Good morning, and welcome to the Centene Corp. 2012 First Quarter Earnings Webcast and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Ed Kroll, Head of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Thank you for joining us on today's earnings call. Michael Neidorff, Chairman and Chief Executive Officer; and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene, will host this morning's call. The call is expected to last approximately 45 minutes and may also be accessed through our website at www.centene.com. A replay will be available shortly after this call's completion also on our website at centene.com, or by dialing (877) 344-7529 in the U.S. and Canada, or (412) 317-0088 from other countries and the playback number for both of those dial-ins, 10011606. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's Form 10-Q dated today, April 24, 2011 [ 2012 ], and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's First Quarter 2012 Earnings Call. We delivered strong top line growth of over 40% in the first quarter. First quarter 2012 earnings per share came in at $0.45 compared to $0.46 in the first quarter of 2011. While it is not our policy to provide quarterly guidance, we did note at our December 2011 Investor Day that we expected first quarter earnings per share in 2012 to be relatively flat compared to the first quarter of 2011. In fact, on our fourth quarter 2011 earnings call, I said in part and I quote, "year-over-year flat would be good recognizing the new business and recognizing the start up costs." We view these quarter results as mixed, as our solid HBR came in 20 basis points higher in the top of our guided range. This was due to the continued elevation of the HBR in Kentucky market, Texas seasonality in March, as well as an uptick in medical costs in our South Carolina market driven by the Norovirus. Additionally, we incurred $0.15 of startup costs in the quarter, which came in higher than our previously expected $0.10 to $0.12. This increase occurred as a result of greater business expansion activity, including costs associated with enrolling additional lives in Texas. In Texas, we received 300,000 members in March and an additional 70,000 in April. While not intending to set a new precedent by disclosing membership data prior to the current month, we believe that it is appropriate in this case due to the G&A impact on the current quarter. At the end of the first quarter, we had 811,000 lives in Texas, including the March expansion in Texas of approximately 300,000 lives. And the before mentioned addition in April of 70,000…

Thank you, Michael, and good morning. For the first quarter of 2012, Premium and Service revenues were almost $1.7 billion compared to $1.2 billion last year, which represents a 41% increase between years. This increase is driven by a 39% increase in membership between years coming from the addition of 4 new states, Illinois, Kentucky, Louisiana and Mississippi, and a significant expansion in Texas effective March 1, 2012. In addition, revenue increased from the pharmacy carve-ins, which occurred in Ohio last October 1 and in Texas, March 1, and also from the addition of in-patient services for the Texas STAR+PLUS product on March 1. As a reminder, last year we did not recognize revenue or medical costs for Mississippi in the first quarter due to CMS approval requirements. We recognized the revenue and medical costs for the January 1 through June 30, 2011 period in the second quarter of last year. Our consolidated Health Benefits Ratio was 88.2% for the first quarter this year compared to 84.9% in the first quarter of last year, and 85.9% in the fourth quarter of last year. Our HBR increased from the first quarter last year as a result of higher Health Benefit Ratios in certain markets, along with a mix change resulting from adding higher acuity membership and from reserving in higher levels in new markets. As Michael indicated, we continue to experience an HBR in Kentucky of approximately 100%. We also experienced a higher HBR in Texas between years as the result of the impact of the September 1 rate decrease and higher medical costs in March. Higher seasonal costs in South Carolina and an increased level of medical costs in our individual health business. Sequentially, our HBR increased by 230 basis points reflecting increased utilization in Texas, and the fact that…

[Operator Instructions] Our first question will come from Josh Raskin of Barclays.

I've got 2 questions. First question, just on the guidance, the $0.04 boost to earnings per share. Is that just simply adding in the new markets, the 2 new markets plus the Texas expansion? Or is that adding earnings for the new markets and then subtracting for slightly lower earnings in the core business? I was just trying to figure out what drove the actual increase.

Yes. I think what we do is we go through a review of all of our business for the remainder of the year and sort of re-forecast, and this is the result of that process. So, I'd say it's a combination of taking the actual results for the first quarter and then, where we expect things to see for the rest of the year. Clearly, the additional revenues that we're adding for -- to our guidance numbers of $500 million on each end is a big driver of the earnings increase and which, obviously, makes up for the first quarter shortfall, let's say, and for the additional earnings from the new business.

As we talked about here, we see a second half -- true to the second half, as Bill just indicated, as this new business comes online we get past the continuity care, that type of thing. So there's a number of factors that affect the new business and we still will continue to focus, of course, on the legacy business, which we expect to perform within normalized ranges.

Okay. So, not to put words in your month, but it sounds like the changes were all incremental to the new states, and as you turn to the legacy markets was, Bill, is there any change to the forecast on the legacy markets?

I would say there would've been changes, Josh. In most of our markets, there will be updates. We put our guidance numbers together initially, we're making estimates of what membership levels are going to be, what number mix, what rates, et cetera, as we get further into the year. Obviously, we're able to fine tune those and come up with better estimates. So we run that across our whole book of business and there's pluses and minuses in terms of the whole portfolio but overall, we do expect to see a significant ramp in the later quarters of the year as we benefit from the additional membership coming on. And, again, first quarter, usually has a higher seasonality and we expect that to taper off.

Each plan, I mean, on a monthly basis we forecast the business looking at all the factors impacting it. And if we identify an issue, we deal with it. If we see some good things happening, we do what we can to accelerate it.

Okay. That's helpful. And then just on Texas, on the cost trends, you guys speak about the dashboard and breaking down sort of the cost trends and seeing realtime data. So, I guess the 2 questions are what specifically drove that? Is that the new membership? Was that the carved-in benefits of in-patient and RX? And then, just looking at the flu data, it looks like there was obviously a spike in Texas sort of that week of March 17, held off pretty quickly so have you seen a reversion back to normal levels in April yet?

Our dashboard is really helpful and we have that bonus with new membership coming in, in one month, 300,000 lives. It takes a while for all that to settle down and starts to normalize, so we got some confidence in it, Josh. I mean, that's like taking in -- we have some states that aren't that big, so I mean that was a big bonus come in. And Jesse, would you and Mark, anyone want to add to that in terms of...

Yes, sure, Josh. This is Jesse Hunter. With respect to Texas, I think there's a combination of factors and you referenced a couple of them. So with respect to our existing business, we did see some higher seasonal costs, so particularly in areas like respiratory, for example. And we've seen that before in Texas and we've seen that also be limited to the first part of the year. What we've also seen is, as we -- with our existing business, but with new benefits. So, bringing on pharmacy across the board in Texas, obviously, was a big, big undertaking. We've got some Coordinated Care and other requirements with respect to that. But also bringing on in-patient for STAR+PLUS for March 1, was a driver. So we did see some higher in-patient cost but it was in the STAR+PLUS population. So existing members, but in new benefit, so still new to the program. So those things that we're seeing and what we -- what we can use that, the dashboard for are related to our existing business, and we've identified those areas quickly. We're, obviously, taking action against those and what we don't see right now are things that would -- that we think would be persistent in Texas legacy business over the course of the year.

We have a very experienced management group there that have been running a big business and have the skill sets for a bigger business. And I'd also add that the -- when you see this large membership coming on and accelerating to levels beyond what your initial expectations were, there was a lot of G&A cost that was added. A lot of temporary help and other things so we were able to absorb it and service that membership well. So, could be that the combination of things, Josh that -- but nothing there that says it won't normalize at a reasonable rate.

And our next question will come from Charles Boorady of Credit Suisse.

Just a couple of questions. First, on medical cost trends. Can you give us some details behind the key drivers of trend and, I mean, what the overall underlying industry medical cost trends are that you're seeing? And then, what you're seeing as a company in terms of the trend, i.e. how much are you bending that industry cost curve?

Yes. I think with respect to Q1 particularly, I'm not sure this is an issue of medical cost trends across the company versus some issues in specific markets. For example, in South Carolina, what we saw particularly early in the quarter, January and February, was this Norovirus which impacted the costs in that market, but it's subsided quite a bit by the month of March. And in Texas, as we just talked about, there's some additional respiratory costs and things like that. So, overall, I don't think we're seeing anything that we'd say we see anything different in medical cost trends at this point in time than we have talked about in the past. I think they're relatively stable. In any one market in any one month, you may see some increases or decreases but I wouldn't call that a trend. And as we're guiding for the rest of the year we still think that our overall guidance for HBR of 87% to 88% is the right range for us.

So, as you think about it, you take Kentucky and we said that that's going to be higher and that's -- we're booking at it close to 100%. You take the other new markets and we have always classically said to the first few quarters they're at 90%, 95% and it was appropriate how new they are to managed care. And you take that with the kind of membership we've been adding, you can see where that would put -- what we could call pressure or elevation in HBR. And the fact that it's where it is, probably speaks to the fact that the rest of it is predictable and manageable.

And you're suggesting that the growth in medical cost for the industry, for your end markets, are pretty consistent this year with what you saw last year?

Yes. I think there'll be some -- we'll see some pressure up, we've said that all along. But not -- I mean, that's not the key, in by any way, the largest driver of what you saw, that 230 basis point jump. That was more the new markets with some seasonality. I mean, we're pleased that that Norovirus stayed in South Carolina. I don't know how they shut down the borders around it.

Kentucky. You talked about Kentucky. And we knew cost trends were higher previously. So I just want to understand if there's a real surprise back to there. According to the stat filing that we pulled, it looks like you booked 106% loss ratio in the fourth quarter, and you said you booked around 100% loss ratio in the 1Q. Is that the kind of improvement sequentially that you expected in Kentucky? Or did it come in a little bit above where you are hoping to get it into Q1?

Yes, I'll start it off and then I'll turn it over to Bill and Jesse. But I think, if you think about there's a lot of volatility in the membership, and a lot of shifting in membership taking place so that some of the tools utilities depend on were not as effective when you have that kind of shifting. Bill, you want to talk about the things that really impacted the...

Well, I think, one thing to think keep in mind, particularly when you look at the statutory financial statements, is we might have a slightly improved consolidated HBR in a market like Kentucky, after we consider our specialty companies. Because there is margin in the specialty companies which when we consolidate that with the individual states, show a lower HBR than what the statutory financial statements might show, which basically shows the benefit of having our specialty companies and the ability to use those across to all of our health plans.

And we charge ourselves market rates. And as we charge ourselves we would tell to any other health plan in that market.

So the margin on our pharmacy and things like that like there would be for using anybody.

Got it. So the 106 versus the 100, not apples to apples basis, what was the sequential change in the Kentucky loss ratio and was it as good as you expected it would be knowing it takes time to get down to your targets?

Yes, it's pretty flat because -- it's fairly flat because as I said the membership's been bouncing around. And we think it's going to take 2, 3 or more quarters to get this normalized. It was virgin territory. They have not had managed care, and we're working through it. And we've seen this before in other states, that if you will, go back and you think about and we will normalize this.

Got it, so just a last question, as I look at your guidance for the full year, it seems to imply an improvement in the loss ratio. Am I right in inferring that, that improvement's coming from legacy markets and so as I assume new enrollments are going to have a higher loss ratio coming in? And if I'm right about that, what are the drivers of the improvement in the loss ratios?

Right. Let's see, I'll start and ask Bill to pick it up. But if you think about it, in the legacy markets we have said we have predictable trend. We're working through. End markets will vary market to market a little bit. Some of the new markets with higher medical trend in the early quarters will start to normalize and then we will be bringing on some new markets, Washington and Missouri, for example, that will have higher trends. So it's a shifting mix as we grow the business. And from where we sit, it's a high level, good issue to have to deal with. I mean, you have a very viable growing business with the tools to manage the costs in the way you should. And these shifts are really more a function of cost than any other factor. Bill, anything you want to add to that?

I'd just say that we give our guidance. We try to give a full-year guidance with respect to our medical loss ratios, so 87% to 88%. It's not unusual, and particularly in the first quarter, you might be outside that range where we are at this point, 20 basis up over that. But for the rest of the year, obviously, to get back into the 87% to 88% range, we would run less than that I think at the whole year here. And that's clearly our expectation, what we would have forecast initially. As the new business matures, we will see and expect to see lower loss ratios in the second half of the year because we'll get -- it will be more seasoned and we won't have to provide additional levels of margin on that new business. So clearly for the rest of the year, we will see the ramp. As we said in particularly the second half of the year, as we've gotten Missouri and Washington online, all of the Louisiana membership will come online April 1 and June 1, Texas is on March 1 and April 1. So the benefit of all of that will certainly accumulate in this third and fourth quarters and expect to be significant contributors.

To point out what I said in my remarks have Mississippi and Illinois, they came online in 2011. They're normalized and they're contributing in line with where we expect to see it. And this is high acuity population. This was basically the ABD and some foster care in Mississippi. So there's a good model of where we brought it on early last year and it's normalized today.

And our next question will come from Peter Costa of Wells Fargo Securities.

Can you talk a little bit about the rate in Texas? There was a lot of puts and takes on the rating with the rate cut, and then the carve in and the partial month, or just the partial quarter membership. Can you kind of talk about where the PMPM rates are going in Texas and what they are right now?

I think in Texas we had the rate decrease on September 1 of last year, which has flowed through. But then we had additional adjustments on March 1, which sort of, for all the new areas. And then I think on September 1, we'll have another rate change. So right now, we believe the rates in Texas are reasonable and fair. I think we worked well with the state from an actuarial soundness standpoint. And the issues that we have in there right now tend to be more just things like seasonal respiratory cost rather than they are an underlying rate problem or really an ongoing utilization problem. So at this point, we would expect the rates to be reasonable for the rest of the year.

I think, yes, you remember, we've been rebating a lot of funds back to the states over the years so they have that incremental move there. We just -- we probably won't be rebating as much this year as we have historically.

There's a lot of member mix issues that come into play and with that type of the membership that we have. So how many members are in STAR+PLUS, and how is STAR+PLUS having in-patient rates carved into it, the pharmacy carved in across the board. So it's a different ballgame on March 1 than was previously in terms of a lot of these factors.

And I'll just add I see it as a real positive to have that -- to have the law of large numbers sort of come to play as the year unfolds. So it's a nice place to be.

All right. That's kind of what I was trying to kind of nail down is, what exactly is the change in the PMPM rates? If you can kind of give us a percentage change or something...

I think what Bill said, that's hard to put that number out there right now. We have more membership that came on April 1 and we now have ABD, we have carved-in rates for the in-patient in STAR+PLUS, we have pharmacy coming in and that coming in too. So I want to be careful not to mislead and give you some sense to that. You can try and trend that and I would not be -- say the right way to go.

I will say with that with respect to our revenue guidance increase, over half of that is from Texas.

And our next question will come from Carl McDonald of Citigroup.

So, I want to talk about the specialty business. It looked like earnings in the first quarter nearly doubled versus where they were a year ago, which is a little surprising given the commentary that you had on the individual business. So can you talk about what the factors were that drove specialty earnings in the first quarter? If there are any one-time benefits or if you think $20 million is a reasonable go-forward earnings projection?

Bill, and then if Jesse, you want to add something.

Yes, I think the primary contributor there would have been from our PVM US Script in terms of the incremental change from last year. We have, between years, we've added pharmacy in Ohio, Kentucky and Texas. Texas is still only for one month in the quarter, but still is pretty significant. The Celtic business, our individual health business, I think what we -- we have a lower performance there than we really would like to have. But that's a small part of our business. And one of the things we're trying to explain, if you see the individual Health Benefit Ratios in our press release, there's a significant increase in our specialty HBR. That really is driven by the Celtic individual health business, not from our behavioral health business and other things that are included in there. And we would expect to continue at some level, similar level, for the specialty business on an ongoing basis.

Yes. I think it's just, once again, it's the benefit of being a multi-line company.

And our next question will come from Matt Borsch of Goldman Sachs.

Yes. I just was hoping that you could give us a little more detail on the Celtic business that you alluded to. The -- was there some pressure on the results just geographically where you're seeing and is it more on the rate side or more on the utilization side?

Yes. So on that, there's a few drivers that we can speak to you and also talk about what we're doing about it. It is fairly targeted from a geographic perspective. So there are certain markets where we are seeing higher utilization so what -- where we are as a result of that. In addition to things that we were doing directly, we are also looking at targeted rate increases in those specific markets. And those would be geared towards the second half of 2012. In addition to that, we are looking more broadly at unit cost. So even though it's not specific to those particular markets there, we believe there are opportunities to get unit cost savings, which would benefit the entire book. So as we're looking at that Celtic portfolio and the multiple states that, where we do business there, we see opportunity to pick that up again, it would benefit the second half of the year.

All right. And just, separately, could just give us a comment and update on the Ohio Medicaid contract situation?

Yes, I think as I said we really don't want to comment on something that's under appeal. We're going through the process. We believe we have a strong appeal. And so I can't even speak to the timing because the state has a lot of flexibility in how long they take to get back to us.

The next question will come from Chris Rigg of Susquehanna.

I just want to come back to the loss ratio comments. I hear you on the second half improvement but I guess, sequentially when you have sort of a full quarter's worth of Texas, does that exert sort of upward pressure on the consolidated number, relative to Q1? Or should we still expect some improvement in the second quarter overall?

I think you'll see an improvement in the second quarter overall. We generally see second, third quarters are fairly low. They're good quarters for us in terms of the MLR. And we expect that the seasonality things that we saw in Q1 will abate and we really don't think the expansion membership, and we will record that at a 90% or so HBR to start with, but that's planned in our forecast. It was all along in our forecast that way so we really expect to see an improvement for the rest of the year.

It's kind of a bridge to the second half.

Got you. And then in terms of the startup costs, $0.13 to $0.15 in the second quarter. Is there anything implied in guidance for the second half of 2012, all of things being equal, no new business one?

Well, I mean I'll start it off and Bill and others can jump in. But if you think about it, in the case of Missouri and Washington by example, we have all the hiring, recruiting and placement, the office setup, the systems, all those expenses without revenue. And so that's the issue and as you get the revenue coming on, you get the offset.

Yes, I would just say, with comparing first half to second half, we have a much, a greater amount of business that's coming on between Louisiana, which started February 1, to Texas expansion on March 1, and then Washington and Missouri on July 1. So those kind of accumulate to a large number for the first half. In the second half, we are anticipating fewer states to start up. We are building into our guidance some startups for let's say January 1 of '13. So we would have some fourth quarter start-up costs which we've included in our guidance and our estimates, but at a substantially reduced level than that we were seeing in the first and second quarters.

So, just one thing to add is we -- if we broaden the definition to business expansion costs, we do expect a reasonable amount of activity in the second half of the year. And that will be incorporated into our broader business expansion cost definition.

And that's a continued run rate that we have in terms of activity on some of those areas.

And our next question will come from Scott Green of Bank of America Merrill Lynch.

First, could you talk a little bit about your experience on the new Texas markets, like the Rio Grande Valley? Maybe how that faired versus your existing membership base in Texas?

Yes. I think, if you think about it we have one month with several part of the membership in the month of March. And to try and say more than we have about it, we would just be hazarding some guesses. And we're getting a better feel of it. We have another 70,000 lives that came on April 1. So we had, 370,000 lives over 2 months. Although we'll take a little more time before we start hazarding those kinds of guesses. We'll make it more fact based as our dashboards and other things start to come into play.

Okay, all right. So then the -- seemed like there were 2 issues you called out in Texas, the STAR+PLUS in-patient and then some flu-related costs, if I'm summarizing correctly. And where those kind of spread out evenly throughout the state? Or was there an isolated region where you saw those issues?

Yes, Scott. It's Jesse. The -- first, just to clarify, we were focused on respiratory issues, which are not specifically flu but still seasonal in nature. And I wouldn't comment at this point about the kind of the geographic concentration in STAR+PLUS. We have broad book of STAR+PLUS business. In-patient was new in all those regions and so I think that we're seeing that more broadly, and I wouldn't narrow it into a particular geographic area within Texas.

And the respiratory things is very consistent every year where some parts of the state are subject to people using various fuels to heat their homes and things and that just has an impact. And that's standard and to be expected.

Okay. All right. And one last one on Texas. Is it a bit surprising for the inpatient cost to be higher than expected, considering you were managing these numbers already? So it's not really that the number came from unmanaged fee-for-service to managed care that the...

No. No, Scott. We were not managing the in-patient side. The in-patient was outside at privy. We're dealing with a physician at that point, outpatient services. When you pick up the whole new in-patient side there's a curve on that obviously.

Okay. Could you quantify what you estimate is the seasonal impact on the MLR in the first quarter? So if it's respiratory issues. And then to the extent leap year had an impact. Could you try to quantify that for us?

I think that we really don't have a specific number that we're going to give other than to say that we, obviously, were impacted both in several markets by the seasonality. It wasn't across the company. It was really South Carolina and Texas more than anything in the seasonality side of it. And we expect that to abate in Q2.

And leap year, the extra day...

Things like that.

Yes.

Okay, but, all right, so you're assuming it gets better, but you can't share by how much it will get better because of those 2 issues?

Again, I think, we're staying with our guided range rates. We are at 87% to 88%. In the first quarter we were above that, 88.2%. But we do expect, obviously, to be back in that range for the whole year. So obviously, we do expect improvement which we would have through the reduction of the seasonality.

When I think about the impact of leap year, it's kind of simple just to think about 1 divided by 90 days or so. But is the impact, would it be a lot less than that if some of your costs to providers are capitated so that's a pass through? Is there any way to think about the impact of what the leap year might be?

Most of the costs are not going to be capitated. And so, we really have an additional day where our members can go to the pharmacy and get drugs filled, additional day of hospitalization, additional day of office visits, specialty, you name it. So I think your initial math is kind of similar to what we've looked at, it is an additional full day of medical costs that occurs as a result of that and it is what it is.

Yes, it would be better if leap year was in July or August.

One last one, I guess. So you talked about some new, like Missouri and Washington coming on. That's -- it sounded like contributing to the higher guidance. So are new markets like that immediately accretive out of the box?

We said earlier that we will book new markets at a higher MLR.

And market-by-market, it depends based on the data book and our review of what the rates are and expectations, et cetera. But if we thought the HBR was going to be at 90%, for example, it would be accretive because our G&A load incrementally is going to be less and it would add in. So as we look at these 2 markets coming on, we do expect them to contribute for the second half of the year. We'll incur the start up costs in the first half of the year but then once they start generating revenue, there will be an immediate change in terms of the contribution level.

That contribution will get stronger over a period of time as it becomes more managed so...

Is there a point where 90% isn't as conservative anymore for a new market if your current business is over 88% at this point?

I would say that when we look at each market, we have to take into account what our expectations are in terms of the long-term HBR, how we might have bid the rates in a particular case. And then we book what we would consider to be a reasonably conservative HBR in the initial 6 months or more of operations. With as we said in Kentucky, we're running at around 100% so we're not booking 90% in Kentucky. We're higher in some of those markets where we see that, that would be more appropriate. So overall, we think in normalized markets, 90% should be about the right number.

And our next question will come from Scott Fidel of Deutsche Bank.

Just had a question on Ohio. And maybe if you can help us think about the contribution that you're expecting from Ohio in 2012 as a percentage of earnings. And if you're not comfortable going into that level of detail, maybe just talk about some of the margin assumptions that you're building in. And really, what I'm trying to get at is clearly Ohio for most of the companies there they've been operating at very attractive margins, at least in 2011, due to some of the rate increases and cost improvements. So were you assuming that the margins in Ohio were or are going to start to normalize pretty significantly in 2012? Or are you still assuming that, that's going to be an above-average contributor to earnings in 2012?

Well each state is different in terms of their individual contributions. In Ohio, the state has been performing well. The health plan has been performing well for several years now. So it has been a meaningful contributor to the company. We're not going to get into specifics of percentages, totals or things like that. But it's a well-run operation. They have high-quality marks and overall, they're a good performer.

It's better, should have noted that out because of particularly the consolidated margin coming under pressure this year due to all the new business start ups that there would be a fairly richer margin assumed in that business like in 2012 relative to the consolidated margin?

Well, clearly the more mature businesses, and I would call Ohio is mature, are contributing more than the new businesses which are booking at higher margins to create, to develop margins and in dealing with things like continuity of care and normality. So I think that's a good assumption, yes.

Okay. Then, I just had a follow-up question back on Kentucky And if you think about sort of the factors that have driven you to underwrite that business at a materially higher loss ratio initially, whether it's 100% or 105% compared to that 90% traditionally. Can you help us think about sort of how much of a factor pricing is as compared to some of the mix changes you're seeing as compared to just that the cost trends are higher because it's an unmanaged market, where it didn't have managed care before.

Yes, Scott. I think it's obviously, it's a combination of factors there. And this was a situation where there was a competitive price. So clearly, pricing is a factor. And I think as a result of the process there where you've got your different prices across the 3 incumbents now. That's a factor, right, in terms of the actions, reactions, et cetera. So those, yes, those kind of go hand-in-hand. I think the fact that it's -- has been an unmanaged market is clearly a meaningful factor. You've got a number of populations that have been brought into managed care. You've got, including high acuity populations and then, so that's kind of normal, I would say, in terms of that fee-for-service to manage care transition. Although a little more volatile in Kentucky than we've seen in some of the other markets. And then you have, I would say, in addition to that, you have some Kentucky specific factors. Things like prescription drugs, overutilization, over subscribing, things along those lines that we've seen. And that we're working aggressively to with the state and with the provider community to address. So it's really a combination of all those things that are resulting in what we're seeing now. And obviously we're working hard to improve that.

I think if there's any parallels, other states we'd run into, that are really virgin territories where they got no managed care, this plan came up very quickly in a matter of 5 months or so from start to end. And we were up and running so there's some of the educational things you do upfront that's why we're booking ahead of this. But once again, we feel that over the terms of the contract, margins will be normalized and we will work out well.

So you did a good analogue as sort of what we saw in Ohio back in '04 when that was initially launched, but with a faster implementation time that was required for Kentucky then that plans happened for Ohio initially?

Yes, I mean that might be a good proxy to look at. How can you -- in our own staff, it means, these -- we have to look back at some of the states. And the issues were not dissimilar than we were talking to you then about and now we're talking about the margins, the positive aspect of Ohio. So you're right on, Scott.

Okay. And then, just one last quick question. Just on Kentucky again. It's probably a tough exercise for you guys to have done. But has there been any way to parse out sort of the utilization or acuity profile or the trends that you saw with the stayers, essentially the membership that you still have post the membership dip in the first quarter as compared to the leavers that exited to other plans during that open enrollment period?

I don't think we have a lot of data on that. That's...

We're looking at that. But I would say right now, it's not something that we really want to comment on.

You would tend to be more in the speculative side.

And the next question will come from the location of Sarah James and colleagues out at Wedbush.

I believe Ohio is looking for a bitter or a better partnership for the duals contracts that has a Medicaid contract in the state. So if in the event that the protest is not overturned, would a partnership with one of the 2 smaller awardees be something that you would even be open to?

Well, I think if we were going to think about it, we wouldn't talk about it at this point. But you can take that either way as a yes or no. Okay? Yes, it is a fair question but not one I want to comment on.

Just thinking in theory. If someone was to pursue a partnership logistically, is that even possible seeing that the due date for the duals contract is at the end of May, but we don't really know when the protest award is going to be decided but it's probably after the dual contracts is due, so logistically, is that even possible?

I think it's really better to say that we have the capability to do these things within our total market basket of skills and capabilities, and never say never. But I'm not saying we're ever going to do it either.

Okay. And then on the Celtic's uptick in cost, I was wondering if that's more of a utilization uptick or something that might be influenced by consumer demand for health care services? Or if it's more of a acuity or pricing issue?

Yes, I think -- yes, Sarah, as we've mentioned before, we are seeing an increase in utilization. So that's, I'd say, the principal driver. Yes, I think there may be some of those other macro factors, economic drivers, changing regulatory environment and other things which could be kind of a precedent factor that would be driving the higher utilization. But I think the end result is higher utilization.

Our next question will come from David Windley of Jefferies.

I wanted to come at the HBR a little bit differently. If I'm interpreting your comments about Kentucky correctly, I would guess that your kind of revisit or reforecasting of the year would be -- would that carry a little bit higher cost than maybe where you were at the beginning of the year? And then your Missouri and Washington assumptions are new to your guidance and so it would seem that at least, those 3 -- excuse me, at least those 3 factors would have an upward bias to your consolidated HBR. You are keeping that constant. And so I'm interested in what the offsetting factors are to keep that constant. What are the elements that are better than your previous assumptions?

You're correct in the sense that you have to look at the overall mix to see how that gets weighted. And I think as I said, over half of the increase in the revenue guidance comes from Texas. So I think that's probably going to be the offset that you're looking for. I would agree that we've added -- we go and we look at every market and we do the reforecast for our guidance, and there are ups and downs. Kentucky continues to be at a high level. Missouri and Washington are -- or not anything, I would say, that are drastically different than where we would have been coming up on an average for the whole year. And Texas addition, really has offset that to get it back in the range.

Okay. And on your comment on Missouri and Washington, are you planning to initiate those or upon implementation, you would accrue those at appropriately conservative levels as you normally do, so north of 90?

I'd say they're 2 different markets. I don't know if they're north of 90 or but they will be appropriately conservative, yes.

And then final question. I think your guidance on investment income kind of off a beaten path here. But investment income is about $16 million to $17 million. You had -- your on a $20 million run rate in the first quarter. Anything we should know there?

I don't think there's anything particularly worth mentioning at this point in time. I think some of those are different investment products that we have that could be are offsetting other investment, other liabilities we have in deferred comp and some things like that where we've tried to match up some of those programs.

And our next question will come from Michael Baker of Raymond James.

I was wondering if you could update us with respect to the birthrate, what you're seeing there? How that trended? And then historically, how closely you've seen that tied to the economy?

Mary?

Mary Mason. When we look across our markets we may be seeing a slight decrease in our birthrate. But this is something that goes up, that goes down. But it's staying pretty flat.

Our next question will come from Melissa McGinnis of Morgan Stanley.

To touch briefly on Centene's positioning for the duals in your early prepared commentary. And I believe health plans had to submit letters of intent by state to CMS in early April. Can you just confirm which states it is that Centene is most interested in participating and has submitted a letter of intent to CMS?

Yes, this is Jesse. Obviously, we are particularly interested in the duals opportunity. I won't go through kind of the laundry list of states where we submitted. But I guess what I would say is when we look at the criteria for our participation there, in our existing markets, you should expect that we would participate in those opportunities in our existing markets, or kind of pending markets, if you will. And then there are other markets which -- where we either think that the markets are potentially attractive or the duals opportunity, specifically, is attractive and we would have submitted our intent on that basis.

Okay, great. And not to belabor a point, but to just really understand the MLR seasonality as we think through new businesses and core business as we get into the second half of the year. It would seem like in Q1 maybe MLR came in a little high. You did have bigger Texas for one month, 2 months of 1/3 of Louisiana contracts. But it seems like you'll have actually a lot more new business coming on in Q2 when Texas is in for a whole quarter. And then we'll also have Washington and Missouri in the back parts of the year. Are you expecting maybe MLR improvement in the back half on your legacy business because of rate improvements? And if so, are you seeing in conversations with the states that maybe certain things in your core business will be tracking better relative to expectations on the rate front or the cost front? Because I'm just having a hard time understanding the new business versus the core business kind of pattern there.

Sure. Just a couple of things. On rates, we, I think Michael mentioned in South Carolina, we are working with the state for an April 1 rate adjustment. They should be finalized in the near future to help with regard to that state. Other rates, there's a few states we have July 1, September 1. Those are -- we are not expecting anything particularly significant in terms of rate adjustments for the remainder of the year in our states where we're working with each state that -- where that's applicable to to make sure they're actuarially sound. I think the other thing that I would point out with respect to the new businesses and the new -- the MLR impact of when we bring those on is we might record let's say a 90% HBR for that new business. But we will also benefit from the specialty companies in the margin that we will generate in the specialty company. So on an overall basis, we will not be as high as 90% in those markets when you take that into account. So I think there's contribution from the specialty companies was also an important aspect of that.

I think, if you look at historic data, you'll go back to see that the markets when they were new, we said the same thing. We said it's going to be in the 90%, 95% initially. And we said it could be for 2, 3 quarters. And how quickly we're able to bring it in is a function of the network, how used to managed care they are, a number of factors. But every market we go into and the rates that we use, we've done some actuarial studies, and know that we're capable of bringing it into a normalized margin over time. And there is no magic wand that just takes it from the 95% instantly. Because we're more concerned in doing things sort of at a sustained level. And we do things in a very methodical way that they were sustained. And if we see some uptick, it tends to be because of some seasonality, a flu season, respiratory thing, something of that nature, that can be market specific. And we'll just continue down that same cadence in our new markets and they'll come on stream and start to, like somebody mentioned earlier, it's like Ohio. There are a lot of same questions about Ohio we're getting about Kentucky before years ago. So it's a good plan today.

Okay, great. And then, final question. If we think about one of the near-term pipeline opportunities it's the Kansas RFP and I think Kansas is a little bit somewhat related to Kentucky is pretty priced focused on the contract. How is Centene thinking about their positioning for the Kansas RFP? And then maybe thinking about the Kentucky experience out of the gate and that price competitive bid? How you might approach the Kansas RFP, either maybe differently?

Well, I have to answer this in traditional fashion that until the state announces who's participating, we don't presume that we're going to be there. Or talk about it in that context. So we always believed that it's up to the states to announce who's going to be there and who's not. But if we're in states, whether it be Kansas, Kentucky or anywhere where there is a price bid, we get the data. We run it through our predictive models. We work with our actuaries, our consulting actuaries, our internal actuaries. And we come up with rates that we believe will protect normalized margins over the course of the contract and a reasonable period of time. And we're not trying to grow the top line without seeing longer-term benefits to the bottom line. And it's just as I said, there's no magic ball that you go in and it will tell you you're profitable. It takes time.

And our next question will come from Brian Wright of Monness, Crespi and Hardt.

If you could help me out with the Texas STAR+PLUS rates, embedded in those rates was an assumption for utilization levels. And I was just curious what were those assumptions? Where they fee-for-service utilization levels? Or was there a discount for fee-for-service utilization levels and those assumed rates?

Bill, we don't have our actuaries here but go ahead.

Yes, I can't comment specifically, Brian, on what was included there. But in general, as states go through that process and what the state of Texas has done broadly is they would look at their historical experience and they would apply a series of adjustments. As you recall, the state of Texas had the rates. So they are working through -- they work through their actuaries to get to all of the various factors, which would include generally some form of managed care savings as part of that rate setting process.

And that would be true on the in-patient carve-in as well?

I think it will be true for all aspects of the business but they are, we are contracting with state of Texas.

And then on a follow-up. So just in the Texas existing business, you highlighted the respiratory, which sounds very seasonal. But is there -- were there other categories of medical costs that were also elevated?

Nothing that really popped out or was -- indicated anything just market by market.

What we normally see, nothing more.

Okay. And then on the reduced variable comp cost in the quarter, what was the impact on G&A? How much higher would G&A then had the variable comp been as expected?

We don't really try to quantify what that is. It's built in. It's part of our G&A assumptions at the beginning year. If we do well, we accrue that. If we don't, we don't accrue it.

Yes, it's a function of how in the quarter, the shareholders always come first.

Well, I did have one more. On the DCPs, on that guidance for 39 to 44 for the year. You're at 44.7 for the first quarter. How should we think about that progressing through the year considering you are adding on a bunch of new business?

I think as the reconciliation shows, the DCP tends to go up when we have large increases in new states that we add or Texas expansion for a while, until it normalizes, but then it will come down. I think as we said last year at Investor Day or whatever, we are seeing increasing rates of electronic submissions and auto adjudications. So we do believe that as the claims received normalizes, we will see a decrease in DCP because we're seeing a decrease in the time that it takes to receive and process the claims.

I mean, I would say a percent of all adjudication, a percent of electronic filings just continues to grow because cash is king to everybody. And they figure out we pay fast when we get the claims fast.

Okay. I'm just a little surprised because given the amount of new businesses coming on throughout the year, given the initial favorable impact to the DCPs why the range would still be significantly below where you are now.

Again, I think directionally that's where we think we're going to be heading over time. And in any one quarter, you could have a particular issue as a new state comes on. And we said we expect, our targeted range continues to be 39 to 44, we believe that's correct. But any one quarter there could be an exception because we just brought up a new state.

Anyway we gave you the detail in the press release and you can go back and see over time to what the impact's been.

Mr. Neidorff, at this time, we are showing no additional questions in the queue. So I'll turn it over back to you, sir, for closing remarks.

Oh. See, I could magnanimous, feel I'll take one more but there are no more. I want to thank everybody and look forward to seeing you on our Investor Day. And have a good quarter. Thank you.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.