Molina Healthcare Inc (MOH) 2011 Q2 法說會逐字稿

Welcome to the Molina Healthcare second 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 remainder, this conference is being recorded Thursday, July 21, 2011. I would now like to turn the conference over to Juan Jose Orellana, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Andre. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the second quarter, ended June 30, 2011. The Company's earnings release reporting its result was issued today after the market closed and is now posted for viewing on our Company website.

On the call with me today or 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 without limitation statements regarding expected rate revises, enrollment and business growth, utilization and unit cost reductions, and an upward revision of our EPS guidance for fiscal year 2011. All of our forward-looking statements are based on our current expectations and assumptions, which are subject to numerous to risk factors that could cause our actual result to differ materially.

A description of such risk factor can be found on 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 website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of July 21, 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. Hello, everyone, and thank you for participating on the call.

Today Molina Healthcare reported earnings per diluted share of $0.38 for the second quarter of 2011, a41% improvement over the second quarter of 2010. We are pleased with these results, which reflect our continued strength and momentum in the Medicaid space as well as the strategic benefits derived from our diversified business. Even more exciting, though, are the many opportunities over the next few years. These include upcoming Medicaid managed care procurements, ABD population expansions, dual eligible Special Needs Plan expansions, and MMIS procurements.

With half the year behind us, the close of the second quarter provides an appropriate point to review the progress of our business and to talk about the developments since our most recent Investor Day last January. At that time we talked about the key measures of our financial performance; revenue, medical costs and administrative costs. Let's review each of these measures in greater detail and spend some time discussing the drivers behind each of them.

Premium revenues in the second quarter grew approximately 16% over the same period last year. At our January Investor Day we said that our revenue growth would primarily be driven by membership increases and membership mix as opposed to premium rate increases. Our results so far this year have been consistent with that expectation. So far 2011 has seen an acceleration of the transition of the aged, blind and disabled beneficiaries into Medicaid managed care. During the first half of the year we added 30,000 new ABD members in the Dallas-Fort Worth service area. As of today we've added 5,000 new ABD members in California as a result of that state's expansion. We expect that our ABD membership in both Texas and California will continue to grow in 2011. Today ABD members account for nearly 10% of our total enrollment.

We have also seen growth in our Medicare membership. In terms of enrollment our Medicare Special Needs Plan for dual eligibles ranks tenth overall nationwide and third in the markets we serve according to the CMS Health Plan Management System's website. It's important to remember that all of our Medicare Special Needs Plan members are dually eligible for Medicaid and Medicare. The experience we have gained in serving these populations will serve us well as more of this membership moves into managed care over the next few years. Please note that both of these populations, ABD and Medicare, have much higher premium revenues than our traditional membership.

Our membership for the Temporary Assistance to Needy Families, or TANF, consisting mainly of mothers and children, has remained static during the first two quarters of 2011 when compared to the same periods in 2010 and 2009. This is not surprising nor is it cause for concern. As the unemployment rate across our states decline or remain flat, membership growth begins to ease. However, we have plenty of opportunity for continued growth among new populations and new markets.

As we expected, premium rates remain anemic. We received a rate increase in Missouri, but other states like New Mexico and Utah have actually implemented small rate reductions. At the beginning of the year we said we expected rates to be either flat or down and that mix and enrollment growth would be better indicators of our business than small fluctuations in premium. John will provide a summary of rate developments for the remainder of the year during his remarks.

The second key measure of financial performance is medical cost. Little has changed in this area relative to the trends we shared with you at the first quarter. Overall, utilization tends to be favorable so far this year. Our larger and more established health plans and fiscal agents remain profitable. Our performance in key states like California, Michigan, Louisiana, New Jersey, New Mexico, Ohio, Washington and West Virginia demonstrate that with time and effort we are able to earn a fair return for our investors as we provide quality health care to our members at a lower cost to the taxpayer.

The key attributes here are patience and experience. These health plans and fiscal agents develop the size, technical expertise and relationships needed to thrive over time. We need time to achieve similar results in markets where we are not yet as well established. We continue to build on our experience in Florida, Idaho, Texas and Wisconsin, and we believe we are on the right path to success in each of these states. In the mean time, our established markets are producing favorable financial results.

The medical costs in our new Texas ABD contracts, particularly in the Dallas-Fort Worth region, are running substantially higher than we would like due to both high utilization and high unit costs. We've undertaken a number of measures focused on both utilization and unit cost reductions to improve the profitability of the Texas health plan. These utilization and unit cost issues are -- now confronting us in Texas are not new to our Company, and over time we will deal with them just as we have dealt with them in our other health plans in the past.

The third measure of financial performance is administrative cost. Here we must strike a balance between fiscal discipline and making the investments to capitalize on many of the opportunities coming our way in the next few years. We think we have struck the right balance, and we projected an administrative cost ratio of 8.4% for all of 2011 back in January. So far we're right on target.

Now I would like to comment on some trends we are seeing in our competitive environment. Let me start with Molina Medicaid Solutions.

As we identified at the beginning of the year, our revenue and cost of service in this segment would primarily depend on our ability to stabilize our fiscal agent contracts in Idaho and Maine. You may recall that our efforts to correct issues from the system implementations started under Unisys are ongoing and have been more costly than we anticipate. I am pleased to report that we received notice from Idaho that our Medicaid Management Information System, or MMIS, has been approved to exit the pilot phase. This is further evidence of the progress we are making with this contract and gives us confidence as we move towards the key goal of CMS system certification in both Idaho and Maine.

Despite the implementation delays, which are common in the MMISindustry, and which can be measured in years for some states and vendors, we are very pleased to have gotten these two systems up and running in a timely fashion by industry standards.

Now let me move on to the health plan business. The moderation in organic growth we discussed earlier has not altered the positive outlook we have for our industry. On the contrary, the growing number of RFPs and program expansions ahead of health care reform will boost enrollment significantly as these programs are implemented. Furthermore, the robust RFP pipeline has enabled us to be more selective and strategic when investing for the long-term. In other words, we've determined that we do not have to pursue every opportunity. We will be selective. We can focus our efforts on pursuing those that meet our strategic and financial objectives.

For example, after careful consideration, we elected to forego submitting a bid on the Kentucky managed care RFP. In this RFP over 40% of the evaluation criteria was based on a three year price bid, effectively locking in reimbursement rates by projecting medical costs for the next three years. While profitably growing our business is a top priority for us, preserving existing business is just as important.

Both Ohio and Washington, states in which we currently operate health plans, have expressed an interest in pursuing RFPs that rebid existing contracts and further expand the program by adding new populations. Ohio intends to release a competitive procurement either late this month or early in August. Enrollment of the eligible populations is expected to begin in July of 2012. This will also allow Ohio to add additional Medicaid populations like the dual eligibles and disabled children for a number of years without issuing additional procurements.

On July 14, Washington reset the probable release date for their Medicaid procurement to September 15, 2011, in order to complete greater analysis and review. The start date of the Washington contract would be July 1, 2012. We believe that our quality scores, strong provider networks, success in managing ABD populations, commitment to Medicaid and our proven success in serving those markets will provide compelling value propositions when these states pursue RFPs.

Transitioning high cost populations from fee-for-service to managed care continues to gain momentum and support across the country. For example, CMS agreed to fund 15 states to design programs that integrate care for Medicaid and Medicare dual eligibles. Currently nine million dual eligibles consume approximately $300 billion each year for Medicaid and Medicare services combined,mostly in a fragmented fee-for-service system.

In California the state mandated ABD patients in various counties to enroll in existing managed care plans starting in the month of June. As I said, so far we've seen an increase of approximately 5,000 new ABD members. The weighted average per member per month revenue on these members is approximately $450. which is about 4.5times higher than the premiums we received for TANF members in California.

Overall, we're pleased with our second quarter results. We're well positioned for the remainder the year, and we're excited about the growing number of that are rapidly developing in our industry. I will now turn the call over to John to review the second quarter's financials in greater detail.

Thank you, Mario.

Earnings-per-share for the quarter were $0.38 and, as Mario mentioned earlier, up 41% from a year ago. Net income for the quarter was $17 million, or 65% over last year. I am pleased to say that this is the highest net income we have ever reported for a second quarter. In addition, the $34.8 million we report for the first six months is the highest net income we have ever reported for the first half of the year.

EBITDA was up 37% over the same quarter last year. Operating revenue for the quarter was $1.2 billion, up $168 million, or approximately 17% from the second quarter of 2010.

Our health plans currently serve 1.6 million members. Our total enrollment grew by 147,000 members, or 10% over the second quarter of 2010. That includes the addition of the Wisconsin plan as well as the new CHIP and ABD contracts in the state of Texas. Medicare enrollment exceeded 26,000 members, up 29% from the same quarter last year. As Mario discussed, organic growth in our legacy states appears to be moderating.

Premium revenue grew 16% in the second quarter of 2011 compared to the same period last year due to membership and PMPM revenue increases of approximately 10% and 5% respectively. Medicare premium revenue was $96 million for the first three months -- or for three months ended June 30, 2011, compared with $68 million for the three months ended June 30, 2010.

As we discussed in January, the rate environment remains difficult. Premium rate changes for the second half of the year are as follows. In Missouri we received a blended increase of approximately 5% effective July 1, 2011. In New Mexico we received a blended reduction of approximately 2.5% effective July 1, 2011. In Utah we received a blended reduction of approximately 2% effective July 1, 2011. In addition, Texas and California have signaled rate reductions, but rates have yet to be finalized. In light of this challenging rate environment, it is essential that we aggressively manage our medical costs.

Our medical care ratio declined by 190 basis points year-over-year primarily due to lower utilization. Fee-for-service costs increased approximately 6% PMPM, partially 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 2% PMPM.

General and administrative expenses for the quarter were $97 million, or 8.3% of total revenue, compared with $78 million or 7.8% of total revenue for the same quarter last year. As Mario discussed, we must strike a balance between our traditional practice of tight administrative cost control and the need to prepare for substantial growth in enrollment over the coming few years.

Cash flow provided by operating activities was $115 million for the first half of 2011, compared with $26 million for the first half of 2010. The Company had cash and investments of $885 million, and the parent company had cash and investments of $50 million.

Finally, we are increasing our EPS guidance for all of 2011 from a split adjusted $1.47 to $1.55. Strong performance by our established health plans and fiscal agents, the realization of utilization improvements earlier in the year than we had anticipated, and our expectation that results for our Idaho fiscal agent contract will improve in the second half of 2011 are the primary reasons for this increased guidance. We expect these positive factors to be partially offset by premium rate reductions in some of our health plans and continuing cost challenges in Texas and Florida.

We look forward to seeing you in September at our fall Investor Day. That concludes our prepared remarks. We are now ready to take questions.

(Operator Instructions). Our first question comes from the line of Chris Rigg with Susquehanna. Please go ahead.

Thanks guys. Thanks for taking my question. Just want to make sure I understand the outlook. You did $0.75 in the first half of the year. That looks like it was negatively impacted by this acceleration of some costs in Idaho by the tune of about $0.09 to $0.10. Is it right to think that the core business is looking for a $0.05-ish headwind in the second half of 2011? Again, operating on the assumption that the MMIS business reduce earnings roughly $0.10 in the first of 2010. That will not occur in the back half of this year.

Oh, boy, Chris. I hate -- you know me, I always hate to point to one thing or the other that magnifiers it. When we looked at the back whatever of the year, we looked at what we had projected in January, which ones of those trends were coming in in line or ahead, so medical utilization was more favorable. I think if you go back to what we projected for MCR for the entire year, it was around 84.2%, 84.3%, somewhere in that neighborhood. And we are he already there. But we are looking at some pretty healthy -- not healthy -- we're looking at some changes to the down side in terms of rates in places like New Mexico, Utah and, as I said, California and Texas have signaled downward.

Okay. What -- Florida should have some rate changes coming up this fall. What are you guys thinking you might see there at this point?

At this point we don't know.

Okay. Because they're looking at some I think hospital fee schedule reductions 4% to 10%-ish, something along those lines. Do you think -- so do you think you can still come out with a net positive or net negative or flat? Any directional sort of flavor you could provide would be great.

Hi, this is Mario. We have seen some decreases in utilization, which we're pleased with, in Florida. We still think there's a rate problem, especially in Broward County, so we're looking to see what the state does to address those issues. We'll continue to work on lowering our cost as best we can, but I think part of the Florida story depends on what they do with premium rates.

Okay. And then my last question. It looks like -- is it fair to assume that the -- knock on wood -- the worst will be behind you in Idaho after this -- really through the second quarter of this year?

This is Terry. Yes. The fact that we've been able to exit pilot and we're a year or so post go-live, much of the stabilization of the system is under way, so we will he be looking forward to getting to more predictable operating levels going forward.

Okay. Thanks a lot, guys.

Our next question comes from the line of Josh Raskin with Barclays Capital. Please proceed with your question.

Hi. Thanks. Good afternoon. Question for John, and I didn't hear it in the prepared remarks, but I see it in the press release. Two what seem to be one time items. I guess the first in Utah where you talked about the recognition of some premium revenue without any expenses in 2Q. I sized that at $0.09. And then there was another $0.02 -- my calculation, at least -- another $0.02 from the premium deficiency reserve reversal in Wisconsin. So I guess an aggregate of $0.11 in the second quarter. I'm just curious, those two items, were they expected? Was that part of guidance, or is that just part the boost that we are weigh seeing for the full year guidance, and how should we think about that as you were thinking about the next quarter?

Hi. It's Joe speaking. Obviously, when we gave guidance back in January, we knew there were going to be challenges in Wisconsin, and there was an increment built in at that point for the Utah settlement. We were anticipating that.

So both of those numbers were in the guidance?

Yes.

Okay. Okay. Got you. Okay. So -- okay. And -- but there, I guess just in terms of forward-looking, you would consider these to be one time in nature? Is that fair?

A lot of it depends on Wisconsin -- Josh, this is John. It depends on how Wisconsin actually in the back half the year. If its performance for one reason or other improves, then we might be able to reduce the liability we put in for the premium deficiency reserve, but at this point we haven't put anything more in guidance on Wisconsin.

Okay. That's helpful. And then just Texas. It sounds like [maybe] -- sounds like there's some challenges from an MMLR perspective, and I guess Texas puts out some financial information for all of you and competitors in there. And it looks like your G&A ratio is actually trending a little bit above your peers as well. And I'm just curious, as you're going through the RFP opportunities in Texas, how should we think about that performance in light of what is coming up in terms of awards? And maybe remind us how important financial performance is relative to their expectations? And maybe where service ranks for your guys, et cetera?

Well, Josh, we talked about the Texas RFPs I think in January. Obviously, Texas is a state that we put a lot of effort into getting into a number of years ago, and we've had some success in getting contracts for the rural CHIP and for the STAR+PLUS, so we are during our best in Texas. Texas is not much different I think than Ohio was several years ago or than California was. We go through some challenges, we focus in on what needs to be fix, and we fix it. And look at Ohio now. A couple, three years ago it looked pretty bleak, so we continue to invest in both our network -- refining our network, medical management, and fine tuning the service so that we can achieve and maintain our NCQA accreditation, because ultimately it's taking care of the patients that's the most important thing for us.

Okay. John, you understand because I can't ask about Ohio any more,I have to start asking about Texas.

And that's why we do it, Josh.

And then lastly, just on Idaho. I hate to belabor this one. It sounds are like -- you're out of the pilot phase. It sounds like now you can recognize -- or I guess you can bill for certain costs. Does that, mean Idaho is breakeven until the big CMS approval? Or does it mean you're just getting a pores of your costs covered, and it's still not going to keep you whole, I guess, the rest the year?

Josh, it's Joe speaking. A couple of points. The exit from pilot is a milestone that's unique to the contract. And yes, the exit from pilot will trigger a milestone payment from the state to us. As far as the contract being breakeven or not, essentially after the adjustment we made at June 30, the contract is breakeven going forward through the termination of its initial term. Obviously, after the initial term we expect it, like all of our MMS contracts as they mature, to be considerably more profitable.

Okay. Okay. So we're just waiting -- breakeven until we hear the next milestone?

No. Essentially breakeven -- as we projected now, breakeven through the termination of the initial contract.

Oh, okay. I'm sorry. Through the contract. All right. That's perfect. Okay, thanks.

Our next John Rex with JPMorgan. Please proceed with your question.

Thanks. I was just wondering if you could give us a little more colorspecifics on exactly what the measures are you did undertake in Texas and kind of what some of the most problematic areas are beside the personal care services and such?

This is Terry. Let's also keep in mind that putting the ABDs in managed care in the Dallas-Fort Worth area ways first-time event for many of those folks, so this is an educational process. There are continuity of care requirements in the initial period of the contract where you are really not permitted by the state contract to make many changes.

So as we in all of the other markets, we're approaching our costs in two ways. One is to improve our unit costs. Now that we're bigger and we have some sense of what our enrollment is, we're in a position to negotiate better unit costs with our providers, and that would include the home care providers as well as others providing service. And secondarily the utilization. So we are going full force to monitor the services that are authorize and ensure that they're in compliance with state regulation. And most of you know this area has potential for abuse and we're committed to making sure that folks get the services they need and that are allowed under the state agreement.

So is it fair to -- is home care the biggest issue that you are seeing right now.

Yes.

I mean, if you're -- it is? Sorry, I couldn't hear you, Terry.

(Inaudible -- multiple speakers) -- a little more about it. The personal care services arrangements by which folks who are in their homes instead of institutionalized are receiving more than what you might think of as traditional home care, but any -- an array of services in the home.

I mean, should we think about it that you are find instances of like 24x7 home care or something like that, and that's what you're dealing with.

It's not always 24x7. It will depends on what the member's needs are. It might be need for assistance in daily living and support services during the day.

Okay. And then just broadly -- your other utilization commentary, I think, similar to last quarter, you cited a decline in inpatient bed days. It likes like you citing that this time also, broadly across the book. Can you just kind of spike out any specifics there in what you are seeing driving that?

Oh, I -- this is Mario. I think it's a combination of a secular trend. I think everyone's seeing decreases in utilization. I think we've also been working to improve our medical management to be sure that we are having the right people in the hospital at the right time and eliminate over utilization. So it's a maturation of some of our medical management as well. B I think it's a combination of those two. And, Mario, is OB still having an impact there? Are you still seeing declining birth rates, or has that stabilized and started trending up again? No, the birth rates seem to be flat.

Okay. So -- all right. Thank you.

Our next question comes from the line of Scott Fidel with Deutsche Bank. Please proceed with your question.

Thanks. Just a first question just on the Medicaid Solutions business. And might be helpful if you have an updated estimate on the cost of services ratio for the full year, just given that the quarterly trends have certainly been bouncing around quite a bit on the margin side in that business the last few quarters.

Hi. It's Joe speaking. I think if you were to look at the second half of the year standalone, you might look to 10% to 12%.

Okay. That's helpful. Then second question, Mario, maybe if you can give us your latest read on the intelligence that you're hearing out of Washington just on the deficit reduction discussions and how those could impact Medicaid. Clearly events are moving by the second there, but maybe just a summary would be helpful.

Did you mention intelligence and Congress in the same sentence?

That I did, and that was -- I don't know what I was thinking there but --

Well, the whole thing is really very much up in the air. I think there are things that could be done, like the acceleration of the movement of the duals into managed care, that could really help with this deficit issue, atthe same time providing the same or, frankly, better levels of care for the beneficiaries at lower cost.

One of the things we see with the duals is that frequently when they get into managed care they have somebody to help them. And it's really interesting some of the calls we've gotten on our member services line, people saying lines I've never had anyone to help me before. So I think that is something that could be a win for the patients and a win for the budget. Beyond that, I don't really want to speculate as to what Congress is going to do.

Okay. Then just any updates you can give us on Louisiana? I know you don't usually talk about bidding on new business, but is it your expectation that we should hear an update on that on Monday?

I don't know what's happening with the bids in Louisiana, so I can't tell you.

Okay. Then just -- last question -- just going back to California ABD. Any initial sense of how the utilization is tracking there? I know you just started ramping up there in June, but just any sense of initial cost relative to expectations? And then do you have an estimate for how much ABD membership you expect to add in California in the back half of the year?

Well, what I would say on that is that we've had ABD members on a voluntary basis in California for some time. We have contracts and networks put together, so it's a little different scenario than what you have in Texas where you have rolled a lot of people into a new system. As far as we can tell right now, the utilization in California appears to be consistent with previous experience. As far as the estimates of the enrollment, we gave an estimate at the Investor Day, and I think we're going to stick with that. That was about 12,000 members.

Okay. All right. Thank you.

Our next question comes from the line of Ken LaVine with UBS. Please proceed with your --

Thanks. Good afternoon. As was referenced in the call earlier, just the TANF enrollment has been largely stable since the latter part of 2010. I was just curious about the level -- the levers of that -- stable memberships, just in terms of -- [Have] you see anything in terms of changes perhaps in a trajectory of monthly gross ads versus maybe being offset by being staying on Medicaid longer? If there are any kind of numbers you can put around that?

This is Mario again. I don't want to get into specifics, but I think that generally speaking what we have seen is a flattening out of the enrollment, and this reflects a modest improvement in the economy. At the same time the requirement for maintenance of effort is also helping to maintain the current levels. I don't anticipate big changes either upward or downward over the next couple of quarters. Unless we were to take market share. But I mean it's -- I think that the Medicaid population has stabilized, and growth will moderate over the next few quarters.

Okay. Got it. Thanks. That's helpful. And also in Ohio you guys done a great job there, and the recent strong margins certainly look to reflect that. And I was just wondering how the impending RFP might change the margin trajectory there? Is this something that may drive some sort of margin reset to an extent? In the first year of the renewal, assuming you retain the business?

Ohio has not typically done a price bid in the previous RFPs that we've looked at, so we certainly will be going through a rate discussion with the state effective -- or for an effect at this date of January 1. We are also anticipating the [carve in] of the pharmacy benefit back in later this year, so those things will have some impacts that we really can't quantify at the moment.

Okay. Great. That's all I had. Thanks very much.

Thanks, Ken.

Our next question comes from the line of Brian Wright with Citadel Securities. Please proceed.

Thanks. Good evening. Can you just walk us a little bit through the decision to increase the completion factor about a 150 basis points year-over-year this quarter? Because it just seems a little at odds with the per member inventory at the end of the quarter being flat year-over-year.

Are you talking about claims reserves, Brian? It's Joe speaking.

Yes, exactly.

Yes, wedevelop our claims reserve essentially just based on what our actuaries developed, and obviously reviewed by the actuarial team of our independent auditors. I don't know that there's a specific intent to change completion factors. It's more or less what falls out of the analysis. I -- obviously days in claims payables is down, but I would also point out that our run out from December 31, 2010, is again very consistent year-over-year.

Okay. And then lastly like -- with the potential -- if you just give us an update on the Louisiana -- the MMS contract down there, is -- tour protesting it, so because it's under protest you're not going to make any decisions as far as asset kind of impairment or anything like that until that protest is either won or lost or whatever? Is that --

Well, Brian, it's Joe speaking again. Let me talk a little bit about that. A couple points to bear in mind. First of all, even if we were to lose that contract, we're going to continue to serve the state while the new system is developed for several years. So we have -- when we lost the contract, we did undertake a potential impairment analysis, and that analysis as of today indicates that even if we were to lose that contract, we would not have any goodwill impairment at the -- of the MMS goodwill.

Okay. Great. Thanks.

Sure.

Our next question comes from the line of Carl McDonald with Citigroup. Please proceed with your question.

Great. Thank you. Could you remind me on the 55,000 Medicaid [lives] in Florida, the breakdown between reform counties and non-reformed counties. If I remember correctly, I think the bulk of it is in reform counties.

Yes, I think it's about 60/40 reform, and a big chunk of that Broward County.

Okay. And is it right to think about the cost pressures that you're seeing in Florida relating primarily to the reform, or is it more widespread across the entire book?

I think that Broward County is front and center in terms of things that have to be addressed.

Got it. Okay. And then the other question was just Utah has talked about some potential changes to their Medicaid program, sounds like moving away from managed care to something that looks more like an accountable organization. So just interested in your thoughts on at that in terms of likelihood of that change happening, and also, if it does, the timing around that.

Carl, I wouldn't say that that's 100% accurate. I mean, what the state of Utah wants to do is they want to put more members into risk environments. We are rights now the only plan that's fully at risk in Utah. The other two plans that take care of Medicaid beneficiaries are not at risk, and so it's really -- and they're provider-based systems. So the whole notion of accountable care organizations really is to draw those folks into a greater risk contract arrangement.

Got it. Thank you very much.

Thank you.

(Operator Instructions). Our next question comes from the line of Sarah James with Wedbush. Please proceed with your --

Thank you. It looks like there was somewhat of an uptick in physician and outpatient costs, and I'm wondering how much of this is pricing versus volume, and if it is volume, is this being driven by some new populations coming on or a possible shift of where people are choosing to get the care done?

Sarah, this is John. I think there is a couple of factors there. One, we did terminate some capitated contracts and move them to fee-for-service, so you would see an increase in physician and outpatient services. And then also with the increase in membership in Dallas for the STAR+PLUS there is a lot of outpatient services. The personal care services that Terry talked about earlier would be classified as outpatient services. I think those are the two primary things.

Got it. [Thank you].

We're not really seeing across the board increases in physician unit cost.

Okay. And is there any update on some of the MMS RFPs? I know Vermont and Arkansas were expected out around this time.

Sarah, could say that again? You kind ever faded out at the end.

Sorry. I was wondering if there's any update on the MMS RFPs, possibly for Vermont or Arkansas.

Vermont had an RFP, and they decided to pull it and are reexamining the direct they want to go. Arkansas, I think, is still in draft. if I'm not mistaken.

It's released, but it's in the question period for bidders.

Thank you.

Our next Charles Boorady with Credit Suisse. Please proceed with your question.

Hi. Thanks. First question on Texas. Just -- you talked about the challenges there, and I was just wondering how long they take to address and approximately when you would expect a loss ratio to get into your targeted range?

Charles, that's a really good question. I think that there is a certain amount of pent-up demand in Texas that we're seeing with the move of the STAR+PLUS patients into managed care. I think that there is a certain maturation that has to go on in that health plan in terms of gearing up their management systems. I think we're a little bit behind of the curve there. And it will take on the order of a few quarters I would imagine. I can't give you an exact answer. It's going to be what it turns out to be. It's certainly getting a lot of attention.

And somebody mentioned about the resources. I think that we're putting a lot of resources into Texas right now, and part of that is not only to deal with the STAR+PLUS utilization that we're seeing in Dallas, but also to build in preparation for the contracts that will come with the next RFP. So there is some infrastructure building going on there as well.

Got. And you used to show -- I remember a few Investor Days ago you had a chart showing how as new lives aged, the loss ratio is improved because of the pent-up demand as they first enrolled. So is this to be expected kind of a typical experience in -- one that we should expect with -- with any startup market and new populations come in, or would you also say that there's certain execution failures that you need to address? Things that went wrong operationally that shouldn't have gone wrong?

Well, Charles, first of all, let me complement you on your memory. That's pretty good, because it was about me Investor Days ago we did that chart.

I think that our expectation is that Dallas will follow the same pattern. I think where it's different in Dallas is that the initial spike is higher than we are used to seeing, and that surprised us a bit. But we're confident that as it follows the same pattern, and we put in this is like prior authorization for certain services, as the continuity of care requirements come away, and as we renegotiate, especially with the myriad of home care providers and sort of narrow the network down, that we'll get some traction on the medical cost side.

This is Mario. I think there are a lot of parallels with what we saw in Ohio. Small health plan struggling with some growing pains. As the membership grows we'll be in a better position to go back to some of the providers and get better contracts. I think that the medical management staff will mature over time.

I also think it's an interesting contrast with California, because in California you have mandatory enrollments of the ABD patients, but we've already had voluntary enrollment. So there are some patients that have already enrolled on I voluntary basis, and we have experience with them. We were also have a much larger contracting basin California just because we've on here for a long time and had lots of members. So that's why I think California is a little bit different than what we're seeing in Texas.

And let me add one more thing, and not to beat a dead horse, but the Dallas contract is unique in that inpatients is carved out, behavioral health is carved out, and pharmacy is carved out. That presents two challenges. One, it presents a challenge for folks to have to manage that to make sure that we're providing the right services and not the providing services that the state has carved out, and carved out really for the rate side. So there's also a challenge for the state to make sure that they have nailed the rate side adequately.

So when we hear from Texas in a few weeks about your wins, and we try to model your wins in the ramping up of some of these ABD lives with the new contract, is it fair to say that we should not expect the loss ratio to be quite this high? It should be high, but not quite this high because of some of the unusual situations like the home care and other things that you talked about that affected this business?

I would say that that's a fair statement from about 50,000 feet, but then I would also encourage you to come talk to us in September when we have our Investor Day, because I would imagine that this will be one of the primary topics we talk about.

I will be there, and I'll remember what you say.

[And believe me, wanting more].

On Ohio, since Josh kind of said that he can't ask about it any more, I will pickup that baton. And you are doing great there, and I just want to confirm that's a calendar year-end right before you get new rates? Am I right on that? And then what would you expect the state's a response to be in light of your success there in keeping costs low? What would a normal loss ratio be that you would expect going forward?

Well, normally -- I shouldn't say normally. The rate year for Ohio is a January through December rate year. Follows the calendar year. When we get the responsibility for pharmacy back in, and I believe it's October, there will be an adjustment for that benefit. When the states are setting the rates, individual health plan performance is a factor, but it is not the only factor, because there are other plans in Ohio that may be doing as well, better or worse than we are. So they've got to set a rate that's sort of across the board. I don't know what -- if Ohio does a targeted loss ratio or not.

Okay. And then just my last question. The drop in the days claims payables. I think you addressed it a little bit. I'm not sure if I captured the essence of why it was down and whether you can share the prior period reserve developments that related to this year and that related to last year that were included in today's results.

Well, we always disclose prior period reserve development from December 31 of the preceding year, and it's consistent with what we have seen in other years. March 31 is a little bit immature right now to talk about.

Got it. Can you tell us what you baked in in the results you reported that related to March 31?

We don't really look at it that way, Charles.

Okay. All right, thank you.

Our final question comes from the line of Scott Green with Bank of America Merrill Lynch. Please proceed with your question.

Hi. Thanks. So a question on Dallas. My understanding was that Amerigroup was managing some of these lives on an ASO basis before they transitions to managed care? So I mean did the population just have the traditional behavioral patterns of people in fee-for-service, or was -- what was that like when you brought some of those lives on?

Scott, I'm not aware of what Amerigroup was or wasn't doing in Dallas, so I can't comment on that. What we're seeing is -- we are seeing some pent-up demand. We're seeing -- I think that one of the concerns was when folks found out about managed care and greater access to services they utilize them. So whether that's ER or -- excuse me, not ER -- primary care services or personal attendant services, we are seeing an increase in utilization for services.

And I think it's fair to say that the utilization patterns we are seeing in Dallas are different than what we're seeing in other part of the state.

That's correct.

Those are the factual things we can tell you. As far as what Amerigroup did, you can ask them when they have their call.

Okay. And they're different than other parts of the state just because it's an immature population, or because of the home care stuff you described previously?

Part of it's the fact that it was fee-for-service before. And another area we went to was more mature managed care market. Part of it is a different benefit pattern. I think in Houston we have behavior health carved in. So there are differences a lot in the contracts. That's why one of the nice things about the RFP is that it's going to be more uniform across the state in terms of the benefits that are carved in and carved out, and our responsibility will increase with things like inpatient and pharmacy.

Okay. All right. And then, are there any other states besides Michigan and Washington where members are transitioning to fee-for-service networks from capitation?

Those were the ones that --

You point those two out in the press release.

Because those were pretty big groups were we changed the contractual relationships. It happens to a lesser degree in other states, but Washington and Michigan had some pretty big groups that we did that transition.

Okay. And those are your recontracting initiatives? I thought I remembered last conference call you might have mentioned that the providers were increasingly preferring to participate in fee-for-service networks instead of capitation.

That was the case in Michigan. I believe in Washington it was just the economics didn't work out for us to continue the capitation contracts with those groups.

Okay. Okay. And so the MLRs in those markets actually fell sequentially, so you don't see when that transition happens to a fee-for-service network that just the incentives of the providers change and you see some utilization increase? You're not seeing any of that?

No.

Okay. Okay. And so on the front page of the press release where you talk about fee-for-service and capitation costs up 2% sequentially, so I just wanted to make sure I understand that, because there could be mix changes going on there too. But is the way to think about that, since the MLR excluding the Utah issue -- the Utah payment that you received, and Texas, which is a new population -- if the MR was essentially sequentially, excluding those items -- and I don't think rates changed sequentially between first quarter and second quarter -- is cost trend basically flattish sequentially if your rates are kind of flattish sequentially and the MLR was flattish sequentially?

It's pretty flattish. Yes.

Okay. And then for California where you spoke about an expectation for a modest rate reduction, is there any consideration in that for changes to the provider rates that were also proposed, or is that a separate issue? Because I believe -- I recall in the budget proposal there was a modest increase, but also potentially a provider rate cut, so I'm not sure if you were netting those out or those are two days doesn't issues.

I think that those are two distinct issues. We know of one, and wedon't know the impact -- or we've gotten information on one, but not the other, so that's why we didn't explicitly say this is what California is doing to the rates.

Okay. But you said they're going down?

Correct.

Okay.

We anticipate the premium rates will go down in California.

Okay. And then we're waiting to see on what happens with the provider rate issue?

Yes.

Okay. All right. And you mentioned Broward County specifically a couple times. Just want to make sure I understand. So is that a county potentially you would consider exiting if the rate update in September was not what you deemed to be appropriate, because before you have kind of said that it's an investment market, and you're going to stick it out like you do in other markets.

We need to see what happens with the rates for all of Florida and specifically for Broward County before we make decisions and want to call out that we may or may not exit a county.

Well, yes, thisis Mario. Let me just also comment on that. When you look at the premium rates by county in Florida, they vary tremendously. And one of the things we're hoping the state will do is come up with little bit more uniform and spread the money around across all the counties.

But having said that we will give serious consideration to exiting Broward County if we can't get adequate rates. I mean, it's just -- that's just the way it is. We have done that in the past in other states, in other areas. We're not afraid to leave county if we have to. We will give it a good try. We will work with the state and present our arguments as to why the rates need to be adjusted, but in the end if the premium rates are just not adequate, we can't stay.

And Broward has been a challenging county. I think there are a couple other health plans that exited in the last 12 months or so.

Okay. Okay. So --

We're patient, but there is a limit to our patience.

Okay. And -- okay. You might be stress testing some of those limits as it relates to Broward. You're calling out Broward, it seems like. What -- can you tell us what the MLR is in Broward for your book?

No. We don't go down to that level of detail. We go to a lot of detail, but MLR by county is getting a little bit too granular.

(Inaudible -- multiple speakers).

Can you remind me how many lives you have in Broward?

Off the top of my head I don't recall.

I think it's about 60% of the total.

Yes, I think so. So it's probably about 25, 30% -- 30,000.

Okay, because the MLR sequential in Florida it seems like was basically unchanged. Up 35 basis points or so. So -- but you're suggesting the Broward MLR deteriorated sequentially?

We're not suggesting anything right now. Broward is an issue. There are other usual us in Florida that we're getting addressed. Some of these things that we're addressing are within our control, and some of them, like the rate, are not completely in our control. So we're just going to work through the rate process and see what happens and -- again, we'll update when we have more information.

Okay. Thank you.

Thank you.

This concludes the question-and-answer session for today's call. I would not like turn the call back over to Mr. Orellana. Please go ahead, sir.

Well, thanks, everyone, for joining, and as John mentioned, we'll see you at Investor Day in September.

Ladies and gentlemen, this does conclude the presentation for today. We thank you for your participation and ask that you please disconnect your lines.