Molina Healthcare Inc (MOH) 2012 Q3 法說會逐字稿

\>> Operator Ladies and gentlemen, thank you for standing by and welcome to the Molina Healthcare third quarter 2012 conference call. During today's presentation, all participants will be in a listen-only mode, and afterwards we will conduct a question and answer session.

(Operator Instructions)

As a reminder this conference is being recorded Tuesday, October 23, 2012. And I would now like to turn the conference over to Mr. Juan Jose Orellana, VP of Investor Relations. Please go ahead, sir.

Thank you, Shantel. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2012. The Company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our Company website. Participating for Molina today will be 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. If you have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions.

Our comments contain forward-looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act regarding our Texas cost containment efforts and year-end profitability; our Ohio duals expansion; our transition of ABD members into managed care at our California, Washington and Texas health plans; our MMS operations and other matters. 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 2011, our form 10-Q quarterly reports and our for 8-K quarterly reports. These reports can be accessed under our investor relation tap of our Company's website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of October 23, 2012, and we disclaim any obligation to update such statements. This call is being recorded and a 30-day replay of this conference call will be available over the internet through the Company's website at www.Molinahealthcare.com.

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

Thank you, Juan Jose. Hello, everyone. Today we reported earnings of $3 million or $0.07 per diluted share for the third quarter of 2012. We are pleased with the progress we made during the third quarter. Both revenue and enrollment were strong which bodes well for our Company's future as we improve our margins. More importantly, in Texas we saw incremental improvement this quarter as the implementation of our utilization and unit cost initiatives gained momentum. We are seeing continued stability in our Molina Medicaid solutions business and it is making the kind of contribution we expected when we made the acquisition. So, let's start with Texas.

Since reporting our second quarter results, we have made considerable progress toward achieving our objective of reaching a break even run rate by the end of the year. Our medical care ratio in Texas decreased from 109% in the second quarter to 90% in the third quarter. This improvement is even better than the medical care ratio we reported in Texas for the second -- third quarter of 2011. However, we are not yet out of the woods. There is still a considerable amount of work to be done, and we must remember that this early success does not constitute a trend. The improvement in our Texas medical care ratio was due to the implementation of initiatives aimed at reducing utilization and unit costs. As Terry Bayer outlined at our investor day in September, this included changes to contracts with providers to lower unit costs and the implementation of state-required changes to fee schedules. In addition, a blended 4% premium rate increase that went into affect on September 1 also contributed to the improvement.

Ohio was also in the headlines this past quarter. Molina Healthcare of Ohio was selected to participate in Ohio's Integrated Care Delivery System for dual eligibles. As a reminder, we were awarded the maximum number of regions allowed per health plan, and the awarded regions are within our existing service areas. This service area overlap is important during a transition from fee for service to managed care. If we assume that premium rates are set adequately to cover medical costs, then having an established provider network and experience in a given market can ease the transition to managed care for members. In addition to Texas, Washington and California are the two other states where we continue to transition thousands of ABD members from fee for service to managed care.

In California, our health plan has experienced a considerable change in our member mix adding about 20,000 ABD members over the past year and nearly doubling our ABD enrollment. Accordingly, our medical care ratio also increased during the same period because these members require more medical care. The California department of healthcare services recently asked for health plan input in a review of premium rates for ABD members. Our California health plan has already provided input in support of that review. In addition, we will be exiting an area in northern Los Angeles County where there is only one hospital and costs are extremely high. We expect this will reduce our enrollment by about 6,000 members but lead to lower medical costs.

In Washington, we added nearly 19,000 blind and disabled members since July of this year. And like California, the influx of these members has moderately increased our Washington health plan medical care ratio when compared to the second quarter of this year. Our initial data related to these new members in Washington is promising. But I caution you the claims data will take some time to develop fully.

There are a few developments since our investor day presentation that I would like to bring to your attention. On October 12, Governor de Jongh of the US Virgin Islands announced a partnership between the Virgin Islands and the state of West Virginia in which Molina will provide our Medicaid management information system to the US Virgin Islands through our West Virginia fiscal agent operation. The contract outlining the sharing of the Molina platform went through several rounds of review at the federal level and has been approved by CMS. The partnership will benefit both the Virgin Islands and taxpayers by avoiding the costs associated with the design, development and implementation of a new system while gaining leverage from operating on a common platform. This partnership can serve as a model for the country by demonstrating that states and territorial governments can reduce their costs by sharing such technologies for their Medicaid programs.

Molina's system in West Virginia is a fully certified system by the federal government. And as a result, the Virgin Islands will be the first US territory to have a certified system. It is important to note that West Virginia's system is the first to be certified under the Department of Health and Human Services' seven conditions and standards for enhanced funding. Although the revenue associated with this partnership is small, the precedent established by this partnership is significant.

In our health plan business, we are especially proud that our focus on quality continues to attract national attention and recognition from Consumer Reports and the National Committee for Quality Assurance which ranks the top Medicaid health plans in the country. Eight of our health plans are accredited and have been nationally ranked for the 2012, 2013 cycles. We are especially proud that our New Mexico, Utah, and Washington health plans were ranked the top Medicaid health plans in their respective states.

Our health plans are also gaining recognition for innovative partnerships and programs. For example, Molina Healthcare of California and Sacramento County joined forces to launch the Low-Income Health Program. This program, a safety net managed care health plan administered by Molina will allow uninsured low income Sacramento County residents who do not qualify for Medicaid to receive healthcare. The program is a precursor to the Medicaid expansion in California and the implementation of an insurance exchange pursuant to the Affordable Care Act. It will ensure continuity of care and reduce stress and confusion among members by allowing them to keep their providers when the Affordable Care Act is implemented. Many of our clinics in the Sacramento region will participate as primary care providers. The new plan goes into affect in November of 2012, and up to 14,000 childless adults whose income is less than 67% of the federal poverty level will be enrolled in the low income health program.

We have also joined forces with America's Health Insurance Plans and the Centers for Disease Control and Prevention to implement the National Diabetes Prevention Program. As part of this initiative, Molina Healthcare will implement the program to prevent type 2 diabetes in individuals who have prediabetes, a condition of elevated blood sugar that may lead to type 2 diabetes. By developing innovative partnerships with local and regional organizations, Molina Healthcare will be able to leverage existing competencies and resources to provide a national diabetes prevention program to our members in Florida and New Mexico. Molina's involvement in this program also happens to be personally rewarding for me. This positions our Company as a national healthcare leader focused on prevention of a disease that affects nearly 26 million Americans. As an endocrinologist, the diagnosis and treatment of diabetes was the focal point of my medical education, training and research.

As we move into the fourth quarter, today's results give us confidence that we are on the right path toward improving our profitability. The combination of our short term tactical actions coupled with the experience we are building from the long term bodes well for our future. Now, I would like to turn the call over to John, who is celebrating his birthday today with us. Happy birthday, John.

Thank you, Mario. It's always a pleasure to celebrate your birthday with 58 of your analytical friends. Hello, everyone. As Mario pointed out, today we reported net income of $3 million or $0.07 per diluted share, a substantial improvement over the loss of $0.80 per diluted share that we reported in the second quarter. Of course, our turn around in Texas is the big story for this quarter. Our medical care ratio dropped from 109% in the second quarter to 90% this quarter. I want to be clear that we still have work to do in Texas. But we are delivering on the commitment we made three months ago that Texas would be break even on a run rate basis by the end of 2012. It is my belief that we will be able to report success in reaching that goal when we announce our fourth quarter results.

With that said, I want to talk for a moment about our third quarter results from a broader perspective. Premium revenue for the third quarter grew to $1.5 billion representing a 31% increase over the third quarter of 2011. All of the key factors driving our business forward position us well for the implementation of the Affordable Care Act. Revenue grew due to membership increases, more ABD members and the addition of more benefits into managed care, and the growth in our business is not just year-over-year. We can actually see the changes happening from last quarter to this quarter. We were able to maintain revenue between the second and the third quarters despite the loss of our contract in Missouri. Put it another way, our growth in Washington this quarter was enough to offset the loss of all of our membership from Missouri. The growth in Washington came from two initiatives, the transition of ABD members into managed care and the transition of additional TANF members to Molina as a result of market consolidation. Our ABD enrollment has grown to 15% of our total membership representing about one-third of our revenue. Our experience managing these chronically ill and complex members is important, because this is a significant area of future growth.

Our consolidated medical care ratio decreased sequentially from 92% in the second quarter to 88% in the third quarter. This decrease was the result of substantial improvement at the Texas Health Plan, which contributed nearly a quarter of all premium revenues in the third quarter, and therefore, the medical cost improvements in Texas had a disproportionate impact on our consolidated results. Mario also talked about the traction we are getting in Texas. Now, let me provide you with more detail. The medical care ratio for the Texas ABD membership declined to 94% in the third quarter of 2012 from 119% in the second quarter. ABD membership overall constitutes approximately 67% of all Texas Health Plan revenue.

Turning to California, the increase in the medical care ratio year-over-year was primarily due to the mandatory assignment of ABD members previously served under fee for service arrangements. Generally speaking, individuals who are new to managed care have higher utilization of medical services upon enrolling into managed care. Our internal data and experience with this population suggests that medical care costs will decrease for the ABD members over time. In California, ABD enrollment was spread out over a 12-month period beginning in June 2011 and ending May of 2012. We have seen utilization decline for the members enrolled early, but are experiencing the expected higher costs from members more recently enrolled.

As Mario pointed out during his remarks, we are working with the state by providing input into their review of ABD premium rates in California. We are also exiting a high-cost area with about 6,000 members and a medical care ratio well in excess of 100%. We continue to accrue for the premium impact of the provider cuts called for by Assembly Bill 97 in California. As of September 30, 2012, we have accrued approximately $15 million to pay back to the state as a result of these provider cuts. Because we have not passed on these cuts to providers, this accrual has resulted in a higher medical care ratio in our California health plan since July 1, 2011.

General and administrative expenses for the quarter were essentially flat sequentially and year-over-year at 8.3% of total revenue. Cash flow provided by operating activities grew to $264 million for the nine months ended September 30, 2012 compared with approximately $155 million for the same period last year. This is a 70% higher than it was last year. Similar to last quarter, higher medical claims and benefits payable, mostly in Texas, were the main reasons for the increase in cash flow provided for operating activities followed by an increase in deferred revenue. We reported a tax benefit in the third quarter. This is the result of a true up of our year-to-date effective tax rate to reflect the impact of lower net income including the affect of nondeductible expenses.

The Company had cash and investments in excess of $1 billion. Our parent Company had cash and investments of $41 million. Days and claims payable increased sequentially by one day to 45 days. Year-over-year, days and claims payable increased from 39 days to 45 days. I am also pleased to report that we had another strong quarter at Molina Medicaid Solutions. We reported operating income for MMS of $8 million for the quarter and $23 million year-to-date. Operating margins for MMS were 17% for the quarter and 18% year-to-date. As we expected when we acquired MMS, the long run consistency of operating margins in this business counteracts the unevenness that we often observe in the health plans.

We have made great strides in improving our operations which are reflected in the improvement of our third quarter results when compared to second quarter results. But we still have a ways to go until we are satisfied as the year-over-year results still show a gap. As such, we will not be providing EPS guidance until we are confident that the operational improvements made in Q3 have gained traction for the long term.

Operator, that concludes our prepared remarks. We are ready to take calls.

Absolutely. Thank you.

(Operator Instructions)

Josh Raskin, Barclays.

Happy birthday, John.

Thanks, Josh.

I hope you get a better reception at home with something more special than this conference call. (laughter) So, a Texas question for you. It sounds like the 90.3% MLR would have been -- if you would have the rate increase for the full quarter instead of just one month, I'm calculating about 88% and I'm getting a profit for September. So, it sounds like your goal of break even by year end -- is it fair to say you are already there? Is it something that you are anticipating in the fourth quarter? Is it seasonality of cost or something that could potentially bring you back under that?

Josh, this is John. As Terry Bayer likes to say, one point doesn't constitute a trend, but every trend starts with one point. We had a good September in Texas. I think you have calculated it correctly. We do have issues such as seasonality that will creep up in the fourth quarter so we are not ready to say that Texas has reached our goal, but we are confident that we can get there.

Okay. Not declaring victory, I guess. Second question just around capital needs and stuff, and I guess the first question is just around Missouri and the exit there. The claims run out, is that in line with expectations, and are you expecting any additional capital to freeing up over the next -- I don't know how long it takes 6, 9, maybe even 12 months? And then maybe you could just update us on your overall thoughts around capital adequacy and any potential needs for additional capital as you continue to see the top line accelerate.

Hello, it's Joe. In terms of Missouri, it's playing out essentially as we expected it would. And, yes, sometime between now and the first half of next year, we'll be able to withdraw -- I think we have talked about this -- somewhere between $20 million and $25 million for Missouri. Regarding overall capital, I think John talked about that in New York quite a bit. I don't know if John wants to add anything.

Josh, nothing has changed in our thinking right now.

Okay. I would have thought the quarter obviously an incremental positive, but it sounds like the growth is coming in a little bit stronger. So net-net no change to the overall thought around capitol.

Correct.

Okay, perfect. Thanks.

Justin Lake, JPMorgan.

Thanks. Just first, obviously the Texas improvement is fairly dramatic there. I know the rate helps in September, but can you talk us through a little bit of what maybe a few of the drivers that you saw in the quarter in terms of what you were able to implement that got that MLR to improve so much and what you still have left to put in place, maybe in terms of further cost and medical management.

This is Terry. You know, we always share with you that we use a very basic and simple formula to improve our medical costs. We had unit cost changes. We had utilization changes. We had claims processing changes. And then we had a rate increase, and all of that combined came into play to bring down that MCR. I think the details are simply that we look looked at our highest cost providers, and we brought them back closer to the Medicaid fee schedule or made the adjustments we needed to there.

We greatly enhanced our active Utilization Management and increased our activity so that only appropriate care was being authorized. And we did implement a number of claims processing changes that relate to implementation of state fee schedules. So, you're quite correct that the rate increase helped. At this point, we continue on as we do in all of our markets. We'll continue to monitor our unit cost. We'll continue to manage the utilization and implement other changes as they come. So there is nothing dramatic to share with you except a continuation of the same.

Can you delineate for us what the unit cost verses utilization just to give us an idea of where the bigger --

We haven't looked at it in that great a detail.

Okay. Just a follow-up then on the California dual roll-out and what you are seeing now at ABD. First can you remind us what the -- when the ABD rates were set here and as you are re-looking at them now. What was the assumed savings verses fee for service in these rates?

We have heard -- this is Terry again -- we've heard that the state was looking upwards of 20% to 30% for savings, but that was not shared early on with us as overtly as it was for instance in the Texas market. So there was a cost-savings imbedded there, and all of the health plans have brought together their combined experience and are working with the state actuaries at the state's recognition that they are going to re-evaluate the rates now that we are post 16 months into that population roll-out.

Okay. And just the -- thinking about the California dual roll-out. Any update there on timing and what kind of savings that California might be looking at with duals. Would it be similar? Would it be materially different there?

The state has not updated us beyond what we share with you folks in September.

Okay, great. Thank you very much.

Chris Rigg, Susquehanna.

Just to come back to California real quickly. On the 6,000 members in the unprofitable service area, what will that do to the MLR prospectively or I guess -- at a minimum, can you give us a sense of how much of a drag they were in the current quarter?

We -- Chris, this is John. We didn't separately quantify what the profitability was for those members. It's a relatively small number out of the 350,000 that we have got. Suffice to say that for that group though, on the MLR side, their medical care costs were exceeding 100% of premium.

How many in the 6,000 were ABD? Or were any of them ABD?

You know, I couldn't tell you. I would imagine that some of them probably were, but I couldn't tell you how many of them were.

Okay. And then more broadly in California on the rate side, I believe a portion of your membership was supposed to receive a rate update October 1. Did that happen? Or have you been given any color as to what that rate change might look like?

The Two-Plan Model contracts, LA, Riverside, San Bernardino have an October 1 rate year. I think the state has given out draft rates that folks are looking at and looking at the methodology and commenting on. They are not final yet, and so we don't typically comment on draft rates.

And I mean anything directionally, or are you expecting a positive rate update?

Right now, I think that they are still in negotiations. If it was dramatic, I think we would have said something. Other plans would have said something, but the fact that no one has done much in the way of commenting would suggest that it's probably what we expected. If you recall at the January Investor Day, we're talking about rates flat to slightly down.

Okay, and then changing gears. I know you don't have a lot of members in Wisconsin, and it's not a big part of your business right now, but obviously United has left there. And you saw a pretty big sequential drop in the MLR. Is this now business that you would be actively soliciting, or any color on what is going on there would be great?

This is Mario. No, we're not actively soliciting any of that business. The state will reassign those members beginning, I believe, in February. We are still working with the state trying to determine what the rates will be for next year. We don't yet have the rates. And that is going to have a big impact on our decision whether or not to stay in Wisconsin. Obviously, we would pick up a portion of those members, and, unless we get an appropriate rate increase, we probably will not be able to remain in Wisconsin.

Okay. All right, thanks a lot.

Ralph Giacobbe, Credit Suisse.

Seems like you have done well with Washington considering on bringing on the ABD population. Is this a situation of familiarity with the state and population and that kind of helped you manage it out of the gate? And I guess your comfort level of seeing any hiccups relative to maybe some of the other states where you have seen issues within this population.

This is Mario again. I want to go back to the comments I made earlier, and that is that having an established provider network and experience in a market is really helpful when you are transitioning new populations. We have a very strong provider network in Washington. It's a plan with a lot of experience. We have been operating there since 2000. Good reputation, good relationships, and that has made a big difference. I think that any time we are in a situation where we can transition members to an existing service area like the upcoming situation in Ohio, that is certainly our preference.

Okay. And then just going back to California, and higher MLR there and state to review the premiums. Does that -- I guess does that give you any pause around the duals or how you think about the ability to manage that population at all? And then how do we think about start-up costs and initial MLRs for the California duals?

Well, first of all, this is Mario again. I think everyone has struggled in California with the implementation of the ABD patients, and that is why there's been a lot of discussion back and forth with the state over the rates. The other thing to remember, as John pointed out, that these patients rolled in one month at a time over a 12-month period. And, while the costs have been lower for those that entered early as they have come down, we still have a cadre of patients that came in later, and we are still experiencing higher medical costs. If you look at all the states, though, one of the things we have pointed out is that the ABD patients have pushed up the medical costs somewhat.

And that is to be expected when you have got relatively sick patients who are higher utilizers than the TANF patients, and these are patients that are new to managed care. I think the same applies for the duals. And when we get the ABD members in who are duals, we're going to have similar issues, and it's going to take time to work down the medical costs. So, we have said before, we expect higher medical costs for certain populations in the future. We think we can bring them down over time, and we also think that a big key to managing the duals is going to being managing the long term care benefits which are less medical and more social and supportive in nature.

Okay, great. Thank you.

Tom Carroll, Stifel.

Sticking with Washington state, enrollment was much higher there than we expected. I guess a two-part question -- did you retain more than you expected, or did members voluntarily stay with Molina given your presence in the state? And secondly, is there anything to suggest that this enrollment will become more costly as claims mature a bit more over the next couple of months?

Well, Tom, this is John. With respect to your first question, we did get a greater retention, and we did get greater new enrollment, which is why enrollment is higher than what we had guided to back in January. Not quite sure what you mean by the second part of your question. Will dis-enrollment be more expensive? Could you clarify?

Yes, if you have new enrollment coming in and we're seeing a slight increase in the MLR in the market, and I'm just wondering if there is any other data points you can give us to provide some comfort that we won't see another 3 or 4 or 5 or whatever percent increase -- percentage point increase in the MLR in that market with a bolus of new members coming in.

I apologize, Tom. I heard dis-enrollment, not this enrollment. Perhaps I need a hearing aide for my birthday. Right now, the data that we have got, the claims data from the first three months suggests that the costs are not running up higher than we expected. I think we actually got a little bit of positive development for Washington, so we're feeling that the costs are in line.

Okay, very good, thank you.

(Operator Instructions)

Peter Costa, Wells Fargo Securities.

Getting back to the Texas question again, your ABD MLR you said went from 119% down to 94% I think you said. Maybe one-third of that comes from the rate in September but the other two-thirds comes from other things. Are there some one time items in there that we can back out, or timing things that we can back out, or should we look at that as the current run rate trend? I know you don't talk a lot about prior period development, but if you can discuss that, perhaps that would help us understand it. Or maybe is there a timing differential of when you got the rate increase verses when you had to pass rate increase along to providers?

I think part of what is changing that, is you have to factor in the premium deficiency reserve that we took in the second quarter. So I think you are going to see this from some other folks in the future as these new contracts come online if other organizations take a premium deficiency reserve in one period then they push costs from a future period into the current period. We do that in second quarter. So we didn't have those costs occurring in third quarter.

So there's nothing to be backed out -- you didn't over-reserve perhaps at that point? The 94% is what -- (multiple speakers)

The premium deficiency reserve -- that has an impact. I think that we are very adequately reserved from a pure claims standpoint in Texas. If you look at the days and claims payable, if you look at our cash flow, what you see is an increase in the medical claims benefit line. A lot of that is coming from increasing the reserves in Texas. So, I don't think it is the case that we are going to be under reserved in Texas. I also don't think that the 90% plus MCR that we experienced is the run rate. I think that what Terry talked about in terms of decreasing utilization and having some of the provider contract changes take full affect, we should see continued improvement in the medical care ratio for the ABD members.

Can you talk about the timing on the California rate review process? What is the time frame on that?

We've submitted our data. We don't know who else has yet. Obviously, we're pushing the state to get us an answer as quick as possible. But we also want to make sure that we don't exchange expediency for accuracy. We want the right rate not a quick one.

If you had to handicap it, what is the likelihood that, that rate goes higher verses goes lower?

If I had to handicap stuff, I would be at the racetrack, I think. It's really hard to know. Our data suggests that they were too aggressive in the rate assumptions.

Okay. Thank you.

Melissa McGinnis, Morgan Stanley.

One more thing on Texas, just to understand as well some of the things that might be driving the margin improvement there. Was there any disproportionate loss of membership of some of the higher cost members? Because it actually looks like, despite the rate increase, your premium PMPM came down sequentially. And I am just trying to understand what might be the driver of that.

Sure. This is Terry. We shared with you at Investor Day about an 8% drop in our ABD enrollment -- close to 10,000 members over the last three or four months. Yes, those that dropped out were running a significantly higher MCR.

Okay, great, thanks. And then --

Oh, let me just add -- this is Terry again. The -- that also impacted, though, the mix on our -- on the rate increase we received. So, we received a slightly over 4% rate increase, and it would have been greater if we would have had more higher cost members. So that was calculated very thoughtfully by the state to pick up the gap where the higher costs were.

Right. Great. Thanks. And then maybe switching to a different market. If we look at Michigan, the MLR there has come up pretty significantly over the last nine months. And I was just wondering, if I am remembering right, Michigan actually carved in or started assigning some of their duals on the Medicaid side. Is that having any impact on the MLR there, and I guess just wanting to understand the margin change in that market?

Melissa, this is John. The margin changed primarily due to the change in the premium tax. It used to be I believe a 6%. And so it had the affect of bumping up the revenue, and then we would take the premium tax line out of admin, not out of the medical costs. So that has had the biggest change in what appears to be the MCR margin.

Okay, great.

Dave Windley, Jefferson.

I wanted to follow up on Peter Costa's question, ask a little more directly. On -- as I look at your claims and benefits payable schedule for the three months ended September of 2012, the prior period positive development is $47 million. And it's from a negative development number on the last quarter, and I guess I wanted to understand more directly how much of that if any affected the income statement in the current quarter.

This is Joe speaking. Without going into it on a state-to-state basis, I think it's fair to say that much of the -- we talked in the second quarter about the negative impact for prior period development in Texas. We think we have restored those reserves in the second quarter and then carried on into the third. So, if you look at the $46 million of prior period development from Q2 to Q3, that is pretty consistent with what we have shown in the past, if you look at the run-out from 2010 and 2009. So, again, I would say I think we caught up in the second quarter, and we have maintained those margins and reserves.

Okay, so, as I think about the change then in MLR, is the sequential change in MLR not attributable to some of this positive development?

Well, I think we talked, and I think we talked at length if you go back to our second quarter, our second quarter release. We talked about the impact of the PVR and unfavorable development in the second quarter. I think it was $10 million on the PVR and $12 million in unfavorable development.

Right.

I think the better approach is to go back and re-look at your calculation of the second quarter MCR. Rather than the third.

Okay.

Is the way I look at it.

Okay. All right. I'll do that. And so, I guess another follow-up on Washington in light of -- and you kind of answered this question already. But I'll ask it again. So in light of a couple of other states where you are highlighting MLRs above 93% on ABD populations, can you talk about maybe how much visibility you have. How much claims inventory you have in hand today to give you the confidence on the 93%? How you would expect to track that and play that out over the next several months? Or perhaps by comparison, how did the MLRs progress in the other states to get to this level, some over 100% like California and Texas.

This is John. I think, in Texas, we got the slug of membership all at once. And so, just to sort that out was difficult. In California, a little bit different because the enrollment progressed over a period of 12 months. I think in California, what the bigger driver is in terms of the MCR for that particular population is the rate give-backs that we have accrued.

So, if you think that we're going to give back a significant premium to the state, we have got it recorded at $15 million. But we didn't drop the provider rates, because the state didn't. You have got a mismatch there which you don't see necessarily in other states. It's hard to take experience in one state and necessarily translate it to the other. What we have got in Washington is a stable provider base, rates that we believe having looked at them are adequate for the population, and frankly some pretty aggressive UM up in Washington that has provided us with the confidence as we watch the claims run out now for 90 days at least that we're not going to have significant negative development in the future.

Okay.

This is Mario. Let me -- I'm going to comment on California to be sure you understand. In California, there was supposed to have been a provider fee scheduled cut. There were some issues in the court that prevented that. But the issue is not resolved. And so we have been reserving as if we are going to have to give money back to the state because of this provider fee schedule change. Because our contracts -- many of our contracts in California are tied to that Medicaid fee schedule. Until the state changes it, we don't change it either. So we've created this mismatch.

Okay. Understood. Thank you.

Carl McDonald, Citigroup.

I just wanted to follow up on that $15 million accrual in California. My understanding from some others was it didn't sound like that or that rate cut was actually going to be implemented. So I would be interested in your latest conversations with the state if you have a bias one way or the other.

We certainly do have a bias, Carl, and that is until we see the final rate sheets. We're just going to keep doing what we have been doing. So we know that other plans have had discussions with the state about reversing that, and if that is the decision the state makes, then we will reverse it. Otherwise we are confident that we are well-protected against the state coming back and asking us for the money.

Okay, thank you.

Scott Green, Merrill Lynch.

Happy birthday, John.

Thank you.

Can you tell us -- did you make an accrual in the current period for lower California provider rates, or is that annualized now?

The accrual is running about $1 million a month.

Okay. All right, and then one more on the California ABD MLR. You said it was higher mostly attributable to the recently added lives, but it looks like in the press release you only added 3,000 sequentially. So, I was hoping you could elaborate. Was it just those most recently added that are driving that, or was there some unfavorable development in the current period California MLR?

Scott, this is Mario. If you go back to our Investor Day, there was a slide where we showed a cohort of patients that we followed forward for ten months, and you saw how their costs went down. The more recent patients are still running at higher costs. So, it's going to take a while to work through that. And that is what we are talking about here. So that group that came on the first month, we think their costs have flattened out. But it is going to take 10 to 12 months for each cohort to flatten out again. And that is what we mean. There are continued upward pressure, and it's going to level off and then go down.

Okay. I thought you had said before that the ABD MLR in California was around 95%, and now we are seeing a step up to 110%. And I wasn't sure what was driving that. It didn't seem like you added so many new members, but you are saying it has been and remains elevated.

It is a blended number and it's going to take time for that to come down. But we think that it will come down over time next year.

Okay.

Scott, it's Joe. There are a couple of items, though, that are worth -- I think are driving that number higher than we would -- the California MCR than we would expect in a run rate. First thing I'd like to point out is the California has removed its premium tax this quarter. So, this would apply just to the ABD to SPDs but across the California population. That is probably driving the MCR up about 1.5%. This is analogous to the situation in Michigan in the start of the second quarter.

We have also had some catch-up in California with capitation payments, specific to the SPDs. We have had to go out and re-contract with some of our capped providers to allow for the higher premium. So, you do have some factors in there that are spiking at this quarter that I wouldn't call run rate issues.

Okay. That's really helpful. Would you say the run rate maybe is a couple hundred basis points less? Any way to estimate that?

When I take an estimate of the premium tax 1.5%, the cap issue in unfavorable prior period development probably another 2.5%. This is all on the California consolidated MCR. So, we definitely saw a little bit of an up tick this quarter, but not nearly as much as the financials suggest.

Okay. And then can you talk about the MMIS revenue trajectory, what drove the sequential increase and how you see that trending going forward?

The sequential increase in MMS revenue is really just accounting. If you will recall, we have been deferring revenue and expense recognition for the Idaho MMIS. We went through some accounting exercises with that last year you will recall where we had some write-offs. So upon receipt of CMS certification and acceptance of the system by the state of Idaho in July, we started recognizing both revenue and expense in MMIS. The P&L impact is pretty much zero because, as you recall, we were booking revenue and expense at very similar amounts. But it will drive higher revenue and higher expense.

Okay. And then one last one real quick -- any update on California's -- was thinking about integrating the CHIP and MediCal programs. Just curious whatever happened with that.

It is definitely happening. It will begin, I believe, in January.

Okay.

You will see those former CHIP members will roll over to Medicaid.

And do you view that as a positive or a neutral or a risk for your business?

I think it's largely neutral.

All right, thank you.

Sarah James, Wedbush.

I wanted to speak about contract opportunities. And I guess I would break it up into three buckets here, Ohio, Michigan, and MMIS. On Ohio that was just -- Ohio duals was just pushed back, and I was wondering if you had any thoughts on the reasoning and if there had been any resolution there on some of the unknowns like day one savings or rates.

This is Terry. Sarah, you know what we know. We are just at the mercy of the state letting us know when their start-up dates. We know they are in negotiation with CMS. This is really a new venture for these states to work out with CMS how these three-part contracts are going to go. I think they are learning as they go, and as glitches in their roll-out process occur, they just turn to us and let us know it's delayed. But we have had no further official delay, although we have heard as well.

And then on Michigan, as we are getting close to the end of the year here, are you still expecting to hear an update on awards in 2012?

No, we haven't even embarked on that RFP process. Michigan did note originally was attempting to go forth with an RFP this year for 2013. They then let us know mid process that it would be a January 1, 2014, but the RFP process for the duals has not yet been rolled out. And we have heard nothing further about a further delay. So as far as we're concerned, they're still targeting January 1, 2014 for their duals launch.

Do you have a date when you expect the RFP to be rolled out?

No. Sorry we don't have any further information.

No.

And then the last bucket would be for MMIS if you could just talk about some of the opportunities that you're evaluating. The CMS and MMIS fiscal agent contract status report suggested about four to five contracts were coming up for rebid a year. So just any thoughts on how actively you may be pursuing those new contracts, and, as some of them coming up for rebid in 2012 or 2013 are in states where you have a managed care contract, if you could just speak to which contracts may be of more interest to you.

Sarah, this is John. When we bought the business, we wanted to target the states where we didn't have a managed care presence. We have plenty of growth opportunities in the health plan business, so there is no reason to cannibalise ourselves, and there are enough states for the MMS business to pursue RFPs. I think that, frankly, the Virgin Island example might give us real innovative and competitive target -- or competitive advantages in some of these applications. But right now we are not disclosing where we are applying.

Thank you and happy birthday.

Thank you.

Dr. Molina, I will now turn the call back to you to continue with your presentation and closing remarks.

Thanks, everyone. I have nothing else to add. We look forward to being with you again at the next quarterly earnings call.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great evening, everyone.