Molina Healthcare Inc (MOH) 2014 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Molina Healthcare fourth-quarter and year-end 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Monday, February 9, 2015. I would now like to turn the conference over to Juan Jose Orellana, SVP of Investor Relations. Please go ahead.

Thank you, Ash. Hello, everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the fourth quarter and fiscal year ended December 31, 2014. The Company issued its release reporting these results today after the market closed, and the release 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 that you get back in the queue so that others can have an opportunity to ask their questions. As a reminder, given that our investor day presentation will take place this coming Thursday, but we will discuss the company's outlook for 2015, today will only be taking questions related to our earnings release. 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 under 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 judgments as of February 9, 2015, 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, MolinaHealthcare.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. I have just a few comments today and then I will turn the call over to John who will delve into our financials in greater detail. I am pleased report that 2014 was a year of continued success in delivering on our strategic objectives. When compared with 2013, our revenue grew by almost 50%, our enrollment increased 36%, we expanded our geographic footprint to new markets in South Carolina and Florida, and we achieved greater economies of scale as evidenced by the consistent decline in our administrative cost ratio throughout the year.

Two years ago at our winter investor day, we shared with investors our plan to nearly double the size of the Company by the end of 2015. Our milestones for the quarter and the year confirmed that we have made considerable progress towards that end, but more importantly that our goal is now clearly within our reach. Last month, I had opportunity to meet with many of our investors at the JP Morgan Healthcare Conference in San Francisco to talk about the Company and our strategy.

As I shared in my presentation, the revenue and enrollment momentum that we generated throughout 2014 has carried forward into the first quarter of 2015. In January alone, our enrollment grew by nearly 200,000 members led by new Marketplace and Medicaid expansion lives. While the actual enrollment gains in our dual eligible plans have been overshadowed by the gains in our marketplace and Medicaid expansion plans, let me remind everyone that the revenue impact of adding one dual eligible member is comparable to adding almost five Medicaid expansion members or 10 traditional TANF members.

The continued addition of members with dual and long-term services and supports benefits shifts our focus towards more chronic, home health, and long-term care services for these members and away from the more episodic and acute medical conditions we have seen in our TANF members. Several years ago, I introduced a chart that nicely illustrated the market segmentation of our business in the form of a pyramid. Today, I want remind all of you that this chart is still applicable as much today as when it was first presented. While mothers and children continue to form the foundation of our membership base, we have continued to move towards a more complex care by adding more elderly and disabled members that now include the duals and long-term care beneficiaries.

The implementation of our duals and standalone long-term care contracts will allow us to continue to evolve our model of care for members with chronic medical conditions, while at the same time refining our operational processes for the duals contracts in Michigan and Texas. As an aside, our duals contract in South Carolina became operational this month with voluntary enrollment. And I discussed last month during the conference, we continue to expect 2015 to look a lot like 2014.

In 2014, we experienced rapid membership and revenue growth requiring the assimilation of new members across all lines of business, and we expect much of the same this year. While this growth may come with the usual set of growing pains, as we have seen in 2014, it adds tremendous opportunity for us to greatly expand our business. Harnessing this unprecedented growth is a key area of focus for us in the near future.

We are very excited about the growth that we have seen this past year and with our successes in lowering the percentage of revenue spent on administrative costs. Staying true to the mission of our Company and our values has allowed us to navigate through this exciting time and we are looking forward to 2015 and to what the future holds for the Company. I would now like to turn the call over to John.

Thank you, Mario, and hello, everyone. Although we did not meet our earnings expectations in 2014, we did make good on many of our commitments to revenue growth and a greater administrative efficiency. When we see you in New York on Thursday, we will talk more about how our work in 2014 has set the stage for continued growth and improved profitability in the future. Right now, though, I want to focus on 2014.

Today, we reported full-year earnings of $1.30 per diluted share on a GAAP basis or $3.43 per diluted share on an adjusted basis. This represents an improvement of more than 35% on a GAAP basis from our earnings of $0.96 per diluted share reported for 2013. We reported $3.13 per diluted share on an adjusted basis for the full year of 2013. Total revenues for the year grew by almost 50% compared with 2013 reaching a record of almost $10 billion. Putting this in perspective, we had more revenue in the first three quarters of 2014 than we had during all of 2013.

Five of our health plans now generate over $1 million -- $1 billion in premiums and two health plans, California and New Mexico, doubled their revenue in 2014 alone. This revenue growth was driven primarily by two key factors: significant increases in enrollment and higher premium revenue from many of our members. The higher premiums per member resulted from our continued transition from a Company operating an acute care business to one serving members with complex care needs that include behavioral healthcare and long-term services and supports. Members with more complex needs bring with them a higher per member per month premium. 2014 enrollment grew to 2.6 million members, an increase of almost 700,000 members over year-end 2013.

Membership growth was strong across all lines of business but was driven by Medicaid expansion and the membership added in South Carolina, Illinois, and our acquisition of First Coast Advantage in Florida. Per-member per-month premium grew by nearly 20% over the prior year and was primarily a result of new long-term service and supports, or LTSS benefits, now included in our managed care programs in California, Florida, Illinois, New Mexico, and Ohio. As we promised back in February of 2014, we were able to deliver significant improvements in administrative efficiency throughout the year.

General and administrative expenses as a percentage of revenue declined to 7.3% for the fourth quarter of 2014 from 11% for the same period in 2013. For the full year ending December 31, 2014, we experienced an administrative expense ratio of 7.9% versus 10.1% in the same period for 2013. To remind you, a 10-basis-point drop in our administrative expense ratio equates to an expense reduction of approximately $10 million or about $0.12 per diluted share directly to the bottom line.

As we discussed last year, we devoted significant resources to infrastructure and human capital investments that were necessary to fuel our anticipated growth. As our new growth businesses came online during the year, we were able to finally realize the benefits of those investments. Our greatest financial challenge in 2014 was reflected in the increase in our medical care ratio over 2013. While we were pleased that our medical care ratio actually dropped slightly in the fourth quarter of 2014 when compared to the third quarter of 2014, our medical care ratio for the full year of 2014 was 240 basis points higher than in 2013.

We attribute the year-over-year increase in MCR to four factors. First, a significant amount of our revenue is now coming in from programs that cover long-term services and supports. As we've discussed in the past, the percentage profit margins from members receiving LTSS benefits are generally lower than those associated with our traditional membership, but the dollar margins are significantly higher. Second, increases to our base premiums in recent years have not kept pace with medical cost trends as states have had to balance the need for rate increases with an increasing number of individuals who are eligible for government programs.

Third, a lack of coordination in the design of profit caps and medical cost floors in some of our contracts have resulted in counterproductive outcomes. And the fourth factor is the inevitable time lag between the initiation of care coordination and the care management efforts for our members with complex needs and the realization of financial benefits from those efforts to reduce margins in 2014. In San Francisco last month, we talked about how we continue to be effected by delays in reimbursement for the health insurer fee in a few remaining states.

We've also previously discussed that during the fourth quarter, the New Mexico and Texas Medicaid agencies agreed to full reimbursement resulting in the recognition of $30 million in the fourth quarter. We have summarized the still unrecognized health insurer fee revenue for 2014 in the earnings release. The net amount outstanding from the California, Michigan, and Utah Medicaid agencies is approximately $20 million. In other words, had we been able to recognize this revenue in 2014, our EPS would have been higher by $0.26.

Finally, I want to highlight our cash position as of December 31, 2014. The Company had cash and investments of around $2.6 billion including approximately $200 million at the parent level. Most importantly, cash flow from operations increased significantly to over $1 billion for the year ending December 31, 2014. We will be hosting our investor day conference in New York City this Thursday, February 12, at 12.30 PM Eastern time. At that presentation, we will be discussing the Company's outlook and strategy for 2015.

We look forward to seeing you there or encourage that you listen via the webcast. Since will be discussing 2015 outlook in New York on Thursday, as Juan Jose said, we will not be taking calls or questions on the subject matter today. This concludes our prepared remarks. Operator, we are now ready to take questions.

Thank you.

(Operator Instructions)

Sarah James, Wedbush Securities.

Thank you. I was hoping that you could break out some of the out of period items in the quarter. It looks like there is about $0.21 of health insurer fee that was out of period benefit in the $0.10 Texas bonus headwind, but I wasn't sure if there was some unusual flu activity.

SG&A came in about 20 basis points better than guidance so I wasn't sure if that's just the out of period revenue or if there's some sustainable improvement there. And then last, if there was anything on in Florida related to the acquisition like a reserve build. Thank you.

Sarah, it's Joe speaking. As with any quarter, we have and I could discuss with you for hours a whole pile of one time out of period adjustments, favorable and unfavorable. I think really other than the pickup from the ACA health insurer fee in Texas and New Mexico, I would say that the pluses and minuses kind of evened out this quarter. Texas quality revenue continues to remain a headwind. I think we spoke about that.

There's about $19 million or $20 million of that potentially still left on the table that we might be able to realize in 2015. If we get information from the state and that information indicates we've earned the quality revenue. Again, there's a lot of stuff back and forth. New Mexico, for example, is a state with considerable activity this quarter and this year in terms of retroactive enrollment, adjustments to reserves.

I'd say the same thing about Florida. The second half of the year is a result of revenue increases that are going to come in retro to September 1 of 2014 that we weren't able to recognize. You've seen some out of period stuff reflected in those two states, and I think it's meaningful but in general, I think you can just look at it in terms of the health insurer fee as being the one item.

Sarah, this is John. This is why we always caution everyone against trying to take a quarter and extrapolate future run rates. That's why we'd rather have you look at a longer period of time, one or two years as opposed to one or two quarters.

Got it. Thank you, guys.

Chris Carter, Credit Suisse.

Thanks. Good afternoon. I'm just wondering if you could give us an update on New Mexico. I know the LTSS members are running excess of 100% MOR their last quarter. Just curious how that book is tracking this quarter.

It's Joe speaking again, Chris. I don't think we've seen anything drastically changed about New Mexico. Obviously, we will talk about that more on Thursday at investor day. I would say though that despite what the recorded numbers are showing you, I don't think there's been a deterioration in New Mexico or Florida this quarter. And there's just a huge amount of retroactivity with membership and other issues in New Mexico. I think what we said last quarter, it pretty much stands.

Got it. And then a -- just maybe similar commentary in Washington? Did you guys get a rate increase there or anything on the ABD book?

Chris, we'll be talking about all of the 2015 rates on Thursday.

Okay, all right, thank you.

Josh Raskin, Barclays.

Hi, thanks. First question just on Texas. I think in the press release you talked about what the $25.5 million that wasn't recorded. And you said $20 million was lack of information to substantiate the payment. What's the other $5.5 million?

Josh, it's Joe again. The other $5.5 million is essentially revenue we don't think we're going to be able to recognize related to 2014.

Okay, so you have visibility on that but you just don't have think you hit the metrics or whatever they changed enough and that's sort of, okay. So that's no longer there.

Correct.

And then what about timing for the ACA reimbursement from California? Have they given you a timeline as to when they will be reviewing this? And do they have any rationale for why they're one of the only states that doesn't believe that this should be part of rates?

Josh, we're going to talk more about that on Thursday, but California is making progress, albeit slow. There is a light at the end of the tunnel and there is not a train coming our way.

Okay. It's not something where you feel like you need to start taking legal action or anything like that?

No.

No. This is Mario. My understanding is that they have submitted something to CMS on they are awaiting approval.

Okay, got you. And then just last question. I know we don't want talk about a specific quarter and extrapolating and I know you're not going to give guidance for 2015 but that's our job. I have to ask. The 2014 number, as you guys think about it, how would you break out the one-time items?

Obviously, we know the ACA fee and we know the Texas performance fees and I guess we can determine whether or not we think Texas is run rate or not. But I know Joe just mentioned some retroactivity in the quarter, and so I'm just trying to figure out if you think about what is the run rate -- forgetting about 2015, but where do we start in 2014 as a baseline of what you think you earn on a run rate basis?

It's Joe speaking. I think it's -- all in, Josh, I would kind of look to what we reported for the full year. That's all in. That, I think, says what our year is pretty well once you smooth everything out. I wouldn't look to a quarter but I think the full-year rate of 89.5% is -- that's our run rate for 2014.

This is Mario. I just want to reemphasize what Joe said. This has been a lumpy year because of a lot of timing issues, things like the ACA fees and so forth. New programs coming in, some rate adjustments here and there, retroactive membership, It's been added to the plan. So It's very difficult to do much with the quarter but I think that to Joe's point, look at the year-end results and that gives you a pretty fair picture smoothed out of what the year looked like.

Yes, and I was looking more at the EPS number. If I was thinking about the $1.30 and then Texas is $0.33 and then the unreimbursed health insurance fees is $0.26. After adjusting for those, you think that that's relatively reflective of what you think Molina's underlying earnings are?

I would say, Josh, that's reflective of what 2014 underlying earnings are. We are going to speak more on 2015 on Thursday.

Clearly there's some things like the ACA fee reimbursement that hurt us this year that were really outside of our control. If you look at the medical care ratio, it's about what we thought it was going to come in at when we gave guidance last year.

Okay. All right. Perfect. Thanks, guys.

Justin Lake, JPMorgan.

Good evening. This is Mike Newshel in for Justin. Did the fourth quarter include any one time transaction costs from the First Coast Advantage acquisition? And also can you break down and share any transaction details or expected accretion from the deal?

It's Joe speaking. As far as transaction costs, they were pretty minimal.

And how about any transaction details or accretion?

We brought over 63,000 members in the Jacksonville area. It was an asset purchase. In terms of the revenue and accretion, it's probably not material at this point.

Okay. And did the deal have any skewing effect on the elevated MLR in Florida for the quarter or was that really not much of a factor?

It's Joe speaking. If you look at the Florida standalone results for the quarter, yes. Because when we do an acquisition of that, especially in December, the way we book reserves it's going to be a factor in pushing up the fourth quarter Florida MLR, but not consolidated.

And so do you have a sense of where the Florida MLR would have been ex the transaction?

I can't speak to that. But I would just say that given everything that's happened in Florida this quarter, back in New York in September, I said Florida was probably going to run in the low 90s, and I'm standing by that prediction.

Okay. Great. Thank you.

Kevin Fischbeck, Bank of America.

Okay. Great, thanks. I guess let's go back to the Texas FT for a second. I guess you didn't book $5.5 million. How do I think about that number? Is that a number where you say, well if the number was $32 million annually that you only collect 90% of it or 80% of it? Or is that a number you think you should be consistently getting 100% out of? What has that been historically?

This is John. It changes every year because the state of Texas changes the P for P metrics. This year on the metrics that we got visibility on, we think that we're not going to achieve 100% compliance. We think that's going to result in a $5 million giveback. In 2015, it may be different depending on what the measures are and our performance.

I guess you have a 2013 number.

Actually, I want to say in 2013 there was $4 million or $5 million we were able to recognize, too. In that regard, it's been consistent.

Okay. And I guess -- I appreciate the fact that from quarter to quarter there's a lot of moving pieces [needed] so much that it's difficult to look at things on a quarterly basis. But I guess just qualitatively as we think about the quarter, there's some books of business that you just brought online this quarter, some books of business that you've had for a couple of quarters now.

As you guys think about that normal progression of a company bringing on a lot of revenue, is there any book, whether it's duals or long-term care, or whatever that is performing not the way you would've thought, either good or bad? Is there any color you can give around how you feel like qualitatively the progression is coming in and if you can kind of break it out between Medicaid expansion versus [quarten] versus duals versus long-term care, that would be helpful.

Kevin, that is a great question. We actually have a slide on that. We'll be talking about that on Thursday.

Okay. All right. I guess I will tune in Thursday. Thanks

Brian Wright, Sterne Agee.

Thanks. It seems like there was some retro membership assigned in both Florida and New Mexico. Did I hear that correctly?

Brian, much more in New Mexico. New Mexico has been having retro revenue -- I'm sorry, retro enrollment additions all year.

And that's completely separate from your negotiations with regard to the separate minimum MLR byproducts in New Mexico?

As far as I know, yes. I think is just a matter of the state and everybody in New Mexico who had working hard to get members on so they can get care, and that rolled out during the year and some people were enrolled retro.

I apologize, but could you give us the dollar amount of the negative impact for the byproduct MLRs in certain states like New Mexico?

Say that again, Brian?

I wanted to know kind of how much the results were in 2014 by byproduct MLRs in states like New Mexico instead of a consolidated minimum MLR.

Oh, Okay. Brian, let me speak to -- we have a line on our balance sheet for the amount payable back to the states. About $527,000 is payable back to the states for various issues. About $390,000 or $400,000 of that relates to Washington, California, and New Mexico combined.

Let me clarify, Brian. That was $570 million, not thousand.

Okay. Thank you. And then if I can sneak one last one in here. Way back in 2005, you guys took a run at Georgia. Just any updated thoughts?

Our understanding that the RFP was released today. And so any time an RFP is released, we evaluate whether we want to proceed.

Do you have people in the state currently?

What you mean by people, Brian? Do we have staff there? No.

Okay. All right. Thank you. That's all I got.

Chris Rigg, Susquehanna Financial Group

Thanks. I just wanted to come back to Florida quickly here on the MLR. I hear the comments about the acquisition but I guess I believe you got a rate increase on the long-term care side. I could be wrong, but assuming you did, did things Joe still shape up as you -- when you talked about the MLR last fall, did you assume the rate increase in the context of your comments?

Yes. That's correct, Chris. There was a rate increase in Florida effective September 1. Just as a result of timing of communication of that and signing of the paperwork and everything, we weren't able to recognize any of that increase in 2014. So that's one reason why the fourth quarter has such a high MCR. (multiple speakers) There's delay in revenue recognition in Florida that's hurting the quarter.

Okay, all right, so then I guess how much would -- can you give us a sense for how much the rate increase would have impacted results?

I don't have that specifically, Chris, but I think if you combined that with the impact of the way we booked the acquisition, you definitely pushed down below 95%.

Okay.

I think we're going to end up in the low 90s there when all is said and done.

Okay. And just on the flip side, California continues to track pretty well here Any sense for how we should think about -- I know this is a 2015 question, but just some sense about trends going forward, how the state's looking at the rates there, how you feel about rates in California generally. Thanks.

I think California is a real good illustration that we can carry on to places like Florida and New Mexico and Washington. California recognized that it had underpriced specifically the ABD population. And over a period of about 2 to 3 years, they raised that rate and as we grew business, it grew profitably. Again, I think that for the next several years we will be working with other states on the base rates because the lack of rate increases over a period of time can squeeze margins.

This is Mario. I just want to put in a plug for medical management as well. It's not simply a passive issue about getting a rate increase The management team in California did a good job as well in trying to improve their performance of that plan. They deserve credit, too.

That's the difference between the doctor and the lawyer in the Molina business.

There you go. Thanks a lot.

(Operator Instructions)

Ana Gupte with Leerink Partners

Thanks. Good evening. The first question I had was on G&A outlook. As you point out, it's extremely sensitive and up to the bottom line. In terms of the fourth quarter and business expansion cost and other things for 2015, was that in any way more front loaded? As you are thinking about 2015 is there likely to be more improvement going forward?

Ana, you said the word outlook, so we're going to get into all of the admin -- remember we're going to be bringing on Puerto Rico and some other of the duals contracts in 2015. We'll go through the whole admin discussion on Thursday.

Okay. Anything at all on whether or not you had 2015 costs? What was the magnitude of the 2015 costs in the fourth quarter?

I'm sorry, Ana. We didn't hear that. Any magnitude of what?

Anything you can comment on as far as just how much of the business expansion costs might have been booked up front.

I would say in general they weren't substantial. When we were in New York, we expected G&A back in January, we said G&A would run about 7.5% on the fourth quarter. It's a hair below that, but year to date, we're right basically where we said we'd be. I wouldn't -- we continue to make good progress on the G&A front but I don't think there is something -- there's huge upside out there beyond what we've already talked to you about.

Okay. Thanks, Joe. On flu and hep C, did you say anything about that? If you did in your prepared marks, I'm sorry, but what was experience in the fourth quarter? And is the flu season peaking?

Sure. On the flu season, I think it's been a moderate increase from last year. So 2014 a little bit higher than 2013 but not a lot. And on hepatitis C, as you know, we have been able to reach accommodation with many of our states on some sort of reimbursement mechanism so that's mitigated a lot of the risk that we face on hepatitis C front. And the current hepatitis C utilization is included in our numbers for the quarter.

Okay. Thanks. One last one on days in claims payable. Is where you are right now something that you see as your normalized levels of where you need to be?

It's Joe speaking, Ana. I would think that over time that DCP number is going to come down. Right now obviously, we still have a lot of business that's starting. Any clients that were associated with the Florida acquisition, very few of those were paid in December because we just started. I think over time, you'll see us work our inventories down which will in turn reduce the days in claims payable as a byproduct of that. I don't know when that's going to happen because we've got some growth in front of us next year. But I think in general as we look out over a couple of years, that number will come down.

Thanks so much. I appreciate it.

Tom Carroll, Stifel.

Good evening. I want to come back to a couple of things. I would come back to Josh's question on run rate and put a finer point on it. Joe, you mentioned 130 was a good number but if we add back to $0.26 for the ACA impact, $0.33 for the Texas quality impact, we get to $1.89. Is that a reasonable number to think about in terms of us now thinking about next year?

My thoughts were more of the MCR level. I think we've laid it out, Tom. I think if you add back in the health insurer fee and a good chunk of the Texas quality revenue, that's where you get. I would just caution everybody that we're going to be talking again about 2015 on Thursday. Things can change in the course of a year.

So considering the $1.89 for conversation purposes now, and looking out at the consensus numbers that are out there of around $2.51. That implies like 33% growth and I would think a company like yours, seeing all kinds of growth, would be fairly comfortable with that number. Can you comment on -- would you feel uncomfortable putting out a -- ?

Tom, Tom, Tom.

Nice try. You are asking us to confirm something that we are going to talk about on Thursday.

We'll see you Thursday, Tom.

One other thing. Let's go to Texas quality payment again. There's been some dialogue around this now for a while so I apologize, but relative to the $20 million that you highlight that lacks information, is that run out data that you need from the state in order to evaluate the framework? And I guess what is your gut feeling in terms of that coming in to the Company either in first quarter or second quarter of this year?

Tom, this is Mario. This is a very complex calculation. It depends not only on our performance but our performance relative to our peers. Even if we know how we are doing on some of these measures, it's very difficult for us to be able to recognize the revenue because we don't know where we stand in relation to everyone else.

That's one of the problems with these new measures that Texas has come up with. If you look at some of the measures we had from 2013, we did not settle that until December of 2014. So it could take a while before we get clarity on the Texas pay for performance measure that's still outstanding.

Right. I appreciate that, but you must have some -- you have some comfort around the $5 million, right, in not being able to capture that

The $5 million is really more related to HEDIS scores, which are pretty easy to calculate.

Okay, and I guess what's your comfort level around the $20 million? It sounds like there is some risk there still to it. Do you feel like you are going to get 80% of it?

I think it's difficult for us to say at this point.

No answer. Okay.

I think there is potential that we're going to pick up some of it but I can't tell you how much.

If we had insight into that, we'd record the revenue or tell you we can't. We would record the revenue. Right now, we just don't know enough.

And then one last one. The tax rate in the quarter seemed a little lower than it was implied through the guidance discussions we had all through 2014. Is that the case do you think and if it was, why did you have a lower number?

John's going to be talking about tax rates in New York on Thursday. But not to steal his thunder but in general, remember with the large nondeductible expenses we have to the extent pretax income increases, you're going to have a decrease in your effective tax rate which is what happened this quarter.

Okay.

So, you are correct. It would be a little lower than some -- it would be lower than some people might have expected.

All right. Good deal. Thanks. Thursday.

Thursday.

Peter Costa, Wells Fargo Securities.

Thanks. In looking at your Texas quality payments for the quarter, they actually went down from the third quarter, yet you're expecting to see more coming in from next year. Can you explain to us why they went down from one quarter to the next?

It's Joe speaking. First of all, we're not saying anything about what we expect to receive or not receive, what we expect to earn next quarter. All we are saying is that of the $25 million of Texas quality revenue related to 2014, $20 million of that was not recognized because we do not yet have the appropriate metrics from the state to assess our compliance.

As far as the actual number, the amount recognized in fourth-quarter dropping that's because we realized that $5 million of revenue was not going to be recognized as a result of some HEDIS measures we didn't hit. Again, I just want to emphasize we don't have visibility right now into how that $20 million is going to play out in terms of whether we'll be able to recognize it or not. Right now it's unrecognized and we'll recognize it if we indeed earn the revenue.

So the revenues would have been higher if you hadn't made the decision that $5.5 million wouldn't be recognized. As that a fair statement?

That's correct. That's correct.

And then can you talk about hep C a little bit more in detail? How many states have carved out specifically insulating you from utilization of hepatitis C drugs? So not necessarily included into your rates, but created some kind of carve out either a kick payment or something like that.

Off the top of my head, I can't tell you that but I know that most of our states, perhaps almost all of them, have done something to mitigate the hepatitis C instead in a variety of different mechanisms. It's very complicated but we do have a fair amount of protection or mitigation, not entirely and clearly we don't have that for the Medicare business on the part D side but there are other issues with Medicare part D.

I'm feeling pretty good about it now much, better than I did this time last year when we talk this was potentially a budget buster for us. Having said that, it's still a big issue for the states. And whether they are reimbursing us or paying for it fee-for-service, this is something that's going to put a drag on state Medicaid budgets in the future.

Okay. In your prepared comments, you said 2015 would be a lot like 2014 but then you said it was a year where it's setting you up for growth and improved profitability in the future. Did you imply improved profitability in 2015? And if you did, off of what level? Off the run rate you guys were talking about or off of the reported numbers?

Again, when we get into guidance on Thursday, what you are going to see is the 2014 and 2015 are going to be very similar and that this is another year of growth for us. We picked up a lot of members in January and February through the marketplace. And we continue to see growth in Medicaid. We have the Puerto Rico contract coming in, and we have some duals contracts that are rolling in. Again, another year of a lot of growth in revenue and membership.

All right, I understand that but just regarding the improved profitability in the future. What future are we referring to? Before 2015? After 2015 or 2015?

(multiple speakers) --Thursday.

Okay. Got it. Thanks much.

David Windley, Jefferies.

Good evening. Thank you. You've addressed Florida but several of the other higher MLR states in your report tonight overlap with the state that you mentioned about LTSS and in the case of Washington, ABD. Do feel like you have the appropriate programs and resources deployed in states to be able to continue to attack and work down medical costs in MLR or are there still investments that need to be made in those states to get there? I suppose the flipside of that question would be how much of it is rate and how much of it is your execution?

This is Terry Bayer. I will respond to that. First keep in mind that this is the first time that the full long-term services and supports benefit both home and community based and long-term care facility is coming into managed care. And like any new program, it takes time to really develop and execute on the programs. No different, there's a unit cost element but more importantly, we're focused on the coordination programs.

One of the benefits of the duals and the Medicaid and Medicare dollars coming together is that by managing the long-term services and supports, we expect to see benefit back on the Medicare side. Remember that the LTSS is a Medicaid benefit. So this will not be in place on day one. It takes time to build relationships with the facilities, to get everyone assessed, to get the care plans in place and get it executed [bu hon], but we are really looking at the whole set of services, both the Medicaid and Medicare side.

So let me just also add to what Terry said. This is Mario. We have been doing Medicare D-SNPs now for 9 years. We have experience with many of these benefits in places like California, Texas, and Florida. So I think we are very well-positioned to deal with these issues going forward. And I think that we do have the appropriate staff and experience.

I think our experience with the d-snips has been invaluable and will really help us as we try to combine the Medicaid long-term services with the Medicare program in these combined contracts. I'm pretty confident that we can do this and I think that we're really well-positioned for it.

Thank you. A follow-up question there, what are you seeing in terms of Medicare opt out in duals? Is that leveled off in and maybe what messaging actions are you taking around that?

We told everyone at the beginning of the year that we thought it was going to run about 50%, and it's been doing that. Of course, it varies a little bit from one geographic region to another. It depends on things like networks. Remember if you've got a dual eligible beneficiary who has seen five or six specialists, all you need is for one specialist to say, I'm not in the network, don't stay in that health plan.

So that's part of what contributes to this. Part of it's network. The other the thing is frankly, the way these things are rolled out, there's a lot of confusion for the beneficiaries and some of these people dis-enroll before they even find out what the program is all about. I think that to the extent that we have a longer voluntary enrollment period And more of an ability to explain to the members the benefits of the program, as we've done with the D-SNPs in the past, people will sign up.

I think they will see that it's beneficial to them. But it's going to take a while and I think some of people that are opting out now may come around and rejoin us in the future. Because we will still be responsible for their long-term care services.

Thank you for the answers.

Chris Rigg, Susquehanna Financial Group.

Great. Thanks for letting me hop back on here. I wanted to come back, Mario. I could have misheard you. Did you say that you just recognized some quality monies in Texas from 2013 in the fourth quarter of 2014?

It's Joe speaking. That's correct. The amounts were fairly small but I think there was a $300,000 or $400,000 that just got cleaned up in late 2014 related to 2013. I think Mario's point was there's an extraordinary -- there can be an extraordinary tail of the determination of these metrics. They're extraordinarily complex and their calculation and required time for them to develop. While it's not -- that specific item wasn't financially significant, it does indicate, again, the tail we have on some of this revenue which really far exceeds what we have on claims liability.

Right. Great. I just wanted to make sure that it wasn't something material in the quarter. Thanks a lot.

There are no further questions at this time. I will now turn the conference back to you.

It probably doesn't need to be said but we're looking forward to seeing you all on Thursday where we are going to provide guidance and talk about our strategy and outlook for the 2015. See you then. Bye.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.