Molina Healthcare Inc (MOH) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Molina Healthcare second-quarter conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, August 2, 2007. It is now my pleasure to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Dave. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's second-quarter financial results. The Company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our Company website.

On the call with me today are several members of our executive team -- Dr. Mario Molina, John Molina, Terry Bayer, Joseph White, and Dr. Michael Siegel. After the completion of our prepared remarks, we will open the call to take your questions.

Our comments today contain numerous forward-looking statements that are intended to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions, though subject to numerous risks, uncertainties and other factors that could cause our actual results to differ materially. A description of such risk factors can be found in our 10-K annual report and our 10-Q quarterly reports filed with the Securities and Exchange Commission, and these reports can be accessed under the Investor Relations of our Company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of August 2, 2007, and we disclaim any obligation to update such 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 website at www.MolinaHealthcare.com.

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

Thank you, Juan Jose, and hello, everyone. At Molina Healthcare our mission is to promote health and provide Healthcare services to low income families and individuals covered by government programs, all of this while meeting our financial goals.

I'm pleased to report that we made great progress toward meeting these goals in the second quarter of 2007. We had strong execution and financial results during the second quarter, and it is important to note that net of various adjustments, earnings per diluted share increased 25% in the second quarter of 2007 compared to the second quarter of 2006.

In addition, quarter-over-quarter this year as compared to last, the premium revenues increased by over 25%. The medical care ratio of our legacy health plans decreased by 40 basis points, and our core general and administrative expense ratio dropped 90 basis points. Furthermore, as we outlined during our investor day in January, there were many variables that represented risks and opportunities to our 2007 earnings prospects that needed to be resolved.

Today, although some of these issues still need to be addressed, we have resolution or visibility into the following items. A retroactive rate increase of approximately 4.8% to our San Diego Medi-Cal membership effective July 1, 2006. An additional rate increase in San Diego of approximately 5% effective July 1, 2007 and improved medical cost performance in California.

During today's call I will review some of our second-quarter operational successes and address some of the risks and opportunities to our earnings potential for the second half of the year. John will review the financial results in greater detail in his remarks.

We are encouraged by several key operational trends that contributed to the strengthening of our business in the second quarter and the first half of 2007 that should carry over to the second half of the year. Specifically the trends include revenue growth, improvements in medical management and a continuing decline in our administrative cost ratio. Administrative costs continue to decline, reflecting our membership growth and improving administrative efficiency. If we look at overall administrative costs comparing the second quarter of 2007 against the second quarter of 2006, we see that costs fell as a percentage of revenue from 11.6 to 10.9%.

Furthermore, if we examine our core administrative costs, which exclude premium taxes, we see that they also decline on a year-over-year basis from 8.6% in the second quarter of 2006 to 7.7% in the second quarter of 2007. All of this points to greater administrative efficiency and overall revenue growth.

Our revenue growth, when compared to the same time a year ago, was driven primarily through enrollment gains in our startup health plans in Ohio and Texas and our acquisition of CAPE in Michigan. To a lesser extent, revenue also benefited from modest rate increases we received in some of our markets.

It is particularly noteworthy that our California health plan received a rate increase in our San Diego contract. The retroactive rate increase of about 4.8% added $2.9 million to premium revenue in the second quarter, about $2.2 million of which related to three previous quarters -- the last half of 2006 and the first quarter of 2007. We believe this is tangible evidence that the state of California is serious about addressing rate issues with California Medi-Cal Managed Care plans in the future. We expect to hear soon about possible rate increases for Los Angeles, Riverside and San Bernardino counties where where about two-thirds of our California members reside.

I would like to remind everyone that our previously issued guidance for fiscal year 2007 did not include any rate increases in California beyond those we received in the first quarter of 2007. We are also anticipating possible rate increases in Michigan and New Mexico.

In addition, we expect to learn about rates in Ohio and Washington late in the fourth quarter. These new rates for Ohio and Washington will be effective on January 1 of 2008. Overall membership is essentially flat at 1,076,000 members in the second quarter as compared to 1,074,000 members in the first quarter of 2007. Membership is up 68,000 members from this time a year ago. The increase has been driven by enrollment growth in Ohio and Texas, partially offset by a loss of our Indiana membership and declining membership in California and Michigan. Ohio enrollment has leveled off at about 140,000 members. With most of the conversion of members from fee for service to Managed Care completed in Ohio, we are currently below our earlier year-end projection of 160,000 members.

Over the past two years, we have devoted considerable time, energy and resources to improving our ability to manage our medical costs. We believe that those efforts have been quite successful, and we now intend to focus more of our energy on growing enrollment in our legacy states.

Medical management is at the core of what we do as a health plan. Two years ago we recruited an experienced Chief Medical Officer, Dr. Bill Bracciodieta to tackle the issue of better controlling our medical cost. Dr. Bracciodieta in turn recruited two capable managed care physicians to help him -- Dr. Michael Siegel and Dr. Jim Howatt. When Dr. Bracciodieta left the Company, we found his successor among the physicians he had recruited. Dr. Howatt assumed the role of Chief Medical Officer this past June. Dr. Howatt in turn lost no time in further strengthening our medical management team. He hired Dr. Ward Hurlburt to replace him as the new CMO of our Washington health plan.

Additionally we hired Dr. Richard Sanchez to be CMO of our California health plan. Dr. Sanchez was formally Chief Medical Officer of Mercy Care Plan in Phoenix, a Medicaid plan administered by Schaller Anderson.

In Texas we have also added [Dr. Miguel Vasquez], who is will be responsible for the STAR+PLUS membership that covers the ABD and long-term care programs.

In Ohio we have added Dr. Thomas Nelson in connection with the growth of our ABD membership in that state.

Dr. Gary Call who would previously worked as Chief Medical Officer for our Utah plan is now Corporate Medical Director focused on Medicare, ABD and long-term care. The growth and dedicated resources to address the problems of the elderly and disabled reflects the growth of our total ABD membership to 91,000 members.

One of our core competencies is our ability to connect vulnerable populations with the right resources in the right place at the right time to promote good health. Low income Medicare beneficiaries benefit from the coordinated care and preventative services that we offer. We are committed to long-term growth in our programs for low income Medicare beneficiaries, and we will continue to make the necessary investments.

You may recall that we place great emphasis on medical informatics, the science of drawing together data from disparate sources and turning it into actionable medical information. I'm pleased to report that we continue to make progress in this area. We have created a new department of health care and quality analytics under the direction of Karen MacDonald, our Chief Actuary. The new department combines the actuarial, medical informatics and (inaudible) departments into a single unit. [Kathy Johnston], who leads the Medical Informatics Unit, has also added staff.

An important determinant of our success in the second half of 2007 will be our ability to manage our medical costs in Ohio and Texas. The additional resources in medical management and the physicians that I have just mentioned should help us to gradually lower medical costs and prepare the plans for NCQA accreditation when they become eligible.

In addition to developing more robust medical informatics and ensuring organizational continuity, this year our Medical Affairs Department also successfully implemented a companywide flu prevention program, and it also achieved formal accreditation of our bilingual nurse advice service, TeleSalud, by the Utilization Review Accreditation Commission more commonly known as ARAC.

Finally, we are also very proud that Sally Richardson who is on our Board of Directors and who from 1997 to 1999 served as Director of the Center for Medicaid and State Operations in the Clinton administration, recently won a national award for her efforts to improve world health care. She was recognized by the National World Health Association with a top award for long-time service in world health care. This hon or is the nation's most prestigious award in world health care policy. We would like to congratulate Sally on her achievement.

In addition, Mr. and Mrs. Tom Carroll are celebrating their 10th wedding anniversary. Congratulations, Tom. I would now like to turn the call over to John.

Thank you, Mario. As Mario noted, results for the second quarter of 2007 showed a substantial improvement over 2006 second-quarter results. Net income for the second quarter ended June 30, 2007 was approximately $13 million or $0.47 per diluted share. This $0.47 per share figure includes a net benefit of $0.02 per share in the quarter, resulting from the addition of $0.04 per share due to a retroactive rate, increase less a $0.02 per share charge due to software impairment. Excluding the $0.02 net benefit, earnings per share during the quarter were $0.45, representing a 25% increase for the second quarter when comparing 2007 to 2006.

To arrive at this 25% year-over-year increase in EPS, an apples-to-apples comparison is necessary. We begin by adjusting the baseline results for the second quarter of last year. Net income for the second quarter ended June 30, 2006 was $0.47 per diluted share. However, this included a positive prior period claim adjustment of $0.11. We did not experience a similar claim adjustment this quarter. Therefore, excluding this $0.11 benefit, earnings per share in the second quarter of 2006 were $0.36 per share. When compared to the $0.45 realized this year, we see a 25% increase.

As I mentioned, our 2007 second-quarter results include a benefit due to a rate increase of approximately $0.04 per diluted share. The rate increase was for our San Diego County geographic managed care contracts with an effective date retroactive to July 1, 2006. As Mario pointed out, this retroactive rate increase is separate from the additional 5% increase we received for San Diego effective July 1, 2007. We may receive additional rate increases effective October 2007 for Los Angeles, Riverside and San Bernardino counties where approximately two-thirds of our California members reside.

In the second quarter of 2007, premium revenues were $607 million, an increase of $127 million or approximately 27% of the premium revenue in the second quarter of 2006. The increase in premium revenue was primarily due to membership growth in Ohio, Texas and the membership acquired as part of the CAPE acquisition in Michigan. As a reminder, CAPE did not close until May of 2006, and therefore, last year's figures do not include a full quarter's revenue from CAPE.

Enrollment continues to exceed 1 million members, and setting aside Indiana, which we exited at the beginning of this year, enrollment increased by 11% year-over-year. However, our premium revenue grew faster than enrollment due to a shift in patient mix towards more patients with higher premiums, including more aged, blind and disabled patients, as well as more Medicare patients.

As of June 30, 2007, our total aged, blind and disabled membership increased to approximately 91,000 members or about 8% of our total enrollment. This patient shift is consistent with our mission and our previously stated diversification strategy.

While on the topic of enrollment, I would like to point out that we have added a new section to our earnings release, which provides greater disclosures surrounding membership statistics. This section now includes information on ABD and Medicare populations by state.

Our medical care ratio increased to 85.1% in the second quarter of 2007 from 83.7% in the second quarter of 2006. This increase is due primarily to growth in the Ohio and Texas membership. A detailed review of our medical costs in our legacy health plans shows that, excluding the 2006 favorable prior period adjustment, the retroactive rate increase in California and the startups in Ohio and Texas, our medical care ratio improved by approximately 40 basis points.

Washington's medical care ratio was affected by higher specialty fee for service costs, while Michigan's higher medical care ratio was primarily due to higher capitation and specialty fee for service costs. The medical costs in Ohio and Texas are in line with our expectations.

General and administrative expenses, including premium taxes, were $67 million for the second quarter of 2007, representing 10.9% of total revenue as compared with $56 million or 11.6% in the second quarter of 2006. Our core G&A or G&A less premium taxes decreased 90 basis points year-over-year to 7.7% in the second quarter of 2007 as compared with 8.6% in the second quarter of 2006.

Sequentially our core G&A ratio also decreased by 20 basis points from 7.9% in the first quarter of 2007.

We have been successful at keeping our administrative costs flat on a per member per month basis. As our premium revenue grows, we will continue to see additional efficiency.

The Company remains consistent in its reserving methodology. Days and claims payable remained flat sequentially and year-over-year at 54 days. Claims in inventory per member have gone down both year-over-year and sequentially. Cash flow from operating activities was strong at $52 million for the second quarter of 2007 and $88 million for the first six months of 2007, which represents almost four times net income for both the quarter and year-to-date period.

As the Company continues to grow, we expect cash flow to exceed net income. Again, excluding the impact of growth, we would expect cash flow to approximate net income plus depreciation and amortization. The Company finished the second quarter of 2007 with cash and investments at the parent company of approximately $32 million. Current borrowings on our $200 million credit facility stood at $30 million. Our subsidiaries had a combined $114 million in excess of statutory equity.

At this time the Company confirms its previously stated fiscal year 2007 guidance of earnings per share in the range of $1.75 to $1.90. The Company believes that its improved medical cost performance will offset any shortfalls in anticipated enrollment in its Ohio plan and its Medicare Advantage plans.

We will update guidance as future developments warrant and as we are better able to quantify and explain the impact of these developments. Some of the factors that could affect the second half of 2007 include, a potential rate increase for our New Mexico plan expected to be effective as of July 1 and potential rate increases for our California and Michigan plans anticipated in October; potential favorable changes to our New Mexico contract that may allow us to free up some premium reserves; and the potential changes to the Washington in-patient fee schedule that could increase our medical costs in that state.

Let me remind you that our current guidance assumes no rate increase for California or New Mexico and a 2% rate increase for Michigan.

Finally, we would like to make everyone aware of some updates to our investor relations activities. As you may have already heard from Juan Jose, we're hosting an additional investor day in the fall. Our second 2007 investor day has been scheduled for September 12. We believe this will provide investors with an additional opportunity to interact with many of our company leaders and also provide a more comprehensive check-in point.

This concludes our prepared remarks. Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Josh Raskin, Lehman Brothers.

The first question just on New Mexico. Is that -- the payable to the state, is that for minimum MLR requirements, and if so, how do you -- what could potentially change there that would allow you to free up some of those potential payables?

The answer to that is yes. It has to do with the minimum requirements that the state has put in its contract. The potential changes include the definitions of what accounts for its premium and medical expenses, the time period in which we measure that threshold.

Got you. So it is definition. Okay. So that could potentially impact you positively going forward as well?

That is correct.

Okay. Second question. Just the Ohio and Texas MLRs coming in just over 91%, obviously they are new markets and I know that is expected. How long does it typically take to see a marked move for what you will call one of these new startup markets to your legacy or more mature markets? How should we think about a low 80s MLR and at what point do we get there?

A lot of that is dependent upon the type of enrollment growth we get and really the maturity of the claims payment.

So in Ohio our CFC membership we have had for I think going on about nine months now I think to where it is got a good basis. So we should start seeing some effect on that probably within the next two quarters. The ABD membership in Ohio, just got that in this year. So that's going to take a little longer, and the same thing for Texas. We have got the bulk of the membership in Texas in Q4 and Q1. That is going to take a little while.

The other disadvantage with Texas is because it's a relatively small enrollment, 30,000, you may see some more variability just because you've got potential greater impacts from the larger dollar claims. But we should start to see more stability in the claims area later this year.

I guess if you go back and look at maybe New Mexico, that was the last market that you guys have added. How long did it take until New Mexico's MLR got to what you think is more steady-state?

It is a little bit different with New Mexico because New Mexico had an ongoing book of business when we bought them. So that was mature already. I think that again probably nine months after we get sort of the stable membership, we will be good.

And I am sorry. Just last question. I appreciate you guys gave a ton of new disclosures, extremely helpful. Just one question. There is not a big bucket but just a few, a couple of million dollars here and there in other medical costs that are not allocated to specific states. What is the other category?

I want Joe White to answer that question. Joe is our Chief Accounting Officer.

That is predominantly the -- I think if you look at our 10-Q, you will see us talk about quality assurance costs. Those are the admin type costs, medical director salaries, things like that that we have reclassified up to medical at the parent.

Okay. But not in the stat filing, so those won't count for state. But you consider the new medical costs?

Correct, and that portion that is in other is the portion that is the parent.

Bill Georges, JPMorgan.

Just another follow-up question on disclosure, which is definitely very helpful. Can you just highlight some of the moving parts around the differences in PMPMs on the revenue side that we see here? Is it because benefit structures are carved out in one state as compared to another?

Absolutely. In California, for example, the high cost children are carved out, so that's going to have a big impact on the PMPM revenue as opposed to a New Mexico where we include those. The differences in fee schedules is another big impact. California pays I think it is the 48 and 49th lowest as compared to New Mexico where the Medicaid rates are very close to Medicare rates.

Finally, you also have to remember that there is a case mix issue. Some states have more of the elderly disabled members which come as higher premiums. So you see that case mix playing in here a little bit too.

Okay. And then just with respect to your guidance, I know you're not going to be giving quarterly guidance. But you have done well at least versus street estimates for the first two quarters of the year, yet you're maintaining your full-year EPS outlook. I am wondering if you could just highlight, is there conservatism built in there, or what are some of the moving parts? Is your outlook for the back half of the year not quite as optimistic?

Well, this is why we gave a range at the outset of the year. Because it would take into account we think immaterial changes to our business. We went to great pains at our investor day to really lay out what the various moving pieces were and how they were -- and quantify how they impacted our guidance buildup for 2007, and we want to just maintain that consistency. And, as I stated at the last part of my talk, there are three pretty significant events, or potentially significant events, that we don't have data on yet. Those are the rate increases, the New Mexico contract which are positive for us if they come through, and the perhaps increase in medical costs in Washington because of a fee schedule changes.

Until we can quantify that, it does not make sense from our perspective to just up-to-date guidance or increase guidance just for the sake of saying we are optimistic. We want to be able to quantify it and tell our investors and tell the discerning investors really what is going on with our business.

Greg Nersessian, Credit Suisse.

I guess my first question was on the San Diego rate increase. I just want to understand the 5% that goes into effect July 1 would be off the base that was already increased 4.8%, so it is almost a 10% rate increase, is that right?

That is correct.

Okay. So how should I think about the revenue for 2007? I noticed you did not update your guidance there because there's a lot of moving pieces. With the enrollment coming in a little bit light but then the potential for these rate increases, is there a range you guys could give us for the top line this year?

We are going to stick with what we said before, that because we don't know -- we don't know if the rate increases for New Mexico, Michigan and potentially California to what degree they may offset what we are seeing as a sort of slowdown in enrollment, especially in Ohio in Medicare. So until we get those inputs, we're not going to change our guidance.

Okay. And then just to follow-up on Josh's question on Ohio and Texas, I guess specifically the Ohio market I recall some contracting issues in that state. I am wondering if there is anything sort of structural in your medical cost structure that would prevent you from achieving an MLR that is comparable with the overall book?

This is Terry. Not really. We have made progress in our contracting. I think we shared with you last quarter as the impact of some of the less favorable contracts was diluted. As we expanded and our enrollment moved to other counties, we were able to minimize that.

We are continuing to focus on reducing our unit cost in the emergency room, for instances, with lots of activity, diversion of patients and education of the providers and members. But most of what you will see change and that ends here, as John alluded to earlier, is just the maturing of the claims and a better sense of where these ABD members are truly coming in.

Okay. Great. If I could -- (multiple speakers)

Let me also follow-up with that. The problematic contracts we had in Ohio merely related to the CFC population. We did not have the same issues on the ABD side.

Okay. So you contracted separately on the ABD?

To fund a different network. In some cases the providers overlaps and they amended their agreement, but we did not pursue the less favorable contracts when we came on the second round of ABD contracting. We had more intelligence and narrowed our network away from the higher unit costs.

Okay. Fair enough. And then just a less quick one if I can get it in, you have a fair amount of excess capital at the subs. Any intention to dividend that up to the parent, or what are your thoughts on that front?

Well, we do try to do regular dividends and establish a track record with the states. So we will continue to pursue our usual course of dividends.

Tom Carroll, Stifel Nicolaus.

Thanks for those kind comments in your prepared remarks. I appreciate it.

I do have a couple of questions for you tonight. Again on New Mexico, following up on Joshua's question, you reported a premium adjustment because your MLR was too low, right, at 82.1%. However, if you look back to last year, you had no such adjustment, and your MLR was even lower than that. So is the minimum MLR requirement in New Mexico new relative to last year?

No, it is (inaudible) when it is measured. So I think what you are seeing for last year was the second half of the fiscal year, which the state measures in on. It was above that in the first half.

Okay. The timing on that. And then in your Washington market, the state fee schedule change. Could you provide some further detail on that?

The state of Washington is looking at changing the hospital DRG payments and increasing the payments to some hospitals, decreasing the payments to others. We are in discussions with the state right now as to how that is going to affect us and how that should be handled, but we don't have a final answer yet. In fact, I'm going to Washington in a couple of weeks, and we have been having ongoing dialogue with the state.

So that is a bit of an unknown. It does have the potential to increase our medical cost slightly in Washington and we have a range of numbers, but we are not prepared to discuss that just yet.

So net of all changes you think it is going to be potentially more costly to the Managed Care companies, and that is not going to flow through in rates at all?

Well, it depends on how the state handles it. If the state delays the implementation, it may not have an impact on the remainder of the year. If the state goes forward with the implementation and gives us a rate increase, it may not have an impact on costs. If the state goes forward with the implementation but does not increase rates until January, it could have a negative impact on the plan. And I think those are the three likely scenarios, and we just don't know yet which one it is going to be.

What is the timing? Do you think you're going to get comfort around it?

It is going to be several weeks probably.

Scott Fidel, Deutsche Bank.

Our first question just getting the updated guidance just around the MLR and SG&A. Is there any change to those, or is that still just being reaffirmed from the prior guidance?

No change.

Okay. And then second just relative to in the press release and in the stats that you show, you have shown 80.4% California MLR in the supplemental data, yet in the press release earlier it shows 82.2%. I'm just trying to understand the variance. Does that relate to the retroactive rate increase that you booked in San Diego and we should think about that as the differential?

Yes -- it is Joe speaking -- that is entirely correct.

Okay. And then just thinking about enrollment, it sounds like you guys are basically guiding at this point to pretty much flattish to slightly down enrollment for the year. First, is that accurate, and then, second of all, just thinking about 2008, any markets that we should think about starting to show accelerating growth, or should we start to think about pretty flattish enrollment for 2008?

Well, first of all, I would not say that we are guiding to flat or down. What we said was that the enrollment in Ohio was flattened out. There still are some open enrollment periods coming up in Ohio. There is some potential. The enrollment has not grown as fast as we had anticipated. But it's an ongoing process. We are not sure where we're going to end up at the end of the year. We could end up at 160,000. What we know right now is we are about 140,000. The Medicare enrollment has come in lighter than we had anticipated, but we still see growth throughout the remainder of the year.

Okay. (multiple speakers). Sorry. I was going to just follow up on that -- (multiple speakers)

At this point I think it is premature for us to discuss 2008.

Okay. And then just one last follow-up. Just sort of update on what you are seeing with the California reform discussions with Schwarzenegger and the assembly and expectations on whether you think something gets done this year, and the latest you're hearing around the 85% MLR proposal?

Well, we have had some discussions with the Governor's office, and first of all, I wanted to say that we do endorse the Governor's reform package. We believe it is the only proposal right now that is comprehensive in nature, that would cover all Californians, guarantee everyone coverage and also address issues like payments to Medi-Cal providers. You can't go out and expect doctors to increase coverage to the uninsured at the very low rates that they are being paid by Medi-Cal currently.

And finally, it has a portion that addresses preventive health care which we think is very important. Unfortunately the budget did not pass last night. It was one-vote short. And the Legislature will come back I believe it is on August 20, 22 something like that to reconsider the budget. So I'm sure there will be discussions in the meantime.

Hopefully they will address the budget and get down to addressing the health care reform issues in the period between late August to mid to late September.

And the three rate increases that you had talked about in I think LA, Riverside, San Bernardino, are those essentially in the budget and basically you need to see the timing of that getting approved to get the full visibility into that?

Yes. The Governor's budget proposed $107 million in general fund with about $107 million in matching funds from the federal government, and that was to be used for rate increases for the health plans. So that is up in the air. It was in the assembly version of the budget. It was in the Governor's version of the budget, and we are hopeful that that will continue to be in the final budget.

Brian Wright, Jefferies.

Can you talk a little bit about the Michigan fee schedule change that went into effect in April and if you're seeing any of that impact to your medical cost in Michigan? Or --

In April the state changed the methodology used to pay outpatient facility charges. We have seen minimal impact at this point. We have heard other health plans have a larger impact, and the state has agreed to go back and look at the overall impact to health plans. Because it was not the states' intention to have the plans bear a larger burden than they anticipated.

Okay. And then that -- okay. And then the second question is on the guidance for the year. Are you still looking for 86% in California, or is that now lower given what we have seen for the first half of the year and then there is an offset somewhere else? Is that probably the best way to think about it?

Brian, we did not give -- we don't really give guidance by state or by quarter. We give an overall range, a number. We did discuss our expectations for California at the investor day. I think that year-to-date what we're seeing is that the California MLR has improved faster than we had expected. It is the result primarily of the recontracting efforts that began a year and a half ago, helped by in the first quarter a slightly greater than anticipated rate increase of about 2.5%, and then we've got the San Diego rate increase which went into effect. We're hoping that we will see some rate increases in our two plan model counties come October. That is the date that the two plan model counties rates go up.

Brian, let me just add onto that two additional points. One of the reasons that our California MCR has been tracking below last year's certainly and even what we had anticipated in January was the recontracting efforts that we have been talking about now for the past year, year and a half, really have come into good traction. So it was that lower unit costs, and our utilization management has been very good in California. So utilization continues on.

Yes, hospital bed days are down in California compared to last year and down from first quarter to second quarter. So it is all positive.

But again this is why we put out a range in terms of the EPS guidance so that we are not constantly going back and tinkering with this factor and that factor. When we get additional information on primarily those three big issues that we spoke about earlier, we can go back and unveil what we think it is going to do to 2007 guidance at that time rather than a nit here and a nat there.

I guess with -- I mean if you have got those, is there -- I mean you would probably do better than what you're doing now in California. Is that fair to say?

If utilization remains at the current levels and the rates go up, then yes, we should do better.

Carl McDonald, CIBC.

I just want to go back to the enrollment in Ohio and more specifically the Medicare part. Ohio, the potential shortfall there seems straightforward.

On the Medicare product, I was wondering if you think that is indicative of an overall market issue in terms of this net market itself just did not grow as fast as you thought that it might, so your enrollment is proportionately lower, or is there some other factor that is impacting that growth?

We went into Medicare knowing that we were going going to go into that slowly and really get our bearings and understand that market, particularly how to manage those patients. And in the dual population, it is a little slower growth as you struggle to really identify those patients.

So recall we are only enrolling those who are fully dually eligible, Medicaid and Medicare. So we've learned a lot and in most recent months beefed up our sales efforts in the field, have gotten a lot more knowledgeable, and I think you will begin to see as we have in the last few months increased traction as we grow that plan.

Okay. And any sense for where that enrollment number should be for the year relative to the 3200 or so?

More.

It is a little difficult to say at this time. And we have not -- we're not prepared to give guidance as to what we think the Medicare enrollment is going to be by year-end. I think you can check the website, the Medicare website and follow the progress, and I think what you will see is that in the last few months we are beginning to see that enrollment grow.

For a long time, it was fairly flat. But, as we have learned more about how to market and how to identify the dual eligibles, we're making progress. It's a very difficult population to reach, and you have got to sign them up one at a time. So it has been slow, we think it will continue to be slow, but we're seeing some acceleration in the growth.

And the second question is, in Ohio earlier this year there was some concern raised about a potential change to the administrative cost factor. You have been setting the rates. Is there an update there, a resolution on that issue?

Well, sort of yes and no. There were talks about ratcheting down the administrative allowance. That has not happened. But as we're in discussions with the state for the rates next year, we know it will be somewhere probably between 8% and 12%.

At the same time, we are also having a lot of discussions with the state about what we can do in terms of administrative simplification. The Ohio program was new, and mandatory enrollment was new to Ohio. The state wanted to make sure it went well. They put in an awful lot of requirements just to make sure that you did not run into problems with plans that could not deliver on the services.

As a result, they have created a lot of administrative work for the health plans, and as they gain comfort with our ability to manage the patients, I think that we will see some of those things scale back.

Also, remember that this is a state in which you're dealing with a lot of fairly sophisticated plans that do have experience with Managed Care. And when the state set these requirements up, they did not know if they were going to be dealing with startups or multistate plans. And so they had to plan for the worst-case scenario where they got inexperienced management. But I think it has gone pretty well, and I think we can expect to see some administrative simplification next year.

(OPERATOR INSTRUCTIONS). Matt Perry, Wachovia Capital Markets.

A question first, just clarifying. On your guidance range of EPS of $1.75 to $1.90, does that exclude the two items that you excluded from Q2 earnings, the charge and the retroactive rate adjustment?

No, it did not.

It did not exclude. (multiple speakers)

At the time we gave guidance, we did not know half those things, so.

Okay. So the $1.75 to $1.90 includes the kind of net positive $0.02 of those two items?

Yes.

Okay. And then second, I know you have given a range on the EPS line, but you have given kind of a data point of 86.2 on the MCR. If I look at the first-half medical loss ratio combined, it is below that, and then just qualitatively I see the rate increase in California for July 1, potential for a couple of more second half of the year rate increases, potential for improvement in profitability in New Mexico, and then offset maybe by a negative in Washington. It just seems that there's more positives than negatives in the second half, and I'm trying to think of why that MCR should actually tick up in the second half?

I think we would agree with you.

Okay.

We will wait and see. We have talked about the fact that we are unable to quantitate some of the changes like the rate increases for California and the impact on the rate increases in New Mexico, as well as potential increases to hospital costs in Washington. But on the whole, we're optimistic, and we think that there are probably more pluses than minuses.

Okay, that is helpful. And then lastly, on this kind of increase in the amount of data you are disclosing, certainly a lot more data than any of your peers disclose. And I know you have some new markets that maybe you want to give us some data on versus your mature markets. Can you just talk a little bit about the decision to just increase the amount of data by that much?

Yes, I think it is pretty simple. What our approach has been, and if we put ourselves in the investor shoes, we want people to be able to make informed decisions whether they buy, sell or choose not to be involved with Molina. We at least want that to be an informed decision, and we're trying to give investors the kind of information that we think really rounds out and gives a full picture of what our business is like.

Okay. Thank you very much. That is helpful.

Sir, there are no further questions at this time. I will turn the presentation back to you. Please continue with your presentation or closing remarks.

Well, I really have no more to say. We wanted to keep this call short, so Tom can get home to his wife, and we look forward to seeing you at the next quarter.

Thank you, operator.

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation and ask that you please disconnect your lines.