Centene Corp (CNC) 2019 Q3 法說會逐字稿

Good day, and welcome to the Centene Corporation Third Quarter 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.

Thank you, Alyssa, and good morning, everyone.

Thank you for joining us on our Third Quarter 2019 Earnings Results Conference Call.

Michael Neidorff, Chairman, President and Chief Executive Officer of Centene; and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call, which can also be accessed through our website at centene.com.

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

The playback number for both dial-ins is 10135235.

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 recent Form 10-Q filed October 22, 2019, today, and the Form 10-K dated February 19, 2019 and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change.

While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so.

The call will also refer to certain non-GAAP, that's generally accepted accounting principles, measures.

A reconciliation of these measures with the most directly comparable GAAP measures can be found in our third quarter 2019 press release, which is available on our website at centene.com under the Investors section.

Finally, a reminder that Centene will hold its next Investor Day on Friday, December 13, 2019, in New York City and host its fourth quarter year-end 2019 earnings call on Tuesday, February 4, 2020.

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

Michael?

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's Third Quarter 2019 Earnings Call.

During the course of this morning's call, we will discuss our third quarter results and provide an update on Centene's markets and products.

We'll also provide commentary around the health care legislative and regulatory environment as well as an update on the acquisition of WellCare.

Let me begin with the third quarter 2019 financials.

We are pleased with our third quarter results, which delivered strong top and bottom line growth.

These results reflect the growth in our Marketplace business, new Medicaid contracts and programs and demonstrate the benefits of our diversified health care enterprise.

Membership at quarter-end was 15.3 million recipients.

This represents an increase of 884,000 beneficiaries or 6% over the third quarter of 2018.

Third quarter revenues increased 17% year-over-year to $19 billion.

Adjusted third quarter diluted earnings per share were $0.96.

This compares to $0.89 reported in the same period last year, representing 8% year-over-year growth.

The $0.96 excludes a $271 million or $0.57 per diluted share noncash impairment charge, virtually all related to the write-down of goodwill and intangible assets of our U.S. Medical Management subsidiary.

The third quarter HBR was 88.2%, representing an increase of 190 basis points year-over-year.

The HBR was impacted by a number of nonoperational items, which accounted for 180 of the 190 basis point increase year-over-year.

100 basis points of the increase was attributable to the California In-Home Support Services reconciliation in the third quarter of 2018.

This benefited last year, the third quarter of '18, HBR by 100 basis points.

The health insurance fee moratorium increased the HBR by 58 basis points quarter-over-quarter.

The impact from the at-risk, state-directed payments in California was 30 basis points this quarter.

I also remind you, the third quarter of 2019 HBR reflects new contracts in Pennsylvania, Iowa and New Mexico, which carry higher HBRs in their first year of operation.

On a sequential basis, the HBR increased 150 basis points, which was primarily attributable to the normal seasonality of the Marketplace business.

Consistent with prior years, our Marketplace business has higher medical expenses as the year progresses, as more members reach the out-of-pocket maximums.

The previous mentioned at-risk, state-directed payments also contributed to this sequential increase of HBR.

Moving into markets and product updates, first, Medicaid.

Our Medicaid business continues to grow, benefiting from new contracts such as Iowa, New Mexico and Pennsylvania.

In aggregate, membership grew approximately 3% sequentially and approximately 1% year-over-year to 8.7 million recipients.

Our new business more than offset the enrollment and revenue headwinds caused by ongoing eligibility redeterminations in certain states.

The redetermination process can cause an adverse impact on acuity levels as disenrolled members tend to have a lower HBR.

We view this as a temporary issue as we continue to work with our state partners to appropriately adjust our rates.

Next, state updates, North Carolina.

We are pleased to announce Centene was successful in its appeal of the North Carolina Medicaid Managed Care RFP, resulting in an expansion of our North Carolina Medicaid contract.

Our provider-led North Carolina subsidiary was awarded an additional region, which includes the Raleigh-Durham area.

With the addition of this region, we will now be providing managed care services in 3 regions: Region 3, Charlotte area; Region 4, Raleigh-Durham area; and Region 5, Wilmington-Fayette areas.

According to state data, these regions represent approximately 60% of total Medicaid beneficiaries covered under the program.

This new 3-year contract is expected to commence February 1 of 2020 and includes the option to renew up to 2 additional years.

Texas.

Texas has rescheduled its STAR+

PLUS reprocurement announcement until sometime later this month.

The STAR and CHIP reprocurement announcement is expected in December.

We remain confident that our performance and value are recognized by the state.

Louisiana.

We were disappointed to not have been selected for the Medicaid contract in Louisiana's recent reprocurement.

We performed an extensive review of the scoring and evaluation process and, as a result, filed a protest with the state.

We anticipate a decision on our appeal from the procurement officer later this month and remain cautiously optimistic.

The state is considering using emergency contracts with the incumbents to eliminate member disruption until the appeal is resolved.

New Hampshire.

On September 1, we commenced operations under our new Medicaid Managed Care contract in the state.

This was a successful reprocurement of an existing contract.

We are now serving just under 80,000 beneficiaries in New Hampshire, which is marginally higher year-over-year.

Now Medicare.

At September 30, we served approximately 405,000 Medicare and MMP beneficiaries across 20 states.

This represents a year-over-year decline of approximately 13,000 recipients, which is the result of planned actions taken by Fidelis to reestablish their 4-star rating.

On a sequential basis, membership increased by 6,000 recipients.

Next year, we plan on expanding into 100 counties in existing states and adding one new state, Nevada.

Further, Centene will return to a 4-star MA parent rating in 2020.

We will begin our joint venture with Ascension in 4 locations next year and look forward to developing this as another potential growth engine.

Other Health Insurance Marketplaces, the Marketplace business continued to perform well in the third quarter, consistent with our expectations.

At September 30, we served approximately 1.9 million exchange members across 20 states.

This represents a sequential decline of approximately 51,000 recipients.

This is consistent with the higher member retention we are experiencing this year.

Our Marketplace margins continue to be within the range of 5% to 10%.

We anticipate another strong year of operations as the national leader of exchange products.

We aim to grow the business in 2020 as we expand our footprint in 10 of our existing states.

I'll now provide an update on the health care legislative and regulatory environment.

We continue to expect most of the activity will be at the state level and in the courts.

Earlier this month, a federal judge in New York blocked the implementation of the administration's corporate charge rule.

This rule would make it more difficult for legal immigrants to obtain green cards if they have utilized certain benefits including Medicaid and housing assistance.

In addition, we are actively monitoring the pending decision from the Fifth Circuit related to the Affordable Care Act and the individual mandate.

Even considering these potential issues, we remain focused on delivering against our vision, which is to be the leading provider of government-sponsored health care.

We believe the demand for affordable, high-quality health care coverage will remain a constant and durable driver of long-term growth for us.

Over the last 30-plus years, we have remained focused on adding value to communities under various regulatory environments.

Many states are seeking to improve access and affordability.

We view this as an opportunity for Centene to be an innovative partner with these states.

We continue to work to ensure issues such as pharmaceutical costs, surprise billing and the health insurer fee are recognized and are a focus for policymakers and regulators.

A quick -- excuse me, a couple of quick comments.

On medical costs, they remain stable and in line with our expectations in the low single digits.

On our rate outlook, we expect a composite Medicaid rate increase of approximately 1.75% to 2.25% for 2019.

This is slightly higher than our previous expectations due to increases that mitigate the higher acuity levels associated with the eligibility redeterminations I previously mentioned.

I will now provide an update on the acquisition of WellCare.

The approval process continues to go well and is ahead of schedule.

Conditional approvals have been obtained in all but 2 states, Illinois and New Jersey.

WellCare and Centene continue to work expeditiously and cooperatively with the Department of Justice.

The divestiture process reached an important milestone in September when WellCare signed a definitive agreement to sell its Missouri and Nebraska Medicaid health plans to Anthem.

The comprehensive integration planning process is well underway.

Both companies are fully engaged and are doing extensive work to ensure a smooth and seamless combination.

We remain comfortable with our previously communicated synergy and accretion targets.

We continue to believe we will receive all necessary approvals to close the transaction by the first half of 2020.

Given the progress of activities to date, there may be an opportunity to close earlier in 2020.

Next, I'd like to make some preliminary comments on 2020 guidance.

Note that my comments exclude the WellCare acquisition and include the Louisiana contract, which is currently being protested.

We also assume a higher tax rate due to the return of the health insurance fee.

We are still finalizing our annual planning process, but based on our reviews to-date, we expect revenue and adjusted diluted earnings per share for 2020 to be consistent with the forecast included in the Form S-4 filed in conjunction with WellCare acquisition.

As is our custom, we will provide full details on 2020 guidance at our Investor Day on December 13 in New York City.

In summary, we continue to deliver against the strategy and vision for Centene to be the leading government-sponsored health care provider.

The scale and diversity of our enterprise allows us to absorb the ups and downs of rate cycles, markets and subsidiary performance.

This is while simultaneously driving profitable growth, both organically and through M&A.

Our targeted pipeline remains robust with more than ample opportunities.

The WellCare acquisition will enhance our ability to provide recipients with access to affordable high-quality services and products as well as deliver fair compensation for providers and create savings for states.

In addition, technology and innovation remain key differentiators across our enterprise, and we remain highly focused on furthering our capabilities and maximizing the impact of our investments in this area.

Fortune recently recognized Centene as #7 in their Change the World list for our Provider Accessibility Initiative.

Our recently announced strategic partnership with Walgreens and RxAdvance addresses a growing need for new approaches to pharmacy benefits management, particularly in Medicaid.

This innovative model aims to increase transparency, enhance customer experience and ultimately result in better health outcomes at lower costs.

We remain focused on executing on our strategic priorities and are enthusiastic about the growth opportunities ahead.

We thank you for your continued interest in Centene, and I will now turn the call over to Jeff.

Thank you, Michael, and good morning.

Let me reiterate some highlights of our third quarter results.

Third quarter 2019 revenues were $19 billion, an increase of 17% over the third quarter of 2018, and adjusted diluted earnings per share was $0.96 this quarter compared to $0.89 last year.

Total revenues grew approximately $2.8 billion over the third quarter of 2018, primarily as a result of growth in the Health Insurance Marketplace business; expansions in new programs in many of our states in 2018 and '19, particularly Arkansas, Illinois, Iowa, New Mexico and Pennsylvania; the Ribera Salud acquisition in Spain; and approximately $440 million in at-risk, state-directed payments in California recorded in premium revenue.

This growth was partially offset by the health insurer fee moratorium in 2019.

Moving on to HBR.

Our health benefits ratio was 88.2% in the third quarter this year compared to 86.3% in last year's third quarter and 86.7% in the second quarter of 2019.

There are a lot of moving parts in the HBR for last year and this year that are nonoperational in nature and affect the year-over-year comparison.

In order to understand the changes more clearly for this quarter, we have included a reconciliation in our press release.

We don't expect to provide an HBR reconciliation in future releases, but felt it was important in this quarter.

Let me explain the line items one by one.

First, in the third quarter 2018, the HBR benefited by 100 basis points due to the IHSS reconciliation in California that we disclosed last year.

Second, the third quarter 2019 HBR was adversely affected by the health insurance fee moratorium, which accounts for 50 basis points.

And finally, the third quarter 2019 HBR was adversely affected by approximately $440 million of state-directed payments in California, which accounted for 30 basis points.

State-directed payments are payments that have minimal risk but are administered as a premium adjustment.

These payments are recorded as premium revenue and medical expense at close to 100% HBR.

In aggregate, these items account for 180 basis points of the change from the third quarter of last year to this year.

Sequentially, the 150 basis point increase in HBR from the second quarter of 2019 is primarily due to the normal seasonality in the Health Insurance Marketplace business and the state-directed payments I previously mentioned.

Let me provide a quick update on the Medicaid performance and eligibility redeterminations.

The Medicaid HBR was flat year-over-year.

Improvements in the Medicaid HBR, which were driven by network and medical management initiatives, were offset by the effect of membership reductions due to the eligibility redeterminations.

We have experienced continued membership declines as a result of redeterminations, resulting in an overall increase in the acuity of our remaining membership.

While states have responded with premium rate adjustments, recognizing the change in acuity, there can be a timing difference from an HBR perspective.

Long term, we expect the eligibility reductions to subside and premium rates to align with the relative acuity of our membership.

Next, Marketplace.

The Marketplace business continues to perform well, and membership remains strong as we ended the quarter with approximately 1.9 million members.

We continue to expect pretax margins for the year to be within our stated 5% to 10% range.

Now onto SG&A.

Our selling, general and administrative expense ratio was 8.8% in the third quarter this year compared to 10% last year and 9% in the second quarter of 2019.

The year-over-year decrease was primarily driven by a 70 basis point reduction related to the Veterans Affairs contract expiration and our commitment to our charitable foundation recognized in the third quarter of last year.

The third quarter 2019 ratio was also affected by the state-directed payments and benefited from lower variable compensation cost for programs indexed to our stock performance.

Additionally, we spent $0.02 per diluted share on business expansion costs during the third quarter.

During the third quarter, we recorded $271 million or $0.57 per diluted share of noncash goodwill and intangible asset impairment, virtually all associated with our U.S. Medical Management business.

The impairment was identified as part of our quarterly review procedures, which included an analysis of new information related to our shared savings demonstration programs, slower-than-expected penetration of the home health business model into our Medicaid population and the related impact to the revised forecasts.

The business continues to be cash flow positive and remains an important part of our care management programs but has fallen short of our profitability expectations at the time of acquisition.

Investment income was $98 million during the third quarter compared to $80 million last year and $120 million last quarter.

The increase year-over-year reflects the increased investment balances and higher interest rates.

The sequential decrease is primarily related to our second quarter Ribera Salud acquisition gain.

Interest expense was $99 million for the third quarter 2019 compared to $97 million last year and $101 million last quarter.

In October, we completed the refinancing of our 2021 senior debt securities to a floating rate Term Loan A that has a 3-year maturity.

This lowers our interest cost, creates demand for our WellCare transaction financing and aligns our short-term interest rate risk with our investments.

One-time refinancing costs associated with the transaction, including the call premium, were $30 million and were incurred in the fourth quarter.

These are excluded from our adjusted earnings per share guidance, which I will discuss in a few minutes.

Our effective tax rate for the third quarter was 45.1% compared to 33.3% in the third quarter 2018.

The increase year-over-year is driven by the nondeductibility associated with the goodwill and intangibles impairment offset by the impact of the health insurer fee moratorium.

We have a strong balance sheet.

Our debt-to-capital ratio was 35.6%, excluding our nonrecourse debt, improving 180 basis points from year-end and 70 basis points from last quarter.

We had $415 million borrowed on our revolving credit facility, and our days and claims payable was up 1 day from last quarter to 48 days.

We continue to expect the DCP to be in the mid-40 range on a run rate basis.

Our cash flow for the 9 months ended was $2.1 billion, representing 1.9x net earnings.

Cash flow used in operations was $99 million in the third quarter driven by the payment of approximately $1 billion related to the 2018 risk adjustment to CMS and minimum MLR programs partially offset by net earnings.

Before I get into our updated guidance, let me make a few comments on the WellCare acquisition.

We are pleased with the progress on the regulatory approval and have made significant progress on the integration planning.

Based on the work performed to date, we continue to be comfortable with the synergy and accretion targets that we have previously communicated.

As we continue through the integration planning and get closer to the closing date, we will provide a complete update on the acquisition.

Additionally, as disclosed yesterday, our Board of Directors approved a $500 million increase to the company's stock repurchase program.

This, together with the new Term Loan A, provides flexibility to the company to either repay debt or repurchase equity with the net proceeds related to the WellCare transaction divestitures.

Now onto 2019 guidance.

We are updating our GAAP diluted earnings per share and our tax rate to reflect the impairment charge and the refinancing costs that will be incurred in the fourth quarter.

For an adjusted tax rate, the previous guidance range can still be used.

The remaining guidance metrics are unchanged and are included in this morning's earnings release.

One quick note, we expect our fourth quarter total revenues to be lower than the third quarter 2019 revenues as a result of the state-directed payments previously mentioned.

Our headline numbers for the full year remain unchanged.

Let me take a few minutes and discuss 2020.

As Michael mentioned in his comments, we expect total revenues and adjusted earnings per diluted share for 2020 to be in line with what was filed in the S-4 registration statement associated with the WellCare acquisition.

This includes total revenues in excess of $79 billion and an adjusted earnings guidance range that will encompass $4.79 per diluted share, which was in the filing.

This, of course, includes Louisiana and excludes the WellCare acquisition.

Overall, we were pleased with the performance during the quarter and the continued progress on the regulatory approval and integration planning associated with the WellCare transaction.

We are entering the fourth quarter with positive momentum.

Looking ahead at next year, we remain focused on executing against our growth and diversification strategy, delivering both top and bottom line growth and on successfully completing the integration of WellCare.

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

(Operator Instructions) And the first question today comes from Matt Borsch with BMO Capital Markets.

If I could just ask you about the -- your reference to the S-4 forecast for 2020.

So it looks like that is, of course, on a stand-alone basis before the impact of WellCare.

The Street estimate is $4.92.

You guys are pointing to $4.79.

I know you're not answerable to The Street estimates, and I don't know which ones include WellCare and which ones don't.

But can you give us any more color on the moving parts that influence your view on 2020 at this point?

Yes.

I mean, I think a couple things.

We've obviously mentioned a little bit today about the redeterminations and the reductions in membership.

Obviously, that would have a carryover effect into 2020.

We're not going to go through, I would say, all the headwinds and tailwinds.

We typically save that for our Investor Day in December.

And I think, also, Michael highlighted in his prepared remarks the tax rate.

Just so everybody has a baseline here, we've historically commented that, when the return of the health insurer fee comes back, it's usually 10% on the tax rate.

So I guess what I would say is we're still in the early stages of our planning process, and we're comfortable with the numbers that we communicated today for 2020.

And we'll give an update -- a broader update on, I would say, the puts and takes when we get to our December Investor Day.

And I think, Matt, I might just add, we look at that as the baseline.

I mean, it was thoughtful when we put it together, and it's a really good beginning point.

And we want to be very careful not to get ahead of ourselves because we always go into great detail on the December 13, in this case, meeting.

And so look at that as a baseline from which we can build.

The next question today comes from Josh Raskin with Nephron.

First and foremost, congrats to Ed, and good luck.

In terms of my question, I guess the first one would be the catalyst for the buyback.

This seems to be a relatively new idea for Centene.

You guys have been reticent in the past just being sort of so growthy.

What was the catalyst?

What was the decision now to decide, okay, we could -- especially in light of some of the commentary that WellCare may be coming -- the closing may be coming sooner than expected?

Well, I think there's a couple of factors.

One, with the WellCare deal, we treat that as a separate issue from the ongoing operations and buyback of stock, which, as you correctly pointed out, we have lots of applications for our cash and capital.

So that's -- it's we're treating it very separately because, say, that's part of this deal, what we receive on this really.

And the buyback of the stock, again, to some minimal degree, help on the accretion, things of that nature, and treat the case as just isolated and very separate from the ongoing day-to-day business.

It just seemed the appropriate opportunity.

And we may use some of it to reduce debt, so I might also add that using it to buy back the stock at the levels that [most of us] is trading at now also seems to make a lot of good financial sense.

I think it was you or somebody said, I was [going to apply] it, but we will.

So it just makes sense, Josh.

I knew someone read one of our notes.

All right.

And just the MLR guidance.

You guys are running up about 120-ish basis points year-to-date or so.

The fourth quarter, even at the high end, would imply an MLR that's only up 90 basis points.

And I say that because you've got some headwinds and things like that impacted on a year-over-year basis.

So what improves in 4Q relative to what we've seen year-to-date?

And should we be thinking more about sort of that higher end of the MLR guidance, the range that you guys have provided?

Yes, yes, just a couple.

I'm following you there, Josh.

I think a couple things.

We obviously did have some new programs that started, Iowa, I would mention would be one and some other new programs that started this year.

And so those usually start out at higher HBRs at the beginning of the year, and by the time we get to the end of the year, for example, the Pennsylvania LTSS, we've had for almost a full year by that time.

So there are things like that, that have, I would say, improvements in the fourth quarter from a seasonality and a new business perspective.

So I think those are the things that I would point to.

And the problem, I think, with looking at this year compared to last year is, we've -- last year, we had some unique items.

This year, we have some unique items.

So it's kind of difficult to get to earnings progression.

But, again, we didn't change our guidance range, and I think we're comfortable where it is right now.

I'd like to just add one factor.

As you recall, in my comments, prepared comments, I went through the 180 basis points of change and what occurred.

I just want to reemphasize that within those numbers absorb the incremental costs associated with the new state study.

And some of you who will remember going way back when, we always assumed a very -- a much higher medical demonstration, 90% or something.

For the first 2, 3 quarters of a new business is things like the long-term care, you started looking even longer while you're putting it under control.

And I also remind you that some states, when you take on a new business, they have continuity of care.

You can't input them if you pull those out of the way.

So there's things like that, Josh, that impact it.

All of that was absorbed within the state of MLR.

The next question today comes from George Hill with Deutsche Bank.

I guess on a different angle, I wanted to dig in a little bit on the recent Walgreens announcement in the pharmacy.

I guess can you talk about how much you've increased your stake in RxAdvance?

And kind of what's different about the new relationships?

Jeff, do you want to talk about that?

Sure, George.

I think we -- when we made the RxAdvance investment initially, we had contemplated a few different steps along the way.

And so I think this is really kind of the 1-year step.

And so without getting into a lot of the specifics.

We increased a nominal amount, but I think it's representative of momentum and the trajectory of the work that we're doing together.

And I think, in terms of the Walgreens relationship, yes, we have -- some of you may recall, when we had our Investor Day in June, we talked about the work that we're doing on the enterprise partnership front, identifying a few different categories.

Retail was one.

And so we see meaningful opportunities to engage on some of the things that Michael referenced in his comments, principally transparency as it relates to pharmacy for the Medicaid population, and then ongoing opportunities for consumer engagement and enhanced experience at the retail.

And I want to emphasize.

There are various outlets with pharmacy, and Walgreens has done a particularly good job in urban areas and is recognized for it and the inner cities, where we have a large population.

And so working closely with them is an added plus while still maintaining relationships with the other large retail outlets.

So maybe if I could get a quick follow-up then.

Is this really just a tighter alignment around the kind of networks and direction?

Or is there any actual change to how we should think about the reimbursement process in pharmacy?

Well, I think, I mean, you know I've stated our goal to try to move towards net pricing.

I've said that historically, we're still working on it.

We'll be working with them and other partners, but they have a lot of capabilities in that area, but I'm not prepared to get ahead of myself.

So it's -- these things are a process, and it takes a certain amount of time and energy to get there.

And it's not always a straight line, but it's moving in the right direction.

The next question today comes from Scott Fidel with Stephens.

And first of all, I just wanted to add my best wishes to Mr. Kroll as well.

And first question is just on the 2020 sort of initial insights.

Can you just clarify, would that include the impact of the new buyback program that you just announced this morning?

Or should we consider that being more sort of related to some of the WellCare deal dynamics, which are not included in the guidance?

That's -- that would be related to the WellCare deal dynamics, which are not in the guidance.

Okay.

Then just, also, I saw that you are reiterating your synergy views on WellCare.

Also just wanted to clarify, would that be inclusive of the lower STARs that WellCare will now see in 2021?

And do you feel that you can offset that in terms of the synergy views?

And then maybe just more generally, if you can talk about sort of your assessment on the STARs results for Centene and for WellCare, if you can, and in terms of maybe some of the mitigation actions that you think that you can take and how that sort of influences your views on 2021 and any growth prospects for the combined company.

And I'll ask Brandy and Kevin to comment on that.

So to start off with the -- from a STARs sort of perspective, our current STARs, we made significant progress in our quality programs this year.

We've had 2 plans achieve a 4.5-star rating.

And one of our largest plants is a 4-star rating.

Although we made the progress, one state has impacted our overall parent rating, which we'll finalize in November.

We estimate a miss by less than 0.02 points when it comes to this, but with all that said, we remain committed to our quality initiatives and believe that we can make up any differences we might see from a premium sort of perspective over time.

So I look forward to seeing the results in the future.

And, Kevin, anything that you want to add related to...

Well, just that I think we did -- as Brandy said, we actually did expect 4. We were less than 2 basis points away from getting it.

We know what we need to do to fix it, and we'll be on track to correct it.

Got it.

And, Jeff, just to clarify on just the reiteration of the synergy view that, that would be inclusive or is that exclusive of WellCare STAR's impact for 2021?

Yes.

I mean, I'm not specifically going to comment on WellCare STARs at this point, but I would say the synergy comments would still hold given what I know about that.

The next question today comes from Sarah James with Piper Jaffray.

Congratulations to Ed.

You'll certainly be missed.

So when you guys announced the deal, you talked about assuming a certain amount of divestitures that went into that $700 million of synergies.

And the divestiture package certainly came out better than our expectations.

I'm just wondering how it compared to yours.

The fact that there aren't divestitures in Georgia and Florida, was that initially contemplated in your synergy guidance?

Well, I think -- let me say it very broad because I -- we're careful not to get into a lot of details, Sarah, on that.

But I think some of you made some assumptions that we may not have.

But let's say that the divestitures to this point have been consistent with the expectations, seem reasonable and appropriate, and there still may be, in a couple of states, some issues we're working through with Justice and others.

We're staying flexible on it.

You have to.

But it's -- I can't say a whole -- I don't think we can say a whole lot more because I'm not going to negotiate that type of thing in the press, so to speak.

I hope you understand what I'm trying to say.

Yes, absolutely.

Fair enough.

And then, just wanted to follow up.

Last quarter, we talked a little bit about the TRICARE potential conversion, and you guys left us off where you thought maybe there would some certainty in 3 months or so.

And so I just wanted to follow back up.

Is there any update on the potential TRICARE conversion to risk and how meaningful that could be?

Kevin?

Sarah, it's Kevin.

So our relationships with TRICARE continue to deepen.

We're in the midst, right now, of consulting with them on a variety of access and quality and actually technology types of enhancements to the program.

You're probably aware that there's a new director of BHA there and a lieutenant general, Ron Place, who we've established a relationship with already.

And so we're enthusiastic about the future of the program.

The next question today comes from Lance Wilkes of Bernstein.

Congratulations, Ed.

So my question was really on the PBM business and trying to understand sort of the state activities as they're looking at changing relationships with PBMs and how that impacts kind of existing book of business and how RxAdvance might play into that.

Well, I think our side and [gently] we'll add something, but the states want transparency, and we agree with that.

And we have moved more and more in that direction, I think, in several states where we've already met and exceeded maybe their expectations on transparency.

I think RxAdvance will only enhance that opportunity.

And some of the systems they have and some of that information moves us in that direction at an accelerated rate.

So we have a unique platform.

I think it will be very helpful.

So the states are looking for transparency.

That'll be our administrative rates and fees.

And when you have multiple tiers, they're worried about how many people are, so to speak, involved in explaining that [pile-around].

So we're clarifying that.

And I think it's a fair request, and we're dealing with it very openly.

Got you.

And just one more follow-up on the reverification and redetermination.

Can you talk just a little bit about, in the third quarter, maybe contrasting that with the second quarter, the magnitude of impact?

Was third quarter sort of a larger impact that you were able to overcome in the MLR?

Or was it in line with second quarter?

Well, I'll start with it, and then -- and Jeff can pick up on the details, but it's really -- there has been a certain consistency.

And I think what's important here is the states are realizing -- and there's a couple of states that have more redetermination than others, but the states realize the impact it has on the acuity.

And they're working with us on the rate adjustment.

There is a lag there, and that's something you work through.

And over time, it starts to pace itself.

Jeff?

Yes.

I guess, Lance, what I would say is it's different by state, right?

So it just depends.

So -- and aggregating that, I would say, off the cuff, that it's consistent.

I mean, we've seen this, but it's different by state.

And the other thing to note is if you look at the third quarter, if you back out the new award in Iowa, our Medicaid membership in total is essentially flat from Q2.

I also want to emphasize, states are looking to expand coverage.

We're looking at increasing the Medicaid coverage in long-term care.

So there -- in our opinion, we think we're delivering on their expectations in most cases, and we see it sort of as a very viable, strong, growing business.

The next question today comes from Kevin Fischbeck of Bank of America.

Great.

Maybe, I guess, just following up on the state rates around the redeterminations.

Where do you think you are in that process of the states kind of adjusting the rates?

Are we still kind of early in that process or are we kind of well along in that way?

I think, well, Jeff, do you want to...

Yes.

No, I would say the states have been quick to act, but they're really -- they're acting on data from months ago, right?

And so, I guess, what I would say is we're not done.

And they've taken quick action, but as this continues, and then we have to continue to see more rate adjustments.

And I think that's the plan, obviously, but there is a timing difference.

There is a timing difference from when the data comes in to when the rate adjustment happens.

And that's really what we're seeing in the HBR.

And I guess we're going to sound more competitive than I wish, but we have real-time data.

We're able give some real-time data.

And that's helping us, but they need to get the collective data from all the plans.

And so that takes some time, too.

So it's a process, and it's not a point in time, it's something that's moving.

And I think the states recognize it, and they're trying to accelerate it as fast as they get the necessary information to do so.

Okay.

And then going back to the divestitures and using, potentially, some of those proceeds for share repurchase, I mean, you guys mentioned that you already kind of assumed some divestitures.

And in your guidance, I assume you would have assumed you would've gotten proceeds from those divestitures.

I'm trying to understand whether this signals that maybe you're willing to have a little bit higher pro forma leverage after the transaction if you're going to use these investor proceeds for share repo or how we should be thinking about that?

Yes.

I think the way to think about it now is we've positioned ourselves to have optionality, right?

So obviously, when the transaction closes and if there are divestitures, which there's already 2 that we've announced, then we would look at all the factors, including economic, at the time of that and just make a decision.

But the key here is I think we've now, between the Term Loan A that we can prepay without penalty and the share repurchase that we just increased today, we've put the company in a position to have optionality on what to do with the proceeds.

And those proceeds, you're going to have to wait for those proceeds to come in before you would be able to exercise it.

Because to your point earlier, I mean, the valuation today is pretty compelling.

My guess is when the deal closes, the market will start to change the valuation for the better.

So is there any thought about using it...

I hope you're right.

Obviously, yes.

Typically, the way these work is that the divestitures happen simultaneously with the transaction closing.

Again, we'll just have to look at the economic factors and everything at that time, and we'll make a decision.

Okay, great.

And then just maybe a last question.

The impairment charge for USMM, I mean, a pretty big impairment charge, obviously implies that the run rate earnings from that business are going to be lower than what you thought.

I guess you're reaffirming your guidance for 2020 as far as the S-4 goes.

So trying to understand kind of what the impact is there and maybe what is coming in better to offset that.

So let me start and Jeff can pick up.

It is large when you recognize, over all the years we've been in business, we haven't had very many impairment charges.

It's -- we don't see it as overly dramatic in that when you -- an enterprise of our scale and size at this point in time, things can happen.

And we have been committed that, at the point in time we recognize something's necessary, that investors and the analysts can expect us to come forward with it immediately and as quickly as it's going to be confirmed.

So this is just -- it's a lot of money.

It's a large number.

It's not in cash.

And it's -- these are the kinds of things I -- we personally expect could happen when you consider how accretive we are -- how acquisitive we are and the total size of the company.

Yes.

Kevin, the other thing I'd highlight, it's really a magnitude issue.

If you look at the size of the USMM business, it's roughly $300 million in revenue, let's say.

And the piece that we were missing this quarter, we mentioned this, is the shared savings.

And so if you look at the shared savings program, it was half of what we expected, which is we expected roughly $20 million in shared savings.

This quarter, we got $10 million.

And so it's a magnitude issue as you look to 2020 is all I would say.

And the shared savings, the CMS will redetermine it every year, then decide what amount they want to...

They adjust the baselines every year.

The baselines with the bases.

The next question today comes from Charles Rhyee with Cowen.

Congrats to Ed as well.

Maybe just to follow up on that, Michael.

What does that say about these -- the shift to value-based care here?

If the shared savings that you were kind of expecting came in half, and you kind of talked about sort of the baselines moving around.

Does that speak more to a fundamental problem with the structure of the programs themselves?

Or what can be done to actually kind of move maybe sort of this piece for the long?

I mean, you talk about kind of moving net pricing on the drug side.

Overall, we're trying to -- it seems like we're overall trying to make a shift towards this more value-based type of reimbursement model across health care, but these kind of examples kind of point to some of the challenges here.

Maybe you can give us a sense on what [your view] is and what changed.

Yes, sure.

I'm glad you raised that question.

One, the value base we're doing with provider groups, doctors, hospitals, pharmacies and others, that's something that's in our control.

We set baselines.

We set the program.

We determine how it's going to work.

We have a model one that is our program.

We have the reporting that can show the doctors real-time, virtually, how they're doing against how they should be performing than their peers and a lot of different things.

The -- in the case of USMM, this is something that was determined by CMS.

Now in the grand scheme of things, I think it's still worthwhile.

It's a program that I think has legs and has helped save some other costs in Medicare and, as our Medicare business grows, will be even more important.

But we -- I can say that we feel comfort because it's such a small portion of this total enterprise we've become.

And so it's absorbable, and it's not that major a thing.

But it's very distinct, I can't emphasize that enough, from the value-based contracting that we determine, set up and report against.

That's helpful.

And then maybe, Jeff, if I could follow up on one other question.

You guys talked about in the adjusted SG&A, it was partly lower due to sort of lower stock compensation expense.

Maybe can you give a sense of sort of some magnitude here if -- maybe what you would have expected relative if, let's say, the share price was sort of flat year-over-year.

Just trying to get a sense for sort of a baseline as we think about modeling either from next year or the rest of this year.

Yes.

Yes, I'd say it's probably less than $0.01 a share is what I would say.

Because you have to remember, these are long term -- mostly long-term plans that are built over a 3-year period, and it's obviously just one quarter effect.

So I would make -- if you're looking at the G&A ratio, you really have to look at the stepping-off point from Q2 of this year.

And then if you factor in the $440 million of additional revenue, that's roughly 20 basis points on the G&A ratio.

So that kind of bridges you from Q2 to the 8.8%, which is where we are in Q3.

The next question today comes from Dave Windley with Jefferies.

I wondered if I can get you to size a couple of things.

In the MLR bridge, you didn't call out the -- what I think was an extra business day and maybe an extra important business day in the third quarter of this year.

I'm wondering, is that in the 10 basis points of other or is it a bigger call-out than that?

And then following up on the earlier question on kind of redeterminations in state rates, is it possible to -- you said the states have been pretty expeditious in responding but are working on stale data.

Is the 25 basis points that you're kind of lifting your composite rate reflective of all the states giving you some or half the states giving you some?

Like just hoping to understand essentially kind of what inning are we in?

How much have you gotten?

How much do you still have left to get?

I'll take the first one, and, Jeff, you can pick up the -- I'll take the second part and you pick up the first question.

The rate adjustments, it's staggered.

And it's not every state that has them.

Some are larger than others.

So I can't point to a specific pattern for you.

It's not that -- it doesn't have that kind of rhythm to it.

It's really episodic.

And there's a state that has a larger redetermination, and they may be very quick in getting back to us.

So it's -- there's no set pattern to it.

Yes, that's correct.

That's correct.

And then the other thing, Dave, just on your first question with respect to, yes, the extra business day, I mean, we would -- we had that -- we would account for that in our forecasting process, so at the beginning of the year.

I guess what I would say is, yes, there was an extra business day in the quarter.

And so if that weren't the case, then our results probably would have been better than they were.

But nonetheless, these are actual results, so it included the business day.

If I could just sneak in one more.

Michael, are the state -- are the lawsuits related the Medicaid work requirements in a couple of states, are those important to kind of your views around Medicaid program structure and longer-term views on Medicaid waiver programs and things like that?

No.

I think it's something that we adapt to, work with and deal with.

And it -- there's various programs, some we support.

And so it's -- most states are trying to do it in a responsible way.

And so, no, we find it does not have a significant impact on us.

We've learned how to work with the states on it and even support them on it.

The next question today comes from Peter Costa of Wells Fargo.

Good luck, Ed.

Your adjusted EPS guidance for this year is still quite broad at $4.29 to $4.49.

I think the midpoint of that, you're still $0.18 above where your S-4 guidance would be for 2019.

So you're running well ahead this year, and yet, for next year, you talked about the $4.79 as being sort of the right number.

Why are you not talking about being ahead 4% in next year as well?

I want Jeff to comment, but I just want to open it up by saying that we comment, we establish that as a baseline.

I think we would recognize we like an abundance of conservatism going into it.

So I think we have various issues we're dealing with.

And we will give you the full guidance and all the reasons and bridges, up, down, otherwise, on the 13th.

Jeff, anything;?

Yes.

The thing I would point to, Pete, is if you go back and look at the S-4 and look at the revenue number, it was roughly $70 billion.

And we're almost at $74 billion now.

Remember, it was the open enrollment that kind of concluded in the first part of this year on Marketplace and the Marketplace members staying longer and all those phenomenons that are, I would say, causing additional top line growth this year, which is good.

And right now, as we look to next year, we're still projecting to be around that $79-plus billion range.

So I think that's the difference that you're looking for.

If you recall, we've increased the guidance early this year.

Actually on our year-end 2018 earnings call, we increased the guidance because of the additional Marketplace membership.

So you've talked about exchange business hopefully growing next year.

So what is the headwind to your top line that we should be thinking about?

Is it Louisiana or...

No, no, we -- no, because, remember, we said Louisiana's in.

Part of it is the eligibility redeterminations that we talked about today.

So, obviously, you guys have seen the effect of that.

A lot of you have commented on it as far as percentage-wise, but that is certainly a headwind from a run rate perspective exiting this year.

I think trying to get ahead of this [helps], Pete, now will not serve a lot of purpose.

I mean, we have a cadence, too, where we give you an indication.

We try and give you a baseline to think about.

But on the 13th, we'll be in a position.

We'll have a better sense on Marketplace, better sense on redetermination, better sense on what states are doing with rates, a whole series of things.

And so why?

I'm not sure it would serve anybody well to try and get ahead of ourselves and front-run our own December 13 meeting, which is a couple of months away.

Okay.

Just the last on that.

Is the USMM issue bigger next year than it is this year because of the rate cuts in home health?

Or is there anything else impacting that?

No, no.

I would expect it to be flat year-over-year.

The next question comes from Steve Tanal with Goldman Sachs.

Two questions for me, and congrats, Ed, as well.

Just on the -- one more on the 2020 outlook and the S-4 but more of a simple question.

Has that factored in Centene Forward?

I know you filed it in May, but you told us about Centene Forward in June but presumably had that in the works earlier.

So I just wanted to understand if that was kind of contemplated in the number that's there.

I think it was we contemplated and talked about before is that we're continuing to use Centene Forward to kind of reinvest in the business.

And so there's -- that's the plan.

And as we continue to get to the $0.5 billion of savings, it's to reinvest.

And some of these things that we're working on are process automation and digitization, they're heavier lifts and they take a longer time to realize the efficiencies.

So I would say, right now, that includes Centene Forward, but the benefit is minimal.

But more to come on our December Investor Day.

Yes, point taken on that.

And just on HBR, the at-risk payments in Cali, could you give us a little more on kind of the nature of that?

It sounds like it was Medicaid.

And then maybe just very specifically, would you expect to get back to 30 bps in 3Q '20?

I wasn't perfectly clear on what that is.

Yes, a couple of things.

What I would say is the process is changing, where states used to have these payments, where they would give us the cash and we would turn around and pay providers.

And that was a one-for-one, and we recorded those in premium tax revenue and premium tax expense.

The process is changing to where these have to have some form of risk, and so they show up as retroactive premium changes.

And so what I would say is you'll probably see less on the pass-through lines and more in premium revenue.

But we would anticipate that the level of these payments would probably continue, but as you've seen, they're very lumpy, right?

Especially -- I mean these happen in other of our states.

They're just -- they're not as large as California.

And so I suppose, then, it's like a new baseline, like you wouldn't just go in your model and assume you get 30 bps back in 3Q '20?

That's right.

We would anticipate a similar level of these type of payments in next year.

The next question today comes from A.J. Rice with Crédit Suisse.

Best wishes to Ed, too.

A couple quick things if I could get in here.

When you get into an outlook for rate increases next year and said it would be a little better, you mainly pointed to premium rate adjustments.

I was wondering, obviously, the HIF is coming back, and the states, last time it came in and out, they obviously covered it.

You didn't really mention that as part of the reason why the rates might be a little higher.

Are you just excluding that?

Is there any movement on the part of states not to include that?

And then, also, I just -- on the exchange, it's sort of an interesting beast.

Are you feeling comfortable that you can get compensated for the HIF coming back on your exchange business next year as well?

Yes, a couple things.

On the Medicaid side, just to be clear, and I think we've commented about this before, the composite rate adjustment that we quote is net of what we would call fee schedule changes and pass-throughs.

So as the health insurer fee is predominantly a pass-through in the Medicaid business, it's a specific add to the rate, and then it's grossed up for the tax effect, and then, that's excluded from the composite rate that Michael commented on today and has always been.

The second thing, on the Marketplace, we actually price for the health insurer fee.

So that's included in the pricing.

Okay.

And then on -- another quick one on Fidelis.

You anniversary that this quarter.

I know, when that came online, the thought was their MLR was quite high and you'd get some benefit over time from bringing that down.

Obviously, their G&A was quite low.

That might creep up, but there was some synergies.

Can you just -- with all the moving parts, especially on the MLR today, is that expectation on Fidelis playing out?

And have you pretty much normalized their MLR at this point or is there still more room to go?

Yes, I'll handle the first part, which is really around the transaction, and then Dave Thomas is here.

He could talk about the future.

I would say, yes, it has played out.

So we have seen meaningful improvement in, I would say, the revenue and medical cost line.

And we did add G&A dollars.

So we have seen a slight increase in G&A, which is what we anticipated making investments to bring down the medical costs and improve the revenue performance, and that has happened.

And as far as what's remaining to go, I'll turn it over to Dave.

Yes.

So this is Dave Thomas.

As Jeff said, I think we've been successful to this point.

We've done very, very well with our synergies.

That being said, I do think there is more real estate for us there.

There is more that we can do and are doing from a medical management front.

We also are continuing to grow the plan, albeit not as quickly as we had been growing historically.

So we look very good in terms of both continuing to tamp down from a medical management perspective and continuing to grow the plan and continuing to grow revenue as well.

I think I'll remind you.

I said it one time at Investor Day that if we could find more Fidelises, we'd like to do one in the morning and one in the afternoon.

I remember that comment.

I remember that comment.

Since it's late in the call, I'm going to slip one more in, if I could.

Obviously, there's been so much focus on taxes and what's happening with that RFP.

I wonder if you could give us any update on what the RFP pipeline looks like right now over the next 6 to 12 months.

I haven't heard a lot other than Kentucky, which, I guess you have a history with them.

I'm not sure you're bidding on that one, but is there -- are there other near-term to intermediate-term RFPs that are a focus right now?

There's one in Pennsylvania.

It just came out with one of the couple times that we'll be doing it.

So we have that one in there.

And there's Oklahoma, yes, is looking at considering one.

So I mean, there's -- we're in conversations with states, and they may not have announced it yet, so I'm going to -- they haven't said they're going to do it, but I think it's appropriate for them to -- but we still see, as I said, a robust pipeline and opportunities.

But I gave you 2. Just I mentioned those 2 just to give you a sense it's real and not just platitudes.

The next question today comes from Justin Lake with Wolfe Research.

Congrats again to Ed.

So first question.

I think Josh asked this earlier and I didn't really get it.

But just given how the year is shaped up and some of the questions around the MLR, it might be helpful just to give us an idea where your -- expect to be within that range of the guidance that you've -- 86.6% to 87.1% just to help us understand how you're thinking about the walk for MLR.

Should we be towards the higher end of the range or towards the midpoint?

Yes, yes.

I mean, I guess that would -- I mean, that's why we give a range, Justin, on the HBR.

So that would kind of -- if I picked a number, that would defeat the purpose of the range.

So again, I think we're comfortable with the range where it is.

And that -- I guess that's my only comment on that.

And I just wanted to add.

I think [leisure's] an important business because remember we said once the flu season's over, there's just so many things that come into play that can affect the range, Justin.

It's -- I'm going to support what Jeff said, that's the range.

Got it.

And then just CMS looks like they've finally put out the individual market kind of landscape file today.

I haven't had a chance to go through it yet, but I was wondering if there's anything you would point to in terms of how you feel about your competitive positioning for 2020 in that business in terms of membership and margin kind of thinking of it going into next year.

I don't really look at it closely ourselves at this point.

But I will tell you that, we've talked, when you have competition in this space, we really like it.

It grows categories.

When you're out there by yourself, you're growing and everything else, but if you get something.

And in a -- in that type of situation, the larger player, the #1 player usually does better.

So I see it as we like competition.

It just makes us better, and it, I think, even helps grow the market.

The next question today comes from Ricky Goldwasser of Morgan Stanley.

Yes.

A couple of follow-up questions here.

So one, what's the -- can you give us an update on the status of the WellCare PBM RFP process?

How should we think about it in light of your partnership?

Yes, I -- we cannot comment on WellCare business at this point in time.

It's still a very independent company, publically traded so, I think we just can't get involved in that.

Okay.

Will you give any -- will you provide additional color on the PBM RFP process on the Analyst Day?

I know in the past you said you would.

No, no.

I mean, we can't really comment on the WellCare business until the transaction closes.

They're a separate company, stand-alone.

Okay.

And then another question regarding 2020.

When we think about the $4.79 in the S-4, I know you said that you're assuming Louisiana is unchanged, but also a higher tax rate.

So as we think about the embedded assumptions that you had back when you provided the original EPS, was the higher tax rate included in it?

Yes, yes, it was.

It's a direct result of the health insurer fee.

The next question today comes from Gary Taylor with JPMorgan.

Just a few quick ones.

The first would be, Michael, you alluded to the Fifth Circuit briefly, but just wondering, do you have any sense of timing on that decision there?

No, no.

I mean, it's -- anyway I'd like to say it's imminent but not today.

So I'm not sure.

I'll have to get somebody to define imminent.

We say that in Texas RFP, too.

But I think it's going to come down, but I -- we're not spending a lot of time thinking about it.

If they reverse it so much the better.

If they don't, we believe it will go to the Supreme Court quickly.

And we have not changed our point of view.

It won't be 5/4.

It would be 6/3 or 7/2 that the precedent will hold and it will get through very [soon].

So it's not something we're spending time worrying about.

It's an overhang in some people's minds.

So the sooner it gets resolved and reversed, the happier we'll all be.

Got you.

I don't meant to preempt Investor Day, but you have talked about 2020 a little bit.

You have talked about exchanges a little bit.

Probably one of the most common investor questions is whether this increased competition and lower premiums on the exchanges, how much impact that might have on your margins.

Is there anything you're willing to say about 2020 exchange margin outlook at this point?

I think it's premature to say anything at this point in time.

We have -- Jeff's commented, we're comfortable with our 5% to 10% margin range in that business.

And as I've commented in the past at various meetings, that doesn't mean it's going to be 7.5%.

It means it moves up and down depending on the time of the year and various issues.

But we're still comfortable with that kind of range.

And we still see it as a growing, very viable business for us, something we know how to manage and manage well.

Last question, if I could, on the public charge rule.

Obviously, an injunction was issued, but to the extent that, that rule does have -- drive any adverse selection in 2020 or even the fear of that rule has an impact, is there any reason why the same ability you've had to get these rate adjustments from states for the redetermination adverse selection would not apply to the similar dynamic that might arise from the public charge rule?

Do you believe you'll be able to go back and demonstrate that to states and largely will offset what risks...

I think that particular thing will be -- probably has a bigger impact on the exchange business than on the pure Medicaid to some degree, but...

Yes, yes, it would follow the same process.

I mean, the way the states view it is these are eligibility redeterminations or members leaving the program.

Either way, there's a shift in acuity that you would have to go back and recalculate the rates.

The next question today comes from Ralph Giacobbe with Citi.

I hopped on a little bit late, so apologies if you did -- if you went through this already, but did you actually quantify what the impact on the MLR was from the redeterminations?

And then the second part of the question, just want to kind of revisit the MLR guidance.

I hate to harp on it, but I understand the ramp and improvement in the new business as sort of you move through the year, but you also have a new business like Iowa that started midyear coming on and what I assume is sort of higher MLR.

At the same time, you have sort of these timing differences that you talked about more related to the redetermination.

And then the exchange business that's seasonal works against you as well.

So I guess I'm still having trouble reconciling the 4Q MLR.

Is there anything else in terms of other payments or considerations for the fourth quarter that just gives comfort to the mid or high part of the range?

Yes.

So I guess what I would say is you have to remember, like in Iowa, we're building margin in the first quarter, right?

You build margin in the first quarter after the plan goes live.

And that margin build in the fourth quarter is lower.

That'd be again another thing that I would point to.

And as far as the eligibility redeterminations impact on MLR, we did not quote a number on that.

I guess that's the only other commentary I'd give you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Chairman, President and CEO Michael Neidorff for any closing remarks.

Well, I just want to thank everybody for your participation.

And it was -- it turned out to be a little longer call.

And we're really looking forward to the December 13 meeting where we can give -- answer even more of your questions.

And we're feeling good about where the business is, and we thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.