Edmund E. Kroll - Senior Vice President of Finance & Investor Relations Michael F. Neidorff - Chairman, Chief Executive Officer and President William N. Scheffel - Chief Financial Officer, Executive Vice President and Treasurer K. Rone Baldwin - Executive Vice President of Insurance Group Business Unit Mary V. Mason - Chief Medical Officer and Senior Vice President

Joshua R. Raskin - Barclays Capital, Research Division Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Matthew Borsch - Goldman Sachs Group Inc., Research Division Sarah James - Wedbush Securities Inc., Research Division David A. Styblo - Jefferies & Company, Inc., Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Justin Lake - JP Morgan Chase & Co, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Scott J. Fidel - Deutsche Bank AG, Research Division Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division Carl R. McDonald - Citigroup Inc, Research Division Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division Brian Wright

Good morning, and welcome to the Centene Corporation's First Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Edmund Kroll, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. Thank you for joining us on today's 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 about 45 minutes, and may also be accessed through our website at centene.com. A replay of the call will be available shortly after the completion of the call, also at our website, at centene.com or by dialing (877) 344-7529 in the U.S. and Canada or in other countries by dialing (412) 317-0088. The playback number for both of the call -- call-ins, is 10026527. 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 most recently form -- filed Form 10-Q, dated today, April 23, 2013, 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. As a reminder, our next Investor Day is Monday, June 17, 2013, in New York City. Please mark your calendars for that. And also, later this morning, at 10:00 a.m. Central Time, we'll have a webcast of Centene's annual shareholders meeting available, and you can access that link at centene.com in the Investors section of our website. 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 2013 earnings call. During the course of today's call, we will discuss our strong first quarter results, our growth opportunities, including the implementation of the Affordable Care Act, ACA, and Centene's business environment. I will then turn the call over to Bill Scheffel, who will provide further detail on the quarter's financial results. First, a few comments on the quarter's results. Premium and Service revenues increased 53% year-over-year to $2.5 billion. The health benefits ratio improved 90 basis points sequentially to 90.4%. Please note the new business HBR improved 260 basis points sequentially to 94.1%. Flu cost in the first quarter of 2013 were $0.20 higher than in the first quarter of 2012. This was consistent with our expectations. Flu cost moderated in February and March after peaking in January. During the quarter, we experienced a slight reduction in medical trends across our existing business. This included inpatient, premature births and certain outpatient costs. The HBR in Hidalgo showed some limited improvement sequentially, as our medical management efforts gained traction. At the same time, we feel it is too early to conclude that the lower utilization experienced in the first quarter will continue throughout the balance of the year. Thus, we are maintaining our full year 2013 medical trend estimates at the previous level. The G&A ratio improved 150 basis points year-over-year and 10 basis points sequentially to 8.3%. Importantly, the 8.3% includes a normal level of performance-based compensation. Membership increased 25% year-over-year to 2.7 million lives. Finally, cash flow from operations was just under 2x net earnings. We believe we are well-positioned to meet expectations for the balance of the year. In addition, we feel that we can achieve increased profitability in 2014 upon the…

Thank you Michael, and good morning. For the first quarter of 2013, Premium and Service revenues were $2.5 billion, representing a 53% increase over last year's level of almost $1.7 billion. This increase of approximately $880 million results from the addition of 3 new states: Missouri, Washington and Kansas, and from a full 3 months of revenue related to the 2012 expansions in Louisiana, Mississippi and Texas. As noted in our press release, our revenue from new business, with less than a full 12 months of operations, amounted to 35% of Premium and Service revenues in 2013 compared to 20% in 2012. Our consolidated health benefits ratio for 2013 was 90.4% compared to 88.2% in 2012. The increase in our health benefits ratio between years is primarily caused by the higher level of new business, which has a higher HBR than our existing business. For Q1 this year, our HBR for new business was 94.1% compared to 88.4% for our existing business. Last year, our HBR for new business was 90.7% and 87.6% for our existing business. Our 2013 results include the pharmacy carve-ins in Louisiana, beginning November 2012, and in Texas, beginning March 2012. It is important to remember that pharmacy has a higher HBR than our overall HBR, causing the consolidated loss ratio to increase when we add additional pharmacy business. Also, during the first quarter this year, we incurred approximately $27 million of flu cost versus $8 million in the first quarter of 2012. Over half of the quarter's flu cost were incurred in January, and as anticipated, significant declines were seen in February and March. We estimate that higher flu cost this year accounted for a 60 basis point increase in our consolidated HBR compared to last year and decreased earnings per share by $0.20. Sequentially,…

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

Question on the Texas rate increases that you guys talked about, it sounded like you got legislative approval, et cetera, and just looking for CMS sign off. Should I assume, therefore, that they were not, in your opinion, completely finalized and therefore there was no retroactive impact? It looked like in your 10-Q, the exhibits pointed to a March 1 retroactive date, but did you include any of that in the quarter?

Bill, go ahead.

In Texas, it's still going through the process for the rate approval, and so we expect that to be finalized in May. The amendment that was filed, really, was related to other items in the contract, nothing really to do with rates, and so there was no rate impact, no rate increase included in the first quarter from what is being considered today. We received the rate increase September 1, and that's been in there for fully -- for the fourth quarter and the first quarter.

And Josh, as I was going through this whole process, it's prudent just to not talk a lot about it.

Okay, that's fair. And you guys will have an update in May, it sounds like?

Yes, we will.

And I assume you guys have in your guidance that the preliminary rates that you've seen are going to be trended forward, right? I mean, I assume that's at least baked in.

I think it's fair to say that our guidance numbers all along that we provided in December and February and today have all assumed certain rate adjustments in Texas, and that's proceeding consistent with the guidance that we've previously provided.

Okay. And then just on Acaria, I'm just curious, how is that going to flow through from an income statement perspective? Is that considered fee revenue or were some of that in premiums? Or how should we think about that? And then just a slight nip, but the share count's up 1.2 million to 1.3 million even if I adjust the 2 million shares for an April close. I would have assumed that would have been up a little bit more. Were there some buyback or some change in share count other than that?

Well, with Acaria, there's no results of operations for that until starting in the second quarter, right, beginning April 1, and that will be considered primarily service revenue, not premium revenue, when it is recorded. So the shares were not issued at March 31, were not outstanding and were not included in our numbers at March 31 or any of the reported results. They are included, the estimated impact of having those shares outstanding for 3 quarters of the year, in our guidance number for the use of shares outstanding for purposes of calculating earnings per share.

Yes, I know. That's what I was talking about. I would assume 2 million shares at 9 months is 1.5 million shares. It seems like the share count what not as much so was there some buybacks or something else in there that...

No buybacks.

There are certain share activity that occurs primarily from the exercise of options or from the vesting of stock awards that occur, and so that's -- we don't have any unusual activity other than the stock award activity.

And I'll remind you, 40% of the purchase price was cash, with 60% -- approximately 60% in stock.

Right. And I guess, more importantly, it sounds like revenues are a little bit higher; MLR, unchanged; G&A, a little bit better, and then the offset from the share count, I guess, with Acaria. I think you mentioned the startup cost around Acaria making it sort of neutral. So would you say in terms of the actual guidance, that $2.60 to $2.90, would you think that within the range, you'd be trending a little bit better than you were previously just based on the components of guidance?

Well, I guess, what we said is we saw some improvement in trend, modest small improvement in Q1, but it's probably really prudent to not anticipate that continuing, and so we're going to stay pretty much with that guidance of $2.60 to $2.90, Josh, and let it play out another quarter or so.

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

Question on the -- just first, could you clarify a little bit more about the prior period unfavorable development for Celtic in Texas, exactly what caused that, and expand that a little bit better for me, if you would?

I think what I said, Peter, was that we gave in our press release the roll forward of the claims liability reserve as of March 31, 2012. At that point in time, the Texas expansion only had 1 month of results in there. And so what we've seen since that point in time is that the prior period development, let's say, excluding the retroactive claims in Kentucky, which kind of changes things a little bit, was only $14 million. Normally, we would see $40 million, $50 million that would occur a year later. So the positive development that we have is less than what we normally incur and see. And so -- but as you recall, in June of last year, we did record additional reserves for a number of things and pulled down our guidance for all of 2012. And what we're saying is when we now look at the hindsight analysis with respect to the reserves for June, September and December, they're all developing normally compared to our experience that we've historically seen, and the amount of positive development is in excess of $40 million for each of those 3 periods.

Got it. Okay, and then can you talk about how your contracting is going for the exchange membership that you're expecting to get? You laid that out as one of the bigger opportunities, going forward, at $52 billion in your markets. Can you talk about how your contracting is going on with the hospitals there in terms of rate?

I think it's going well. Maybe, Rone, you want to make a comment on it?

Yes, as Michael mentioned, we do expect to be on the exchanges in a subset of the places where we have Health Plans today. And we're entering into contracts with hospitals in line with the kind of the expectations that we set in terms of reimbursement rates, and I don't think it's appropriate to go into a lot of details about the specifics of it, but we're pleased with where we're landing in line with our expectations in terms of the contracts.

And so are those rates relatively close to your Medicaid rates with these hospitals or are they closer to where commercial rates would normally be?

Well, again, I don't think it's appropriate to go into a lot of detail, but we're landing at what we think is good rates with respect to where we're ending up on reimbursement rates with -- and it's certainly not exactly at Medicaid rates, but I wouldn't say it's exactly commercial rates either. So I think we're pleased with where we're ending up.

The next question will come from Chris Rigg of Susquehanna.

I just wanted to come back to the G&A ratio in the quarter. It was about 8.3%, and then for the rest of the year, it looks like you're expecting a big step-up. Can you just sort of help us understand what's driving the big step-up in the latter 3 quarters of the year? And was there anything that was delayed in the first quarter that you had been expecting and that's causing the sort of seasonal shift?

No, there was nothing delayed. We have the new businesses that are being brought up in the second, third quarter. Bill, you want to add something there?

Well, I think the primary changes you're going to see, beginning April 1, is the addition of Acaria, and so they will have a different level of G&A cost in that business than we have for the rest of our mix, so that's certainly one aspect that causes that. And then with respect to business expansion cost, I think we said we had $0.09 in Q1, but 58 to 65 in the rest of the year. So that will cause there to be a higher level of that in the remaining 3 quarters of the year. So I think those are the primary drivers of the increase in our G&A ratio for the whole year versus where we were for Q1.

And closing cost.

And closing cost for Acaria of $0.06 also get recorded in second quarter, which is the remainder of the year.

Okay, and then just to follow-up on Peter's question a little bit on the reserve development. I know you gave the roll forward. I just to make sure I -- can you help us understand what the development was in the first quarter if we just sort of isolated it to one period?

We don't really try to do that on a quarter-by-quarter analysis in the current period. I think what we're saying is that the reserves were lower in terms of the amount of prior period development in March 31, 2012. But the actions that we're taking in the second quarter of 2012 seem to have taken effect so that we're already showing positive development on the June 30 numbers of over $40 million. So I think that issue related back to that period of time when we were just starting up in Texas and a few issues in Celtic, which hadn't risen to the surface, really, at that point either.

I think, what's important in the technique gives you a good view of what occurred at that period of 12 months before in that quarter, and it said that we're adequately reserved, but we did not have the excess. It also shows that the action we took in the second quarter was appropriate, and it's built up and it's where it should be. So it's really just a way that we test ourselves, and you need to look at and say, "Yes, they were -- they continue to be adequately reserved historically, and it becomes a pretty good metric for you to take a look at in that regard."

Okay. And then just one last question, and I'm not sure what you think [ph] about it, but when I look at the latest disclosures on Kentucky in the 10-Q compared to what's there in the fourth quarter with the 10-K, I guess I just want to -- what if the declaratory relief is not granted next month? [indiscernible] to operate the contract through the end?

Let's recognize with litigation, there's nothing to be gained by saying what we'll do or not do. We will be in front of the judge. We'll see what he says. We'll see what he's reasoning, and we'll work on it from there, but to say we're going to do this and that before -- I think if I was a judge, I wouldn't want to hear somebody standing in front of my bench saying that.

Our next question will come from Matt Borsch of Goldman Sachs.

Could you just elaborate a bit on the discussions that you're having with states on the industry fee and their willingness to include that in rates in the event that Congress does not take action?

Yes, I think we saw Florida is going to add a line for it. Other states recognize the actuarial soundness. There's been a lot of press, watching it elsewhere, that it's going to cost the government about $15 billion because it's going to have to come back in the rates, and then the states will be billing that back to the federal government again. So it becomes very circular, and we anticipate that the states understand that if it's not changed that there's going to be that cost to the state, and hence, to the federal government when they bill it back. The states then goes -- all of them have written letters to their delegations in Congress and elsewhere, stating their stand with this issue, and we'll just continue to let it play out. Those have been in commercial, and we'll -- well, we are still cautiously optimistic that it will be resolved. And I guess I'll characterize we've not seen where -- legislatively, people tend to do things way ahead of when they have to. That's not a snide remark. That's just a realistic look at what to expect. They rather do the things right now that they can.

Yes, the real world. And on a different topic, the softer utilization trend that you alluded to in March, is there any further granularity you can give us on that? Did you see a decline in the hospital days year-over-year or births or outpatient visits? How did it manifest itself and is there anything you might attribute it to?

Yes, I just think, as Bill had said, we saw some slight declines in inpatients. We saw the premature birth rate decline, but we also have healthy start for new baby, a lot of programs that may be taking hold, and we -- but I can't say it's going to continue in that, but some outpatient services were down. It was -- there were a lot of bits and pieces across the entire market in the various states, and that's about as granular as it will be safe to give without misleading, but I think there's a trend there that yet has to prove itself in another quarter or 2.

Okay, got it. Last question, the Arizona contract loss, is -- have you done any back analysis to figure out where -- if there were metrics on which you could have done better or was it price rate based?

Well, I think, anytime you're in that situation, even when you win, you always look back and say, "I could still have done even better." That's part of the mindset of the company. I mean, in rates, there are a lot of different factors. Arizona is clearly recognized for making a lot of changes, and you've seen them across even bigger changes than this. The fact that this went that direction, I could have found a lot of different little things and we're just -- we're doing that analysis. Our internal audit department has individuals who are charged with reviewing all our peer responses, and see where we could still further improve. So that's an ongoing process, Matt. .

The next question will come from Sarah James of Wedbush Securities.

I wanted to get a better understanding of what was impacting your new versus existing business MLR? So on the existing, I'm trying to come to a run rate. It's been pretty consistent, the last 6 months, 88.4, 88.5, but then that has excess flu cost, some positive development, and I'm not clear if you're putting Kentucky in the existing bucket by now, but maybe there'll be a step down when that contract ends. So can you talk a little bit about where run rate on existing business should be?

Do you have some detail there?

Yes, I think that the Kentucky business has been in more than 12 months so it's in the existing business at this point. But Kentucky, because of the premium deficiency reserve amortization or whatever, it really has minimal impact on our overall numbers. I think as I said, we had about $41 million, I think, of premium deficiency reserve at 12/31 on our balance sheet to cover the remaining 6-month period. About $23 million of that was used in the first quarter, leaving $18 million for the second quarter. So that's all performing to our expectations at this point. With regard to an HBR run rate for our existing business, I think it has been -- there's always ups and downs in terms of seasonality, the level of flu that's included in there versus the new business. So I wouldn't say anything unusual there. I will say that Texas will move into the existing business column for the second quarter, and we're not anticipating to see a significant -- we're expecting to see a slight decline in our HBR in the second quarter, even with Texas moving into that bucket.

And are you referring to the Hidalgo STAR+PLUS contract there?

That's part of it. Well, we have a large expansion in Texas, which was included in the new business until -- again, until the second quarter, but it's been in there for a full 12 months.

And on the Hidalgo contract, was that the primary driver of the decrease in the new business MLR coming down or was there another state? And are there any kind of ongoing negotiations with the state around rates for that specific contract?

Well, I'll deal with the rates and turn it over to Bill. We said -- I think, in my comments, I said that we will continue to work with Texas in evaluating the rate adequacy and so that's -- this is sitting here in April. The next increase is due in September. We have these real-time dashboards and things, so as time goes along, as we are close to September, we'll be able to look and demonstrate what our trends are in a realtime basis, and work very constructive with the states. So that's the time we'll really talk about that. Bill, do you want to pick up the driver of the new business in Hidalgo Star?

Yes, I think Hidalgo was just one part of the overall Texas expansion and we did get a rate increase in Hidalgo in September 1. So I think as the state's gone through their rate analysis in Texas, there was virtually no rate change in the Rural Service Area on September 1. That's what's currently being considered. Much of what has been in the new bill is for the Rural Service Area. So I think that in the fourth quarter, just on our overall HBR versus the first quarter, we said we added, I think, around $10 million of additional premium deficiency reserve for Kentucky in the fourth quarter, which we didn't do in the first quarter, so that causes some of the decline from quarter-to-quarter.

And I wouldn't want you to, through the call, thinking things have fully normalized in Hidalgo. I mean, we -- it's still a work in progress. And as we've said many times, it's a matter of doing things on a sustainable basis and balancing our efforts to manage to care in a quality cost effective way, and then work with the states where additional rates are still needed.

The next question will come from Dave Windley of Jefferies. David A. Styblo - Jefferies & Company, Inc., Research Division: It's David Styblo, filling in for Windley. I had a kind of a follow-up on the utilization, the soft utilization trends you guys spoke about earlier. Can you talk a little bit more about when you start to see those? Were those consistent throughout the quarter? Did those [indiscernible] soften even as we were heading out?

Well, I think what we said is, across the quarter, we saw some consistency in it. Now we had the flu cost in January. It was still high. Then we saw some mitigation of that as the quarter unfolded, and our experience tended to mirror the -- or follow that, what the CDC was seeing across the country. There's a lot of consistency there. Things like premature birth rates and that, that you get peaks and valleys in any quarter. So to say that versus other inpatient versus other outpatient services, it's hard to pinpoint and say if there was a fixed trend we're headed down and was continuing into April. That's why we're saying that that's the cause, not the cause, but the reason for some of the experience we're seeing in the HBR, but it's too early to say that, that will continue. And so therefore, we think it's prudent and appropriate to maintain the -- it's our expectation of our previous utilization levels. David A. Styblo - Jefferies & Company, Inc., Research Division: Okay, that's helpful. As a follow-up, if that softer trend that you're seeing continues, is that enough to get you to the upper end of the guidance range or exceed it? Or how do we think about that in comparison to the other pivotal points that might push you to the lower end or the higher end of guidance? I suspect those would be in the new business.

I want to be as helpful and as transparent as we can, but I would say, right now, our experience and how we look at it, going forward, keeps us about where we are in that range. And that if we see continued improvement or maintain a lower level in Q2 or Q3, that would be the time to talk to you about where in the range we would fall or tighten the range. As I think I said in my comments, it's just too early to declare that based on the Q1 data. Even though we're looking at some real-time data through our dashboard, it's still just a little bit early. David A. Styblo - Jefferies & Company, Inc., Research Division: Okay, that's fair. And then finally, on lowering the SG&A outlook by about 20 basis points, is that more of a function of leveraging the new business now that all the transactions are in and new awards are in? Or is that more a function of Centene kind of being ahead of plan in terms of just their operating expense run rate?

Well, I think, really, we've said all along, our goal is to leverage our incremental volume and we maintained cost reduction programs on an ongoing basis. And as you're expanding and growing, that's the time to focus on what your expenses are, not just adding more and saying more of the same. So what we're really doing is we're -- we continue to have everybody focused. And just because we've always done something doesn't mean you should continue to, and we're using systems and other things to never sit where we're at across the plans, especially companies, everywhere you look.

Our next question will come from Ralph Giacobbe of Credit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I may have missed it. Did you guys -- did you give what Texas MLR was in the quarter?

No, we haven't given the specific HBRs by state at this point. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, okay. And then, I guess, second question, if exchanges sort of do shakeout higher than Medicaid rates with providers, can you talk about your protection from getting charged that amount on your current book of business? I guess, will you have a separate carve out exchange product? And are you concerned at all around and how do you protect yourself in terms of future negotiations?

Well, I mean, the exchange product is very different -- not very different, but the rate setting is different for the Medicaid versus the exchange, and Rone and his team has been -- with the help of Rob and others, are renegotiating effective rates for the book of business we're anticipating, which we told you was at the lower end of the spectrum. And so it's just a matter of working on it and dealing with it and working with the ACA rules and regulations, and figure out the size and what's an appropriate range. And I think with our actuaries, both internal and with our external actuaries, we'll be in business, very responsible. And of course, as we've always said, we want to always return to it's not how big you are, but we'd rather be a little smaller and profitable so we are willing to do that. But we believe we're well positioned. Rone's done a lot of work in the analysis work with everybody to get us where we need to be in the ranges. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, and then have you actually locked in contracts with providers at this point in terms of exchange?

Yes. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then just my last one, can you help us maybe parse out the revenue components maybe by contract, if at all possible, for the increase in that full year premium guidance? So obviously, the premium guidance went up. So I'm just trying to get a sense of the components of what potentially has shaken out better or incremental to what you knew sort of last quarter?

Go ahead, Bill?

I think the primary item that's new is the Acaria revenue for 3 quarters of the year, and then we're making estimates with respect to the start dates in the membership levels and premium levels for some of the newer business coming on in the second half of the year, including in Ohio and in California, and so -- and the Florida long-term care, which will start in August, I think it is. But we'll come in region by region for over a period of, I think, 8 or 9 months. So I think that it's our normal estimate -- estimation process of what we think those numbers will be and membership levels will be, which is included in our revised revenue guidance that we've given.

The next question will come from Justin Lake of JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First question, I just wanted to get some clarity on Texas. Specifically, can you give us the level of those rates? I apologize if you mentioned it before and I missed it.

I'm sorry, the level of the rate? Justin Lake - JP Morgan Chase & Co, Research Division: What was the rate increase that we should expect you to get in Texas?

Well, we haven't really given a specific number at this point in time. The state's still working through their process. I mean, we have our own estimate as to what that's going to be, which is factored into our guidance numbers. But I think that until the process is completed, we don't have a rate amendment, for example, yet from the state. That won't occur until May. So we've done our own analysis on what they've been talking about, but until that point in time, I think, we're not quoting a specific percentage.

It's not wise to front-run anything, and future rates or rates people work on, that's doubly true. There's a whole process that goes through our actuaries, their actuaries. It's very constructive process in Texas. They want to ensure that it's adequate, and I think they know that we ask for what's really needed, and not trying to see how high we can push it, and we've demonstrated that to them over many years. And they've demonstrated to us that they're -- they've acted in a very responsible way over all the years, so that's why we have a good relationship down there. We have a lot of respect for the director of Medicaid and others down there who work hard to get it right, and it's not always the easiest political environment they have to work in, but they worry about the quality of care for the recipients and that those who are providing get adequately reimbursed. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And what you've said is that you -- the rates, the way you understand them, are in line with what you had built into the original guidance. Is that correct?

Yes, that is correct. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, and the retroactivity, how far retroactive are they going to go back? So when they come out...

We were talking to them. They understand the issues. They understand where we've had rate issues versus utilization. And Bill wants to add something?

Yes, I think what they're doing is looking at a particular fiscal year and then making a budget decision on paying additional rates for a certain period of time. i.e., the time of June, July and August to make payments, which apply to a greater period. But without any details of a rate amendment or anything, right now, we're just assuming that that's going to be part of the June, July and August revenue that we received.

And the safest thing is they don't go through their process. They're responsible. They do a good job, and as quickly as we know and can responsibly report it, we'll try and let you know. We will be meeting again early June, which seems a long way off, but we all know it's really tomorrow. So hopefully -- I would hope and it's our hope that we have some resolution at that time. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. Then last question on Texas. Just the -- as you think ahead, I think you mentioned that their -- the typical rate cycle starts in September. So you're negotiating, not only this retroactive look back, but also the forward rates for September. Is there any -- is there an expectation that you're -- the more they give you early on or what they're giving you was fixed was going to lower...

No, I think they all look to us for some real-time utilization information off our dashboard and other things, and to talk now today about what we're looking for in September, I think we need to let the other adjustments come and settle in, look at what that does to the total cost picture and revenue picture. And then as we get into the late July, August period, that's the time to be sitting down and getting very serious about what the data looks like because there will be enough in there to tell, to try and go now. I think with our real-time systems, we have an advantage so we don't have to take 3, 6 months old data and trend it as much as you would if you didn't have it. So I think we're in a position, the actuaries and ours, to use that real-time data to be more realistic at the time they set in the rates.

The state, obviously, will look at the rates for the entire state, and all the managed care organizations and in their process. We're one piece of that. We provide our input and work with their actuaries to give them the data that we're seeing from trends and everything to make sure that's taken into account, but it would really be the state, obviously, working through their normal process.

And as we've said historically, the state works constructively, and I think the activity you've seen since last September continues to demonstrate that. Justin Lake - JP Morgan Chase & Co, Research Division: Absolutely. One last question, your commentary on exchanges, specifically, your commentary around your product set that's going to look to address in lower income population or targeted for that population. Is there -- I mean, I'm just not aware of any way to specifically target lower income population. I mean, I understand that you can offer certainly a very narrow network product. But beyond that, is there a way to target, let's say, 250% or less of the MPL? Or is that just who you're going to market to? Or is that where the hospitals are going to be around in places where there's a lot of that population? Can you explain that to me?

Well, I think as we have covered in the December Investor Day and introduced a little bit of our exchange strategy, we view this as an extension of our focus on uninsured people, particularly with the Medicaid base. So there are people that do churn out of Medicaid in terms of losing eligibility and then are looking for a private market solution. So there's a natural affinity in terms of our strategy for exchanges and the type of people that we've historically served and will come out and be looking for potential exchange solutions out of our Medicaid base. That's one lever. Certainly, network is a second one. We are building our network on the same set of providers that are providing people with care to our Medicaid members. So that is another way that basically, again, you tend to attract our target population with respect to things. We will be initiating certain marketing efforts and certain sales efforts that will again be built upon the types of people that have traditionally provided support and guidance to people that are looking for Medicaid solutions that will again be weighted more towards the lower end of the income continuum. And with respect to how we're looking at our product design, we're looking at a product that is going to provide a comfortable transition from what people have historically had their care through Medicaid in terms of not being used to copays, not being used -- or large copays, not being large, used to large deductibles and co-insurance levels. Again, try to offer a product that offers people a comfortable transition from that type of care or reimbursement to what will be offered on our exchange products. So through a series of those sort of levers, we feel that we are going to pull in and attract that lower income population that's eligible for subsidies on the exchanges.

And I think also, I would remind you, we have some practical experience with the hybrid product in 3 or 4 states so that we have understanding how some things -- kind of what works in that area. So I won't say anything more than that from a competitive standpoint. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, so you don't want to share with us what the maybe a reasonable target? I mean, the bids are due, I know, in a couple of weeks. You don't want to share with us a reasonable target [indiscernible]?

Let's not get ahead of ourselves. There's something [indiscernible] after the years we were doing this, in some things, there's no advantage to get ahead of yourself. But thank you for your questions, thanks.

The next question will come from Kevin Fishbeck of Bank of America Merrill Lynch.

Okay, great. I wanted to go to flu for a second. The -- it sounded like you said that flu was -- there's no real difference between flu in the new market and existing markets, is that correct?

Bill?

I think that we incurred that across the country. Texas was our largest market, and the largest market where we saw flu. So I think that we haven't attempted, really, to split the flu out between the 2 that much [indiscernible] overall...

Anything you'd add, Mary?

I would agree. I would agree with what you said earlier, Michael, that, really, our experience mirrored the CDC.

Okay. Was there anything as far as the product design, as far as ABD? Because the ABD Medicare MLR improved pretty significantly, certainly, compared to the TANF increase in MLR. I want to see if there's some thought about flu disproportionately impacting the TANF versus the ABD and Medicare.

I don’t think you could make that. I don’t think that's the case.

Okay. And then moving over the Illinois duals. Last quarter, I think when you gave the update on Illinois, you kind of gave Q4 as the implementation date. And then this quarter, you said that the date was still kind of under review. Do you feel like that might flip into Q1 next year?

When you're working with states, it's very difficult to pinpoint it, and I think the approach we took in getting that information was really where it needs to be.

Okay. And then just following up on the exchanges, can you give a little bit more color on the states that you're targeting? And then since you're talking about your experience and the hybrid program is giving you a leg up, I mean, the hybrid program membership has been declining. Can you just remind me -- is that just the repricing that you've started last year...

Well, it's a combination of things. We've been using that as kind of a test market so to speak, and you're trying different things, which can move the membership up, down, as you try. I mean, the -- it would never be great, big significant membership. We knew that so it gave us that opportunity. And let's just say that in terms of what states, we're working through those, and when we file, it's going to be a subset loan of the current state. It won't be all 18, but there is a subset. And I think in some Investor Days, you've seen, we've talked about where the intensity and membership is, and the largest shares of market that would be there. Well, that's probably a good point to start, look at which states have the largest potential market and go from there.

Our next question will come from Anna Gupta [ph] of Dowling & Partners.

So just continuing on the medium term growth drivers, the number of your states have expressed ambivalence about doing the Medicaid expansion. So as you are planning or doing scenario planning so you can operational-ize some of this and it's not that far ahead, can you give us some color on how you see the potential addressable market, assuming they do go for Medicaid expansion, assuming they do nothing or they opt for the hybrid and to what extent is your [indiscernible]

Yes, let me -- I think part of it is we know there's those states who've announced they're going to do it, and when we're in that market, so be it. We know that other states are still looking at innovative approaches. And the innovative approaches require CMS approval. But in some cases, we'll talk to the states on how our system do that, if that's what they want to do, but it's -- there's a lot of political and other business issues that states are dealing with that will determine which states do it, and when they do it, we'll be there if it's one of our states.

And do you think the Celtic-type offering, is it portable? And that if you ended up doing based on the Arkansas model to close, for example, would your profitability be in line with what you'd like it to be and how would that compare?

I think that we are very capable of doing the Arkansas-type model. I think, if we're going to be in exchanges, we're going to be at the low end of exchanges, and that's really what you're talking about. That's something we -- will be a sweet spot for us.

Okay, great. And then on the duals, there's been some talk on the baseline rate in California and some actuarial concerns around what that might be. Can you comment on that at all? What sort of margins are being targeted in Ohio and Illinois? Is that likely to have any impact?

Do you want to say anything or add on that?

I think it's fair to say there's a lot of discussions going on around the country with respect to rates for duals. So those conversations are starting obviously between CMS and their respective states and then extending into the plans in certain markets. So I think it's premature to kind of comment on those as it works through. But I think that our understanding and expectation is there will be a balanced discussion on rate adequacy amongst those 3 parties, CMS, the states and the plans.

And that goes also with the forward expected trajectory of savings? Do you think that's going to go in line with what you all think is achievable?

I think, obviously, it's going to depend on what -- we need to get more visibility on expectations, both in kind of the initial year and in the out years. But yes, I think everybody has an interest in achievable savings and a sustainable program.

The next question will come from Scott Fidel of Deutsche Bank.

First question, just if you can maybe give us some thoughts on the trajectory of the MLR in the 2Q relative to the back half? And specifically, are you thinking the MLR can get back to within the guidance range in the second quarter as the Texas rate increase starts to materialize or do you think that's more of a 3Q event?

Bill?

I think that we -- from a seasonality standpoint, Q2 is usually one of our better quarters. And so I think as we're looking at this -- our overall HBR that we're looking at for the remaining 3 quarters falls more into the guidance range that we have indicated, and that we'll obviously benefit from certain rate increases that we have assumed that will occur, starting in the second, third quarter in Texas, but overall, we do think it will be -- the remainder of the year will fall within the range.

Okay. Then just a follow-up question, just wanted to just get some more color on the disclosure that you included in the Q on contributions to the subs relative to capital. And it looks like you're forecasting you've going to have around $270 million of capital contributions over the remainder of the year to the subs. Maybe if you can just give us some color on -- are there any particular subs where you're expecting to direct most of that capital? And then just in terms of financing that, it looks like highlighted using the revolver to fund a portion of that. So just interested in maybe the mix of the financing of that between the revolver and from unregulated cash flows.

Well, we have strong cash flows, and we have more than adequate capacity within the revolver. And again, as far as stating our current forecast, Bill, do not show us drawing the whole revolver, anything close to it?

Right, we've been fortunate in our internally generated funds. It really covered most of the increase that we funded over the last 1.5 years or so in terms of the increase in revenues from 2012 of almost 60% and 25% or so, we're looking for this year. So we will put in over $1 billion in capital in that period, most of which we've put in $220 million, I think, in this first quarter already and the revolver balance is 0. So I think we've shown the ability to self-fund most of that, and we do have the revolver out there to fund the remaining. We did issue the $175 million in notes in the fourth quarter of last year, but that's really been the only issuance that we've had. We're very comfortable with our debt-to-cap ratio at this point in time, given the low-cost of debt, so we would expect to continue down that path.

Okay, and then just one last question. Just on Kentucky, can you remind us whether you did end up getting a rate increase? I think some local media had said that all the plans did get rate increases when some of your peers decided that, but I'm not sure if you guys have publicly talked about that yet, so just interested if...

We really have not talked publicly beyond saying where we are in the course and the administrative reviews, Scott. It's just...

We did not get a rate increase in 2013 in Kentucky. Those were separate contract amendments for the other 2 plans, and we do not have a contract amendment.

The next question will come from Tom Carroll of Stifel, Nicolaus. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So just a couple of quick ones. Could you update us on how much remains in the PDR that was established? And Bill, I think you said it was $41 million at year end. Kind of where is that today? And then secondly, with the visibility on all the new business, I mean, my question was going to be do you anticipate having to raise more capital, but based on your answer to the last one, it sounds like that's no, but maybe just some clarification on that.

Sure, the remaining premium deficiency reserve at March 31 is about $18 million, which is consistent with our expectations that we had at the end of the year when we revised our numbers in 5 or 10-K. So that's proceeding according to plan at this point in time. The other question with respect to the new business, we -- it takes about 12 months of revenue to -- for that to run out before all of the capital that you need for a new area is -- needs to be fully deployed. So our current projections are, as we add this new business, particularly in the -- we added Kansas on January 1, and we'll add some other states in the second half of the year and programs, that gets factored in quarter-by-quarter, and our current projections certainly allow us to cover that through internally generated funds and the use of our revolver.

I'll also remind you that we have said at several different occasions that acquisitions for stock would be a way of adding equity to the balance sheet. And Acaria is probably a good example where we started that, and obviously, any acquisition we do won't be for that purpose. It has to be something that strategically we want to move into, but that's another way to add the equity without being dilutive to earnings.

The next question will come from Carl McDonald of Citigroup.

Specialty margin looked like it was 26% this quarter, which seems unsustainably high. So could you just talk about what drove the specialty results this quarter and where you think a sustainable margin would be for specialty? How do you factor in the Acaria deal as well as the new Massachusetts contract?

Let me try to address that. I saw your note early. I think with regard to our income statement, if you're looking just at service revenue and cost of services, that's a fairly small number, $33 million in revenues for the quarter. And I think that the improvement in our margin with respect to services really comes from a number of our separate Specialty Companies, including Nurtur and Sympatico and OptiCare, and so I think it's actually a $3 million difference so I don't -- percentages are not necessarily indicative of the whole trend. In our segment, footnote in the 10-Q, when you look at earnings from operations divided by our revenues, I think we improved our margin from 4.4-something percent to 4.7% year-over-year. So I think that's more indicative of the additional volume that we've received from the membership gains over the year and increasing the revenue from the health plans where we serve those same customers at the specialty side.

And so would you view the current earnings stream as being a good run rate for go forward?

I think that the current run rate that we have shown, particularly in the segment footnote, is reasonable and appropriate for going forward.

Our next question will come from Brian Wright of Monness, Crespi, Hardt. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: A couple of questions. Can you give us the SG&A ratio for Acaria specifically?

We don't give the specific ratios, but let's just say it's higher obviously, than our average of 8% or 9%. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: In the 20s range?

Well, we don't give that, Brian. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Well it's just that it's a whole new business for us so it's kind of just...

I know. Let it settle down as our business falls in, and what we see now and where it is, as the revenue grows, will be different. So let's give it some time before we start to maybe jump into this, and I want to be careful. You can mislead by giving too much granularity too soon, and that's something I want to stay away from. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then just as far as Kansas, that's a new market. Is that kind of in your new typical 90% kind of range for new market?

I think each market is different, and the 90% that we talked about in the past with regard to within reserves, the 90% in the first period of operations, probably it's closer to 92% today when you consider our re-class of medical management cost that we did a couple of years ago. Having said that, Kansas, in the first 6 months of operations, where we have some continuity of care provisions and have margin build, we're running in the high-90s. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay, and that's just for 6 months?

Well, it's only been up for 3 months so...

Expect that for the first 6 months?

The first quarter was there. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then -- okay, and then just lastly on Kentucky, you ended the last year with a 255, I think, RBC ratio there. I would think with the premium deficiency reserve kind of buckets, is it reasonable to think that you're still in the same range then, for Kentucky?

I think we'll probably be in excess of 200%. How much above that, I don’t really know.

Ladies and gentlemen, that will conclude our question-and-answer session. I would now like to turn the conference over to Centene Corporation's Chairman and CEO, Mr. Michael Neidorff for his closing comments.

I just want to thank you, all, for tuning in. And we look forward to talking at the Investor Day and at the end of Q2. Take care.

Thank you. The conference has now concluded. We thank you for attending today's presentation. You may now disconnect.