Centene Corp (CNC) 2016 Q4 法說會逐字稿

Good morning and welcome to the Centene 2016 fourth-quarter and year-end 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, Centene's Senior Vice President of Finance and Investor Relations.

Please go ahead.

Thank you, Carrie, and good morning, everyone.

Thank you for joining us on our 2016 fourth-quarter and full-year 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.

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

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

The playback code for both dial ins is 10098783.

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-K dated February 22, 2016, the Form 10-Q dated October 25, 2016, and other public SEC filings.

Centene anticipates that subsequent events and developments will cause 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.

Please mark your calendars -- our next Investor Day will be on Friday, June 16, in New York City.

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

Michael?

Thank you, Ed.

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

During the course of this morning's call, we will discuss our fourth-quarter and full-year 2016 financial results and provide updates on Centene's markets and products.

Additionally, we will bring you up-to-date on the Health Net integration and discuss the changing healthcare regulatory landscape.

Let me begin with fourth-quarter and full-year 2016 financials.

We were pleased to conclude the year with a strong fourth quarter marked by solid top- and bottom-line growth.

Membership at quarter end was 11.4 million recipients, representing an increase of 6.3 million beneficiaries over the fourth quarter of 2015.

Fourth-quarter results increased 89% year-over-year at the revenue level to $11.9 billion.

2016 revenues grew 78% year-over-year to $40.6 billion, ahead of our guided range.

The revenue increases were primarily attributable to the Health Net acquisition.

The fourth quarter HBR improved 320 basis points year-over-year and 220 basis points sequentially to 84.8%.

The 2016 HBR improved 240 basis points year-over-year to 86.5%.

These improvements were primarily related to the product mix shift from the addition of Health Net and a California minimum MLR change.

We reported adjusted fourth-quarter diluted earnings per share of $1.19 compared to $0.97 in the same -- prior period of last year, representing growth of 23%.

Adjusted 2016 diluted earnings per share were $4.43 compared to $3.14 reported in 2015 representing an increase of 41%.

Lastly, 2016 operating cash flows came in very strong at $1.9 billion or 3.3 times net earnings.

Please note there are several moving parts related to the adjusted numbers including the California minimum MLR change I just mentioned.

Jeff will provide further detail on these during his prepared remarks.

A quick comment on medical costs including flu.

The latest data indicate the flu season is peaking higher and earlier than last year's season.

Please note, last year's flu season was more moderate than usual.

Importantly, we continue to see, as well as anticipate, overall stable medical cost trends consistent with our expectations in the low-single-digits.

Next, the Health Net integration.

2016 was a transitional year and period for Centene as we began integrating Health Net into our enterprise.

Health Net, which is now our California plan, is fully integrated from a cultural, leadership, human resource and financial systems standpoint.

The operational systems are on track to be fully converted within our anticipated timeframe and we continue to expect to reach or exceed our synergy targets.

We're confident all of the components of the PDR booked in the second quarter of 2016 have been successfully resolved and did not record any PDRs in the fourth quarter of 2016 for 2017.

We are already seeing improvements in the operating performances of the markets and products in 2017, the most significant being the California PPO product, which was the largest component of the PDR.

We're monitoring changes to the PPO membership and are finding the benefit design changes, price increases and network enhancements, which became effective in 2017, have created a more balanced book of business.

In addition, we have made equally significant progress in addressing the substance abuse issues related to this product in 2017.

We anticipate the California PPO product will be at least breakeven in 2017, in line with our expectations.

I would now like to make a few comments on the changing healthcare regulatory landscape.

In the healthcare industry, especially the government services sector, change is nothing new.

What remains constant, though, is the need for high-quality, affordable healthcare.

This is regardless of what party is in office or the status of the economy.

Centene has over three decades of experience spanning five presidents from both sides of the aisle.

During this time, we have proven our ability to provide high-quality, cost-effective healthcare to state beneficiaries while saving states money and delivering strong returns to our shareholders.

In addition, we have demonstrated our agility, as well as our capacity and capability, to successfully navigate industry changes.

This is evidenced by our success with the ACA while others have struggled.

You will recall, we maintain a business as usual approaches when it came to exchanges.

Early indications suggest if the ACA is completely repealed and replaced the process may take several years and include a transition plan designed to minimize, if any, disruption to states or subsidized populations.

As an example of this, the new administration recently submitted a proposed rule to the OMB aimed at stabilizing the exchanges.

Currently, there are no specific agendas regarding the administration's approach to Medicaid.

We believe it is likely they will give additional flexibility to states for managing this population, which aligns nicely with Centene's local approach to healthcare.

In addition, the administration has to determine its plan for dealing with those states that have expanded Medicaid versus those that have not.

In the meantime, we are taking our business as usual approach from an execution standpoint.

We believe we can work on any basis, whether it is block grants or per capita caps.

I will note that per capita caps is a fairer approach for states that have a growing Medicaid population.

Centene provides healthcare services to the largest number of Medicaid recipients.

We have an experienced team on hand and are confident our scale, systems and expertise will allow us to be ready as the new healthcare agenda unfolds.

Moving on to markets and product updates.

First we will discuss recent Medicaid activity.

Nebraska, in January 2017, we commenced operations under Nebraska's new Heritage Health Program covering TANF, CHIP, ABD, Foster Care, and Long Term Care beneficiaries.

Results are currently trending in line with expectations and we anticipate serving between 75,000 and 80,000 members under this contract.

Indiana, also in January of 2017, we began a new contract serving beneficiaries enrolled in Indiana's Hoosier Healthwise and Healthy Indiana Plans.

This contract represents a re-procurement in a state Centene has been successfully operating in for over 20 years.

North Carolina, in September 2015, North Carolina's General assembly passed reform legislation to privatize the state's Medicaid program.

In a proactive approach, Centene signed an agreement last month with the North Carolina Medical Society to collaborate on a statewide, member focused approach to Medicaid managed care.

As part of this agreement, a joint venture known as Carolina Complete Health formed.

This JV will establish, organize and operate a physician led health plan to provide Medicaid managed care services in the state.

A key feature of the JV will be the active participation of physicians in the ownership and governance of the health plan.

Centene will manage the financial and daily operations.

Carolina Complete Health will seek to participate in the privatization process as a bidder for a likely North Carolina Medicaid RFP in the near future.

This joint venture serves as another example of Centene's ability to provide innovative solutions to meet local market needs.

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

I would like to remind you this award was in response to a reissue of the state's initial RFP, and we are pleased to have retained the three zones first awarded to Centene in April of 2016.

Implementation is well underway and we will be ready to hit the ground running on the anticipated start date of June 1, 2017.

Georgia, in November of 2016, Centene was awarded a statewide contract to continue serving Medicaid members in Georgia.

Under the new contract, Centene will be one of four plans providing medical, behavioral, dental and vision health benefits to the state's Medicaid beneficiaries.

Centene has been providing healthcare services to Georgia's Medicaid recipients for over a decade and we look forward to continuing our partnership with the state.

The new contract is expected to begin on July 1 of 2017.

Nevada, also in November of 2016, Centene was selected to serve Medicaid recipients in two counties in Nevada.

This contract is expected to begin on July 1 of 2017 and we anticipate membership of 35,000 of 50,000.

In addition, we expect to offer a Health Insurance Marketplace product in these two counties beginning in 2018.

Nevada marks Centene's 29th state of operation.

Next, Medicare.

At year end, we served over 334,000 Medicare beneficiaries.

On January 1, we began offering Medicare Advantage plans in four new states, Texas, Georgia, Mississippi and Florida, under our four-star [parent] rating.

We are applying a test and learn approach to our first year of MA operations, similar to Centene's initial launch of our exchange product in 2014.

Also, similar to our exchange approach, we will be focused on providing high-quality, affordable MA products to low income beneficiaries.

We do not anticipate meaningful MA membership in these four new markets in 2017.

We will be applying the insights we gain this year with respect to network, plan design and benefits to Centene's 2018 MA plans.

Overall, we expect our Medicare Advantage business to be profitable in 2017.

Now, Health Insurance Marketplaces.

2016 marked another year of Centene's successful operating on the exchanges.

At December 31, we served roughly 540,000 exchange members, in line with our expectations.

Over 90% of these members were subsidy eligible.

In 2017, open enrollment periods concluded last week and we had just over 1 million paid members.

The key demographics of these members including age, gender, financial assistance and metal tier are consistent with our experience over the past three years.

Over 90% are subsidy eligible, and almost 90% enrolled in silver tier plans; this includes those members enrolled in Maricopa County, Arizona where Centene is the sole exchange provider.

In addition, over 90% of our total paid enrollees are a combination of members renewing their Ambetter plans, and shoppers who are new to the exchanges.

This is important for two reasons.

We have historical data on our renewing members, including medical history and utilization patterns, and the new shoppers are actively selecting our Ambetter exchange product based on price, network and benefit design.

This is the same purchase criteria reflected in our risk pool since we began offering exchange products in 2014.

We are closely monitoring emerging claims experience, specifically membership profile and claims utilization patterns.

Thus far in 2017, we have seen no evidence of unanticipated utilization levels.

As it is early in the year, we feel it is prudent to include the extra level of conservatism in our 2017 guidance related to this business to allow for uncertainty regarding membership behavior post election.

We continue to expect our marketplace offering to be profitable this year.

Lastly, federal services.

The 2017 TRICARE contract appeal process was completed in November and we were pleased to have sustained our West region award.

This represents a return to Health Net's region when the TRICARE program was initially launched in 1988 and aligns nicely with Centene's growing business in the western US.

This new contract is expected to commence on October 1, 2017.

Separately, our current VA choice contract runs through the summer of 2017.

We are actively reviewing the community choice network RFP that was released in late 2016 and remain committed to providing high-quality services for our nation's veterans.

Shifting gears to our [radar] (inaudible).

For 2016, our composite Medicaid rate adjustment was an increase of approximately 1%.

We continue to expect the 2017 composite Medicaid rate adjustment of 0% to 1%, consistent with the past few years.

Separately, CMS issued the 2018 advanced notice last week and preliminary Medicare Advantage rates appear to be in line with our expectations.

In summary, 2016 was another successful year for Centene.

We are now realizing the full benefits of the Health Net acquisition, particularly those products new to Centene, which will drive further growth and greater scale in 2017 and beyond.

Over time, we believe the critical mass achieved with the addition of Health Net will prove to be invaluable.

We remain committed to long-term margin expansion and continue to make the necessary investments in systems and infrastructure to successfully execute our strategy.

We are optimistic about 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 fourth-quarter and full-year 2016 financial results.

Thank you, Michael, and good morning.

Earlier today we reported our fourth-quarter and full-year 2016 results.

For the full year, total revenues were $40.6 billion and adjusted diluted earnings per share were $4.43.

The increase in the top and bottom lines compared to 2015 was the result of the acquisition of Health Net, growth in the Health Insurance Marketplace business and the full year effect of product and market expansions in 2015 and 2016.

Membership grew to 11.4 million members, an increase of 124% between years.

For the fourth quarter, total revenues were $11.9 billion, an increase of 89% over Q4 of 2015 and diluted earnings per share were $1.45 compared to $0.91 last year, and adjusted diluted earnings per share was $1.19 compared to $0.97 last year.

As highlighted in our press release issued this morning, adjusted diluted EPS for the fourth quarter and full year excludes the following items: the acquisition costs associated with the Health Net transaction; amortization of acquired intangible assets; the favorable pretax effect of $195 million of additional revenue associated with the retroactive contract amendment received in the fourth quarter that changed the minimum MLR calculation under California's Medicaid expansion program, this amount relates to periods prior to the acquisition date for legacy Health Net business and periods prior to 2016 for the legacy Centene business; a charitable contribution to the Company's foundation of $50 million in connection with the additional revenue from the change in the California minimum MLR previously noted; and debt extinguishment costs of $11 million associated with the early redemption of the Centene and Health Net senior notes that were scheduled to mature in the first half of 2017.

Additionally, the fourth-quarter and full-year results also include a net benefit of $0.03 and $0.05 per diluted share, respectively, due to the early adoption of the stock-based compensation accounting standard and the incorporation of retirement provisions in our stock-based compensation agreements.

In more detail, total revenues grew by $5.6 billion in the fourth quarter year-over-year, primarily as a result of: the Health Net acquisition, which closed on March 24, 2016; the startup of the Texas Star kids program in November 2016; the July startup of the Louisiana Medicaid expansion business; and growth in the Health Insurance Marketplace business.

Sequentially, total revenues grew by $1.1 billion from the third quarter of 2016 driven by the $195 million of additional revenue associated with the change in California minimum MLR definition and $500 million of additional revenue received in the fourth quarter associated with pass-through payments from the state of California that were recorded in premium tax revenue and premium tax expense.

Moving on to the HBR.

Our health benefits ratio was 84.8% in the fourth quarter this year compared to 88% in last year's fourth quarter and 87% in the third quarter.

The 320 basis point decrease in the fourth quarter year-over-year is a result of the higher mix of commercial business associated with the Health Net acquisition and the effect of the retroactive revenue recorded in California associated with the change in the minimum MLR definition.

Sequentially, the variance is driven by the California minimum MLR change which decreased the fourth-quarter HBR by 170 basis points.

Our selling, general and administrative expense ratio was 9.9% in Q4 this year excluding the Health Net merger costs compared to 8.6% last year and 9.1% in the third quarter, also excluding Health Net merger costs.

The increase in the ratio as compared to the prior year is primarily due to several items.

First, the acquisition of Health Net, which operates at a higher SG&A ratio due to the higher mix of commercial and Medicare business.

Second, the fourth quarter 2016 includes a higher level of seasonal costs related to the open enrollment period for the Health Insurance Marketplace business due to the expected growth in 2017.

And third, the fourth quarter of 2016 includes the $50 million charitable contribution to our foundation as a result of the additional revenue recorded related to the California minimum MLR change.

The charitable contribution increased our SG&A ratio in the fourth quarter by approximately 50 basis points.

The increase sequentially is a result of the higher enrollment costs in the Health Insurance Marketplace and the charitable contribution previously mentioned.

Excluding Health Net merger costs, business expansion costs of $0.11 were incurred in the fourth quarter and $0.25 for all of 2016.

Investment and other income was $34 million in the fourth quarter compared to $8 million last year and $33 million in the third quarter.

Interest expense was $217 million this year compared to $43 million last year.

Sequentially, interest expense increased from $57 million in the third quarter to $75 million in the fourth quarter.

The increase year-over-year is primarily due to the financing associated with the Health Net transaction.

Sequentially, the increase is due to the early redemption of the Centene and legacy Health Net senior notes that were scheduled to mature in the middle of 2017.

The increased interest expense -- this increased interest expense by $11 million pretax for the fourth quarter and full year.

Our effective income tax rate was 47.3% in the fourth quarter of 2016.

The lower than projected tax rate in the fourth quarter is due to the additional earnings associated with the revised minimum MLR definition in California and the stock-based compensation adoption.

The increased earnings and lower tax rate associated with the California minimum MLR definition lowered our effective tax rate.

For the full year 2016, our effective tax rate was 51.8% compared to 48.6% in the prior year.

The increase in our effective tax rate year-over-year is due to the acquisition of Health Net partially offset by the California minimum MLR change and the adoption of the new stock-based compensation standard previously discussed.

The California minimum MLR change and the stock-based compensation adoption decreased our effective tax rate for the full year by over 400 basis points.

Before I get into details regarding the balance sheet, first let me provide an update on the fair valuation exercise associated with the Health Net acquisition.

During the fourth quarter, we finalized the fair valuation associated with the transaction including our fair valuation estimates of intangible assets and substance abuse treatment center costs.

Total intangible assets have been revised to $1.530 billion amortized over a weighted useful life of 12 years.

In addition, we finalize the liability associated with the substance abuse treatment center cost and increased our estimated liability by approximately $30 million during the fourth quarter.

This adjustment primarily relates to periods prior to the acquisition date and did not go through earnings.

As of December 31, 2016, we maintained approximately $125 million in medical claims liability associated with the substance abuse treatment center costs primarily related to periods prior to the acquisition date.

Now on to the balance sheet.

Cash and investments totaled almost $9.1 billion at year end, including $264 million held by unregulated subsidiaries.

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

Debt on December 31 was $4.7 billion including $100 million of borrowings on our revolving credit facility.

Our debt to capital ratio was 43.7%, excluding our nonrecourse mortgage note compared to 34.7% at last year end.

We have reduced our debt to capital ratio by approximately 60 basis points since the Health Net acquisition.

Our medical claims liability totaled $3.9 billion at December 31 and represents 42 days in claims payable compared to 41 days last quarter.

Cash flow from operations was $1.6 billion in the fourth quarter and $1.9 billion for the full year.

Operating cash flows for the fourth quarter and full year were impacted by the finalization of the opening balance sheet associated with the Health Net transaction.

As a result, operating cash flows benefited by approximately $445 million in the fourth quarter.

Now for 2017 guidance.

Our total revenue and adjusted diluted earnings per share guidance remains unchanged from our December Investor Day.

We have adjusted our GAAP diluted earnings per share guidance to reflect the finalization of the purchase price allocation with respect to intangible assets.

This increased our GAAP diluted earnings per share by $0.04 on the bottom and top end of the ranges.

The updated amounts are reflected in the revised guidance included in our press release today.

Additionally, as previously stated at our December Investor Day, we took numerous actions in 2016 to resolve the issues associated with the products that were included in the PDR.

As a result, we did not record any premium deficiency reserves in the fourth quarter of 2016 related to 2017.

Overall, 2016 was a transformative year, and we are pleased with the operating momentum heading into 2017.

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

(Operator Instructions).

Sarah James, Piper Jaffray.

Thank you.

I wanted to follow up on some comments you made for 2017 guidance.

So initially, you had talked about flu peaking earlier and maybe a little higher.

So how does that compare to what you have in guidance?

And then it sounded like you said that you built in some conservatism on health insurance exchange expectations to 2017.

So if you could help us understand what that means (multiple speakers).

Yes, sure, I'll start off and Jeff and others can add to it.

There's been reports out on the flu, so I wanted to ensure that you all understood we've been tracking it.

Last year was a very low base, so it's higher than last year.

It is peaking earlier.

It's all contained within the guidance that we've given you.

And so it's not a surprise.

I was only really trying to just clarify it to avoid any confusion later, Sarah.

As it relates to the second part of your question, we took an approach of being conservative in looking at the exchanges and the costs.

Why?

Because everybody was doing it anyway.

And we said, let's just build it in so people are comfortable that we've done it.

It's at the -- we could still achieve our range that we originally talked about at the high end.

And it's just being extremely conservative.

It's still a great year with a lot of upside and we said everybody is so concerned about this now.

As I said, early indications, and it's one month, so it's -- but it's important when you look at the demographics of the population that it's very consistent with what we've had success with in the past.

So it was just a case of saying, let's be conservative.

It's much better to meet and beat than later on saying that it didn't quite come out as we expect.

So it's just a comfort zone I think for investors and ourselves.

Got it.

And are there aspects of your health insurance product maybe, either in the benefit design or in the provider contracts such as risk sharing, that give you comfort around markets like Arizona on the health insurance exchange and being able to control costs in events where you're just the only one or one of two.

Right.

No, I think, first of all, an Arizona, there were two issues going back.

We had the Health Net PPO product, which went away December 31.

We then went back in and we entered with our design product that we have used everywhere.

And contrary to what people think, in the insurance business, an ideal world is where you do a carry or replace.

It ensures you get the full balanced book of business, and that's something we learned a long time ago.

So, as it relates to Arizona and going in, by example, any of the new markets, we've used our same design -- product design.

We've used our same network approach to it and we've been very consistent.

And when we took that and any experience we had in Arizona through the old business and looked at it through our lens, it said it should perform consistent with our expectations of any of our businesses.

And we -- 90%-plus of it is in the silver tier, as we said, which is the area we had the most success and with subsidized members, so it's very consistent.

Thank you.

Michael Newshel, Evercore ISI.

Can you quantify any benefit from the California minimum MLR adjustment that was related to the first three quarters of 2016 that may have been included in the fourth quarter?

Yes, so, just a quick thing on that.

If you recall, the minimum MLR in California actually ended on July 1 -- actually June 30, so the minimum MLR rebate provisions -- I think they began in January 2014 and then went all the way up through June 30 of 2016.

And, in the third quarter, we had mentioned that we had roughly $0.09, I think, in the guidance for the full year, which really represented the current year effect for our California health and wellness plan and then subsequent to the acquisition date for the Health Net plan.

So in total, it was around -- a little over $220 million of benefit for us for the full year, so that's a little over $25 million of it that's effectively in the adjusted diluted earnings per share number, pretax.

So we recognized only that portion in the areas that are impacted, except in (multiple speakers) 2016.

In 2016.

Right.

And then just one more clarification on the revenue guidance, given that it was unchanged.

Can you just clarify whether that includes the Pennsylvania HealthChoices contract win?

Yes, yes, obviously we have a -- it does and, obviously, we have an $800 million range on that.

So it's early in the year, contract, start dates, etc., etc.

We just thought it prudent to just keep the same guidance range with the $800 million spread we have on the range.

Got it.

And can you give us any view on like what the full annualized run rate of revenue would be in that contract?

Do you have any visibility [from the state] in how they're going to allocate lives?

No, we do not have visibility at this time.

I can give you a range of membership.

I'd say we're looking at maybe 75,000 to 100,000 members, so hopefully that's helpful.

But more to come, obviously, when the state finalizes its allocation methodology.

And it's during a period when all these appeals are taking place, you're not really having discussions about it.

Understood.

All right.

Thank you very much.

Josh Raskin, Barclays.

Thanks.

Good morning, guys.

Michael, just wanted to follow-up on the North Carolina JV that you guys created.

I certainly understand with the potential RFP coming out why you guys would be so active early here.

But could you just walk us through the economics?

Is that going to look any different than your typical awards?

I know you said the physicians have some ownership stake in it as well.

So is there some sort of non-controlling interest that you guys have to disperse, distribute or how did that work?

No, it's going to be -- it's an 80/20 joint venture with us having the 80%.

It's something we -- typically we've done in other markets very successfully.

We work with the physicians on the medical policies, the practices, the financial side of things we manage.

And it will, in the end, ensure their involvement on how medicine is practiced, which is something we've always subscribed to in our markets, so there's no change there.

But we think it's particularly important with a state that is as large as new as it is to really have called it out.

And we want the doctors understanding that they will have every opportunity to review the medical policies and practices.

And then -- but from a financial standpoint, we'll be managing that forward.

Okay.

Is there an exclusivity with the providers or I assume they'll be able to participate with other plans when the RFP is (multiple speakers)?

Well, I think, history shows [surely] if they wish to provide with others, that's fine, but doctors tend to prefer or like the plans that they are that involved with.

So we'll wait and see how that unfolds.

That makes sense.

And then just lastly on the health insurance on the marketplace, you mentioned 90%, I think, were sort of known.

The other, call it 100,000 or so lives that came from other plans, do you have color on the demographics for those individuals at all?

Did they come from plans that exited or did you just take share from plans that remained?

Is there any color on that 100,000?

I think we have some of it -- Jesse, do you want to add to it, [add more] detail?

Yes, Josh; this is Jesse.

So we have some visibility on those.

Obviously we don't get into the specificity of which carrier in terms of exits and the like.

And I think when we look at the pieces here, the most relevant data point is what Michael mentioned before that, in aggregate, our key demographics, subsidy levels, metal tier, age, gender, up and down the line are almost entirely in line with our prior experience.

Okay, all right, so that -- and that's inclusive of that extra 100,000?

That includes -- that represents 100% of the members that we have for 2017.

We did not see anything so far that says we're getting -- we attracted any different members than we typically have.

And other people in the room here with us are shaking their head yes.

Okay, all right.

Thanks, guys.

A.J. Rice, UBS.

Thanks.

Hi, everybody.

First of all, let me ask you about Health Net synergies.

I know you guys said you're generally tracking your expectations.

And presumably a lot of what you'll realize in 2017 is the result of actions already taken in 2016.

I wonder when you think about 2017 and actions still to be done to capture more synergies, what's still left to be done with respect to Health Net integration and so forth?

Well, we're still working through the operational systems, the claims payment, some of the medical management things being put in place.

And Mark Brooks is doing an outstanding job for us in that area, working through it very methodically.

Some of it we'll be bringing back from offshore, some of the claims payment.

That's something that has nothing to do with the current political environment; we announced that we would be doing that with the acquisition almost two years ago now.

So that's consistent with our approach.

So for those kinds of things, and actually when we look at it, we're more efficient in our automated claims payment here in the US than what it is offshore, so we see all those things still to come to bear.

But I keep encouraging -- and I think the senior management is encouraging everybody that's involved with the execution of it, it's not how fast, it's how well; it's on target.

I think what was important to us and what I highlighted before, the things that have been integrated, the cultural things, the HR, the general ledger, where we are moving the IBNR system to hours, running parallel in the first quarter, and then we'll be fully on our system, those kinds of things -- it's really worked the way one would expect it to and then some.

And I'll gratuitously take advantage of your questions and roll in one other thing.

It gives us a great deal of confidence in our ability to take on a fairly large acquisition, one that was not simple and had some issues, and integrate it effectively.

And so it's all worked on schedule.

That's great.

And let me just ask on -- some of the other companies are talking about how they are going to think about 2018 for the health insurance exchanges given the moving parts in Washington.

You're in the unique position that you're still actually making money on the exchanges; a lot of the others are not.

Any early thoughts about 2018 and the changing landscape and how you're going to think about exchange participation?

I know you've got to start thinking about it in spring pretty seriously.

Sure.

I had -- we had our Board meeting yesterday.

As you know, we have a couple very knowledgeable Board members and in our discussions everybody is of one mind.

We maintain business as usual.

And as I tried to say in my prepared remarks, this is a population that I think everybody is going to work very hard to minimize the transition, the impact on the states and on the recipients.

And our approach is going to be what it was this past year, continue to move ahead very effectively.

And I'll go back and say that in 2008 when President Obama was elected, there were a lot of concerns of what was going to happen.

We said, business as usual, and we're just going to adapt to what has to be and we're just going to continue down on 2018.

We'll have this current exchange program or whatever we move to and we're comfortable we have the capability just to continue to do it.

I'm not backing off at all, in other words.

Okay, great.

Thanks a lot.

Gary Taylor, JPMorgan.

Hi, good morning.

Just a couple questions.

First, on the donation to the California foundation, I presume that's just part of your corporate responsibility commitment to the state of California and there wasn't any contractual obligation to do that?

Yes, that's actually not -- that's just to the Centene foundation; that's not specific to California.

Oh, okay.

Yes, we've done this in the past.

I think if you go back last year, anytime we usually have these one-time benefits, we usually do some of the charitable contribution to our foundation.

We don't expect much credit for one-time gains.

And so, that's an opportunity to build up a foundation that over time will help to ensure our ability through the earnings of it -- we're not there yet -- to maintain our commitment to all our communities across the country.

Thank you.

And then my second one was just, of the roughly 1 million exchange enrollment, would you be willing to give us that total for California and Arizona at this point?

I think we said Arizona just would be about 100,000 and I don't know that we specified in California.

Excuse me, Gary.

The way to think about those two markets on the legacy Health Net side is we -- Michael touched on Maricopa previously.

So we have 100% of that market; it was directionally 100,000 members last year.

So that's consistent with what we're seeing for 2017.

And then on the California front, I'd say -- pretty -- it's relatively consistent with what Health Net had seen historically, so think mid-100,000 range -- meaning between 100,000 and 200,000.

What's really significant -- I'll go this far, because I've been carefully following up with the California people, that the -- on the PPO there was a shift in the population.

That some of the -- the book of business has really become balanced and we have about the same number this year as we did last year.

We have -- so it achieved what it should.

So we expect our high utilizers, but we expect a balance, so it's a nice -- every indication is it's a nice balanced book of business, which is why we said we fully expected it to be breakeven or less.

Chris, anything you would add to that?

No, Michael.

I think you hit it right on the head.

I think we're really happy with the way the benefit changes have moved product.

Yes, and I want to call out the state and everyone else that understood the issues and helped us to do it.

And we were able to affect the pricing and just create the right environment the way it should be.

We took a much smaller price increase than what you originally heard about.

Okay, thank you.

Lance Wilkes, Sanford C. Bernstein.

Yes, good morning.

Wanted to ask a little bit about the Long Term Care business.

And if you could comment a little bit on both pipeline, if you are expecting any sorts of delays with respect to risk or replace and repeal and replace.

And also what sort of MLR trends are you seeing in that business?

I'll just comment that there's been a couple states that were in-force now that have talked about delaying the re-procurement per year.

I think Kansas and there was one other one, which is fine.

We're in-force there and some say it's business as usual.

They want to do that, we can live -- either way is fine with us.

As far as the MLR, I don't know how --.

Yes, as far as the MLR -- this is Jeff; hey, Lance.

So, I think we've historically said that usually Long Term Care products are underwritten, close to the mid-90%s, a little bit below the mid-90%s range, because of the size of the premium.

So, we're seeing -- I mean that's consistent with our experience, relatively close to where the state's underwriting the program.

And the SG&A is lower because, once again, the size of the --.

Premium, yes.

Yeah, totally makes sense.

And then in North Carolina and in the other places where you've taken a similar approach in partnering with physicians, understand the 80/20 split on the overall economics.

Do you enter into a capitation or is there some sort of an upside and downside arrangement with the physicians as far as medical costs in those instances?

There have been -- there are ways to do some of that, some risk.

We are moving to a risk type contracting, and those are things yet to be worked out.

We're in the early stages of those discussions, but it will be done in a way that is very balanced and fair to both sides, and we've had great success with that.

We have a shared risk with the physicians that are taking on the ambulatory risk and we share in the inpatient/outpatient services.

So we have tomorrow -- I don't want to, for competitive reasons at this point, get too specific.

But we have the systems capability we're developing and continue to look at risk sharing with providers, but not at the global cap level; we've seen too many people have issues with that.

Great.

Thanks a lot.

Kevin Fischbeck, Bank of America Merrill Lynch.

Great, thanks.

Just wanted to ask on the individual business, I think previously you talked about having about $300 million of kind of making a net payable position on the risk adjusters, risk corridor and minimum MLR.

Is that where you ended the year or did anything change around that?

Jeff?

Yes, the total around the year end is going to be around $425 million of the risk adjustment payable.

You'll see that in our 10-K.

I guess the number that I think I remember hearing is kind of all of those things combined.

So is that all combined or just the risk-adjusted payables is $425 million?

That's just risk adjustment payable, so obviously we'll have a receivable on the reinsurance, right?

It kind of goes the other way.

And risk corridor and MLR, you'll be in a payable position as well?

Yes, those are relatively inconsequential as far as you look at the whole year.

The majority of it's going to be in the risk adjustment payable and the reinsurance receivable.

Okay, and then as far as the MA rollout, it wasn't clear to me -- you were saying that the MA business was going to be profitable.

Did you -- was that related to the four new states were going to be profitable, or is that including the existing California business?

We were kind of in the totality of it, in the totality.

We said from the beginning we're going to go very cautious in the new states.

I mean it's just the way we do it.

We did that with the exchange, get the experience, understand it, get -- and it's as much -- we have -- we think we have a lot of the capabilities of headquarters.

But you really need to get your state employees, those that are executing day in, day out, get them very comfortable, trained on just how they are doing it, and then you end up with a much more successful longer-term growing business.

So it's really taking that approach, Kevin.

Yes, no, that makes sense.

And I guess maybe just a last question then.

As far as -- I know you said there's not a lot of membership in those four new states, but any color on the demographics of how that's shaking out?

Yes, Kevin; this is Jesse.

Not a lot that we would be -- worth sharing at this point.

As Michael mentioned in his other comments, we've talked about consistently our focus is on making sure that we have a product that is attractive for the lower income seniors, so that will continue to be the focus as we apply the test and learn approach that we've talked about.

Great, thanks.

Matthew Borsch, Goldman Sachs.

Yes, I was hoping you could talk a little bit about the outlook for the commercial group business, maybe give a sense of how enrollment faired to coming into Jan 1. And whether you think profitability will be stable in 2017 versus 2016 or up or down.

Yes, I -- as I said -- now when you say commercial, there's two aspects to it.

There's what California is doing in the small and large group and then there's the exchange and we kind of say that's all commercial.

So the exchange business I think we've talked about [in the sense].

The business -- we're still very committed to the commercial business in California, large and small group, and its -- and Jeff probably has a few numbers on it he can share and help on.

Yes, so a couple of things.

If you recall, we took a lot of actions in 2016 to improve the performance on the small group business, so I think our expectation is that that's going to be more profitable heading in 2017.

Large group has been very consistent; it's been a profit contributor in 2016 and we have the same expectations for 2017.

And how about the enrollment change going into the new year?

What does that look like, large and small group?

I think if you look at the -- if you just look at our press release and you look at the fourth-quarter commercial, you'll notice membership is down.

Some of that is just the normal attrition of the exchange members.

But the other component of that is lower membership in the small group and a little bit lower membership in the large group.

And you have to remember a bulk of those blocks renew for January 1. A large part of that business renews in December for January 1. So I think what you've seen is our actions around pricing and other network actions take effect.

And so, the membership will be a little bit lower as we jump off the year.

It's still in line with our forecast, we projected this, but more profitable.

Okay, thank you.

We're still very committed to that business; don't misread that.

Dave Windley, Jefferies.

Hi, thanks for getting me in.

A couple questions around pricing.

First, is there any health insurer [fee] holiday benefit to 2017 earnings and what was the strategy about the holiday?

How did you apply that money?

And then how -- what dialog -- what information are you getting from your Washington lobby or contacts in terms of prospects for having that holiday extended or the health insurer fee permanently removed as you think about pricing for 2018?

Yes, so this is Jeff.

Specifically for the largest part of our business, there is no effect right on the Medicaid side.

Those are predominantly a pass-through with a gross up, etc., etc.

I think we've talked about the Medicare before and we just took that into totality in our pricing, right?

So I don't see it as any benefit as far as that is concerned.

And then on the -- Michael, if you want to --.

Yes, are we talking -- we're very active in DC, talking about all aspects of this business, and we think that the [tactical] taxes of the fees are on the table for discussion.

And we, particularly in the Medicaid business, we've been demonstrating that it's very circular.

If we pay a dollar in, because of the actuarial soundness of rates, by the time the state has to gross it up to keep our rates and they get reimbursed, it's cost them money.

So we're showing them that.

And we're also explaining that as they look at all these things, somewhere in the commercial and other -- it finds its way into the pricing and they are talking about reducing the price of insurance, how that's all on the table.

At this point, there is no fixed or set anchoring on any particular point.

It's all up in the air.

So I'm not going to commit one way or the other.

I'll just say that we continue to work on it and I want to be cautiously optimistic we'll get a positive solution.

And, Michael, a kind of similar vein but different book of business -- on your marketplace business, you talked about business as usual.

Do you have any sense of whether -- what the administration is going to do with co-pay assistance, the cost -- the out-of-pocket cost assistance for members and whether that will stay?

Do you have confidence that that's going to be a stable environment for you to continue in the marketplace?

Yes, I do.

I think nobody -- if you eliminate that support, that's the same as doing away with the product.

And I don't think anybody wants to see that large number of people back out on the street, so to speak, without insurance.

I think there will be -- we believe strongly that that will be maintained.

Okay, thank you.

In some form.

Justin Lake, Wolfe Research.

Thanks.

Good morning.

A couple questions.

First, the 900,000 that you talked about in terms of the individual membership, can you break down --?

So we know 100,000 came from other plans.

Out of the 900,000, how many are the members that were with Centene last year and how many are completely new to the Company?

Well, we had 500,000 last year, like --.

Yes, I don't know if we want to get too specific in terms of retention rates and other things on that, Justin, but I would say, as Michael is referencing, we had -- a little over 0.5 million lives last year and our retention rate was actually -- I think it was the highest year that we have had of any of the subsequent years.

Our retention rate was higher for -- from 2016 to 2017 than we've had in the past.

So I'd say at least in line and I'd say a little bit better than what we've seen historically.

Can you give me an historical ballpark?

I just don't remember off the top of my head.

So, well over 80%.

Got it.

And then just on the pipeline broadly, can you give us some color in terms of what you're seeing out there or what you are focused on that you expect either is out there in the market or is expected to come to market in 2017 that will fuel 2018 and 2019 growth?

Thanks.

Well, there is -- we really didn't comment, but we know that Oklahoma has an RFP out there we're looking at.

We know that North Carolina is working; we've talked about that.

Cindy, anything else you want to add that --?

No, that's right.

I mean we still remain optimistic about the pipeline and what's out there and we'll continue to evaluate these opportunities as they arise.

Great, thank you.

Jesse, you made a very important point.

Yes, I think one thing just in general that we've seen over the last -- approaching a decade now, states have moved -- the higher acuity, more complicated populations into advantage care.

I think there's been a lot of demonstrated success around that.

So if you think about this environment where there's going to be more flexibility at the state level and more focused on cost containment while improving quality, I think you would look at long-term care, other complex populations being a real catalyst for more opportunity at the state level.

And we really prefer that.

We have -- we plan on that.

We have the systems and the capability to manage that population and we can save the states a lot of money there while improving outcomes.

Scott Fidel, Credit Suisse.

Thanks.

Just had one question, just related to -- there was an interesting proposal in the Florida governor's budget to allow Medicaid MCOs to potentially shift the range at which they contract with hospitals to a lower range relative to FFS.

I think it had been at 100% to 120% previously and they are proposing it -- shifting that down to 90% to 110%.

Just interested if you have any more details on that and whether you see an opportunity for that in terms of lowering your rates with the hospitals and then also how that may actually work through the Medicaid rates.

Thanks.

Chris?

Thanks, Michael.

Yes, we've had an opportunity to take a little bit of a look at this at this point in time, but I think right now it's just -- as you mentioned, it's in the governor's budget.

We're talking with the health plan to see what we think the impact of something like this would be.

But from our particular standpoint, we don't see really a big impact in this particular proposal at this point in time.

Okay, thanks.

Tom Carroll, Stifel.

Hey, guys.

Good morning.

Yes, just a quick one here.

As we look at the high end of your guidance, what does that assume about the California PPO performance?

It assumes a breakeven.

I mean what we've said is we expect it to be roughly breakeven; we said that at December Investor Day and that's still our message today.

Yes, thank you for that --.

Which is a huge improvement.

Yes, right.

Understood.

I just -- you have a relatively wide range, so I didn't know.

I'm trying to get a sense of -- I know you said at least breakeven, so at least breakeven is the high end of your guidance.

So if you do better than breakeven, you are coming in at the higher end of your guidance range, all else equal.

Is that fair?

To the extent that that amount of population impacts it, yes.

Okay, great.

Thank you.

Ralph Giacobbe, Citigroup.

Thanks.

Good morning.

Just wanted to ask about the margin profile of the Company at this point.

It's been lifted a bit, partially due to the Health Net deal.

But as you look ahead, do you still see opportunity for margin expansion?

How do you view a range, target margins?

And just maybe talk about the impact of higher acuity populations coming on as we look to the out years?

Well, I think -- we are on record as saying that margin expansion is still a short and longer-term objective of ours.

And the higher acuity populations, as we said, we had the systems and capability and I think that we're -- the more of that we have, we can enhance it.

Jeff, you want to add anything?

Yes, we've always held this long-term pretax margin of between 3% and 5%.

And I think, obviously, there's a lot of opportunity on margin.

We talk about synergies and the run rate synergies and executing on those.

I think we still have room to go as far as systems and the operational systems that Michael mentioned before.

Additionally, there's always investment income.

Right now interest rates are relatively low.

So there's a lot of things I think out there for the opportunity to expand margins in the future.

Okay, that's helpful.

And then just last one here, as you expand presence on the exchange, have you expended your provider networks?

Have providers started to come to you to want to be included in your networks?

And then, I guess, have you seen any pressure on provider rates as a result of having to expand?

I think our mindset is -- our population is 400% of the total poverty level and below.

We're very focused -- we're not trying to grow beyond that except in California where we have the large group business and they have had historically the relationships to support that.

But if any of the providers that fit within our traditional provider group want to join, we'll be happy to talk to them.

But we find that the network we have is very adequate for the population we're attracting and serving.

Thank you.

Christine Arnold, Cowen.

Thank you very much.

Two questions.

We added about 500,000 public exchange members entering this year.

It looks like we've got 200,000 plus with California and Arizona.

Were there other big areas of growth that you'd like to call out as areas where you increased your presence?

And then the retroactive minimum MLR, does that change your view of how the Health Net business was doing when you acquired it?

Are you now looking at the Health Net business and saying, gee, we thought they were losing X, but after this retroactive adjustment it looks like it's doing better?

And how do we think about that in terms of the Health Net run rate?

Jesse, you want to take the population --?

Yes, Christine, just in terms of the markets where we've had stronger presence on the marketplace in 2017.

So not surprisingly, that matches up with where we have just a stronger presence generally at the local level.

So states like Texas -- in addition to the California and Arizona markets, so Texas, Florida, Georgia, those are all markets where we have a meaningful marketplace in 2017.

Yes, and this is Jeff, I'll answer your second question.

It doesn't change our views because ultimately the minimum MLR ended in June 30 and they were accruing to that level.

And July 1 there was a rate reduction in the Medicaid expansion rates -- a sizable rate reduction, really in combination with eliminating the minimum MLR.

So it doesn't change our views on the profitability of that product going forward.

So those two things were a wash?

Yes.

Close.

Close, yes, more or less.

Okay, thank you.

Ana Gupte, Leerink Partners.

Yes, thanks.

Good morning.

Thanks for squeezing me in.

On the guidance, so you talked about flu.

I was wondering if you had the leap year tailwind in the guidance as well across your Medicaid and commercial book.

Yes, I think we talked about that at our December Investor Day.

So, yes, it was -- we mentioned that.

So that was in -- I mean nothing has changed since our December Investor Day.

Okay, so it is in there then, because that offsets the flu headwind, correct?

Predominantly.

More or less?

Last year was a moderate level of flu, so there's a lot of puts and takes.

Obviously, we're managing over 300 products, 29 states, so --.

Okay.

(Multiple speakers).

But it's a $46 billion business this year.

Yes, it's huge; agreed.

It's impressive.

The second question on the rate notice on MA.

Can you give us any thoughts on what this means for Health Net and your expansion states Florida and Georgia and the others for 2018?

What are you lobbying for from here on?

Jesse?

Yes, not sure we'd comment a lot on that just -- other than to say that the preliminary view is it's in line with expectations.

Our analysis is pretty consistent with a lot of the reports that we've seen that have come out over the course of the last week.

So there's some variability from state to state, so we're not in a position to get into that just yet.

But I think it's a good starting point is how I would characterize it.

Okay, and the final one is on the Trump executive order that -- the news flow that came out last night and this morning.

How do you see that impacting?

Is that going to impact your 2017 margins favorably?

And then what does it look like for 2018 (multiple speakers)?

(Multiple speakers).

I've been upper early rehearsing for you, Ana.

Can you tell me what Trump said last night?

I believe he's expanding the age underwriting bands to some degree.

And with an executive order I think there's more flexibility on consumer cost sharing, provider networks.

I think that kind of covers it.

There's no state (multiple speakers).

Yes, we've been talking about the bands or he's hearing us, so -- and any of these things he does that improves it, there's going to be a lot of discussion about it, so it's all good.

I'm just comfortable that -- we have our proposals in to the decision-makers.

They understand it.

They understand how big we are in this business so it carries some weight.

They are soliciting some of our opinions.

We have a very active Washington office, so any of these things that expand -- that correct some of the things that need a corrected will only help us.

Okay, great.

Thanks for fitting me in.

And this concludes our question-and-answer session.

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

Well, I want to thank you all for participating and I will tell you, I look forward to being able to have more of these kinds of calls with the kind of results we delivered this past quarter.

So, off to 2017 we go.

Have a great year, everybody.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.

Have a great day.