Good day and welcome to the Centene Corporation First Quarter Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] 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, Nicole, and good morning, everyone. Thank you for joining us on our first quarter 2019 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 code for both of those dial-ins is 10129281. 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 recent Form 10-Q filed today, April 23, 2019 and the Form 10-K dated February 19, 2019, 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 first quarter 2019 press release that we released this morning which is also available on the Company's Website at centene.com under the Investors section. Finally, a reminder that our next Investor Day will be on Friday, June 14, 2019 in New York City. With that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's first quarter 2019 earnings call. During the course of this morning's call, we will discuss our first quarter financial results and provide update on Centene's markets and products. We will also provide commentary around our regulatory and legislative environment and our recently announced agreement to acquire WellCare. I want to emphasize, while we have an experienced team working on the WellCare integration, our main focus continues to be the results of the core business. This includes executing on our transformation project Centene Forward. Let me begin with first quarter 2019 financials. We were pleased to begin 2019 with another strong quarter marked by solid top and bottom line growth and robust operating cash flows. Membership at quarter end was 14.7 million recipients. This represents an increase of 1.8 million beneficiaries within the first quarter of 2018. First quarter revenues increased 40% year-over-year to $18.4 billion. The HBR increased 140 [ph] basis points year-over-year to 85.7%. This was primarily due to Fidelis Care which we noted when we announced the acquisition operates at a higher HBR as well as the impact of the health moratorium in 2019. We reported adjusted first quarter diluted earnings per share of $1.39 compared to $1.09 in the same period last year. This represents 28% growth year-over-year. We are pleased to report our adjusted net earnings margin improved 40 basis points year-over-year. This improvement was due to better network management, leveraging our scale and enhanced medical management efforts. We continue to see opportunity for further improvement. Lastly, operating cash flows came in at $1.3 billion or 2.5 times net earnings above the high-end of our previously stated range of 1.5 times to 2 times net earnings. Jeff will provide further financial details including increased…

Thank you, Michael, and good morning. This morning we reported strong first quarter 2019 results. First quarter revenues were $18.4 billion, an increase of 40% over the first quarter of 2018 and adjusted diluted earnings per share was $1.39 this quarter compared to $1.9 last year. Before I get into the details, I want to remind everyone that the company’s stock split was distributed on February 6, 2019 to stockholders of record as of December 24, 2018. Now let me provide additional details for the first quarter. Total revenues grew by approximately $5.3 billion year-over-year, primarily as a result of the acquisition of Fidelis Care, growth in the health insurance marketplace business, expansions and new programs in many of our states in 2018 and 2019 including the Illinois contract expansion, another region going live for the Pennsylvania LTSS program, and the beginning of operations in New Mexico and approximately $500 million of pass-through payments from the State of California and approximately $435 million of pass-through payments from the state of New York. This growth was partially offset by the health insurer fee moratorium in 2019. Moving on to HBR, health benefits ratio was 85.7% in the first quarter this year compared to 84.3% in last year’s first quarter and 86.8% in the fourth quarter of 2018. The increase was primarily due to the acquisition of Fidelis Care which operates at a higher HBR and the impact of the health insurer fee moratorium in 2019. These items contributed to 130 basis points in the increase from last year. Sequentially the 110 basis point decrease in HBR from the fourth quarter of 2018 is primarily due to the performance and seasonality in the health insurance marketplace business, partially offset by the impact of the health insurer fee moratorium in 2019. The marketplace…

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Josh Raskin of Nephron Research. Please go ahead.

Hi, good morning. Thanks.

Good morning.

Goof morning Michael. So my question just it sounded like a little bit more excitement around the Medicare opportunity for next year, talking about the inflection point, and so I was wondering if you could help sort of flesh out what gives you that confidence, how you guys are thinking about your bids with a month and a half to go on that? And then was there any thought as to waiting for the WellCare acquisition to close and giving yourself a little bit more time and information and management expertise and Part D plans et cetera, or is it sort of now we’ve got the four stars for Centene and that’s all we need? And then just one quick one on the WellCare progress, I understood the integration started et cetera, anymore updated thoughts on combined management team? I think that’d be helpful as well.

Josh, I’ll start off on the Medicare and then others can jump in a little bit. On the Medicare we’ve said that the 2020 will be the year where we come together, we’ve been testing things. Our re-contracting with providers on this space contracts and the things that create successful Medicare products, so we will continue to move ahead on our own recognizing that until we close we can’t work with WellCare, once we do close they have a strong platform, we have added some new talent here and into the integration process we’ll be putting those two talents together and I think 2020 will be a very strong year for Medicare on that basis. On the organization I’m not going to comment. I think before I say too much on a call like this, first the Centene people and as well as, and the WellCare people need to know what the new organization will look like. And we’re not going to get into that until we get closer to the, knowing it’s closing, simply we have, as I said earlier everybody is focused on their respective businesses and that they will move through that, I'm absolutely not going to say anything about it. That’s a better place to be.

Okay.

But, see, I will add this much, just that we are working with some of the senior management at WellCare and have some very important responsible positions at, they'll be able to move into this new $100 billion company.

That’s helpful Michael. And just one quick followup on the Medicare comment 2020, you've talked about Medicare contributing as much as 20% of growth in future years, is 2020 that year where we start thinking about as much as 20% of the growth coming from Medicare?

You know, I think I said in the course of a decade, so I’ve been, well sorry for it Josh, and then you’ll see it continue to ramp up. It's not going to be access rates.

Thanks.

Thank you.

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

Great, thanks. I wanted to ask a question on the WellCare deal. It sounds like you have already started the process with the states and again you going to find a couple of states where you expect there to be divestitures. Is it safe to say that based upon the conversations with the other states where you have above average pro forma market share, you still feel confident that divestitures will not be required? And then, I guess how do you think about the sustainability of a state where you have pro forma 50% market share? How did you factor in the potential risk that in two years during the reprocurement the state might add a new player in to replace the fact that you've consolidated WellCare?

I will tell you this, Kevin I think you know we, we tried to plan ahead and we’ve thought through those kinds of issues and looking at this with different [ph] transaction, I’m not going to front run the states with a lot of discussion as to what our discussions with them. They are very constructive and I would go this far and say that before we shared focus I'm worried about the recipients and what’s best for them. Then we look at the provider networks ensuring that their well taken care of in terms of provided for in this situation and protected and then to say discuss this. So we’re focused on all three of those things. As far as divestitures are concerned, those are subject to discussion and even in Missouri and Nebraska we're in discussions as to what if anything they want us to do. I’ve mentioned that the days we have talked about it in the past as where there are three and two of the three are WellCare and Centene. So we’re working through and see what they want to do there and go from there.

I guess in the past you talked about the accretion the 30 numbers [ph] assuming approved in amount of divestitures, did it take into account potential issues a couple years down the road when you get to that two-year cliché number does that also factor in any kind of loss of membership if states were going into divestiture [ph]?

Oh yes, yes sure. It factors in a conservative position on that, so we’re, absolutely.

Okay, then if I could ask one more question, you mentioned that Medicaid margins have room for improvement, where, how do we think about where we are in that process, is this a multiyear process, where are we versus your target margins and how long it takes to get there? Thanks.

Well, we’ll never perceive from a manager's standpoint scale the Jeff and all us here, Chris, we'll never take the pressure off improving margins, because the moment you stop trying to improve they are going bounce off. So it's an ongoing process and, but we want to do it in a way that is sustainable, it’s like we don’t want a short-term, big, huge improvement and then have something come up, so we’re working on this. The network, the contracts with various providers and keep it balanced with them because we view then as a part of our product, we don’t want to, you never want to hurt your products, you want to maintain it. So it’s a total process we’re going through and we’re moving more and more to risk-based management where the providers can do very well when they work with us and manage it. So it’s a longer-term thing, but I think what's important is that we see it on a sustained basis. I hope that helps.

Yes, thanks.

Our next question comes from Sarah James of Piper Jaffray. Please go ahead.

Thank you. I wanted to drill down on the services line. It looked like costs of services increased about 250 basis points year-over-year and we’re estimating that was about $0.04 headwind which implies the underlying health plan results were strong. So on the services line I knew there were some moving pieces with the VA contract and the NHS [ph] acquisition, can you help us bridge 1Q 2019 to historical levels and how we should think about revenue and gross margin on that product going forward?

I'm going to point that one to Jeff.

Thanks Michael. Obviously, I think a couple of things first, I think you hit the nail on the head there Sarah, I think a few things is, it is a different mix of business than we had in the first quarter of last year. So I guess what I would say is I would bridge from the fourth quarter to the first quarter. I think that’s more appropriate given the fact that we had the VA business that’s no longer a part of that line and then you also have a couple of acquisitions that we’ve made that are changing the mix profile of that business. And so, I guess what I would say is, I would look at the fourth quarter of last year bridging to Q1 and I think that’s pretty consistent and I think that’s what you would expect to see for the remainder of the year. There is some lumpiness in those because there are certain - like for example the home health business has some contract reconciliations that are normal and occur every year either in the third or fourth quarter, so it doesn’t mean every quarter is going to have a consistent cost of service percentage, but for the full year we would expect it to look similar to the fourth quarter maybe a little bit lower.

Got it and one clarification here on guidance, last quarter you guys talked about 60% one half 40% second half and last year you talked about a 10% or so historical average for the risk-adjusted through up which, based on today’s Q would be about $93 million benefit to Q2 2019. So I just want to make sure on those two aspects that’s still what guidance has been there is a 60-40 seasonality split and about a 10% [ph] risk adjusted through up benefit in 2Q?

Yes, the 60-40 is consistent with what we said. The through-up piece, you just have to make sure that when you do the through-up it’s really based on last year’s, it’s on 2018 business right? You can’t roll in the first quarter of 2019’s risk adjustment in order to calculate the 10%. So, it’s a state-by-state calculation that’s really based on the business activity in the 2018 year.

Thank you.

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

Good morning. Nice quarter guys.

Good morning, thanks.

Good morning.

Can you tell us a little about what you're thinking about what the PBM at this point? You’ve had a couple of states now convert to RxAdvance, you’re starting to see how that’s performing. Is that performing up to your expectations at this point or do you think you can do better by looking at what WellCare is doing, given that WellCare has the buying power of much bigger CVS [ph] behind it than what RxAdvance has which maybe doesn’t matter in the Medicaid space but certainly matters in the Medicare space?

I think one, the first part, the RxAdvance has been flawless in the implementation. I expect that as we continue to enroll more states we’ll continue to find ways to improve and always do better. Two, I think you are going to find that RxAdvance will provide some really useful tools to the WellCare and what they’re doing with the purchasing they are doing. And this is really a very modern day PBM type sale with a lot of transparency, a lot of great information that I think it’s going to serve everybody well. So, the combined and the combination of the two will help and Jeff do you want to add something? Jeff do you want to add something ?

Yes, thanks Michael. So I think just to your point Peter I think this is, we're looking at the combined business. Yes, we do recognize the importance of pharmacy cost management on the MA and PDP businesses and we think as Michael referenced the combination will certainly have the ability to leverage the capabilities from the WellCare team and their experience.

So are you talking about some kind of a combination of RxAdvance and what WellCare us doing currently with CVS?

Well we're working through the integration now and we'll determine what part each one should play in it. And so you're probably about two months ahead of us. But it's a good question Peter.

All right, and this is the last question. The third quarter of last year you had some reconciliation benefit from the California in-home services and sports program ending and you talked about perhaps getting some more of that reconciliation completed in 2019, was there any of that in this quarter and do you expect any for the remainder of the year?

There was not any of that in this quarter and as you are well aware typically what happens you know you are waiting for the final reconciliation and the state notifies you, so we don’t have any of that included in our guidance and more to come, I guess we're waiting to see what the results are.

And you do expect that to be positive when it happens?

I mean we've made our best estimate, so it could go either way, but we’ve had a history of making relatively conservative estimates, so that I guess I'll leave it at that.

Okay, thank you.

Our next question comes from Scott Fidel of Stephens. Please go ahead.

Thanks, good morning. First question, just interested in your assessment on the final 2020 exchange reg that came out late Thursday? Then just specifically also whether you think the subsidy tweak that CMS made will have any impact on exchange market fundamentals or it is just you don’t see it as being particularly material?

Kevin, do you want to comment on that?

Sure. Hi Scott. You know, I think in general we're pretty much supportive of the new final rule. We think the lower user fee is definitely appropriate. We support the fact that there’s no change in either the silver loading or the automatic reenrollment. We also are supportive of the exclusion of the of the manufacturer coupons for patient cost sharing which we think is going to actually incent members to take more attractive generics. And we think some of that offset, some of that headwind that you are talking about could be offset both by the lower user fee as well as the fact that manufacturer rebate or manufacturer coupon changes I talked about is also going to create more incentives for people to take generics. So we think some of that projected $980 million less APTC which I think is what you’re referring to will be offset by those two items.

Got it. So net-net when you look at all the different variables, would you attribute the final exchange rule as more of a sort of neutral to slightly positive overall?

That's our view.

Okay and then just I had a follow question, just actually wanted to tack on to Sarah's question just about some of the moving pieces in the specialty segment, I actually noticed in the Q you guys mentioned how in the 2Q we'll probably see more of a noticeable shift from earnings from specialty over to managed care as you continue to implement the new RX pricing model. Jeff interested if you could may be just walk us through sort of functionally how that plays out within the two P&Ls, is it basically you have a lower gross margin in the specialty segmented and it benefits the MLR in the managed care segment or just interested in the exact mechanics of how that works out? Thanks.

Yes, you know, you are exactly right, that's what we preview included that language in our 10-K, you’re exactly right there would be a lower gross margin in the segment results for the specialty that would in turn directly benefit the health plan results. And just to make sure I clarify for everybody that’s only in the segment disclosure and that’s a intercompany item. So that gets eliminated in the consolidation. So for - you know we're not talking about the cost of service line for example, it’s reported on the GAAP financials.

Okay, all right, thanks.

Yep.

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

Hi thanks, good morning. I want to ask a followup and pharmacy, Michael I believe I caught you saying in your prepared remarks that Centene would be supportive of a move to net pricing and if I'm interpreting that right elimination of rebates and a reduction in manufacturer price to net, if I'm interpreting that correctly, I'm curious what mechanism you would see as the governor to pharmaceutical price increases after that happens?

Well, I think one, I said some time ago that that's something I believe we work fully hard to try to move to. And if we are successful in it the governor on price increases would obviously be the competitive world and we will be a - we will have the critical mass in drug purchasing that all the pharmacists who will cover us will have to take it seriously, because we said that 30 billion we see as a growing number. And as that continues to grow it is RxAdvance information becomes ever more credible. I think we'll have the data we need to encourage competitive pricing.

Got it, thanks. If I come back to medical costs free-sheet the reconciling items that you provided, I'm curious if there's any difference year-over-year in the contribution or lack thereof from flu and with a relatively I guess in line expectation after those adjustments, if there were other moving parts, if flu was better this year, for example, were there other moving parts as an offset?

I'll let Jeff answer that. I'll cover the flu initially, but I want to remind you the flu we had a flu season it looked like two years ago, not last year, but when you have the scale and size over $70 billion enterprise this year before Health Net that the medical costs associated to flu is really not a major factor as part of the total medical cost. So that's something that we plan fully booked for variation will not have a material effect. Jeff?

Yes, thanks, Michael. Dave, I think, Michael is spot on. We're obviously calling out the large drivers, the largest drivers obviously which being Fidelis in the health insurer fee moratorium are the two largest pieces. I would say, we did see a lighter flu than we did in the first quarter a year ago, but we also had, I'd say, a lot of new businesses starting up, including the Pennsylvania LTSS. New Mexico, and as Michael mentioned, we record a higher level of HBR in those because you're also building margin at the inception. And then we had new members in both Illinois and Florida. And so I think those were smaller drivers on an absolute basis, but you add all that together and they're kind of offsetting.

Great, very helpful, thank you.

Our next question comes from Matt Borsch of BMO Capital. Please go ahead.

Yes. Maybe you could talk about the Iowa situation, and how you expect that to unfold and what gives you confidence that unlike the peer companies had exited the market you cannot, you can reach a mutually workable rate arrangement?

Well, I think, one, we've had discussions over a long period of time, at the most senior levels at this stage in the regulatory environment. And we have a comfort in their commitment to have a very successful managed care program. It's fairly obvious, you know, historically, we've been offered contracts and have turned them down rather than end up entering a new contract and filing a PDR [ph] before you even have your first member, that's something we try to avoid. So we – but this time we looked at it, our actuaries looked at it. The state just - the legislation just floated additional $150 million available to help sustain the program and improve it. So everything we looked at said that this will be a successful program. And also some peers have exited. It was a different time. If I had entered when they did I might have a different feeling than I do coming in now with the new administration in place the past year or so and very aggressively looking at how they can have a successful program.

Michael, I would follow that with one question partly related which is, do you have a view on the optimal number of participants in a given state? I know the question isn’t quite as simple as that, because you've got small states and large states but…?

Right.

You know are two plans sufficient for some states like the size of Iowa?

Yes, we are, let me put it this way. Regardless of the size, I think the optimum is it was just us.

Okay. Got it.

Have it both way, we would be on that, you kind of hit it on. I think in Iowa, the size and scale two is appropriate. If it was three then you can deal with that. We saw Georgia go from three to four. So in aggregate, did not have much of an impact and that's fine, because you have choice, and when you have the, it always starts out with choice and we have the network we have and the reputation we have in most of these states, we can do well with this choice. So, we deal with it as it is. In Florida there are some counties, I think there they have as many as six plans in it and that's okay. But either way, the algorithms work on auto-assigns and have a member of the families in and other members get a size of that plan they, it's the states that have been doing for a while, understand and get it right. And obviously when you look at the growth we've had, and how we're doing, we're very comfortable with the way it is. And so you really hit on it, it is really a function of the size the state is as to how many.

Okay, all right, thank you very much.

Thank you.

Our next question comes from Charles Rhyee of Cowen. Please go ahead.

Yes, thanks for taking the question. I'd like to go back to pharmacy, a little bit, and you talked to and this idea of going to - of supporting credit price transparency. When it comes to pharmacy, my understanding, generally speaking right, states have tended to like the current rebate model in part because rebates don't necessarily have to be from a back to healthcare and can be used for general sort of budget purposes. As you see the market moving maybe towards greater transparency and maybe even towards the net pricing model, how do you see states moving towards this as well, and how do you see them sort of operating within this kind of this new world, I guess, as we think about the way pricing starts to evolve and sort of how do you think this would impact your pharmacy business, particularly if you try to rollout RxAdvance? Thanks.

I think that's where they are right now. I mean they are pushing more and more for transparency and where it is for pass-throughs or the pricing and how to do it. So they really have moved away from just the pure rebate type model and we're hearing more and more of the federal level of rebates at point-of-sale and that type of thing. So that's a whole, it is all in transition, it's in flux right now and I think the things we can do and we can move to a net price type thing. And everybody can do much better with the transparency, the competitive bidding et cetera. So, as you know our plan with discounts and rebates and volumes and things, is here's the drug cost and it's particularly important in specialty pharma. So this is something that can apply to both. So I think the states are really adapting to it and have been in their own way moving more towards it on an ongoing basis.

And then maybe following up on Dave's question, in terms of sort of a governor for price increase in the future, you talked about price competition from transparency, but what about - in many cases, right a lot of these particularly in specialty, a lot of these drugs are the only drug in their class, so there's really no competition. How do you look to manage costs in those particular drugs where there is little to no competition?

Well, you know, you manage through effect by managing the utilization effectively. I mean, if you have only one drug, it is a curative drug. So you negotiate the best as you can, but rebates aren’t going to help you there, one way or the other. I mean it's, I think as we raised it earlier, it is going to be the same, this is what you do is you manage the utilization and ensure the people are getting especially pharma drug, whether you use genome or other things, it's going to be supportive and helpful for them. And you know if it's curative, you're going to get it for them and that's what's important. When the hep C drugs first came out they were expensive and it didn't take long before a second one showed up. So it's not – usually not very long. I used to be in pharma side Bristol-Myers and eventually for a little time Bayer and we learned very quickly, if you take your margins up too high, you're just leaving room for somebody to come in under you. And so, you are going to get competition very quickly if the pricing gets too abusive. Does that help?

Our next question comes from Steve Tanal of Goldman Sachs. Please go ahead.

Good morning, guys, thanks for taking the question.

Good morning.

I guess the, I wanted to follow up on just sort of the HBR, the new programs and then talk about DCPs for a second. So I guess, come out this is flattish HBR ex-Fidelis in the half. It looks like a pretty solid outcome when you've expanded or entered into new programs in four new states. I guess I'd first ask how those programs are shaping up in their early days, but it seems like that the numbers would suggest quite good and so maybe the real question is around just comment on DCPs returning to the mid 40s, from 47.9 at the end of the first quarter to 2.9 days, 3 days to get to 45, let's say, it's sort of like $450 million of excess reserves using Q1 claims per day. So does that math sound right? Is it fair to think about that as an excess or are there seasonal fluctuations around marketplace or otherwise we should be thinking of and just finally, is there anything you'd tell us about sort of the path and time line to returning to mid 40s, if that's the right level? Thank you, guys.

Yes, certainly, Steve, a lot in that question. But I'll start with the DCP in the first. I mean what we're saying is, that's our long-term range. That doesn't mean by the end of this year. There's a couple of things with the Fidelis on the cash timing that we're still working through that could reduce that sometime this year. So think of it is more like a day, maybe two by the end of this year. And ultimately when you look at DCP, a lot of that has to do with timing of payments. Right? It's really a timing of payment measure, not necessarily how your reserves are. We look at reserves differently as a percentage of medical expense, which we've been very consistent over the - since over the last five, ten years, and had a very consistent reserving methodology. So I guess, what I would say is, it's more timing related than anything. The other thing is, we have obviously some risk-based contracts with some providers. Those accruals are in the IBNR balance, some of those accruals in the IBNR in our balance. So when those get paid, IBNR goes down. So those are the things that we're dealing with and why we call out timing of payments from a quarter-to-quarter perspective.

Perfect, very helpful. And just any comments on those - on the new state programs, Florida, Illinois and [indiscernible]?

Yes, sure. On the HBR side, I guess what I would say is, it's in line with our expectations. You have to remember the Pennsylvania is an LTSS award. So it's going to be in the 90%-plus range from an HBR. So it's really a mix of business that obviously impact on the total HBR of the company. But in general, those programs are and the expansions are running exactly in line with our expectations. As Michael mentioned before, a lot of times there's continuity of care periods and then obviously you have to build margin on that additional new business and that impacts the HBR early in the program, but nothing outside of our expectations.

I think - if I may just add that, in the new plan, you don't have, - we used the date received methodology for calculating, and its proved to be a very accurate way to do this claims, but you need the history of quarters - two, three quarters to be able to do the accurate accounting of it. I think we'll never say never, but we are proud of the fact you don't see a lot of prior period adjustments and so, it works. So rather than, take the chance, we typically will book it at 90% for the first three quarters or so. So just not knowing if it's where it is and that has typically served us well. So that's the approach we take to it.

Perfect, thank you.

Our next question comes from Ana Gupte of SVB Leerink. Please go ahead.

Yes, thanks good morning. I appreciate you taking the question. On the deal again, as you're having conversations with the DOJ, which I'm assuming will be the arbiter here in the States. As you have like a broad platform now across Medicaid exchanges and Medicare, do they view that in a favorable context and what types of what type of feedback are you getting from the DOJ and states, if any? And how does that dovetail with kind of this integrated, no it is not integrated, but states looking for players to be in Medicaid to participate in the Special Needs Plans and so on and on in places like Florida?

I think the states recognize a leader, they recognize the systems and the capability we have to really improve outcomes and control costs and a very fair balance basis, so that goes a long way. Now there has not been this kind of Medicaid acquisition going back, I think they said it was, I guess Amerigroup was the last one that occurred. And so, that is alluded they are reestablishing the grounds. But when you look at this as a different form of competition, you have states setting rates, you have things of that nature. So it's working through and talking about all these elements, and I don't want to get ahead of them, but we're finding that their questions are really the kind anyone should expect in this kind of transaction. And it's constructive, and as I said, it's really focused in three areas, one payer to first what's best for the recipient. As we deal with a fragile population we emphasize that, and it's important to think about them to the provider network. This is not just gaining critical mass against them, but how do you get the kind of size and scale that allows you to do the risk based contracting so many of them want and we show the data and what we can do and how we do that. And thirdly, the state, how we're able to contain costs, and how the benefit of large numbers, everybody wins. So it's - and it's been an enlightening process and I think I'll add one other thing and we've done other deals with, I'm finding that we have a lot of very smart regulators at the state level, and they're asking the right questions, they understand it and they're able to think through it. I find that positive and I think we'll find that the Justice Department is and the federal level there are equally trying to get this right, and now and so, I'm very encouraged just by the question that doesn’t guarantee the absolute maximum outcome we have, I'm not trying to further than that, but I feel good about where it is at this point in time.

Thanks for the update. And then one more on the Texas and the Louisiana re-procurements any updates there?

Well the Louisiana, well that just went in…

Yes, Louisiana, I think is due to be submitted in next week and no update on the Texas timeline other than what we've previously discussed, I think May or June timeframe.

Got it. Thanks so much, I appreciate it.

Our next question comes from A. J. Rice of Credit Suisse. Please go ahead.

Hi. Yes, hi everybody. First one is on the public exchange comments, you highlight member retention being better and favorable, risk adjustment, I wonder if you could flush those out a little more, what you are talking about there? And I think last call when the - or maybe was on the Investor Day when you gave guidance about the exchange this year, you said you'd be in the 5% to 10% range as the last year but down slightly and margin within that range, is that still your thinking or have you changed in the way you think about what the margin looks like this year versus last year?

Yes, Jeff?

Yes, thanks AJ, it's Jeff. Yes, no, nothing different than what we said in our, in our previous guidance with respect to exchange. Yes, we do expect it to be a little bit down from 2018 more similar to '17, '16, '15; the margin that we had there. As far as the retention, I think we have a normal retention rate that we've assumed based on our historical experience, meaning how long a member stays with us and pays premiums. Obviously, you can go back and look at the historical retention rate from beginning to end, and we've been obviously tracking that and what we're seeing is that members are actually staying and paying in premiums longer, which is, which is obviously a good thing and that's driving, I guess the additional revenue that we added to the guidance today. And the other piece is risk adjustment and on the risk adjustments side we have certain geographical areas where we've got a lot of scale. We've grown the business very successfully. And as you continue to grow, and capture a larger percentage of that market, you do see a little bit of a return to the mean on the risk scores, nothing significant, but obviously, that was the other piece of the guidance increase on the revenue line.

Okay. And then, and just taking a quick glance at your 10-Q, I mean hopefully I have this right, it looks like you're up about $230 million in prior year development, this year's first quarter versus last. Now I know that' s a gross number. Is that a function of the Fidelis and the exchange, new exchange volume or is it - what's driving that and any comment about that?

Yes, that's pretty much all related to Fidelis. We put a note actually in the table of our press release, kind of highlighting that the press release has a 12-month roll forward, which does not include the Fidelis business, because that transaction happened July 1st of last year. So, the development is not included in that 12-month roll forward, but in the 10-Q that is a 3-month roll forward from December's number, which obviously does include Fidelis. And so that's the difference there.

Okay. all right, thanks a lot.

Our next question comes from Justin Lake of Wolfe Research. Please go ahead.

Hi. Thanks, good morning, couple of follow-ups here. One on the PBM side, when you've looked at, now that you've had some conversations I assume some greater conversations with WellCare Group on their ability to drive cost savings it may pop a lot about how much they've been able to save with CVS and use their scale, is there any comparison, you've been able to kind of make versus your kind of cost of goods on the PBM side of Centene? And is it comparable, dose WellCare look greater, or are you guys great or any kind of color you can give us there?

Yes, Justin. So I think just, obviously there was a limited amount that we can comment on with respect to relative pricing on those things and that's obviously we went through an appropriate process on that in the diligence phase. And I think as we said, as part of the announcement of the deal that there are kind of net synergies anticipated on the pharmacy front. So I don't think it would be appropriate to go into too much more detail than that at this point.

Okay, and then just following up on the risk adjustment side. Can you give us an idea of how big you expect that risk adjustment payable to be at this point given the kind of shift in the risk pool, you're talking about here? And, any impact or kind of update you can give us on margins that you're seeing kind of you as you get a full look at the book?

Yes, a couple of things Justin. I would say risk adjustment, obviously we continually update that estimate every single quarter and so that changes. but I would say over $800 million is what we're anticipating on a risk adjustment payable for the year. On the margin side, it was right in line with our expectations and obviously we expected and we expecting for the year, a little bit lower in our margin range compared to last year. So nothing out of the ordinary there as the exchange business performed well, and it was right in line with our expectations for the quarter.

Okay, great, thanks for the call.

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

Thanks, good morning. I want to go back to Iowa quickly. I think in your prepared remarks, you said that those U&H [ph] slides would be split equally, but the 500 million boost in your guide for the back half seems a little bit lighter as I thought the United business was closer to the 3 billion annualized number. So, is that related to the mix, is it maybe timing, just hoping you can maybe reconcile that?

Yes, I know, I mean, I think if you look at United, they had a larger percentage of the business. They didn't have just half. And so we've previously given a range of membership, I think, of 180,000 to 200,000 members. So we've updated that to half the market and obviously you're only getting half of the year, so nothing unusual other than the mathematics behind that.

Okay. And then you said you assume a higher MLR in new businesses you've talked about which would certainly makes sense. For this, just remind us, are you assuming a loss in year one or more breakeven and if it is a loss or breakeven?

Yes, more breakeven, which is why you didn't see any earnings flow through on the increase in the revenue line for the six months and we're not talking about 20, so and just for the six months in '19 we're assuming breakeven.

Okay, that's helpful, thank you.

Our next question comes from Gary Taylor of JP Morgan. Please go ahead.

Hi, good morning. Just three clarifications, nothing original at this point and all financials, so sorry Michael, let me go to Jeff.

Okay, it's okay. I understand financials too so…

That's fair. Well you take a shot at this. Just on days claims payable and I appreciate the comments about timing and in fact, when I look at the roll forward for the first quarter in the Q, it does look like the ratio of current paid versus incurred slipped about 300 basis points year-over-year from about 64 to 61 so a lot of that, a lot of the impact on days claims payable does look like it's sort of timing related. Is there anything to call out on that or is this just illustrating the point that you were making earlier?

Yes, no, nothing to call out. I mean I would say that this is a three-month roll forward that's in the 10-Q, and so that number, I mean, we've only had three months of run out on those medical claims from December. So, that number will, all things being considered would in theory, continue to grow. So you have to – it is only three months out and usually in the press release it is a full year roll forward. So, that number will continue to change, I guess is what I would say, but no, nothing unusual, which is, I mean from our view, it's consistent, on a percentage of medical costs, that's how we track it. We show this information to our audit committee, and Board every single quarter, it's been very consistent for a long period of time. The methodology hasn't changed, so we're comfortable where it is.

Got you. And, just trying to understand on the investments I caught what you said about little bit higher balances and higher rates, but the investment income more than doubled year-over-year and above a 12% year-over-year increase and the investment balance you called out a little better investment income in the quarter, but you also guided for that continuing for the year and part of the guidance raise. So is there any extra color on how you're doing so much better on investment income per the growth in balance?

Yes, sure. Good question, two things Fidelis. So, you have the impact of Fidelis, we have their investments. We didn't have those in the first quarter or second quarter of last year. So you get the full effect of the Fidelis investments. The other thing is, on the health insurer fee we had received payments for the last year's health insurer fee reimbursement from a lot of our states earlier, than we have historically. So think of that number to $300 million to $400 million, that we have earlier in the year than we've had in the past and so you're earning investment income on that. And then obviously we had a strong cash flow generation for the quarter and a lot of that cash goes to the balance sheet, and we earn a short-term interest rate on it. So ultimately, you add up all those three things, and that's really driving the increase on a year-over-year basis.

Okay. And then final one was, I think Scott had mentioned the 10-K disclosure about move starting in the second quarter seeing some of specialty earnings moving to MCO intra company, in the elimination, is the effect of that or what's driving that merely less retained rebate at the PBM more going to the health plan or what's the dynamic that drives that?

No, it's nothing other than internal dynamics as far as the margin on as we move to transparent pricing, there used to be a margin there, that's no longer going to be there. There's going to be a small piece really on administrative front, but the margin just moves into the health plan segment. So nothing other than I would say internal company activity.

Okay, thank you.

Thank you.

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

Yes, thank you for your questions, your attention, your participation. We're off to a strong start and looking forward to the Investor Day and future quarterly reports, so have a good day. Thank you.

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