Molina Healthcare Inc (MOH) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare first-quarter 2011 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 Monday, April 18, 2011.

It is now my pleasure to turn the conference over to Mr. Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Shawna. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2011. The Company's earnings release reporting its results was issued today after the market close and is now posted for viewing on our Company website.

On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions.

Our comments today will contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our guidance for 2011. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous risk factors that could cause our actual results to differ materially.

A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K Annual Report for fiscal year 2010, our Form 10-Q Quarterly Reports, and our form 8-K Current Reports. These reports can be accessed under the Investor Relations tab of our Company's website or on the SEC's website.

All forward-looking statements made during today's call represent our judgments as of April 18, 2011, 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 molinahealthcare.com.

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

Thank you, Juan Jose, and welcome, everyone. We know that many people are celebrating a holiday this evening. John and I will therefore keep our remarks brief so that those observing the holiday can get to their friends and families.

Just a few months ago, we completed an important year for Molina Healthcare. We celebrated the Company's 30th year in business, as well as our success in delivering strong earnings growth in 2010. We exceeded the guidance provided, and the Company's financial position was strengthened as a result of our operational results.

Today, I'm pleased to report that our first-quarter results have given us a solid start toward achieving the financial guidance we provided for 2011. Our financial results improved dramatically over the first quarter of 2010. Implementation of various contracting and medical management incentives resulted in lower medical costs across our consolidated health plans segment during the first quarter of 2011. Inpatient utilization dropped by 7% compared with the first quarter of last year, while pharmacy utilization was flat, despite the return to a more typical influenza pattern.

Overall, our medical care ratio dropped by approximately 80 basis points year over year. Premium revenue per member per month increased by only 1% in the first quarter.

Our larger and more established health plans fared the best in the first quarter. California, Ohio, Utah and Washington all have lower medical care ratios when compared to the first quarter of 2010. And Michigan's medical care ratio was up slightly.

At some of our smaller or newer health plans, we continued to confront challenges during the first quarter that resulted in medical cost trends that exceeded premium growth. In Wisconsin, our newest and smallest health plan in terms of enrollment, greater visibility into our cost trends due to longer experience and a reduction in premium rates by 11% January 1, 2011, triggered the establishment of a premium deficiency reserve of approximately $3 million in the first quarter of 2011. This is one of the most dramatic rate cuts that we have experienced at one of our health plans.

The medical care ratio in Florida remains elevated. However, there is indication that we are making progress, as the medical care ratio declined 360 basis points sequentially. As we have discussed in the past, we expect medical costs to remain volatile and elevated in our smaller markets until we gain additional market share, enabling us to establish better provider relationships with those providers that are the most cost-effective.

We now have about one full year of operational experience with our fiscal agent business, Molina Medicaid Solutions. During that time, we have gained valuable insights into the business, and we have a better appreciation for the earnings and revenue recognition patterns associated with the design, development and implementation, or DDI phase, of new contracts.

Our efforts in Idaho and Maine to correct issues from the original implementation under Unisys are taking longer and are more costly than we anticipated. On the other hand, the margins in our fiscal agent contracts in New Jersey, Louisiana and West Virginia remain stable.

We firmly believe that the government healthcare sector in which we compete is an attractive growth industry. There is a considerable amount of Medicaid activity that is taking place ahead of healthcare reform. For example, the Texas RFP, which had been delayed, has now been released with a due date of May 23. In Ohio and Michigan, both states are exploring making managed care mandatory for the dual-eligible population.

In Florida, the state legislature approved a proposal to reduce long-term costs by moving a portion of its Medicaid population into managed care. And in California, a large portion of the state's aged, blind and disabled Medicaid beneficiaries will be required to enroll with a managed care plan starting in June of this year.

Overall, we had a successful first quarter. I firmly believe our results validate our strategic imperatives, emphasizing diversification, financial strength and profitable growth. We are very well positioned for the year ahead, and I look forward to updating you on our progress next quarter.

I will now turn the call over to John to review the quarter's financials in greater detail.

Thank you, Mario. We are very pleased with our results for this quarter.

EPS for the quarter was $0.56, up 37% from a year ago. Net income from the quarter was $17 million, up 64% over last year, and EBITDA was up 62% over last year.

Operating revenue for the quarter was $1 billion, up $153 million or approximately 16% from the first quarter of 2010.

Our total enrollment grew by 165,000 members or 11% over the first quarter of 2010. This growth is mainly attributed to solid organic growth in Texas and Ohio, as well as the acquisition of our Wisconsin health plan.

In Texas, the two recent RFP awards, one for CHIP members in September of 2010 and one for STAR+PLUS members this past February, have more than tripled our enrollment in that state since last August. In Wisconsin, our acquisition of the plan closed in September of 2010, which enhances year-over-year growth.

Sequentially, our enrollment rose by 34,000 members over the fourth quarter of 2010. Medicare enrollment grew by 43% over the first quarter of last year, and we now serve approximately 24,000 Medicare members. Today, Medicare accounts for 1.5% of our membership and approximately 8% of our revenue.

Our membership growth was essentially the sole driver of higher revenue for the quarter as blended premium revenue per member per month grew only 1%. Although we have received relatively small rate increases in states like Ohio, California, Utah and Washington over the past year, we have seen substantial cuts in states like New Mexico and Wisconsin.

As Mario touched upon, medical costs that exceeded premium growth in Wisconsin due to an 11% rate decrease on January 2011 require the establishment of a premium deficiency reserve of approximately $3 million in the first quarter of 2011.

We have also seen a shift in our member mix as growth in lower-premium membership from Wisconsin and the Texas CHIP expansion have more than offset the increase in ABD members we experienced in the Dallas/Fort Worth area in February.

Therefore, the dynamic rate environment in our markets, which combines rate increases in some states, rate decreases in others, and changes in membership mix, further reinforces the need for diversification across multiple health plans.

In light of this environment, we have made the most of any premium rate increases we have received by better managing our medical costs. Our medical care ratio declined by 80 basis points year over year. Despite the return of a flu season, hospital utilization declined by 7% and pharmacy utilization was flat.

Pharmacy costs, after adjusting for the carveout of the pharmacy benefit in Ohio, increased approximately 5% PMPM quarter over quarter. Capitation costs decreased approximately 15% PMPM, primarily due to the transition of members in Michigan and Washington into fee-for-service networks.

Fee-for-service costs increased approximately 4% PMPM. Much of this increase was due to the transition of members from capitated provider networks into fee-for-service networks. Fee-for-service and capitation costs combined increased less than 1% PMPM.

General and administrative expenses were $94 million or 8.4% of total revenue compared with $79 million or 8.2% of total revenue for the same quarter last year.

Cash flow provided by operating activities was $82 million for the first quarter of 2011 compared with cash used in operating activities of $27 million for the first quarter of 2010.

First-quarter cash flow was lifted by the early receipt of our April Ohio premium. We do not expect Ohio to pay again early this year, so, all other things being equal, you can expect cash flow to show a drop in the second quarter.

The Company had cash and investments of approximately $871 million. The parent company had cash and investments of approximately $26 million.

Finally, we are reaffirming our EPS guidance for 2011 of $2.20.

We are very pleased with our results this quarter. However, as you know, government budget deficits are not expected to improve in the remainder of 2011. Accordingly, the rate environment for the Company's health plan remains uncertain, making any adjustment to guidance unwarranted at this time.

That concludes our prepared remarks. We are ready to take questions.

(Operator Instructions). Josh Raskin, Barclays Capital.

This is Joe Kuhns filling in for Josh today. Thanks for taking the question. The first one is, can you just give us an update -- I know you talked a little bit about the RFPs, but I guess in terms of timing, which are the ones that are coming up next, and when should we expect for California specifically, when should we expect to start seeing some ABD members come in?

Well, let's talk about California for a second. This is John. The ABD members should start to come on the rolls in June or July of this year. And it was done not through a separate RFP.

As Mario discussed, the Texas RFP came out with a due date of May 23. There have been a couple of RFPs in the MMS space. But beyond that, I don't think that we have much of a signal other than what is already out there, which you guys and all the analysts have been covering.

Right. And were you surprised at all specifically about Texas, that the effective start date didn't change, given the delay?

No.

Anything else, for that matter, surprising, in your opinion, on the Texas RFP?

This is Mario. We did not find anything surprising about the Texas RFP.

Okay, thanks. I know, obviously, you are reaffirming 2011 guidance. Any comment today on 2012 guidance, or are you leaving that off the table for now?

You know, I think we made some comments at our Investor Day about 2012. I don't think we want to go beyond what we said previously.

Okay. And just one more, if I may. I guess this is really more of a logistical question, but I guess what was the decision process in terms of reporting so early in earnings season? Usually, I think last year, you guys were around the first week of May. So I'm just curious to see why you have moved up the date.

You hit the nail on the head. It was logistics. We have our shareholder meeting next week. We've got spring break for my kids, and a couple other folks have spring break coming up. So it was just easier to get it done early.

Understood. Thank you very much.

Tom Carroll, Stifel Nicolaus.

A few questions. On the transition of the capitated cost from fee-for-service to -- or I'm sorry -- from capitation to fee-for-service in Washington and Michigan, is this more of a proactive approach on your part as you expect the rate environment to be challenging in the coming years? Or is this just more reflective of how the population is choosing providers?

No, I think this is more an issue of -- this is Mario, Tom. This is more an issue of provider preference in the way they have chosen to be paid, which I think is really ironic, because there has been so much talk about accountable care organizations, which would put providers at risk. And yet more and more of the providers are coming to us saying they want fee-for-service contracting arrangements.

So this is the docs actually saying they want to get paid fee-for-service?

Correct.

Interesting. Okay. What drove the Rx costs in Washington state, and does that suggest anything about future claims flow?

Hey, Tom, it's Joe speaking. I think in both California and Washington, when we look at pharmacy costs, I think the biggest impact this quarter was a continuing diminution of pharmacy rebates. We have talked about the pharmacy rebates we receive via the pharmaceutical manufacturers drying up as the states collect that.

Also, curiously enough, those are two of the -- I guess not curiously -- those are two of the states where we had high Synagis use as a result of the Synagis season. Also, those are two of the states where we had probably the least -- probably had the highest Rx utilization creep for the quarter.

So it's really a combination of factors. But I think what really stands out for them this quarter is the way they have been hit by the loss of the pharmacy rebates.

Yes, that's it. And then, lastly, what is the -- the decrease in admissions per thousand, was that focused in any one or two markets, or mostly evenly spread?

No, we saw that pretty much everywhere, except our Missouri and our Ohio plans. Otherwise, very consistent.

Very good, thanks. Nice way to kick off earning season. Good job.

Glad you said that, Tom.

Sarah James, Wedbush.

I was wondering how should we think about seasonality. At the Investor Day, you indicated 2011 would be more backend loaded than past years. And if I adjust for the Wisconsin reserve boost of about $0.07 and the MMS margin step-up [and once that's passed], does the year still look like 60% second half, 40% first half?

Sarah, could you be a little bit louder there? We're having a hard time hearing you, Sarah. Could you just, one more time?

Sure, yes. I was wondering how I should think about seasonality. At the Investor Day, you guys had mentioned the year being more backend loaded than past years. So if you adjust for the Wisconsin reserve boost of $0.07 and the second-half step-up in MMS margins, I was wondering if the year still looks like 60% second half, 40% first half?

I think, Sarah, rather than try to pigeonhole or pinpoint how much is coming from back half versus first half, what I would say is first quarter is ahead of I think even our expectations. But I'm just being a little cautious because the rate environment is still in flux.

Do you have any basic assumptions for the second-half rate?

I'm sorry; say that again, Sarah?

Do you have any assumptions for the second-half rates currently built into your 2011 guidance that you could share with us?

What I would say is there has really been no change to the information we provided in January at our Investor Day. I think what has changed for us is that the first-quarter results came in a little bit better than anticipated. And a lot of that had to do with lower hospital utilization.

It is a good sign, because that is something that we have some control over. But I would be cautious about extrapolating the whole year based on one quarter. So, really, no change to guidance; no change to the information that we provided in January; slightly lower medical costs in the first quarter than anticipated, leading to better earnings.

Got it. And on the hospital utilization, is there anything in particular that you see that is driving that, or any color that you could provide?

I think this is just a product of our medical management initiatives. We have been trying to push the medical management down to the state health plans, asking our state health plan CMOs and medical directors to step up a little bit and help us control our medical costs better, especially at a time when we are experiencing minimal rate increases on the premium side.

Got it, so, better medical management. And the last question is on the clinics. I believe you talked about building a couple clinics in California. I was wondering if there was any update on that.

Well, we've still got, I think, two more that are scheduled to be open later this year. And we did open our second clinic in Washington either late last year or early this year.

That was in December. Plus we have expanded the capacity at two of our clinics in California. All of this is in anticipation of the influx of the ABD members. We wanted to have a little bit stronger staff model clinic network to be able to handle that growth.

Okay. So would it be fair to say that they would be up and running before the ABD members come in at the end of the year?

Yes.

Great. Thank you.

Chris Rigg, Susquehanna.

Thanks for taking my question. Just to put this utilization issue to rest, it sounds like you're saying the lower utilization was primarily a result of the lower admits in the hospital. Is that correct?

That's correct.

Okay. And are you saying that it was Molina-specific, or do you think it was more general broadly to the industry?

Well, here is what I would say. It is very difficult to generalize from one health plan to another, and I would urge everyone to be cautious about that. What we see in the first quarter is higher utilization due to the flu, typically. But that is mostly on the outpatient side.

So the fact that we had a slightly more intense flu season in 2011 than 2010, but lower medical costs, is really reflective of the fact that we had lower hospital utilization. And as I said, we have been struggling for a long time to try and improve our margins and decrease our medical costs. And I think that we are seeing some of the benefit of that work, and I hope that that will continue for the remainder of the year.

But, again, I caution everyone to be very careful about trying to extrapolate our performance to the rest of the industry.

Okay, thanks. And then thinking about the guidance for this year, can you tell us what percentage of your member months you currently have rate visibility on?

The only state -- actually, two states -- Ohio and Wisconsin. The rest of them will be a July or October rate change. (multiple speakers) 20%. It is probably like -- yes, it's probably 20%, 22%.

Do you follow that?

Sort of. I guess what I'm trying to figure out is that, as of today, you know -- because there are varying times when the rate affects -- when the rate changes take effect. How much is locked up, meaning what do you know you have for sure, and then what percent is still variable for your expectations for 2011?

So, basically -- it's Joe speaking -- Wisconsin and Ohio receive 1/1 rate increases. Everybody else is going to hit either 6/30 or 9/30. So if you look at our earnings release, we break out the enrollment. I think you can do the arithmetic. (multiple speakers).

It's 23% of the total.

So one way of looking at that is that we have the rate -- we know the rates were slightly more than half. Correct?

Okay, that is what I'm trying to figure out. (multiple speakers).

Through the midpart of the year, we have rates (multiple speakers). So in July they change, or in October they change. So a little bit more than half of the rates are locked in for this year.

Okay. And then, is it possible --

Having said that, I also want to caution everyone that as states run out of money, there is nothing that says they can't come back and adjust the rates downward during the contract period.

Okay. And then a last question here on the guidance. Is it possible to tell us whether -- you gave a detailed breakout of the line items at your Investor Day. Did any of those line items change materially since January?

No.

No, I don't think so. Our policy has always been that if there is a material change, we will let people know. I think that for the most part, the year is tracking as we anticipated, but with slightly lower hospital utilization and better margins as a result.

Okay. Thanks a lot.

Scott Green, Bank of America-Merrill Lynch.

Thanks for the questions. So, first, I was reading through the Louisiana RFP, and I thought I read that they were extending the fiscal intermediary vendors' contract through 2015. And so I was asking, is that you? Is your contract extended for another five years? Is that new? I didn't see it in the risk factors this quarter.

This is Terry Bayer. We are the current fiscal intermediary. So a state will often extend the contract to cover the development period should there be a new vendor.

Okay, so is there -- there is still an RFP you're preparing to submit a bid for there?

Yes, we have submitted a bid to reprocure that business. So we are both the incumbent and a potential future awardee of the business going forward.

Okay. All right, so that wasn't new from your perspective. You are still competing to retain that business at the same timeframe.

Yes, I think what the state is signaling is that there is not going to be an abrupt change. Even if they were to bring in a new contractor, as Terry said, there is a runout period where they would have us probably continue that contract. So I think that is what they are trying to signal to the bidders, that there should be minimal disruption to them with regard to the MMIS vendor.

Okay. All right. And then secondly, so in Wisconsin, could you clarify the premium deficiency reserve, is that higher-than-expected costs very initially, as you have gotten claims that are more mature, or is it lower revenues there?

This is Joe speaking. I think it is fair to say it's generally driven by lower revenues. We took about an 8% cut there effective September 1 of 2010, you'll recall, and then another 11% on top of that effective January 1. So, essentially, the revenue is simply not keeping up with the medical costs.

Okay. All right. And then I guess following up on Sarah's question, you had already assumed in your initial guidance 0% for rate updates on signed contracts going forward. And your results in the first quarter were better than expected. So I guess that means we are assuming something less than 0% going forward, or just some other conservatism there, or maybe just a lower number there. Is that based on any conversations you're actually currently having with states where you now think rates might be lower, or just general caution?

I would say it's general caution. We will have much better visibility after the second quarter is done. We hate to change guidance now when we have to change again once we have better visibility on rates.

Okay. All right. And then, a question on California. So could you just update us on where we are in terms of -- there was a proposal for a 10% provider rate cut in the back half of the year, and I think they're working on some study to show if it would impact access to care or not.

There was also some placeholder for a rate increase to HMO plans. So if you could give us your perspective on where we are in that process.

And then related to that, in 2008, there was also a proposed 10% provider rate cut in California. And you quantified that potential impact at around $0.10 to EPS in the back half of the year. And I was wondering if that would be the same way to think about it, using those 2008 disclosures that you gave, if that happened to be (multiple speakers).

This is Mario. What I would say about that is that, in the first place, there are a lot of moving parts with the California budget. And as I have said in the past, until the tax receipts come in and you get the May revise, I'm always very cautious about anything that is said about the California budget until after May.

So I would continue to wait and see. With respect to what the impact of a rate -- of a provider rate decrease would be on the health plan, I would just caution you that the Company is larger than it was in 2008. And California makes up a smaller percentage of its overall business. So it probably would have a smaller effect than it would have in 2008. But there is just a lot of uncertainty about what is going to happen with California.

About the only thing we really do know for sure is that the process of moving the ABD patients into managed care has begun. Letters have been going out to the beneficiaries notifying them that they must choose a plan. And I think that that is on track. Beyond that, I think it's too soon to really comment.

Okay. All right, fair enough. So, more color there in May, I guess. So hopefully if they get a budget passed on time, maybe.

And then, so in Georgia, you had spoken previously about working to establish networks there in preparation for an RFP that has now been delayed by at least a year. So, what do you do there if you either had people on the ground or you had a network in place? Is there a cost associated with just that sitting there for a year or two? Or do you -- is there a way to lower those costs, or maybe you start selling a Medicare plan or something like that? What are your thoughts about that?

What we would do is -- this is John -- keep efforts, I would say, more than minimal, less than maximum efforts to keep the network that we've got together. It doesn't cost us really much in order to keep the contracts open. And to the extent that we have excess resources, we will put them into other locations where we are trying to build and expand.

Okay. All right. And lastly, could you talk about the sequential decrease in Washington enrollment? What drove that? I think it was down 14,000 lives sequentially.

Sure. There are a couple of issues in Washington that are driving the enrollment decrease. One, when we moved some of the contracts off of full risk to fee-for-service, we did have some membership attrition. But that is okay.

We also -- Washington in 2010 brought up a new MMIS system. We are very familiar with transitions, having gone through that in Maine and Idaho ourselves. And we think there are some issues related to the implementation of the MMIS that affected our ability to gain enrollment in Washington.

Okay. So, do you think going forward you can regain some of that, or should just kind of be steady-state from here?

We are working with the state on the MMIS issues.

All right. And that maybe one more. Are you guys looking at the Kentucky RFP at all, or are you more focused on the opportunities that you outlined at Investor Day?

Well, it has always been our policy not to comment on potential RFPs. So we are not going to comment on that one.

Okay. All right. Thank you.

Carl McDonald, Citigroup.

First question is if you could update us on how you're feeling about the California ABD rates. I know initially, the proposal from the states, a couple of the plans thought the rates were a little bit low. So, anything that has changed since the initial proposal?

Well, you know, we are in the ABD business right now. So we have our current rate. And although we have been quoted the go-forward rate, it is premature to conclude that it is final in any way, because of the budget issues. And again, we don't comment until we have it in hand.

And with this expansion, just hypothetically, if the state gave you a rate that you thought was way too low for ABD, do you have to take the membership? Can the state basically force it onto you, or can you choose whether to participate?

It would be mandatory enrollment, so we would have to accept the members, yes.

Second question is, recognizing the comment you just made on not commenting on RFPs, I know with Louisiana specifically, there was some dispute over whether or not you guys would be able to bid, given the existing MMIS relationship. Did you ever get conclusion on that the last time around?

Well, Carl, it is an interesting question, especially in light of the fact that United owns Ingenix. I find it curious that people are so concerned about our IT vendor relationship.

Got it, but anything specific on Louisiana, or--?

No.

And then last question is if you could just talk about your pharmacy strategy, thinking specifically about the preterm labor drug now that K-V has the exclusive there, what the strategy will be?

I don't think there is really any change in our strategy. We have about between 400 and 500 women in the 17P program, and we will continue with that. One of the issues about this drug being exclusive, I think, has changed -- we can continue to use the compounded product. So I don't think it is going to be a huge issue.

Got it. So your plan, then, is just to continue to do what you have been doing?

Yes.

And using the compounded product?

Correct.

Great. Thank you very much.

Brian Wright, Citadel.

Two quick questions. On Texas, what was the MLR ex- the STAR+PLUS expansion in Dallas-Fort Worth?

Brian, it's Joe speaking. We normally don't share that level of detail. The STAR+PLUS expansion in Fort Worth, though, I will say their MCR was slightly below the number reported for Texas as a whole.

Okay, thanks. And then, Joe, just lastly, the claims inventory was up at the end of the quarter relative to where it was a year ago, and even though -- the fourth quarter, and yet -- and the dollar amounts are higher as well. But the days claims payable was down. Could you kind of reconcile some of those metrics?

This certainly isn't the first time we have had a drop in DCP coincide with an increasing claims in the inventory. We have also had the opposite on occasion. I think we have had increased DCP with a drop in inventory.

It is a rough correlation, Brian; that is all I would say. There are a lot of factors that go into our estimates that we and our actuaries make, everything from hospital bed days, authorized bed days, pharmacy utilization and all of that.

So, I don't think the change in inventory is particularly out of line with what we have seen at DCP. It has never been a tight relationship. (multiple speakers).

I'm sorry?

Go ahead, Brian.

(multiple speakers)

Brian, John was going to talk about, if you also look to the roll-forward table, it's rather interesting. We actually had a greater benefit from 12/31/10 in the claims roll-forward table than we did in the first quarter of last year. So those two indicators are kind of pointing in operates it directions. But we are very comfortable with our reserves.

Okay. And then I just don't remember, and I apologize; have you guys talked about what the DCP number you're expecting for the year, then, kind of a range, or--?

No, we have never really talked about that, because it is too difficult to predict. It is always worth remembering days in claims payable is a product, a result, a derived number from our reserves. It is not how we set our reserves.

Okay. Thank you.

Ken LaVine, UBS.

Thanks for taking the question. I just had a question on the Ohio health plan. It has been pretty strong in recent periods, particularly in the last six months. And I was just wondering if the MLR improvement there has kind of been notably different for the ABD population versus the CFC in the state, or if it has pretty much been moving in tandem there.

I think it has been -- this is John. It has been moving in tandem. Ohio is an example of where we are able to grow the business, put a lot of focus on medical management, and get some rate increases. The combination of those three factors allows our health plan to do very well.

Got it, got it. And then, just to circle back around on the 7% decline on the hospital admissions in the quarter, how does that compare to the year-over-year trend that you saw in the fourth quarter of 2010? Was the fourth quarter, was that also down an equivalent amount year over year?

I don't believe -- it is Joe speaking -- I don't believe so. Fourth quarter over fourth quarter?

Yes, the problem with the fourth quarter -- trying to compare the fourth quarter of 2009, when we had the big spike in the flu season --

Right, it was the (multiple speakers) dispute, but --

Yes, it was a big blip.

I think it is fair to say, though, since the second, third quarter of last year -- second half of last year, we have seen reduced inpatient utilization. I think it has been an ongoing trend. And that is one of the reasons why we are confident that at least a good chunk of what is happening is driven by the efforts we have undertaken.

Got it. Okay. And what about within the first quarter? How did that -- what was the trajectory there intra-quarter? Or was the admissions decline perhaps greater when you were exiting March versus earlier in January year over year?

I don't have that data. Sorry.

That's all I had. Thanks, guys.

(Operator Instructions). Charles Boorady, Credit Suisse.

First question, just to -- going back to my notes from your Investor Day, I recalled you were assuming about a zero average rate increase for the year. And I'm wondering, are you now revising that to say we should assume something less than zero for the full year? And if so, I'm wondering --

No.

-- what changed. Okay.

No, Charles. We are sticking with our guidance numbers. We are not assuming that it is going to get worse. We are not assuming it is going to get better. It is what we said back in January. That continues to be our assumption.

Okay, got it. So your commentary today about concern over state budgets, et cetera, is that any change from what you were thinking at your Investor Day?

No, I don't think so. We have been telling people for a while that we thought that the rate environment was a problem. I think that the fact that the federal government increased the FMAP for a while pushed the issue out a little bit. But it continues to be a concern, and it is one of the things we want people to understand is a big risk for us.

Got it. So, basically, no change in your thinking for an expected roughly zero average price increase for the full year. And your commentary today, is it basically -- are you seeing anything different from what you were seeing then? Are you giving us a bias towards a potential cut in rates based on what you are seeing so far? You said something about nothing prevents states from adjusting rates downward during a contact period.

No, but -- Charles, the reason I was saying those things, I think that there is some misconception about our industry. You hear people say things like, are the rates locked in? Rates are never locked in with state governments. They give us a rate, and in the vast majority of cases, that rate doesn't change throughout the course of the year.

But there have been times when rates have changed. I think a good example of that was the successive rate decreases we saw in Wisconsin. It is unusual, but it is not unheard of. And I don't want people to take away from our discussions the notion that rates are absolutely locked in or carved in stone. And this is a significant rate factor for us this year because of state budget problems.

But I don't think it is really any different than what we talked about in January. I think we signaled in January that we weren't expecting much in the way of rate increases. And if you look at our results for the first quarter, premium rate increases were up 1%. That is not very much, especially given the historic numbers that we have had, which have been in the low single digits.

I guess the comment -- I appreciate that. And I guess the comment around states potentially adjusting rates downward during a contract period, given the state budget challenges this year and given that medical trends were a lot weaker than expected last year, is it more reasonable to maybe assume as a base case that the rates might get cut? Or do you think that is unlikely to happen and that no increase or decrease is the best expected case for the year?

Charles, we are going to stick by the rate schedule that we put out in January. I think the comments that we have today really are reflective of we don't want our business to be solely dependent on states giving us or taking away rates. We are managing our business based on the available revenue stream we've got.

And that is keeping our admin costs in line with our expectations. That is working on utilization. And that is contracting efforts and diversification into things like MMS.

We don't want the whole discussions to be about what are our rate increases, because, frankly, that advocates our profitability to the states. The states may go back and change rates when they get into financial problems, as Mario has said. However, they are still bound by actuarial soundness. And Congress and CMS are looking at that whole process right now, but putting some more teeth into the oversight.

Got it. That's helpful added color. Thank you. The next question on free cash at parent, just to make sure I got this right, at $25.6 million versus $65 million in the fourth quarter, and I'm wondering if that is correct and what the drop related to.

It is Joe speaking. A lot of that is essentially just timing of cash flows. We have our -- in the first quarter, we pay out our 2010 incentive accrual -- incentive comp accrual. We also have to ensure that we have adequate statutory net worth in states like Wisconsin, where when we take that premium deficiency reserve, obviously, that was -- that diminished their net worth considerably.

So I would say it is a combination of normal ebbs and flows of cash and the need to fund Wisconsin, in particular.

Got it. And then, in Texas -- I think you might have answered this -- the MLR of 91.1, which was up quite a bit sequentially, was that mainly new ABD lives added?

No, I think, as I said on the other call, we don't go into that detail. But I can tell you that the Dallas-Fort Worth MCR was something less than the consolidated Texas number.

Got it. And then, just finally, on the sequential enrollments dropping, but just by a little bit -- in Michigan by a couple thousand, Washington 14,000, New Mexico by about 1000 -- was there a common thread there of maybe eligibility going down as employment picks up or any way to explain those changes?

I think part of that in Michigan is exactly that, just the population of the state, and particularly in Detroit, eligibility is going down.

Got it. And then Washington state, anything unusual?

Well, we've already talked about Washington. I think there were a number of issues. One of them had to do with some of the changes in the provider contracts, and the other is an issue on the MMIS side, which we think is affecting eligibility.

We have informed the state, and we're working with them to straighten out the eligibility issues in Washington.

Okay, got it. Yes, I did get those comments. So that explained that drop and not -- future expectations, did we already see the full impact of that, or should we expect continued erosion there?

No, I don't expect continued erosion in Washington.

Okay, great. Thanks, guys.

We have no further questions at this time. I will turn the call back to you, Mr. Orellana.

Thank you all. Thanks, everyone, for joining us today. We will talk to you second quarter.

Ladies and gentlemen, that does conclude today's conference call. We thank you all for your participation and ask that you please disconnect your lines.