Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Year-End Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, February 11, 2009. I would now like to turn the conference over to Mr. Juan Jose Orellana, Vice President of Investor Relations with Molina Healthcare.

Thank you, Mohamed. Hello everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare’s financial results for the fourth quarter and year ended December 31, 2008. The Company’s earnings release reporting its results was issued today after the market close, and is now posted for viewing on our Company website. We would also like to thank those of you who attended our Investor Day in New York City on January 22, or listened to a webcast of the conference. For those who have not done so already, we encourage you to listen to the webcast, as we covered a variety of topics, including a detailed review of our 2009 outlook during our management presentations. On the call with me today are several members of our executive team, Dr. Mario Molina, our Chief Executive Officer; John Molina, our Chief Financial Officer; Terry Bayer, our Chief Operating Officer; Dr. James Howatt, our Chief Medical Officer; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks we will open the call to take your questions. I also would like to remind you that our comments today contain numerous forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. All of our forward-looking statements are based on our current expectations and assumptions that are subject to numerous risks, uncertainties and other factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release, our 10-K annual report, and our 10-Q quarterly reports filed with Securities and Exchange Commission. These reports can be accessed under the Investor Relations tab of our Company website or on the SEC’s website. All forward-looking statements made during today’s call represent our judgment as of February 11, 2009, and we disclaim any obligation to update such statements. This call is being recorded and a thirty-day replay of the conference call will be available over the Internet through the Company website at www.molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan Jose. Hello everyone and thank you for your interest in Molina Healthcare. 2008 was a very difficult year for companies across most industries. Despite a challenging economic environment, I’m pleased to report that Molina Healthcare achieved strong financial results for 2008. The Company’s earnings for the year were $2.25 per share. This is within our initial guidance range issued in January 2008. I would like to take this opportunity to thank our employees for our accomplishments this year. Some of our operational achievements for 2008 include, the Florida NetPASS acquisition and Medicaid contract in the State of Florida, the re-branding of Mercy CarePlus as Molina Healthcare of Missouri, the groundbreaking on our IT facility in the State of New Mexico, the successful re-procurement of our New Mexico Medicaid contract. And for the fourth year in a row the ranking of several of our health plans among America’s best Medicaid health plans in U.S. News & World Report. As we look to 2009, it is clear that Medicaid managed care is a viable solution to covering the uninsured and alleviating states’ rising Medicaid budgets. Medicaid managed care can also provide a much-needed safety net for individuals affected by the current economic turmoil. Strengthening the safety net for families and children is a central component of health care reform proposals. And we are pleased to see that momentum continues to build. For example, last Wednesday President Barack Obama signed a bill reauthorizing the State Children’s Health Insurance Program, or SCHIP, for the next four and a half years. This bill preserves healthcare coverage for almost 7 million children, and provides new coverage for an additional 4.1 million children. It provides funding for outreach and enrollment efforts, bonus payments to states for enrolling the lowest income children in Medicaid, and…

Thank you, Mario. As Mario said earlier, we overcame challenges and achieved solid financial results in 2008. EBITDA grew by 16% in 2008, despite a decrease in investment income of $9 million. Net income for the year ended December 31, 2008 was $62 million or $2.25 per diluted share, compared with net income of $58 million or $2.05 per diluted share for the year ended December 31, 2007. Net income for the fourth quarter ended December 31, 2008 was approximately $16 million or $0.58 per diluted share, compared with net income of $18 million or $0.63 per diluted share for the quarter ended December 31, 2007. If we exclude investment income from both periods, net income would have been $1.1 million higher in Q4 2008 compared to Q4 2007. Our medical care ratio increased to 84.7% in the fourth quarter of 2008 from 83.6% in the fourth quarter of 2007. On a sequential quarterly basis, the medical care ratio for the fourth quarter of 2008 increased from 84.6% in the third quarter. This is consistent with historic seasonal variations. Our membership at year-end stood at almost 1.26 million members, up 9% from a year ago. We continue to see strong enrollment growth so far in 2009. As of February 2009, our 2009 enrollment has already grown by 2%. This figure does not include enrollment in our Florida health plan. Premium growth for the quarter and for the year was strong. For the fourth quarter of 2008, premium revenues were $809 million, an increase of $138 million or approximately 21%, over premium revenue in the fourth quarter of 2007. For all of 2008, premium revenues increased by $629 million or 26%, to $3 billion, compared to premiums in 2007 of $2.5 billion. Membership growth, mainly due to our acquisition in Missouri…

(Operator Instructions) Your first question comes from Josh Raskin - Barclays Capital.

First question just on the cash flow. I know it rebounded in the quarter. And John, you mentioned the Ohio and Utah reversals. I think you mentioned last quarter that was about $45 million. But you also mentioned last quarter that there was a deferred revenue timing issue with California that was, I think, $40.5 million that was received in October. So I think I was expecting actually even a little bit bigger of a reversal. So, was there any other one-timers or any other timing issues in the fourth quarter or was this just simply another acceleration of claims payment?

I think Josh that although we got the catch up payment in California in October; we also got it delayed in December. So it’s sort of rolled over and didn’t have much of an impact. There has been some impact obviously from increased claims payment. But I think you might have been assuming that we were going to get both California payments, actually received four California payments in the quarter and we only received the three.

So theoretically they’re just a week behind or whatever it is.

That’s right. Let me add on to that. We have not received IOUs from the State of California.

You only got three payments. That is what I was looking for. The second question just on the tax credits here. It looked like it added a couple of cents to the quarter. And I’m just curious, if you guys have an actual dollar amount for that? Is that is an issue that is completely behind you now at this point?

It is Joe. The issue you’re talking about is we had a California state audit where they reviewed certain economic development credits we take. As a result of that audit, we were able to let certain of those credits go into income. It is about $600,000 for credit value. It is an ongoing thing. Every time we have an audit we true up, and we are usually a little bit conservative, so there is usually a release when we have an audit.

Perfect. Then also let me sneak in a last question. Just California, was there anything that happened in the state? It is just the membership was very strong. Anything happened from a market perspective or was this just general growth in state Medicaid?

It is Terry. It was growth in Medicaid, and it was a result of our concerted efforts at outreach and local area marketing.

But, Terry, you think that is share gain as opposed to overall market growth?

I would say it is both, a little of both.

Your next question comes from Tom Carroll - Stifel Nicolaus.

A question on the pending March provider cuts in California. Is there any update on that?

This is Mario. No, we don’t have any real visibility into that yet. We have not received anything from the state, so we’re just going to have to wait and see.

There is no opinion on timing as to when we might get some more clarity on that?

We are still waiting for more information from the state.

Have you guys seen anything unusual in flu trends this season yet?

This is Jim Howatt, actually we have. We’re starting to see the bump that we expected would happen at some point. But notable so far is the point by point, year-over-year compared to the last two years this flu season is less severe. And while we’re starting see the bump up that we usually see at this time of the year, it looks like it is going to be more moderate than even 2007, and certainly less severe than 2008. It’s all a bit of black box, but that is how it looks.

Do you currently have any risk-based enrollment in Florida?

Yes, we do.

Can you give us a sense of what that is growing at?

We have currently 20,000 members.

Then just lastly, how much did Molina spend in 2008 to get the accreditation on its various health plans? Then maybe how do you think about that in terms of budgeting what you want to spend on that process to gain accreditation?

That is an interesting question. We don’t look at it that way, and we build it into our operations. We don’t segregate it. It is a part of the ongoing operations, a part of the ongoing business plans, so we don’t segregate out what we would have done if we had gotten the accreditation and what we would have done if we didn’t. It is rolled into our admin costs.

It is just one of those things that differentiates you guys against some of your peers and obviously there is a cost to gain that. Just a thought.

Whatever it is, we think it is worth it.

Your next question comes from Scott Fidel - Deutsche Bank.

Could you give us an update on your current views on the rate environment in Florida, just in the context of WellCare just announcing their exit from two markets there? And then just relative to enrollment, are you still comfortable with your target to add 60,000 lives this year in Florida?

We’re still comfortable with our enrollment targets. As far as the rates decline we’re not in the two areas that WellCare is in, so it is hard for us to comment on specifically what happened with WellCare. I will say that we are experiencing rate challenges in all of our markets, which is why we have not put anything in our guidance that would suggest we’re going to get rate increases in 2009 beyond those that we’ve already received.

Scott, this is Mario. I also want to emphasize the point that I made in my remarks that in a time when we are facing rate challenges and pressure from the states, I think being the low-cost provider does give us a competitive advantage. We have worked very hard to hold the line on our administrative costs, and we expect to see the cost as a percentage go down in 2009.

Then if you can talk about your expected accretion performance of Mercy relative to your initial expectations. I think you had initially guided for that to add around $0.13 to EPS in 2008. Actually it looks like the MLR in Missouri improved quite significantly in the fourth quarter to around 75%. I guess just as you sum up that year how the performance ended up coming in relative to your plan?

Generally, when we get an acquisition, we anticipate that the first year the performance will decline from the previous year, and then it will as we are able to integrate, improve. I think that it is a credit to the teams that we have both at the corporate office and at the Missouri health plan that we are able to move that integration faster and further along than we would generally anticipated. But I would say, although it is ahead of schedule, it is nothing that is unexpected.

Then just relative to Nevada, I clearly know this is a very small book, I think only around 700 lives. It looks like the MLR was up to around 149% in the fourth quarter. And just wondering about expectations for growth in that market, and whether you’re comfortable that you can build up enough of a sizable block there maybe to reduce some of the volatility in the MLR that you saw there this year?

This is Terry. We’re working on our relationships with those providers and our ability to control medical costs, before we aggressively grow that market. So that is the answer.

One last question, just on fiscal stimulus have you had a chance to determine yet whether you think all of the money is coming in will actually lead to states actually expanding the programs and expanding their eligibility levels relative to what they have currently? Or do you think that most states will really just use this to try to plug in the projected gaps that they have in their budgets right now?

This is Mario. We had quite a discussion about that earlier. There are a couple of things about this. First, since Medicaid is an entitlement program, as people lose their healthcare coverage and their incomes dwindle more people will become eligible for the Medicaid and SCHIP programs. We expect to see growth in the number of eligible beneficiaries in 2009. The other thing that is important to note is that the language in the bills require states to keep the eligibility requirements, I believe, at the levels they were at on July 1, 2008. So they can’t be more restrictive going forward. And in fact some of the states may actually relax the eligibility requirements a little bit. Our hope is that this money will be used to cover more beneficiaries.

Your next question comes from Daryn Miller - Goldman Sachs.

This is Shelley Gnall on for Daryn Miller today. Following up on your prepared remarks about SCHIP mix and I apologize if I missed this, but also following up on the Investor Day, I think John made an effort to spike out your mix of business, but I don’t think truly reflected the SCHIP mix. I’m just wondering can you break that down for us? What does your mix look like after adjusting for that SCHIP that is embedded in the Medicaid contracts relative to the 5% we saw at the Investor Day?

Unfortunately, we can’t do that. And the reason is in some of the states they come in under the same contract as the Medicaid members and you can’t differentiate them. What we do think is that the number of eligibles in both the SCHIP program and the Medicaid program in our states will increase.

Again, let me just add, there is no benefit from the SCHIP legislation in our current guidance.

Understood, okay and then just maybe a quick follow-up on the FMAP issue. It doesn’t look like the FMAP will be sufficient to fill the gap in California. Any thoughts there?

Which gap are you referring to in California?

The state budgetary gap in California.

I don’t think that the federal government was intending to make California whole through the Medicaid program. The purpose of that is to provide more funding for the state to cover their Medicaid liabilities. I think it will definitely help. We’re looking at perhaps another $11 billion for California to fund the Medicaid program.

I know it is hard to figure out how much of the state budgetary shortfall is attributed to their Medicaid program. I am just doing a quick sort of 20% assumption that the budgetary shortfall is comparable to their spending on Medicaid. I think that is way we think about it. I am just wondering if you had any comments on whether that, that is an appropriate way to think about it, and whether you think that is going to still fall short.

I’m sorry. I don’t understand your question.

Okay no worries, we can follow-up offline.

Your next question comes from John Rex - J.P. Morgan.

I was just wondering if you could give a little more color on Washington, you noted the higher specials and hospital costs there, and how that trended in the quarter, if that is not something you saw continuing through December and into January?

I think one of the things that we’re going to see in Washington, because they did decrease the provider rates a bit effective January 1 or February 1, we’re going to see a little bit of a squeeze in Washington. That is already embedded in our guidance. Washington has been a great performer for us. We expect it to have another good year. And I think it is more seasonal than anything else.

I guess so though, so you would expect that thing to continue. I guess you are saying you expect that to continue. And the rate schedule will doesn’t go into effect until January, right? So it looked like there was some increase in costs going on in the 4Q also in your commentary on the press release.

John, this is Joe speaking. I think if you look back Washington all the way back to August 1 of 2007, where they had some adjustment of their DRGs through a fairly small rate increase in January this year, we have just seen a gradual compression of margins in Washington. It is happening in rate that we can compensate for. It is not unexpected by us. It is really what we have been looking out over the last year and a half. So I think it is just a lot of things over time have been compressing those margins a little bit. I can’t point to any one thing. Utilization remains good.

This also underscores why we have made a concerted effort to diversify the revenue stream. As you may recall, one of our strategic goals is diversify our revenue stream so that no state makes up more than 15% of the revenue. We are going to continue to do that. And frankly, New Mexico, Michigan, Missouri are all performing at a level where they can take some of the pressure off the Washington plant. And we see that as a very good thing.

Just the way it was, you were talking the sequential increase was due to higher fee-for-service specials and hospital costs. So, I was thinking you were saying there is something going on in the quarter in terms of higher utilization. Is that not correct? Or is that, we’re supposed to think about it as more gradual. I know that 3Q was abnormally low, but it sounded like you were indicating there was a spike in the 4Q, and that is what I’m trying to understand?

It is difficult to tease out a single quarter John. I would just view it as a more cumulative process.

Okay, but as you’re looking into ‘09 and so then first quarter you get roughly 4% or 5% rate decrease. Is that all then, is that right in Washington?

In Washington it was less than that. I think the rate decrease was about 3%. And part of that will pass through to the providers.

The cut in February is also tied to a cut in fee schedule, so it won’t be as dramatic as the actual cut on the top line.

Okay, should we be expecting maybe versus let’s just look at full year Washington then. So you were running like an 81% loss ratio. Should we expect a couple of hundred basis points of deterioration in that though, as we’re looking out for ‘09 business based on the rate action and then maybe this gradual rise in provider costs?

I hate to tease out these things on a guidance basis on a state-by-state basis. I don’t think it is going to go up as high as a couple hundred basis points.

Okay and just a quick one. I just wanted to clarify something on the cash-flow statement. Can you remind the OTTI and the unrealized loss, and it looks like an offset here, just remind me what that is?

We could spend a lot of time on that.

It suddenly popped up.

I will be as brief as I can. Basically, you’ll recall we have some auction rate securities. We entered into an agreement with a brokerage to repurchase those auction rate securities in about two years. Essentially, where that left us due to the way the accounting gods looked at things, once we entered into that two-year horizon that is far shorter than the actual maturity of the actual auction rate notes. Therefore, we ceased to have the intent, so we’re told by our auditors to hold to maturity. That triggered a reclassification of the securities from available for sale into marketing securities, which means we had to mark the securities down to market. At the same time, we now have the benefit of this put with the brokerage house in two years, which to put the securities back to them at par value in two years. So that has a value. The combination of those two events, marking the option rate securities to market, which is a hit, and then booking the asset of this put to the brokerage firm, cost us about $600,000 on investment loss. So, while we have strengthened our position, and are going to be out of those securities in two years minimum, we have had to take a little haircut in the process, which will be recouped when we put the securities back. I would love to talk to you about that.

(Operator Instructions) Your next question comes from Greg Nersessian - Credit Suisse.

My first question was just on the inventory claims data that you provide. My first question was just in terms of the percentage of the billed charges that you actually estimate that you have to pay out, could you give us a sense of what that number is, and if or how that has changed over the last year?

Greg, we don’t really look at that, in part because the populations have been changing so much. We’re going to add on Florida, which is going to have an impact. We added more ABD members in Ohio. It is just all over the place. A lot of it is, unlike Medicare or commercial business where the prices may be closer; we’ve got ten different states with ten different fee schedules that vary quite a bit.

Okay I guess where I’m trying to go with that is just obviously that number has fallen off a lot. Even if you go back before 12/31 ‘07 was even higher. I’m trying to figure out, that is a number that is greater than what you actually expect to pay out. So I’m trying to figure out how much further down that 115 can go? Do you expect that to stabilize as a percentage of the total payables or to continue to go down or can you give us a sense for what direction that is going? In other words, have you worked off most of the inventory that you were trying to pay off?

We are down to I think --

$115 million.

$115 million, no charges. And then inventory is like six days receipts on hand. I’m not sure we’re going to get it down much further, but having said that, we thought at the end of our third quarter we couldn’t get the inventory down any further. It is possible that we can continue to bring it down. As Terry emphasized, as Mario emphasized [Audio Break] providing cash flow to the providers is important to us. Now, we are adding Florida, and until the providers really understand how to bill us, where to bill us that kind of stuff, there may be some change this quarter. I don’t know how material it will be.

Okay, but all things else equal, you would expect that to stabilize, would be your best bet I guess?

Let’s put it this way, it is hard for us to imagine it going much lower.

Okay. That’s what I thought. My second question was just on the, I guess a quick one. What is your RBC, you gave us the absolute dollar number, what is the percentage of company action level?

We’re pulling that as we speak.

Maybe in the meantime, Mario, just to clarify again, how does that mechanics of the SCHIP match work between, how does it differ between a state that has rolled it into their Medicaid program and then one that is separate?

My understanding is that there is a higher match from the federal government on the SCHIP, but in some of the states, the patients come to us through the same contract as our Medicaid contract. So we get a member and it is a member. We can’t look at that person and say, “oh, you are an SCHIP member, or you are a Medicaid member”. It is just a member in those states where we have a single contract, and they are coming to us through that contract. We don’t get involved in the federal match, the states bill the federal government, I believe, monthly for the matching funds. So they report how many patients they have, or how many members or enrollees that they have, and then the federal government has to match the funding, but in those states where we do not have a separate contract, they look the same to us and to the providers.

Okay, so from a state that has it rolled into my Medicaid program, and I’m looking to increase by SCHIP eligibility, I can just raise the income threshold and be paid at the higher SCHIP matching rate on that population without changing my Medicaid eligibility rules or anything like that? In other words, keep the Medicaid eligibility untouched and just raise that piece of the Medicaid program that relates to the higher income kids. Is that right?

Between the state and the federal government, the states have to demonstrate that the patients that they are billing for that match on are in the right category, because the state does not want them shifting kids who should be in Medicaid into the SCHIP program and then there is a matching payment that is made from the federal government to the state. So, you can’t simply just shift a kid, for example, and say “well if we put them in the SCHIP contract, we will get higher reimbursement”. And there is even language saying that, we talked about this, encouraging the states to make sure that the kids are in the proper program, whether it is Medicaid or SCHIP.

How quickly do you think the states are going to respond to the SCHIP reauthorization, the additional funding there? Do you think it will be in this legislative session or do you think they will wait until next year?

I think they will do it this year. They are under pressure because they’ve got more kids to cover. So, the faster they can get these things geared up, the better off they will be.

That could potentially lead to SCHIP growth that you see by the end of this year you think potentially?

Yes.

And possibly Medicaid growth because, as Mario said, within the SCHIP reauthorization, there are funds that will reward states for signing up kids under the Medicaid program, but again, none of that is included in our guidance.

It is Joe. You had asked about RBC levels. In total across the company, we are at 156% of the required amount. Just remember, some of our states are at 200% RBC, some are at 300%, but we are 156% of the required amount.

Your final question comes from Carl McDonald - Oppenheimer & Co. Carl McDonald - Oppenheimer & Co : I just had another follow-up on the mechanics of SCHIP, which is for the 4 million children that are being added to the program, do the states have to opt into that, or does that just happen automatically? So said a little differently, to cover all of these additional children it is going to cost the states more money, which a lot of states don’t have at this point. Is it something where the states literally have to say, we are going to participate in this program, or is it mandated as part of the legislation that they offer it?

I think it is optional Carl, but I’m not positive. The states I don’t think have to participate in the SCHIP program. In fact, when you come right down to it, Medicaid is also optional, but I don’t think there’s any state that would seriously opt out of the Medicaid program.

There are no further questions at this time. I now turn the call back to you, Dr. Molina. Please continue with your presentation or your closing remarks.

All I would like to say is thank you for participating in our call. And we look forward to talking to you next quarter. Thank you.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect the line.