Molina Healthcare Inc (MOH) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare third-quarter 2006 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 today, Tuesday, November 7, 2006.

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

Thank you. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's results for the third quarter of 2006. The Company's results were issued today after the market closed, and they can be viewed on our Company Web site.

With me here today are Dr. Mario Molina, our CEO, and John Molina, our CFO. After the completion of our prepared remarks, we will open the call to take your questions. At that time, Terry Bayer, our Chief Operating Officer, and Dr. Bill Bracciodieta, our Chief Medical Officer, will also be available to answer questions.

Our comments today contain forward-looking statements. All forward-looking statements are subject to numerous risk factors that may cause our actual results to differ materially. Such risk factors are more fully discussed in our periodic reports filed with the SEC, and include risks related to the continuation of the observed improvement in our medical care cost trends, our ability to accurately estimate incurred but not reported medical costs, risks associated with our startup operations in new states, the successful renewal and continuation of the government contracts of our health plans, the favorable resolution of pending litigation or arbitration, our ability to successfully integrate our completed acquisitions, the ability to enter into more favorable hospital or provider contracts, high-dollar claims related to catastrophic illness, the availability of financing to fund our acquisitions and start up health plans, membership eligibility, processes and methodologies, including citizenship, certification requirements and the successful maintenance of member enrollment levels, unexpected changes to member utilization patterns and other risk factors as detailed in our filings with the Securities and Exchange Commission and available on its Web site at www.SEC.gov.

All forward-looking statements represent our judgment as of November 7, 2006. We disclaim any obligation to update our forward-looking statements.

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

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

Thank you, Juan Jose, and hello, everyone. I'm very pleased to report that our third quarter produced good results, and that we are maintaining the momentum we have experienced so far this year. As we have seen in the past few quarters, today's results continue to demonstrate a stable core business and improvements related to medical cost containment. Net income for the third quarter was $12.3 million. This was an increase of 80% over net income for the third quarter of 2005. Year-to-date, net income was $34.1 million, more than double our net income for the comparable period in 2005.

Before John provides us a more comprehensive review of our financial results, I would like to take a few minutes to provide you with a brief update on the performance of our existing markets and our startup markets. In the third quarter, Michigan, New Mexico, Utah and Washington led our existing markets with results that met our expectations. We have seen progress in these markets, both in terms of utilization and unit costs. The investment we have made in administrative infrastructure over the past year has provided us with tools to better understand cost and utilization trends and the resources to address problems as we identify them.

In California, on the other hand, we continue to grapple with the challenges discussed during our last call. While utilization has remained consistent, unit costs have continued to increase, principally due to hospital contracts. These unit cost issues have been compounded by limited rate increases provided to contracted health plans by the state of California. You may recall that in the last four years, our Medicaid business in California has had limited rate increases. We continue to focus on working with the state to increase rates.

The rising unit costs observed in California, however, is an area where we feel we can gain traction and generate improvement more rapidly. Our ongoing monitoring of statewide unit costs confirms what we have discussed during our last conference call. The unit cost challenges are not a state-wide problem. They are specific to certain providers in our network. This is similar to what we observed and corrected in the state of New Mexico. Please keep in mind that although the problems in California may be isolated to a handful of providers, incidence of higher patient concentration or higher than expected utilization can still have a significant impact on our operating results.

We have an action plan to address these challenges in California, and are encouraged by the results we have achieved from deploying these types of initiatives in other states. One of the most important changes implemented in California in the third quarter has been the addition of Steve O'Dell as our new California Health Plan President. Steve has a strong and successful track record of 30 years of health-care industry experience and in leading managed care organizations. He has served in various senior leadership roles that include senior vice president of health plan business unit at first consulting group and COO of various health plans in Colorado, Nevada and New Mexico. Based on his experience, Steve has already hit the ground running and his team is currently working on various initiatives that focused on providers, where unit cost problems have been identified. These initiatives include implementing hospital list contracts to address in-patient utilization, adding additional UM resources, negotiation and implementation of streamlined capitated children's specialty and hospital contracts, just to name a few. If we cannot come to acceptable agreements with our targeted providers, we may experience additional member attrition in California, as we are willing to terminate contracts in order to eliminate losses.

As I mentioned earlier, the Washington, Michigan and New Mexico health plans have made significant strides by addressing many of the issues that became apparent during the second quarter of 2005. In New Mexico, the improvements achieved have confirmed our belief that over time, our focus on medical management and contracting can improve financial performance. Today, the combination of several quarters of operational experience in the New Mexico market and a more disciplined approach to medical management have contributed to a performance by the New Mexico health plan that meets our expectations.

In Michigan, the integration of CAPE Health Plan, the acquisition which closed in the second quarter of this year, remains on track. We expect our two health plans to begin operating as a combined entity in January of 2007. In addition to their improved operating results, our Michigan plans also set the standard for developing key programs for our members that have been recognized on both the state and national levels. The Michigan Association of Health Plans Pinnacle Award was awarded to CAPE Health Plan for improving access to care for pharmacy services. In addition, Molina Healthcare of Michigan was recognized by the National Committee on Quality Assurance for innovation in multicultural health-care delivery for its vaccination program called Shots for Shorties. We are particularly proud of the recognition of our Michigan Health Plans by both the National Committee on Quality Assurance and the Michigan Association of Health Plans.

Quality is and will always be a core Molina value. For the second year in a row, our health plans are ranked among America's best Medicaid Health Plans by U.S. News & World Report. U.S. News evaluated 192 Medicaid health plans and ranked six Molina Healthcare plans in the top 50. Health plans were evaluated in four major categories, including access to care, member satisfaction, effective delivery of preventive services and treatment. Of particular note, both our Washington and Utah HMOs were ranked as the top Medicaid plans in their states.

These rankings are an important achievement, because they highlight the quality of services delivered by our providers and provide additional comfort to state agencies we contract with by assuring that tax dollars are spent on quality health care.

Washington continues to perform well. During the third quarter, our Washington health plan began delivering long-term care services to the SSI population served by the Washington Medicaid Integration Project, or WMIP. As you may recall, the WMIP program is a managed care pilot program for aged, blind and disabled Medicaid beneficiaries in Snohomish County. The program includes medical, mental health, chemical dependency, and now, long-term care services as part of the managed care benefits. The incorporation of the long-term care services will enable us to continue expanding our expertise in delivering care to this segment of the population.

Shifting gears, I would now like to update you on our new operations. By new operations, I am mainly referring to our current startup businesses, which include Indiana, Ohio and Texas. In the third quarter, we were disappointed to learn that the Procurement Division of the Indiana Department of Administration had not selected Molina Healthcare of Indiana for contract negotiations in 2007. As a result of this decision, our Medicaid contract in Indiana, where we served approximately 54,000 members as of September 30th, will expire on December 31 of this year. We have submitted an appeal to the state's decision, and a related lawsuit has also been filed. We will continue to monitor the situation closely, and will keep you abreast of any developments. At this juncture, the state has yet to release any additional information related to the anticipated RFP for the aged, blind and disabled populations.

Moving on to Ohio, the past few weeks have been filled with many developments. As you will recall, Molina Healthcare of Ohio was selected to serve Ohio's aged, blind and disabled populations in all four regions in which we bid. The regions include Southeast, Central, west Central and Southwest.

These regions also coincide with our coverage area for the TANF population. Recently, the Ohio Department of Job and Family Services issued a notification to all applicants in a request for applications, as well as the selected applicants announced on October 6, that it had discovered an information system issue in the scoring process used to select health plans. The state communicated that the error in their system only affected the scoring outcome in three regions -- East Central, Central and Southwest. Based on these scoring errors, the Ohio Department of Job and Family Services has determined that it will reissue a new RFP and select a maximum of three applicants in each of the East Central, Central and Southwest regions. As a result of the state's system issues leading to this new RFA, Molina Healthcare of Ohio will have to reapply in the Central and Southwest regions. The two other regions -- Southeast and West Central, where Molina was awarded contracts -- were not affected. The new RFA is expected to be released on November 15, 2006. The impact to Ohio's managed care expansion for the aged, blind and disabled population is expected to be a one-month delay, and the completion of enrollment activities for the overall aged, blind and disabled managed care program.

In preparation for the additional TANF and ABD membership anticipated in Ohio in the upcoming quarters, we have made various infrastructure and management changes to support this growth, most notably, last month, we announce the addition of Jesse Thomas as our new Health Plan President in Ohio. Jesse brings to Molina Healthcare of Ohio a wealth of experience in the industry. Most recently, he served as chief of the office of health care purchasing at the Illinois Department of Healthcare and Family Services. He has also led several health-care organizations in roles, including that of the executive director of United Health Care Illinois - AmeriChoice.

In terms of our TANF enrollment in Ohio, the enrollment process for the Southwest, West Central and Southeast region is already underway. The Southeast region came online September 1st, and beneficiaries who did not choose a plan were automatically enrolled on November 1st. As we discussed during our call, the rollout of a Central region was delayed, since only one -- only two out of the required three plans were in place to serve the region. A third health plan was selected to participate in that region, and we have received notification from the Ohio Department of Job and Family Services that the Central region will become a mandatory Medicaid managed care region effective December 1, 2006. Eligible patients will be receiving an announcement letter and a consumer guide in the next few weeks, which outlines the Medicaid managed care program and provides specific information regarding the selected health plans in this region. Eligible patients who choose a health plan will be enrolled in January of 2007. Default enrollment is scheduled to occur in February 2007.

Also affecting short-term enrollment levels are the enrollment threshold set by the state. In each of our regions in Ohio, the state limited each health plan's enrollment to no more than 40% of the membership. However, they also protected each plan by assuring at least 20% of the membership has a default process. In the short-term, there may be fluctuations in enrollment levels until equilibrium is reached. In other words, the thresholds are not in effect on day one, but will be reached over the balance of time.

Given these enrollment fluctuations and the delay of the Central region, we do not believe that our enrollment projection of 120,000 members will be achieved by the end of 2006, as we had previously stated. We now believe a better estimate for year end 2006 will be approximately 80,000 members.

In Texas, Molina Healthcare welcomed its first members in the Houston area, where enrollment is currently underway. In addition, any current fee-for-service primary care case management patients who have not chosen a plan will be assigned to a plan in November. Starting in 2007, we will begin participating in the Star Plus program for the aged, blind and disabled in both the Houston and San Antonio service areas.

I want to caution everyone that considerable uncertainty surrounds startup operations, and startups are often a drag on earnings for a period of time. When a state transitions to managed care, a number of assumptions are built into the premium rates it pays. Only with the passage of time will these assumptions prove out, and the rates may need to be adjusted. From a cost perspective, both administrative and medical expenses contribute to the comparatively poor performance of startups. The administrative costs of a startup are a burden, because the infrastructure to serve our new members must be in place well before those members actually join the health plan. Therefore, we are left with excess administrative costs until membership has caught up with the growth of our infrastructure.

From a medical cost perspective, startups such as Ohio involve the transition of members from a fee-for-service environment to a managed care environment. Both members and physicians need to be educated in the appropriate practices of managed care, such as the reliance upon primary care physicians rather than emergency rooms. Additionally, the management of member care may lead to the identification of previously unmet health needs, which can create a temporary spike in health care costs. The transitions of a new population such as the aged, blind and disabled and those requiring long-term care into managed care services only compounds these challenges. Nevertheless, we remain confident we will in time operate profitably in Ohio and Texas, as we apply our experience from other markets and leverage the administrative infrastructure we have built up over the past year.

Now, I would like to turn the call over to John.

Thank you, Mario. Hello, everyone. Net income for the third quarter ended September 30, 2006 was approximately $12.3 million or $0.44 per diluted share, compared with net income of $6.8 million or $0.24 per diluted share for the quarter ended September 30, 2005. As Mario noted, this is an increase of 80% over third quarter 2005 results. Year-to-date net income is double what we reported at September 30 a year ago.

For the quarter ended September 30, 2006, premium revenue was up 20% to $512 million compared to $426 million for the same period last year. The major contributor to higher premium revenue was enrollment. Enrollment exceeded a million members, and increased by 12% from the same period last year, and 1% sequentially.

Growth in enrollment is primarily attributable to increasing membership in our Ohio and Indiana startups and the recent acquisition of the CAPE Health Plan in Michigan. Most of our organic growth continues to come from our startup operations. Our startups in Indiana, Ohio and Texas collectively have contributed over 90,000 new members as of September 30, 2006. We expect continued organic enrollment growth, especially in Ohio, as the state's Medicaid beneficiaries are transitioned into managed care. It is not uncommon, however, for a state to experience delays in implementing these programs. As Mario highlighted, we have already experienced delays in Ohio.

Our medical care ratio for the third quarter of 2006 was 84.1%, down from 86.1% for the same period last year. Our year-over-year improvement is attributable to our continued emphasis and success in managing medical costs, especially in our Michigan, New Mexico and Washington health plans. This improvement is somewhat dampened by the higher medical costs in our startup plans and our California health plans. However, as Mario stated, higher medical costs in our startup plans are to be expected, as it takes time to transition these new populations into managed care. It will take time before we are fully able to fully leverage the size and geographic diversification that results from serving these new markets.

Salary, general and administrative expenses were $60.5 million for the third quarter of 2006, representing 11.7% of total revenue, as compared with $47 million or 11.0% of revenue for the third quarter of 2005. Our core SG&A, or SG&A less premium taxes, increased to 8.6% in the third quarter of 2006, as compared to 7.4% in the third quarter of 2005. Core SG&A has been fairly consistent throughout the year, at about 8.5%. The increase in core SG&A, for the most part, was due to investments in infrastructure to support the Company's medical cost control initiatives, the launch of our Medicare advantage special-needs plan and our expansion in Ohio and Texas. Although greater emphasis is placed on growth-related investments, there are other smaller yet equally important administrative investments that enhance our current operations, assist us in mitigating risks and better position our Company for the future. Over the past few quarters, for example, we have added management resources in areas such as compliance, including Medicare compliance, and internal audit, making our internal controls more robust.

We have also invested in additional in-house resources, focusing on information technology, actuarial analysis, medical informatics, and employee training and development. These additional resources contribute to expanding our management capabilities, reducing our alliance on external entities and consultants, and better position the Company for long-term growth.

Moving on to the balance sheet, our total assets as of September 30, 2006 were $778 million, up $118 million from the end of the year 2005. Our medical claims payable were $257 million at the end of the quarter, up $40 million from the year end 2005. We continue to apply consistent reserving methodologies. Sequentially, our days and claims payable remain flat at 54 days as of September 30, 2006, when compared to June 30, 2006.

Cash flow from operating activities provided approximately $67 million for the nine months ending September 30, 2006. Net income and the timing of payments for medical claims and benefits payable were the primary sources of cash provided by operating activities. Over time, we expect the cash flows will equal net income plus depreciation and amortization.

We finished the third quarter with cash and investments at the parent company of approximately $28 million. Our subsidiaries had a combined $88 million in statutory equity in excess of regulatory requirements. Given additional capital requirements at our startup in California health plans, the Company had to seek a waiver and amendment with respect to our $180 million revolving credit facility to fund statutory equity requirements. The waiver and amendment have been secured with our administrative agent, and the Company is currently fully compliant with all facility covenants.

In keeping with last year's practice, the Company will address 2007 earnings guidance in January of 2007. As we did last year, we would like to emphasize clarity over expediency, as there are a number of factors that affect our visibility into 2007, including the rollout of TANF and ABD membership in Ohio that we have already discussed, the reprocurement of the ABD contract in two regions of that state, our efforts to improve financial results in California, the pending appeal and litigation related to the Indiana contracts, and the timing of the rollout of the Texas Star Plus program. We believe the additional time used to prepare guidance will give us greater ability to provide you with our 2007 numbers, as well as the inputs and the drivers that are behind those numbers.

Operator, this concludes our prepared remarks. We would now like to open the lines to take some questions.

(OPERATOR INSTRUCTIONS). Greg Nersessian, Credit Suisse.

I just had a few questions on the California possible unit costs. I guess my first question was just -- you could quantify for us how many hospitals there are there that need to be contracted. Are there any alternative hospitals that you can utilize in the interim period, where maybe you could negotiate better rates, and what your sense of timing is for the recontracting efforts, when those contracts come due and how aggressive you can go after the renegotiation?

Let's paint the picture first as an overview of the recontracting effort. In certain cases, a hospital routinely terminates its agreement at the end of a term, because they are in hopes of negotiating a better deal for themselves. We find ourselves in that situation in selected instances, where then we come to the table to negotiate and if we're not successful and we do not reach terms for a deal that makes sense for us, we have to do two things. We have to be sure we have an alternative hospital system in place, so that we do not impair the members' care, and we have to assure ourselves that it is the right financial decision.

So we have terminated several contracts and we may in the future terminate additional contracts. Those are driven by that termination date.

In other instances, the timing of our efforts on the negotiation are tied to our ability to build an alternative. You mentioned that a minute ago. It is difficult -- I can tell you that we have accomplished some of our recontracting, and we have some left, but again, it is always difficult for us to give you a number on the number of contracts and their ultimate implementation. So I just want to keep educating our audience about all of the moving parts.

Then just on the rate side of it, what is the likelihood of getting any kind of mid-period rate increase from California? Or is this something that you guys are going to be -- you know, your only alternative will be to negotiate the cost side of it down between now and the next rate cycle.

We negotiate rates for the Sacramento GMC program and the San Diego County GMC program directly with the California Medical Assistance Commission, and those are ongoing. In addition, we are expecting a rate increase in the two plan model counties, which are Riverside, San Bernardino and Los Angeles, but we do not have that locked in yet.

How much of a rate increase would it take to get you guys to stabilize the MLR? Order of magnitude?

I think we're looking at single-digit rate increases in California, and I think that has to be combined with the recontracting efforts that Terry described to decrease our unit costs. It is a combination of both.

Okay, so if you have got like a 5% rate increase or something like that, and we are able to renegotiate those proprietor contracts, you'll be able to feel much more comfortable?

I'm not going to give you numbers on the rate increase, but it is going to take a combination of both rate increases and a renegotiation of provider contracts to turn the California situation around.

Josh Raskin, Lehman Brothers.

A quick question on the medical cost expense. I am just trying to figure out the sort of moving parts here. It sounded a lot like it was on the hospital recontracting side, where some of the pressures are being seen. But if we look at the breakdown of your medical expenses on the income statement, it looks like the PMPMs were actually up for medical services the highest. And then the hospitals were up only about 2% or so sequentially, and the Rx, which you mentioned in Indiana, was actually down. So I am just trying to reconcile -- was there some seasonality in there or mix shifts that I'm missing?

First of all, I think you are looking at consolidated numbers. So they differ from state to state. I will let Bill take this.

From the hospital in-patient utilization perspective, we remain flat in terms of year-over-year trends. On the pharmacy side, we are very pleased with our performance, and that includes states like Indiana and Ohio. As Terry mentioned, we have ongoing unit cost initiatives that we're putting a lot of effort and energy into. But from a medical management perspective, on the utilization side, and on the pharmacy side, we are pretty much flat at this point.

I guess I am just trying to reconcile the comments. You're saying sort of very pleased with Indiana, Ohio and Rx, but in the press release, you are talking about the increases in medical care ratios in the Indiana plant, and to a lesser degree in Ohio, experienced higher than average pharmacy costs. Is that just year over year, and you are now beginning to see some of those medical management techniques take hold in the third quarter? So it's more year over year than sequential? Is that the difference?

Yes.

Okay, that is helpful. Second question -- you said the Indiana loss would not be material to 2007. I know you're not giving formal guidance, but just on that piece, does that mean less than a couple of cents, or is that -- I mean has that really just been relatively breakeven early this year?

Josh, we're not going to talk about the impact on 2007. We said it is not material, so you can draw your conclusions as to what you think is material.

Fair enough. Then just last question -- how many [SNP] lives at the end of the quarter?

About 2000.

So relatively flat sequentially?

Correct.

Bill Georges, JPMorgan.

Could you help us out with the direction of SG&A, I guess at least for the balance of this year? I think you had previously guided to low 11% area. Are you still expecting that for this year?

As I have commented earlier, SG&A for the year has been running about 8.5% -- core SG&A, 8.5% flat. The difference between our admin and the core admin is the premium taxes. And Ohio has got a premium tax, as does, I believe, Texas. So as enrollment in those ramp up, there is a bit more of a burden on the overall admin side. I think what we are seeing, though, the SG&A has flattened out. As the enrollment kicks in in these states, you will see flat to a decline. Flat to a decline in the core SG&A -- Bill, I want to emphasize that.

Got it. With some of the new markets, because of premium taxes maybe driving the consolidated SG&A a bit higher? Is that fair?

Yes, a little bit. I would not expect it too much.

Then on the MLR, do you give MLR magnitude by region? If we're trying to size what the impact of the new markets is, would you give guidance there, or can you tell us if you are booking more conservatively in the new markets?

For new markets, we do book the medical care ratio fairly conservatively. I think in the past, we have said about 90% until we can get claims development that allows us to move from sort of a benchmark to a more actuarial model.

What is your view, then, of the MLR this year? It seems like you were a little bit disappointed in the quarter. Previous guidance for the year was about 84.7. Should we expect that to pick up a little bit in the fourth quarter then, or for the full year, rather?

Fourth quarter does tend to be a little bit up seasonally.

Then would your full-year guidance now be a little bit higher than previous?

Well, I think we have basically said that we are sticking by our full-year guidance. So we are not changing anything at this point.

Carl McDonald, CIBC World Markets.

I wanted to spend a minute on the California hospitals, just to understand what it is that is driving the unit cost higher. Is that a contracting situation with percentage-of-billed charges, or is it something else that is driving that?

I think it is a combination of things. You have got hospitals where you've got bill charges, you have got hospitals where you have got stop loss issues. We have hospitals that are coming to us asking for higher rates, and they begin the negotiations by issuing a termination notice. So it is a combination of all of those.

Any way to sort of break it down between the pieces of -- is it a vast majority of hospitals that canceled this quarter causing cost to kick up, or is that something you expect to potentially be more of an impact at end of year, and more the impact this quarter was the percentage-of-billed charges and the stop loss issues?

Well, as I said in my remarks, this is really spotty. It is a handful of hospitals in various places. It is not a statewide phenomenon, and I would not even say it is a widespread phenomenon. It is in particular parts of our market. We do have alternatives. I think if anything, we would hope that through the recontracting process, we can lower our costs. That may mean, however, that we have fewer contracted hospitals next year than we did this year. That may end up with some attrition of membership in California, if plan members decide to leave us because we do not have a particular facility under contract. But we're willing to do that if it is going to bring our costs down and make the health plan profitable.

I can add one point of clarification. The hospital terminations are not on calendar year, so there is no year-end kind of uptick in the amount of negotiating. A hospital's contract depends on the date it was signed, and there have been generally been an annual renewal, and they occur throughout the year.

Could you go through and give us a sense of what your historical rate increases have looked like in California?

Yes. Over the past four years, I think we've had an aggregate -- what, about 2%? 3%?

We've had one net 3% increase when we had the provider tax put in place last year. That is the only one we received in the past three or four years.

And there was the also about a 8.1% decrease when the Legislature passed a bill that decreased the physician rates. CMA went to court and got an injunction which prevented that from being implemented on the physician's side, but the way the bill was written, it still was imposed on the health plan. So we got hit with a double whammy. The Medicaid fee schedule in California was frozen, but our rates actually were decreased by about 8.1%.

If I remember correctly, the rate increase in California covers -- at least for the bigger piece of the population, the rate increase comes at some point in the fall. Do you have any sense for how that will -- how that is going to shake out for 2006?

We do not know yet. Typically, it comes in the fall around October. We do not have final rates yet.

How is the budget situation in California, and any potential impact that will have on the rate negotiations?

Well, I think two things happened with the budget this year. I think that the tax revenues had improved, and it was an election year. So I think it was relatively good.

Last question -- just in terms of entering into new markets, how long does it usually take for utilization to move to a more normal level, as people move from the fee-for-service program into a managed care program?

Well I wish I could give you a distinct answer, but basically, what we have found is that it varies from state to state. Each market is different, so I cannot give you a pad answer for that.

Maybe a range, or some sense of sort of low to high in markets that you have seen before?

Well, I think at the outside range, we would like to see a new plan become profitable within 18 months of getting their first members. Some are faster, and it is possible that some of them will take longer. But that is sort of the outside range we're looking at.

Matt Perry, Wachovia Securities.

I guess I just want to clarify something first. I think it was last quarter you had given specific medical cost ratio guidance for Ohio and Indiana. I think it was 89% for Ohio this year and 90% for Indiana. Is that where the trends are coming in, or where the cost ratio is actually higher in those two markets?

I do not remember giving specific MCR guidance by state. Again, as I said earlier, until we get enough data in place to give us some credibility, on the actuarial side, we tend to use a 90% because it is -- we think it is a fairly safe number.

Okay, I guess just what I am trying to get at is from reading your press release, it is hard to tell if the higher costs in those markets were within your expectations or whether they were higher than expectations.

I think that Ohio and Indiana are running a little higher than expectation this quarter.

Okay. Then, could you talk about any impact your seeing from the Deficit Reduction Act, and maybe changes in the way states are looking at eligibility? I mean, California membership ticked down a little bit, but maybe you could tell us how California has treated eligibility in the past, and has that changed much since the DRA went into effect?

Well, we are concerned about the California market and the number of eligibles. I think that it has gone down a little bit. We think that eventually, we will come back into an equilibrium position. Anytime you make any changes in eligibility, our experience has been that there is a decrease. It does not really matter what the change is, whether it is changing the frequency of recertification or changing the requirements or the documents that are necessary, any perturbation of the system usually ends up with a transient decrease in the number of eligibles. How long that will last, whether it is a few months or a year, we do not know.

Would you be willing to say, or to give your opinion on whether it is likely to get kind of worse before it gets better?

It is hard to say, and it could vary by state. For example, it appears that the number of eligibles in New Mexico has actually gone up. So I think we need to be careful about generalizing across all states.

Just last question on Ohio, I think previously you had talked about 120,000 members this year, and now you are dialing that back somewhat. Is that just more a change in the timing? Do you expect to eventually get those 120,000 members maybe at some point in '07, or has the opportunity become smaller?

Well, without giving '07 guidance, what I can tell you is that we really think that this is a delay and a shift of the membership into 2007, because of programmatic issues. It is not that we think that we're going to get fewer members in the long run. It is just the timing differences.

I refer you back to the comments Dr. Molina made earlier about the way the Ohio health plans are going to find an equilibrium between 20% and 40%. Initially, it is not appearing that way, but over the coming six or eight months, it will level out. So those were the comments we talked about, how the balance of the enrollment will play out through the balance of the time frame.

Scott Fidel, Deutsche Bank.

First question, John, if you could just update us on expectations for operating cash flow and CapEx for 2006?

Well, you know, we do not really comment on quarter-to-quarter cash flows. Again, over the long term, [it had some] plus depreciation and amortization -- typically, fourth quarter has a little bit higher medical costs, so the cash flow probably would not be as robust. The other thing is, as we mentioned before, we're putting a lot of emphasis on our technology and our ability to pay claims faster, which should have an impact on cash flow, as we pay the claims inventory down.

Okay, it looks like, though, it has been tracking clearly above net income for the first three quarters, so maybe thinking about 1.5 to 2 times for this year, and then moving back more towards your net income plus D&A in out years?

I think that is a fair statement. If over the long term, we say it is going to equal net income plus depreciation and amortization, and we're running higher than that now, at some point, it has got to turn back the other way.

Then just on expectations for Texas enrollment, I think you had talked about 15,000 lives previously by the end of the year. Is that still your expectation for this year?

We're not making any changes to our enrollment projections.

Then just one follow-up. Just thinking about the RFP pipeline, and obviously you have some new markets that you have already ramped up on, but can you help us think about 2007 and potentially other markets where you would think about bids?

I think 2007 is really going to be about working on our operations in California and Ohio, working to improve margins and looking for growth opportunities for 2008.

Brian Wright, Jeffries & Co.

First question is on the [DCP] for the fourth quarter, should we expect that to be relatively flat, or with the Ohio membership coming on board, should that increase a little bit?

I think that is a fair statement. It could increase a little bit because Ohio is ramping up, although as Mario alluded, it is not ramping up as much as we had anticipated, say, at the last conference call.

Okay. Then on California, the MLR in California -- and I know you do not talk to individual state MLRs -- but if you could just help us out with was that flat sequentially, up sequentially, down sequentially?

It was flat to a bit up.

Then last question. Of the shares outstanding for the year -- last quarter, I think you talked about 28.5. Is that going to be the same? Is that still the same with what [the guidance is]?

No, we're not changing the --

Not changing the numbers? Okay. Thank you.

(OPERATOR INSTRUCTIONS). Greg Nersessian, Credit Suisse.

Could you remind us what the goodwill booked with the Universal and Sharp acquisitions was, and is there a membership disenrollment level associated with those plans that would trigger a charge?

Greg, I do not recall what the goodwill is. We can look that up. The way that we do the testing for goodwill and other intangibles is we will do at the end of the year, an assessment evaluation on it, if you will. Basically, the discounted cash flow off of future operations, and see if the value that we have got booked compared with the assessment, if any impairment needs to be taken. But it is way too early to say anything at this point.

Okay, but in a scenario where your membership disenrollment was greater than expected and you were to take a charge, that would occur in the fourth quarter, theoretically? Hypothetically?

Hypothetically, I would -- I think it's part of our year-and analysis for the audit. But again, it is not based on membership attrition. It is based on our expectation of future profitability, as compared to what we have got booked in goodwill. I think the goodwill is about $30 million.

Tom Carroll, Stifel.

Two quick items. I wonder if you could tell us your -- in the Texas ABD business, what is your expected PMPM that you are thinking about once that begins? I am not asking you for enrollment expectations; we will get that in a month or so. Then secondly, I would be interested in your opinion about the governor races. Are there any outcomes that you are particularly interested in that potentially could impact the business?

Well I will take the second question first, Tom. I think that in terms of the governor's races, the two that we are watching most closely are Michigan and California. I think, as you know, Schwarzenegger went into this with about a 16 percentage point edge. The race is much closer in Michigan. But last I heard, I think Jennifer Granholm had a bit of an advantage there. So we do not think that those are going to change, but we will find out tomorrow.

You know, Tom, on the PMPM for the Star Plus program, honestly, I do not have that in front of me. I did not expect you guys to get that granular.

I have no further questions at this time. I will turn the call back over to you.

Well, we have no further comments, so we will look forward to talking to you next quarter. Thank you for joining us.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation, and we ask that you please disconnect your lines. Have a great day, everyone.