Molina Healthcare Inc (MOH) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare fourth-quarter and year-end 2007 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 13, 2008. I would now like to turn the call over to Mr. Juan Jose Orellana, Vice President of Investor Relations for Molina Healthcare. Please go ahead, sir.

Thank you, Vanessa. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and year ended December 31, 2007. The Company's earnings release reporting its results was issued today after the market close and is now posted for viewing on our company Web site.

On the call with me today are several members of our executive team -- Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO and Joseph White, our Chief Accounting Officer. Dr. Michael Siegel, our Corporate Vice President and Medical Director, will be sitting in for Dr. Howatt, our Chief Medical Officer, who is visiting our Michigan health plan this week. After the completion of our prepared remarks, we will open the call to take your questions.

I also would like to remind you that 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 that are 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 press release, our 10-K annual report and our 10-Q quarterly reports filed with the Securities and Exchange Commission. These reports can be accessed under the investor relations tab of our Company web site or on the SEC's web site. All forward-looking statements made during today's call represent our judgment as of February 13, 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 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 hope you have had a chance to read our press release, which is comprehensive. As indicated by our results announced today, our fourth quarter performance represented a strong conclusion to the year. We accomplished a great deal in 2007 and our efforts translated into the consolidated full-year earnings of $58 million, or $2.05 per share. This figure represents a year-over-year increase in net earnings of 28%.

Our results came in slightly ahead of our estimates and validated many of the assumptions we discussed at each of our investor days. As outlined in our press release, there were various factors contributing to our success in both the fourth quarter and full year. Generating these financial results are various operational achievements that are worth highlighting. These operational achievements can be grouped into three categories -- execution, continuity and transparency. Let me briefly address each of these categories.

Let's begin with execution. In large part, our increased earnings can be attributed to higher revenues while holding the line on our medical care ratio. In our industry, managing medical care costs is a health plan's most fundamental form of blocking and tackling. In 2007, we continued to focus on basic medical management tactics that included recontracting with providers, directing patients to cost-effective providers, implementation of care management programs and the integration of new populations into our existing operations. A continued emphasis on basic management tactics is how we will succeed in 2008 and for the foreseeable future.

The second category is continuity. Essential to our success is a coherent and consistent approach in the execution of our business strategy. We have achieved our objectives as a result of our focus and the stability of our management team. If you have been following our Company over the past few years, you will know that our executive team is stable and that we foster management continuity. For example, Jesse Thomas, who lead our Ohio health plan, now leads our Michigan health plan. And Kathy Mancini, who was our COO in Ohio, was promoted to lead the Ohio health plan. This continuity strengthens our operations as our executive teams develop their skills by leading projects at Molina Healthcare from inception to completion.

In addition, we benefit from executive teams that have managed through challenging industry business cycles. Management continuity is at the core of the consistent execution of our strategy and is a characteristic that differentiates us in our industry. The final achievement in 2007 I would like to discuss is transparency. Last year we provided additional financial and operational disclosure, revenue and medical cost on a per-member per-month basis, details on the category of services provided and medical claims inventories include some of the information we added throughout the year. These disclosures help describe some of the details that we use to analyze and manage our business. We're very pleased with the progress we have made in building a more robust internal reporting and analysis infrastructure because it enhances our ability to identify and address business trends earlier.

In 2008, we see opportunities across several of our markets despite potential challenges.

One example of both a challenge and an opportunity is the recent rejection of the sweeping California health care reform bill. The failed passage of the bill hinders the expansion of coverage to 3.6 million Californians, but it heightens the need for the Governor and the Legislature to address incremental change to improve affordability and access to health care. This situation positions experienced Medicaid managed care organizations like Molina Healthcare as logical partners for reducing health care costs and increasing access to health care. Our experience gives us confidence with respect to the current anxiety about the health of our economy. In previous recessionary periods, the government turned to managed care for cost containment and increased access. Over our 27-year history, we have endured three economic downturns, one in the early 1980s, one in the early '90s and the recession of 2001-2002. During tough economic times, the reimbursement rate environment sometimes becomes constrained and rate increases can be somewhat anemic. However, this is partially offset by higher enrollment as the Medicaid rolls grow.

Another characteristic of recessionary periods is the exit from the market by companies that are unable to make the economies work under a difficult reimbursement environment. The exit of such competitors provides membership growth opportunities for us. For example, our California plan has already benefited from the exit of local competitors in San Diego and Sacramento counties, and we expect some membership increase from the exit of another local competitor in the central region of Ohio. Therefore, given our inexperience, our administrative efficiency and our focus on government programs, we view a recessionary period as a time of opportunity. We will continue to pursue our growth and diversification strategy. We will build on our Medicare experience, pursue acquisitions and participate in future RFPs in new and existing markets.

As it relates to new markets, we expect to work with United American Health Care, UAHC, to submit a bid for the Tennessee western region RFP. UAHC is a full-service health care company that owns and operates a health plan in western Tennessee and has a long history of participation in the TennCare program. If our bid is successful in the western region, Molina Healthcare would take a minority interest position in UAHC's health plan.

As you know from following our Company, delivering quality health care is a priority at Molina Healthcare. We are therefore very proud that recently our Washington and Utah health plans have renewed their excellent accreditation status for three years. This means that both of these health plans once again met the criteria for Medicaid Managed Care Organizations established by the National Committee for Quality Assurance.

Overall, I am pleased with the results and the progress we made in 2007. I want to take a moment to acknowledge all of the hard work by our employees and the support shown by our state partners and by our providers during the past year. Finally, I want to thank those of you on the call for your interest and your investment in Molina Healthcare.

I would now like to turn the call over to John.

Thank you Mario. As Mario noted, results for the fourth quarter of 2007 and fiscal year 2007 showed an improvement over 2006 results. Earnings per share for the fourth quarter were $0.63 per share as compared to $0.41 per share for the fourth quarter ended December 31, 2006. Additionally, at year end, earnings were $2.05 per share as compared to $1.62 per share for 2006, a significant increase of 27%. These results are slightly better than our stated expectations of $1.90 to $2.00 per share. Our results tracked very closely with the estimates and the assumptions we provided back on September 12. We were on target with our revenue estimate, we did better than anticipated on our medical care ratio and administrative costs were slightly higher due in part to Medicare.

Our 2007 fourth quarter revenue includes the benefit of higher enrollment at our New Mexico, Ohio and Texas health plans and the acquisition of Mercy CarePlus in Missouri. These increases offset the termination of operations in Indiana and reduced membership in Utah and Michigan. Our medical care ratio decreased from 85.1% in the fourth quarter of 2006 to 83.6% in the fourth quarter of 2007. This is an improvement of 150 basis points year-over-year and a 10 basis point improvement over the prior quarter ended September 30, 2007. This improvement comes from stable utilization, lower medical care ratios in the Ohio and Texas health plans and the termination of operations in Indiana.

General and administrative expenses in the fourth quarter were 11.8% of total revenue, or $81 million, as compared to 11.1% of total revenue for the fourth quarter of 2006 or $61 million. Core G&A expenses, defined as G&A expenses less premium taxes, increased to 8.8% of total revenue for the fourth quarter of 2007 as compared to 7.9% for the fourth quarter of 2006. This increase in core G&A is primarily due to increases in employee incentive compensation which would be expected given the Company's improved financial performance, employee recruiting costs and continued investments to support our Medicare operations. These Medicare investments include development costs, the service area expansion into two new markets, the addition of the MAPD product to all of our Medicare markets, sales and marketing, information technology and salaries for the new management team in our Medicare operation.

For 2007, premium revenues were $2.5 billion, an increase of $477 million or about 25% over premium revenue of $2 billion in 2006. Medicare premium revenue increased 81% to $49 million in 2007 as compared to $27 million in 2006.

Nearly all of our health plans contributed to both higher premiums and enrollment gains. The increase in premium revenue was mainly due to membership growth in New Mexico, Ohio and Texas, a full year of Cape Health Plan in Michigan, the finalization of Mercy CarePlus acquisition, along with premium increases in California, Washington and New Mexico. As it relates to enrollment gains, before taking into consideration our exit from the Indiana market or the Missouri acquisition, membership increased approximately 6% year-over-year. We also experienced some modest growth in our Medicare population where the premiums are higher as compared to in Medicaid.

Our consolidated medical care ratio was essentially flat year-over-year despite the addition of the aged, blind and disabled populations in Ohio. A comprehensive list of medical care cost drivers is available in our press release, but I want to take a moment to highlight a few these items.

In California, our medical care ratio decreased from 88.3% in 2006 to 82% in 2007 as a result of premium increases in San Bernardino, Riverside, San Diego and Sacramento Counties. Medical costs in California on a per-member per-month basis remained essentially flat due to stable utilization and provider recontracting. Our health plan in Ohio continues to experience some reductions in the medical care ratio. Specifically, the Covered Families and Children, or CFC populations' medical care ratio, decreased from 88.6% in the fourth quarter of 2006 to 86.2% in the fourth quarter of 2007. This was offset by the addition of the aged, blind and disabled population in 2007 where the medical care ratio was 94.7% for all of 2007. As outlined in our press release, we expect the Ohio aged, blind and disabled membership to have a reduced medical care ratio for 2008 with a 2.6% rate increase effective January 1, 2008 and with decreased utilization.

We estimate that if the 2008 medical care ratio for the CFC population remains at 86.2% for all of 2008, we will need to achieve a medical care ratio of 91% for the aged, blind and disabled population in order to reach our previously announced expectation of an 88% medical care ratio in the Ohio health plan. These assumptions, however, do not take into consideration the exit of a competitor from the Ohio central region.

In Texas, the medical care ratio decreased to lower medical costs for the Star Plus membership. We do not believe the medical care ratio reported by our Texas health plan in 2007 to be sustainable and expect the medical care ratio to rise during 2008, consistent with consolidated results. For Utah, our medical care ratio increased due to the write-off of $4.7 million in savings [share] receivables during the second half of 2007. Of this amount, $3 million was written off in the fourth quarter 2007. On a per-member per-month basis, the Utah medical care costs decreased in 2007 over 2006.

Cash at the [outer] period write-off, the 2007 medical care ratio, would have been 90.4% which is a decrease over the 2006 level of 91.5%.

As you review our selected financial data by health plan, you will see while some health plans performed well in 2007 they may not have performed to the same levels as in 2006 and vice versa. This variability an individual health plan performance is to be expected and is one of the reasons that contract diversification is a core component of the strategic plan we shared with you last September. We encourage you to evaluate the consolidated entity as opposed to focusing on the performance of one or two health plans.

Our general and administrative expense ratio was flat year-over-year. G&A expenses, including premium taxes, were $285 million for 2007 representing about 11.5% of total revenue as compared with $229 million for 2006 which was 11.4% of total revenue. Our core G&A, or G&A less premium taxes, was also essentially flat year-over-year. As we previously noted, the improvement in our core G&A ratio would have been greater except for our additional expense for employee incentive compensation and for Medicare administration and recruitment.

Days in claims payable decreased from 57 days on December 31, 2006 to 54 days on September 30, 2007, down to 52 days on December 31, 2007. We have previously discussed our expectation that days in claims payable would decline during the course of 2007 and have pointed to three specific reasons. First, when large populations are transferred to our care, as was the case in Ohio and Texas, there is inevitably a lag before claims are processed with the speed and consistency that we expect in our more mature health plans. The last large segments of enrollment were added to our Ohio plan in late summer. By the close of the year, payment patterns in both Ohio and Texas were much more consistent with our other health plans and liabilities that were originally recorded as IB&R had been paid off.

With that said, I want to emphasize that there's still a degree of uncertainty surrounding our cost estimates in Ohio and Texas that is not found in our more mature health plans.

Second, we have paid claims faster during the course of 2007 which will tend to reduce the days in claims payable. We can see that we're paying claims faster by measuring changes in claims inventory over time. One measure of claims inventory is billed charges in that inventory as measured by the total billed charges for all claims received but not processed.

You will recall that we started sharing this inventory metric with you in our earnings release for the first quarter of 2007. Billed charges in claims inventory declined by approximately 25% during 2007. Billed charges in claims inventory declined by approximately 9% during the fourth quarter of 2007. Last, as we have talked about before, our shift towards capitated provider contracts would reduce days in medical claims and benefits payable. Capitation costs were 18% of medical costs in 2007, but only 15.6% of medical costs in 2006. If capitation costs and liabilities were removed from this calculation, days in claims payable would have been 64 days at December 31, 2006, 61 days at December 30, 2007, and 59 days at December 31, 2007.

Cash flow from operations was $158 million for 2007 which is an increase of $56 million or 55% over 2006. The improvement is primarily due to increased consolidated net income, depreciation and amortization and deferred revenue in the Ohio health plan. On a consolidated basis, at December 31, 2007 we had over $700 million of unrestricted cash and investments. The parent company had approximately $98 million in cash and investments at year end. With the Company's continued growth, we expect cash flow to exceed net income. However, excluding the impact of growth, we would expect cash flow to approximate net income plus depreciation and amortization.

As previously noted in our releases, during the fourth quarter of 2007, the Company issued $200 million in senior convertible notes. A portion of the proceeds were used to pay off the $20 million owed on the Company's credit facility at September 30, 2007, approximately $80 million was used to acquire the Mercy CarePlus plan in Missouri and $45 million went to health plans for regulatory capital purposes and contributions.

Given that we issued 2008 guidance less than a month ago and no factors have come to our attention that would lead us to change that guidance, we will not be revising our 2008 guidance at this time.

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

(OPERATOR INSTRUCTIONS) Josh Raskin, Lehman Brothers.

First question, just looks like you spent about $10 million on investments in Medicare in '07. Curious what the expectations in terms of 2008, where you think you're going to be expanding into 2009, how should we think about that investment level?

Josh, I think that we're not planning to do as major of an expansion for 2009 as we did in '08. As we talked about, we added the MAPD in all of the markets and we entered two new markets, those being New Mexico and Texas. And we did bring in a more experienced management team in the fourth quarter. So we will continue to see investment in Medicare because it's a product that for the long-term we believe in. We think it fits very well with our profile, but I don't expect to see the same sort of ramp-up as we did it '07.

That makes sense. And then the second question on Tennessee, could you just run us through the relationship there that you guys are forming with UAHC and how the economics play out? Is that just an investment? Should we think about that as earnings and equity in an affiliate, or is there going to actually be a P&L impact? How do we think about that?

Let me start with saying that when we looked at the Tennessee opportunity, we thought it was important to link arms with a group that has got experience in the TennCare program, and that partner was United American Health Care. They have been in western Tennessee for 12 years. We are putting together a joint bid and we will be finalizing our definitive agreement with them before that bid is in place. So I really don't want to get into the economics of the deal until we are able to have full sign-up on that. But it would be our intent to make sure that that agreement aligns our incentives with United American. So it will not be just a passive investment for us. We will be providing some administrative service for them so that we can work on this project jointly.

Okay, that's helpful, and once you get the contract, you can also get (inaudible). Last question. I know you're not updating the guidance in light of it having been provided just a couple of weeks ago, but you had mentioned investment income as one of the -- John, you had mentioned the opportunity for challenges and suggested a quarter point in interest rates was about $1.8 million. And then I believe that did not include the Fed's action. I believe it was either that day or the day before of 75 bps cut. So I am curious, is it confirming the guidance there's still plenty of pluses and minuses and maybe that's a little bit of a hurt, but we feel better somewhere else? How do we think of that?

I think that's a good assessment of it, Josh. I want to focus for a second on the investment side because we've had a number of questions raised about this. We did build in the guidance some assumptions that rates would decrease throughout the year. So embedded in the guidance is a lower rate of investment returns on our investment. So although we did not factor in a 75-point cut that happened about the day after I think we gave guidance or the day of guidance, we did factor in some (inaudible) throughout the year. And I think on balance right now, it's too early to tell if that going to go up or down throughout the year (inaudible) we feel comfortable, which is why we put in a range and not a single point.

I would just add on that, we disclosed when we did the guidance, we were assuming a 4% rate of return for our investments, and fourth quarter we ran around 5%. So obviously we built in some cuts into that guidance we did last month.

Scott Fidel, Deutsche Bank.

First question just around Ohio, maybe can you talk about just what your expectations, I know it's early here in terms of enrollment, you may pick up from the WellPoint exit? And then how would you think about that impacting your MLR expectations for Ohio? And then maybe, would you expect that in aggregate to be accretive or dilutive in terms of the WellPoint membership to your Ohio business this year?

As I recall, Scott, in the central region, which is the only region that we overlap WellPoint, we had about 40,000 members. So I don't know at this point how many of those members we're going to get, how many of them will first have the opportunity to choose a health plan between Molina and [Care Source] and then how the state is going to divvy up the rest of them. So it's really too early for us to tell. We will know sometime in April I think is when the final rollout is done. As we have seen, our CFC members run a medical care ratio slightly below what we are expecting for the entirety of Ohio to be. I think we said the CFC runs about 86% and we are expecting 88% for the year. So it may have an impact just to bring the average down a bit, but we also don't know what the characteristics of the population coming over from WellPoint are.

And then just a follow-up question on California, maybe if you could just give us an update on where the governor stands with this current proposal in the budget around MediCal in terms of rates for health plans and providers and what your expectations are of actually seeing those proposals actually coming to fruition?

I don't know of any further information beyond what the governor originally proposed. There has been some information that I've gotten in the last couple days that the California Medical Association, as you might expect, intends to vigorously oppose those changes. But beyond that, we have no new information.

And then if you could just give us an update on the Mercy Care acquisition and how the integration is proceeding there. Any change on views to the accretion there? And then, how you see enrollment tracking relative to, what are your expectations in terms of counties that may expand in Missouri for 2008?

The integration of Mercy CarePlus is tracking according to our plan and we are treating them as we do -- supporting them as we do all of our other health plans. As you know, some of the counties dropped out because there were inadequate bids. We were approved in the 17-county expansion and we are still awaiting word on the Insure Missouri initiative. So we don't have any additional information at this time as to how that enrollment will come in.

[Darren Miller], Goldman Sachs.

A question on the Ohio ABD MCR, two questions. What was the MCR last quarter? And then in terms of the 97% this quarter, is that a target that you're booking to at this point?

Can you repeat the last part of your question?

On the Ohio MCR, the 97%, is that some target that you're booking to, considering that this is a newer population, or is that your best estimate of what the actual medical costs are running at?

I think John touched on the fact, we don't have quite the clarity into that, given the limited history there, but I think it's a combination of a target combined with just what we're now -- we are getting claims data in, so I would not say that it is purely a target.

I think the way to think about this, any time we can get a new population, you're talking about a spectrum. So on the one hand, you have almost a pure target, which is probably what we would use when we started with the ABD population in Ohio because you've got virtually no data. From the other end of the spectrum, it's purely based on historical information. So we are moving from the pure target ratio down to more claims experience base, but we're not there yet.

And what was it last quarter?

I don't believe we disclosed that, did we?

Last quarter, we haven't, but I think we can talk about it. Last quarter, we were at 94.4% for ABD in Ohio.

Anything particular that moved it up some 300 basis points this quarter?

It's essentially seasonality.

In terms of your SNIP enrollment, I was just curious if we could get a little color on how that is progressing so far this year, and just in terms of what you're seeing in the way of competition?

I think there's lots of competition, but we have been pleased so far with the growth of our Medicare enrollment. It hasn't been spectacular, but it has been steady and it's been good for us so far.

John Rex, Bear Stearns.

First I had a question on the Washington market. I believe just even last quarter, you were talking about the unsustainability of the loss ratios in that market, but they got better again, at least sequentially. So a coupler of things on that. I believe your rate increase was effective 1/1/08, if I'm not mistaken, so it would seem like they get better from here. I guess the second point was, at one point you were referring to 4Q as being more challenging because of the impact of the lack of rate increase in 4Q and how they had handled the fee schedule in that market. So I just wanted to get a little color of what's going on in that market and how we should be thinking about it for '08?

Well, we were concerned as you recall at investor day because there were some fee schedule changes and there was not a commensurate rate increase. However, and we have Dr. Siegel here, so I'm going to venture out a little bit on the medical utilization side. The Washington plan has done an extremely good job of managing the pregnancies and the low birth weight babies, and that has been a very big financial impact for us in the Washington plan year-over-year. We have some great programs up there and we have seen a decrease in our NIC utilization. I think, John, that we did get a rate increase as we said in Washington of about 5% effective January 1, 2008, and I believe commensurate with that, there were probably some provider changes. So we're not expecting that 5% to drop to the bottom line.

Yes. Furthermore, I think you need to be aware that there are changes in seasonality as well. So we may see some increase in hospital utilization. The thing that we did well in the fourth quarter was, we had low utilization in hospital services for Washington.

But I guess at this point, in light of the rate increase for -- effective, January 1, we should probably expect that this loss ratio still stays in the high 70s rather than getting into the 80s. Would that be a correct assumption?

You know, I think we're going to stick with our guidance, and I don't think that we were really anticipating that the numbers were going to go down. I think we were fortunate that we had a strong fourth quarter, but utilization was lighter than we anticipated and I would not expect that to necessarily so on.

And just California, the enrollment there, was that all about San Diego in terms of the enrollment increase in that market?

No, we also did, as Mario said, one of our competitors in Sacramento County left that market. We actually ended up picking up purchasing their Sacramento contract and it was about 4000 members in Sacramento.

And why did you pick up in San Diego again?

The San Diego you're talking about (multiple speakers) it's a January event, so what you are seeing there, John, is if you're looking at between September 30 and December 31, you're seeing about 4300 members I think coming on from the acquisition in Sacramento and the rest is just organic growth. We've seen some improvement there in the growth side lately.

Okay, thank you.

Carl McDonald, Oppenheimer.

I just had a couple more Ohio questions. The first is on terms of the CFC roughly 86% loss ratio projection, can you just remind us if there's any seasonality we should think about in terms of the fourth quarter number of roughly 86%, and then also was the rate action was for that population in '08?

I think the seasonality, Carl, we've been in Ohio for I think now five quarters or six quarters more or less, so it's hard to really judge, is it a onetime blip or seasonality. But generally speaking, the fourth quarter and the first quarters tend to have the highest medical costs for us.

Secondarily, our CFC rates for Ohio are basically flat, but we have talked about some recontracting efforts that we -- our plan did during 2007. Most of those will take effect either January 1 of 2008. I think a couple of them took place in the fourth quarter, so maybe a little bit too early to see the impact of that. But that's the other big driver for us in our confidence in the Ohio rate targets, our MCR target rather, is the recontracting and the utilization improvements that we are seeing.

Yes, and we also think there will be some improvements in the pharmacy side as well.

The second question was just a follow-up in terms of the potential impact of the loss ratio, were you to pick up some membership from WellPoint. I guess the CFC overall is lower than the consolidated, but I also remember the central region, or at least I recall the central region, as having a higher loss ratio potentially than some of the other regions, given the specific provider environment in that region.

We really don't break out the medical care ratio by regions, but I will say that the central region was one of the primary areas that we refocused on and were able to renegotiate a couple of the big provider contracts there.

Also, remember that roughly half the CFC membership is in the central region, so it plays a strong -- it's a big part of our numbers right now on a weighted average basis.

[Mike Lee], [Bishop Boston].

Sorry, you're one of the few HMOs I don't have any background with. When I think of your company, because I think of the Hispanic population in mainly sort of the western part of the country, I was really surprised when I saw this deal with United Health Care, which is -- United American Health Care, sorry -- which is basically a Southern and African-American. I guess does this signal you guys are really interested in broadening into that market, or maybe you're already there. I really don't know. And did they contact you or did you contact them? I was a little surprised, maybe I don't know enough about your company when your name showed up.

We currently have operations in nine states. The ethnic background of our members varies widely from various locations from state to state, even within a state. California, over half of our members are Hispanic, but in other markets that's not the case. We're interested in serving low-income families and individuals through government programs like Medicaid, SCHIP and Medicare without a particular geographic bias. So we're in Michigan, but we're also in Texas, we're in New Mexico, Nevada, Washington, so we cover a pretty good distribution of the states.

Do you contact them, or were you interested in getting into that market in those areas, in that area?

Well one of the things we have talked about at some of our investor days is the criteria that we use in identifying new market entries, and certainly Tennessee fits the criteria. It has a large Medicaid population, it's a mandatory enrollment state. We think that the state would make a good partner. So those are the kinds of things that we are looking at.

So you're interested in Tennessee, which is a terrific state for Medicaid.

It certainly fits the profile.

I see. All right, thank you very much and good luck.

Greg Nersessian, Credit Suisse.

My first question was just on the capital infusion in Ohio, and I guess wherever in other state. I guess that is based on having -- is that based on having losses in Ohio in 2007? Is that a Department of Insurance requirement based on losses in '07, or is that based on projected losses in '08? Is there a risk for further capital infusions in '08?

We have been talking about this since we went into Ohio. That rapid growth of enrollment of course triggers with the medical care costs which are the basis for the risk-based capital calculation that the Ohio regulators hold us to. It's that 300% of the risk-based capital requirement by Ohio regulation. A typical state is 200%. So it's just a capital intensive -- it's a very capital intensive regulatory environment there. And this is pretty much in line with what we have been talking about the last year. So just in terms of what would be required there. If we were to have the growth next year that we had this year, we would have to put a bunch more money in, and we would like that opportunity but we don't see it happening. So I think you can just view this as bringing Ohio up to the requirements for a plan of their size. Remember, we don't have to fund those regulatory requirements until 12/31 of every year.

Okay, I see.

Greg, if you go back our schedule, you will see that we almost doubled our Ohio enrollment. But the important thing to note is, the majority of the new membership we got this year came at the higher premiums because we're ABD members.

So it's a function of your growth in the state, not necessarily your financial performance?

Yes, it's all growth related.

Okay, and then you mentioned the lower MLR and the Star Plus. I guess maybe if you could just provide a little bit more color around what drove that lower MLR and why you think it's going to move higher in '08?

Frankly, we're a little bit puzzled by the costs associated with those rates ourselves. And it's a pretty good environment there for us, even in the Star area, it's just the Star Plus line that really stands out because it's proportionally so much more of our revenue there. I think this points to a lot of what we have talked about in the past and the uncertainties of moving into new markets. Star Plus is essentially a new product from an HMO perspective and that always creates uncertainty in the rates that the states are going to pay us. We tend to focus on [sometime] fee, so what if the rate is set too low? Perhaps sometimes a rate can be set too high. I just think as a practical matter, those rates are simply not going to be sustained long-term.

So it's a function of the rates that you are getting related to the rates you are paying providers, not necessarily a function of utilization being lower?

Well, no, obviously utilization is part of it. I think all of that factors in.

Last quick one, just curious if you have seen any indication of a spike in flu-related activity. I know a couple of years ago, you had a stronger and later flu season impacting first-quarter results. Any sign that that may be the case this year?

We are seeing increase in terms of across the country the flu epidemic, and in our own population, we're seeing an increase in respiratory illness, not necessarily related to the flu. So at this point, we still are in a watchful waiting mode and we have a line of confidence in the fact that we had a flu initiative last year, we had a flu initiative this year, which was really enhanced over last year and we're hoping that there will be some impact from those increased activities around flu prevention.

(OPERATOR INSTRUCTIONS). Matt Perry, Wachovia.

Most of my questions were answered, but I do have one question, a two-part question actually. Did you give guidance for a 2008 MCR in California?

No. Generally speaking, Matt, we don't give state-specific MCR guidance. However, we did go in a lot of detail in Ohio because a lot of folks were asking us about Ohio.

If I think about California, 88% MCR I think in '06, down to something like 82% in '07, maybe 100% due to rate increases. But if we think about the kind of long-term outlook in California and if we look back at the history, I guess the question is -- do you think that MCR down at that 82 level is sustainable for any long period of time?

I think we have said in the past is that, and I think our guidance reflects this, that we think an MCR in the mid-80s is probably appropriate. And while as you have seen numbers can fluctuate from year to year from state to state, you really need to look at the aggregate. And while one plan might have an increase this year, another plan might offset it with a decrease. And one of the things we want to emphasize is, it's really important to look at the overall consolidated numbers, not focus excessively on plan or another.

Actually one final question, and correct me if I'm wrong here, but I know you have some growth in your SNIP plans, but am I remembering incorrectly? Didn't you offer a few traditional Medicare Advantage plans targeted at people slightly above the Medicaid qualification, and could you comment on how those might have been doing?

You are correct. So let's just review. Effective January 1, '08 we are operating in seven states, not only are (inaudible) SNIP we're dually eligible plan, but we did enter the market focusing on the lower income beneficiaries that would be appropriate for our delivery system. So we are still in that marketing open enrollment period, though members in what you're calling regular Medicare are still free to select plans through the end of March.

James [Shertlis], Stifel Nicolaus.

Thanks. Do you remain interested in the Tennessee eastern region, as well as the west?

We are looking at the Tennessee eastern region.

I have a follow-up on New Mexico. Your '08 guidance assumes that second half that you retain current membership at 85% MLR. You also I am assuming are retaining the same PMPM on those people?

I believe so (multiple speakers)

There was no rate increase assumed in that.

There are no further questions, I will now turn the call back over to you.

Thank you very much for joining our call, we'll talk to you next time.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.