Molina Healthcare Inc (MOH) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare first quarter 2014 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 May 1st, 2014.

I would now like to turn the conference call over to Mr. Juan Jose Orellana, Senior Vice President of Investor Relations. Please go ahead.

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 31st, 2014. The company's earnings release reporting its results was issued today after the market closed and has 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 that you get back in the queue so that others may 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 May 1st, 2014. And we disclaim any obligation to update such statements except as required by securities laws. This call is being recorded and a 30 day replay of the conference call will be available at our company's website, www.molinahealthcare.com.

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

Thank you, Juan Jose. Hello, everyone, and as always, thank you for your interest in Molina Healthcare. As you review our financial results for the quarter, you'll see that our performance reflects actions that we talked about at our Investor Day in February. We are experiencing considerable revenue and enrollment growth. We are transforming from an acute care company to a chronic care company. We are diversifying by winning new contracts and entering new states. We are aligning our resources and skills to gain greater administrative leverage, and we continue to build on our framework for dramatic expansion in 2014 and beyond.

For the quarter, we delivered adjusted net income per diluted share from continuing operations of $0.64. Our operating results were strong, despite the headwinds we communicated at our Investor Day.

Of considerable interest to investors during the first quarter was the timing difference between expense and revenue recognition associated with the reimbursement of the health insurance fee. As expected, the company had not secured agreements with all of our states prior to the quarter end, and as a result, only recognized reimbursement and tax effect in Florida, Illinois, Ohio, Washington and Wisconsin. Nevertheless, we remain optimistic that agreements with our remaining states will be resolved prior to the close of 2014.

While much has happened during the first quarter, in both our industry and our business, not much has actually changed from what we reported at the Investor Day. So let me focus on some of the things that have changed.

Earlier this month, CMS reported that between October and February, nearly 12 million people have been determined eligible for Medicaid and CHIP, but that only three million people have actually enrolled in these programs during the same period. The increase in Medicaid enrollments across the country is encouraging. But the gap between those deemed eligible and those that are enrolled continues to point to the system wide hurdles and resource constraints related to processing applications for millions of individuals. However, it's important to note that although the March 31st deadline for marketplace has passed, under the Medicaid program people can apply for coverage at any time. This will enable us to continue to grow as the year goes by and as enrollment barriers are overcome.

The surge in Medicaid applications during the open enrollment period still contributed to a considerable enrollment gain to Molina during the first quarter. Specifically, our health plans in states participating in Medicaid expansion added 133,000 new Medicaid expansion lives, accounting for 60% of our sequential enrollment growth.

As a reminder, Medicaid expansion lives are reimbursed at higher per member per month premiums. To put these premiums in perspective, our new expansion lives are expected to generate approximately $1 billion in annualized revenue. This is almost the same amount of premium generated by our Ohio health plan in 2013. Enrollment due to the so-called woodwork effect at our health plans has not yet had a material impact on our results, but we anticipate that we could see higher enrollment related to it in the upcoming months.

Also contributing to enrollment growth during the quarter was our expansion and diversification efforts in South Carolina. Effective January 1st, 2014, we began serving members in all 46 counties under the state's new full risk Medicaid managed care program. At the end of the first quarter, we had membership of approximately 126,000 members, distinguishing Molina as the second largest Medicaid health plan in South Carolina. Our expansion into South Carolina demonstrates that there are still start-up and acquisition opportunities in states where we do not currently operate.

For many years we've been building for the opportunities associated with the dual eligibles that are now within sight. While technically a second quarter event, we're pleased to report we have already enrolled nearly 9,000 fully-integrated dual eligible members across California, Illinois and Ohio. Fully-integrated duals are individuals for whom we receive premiums from both Medicaid and Medicare.

California has generated nearly 60% of our initial dual eligibles enrollment. Voluntary enrollment for the demonstration program in California, called CalMedi Connect, started April 1st in three out of the four counties where we were selected to participate; Riverside, San Bernardino and San Diego. Voluntary enrollment in Los Angeles county is slated to begin on June 1st.

Our corporate and field teams are working diligently to complete health risk assessment calls, and call volumes are being handled and we are meeting all compliance standards. The passive enrollment process for Riverside, San Bernardino and San Diego begins today, May 1st, and on July 1st for Riverside � sorry, for Los Angeles county.

Dual eligibles are elderly or disabled, tend to have chronic illness or even multiple chronic illnesses, including mental illness, and are more likely, because of their low income, to remain continuously eligible for government programs. The demographic and healthcare characteristics of the dual eligible members requires additional outreach and individual care plans, making Molina exceptionally well-suited to address the needs of this population. Our focus has always been to take care of those most in need of healthcare and least able to afford it.

We are excited that California remains on track, in terms of the implementation of its dual demonstration program. However a delay has emerged in Michigan, where you may recall we were chosen to participate in the dual eligible demonstration in two counties, Wayne and Macomb, which have a combined dual eligible population of approximately 75,000 individuals.

Last month, Michigan finalized its memorandum of understanding with CMS, which included a delayed implementation timeline. The demonstration will now begin no earlier than January 1st, 2015, and will continue through December 31st, 2017. In the two counties in which we operate, Wayne and Macomb, the opt-in enrollment period will begin no earlier than March 1st 2015, with enrollments effective May 1st, 2015.

In Texas, we received notice from the Texas Health and Human Services Commission that the duals implementation has been delayed to March 1st, 2015. In South Carolina, the duals eligible demonstration was originally slated for implementation in July 2014, and has now been delayed by the state to January 1st, 2015.

Finally, there have been various headlines in the news regarding the new hepatitis C treatment drug, Sovaldi, and how states will pay for this extremely expensive therapy. For Molina, coverage of the cost of this new hepatitis treatment is included in our first quarter results. However, we anticipate an increase of cases where the new hepatitis C treatments are requested, as new all oral therapies in addition to Sovaldi are being approved by the FDA later this year. So we're keeping a close eye on this situation.

We are still awaiting guidance from many our states on how Sovaldi is going to be handled, and how they are going to pay for it. We continue to believe that the costs of Sovaldi are not included in the rates we received, and remain in discussion with states on how we will be reimbursed for these costs. In the meantime, in the relevant states, we are rigorously applying our clinical guidelines to request for treatment. And so far the numbers of applicable cases has been low. However, we remain extremely concerned about the high cost of Sovaldi and other new hepatitis C treatments and how they will affect state Medicaid budgets

And now I'd like turn the call over to John.

Thank you, Mario, and hello, everyone. As Mario highlighted earlier, we reported adjusted earnings of $0.64 per diluted share. And on a GAAP basis, earning per diluted share from continuing operations of $0.10.

As a reminder, we introduced our methodology for the adjusted net income per diluted share calculation at our Investor Day last February. These adjustments add back non-cash items such as depreciation and amortization, stock-based compensation, and non-cash interest expense. We believe that these adjustments best reflect our financial performance. We are pleased with our first quarter results, which have developed much as we anticipated they would when we spoke to you last, in New York, in February.

We have been speaking for some time about the dramatic changes that would come our way in 2014. These changes make meaningful comparisons difficult to our results of a year ago, or even to the previous quarter. We outlined many of the items affecting year-over-year comparability in today's press release for your reference. So rather than revisiting the differences, let me highlight some of the accomplishments achieved this quarter.

Premium revenue grew by 21%, almost $350 million from what we reported for the fourth quarter of 2013, only 12 weeks ago. At 88.7% of premium revenue, medical care costs were flat compared to last quarter, generating over $37 million more in medical margin than we reported a quarter ago.

General and administrative expense fell from 11% of revenue in the fourth quarter to only 9.1% of revenue 90 days later.

So as with that as background let me dive into the details. First let's look at revenue for this quarter. The major drivers of the $350 million increase over the fourth quarter of last year were; Medicaid expansion in California, New Mexico and Washington, which added $200 million in revenue in the first quarter; the start-up of our South Carolina health plan, which added another $96 million to revenue; increased long-term care membership in Florida, which added $28 million to revenue over the fourth quarter; and the role out of centennial care in New Mexico, which increased our revenue for the quarter by $27 million. This is separate from the increased revenue related to Medicaid expansion.

Now moving onto medical costs. We are pleased that the medical care ratio at 88.7%% was unchanged from the fourth quarter of last year. MCR was flat, even though we added new products and services, which tend to exhibit higher initial medical costs due to factors such as pent up demand.

The medical care ratio for our Medicaid expansion members was about 88% on a consolidated basis. We did record a high MCR, or 94%, for our South Carolina health plan. High medical care ratios are typical for start-up health plans when members are transitions from fee for service to managed care. For both Medicaid expansion in South Carolina, it's still too early to assess what the steady state medical care ratio will be.

Again we are happy to see a consolidated MCR unchanged from the fourth quarter. We often see higher medical costs in the first quarter of the year compared to other quarters.

We're also pleased to note that we've started to experience the administrative costs leverage we talked about at our last Investor Days. This was a big story for us this quarter. General and administrative expenses were 9.1% of revenue for first quarter of 2014, a decrease from 11% in the fourth quarter of 2013.

The administrative ratio improved even though approximately $20 million or $0.19 per diluted share in G&A costs were spent during the first quarter with no related revenue. As the new programs are implemented, and their associated revenue finally starts hitting our books, we expect to gain greater administrative leverage resulting in an even lower administrative expense ratio. Our full-year guidance for 2014 anticipates that our administrative expense ratio will continue to decline to 7.5% for the fourth quarter of 2014.

There are three other items that require special mention this quarter. First, the ACA health insurer fee. As of today, we have signed contracts calling for the reimbursement of the fee and its related tax effects with Florida, Ohio, Illinois, Washington, and Wisconsin. This means that we have reached agreement for full reimbursement of the fee for approximately 50% of our Medicaid revenue.

We remain optimistic that we will reach agreements for reimbursement with all of our states before the end of 2014. But for right now, for the first quarter of 2014, we have recognized the impact of the entire fee, and its related tax effects as an expense. But we have recognized only half of the related Medicaid revenue that we expect to receive. This means that the first quarter revenue and pre-tax income is about $16 million, or $0.15 per diluted share, less than it would have been had we recognized full state reimbursement of the health insurer fee. Bear in mind that the fee in any related revenue we recognize is prorated evenly across the year.

Next, we were unable to recognize about $6 million, or about $0.06 per diluted share, of quality related revenue at our Texas health plan this quarter. We spoke about this in February.

The State of Texas has changed some of its measurements used for the quality related revenue. Since we don't have prior history for these new measurements, it is difficult to estimate current year progress towards these goals this early in the year. Thus, we have not recognized quality revenue for these new metrics as of yet. We believe that we should be able to recognize most of this revenue later in the year.

Lastly, our effective tax rate. As you no doubt can see from our financial results, the non-deductibility of the ACA health insurer fee results in a much higher tax rate this year. We have recorded an effective tax rate of about 54% for this quarter.

As hard as it is to compare the first quarter of this year and the fourth quarter of last year, it is even more difficult to compare our results this quarter with the first quarter of 2013, given the significant changes to our business. All of the caveats I mentioned regarding the absence of reimbursement of part of the health insurer fee, the revenue gross up required due to the non-deductibility of that fee, and the unrecognized Texas quality revenue still apply to the first quarter of this year.

Lastly, we have very different effective tax rates between the first quarter of 2014 and 2013, due to the non-deductibility of the health insurer fee. Again, you will need to interpret our comparative financial performances yourselves should you want to undertake such an analysis. But I encourage you to consider all the points that I have made as you do so. We feel that year-over-year comparisons are not the most valuable way to measure our progress towards our defined goals.

Operating cash flow was strong at $210 million for the quarter. We added a significant amount of premium and correspondingly we strengthened our reserves as evidenced by an increase in days in claims payable. Days and claims payable increased to 46 from 43 at the end of 2013.

As of March 31st, 2014, the company had cash and investments of around $1.9 billion, including approximately $340 million at the parent company.

We are reaffirming guidance for 2014 of adjusted net income per diluted share in the range of $4 to $4.50. And net income per diluted share on a GAAP basis in the range of $1.65 to $2.15. We had a strong quarter, but as you know from following us over the years, it is not our practice to fine tune guidance on a quarterly basis, particularly when we provided guidance just 12 weeks ago.

Mario talked about delays in the implementation of duals programs in Michigan, South Carolina and Texas. It is important to note that these delays have a minimal affect on 2014 guidance and no material effect to our long-term revenue growth target of $12.5 billion. While we are keeping our guidance range unchanged, because of our positive Q1 results, we now have a corresponding bias towards the higher end of fiscal year 2014 EPS guidance range.

This concludes our prepared remarks. We are now ready to take questions.

Certainly. (Operator Instructions). Our first question comes from Sarah James from Wedbush. Please go ahead.

Thank you. As some of your dual contracts have started to come online, has there been any updates or developments in your understanding of opt-out likelihood. Your assumptions seem to be a little bit more conservative than some of your peers.

Hi, Sarah, this is Mario. We think it's a little too early to start commenting on the opt-out rates. Remember that these patients have the ability to opt out at any time throughout the course of the program. And for our guidance we assumed a 50% opt-out rate.

Okay. You mentioned benefiting from Sovaldi not being on the preferred drug list in some markets in first quarter, which is similar to comments that your peers have made. But some states have moved it on to the PDL for April. While others like Texas, may not do so until the third quarter. So I was wondering if you could help us understand how much of your book was exposed to that drug cost in the first quarter versus how you think about it being exposed in the second quarter, given the recent PDL update?

Well, this is Mario again. I think that we will see more exposure going forward. I think Gilead reported that only 7% of the sales in the first quarter were from Medicaid. Although they didn't break out how much of the sales on the HMO side were to Medicaid patients covered by health plans. But I do think we will see this grow as the year unfolds.

By the same token, when we first started talking about this at the beginning of the year, most states didn't recognize the problem. I think now it's widely recognized by state Medicaid directors that this is an issue. And I think there's growing acknowledgment by state Medicaid programs that the rates that we initially received did not include the costs of this new drug. So the story is evolving. And I think perhaps next quarter we'll be able to tell you a little bit more about utilization, but also a little bit more about what the state Medicaid programs are doing to appropriately reimburse us for the costs.

Thank you.

Our next question comes from Joshua Raskin with Barclays. Please go ahead.

Hi, thanks. Good evening. And first, a guardedly optimistic congrats on the quarter.

Thanks, Josh.

My question is on the Medicaid expansion population. I know it's early, in terms of trends, and it sounds like you guys were accruing -- I think you said at 88% MLRs. When do you think you'll have a better handle as to what the claims look like? I'm assuming, you've got some of the January claims processed and maybe a lot of the pharmacy claims, et cetera.

And then a second part to the question is where are these members getting enrolled? Are the states aware of who these individuals are and they're auto assigning them? Or are a lot of these people getting signed up through utilization of the health care system, i.e. hospital providers signing them up when they have some sort of acute episode?

So Josh -- this is John. With respect to the first part of your question, I think we'll have a much better handle by the end of the second quarter, in terms of what the true utilization patterns are going to be. And as far as how folks are signing up we don't have a lot of visibility into that. If they do identify a provider and they communicate that to the state and we get that information, we can match them up. But I don't know, at this point, how many do and how many of them are just being auto assigned.

If you look at your January enrollment, for example, in some of the states where you're seeing robust growth there, are you able to see some sort of episode or some sort of cost usage early in their assignment of health plans? Or was there a January 1 bucket that came through, so it looks like these are more evenly distributed across the population?

We didn't notice any particular pattern of how people were enrolled, Josh. Sorry.

Okay. All right. No problem. Just one second question, just on the exchanges, I know it's only 8,000 lives for you; is that majority in California? And then any thoughts on where those individuals are coming on versus where you guys priced for them?

Well, the state that has the largest enrollment right now is California, so it is the -- where the majority of the -- probably one-half to two-thirds are coming out of California. And what was the second part of your question, Josh?

In terms of cost trends or any early signs of the age or demographics, how they're lining up relative to what your expectations were?

Yes. Actually, the demographics are very similar to what we expected when we made our projections, so we're pleased about that. A little over half of them are coming on in the silver plan. 91% of them are receiving some sort of government subsidy. So it's all very consistent with what we expected.

In terms of the medical costs, I think it's probably still too early to say. But the pharmacy costs seem to be tracking within expectations.

Okay. Perfect. Thank you.

Our next question comes from Justin Lake with JPMorgan. Please go ahead.

This is Mike Minchak in for Justin thanks for taking the question. If I can I would like to go back to hep C costs. If you can, is it possible to give us a number of patients or the dollar spending for the quarter? And embedded in guidance do you have a -- is there something embedded in there for the full year? Or are you just assuming if it does accelerate, that the states are going to come back and cover it for you?

Well, we're not going to break out the number of prescriptions or utilizing patients. We typically don't get into that kind of granular detail on our medical costs. So we're not going to do it here, either. I don't believe that it was built into our guidance because we frankly did not anticipate this based on the rates that we were given from the state. So we see this as something outside of guidance. We are negotiating probably right now with about half the states over adjustments to payments, whether it be through carve outs or a pass through or some other mechanism, or revisiting this in the rates.

Okay. One more question on the ramp up of � or actually the ramp down of administrative expense ratio over the course of the year. You updated the fourth quarter -- any update you can give for the second and third quarter, in terms of ramp down given the delays in duals launches?

Sure. This is John. If you go back to our Investor Day slide presentation, there was a slide that had a quarterly estimate for what we thought the admin expense ratio would be. I don't off the top of my head know what it is for Q2 and Q3. If you want on go back to that slide, you should be able to find it.

And that's still valid?

Yes, that's correct. It's Joe speaking. We don't think the sliding of those duals programs is going to affect guidance one way or the other.

Great. Thank you.

Our next question comes from Chris Rigg with Susquehanna International Group. Please go ahead.

Thanks for taking my questions. Just to come back to the exchange population again. I know you get paid slightly different rates because there's obviously some acuity differences. But more generally, we've heard some of the hospital guys talk about substantial declines in their uninsured visits, primarily in expansion states. And can you give us a sense for whether you've seen a materially higher level of inpatient or hospital outpatient utilization among the newly enrolled by the expansion versus traditional populations?

Well, you talking about the expansion population or the exchange population? Because you -- sounds like you're mixing the two.

Yes, I meant to say the Medicaid expansion population. So the 133,000 that you guys highlighted.

Yes, it's Joe speaking. Frankly, those claims have been slow to come in. And we've really -- we really just don't have a read on their medical -- the medical claims development there, how it breaks down between inpatient and outpatient. Again we're confident it's in that high 80s MCR. But we just haven't had a huge amount of claims development.

Okay. And then just on the billed and the claims inventory on the balance sheet, is that just due to your expected ramp in growth? Or is there something else going on there?

It's Joe speaking again. That's tied to our growth, nothing unusual in the claims processing or anything.

Okay. Great. Thanks a lot.

Our next question comes Andy Schenker with Morgan Stanley. Please go ahead.

I was going back to the exchanges here, obviously about 8,000 lives in the first quarter. May I ask what are you guys expecting now for the year? Is it still around the 15,000 point, or after April is it going to vary a little bit from that?

This is John. We did see a pickup in enrollment towards the end of March, early April, so that's going to grow. I don't know if it's going to get much beyond the 15,000 that we're talking about.

Okay. And then just switching specifically to Washington there, saw a little bit of an increase in the MCR, obviously an expansion state there. Was that part of the driver of the increased MCR? Anything else worth highlighting in Washington specifically? Thanks.

It's Joe speaking. Yes it's expansion, which is running (inaudible) again what we expected is running a little bit above what we traditionally run for the other populations in Washington. And I think we talked at the end of last year about a little bit of rate pressure in Washington which has carried over into this year.

Thanks.

Our next question comes from Ana Gupte with Leerink. Please go ahead.

Thanks, good evening. Just following up on the Medicaid expansion and the claims experience that you saw this quarter. You talked about the 1Q being -- coming in favorable relative to expectations. How much of that is due to any kind of weather and/or weak flu impact?

And on the Medicaid expansion, you said you haven't seen a lot of claims. But are you trying to steer the patients more to your point about being a chronic care company to the primary care physician when they come onboard? Or would they just end up in the ER? And how long does the claim cycle take for you to start seeing something, when might we see something that may have already happened in 1Q?

There is a bunch of questions in there. I'll see if I can hit them all. In terms of our expectations -- and was there a favorable pick up in Q1 because of it? I think what we said was they're coming at our expectation, which was the high 80s, I think 88%. So I'm not sure there was any favorability there.

In terms of where are we expecting them to get care, all of the patients that we get we do try to steer towards the primary care doctors as opposed to the ER. These folks may traditionally have used the ER as their primary care site. But that's really not much different than any time we switch from a fee for service into a managed care environment. So we do try to connect them with their PCP. We do welcome calls, make sure they know who their primary care doctor is and encourage them to go in for that visit.

Lastly, again, it's just too early to tell since we don't have a lot of claims experience yet, to know what the utilization patterns is. But I don't think we're seeing anything unusual.

Okay. Yes, got it. It's very early in the day. And I just wanted to follow up your understanding again, it's very early on the dual side, you have enrolled some members and you're doing the health risk assessments. I'm just trying to triangulate to your point around we should be looking at adjusted income. And have you seen some of this early experience and risk profiles with duals and Medicaid expansion? And after you get your revenue that you're expecting onboard, what might we see as normalized MLRs and your administrative cost ratio and margins? What would be your best guess going forward, compared to where you are today?

Sure. I think that for the year, we're estimating medical care ratio of somewhere between 88% and 90% off the top of my head -- I'm going back to guidance. And the admin costs we're expecting will continue to decline throughout the year. We should have, as we said, fourth quarter about 7.5%. I think on average, about 8% for the year. 89% --

I'm talking more about your $12.5 billion long-term targets. So going to go beyond your one time story in 2014, we all understand it's a transition year.

Sure. And what we�ve said consistently is we should exit 2015 on a $12.5 billion run rate. And our net income goal is 2%, and that's on a GAAP basis. So we'll be revisiting that in next Investor Day to translate that into an adjusted earnings margin. But our story is fairly consistent, in terms of what we expect, in terms of the margin and the revenue goals.

So still 2%. Okay. Thank you.

Our next question comes from Chris Carter with the Credit Suisse. Please go ahead.

Thanks. Good afternoon. Just first question, can you talk about if you experienced any benefit in the quarter from weather or a more benign flu season?

This is John. I think the flu season was about the same as it was last year. So I don't know -- certainly better than H1N1 in 2009. But I don't know if I would say it's a benefit.

In terms of the weather, this is Mario, a lot of that weather affected more the eastern part of the country. If you look, a large part of our membership is in places like California and Washington. I don't think the weather had any impact on us.

Okay. And then just curious, I know the California MLR looked pretty good. I'm curious how that compared to the 3.25% target margin in the settlement agreement? And maybe if you had a swing positive or negative into the settlement account.

This is John. I think if you look in our Q, which is also filed today, we realized about a $5 million pick-up from the settlement agreement.

Okay. Thank you very much.

(Operator Instructions). Our next question comes from Scott Fidel with Deutsche Bank. Please go ahead.

Thanks. First question, just looks like the cost of services ratio improved by around 250 bps sequentially. Was there any factors that drove the improvement in particular? And is this a good run rate for the rest of the year? That was -- seemed to be trending a bit better than I was expecting there.

This is Joe speaking. We've seen a pretty good quarter with MMS in first quarter of this year. It's a couple of things. There has been some lift which we expect to continue from more claims volume tied to Medicaid expansion. There was also some revenue recognition related to projects being completed and one time payments from the state. I�d say you can look at that, the improvement is a 50-50 split between those two. So some of that improvement will carry forward.

Okay. Then just on the Texas MLR was up around 300 bps, sequentially. Was that all not being able to recognize the quality revenues yet? Or were there any other factors that drove the MLR up a bit sequentially?

It's Joe speaking again, the big issue there, in terms of that sequentially from fourth quarter, is the at risk quality revenue not recognized.

Okay. Then just last question just swinging back to Sovaldi here. Interested just how much does the determinations differ in the states where the drug is on the PDL as compared to those that aren't? It was just interesting looking at the Florida Medicaid drug utilization report for the first quarter, it showed that Sovaldi for Florida Medicaid was the most costly drug in the program, even though they didn't even put it on the PDL until the end of the quarter. Just thought it was interesting that we're already seeing that type of spend even in a state where it wasn't on the PDL. Just interested the variability that occurs between states with it on the PDL as compared to those that are not.

Well, we know that the state of Florida said that they expect that Sovaldi to double their costs this year for the treatment of hepatitis C. I think, at least in that state, it's going to be significant. I can't give you data on a state by state basis. Of course, we only have limited exposure because we're only looking at what our patients are experiencing, not what the entire state is doing.

Mario, on Florida, is there any update that you know of, just in terms of where the discussions stand? Because I think the budget was basically getting wrapped up, right? So just wondering whether -- how the discussion on getting in a rate adjustment filtered into that last minute discussions going on.

I think there's a lot of activity, even yesterday and today on that. And I would say that it's a positive sign that the states are recognizing that this is an incremental cost. And I think most states are now recognizing that it was not built into the rates.

So you feel positive that they're going to make an adjustment then for the rates there?

I think we're going to see some adjustments. Like everything else, though, is it appropriate? Is it enough? Those are the kind of things we always discuss with the states when they make changes in the rates.

Okay. Thanks.

Our next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

This is Steve Baxter on for Kevin. I wanted to come back to the balance sheet. It looks like the claims in inventory and the claims in inventory per member roughly doubled year-over-year. I was wondering if you could provide some color on what's driving the increase and whether you expect that to clear out? Or whether that might be a more stable kind of inventory level to think about going forward?

It's Joe speaking. The increase in inventory -- and I think a better metric to look at would be to compare it to fourth quarter of last year. But it certainly -- it's certainly a predominantly enrollment driven.

Okay. Well I see that the claims per member were about .08 last year in the fourth quarter. And now it looks like they're .013 --or .13, so seems like a pretty dramatic increase.

Well you're always going to have with -- as good a job, frankly, as we think we do in terms of claims payment, when new populations come on you always tend to have a buildup. It would peek third, fourth month, fifth month of enrollment. And it just speaks to the time it takes for that, those claims to show up in inventory and to work through the backlog.

And it takes a while when we people on for doctors to get the claims in based on where the member belongs. And this also underscores why the days in claims payable was up.

That makes sense. Appreciate the color. And just one follow-up on the $5 million you recognized from the risk share agreement. Was that in the dual side of the enrollment or on the Medicaid side?

That was on the Medicaid side.

No duals in first quarter in California.

Okay. So you're not really booking those -- the duals at very high MLR then, somewhere in the low 90s like you had kind of given it at guidance?

We haven't got any duals in the revenue side for the first quarter. So we will book those as they start to come in in Q2.

Right. Of course. Thanks.

Our next question comes from Peter Costa with Wells Fargo. Please go ahead.

Good evening. Can you tell us a little bit more about the woodwork effect? I know you haven't seen much of it yet but you talked about potentially seeing it going forward. Do you think that it's just held up in process as we're moving through some of these people who have been identified as perhaps eligible for Medicaid, but just haven't signed up? Is it a matter of going out and targeting these people from you guys? Or exactly what do you think is going on there? And when do you think that will start to show up in your numbers?

This is Terry. It's varies by state. But you've seen in the press that the high number of folks who have been found eligible but still have not really made it in through the rolls. Remember there's a process by which people get on Medicaid and it can take months. It varies, sometimes it's handled at the county levels. There have been issues with some of the state processing systems. So in most cases we've had to seen delays in that. And we expect it to be coming in as people work their way through that process.

And is that factored into your guidance as you go through that enrollment process and you see them -- some of those people coming in? Do you have some of that factored in the last couple quarters here showing up?

Yes, we do. I think we went over that quantified that at the Investor Day.

Okay. And then just on the Texas incentive fee, is that in guidance at this point, the $0.06?

It's Joe speaking. Yes, we expect to realize most of that by the end of -- recognize that by the end of the year.

Okay. Thank you.

Our next question comes from Dave Windley with Jefferies. Please go ahead.

Hi, thanks. I apologize in advance for the airport PA here. A quick question on your MLR accrual on expansion lives. I want to make sure I understand. I heard you say 88% to 90% or that range a couple of times. I've also heard you say that you haven't seen a lot of claims for them. So can you help me again to understand your comfort level with that high 80s level -- if I have that right? And what allowances you're making for the low visibility relative to claims lives? Thank you.

This is Joe speaking. Obviously, when we have situations with like claims receipts we tend to err a little bit to the side of being cautious. What we do clearly have with the expansion lives at this stage is we have very good pharmacy data of course. And that is suggesting that we're tracking to the -- where the lives were priced at by the states or perhaps a little bit better than that. So I think it's fair to say we feel pretty good about that number. Pharmacy data is a pretty good indication of where it's going to come in in time.

Okay. Thanks, Joe. And taking that down to operating or pre-tax, what are your -- what are the company's expectations for contribution margin on these lives? What's in guidance, is what I mean by that?

This is John. In guidance, we've got it -- it varies a little by state but 88% is about the average. If you go back to our Investor Day slide, we sort of broke it down what we thought Medicaid expansion would be on a state by state basis. I don't know that the admin costs vary much, so I would use an average admin costs. And that's how you can get to a margin.

If you look towards the MDA discussion in our 10-Q, you will see where we talk a little bit about blended premium rates for the different population groups. So you can build it from that, I think.

Okay. Thank you.

Our last question comes from Tom Carroll with Stifel. Please go ahead.

Good evening. A question for you on the variation in the headwinds that you told us about at your Investor Day a couple months ago versus the actual results. And if I'm adding it up correctly, it looks like -- you highlighted kind of $0.92 a share in headwinds. And it looks like those are only turning out to be about $0.40 a share. So big favorable swing. Any one or two items you could highlight for us that would reconcile that sizeable difference from two months ago? Is it -- ?

Sure. It's Joe speaking. When we called those out in New York, the intent was to present in each of those areas the most extreme negative circumstances that could arise from those areas. So obviously had all of those played out -- I think it's slide 57 our Investor deck -- had all those played out as negative we would have had -- we would have had a disastrous quarter. So I think the way to look at it is those were each worse case of what could develop. That's not -- we don't set guidance so assuming that every worst case is going to develop. So that's the best I could express that.

Okay. Okay. Very good. Sounds like a lot of conservatism built into those numbers which were worse case scenarios.

Right. And had anybody worked those into their numbers they would have had a much lower number than how consensus worked out for this quarter.

And I missed it, did you mention the Sovaldi spend in first quarter? I would love to know that number if you could provide it to us.

No, Tom, we didn't, and we're not disclosing it. We typically don't break out medical costs to that granular degree, so we're not going to do that now.

It's just kind of an unusual characteristic this quarter. So just sticking to your guns on that?

That's right.

Okay. And then one last question. I'm pretty sure you guys bid down in Puerto Rico. I wonder if you could give us an update on kind of where that stands? It seems like sources and information has kind of gone radio silent. Is there an update you can give us?

No, this is John. No, until something definitive happens, we're not going to comment.

Okay. Great. Thanks, guys.

All right. Thank you everyone. We appreciate you listening in on this quarter's call and we'll be back with you in a few months to go over the second 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.