Ladies and gentlemen, thank you for standing by. Welcome to the Molina Healthcare Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday October 25, 2011. I would now like to turn the conference over to Juan José Orellana, Vice President of Investor Relations with Molina Healthcare. Please go ahead, sir. Juan José Orellana: Thank you, Allan. Hello everyone, and thank you for joining us. The purpose of this call is to discuss Molina Healthcare's financial results for the third quarter ended September 30, 2011. The company's earnings release reporting its results was issued today after the market closed and is now posted for viewing on our company website. On the call with me today are Dr. Mario Molina, our CEO; John Molina, our CFO; Terry Bayer, our COO; and Joseph White, our Chief Accounting Officer. After the completion of our prepared remarks, we will open the call to take your questions. If you happen to have multiple questions, we ask that you get back in the queue so that others can have an opportunity to ask their questions as well. Our comments today will contain forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act, including statements regarding our earnings per share guidance for 2011, expected rate changes and opportunities relating to the migration of dual eligibles into managed care. All of our forward-looking statements are based on our current expectations and assumptions which are subject to numerous risk factors that could cause our actual results to differ materially. A description of such risk factors can be found in our earnings release and in our reports filed with the Securities and Exchange Commission, including our Form 10-K annual report for fiscal year 2010, our Form 10-Q quarterly reports and our Form 8-K current reports. These reports can be accessed under the Investor Relations tab at our company website or on the SEC's website. All forward-looking statements made during today's call represent our judgment as of October 25, 2011, and we disclaim any obligation to update such statements. This call is being recorded and a 30-day replay of the conference call will be available over the Internet through the company's website at molinahealthcare.com. I would now like to turn the call over to Dr. Mario Molina.

Thank you, Juan José. Hello, everyone, and thanks for joining our discussion of third quarter 2011 financial results. Let me begin by saying that I'm very pleased with the performance of our business, both in financial terms as well as our strategic execution. Our team's efforts resulted in a quarter that reached the highest levels of both revenue and net income that we've ever had. For the third quarter of 2011, we earned $19 million in net income or $0.41 per diluted share despite operating in the most complicated premium rate environment in the history of our company. For fiscal year 2011, 6 out of 10 of our states actually cut their premium rates. Nevertheless, today's financial results were consistent with our expected quarterly performance towards achieving the full year guidance of $1.55 per diluted share. Our comments today will be brief since there was considerable discussion about our business as well as the key drivers of our financial performance at the company's Investor Day held on September 15. During that presentation, we discussed various business drivers, including the premium rate environment in our industry and specifically in our markets, the performance of our legacy health plans versus our newer startup health plans, and utilization trends. Although there have been no fundamental changes to these drivers, there are a few updates that we want to share with you. Let me begin with the rates. Our forecast at the beginning of the year that premium rates in 2011 would be flat to down has borne out as we now have full rate visibility and we believe our industry will continue to operate in a state of flat to down rates for the near future. State budgets have yet to recover, and the expiration of the enhanced federal matching funds have exerted…

Thank you, Mario. Hello, everybody. We are pleased with our results today. EPS for the quarter was $0.41, up 8% from a year ago. Net income for the quarter was $19 million, up 17% over last year, and EBITDA increased by nearly 10% over the same period one year ago. As Mario mentioned, these are the highest levels we've ever achieved for these financial metrics. At the end of the quarter, our enrollment stood at 1.7 million members. Enrollment was up across the majority of our health plans on a sequential basis. The bulk of the enrollment gains were in Texas, where the company began serving new TANF and ABD members in the Jefferson County service area effective September 1 of this year. Our Medicare enrollment continued to grow steadily and topped 28,000 members during the quarter. Our year-to-date Medicare revenue grew to $282 million, nearly 50% higher than it was one year ago. As a reminder, nearly 80% of our Medicare enrollment is comprised of dual eligibles. Consolidated premium revenues grew 13% to $1.2 billion in the third quarter of 2011 compared to the same period last year due to an 8% increase in membership and a 5% increase in PMPM revenue due to mix shift. Mario has already spent some time discussing the rates in his remarks and there's no question of the impact that flat to down rates have had on our business. There are also other revenue adjustments we made in the quarter that, while not necessarily one-time in nature, nevertheless can serve to obscure the underlying strong performance we are observing across our health plans. For example, reductions to revenue due to a minimum medical care floor in New Mexico and a private cap in Texas had a negative $5.9 million impact in the third…

[Operator Instructions] Our first question will come from the line of Josh Raskin with Barclays Capital.

Just a question on the Texas -- I guess I'm just a little confused on Texas rebate versus the Texas MLR issue, so is it just because the new members are coming in and that doesn't count as sort of a statewide profit? Is it just -- is just CHIP the only thing that counts or is that profit cap? I'm just sort of confused as to why the MLR was a lot higher and yet you're still accruing some of these negative revenue accruals because of the rebates you needed there?

Josh, this is John. The profit cap is based on the product line, and so CHIP's got one. Actually they all have one, but in CHIP our MCR is low enough that we've got to do a rebate, but the other lines of business, it's high.

Okay. You don't get to sort of offset any of that within the state?

No, you don't.

And then -- sorry, just one more quick correction or question. You put in the press release, you talked about a potential for provider payment recoupment in California, and I was just curious what the potential size was or how that would go about, or how that would come about, I should say?

Well, if the fee schedule goes into effect as the state of California has planned, that would reduce the medical fee schedule by 10%. To the extent that we had providers that we paid at the higher rate going back to July 1, we would have the ability to go back and recoup the difference between what we pay them and the new fee schedule.

And is there a way to size what that is?

We have not done that yet.

Okay. And I know they've done retro cuts before. Have you been successful in going back to providers and saying, "We overpaid CHIP [ph]. Here's the new fee schedule"?

The answer to that is somewhere between 0% of the time and 100% of the time.

Our next question will come from the line of Chris Rigg with Susquehanna.

Another clarifying question on the California issue, is the 6% assumed reduction only -- will that only occur if the 10% fee schedule reduction occurs? Does one have to happen for the other to occur, I guess is what I'm trying to ask?

Yes.

Okay. Can you give us a sense for -- I know there's been some ongoing legal issues there, court hearings. Where does that process stand at this point?

There are 2 separate processes going on. A prior rate change from several years ago has been contested and worked its way through the courts, and I believe it was heard by the Supreme Court this past month. That relates to who has standing to sue regarding the rates. The current rate year has a proposed 10% rate cut in place and that has been submitted to CMS for approval. The 2 are not at this point connected.

Our next question will come from the line of Matt Borsch with Goldman Sachs.

This is Sam Wass on for Matt. I know that you mentioned that hospital utilization is down 7%. I was wondering if it'd be possible to go into any more specifics on that, whether you saw variation across different markets?

Sam, this is Mario. No, we're not going to break it out by market. Suffice it to say, we saw a 7% decrease year-to-date as compared to last year, and that from the second to the third quarter, hospital utilization was flat.

Got you. And is there anything worth noting on physician or outpatient?

Well, I think we talked about what the changes were for pharmacy, physician and outpatient, so I don't think there's anything more remarkable beyond what we described in the release.

Our next question will come from the line of Charles Boorady with Crédit Suisse. Charles Andrew Boorady - Crédit Suisse AG, Research Division: First question, just a small nit here on the deficiency reserve release. Can you size that up for us? Was it roughly in the $0.02 to $0.04 range?

It's about -- it's Joe speaking, Charles. It's 1.8 million, so a hair over $0.02. Charles Andrew Boorady - Crédit Suisse AG, Research Division: Okay, great. And then in terms of your guidance for the year, what are you assuming for fourth quarter influenza?

Well, Charles, we don't break it out that way. What we have said and maintain is that we are looking at $1.55 for the year. Charles Andrew Boorady - Crédit Suisse AG, Research Division: Basically we assume that you bake in a typical flu season for the year, which hasn't really been picking up. It's kind of early in the season, but as we look at one of your guidance [ph]...

It is early, but we always take that into consideration when we develop our numbers for the year. Charles Andrew Boorady - Crédit Suisse AG, Research Division: Got it. As we look out to the new expansions in 2012, there's some expansions in existing markets and in some new markets. How should we think about the marginal admin cost that comes with some of the new contract wins?

Well, I think we talked a lot about that at the Investor Day back on September 15, so I would refer you back to our discussions of the new and expanded markets that we talked about, especially in Texas. There will be some additional incremental admin costs, but since we're already operating in Texas, for example, it's not going to be large. Charles Andrew Boorady - Crédit Suisse AG, Research Division: Okay, great. Yes, those were helpful slides. just a wide range of possibilities for 2012 still. And I guess, getting some more granularity on that, when do you think you'd have a reasonable range down at the EPS level of where you think putting those components together we'd get to next year?

Well, we're not prepared to talk about 2012 guidance at this time, so it would probably have to wait until after the first of the year. Charles Andrew Boorady - Crédit Suisse AG, Research Division: So after Jan. 1. All right, great. Just finally, as you look at the various components of medical trend, and I know you gave us some of those components on the call today, after the quarter ended just in the last, say, month, or as you look towards the end of the last quarter, you reported -- do you start to see any inflection points at all in any of those components where costs are either continuing to decrease surprisingly or starting to bend upward?

It's too early to make any definitive statements, Charles.

[Operator Instructions] Our next question will come from the line of David Windley with Jefferies. David H. Windley - Jefferies & Company, Inc., Research Division: So I was looking at the 4 states in which you had rate changes that were either not effective until after the quarter or effective for only part of the quarter, and I wondered if it was possible or if you looked at what your MCR would have been had those rates been effective for the full third quarter and what would the net effect those had been?

You know what, we didn't do that analysis. I'm not really sure how meaningful it would have been. David H. Windley - Jefferies & Company, Inc., Research Division: Okay. If I could ask one other then.

Sure. David H. Windley - Jefferies & Company, Inc., Research Division: In Texas, on the comments around higher utilization, is that exclusively related to the new ABD members, or is that a statement that reflects more of a broader base of membership that's driving utilization?

This is Terry Bayer. It's reflective of the new membership and it ties back to what we've shared with you when we go into a new market, we run it at a higher cost until we're able to institute all of our programs. So that applies in this case to the new membership in the Dallas/Fort Worth service area this year.

Our next question will come from the line of Tom Caroll with Stifel. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: A clarification on the California revenue adjustment of $7.5 million, is that just for third quarter, or is that an amount that you expect to cover the entire second half of this year?

No, Tom. Joe can answer that.

Yes, Tom, it's Joe. That is just the estimated third quarter impact so about $2.5 million a month. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So is -- I mean, if things don't get finalized, could we see a paragraph like this on your fourth quarter call or do you expect to have things wrapped up by then?

It's certainly possible, Tom. It all depends on what happens with CMS in the state, but this is our best estimate based on what they've told us and what the revenue is going to look like. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Got it, got it.

If we... will go with the final rates. If we don't, you will see another paragraph next quarter. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Okay, that's helpful. And on your repurchase that you mentioned, the $75 million, I think this is the largest repo authorization we have ever seen out of Molina, right, certainly since your IPO. Do you have a corporate policy on how those shares are to be repurchased over time, a methodology?

I'm not sure what you mean. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So is it going to be pro-rata, is it going to be based on some kind of share price formula relative to a benchmark, is it going to be just purely opportunistic on your part?

The board gave us latitude, Tom. Really what triggered it was, for a while, our shares were trading below book value and did not make a lot of sense for us to just have a sitdown at that level. So to the extent that we see that the stock is undervalued, we now have the ability to deploy capital to repurchase those shares.

Our next question will come from the line of Scott Green with Bank of America.

What would be your forward view of what a normal cost trend is? And you've executed well to keep costs flat here. How long do you think that can continue?

Scott, I'm not sure that, in our business, there is one normal cost trend. We've got 10 health plans with 10 different things happening in each of them. So realistically, we don't look at what the future cost trends may be. What we've got to do is manage within the budget that the state gives us.

And -- this is Mario. Let me just add, states have the ability to influence cost trends. A good example is what's happening in California where they are decreasing rates to providers, and this is not uncommon in the Medicaid program for states to make adjustments to the benefits or to the payments they make to providers, and that influences what our medical cost trend will be. And that's really beyond our control. That's set by the states.

Okay. So when states are sitting down and calculating what a rate of date [ph] should be going forward, they have to make some projection of trend. Is there some general range that they use in some of your more mature core markets?

No, I don't want to generalize it. I mean, what you saw as an example, our rate in Florida ended up being 7.5% because of where our population is distributed in that state relative to the state as a whole, which I think the state gave out rates that were basically flat, but because of where we were in the cost in those particular submarkets of Florida, we were able to get a higher rate increase.

Yes. This is Mario again. The rates must be actuarially sound, and so each state must look at the rates independently based on the experience and come up with an actuarially sound rate, and they do it typically in rate sales. So it may vary from geographic region to geographic region, it may vary depending on the 8 code [ph] of the beneficiaries. So it's a complex thing and it's very difficult to generalize a single number. I mean, I think you can look back over the years and probably come up with some numbers, but again, it's a mosaic. It's lots of little pieces that get blended together to come up with the final number.

Okay. And could we assume that your rate increase in Florida is adequate so that you remain in all your counties? I think you had spoken last quarter about using the rates to gauge your future operations in a few of the reform counties?

We are happy with the rates that we receive in Florida.

Our next question will come from the line of Peter Costa with Wells Fargo.

Can you give us any update on the Washington State rebid? Has there been any new information there in terms of how that business is going to work and what populations are going to be included there?

This is Terry Bayer. I believe at our Investor Day we didn't quite have the fully released RFP, so I can update now. That RFP is released. It is due back to the state on December 2, and at this time, the current populations as well as they have added the SSI population in Washington, so that will be a new population based on this RFP.

And do you have some dollar numbers around how big that will be?

No, not at this time.

Okay. And then, can you talk a little bit about the Wisconsin rate environment? You had a tough rate there at the beginning of this past year of 2011 and sort of moving, getting closer to the 2012 rate. Have you been in discussions with them about sort of your situation on MLR there and what they're likely going to do with the rates in 2012?

We certainly shared our data with the Medicaid agency at the state of Wisconsin, but at this point they haven't given us final rates.

Any feeling for which direction that's going to go or is it too early to tell?

I think it's too early to tell.

Our next question will come -- is a follow-up question from the line of Tom Carroll with Stifel. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Question on California again. And I think it was Josh that brought it up that you had highlighted that you haven't recorded any potential recovery of provider payments, you've only taken a hit against your potential reimbursement loss. I'm trying to think how -- I know you said you haven't thought about quantifying that yet but tell me if this is kind of an appropriate back-of-the-envelope way of looking at it. If you've got $7.5 million this quarter, let's say you have another $7.5 million next quarter for $15 million total, let's assume you can mitigate half of that. I mean, can I estimate that $7.5 million you might get back, and if I tax adjust that, that's like $0.10 a share on a full year that your guidance could be underestimated by? Meaning you should be reporting a higher number by about $0.10 cents? Is that a way to think about it or am I way off base?

The challenge, Tom, is what's that -- your initial math is right, 7.5 and 7.5. The challenge is what's the percentage that we can get back, and the real issue for us is California tends to have more IPAs and so those contracts need to be negotiated one-on-one. And then I believe that inpatient and pharmacy are also going to be a challenge. I think inpatient may be excluded from that rate cut, and there's something about pharmacy to where it can or can't be adjusted. That's why we haven't done it. I'm just trying to be conservative until the rates actually come out. We certainly can't tell with the providers now. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So -- but that's the math though, right? I mean, if you could mitigate half of what I just threw out there, it would be like $0.10 a share?

That's probably right, Tom. It's just a question of what are the final rates going to be, how much of this fee-for-service cut can we pass on to the providers, how much we will be able to recoup. I think to the extent that we're paying people off the Medicaid fee schedule, recoupment shouldn't be a big problem, but as John points out, a lot of our physician payments in California are tied to capitation rates. So... Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: It's contracted...

There's definitely some upside that we're not taking into account right now, but we don't know how much. I wouldn't expect it to be huge number. Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: So it doesn't sound like that amount would be recouped in this calendar year, given the process and the nuances of California provider contracting?

You mean before the end of 2011? Thomas A. Carroll - Stifel, Nicolaus & Co., Inc., Research Division: Yes, yes.

No, I don't think so. This is going to be more 2012 recoupments.

Our last question for today will be a follow-up question from the line of Chris Rigg with Susquehanna.

On the bond -- on the buying back to converts versus the stock, looks like the converts are trading at roughly $0.97 on the dollar. Obviously the stock is where it is. Can you sort of tell us how you guys view the relative detract in this, whether you would want to buy the converts at a discount in par or you would prefer to buy the stock here and sort of how do you guys think about that internally?

We look at it whichever purchase is going to get us the best, ultimately, the best use of our capital. We have repurchased the convert before and we have repurchased stock.

Any sense for what you prefer today?

Really it goes on a day-by-day basis what the relative prices are of the two.

Okay. And then last question. So you guys came up with $1.55 of earnings, that updated number with Q2, and obviously we talked quite a bit about that number and the impact to California at the Investor Day. Can you remind me, when you guys came out with the updated $1.55 with second quarter, were you guys already assuming the 6% cut in California, or were you assuming something less at that time?

No, we were assuming the 6% cut.

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

Well, I just want first of all to thank all the employees. This has been a very challenging year from a rate standpoint, and the team has pulled together and done a great job of managing our medical costs and at the same time holding down the admin costs. We've managed to improve our status in terms of NCQA accreditation, so I just want to thank everyone who's really pulled together to make this year-to-date successful. I also want to remind everyone that we will be out in New York again for Investor Day in January. So we look forward to seeing you there, and that concludes our presentation. 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 your lines. Have a great day, everyone.