Centene Corporation (CNC) Q3 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to the Centene Corporation Third Quarter 2015 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, Head of Investor Relations. Please go ahead. Edmund E. Kroll - Senior Vice President-Finance & Investor Relations: Thank you, Emily, and good morning, everyone. Thank you for joining us on our third quarter 2015 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 should last approximately 45 minutes and may also be accessed through our website at 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 access number for both of those dial-ins is 10073458. Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene's most recently filed Form 10-Q dated today, October 27, 2015, in Centene's registration statement on Form S-4 related to the proposed Health Net transaction dated September 21, 2015, and in 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 18, in New York City, please mark your calendars. And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Thank you, Ed. Good morning, everyone, and thank you for joining Centene's third quarter 2015 earnings call. Before I discuss details of our third quarter results, I would like to provide an update on Centene's pending acquisition of Health Net. We are making significant progress towards completing this transaction. On August 12, we announced early termination of the waiting period required under Hart-Scott-Rodino, after just three weeks, clearing a key antitrust hurdle. Second, on September 21, our definitive joint proxy statement became effective. Third, regulators in New Jersey, Texas and the Cayman Islands have approved or not objected to this transaction. Fourth, most recently, on October 23, shareholders of both Centene and Health Net voted overwhelmingly to approve the merger. Approximately 99% of Centene's shares voted were in favor. We appreciate the mandate of our investors, as they recognize the value of this transaction. Lastly, state approvals are still pending in Arizona, California and Oregon. State filings are essentially complete. Integration planning is underway and moving according to our schedule. While the transaction remains subject to the satisfaction of the remaining conditions, we continue to expect to close the deal in early 2016. Health Net employees are fully engaged in the process and look forward to being part of the combined company. We believe this transaction best positions Centene for a continued growth in 2017 and beyond. Uniting Centene and Health Net will create a leading platform to service government sponsored healthcare programs. We will be the largest Medicaid managed care organization in the country. We believe that the addition of Health Net's Medicare expertise creates significant opportunity across our existing markets. Their Medicare Advantage focus is on low-income seniors, which is complementary to Centene's strategy of providing high-quality affordable healthcare to Medicaid, uninsured and underinsured populations. Over 65% of Medicare eligible individuals are at or below 400% of the federal poverty level. The low-income Medicare opportunity across Centene's existing markets is in excess of $150 billion. Additionally, approximately 78% of Health Net's Medicare Advantage members are in four-star rated plans, indicative of their commitment to quality. Medicare star ratings are increasingly important to maximize reimbursement and enrollment growth. Centene has recently achieved three stars or better on its Special Needs Plan. We are encouraged that this is not easily attained in the special needs population. Furthermore, we are pleased to add additional product capability in the commercial and federal service lines business. We believe these offerings are complementary and complement our goal of providing high-quality, low-cost health solutions. Finally, today's call is about Centene's third-quarter results and outlook. I ask that you please limit your questions to third-quarter results, for which I thank you in advance. Now on to third quarter financial highlights. We are pleased to report another strong quarterly performance. We added over 930,000 members compared to the third quarter of 2014. This represented a 24% increase to 4.8 million beneficiaries. Third quarter premium and service revenues grew 31% year-over-year to $5.5 billion. The HBR improved 70 basis points year-over-year to 89%. This is primarily attributable to significant growth in Centene's beneficiaries enrolled in Medicaid expansion programs. At September 30, we served approximately 443,000 members enrolled in Medicaid expansion programs, representing year-over-year increase of about 250,000 members. Bill will provide further HBR details, including new and existing business mix. Importantly, we continue to see, as well as anticipate, overall stable medical cost trends. We reported third quarter diluted earnings per share of $0.75, or $0.84 when excluding $0.09 of cost related to the Health Net acquisition. This compares to $0.67 reported in the third quarter of 2014, or $0.61 when excluding the $0.08 impact of health insurer fees, $0.03 of transaction costs, and income tax benefit of $0.17 related to prior periods. Recognizing our commitment to margin improvement, the third quarter pre-tax margins, excluding merger-related expenses, increased 50 basis points year-over-year to 3.6%. The 3.1% pre-tax margin in the third quarter of 2014 excludes transaction costs and adjusted for the impact of the health insurer. Our full-year 2015 guidance reflects higher margins compared to 2014. Next, market and product update. First, we will discuss recent Medicaid activities. Indiana, during the third quarter, the auto assignment process commenced with the state's Hoosier Care Connect program. At September 30, we served approximately 20,000 ABD members in Indiana, adding 16,000 over the second quarter of 2015. Mississippi; an anticipated expansion of Tenet beneficiaries resulted in significant membership growth in the third quarter in Mississippi. We added more than 32,000 members over the second quarter of 2015. This is on top of the 100,000 we added in the second quarter. We will begin managing inpatient services in Mississippi starting in December of 2015. Florida; on October 1 we commenced operations under a new statewide contract with the Florida Healthy Kids Corporation, managing healthcare services for children ages five to 18 in all 11 regions of the state. This full-pay program is for children who do not have access to a parent or guardian's employer health coverage and do not qualify for Florida's Medicaid or a subsidy. Though it is still early, the contract is proceeding as planned and we expect to serve 15,000 members to 20,000 members in this program. Arizona; also in October of 2015, Centene's behavioral health subsidiary, Cenpatico Integrated Care, in partnership with the University of Arizona Health Plan, began providing services under an expanded contract for the state's newly-formed southern region. While it is still early, this contract is ramping as expected. We anticipate more than doubling our membership to over 400,000 lives. Washington; in August Centene was selected by the state of Washington to serve children in foster care and adopted service programs or support programs under the Apple Health Foster Care contract. Centene is the sole statewide provider for this program. We anticipate serving over 20,000 foster care members under this new contract, which is expected to commence in early 2016. Oregon; in September we completed the acquisition of Agate Resources, Inc., which we will be operating through Agate's Trillium subsidiary, which provides Medicaid, Medicare Advantage and marketplace services to Oregon residents. At September 30, we served approximately 100,000 beneficiaries in this state. The entry into Oregon marks Centene's 23rd state. Georgia; also in September, Centene's Georgia subsidiary, Peach State Health Plan, successfully reprocured its Medicaid contract. We are pleased to have been selected to continue providing healthcare services to Medicaid recipients in Georgia. The new contract is expected to start on July 1, 2016. Texas; in October 2015 Centene's Texas subsidiary, Superior HealthPlan, was awarded a contract by the state to serve STAR Kids Medicaid recipients in seven delivery areas, more than any other successful bidder. This new program will be the first Medicaid managed care program specifically serving youth aged 20 and younger who receive disability-related Medicaid benefits. The addition of STAR Kids makes Centene the only managed care organization in Texas to participate in all of the state's Medicaid product lines. This contract is expected to commence in the second half of 2016. Moving on to the Duals. At September 30 we served 27,900 members across our dual demonstration contracts in Illinois, Ohio, South Carolina, Texas and Michigan. This represents an increase of 8,200 members over the second quarter of 2015. The dual demonstration projects are in the early stages. We continue to work with our state providers and CMS to make these programs successful and sustainable. I remind you that we have always taken the view that dual demonstration programs would not be a significant near-term growth driver for Centene. Shifting gears, our rate outlook. We now have visibility on all our 2015 rates and continue to project a 2015 composite rate adjustment of flat to 1%. In conclusion, Centene's fundamental momentum continues and remains strong. As this quarter illustrates, we're executing on our strategic objectives, including margin expansion. With our growing portfolio of integrated health solutions, Centene continues to extend our leadership position in government sponsored healthcare, the highest growth category in the industry. We are committed to providing high-quality low-cost solutions across product lines, including our ongoing commitment to the Federal TRICARE and Veteran Administration programs and the continuation in commitment to the commercial business in California. Our pipeline remains robust. We see numerous opportunities in the near-term and long-term, and are well positioned to continue to be a strong diversified growth-oriented health solution company. We look forward to the remainder of 2015 and beyond. As a reminder, our Investor Day is on December 15 in New York City. We thank you for your continued interest in Centene. Bill will now provide further details on our third quarter financial results. Bill? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Thank you, Michael and good morning. Our third quarter results demonstrate our continued strong performance in 2015. Membership is up 24% year-over-year. Premium and service revenues have increased 31%, and diluted earnings per share of $0.84 excluding the Health Net merger cost, represents a 38% increase over last year, after adjusting for certain items in last year's quarter. And we have also increased our 2015 full-year earnings guidance again. In more detail, premium and service revenues increased $1.3 billion over last year and reflect program expansions between years in many of our states, particularly Florida, Illinois, Louisiana, Mississippi, Ohio and Texas. Our health benefits ratio was 89.0% in the third quarter, compared to 89.7% in Q3 last year and 89.1% in the second quarter of 2015. The 70 basis point improvement between years reflects the impact of stable medical cost trends that we continue to experience in 2015 and the growth in Medicaid expansion membership, which has more than doubled between years and runs at an overall lower HBR. This growth in Medicaid expansion membership also contributed to our HBR for our new business having an 88.6% HBR this quarter, which is lower than our existing business HBR of 89.1%. The primary drivers of this result are the Florida Medicaid business moving to existing business for the third quarter, leaving new business with a higher proportion of the Medicaid expansion business, which carries a lower health benefit ratio. With respect to the 3Rs related to the health insurance marketplace, we continue to be in a payable position with the risk corridor, risk adjustment and minimum loss ratio components. The recent discussion on the ultimate collectability of risk corridor receivables does not impact us, as we have no receivables recorded for the risk corridor for any of our states for any year. Our general and administrative expense ratio was 8.2% for the third quarter, excluding Health Net merger related costs, compared to 8.0% last year and 8.5% in the second quarter of this year. The increase of 20 basis points over last year reflects a higher level of variable compensation costs, while the decrease from the second quarter represents the benefit of increased scale. Also, during the third quarter, we experienced higher-than-anticipated opt out rates and member attrition for the Michigan dual demonstration program, resulting in a reduction to our membership forecast. As a result, we reduced by $27 million the amount of contingent consideration payable, that was previously established at the time of the acquisition in the second quarter. We also reassessed the amounts recorded for the goodwill and identifiable intangible assets, based on the new membership levels, and reduced these values by $28 million. The net effect of $1 million in expense is included in G&A expenses. Business expansion costs totaled $0.05 this quarter, excluding merger costs, compared to $0.07 last year. Investment income was $8 million in this quarter compared to $6 million last year, reflecting a higher level of investment balances. Interest expense was $11 million in the third quarter compared to $9 million in the third quarter last year. The increase reflects the additional borrowings outstanding. And the effective tax rate for the third quarter was 48.3%. This compares to approximately 46% in last year's third quarter, after adjusting for the effect of the benefits recorded related to the change in the limitation on the compensation deduction. Our diluted earnings per share from continuing operation was $0.75, $0.84 before Health Net related merger costs. This compares to last year's $0.67 or $0.61 after adjustment for the effect of the health insurer fee, acquisition transaction costs, and the income tax benefit. Diluted shares outstanding were 123.1 million shares compared to 121.4 million shares last year. As of September 30, we had $3.9 billion of cash, investments and restricted deposits, including $91 million held by unregulated entities. We continue to maintain risk based capital in excess of 350% of the authorized control level. Total debt was $1.3 billion at September 30, including $275 million in borrowings under our revolving credit agreement. The debt to capital ratio was 37.1%, excluding the $68 million non-recourse mortgage note. Medical claims liabilities totaled $2.1 billion at September 30 and represented 44.5 days in claims payable. Cash flow from operations was $62 million for the third quarter and $457 million year-to-date. For the nine months, cash flow from operations represents 1.9 times net earnings. Our updated full-year 2015 guidance numbers are as follows: Premium and service revenues $21.0 billion to $21.3 billion; diluted earnings per share, excluding Health Net related merger costs, $2.84 to $2.90; consolidated health benefits ratio 89.2% to 89.4%; general and administrative expense ratio excluding Health Net related merger costs, 8.2% to 8.4%; effective income tax rate, 48% to 50%; and diluted shares outstanding, 123 million to 123.5 million shares. Our guidance numbers do not include any merger-related costs related to Health Net, which we expect to close in early 2016. Business expansion costs are estimated to be between $0.25 per share and $0.27 per share for the year excluding Health Net costs. This includes our normal enrollment costs for 2016 health insurance marketplace membership, which will add an incremental $0.05 a share in G&A costs for the fourth quarter. This concludes my remarks and, operator, you may now open the line for questions.

Thank you. We will now begin the question-and-answer session. Our first question is from Josh Raskin of Barclays. Please go ahead.

Hi, thanks. Good morning, guys. Michael F. Neidorff - Chairman, President & Chief Executive Officer: Good morning.

Good morning, Michael. First question, just on your June Investor Day, you guys talked about a run rate of $24 billion of premium and service revenue. You guys have obviously added a lot of – a bunch of contracts actually since that time. If I annualize 3Q, it's maybe 10% growth off of that, and if you look at the implied fourth quarter premium and service revenue, growth is less than 5%. So will it be fair to say you guys are running well north of that and any chance you'd give an updated sort of run rate, without any new wins, where 2016 revenues look like? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Well, I think we'll give you a full update on December 18, when we give the full guidance for 2016, Josh.

Okay. But fair to say that you guys have added significant contracts since June? Michael F. Neidorff - Chairman, President & Chief Executive Officer: As we said back in June that the guidance we gave was initial and what we had visibility at that time, and that it tends to be above what that number is by the time it unfolds in December. So yeah, it's fair to say that there is some upside on it.

Okay. Then, just a second question. You guys have talked about better MBR or HBRs for your expansion lives. Any sense on where rates have come in for those expansion lives in 2016? Would you expect MBRs to normalize? And I don't know, was that 90%, or sort of how should we think about the reversion back to the means for next year? Michael F. Neidorff - Chairman, President & Chief Executive Officer: You want to say something about that, Bill? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Well, I think that certainly Medicaid expansion rates are going to be trued up against the experience and the experiences is emerging. I think that in several states, the Medicaid expansion programs are in a rebate position. So you've got to look at rate changes on a net basis, in the context of where the programs are against minimum loss ratios. So we don't expect a significant adverse movement or deterioration in HBRs in Medicaid expansion going forward, based on what we're seeing at this point, in terms of rate changes for the programs. Michael F. Neidorff - Chairman, President & Chief Executive Officer: I think when you think about it, if I may just add to it, when the rates are inadequate, we expect the states to make the adjustments, and in isolated instances where they are high, we would not complain or have any concern with them adjusting it accordingly. So it's a matter of having a fair balance rate.

Okay. That's fair. And last question, excluding Health Net, thinking about the Medicare opportunity, did you guys file for any new county expansions in 2016 for MA plans? Michael F. Neidorff - Chairman, President & Chief Executive Officer: No. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: No, we did not. The filing date for that would have been some time ago, and we did not file for any expansion except for minor expansion in our dual special needs plan in Arizona for service counties.

Okay. Perfect. Thank you.

Our next question is from Peter Costa of Wells Fargo. Please go ahead.

First, can you explain the drop in days claims payable? Was that the rebates being paid back to the states or is there something else going on there? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yeah, that's primarily – we transferred dollars out of the medical claims payable to accounts payable, based on certain amounts we have to pay back to a couple of our states for a variety of programs including the rebates.

Okay. And then can you talk a little bit about the dual demo programs? We broadly saw those decline last month and throughout the industry, and you kind of talked about it not being an important part of your driver of growth. But then also we've seen the state of Virginia saying that they're not going to extend their dual demo contract, and California has talked about wanting some changes to the dual demo contract going forward. What's your perspective on how the dual demo program is going to work going forward from here? Michael F. Neidorff - Chairman, President & Chief Executive Officer: I think – and others here can add to it, but I think generally it's recognized some adjustments need to be made to it. There is a higher dis-enrollment rate than what the states and CMS would like to see or expect. But these are demonstration models. And we expect that there's some change. We've heard the same things in California as you have. But once again, we've been very clear from the beginning that our short-term growth is not dependent on that. And so we'll work with the states and the CMS and try and improve where we can. Anything anyone else would like to add? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: I just wanted to add that Virginia is actually an exception and not intending to extend their dual demonstration program. I believe all of our states and actually California have filed letters of intent. So I think there's still certainly the desire to want to give these programs more time to be able to improve and develop that's shared across the states that we participate in. Michael F. Neidorff - Chairman, President & Chief Executive Officer: Thank you.

Can't states save more money by pushing more of their Medicaid dual population into state-specific Medicaid managed care programs than using these dual demo coordinated care programs through the federal government? And if the states did pursue that, would you guys not see an extra benefit from that in terms of more contracts for long-term services and supports-type contracts? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Jesse? Jesse N. Hunter - Chief Business Development Officer & Executive VP: Yeah, I think, Peter, it's Jesse Hunter. that it's a fair point. I think what you've seen already is states making their determinations about what kind of policy direction. Some of that is working with CMS on a more integrated dual demonstration model. There are some states who have kind of bypassed that demonstration approach and gone directly into a managed LTSS program. So I think you will continue to see some variability on that. Our objective is to work with the states to meet their policy objectives. So as they are working to determine whether they work through CMS or work through that directly, we want to help, and I think we're in a position to help in both directions.

Thank you.

Our next question is from Brian Wright of Sterne Agee. Please go ahead.

Thanks. Good morning. Could you help us out, in the prepared remarks you said the state filings are essentially complete. Could you give us a little more kind of definition on what you meant by that? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Yeah, what we're saying is that we have completed filings with the state, and the word "essential" is there because that does not mean that they cannot come back and ask for another – or make a request for one bit of information or something. So that was just – say, absolutely complete, Brian. They are complete, but it left room for a state to ask a question obviously.

Okay. And just to follow up on that, are we expecting a hearing in California and Oregon and I think Arizona or... Michael F. Neidorff - Chairman, President & Chief Executive Officer: Well, I don't want to talk, as I commented at the beginning, I don't want to talk a lot about this whole process. But where the states require hearings they are being scheduled, and we'll follow all the process to completion. And that's probably all I should say about it at this point.

Okay, fair enough. Sorry, I missed that. I apologize. Michael F. Neidorff - Chairman, President & Chief Executive Officer: No worries.

Our next question is from Kevin Fischbeck of Bank of America. Please go ahead.

Great, thanks. Can you provide an update on how Florida MMA is going? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Bill? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Florida MMA is improving in terms of its performance. The state did set new rates for the program effective September 1, and those rates have helped move the program to a more sustainable kind of level where it should be closer to the state rating. Also, we've continued to push initiatives to improve our HBRs. So we're seeing some good improvement in terms of the MMA program in Florida.

Are there still things you're trying to do around getting approval for medical cost management, around pharmacy and things like that? What's the status there? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yes, the management of the pharmacy remains one of the bigger issues that's still outstanding that we're trying to continue to have a dialogue with the state about what's the best way to go forward from the state's perspective and the managed care organization's perspective, so that remains a key issue. Michael F. Neidorff - Chairman, President & Chief Executive Officer: I think it's important that they have made significant progress. And Florida has demonstrated in the past, where there is a demonstrated need and it's substantiated, they will work with us on it. So we're very encouraged.

Okay. And then just to make sure I understood the issues around Michigan, it sounds like that was a net $1 million expense, so that was not excluded from your numbers. So that's kind of a one-time thing that you included in your EPS – your number? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: That's correct. We absorbed that $1 million.

Okay. And then I guess you talked about on the Medicaid expansion rate side, I guess two things. When you talk about rates for next year, if you have a Medicaid expansion rate cut, are you going to talk about that as a net number, because, like, when you say 0% to 1% this year, are you going to be talking about that as a net number when you give guidance around rates next year? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Yes. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: We'll have to evaluate that and provide the level of detail to explain it clearly. Michael F. Neidorff - Chairman, President & Chief Executive Officer: You will have that background on Dec 18.

Yeah, okay. And then, that was one area that I think was pretty clearly an area of pressure. Are there any other outstanding issues where you – where you are in any kind of negotiations with the state around kind of major issues either positive or negative? Michael F. Neidorff - Chairman, President & Chief Executive Officer: I think to say yes or no is difficult. At any given time when you have the number of contracts you do, I think we have 280 solutions right now, across our 23 states. You're always going to have something, but the benefit of having the diversity we do is that there is – we have offsets to it. So, right now as we look at it, there is no major issues that raise a concern.

Okay. All right. Great. Thanks.

Our next question is from Dave Windley of Jefferies. Please go ahead.

Good morning. It's Dave Styblo in for Windley. Just want to get a little more color on the guidance raise. If you could just tease out what's driving that, because it looks like, relative to what you had said last time for business expansion costs, there's a little bit more in there. SG&A ratio is picking up a little bit from the guidance; MLR is steady. So is it just a function of the higher revenue coming online that's just profitable? And what is that revenue from? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: I think that clearly our guidance adjustment this quarter end – for this quarter is, after three quarters, we're giving full year. So you could pretty much focus on that differential being the fourth quarter. And so we've tightened number of those ranges, just because it's pretty wide for just one quarter. Overall, the increase reflects third quarter results which were good and above our original expectations. And I think Q4 includes, as we said, about a $0.05 of G&A costs related to additional enrollment costs for the 2016 health insurance marketplace. So it's a combination of increase in revenues and the costs and we've added Oregon in affective the beginning of September. So there's variety of things that make up the total. Nothing specific I would point to.

Okay. On Georgia, obviously, you got the re-procurement there. At the same time, there was a fourth plan that's added. Do you have visibility or plan from the state yet about how they're going to sort of split up the membership? I think my understanding was that that up to about 15% of existing membership might go over to this new plan, but wasn't sure on the timing or if that plan had actually gone through. So helpful to hear sort of how that membership may shake out over time here for you? Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: Yeah. This is Rone Baldwin. The clarity on that is still not accomplished with the state. Again, the program will not be effective until July of next year and the expectation is the membership to the fourth MCO will build over some time after that. So it's not clear at this point.

Okay. And then lastly, there is – it seems like the RFP queue is sort of ramping up and pipeline seems to be ramping up again with opportunities from Pennsylvania Nebraska, Oklahoma, and especially North Carolina, where about $15 billion is going over to managed Medicaid. So, curious to hear, what's your strategy or how do you think about positioning in these markets, especially for something like North Carolina where we're years away, but about positioning for those markets? Michael F. Neidorff - Chairman, President & Chief Executive Officer: We're not going to give away our whole positioning. But Jesse, do you want to make some comments to the extent we can without giving a competitive standpoint? Jesse N. Hunter - Chief Business Development Officer & Executive VP: Yeah. I think that will be a test but, yes, I think it's certainly a fair point with respect to the magnitude of opportunities that are coming up. We started to highlight a little bit of that in June at our Investor Day some of these earlier-stage programs that are either going through a legislative process or kind of the pre-RFE activities. So, I think the best consistent answer is that every market is different, and so our approach to every market needs to be reflective of what that state is trying to accomplish. You've got – with respect to the different states which you mentioned, different populations that are going to becoming in over different periods of time, statewide, regional. You've got of number of variables and we need to understand those and take all of those into account to figure out what is going to be our best kind of go-to-market approach that will, again, help the state achieve their policy objectives. Michael F. Neidorff - Chairman, President & Chief Executive Officer: Yeah I mean you have some that are re-procurements and you have North Carolina, so it would be brand new. So, it's going to take, as Jesse highlighted, a different approach.

Okay. Thanks for the question.

Our next question is from Andy Schenker of Morgan Stanley. Please go ahead. Andrew Schenker - Morgan Stanley & Co. LLC: Thanks. Real quick, just on the specialty MMR declined about 200 basis points year-over-year, and this quarter, it was up in the first half of the year, year-over-year. Anything driving kind of the big swings in that one, and how should we think about that metric going forward? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: I don't think there is anything special. There is a little bit of seasonality that we have from time-to-time in the specialty companies, but it's nothing that changes it overall. Andrew Schenker - Morgan Stanley & Co. LLC: Okay. So is that kind of year-to-date number or kind of reasonable place to be thinking about for that line going forward or? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yeah, I think that would be a reasonable way to approach it. Andrew Schenker - Morgan Stanley & Co. LLC: Okay. And then on the $48 million related to minimum MMRs, any states you want to call out there? And then similarly anything else within development between states that you're willing to call out? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: No, nothing that I think that's special. I think we've certainly seen a lot more in the more recent years of dealing with the minimum HBRs in the states, and a lot of the new programs have those. And tends to be the ones – the Medicaid expansion are well-funded, so it tend to have more payable back to the states on those programs and ... Michael F. Neidorff - Chairman, President & Chief Executive Officer: And we kind of like it in the sense that these rebate programs where we get actuary sound rates. And then HETA's reports show the high quality, and we show we are efficient through the refunds. So it's a good combination. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yeah, I think that – and that's one of the reasons we present that $48 million number is, so people understand that, when we have positive development, it doesn't necessarily all go back into earnings, it actually comes because the conservatism we have in the initial reserve setting, and then, at some level, that's payable back to the states for these programs, and we just thought that was good disclosure. Andrew Schenker - Morgan Stanley & Co. LLC: No, I appreciate that. I mean is there any one or two states that are really driving it or that you're willing to disclose? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: No, I'd say it is lot of Medicaid expansion programs that contribute to that. You got to go back a year and figure out which programs we're doing that at that point in time, but I'd say Medicaid expansion is a good chunk of it. Andrew Schenker - Morgan Stanley & Co. LLC: Fair enough. And then lastly, exchanges are highlighting an increase, and I guess, enrollment costs in the fourth quarter here. So thinking about 2016, obviously, you had success in 2015. I mean what are your plans for exchanges next year? Have you expanded your participation ahead of Health Net here? Any new states? Any new markets? New pricing, anything you can highlight there? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Some of that detail will be more appropriate and December 18, we're going to make some preliminary. Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: Well, just in terms of new geographic expansion, the only new state we've entered is New Hampshire. And that's related to the state's transition from having Medicaid expansion to want to move it over to a private option type solution in 2016. So other than that, a little bit of geographic service area expansion, and that pretty much is what reflects our participation for 2016 compared to 2015. Andrew Schenker - Morgan Stanley & Co. LLC: Okay. Thank you.

Our next question is from Michael Baker of Raymond James. Please go ahead. Michael J. Baker - Raymond James & Associates, Inc.: Thanks a lot. Bill, I was wondering if you could give us some color around the service revenues, how they perform relative to what you expected and maybe give us an update on some of the key drivers in that line item? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Sure. I think one of the significant items in that line is going to be our specialty pharmacy business, which has a lot of Hep C product there. And that, as we've seen is, I'll say somewhat plateauing in terms of – we saw significant growth last year in those products versus sort of plateau this year, and then there's a little bit of seasonality in some of the different lines that are included in there. So nothing unusual other than sort of the Hep C flattening out. Michael J. Baker - Raymond James & Associates, Inc.: Okay. And then, Michael, the question I had for you is, maybe you could give us a sense as you near the closing of what's an important acquisition for the company, can you give us little bit more color on who's heading up the integration efforts? Then we've seen other players that face mergers kind of give us a sense of management changes et cetera. Are there any other additional management changes we should look for or if you're not ready to say that at this point, is that more of a December update? Michael F. Neidorff - Chairman, President & Chief Executive Officer: You know, I think you'll get the full detail – much more detail in December. Cindy Brinkley is heading up the integration. And I think speaking behalf of the whole management team and the board, that we're very pleased with the progress and how it's going. And as I commented in my remarks, the Health Net people are fully engaged in and participating, and it's moving down the line very well and we expect to hit the ground running when it closes. Michael J. Baker - Raymond James & Associates, Inc.: Thanks for the update.

Our next question is from Chris Rigg of Susquehanna Financial Group. Please go ahead.

Good morning. Just to come back to the rebate or call back mechanisms in the expansion states. Are they – do you have that in every state or is it only in a handful? And if it's only in a handful, can you tell us which states have the rebates in place? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: I'd say it's in most states, they have these in their products and – or almost all of them, I mean, so it's across the board. And typically those programs are funded by the federal government, and we generally are running at or below the minimum HBRs in most of those states. So we have to accrue the amounts payable back on that.

Okay. Michael F. Neidorff - Chairman, President & Chief Executive Officer: It's good to take that approach.

Right. Right. And I guess just – I mean some of the states have had mechanisms like this in place for a while pre-ACA. Can you give us a sense for how, like a state like Texas, for example, has tended to view these type of things where you're running an excess profit in a given year, how they look at prospectively? Do they normally try to make a quick adjustment to sort of get the rebate or the profits back to where they want them to be? Or just any color as to how they tend to look at rates prospectively would be helpful. Thanks. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yeah, I think that Texas is a unique state given the size of the state and the size of our business. So we have some advantages in Texas because of our scale. And so we could produce a larger payable back to the state at times, which may or may not impact others in the state. And so, the state has to be cognizant of how they look at the whole state and all the players and how they establish rates for actual soundness purposes. Rone, do you want to add? Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: Yeah, I think what Bill said is an important point, that the way a state is going to look at the rates is they are going to look at the overall program across all the – and the experience of all the MCOs, and the fact that we may be in one position related to the rebates doesn't necessarily mean that all the participants in the market will. So it's going to be program-wide that they are going to be actually reflected in the actuarial rates going forward. Michael F. Neidorff - Chairman, President & Chief Executive Officer: But we like the fact that we can show how efficient we are, because we have high – and it's gained us a lot of balance within the states.

Got you. Thanks a lot.

Our next question is from Ralph Giacobbe of Citi. Please go ahead.

Thanks, good morning. Can you give a sense of the new business, how much is Medicaid expansion-related? So sort of what percentage of that new business may be this year relative to last year? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: We don't really have a percentage of the total how much of the new 21% or whatever is Medicaid expansion or not between years, other than to say clearly between years Medicaid expansion continued to grow. Some of that rolls into existing after a year, but a lot of the new stuff continues to be added. And with that low HBR, it has the impact of – for this quarter, having the phenomenon of our HBR being lower for new business and existing, which is the first quarter we've actually experienced that. Michael F. Neidorff - Chairman, President & Chief Executive Officer: In my prepared remarks, I commented that a year-over-year increase of about 250,000 members Medicaid.

Okay. All right, that's helpful. And then the exchange book I guess at this point, can you give us a sense just where that's running? Obviously, you're in payable position for the 3Rs. Is that fair to sort of assume that your margin levels of that are already within kind of the 3 percentage point to 5 percentage points, I think, that you had targeted there or is that not a fair assumption? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: I think that's a fair assumption. I think, as we said probably several times, the exchange business, we were very conservative going in, and it's performed better than our expectations both for 2014 and 2015 at this point in time. And we are in a payable position back on all those components that we talked about.

Okay. That's fair. And then it may be early for this, but any early read on flu and maybe help us understand maybe what's baked into your expectation relative to what we saw last year? Thanks. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: We don't really have any reading at this point in time I would say on current flu levels or anything. It's always a fourth quarter phenomenon when it starts up. So we do allow for a certain level that in our forecast or guidance numbers to occur. Again, I can't tell you sitting here today whether it's going to be a heavy or light season for flu. Michael F. Neidorff - Chairman, President & Chief Executive Officer: I might add, there has been some early indications that they've guessed right what strain to put in the extract, at least in one of the two extracts that are available. So, Ken, is there anything you can add to that? Ken Yamaguchi - Chief Medical Officer & Executive Vice President: No, just what you said, Michael.

Okay. Thank you. Michael F. Neidorff - Chairman, President & Chief Executive Officer: So take your flu shots.

Our next question is from A.J. Rice of UBS. Please go ahead.

Hello, everybody. Just a couple of quick questions if I could ask. First, we're hearing now I guess that the Medicaid Managed Care rule probably is going to get pushed off until next year or early first half. I wonder if you have any updated thoughts about either the significance of the rule to you or the timing. Michael F. Neidorff - Chairman, President & Chief Executive Officer: The rule we probably stated, we think it's balanced and appropriate, without the actuarial soundness of the rates by sales. So I'm not going to say it's negative or positive. We were in favor of it and we support it. So as soon as they do it the better.

Okay. On the... Michael F. Neidorff - Chairman, President & Chief Executive Officer: Rone, do you want to add to that? Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: I would just say that timing is in line with what our understanding is also.

Okay. Maybe just to ask on the specialty pharmacy. I appreciate the comments about the Hep C drugs. I wonder with new specialty growths coming down, with obviously a lot of turmoil in the specialty arena right now, is that creating any opportunities or anything worth highlighting that sort of is the next areas of focus for the group? Michael F. Neidorff - Chairman, President & Chief Executive Officer: I'll start out and, Jesse, you can add to it. I think we demonstrated we know how to work with the states in determining the proper reimbursement, when it should be carved out and when included in the rates. So the turmoil is not something that we are concerned about. We feel it can help provide some direction to us. Jesse? Jesse N. Hunter - Chief Business Development Officer & Executive VP: I would say from an opportunity standpoint, A.J., that Acaria has demonstrated the ability to work with the manufacturers to participate in the kind of proliferation or the rollout of some of these new drugs. So as you said, there's a lot of activity there, and I think we and the Acaria team are squarely in the middle of that, and hopefully that will translate into future growth opportunities within the specialty pharmacy segment.

Okay. All right, thanks a lot.

Our next question is from Gary Taylor of JPMorgan. Please go ahead.

Hi, good morning. Just had a couple questions. First, I just wanted to go back to the Georgia re-bid where there was an additional plan added. Has the membership allocation methodology been finalized yet there such that you have visibility on what your retention rate is expected to be? Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: Yeah, we spoke a little bit earlier that the allocation methodology has not been determined. And again, I would just keep in mind that the new program is not going to be effective until July of next year. And the way these things normally work is membership builds over some period of time, but it's too early to tell. Michael F. Neidorff - Chairman, President & Chief Executive Officer: We have three plans, one which is larger than the others, and so how they deal with that is yet to be determined as well. So, I mean I think the two at 30% are in a better position than those at 40%.

Fair. Yeah. Sorry I missed those comments earlier. My other question is just going back to days claims payable, the 1.9 days on the transfer. I mean the 1.9 days would be closer to a $90 million amount. You highlighted the $48 million related to the prior period HBR transfer. What was the other – what would be the other about related to within the current period? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: What that is is that was a build-up over probably 18 months in some cases in several of our states of amounts due back to the state for certain programs, particularly for services that the state paid for on our behalf. And so we were to reimburse the state for that. And so they haven't yet sent us a bill quite frankly for it but it's getting close. So, we have reclassify that out of medical claims liability and set it up into accounts payable, because we think that's a better place for going forward.

I'm sorry, that's the amount above the $48 million that you called out? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Well, I mean I think your calculation of $97 million is reasonable, in terms of how much we've classified some medical claims to accounts payable. And we didn't restate prior periods for DCP. If we would've taken it out in prior periods, it would have reduced the DCP for all periods, if we would've re-classed that at any one point in time.

Okay. Because I know on the 2Q, you had called out $65 million re-class related to prior period, but I guess it's fair to assume that the total amount that might have been re-classed in the Q2 was much larger than that 65 million as well? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Well, I think it's important – those are probably two different things. Number one, in the roll forward of our reserve, we are rolling forward the reserve from a year ago. And so we're saying, of that development that occurred, in this quarter, it shows I think $177 million of positive development, that $177 million doesn't roll into earnings or anyway, because to an extent the $48 million of that is actually reclassified as a payable back to the state. And I think we have a separate line item on our balance sheet for return premiums to the state and it goes into that line item. The amount that we talked about this quarter for the DCP change was really reclassified into accounts payable, not in return premiums payable, because it's really reimbursement for services that they paid for on our behalf which are covered under our contracts. So, they are just slightly different items, but they effectively represent the reclassification of items out of medical claims liability into separate classifications, to put them in the right place, when we're going to pay them in the near future.

Okay. I think I understand that. Thank you. William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Sure.

Our next question is from Ana Gupte of Leerink Partners. Please go ahead.

Yeah. Thanks. Good morning. The first question I have is about the retrospective analysis of what you saw in Iowa and Michigan and Georgia. Is that mainly an issue of incumbents in the way the states are evaluating the bidders or is that something else going on, and can you tell us what the criteria might have been for the United Merit group and the Merit Healthcare getting it and not you in Iowa? Michael F. Neidorff - Chairman, President & Chief Executive Officer: Jesse? Jesse N. Hunter - Chief Business Development Officer & Executive VP: Yeah, I think you mention a few states there. So I think obviously each state and each process is unique and I think we are still in kind of an administrative review process. There is a limited amount that we can speak to with respect to that at this point. So, I would say probably broadly and it's probably premature to share lot of our observations and obviously some of that would be speculative with respect to the state's decision-making process, which is really under a review at this point.

Okay. Then the second question I have is on your 89% loss ratio this time, you cite the Medicaid expansion as one of the mix shifting there as one of the favorable drivers. As you look at all the pushes and pulls, with the mix shifting to expansion lives to exchanges, but then you're also growing obviously in long-term support services. And with that 85% kind of average federal regulation out there with the rates, what would be your long-term outlook for your loss ratio? Should be consider 89% as still got – having some opportunity to improve it further? William N. Scheffel - Chief Financial Officer, Treasurer & Executive VP: Yeah. I think that the waiting of the various books of business have a big impact on what the consolidated HBR is. So if we grow our exchange business, the exchange business has a lower HBR generally, but a higher G&A ratio. And so the Medicaid expansion has a lower HBR than our average, let's say, and so depending on how those books of businesses are growing that can influence the total waiting. And then we added, as we did, a lot of long-term care business over the last couple of years, that's increasing our consolidated HBR. So it's hard to say where the future – in the next two years, the HBR is going on a consolidated level, without understanding which books of business are going to have the greatest growth. And I don't think we're really in a position to speculate on that particular issue, other than we try to provide as much transparency as we can with respect to the levels of HBR during the periods when we have our calls.

Thanks. One last one on exchanges, you said you were doing well with the 3% to 5% margin. It seems as though the Medicaid players are and they maybe a very obvious answer to this relative to the diversified. So is this more you're getting Medicaid plus members is it more mix related or is it that you're building it off a Medicaid network contract chassis or something else like medical management? Why do you think the diverse sites are having ... Michael F. Neidorff - Chairman, President & Chief Executive Officer: I think it's a combination of these things, and part of it is our overall conservatism. Anything you want to add, Rone? Kenneth Rone Baldwin - Senior Executive/President/COO-Life Insurance/Health/Financial Services: I think we've had a disciplined strategy on exchanges that we've stop to and its focused on the low-income individuals, subsidized Medicaid turn population. And we're going to continue that and continue to try to make sure that we can grow this business, but make sure it's a consistent contributor. So it's worked so far for us and that's all we can say I think.

Thanks. Appreciate you taking the questions.

This concludes our question-and-answer session. I'd like to turn the conference back over to Michael Neidorff for any losing remarks. Michael F. Neidorff - Chairman, President & Chief Executive Officer: We thank you for your continued interest and thoughts and look forward to December 18 and in the subsequent year-end conference calls. So, happy holidays.

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