Centene Corporation (CNC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Centene Corporation Third 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 Mr. Edmund Kroll, Senior Vice President, Finance and Investor Relations. Please go ahead, sir.

Thank you, operator, and good morning, everyone. And thank you for joining Centene's Third Quarter Earnings Call. Michael Neidorff, Chairman and CEO; and Bill Scheffel, Executive Vice President and CFO of Centene Corporation, will host this morning's call. The call is expected to last approximately 45 minutes, and may also be accessed at our website, centene.com. A replay will be available shortly after the call's completion, also 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 those calls is 10033731. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the 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 filed Form 10-Q dated today, October 22, 2013, and also 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 Friday, December 13 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. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's third quarter earnings call. During the course of today's call, we will discuss our solid third quarter results, including continued progress towards our margin expansion objectives, future growth opportunities and state updates including recent RFP wins. I will begin by discussing highlights of our third quarter results. We are pleased with our third quarter results. We continue to produce strong revenue growth and, once again, showed sequential improvement in our pretax margin. This increased by 50 basis points in the third quarter to 2.95%. The improvement was due to a better HBR. Solid expense control at the G&A line was partially offset by higher performance-based compensation and start-up costs in new markets. Margin improvement is a strategic priority for Centene, and our long-term goal continues to be 3% to 5% on a sustainable basis. Membership increased 4% year-over-year to 2.6 million covered lives. Premium and Service revenues grew 24% year-over-year to $2.7 billion. The faster Premium growth relative to membership growth was driven by the continued shift in mix towards higher acuity beneficiaries. For example, long-term care membership increased almost 300% to 31,600 lives. Additionally, our average revenue PMPM has increased 16% year-over-year. The increase in high acuity membership is consistent with Centene's strategic priority to diversify its product lines to maximize cost savings for our state customers. The long-term care growth should continue over the next several quarters as our new Florida contract ramps up. The HBR improved 560 basis points year-over-year, and 110 basis points sequentially to 87.7%. The HBR for our existing business improved 210 basis points sequentially to 86.3%. As a reminder, changes in the mix of new and existing businesses can cause variability in the consolidated HBR. Bill will provide additional detail on this topic. During the third quarter, we continued to experience a modest reduction in medical trend across our existing business. I would now like to discuss Q2 growth opportunities. Our targeted pipeline remains extremely robust at $130 billion through 2016. We expect to continue our recognized success in winning new business. We will diversify by geography and product line with the goal of driving profitable growth. We already have visibility on 2014 revenue growth in excess of 20%, excluding exchanges. This compares to our previous estimate of 15%. We will provide full details at our December Investor Day. I will now cover state contracts and rate updates. Florida. Our new and expanded Florida long-term care contracts started on schedule on August 1. This program is proceeding as planned with enrollment to be phased in by region through March of 2014. We added an additional 7,000 lives during the third quarter due to the expansion. In September, our Sunshine Health subsidiary was awarded a new and expanded contract for 9 of the 11 regions under Managed Medical Assistance program. Enrollment is expected to begin in the second quarter of 2014 to October 2014. The contract is subject to challenges and contract readiness reviews. Therefore, it is premature to comment on membership and revenues. Sunshine Health was the only plan awarded a Foster Care contract statewide for the Child Welfare Specialty Plan. The current Foster Care population in this state is approximately 30,000 children. Ohio. Our Ohio subsidiary began operating under a new and expanded statewide contract in July. Our enrollment increased 9% sequentially in the third quarter. We previously noted that the ramp-up of additional lives had been slower than expected. We continue to work closely with the state on this matter. The enrollment ramp should continue into 2014. Massachusetts. Last month, CelticCare Health Plan was awarded a contract to participate in the MassHealth CarePlus program in all 5 regions. This is a significant win for Centene as it provides an entry point into the Commonwealth Medicaid program. This contract is expected to begin in -- on January 1, 2014. California. Earlier this year, our California Health & Wellness subsidiary won 2 Medi-Cal contracts in California. Under the first contract, we will serve members in the state's Medi-Cal Managed Rural Expansion program in 18 counties. Under the second contract, Centene will begin serving Medi-Cal beneficiaries in Imperial County. With the benefit of being the only county-selected plan, enrollment is expected to commence on November 1 of this year for both contracts. New Hampshire. We expect to begin serving TANF and ABD beneficiaries on December 1. Texas. In September, we were awarded a contract to serve an additional STAR+PLUS recipient -- recipients in 2 rural service areas. Enrollment is expected to begin during the second half of 2014. Dual eligibles. The demonstration projects in Ohio and Illinois are expected to commence in 2014. We continue to work constructively with both states and CMS on rates and other contract terms. Centurion. In July 2013, our joint venture subsidiary, Centurion, began operations under a new correctional contract in Massachusetts. This contract provides comprehensive health care services to 11,000 individuals incarcerated in the state's correctional facilities. In September of 2013, Centurion began its second state correctional contract in Tennessee covering 20,000 prisoners. And last week, Centurion executed an agreement for a third state correctional contract in Minnesota, covering 9,000 offenders. This latest award is expected to begin in the first quarter of 2014. Next, a quick comment on the rate outlook. We continue to expect a composite rate increase of approximately 2% for 2013. In Texas, we received a net rate increase of 4.2% which includes risk adjustment. This rate increase was effective September 1. Georgia and Florida are in the process of finalizing rate updates that will be retroactive to July 1 and September 1, respectively. All these rates are exclusive of the ACA industry tax, which is being negotiated separately. Switching gears, let me make a brief comment on the ACA opportunity. The ACA is an important opportunity for Centene, but only one part of our overall growth pipeline. We have taken a selective approach to our participation in health insurance marketplace. We have launched our Ambetter brand on a limited basis in 9 of our current states. The legacy book of individual policies at Celtic is in runoff mode. We have repositioned Celtic to support our exchange growth strategy. We have scalable infrastructure and the overall bandwidth to effectively manage the Medicaid expansion in our participating states. Now a brief comment on Kentucky. As you know, we exited Kentucky July 5. We are winding down operations, which will be substantially completed by the end of this year. We cannot comment regarding the ongoing litigation with the Commonwealth on this call. In closing, our view of 2013 and 2014 remains positive and upbeat. As Bill will discuss in more detail, we are raising our 2013 guidance to a range of $2.77 to $2.87. Thank you for your support and interest in Centene. We look forward to seeing you at our next Investor Day on December 13 in New York City. I will now turn the call over to Bill.

Thank you, Michael, and good morning. To begin my comments this morning, I would like to reference you to the table on Page 3 in our press release, detailing the components of our third quarter earnings numbers, particularly for the third quarter of last year. Excluding the impact of Kentucky operations and certain gains recorded last year, our diluted earnings per share was $0.88 in Q3 this year, compared to $0.81 in last year's third quarter. I think this provides a good comparison of our ongoing operation between years, although the improvement is much greater when considering that this year includes a normal level of performance-based compensation compared to no-performance-based compensation in last year's third quarter. We expect to classify the Kentucky operations as discontinued for reporting purposes at some point in the future. This could occur at December 31 or for the first quarter in 2014, depending on the level of remaining claims reserves at those dates. For the third quarter, Kentucky is still included in all of our numbers as a normal operation. And as Michael indicated in his comments, we ceased operations in Kentucky as of July 5, and our ongoing wind-down efforts primarily consist of paying any remaining claims going forward. For the third quarter of 2013, our Premium and Service revenues were over $2.7 billion compared to $2.2 billion last year, an increase of 24% year-over-year. The $500 million increase results primarily from the start-up of the Kansas contract on January 1; the impact from the membership expansion in Mississippi last December 1; the increases in membership and rates in Texas between years; and the Acaria acquisition on April 1, offset by the elimination of the Kentucky revenue after July 5. Premium taxes were at a more normal level this year at $70 million for the third quarter. Last year's amount of $236 million was impacted by a separate payment to us from one state of $180 million, which we immediately passed through to providers. Our Consolidated Health Benefits ratio declined to 87.7% this quarter compared to 93.3% last year and 88.8% in the second quarter of 2013. As we indicated last year, our consolidated HBR without Kentucky in the third quarter of 2012 was 88.7%. The improvement in our HBR without Kentucky year-over-year and sequentially is primarily a result of rate increases in Texas, as well as a continued level of moderate utilization resulting from a combination of our medical management efforts and overall low trend levels. For the third quarter, the portion of our Premium and Service revenue derived from new business has declined to 14% this year compared to 32% last year. The HBR for our new business has decreased to 96.5% compared to 106.5% last year. The HBR for existing business has improved year-over-year by 70 basis points from 87% to 86.3%, favorably reflecting the absorption of the significant increases in new revenue generated in 2012. Our General and Administrative expense ratio was 9.3% in Q3 of this year, compared to 8.2% in the same period last year, and 8.7% in Q2 this year. The increases in the G&A ratio reflect the additional performance-based compensation recorded this year and an increased level of business expansion costs. Our business expansion costs were $0.12 in Q3 this year. This compares to $0.07 in Q3 last year and $0.17 in the second quarter of this year, although Q2 included $0.07 per share for the Acaria transaction costs. Our third quarter business expansion costs included Centurion's start-up in Massachusetts and Tennessee during the third quarter, costs in Florida related to the long-term care expansion, preparation for the start-ups in California and New Hampshire later this year and the exchanges beginning January 1, plus our normal RFP and business development costs. Investment income was $4.9 million in Q3 this year compared to $23.2 million last year. The third quarter of 2012 included $19.4 million of gains from the sale of certain investments which we discussed last year. Excluding these gains, our investment income increased due to a higher level of invested assets. Interest expense was $6.6 million in the third quarter this year, compared to $4.9 million last year. The increase between years reflect the cost of the additional $175 million in senior notes issued in the fourth quarter last year. Our income tax rate for the third quarter this year was 39.1%, excluding the effects of noncontrolling interest. During the third quarter of last year, we recorded an overall income tax benefit of $9.5 million comprised of the benefit from a pretax loss for that quarter and a benefit of $4.6 million from certain state tax items. Our GAAP diluted earnings per share was $0.87 compared to $0.07 for last year. As I previously indicated, the third quarter EPS numbers adjusted for Kentucky and the 2012 gains are $0.88 for 2013 versus $0.81 for 2012. September 30, we had cash, investments and restricted deposits of $1.7 billion, including $38 million held by unregulated entities. We continue to maintain our risk-based capital in our regulated subsidiaries in excess of 350% of the authorized control level. Our debt at September 30 totaled $521 million and there were no borrowings drawn under our revolving credit agreement. Our debt-to-capital ratio, excluding the $73 million nonrecourse mortgage note, was 27.4%, a decline from 29.8% at June 30. Our medical claims liability totaled $1.1 billion at September 30 and represents 42.9 days in claims payable. Cash flow from operations was $131 million for the third quarter, which is 2.7x net earnings for the quarter. Our 2013 updated guidance is Premium and Service revenues, $10.6 billion to $10.8 billion; diluted earnings per share, $2.77 to $2.87; Consolidated Health Benefits ratio, 88.5% to 89%; General and Administrative expense ratio, 8.8% to 9.2%; and diluted shares outstanding of 56 million to 56.5 million shares. Our guidance assumptions include the start-up of operations for California on November 1 and New Hampshire on December 1. Business expansion costs are expected to be $0.60 to $0.65 for all of 2013. Operator, you may now open up the line for questions.

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

So a question about 2014. You guys said you had visibility into 20% revenue growth or Premium and Service growth for 2014 and then excluded -- it sounded like that excluded exchanges. Does that also exclude the Medicaid expansion?

Yes.

Okay. And you -- is it fair to assume -- I mean, I don't know what your assumptions are on Ohio, but is it fair to assume, we have with Ohio, it's still only about $250 million in revenues; without Ohio, maybe $100 million. Would you expect the impact from the ACA, the Medicaid expansion to be pretty modest?

Bill, you want to...

Well, I think, at this point in time, we don't know enrollment numbers for exchanges. And for Medicaid expansion, we're looking at a couple of states, particularly I think, Washington, Massachusetts and Ohio has just recently talked about that yesterday. So I think the 20% -- in excess of 20% revenue growth we talked about will further be updated on December 13 on our Investor Day. We may know more about exchanges at that point in time and can talk about that. Right now, our number excludes that.

And Bill, is it fair to assume that the exchanges are a bigger impact in '14 than the expansions?

I think that's -- we'll have to wait -- and that will be seen as we get a little farther along. I think both of them have potential for larger numbers, and we don't really have much visibility into the enrollment process yet for exchanges. So we'll have to see.

There is no good proxy out there yet.

Yes. Yes, that's fair. The 3% pretax margin that you guys talked about, so I'm curious. Do you think that's an achievable number for '14? And maybe even if you just look at sort of existing business, business that will -- so if you take your 2013 book and roll it forward, would you assume that you can at least get to the 3% on your existing book? Or do you think you can even get there on the overall next year?

Well, I mean, right now, we're at 2.95% for Q3. And I think it's possible we'd get there. It's going to be a function of new and existing mix.

I think the expansion costs that we will incur in 2014, for example, Florida Medicaid, that expansion will need to be considered. So I don't know at this point in time, we have a pretax margin number for 2014 that we're ready to lock on to. We obviously will have that for this December 13 meeting. But certainly, that's our goal over time. Whether we will achieve that in 2014, we'll have to wait to discuss that later.

I think what's important is we try to do a -- we want to try to show you that it's sustainable. As the HBR gets controlled, G&A, yes, we think it's very achievable. That the timing, we'll have better insight as we unfold the '14 budget.

Got you. So just one quick question, follow-up on that and then I'll jump off though. Are you insinuating that the start-up costs, including Florida and all the others next year, will be greater than the $0.60 to $0.65? Were you insinuating that's sort of a headwind for next year?

Yes, we haven't totaled everything up, but I would certainly think that our expansion, our growth continues, and with growth comes the expansion costs. So I would expect that each year that those numbers would continue to grow. I don't have a specific number yet for 2014, we'll give that in December. But certainly, one of the big numbers will be the Florida Medicaid expansion, which we'll primarily hit in 2014 versus 2013.

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

Can you talk about the Premium tax? You talked about it being separate still from your rates and negotiating still with states. Are there any states that have agreed to compensate you for that? Or where do we stand on that at this point?

There are a lot of discussions taking place. Florida has indicated they have a budget line to cover us. Texas is talking about various mechanisms that they're going to use. Sounds like maybe a retro look, and then an adjustment, and we're talking to the accounting firms about it. They do that, blends revenue recognized. So there's still a lot of moving parts. And that's one of those -- we're at that tenuous, not tenuous, but at that point in time when we are close to the annual budget numbers and be able to give you some guidance for '14. But I'd like to wait and be just a little more specific. With the passage of time to December 13, I think we should have more visibility.

I think we are encouraged by the discussions that we are having with our state partners. And I think the actuaries that are involved in this process seem to all recognize the need to include in our rates an adjustment for this. And so, that is moving forward and with discussions with the variety of states, and we're encouraged by those discussions at this point.

Are you still talking about the adjustment being on a grossed up basis? Or is it just the premium tax itself?

No, we're talking -- I mean, the actuaries, everybody recognizes a need for the gross up.

The fee is nondeductible for tax purposes, so we have to achieve a similar amount at the revenue line to cover the after-tax costs.

The states understand that.

Okay. And then can you talk about your 20% growth in revenues that you talked about for next year? Are you including anything in that for growth in members in your state, your Medicaid contracts that you have existing today in terms of new people who may sign up that, perhaps, qualified before but have not actually signed up for Medicaid?

Well, I mean, outreach is an ongoing effort, day in and day out in the various markets. So we, of course, always look to take advantage of that. And you lose some as well so there's a combination in that mix. But once again, we'll give you much more clarity. We probably spoke of the increase in long-term care, we talked about the new contract in Florida. Those things we have some visibility on, that we're comfortable talking about the 20% versus '15.

And that number is primarily consisting of new awarded contracts or expansions that we're aware of. It doesn't include anything for the woodwork effect, for example, that people have talked about or anything like that.

Okay. And then can you just tell us how much performance-based comp there was in the quarter?

I think, they were probably around $0.20 of performance-based comp in this year's quarter.

Our next question will come from Sarah James of Wedbush.

You talked a little bit about the legacy Celtic contracts being in runoff as you switched to Ambetter. Could you talk to what retention might look like on the existing book? And if margins would look similar under the new formula compared to how you ran it at Celtic?

Rone, would you like to comment on that?

Yes, with respect to the legacy block, it's really not something that we view as strategic to the future. That's a block of business that was underwritten largely acquired through brokers, typically upper-income individuals. And as we've talked about in the past, our individual insurance and exchange strategy is to focus on lower-income-subsidized members that's an extension of where we traditionally operated on the Medicaid plans. So as a result to that, there's not a block that we've taken a lot of steps to enhance the product line in compliance with the changes contemplated by the Affordable Care Act for 2014, although we'll continue to offer a product in a number of states. So we don't expect -- we expect this block to continue to decline throughout 2014. And the nature of a runoff block like that is it typically doesn't throw off great margins. So it's going to be something that's not going to be a big contributor, one way or the other, with respect to the bottom line.

Got it. And now that pricing data has been released for the exchanges, how do you think about your competitive positioning for the Ambetter product?

Look, I think a lot of people expected that, and you're seeing that a great deal of variability in the rates in 2014 on the exchanges. And the expectation isn't that the rates are going to compress more in future years. With respect to our position for 2014, it really varies quite a bit. In some states and counties we're very competitive; in other states and counties we're less competitive. I can tell you that we had a very consistent and disciplined approach to how we priced that we applied across all the different states and service areas that we're serving for 2014. So where we see ourselves from a position standpoint really reflects the specifics of the competitive environment in the states, as opposed to any difference in terms of how philosophy, how we apply it to our pricing.

That's helpful. And last question here is on the Centurion business. The win in Minnesota was very impressive as you dislodged an incumbent with a lower price point bid due to the advantages that you provide in vertical integration and medical management. So seeing that there clearly is an appetite for the type of product offering you have, can you talk about the scope of contracts that are coming up in the next 12 to 24 months? How many other opportunities are there in the near-term?

Jason?

So Sarah, we continue to evaluate a number of different states that have potential RFPs that will be forthcoming in the subsequent months and years ahead and have a fairly robust pipeline. So we'll continue to evaluate those on a case-by-case basis, depending upon the market and the nature of the opportunity. But we do see a robust pipeline for partnership with MHM and this joint venture, Centurion, as we move forward.

But no specific numbers of contracts that are coming up in the industry for a rebid over the next year?

No.

No, I think that would be...

No.

No.

Our next question will come from Justin Lake of JPMorgan. Justin Lake - JP Morgan Chase & Co, Research Division: First question, I just want to follow-up on the industry tax. Can you walk us through the mechanics of how you expect the state rate -- the states to get you this rate increase that would allow for the tax? Do you just expect it for -- to be one more or do you expect it to happen after that and there'll be some kind of retroactive adjustment process.

It's going to vary state to state. Bill, you want to make a comment on what we've seen so far and...

Sure. There are couple of different ways that it could be done and not all states will be the same. In some cases, it could be built into our rates starting January 1, and it will be included there. For the expense side of that, we expect it will be -- we will estimate it beginning January 1 and we will have an expense each month for this. The revenue that we'd have to offset that could be coming through a rate amendment that we get currently. It could come through a rate amendment that just says we'll get a onetime payment, maybe that would be in September. But it could -- as long as we have the rate amendment, we would be able to recognize the associated revenue with that, at the same time we're recording the expense. And some of this will be depending on these getting rate amendments with each of the states. So it will just vary as when the cash flow. We won't pay the money until the third quarter or a little later even, September to October range of next year. But we do expect the revenues from the states to come in either pro rata as part of a monthly premium or as a onetime payment.

We also continue to work in Washington for a legislative alternative there. So there's a lot of various approaches being taken at this time. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And with those amendments or the rate increases, would they be publicly available in terms of state making an announcement so we'd know which states have decided to make these amendments and which haven't and when? Or do you get the...

I don't know the answer to that question yet as to whether those will be public, or how those will be publicized. But we're having discussions with each of our states, at this point in time, in terms of the mechanics of how to achieve this. And each state has a different approach on how they are looking at responding to this. And we'll work this out over the next couple of quarters, I think. Justin Lake - JP Morgan Chase & Co, Research Division: Okay. And I think one of your peers had mentioned that they saw about -- they had indicated that about 25% of their states had, thus far, agreed to kind of pass through the rate. Is that -- do you have any number there in terms of what percentage of your premiums, for instance, or what percentage of states have given you that level of confidence?

I think it will be a little premature to talk about it at this point. Let's see where we are in December 13. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, and just last question on this. The -- can you tell us what you would estimate the grossed up number you need to get to be made whole on this industry tax? What number should we be looking for for you guys?

Generally speaking, I think some of the rates that we've seen is that our tax would be roughly 1.4% of the premiums. So if you gross that up for federal and state taxes, and that's different state by state, you're probably in the 2.2% range as you need to get paid to get a 1.4% after tax number. And so those are kind of the numbers we're working with right now in our discussions with the states. Justin Lake - JP Morgan Chase & Co, Research Division: Okay, great. And then one other question on duals. Can you give us an update on what you're thinking there for 2014 and what's -- where you are in kind of your major states in terms of negotiations for rates on the dual side?

Jesse, you want to comment on it?

Sure. Justin, the -- Jesse Hunter. So very much a work in progress in both of our markets where we've been awarded the dual demo contracts in Ohio and Illinois. So there's a dual track, at least a dual track with respect to both the rates and the contract terms. So we're continuing to work down on -- down both paths, and there are some challenges that we continue to work through in the rate setting process. So we're working with the states and CMS, respectively, to work through those issues. And we'll talk more about the implications of that as it gets into our 2014 guidance in December. Justin Lake - JP Morgan Chase & Co, Research Division: Anything that you could share with us in terms of what the major 2 or 3 kind of hurdles are to getting these rates done, given they seem to be dragging out in terms of negotiations?

Sure. I think at a high level, I can't give too many particulars here. But at a high level, on the Medicaid side, it's the same process that we would work through, if we have -- particularly, if you have a population that's moving from an unmanaged setting into a managed setting. So what are the variables with respect to things like managed care savings? What were the assumptions and where that's coming from? And making sure that we understand, both the actuarial and then our kind of relevant experience, how those translate into what we believe to be rate adequacy. And on the Medicare side, a lot of this comes down to the relative acuity of the dual population versus the traditional Medicare advantaged population. And so that's what we're working through as a consistent theme.

The next question will come from Chris Rigg of Susquehanna International Group.

I want to come back to the new MLR guidance for this year. Was there something obvious coming online in the second half now that you didn't expect back in July when you put out the old guidance? Or is there something on the medical cost side, more directly in Florida or some other state, that's pushing up the low end of the target for this year?

I don't know that we see any changes. And Bill, do you want to....

I think the basic issue that you have there is we have sort of looking at the whole year at this point in time, we've tightened the ranges for where we are on an overall basis. And so what we're providing now is what we think is where we're going to come in for the whole year. And it's -- instead of taking 100 basis points, I think we're down to 50 basis points in terms of range. And so that's something that, when you look at our year-to-date numbers, is something closer. We're at 88.9% year-to-date for 9 months. And so where we are really reflects the fact that you got 3 quarters of the year already behind you.

Okay. And then just with regard to Florida and Georgia, specifically. Can you give us some sense for what you're expecting in the fourth quarter, at least from an earnings contribution from those 2 catch-up for retroactive premium adjustments?

Those discussions are in process right now. I mean, I think we're looking at an overall modest amount. And I think that I think they will be overly significant for us in terms of the consolidated numbers.

Yes, we've commented that we see a 2% on the year. So...

For overall. Composite.

Yes, overall. So therefore with -- you can see where it's going to have a big dramatic impact. But -- and it's not -- we're in discussion whether -- and that's not something we talk about publicly towards results.

Okay. And then just clarifying question on the compensation spending. Is that $0.20 pretty stable quarter-to-quarter? Or does it vary from period-to-period?

It's pretty stable as a proportion of revenues.

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

Just wanted to see if you have -- I know it's early, but do you have any comments at all about how the enrollment process is going on the public exchanges?

I think we've seen nothing that different what you're hearing about. Rone, you're closest to it.

Well, I think as Bill mentioned, it's premature to draw any conclusions about the enrollment volumes that we're seeing. We're in 9 states for 2014. 7 of those are on the federal facilitated marketplaces, and we're certainly being affected by the same issues that are pretty well publicized about challenges with consumers being able to get access and get through the shopping experience with respect to the federal exchanges. We're also on 2 state-based exchanges, Washington and Massachusetts. And they're -- it's pretty well publicized that Massachusetts is having better experience, and we're certainly seeing that reflected as well. So not clear when things are going to -- the fact that the Washington exchange is working well, I think, is -- gives some room that -- to think that the problems are not intractable, that we're seeing in some of the other areas. But again, it's premature to really draw any conclusions at this point.

Okay, that's helpful. I guess you mentioned that there's not a lot of precedence for something like this. So it's hard to tell. My assumption would be that enrollment would be back-end loaded towards the deadline in December. But is there a point in time where you look at it and say that if things are still not working at some point in the future, you start to get worried or more worried about that first selection? Or I mean, how do we think about the delays and what a good time for you would be for things to be up and running again?

Well, I think that we -- as the lead up to October 1 and some of the expectations about a bumpy October became more widespread, we certainly adjusted our expectations that October was going to be more of a slow ramp as opposed to a big bang in terms of enrollment. The -- I think at this point in the context of the 6-month open enrollment period, there's still lots of time to be able to get back to whatever level of expected national enrollment or state-wide enrollment that people were expecting. As we get into November, it becomes a little bit more concerning because we're bumping up against the December 15 deadline to get coverage effective January 1. But even then, there's still -- it's unclear how much of the enrollment that might have originally been expected in the fourth quarter can still get shifted into the first quarter of next year. But November becomes a somewhat critical month in terms of looking to see that things are working better than they are right now.

There is no reason to believe that it's going to effect the selection side of it, the ADA acuity one way or the other. It's -- someone that's high acuity will have the same difficulty as someone with lower acuity getting through the system.

Yes, I guess I just figured that someone with high acuity is going to keep trying, whereas someone with low acuity might get dissatisfied and move on.

Right. It's hard to speculate on that.

Yes. Okay, so Just shifting topics. It was helpful to get the business updates. And I just wanted to go drill down into the targeted pipeline that you mentioned of $130 billion. That's all new business, that doesn't include the contracts that you kind of listed off as kind of coming online over the next year, is that correct?

Yes, yes, it is. Jesse? You want to comment, Jesse?

Is there any way to break it out, more color between like just Medicaid, core Medicaid business, duals, Centurion, and any other buckets that you think about as to kind of what make up that $130 billion?

Yes, and so the little bit of color we can provide right now, Kevin, is that's the same orientation that we've talked about recently in terms of the -- there's the macro pipeline across Medicaid, kind of broadly defined Medicare, duals, exchange, et cetera. And then this is the subset of that, that we're viewing as an kind of a targeted Centene pipeline, which would cut across all the things that you shared. And I think what would be in a position, as we have in the past, to give a little more color on that in December as we talk about how we look at 2014 and forward.

Okay. And then maybe just last question. I think you mentioned a couple of times that you saw a trend moderating slightly. But did you -- I didn't hear if you did. But any color on what exactly was kind of driving the moderation? Is it any particular bucket of cost trend, inpatient, outpatient, drugs?

Mary, would you like to comment on that?

Sure. If you look at ER for example, we're seeing slight downward trends in the TANF ER utilization, both for our same store and also for our new plans year-over-year, but also Q3 to Q2. And inpatient is another good example. With TANF, for example, we're seeing some slight increased seasonality, mainly due to some increased deliveries, but very moderate. And for inpatient days if you look Q3 to Q2, but we see decreasing trends year-over-year for all the plans.

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

Just first question, just to follow up on the exchanges. Just curious on whether you've seen any enrollment data come in yet from the federal exchanges?

Rone?

Yes, we've seen enrollment data come in for pretty much all the federal states that we're participating in.

Okay. Are you seeing any of the issues in terms of data integrity with those -- with the 804 files or are those looking pretty clean so far?

Yes, I think like a lot of other issuers, we've done a level of outreach to people that we've gotten enrollment files for. And pretty much confirmed that the 834 files we're getting reflect the members they intended to roll, the plan they expected to select, the -- whether or not they're APTCs. So the rates are accurate. We're not seeing kind of random problems with respect to the quality of the data that we're getting. There's 2 or 3 specific issues that we're kind of seeing on a systematic basis that we've raised with the exchange authorities and are working through those with them. So we're not seeing -- and with those, we can accommodate those at this point through fairly easy workarounds. So those are being worked on, we know to fix. So we're not seeing enormous problems right now with the actual quality of the data that we're getting through the federal exchanges.

Okay. That's helpful. I had a follow-up question just on the visibility into the 20% revenue growth that you have now. Is that still excluding Florida? It sounds like you said you weren't ready to opine on that just yet. So just wanted to make sure that, that excludes the expansion of the contracts?

Florida.

I think that the 20% number includes Florida Medicaid expansion. We've got a wide range right now included in there on the Medicaid side of that.

Okay. And then just a question on the specialty earnings. Looked like those are down pretty meaningfully year-over-year. You had nice margin improvement in the Medicaid side, but just interested on what was driving down the specialty earnings year-over-year?

Bill?

There's really 2 components. The primary component there is that we have performance-based compensation included in those numbers this year, and there was none last year. And we've got some additional shifts in margin, particularly in the pharmacy area between our health plans and the Specialty Companies.

Okay, what does that mean, though, in terms of shift in margin from the specialty plans into the health plans on performance there?

Generally, we have lower margins this year than last year than we have on pharmacy side. Those costs are pushed through to benefit the health plans. Maybe I'll eliminate the consolidation, but when you look at it on a segment basis, it's a slight shift in the margin dollars.

Okay. And then just one last question. Just on the new business, MLR, that was up 580 bps sequentially. Is that just the start of the Florida LTC business in the quarter? Or was there something else going on?

With respect to the new business?

Yes, primarily MLR, that was up around 580 bps.

Yes, the primary thing in new business right now is Kansas. And then we've got a bit of the Mississippi expansion which occurred on December 1. The Florida long-term-care new rollout is very small so far through September 30. They just -- it doesn't weigh in there very much.

Okay. So the Kansas MLR that you did, you have seen that rise throughout the course of the year then?

Yes, I think Kansas is operating in the upper 90s, and that's where we're 96.5% for -- through the overall new business HBR.

The next question will come from Ralph Giacobbe of Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: Obviously, a lot of new business sort of coming on next year. And you did talk about sort of the business expansion costs potentially being even more than what it was this year. I guess, given sort of the commentary around the change of -- in the mix of the business as well, can you maybe remind us or walk us through how you think about the margin ramp of that new business?

I think that the information that we provided since, I think, December of last year where we split out the new and the existing, you can see, as we've sort of absorbed that large revenue growth in 2012, and you've seen the impact on that as we've been able to -- as it's rolled over from new into existing, we've been able to get that to more normal margins. So we're looking at a 12-month period, we're able to take that business on and get into to the normal range. And as you can tell by the existing HBR numbers that we provide, those numbers have continued to be in the -- at the 88% range, I think 87%, 88% range in a lot of cases, which reflect that our ability to keep with what we would consider to be normal margins overall. And so I think our absorption period tends to be from 6 to 12 months to be able to take new business on, dealing with things like the continuity of care provisions, a little initial margin buildup and the new -- the start up of operations and things like that.

We've always, historically, we've always said new business, we'd look at a higher MR in the 90s. And the type of business it is and how virgin the territory is impacts how fast it comes down. So excluding out kind of the new store, same store, new business, same business, is just to give you more color and ability to look at it versus saying that it has a blended new margin and new business margin in it of 90%, 95%. So it's -- the overall approach hasn’t changed, just a little more transparency on what we're doing. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, that's helpful. And then, I guess just back to the Centurion business. Can you give us a sense at all of how we should think about the margins there? Any different than the sort of the base business? And if at all, we should think of sort of a -- just in terms of a total sort of revenue like the PMPM, is it the same as we should think as you expand into more states or are there nuances by state within these programs?

Jason?

Sure. So when we talk about the kind of revenue per inmate or per offender, it can vary fairly significantly depending upon the market that we're going into, what the underlying cost could be for a care provider outside the walls, what services are included, whether pharmacy is carved into that particular opportunity or not. So there could be fairly significant differences. But we've given some revenue and some inmate population numbers for the markets that we're moving into or are already in. So you can kind of back into a per inmate per day type of a rate. And it can, again, vary significantly depending upon the market.

But generally speaking, I think the margins in the correctional business, we think are as good or better than what we see in the Medicaid business.

That's right. Ralph Giacobbe - Crédit Suisse AG, Research Division: All right. That's helpful. And then last one, if I could. Just on Ohio, you had noted in the past that it's slightly behind expectations. Any update there on sort of the ramp of additional lives under that contract? When you'd expect sort of some of that to pick up?

I think I said in the prepared comments that we continue to work with the states and we see it continue to ramp up through '14. So to get more specific at this point before the December meeting with investors would probably be -- we will probably better just wait and have that kind of insight -- additional insight.

The next question will come from Dave Windley of Jefferies.

I wanted to come back to Chris' question on MLR. If I understand correctly, you said that trend was a lower than you expected. It looks like MLR in the quarter, in the third quarter was a little better, certainly, than we expected. I guess I'm trying to understand, again, why the guidance is being squeezed to the high end of the range? Is that a function of some revenue that is now in guidance that wasn’t in the guidance prior? Can you elaborate, please?

Sure. I would say that the primary issue is just math. When you look at -- you've got 3 quarters of the year already in at 88.9%. And if you just factor in a fourth quarter similar to what we're running in the third quarter, you're going to be between 88.5% and 89% for the whole year. There's really nothing unusual in there that we're expecting. We expect the trends to continue as we have in the third quarter. It's really just the waiting that you have, that, given we're already at 88.9% through 3 quarters, the whole year is going to come in the 88.5% to 89% range.

Okay. And clarifying, for your retroactive rate updates for Florida and Georgia, do you include those in your revenue and MLR calculations for guidance? Or are you waiting to see what -- how those turn out?

We have estimates that have been built in.

Okay. And then final question. On the SG&A range, could you talk about what items in the fourth quarter could swing you from the low end to the high end of your SG&A ratio targets?

I think the primary item is business expansion costs. And if -- how much we spend there has a bigger impact. The rest of it just tends to be more as expected and less a variability in it. As business expansions goes, RFPs, things like that that we [indiscernible].

[indiscernible] there's not absolute certainty when the state will drop an RFP, to be [indiscernible] So it's that type of thing.

And right now, we're not anticipating a large amount of, for example, business expansion costs in Florida for the Medicaid product because that's going to be primarily 2014. But that could get ramped up a little earlier in terms of adding some facilities and people and things, so it could impact the fourth quarter. But as I say, right now we think that's primarily going to be 2014.

Okay. And if I could slide in one more. On Kentucky, can you quantify what the drag, the kind of the total year-to-date drag for Kentucky has therefore, kind of the tailwind that we could see from that for 2014?

I don't know if we've got the year-to-date numbers for Kentucky. It's not been significant because we accrued for the premium deficiency reserve in 2012. And so the amounts that we've expensed in 2013 tend to be just some of the litigation or legal costs and some of the operating facility costs that we have. Some of those costs were not accruable in advance and you can't accrue shutdown costs for facilities and things like that until you're actually out of there. So I think we said early on, we would expect to have, I think, it was $3 million or $4 million of costs that we would incur after the -- we left there. And I think those numbers, $0.03 or so a quarter, would continue into 2014 for litigation and other things like that for awhile.

The next question will come from Brian Wright of Monness, Crespi and Hardt. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Could you give us an update on the Texas rate situation as far as -- I thought there was just the normal year update for September, October? Did you discuss that?

Yes, I think we said that there was a 4.2% increase, including some risk adjustment that was put in there. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then that was September 1?

Yes.

Yes. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then what -- how should we think about the Florida long-term care MLR, at least initially? Is that kind of the normal 90s or more mid-90s?

I think that the initial rates for the Florida long-term care, we think, are going to be in the upper 90s.

It's higher, too.

And it's going to take some time to get that into a, let's say, a lower 90s, ultimately. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And that's in the guidance for the year? And that may have an impact as well, right?

That's in our guidance for 2013, yes. And we don't expect that to have a significant variability at this point given our insight and where that is. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Just -- if you could just remind me, what was the utilization reduction assumptions in -- that went into the Florida LTC bid pricing?

We usually don't get into that level of detail in terms of what our bid amounts are on terms of things like managed care savings. Brian Wright - Monness, Crespi, Hardt & Co., Inc., Research Division: Okay. And then lastly, since you did have -- you do have exchange, kind of filed data that talk about, for the public exchanges, can you give us what percentage of the enrollment that you've seen so far is subsidized?

Rone?

Yes, actually, I don't have the answer to that question. We're starting to look at our actual enrollment information now and trying to analyze it, looking at things like that. So I don't have an answer for you.

The next question will come from Carl McDonald of Citigroup.

With the new business that you're adding next year, it looks like the new business revenue as a percent of total will be somewhere in the 20% to 25% range for next year. Is that a reasonable estimate based on what you know today?

I think we said that we could see a 20% increase in our revenue at this point in time. We'll have more specifics, Carl, when we get into the December 13 call.

Yes, I think, Carl, that the percentage of new and existing, we'll have that estimate in December. I do think it will be higher than the 14% you're seeing right now for the third quarter, yes.

Okay. And as you look at those contracts that are coming on, anything that stands out in terms of why the initial loss ratio would be different on that new business relative to what we've seen in the past? So -- and you just gave the example of Florida long-term care being high 90s but that's probably not long-term care, probably not a huge piece of that 20% growth. So just anything that stands out that would be vastly different than what we've seen in the past?

I don't know of anything, Bill, that we would call out on that. It's...

Not at this point. We might be able to provide some more color on that in December at the Investor Day.

There are some RFPs still coming in '14 as well. So I mean, it's a -- there are some variables that are not yet known.

Okay. And then last question is just the fourth quarter assumption around the flu.

Our assumption built into the guidance is we would have what we would consider to be a normal flu season. Last year was abnormal. And so...

Mary, you want to add to that? Mary?

Right. We are experiencing what we consider a very normal flu season; low levels of flu testing and prescriptions. But we all know flu can be unpredictable. So we continue to closely monitor that data.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference call back over to Michael Neidorff for his closing remarks.

Well, we thank you for tuning in, so to speak. And look forward to seeing you all on December 13 for our Investor Day. Take care.

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