Molina Healthcare Inc (MOH) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare first quarter 2013 earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference call is being recorded Thursday, April 25, 2013. I will now turn the conference call over to Juan Jose Orellana, VP of Investor Relations. Please go ahead, sir.

Thank you, George. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the first quarter ended March 31, 2013. The Company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our Company website.

On the call with me today are 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 the get back into queue so that others can have an opportunity to ask their questions.

Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward looking statements are based on our current expectations and assumptions 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, 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 April 25, 2013, and we disclaim any obligation to update such statements except as required by the securities laws. This call is being recorded and a thirty day replay of the conference call will be available at our Company's website, www.molinahealtcare.com.

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

Thank you, Juan Jose. Hello, everyone, and thanks for joining our discussion today. We're very pleased with our performance during the first quarter of 2013. The improved financial performance we achieved in the second half of last year carried over into 2013 as we continue to make improvements to our core operations.

John will be addressing our financial results in greater details during his remarks. But first, I'm going to talk about a number of positive developments to bear noting. Let's begin with the quick review of events that have taken place since our Investor Day in February. On the dual eligible front, highly anticipated memorandums of understanding or MOUs, were signed for Medicare/ Medicaid programs in both California and Illinois.

Including the MOU in Ohio, this brings to three the number of Medicare/Medicaid MOUs signed in Molina markets. Intensive efforts are underway across the Company as we prepare to serve the new members that these programs will bring. All three MOUs have aggregate savings targets at or are very close to the CMS rate setting process guidance of 1% in year one, 3% in year two and 5% in year three. This guidance confirms the CMS commitment to the success of the Medicare/Medicaid programs by preventing overly aggressive savings targets.

Now I will discuss some of the specifics regarding each state's Medicare/Medicaid program. California's implementation of its program, now called Cal MediConnect, will start no earlier than October 2013. Implementation involves a 12 month phase-in period and passive enrollment of Medicare, but it does not include an initial lock in period, suggesting that Medicare beneficiaries will be able to opt out of the program or switch health plans at any time.

As a reminder, the enrollment in managed care for the Medicaid portion of the benefits in our markets is expected to be mandatory. While the absence of the lock-in period may result in short-term variability in enrollment, the 12 month phase-in should produce a more orderly implementation by avoiding a one-time major influx of patients and providing more time to educate patients about the new program.

As a reminder, the long term revenue projections that we shared at our last Investor Day assume that are California health plan would participate in Medicare/Medicaid contracts in San Diego, Riverside and San Bernardino counties. Molina currently holds a primary Medicaid contract in each of these counties were 329 -- I'm sorry 392,000 dual eligibles reside.

In Ohio, we will participate in that state's Medicare/Medicaid program in the Southwest, West Central and Central regions, where approximately 48,000 dual eligibles reside and where we will compete with one other health plan in each region. Dual eligible beneficiaries will be able to voluntarily enroll beginning in early June with coverage starting September 1, 2013.

After this initial voluntary enrollment period, Ohio will begin passively enrolling dual eligibles in the plans. The schedule for passive enrollment will vary by region with the Southwest region beginning on November 1, 2013, and Central as well as West Central starting on December, 2013. Beneficiaries can opt out prior to the passive enrollment and may change plans or opt out of the demonstration at any time.

In Illinois, Medicare/Medicaid plan passive enrollment is expected to begin October of 2013 with an effective date of January 2014. As discussed at our most recent investor day, we will be serving the Central Illinois region that has 18,000 dual eligible beneficiaries, and we will compete in that market with one other health plan. Dual eligible beneficiaries will be able to voluntarily enroll for the first three months from October to the end of December. Program implementation also includes a six month phase-in passive Medicare enrollment period that includes monthly caps on enrollment.

Under the passive enrollment mechanism, beneficiaries will be automatically assigned to plans by the state unless they opt out of the demonstration. Beneficiaries will always have the option to opt out of a demonstration or select an alternative health plan. Our Illinois award also includes extending Medicaid managed care to 13,000 aged, blind and disabled beneficiaries in central Illinois as well as 7000 eligible beneficiaries in East St. Louis. Our Illinois ABD contracts are slated to begin ahead of the duals with expected dates of June 2013 in central Illinois and July 2013 in East St. Louis.

Of course, as we have experienced across various state Medicaid programs, the dates are always subject to change and can sometimes be extended. With these significant expansions fast approaching, the decision to raise $550 million in convertible debt in February gives us added comfort that we have additional resources to manage through a period of strong growth. We are now better positioned to fund statutory requirements and to manage through the temporary pent-up demands and higher medical costs that may -- that we may experience while transitioning fee-for-service patients into managed care.

Another recent development involving our fiscal agent services business in Louisiana. As you may recall, in 2011 we received notice that the state intended to award the contract for replacement Medicaid Management Information System, or MMIS, to a different vendor.

However, in March of this year the state of Louisiana canceled its contract award to that vendor. That vendor is currently challenging the contract cancellation. The State has informed us that we will continue to perform under the current contract until the successor is named.

Subject to the pending challenge, it is currently uncertain when a new RFP will be issued, and, if so, when the award would become effective. If a new RFP is issued, we intend to participate. In the meantime, we will continue supporting the state during this period of transition and will closely monitor any developments on this front.

Now let's turn to the results of our core health plan business. As I mentioned earlier, the operational results were strong across the health plans, and we continue to see improvements despite difficult market conditions in Texas and Wisconsin. At our Texas health plan, we are pleased to have achieved our stated goal to reach financial breakeven by the end of the fourth quarter of 2012. However, I would like to caution investors that, given a variety programmatic changes in Texas over the past year, comparability between the first quarter of 2012 and the first quarter of 2013 is difficult. By programmatic changes I'm referred to manage care expansions, rate adjustments and benefit carve-ins that we have highlight during our previous these calls.

Now looking ahead in Texas, we believe that the stabilization of that business now enables us to better understand the distribution of services. As a result, we will increase payments to personal attendant services and day activity and health services providers effective July 1, 2013. John will talk about the expected financial impact of this increase on our projected 2013 results.

Last quarter we talked about our progress in improving the financial performance of our Wisconsin health plan. We are cautiously optimistic that our Wisconsin health plan is indeed turning the corner. Contracting efforts and a small rate increase that became effective in July have led to improved financial performance.

Our membership has grown from approximately 46,000 members at the end of the fourth quarter of 2012 to approximately 86,000 members at the end of the first quarter of 2013. Member growth is primarily in Milwaukee and surrounding counties stemming from United Healthcare's exit from the Southeast Wisconsin. At this point it is too early to say what the impact of the additional membership will be on our Wisconsin health plan performance. Additionally, we experienced improved financial performance in this quarter at our Florida and our Ohio health plans.

On another front, I'm pleased to announce that we have expanded the size of our Board of Directors at Molina from 8 to 11 members and added Steve James, Daniel Cooperman and Dale Wolf as new independent non-executive directors. Steve James is a former audit partner with Ernst & Young, with 30 years of experience providing accounting, auditing and consulting services to help in managed care companies.

Daniel Cooperman is an attorney with the law firm of Binhgam McCutchen. He has served as a Senior Vice President, General Counsel and Secretary at both Apple and Oracle.

Finally, Dale Wolf served as Executive Chairman of Correctional Healthcare Companies. He also previously served as Chief Executive Officer, Chief Financial Officer and Treasurer of Coventry Healthcare. We welcome Steve, Daniel and Dale and look forward to their contributions.

In summary, during the first quarter, we solidified the progress we made during the second half of 2012. We strengthened our capital position, and we continue to prepare for the opportunities and challenges of the next several years.

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

Thank you, Mario, and good afternoon, everyone. Today we reported net income of $30 million or $0.64 per diluted share compared to $0.39 per diluted share reported in the first quarter of 2012. We are also increasing our previously issued guidance to reflect improvements in anticipated earnings per diluted share from $1.45 earnings per diluted share to $1.55 for 2013. I will come back to guidance after reviewing the results for the quarter.

Overall premium revenue grew to $1.5 billion representing a 17% increase over the first quarter of 2012 mainly due to a shift in member mix resulting from the growth in our aged, blind and disabled, or ABD programs, which generate higher premium revenue per member. Pharmacy benefit expansion at the Utah health plan and the inclusion of inpatient and pharmacy benefits at our Texas health plan also contributed to our revenue growth.

Medical costs were higher during the first quarter of 2013 primarily due to the shifting patient mix associated with the growth in our ABD patients as well as the benefit expansions that resulted in higher revenue in Texas and Utah. More importantly, our medical care ratio decreased to 86% when compared to 88% in the first quarter of 2012. The main drivers for the decrease in medical care ratio included retroactive rate increases for the California health plan and increased margins at the Texas health plan as well as stable inpatient utilization. As it relates to rate adjustments in California, you will recall from previous conference calls that we have been reserving a portion of premiums received every month since July 2011 for the premium impact of the provider cuts called for by California assembly Bill 97.

This quarter we received confirmation from the state of California that it would not be seeking to recover those amounts. As a result, we recognized premium revenue previously reserved at the California health plan which contributed approximately $18 million to pre-tax income, or $0.24 per diluted share related to 2012 and 2011 periods of service.

In Texas, although the quarter reflects significant improvements to margins compared to last year, a year-over-year comparison is made difficult by significant programmatic changes and implemented by the state. Among these changes were the expansion of Medicaid managed care into newer, higher cost regions, the extension of inpatient and pharmacy benefits carved into health plans and a 4% rate increase which was effective September 2012. All of these changes occurred after the first quarter of 2012 but before year end.

During the first quarter of 2013 we also recognized two out of period accounting adjustments that resulted in a lower reported medical care ratio for the Texas health plan. First, there was a $6 million out of period benefit related to performance measures for fiscal year 2012. Second, a $14 million benefit from favorable development of claims liability established for the health plan at December 31, 2012. Absent these adjustments, our medical care ratio in Texas would have been approximately 86.6%.

General and Administrative Expenses were flat quarter-over-quarter. However, as Mario mentioned, the Company issued $550 million of cash convertible senior notes in February of 2013. The coupon on these notes is 1.125%.

The issuance resulted in the recognition during Q1 of approximately $6 million in debt issuance fees recorded as part of interest expense. The remainder of those issuance fees will be expense over the seven-year life of the notes. In addition to providing greater flexibility on statutory equity requirements, issuance of the convertible notes also provides a payoff vehicle for our convertible notes issued in 2007 which mature in 2014.

As of March 31, 2013, the Company had cash and investments of approximately $1.6 billion. Our parent Company had cash and investments of approximately $450 million.

As I mentioned earlier, in light of our strong first-quarter results the Company is increasing its previously issued guidance from $1.45 to $1.55 in diluted EPS. We believe the increase to our 2013 guidance of $0.10 per diluted share is a reasonable estimate in response to the positive operating improvements we are seeing across the Board balanced by other factors that we anticipate will affect us during the last three quarters of the year.

These factors include an increase in payment to certain providers in Texas that Mario mentioned and higher performance-based equity compensation. As Mario mentioned, we will be increasing payments to certain providers in Texas effective July 1, 2013. We expect these payments will increase medical cost during the second half of 2013 by approximately $10 million or $0.13 per share.

Like we discussed in our proxy statement, the Company will be increasing its performance-based equity compensation. As a result, we expect to incur approximately $13 million or $0.17 per diluted share of additional performance-based compensation. We believe that performance-based equity grants better align management with the long-term interest of investors.

Again, both the payment of the increases in Texas and the performance-based equity compensation are included in our revisions to guidance of $1.55 EPS. As we are now -- have better visibility into those items.

However, there are still a few items that are excluded from guidance. For example, we have also noted that certain administrative costs associated with the membership growth related to the Affordable Care Act and in various state duals initiatives were not included in our original or our revised 2013 guidance. Guidance still excludes these costs due to a lack of current visibility as to the size and membership and the exact timing of the expected dual enrollment start dates. As we learn more we will update.

We also anticipate that at some point in the near future we will reach resolution with the California Department of Health care services on our other rate disputes in California associated with premium rates dating back to 2003 and 2004. However, we currently do not have enough information to predict the financial impact of any settlement.

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

(Operator Instructions)

Ralph Giacobbe.

I guess just the first real quick one just to be clear -- in terms of the guidance of $1.55, is that going off the assumption of the $0.64 number in 1Q?

Yes it is, Ralph. And again what we wanted to do here is provide a balance for better underlying operating results. Some one-time benefits and some of the additional charges that we know are coming in the balance of the year.

And then I guess I wanted -- was hoping you could help me with some more context around the Texas provider payments, some more details on exactly who that's going to and the rationale around that? Thanks.

Terry, do you want to respond to that?

Yes, this is Terry Bayer. We are making a payment adjustment in the form of an increase to both the traditional caregiver providers, the personal attendant services and then the adult day health. Those are the two categories chiefly. There may be some additional home care providers as we go through the details. And the rationale is simply a better understanding of our underlying service basis and the cost structure and the plan. Last year we were hit with a significant enrollment when we first started out. And we wanted to be very cautious as to how we spent the revenue we were given by the state, and, as the rate increases came in and our experience gained, we are able to make an increase.

Okay. If I could sneak one more in, maybe an update on where you stand in terms of the exchanges, how much you expect to participate, how your negotiation with providers is going and the rate you expect to get? Thanks.

Ralph, this is Mario. We do intend to participate in the exchanges in those states where we have Medicaid contracts. We are making good progress. I think the provider contracting is going fairly well, and we anticipate being ready to participate in those programs on time.

Josh Raskin, Barclays.

I'm sorry. I want to ask the same question maybe getting back to Terry on this Texas provider. I understand you have a better understanding of your cost structure, and you got the rate increases, but what is the business rationale? Were you having trouble keeping docs in the network, or were there access issues, or why not just wait until the end of year or something for annual negotiations?

Josh, this is Mario. It is a combination of things. First of all, as we have a better understanding of the patterns of utilization now, we can see where the costs are. The other problem is that in some of those -- in some cases we were actually paying providers more than what they would have been paid under Medicaid. So we are trying to come back to a more rational payment system that more fairly compensates the providers for what they are doing and aligns with traditional patterns. So it is really a function of the experience that we have gained over the past year. We have plenty of providers. In fact, I think we probably have more home care providers now than we did a year ago. So getting more contractors has not been a problem.

So, is it more you were denying certain requests for home health, and now you are expecting a higher level of utilization of those services, and that's what that's owing to?

No. I think it is more the case of getting it all right sized. Again, as I pointed out, in some cases we were actually paying the providers too much, other providers may have been paid too little. Now that we see where the actual utilization is, we can adjust the payments accordingly, and that's what we are doing.

Okay. I guess next question, any progress in terms of discussions with the state in California around a potential deal like what HealthNet did with their Medicaid program?

Yes, our next meeting to negotiate with the state is scheduled in about three weeks.

Okay. You would expect -- is that meeting in terms of you would expect some resolution at that point, or is that just another in a series of meetings?

I think we're very close to getting resolution.

Okay. Got you. Last question on MMIS, I know it was a tough quarter in the fourth quarter. Do you guys have an operating income number for that segment in the first quarter? I know you don't break it out in the press release anymore.

It is Joe speaking, you can lift it from -- it was what we expected pretty much. You can lift it from the income statement. It is revenue of about $50 million expense of $40 million so about a $10 million operating revenue.

All right, so that's actually a lot of revenue, then.

(multiple speakers) [service] revenue margin.

So that's a lot better then. I think you guys did $8 million or so last year in the first quarter and then $0.5 million or so in the fourth quarter and so sequentially we are up to $10 million?

Fourth quarter, remember, was hit by a lot of -- fourth quarter was hit by a lot of one-time charges. I think overall we are expecting, if you were to remove those fourth -- and we went through these in guidance in New York, if you were to remove those fourth quarter charges from 2012, we're going to see lower -- a little bit lower performance in 2013, just because of some contract changes. But it's -- suffice it to say it is moving along like we expected when we gave guidance back in February.

Okay. Perfect. Thank you.

Sarah James, Wedbush.

I hate to keep going back to this, but I'm still just a little bit confused about the voluntary payment increase in Texas. So I'm wondering if this is a straight up unit price increase for what you are paying per hour, or if maybe there is a shift to a different cost structure here like a flat per week or per month that you think in the long run will benefit you. And I guess what I'm trying to get at from that is also, if it is an hourly increase, if you're going to see these Personal attendant starting to persuade the people they care for it to switch over to Molina, and if that may drive some sort of negative selection?

Again, this is about paying the providers correctly, based on the utilization of services that we're seeing and the distribution. And I don't think that we expect to see any shifts in the patient population. Likewise, I don't expect to see much of a change in our provider network. I think this really reflects having a year's worth of data under our belts, and I think that we made some incorrect assumptions initially when we started paying the claims, and we are able to correct those.

Got it. And could you guys update us on the impact of the Medicare risk model update and how you see that impacting your payments?

On Medicare, with the current -- Sarah, just flesh out that a little bit more. In terms of sequestration cuts or just in general Medicare advantage pricing?

In the updates to the risk scores, United had talked about it being maybe 200 basis points based on their book. WellPoint had said it was closer to -- I'm sorry, United had 250 and WellPoint 200. So I know it hits every company differently based on what the risk scores of your book is what the health conditions are. So if you guys could just talk a little bit about how you are seeing it working through based on (multiple speakers)

Let me just back up. We are not compared to really quote any direct impact based on risk scores. There were some cuts to the Medicare rates by -- as a cause of sequestration and we have passed those onto the providers. That's separate. Now, when you start talking about risk scores, we are still submitting additional information to CMS and waiting for information that we will receive sometime in June which will reset our rates, considering our risk scores. That will be retro back to January and then going forward from, July but we don't yet have the results from our most recent submissions. By that I mean we seek additional information from the medical records to ensure that we've appropriately documented the diagnoses. We get that into CMS, and then they award us associated revenue.

Okay. Thank you.

Peter Costa, Wells Fargo.

The California subcontractor relationships that exist between yourselves and other Medicaid plans, have you furthered the conversations with those regarding the duals if that -- they will carry to the dual eligibles? Where does that stand at this point?

That issue is currently ongoing.

So there's no further view on your part as to whether that will continue are not?

Not at this point. We are not prepared to comment any further at this point.

Okay. And in terms of the settlement with California, one of your competitors has already done that settlement and gave them a rate going forward. You talked about settlement regarding historical issues. Do you expect to be paid in the amount historically, or do think that will all be resolved more or less in a rate structure going forward?

It is our -- this is John. It is our assumption that the state of California is going to want all the settlements to be of the same construct.

Okay. Given that they already have that and have for some time now -- almost two quarters now, with one of your competitor plans, what is the hold up? Do perceive their contract to be somehow not as good as what you are looking for? Or does the state want to give you a different contract for some reason? What exactly is the holdup at this point?

I think the biggest holdup is there's an awful lot of stuff going on right now at the Department of Health Care Services, trying to do Medicaid expansion, moving a bunch of the SHIP members into the Medicaid program trying to get the duals off. So it is more a factor that they've got a lot of competing priorities, then there's any adverse discussions going on with us.

Okay. Just a last question if you don't mind. Help me out with the math a little bit on the fees on the debt going forward, it was $6 million this quarter, the straight 1.125% would be like $1.5 million in future quarters, but I know there are some fees and other things that affect the actual expense line. Can you help us out to understand the impact quarterly?

Yes, it is Joe speaking, Peter. Recall the expenses on the offering were about $16.5 million or $17 million. There is a pro-ration of those expenses between the convert and the elements of the call spread. The -- that pro-ration, what is assigned to the call spread gets expensed immediately, which is why you mentioned the calling out of about $6 million of expenses tied into the -- for fees for the first quarter. So the remaining $11 million -- $10 million to $11 million or so are amortized pro rata over the life of the notes.

Great, that's the only other impact besides the interest itself?

Correct.

Thank you very much.

Scott Fidel, Deutsche Bank.

First question, if you have any updates you can give us on how the conversations are proceeding with the states around the industry tax for 2014 and feedback from the states on how they plan to build that into the rates? Obviously there has already been a lot of focus on Florida with that, but interested if any of your other states have given you any feedback yet so far?

This is Mario. We have not gotten a lot of feedback on that issue, but I think that perhaps the best piece of information we have is a letter that was written by the Republican Governors Association acknowledging that this is a tax that's going to affect state Medicaid programs.

Okay. Then wanted to return to the Medicare question I think that Sarah had asked. And I think, Terry, you talked a little about the 2013 impacts, but interested if you have been able to do the analysis, the Company has been able to do the analysis yet on the proposed change to the risk adjustment model, the HCC model that starts in 2014 with the 75% phase-in? Given particularly some feedback that's been out in the industry about those changes to the risk adjustment model having a more significant impact on higher acuity members with higher frailties. So interested if you're thinking there could be more significant impact to Medicare SNP plans, granted though that Medicare is a pretty small amount of your revenue?

You're right, right now Medicare is a smaller portion of our revenue, and we are still looking at what we think the projected impact will be.

Okay. Then last question. Can you break out what the revenues are that you are accruing from the Louisiana MMIS contract, interested in with the overall mix of revenues from that contract is relative to the total MMIS book.

I think it is around $35 million a year.

Okay. Thank you.

Carl McDonald, Citigroup.

Help with just understanding the run rate in the first quarter, was there any impact from the flu? I know it didn't have much of a hit in the fourth quarter.

It is Joe speaking. You know certainly the external indicators indicate that flu was more prevalent at least in our states. I won't say our markets, we saw more Tamaflu utilization, but overall we just didn't see anything this quarter that would indicate it was a -- anything out of the normal in terms of a flu season. We haven't quantified anything for the simple reason we haven't seen any indication there's a whole lot abnormal to quantify.

Got it. Okay. And it is a smaller market for you, but you talked about in Utah a 16% rate increase. The loss ratio in the market certainly picked up a little bit in the first quarter, but not nearly as much as what a 16% rate cut would imply. So just be interested in whether that cut didn't go through to the full affect or whether you were able to offset the bulk of it, and, if so, how?

This a lot to it -- Joe speaking -- there's -- bear in mind there's a lot of factors in Utah beyond that Medicaid rate cut, which was -- it was a cut of 16%. Utah has a high percentage of Medicare membership among our states. It is the highest with Medicare membership, so activity in that Medicare business is going to be factored into the MCREs and the financials. We also have a pretty strong -- a pretty large SHIP product there -- a pretty strong SHIP membership. And, lastly, we had the pharmacy benefit carved in this year and when you lay onto that the -- I think the team there has done some very good work with patient care that has positively impacted both patient care and medical cost. So I think you have to look at the context of all those other factors there. And it was a16% cut, but when you layer in those three or four other factors, it ameliorates that in the consolidated results.

Great. Thank you.

Michael Baker, Raymond James.

I was wondering if you could update us with respect to your strategy around behavioral health management, in light of over time you addressing or managing the duals, trying to get a better sense for whether that will vary market by market if their plans at this point to in-source some of the capability. Just trying to get a general sense of your thoughts on that part of the business

This is Terry. Yes, we are in-sourcing our behavioral health management, and over time we've been doing that for a number of years as contracts with outside vendors expired. We have recently hired a new physician leader for our behavioral health initiatives Company-wide. And we have an overall philosophy on the integration of behavioral and physical health as well as extensive community-based social support systems. So that's the overall philosophy. It will be tweaked state-by-state, because there are varying state regulations that often play into the fold as well as an incorporation of the pharmacy benefits. So in general, in-sourced and same philosophy.

So, can you give us a sense of which markets are still outsourced?

No.

We don't want to go into that level of detail.

All right, thanks.

Kevin Fischbeck, Bank of America.

I guess it sounds like California gave the plans the dual rates a couple days ago. I didn't know if you had any initial views on those rates?

We received the rates night before last. We are still analyzing them.

Okay, so it's too early to have any kind of initial view on it?

Correct.

Okay. And then I guess you mentioned that the California settlement, the prior period portion at least had some costs associated with it, but then you mentioned an ongoing $400,000 benefit per month to premium. Are there any costs associated with that, or is that a good number to think about as a net number as well?

It is Joe speaking. There will be a small number of costs associated with that but very small, so we will keep 80% or 90% of that amount.

Okay. And then the $0.06 performance bonus, related to Texas, it sounds like Texas changed the methodology for performance bonuses for 2012. Is that change going to maintain in 2013, therefore, is there a view that that $0.06 is now recurring, or are you looking that more normally going forward?

The state -- it's Joe speaking, the state change the metrics in 2013, so this will have no impact on 2013.

No impact, okay. Any update on the Medicaid/Medicare parity for physicians? How are you incorporating that in your guidance, and does that have an impact on your numbers?

You mean that program that went into effect on January 1?

Yes.

No, no update yet. We are still waiting for the states to give us guidance on how to pay that and get the state plan amendments done.

Is that supposed be a net neutral to you, or is there an impact either way?

You know, it should be more or less neutral to us, although, because we have staff model clinics, there may be some positive impact, because, as we employ these physicians, some of that money will remain with the Company.

Okay. And then last question just trying to understand the two data points that you mentioned that [said] went to the guidance for this year. So if I think about the Texas provider rate increase, I guess that's about $0.13 this year, but I guess it will be $0.26 for the full year next year? Is that the right way to think about that?

All things being equal, that's correct.

Is there any thought that you are paying them more might result in a better rate increase prospectively and that the net number for next year might be less than the annualized second half of this year?

You know, I don't think so. I think the rates are going to be based on utilization and based on risk adjustment. So I don't think paying the providers more is necessarily going to lead to us getting a greater rate increase.

Okay. Then as far as the executive incentive comp number, it sounded like that only was in place for March, so that $13 million, which might be $0.16, $0.17 -- that number is going to be more like $16 million next -- for the full year next year?

Part of that depends on when the performance measures are met and let's face it, if the performance are met, that means that we are doing a good job with our executing our strategic plan. So let's hope that gets fully expensed.

Okay, but all else equal, assuming you hit it this year and next year, the number next year will be about $3 million higher than the number this year?

Well, -- it's Joe speaking, those -- the compensation committee the Company re-bids it so those measures and that compensation every year, so it's a little bit premature to speculate on what that would mean for next year.

Okay. All right, thanks.

Brian Wright with -- go ahead.

Yes, real quick and I apologize. I may have missed this, but the midyear RFA proposed rate increase in Texas, is that included in the numbers, or are you going to benefit from that at all?

There was a slight adjustment to our rates, Brian, but for the most part those were targeted at service areas that we don't participate in.

So nothing -- nothing for Hidalgo then?

We are not expecting to see much of a rate increase as a result, no.

Okay, thanks.

David Windley, Jefferies.

I believe that you are continuing to not include in guidance an amount of Admin spend to prepare for what I think is Medicaid expansion 2014. I guess I wondered a couple things. One, what elements of visibility are you still waiting to get to be able to quantify that? And then two, is that essentially an onboarding expense that would be somewhat one-time, or is that a step up to a higher level of expense from an Admin standpoint for that amount?

This is John. If you recall -- at our investor day, we broke our readiness costs into a couple of buckets. One was just the basic infrastructure that we've got to do regardless. That's setting up the new benefit packages in the IT systems, getting the provider contracts written for things like the exchanges, et cetera. And then the other piece was that variable piece, really tied to the membership increases.

Okay.

And it is the latter piece that we don't have great visibility on yet with respect to some of the Medicaid expansion, some of the exchanges or insurance market places and some with the duals. And these are programs that we think will take flight in 2014, but in a number of states, Texas, Florida, Ohio, Michigan. We don't know as of today what the Medicaid expenses is going to look like. We don't know if they are going to be ready to start marketing their insurance marketplace in October. So we have the basic infrastructure piece, but it is the variable piece, the additional employees that we have to hire to handle the membership that we don't quite know yet. And as soon as we get some information on when these programs are expected to start and how many people they are expected to cover, we can then adjust our guidance and give you folks additional information.

Got it. And so your description then answers the second part of my question which is that should be an ongoing expense. Once you ramp that up, that will be in place to service that higher membership?

Correct, but it will be ramped up because of the higher membership.

Right, right. Coming back to earnings and wanting to make sure I understand and reconcile some of the pieces. So in the first quarter the $0.64 relative to [street] 25 am I right that about $0.24 is California retro rate. Texas retro is about $0.08 and then on the flip side you are additional carrying costs for debt are about $0.08 as well. Is that pretty close?

You've articulated the main one-time items in the quarter, however, as you listen to our calls, we are really hesitant just to focus on a few one-time items. There's lots of stuff happening in the business up and down that we don't point out. So that's why we hate to just look at a quarter in isolation and say that's our run rate. That's a point, not our run rate.

Okay, fair enough. All right, I will leave it at that, thank you.

Matt Borsch, Goldman Sachs.

Question on the -- right back on the earnings trajectory. The $0.08 that you referenced, wasn't that already reflected in the Investor Day guidance when you brought -- when you did the new debt issuance?

(multiple speakers) A portion of it was, yes. We fine tuned our calculation of expense for the year, and I think there's about a -- I think expense recognition for the year is going to be about $3 million, $2 million or $3 million more than we anticipated back in New York.

I get it. Because it looks like your outlook for the back nine months is maybe somewhat conservative in light of some of the margin improvement that you are seeing, and I know you're not giving quarterly guidance, but is the trajectory going to be $0.20, $0.30, $0.40 as we look ahead, or is it going to be less sloped?

This is John. Again, we had -- we've had a good first quarter. I think the last two quarters, what we're seeing is the operational improvements taking hold a little bit faster than we anticipated. But the last thing we want to do is start to run ahead of ourselves. And so -- you know how volatile this business is, and so we try to paint a nice middle path until we get another quarter or two under our belts.

Yes, yes. That make sense. Coming back to the additional provider payments in the back half. Am I correct understanding that what -- you are taking a longer-term view here, and you are saying you have these providers who were making up for very low or let's say on the low side unit payments by making it up on volume, if you will, and you are bringing them into a program where they are doing volume at a more appropriate level, and you want to pay them more per unit, is that correct or partly correct?

If you recall, last year we made some cuts to the provider payments for the personal attendant services and the day health care services.

Right, okay.

And we also -- we are restoring some of those cuts, but it is not an exact restoration because the increase in payments is going to more closely match the distribution of the utilization of services. When we set up our payments last year, we made certain assumptions about the utilization of services which turned out not to be correct. Now that we have a better picture of the pattern of utilization, we are increasing the payments to the providers to reflect the services they are providing. So it is an increase in unit cost, but is also a change in the distribution of utilization in connection with that.

Got it. Okay. That make sense, and I guess the last question. Anything to note on the longer-term growth pipeline that may have changed from the investor day view?

No, I don't think so. We continue to think that there is a good opportunity for growth in these Medicare/Medicaid contracts. We think there will be some expansion of Medicaid. It has become more complicated now with the politics that are involved, with governors proposing to increase enrollment and legislators pushing back with this concept of the Arkansas experiment which -- we're not in Arkansas, and we are not sure how widely that will be adopted. But overall, we still feel confident about the opportunities and the numbers that we quoted, and we are feeling more comfortable about the exchanges as well.

Great. Thank you.

Chris Rigg, Susquehanna Financial Group.

I just wanted to come back to the guidance for a second and the revision here, and I apologize if I missed it. But there are five major items that you guys spiked out, the [AB 97] of the Texas performance-based change, the Texas PPD, and then the Texas provider payments and the performance-based comp. Can you -- what was in the prior guidance, and what's new?

The California ABD increase was in guidance. We just didn't have a really good, significant quarter-- we didn't have it specified in any particular quarter. The increase in the equity comp was not in. The increase in the Texas provider rates was not in. And the -- what was next?

The performance.

And the performance was not in.

California was is, and basically everything else was not.

Correct.

Okay. And then I guess outside Texas is there any notable development -- was there any notable development in the quarter?

Outside of Texas?

Yes.

The [fire tree] development?

Yes.

No. It was pretty consistent.

Okay. And then I guess last question somewhat philosophical and then also quantitative in a way. I guess when we think about the California duals, I guess philosophically, not being able to mandate the Medicare side of the payment, does that at all change the attractiveness of the market, meaning that you have less ability to manage the overall cost? And then two, if you exclude the Medicare portion, what do you think that does to rates on a relative basis? I know you don't want to give a specific number, but does it drop the rates -- how much percentage-wise? Thanks.

I love this. So you are asking us to give you a philosophically quantitative answer.

Exactly.

The duals opportunity in the counties that we are in in California is roughly -- almost 400,000 beneficiaries. There is a huge opportunity especially when you compare it to states like, Ohio and Illinois where we are also participating. So you see that California really dwarfs most other states, and roughly 11% of all the duals in the country reside in California. We have participated in this program as a Special Needs Plan. We're the seventh-largest Special Needs Plan in the country by enrollment. And that has all been voluntary, so no, I don't think the fact that they are going to be able to opt out deters us in any way because enrollment in these plans as far as we're concerned has always been voluntary. And so our goal is to try to convince the beneficiaries that there is a benefit to them to remain with us. But we've always assumed that -- I think in our assumption about 40% to 50% were going to opt out. So, no, I don't think it changes anything.

Okay. And then just on the latter part. Any way you could directionally guide us -- if you're expecting $1, if you're getting both portions what that dollar would be? If you're just getting the 'caid component?

No, Chris, we are still looking at that stuff.

Okay, thanks a lot.

Tom Carroll, Stifel.

I jumped on late as well, I apologize. A question on Texas and the favorable development that you said related to the liability -- the claims liability that was established at the end of last year. I guess two questions on that. Did all of that support first-quarter earnings? And, secondly, how much remains on that reserve that you established for future periods? Thanks.

Tom, you know how much we love to talk about reserves and roll forwards, $16 million was what we had accrued and what we took in income in Q1 based on the liability we established at December 31 -- so that whole $16 million benefited Q1. What we didn't talk about and we have no way to know just yet is how much of excess reserves have we built in as we put in the reserves for Q1? It is always a matter of taking excess out from the past periods and building of the current period. So we don't know to what extent future periods will continue to have prior period development in Texas on a favorable basis.

I guess I'm referring to (multiple speakers) I'm referring to the $13.5 million.

He's talking about the premium deficiency reserve, I think.

It's Joe speaking. A note to John to confirm if he's talking about favorable prior period development claims.

Right.

So Tom, I cannot do anything other than reiterate what John said. It was certainly more favorable prior period development than we typically see in a health plan, hence we called it out. We try to set the reserves as accurately as possible every quarter, so all things being equal, there would be much less favorable development in future period.

Okay. Thank you.

That was our last question. I will turn the call back to you, Mr. Orellana, for your closing remarks.

Thank you for joining us during today's call, and we look forward to talking to you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.