Centene Corporation (CNC) Q2 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the Centene Corporation 2017 Second Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ed Kroll, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Anita, and good morning everyone. Thank you for joining us on our 2017 second quarter earnings results conference call. Michael Neidorff, Chairman and Chief Executive Officer, and Jeff Schwaneke, Executive Vice President and Chief Financial Officer of Centene, will host this morning’s call, which can 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 number for both dial-ins is 10110042. 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 result of various important factors, including those discussed in Centene’s most recently filed Form 10-Q, dated today, July 25, 2017, the Form 10-K dated February 21, 2017, and other public SEC filings. Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures can be found in our second quarter 2017 press release, which is available on the company’s website at centene.com, under the Investor section. Finally a reminder, that our next Investor Day will be on Friday, December 15, 2017, in New York City. And 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 second quarter 2017 earnings call. During the course of this morning’s call, we will discuss our second quarter financial results and provide update on Centene’s markets and products. Additionally, we’ll provide commentary around our understanding of the status of the Affordable Care Act. I’d like to begin with comments on the healthcare legislation landscape. It is a moving target with a long way to play out, but you know that. Centene’s priority has always been to ensure this country’s most vulnerable populations have access to high-quality affordable healthcare. We remain committed to working closely with federal and state regulators and policy makers to collaborate on actions needed to stabilize the market. Whether or not, members of Congress believe a Medicaid design or a commercial design is the best way to deliver high-quality healthcare to low income individuals, Centene is the market leader in both platforms. We have the credibility as well as the experience to work with Congress on ways to address the challenges associated with the current law. We believe some improvements that need to be included in any picture, eliminating the taxes, which will drive down premiums, maintaining CSRs or some similar mechanism to make coverage affordable for low income non-Medicaid eligible Mississippian’s and reinsurance, which COB has estimated will result in significant premium reductions. We believe, it is important for health plans to take some risk to ensure care continues to be managed appropriately. It is important to note, that every repeal and replace proposal in the House of Senate as well as the House Budget has included CSRs, as a necessary component to stabilize the marketplace. Republicans and Democrats are like have shown how [indiscernible] CSRs are to the stability of the marketplace. At times, we can all get wrapped up in the political debate going on in Washington. However any intentional act to stop these CSR payments, there’s not advanced debate on how to fix our healthcare delivery system. It only hurts the millions of Americans, who currently have affordable healthcare insurance in the marketplace. The leadership in Washington bares a responsibility to ensure that it’s not happen. In the meantime, we are focused on business fundamentals as evidence by another strong quarterly financial performance and positive operating momentum. Now onto second quarter financials. We were please to report a strong second quarter marked by solid top and bottom line growth. Membership at quarter-end was 12.2 million individuals, representing an increase of approximately 790,000 recipients compared to the second quarter of 2016. Total revenues increased 10% year-over-year to $12 billion, the HBR improved 30 basis points year-over-year to 86.3%. This was primarily attributable to growth in our insurance exchange business in 2017. Lastly, we reported second quarter adjusted diluted earnings per share of $1.59 this includes a $0.17 benefit related to the 2016 risk adjustments reconciliation under the ACA. This compares to $1.29 reported in the same period last year, which included a $0.19 benefit related to the 2015 risk adjustment. Jeff will provide further financial details including updated 2017 guidance. A quick comment on medicals cost. We continue to see as well as anticipate overall stable medical costs trends, consistent with our expectations in the low single-digits. Moving onto markets and product updates. First, Medicaid, we were pleased to have grown our overall Medicaid growth by over 400,000 beneficiaries compared to same periods last year. Recent Medicaid state updates include, Missouri. In May, we commenced operations under Missouri statewide expansion of its Medicaid program. Centene now provides healthcare services over 278,000 Medicaid recipients in all 114 counties in the state. This represents a sequential increase of over 172,000 members. State of Washington also in May, Centene successfully re-procuredits Apple Health contract in the North Central Region of the State. The new contract indicates behavioral health into the program as expected to commence in the first quarter of 2018. Mississippi, in June, Centene successfully re-procured its contract to serve Medicaid recipients under the State MississippiCAN program. A new contract is expected to begin mid-year 2018. Georgia, in July, we commenced operation under a new statewide Medicaid contract in Georgia, this was a successful re-procurement of our previous contract with that state. Nevada, also in July, we began providing healthcare services to Medicaid beneficiaries of all in the States, Medicaid managed care program, while this is initially a small market for Centene, it should continue to grow overtime with add marks Centene 28 states of operation. Next in Centurion, in June, Centurion began operating under an expanded contract to provide correctional healthcare services to over 15,000 inmates in South Florida. We now provide services to over 85,000 inmates in the state. Centene currently serves over 150,000 inmates across eight states. Now Medicare, at quarter-end, we served approximately 328,000 Medicare and Dual beneficiaries. As I have previously stated, we are applying a test-and-learn approach to our first year of Medicare Advantage operations in our core of Centene Medicaid states. We are applying the insights we’ve gain thus far this year, to Centene’s 2018 Medicare Advantage Plans. Consistent with our overall strategy, we are focused on providing high-quality affordable Medicare Advantage products to low income beneficiaries. It is important to note, the low income Medicare opportunity across Centene’s existing states is an excess of a $150 billion. For 2018, we have file bids for new Medicare Advantage contracts in six markets as well as bids in additional markets focused on D-SNP products. These will be launched under Centene’s new national Medicare Advantage going all well. They are eligible for a premium bonus under our four-star parent rating. This rating allows our work to be marketed as a high-quality Medicare Advantage program. Over the long-term, we expect our Medicare Advantage product to drive over 20% of our annual growth rate. Next onto the Health Insurance marketplaces. At June 30, we served approximately 1.1 million exchange members. This represents a sequential decline of approximately 100,000 beneficiaries in line with our expectations. The key demographic of these members including age, gender, financial assistance and metal tier remain consistent. This highlights Centene’s continued success in attracting and retaining our targeted customer segment. This has been done through effective sales, marketing and member engagement activities. Our exchange business continues to perform well in 2017. We now have regions to believe, our margins will be at a high-end of our guidance range. As a result, we have removed the conservatism that was previously included in our 2017 financial guidance. Jeff will provide further detail on this topic. For 2018, we intend to grow this profitable segment of our business. We remain focus on providing on high-quality affordable healthcare to low income individuals. Next year, we plan to enter Kansas, Missouri and Nevada, and expand our footprint in Florida, Georgia, Indiana, Ohio, Texas, and Washington. International, our international business continues to perform as expected and we’re encouraged by its long-term growth prospects. Lastly, Envolve, in July, our specialty solutions subsidiary Envolve began providing a comprehensive management services for approximately 200,000 Medicaid members of a health plan in Maryland. Shifting gears to the rate outlook. We continue to expect 2017 net composite Medicaid rate adjustments of zero to 1%, consistent with the past few years. In summary, we delivered another strong quarter and raise 2017 financial guidance. This was achieved, while increasing our investments in clinical opportunities as evidenced by the increase in our expected business development cost. Headline annoys regarding repeal and replace efforts in Congress will posses. It is important to remember, despite political or industry distraction, the need for high-quality affordable healthcare remains constant. In the past, we have demonstrated our ability and capacity to navigate industry changes to the benefit of our members, shareholders and government partners. As such, we continue to follow, our business as usual approach from an execution standpoint. We’re a growth company and our pipeline of opportunity across all the lines of our business remains robust. We are optimistic about our future and ability to extend Centene’s leadership position in government sponsored healthcare. We thank you for your continued interest in Centene. Jeff will now provide further details on our second quarter financial results.

Thank you, Michael, and good morning. Earlier this morning, we reported strong second quarter 2017 results with both top and bottom line growth. Total revenues were $12 billion, an increase of 10% over the second quarter 2016 and GAAP diluted earnings per share was a $1.44. Adjusted diluted earnings per share were $1.59 compared to $1.29 last year. We had strong performance across our products and markets during the quarter, with the marketplace business performing exceptionally well. The performance of Marketplace was driven by a pre-tax net benefit of $48 million or $0.17 per diluted share, associated with the reconciliation of the 2016 risk adjustment provisions under the ACA. As a result of the strong second quarter performance, we have increased the midpoint of our GAAP and adjusted diluted earnings per share guidance range by $0.18, while increasing our business expansion cost by $0.17 per diluted share at the midpoint to fund further growth in 2018. Let me provide some of the performance highlights for the quarter. Total revenues grew by $1.1 billion year-over-year, primarily as a result of growth in the Health Insurance Marketplace business, a full quarter of business expansions in 2016 in Texas and Louisiana. The expansion of the Missouri contract in May of 2017 and the start up of our Nebraska health plan on January 1, 2017. This growth was partially offset by the one-year moratorium of the health insurer fee, lower specialty pharmacy revenue, and lower membership in the commercial business in California, as a result of margin improvement actions taken last year. Sequentially, total revenues for the second quarter increased by $230 million from the first quarter of 2017. The increase was driven by favorable risk adjustment in our marketplace business, recorded in the second quarter of 2017, as well as the expansion of our contract in Missouri. We expect total revenues to be lower in the third and fourth quarter compared to the second quarter of 2017, due to the addition of a competitor in Georgia, and the normal membership attrition on the marketplace business. Moving on HBR, our health benefits ratio was 86.3% in the second quarter this year, compared to 86.6% in last year’s second quarter, and 87.6% in the first quarter. The decrease year-over-year is primarily driven by the growth in the Health Insurance Marketplace business which operates at a lower HBR. Sequentially, the 130 basis point decrease in the first quarter is primarily attributable to the favorable risk adjustment in our marketplace business, recorded in the second quarter of 2017, and normal seasonality of the business in the first quarter, as a result of flu-related costs. As I mentioned earlier, during the second quarter CMS release reconciliation information related to the risk adjustment provisions associated with the 2016 marketplace business. The reconciliation of the risk adjustment provisions for 2016 improved our results for the second quarter by approximately $0.17 per diluted share. This is after considering the risk-sharing contracts primarily in California, the risk corridor and the minimum MLR. Turning to our 2017 marketplace business, the metal tiers enrolled demographics and profiles of our membership continues to be in line with our expectations. Additionally, the claims experience and the initial information we received in the second quarter from the data aggregators, associated with the 2017 risk adjustment estimates have provided additional comfort regarding our margin expectations for the year. As a result, we have removed all of the initial $0.20 per diluted share of conservatism from our annual GAAP and adjusted diluted earnings per share guidance. This includes $0.04 per diluted share that was related to the first quarter, $0.12 per diluted share related to the second quarter and the remaining $0.04 per diluted share related to the second half of 2017. We continue to utilize our consistent reserving methodology for the risk adjustment program, as we have done since the inception of the marketplace business. Moving on our selling, general and administrative expense ratio was 9.3% in Q2 this year, excluding the Health Net merger costs compared to 9% last year, and 9.3% in the first quarter of 2017. The increase in the ratios compared the prior year is primarily due to the increase business expansion costs and higher variable compensation expense based on the performance of the business and the first half of 2017. Interest expense was $62 million in the second quarter, compared to $52 million in the second quarter of 2016, and $62 million in the first quarter of 2017. The increase year-over-year is due to the increase in senior notes over 2016. Our effective income tax rate was 40.1% in the second quarter at 2017. The lower tax rate compared to the prior year is due to the one-year moratorium of the health insurer fee. Now on to the balance sheet. Cash and investments totaled $10 billion at quarter-end, including $291 million held by unregulated subsidiaries. Our risk-based capital percentage for NAIC filers continues to be in excess of 350% of the authorized control level. Debt on June 30 was $4.7 billion, including $150 million of borrowings on our revolving credit facility. Our debt-to-capital ratio was 42.1%, excluding our non-recourse mortgage note compared to 43.7% last year-end and 43% at the end of the first quarter 2017. Our medical claims liabilities totaled $4.2 billion at June 30, and represents 40 days in claims payable compared to 41 days last quarter. The decrease in the days in claims payable is due to the timing of payments associated with improved auto-adjudication rates on the legacy Health Net business. As we highlighted at our mid-year Investor Day, we have improved the auto-adjudication rates by over 10% since the fourth quarter of 2016. Cash flow used in operations was $306 million in the second quarter. Operating cash flows for the second quarter was negatively affected by approximately $750 million of delayed payment, primarily from several our states as result of their fiscal year ends. We expect to receive the majority of these delayed payments by the end of July 2017. Turning to guidance. We have adjusted our 2017 annual guidance to reflect the following items. The strong performance for the second quarter, an increase on our business expansion costs to $0.42 to $0.47 per diluted share reflecting the shortening of the open enrollment period for the Marketplace business, and additional investments and growth initiatives in Medicare Marketplace for 2018; and an increase in our 2017, margin expectations for the Marketplace business. Our updated full-year 2017 guidance is as follows. Total revenues between $46.4 billion and $47.2 billion, an HBR ratio of 87% to 87.4%, SG&A expense ratio of 9.4% to 9.8%, adjusted SG&A expense ratio of 9.3% to 9.7%, GAAP earnings per share of $3.96 to $4.29, adjusted diluted earnings per share of $4.70 to $5.06, effective tax rate between 39% and 41%, and diluted shares outstanding between 176.3 million and 177.3 million. The increase in the SG&A and the adjusted SG&A expansion ratio is due to the increase in business expansion costs, which we expect to occur primarily in the fourth quarter. In summary, we were pleased with the second results and the operating momentum heading into the remainder of the year. That concludes my remarks. And operator, you may now open the line for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gary Taylor with JPMorgan. Please go ahead.

Hi, good morning.

Good morning.

Thank you. I’m just wonder, if you could go into a little more detail on the additional G&A spending, which I guess calculates up to all most a couple $100 million. Maybe just explain why the shorter open enrollment period derives some increase spending in a little more detail on those investments for 2018?

I don’t think is that much for Jeff?

Yes, I’m not. I’m not sure the math there on the couple $100 million. But ultimately, we are investing in further growth initiatives. The shortening of the enrollment period on there, is that you have costs that you encourage enroll members and that used to go up for a longer period in some of those costs would end up in the next fiscal year, but they’ve shortened that cycle. So all those costs will end up in the fourth quarter of this year, and then we are making additional investments in the expansion states which Michael mentioned for exchange as well as Medicare.

Medicare. And Medicare marketing is not in-expensive.

I did have a math error on my – you increase the G&A ratio by 20% to 30%, just had a math error there. But I appreciate the detail. Thanks.

Yes.

Thank you.

The next question comes from Sarah James with Piper Jaffray. Please go ahead.

Thank you. I’m trying to…

Good morning.

Good morning. I’m trying to bridge the guidance change here. If I take the prior guidance and in just for the hits for reconciliation, the outperformance in exchanges the carve in of conservatism, which I was estimating to be about $0.06 and then the SG&A headwind? I’m still getting about another $0.27 benefit between where that math leads me to the current guidance. I’m wondering, if there’s some other improvements going on maybe on the Medicaid side, or if that data really is just even more outperformance to come on exchanges?

Yes. Again, I’m not certain of your math there. I understand that you’re picking up the 25 or the change in the midpoint of G&A ratio, but that would assume that our guidance was at the midpoint initially. So but I follow your math with the outperformance of the second quarter, I think the way we’ve laid out in the press release is the outperformance, we have the $0.17 on the exchange 2016 reconciliation, which is really offset by the additional investments that we have. So I think that’s the rule for that that we’ve done in the press release.

Got it. And you mentioned expanding into more bear accounting as for the exchanges. How do you get comfortable with the margin profile on that business, and are there any similarities between those markets in Arizona which seems to be performing well?

I think, it’s the same principle. I mean these are markets that were you say – you take result were involved in the Medicaid products and they spend in there. And so it’s a – we have the networks in place, the medical management in place, and it’s really success is a great year of our success is the medical management programs and our systems that allow us to do that effectively in serious. So I think, we’re comfortable, we have it in the new counties, so and you pointed out, as we did in Maricopa, when that opened up last year.

Thank you.

Thank you.

The next question comes from the Zack Sopcak with Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for the call.

Good morning.

Congratulations on the quarter. Wanted to ask a question about drug trend for a second – and if there’s anything you see that could impact cost this year or next year on such as Spinraza drug by Biogen?

Hi, this is Ken Yamaguchi, the CMO. No. Spinraza exposure for us has been very, very low. The indications for that medication are also very, very tight. So at this point, we’re watching it carefully but to hide. So at this point, we’re watching it carefully but really our exposure has been low. And then we really haven’t seen any drug trends that are concerning right now.

Yes, I don’t – this is Jeff. I don’t think there’s anything outside of our expectations right now, what we’re looking at.

Okay, great. Thank you so much for the question.

Thank you.

The next question comes from Lance Wilkes with Bernstein. Please go ahead.

Hey, good morning.

Good morning.

Want to hear little more color on pipeline in particular, the higher acuity populations and how you’re seeing that pipeline develop. And then, are you seeing any slowdown or delay in pipeline as a result of clinical uncertainty?

Yes, Lance. Jesse Hunter here. So the answer for your second question first. No. We are definitely not seeing a slowdown. We are quite actives on multiple fronts, have you seen by some recent announcements and reprocurements and I would say more to come there. And I think to your first question. We’ve seen the – this trend initiate a number of years ago and if anything, I’d say it’s accelerating as you look at the impact that these programs are acuity, managed care programs have add on both cost and quality. So we continue to see that as a significant growth opportunity going forward.

And my comment that I have for years commented that the higher acuity programs is where the states get the greatest benefits, our systems and medical management is really mature and you can expect the medical loss ratio to be higher, but the G&A the lower. So it’s something that we’re very comfortable with.

Great. And on the higher acuity programs, can you just talk a little bit about your value proposition, especially with the breadth of specially programs that you’ve got. And how that compares with some reveals in that space?

I’m going to let the others talk about their progress, we’ve kind of focus on our assumption, you’ve really understand that.

Yes.

But we have Casenet, we have a serious of programs that where – we saw it coming, which for a long time. And we we’ve built the systems that predictive models, the case management, medical management, programs and systems to deliver effectively with it. Now, it’s a not an accident that where the largest and long-term care. And I think, we’ve continued rule that for the states recognize the capabilities there. So it’s something that we anticipated for years and we go down as it’s a very local type approach and that’s something that has also serves us very well. Jesse, anything you want to add that.

Yes. Just to Michael’s last one around the local approach, we may not obviously been a hallmark of our net orientation how we serve these populations. I think particularly, on the higher acuity programs including LTSS, yes, these are not just medical programs. So you really have to understand the social determinates and the environmental factors and having a high touch local approach really is a differentiator for us there.

Great, thanks.

The next question comes from Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Okay. Great, thanks. Just want to a add couple questions on MA. You mentioned that some of the business expenditure costs related to the MA. Is that sign that you’re going to try to push a little bit faster into Medicare Advantage in 2018 than you had previously been thinking?

Yes. I mean, I think those additional costs are representative of that. I mean I think, we had a targeted approach and I think we’re comfortable with adding some extra dollars there. We did have a base line of costs in our original guidance. And I think we’re just increasing those.

I think Kevin, if you in call, we said, we viewed 2017 as a learning year when we were into it. So where we see expand in the states that we’re in, as well as the six new markets that we’re looking at a couple D-SNPs markets, we’re adding. So now it’s just time to put that learning to work and we’re taking them in the same approach we did on the exchanges [indiscernible] it’s not how fast but how well and as it continues to do well, then you start building momentum. So it’s not just what 2018 bears but 2019 in and out and we – at the time, we do the health plans we said that, we see going to the end of this decade and the next decade material growth out of the Medicare Advantage products.

Okay, thanks. I think in the past you guys have said that, you expected MA in 2017 to be profitable as larger to existing California business. Is that still on track I assume, given it’s...

Yes. It is.

And then as far as Health Net goes, you mentioned that DCPs were down, because even proven auto-adjudication is that largely now run rate? Or there still room for that to go? What should we expect DCPs to go from here?

No, I think there still room for that to go and specifically, because we have done all the operational systems conversions. So the Centene platform has a higher auto-adjudication rate. And so I think there’s more room to go on the legacy system. And I think there is additional room even further out in the future on after the system – post system conversion.

And more, we’re looking at February 2018 for that conversion at this point. Right?

That’s correct, Michael.

Okay. And then I guess last question. So it’s hopefully be lot of time ask about – I guess call it for California Health plan. Just want to make sure that that business continues to come in line with your expectations?

I would say clearly within our expectations because we’re very pleased with the integration is where it should be the synergies are being delivered. The team out there is incredibly strong, I think they’re enjoying the business more that they have some of the systems support that we’re given them, Casenet and other, so it’s proving to be very well clever move.

Okay, great. Thank you.

The next question comes from Chris Rigg with Deutsche Bank. Please go ahead.

Good morning. Just wanted to get your view mid-year coming into 2017, people were concerned about a county like Maricopa for I think only insurer, I guess with six months on the above, how do you feel about the conceptually, when you’re the only insurer to market. Does that make you feel more comfortable or less comfortable about that serving that population?

Well, it’s kind of a two hedged sort. One, we like it being the only one to whom we get the full population, some we get the sick, it’s been well at the full mix. When is the second brand there, we get the benefits of showing, how good we are, by comparing the others. So this kind of mix but I have been full risk is consistent with sound insurance policy. So we’re very comfortable with it.

Okay. And then just to come back to the higher SG&A outlook. I mean by my math the increase is about $0.40 of headwind. You’ve talk about of $0.17 of incremental investment spending or business expansion costs. I know, we’re all trying to get to sort of an exact number here, but the $0.23 Delta is that compensation expense. Are there something else in there? Thanks.

I think, there some in the variable compensation category, because obviously, we did increase our guidance substantially. But in general, you’re resuming that our internal forecast was at the midpoint. So if you notice, we did actually take the HBR range [Audio Dip] (36:17)-(36:23)

Great, great. Thanks a lot.

The next question comes from Dave Windley with Jefferies. Please go ahead.

Hi, good morning. Thanks for taking my question.

Good morning.

I want to clarify, Jeff some comments you made in your prepared remarks about the taking the conservatism on the exchange a marketplace business, that was it was previously in there. You said $0.04 in 1Q, $0.12 in 2Q and $0.04 in the second half. Is that when you are taking those amounts into earnings? Or is that where they were mapped out to benefit you in guidance sort to be kind of guided in the guidance?

Well. Actually there’s – you’re not really taking them into earnings, right. Because it was – we took our – if you will, our forecast and added the conservatism on top of the forecast, so when we say that, we beat the expectations in the 2017 marketplace for this quarter by $0.12, that’s effectively a piece of that original $0.20 of the conservatism.

Right. Okay. And so the…

So I guess the way I look at has we originally had $0.20 of conservatism, when we talked everybody in December that’s all out of it – it’s all out now. We’ve taken all that conservatism out of our current guidance.

Yes, understood. So it’s not so much that the exchanges were inline – and then inline in the second quarter and then you took the additional $0.12 out of the conservatism.

I would say that the exchange performance was stronger than the numbers with the conservatism in. Right, we had better performance – we had better performance, I would say more inline with how the bids changed performed in 2016.

Got it. And then follow question here on the risk adjustment. You had positive settlement impact of $0.17, for 2017 it sounds like you need to increase your payable, is that – am I thinking about that right, that those are moving in kind of opposite directions and was that based on a different set of assumptions for 2017 or different methodology in 2017, when you had applied in 2016.

No, no. We didn’t have to increase our payable. What I’d say is, I guess are payables kind of consistent as it was in 2016. But obviously the business is grown. So it’s going to be a larger dollar amount. So I guess what I would say is that the exchange performed kind of better than we anticipated with the conservatism and inline with 2016 and I think that’s where it is.

Okay. All right, thank you.

I think I might just add a thing, that they’ve done – they understand how it works and we’ve booked the appropriate levels.

Yes, yes. I would say, again my comment was we are using the same reserving methodology for risk adjustment that we have for the past three years.

Okay.

Exact state. Nothing is different there.

Got it. Thank you.

The next question comes from Peter Costa with Wells Fargo. Please go ahead.

Can you explained to me little bit what you think the direction of your margins will be going forward, if you’re at the high end of your prior margins on the exchange business. I think that was a 3% to 5% targeted margin. So with high end of that there. And then Medicare business is still sort of growing. And so I imagine, you’re on the lower side, we’re targeted margins there what you think your overall margins will go over the next few years.

Hopefully. Yes, I mean obviously we’re focused on improving and approving the margins on a going forward basis. But again, I think I mentioned this at our Investor Day, I think the largest driver of our margins going forward is going to be the business mix. So the exchange is at the higher end of the margins, the Medicaid’s are little bit lower than that, there’s obviously opportunity for additional interest income and investment income depending on what interest rates do. So I think we would like to see margin expansion in the future. But what’s going to be driving that is how much Medicare and exchange in long-term care and it’s a mix of contracts and business that we have that’s going to drive – I would say the bottom line margin number.

I think that would be growth that we anticipate have been demonstrating. You don’t get –you’re not leveraging the overhead quite as much when you grow that [indiscernible] grow and so. But we expect it to expand.

And then can you break that down by business line in terms of which direction you think the margins will go?

I think that detail will be…

Yes. I’ve think you highlighted for example Medicaid, we would not anticipate to operate long-term at the lower end of the margin range on that. But we’re in investment node. So I think you’re what you said earlier is probably what the expectations are.

Okay, thanks.

Thank you.

The next question comes from Scott Fidel with Credit Suisse. Please go ahead.

Thanks, good morning.

Good morning.

Just on the – have any update on, if there’s been any developments just on that LTSS carve-out situation in California. I know you had put the billion dollar sort of placeholder on the 2018, but it sounded like that situation still a little fluid at the Investor Day.

Yes, I think it was in the governor’s budget, the governor’s budget was improved slight, I believe that’s done, I think it’s carved down.

Chris, do you want to add to that?

Sure. I just add one point of that, Michael, I think that there’s just as it did get passed the governor’s budget, but we continue to work with the counties in the state to look for ways to work together on the home support services.

Okay, got it. Then just on second question, just I know on the services that revenue is can be heavily sensitive to changes in the specialty business but looks like it was down around 10% year-over-year. So with that all just relating to the specialty biz and then how should, we think about I guess revenue growth in that business in the back half of the year.

I can comment on initially on it’s down in the specialty pharmacy business and it’s a related to have see I think that’s a macro trend. And then as far as growth going forward on Jesse if you want a comment on that.

Yes. I think Scott one of thing that we seen, we have talked about a few times with the variability in that line has trended with this Jeff reference more of the macro Hep C trends. So I think we’ve got it certainly a more stable point and we view that as a growth part of the business. So you should expect, see that going forward.

I think as we look at the business, it’s large – it’s $46 billion and you going to have some product that are ups, some that are down, and so that we see is the benefit of the diversity that we have to continue to build into the business that Hep C might be down because of the trends, but there’s other thing that will pick it up, and so we tend to manage at macro level of the overall trends in Centene, what will we expect it.

Got it, just one last quick numbers. One just on do you have where the Georgia lives ended up settling out in July with the fourth vendor coming on?

Yes. We don’t really comment on – I would say inner quarter membership. So but it was inline with our expectations.

Okay, thank you.

We have the total we had a good quarter year-over-year growth in Medicaid. Go ahead, I am sorry. Operator?

I’m sorry. The next question comes from Justin Lake from Wolfe Research. Please go ahead.

Thanks, good morning.

Good morning.

First, just kind of following-up on the last question, given the strength of the exchange margins, would you expect this is our reasonable run rate for this business going forward? Or would you expect good bids similar conservatism in 2018 that you did this year on exchanges?

Let me – I think if you recall why we put the conservatism in is it really is a result of the presidential election. And so I mean I guess, I’m not giving 2018 guidance down. But there’s a lot of things that have to play out between now and December.

Okay, that’s helpful. And then you just in terms 2018 revenue outlook, I was hoping you might better give us some color on what kind of exchange membership growth was kind of built into that revenue outlook you gave us at the Investor Day. And can you tell us what percentage of your membership this year gets CSRs?

I think, just I want to do, I want to be careful, we’re not going to give specific guidance until December 15, I mean that’s always been our policy in practice. So please be aware with us on that, we give in June we give the trend and the directional thing and we’ve expressed historically that 19% and more trends have subsidies at different levels, it’s not all four subsidies that depends on the tears and the income of the individuals.

Okay, that’s helpful. If I could just speak one last numbers question. If there the variable comp you talked about this year, the increase be through SG&A. Can you put some numbers around that, so that we can understand how much might normal I doubt next year…

I’m not going to give that specific. I mean we had a very strong quarters, I think you all recognized. And so therefore the variable comp will be booked accordingly. And that avoids anyone of the quarter taken in appropriate head because up or down. So we bounce it up. But I don’t want give any specific because of the changes that can take place from quarter-to-quarter.

All right. Thanks again guys.

Thank you.

The next question comes from Ralph Giacobbe with Citi. Please go ahead.

Thanks, good morning. I just want to go back to business expansion cost $0.42 to $0.47. I think the cost was $0.05 in the first quarter. I mean, Jeff just give me impact in the second quarter.

$0.07.

$0.07? Okay.

We did not give that. But it was $0.07 in the second quarter. And again, I think my comment was the increase is going to be more in the fourth quarter. So this increase that we put in the $0.17 the midpoint, I think most of that the majority that’s going to be in Q4. Because that’s one…

I think about I mean $0.05 in the first, $0.07 second, it’s been looks like – there’s going to be close to the $0.30 impact in the fourth quarter. Is that fair?

Yes, that’s close enough.

Okay. And you get any that back on sort of an ongoing like when we think ahead to next year to some of that come back or is that just an embedded costs sort of going forward.

If you comparing into 2017, yes, because in 2017 in the first quarter there were exchange open enrollment costs, so when you go to 2018 and there they wouldn’t be but the cost would be higher in the fourth quarter. So I think we’re not going to quantify that but don’t know how much that the differences.

Okay. All right. And then is the underlying base case for hits on enrollment next year to be flat, can you sort of level said already you take the overall pool is?

I’ll go back to Michael’s comment. I think we’re not going to consistent with what we’ve done the past we’re not getting in the 2018 membership. I mean we’re still in pricing cycles and those things sort so…

Yes, we did comment to it. We’re entering new markets than expanding existing markets. So that would probably give the sense that there will be some growth which will detail in December.

Okay, that’s helpful. But just I guess just help sort of frame a little bit just given sort of the you certainly done well in the exchanges to this point, there’s obviously a lot of headline risk still as we think about on next year is why questions around sort of mandate that may not be enforced and the potential sort of drop-off health to your life’s given some of redneck out of the administration currently, I guess how do you get comfort with that in terms of how you price the business as you think about 2018?

I think when we have a little timing at that price, 2018 to – we were articulated again and again. We will make our decision based on the facts as they are today. And it’s trying to do what if that’s we end up with what I would call Polaris by analysis. And so as we get closer, we will continue to look at the facts, and we make those decisions based on where we are. And as I said in my opening remarks, I think this has a long way to play out and I genuinely believe in the time I spend worse than, there is not the appetite across the broad perspective of both Houses to take the most vulnerable populations and leave them without insurance. When do our programs that are working very well. It’s a matter how they cover it to exchanges, how they cover it through Medicaid to at level that we have been giving some very constructive program, that I was quoted last week on – at the bill head been moving in the right direction. And we think that – in the end, they would do the right thing for the part of this vulnerable population.

Okay. Fair enough. And then one more, if I could squeeze it in, can you just remind us, if there is any tailwind of earning this year from the health moratorium. And maybe frame a size of potential headwind next year. Where is a full pass through with maybe more marginal impact from the Health Net commercial book?

Yes. I mean for us – I mean, we’re still heavily weighted towards the Medicaid side. So that’s the predominately pass through side. And then commercial, you’re – to some extent pricing that end. So I think the margin impact will be very small. If any, if any.

Okay. Thanks.

[Operator Instructions] The next question comes from Ana Gupte with Leerink Partners. Please go ahead.

Yes. Hi, thanks. Good morning. The first question I had was on the Florida RFP that came out earlier this month. And can you talk about your views on the consolidation of supplier…

When there’s – an active RFP, we are prohibited from commenting out of it, by law. And I’m not going to give people a pure opportunity.

All right. Understood, okay. The second question, some of it’s been asked already, but in terms of the CSRs, what types of conversations are you having with the State Insurance Commissioners, where some of the states are offering a within, without type scenario. And do you think, at the end of the day, they don’t want to leave whole bunch of low income citizens uninsured, that they will at least come in right…

I think there’s too long, Ana. First of all most of the conversations we have at state and federal level have been very quiet. And we find that really works much better, when you’re not out front in specifics. We are left clearly with the few only in that – at state and federal level. Leadership understands that to eliminate CSRs, who is to create havoc to the insured marketplace. And if you read through many of the comments made by the people and listen to it, they talk about stabilizing the insurance market. It’s not destroying them. So I’m personally I was thinking, we are corporately convinced that when all with that settles. There will be subsidies in some form, CSRs, tax credits would have it – pass through tax credit that will protect the low income vulnerable citizens.

Got it. Yes, one last question I agree with you one that. The last question is on your announcement about Schnucks and the clinic in Ferguson do you thing that’s…

Yes.

One off because you’re trying into the community outreach or is it more business oriented around your Medicare population and or third party services?

I think people will learn from this but – National Chairman of the Urban League, in fact our convention is here, national convention is here this week since my board meetings over I put out different hat. But Ferguson, we decided two years ago as a community and as a business community, the companies that we would – we had an obligation to show what to do and how to correct the kinds of issues that were reflected in Ferguson. There are 150 cities in this country with that same thing could have happen and we’re showing the road map, that it’s creating jobs, small businesses supporting them, the Save Our Sons program that the Urban League put together. So in this Schnucks opened up a supermarket there. But now great separate leaders in the community as well and what they did. I know their Chairman, we know each other. I said, why don’t we put a health center in there that’s going to be man – qualifying health centers. So that population now has access to high quality healthcare but it has another advantage not only can they gets urgent care, but if they see something that’s more chronic, they can then refer to the health center where they can get continued continuity of care. So it’s a combination of doing what’s right for the community and getting some learning that may or may not apply in some other environment. But thank you for your questions. You gave me a chance to get on my hobby.

Thanks Michael. Appreciate it.

Thank you.

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

I just want to thank everybody, for the time in the call. And we look forward to continued success throughout the balance of the year into 2018. Enjoy the rest of the summer and stay warm. Take care.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.