Molina Healthcare Inc (MOH) 2005 Q4 法說會逐字稿

Welcome to the Molina Healthcare year-end 2005 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Wednesday, February 22, 2006. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr. Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Dwayne. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's results for the fourth quarter and the full year of 2005. The Company's results were issued today after the market closed, and they can be viewed at our company Website.

With me here today are Dr. Mario Molina, our President and CEO; John Molina, our CFO; Dr. William Bracciodieta, our Chief Medical Officer; and Terry Bayer, our Chief Operations Officer. After the completion of their prepared remarks, we will open the call to take your questions.

Our comments today contain forward-looking statements. All forward-looking statements are subject to numerous risks and uncertainties that may cause actual results to differ materially. Such factors include the Company's ability to identify medical care cost issues and to address them successfully through its medical care cost control initiatives; the Company's ability to accurately estimate incurred but not reported medical cost; high dollar claims related to catastrophic illness; potential reductions in funding for Medicaid and other government-sponsored healthcare programs; the successful rental and continuation of the government contracts of the Company's health plans; the favorable resolution or settlement of pending litigation or arbitration; the implementation of announced rate increases; the Company's ability to obtain timely regulatory approvals for acquisitions or to successfully integrated its completed acquisitions; the availability of financing to fund our acquisitions; the ability to enter into more favorable hospital or provider contracts; changes in health-care practices, technologies, or utilization patterns; changes in federal or state laws or regulations or the interpretation thereof; risks associated with the Company's start-up operations [in new states] (multiple speakers); retention of key employees; disasters or epidemics; and other risks and uncertainties as detailed in the Company's reports and filings with the Securities and Exchange Commission and available in its website at www.SEC.gov. All forward-looking statements in this release represent the Company's judgment as of February 26, 2006. The Company disclaims any obligation to update any forward-looking statement to conform to the statement's actual results or changes in the Company's expectations.

This call is being recorded, and a 30-day replay of the conference call will be available over the Internet through the Company's website at www.MolinaHealthcare.com.

I would now like to turn the call over to Dr. Molina.

Thank you, Juan Jose, and thanks to all of you for joining our call today. The fourth quarter represented the second consecutive quarter of improvement for Molina Healthcare since our medical care costs unexpectedly increased during the first half of 2005. Our fourth-quarter results of $0.38 per share are consistent with the guidance range of $0.35 to $0.39 per share that we gave in our guidance call a few weeks ago. These results also suggest continuing stabilization of our medical costs. We are encouraged by these results, yet we remain cautious about both cost and utilization trends.

John will provide you with a more detailed review of our financial results during his remarks. I would like to place our fourth-quarter results into the proper context.

We have stated in the past that one point does not constitute a trend. This statement is particularly relevant today, given our positive fourth quarter performance and a natural tendency to want to extrapolate the fourth quarter results as a new run rate.

We believe that the combined results from both the third and fourth quarters better depicts the Company's earnings performance. Our cost containment initiatives are still fairly new. And that fact, combined with an inherent seasonality in our business, will continue to affect short-term cost predictability.

I know that it is normal practice to compare the fourth quarter of 2005 to either the fourth quarter of 2004 or the third quarter of 2005, and to draw conclusions about future performance from that comparison. However, given that our medical cost difficulties were experienced during the first half of 2005, the full impact of our cost containment strategies will be more apparent when we have results from the first half of 2006.

In the meantime, we can make the following two comparisons regarding our progress to date. First, a comparison of our results in the second half of 2005 to our results from the first half of the year shows that we have made noticeable improvement in the second half of the year. Second, a comparison of our results from the second half of 2005 to our results from the second half of 2004 shows that we still have significant improvements to make.

We anticipate that the improvement experienced in the second half of 2005 will continue to build throughout the full year of 2006. This is consistent with our discussion during our earlier guidance call regarding our expectation that the Company will begin reaping greater benefits from our cost containment initiatives in the second half of 2006.

The gradual improvement of our medical care ratio combined with our observed seasonality patterns and expected rate increases supports our belief that most of our earnings will be achieved in the second half of 2006.

The difficulty experienced in our business during the second quarter of 2005 required us to identify specific causes and execute specific actions in order to correct them. Although we identified four key areas of improvement, we have not stopped there. Instead, we have approached the medical cost challenge as an opportunity to assess all of our business, and make changes where necessary to contribute to a stronger performance going forward.

In order to put our progress to date into context, I would like to turn the call over to Dr. Bill Bracciodieta and Terry Bayer for an update of our cost containment initiatives.

Thank you, Dr. Molina, and good afternoon, everyone. As Dr. Molina just mentioned, and as we have outlined in our earnings releases for the past two quarters, we identified four areas that adversely affected our medical costs within certain geographies and among some of our states. These four areas include increased hospital cost, increased costs from catastrophic cases, increased maternity costs, and increased outpatient costs.

In response to these issues, the Company has implemented various medical action plans, as well as operational strategic initiatives to better tackle these costs. Our systematic framework for addressing these areas has been to focus on what I call the levers of medical cost management. I have shared this framework with you during past conference calls, and I will use it today to update you on our progress in the fourth quarter.

The first lever is network and contract management. Various action plans continue to be followed through in this area, and progress continues to be made. I would like, however, to defer to Terry Bayer for a summary of our progress during her remarks regarding this medical management lever.

Utilization management, or UM, represents our second lever. As the result of a companywide review of UM processes, procedures and workflows, we identified many areas of opportunity for improvement in the UM functions of prior authorization and current review and retrospective review.

And as our Company continues to grow, we are better able to leverage our size. For example, on-site case review nurses have been placed in high-volume, high-cost hospitals, which has resulted in a significant reduction in the average length of stay at those facilities. We have instituted successful programs which were designed to redirect members to lower-cost facilities without compromising quality of care.

We have instituted prior authorization for selected complex radiological procedures. We have also instituted multiple pharmacy management initiatives which support increased generic medication usage and formulary compliance. All UM initiatives have been accompanied by an increase physician peer-to-peer interaction with our medical directors. Overall, bed days per thousand were decreased by 5% in the second half of 2005 compared to the first half of 2005.

In addition, we have added more resources to our UM department by bringing on board Dr. Michael Siegel as Corporate Vice President and Medical Director for Utilization Management and Quality Improvement. Dr. Siegel has considerable managed care experience, and has held positions with Aetna, Prudential Health, and most recently served as Implementation Officer and Chief Medical Officer in Health Net's western region.

I would also mentioned during our last conference call that we were searching for a new medical director for our Washington health plan. Dr. James Howatt has joined the Washington team to lead our medical management efforts there. Dr. Howatt has been with Humana since 1996 in various capacities, including Tricare Chief Medical Officer, Vice President and Chief Medical Officer for Humana Arizona, and most recently, Western Region Medical Director.

Third lever is case and disease management. For the second act of 2005, emergency room visits appear to have decreased by about 10% companywide due to case management of high users and through actions taken to increase utilization of our nurse advice line. In addition, the Company continues to improve its disease management programs, or what we refer to as health management programs. In the second half of 2005, we introduced a new cardiovascular program.

Also, our health management program for expectant mothers was enhanced with new care management technology. This program is designed to help reduce the incidence of premature and low-birth-weight deliveries and the costly hospitalization that results from such deliveries.

The fourth lever is claims payout management. Last quarter, I discussed the preliminary findings of our DRG validation pilot program, which focuses on screening hospital DRG claims for accuracy. Based on the success of that pilot program and our test health plan, the program is now being implemented in all of our health plans where appropriate, and in the last four months has delivered savings of approximately $0.5 million.

Finally, last quarter, we discussed the rollout of the [MedInsight] tool and the expected contributions from our medical informatics team. The data from MedInsight has already being utilized for key strategic decisions that Terry will discuss further. It is also being used by our informatics team for provider profiling and for predictive modeling to be used in our case management and health management programs.

I would now like to turn the call over to Terry Bayer.

Thank you, Bill, and good afternoon, everyone. Referring back to Bill's discussion about the levers of medical cost management, the first lever available to us is network and contract management. Last quarter, we highlighted and reviewed the progress on these initiatives which included negotiation of amendments to hospital contracts; new contracts with OB and the pediatric providers; redirection to cost-effective surgery centers, and a new laboratory contract. To reiterate, our objective is to reduce unit costs of service through better contracts.

Our network and contract management initiatives are ongoing. And we made additional progress in the fourth quarter. For example, we have had significant success in New Mexico with our recontracting effort which will reduce costs in 2006.

We are continuing to develop our relationship with the Henry Ford Health System, a prominent provider in the Detroit metropolitan area. As we expand our use of Henry Ford, we diversify our options, allowing us to redirect patients to the most appropriate and cost-effective provider.

We have also been successful in California in redirecting our patients to more cost-effective hospitals. We estimate that we can reduce unit costs across the Company by approximately $4 million as a result of our recent recontracting efforts. I would also like to emphasize that although we have recontracting success in the third and fourth quarters of 2005, the effective date of some of the amended contracts is not until 2006.

There are other developments that occurred during the fourth quarter that we believe are also important to highlight. In previous quarters, we have discussed our efforts to limit our health plan's risk from catastrophic cases. You may recall that in 2005, our Washington health plan was affected by catastrophic claims associated with hemophilia patients. In the fourth quarter, our Washington health plans finalized a contract amendment with the state which will mitigate our financial exposure from catastrophic cases. This contract amendment is a good example of what can be achieved as a result of our partnership with our state agencies. This contract change will limit our risk from similar cases in the future.

Utilizing data from our medical informatics platform, MedInsight, we concluded that the rates in certain markets were inadequate to support sustainability in spite of our efforts to reduce expenses by medical management. Based on our analysis, effective January 1, 2006, we have exited Island County in Rural Washington and Alpena County in northeastern Michigan, totaling a reduction of approximately 2,200 members.

While we realize that the revenue reduction that results from this action occurs, our focus on long-term sustainability indicates that it was the correct decision. Please note that the examples I have provided are state-specific examples that reduce costs in each individual health plan. On a cumulative basis, each of these individual health plan contributions to reducing costs will combine to improve the results of our entire organization.

Finally, we have continued to implement our e-commerce strategy. We currently offer our providers the ability to submit authorizations electronically as well as to view authorization, eligibility, and claim status online through our e-portal. As we continue to expand the function of the e-portal, the increased use of technology by our members, providers, and trading partners will assist us in reducing administrative expense and improving service levels.

I will now turn the call over to John for a discussion of our financial results.

Thank you, Terry. Net income for the fourth quarter ended December 31, 2005 was approximately $11 million or $0.38 per diluted share, compared with net income of $16 million or $0.58 per diluted share for the quarter ended December 31, 2004. Net income for the year ended December 31, 2005 was $28 million or $0.98 per diluted share, compared with net income of $56 million or $2.04 per diluted share for the year ended December 31, 2004.

As Mario said, the results announced this afternoon reflect quarterly sequential progress since the unexpected rise in our medical costs back in the second quarter of 2005. This uptick in medical costs explains the lower earnings performance in 2005 full-year results when compared with the similar period one year ago.

Our medical care ratio increased to 84.7% in the fourth quarter of 2005 from 84.2% in the fourth quarter of 2004. Increased hospital and specialty costs were the primary reason for the increased medical care ratio. On a sequential basis, however, the medical care ratio for the fourth quarter of 2005 recovered by approximately 140 basis points when compared with the third quarter of 2005. This improvement came despite the fact that we typically see an increase in our fourth quarter medical care ratio compared to the third quarter due to seasonality.

For the year ended December 31, 2005, our medical care ratio increased to 86.9% from 84.1% in 2004. The Company's fourth quarter results include pretax expense of approximately $3.7 million, or $0.08 per diluted share, recognized in connection with certain provider disputes, and a pretax benefit or reduced expense of approximately $4.5 million or $0.10 per diluted share related to a reduction in estimated claims liability as recorded on June 30, 2005. The downward revision of the estimated claims liability at June 30, 2005 is consistent with the Company's reserve methodology, which seeks to maintain a constant margin for adverse development and all of its claims liability estimates. The Company continues to believe that claims reserves as of June 30, 2005 and December 31, 2005 are adequate.

Our membership at year end reached 893,000 members, up 13% from a year ago. This increased enrollment includes organic members gains in Washington, Utah, and our startup in our Indiana as well as gains that resulted from the acquisitions in San Diego County, California, which closed in June of 2005.

Sequentially, our enrollment was down in California. We believe this attrition was caused by member migration to another health plan as a result of the inherent uncertainty surrounding the award of the Inland Empire contracts and some erosion in our San Diego membership.

For the fourth quarter of 2005, premium revenues were $419 million, an increase of $46 million or 12% over premium revenue in the fourth quarter of 2004. For all of 2005, premium revenues increased by $469 million or 40% to 1.6 billion compared to premium revenues in 2004 of 1.2 billion. Membership growth, mainly due to acquisitions, contributed to the increase in premium revenues.

Salary, general and administrative expenses, including premium taxes were $46 million for the fourth quarter of 2005, representing 10.8% of total revenue as compared with $31 million or 8.3% of total revenue for the fourth quarter of 2004.

Our core SG&A, or SG&A less premium taxes, increased to 8.3% in the fourth quarter 2005 as compared with 5.6% in the fourth quarter of 2004. The increase in core SG&A in the fourth quarter was due to investments in infrastructure, administrative expenses associated with the Company's medical management programs, and business development activities such as the start of our Medicare Advantage special-needs plans and administrative costs associated with the Company's Indiana, Ohio, and Texas startups. Core G&A increased to 7.1% for all of 2005 compared to 5.9% in the prior year.

Days claims payable increased sequentially to 55 days at December 31, 2005, up from 52 days at September 30, 2005. Cash flow from operating activities provided approximately $35 million in cash for the quarter ended December 31, 2005. Cash flow from operating activities for all of 2005 was $97 million.

The Company finished the fourth quarter of 2005 with cash and investments at the parent company of approximately $28 million. At September 30, 2005, cash and investments at the parent amounted to $37 million. The decrease in cash and investment at the parent was primarily the result of the purchase of a Company holding indemnity health insurance licenses in 48 states and the District of Columbia. These licenses will increase our flexibility to present alternative mechanisms to regulators for the provision of managed care services in new or existing states.

Looking at the full-year 2006, the Company reaffirms its previously stated guidance. We expect results for the year ending December 31, 2006 to be as follows -- earnings per diluted share in the range of $1.37 to $1.47; net income to be approximately 40 million; premium revenue of approximately 1.9 billion; medical care ratio of approximately 86%; core G&A, or G&A excluding premium taxes, approximately 7%; G&A including premium taxes to be approximately 10.1%.

Guidance assumes the recording of stock-based employee compensation expense of approximately $0.08 per diluted share, and weighted average diluted shares outstanding of 28.5 million. It also assumes an effective tax rate of 38%, and does not include any prior-year tax benefit the Company may realize during 2006 for the recovery of certain economic development zone tax credits.

The guidance includes results of the California health plan's Medicare contract for Riverside and San Bernardino Counties, which the Company expects the California plan to retain through 2006. Our 2006 estimates do not include the financial impact of the Cape acquisition or our Medicare SNP contracts. Our guidance figures only reflect completed acquisitions, and do not include future acquisitions or expansions.

I would now like to turn the call back to Mario.

Thank you, John. 2005 was a difficult year for Molina Healthcare. But the fundamental strength of our industry and our business model has not changed. Despite our challenges in 2005, there were also many accomplishments and achievements which are closely aligned with our long-term goals and objectives that are worth highlighting. These include the completion of our acquisitions in San Diego; our contract and license award in the state of Texas; our Medicare special-needs plan contract awards in California, Michigan, Washington, and Utah; the launch of our health plans in Indiana and Ohio; and our NCQA accreditations and the recognition bestowed upon our health plans by U.S. News and World Report as part of America's Best Medicaid Health Plans.

We have always been committed to quality, and believe that quality care makes a difference. The states we operate in are certainly focusing more on quality. In 2005 and continuing with 2006, our health plans in Washington and Michigan have earned over $2 million in quality bonuses from their state governments. Therefore, quality can make a difference, and it does pay.

Finally, I am continuously encouraged by an entire organization that is firmly committed and confident that we're taken the right action against properly identified challenges. This will enable Molina Healthcare to move as quickly as possible on the path of resuming sustainable and profitable growth.

This concludes our prepared remarks, Dwayne. We're now ready to take questions.

(Operator Instructions) Greg Nersessian, Lehman Brothers.

I guess my first question is on the membership mix -- if you could maybe just describe your membership mix here in the second half of the year versus in the first half of the year -- it looks like the PMPMs were down, enrollment was down the quarter, and MLR was down. Is that a function of shifts in either geographical mix or the categories of eligibility in your membership base?

Well, Greg, I think that the reflection of the changes is probably just the kinds of fluctuations in mix that you see from time to time within the existing population.

There are no dramatic shifts going on, Greg.

Okay. So when I look at the PMPMs down -- they have been down the last two or three quarters here -- what would be driving that specifically?

PMPM revenue? We had a big influx of members in California, which has the lowest PMPM. And that came in the second half of the year with the San Diego transaction -- that's probably the (multiple speakers).

Okay, that makes sense. Okay, and then I guess maybe a question for Terry on the recontracting piece. When you look at your efforts there, I know there's some of it which is not becoming effective until 2006. I guess what percentage of the total amount of recontracting that you plan on doing is complete, and what percent will go into effect in '06?

We have contracts in great numbers in all of our health plans. It's really an ongoing effort, so it's not a matter of a fixed-time project where we're going to recontract network. It is ongoing. We're constantly improving our relationships, and constantly expanding our networks, and constantly creating redirection alternatives.

Okay, but in terms of the big -- the large block of contract that you'd look to renegotiate, have you approached all of those hospitals at this time? And I guess what percent of those hospital recontracts are done?

Again, Greg, there are so many that are in process -- everything is in process. It's not a matter of starting it, because we have started with all of the major cost providers that we're intending to approach. But there's really just no way to extract that out of the total, because it is ongoing. And we're constantly watching our MedInsight data, because we might discover a new set of information that might direct you to embark on a new renegotiation at any time.

Okay. Maybe I will just move onto one another topic -- is just the catastrophic cases, the reduction in the second half of the year -- what would you attribute that to if you had to say one or two things?

I think one of the things -- as Dr. Bracciodieta had noted, we had placed some on-site nurses at a couple of hospitals that were responsible for the higher-dollar cases, because they had some outliers. And we were able to ship those patients -- get them out faster, or get them to the right level of acuity. I think part of it also is, as Terry mentioned, the recontracting we did in Washington. And then just -- I think in some cases we were a bit of a victim of bad luck in the first half of the year, and it seemed to come back to normal.

I think in the last call, we talked about the fact that the rate of catastrophic cases had returned to baseline.

Patrick Hojlo, Credit Suisse First Boston.

In the context of your medical management efforts, I understand that your medical cost problems are not really a big issue in California. Do you think some of that increased medical management has driven some of this attrition in California?

No. I think the attrition you've seen in California is as John stated. We had an acquisition in San Diego County. Typically, we see some attrition shortly afterwards. In the first quarter afterwards, we did not see that normal attrition. It really did not come until the second quarter of that acquisition.

Likewise, this issue with the contract in Riverside and San Bernardino County has caused a lot of consternation. And I think some of their providers shifted their patients to the other health plans awaiting the outcome.

You don't worry that in some of the other states, as you buckle down a little bit here while you're doing the right thing -- some docs, some patients could say, eh, let's go somewhere else where we're not as hassled?

It is always a chance. But the chances are if that happens, you're going to be losing unprofitable membership anyway.

Fair enough, absolutely. Okay. You mentioned this -- I want to make sure I understand this acquisition you talked about that granted you an insurance license in 48 states. Which one was that, and what was the total impact on the cash at the parent?

The name of the Company was Phoenix National. It has since been renamed Molina Health. And it is about $9 million -- $11 million.

$11 million?

Right.

The [product through] development you disclosed -- can you give us a little more detail on just what geographies that was from or what particular medical categories that fell into?

We do not break out the claims liability by state, Patrick. So I hesitate to do it now. The thing you have to know is that we had an estimated liability at 6/30, and with six months of hindsight, we realized that that was about $4.5 million too high.

I will also say though we have continued to try and keep our reserve estimates conservative. So if we've done our job correctly, we're still conservative at 12/31 and there maybe additional developments on in the future.

And that was all from 2005, all that prior period development?

It was [estimate] of the liability that we had recorded at 6/30, yes.

Got it. Thanks.

Tom Carroll, Stifel.

First question is on your maternity costs. Somewhat of a 50,000-foot question -- in all the states you currently operate, is there any consistent action on the part of the states that perhaps encourages pregnant women or women that are considering getting pregnant to join managed care programs? (multiple speakers) For example, in Illinois specifically, that state has marketed managed care programs to pregnant women.

That's an interesting question, Tom. I'm not sure that there's a state policy to encourage pregnancy. But certainly, one of the ways that many women qualify for Medicaid is by becoming pregnant. The program was originally devised back in the '60s as a program for pregnant women and for children. And the majority of the Medicaid recipients are still pregnant women and their dependent children.

We believe that there may be some shift occurring from people who are covered under commercial plans to Medicaid plans as fewer employers are offering care for dependents.

Okay. And second question -- could you provide some more color on your state risk-sharing arrangements? I think the bullet point in your press release was talking about your catastrophic claims limit in Washington State -- maybe walk through the mechanics of that a bit -- maybe give us an example of how that will work in the future?

The catastrophic contract in Washington addresses the hemophiliac cases specifically, Tom. There is a deductible, and then the state picks up either 70 or 75% of the costs for the blood clotting factor above the deductible.

So it addresses the high drug cost, basically, of hemophiliacs?

Right, because there's nothing we can do to case-manage that cost. The patients are going to need it. And we've got to give it to them. So the theoretical risk -- [well], you spread that risk over the largest population. And in this case, it is the Medicaid program in Washington.

I imagine you would have told us -- is there anything like this in your other markets that you are currently working on right now?

I would say that there is, Tom. I wouldn't say that we're working on it. But there are other programs in other states. There is a children with special needs program in Michigan. And it is incumbent upon us to identify all of those children who qualify for that program and get them enrolled in that program so that the state will pick up those medical costs rather than the health plan. There is a similar program in California called California Children's Services which we have been working for years with the state to make sure that those children who have CCS-eligible conditions are enrolled in the CCS program. So there are lots of these programs in the Medicaid business.

One last thing -- you said -- back six months ago, during your second and third quarter, you said that Michigan was also a state that caused higher-than-expected medical costs. Did you go to Michigan at all with some type of -- hey, work with us on this higher case mix of membership; let's try to work something out in terms of a risk share arrangement like you're doing here with Washington, or are there any plans to do that specifically in Michigan?

Well there are a couple of issues there. One is that part of the problem in Michigan is the delivery case rates. As we have talked about in the past, the State of Michigan increased the payments to the hospitals for deliveries, but didn't increase the payment to the health plan. And so that has created a gap. But I don't think it is an area where we have a specific issue like we did in Washington.

In Washington, the state admitted that they did not properly take into account these catastrophic hemophilia cases when they developed the rates. And so what they did for all the health plans in Washington -- not just our health plan -- was to renegotiate contracts and put something in to adjust for this, because as John mentioned, this is a problem that you really cannot case-manage very well. It is a high drug cost, and it is a catastrophic event.

Carl McDonald, CIBC World Markets.

Could you give a sense for your estimated accretion from the Cape acquisition and update us on the timing of that close?

Carl, we don't give accretion numbers until after the deal closes. We are hoping that will close during the second quarter.

And in terms of thinking about the sequential change from fourth quarter to first quarter earnings, should we think about all of that decline been driven by seasonality, or are there any other factors that we should be aware of?

It is primarily seasonality. We have the highest medical cost during the first quarter, year in and year out.

What pricing and cost trend assumptions are you using for 2006? And how does that compare with the revised view of 2005?

Give me a minute and I will look that up.

I don't think those things have changed -- I think we did talk about that once in a previous call.

I'm going to my guidance figures.

Why don't we come back to that one, Carl? Is there anything else?

That's all I have for you.

Well, we'll look that up and get that for you in just a second. Operator, do you have another question?

Joe France, Bank of America Securities.

I have two questions. One, the $4 million savings you mentioned related to recontracting -- will that be in the first half or the second half of the year?

Those contracts begin in January of '06. So it will be spread throughout the year, not just in the first or second quarter.

Just to follow up on Tom's questions about rates -- Tom's and others' -- could you remind us what the next milestones will be with respect to rates in California, Michigan, and Washington?

Washington rate went into effect January 1. It was about a 4.5 to 5.5% rate increase, if memory serves.

That was last year.

(multiple speakers) 2%. California, the rate year is, for the most part, in October for the Medi-Cal. And we're not anticipating an increase in the Medi-Cal program, but the SCHIP program, we're expecting about a 4% in July. New Mexico, we're looking at about a 5% in July. Indiana got a 7% increase effective January 1. And Michigan, we're looking at a 4 or 5% increase in October.

Okay. The change in Washington -- was that -- have benefits been changed at all, or something been carved out?

No, Washington uses pretty much a two-year rate cycle. So we had a 5.5% rate increase last year coupled with about a 2% this year.

(Operator Instructions). Matt Perry, Wachovia Securities.

A couple of questions. First question -- it seemed like when you discussed your guidance in this call, that you said you were not including any potential M&A or expansion. So I just want to make sure, does your '06 guidance include picking up members in the Ohio RFP that's supposed to be announced here pretty soon?

The 2006 guidance include about 70 or 75,000 members which we expect to get from Ohio. That really had more to do with the program as we started in the fourth quarter of last year than what we would expect to be the outcome of the reprocurement that is going on right now. We did apply for four regions; we're currently operating in two.

So would you need to maintain those two regions to get to that 70,000 members, or would you need to expand into other regions that you bid in?

We will take it any way we can get it. But our guidance model included about 70,000 members from Ohio.

Okay, and maybe -- I'm not sure if you went over this; if you did, I apologize for missing it. But you discuss in the text of your press release 3.7 million in connection with certain provider disputes. Could you go into a little more detail on what that is related to?

We had two major hospital provider disputes that we resolved -- one with Los Angeles County's hospital system, and one with Tenet. And those are disputes that have been going on for some time.

And you still have contracts with those two hospitals?

We do. The Tenet situation has changed a little bit in Southern California, because they have sold a number of their hospitals. But we do maintain contracts with all of those hospitals.

And you discussed exiting a couple of counties as of 1/1/06 -- one in Michigan and one in Washington. Would you say that the primary reason to exit those was due to the higher maternity costs you have talked about in each of those states, or was there other things going on there?

No, it was more than just maternity cost. The rates was such that even with our best efforts at medical management, we weren't able to make money in those counties, and so we decided to exit. It is going to cost us 22 to 2300 members right off the bat. But that's unprofitable membership. And so we felt it was best just to get out.

And are you anticipating more considering other exits in the first quarter? Or do you think those are the only counties you'd see exiting?

I don't see us exiting any counties in the first quarter. But I think to Terry's point, using the MedInsight tool, we can drill down and look at profitability by line of business, whether it is Medicaid or SCHIP, and also on a county level. So we will continuously monitor these things and take that information into account as we decide what geographies we're going to cover in the future.

And how does the state typically react in those instances, where -- especially Washington, where you're perhaps the largest player there?

I think the state understands that there are times when we're just not going to be able to make a go of things, especially in some of these rural counties. At the same time, I think the State of Washington is pretty happy with us, because we have stepped up to the plate in other areas. For example, they had this experimental program, the WMIP program. And they needed someone who was willing to take on the risk of the elderly and disabled patients, including long-term care, which comes in later this year and the behavioral health. And so we stepped up to the plate and took that on. So there is some quid pro quo. I think we have been a good partner to the states.

And then final question. You discussed, especially in 2Q, a sudden spike in catastrophic cases. And at the time, you weren't sure -- it just seemed to be across several regions, and didn't seem to have any specific related cause across those regions. And now that it has improved, have you been able to look back and identify any type of case other than the hemophilia cases that you mentioned that was driving that sudden spike?

No. I would not say there is one particular bed type or type of illness that contributed to that. We did mention the hemophilia cases, but it was across the board. There were all kinds of medical and surgical problems that contributed to that.

We had some outpatient increase costs from the flu. I do not classify that as catastrophic. The catastrophic illnesses we're talking about are really high-dollar cases. And we did have a lot of high-dollar cases from various causes in the second quarter.

Scott Fidel, J.P. Morgan.

First question just has to do with the 2006 outlook and the premium revenue guidance. Just wondering if you could help us build out to that -- just from my estimation, it looks like you're guiding to around 60% premier revenue growth. And premiums were down sequentially. So if you could maybe talk about how much of a contribution you are expecting in the growth from Ohio and Texas, or just how you get to that type of growth next year?

Well, Scott, we're looking at enrollment growth of about 13 to 15%. The bulk of that is coming from Ohio and Texas. Ohio has especially high PMPM revenues. So that is going to take up a lot of -- the PMPM increase is going to come from Ohio. Texas also has above-average PMPM revenue rates.

Okay, that's helpful. So I estimate your PMPM is around 155 in the fourth quarter. What would you estimate the Ohio PMPMs would be relative to that?

Slightly north of $200.

Okay, and then just second question around the investment income which has been building up over the last couple of quarters -- what do you think -- is this a good run rate that you had in the fourth quarter, or maybe just what your investment income expectations are that you've built into the '06 guidance?

I think the run rate may go up a bit. A lot of it is going to depend on what are we seeing in terms of acquisitions, and how we want to use that cash. But excluding the acquisitions, it probably will continue to build.

Okay, and on the other side of the coin, with interest expense -- no debt at this point, so basically should we just assume no interest expense for '06 or will there be some modest expense there?

We did talk about -- when we are going to close the Cape acquisition, we will probably have to draw some on the line of credit. But we will get into that probably in greater detail when we have that acquisition baked into the numbers. (multiple speakers) outside of that, I would say no interest expense.

Okay, so ex the acquisition, no interest expense. And then just the last question, just around California, since the enrollment did dip there in the fourth quarter, what type of growth or trajectory should we think about for '06 -- do you expect to start growing that again, or is it more just keeping that market flat?

It's for the most part flat. We are expecting some increase, but less than 5% for California.

Tom Carroll, Stifel.

Quick disease management question -- the DM initiatives focused on preterm birth -- are those internal programs, or are they an expansion of an existing disease management vendor relationship?

Actually, the question is answered by saying all of the above. We have a partnership with Pfizer Health Systems, which is our disease management vendor. But we also have internal programs that we're building within. And we use the InformaCare platform for all of our disease management and health management programs. And that would apply to our pregnancy health management programs as well.

Don't you have a contract with Matria -- with their women's and children's health product?

Not that I'm aware of.

They are a vendor for us in selected markets, but there is no broad, long-term or corporate relationship at this time.

There are no further questions at this time. I'll turn the conference back over to you closing remarks.

I haven't forgotten about Carl. Carl, one of the things were struggling with in terms of coming up with the medical cost trends is year-over-year, they've had a number of changes in our program. For example, the New Mexico, the behavioral health business was carved out. Also, our Utah contract is a cost-plus contract.

So I think that the best thing to do is we'll parse that apart and we'll have it more on the next call. It is not quite as simple, because we have got a lot of moving parts. Suffice it to say, though, we're comfortable with the guidance that we've given for the balance of the year. And that's really what I focus on.

All right. Thank you for joining us, and we look forward to the next call.

Ladies and gentlemen, that does conclude the conference call for today. Once again, we thank you very much for your participation, and ask that you please disconnect your lines. Thank you and have a good day.