Centene Corporation (CNC) Q2 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Centene Corporation Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I'm Ed Kroll, Head of IR for Centene Corporation. Thank you for joining us on our Second Quarter 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 live at centene.com. A replay will be available shortly after the call's completion also at centene.com or by dialing, in the U.S., (877) 344-7529 in the U.S. and Canada, or in other countries, by dialing (412) 317-0088. The playback number for both calls is 10030660. 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 the Form 10-Q that we filed this morning with the SEC. Centene anticipates subsequent events and developments will cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically decline any obligation to do so. As a reminder, you can find our remaining 2013 release dates on our websites, and our next Investor Day will be Friday, December 13, 2013, in New York City. Please mark your calendars. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff.

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's second quarter earnings call. During the course of today's call, we will discuss our solid second quarter results, growth opportunities, including the upcoming implementation of the Affordable Care Act, state updates and some brief comments on our recent exit from Kentucky. We are pleased with our second quarter results. We continue to produce strong revenue growth and we are particularly pleased by and with the sequential improvement in our pretax margin. This increased by 90 basis points in the second quarter. The improvement was due to a better HBR and solid expense control at the G&A level. Now let's discuss some highlights of our second quarter results. Membership increased 12% year-over-year to $2.7 million covered lives. Premium and Service revenues grew 28% year-over-year to $2.6 billion. The faster premium growth relative to membership growth is driven by the continued mix shift towards higher acuity beneficiaries. Long-term-care membership increased almost 200% to 24,400 lives. ABD and Medicare membership increased almost 20% to 322,500 lives. The increase in high acuity membership is consistent with Centene's strategic priority to diversify its product lines and businesses, to maximize cost savings for states. Note that the long-term care growth should accelerate over the next several quarters when the Florida expansion commences. The health benefits ratio improved 410 basis points year-over-year and 160 basis points sequentially to 88.8%. The HBR for our existing business was 88.4% and was 20.7% for the new business. We successfully transitioned a large block of business from the new to existing category during the quarter. This continues to give us confidence in our ability to manage new business ramps in the second half of 2013 as we approach our near-term margin objective of 3%, and our long-term objective of 3% to 5%. During the second quarter, we continue to experience a modest reduction in medical trend across our existing business. This included inpatient premature births and certain outpatient cost. For example, ER utilization declined 5.9% sequentially and 1.2% year-over-year. We remain optimistic in our ability to drive utilization lower in the second half, but we are maintaining our medical trend in HBR estimates for the full year. This recognizes the possibility of a late year-end spike in flu cost similar to what occurred last year. The G&A ratio increased 50 basis points year-over-year and 40 basis points sequentially to 8.7%. Please note that the 8.7% includes a normal level of performance-based compensation, as well as closing costs related to the Acaria acquisition. Now onto opportunities, including the implementation of ACA. Our future pipeline remains extremely robust at $138 billion through 2016. We expect to continue our recognized success in winning new business, as well as diversifying by geography and product line, with the goal of driving profitable growth. As discussed at our Investor Day, we already have visibility on at least 15% revenue growth in 2014, excluding health care reform. There has been a lot of discussion in Washington, D.C., and elsewhere as to whether all provisions of the ACA will commence on January 1. In fact, the employer mandate has been delayed until 2015. In any event, Centene will be ready for the exchanges and the Medicaid expansion. We have been preparing for quite some time. We have scalable infrastructure and the overall bandwidth to manage the Medicaid expansion. We are taking a selective approach to participation in the exchanges by focusing on certain markets within a subset of our current states. Now a quick comment on the industry tax. We continue to believe appropriate congressional action will exempt Medicaid from this tax grant. However, we are engaged in constructive discussions with our state customers to include the tax in our rates should Congress fail to intervene. Next, onto state updates. Texas. A 2.9% supplemental rate increase for the rural service area was finalized in June. We continue to work productively with the state in evaluating overall rate adequacy for the regular September 1 rate adjustment. Ohio. At the beginning of July, our Ohio subsidiary began operating under a new and expanded contract. Centene now serves beneficiaries state-wide to Ohio's newly aligned 3 regions. The ramp of additional lives on the new contract has been slightly slower than we previously expected. Also, the dual eligible demonstration project has been delayed and will likely commence in 2014. We are closely working with the state on both of these matters and anticipate an ongoing enrollment ramp into 2014 for Ohio. Illinois. The duals demonstration project in Illinois will also be delayed into 2014. However, we have been approved in several new service areas for non-dual beneficiaries starting later this year. I would now like to discuss recent and upcoming contract starts. Centurion. We recently entered the correctional healthcare market through a joint venture with MHM, a national leader in providing health care services to correctional systems. We see the correctional market as a $9 billion to $10 billion market opportunity. Centurion can deliver cost savings and higher-quality states for the inmate population, the same type of solution we deliver for states in our other businesses. On July 1, Centurion began operating under a new contract with the Department of Corrections in Massachusetts. Centurion also signed a contract for a similar program in Tennessee operations. In Tennessee, we're expected to commence in the third quarter of 2013. California. We have 1 -- 2 Medicare contracts in California -- Medi-Cal contracts in California. Under the first contract, Centene will serve members in the state's Medi-Cal manage rural expansion program in 18 counties. Under the second contract, Centene will begin serving Medi-Cal beneficiaries in Imperial County. Enrollment is expected to commence in the fourth quarter of 2013 for both contracts. Florida. We will be participating in Florida's Medicaid managed long-term-care program. This program is proceeding as planned, with enrollment set to be phased in by region beginning in August of 2013 through March of 2014. New Hampshire. There is increasing momentum for the launch of the state's managed care program. We now expect to begin serving beneficiaries in late 2013. Switching to the rate outlook. We continue to expect a composite rate increase of 1% to 3% for 2013. Finally, some brief comments on Kentucky. As you know, we exited Kentucky effective July 5, July 5. We are winding down operations, which will be substantially complete by the end of this year. Our statutory capital of $80 million will likely be tied up until resolution of the legal matters, which may take several years. Due to ongoing litigation with the Commonwealth, we cannot comment any further on Kentucky on this call. We did provide some updated disclosure on the matter in our second quarter Form 10-Q, which we filed this morning. In closing, our view of 2013 and 2014 remains positive. We are raising our earnings guidance by $0.05 on the low-end to $2.65 to $2.90. As Bill will discuss, we also increased our revenue guidance to effect new contract wins. I thank you for your support and interest in Centene. I will now turn the call over to Bill.

Thank you, Michael, and good morning. For the second quarter of 2013, we recorded Premium and Service revenues of $2.6 billion, a 28% increase over last year. Our revenue increase resulted from the addition of the Missouri and Washington contracts in July 2012; the pharmacy carve-in Louisiana, effective November 1, the additional membership in Mississippi resulting from the December 1 program expansion; the start of the Kansas contract on January 1 this year; the acquisition of AcariaHealth on April 1; year-over-year increase in membership in Texas; and rate increases in several of our markets between years. The $79 million increase in service revenues between years relates to the Acaria acquisition. Our consolidated health benefits ratio was 88.8% in the second quarter compared to 92.9% in the second quarter of 2012, and 90.4% in the first quarter of this year. The decrease in our HBR between years of 410 basis points is a result of the higher medical cost experienced in 2012 for the Texas expansion area, Kentucky business and the individual health business. Those issues have been addressed between years, such that our overall HBR in the second quarter of this year is running at a more normal historical rate. Adjusted for the mix shift, which has occurred through the addition of higher acuity membership in the ABD and long-term care areas. Sequentially, our HBR decreased by 160 basis points, which reflects the high level of flu costs incurred in the first quarter and normal seasonality. For the second quarter of 2013, we have seen a significant decrease in the portion of our revenue with less than a full 12 months of operations. 17% of our consolidated Premium and Service revenues came from new business this quarter compared to 31% for last year's second quarter and 35% in the first quarter this year. This primarily reflects the shift of the Texas expansion business to existing business as of the second quarter. The HBR for our new business declined to 90.7% in the second quarter this year compared to 102.3% in the second quarter last year. The higher 2012 level was also due to the Texas expansion, Kentucky and individual health businesses. The existing business HBR was 88.4% for the second quarter compared to 88.7% in last year's second quarter and 88.4% in the first quarter of this year. Our general administrative expense ratio was 8.7% in the second quarter compared to 8.2% in Q2 of last year and 8.3% in the first quarter of this year. The year-over-year increase of 50 basis points is related to additional performance-based compensation recorded this year, approximately $0.07 of transaction costs for the Acaria acquisition, which closes this quarter, offset by additional leverage from our growth. Our total business expansion cost were $0.17 this quarter, which includes the $0.07 in Acaria cost, compared to $0.11 in last year's second quarter and $0.09 in Q1 of this year. Investment income was $4.3 million in Q2 this year compared to $4.0 million in the comparable period last year. The increase is due to higher invested balances. Interest expense increased from $4.7 million last year to $7.0 million in the second quarter of 2013, reflecting the expense from the additional $175 million in senior notes issued in the fourth quarter last year. Our income tax rate for the second quarter was 39%, excluding the effects of noncontrolling interest. The rate in the second quarter last year was 19.7%, which was impacted from the non-deductibility of our impairment charge. Our diluted earnings per share was $0.70, which includes the $0.07 in expense for the Acaria transaction cost. Our diluted average shares outstanding is 56.6 million shares for the second quarter, which increased by approximately 2.3 million shares in Q1 due to the shares issued for the Acaria acquisition. At June 30, we had cash, investments and restricted deposits of $1.6 billion, including $34 million held by unregulated entities. We continue to maintain our risk-based capital in excess of 350% of the authorized control level. Our debt at June 30 totaled $551 million, including $30 million drawn on our revolving credit agreement. Our debt-to-capital ratio, excluding the $74 million in nonrecourse mortgage note, was 29.8%, a decline from the 31.9% at March 31. Our medical claims liability totaled $1.1 billion at June 30 and represents 43.7 days in claims payable. The increase from 42.4 days at the end of the first quarter is primarily due to the processing and timing of payments at quarter-end. Cash flow from operations was $37.9 million which is almost 1x net earnings for the second quarter. Our updated 2013 guidance is Premium and Service revenues, $10.3 billion to $10.6 billion; diluted earnings per share, $2.65 to $2.90; consolidated health benefits ratio, 88% to 89%; general and administrative expense ratio, 8.8% to 9.3%; and diluted shares outstanding, 56 million to 56.5 million shares. Now these numbers are GAAP numbers and include the $0.07 for Acaria transaction costs. Our guidance assumptions include the start-ups for Centurion and the beginning of operations in California and New Hampshire in late 2013. Business expansion costs are expected to be $0.60 to $0.65 for all of 2013. Operator, you may now open the line for questions.

[Operator Instructions] Our first question is from Josh Raskin from Barclays.

So first question, just -- I know you're not going to comment further on Kentucky. But just maybe, Bill, any changes in the premium deficiency reserve? Any accrual updates, et cetera, on potential losses in Kentucky impacting the second quarter?

Sure. Josh, I think the premium deficiency reserve that we had at the end of the first quarter was around $18 million. We had $1 million left on our balance sheet at June 30, and that really represents the operating period from July 1 to July 5. Now we did incur additional costs in the first -- second quarter for some of the ramp-up of the things we're doing. So that was about $0.04 a share that we incurred for Q2. And we expect to continue to incur that $3 million, is what it roughly was, in Q3 and Q4, and those costs are built into our guidance for the year.

Okay. Now were those previously expect -- those are exit costs, is that what that would be, Bill?

I would say they're a variety of things that as we looked at the close for June 30 and the expectation, obviously, we already know we were out on July 5, that we did everything we could to identify costs in the Kentucky book of business and make sure we have those properly accrued for at quarter-end.

I mean, it's wind down of people, Josh. It's legal expense, things like that.

Right. You're still paying claims, et cetera, through the end...

And we'll be doing that for most of this year.

Okay. And then sort of shifting gears to exchanges. That was an opportunity that you guys have been talking a lot about. I guess, 2 questions around that. First is just how do you think about the capabilities needed in 2014, and maybe where are you along that continuum? You guys added underwriters and things like that. And then secondarily, just looking at the subset. I think you guys have 9 states, at least, that we have identified that you're going to be participating in. I think Arkansas is probably the only one where you don't have a Medicaid presence, but I know there was that -- the legacy acquisition there. So I'm just curious, how did you sort of pare down the list? What made a state more attractive, and how you sort of thought about that?

I'll ask William to comment.

On the capabilities for 2014, we've had a team building out the IT and operations infrastructure, as well as the sales and marketing capabilities that we're looking for to be able to expand our -- enter the exchanges and build our exchange presence in 2014. Clearly, the intent behind our exchange strategy has been to leverage the capabilities that we have in-house today in the different health plans. So a great deal of what we do today, with respect to particularly paying claims, member-facing, provider-facing kind of services that we do for our Medicaid members, we will be duplicating for our exchange members. But otherwise, particularly with interfacing with the exchanges and obviously, designing, building out the products, being able to administer the products, being able to enroll build members, we're well down the road of the building out those capabilities and feel good about where we stand with respect to that kind of infrastructure for 2014. Just a comment on the 9 states. Again, our strategy has been to be selective and targeted with where we participate in 2014. So we looked at pretty much, as you mentioned, focusing entirely in the states where we have health plans today, where we have strong health plans that have the capability and capacity to take this on for this year. And then looking at where we're able to contract with high-quality providers that can deliver an affordable product for our target membership, which is the subsidized membership. And that's largely guided -- where we've been able to accomplish that is largely guided where we're participating in 2014 in terms of the states, but also in terms of the select service areas that we're participating in, in each of those dates. As you mentioned, Arkansas is a slight exception to that. We have had a presence in Arkansas through our NovaSys subsidiary which has been administering -- doing many of the administrative functions for our individual block of business. So they have some strong capabilities there to leverage. And particularly given the Medicaid expansion opportunity that exists in Arkansas through the exchanges, it was something that rose to the list to try to file and try to get -- build-out our capabilities to enter for 2014 and that's why Arkansas is on the list of the 9 areas we're targeting for 2014.

I might also comment that some of you would recall through the acquisition in Arkansas and Celtic, we did some of those things for the individual capability. The building [ph],, the enrollment, the whole design type aspect of it. So that capability was there. It's a matter of marrying that with the medical management and the network that we have in the existing states. So it makes a manageable controlled process for us in those states.

And Mike, any sense as to when you'll be a -- I know you talked about the visibility into the 15% top line growth next year, excluding reform. When do you think you'll be able to give some guidance around the expansion of Medicaid and the impact of exchanges?

We'll -- if something's really known, we'll bring it out on future calls like this. But we typically do that on our December 13 Investor Day, where we give full guidance on 2014.

The next question is from Justin Lake, JPMorgan. Michael A. Newshel - JP Morgan Chase & Co, Research Division: This is Mike Newshel in for Justin. Can you just clarify on the SG&A cost for new business, the $0.60 to $0.65 you mentioned for the full year? How much of that is going to fall on the second half?

I think in the first half, we've said that we've had roughly $0.26, I would say, something like that, in the first half. So we'll have about $0.34 to $0.38 to $0.39 in the second half. Michael A. Newshel - JP Morgan Chase & Co, Research Division: Okay. And on prior period reserve development on a 12-month basis, it was up to more normalized $42 million versus the low-level you had called out in the first quarter. Can you just clarify what impact reserve development had in the second quarter?

Yes, I think what we're -- we don't get into the specifics in any one quarter. But we did say at the end of the call last quarter that the reserve development that we showed, really which was on the March 31, 2012, reserves, was abnormally low for us, of only $2 million positive, maybe a little bit more, when we added in Kentucky retros. And that was the period right as -- right after the Texas expansion was occurring. And we had written some new business in Celtic on individual health business and some of the Kentucky issues. So what we saw was that did not develop as positively as we normally see. And I also said was as we look forward to that point in time for the June 30, 2012, the September 30, 2012 and the December 31, 2012 numbers, those were all developing more similar to what we historically see. And I think all of those were in excess of $40 million at that point in time, and still at this point in time also. Michael A. Newshel - JP Morgan Chase & Co, Research Division: Okay. So basically, the second quarter sort of developed in line with like maybe the past 3 quarters?

Yes, I would say, the June 30, 2012, reserves which was -- which is what is shown as the roll forward in the press release, is a typical quarter that we would normally see. And we would expect that to continue going forward based on our analysis of the 3, 6 and 9 months roll-forwards that we have for each of those other additional periods.

Our next question is from Ralph Giacobbe, Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: Just looking at the MLR on existing business, the 88.4% was flat sequentially. I know last quarter, you had some incremental flu cost that may have bumped that number up a little bit. So anything this quarter, I guess, specifically to point out? And then the second piece of that question. Ultimately, I know you've talked about net margin, but where do you think you could drive MLR in the existing business down to? What's sort of the target range that you think about? Should we think about in that kind of 88% range? Or just parameters around that would be helpful.

I'm going to start with the second part of your question first and hope to remember the first part then. I think, if you recall back to our Investor Day, Rob Hitchcock went through some of our products and what the individual products are rated in terms of an actuarial HBR. And so typically, we would see a ten [ph] of product in the 86%, 87%, somewhere in that ballpark, of a targeted HBR. But our higher acuity products in ABD and long-term care tend to be 88% to 90%, even in low 90%s, and those are much higher-premium products. So I think what we've seen overall is our HBR climb, as we indicated, through a mixed shift, as we've added fewer members, because there's less members in the long-term care ADB membership, usually, but at much higher premiums. So I think I would expect that our overall HBR would be in the range that we're currently talking, which is 88% to 89% for this year. And a lot of that has to do with the mix. We're adding a lot of revenue going forward here in the long-term care product, for example, in Florida. And so that's going to continue, I think, to be rated at the higher HBRs rather than the lower ten [ph] of HBR. And then I think in the second quarter, we switched the Texas expansion business from the first quarter, so from new to existing. So the 88.4% is the same for Q1 and Q2, but there are some pieces to it. Texas moved in as a little higher than the average of 88.4% but we have other businesses that are performing below the 88.4%. So overall, it stayed the same from the first quarter to the second quarter. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, that's helpful. And then just a follow-up question. The California rural Medi-Cal expansion sort of expected to begin in 4Q. I guess, just give us a sense of how you're approaching the business just given the experience in the Texas service -- rural service area where you had kind of a higher utilization trend. So I guess from our perspective, as we think about the business, would you expect MLRs to track kind of at the levels of new business that we saw this quarter in that kind of 91% range? Or should we expect initially higher, just given the rural region?

Jesse, you want to take this?

Sure. Yes, Ralph, thank you. So I mean obviously, as we go into all of our new markets, we try to take an on appropriate view of that. The product mix, to Bill's last comments, and the market-specific dynamics. And we always are going to start higher and I would fully expect that to be the case. It wouldn't get into the commentary right now on how the California rural compares to the Texas rural. But I think we'll take an expectation that the California business will start at a higher level. That business is converting from fee-for-service into a managed care environment. And that, just as we've seen in the overall shift from kind of new market or new business, HBR [ph] , down to existing business, we would expect that trend to continue for California.

Our next question is from Dave Windley, Jefferies.

My first question is around your business expansion cost. You have a pretty substantial bolus of business coming on line for which you're spending $0.60 to $0.65, as you've said. Some of that business is being pushed out, but your guidance really didn't change. I guess I'm wondering how you expect business expansion cost to trend into 2014? Will we see that tail off or are you going to continue to have a run rate at this level given the bolus of business that's coming on in 2014?

Well, let me first start in the 2013 and say that in the second half, we certainly have the startup in California, New Hampshire, and the exchanges, which would start January 1, '14. So that -- those 3 items in particular are driving a lot of our cost in the second half of this year. And looking at 2014, exchanges will, I think, continue to grow. And so I would expect the cost that we see in 2013 will continue in 2014 as additional states are looked at, expansion of areas, et cetera. And I think there's also the duals which will continue to develop and we've got that programmed in the 2014, so we'll have some additional cost for the dual expansion. So the overall answer is, we're seeing, as our business grows and our revenue grows, the opportunities are -- continue to be there, as Michael indicated in his comments. So I would expect the business expansion cost to continue to be at the level we're operating, potentially grow as we see more new business.

Okay. That's helpful. And then my follow-up on the industry fee, Michael, you mentioned the company's view that Congress will step in and act to exempt Medicaid. I guess I'm wondering where that fee would get reallocated to? And in an action like that, who would pick up the additional percentage? And then the second part of that question would be, we've heard that if it were to be cover -- if Medicaid were to be responsible for industry fee, that, that could be paid either through rates or perhaps, through lump sum payments, at the end of the state fiscal year. And if you could comment on how you would expect to be paid the industry fee, what would be the mechanism, if Medicaid has to pay for it?

We've been talking to the state, primarily, about including it in the rates. So at this point, if you want me to -- you'll hear all kinds of ideas surface as it unwinds, as it comes out. So I would say we'll be negotiating, and it's our point of view that it should be built into the rates. If a state, for cash flow purposes suddenly [ph] ends up coming back and saying, we're going to pay you a lump-sum out of surplus at the end of the year, now that's something we would talk about, but we need certainty because of the actuarial soundness aspect of the rates.

Okay. And then on the congressional action, what gives you confidence there?

Well, we've had a lot of conversations. Well first, we've talked to the DGA and RGA and the governors are fully onboard to understand the cost impact to them if it does not happen. They're working with their congressional delegations on it. We have a very active Washington office that's working with the Congress and effectively. I mean, the DRE's a good example when we helped to move that onto both sides of the House and Senate bill of ACA. So we will -- I could you give you a name, rank and serial number, but I'm not sure that serves the purpose. There are bills circulating. We're getting more and more people signing on it. People understand the cost impact of it. [indiscernible] understand that it will possibly cost the federal government more to have that because of the circular nature of refunding state cost. So it's going to take a while to play out. And the Congress we live with today will not do something before it has to. I mean, that's just the environment in which we live and the way things are happening. And I'm not passing judgment on it, it's just a fact.

Our next question is from Sarah James, Wedbush.

I was hoping that you could walk us through a free cash roadmap, where you think you'll be at year-end, and what you see as how much you would have to put up in reserves in '14. Specifically because at Investor Day, you mentioned that some of that was based on trailing 12-month revenue. So I thought at this point in 2013, you may have good visibility on what you see in the reserve?

Okay, at this point, I think in our 10-Q, we included commentary that we would expect to provide additional capital contributions for statutory capital into our subsidiaries of approximately $100 million for the second half of 2013. I think we've put in over $300 million for the first half of 2013. And if you look at our current balance sheet, you can see that we've had $30 million borrowed on our revolver, and that's all we've had to produce. So we have been able to use internally-generated funds to cover most of the funding requirements for statutory capital and the $100 million in the second half is a little lighter than we've experienced in some more recent quarters. So, and in effect, even with the borrowing of $30 million on our revolver, our debt-to-capital ratio came down to 29.8% excluding our nonrecourse mortgage note. So our general view is that we are able to fund our needs through internally-generated funds, plus the use of our revolver to the extent necessary. We do expect that we will be borrowing on the revolver through the remainder of the year. But again, that's all within our current capacity and don't really foresee anything unusual going into 2014 that would change that position.

Got it. So when you look at the revenue growth in '13 and think about the reserves that you would have to post in '14, it looks like to you guys that the cash you generate through the year and your existing debt would get you to where you need to be.

That's exactly right. That excludes any potential acquisitions that might occur, which would probably be separately funded. But as you can see, when we did the Acaria acquisition, we actually issued, I think it was 60% stock, for that and 40% cash, and that had a minimal impact on our debt-to-capital ratio when we did that. So all those are considered as we look at the acquisitions.

Got it. And at Investor Day, you guys talked about looking into additional reinsurance for exchange products. So I was just curious to what extent you're looking to reinsure. In other words, could you completely derisk the 2014 exchanges? Is that even feasible from a cost standpoint? And are there any metrics that you can help us with, whether it's exchange business or your traditional Medicaid book that help us understand the relationship between additional reinsurance versus what you would have to put up in reserves?

I'll start with it and Rone can jump in. I think that as Rone indicated at the second -- at our Investor Day that is something we're looking at. We have not made a decision on whether we would go down the path of buying external reinsurance for the exchange product. It's just something that's being considered. And as we go through the rest of this year, we'll be evaluating our position in those individual markets and where things stand and make that call somewhere in the second half of the year. Rone, I don't know if you have anything else you want to add?

Well, just again, the government is providing risk mitigation programs through reinsurance and risk adjustment and through risk corridors. And we look at the private reinsurance market as another way to mitigate potentially some of the risk for the exchange product. But I would say that I don't think it's -- I doubt if the reinsurance markets at all are going to allow for the ability to lay off the entire risk or a significant portion of it. It's going to be a way -- another mitigant in terms of it, and that's how we're looking at it and that's kind of our expectation for the role it might play.

If you could, sir, there wouldn't be a lot left for the company at the end of the day. So I mean, there's a balance of risk reinsurance, risk reward. And the team here, I think, has demonstrated an ability to manage those factors.

Our next question is from Ana Gupte, Dowling & Partners. Ana Gupte - Dowling & Partners Securities, LLC: The question is about 2014. If you can give us just a high-level perspective on the headwinds and tailwinds to your overall margin as you're considering mix shift to duals and exchanges, some continuing onetime costs. And then for your existing business, what the likely outlook is for the rates and continued reversion to normalized margins?

Bill, you want to [indiscernible]?

Yes, I think at this point, we're not prepared, obviously, to give 2014 guidance. We'll do that in December, as Michael indicated. I think in general, we continue to see strong revenue growth for 2014, as both Jesse and Michael indicated in the last couple of public appearances, where, excluding the health care reform, I think we see revenue growth in excess of 15% already for 2014. That continues and are continuing to be our chief [ph] opportunities. And I think from an expense control, HBR and G&A, I think we continue to benefit from growth and scale on the G&A front, so we'd expect that to continue. And the HBR, a lot of that will depend on the mix of new and existing businesses as we go forward. The second half of the year will have a lower percentage than we've been running the last year or so. In other words, we've been running in the 30%, as we said now, we're down into the teens. And so we expect to be between 10% and 20% in the second half of the year. I don't really know that number yet for 2014, so I can't give you that. But it would be more -- it'd be unlikely that it would in the 35% range again given that we have a stronger base running into 2014. Jesse, I don’t know if you want to add anything else that you see?

No, I think that covers it well. I mean, we certainly have a lot of opportunities ahead of it and cost management will be part of the factor that's going to determine our ability to make all these things come together as expected and get to the margin improvement that Michael talked about over the long-term.

Yes, I think if you look at it, we were able to leverage the growth very nicely over the past 12 to 18 months on the G&A side. We're showing you the new and existing business breakout over the first 12 months and show you what you can really judge and expect how that's going to move going forward. So we try to give you some transparency on that. And so it's a matter of timing. And when some of the new business come on, I can give you a date. It's going to be Q1 of next year, but it could slide into second and third quarter. So that also makes it harder to try and give you something that you can truly model and react to. Ana Gupte - Dowling & Partners Securities, LLC: Okay. That's helpful. On the dual for the existing awards that you've already got, do you have any update on the startup timing? You said just now that you don't know. And then on South Carolina and Rhode Island, any update on the award claimings? And then finally, any [indiscernible] for the new contracts, where do you see yourself the best -- well-positioned for new business?

Sure. So with respect to the previously announced awards on the dual demonstrations in Ohio and in Illinois, both of those are, as referenced in the comments, are expected to now start up in the first quarter of 2014. And that the expectation in those programs is that there will be an initial start with voluntary enrollment and then kind of a phase into passive enrollment within a couple of months after those initial start dates. So obviously, we're -- I continue work with the states and CMS on the launch of those programs. And obviously, we're not in a position to comment broadly about the other opportunities, but as you've seen so far, we are focused on the dual opportunities in existing markets where we can leverage our strength on the Medicaid health plan side.

Our next question is from Scott Fidel, Deutsche.

First question, just on CapEx. It looks like in the Q, you said you have plans to spend around $40 million in additional CapEx on systems enhancements and market expansions in the back half. Just wondering if that's $40 million overall in CapEx or whether that's $40 million on top of the first half run rate?

I think those are second half numbers that we disclosed in the 10-Q footnote there. And normally, those capital expenditures that we have are for new offices, for expansion into new states or new geographical areas. And I think we've also -- IT software is included in a lot of there -- and new computers. And then in the second half, we will move into a facility in Texas for our -- as additional claims processing center that's under construction. It should open up late in the third quarter, I think. So normal operating items, which I think, are nothing there of any unusual nature.

Okay. Then just wanted to just shift back over to the exchanges and just ask specifically a question on Mississippi. It looks like there's going to be around 46 counties where Centene may be the only carrier operating in those counties. So just there were some question already in terms of risk mitigation efforts and reinsurance. And just interested in some strategies you think you may be able to deploy there because not sure how the risk adjustment component within the 3 Rs [ph] will work if you're the only carrier actually operating in that market.

Joe [ph]? Rone?

Yes, one thing, just to make sure everyone's aware of, is on Friday, it was announced that Humana had been in -- had already filed to be in 4 or 5 of the countries in Mississippi, and they announced that they expanded their filing to be in an additional 36 counties. And so at this point, there are 2 competitors in Mississippi exchange, ourselves and Humana. Just with respect to the specific question on risk adjustment. The risk adjustment program is for the entire individual market, both on and off exchange. So given that, there is a fairly meaningful off exchange individual market that exists in Mississippi and they're -- fully expect that there'll be a number of competitors continuing to compete in that off exchange market. So there will be ample opportunity, so to speak, for a viable risk adjustment program in Mississippi. Just in terms of Mississippi, we look at Mississippi similar to how we have every other state to look for where we have strong health plans, opportunities to build a contract with high-quality providers at attractive rates, deliver affordable product for the subsidized low-income population. That's what guided our service areas in Mississippi and has -- we have approached it from that same consistent basis that we have all the other states and feel that we have price to reflect the competitive situation that exists in Mississippi as well.

Okay. That's helpful. And then just one last question. Just interested if you could give us an update just in Texas in the rural markets, and then in Hidalgo. How utilization was trending in the second quarter? Have you seen those markets pretty much settle down, or are they still pretty active but now you're getting the rate relief which is helping to stabilize the margins?

Rob, if you want to take that please?

Sure. With respect to the rural service areas in Texas, we have seen our HBRs decrease slightly. And that's been helped by not only our medical management efforts, our recontracting efforts, but also that 2.9% rate increase that we received in June, specific to the rural service areas. Specific to Texas, I would say that Texas, in general, we continue to improve our operations and improve our results in Texas on a state-wide basis. So we've been in Texas for a long time, it's one of our marquee markets and we continue to improve there on a daily basis.

Yes, we have a strong medical management team, strong general management and critical mass, to say the least, in terms of being the largest player down there. So you combine all those things, and it creates a powerful franchise.

Our next question is from Chris Rigg, Susquehanna.

I just wanted to follow up actually on Scott's question there with regards to Texas. Can you -- I know the RSA rate increase was assumed in full year guidance. But how did that impact the medical cost ratio in the second quarter, at least the retro portion?

I think that the Texas rate increase, the amendment we received, as we said earlier, was -- will be recorded in June, July and August, so as for the remaining fiscal year of the state because their fiscal year starts on September 1. So what we received in second quarter was 1/3 of that. So that would cover 4 months of a year, you were seeing [ph] and there was a 3-month quarter. But when you look at it on a year-to-date basis, it was still short in terms of the whole year for 2013. So in overall, it helped improve the HBR in Texas for the quarter. And in the second quarter, we'll continue to see that benefit. I think what we do still see in Texas is disparities in terms of utilization levels between regions and those -- and some of those are accounted for in rate differences in terms of what the state's doing. And so we continue to work on the medical management front to improve utilization in some of the higher utilizing areas.

Right. Is it possible to quantify the impact? I'm just trying to get a sense for how the company's overall medical benefits ratio trended from Q1 to Q2.

I think it had a minimal effect. The amount that we received in -- that we recorded in June for that rate adjustment was -- it had a minimal impact on the overall HBR and HBR trends.

And when you look at the total size there in the company now, it takes a lot to move the needle.

Okay. All right. And then just wanted -- and maybe it might be a long question, but a yes or no answer. But when you think about the overall cost trends you guys are seeing, seasonally, normally, Q2 is a little bit better than Q1. You had sort of abnormally high flu in the first quarter of this year. Texas rate increase for the RSA, a little bit of a retro there. Another quarter of Kansas. I guess I just want to make sure, I would've thought those factors would have led to slightly greater decline in the MBR sequentially, but it sounds like you guys are saying it's really a function of the mix, and utilization is actually trending somewhat below where you guys would've expected?

Well, certainly, utilization has been lower in Q2 than Q1. And Michael gave a couple of comments on that in his script. I think overall, Q2, when you factor in both the fact -- particularly look at the existing business HBR, with Texas converting into there, they're going to be slightly higher and we have other markets that are lower. And so that we said it kept at the 88.4% level. Going forward into the second half, we continue to think that the HBR should be normalized, running at more normal margins because we have the additional 2/3 of that Texas rate increase coming in the second half, plus the regular September 1 rate increase that occurs in Texas every year. So overall, we continue to believe that it will be in the range that we talked about at the beginning of the year, 88% to 89% for the HBR. And the fact that, that's a little higher maybe than what some people are expecting, is due to the acuity shift where, as we add particularly long-term care in Florida, for example, the higher acuity products in several of our markets.

And then you'll see that, that moderation that does take place is a function of somewhat smaller, really, rates, but also the medical management programs. We have a really strong medical management team that is able to, across various markets, impact the outcomes.

Our next question is from Peter Costa, Wells Fargo Securities.

Couple of questions on the quarter, just help us out a little bit. Regarding the rural service area in Texas, what were your revenues in the rural service area in Texas, specifically, for the quarter?

I don't know that we've got into that level of detail at this point.

Can you help us out with how much it was over the last year roughly, so we can kind of gauge what the EPS impact was or the rate increase was?

We haven't really got into that level of detail.

I'm not sure we even have it here in the room with us.

Okay. Then can you talk about the decline in membership in Louisiana for a minute? And do expect that to continue or what happened there?

Rob?

Yes. The decline in membership in Louisiana has really been because of an erosion of membership to the shared savings programs that exist in Louisiana. So we anticipate that, that will continue to -- in the future until Louisiana decides on whether or not they're going to continue out that shared savings program or not. The good news on that is that some of the membership that we see migrate to the shared savings program are people that really want more choice in their physician network. And so that's something that we're going to continue to work with the state of Louisiana on to work with them on how we can better serve those members going forward in the future.

I think -- we've seen this in other markets. It will bounce around for a while back and forth. But still, we still have a lot of critical mass there. It's still a strong market for us. It's a contributing market. So it's a -- that deterioration, if you try to say -- if we try to call it that, is somewhat expected. And there will be new members coming in, and the states are aware of it, and how much will it save them versus shared savings model. So kind of stay tuned over the next 2, 4 quarters on that one.

Okay. And then going out to 2014, you talked about 15% growth minimum from your sort of your existing business without the impact of reform. How much of that is from the Florida LTC contract and the California contract?

We haven't broken that up into pieces at this point in time. What we said is we've seen at least 15% growth for 2014 coming from known contract wins and membership additions, et cetera. And we're not -- we haven't given out specific pieces.

We typically, after the enrollment in the following quarter, we'll give you the membership by state, by plan. And I want to stick pretty much to that principle because there's so much shifting around that can take place that I don't want to mislead either.

Our next question is Kevin Fischbeck, Bank of America Merrill Lynch.

I wanted to go into the guidance and just understand a little bit the moving pieces in here versus where you were last quarter. You raised the low-end of the guidance by $0.05. It sound to me like also in there, you've got maybe an additional $0.12 drag from Kentucky, $0.04 in Q2, 3 and 4. I guess you'd have the impact of Centurion, Tennessee and Imperial, California. I guess, Q2 probably came in early bit better. Is there anything else that we would think about as far as impacting the guidance from -- in Q1 to where you are now?

I think you've hit most of the things. I would say that the startups, that we've talked about, was probably included in our business expansion cost number that we quoted all year long. The only real difference there might be the addition of the Acaria transaction costs from where we started the year at. And just for -- that's a total of $0.08 for the year. I think we had $0.01 in Q1 and $0.07 in Q2, in case that comes out somewhere. But other items, I think, that you picked up are generally correct.

Okay. All right. And then I think you mentioned that Ohio was coming in a little bit slower than you thought. I think last quarter, you talked about having about 200,000 members by year end. Is that 200,000 member number still a good number? Just is it going to be sometime during 2014? Or does that -- or does the rollout make you think differently about that?

Jesse?

Yes, Kevin. So I think what we referenced is you've always got the starting point and then the ending point with as these new programs rollout. And I think what we're seeing is we're starting out a little less than we were anticipating, but we still see an opportunity to ramp that, both on the state-wide expansion of the existing program and then duals when those come in. So I think without commenting on the specific numbers and you will get into that when we get into 2014 guidance, et cetera, but we definitely see significant opportunity to ramp our membership through the combination of those things in Ohio as we go onto next year. So it's, I'd say, largely a timing shift more than anything else.

Okay. And as far as Kansas goes, I think last quarter, you talked about running in the high 90s MLRs, is that still a good number to think about or has that changed at all?

[indiscernible]

Yes, that's a good number to use at this point in time. We are -- we have 6 months under our belt in Kansas and looking at that situation overall. But we're continuing to run in the high 90s.

Okay. And then maybe just a big picture question. There's a lot of thought that Health Care Reform, just the talk around it and the individual mandate, is going to spur people who today qualify for Medicaid, and just for whatever reason aren't signed up. That they're going to start looking at their options next year and then sign up for the core Medicaid program. So that could help you, even in states that are not actually expanding the Medicaid program. Have you done any work around what that might mean or what the potential pool of people are in your states?

I think we probably just kind of thought about it in terms of there's some upside there in that people become aware there's insurance and starts questioning it. And how it's promoted, by what state. And what they're doing to encourage that is yet to be seen. So I view what you said, an upside from a conservative planning standpoint.

Our next question is Carl McDonald, Citigroup.

Just had a question on the SG&A guidance. When I tack on the incremental startup cost that you're expecting in the second of the year to what you reported in the second quarter, that gets me to a little bit below the low end of the full year guidance. So anything else that you would call out that will impact the second half G&A, other than the start-up expenses?

Well, I think that the expansion costs are clearly a big piece of it. I think even our performance-based compensation varies by quarter. And as the revenues grow, obviously, we'll lose the Kentucky revenue in the second half of the year. And I think that there's -- in general, there's 2 things on a new plan, you have start up costs before you start generating revenues, and those costs are included in our business expansion cost. You also then have, once they start running, the first 6 months, let's say, of a new plan [ph]. You're going to be adding margin, you've got continuity care provisions, other things like that which also can cause increased cost. So a lot of that's in the HBR line, not in the G&A, but there's also -- you tend to have a lot more temps and things like that when you just start up a new plan [ph] to deal with the conversion of the membership at one day and you make sure you have to cover that for a period of time.

Our next question is Michael Baker, Raymond James. Michael J. Baker - Raymond James & Associates, Inc., Research Division: I was wondering if you could provide updated thoughts on dual rates. How they're shaping up relative to expectations, particularly in light of a publicly-traded player when they're finalized in Massachusetts decided and pull out. I understand each state's different, but figured you could provide some thoughts on that?

Jesse?

Sure, thanks, Michael. So I mean, we talked a little bit, Investor Day, of looking to Massachusetts as obviously one of the early markets for dual demo and I think a few data points that we have there, both on the positive side and in terms of some increase in the rates and some risk protections that kind of were added over the course of that kind of rate development process. And then as you referenced, some people deciding not to participate. So I would say, broadly that the rate discussions on duals are still very much in process. And we're working in both of the states where we have been awarded a contract in Ohio and in Illinois, both in the states side, and then to the extent that we can on the Medicare side as well. Ultimately, our expectation is we will get to rates that allow for a successful and sustainable program.

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Neidorff for any closing remarks.

I just want to thank you, all. And it was a great quarter. We look forward to our third quarter review with you in a few months. So everybody have a good day. Thank you.

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