discuss our second-quarter results and provide updates on Centene's markets and products.

Additionally, we will bring you up-to-date on the Health Net integration and the fair value analysis of legacy Health Net's balance sheet.

Let me begin with a few comments on second-quarter results.

The second quarter marks Centene's first full quarter with Health Net.

Overall, we were pleased with our operating performance, which is marked by strong top and bottom-line growth.

We recognize there have been questions regarding the Health Net balance sheet and underlying operations.

Consistent with our previous comments, we continue to make progress on the fair valuation of the Health Net balance sheet.

Importantly, there has been no unfavorable development on the medical claims liability established at March 24.

We did increase reserves for medical claims associated with disputed substance abuse treatment center costs.

Additionally, we recorded premium deficiency reserves primarily associated with Arizona and California individual PPO business.

We believe we have effectively addressed these concerns with the purchase accounting adjustments.

We also believe the opening balance sheet is appropriately estimated at fair value and the PDRs offset losses for certain contracts in 2016.

While there are some moving parts, it is important to note these issues are not unusual in a large acquisition and we believe they are manageable.

We are addressing them in a manner consistent with Centene's approach and have taken significant actions to improve these operating results in 2017 and beyond.

These include price increases, plan design changes and a significant reduction in our Arizona commercial book.

Jeff will provide further details on this topic in his prepared remarks.

Turning to second-quarter financials, total revenues increased 98% year-over-year to $10.9 billion.

Membership at quarter-end was 11.4 million, representing an increase of 6.8 million beneficiaries over the second quarter of 2015.

The HBR improved 250 basis points year-over-year to 86.6%.

This was mainly attributable to the product mix shift from Health Net.

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

Lastly, we reported adjusted diluted earnings per share of $1.29, which includes a $0.19 benefit related to 2015 risk adjustments and reinsurance reconciliation under the ACA.

This compares to $0.76 reported in the second quarter of 2015.

Jeff will provide further financial details, including updated 2016 guidance.

Now onto the Health Net integration.

As we discussed at our June Investor Day, the integration is on track or ahead of schedule in many areas.

Our integration team continues to closely monitor financial and operational metrics.

We have now completed the actions needed to capture over 90% of the $75 million first-year synergy target.

As a reminder, this target is for the first 12 months following the March 24 close of the deal.

Additionally, we continue to believe we will achieve over $50 million in synergies in 2016 or approximately 70% of the first 12 months' target.

We have begun to transition Health Net to Centene's reserving methodology and anticipate this will be completed by the beginning of 2017.

We are also on track to begin the conversion of the California plan into Centene's medical management system in the third quarter of 2016.

Next, market and product updates.

First, we will discuss recent Medicaid activity.

In Pennsylvania, in April, Centene was selected to serve Medicaid recipients enrolled in Pennsylvania's HealthChoices program in three zones in the state.

This contract was expected to commence on January 1, 2017.

However, on July 21, the state reissued the RFP with a 30-day response period and an anticipated start date of April 1, 2017.

We are confident in the value we demonstrated in our response to the first RFP and look forward to this potential opportunity.

Maryland.

In May, Centene's specialty solutions division, Envolve, was selected by Maryland Care to provide health plan management services for its managed Medicaid operations effective July 1, 2017.

This award highlights Centene's depth and breadth of management services packaged under the Envolve brand.

Indiana.

In June, we successfully reprocured our contract in Indiana to serve Medicaid beneficiaries in the state.

This new contract is expected to commence on January 1 of 2017.

Now Medicaid expansion.

At June 30, we served over 1 million Medicaid expansion members in nine states.

This represents an increase of more than 630,000 recipients over the second quarter of 2015 and is primarily driven by the acquisition of Health Net's Medicaid expansion members.

In July, Centene began serving Medicaid expansion beneficiaries in Louisiana under the state's newly implemented expansion program.

We currently serve over 60,000 expansion members in Louisiana.

Moving into Medicare and duals.

At June 30, we served over 300,000 Medicare and dual beneficiaries.

We expect to launch additional Medicare Advantage brands in four Centene states in 2017.

As a reminder, the new plans will be launched under our four star banner, which will give us the benefit of incremental premium revenue.

I would also like to reiterate that we are focused on designing Medicare Advantage products to meet the needs of low income seniors.

Next, health insurance marketplaces.

Centene's exchange experience continues to be favorable and we are achieving margins at the high end of our targeted range.

I would like to remind you that Centene's exchange approach differs from most of our managed-care peers.

Our marketplace strategy has been and continues to be focused on targeted low-income subsidized individuals.

We designed our exchange solutions to be able to leverage our Medicaid platform, including provider networks.

In the second quarter, over 90% of our exchange members were subsidy-eligible.

This is consistent with 2014, 2015 and the first quarter of 2016.

We entered the second quarter with approximately 618,000 exchange members across 15 states.

We continue to anticipate serving approximately 550,000 exchange members at year-end due to normal attrition.

Now Centurion.

Our correctional healthcare business continues to successfully expand.

In May, Centurion was selected to provide correctional medical services, as well as pharmacy services, to over 7,000 inmates in New Mexico.

These two separate contracts both commenced on June 1 and are operating in line with our expectations.

New Mexico marks Centurion's seventh state of operation.

At June 30, we served over 136,000 correctional members, nearly tripling the membership on a year-over-year basis.

Turning to commercial, we ended the second quarter with over 805,000 commercial members.

We remain fully committed to the success of the existing business in California.

Finally, Federal Services.

Last week, we were awarded a new contract for the TRICARE West Region to manage the healthcare needs of active and retired military personnel and their families.

Centene will serve approximately 2.9 million eligible beneficiaries in 19 states and regions.

We are currently the managed care contractor for the TRICARE North Region.

The Department of Defense has reduced the number of regions from three to two as part of this procurement process.

We expect the new contract to commence in the middle of 2017.

Shifting gears to the rate outlook, for Medicaid, we continue to expect a 2016 composite rate adjustment of between 0% and 1%, consistent with the past three years.

In conclusion, the second quarter was significant as it was our first full quarter as a combined company.

And we demonstrated our ability to execute on multiple fronts.

We posted strong results.

We increased full-year guidance.

We won new RFPs and the Health Net integration remains firmly on track.

We continue to be optimistic about our future and our ability to extend Centene's leadership position in government-sponsored healthcare.

Thank you for your interest in Centene.

Jeff will now provide further details on our second-quarter financial results.

Jeff.

Thank you, Michael and good morning.

This morning, I will begin with highlighting the results for the second quarter of 2016 and provide an update on our acquisition accounting and 2016 full-year guidance.

We had a strong second quarter of 2016.

Membership was 11.4 million members, an increase of 148% between years driven by the Health Net acquisition.

Total revenues were $10.9 billion, an increase of 98% over Q2 of 2015.

Diluted earnings per share for the second quarter of 2016 was $0.98, adjusted diluted earnings per share of $1.29 when excluding Health Net acquisition costs and intangible amortization compared to $0.76 on an adjusted basis last year.

Diluted earnings per share and adjusted diluted earnings per share includes $0.19 per share benefit related to the reconciliation of the 2015 reinsurance and risk adjustment provisions of the marketplace business.

In more detail, total revenues grew by $5.4 billion in the second quarter primarily as a result of a full quarter of revenue from the Health Net acquisition, expansions or new programs in many of our states in 2015 and growth in the health insurance marketplace business in 2016.

Our health benefits ratio was 86.6% in the second quarter this year compared to 89.1% in last year's second quarter and 88.7% in the first quarter of 2016.

The 250 basis point decrease year-over-year results from including a full quarter of the Health Net acquisition and growth in the health insurance marketplace business, both of which operate at a lower HBR.

Sequentially, the 210 basis point decrease from the first quarter reflects the effect of the Health Net acquisition, the reconciliation of the 2015 reinsurance and risk adjustment provisions of the health insurance marketplace business and lower flu costs, which were more prevalent in the first quarter of 2016.

The health insurance marketplace business continues to perform well in 2016 with over 618,000 members at June 30.

During the second quarter, CMS released additional information related to the reinsurance and risk adjustment provisions of the business.

The reconciliation of both of these provisions for 2015 improved our pretax operating results for the second quarter by approximately $70 million or $0.19 per diluted share.

This is after considering the risksharing contracts primarily in California, the risk corridor and the minimum MLR.

For 2016, we continue to record reinsurance at the 50% coinsurance rate and record the risk adjustment utilizing the information we received from the data aggregators, consistent with 2015.

Our general and administrative expense ratio was 9.2% in the second quarter this year, or 9% without the costs associated with the Health Net acquisition, compared to 8.4% last year and 8.3% in the first quarter, also excluding Health Net acquisition costs.

The increase year-over-year and from the first quarter of 2016 reflects a full quarter effect of the Health Net acquisition.

During the second quarter, we incurred $0.04 per diluted share of business expansion costs compared to $0.05 in the prior year.

Investment and other income was $32 million in the second quarter compared to $10 million last year and $15 million in the first quarter.

The increase is the result of larger investment balances associated with the Health Net acquisition.

Interest expense was $52 million for the second quarter of 2016 compared to $11 million for the second quarter last year and 33 million in the first quarter of this year.

The increase is due to the full-quarter effect of the transaction financing and the issuance of $500 million of additional senior notes in June of 2016.

Our tax rate for the quarter was 52.7% compared to 48.8% in the prior year.

The higher tax rate is driven by the acquisition of Health Net.

GAAP diluted earnings per share from continuing operations for the second quarter was $0.98, including $0.19 of additional earnings associated with the reconciliation of the reinsurance and risk adjustment provisions of the marketplace business.

Adjusted diluted earnings per share for the second quarter was $1.29.

Adjusted diluted earnings per share excludes $0.16 associated with the Health Net acquisition costs and $0.15 associated with intangible amortization.

Cash and investments totaled $7.5 billion at quarter-end, including $196 million held by unregulated subsidiaries.

We estimate our risk-based capital percentage for NAIC filers to be in excess of 350% of the authorized control level.

Debt on June 30 was $4.5 billion, including $185 million of borrowings on our revolver.

Our debt-to-capital ratio was 44.4%, excluding our nonrecourse mortgage note, compared to 44.3% at the first quarter of 2016.

Our medical claim liability totaled $4 billion at June 30, representing 43 days in claims payable.

Cash flow used in operations was $420 million in the second quarter.

The cash flow from operations was impacted by the delay in our premium payments from several of our states as a result of their fiscal year-ends.

Those payment delays decreased our operating cash flows by approximately $600 million.

We subsequently have received substantially all of the delayed payments.

Next, I want to provide an update on the Health Net acquisition accounting.

During the quarter, we have made progress in updating several fair-value estimates as of the acquisition date.

Although we have not experienced any unfavorable development on the medical claim liabilities established at March 24, 2016, we have increased reserves by approximately $90 million during the quarter associated with disputed substance abuse treatment center claims.

We expect to continue to review the reserves for the substance abuse treatment facility claims; however, we have finalized our fair valuation of the remaining medical claims liability.

Additionally, we recorded premium deficiency reserves of approximately $300 million representing the fair value of underperforming contracts for the period from March 24 through December 31, 2016.

The premium deficiency reserves are primarily associated with unfavorable expected performance in the following areas -- first, losses in the individual commercial business largely in California driven by increased utilization of substance abuse treatment facilities; second, unfavorable performance in the Arizona commercial business reflecting the unfavorable risk pool caused by the grandmothering of non-ACA compliant policies further compounded by the lack of risk corridor benefit; and third, unfavorable performance in the Medicare business primarily in Oregon and Arizona.

We expect to continue to review the premium deficiency reserve for the substance abuse treatment facility utilization estimates; however, we have finalized our fair valuation of the remaining premium deficiency reserve liabilities.

It's important to note we have taken steps to improve the performance of these businesses for 2017.

Specifically, we have filed for rate adjustments in the individual commercial business in California more in line with our costs, and we believe the outcome of the 2017 Medicare bid process will improve the margins in Oregon.

We have taken steps to mitigate the substance abuse treatment center costs in the individual commercial business in California, including modifications to plan design.

We have accelerated the integration of the Arizona Medicaid business and taken actions to reduce our exposure to the individual commercial product in that state in 2017, and we are actively working with the California Department of Insurance to ensure we maintain a competitive individual commercial product in 2017.

We believe the actions we have taken will improve the operating margins in 2017.

We have not completed our fair valuation exercise associated with intangible assets, certain tax matters and the substance abuse facility claims and the related PDR.

I would refer you to the Form 10-Q for a more expansive disclosure.

Lastly, an update on our 2016 full-year guidance.

We expect total revenues of $39.4 billion to $40 billion; GAAP diluted earnings per share of $2.65 to $3.00; adjusted diluted earnings per share of $4.20 to $4.55; a consolidated health benefits ratio of 87% to 87.5%; general and administrative expense ratio of 9.4% to 9.9%; a G&A ratio, excluding transaction costs, of 9% to 9.5%; an effective income tax rate of 54.5% to 56.5%; diluted shares outstanding of 162.5 million to 163.5 million shares.

We estimate our operating cash flow to be between 1.5 to 2 times net earnings.

This can be influenced by the timing of payments from our states, as well as the payment to states associated with minimum HBR and other return-of-premium programs.

We estimate business expansion costs of $0.25 to $0.30 in 2016.

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

Thank you.

(Operator Instructions).

Josh Raskin, Barclays.

You guys just ran through a whole bunch of stuff on the PDR and I guess I just really want to understand what exactly is going on with those losses.

$300 million seems like a pretty big number.

That's 50% or so of Health Net's pretax.

So I guess I'm trying to understand, were their earnings just overstated historically or -- in these PDRs, it sounds like that's really just from March 24 through the end of the year, so it sounds like it's a run rate of more like $400 million, and I'm just curious how does that not impact operations going forward?

Yes, Josh, this is Jeff, you are correct.

I would bifurcate that.

The PDR also does include the substance abuse facility issue that I just mentioned, and I will tell you that the largest component of the PDR is in Arizona.

So I think the math that you did is pretty close as far as the annual run rate.

And what I will tell you is that it was based on information as of March 24 and using that information and fair valuing those liabilities effectively as of the acquisition date and that all of those things that I enumerated as far as the actions we have taken we believe will improve those margins heading into 2017.

And I think, Josh, that's kind of the key.

If we run through all the different, the various issues, all the actions are being taken with the effect January of 2017, which is plan design, which we've been working on for the past several months, the premium increases, the removal from business in Arizona.

There's a whole list of issues that have been dealt with very aggressively so that we will not be discussing this kind of issue next year.

So that makes sense.

I just want to make sure I understand.

So the substance abuse is included in the $300 million, that's the $90 million or is it more pervasive than that?

No, there's actually two components, Josh.

So there's a piece that's really from March 24 and prior and then there's the March 24 and into the future, right?

And so the $90 million is what we added to the medical claims liability.

As of March 24, that really is for prior issues, and then we have a component, which is also in the $300 million for I would say March 24 through the end of this year.

There are some changes being made to the certificate of benefits and the timing on that is being worked on with the state.

And there's some fraud and abuse that's under full investigation by ourselves and the state, which will impact both of those issues.

And the best way to deal with it is this way knowing that going forward it's been dealt with very effectively.

That makes sense.

But I guess I still question how does Health Net get away with not reporting -- what exactly was the dispute?

They just weren't paying these claims and it turns out they had to?

I'm just curious how --?

Well, I will give you as much as I can, but it is in litigation.

Some of it is in litigation at this point, so I want to be careful.

But in the interest of as much transparency as we can, there were some changes to the certificate of coverage, which we believe we are entitled to and which the state is evaluating as well as through other legal recourse.

There's that.

That's being contested by the providers.

There's also a whole series of claims where we believe there's been significant fraud and abuse that we have contested and are being investigated very thoroughly and we expect to prevail on a lot of those.

So what we've effectively done is we've changed some things that created this issue this year, but will not be an issue next year.

And so the best way to handle it going forward -- and it doesn't hit income, it goes on the balance sheet with purchase accounting -- we had that -- and so what Jeff and the finance team has done is, once we closed, we had the benefit of being able to pour through everything, make those adjustments and ensure that it's not hitting the income statement.

And so that's as much with the legal issues and the fact that it is going to be in the courts, I want to be careful how much more I say, Josh.

No, that's fair, Michael.

I get it.

I just want to make sure I got the number right.

So $90 million is prior plus another chunk of the PDR going forward.

So, I don't know, let's just call it half of the PDR for rough math is substance abuse-related.

And are you guys assuming that you owe all of the claims now?

I understand it's under litigation --.

I can't comment on that.

I've got to be really careful on that one, Josh.

I don't want to tip any hands.

No, I get that.

And I apologize for all the questions --.

No, I'm glad you are asking this because it's really important to us that everyone understand that the way Centene does these things is we look at it, we address it.

I've had several meetings personally with Commissioner Jones.

We've talked about it, his deputy.

We've talked about the actions we are taking.

What some people thought we had to wait to 2018, we are effecting January 1 of 2017, so we are being very aggressive in fixing it.

At the other side of it, I don't want anybody to lose sight that this is a lot of business, the Medicaid and other that's doing very well and you saw some of the benefit of the HBR.

So this is -- we knew some of this was there.

We knew it could be dealt with in purchase accounting, and we continue to move through it aggressively.

Okay.

And are you guys exiting Arizona?

So Arizona is the largest component, whatever, I don't know what that means, half or so, but are you guys -- so is this like -- how much of the business that's suffering, or how much of that you are just flat out getting out of next year?

There is a considerable amount of it that we are exiting and the exact amount we will be able to discuss in future calls.

If it's unprofitable and we do not see a road to normalizing margins there, we are going to exit.

And it's not an overwhelming amount of the business.

And Josh, just another thing that compounds the issue is the risk corridor.

So a substantial piece of the risk corridor, the theoretical benefit that Health Net had assumed was in Arizona.

So that's obviously compounding the issue and increasing the size of the PDR there.

And I can't emphasize enough, I'm really glad that this came out so fast because it's things that have been there that we are dealing with very effectively, we believe, correcting and will be behind us as we move forward.

So I'm really glad it came out quickly.

Me too.

And then I guess just the last one, and again, I apologize for another question here, just the $0.19 benefit on the 3R accruals.

Obviously that means the exchanges ran a little bit better than you guys had accrued for last year.

Is there a similar expectation now for 2016?

Did you make any adjustments?

I'm assuming you are accruing 3Rs and payables based on the same math you (multiple speakers)?

I will start and Jeff can add in if he likes what I say or don't say.

But we obviously accrue what we believe to be the most realistic number that reflects where it's going to end up, but we also apply an abundance of conservatism.

I would much rather sit here and say there's a benefit than a loss or something less than that.

So I think -- I would hope next year there's a -- in fact, I'm not going to project it to be as large, but I will say that we treat it as a one-time thing.

We call it out separate from the $1.10 earnings in the quarter because we are not looking to say we had a wild and wonderful quarter from operations.

We did have a very strong positive quarter from operations, but that extra amount we call out as separate from that which came from continuing operations.

Okay, thanks.

Christine Arnold, Cowen and Company.

A couple questions.

The profitability from the new TRICARE contract, can we assume that that's comparable to the old one?

Jesse, do you want to talk about that?

Yes.

Christine, Jesse Hunter here.

So we are obviously not in a position to comment directly around the pricing of the new contract, but I think you've noted and some of the other notes are out there that the contract is similarly sized to the current experience that we have in the TRICARE North Region, and it's a similar set of benefits and the like with the management services, etc.

So I think we will provide more guidance on that as we get clarity on the process and timing, but I think that's certainly a reasonable starting point.

And I also think that the TRICARE beneficiaries and Department of Defense are going to benefit from the fact that while it was good before, our medical management systems and things we are bringing to bear in the new contract will be beneficial to the recipients.

Okay.

And then on the $0.19, on the risk adjusters and reinsurance, can you give me some sense how much of that was Centene versus Health Net and was any of this just purchase price adjustment and not run rate in earnings for Health Net?

Yes, I can give a little bit on that.

So obviously Health Net had some larger balances on the reinsurance.

You are well aware what they disclosed in their 10-K, so they were more of the number than Centene was and there was a small -- I would say an immaterial piece on the reinsurance side that was in purchase accounting, but for the most part the majority of it came through in the $0.19 you see in the financials.

So most of the reinsurance and risk-adjusted, this $0.19, was accrued by both of you?

It wasn't just purchase accounting stuff?

No, said another way, I guess it was not trapped in purchase accounting.

This is the estimates that we had on the books as of the 24th, the fair valuation.

And then that was -- by the way, that information was developed using the same data aggregators that we use and that Health Net uses and I would say the ultimate outcome was the $0.19, once we got the final information from CMS.

Right.

But is it fair to say that you did a purchase price adjustment on Health Net's balance of reinsurance and risk adjustment; therefore some of this may not have been in run rate earnings last year in terms of (multiple speakers)?

It was an immaterial amount specifically on the reinsurance and I would say it trimmed some of the upside on the reinsurance by a small amount.

Okay, so this is real?

Yes, it's real.

Absolutely.

Okay.

Everything we do is real.

Well, I know, but purchase accounting separates the income (multiple speakers) drives us a little bonkers on run rate.

How do we think about the reprocurement risk next year and that's my last question?

We have a solid track record of reprocurement.

I don't want to jinx it and Cindy may want to comment, but we are comfortable, we track it.

We've won 7 so far this year and we have a chance to win one the second time and we are confident we will with the results we had last time.

And so I think from a reprocurement standpoint, we regard it aggressively as we have every other one, but I think the track record speaks to it.

Cindy, anything you want to add?

I don't see it as a huge risk.

Thank you.

Chris Rigg, Susquehanna Financial Group.

Just to go back to some of the stuff Josh was touching on because I think this is the way the market might interpret some of the commentary this morning that if Health Net was doing $600 million-ish of EBIT last year and you've got $400 million-ish of cost, charges etc., however you want to describe it, is the right way to think about it that the earnings power is really closer to $200 million to $300 million of EBIT from Health Net, or you think it is more in that $600 million-ish range?

Well, I think, Chris, what we are saying is that there are some specific items that are obviously depressing the profitability in 2016 that we believe we are going to resolve for 2017.

And I would just point to the specific issue of the substance abuse treatment facility, which is a significant portion of the overall what we are talking about here.

So we believe we will resolve those issues heading into 2017.

So if we resolve the issues that we've talked about today, I would say it's closer to the higher number.

Okay, okay.

And so the substance, the $90 million is basically for the 27-ish month of really 2014, 2015 and about three months of 2016, so (multiple speakers) a year.

Is that the right way to think about it?

It's everything prior to March 24.

Okay, okay.

Then just separately, Florida MMA, there's been a discussion of trueups related to prior-period underpayments, 2014 and 2015.

Have you guys made any assumptions around that in this quarter and/or going forward in terms of what you might receive?

Yes.

Chris, I talked about this at the Investor Day because the MMA, I think they had already released this potential rate correction.

So we did see a positive impact from the MMA rate correction disclosed by the state during the quarter.

However, I did mention it was muted by reconciliations that we had in the long-term care product that went the other way.

So I would think on a going-forward basis heading into 2017, it is a positive, but specifically this quarter we did have an offset for that in the same state.

Okay.

And is that in the 0% to 1% composite rate adjustment for the year?

Yes, we do have a forecasted rate adjustment for Florida.

It's a 9/1 effective date, so yes, that is.

It's in there.

It's in the total composite.

That's right.

Okay, great.

Thanks a lot.

Scott Fidel, Credit Suisse.

Just on the California individual business, what are your plans for the PPO block for 2017?

Are you actually planning to continue to offer that product?

And then just in terms of the rate increases, you mentioned that you think that you are comfortable with what you have for 2017.

We did see the final covered California data that came out on the rates and it looked like you guys were up around 10%.

Just one question though, since it did look like both Shield and Anthem had some very robust rate increases and the risk adjustment settlements and reinsurance, they looked like they had some pretty adverse selection in some of their books in California.

So just interested in terms of how you will try to position the business not to attract some of that adverse risk from those two companies as they raise rates well above (multiple speakers).

Sure.

I think that's something that Centene is well-experienced at and we've been working with the states at the highest levels to redesign the PPO product.

There were major flaws in it and we corrected that.

There's a combination of correcting it and ensuring that it's competitive, ensuring that it attracts a balanced book of business.

We never design anything to be one-sided or just get the [healthys], but we want to make sure we get a balanced book and we definitely want to make sure we are not selected against adversely relative to the competitors.

And I think the design we've come up with using all our experience, modeling systems capability has put us in a strong position to do that and the rate adjustments will be important and staying competitive rate wise and having a product that can be competitive is part of getting a balanced book of business.

So I can say it's something I've personally been involved in and pushing and discussing and I'm very comfortable that we are going to move in the right direction very quickly there starting January 1. And that's why setting up the PDR for this year, that's really easy.

It's the right way because we know that come 2017, we will be in the position we want to be with those products and we will be able to we believe grow them and do well.

Okay.

Long-winded answer.

I hope I answered it for you.

Yes.

No, appreciate that.

Just on the continuation of the fair valuation of the Health Net reserves and Jeff, you had mentioned that a lot of it is completed.

Any way to estimate the percentage of the action items that relate to that fair valuation process that have now been completed and those other elements that you are still working on like what percentage of the overall process you would estimate that equates to?

Yes, I think what I said today was if you look at the medical claims liability absent substance abuse, which we are still looking at, we are kind of done with that, looking at the PDRs again ex-substance abuse, that's still something we are trying to zero in on.

We are saying we are done with the PDRs from that perspective, but really every -- there's some small what I'd call small items that have gotten resolved, but we are still open on, for example, our intangible asset valuation, the $1.5 billion that's on the books.

And so in general, I would say if you look at the large items, we've covered two in the medical claims liability and the PDRs, but there's still a lot of other items to go as far as the valuation is concerned.

So it's hard to give you a percentage of the total balance sheet, but there's still obviously some large items like the intangible asset valuations, some tax matters, etc., etc., that we have to go through.

So if you look at our Form 10-Q, it will disclose, number one, the changes in the quarter and then, two, what we are open on.

I think what's important here is the operational side of things have been resolved and now we are dealing with the accounting things that -- it's what it is and you take advantage of it.

Yes.

And Michael has always mentioned it's not how fast, it's how well.

So we are doing a thorough process and obviously that's what we are focused on.

But once again I emphasize it's not operations.

The operations side, we feel we are just about there.

Right.

That's what I was trying to get to because especially with the planned execution of the conversion to the Centene medical management platform in California in 3Q, just want to make sure that for all the elements that you are planning that relate to the conversion that you've now completed the analysis, so (multiple speakers).

Absolutely.

I can't wait to get to that conversion because it's going to give us the kind of analytical information that allows us to continue to improve health states and manage it.

Okay.

Thank you.

A.J. Rice, UBS.

Just a couple quick questions here.

First, on the Pennsylvania delay and the managed Medicaid.

Have they given you any indication -- is that going to affect the rollout of the LTSS in any way and when we might hear something definitive there?

I asked that question and they wrote it would not affect it.

But I never put -- this can be a direct quote -- I never put my hand in the fire over any dates that states give us on when something is going to be announced.

So we will wait and see.

Okay.

And then I know in the prepared remarks you said you have gone ahead and you are entering into four new markets for MA.

Any comments you want to give us on how you are treating the one-year moratorium on the health insurance fee and thinking about bidding for that MA business?

And I also would ask in the MA area, you've been recently in the press potential as a candidate looking at some large-scale M&A activity.

Any comment or update in your thinking there that you want to share?

Let me gladly respond to that and what we said in the statement we released.

One, we tend not to comment on rumors, but I did add to it that I think if there's any one thing that Centene is recognized for is that it has not participated and will not participate in bidding and auctions.

So anything that indicates that would have to be considered a rumor.

Secondly, at various conferences, which were webcast to protect everybody from an FD, I commented that the MA that we are in -- and my comments talked about at the lower socioeconomic level and that what we see out of the Humanas and others are businesses that are at a higher level that we do not have a network for.

And that's not our business and we would not build a network for it.

So I guess somebody was spreading some rumors.

I can't be more direct than that.

And I'm glad to do it because this is webcast.

Now, what was the first part?

I got so excited I could answer that, I forgot the first part of the question.

Just in thinking about the bids in MA for 2017.

I think as we talked a little bit about at Investor Day in terms of the four new markets, this notion of a proof of concept as we roll out the new Medicare Advantage platform, if you will, into the legacy Centene states.

So we are obviously still in the midst of that, the bid process.

That's not finalized.

We won't get into a lot of commentary around the components of the rates and the like, but our strategy, as Michael said before, has been very consistent.

We want to have a product designed that is attractive for low-income seniors, so I think that's probably the best indicator of what you should expect to see once these things become public later this year.

I will give you a sense of how we like to know where we are going once we prove the concept here.

We know which dates we are going to after in 2018.

Okay.

All right.

Thanks a lot.

Andy Schenker, Morgan Stanley.

So prior-period reserve development as you reported in the release of $252 million is pretty strong, up sequentially there.

First off, just to be clear, I assume that only reflects Health Net business at this point, or maybe a week of Centene -- sorry -- only Centene business, maybe only a week of Health Net and maybe talk a little bit about maybe what's driving some of that strength in the development.

Actually, I think what's disclosed is a roll-forward from last year, so that would be only the Centene business, and we really look at it on a percentage of medical expense.

So I think our view is it's been relatively consistent.

Obviously I think we've done some Investor Days and some presentations where we look at 1.2% to 1.4%, 1.6% in medical expense and so I don't think there's anything unusual there.

Okay.

Following up on that thought process, in the prepared remarks, you said you anticipate stable -- continue to see anticipated stable medical cost trends.

Anything similarly worth calling out in the Medicaid business, any states or business lines, any higher acuity populations that are causing any troubles there?

No, I think we can stand by the original statement.

Okay then.

And maybe just slip one more real quick here just on modeling.

Service revenues, $588 million, obviously a big stepup now including Health Net.

Is that a good run rate we should be using going forward?

Yes, I think that's a pretty good run rate.

Could be a touch higher, but I think that's in the ballpark.

Great.

Thank you.

Peter Costa, Wells Fargo.

Getting back to the PDR and your fixes to it, to the problems, it sounds like you are mostly exiting the problems in Arizona, so that seems fairly resolved and maybe pricing in Oregon Medicare is resolved, but it sounds like the California individual business is still quite unresolved and that you are still discussing pricing and actions there and the payments to the substance abuse providers are still disputed and going through them as disclosed in the newspaper articles, being investigated by the states as of the last month or two.

Can you talk about how much of the PDR is actually really resolved at this point versus how much of the ongoing problem is not yet resolved for 2017?

Let me take initial shot at that.

One, the behavioral side of things, the benefit certificates have been redone, have been approved by the states and that would effectively, we believe, take care of that going forward.

The potential for somebody to try some fraud, which we will always go after very aggressively and we have a fraud and abuse program that identifies and goes after that very effectively.

So I see that as a 2017 issue, not there.

On the individual plan, on the PPO product, I believe we have now the right design.

The actuaries are looking at the right pricing and doing it the way Centene has priced things.

And it's still -- we are taking the same approach we have with the marketplace products.

You go at it, you design the product, you work with your actuaries and you get your pricing right.

So on a going-forward basis, I expect that issue in 2017 to be gone and that's why it was appropriate to do the PDR for this year.

This is something we inherited.

And it was prior to the 24th when those things were set.

We see the impact on the year.

We dealt with it that way, but most importantly we are comfortable that the changes being made will minimize and eliminate this in 2017.

I can't be more straightforward, transparent and confident than that.

Can you quantify how much of the PDR relates to the California individual business, which still seems a little bit uncertain for next year?

As it relates to next year, I'm not uncertain about it.

If I was uncertain about it, I'd still be working on it.

We have the benefit design submitted and I think we are very close to finalizing every aspect of it.

There is one area that we are still discussing that I expect to prevail fully.

The pricing is a function again of its final design and so I believe it's fully resolved.

If it wasn't, I'd say that as well.

When I say I, I think we do.

It's not just me.

Anything you want to add, Jeff?

No, I think I made my comments or maybe some of the Q&A here that Arizona was the largest single component.

I think California is probably up there number two, but you have to remember that also includes this substance abuse issue that we are dealing with.

The substance abuse issue is in the individual business, is it not?

So it's all (multiple speakers)?

Yes, it's in the California PPO, so that's part of the problem that's driving that performance.

So in fixing the substance abuse issue, that resolves -- you have to agree to be either paying the providers or changing their contracts.

Is that correct?

Let me back up.

The issue is certificates of coverage and they are being changed for 2017.

Some of them are being changed for right now and that's being reviewed by the appropriate authorities.

So on a going-forward basis, the behavior issue is being dealt with with the benefit designs.

So that part is 2017.

And that's approved by the DOI in California at this point?

They are willing to -- yes.

As far as I know -- on the new, for 2017, they did not raise any issues that gives us cause to believe it's not going to be approved.

We are talking about how much we could change for this year and we believe we have one position and we are negotiating that.

But as relative to 2017, I believe that the issues have been dealt with with DOI and they want to see a strong company productline competitive and so do we.

We like competition.

We want competitors in this product and ourselves to just have strong products.

It's a big market and we will all do very well.

Okay.

Thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Great.

I guess just going back to the PDR, I guess a lot of time companies can't book all of the losses into the PDR and there's some ongoing impact.

Were you able to isolate it all within the PDR, or does your guidance include some sort of ongoing impact from the losses in those products?

No, no, the way we view it is the requirement is to fair value loss contracts and it's how you acquire and service the members.

That's the accounting term.

And so we've done those analysis based on the expected performance and we've accrued the appropriate fair value of those losses.

We think it's [all-in].

But I guess usually what happens is if you were to sell a new product -- if someone was to, through a special enrollment period, sign up and you were to lose money on that patient or that member, theoretically, that would be an additional loss in the core business (multiple speakers)?

Yes.

Maybe said another way, since we finalized the premium deficiency reserve, that's based on an expectation, right, a forecast.

So to the extent performance is different than the forecast, then, yes, there would be either a positive or a negative that would go through earnings.

Okay, all right.

But this $300 million or maybe call it $400 million run rate is the number as far as you think for all of those businesses?

Yes, that's the number as of March 24.

Okay.

And then so it sounds to me like you are also saying that, as far as 2017 goes, you would expect that number to be basically zero; the changes that you are making that you've caught all the issues, the MA issues, the exchange issues, in time to reprice, change product design and change coverage area (multiple speakers)?

We do not [put out] a PDR for those products in 2017.

Okay.

And then I guess just going back then to the guidance, you raised guidance by $0.20.

Is the way to think about it then in your view as far as what this guidance looks like, that's really just for the 3R change and that from your perspective the core business is basically in line with what you were thinking it was going to be coming in?

Yes, yes, that's the way I would view it.

Okay.

All right.

Great.

Thanks.

Dave Windley, Jefferies.

We saw something about $1 billion of payments in California to cover hep C. Do those have any impact on these other issues that we are talking about?

I think they are probably completely separate, but wanted to understand how much of that $1 billion does Centene expect to get and perhaps is that built into your composite rate assumption, etc.?

Right.

Rone.

Well, in hep C in the Medicaid program in California, there's reimbursement from the state through a kick payment mechanism.

So when we incur hep C expenses, we accrue an offsetting revenue item anticipated from the state for that kick payment.

So we do expect to get our fair share of those payments, but the net impact is effectively neutral and that's the intent of the program.

Got you.

And then so you would treat those aside from your composite rate views, is that the right way to think about that?

I think that's a fair way to look at it (multiple speakers).

It's neutral.

It's zero.

Yes.

Yes, okay, so separate question.

On commercial, we are estimating that your commercial membership down 6% quarter-over-quarter and maybe 2% of that, excluding exchange.

Could you talk about what your views are for the group commercial business in California membership-wise?

We will give guidance for 2017 in December as it relates to the new product design and the pricing and everything we do, but our goal obviously is longer term to build that business, and we have a strong commitment to build that commercial business.

Okay.

Thank you.

Ralph Giacobbe, Citigroup.

Just in terms of the exchanges, seemingly a lot of market exits next year.

Can you just maybe talk about your expectations there?

Is it to capture a lot more lives on the exchange and even broaden your footprint as we think of next year and beyond?

That kind of falls under guidance for 2017, which we will give later.

But we are doing well in the exchanges.

We've been at the high end, so we feel as though it's continuing to grow it and we are looking forward to talking about that in December relative to 2017.

Okay.

Fair enough.

And then you didn't include the MLR for new versus the existing business this quarter.

I'm assuming that's just related to Health Net coming on, and I guess going forward is that something that you will include, or is the base too big to do that?

Jeff and other can add to this, but the scale and size now is so large that with 11 million lives and pushing a $40 billion company, it becomes less material.

It takes a lot to move the needle now and we did that in the early stages when it had a strong impact.

Now, Jeff, it's --.

Michael is exactly right.

Just because of the growing denominator and the mix of business, it's not as meaningful as it was in the past.

Okay.

Fair enough.

And then just back to the PDR.

Just trying to understand, so the PPO piece of it, you have the substance abuse as a piece of the PPO, but can you give us a sense at all, is that the main issue within that product, or can you help us delineate sort of what is (multiple speakers)?

PPO we said was a large part of it, but there are product design issues that were part of it as well where we could get -- some of the products would be selected against, etc.

So we are bringing the product design in line so that it's competitive and we build a balanced book of business across it.

So it's a combination.

Seldom when it gets to 300 million type numbers, it's just one thing, so it's a combination.

But this behavioral health thing was a big part of it.

Okay.

All right, that's helpful.

And then just last thing quickly in terms of Arizona and the quarter commentary, I just want to reconcile that because I thought last quarter you wrote off 100% of the quarter, so maybe I'm just not thinking about it right, but in terms of the PDR on the quarter piece or am I misunderstanding that?

No, I think you are correct.

So effectively what we said is the risk corridor wasn't in -- we did not anticipate that in our guidance.

And I think what's happened is that obviously hurt the profitability as well, right?

So it's been compounded by what we've seen as far as the expectations for the Arizona business on a going-forward basis from March 24 to December 31.

So once effectively that flips to an underperforming contract then the risk corridor adds on top of that, right?

Okay, all right.

Thank you.

If I may, just summarizing it, the PDR, we believe, got us right for the balance of this year from the operational side of things.

The intangibles was not PDR; that's accounting.

So the operations things we believe we have -- that it's right now going forward.

We believe that everything we are doing for 2017, we won't be facing these same kind of issues, so it's really a case of using the accounting that's there for that reason to get things right on this sized deal.

And I will emphasize again in Medicaid and there's a lot of things that we are doing well that are contributing to the top and bottom line of this Company and we continue to win RFPs.

We continue to add members across all our plans, so it's very balanced.

Ana Gupte, Leerink Partners.

The first question, just to follow up yet again on the PDR and this individual book, what is the HMO MLR for Health Net and what are you targeting for a sustainable product?

I hear you on the PPO.

You've taken benefit design steps and the product probably wasn't appropriate designed, but on the HMO side of it, is that going okay?

Let me answer that for you and then Jeff can jump in and others.

We don't give individual product HBRs.

We did talk about how the HBR is down 250 basis points.

We also said a lot of that is product mix out of Health Net.

So you can connect the dots and know that the balance of our businesses have strong -- Health Net and ourselves -- have strong MLRs, that the issue we had in the PPO is isolated to the PPO products in California.

Got it.

Okay.

So nothing else outside the PPO on individual.

The second question was about the Medicare book on Health Net and now that you've got two quarters of integration, insight and experience, they generally ran at a higher MLR above 90 despite a very nice four-star rating, and you said you took some pricing actions I believe.

Is this only pricing-related?

Is there anything else from contracts or utilization management?

And going forward, is it possible to expand the margins on that book of business, which is pretty sizable?

I think we've obviously gotten a deeper understanding of the Medicare book and I think this question came up in the June Investor Day too, what do we see as the margins for the Medicare Advantage product on a go-forward basis.

And I think we continue to see the opportunity for our standard, if you will, 3% to 5% pretax margins for the Medicare Advantage product.

So some of the dynamic that existed on a legacy basis is what I would call mix, so the proportion of the Medicare business that's in California and there are certain contracts and other things that exist within the California market that would be different as we think about the other markets that we've already indicated we will be expanding into in 2017.

I also think that the -- and that's why I commented earlier that I'm glad that we will be adding the medical management systems to some of those products.

Commercial will be the last part of it, but in the Medicaid/Medicare because there's clearly going to be some real benefits from them having the analytical capabilities to improve margins through that data.

Okay.

And then what about on the group commercial side, any postmortem from that now that you are running the book?

The group employer commercial, as you are looking at it, I mean it wasn't your book of business to start with, but again any opportunities to improve the book of business in terms of profitability and how (multiple speakers)?

Once again, it will take a little longer to get the medical measurement systems in, but as we get those in we expect to have some minimal opportunities to improve it.

Got it.

Thanks for taking the questions.

Sarah James, Wedbush Securities.

Can you walk us through some of the moving pieces in MLR, specifically what was the 2R impact?

Was it solely on the med cost side or was there premium adjustments?

And it doesn't sound like you took any of the reserve adjustments into the MLR, but I just want to confirm that.

Then if you could quantify how much the non-repeated leap year contributed to the Q-over-Q improvement.

Thanks.

Yes.

So I think you started out with first the 2Rs.

I think we've disclosed the pretax number.

It's 70 basis points on a consolidated MLR.

The majority of that would have been in the revenue line item versus medical expense as more of it was associated with the risk adjustment versus the reinsurance.

And on your second question, what was your second question?

Just confirming that there was no flowthrough of the reserve adjustments to MLR and then how much the non-repeative leap year contributed to the Q-over-Q improvement.

I guess I'm confused by your no flowthrough reserve adjustments through the MLR.

Do you mean like prior-period --?

Just making sure that the $90 million, the $300 million since it was purchase accounting, that there was no impact on the MLR.

Yes, that's right.

Those were opening balance sheet adjustments included in purchase accounting.

And the Q-over-Q impact from leap year?

I think we've talked historically about the quarterly impact for leap year.

There's additional costs in Q1, so I think our HBR improved, but the biggest reason why our HBR obviously changed is just the acquisition of Health Net and the different mix in the business.

Got it.

Then, lastly, the CDC is pushing for more aggressive use of Zika testing.

Can you speak to whether or not those tests are on formulary in Florida or other relevant markets, and if not, how does that impact claims denials if it's moved on formulary or possibly I guess unit pricing if that helps with negotiations of the test price?

It's hard to hear.

What testing did you say?

The Zika testing.

The CDC is pushing for more aggressive Zika testing, so if you could talk to whether or not it's on the Florida formulary and how that impacts claims denials?

That recommendation is just out and so we are tracking that.

I don't believe it is on the formulary in Florida yet, but we can get back to you on that information, but it's a very recent recommendation from CDC.

Thank you.

In any case, we don't really feel this will have a very significant financial impact though.

The cost of tests are very low.

Okay, thank you.

Justin Lake, Wolfe Research.

First, on the PDR, can you identify -- basically I just want to make sure I understand this -- you are saying that regardless of how this decision turns out on substance abuse, you are not essentially expected to have to even cover it for 2017?

That's right.

We believe that for 2017 the certificate of coverages have been corrected and it's well along the way to being approved.

So when do you expect that approval?

Anytime.

They've been talking about it.

They understand it.

It's ongoing discussions.

It's kind of routine.

You may want to add something.

So this is a routine approval that we will be getting for the new certificate.

Rone.

Yes, this is part of the normal filing process for products for 2017, and that process is not finalized at this point, so we are going through it and there's been, as Michael indicated, discussions that we feel confident that based on the discussions that we will have this immunized for 2017.

There's nothing controversial we are asking for.

We are closing, I don't want to call it loopholes, some openings that the state understands and they are not sure why they are there are to begin with in the conversations I've had.

And so it's a non-risk in my mind.

Okay.

And then, Jeff, I know without giving too much detail, if we were to just bucket this California issue, if it gets fixed the way you are talking about, just the substance abuse and the markets that you are expecting to exit an Arizona, or the products you are expecting to exit in Arizona, if we add those two together, how much of the $300 million does that make up?

You are right, Justin, I'm not going to get into too much detail here, but I think what we've said is, with all the actions we are taking and what Michael said is that we believe that's going to resolve the issues.

Okay.

As we sit here today, right?

Because if we don't resolve the issues, there'd be a PDR at the end of this year and that's not what we are communicating here today.

If we thought this wasn't resolved, we'd tell you that.

We have a track record of saying where things stand, and transparent and they tend to turn out -- they not just tend to, they do turn out that way.

A PDR, we've booked it for the right reasons in the right way.

We've made the adjustments going forward to benefit pricing, withdrawing products and I want to emphasize one last point here.

We are not talking about a big broad-based endemic problem across the Company.

We are talking about a product, basically one product in one state.

We are talking about another product in Arizona, which we are exiting and taking care of it that way.

So we are not talking about something that affects all the places where the systems are broken down and we haven't booked the right IBNR and all those things.

We are talking about one product, one state where we've taken the action to do what we can to improve it this year.

We improve on that, but definitely have taken the necessary steps to fix it for next year.

I appreciate that.

I guess what I was trying to get at was, again without too much detail, a couple of your peers have had somewhat similar problems in terms of specific businesses or products, and they've given some detail around exits for 2017 and the market has chosen to look through them, right, which I think is correct.

But without giving color, it's hard to figure out how much of that goes away directly for 2017.

So that's why I was asking for the color.

Well, give me an understanding of the color you want.

We are saying that we've corrected the certificates of authority.

Right.

That I get.

How much are you exiting an Arizona?

How much of this PDR of $300 million are you just not even going to be in the product for next year such that we can just literally write it off, which is I think what the market would like to do, is just say this is cash charge, we move forward and for 2017, we don't have to worry about that.

Yes, substantially all in the Arizona piece, and I think we've talked about the Medicare piece and what's being done there.

And then you have the substance abuse issue primarily in California and the changes that Michael has talked about.

So we've dealt with it all (multiple speakers) all the product problems.

So, Jeff, substantially all, meaning more than 50% in Arizona, you will not be in that business for next year is what you are saying?

I would say yes.

Okay.

That's helpful.

I appreciate it, guys.

Thank you.

Matthew Borsch, Goldman Sachs.

I just want to understand -- going back to the PDR -- just want to understand the mechanics a little bit better because I'm getting questions on this.

Where did you book it?

It went against the balance sheet?

Was it something that you had to offset in the second-quarter earnings?

I'm confused about that.

No, it's part of the acquisition accounting, Matt.

So what happens is is you increase the reserves and the offset is really embedded in goodwill on the opening balance sheet.

I got that.

I guess I'm trying to understand though for the PDR as it relates to -- anything related to prior to the acquisition date, I get it.

That's against the balance sheet.

It will have no impact on the P&L post-March 24.

But for this $300 million, that's a PDR that you are taking related to the period of March 24 through the end of this year, so that's what I'm trying to understand.

That goes against the balance sheet?

Does that mean that if you hadn't taken the PDR, does that mean that your earnings for that period would be by your estimate $300 million lower than what your guidance states?

So what I would say is that the original creation of the PDR is embedded in goodwill on March 24 and then effectively that PDR amortizes throughout the year to absorb the losses on those products that we've identified and businesses we've identified.

Okay, the answer basically is yes to that question?

So there's no income into it.

Yes.

Right.

Okay.

And just one last one.

For the $0.19, that's all related to Centene, right?

Is there any that's related to Health Net?

No, that's both companies.

That's both Health Net and Centene combined.

But if that's for 2015 --.

Yes, that's for 2015.

That's correct.

And I'd say the majority of it is Health Net-related.

But I guess I'm confused about that because I would have thought -- that's for Health Net prior to the period of the acquisition close.

Look, it's my misunderstanding the accounting, but how does that flow through to benefit the P&L post the acquisition?

Yes, because we are effectively fair valuing that item as of the date of the transaction, and you have to remember that a lot of the encounters data and edge server submissions don't happen until May.

And ultimately we were relying on, and Health Net was relying on the information from the data aggregators to effectively fair value that as of the transaction date.

All right, all right.

Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Michael Neidorff for his closing remarks.

I thank everybody.

I'm glad we were able to have this call today because I think it's important we understand the PDR does not affect us on a going-forward basis.

And it's been dealt with and we are looking forward to continuing for it to growing results for the Company.

So talk to you soon.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.