Centene's CEO Hosts 2013 Guidance Conference (Transcript)

|
 |  About: Centene Corporation (CNC)
by: SA Transcripts

Edmund E. Kroll

Okay. Good morning, everyone. I'm Ed Kroll, Head of Investor Relations for Centene. Thank you for joining us at for our 2013 financial guidance meeting. We'll have 2 Q&A sessions. You can see on your agendas that are at your seats. And of course, for those of you in the room, we'll have microphones available for you to ask your questions. For those of you out on the webcast that want to ask a question, you can either email it to questions@centene.com or simply send it to me, and my email is ekroll@centene.com.

And now I'll read the obligatory forward-looking statement. During the course of this presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of our company. Any remarks that Centene may make about future expectations, plans, prospects, constitute forward-looking statements, for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We also refer you to our SEC filings, Form 10-K and the quarterly form 10-Q that we filed with the SEC, the K on February 21 of this year and the latest Q on October 23 of this year, and also the 8-K we filed this morning, December 14. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Our company's policy is that the company undertakes no obligation to update its earnings guidance other than part of the quarterly or yearly earnings disclosure, and that silence on guidance by the company or company officials should not be interpreted that guidance has or has not changed. No updated guidance would ever be given that is not previously or simultaneously disclosed in an SEC filing or other broad, non-exclusionary means. Further, it is our policy to generally not hold discussions with investors commencing 2 weeks prior to earnings releases. That's known as a quiet period, of course. And that concludes the reading of the statements.

And with that, I'll now turn the meeting over to our Chairman and CEO, Michael Neidorff.

Michael F. Neidorff

Thank you, Ed. Good morning, everyone, and welcome. Throughout the course of this morning's program, we will update you and share with you the confidence we have for the continuance of Centene's success story. We will provide you with one, more detail on 2013 guidance; two, the details for the revision of our 2012 guidance; and three, an update on our full RFP pipeline; and finally, a discussion of our strategic priorities and those things that we think are competitive advantages. We will also introduce you to the latest additions to our senior management team, who will play a central role in executing these endeavors.

As we indicated in our press release, guidance for 2013 is in the range of $2.60 to $2.90, with including approximately 20% revenue growth. In addition, we revised guidance for 2012, which reflects higher medical costs associated with an earlier and more intense flu season in our largest markets, the off-cycle transfer in Texas of higher acuity members from another health plan and higher-than-anticipated utilization in our Texas STAR and Medicaid Rural Service Areas business.

In addition, we increased our previously disclosed premium deficiency reserve for Kentucky due to higher medical costs, which are also impacting our competitors in this market. During today's presentations, we will provide more detail related to these challenges and the corrective actions we have taken to improve performance. As I mentioned, Centene's senior management team continues to increase in breadth and depth to keep pace with our growing business. We have created a broader operating group, a group of partners, who are individually running important segments of the business. Collectively, we are managing the whole business.

As part of the management realignment, on December 4, we announced and please allow me to introduce Rob Hitchcock, Executive Vice President, Health Plans. Rob? Rone Baldwin, newly appointed Executive Vice President for our insurance group. Rone? Dave Minifie, our newly appointed Executive Vice President and Chief Marketing Officer. They will be joined in a newly created operations group, and these are in alphabetical order: Jason Harrold, our EVP for Specialty Companies; Jesse Hunter, Executive Vice President, Chief Business Development Officer; Don Imholz, our Chief Information Officer and Executive Vice President; and, of course, Bill Scheffel, our Executive Vice President and Chief Financial Officer.

The operational realignment ensures an already strong team of leaders and builds on it. Through the general management development program, we will be rotating jobs, allowing each member to become knowledgeable in all aspects of Centene. This greater bandwidth further allows us to successfully manage our rapidly growing business in both existing and new markets.

With the Presidential election and Supreme Court decisions behind us, several elements of uncertainty have been reduced. However, states continue to face budgetary pressures. The trend to move recipients out of fee-for-service and into managed care remains compelling from a qualitative and effective standpoint.

We hope to leave you today with a better understanding of Centene's solid growth trajectory and the reasons for our success. What I want you to take away from today's presentation is that we have addressed the challenges in 2012 and are poised to resume to growth in profitability in 2013. After Bill's address, where he talks more about 2013, I'll be back with some updates on the various aspects of our business.

But before I turn the podium over to Bill, I just probably want to acknowledge the State of Texas Commissioner, his staff in the health and human services area, who have been so effective in working with us in overcoming the issues, if you saw from the press release and one -- and part of the letter we quoted that they recognize what the issues are, they're working with us on a going-forward and basis and helping us to put those things that created some of the issues that created volatility and frustration for all of us behind us. So I just wanted to publicly thank them for that. Bill?

William N. Scheffel

Thank you, Michael, and good morning. As noted in our press release this morning, we have revised our 2012 earnings guidance to $0.10 to $0.20 of earnings per share. The revision in guidance is due to 3 primary factors. First, we are experiencing higher-than-anticipated costs associated with the flu. Flu tests and drugs have increased over 400% from the third quarter of 2012 and are higher by about the same percentage compared to the prior year. Our current estimate is that the flu will be approximately $0.15 to $0.18 per share higher in the fourth quarter than originally predicted. The largest cost increases have been primarily in our Texas market.

Second in Kentucky, we are experiencing higher claims volumes for older dates of service, going back as far as the inception of the program, and that we believe are driven primarily by a 1-year timely filing requirement and the notice of our intent to exit the Kentucky market. We anticipate increasing our Kentucky premium deficiency reserve by approximately $10 million or $0.11 per share during the fourth quarter.

And third, in Texas, we are experiencing higher medical costs of approximately $0.17 to $0.20 per share, associated with the off-cycle transfer of high acuity members in the Hidalgo service area, and additionally, we are experiencing higher-than-estimated utilization, primarily for inpatient services, in our Hidalgo Star and the Rural Service Areas.

A significant portion of Texas' issues were addressed with the premium rate adjustment effective September 1, 2012. However, the rate adjustment did not adequately consider the high utilization levels in the Rural Service Areas and the transfer of new members in Hidalgo. More recently, our discussions with the state have intensified, and we have had a long partnership with the state to try to mutually solve the problems that we have together. And they have been a good partner. The state has committed to us to rectify these matters as soon as possible, and we anticipate that any such adjustments will be made in the first quarter of 2013.

Now I'd like to turn to 2013 guidance. At a high level, we expect Premium and Service revenues at $9.7 billion to $10 billion, a year-over-year increase of approximately 20% at the midpoints of the ranges, and earnings per share guidance of $2.60 to $2.90, which compares to our revised 2012 GAAP earnings guidance of $0.10 to $0.20 per share. I will provide some detail on the assumptions utilized in our guidance numbers, and will then take questions before proceeding with the additional presentations.

The primary components and assumptions used in our Premium and Service revenue estimate of $9.7 billion to $10 billion are as follows: our new health plan in Kansas, Sunflower State Health Plan, begins operations on January 1, and we've added revenue from expansion in existing states. In Mississippi, the managed care program expanded from approximately 50,000 members to 150,000 members effective December 1. And in Illinois, there was an expansion of the managed care program through additional benefit categories beginning in the first quarter of 2013. We currently anticipate that the Illinois duals program will not start until the fourth quarter of 2013. In Ohio, we expect the statewide Medicaid expansion to be effective in the third quarter of 2013 and the duals program to start in the fourth quarter of 2013. And in New Hampshire, we anticipate operations to begin in the middle of 2013.

We will also have a full year benefit of programs started or expanded in 2012, including our Louisiana health plan, which started up in phases beginning February 1 and added pharmacy benefits effective November 1; the Texas expansion, which started March 1, with additional membership added several times after that; our Missouri and Washington health plans, which began operation July 1. And we also anticipate a decline in revenue from Kentucky, where we expect our -- to end our participation in the managed care program effective July 5, 2013, and a decline in revenue from the individual health business for Celtic Insurance as a result of lower membership levels.

And I think it's also useful to look at our revenue in the context of existing markets versus new markets. Michael will discuss later a same-store, new store approach for looking at our business. For example, 2012 is a year of significant revenue growth for Centene in the 55% to 60% range. In looking at the fourth quarter of 2012, we estimate that approximately 35% of our revenues are generated from new markets with less than 12 months of operations. And as we look forward into 2013, this new store percentage continues at 35% in the first quarter, but then declines to the 15% to 20% range for the last 3 quarters.

From an HBR perspective, we experience a higher HBR in the initial periods of operations, particularly the first 12 months, as we deal with continuity of care issues, margin build and implementation of our normal medical management initiatives. Overall, we have historically experienced a higher HBR of 500 to 700 basis points for new markets in the first 12 months of operations compared to existing markets. Thus, as we have a higher proportion of our revenues in new markets, we have a higher overall HBR. And as the proportion of business decreases, we expect to have a lower overall HBR. So 2013 should benefit as the year progresses and as the new business from 2012 matures and operates closer to our existing market HBR levels.

With respect to assumptions related to rate increases, we have factored in January 1, 2013 rate changes, which are a decrease in Wisconsin of 0.9%, an increase in Ohio of 3.7%, a decrease in Indiana of 0.1% and an increase in Missouri of 2.3%. We have also received a rate increase in Florida of 5.3% effective September 1, 2012, and a rate decrease in Georgia of 0.2% effective July 1, 2012.

We have known rates representing approximately 55% of our projected member months for 2013, which is lower than we have historically seen. And this is primarily driven by Texas, where we are expecting rate adjustments on March 1 and again on September 1. We expect low single-digit rate increases for states which have effective dates later in 2013, but overall, we anticipate full year rate adjustments for 2013 to be between 1% and 3%.

For re-procurements in 2013, there are 2 contracts which are subject to re-procurement that may impact 2013 revenue. One is our acute care contract in Arizona, where we serve approximately 17,000 members in Yavapai County. The acute care RFP in Arizona is in process now, and any changes are expected to be effective October 1, 2013, but our revenue in that area is only roughly $15 million a quarter.

In Florida, the state is in the middle of their RFP process for the statewide expansion of the long-term care program. Since we have approximately $40 million in revenue for the current long-term care program, we could be impacted by changes to that program, which are expected to be rolled out over the fourth quarter of 2013 and the first half of 2014. And as a reminder, there is still an open protest in Ohio with regard to their Medicaid re-procurement earlier this year.

For 2013, our HBR guidance is 88.0% to 91% -- excuse me, to 89.0%, compared to 91.0% to 92.0% for 2012. Our 2012 guidance is significantly impacted by the Kentucky operations, such that it raises our consolidated HBR by approximately 200 basis points. Therefore, the 300-basis-point forecasted improvement in our HBR in 2013 primarily comes from only having Kentucky for half of 2013 and from the continuation of improvements in Texas and Celtic.

For general and administrative costs, we are forecasting a G&A ratio of 9.0% to 9.5% in 2013 compared to 8.5% to 8.8% in 2012. Now we have included a normal level of performance-based compensation expense for 2013, which raises the G&A ratio by approximately 60 basis points between years. And we have included business expansion costs of approximately $0.50 to $0.60 for 2013 compared to $0.40 to $0.45 for 2012. And this may be more than was originally projected by many of you.

In 2012, our business expansion costs included startup costs for Louisiana, the March 1 Texas expansion, Missouri, Washington and Kansas. In 2013, our focus shifts somewhat to investments in duals, 2014 Medicaid expansion and exchanges, along with the startup of New Hampshire and a placeholder for one additional new plan to begin January 1, 2014. For other income and expense, we are not forecasting any gains or losses from security transactions in 2013. Interest income is forecasted to be $24 million to $26 million, and interest expense is forecasted to be $31 million to $32 million.

In the income tax area, we are forecasting a 2013 effective tax rate, excluding noncontrolling interest, of 40% to 41%. In 2013, we are subject to a limitation on the deductibility of compensation under the Affordable Care Act, and this increases our effective tax rate by approximately 400 basis points. Our cash flow from operations are somewhat dependent on the timing of state payments at any quarter end, but we expect -- we continue to expect cash flow to be 1.5x to 2x net earnings.

Now during the fourth quarter, we issued an additional $175 million of senior notes at a yield of 4.288%. The proceeds were used to fund additional statutory capital for our insurance subsidiaries. We amended our revolving credit agreement in connection with the offering to be able to maintain $350 million line of credit. Thus, we expanded our total debt capacity by $175 million. And we currently expect that between our internally generated funds and our existing debt capacity, we will be able to fund our capital needs through 2013. This does not include the impact of any significant acquisitions. However, we would expect to include the issuance of stock as either part of the purchase price or as a separate offering in such transactions.

We will report our fourth quarter and year-end results on Tuesday, February 5, with a conference call at 8:30 a.m. Eastern time. And with that, I want to thank you and will turn it back to Michael to begin our Q&A session.

Michael F. Neidorff

Thank you, Bill. There's one point I might make before we start. When we were talking about the rate increases, we did – we talked about those that we have had discussions and know about and more specific versus anticipating working with Texas the next few days and weeks to look for another adjustment in that population for January 1 or in the first quarter.

And I might add that everything we're talking about relative to the Hidalgo service area and the transfer of members from another health plan and the commitment to correct the rates, correct those things, is not just verbal, but they have issued a letter to us in that effect, so that we have a strong confidence in it. And in fact, the quote we put in our press release was a direct quote from their letter. So I wanted to make that.

Question-and-Answer Session

Unknown Analyst

Yes, thanks, Michael. Just first, a quick clarification just around those rate increases. It sounds like you guys are in discussions with Texas at this point around rectifying the new members that are coming over from the competitor plan. Is that included in your guidance for 2013 that you're getting some sort of remedy for that cohort?

Michael F. Neidorff

Yes.

William N. Scheffel

I think the way to describe that is that the issues that have cropped up in the fourth quarter here with respect to the members who've transferred to us, we anticipate that those issues will be rectified through actions by the state in terms of either rate increases or risk adjustments during early 2013. So we would think those sort of neutralize overall and will not have a significant impact on our 2013 guidance.

Unknown Analyst

So you are assuming that, that gets better relative to what you're seeing in the fourth quarter?

Michael F. Neidorff

Yes. I mean the state has made it clear that they respect the partnership. They want to see these plans, ourselves and the others who took the transferred members robust, successful, and will be working to minimize that with us. So yes.

Unknown Analyst

Okay. Maybe a broader question for you, Michael. As you think about the visibility into your business, one of the questions I continually get is just the results relative to expectations continue to be very volatile, both positive and negative over the last couple of years. Do you think you're getting to the point where with $10 billion of revenue, you're at that requisite size, where we should start seeing a little less volatility? Or should we just think about the growth rate in terms of revenue here continues to run at 20% plus, and therefore, that's part of what we're going to see for the next couple of years, and that's part of the business?

Michael F. Neidorff

I would like to think that 2013 forward, there should be reduced volatility. Part of what we're doing is, and I've alluded to it in several other meetings is going to that same store, new store, which I'll talk about more fully. And I think what we want to show our investment community is that the same store, it should be predictable and based on the volume in the new store, looking at what kind of medical costs you should experience there. So I expect longer term to see it settle down and be more predictable; the size and scale, number of states, number of products, all that come into play, Josh. But equally, we manage it on that same store, new store basis and want that to be fully visible to all of you. Does that help?

Unknown Analyst

Yes.

Unknown Executive

Matt?

Unknown Analyst

Yes. A question on the rate development and the industry fee. Are you having discussions around that now or some of these rate increases intended, to the extent they're flowing through to 2014 and encompass the industry fee to any degree?

Michael F. Neidorff

Yes, Matt, I think the intensity of discussions around the industry fee continued to escalate. And as more and more -- both the House and Senate side are very much aware of what it is and are working towards it. We have Jon Dinesman, who runs our Washington office, here with us today. And Jon, you may want to comment in general terms of the depth of those discussions.

Jonathan Dinesman

Sure, Michael. There's no question that there's definitely more discussion in Washington with that. And I would also say that there's more acknowledgment also from the states on that matter. So between the 2, clearly, it is a discussion that will continue in Washington.

Unknown Analyst

Are you -- I would expect you're not assuming, but are you optimistic that the industry fee impact on Medicaid is going to be addressed as part of the fiscal cliff resolution?

William N. Scheffel

One thing I would say is that we have to deal with what it is right now until there's a change that we would like to have happen. So in the discussions we have with the states right now, with actuaries, the actuaries, I'm talking about rate development for the future, this fee is being included in those discussions and planned for and contemplated. So unless things change, we would expect this to be handled through that process.

Michael F. Neidorff

If I'm allowed to have a wish, it's that it not become part of the cliff discussion. I think there was cliff discussions at such a level and such big issues. I'd like to see that resolved with that stability, and then we can go through and start talking with responsible people about this specific one. As Jon, I think you been, and in the industry and others have been. Anything else you want to add?

Jonathan Dinesman

No, it's just that everybody's engaged, obviously. It's an issue that we have been very focused on, and we continue to see that dialogue continue going into next year.

Unknown Executive

[indiscernible]

Unknown Analyst

Yes, a question on Kentucky. Does Centene have an ending date for runout claims there? Is there a point in time where you just pay no more claims at all regardless of when they were incurred? And secondly, do you expect any type of litigation to come Centene's way from Kentucky around the contract in all this year?

Michael F. Neidorff

I would -- I think I'll comment 2 things. That we have, as I recall, we have a 12-month fee timeframe where the claims run out, right, Don?

Donald G. Imholz

Yes.

Michael F. Neidorff

Yes. And from a time standpoint. I would welcome that litigation, Tom. I think the sooner we can move it to that level, the faster we can get a resolution of this whole thing. So they made – they huffed and puffed about it. They took no action. I would encourage them, if they think they have something, to file that suit, we would welcome that.

Unknown Analyst

Did you guys -- do you think you captured effective expenses perhaps for that in your look forward into '13?

Michael F. Neidorff

Yes, I think there are reasonable amounts for those types of things in here.

Unknown Executive

David Styblo from Jefferies.

David A. Styblo - Jefferies & Company, Inc., Research Division

Just wanted to peel back the onion a little bit more on the higher flu trends that you're seeing. Can you talk a bit more specifically about when you started to see these, what the latest data points are? Has it started to ease? We've seen a couple reports where it spiked and then it seemed to have come down the last week or so. And then what are you -- how does that translate to the '13 as you're looking at that rate, what are you more or less baking as you look into the first quarter there and throughout?

Michael F. Neidorff

Mary Mason, our Chief Medical Officer, is here, and in her presentation, we'll be talking very specifically about all those trends and how we see it. But, Mary, you might want to respond to this specific question. Bill, pick up.

Mary V. Mason

Yes. You are correct, and I'm sure you're all aware of the reports that have been out on the flu. This is the earliest season we've seen since 2003, 2004 season. It is an Influenza A, which the good news is it's a 99% match with the vaccine, and it is sensitive to TAMIFLU. So I will be showing you some trends, we do have the latest CDC charts here today. Just show you, it did start to spike up and then we saw it come down in the last week. So we're continuing to watch that, and I'll show you some other slides in my presentation.

William N. Scheffel

We particularly saw that in -- a little bit in October but really in November, and we're continuing to see that in December. Our guidance for 2012 assumes that we have that for the rest of this month. And in 2013, what we've built into our guidance is what I would call a normal flu season. Now the last year or so, it's not -- it's been below normal. So we have expected an increase in the flu cost in 2013. But whether it's a very high flu season, we'll all have to wait and see.

Michael F. Neidorff

I want to help the industry and sort of -- how many people here have had their flu shots? Will the rest of you please go get one? Thank you. I have a question down here that's -- please. It's a question in front. This light -- we need a microphone. The hands that are up. It's hard to see. It's getting better with the lights coming down.

Unknown Analyst

Can you talk about the parity, the Medicare-Medicaid payment parity and what you put into your assumptions for that going into 2013 and where that stands, if that's been used as a pay for, for perhaps the doc fix or something like that?

William N. Scheffel

Well, at this point we're going to assume it's neutral. We will be paid the appropriate amounts which we will pass through to the providers. And beyond that, nothing really unusual.

Unknown Analyst

So is it baked into your revenue assumption or not baked into your revenue assumption?

William N. Scheffel

Yes, I don't know that we've had significant change. We have a fairly broad range for our revenue assumption at this point in time. We'll have to see how it materializes. That's not something we're counting as new revenue.

Unknown Analyst

Okay. And just a further piece of clarity on the flu assumptions into next year. You talked about flu being a factor here in the fourth quarter, clearly, but a normal flu for the first quarter. But what if it continued the way it is now, the flu season, into the first quarter? What would be the impact in earnings in the first quarter relative to what you booked for the normal flu season?

William N. Scheffel

We've been having discussions around that very question to see how bad -- what is a bad flu season, what's that mean. And I think there's probably a wide range of numbers that someone could come in with because how bad and how far it might spread. Our initial guesses are maybe $10 million is a broad number.

Michael F. Neidorff

I think some of it -- right now, we've seen the heaviest in the southern states. I mean, Texas has had a flu season. The last time we saw this particular strain, Mary [indiscernible] bounced around. It would go to one market, then you would see it dissipate there and then it went somewhere else. Well, it's hitting our largest markets first. So depending on what that pattern is, that's the difficult weather. So many things affect it that we're managing it, we're out there, we're inoculating people. We have a Fluvention program that's in place. We're doing all the things we have historically done to minimize it. And the first being, let's keep people healthy. I mean, people don't need to get sick from that. It can be avoided. So we're encouraging the inoculations, et cetera. So we think we've reserved a reasonable amount, and there's always a catastrophic thing can happen, but we're not counting on that.

Unknown Attendee

And the last piece of is clarity, is you talked about Texas and having several different issues, but you talked about the state addressing really the one of the new members coming over to you. How much of the issue in the fourth quarter was tied to those new members as opposed to the other 2 issues?

William N. Scheffel

In Texas, we talked about specifically 2 issues that the state's working on. One is the off-cycle transfer of members to us in Hidalgo and then the rate adequacy and effect in the Rural Service Areas. Both those issues are being discussed with the state at this point in time, and we do expect to have some clarity on that in the near term here. And those were the primary pieces; it was probably 2/3, 1/3 of the total, 2/3 for the off-cycle...

Michael F. Neidorff

I mean, the off-cycle came over and the state's aware – the state knows we didn't have the treatment plans, the things we do with our members. And I guess, we've had some indications. The advocates have been encouraging the members that because of some changes the other plan took, they had the right to come over to us that -- I mean, they did things to incent the members to leave. That they've been encouraging them to join us because of the way we manage that care, I mean, and the better outcomes we're getting. So the state knows all these things, and they're working very effectively. As I said, I have a letter on my pocket where they made it very clear that they recognize the responsible approach we've taken. They recognize we're good partners. They want to see that all the plans have been affected by that continue to be robust and healthy is the best way they have at saving money and getting better outcomes. So it's -- if other states that we've had issues with would be a percentage responsible and helpful. I mean, that's why we've been in all these years, why it's been so successful for us. They're good partners.

Unknown Executive

[indiscernible]

Joseph D. France - Cantor Fitzgerald & Co., Research Division

First, can you reconcile the comment about assuming 500 to 700 basis points higher MLRs on new business for 12 months? I think historically, you guys kind of mostly spoke about booking new business to 90% MLRs or a tad above and that Kentucky might have been an exception. So is there a change there where -- so I guess what are you booking new business at, to what MLR?

Michael F. Neidorff

I'll start and let Bill pick up. But in looking at it, we're getting -- we're moving into higher acuity memberships. And you need treatment plans, you need a lot of things to take place. And it seems it's more conservative to say that we're using the higher MLRs for this fourth quarter, differentiate it between that and our existing business. Rather than come back here in 6 months the next time and say, "Well we saw this continued longer." So it just seems that the business, the pressure on rates and other things, that's a conservative -- more conservative approach to it. Bill, anything you want to add?

William N. Scheffel

Well, I would distinguish between what the HBR is on this new blocks of business and in the existing. So it could be, for example, our existing business could run at 87% and the new business at 92%. That's a 500-basis point differential. Blends down to some smaller number, a number in the middle depending on what percentage or proportion of your new business is of the total. So as we said in, particularly in 2012 like Q4 and Q1 of 2013, we're running about 35% of our revenues coming from this less than 12 months of operations. And then as we get into 2013, in the latter part of 2013, it goes down to 15% to 20%. Michael has, in his discussion coming up, we'll talk a little bit more about the same store, new store and a couple of graphs that show the differential.

Michael F. Neidorff

Well, I think, Joe, it's – some of it's acuity. Some of it's just looking at where things have been, and we'd much rather create a reasonable expectation on it. And there has been some shifting as we get more and more higher acuity. But that's okay because that's what we can help the states the most, and we're demonstrating to them just how well we do it and...

Joseph D. France - Cantor Fitzgerald & Co., Research Division

Okay, so that's helpful. So just to make sure I understand, do it's around 92% is what you're booking the new revenues at?

Michael F. Neidorff

It's going to vary by product and by market so...

William N. Scheffel

Right. I would say 2 things. Number one, we made a re-class a couple years ago in terms of the case managers and other things to be part of the medical and HBR. So when we used to talk about 90% as booking, that's probably more closer to 92% today for that. But I wouldn't stop there because we have to look at each market and see how it was rated, and what the expectations were to start with and what our contracts were set at. And so it's really a specific market-by-market analysis that's done. And we've looked at the HBR, and those the initial periods of operations based on what we built in our models coming in and then it's adjusted for the experience that we've seen during that period of time.

Joseph D. France - Cantor Fitzgerald & Co., Research Division

Okay. And my second question was could you tell us what the debt-to-cap is now, and how comfortable you're new funding business up to what level with internal funds?

William N. Scheffel

I think at the end of the third quarter, and we like to do our debt-to-capital ratio, excluding our $76 million non-recourse mortgage note, it was at a 25% level. I think with the bonds, we're approaching 30% and -- if I can read this. We would expect at the year end, will be slightly above 30%. And then during the course of the year, it will continue to rise as we add more statutory capital in our subsidiaries based on the growth that we've been seeing.

Michael F. Neidorff

It's going to be within the previously stated ranges that we consider successful. And then we work with the rating agency doc as well.

Unknown Executive

Scott, [indiscernible].

Michael F. Neidorff

Scott?

Unknown Attendee

First question just on Texas, you had previously talked about a target to return to a normalized margin in Texas in 2013, and just interested if the guidance you've issued today does incorporate that or if that target has moved somewhat given the higher costs that you're seeing in Texas in the fourth quarter?

Michael F. Neidorff

All right. Bill, you just...

William N. Scheffel

I would say we would expect Texas to run at normalized margins for 2013. Now, what is normal, we have little lower expectations in Hidalgo, i.e., HBR is a little higher there than other parts of the state. That takes more time to change behaviors as we move from a fee-for-service to managed care model. But we believe that the issues that we particularly talk about for Q4 will be rectified through some sort of rate adjustment in the first quarter so that we will be in the position to run what we would consider to be reasonably normal margins in 2013.

Michael F. Neidorff

Yes. And I'll just add the swing you saw in Hidalgo, a lot of it, [indiscernible] over 2/3 of it, is this new membership. And if you look at the membership we had since March and April, Bill, that's been -- continues to come down and continues to be normalized.

William N. Scheffel

Yes. I think as we said at the third quarter, in Hidalgo, we were running in the mid-90s, and that's not a bad number for -- it's actually little lower than that I think for our HBR in that area, excluding the members that were transferred to us in August to October range.

Unknown Analyst

Okay. And then just a follow-up question just on Kentucky and with the increase in the premium deficiency reserve. Does that entirely relate to the impact of the retro assignments that you've continued to see? Or what's the underlying MLR that you're seeing in the recent quarter in terms of the cost trends? I know there's been some assumption of some moderate improvement over the course of the year. Wondering if you're seeing that on the core book and the retro assignments?

Michael F. Neidorff

I'll start and Bill can fill in the details. But we had several issues. One was this retro assignment. And as I said, every other state from the -- you're accountable from when they tell you, not going – they're still trying to go back to November with members, okay. Two, they're not counting the retros or the premature birth in the risk adjustments. So it's a combination of factors, which is atypical to what we see in any other market. Bill, you may want to comment.

William N. Scheffel

Right. And I think the other thing we talked about was that we saw an increase in claims receipts coming in more recently, which part of that comes that there's a 1-year time limit [ph] filing requirement. And so as people approach that time frame know, we're in there more than a year, we've seen an increase and people are trying to get claims in, and that's one aspect of it. So I think the HBR in Kentucky is -- continues to run at levels we've been talking about in the past. There are some program changes that are expected to be occurring January 1 in Kentucky that the state has told us about, which should reduce the number of retros. I mean, the whole issue is not just retros. That's a big piece of it, but they're expecting to make some changes, which will decrease the level of retros that are assigned to the managed care organizations.

Michael F. Neidorff

I mean, I'll submit to you or anybody. If you have 3 brand name companies in a market and they've now been there, I guess, November would be close to a year. And they are still showing losses of $30 million a month -- a quarter, I'm sorry, okay, you can't say that you have a sustainable program. And I mean, if we were the only ones having this issue and we do try to differentiate ourselves in how we go at things, but if we were the only ones having the issue then I'd say, "Gee, that's –" but when the state can sit there and say, "Oh, everything is just the way it should be." And you have 3 plans that have lost $280 million in the first 6 months of the year combined. And you have -- and still losing money, it's getting a lot of attention in a lot of areas that it's not very sustainable, and there are some very fundamental problems with it. Yes?

Unknown Executive

[indiscernible]

Unknown Attendee

First, Bill, thanks for all the commentary on capital. I know historically the last time you did an equity issuance, there was a statement sort of highlighting that, keeping the balance sheet between 20% to 30% debt-to-cap, at that time, was a good place to have your balance sheet as you entered a period of robust growth. Can you just update us, do you have a formalized target that we should think about now given the change in the company's size since that time and the way the pipeline looks now? What are you comfortable running with in the long term?

William N. Scheffel

I think that when one looks at the interest rate levels, that's a key part of our total capital, and so taking advantage of that makes a lot of sense. So I think we're prepared to run in the 30s, mid-30s on the debt-to-capital ratio as a normal thing. We think we're going through an unusual period of growth here in terms of funding our statutory capital needs. And we think that supports having a higher debt-to-capital ratio during that time frame. So 2 to 3 years from now, I don't know if we'll have a similar point of view and what interest rates will be, but certainly in the current environment, we're fully prepared to go down that path.

Michael F. Neidorff

I think being marginally above, as Bill said, with be cost of debt, that's prudent. And how we've also said that we like to issue equity when you can see that it's going to be accretive. So what we can say. So that's very much the approach we've taken to it.

Unknown Analyst

Great. And so that's sort of of my follow-up in some of the conversations we've been having recently about capital in various forums that you've presented in. There's been allusion made issuing equity as part of a transaction. Could just update us on your view on M&A, the M&A environment and what type of assets Centene might be most interested in?

Michael F. Neidorff

Well, if I could tell you all that, then it would become very expensive if we were looking at something. So no, that's not something we can say. We have said historically we continue to look at the right opportunities that are strategic, that were accretive, that meet our criteria. And so there are opportunities, and we do a very tough evaluation of them. And I assure you that when we do one, you'll be among the first to know.

Unknown Analyst

[indiscernible]

Michael F. Neidorff

Pardon me.

Unknown Analyst

Just on the flu, can you give us the -- what's actually driving incremental costs? Is it ER admissions or primary care? What's going on there?

Michael F. Neidorff

There's a lot of testing, but you may want to add to that.

William N. Scheffel

You have flu tests and you have office visits and…

Unknown Executive

The medication.

William N. Scheffel

The medication.

Michael F. Neidorff

Yes.

William N. Scheffel

The drug spend associated with it.

Michael F. Neidorff

I mean somebody in our household that thought they had been exposed to the swine flu, H1N1. And so the doctor said, "Well, if you want to be safe, take some TAMIFLU." People that been around it, so.

William N. Scheffel

And we have realtime information on drugs, so that's an easy way to…

Unknown Attendee

Okay. And then with regards to the guidance for next year, for the dual business that's coming online, what are you assuming revenues and what's the headwind to earnings next year?

William N. Scheffel

I think that we haven't broken out specifically what the revenues for duals are going to be. We expect Ohio to start in, I think it's Q4 and Illinois in a similar time frame. It's built into our revenue guidance of $9.7 billion to $10 billion range. So the headwinds are this is a new program for states and for everyone. So getting it up and running will always be part of the issue because we've certainly experienced different kinds of programs can take a little longer to start. If anything, they take longer, rather than start early. So there's some variability built into our guidance to reflect that there can be some differences in when programs start, what the membership levels are and things like that.

Unknown Attendee

I just -- I don't want to -- I hate to pin you down on it, but can you give us -- this is obviously, it's pretty sick population. People worried about there's a lot of risk here, obviously, a lot of revenue. Is there any way that you could make us feel a little bit more comfortable that there's some cushion here that this, whatever the number might be in next year's EPS that we know that it was wasn't a hiccup [indiscernible] get to your number.

William N. Scheffel

I think one thing, we're not assuming a lot of margin in the duals business in 2013. We think there'll be revenue, but not a lot of margin in those initial periods of operation. So we're breakeven type of an analysis.

Michael F. Neidorff

I think you heard earlier that some of the HBR levels are higher that we're looking at in this business. And we do have experience in it. I mean, there's about 5,040 duals that we’ve been managing. We -- there's another 95,000 we've been managing the Medicaid side of it. So there is some experience. The systems that we probably were talking our own staff meeting that it's -- we're really glad we made the investments we did 3, 4 years ago. Don and I were talking about it at dinner the other night. And it's putting us in a position to anticipate the duals and the things associated with it.

William N. Scheffel

And we do have the start-up costs for those operations built into our guidance. So preopening costs could get -- add the staff, and we're ready to go training, et cetera, for those start dates.

Unknown Shareholder

Keith Meister [ph], shareholder. So 2 questions. The first is just clarification. On the Texas rate adjustment, if you're able to get that in March, is that retroactive to Jan 1 or do you under earn for the first 2 months of the year and then earn the right way for the rest of the year? How does that work?

Michael F. Neidorff

I think – well, there's 2. There's the ones that we knew that were typically going to be coming in March and then again in August, September. There is a -- we're talking to the state now about very a specific segment of population that transferred over in the rural market and talk about them potentially -- and their thought is to do it as soon as they can. That could be Q1, so not wait until March. So there's 2 or 3. The ones that Bill was talking about, those that were expected, have been talked about for some time. We now have their written commitment to look at these other issues sooner.

Unknown Shareholder

Right. So said differently, if you had gotten it all on January 1 at the right levels, your $2.60 to $2.90 guidance would be higher, but you don't know when you'll get it, so you're making estimate in your guidance as to when you're successful in getting that? Am I saying that correctly?

William N. Scheffel

I would say that we assumed in our guidance that we're neutral with respect to the rate issues for the fourth quarter items we talked about, the additional members in Hidalgo and the Rural Service Area. And then we expect to have normal rate increases March 1 to September 1. So right now we're assuming we're going to be neutralized due to the state's actions on higher costs we've been experiencing. And that's based on our intense discussions with the states on these issues and their indication that they're looking at that right now.

Michael F. Neidorff

I mean, you saw what happened the last time when we said they -- in the valley and other areas, they had not given us really adequate, they made the adjustments on a prospective basis. But also, our actuaries are in virtual daily discussions with theirs and our management with theirs, they're fully accessible. And they have clearly expressed their desire to get this right and get it fixed in a very timely fashion. So it's -- and we asked and they accommodated us by giving us some of these things in writing so that we can stand here and have a confidence level of what their commitment is.

Unknown Shareholder

Great, that's good to hear. The second question is we own your stock for the growth story. At the same time, it's helpful to understand what the embedded value is. So and we recognize that growth is all-in-all unpredictable. But if you look at the 65% of your business that you've had today, that's been online for more than a year, can you give some clarity into what -- are you getting the 3% to 5% pretax margin targets on that base? And then as you bid out new business, how long do you reasonably think the competitive market it should be until the typical new contract gets to the target margin?

Michael F. Neidorff

Bill, do want to start?

William N. Scheffel

Yes. I would say that our existing business, we're talking about that 65%, is running at normal margins, which is in the 3% to 4%. I'm not sure we're at 5% overall, but in that range. And that the new business has the issue that I described that happened in the first 12 months of operations between continuity of care provisions, you've got to do a margin build and deal with just applying your normal medical management techniques. And in some markets, particularly in Texas, it can take a while for all those to take a hold and be at the levels that you would like to be. So as we described in June, I think at our Investor Day, we've seen higher utilization levels in the Hidalgo area, significantly higher than the rest of the state. We are bending the curve on that in making improvements, but it's still above the levels of the rest of the state. So it's going to take a little longer.

Michael F. Neidorff

I would – one are the things – that's why we're doing this same-store, new store. We want you to see that in the same store, that the normalization, there's going to be ups and downs across different books, so we'll get that and consolidate it. We even talked as a management group. can we look at margins. But then you start to get into allocation of what percent G&A is this and things like that. And it could be more cloudy than clear with all the qualifications. So we're talking about look and say, look, this is the revenue attributed to new store versus same store and this is the MLR on a consolidated basis associated with new store, same store. And we're voluntarily taking that on and doing that because in a high-growth business, we believe that our investor base needs to understand what the same store story, and they can see that normalization. And if there's an aberration, it's our obligation to say here's an aberration and here's why, and here's what we did about it and call it the way it is. We want that added transparency. And this past year was an unusual year with lot of growth, lot of volatility. And anybody that wants to have a drink on New Year's Eve, I'll be in St. Louis saying, I'm glad '12 is behind us, and the New Year's coming.

Unknown Executive

[indiscernible]

Unknown Analyst

First one is a follow-up on the increased claims that you're seeing related to the year 1 deadline in Kentucky. So how much of the reserve deficiency increase was related to that and how big of a swing factor did it cause in what you viewed as the completion rate?

William N. Scheffel

I think it's hard to portion that out. We said 2 things. I think one was the 1-year timely filing requirements now are hitting, and also our announcement to exit the market I think has also generated people to go back and make sure they'd sent it all the bills that they can. So when we do assessment over the overall claims reserve status, we think it's $10 million that we need to add to the PDR to get to where we need to be. And so that's what we -- our expectation is in the Q4, that's what we will record.

Michael F. Neidorff

This justification for us, you can't do it, but I know that the management team was more than happy to say okay, it's a '12 expense. Let's get it in. Let's do it. Let's move on. I mean, it's -- no -- this was -- you could not have prepared for what we found in the attitudes and how they did things.

Unknown Analyst

Okay. In Texas, one of your peers had talked some other higher MLR STAR+PLUS members transferring out, but I think you said that the off-cycle transfer members you were getting were STAR. So I just wanted to confirm that, and if you could talk about how many there are that are transferring in, what MLR they're running at and maybe what the higher cost lines that you're seeing for this cohort?

William N. Scheffel

It's really STAR+PLUS, and that's -- it's over 9,000 members that we picked up in the fall, let's say that transferred over. They're running well above 100% MLR for that group of members compared to our existing members we've had since basically March 1, which are probably running in the low or the mid, low 90s I think running below, so there's more than that.

Unknown Executive

Let's say 200, but I think it's 2,000-basis point differential between those members and what we've seen with our existing members.

Michael F. Neidorff

I mean, remember, our members in 60 days had a treatment plan. We're starting to manage it. As we said, we started to see it come down and as we anticipated. These we got August, September, no treatment plan [indiscernible] they just started.

Unknown Analyst

All right. And just a follow-up on that, if this is the STAR+PLUS, is it a home healthcare cost utilization being higher that is the driver? And if that is the case, how much of that is the state willing to cover versus how much is on you to bring that down?

William N. Scheffel

I think there's a combination. There's various things you see in those markets, and we have an obligation to bring it under control. Rob, would you like to add something to that?

Robert T. Hitchcock

Yes, Rob Hitchcock. So the other thing I want to just kind of add to that is we're still receiving some of these high acuity members in October and November. We're still getting them in. It's leveled off now. But yes, on the last time I think when we talked to you guys it was the home health therapy and the personal attendant services that were really high. They still remain at levels that are about 5x greater than what we see in the rest of the state. However, we have brought those services down just in the couple months that we've been managing this by about 13% and [indiscernible] respectively. So the medical management programs that Michael has talked about referenced earlier, they do work. It's just it takes -- it's journey for us to get them where they need to be.

Unknown Executive

[indiscernible]

Unknown Attendee

Can you talk a little bit about the expansion costs step up in '13 over '12? I think sort of you mentioned sort of an incremental $0.20. Should we assume that goes down going forward or just assume that the level of spend is consistent and or continues to go higher given the expansion of the programs?

Michael F. Neidorff

Well, obviously I'm not sure. I mean we said that the numbers for 2013 are higher than 2012, and it's particularly for duals, exchanges, 2014 Medicaid expansion, New Hampshire start up and a placeholder for a new plan for next January. So I'm not sure beyond that what your question is but...

Unknown Attendee

Well, I mean, I guess going forward is that, I mean, does it -- would you expect the ramp to continue to go forward or...

William N. Scheffel

Are you talking about 2014?

Unknown Attendee

Well, just beyond, I mean, it doesn't have to be specific in 2014. Just thinking about sort of the ramp. Do we get some of these sort of investments spend back in [indiscernible]?

William N. Scheffel

Well, we believe we'll get a return on our investments in the new markets that we enter and the business that we add on. And we talked about the issue of 12 -- first 12 months of operation and beyond that. So as that matures, we think we do get that to be at normal margins. But we're in an unusual period of opportunity here. Jesse will give in his presentation what the pipeline looks like at this point in time, and all the things that are going on. So I wouldn't project that in 2014, we'll spend less money on business expansion. I think that the opportunities are still out there, and I think you'll still see us working to pursue those.

Michael F. Neidorff

Yes. When we look at 2014 next year in this time, but we'll be working on it. But I think once again, on coming back same-store, new store, you'll be able to track what percent of the revenue is going where and how, and that's part of it. Then you'll be able to think through and say, "Yes, they're growing it." But the same store, which as things move into the same store after 4 quarters, it's falling in line. So we want you to see that natural progression. And this is, I mean, it's historic, the opportunity that companies have to grow their business in a responsible way, and that's what we're really focused on.

Unknown Attendee

Okay. And then just my follow-up. Can help us maybe where we could see guidance be a little bit more conservative? It just sounds like you assumed a normal flu, normalized margin in Texas, rate bump of 1 to 3 and slight possibly in the duals. So maybe help us on the other side of where maybe some of the areas of conservatism may lie in the guidance?

William N. Scheffel

I think that we do our best to try to give an accurate projection of where we think we're going to be for 2013. So we do try to add elements of conservatism in there, particularly starting with the revenue growth in terms of there are issues with when the start date is going to be for a new operation, what the membership levels are going to be, what the rates are, things like that. And we also look at the HBR that we're going to be running in those markets, and when we assume we're going to -- those are going to convert to more normalized margins in some of the new markets. So I think that we think we have a reasonable amount of conservatism in our guidance, but those are the numbers in the areas we've been talking about for quite a while in terms of where we think we would be, and that continues to be the case.

Michael F. Neidorff

Edmund, we have a question on air?

Edmund E. Kroll

Yes, we have a couple of them from the field. First, a clarification on the tax rate. So 40% to 41% is our new run rate tax rate?

William N. Scheffel

For 2013, that's the expectation, as we said, the non-deductibility sort of compensation under the Affordable Care Act drives up that rate by almost 400 basis points.

Edmund E. Kroll

And then one more. On the expansion cost, the $0.50 to $0.60, how much of the $0.50 to $0.60 relates to new business that Centene has already won versus expected spend for potential wins?

William N. Scheffel

Well, that's with start-up costs for like New Hampshire and the duals in Ohio and Illinois would be part of the business already won, and then the remainder is investments in 2014,Medicaid expansion, particularly in the states where we already operate and then the exchanges. So I don't know off the top of my head how much I split between already won and to be pursued. But both of them are included in there.

Michael F. Neidorff

I mean, we did state that we have in a placeholder for one new plan yet won, so that's reasonable to expect that would happen. Other questions?

Edmund E. Kroll

That's all we have on the emails.

Michael F. Neidorff

Anybody else? Before we take a little break, any other questions on this?

I think as I said earlier, we look forward to putting through '12 behind us. There was a lot of volatility. We identified where it is. We're going to try and give you the basis to see how it's moving ahead in '13 with same store, new store. I'll talk in more detail. And we're just glad to drop the curtain on this year, and we're looking optimistically forward to '13 and the opportunities.

We'll take a short break and come back and wrap things up with a couple of more presentations on flu and exchanges and things that you might find interesting. Thank you.

Edmund E. Kroll

So we'll come back in 15 minutes, 9:55, and I'll give you a 5-minute warning on that. Thank you.

[Break]

Michael F. Neidorff

Okay, time to go back to work. Somebody I was counting, I think I said 22 times now, I'm glad '13 -- or '12, that '12 is behind us. '13 is coming. That makes 24, I guess.

Okay. Good morning again. Partisanship, entrenchment, gridlock, impasse, those are words that are dominating the media today, and one could easily become discouraged and complain about the challenges confronting our country and consequently, any company doing business with the government. There's a feeling of continued uncertainty, and we talked about some of that today. It would be nice if we could read compromise reach or handshake seals deal. But at Centene, as we've said many times, we see ourselves as managers of events and business and not victims.

As such, we are focused on what we can control, not consumed by what others, be they governments or competitors, might or might not do. Our job and the job of Centene's growing leadership team, many of whom are here today, this morning, is to focus on the things that we can do and steer our company into the best possible position. While we are truly humbled by the challenges of 2012, today we will share with you a compelling set of facts, expectations for improving financial performance, expectations for a growing set of markets and contracts, plus more organizational capacity than ever. These factors, coupled with sound business strategies and decision making make us feel increasingly upbeat about the future of Centene into 2013 and beyond.

I'd like to begin with something we call trends versus hopes. If you examine our past, you know we have an industry-leading win rate in new or expanded markets. We are pleased that we demonstrated our capabilities with high-acuity populations so as to be competitive in our 2 dual-eligible contract wins. We know that the market for duals will continue to grow, and we know the importance of making sure exchanges are done well, not fast. It is reality we have worked to shape markets. We enter into 1 or 2 contracts in a region or statewide, and we then add major new product lines and work towards the different service area expansion.

Next, I'd like to focus on 3 key things: first, investment. As we head into 2013, we recognize that investing and recruiting and retaining the highest caliber of talent in the industry is critical to our success. At the senior level, we appointed Rob Hitchcock as EVP of Health Plans. All our health plans, medical management and related services will report to Rob. And we recently announced the addition of Rone Baldwin as Executive Vice President Insurance Group, who will oversee our reinsurance companies, our individual and small group products and all products associated with future exchanges. These additions to our already strong leadership team ensure us of the bandwidth necessary to fortify our core business and expand our market reach. We need to ensure that senior staff stay focused on the large opportunities and have the right resources to execute on.

In addition to our people, we also continue our long-standing investment in our proprietary IT systems, including our health dashboard predictive modeling and our infrastructure. As you will see in a few minutes, we also continue our innovative ways in medical management.

Secondly, we focus on execution. We are committed to managing simultaneous implementations. Nowhere are the capabilities of our people and our systems put more to the test than with these multiple rollouts in 2012. Centene implemented health plans in 5 new or expanded markets. In 2013, we will continue expanding into other new markets. Centene has become a leader in working with our state partners to implement innovative programs to serve our most vulnerable members. For example, we have worked with states such as Ohio, Texas and Louisiana to restructure their pharmacy programs as a carve-in benefit, which has ultimately provided better care for our members while saving the state money.

Thirdly, let's talk about growth. Centene has capitalized on the pipeline of business through market expansion and new products within markets, growing from $460 million in 2002 to close to $10 billion by the end of next year. Diversification has been a cornerstone of our growth. Take Texas, where we began in 2001 with one contract in El Paso. In 2000, our first full year of operation there, we did $34 million in revenue. Today, we have multiple contracts having a full range of all our products, generating over $3 billion in revenue. And it's really a good thing that when you have that large a market, you have a state that works well with you.

Geographic expansion is significant. Our growing national footprint is clear. We will have expanded from 7 states with health plans in 2008 to 17 states in 2013, and from 1.2 million members in 2008 to 2.7 million members as of the end of 2013. And we will already have 2 states to be implemented in 2013, Kansas and New Hampshire. We have historically spoken about 15% year-over-year growth rate. We have significantly exceeded the 15% over the last several years, including this past year. With our growth -- with our growing pipeline, we expect to significantly continue to exceed that rate over the next several years.

Next, I want to talk about a concept, which Bill alluded to and I did earlier, which is deeply rooted in the retail trade but also applicable when analyzing Centene's growth. As we've heard, it's known as same-store, new store. We believe this is important for investors at a time of extremely high growth. We have taken advantage of the market opportunities, so we want you to have insight on the impact on margins, short and longer term. To grasp this concept, let me first define same-store and new store. Same-store is a state market, significant geographic expansion in an existing state or product that we have managed for 4 complete quarters. New store is a new state significant geographic expansion and the existing state or product that conversely we have not managed before a compete board [ph]. To gain a better understanding of this concept, I will list a few examples that would be considered new stores and when they would become same stores.

Texas Hidalgo service area and the MRSA expansion are new stores until the second quarter of 2013. Kansas Health Plan is a new store until the first quarter of 2014. Washington and Missouri are new stores until the third quarter of 2013. The examples provided are not all inclusive, as every quarter, some new stores become same stores. Additionally, important to note that pharmacy and other specialty companies, unless specified, will be considered new -- same store. Our objective here is to provide additional transparency and information that we believe is useful to investors in understanding our business. We expect to provide this information as appropriate in the future for premium revenue and health benefits ratios.

As illustrated in the following slides, we have a larger percentage of our total premium revenue associated with new stores in 2012 and 2013. New stores accounted for more than 30% of our total premium revenues beginning with our second quarter of 2012. This is a result of the success we had executing on our growth strategy. However, turning to the HBR, new stores have an HBR that is significantly higher than the same stores. What does this mean? We have historically stated that when store -- when managing new stores, it takes time to realize normalized operating margins. The same-store, new-store concept proves this case.

Centene is a company with its sights clearly set on a promising future, but its decision making is rooted in a clear sense of what is real. As states continue to move recipients out of the fee-for-service model and into managed care, we remain committed to helping them effectively manage their benefits and health outcomes while reducing expenses. And as a result, the growth outlook remains more robust than ever with approximately $33 billion in projected Medicaid Managed Care opportunities through the end of 2013. In conjunction with the 2014 Medicaid expansion, Centene continues to explore future exchange opportunities with states. Having strong experience with exchanges, we are a recognized leader in this market segment and believe we have significant opportunity.

So in conclusion, this is our vision, a vision that builds on the past, continues our strategy and prepares us for continued success. And we think we have every reason for you to expect that success in '13 and beyond.

I thank you, and now I'm going to ask Mary Mason to come up and talk about some of her innovations.

Mary V. Mason

Thank you, Michael, and good morning. Today I'm going to highlight the incorporation of wireless technology into our existing clinical programs and show you some promising pilots, which have resulted in better quality outcomes at lower costs. I'm going to showcase for you several technologies such as cell phone applications, texting programs and telemonitoring that we have successfully used not only with our younger members, those members that know how to use this type of technology, but also with our older members, some as, for example, an aged, blind and disabled who may never have used a cell phone. And this is really important especially as we move into managing more mature population.

Over the past 6 years, I have showed you our successes with CONNECTIONS Plus. This is our free cell phone program for high-risk members who do not have safe, reliable access to a cell phone. We pioneered the use of these phones in managed Medicaid pregnant women, in mentally ill patients with Caring Voices and with high-risk aged, blind and disabled members who needed complex case management, but they didn't have a phone, so we couldn't get a hold of them. And now we can.

So let's take a look at some of our pilots that I'm going to show you today, Start Smart for Your Baby texting program. I'm also going to show you our cell phone app pilot that we did with AT&T around diabetes with our Buckeye plan in Ohio. And I'm also going to show you our telemonitoring program targeting readmissions in complex patients in conjunction with Nurtur, our health and wellness specialty company.

So I told you the year -- over the years about our Start Smart for Your Baby program, and our texting program takes over where the popular TEXT4BABY leaves off. We designed our program to start at 28 weeks gestation and go through the first 6 lives -- 6 months of the life of child. Our goals were to increase the rate of the postpartum visit of the mother, which is a HEDIS quality measure for us and also making sure that the child was establishing a medical home with a pediatrician.

Our pilot has enrolled over 5,700 members who receive weekly educational texts. And the same thing you have to remember, there is -- there are rules with Medicaid where members do have to opt in to a texting program, but you can see how our enrollment has continued to grow.

Our early pilot results are very encouraging. The longer the members receive texts, the more impact it makes. So for example, those members who have participated in the program greater than 90 days, which is right here, we see a 14% increase in the postpartum visit as compared to a control group. Now these are the type of programs that allow us to realize significant overall cost savings from our Start Smart program. This is a slide I have showed you back in June. And if you look here on the right-bottom corner, you can see that we have been able to show an overall cost savings per child birth event of $374 for those women who enrolled in the Start Smart program, and then we followed their baby through the first year of life. So these -- all these type of programs really help contribute to the overall cost savings.

So let's switch gears to diabetes. And there are many challenges when implementing a cell phone app pilot program in aged, blind and disabled population. But we were able to leverage our experience and our lessons learned from the CONNECTIONS Plus program to successfully launch a pilot with AT&T as a partner using a diabetes manager cell phone app. And this allowed individual coaching when the member would put in their blood sugars and their carb entries into the app, they were able to get immediate feedback, and also, they were able to put medications in there as well where they could get messages on compliance.

We use CENTELLIGENCE to help us identify the participants. And you can see here, this is how engaged the members were. They were -- these -- this is the number of average blood sugar entries that they were putting into the app on a week-by-week basis. And what we found is, originally, the patients that we entered had very poor blood sugar control, around a hemoglobin A1c, which is a measure we use to look at average blood sugar over several -- over 6 weeks, was about with 9.4. We were able to bring it down to about 8.7 at the end of the pilot. And this actually is very encouraging. But more encouraging is that when we looked at analysis of the members who completed the program, we showed a 52% decrease in the hospitalization utilization data. And when you think about an average hospitalization for a diabetes-related visit, let's say it's $7,500, we are looking at an estimated projected annual cost savings for the members in this pilot of around $876,000.

And finally, I want to focus on another area of great interest, and that's telemonitoring. Working with Nurtur, we ran a pilot aimed at reducing readmissions in complex aged, blind and disabled members in 3 states, and that was Arizona, Wisconsin and Ohio. So we used home telemonitoring technology with 24/7 monitoring of biometrics, and the goal was to avoid unnecessary readmissions by acting on alerts and making outbound phone calls to those members when we saw a problem. We identified those members for the program, once again, using our CENTELLIGENCE predictive modeling software.

We designed the program to have very close coordination with the outputs of the monitoring technology, with the patient, the health coach, the health plan managers and the physician. This was a retrospective cohort study. We looked at about 454 members over a 36-month period versus a closely matched control group. And when we looked at the odds ratio or the relative risk of being readmitted to the hospital over a 30-day period, here's what we saw. If you look, for example, at the heart failure, which is right there, we actually saw an odds-risk ratio of 0.361 or that's a 64% decrease in the risk of readmission. Acute MI was about 80% decrease in the risk of readmission. For diabetes, we saw 43% decreased risk. And for COPD and asthma readmissions, a 42% decrease. And these were all statistically significant. So once again, as we evaluate this program, very promising early results in the pilot. We're looking to see which markets make sense to expand in.

And we also continue to focus on the development of our educational materials to address the needs of our members who have limited financial resources and are able -- have many barriers that create them -- that create the inability to sometimes really achieve good health. We turn all of our books into audio books, podcasts. We put them on MP3 players. We put them on cell phones, on the MP3 player with the CONNECTIONS Plus program. And this is so important, especially for members who have low literacy.

In flu, I know this is what everybody wants to hear about. So just a few words on this. As I mentioned earlier in the Q&A, this is the earliest start of the flu season since the 2003, 2004 season. Per the CDC, we are seeing a circulating A strain, which is causing severe illness especially in the elderly. And we have seen, as the CDC has mentioned, in the 7 states, we are seeing increased cases in Louisiana, Texas and Mississippi. But as I said, there is good news here. There -- the vaccine is well matched, especially for the circulating A strain. It's about a 99% match. There is a very good supply of the flu vaccine. So you just need to get vaccinated, and that's really what our emphasis has been. And we know that the strain is sensitive to TAMIFLU and also the other medication, Relenza, which people also use.

This is, I think, a really nice graph from the CDC website, just to give you some perspective. So if you look here at this red line, this is our season right now. And you can see it's early start. We had a peak last -- a peak and now it's -- this last most recent graph, you're starting to see a little bit of a downturn. If you look here at this gray line, we all remember the H1N1. That was back in 2008, 2009. We first saw H1N1 in the spring. Then this is the fall curve. It goes up. But once we had the vaccine, we start to see it come down right away. And then the blue line, some of you may remember the 2007, 2008 season. This is when we had a vaccine mismatch. The vaccine didn't cover, and this is where we saw this huge spike.

So the bottom line, the timing of the season and the peak changes each year. Per the CDC, and I think this is an interesting stat, if you look at the last 26 seasons, 40% of those seasons peaked before February; 60% peaked February to March. So we believe that if you look at this, it looks like we are going up. We probably will have a peak late Q4, early Q1, and then you can see it trend down like we see every other season.

So what is our best strategy? It's to vaccinate against the flu and try to get as many members over the age of 6 months vaccinated. We've -- here's a good example with Fluvention, where we, with using our Start Smart for Your Baby program, we have great emphasis on vaccinating our 80,000-plus women a year who are pregnant because, really, it's a 2 for 1. Not only are you protecting the mother, you're protecting the baby in the first 6 months of life when they're unable to get their flu vaccine. We do this through a texting program, through educational programs, and we've really seen a steady increase in the baseline of pregnant women getting vaccinated. And you can see just from the claims data, keeping in mind there are a lot of women who get vaccinated in free clinics and other sources so they may not be reflected in the claims. But we are seeing almost a 7% increase from baseline for the women that are getting vaccinated. We're also using our care gaps within our CENTELLIGENCE for high-risk members. So if a patient's in case management, disease management, coming out of the hospital, we're able to intervene if we see they have not had a flu shot and try to make sure that they do get one.

So in summary, we are very excited about our early successes with wireless pilots and the ability to impact members of all ages. We continue to expand these types of programs across all of our clinical programs and products. And this really allows us to enhance our ability to improve health outcomes.

Thank you very much. And with that, I'd like to introduce Jesse Hunter, who will give you a business development update.

Jesse N. Hunter

Thank you, Mary, and good morning. As Mary indicated, I'm here to talk about the pipeline, and we've got a lot to talk about with respect to the pipeline. So really, a few key categories that I wanted to focus on for this morning: Number one, we continue to get more information, and as a result, get more visibility with respect to the pipeline both prior to 2014, but I think importantly, beyond 2014. We'll tie that directly to some of the business expansion investments that Bill had referred to in his comments, both for this year and then as we go into the future. Number two, we will talk about opportunity for existing product expansion within our current markets that we see significant opportunity to leverage our experience in certain products in existing markets and improve our risk profile as an extension of the same-store concept that was talked about this morning. And then finally, ongoing investment in our capabilities and continuing to understand market needs and trends and be in a position to have all of the assets that we need to be successful in that future state.

So we'll talk first about the pipeline for -- prior to 2014. As you recall, in June, we started to talk about redefining the pipeline. And we did that. We broke it out the same way, pre-2014 and then from 2014 and beyond. And at that point in time, we said total view of $275 billion and split $45 billion pre-2014. And we'll talk about the $230 billion after 2014. In that context, we saw 2/3 of the opportunities be in existing markets and 1/3 in terms of geographic expansion.

So just a quick update of how have we performed relative to that. As Michael indicated, we continue to enjoy an industry-leading success rate of nearly 90% on RFPs. That has led us into 3 new market implementations in the course of 2012. On an annualized basis, adding almost $4 billion of revenue and 400,000 members.

So when we translate that into the 2014 and beyond, as we looked at it previously, we had started to break out the categories of opportunity between Medicaid expansion, duals and exchanges, and you obviously see the split between markets there. There has been a lot of additional information and some degree of certainty between that -- between then and now. And what we're talking about and we want to -- going to introduce here is our view of the trajectory of the pipeline over the coming years. So we have, obviously, since June, we've had the outcome from the Supreme Court, which I'll talk about in a minute. Elections ongoing, CMS guidance, CBO scores and other things, which -- all of which are reflecting our guidance here and our view of the market opportunity. So what we're really focused on for this morning is the near-term pipeline of $33 billion prior -- basically in 2013 and then the longer-term market opportunity based on where we see in excess of $250 billion in 2016.

So first on the 2013, so pre-2014 pipeline, we -- Michael mentioned. And we'll talk about here $33 billion, a meaningful portion of which is in our existing markets. And so we'll talk about a couple of examples Bill had referred to earlier. The Arizona acute care contract that we have is in procurement, as is the Florida long-term care program. Our track record and our experience would indicate that when we look at these re-procurement contracts and the situations associated with rebidding the contracts that we have, we view those as market expansion opportunities. And so that would be the case with respect to both Arizona and Florida. In addition, there are other -- there's active procurements in other markets, and this is representative as opposed to explicit in multiple RFPs in California and an integrated RFP that is in process in the state of New Mexico.

So one of the pieces of clarity that I had mentioned, we had from June to now is the Supreme Court decision, as everybody is aware. One of the key elements of that ruling was the state flexibility with respect to Medicaid expansion, and so we're not going to get into speculation with respect to those things. But it is important to note that, number one, states have the option. Number two, based on recent CMS guidance, it's expected to be all or nothing with respect to the expansion. So as we're working through our pipeline, particularly over the long term, there's a correlation, obviously, between Medicaid expansion and exchange opportunity. So based on the recent information and some of the estimates from CBO, we are expecting a reduction in the membership that would be moved into Medicaid through Medicaid expansion but a somewhat offsetting opportunity increase in the roughly 50% of that offset being an increase in the exchange eligible populations. So this is what's reflected in the pipeline as we see it and as we'll talk about here.

So with respect to the -- what I would call the longer-term pipeline, we referenced $254 billion of total market opportunity. And our expectation is we'll continue to make the investments in 2013 to position us to really maximize the opportunity, and we'll talk further about how we do that. But in particular, this is the total -- our view of total market opportunity across all the products. So you can see the split here, $36 billion on Medicaid expansion, nearly $100 billion on duals and over -- roughly $120 billion in the exchange market.

So one of the things that we have worked hard to do over the last number of years is not just to talk about the total market opportunity, but what does it mean for us. And this is what we'd call more of a targeted pipeline. And what we're focusing on here is a $100 billion opportunity in products that we currently serve, in markets where we currently have a presence. So as we'll talk further, we view this as a significant opportunity where we are particularly well-positioned to be successful. So we'll talk about each of those in the context of the product opportunity, at least at a high level.

So first with respect to Medicaid expansion, as we've talked about before, we view this as a natural extension of our existing business. So while not every state will go through the Medicaid expansion, across our existing markets, we think there's approximately 5 million members that would be eligible for participation in Medicaid expansion, which represents about a $20 billion market opportunity. And we see that we are particularly well-positioned, obviously, with respect to that. And Bill talked about some investments that we have in our 2013 guidance reflecting late 2013 G&A investments for early 2014 Medicaid expansion.

Second, we'll talk about the duals opportunity. So this is -- we've had some experience through the dual eligible split programs in certain markets. We're continuing to invest in our Medicare capabilities, which you can see on the slide here. But significant opportunity in existing markets, and we've already demonstrated what I would call initial success in duals procurements where we have a Medicaid presence in Ohio and in Illinois. This represents an additional $30 billion market opportunity for us.

And then next on the exchange front, Ron will talk about this in significantly more detail. But at a high level, we will continue to expand our capabilities along the income continuum, and we think that this represents an opportunity for roughly 10 million members and over $50 billion in our existing markets. And obviously, we have significant experience, which we intend to leverage along with the capabilities associated with our specialty platform.

So I want to take a few minutes to talk further about the focus that we have on existing -- our existing markets. And this is somewhat related to what Michael and Bill had referred to this morning on the same-store, new-store concept. Obviously, we have developed an operating model, which is based on a decentralized approach, with particular focus on local stakeholders being our customers, state customers, members and providers. We think that there's significant opportunity to leverage the infrastructure, the investments and the relationships, as well as the success and credibility that we have in those markets for future success. And I think an important component of that is the risk profile that, that creates for us as part of the growth trajectory.

So when we have an existing footprint, we have the relationships, we have provider experience and all other aspects of our experience in a particular market, we think that, that improves not only the financial profile, but also the risk profile. We know our states well. And so our ability to add additional products in existing markets gives us more comfort that we can do that successfully. This obviously is not to say that we are not going to focus on -- put attention against geographic expansion, but it is to say that we see $100 billion of opportunity in products we serve, in markets where we have a presence, and that is worth a significant amount of focus from us.

Additionally, we want to talk about capability enhancements. Michael had referred to diversification as a key part of our long-term growth strategy. That continues to be the case, and it represents a few core elements of our strategies. One is integration. So we have seen the benefits of integration on various components of our business to strengthen our overall offering. So things like medical, behavioral, pharmacy, those other pieces, putting those together has strengthened the overall organization and our value proposition for our customers. Again, that has the opportunity to improve our -- both our risk profile and our earnings profile to the extent that we add capabilities that we are currently outsourcing.

And this capability expansion can be either on the health plan in the specialty side, it can be build or buy. To the extent that we go down the buy path, as we referenced already today, we would continue to apply our long-standing and high bar of investment criteria with respect to EPS accretion within the first 12 months and after-tax IRR of 15% to 20%, depending on the type of business.

And as we're looking at these opportunities, we will continue to have a long-term view of where we think the market is going and what assets that we need to be positioned for that. As you look back at some of the transactions that we've done, take Celtic as an example, in particular, there are some of you who questioned why we did that when we did that. But when we look at where the opportunity, where the market is now and the opportunities, which Rone will talk about and the exchanges, we're certainly glad that we have the Celtic assets that we do, that put us in a position to be successful as we see the market trajectory.

So in conclusion, what I think is important is, as I said before, not just identifying the pipeline, but what are we going to do about it and how do we turn what is a big market opportunity into a Centene-specific reality. And we've demonstrated that success. We will continue to do that here. We see significant opportunity in the near term, much of which is in our existing markets. And we will continue to make investments in 2013 and beyond, which we expect to have attractive returns, not only within the $250 billion broader market opportunity, but specifically in the $100 billion opportunity of existing products in existing markets. And we will continue to be thoughtful about making investments in additional capabilities that are consistent with our view of the long-term trends of the market and what we need -- what assets we need to have in order to maximize those opportunities.

So thank you. And now I'll turn it over to Rone to talk in more detail about exchanges.

Unknown Executive

Good morning. Thank you, Jesse. You just heard Jesse talk a little bit about an overview of the pipeline of opportunities that we have for growth in the before-2014 period and the period beyond 2014. I'm going to focus on one of those growth opportunities that we have in the 2014-and-beyond period, which is our plan to participate, by offering individual insurance products, on the health insurance exchanges that are being set up effective January 1, 2014, by the implementation of the Affordable Care Act.

Now why is Centene interested in participating in the exchange market? In short, we think this aligns very well with our corporate mission and our capabilities to provide better health outcomes at lower cost, with a focus on the underinsured and uninsured populations in the United States. We see the exchange product as expanding the solutions that we can offer to this target market. We have the capabilities in-house, we think, to prosecute a winning strategy in the exchange marketplace. And we see that as representing a significant growth opportunity to the company in 2014 and beyond.

This is how we see the exchange product looking along the income continuum of where we've historically participated in Medicaid and managed care programs. We are focused very much on looking at the population for our exchange product that's going to be eligible for subsidies under the Affordable Care Act. So that by having an exchange solution, we have now an insurance alternative for people who are members of our Medicaid plan that may get a part-time job and then no longer be eligible for Medicaid and looking for a solution on the exchanges. This will fill in then for states that expand Medicaid for those individuals above 133% and above on the Federal Poverty Level. And again, for states that do not expand Medicaid, this solution will fit for individuals at 100% of the Federal Poverty Level and above.

The exchange solution will address some key problems that exist today for Medicaid Managed Care members and providers; churn and the existence of split families. And let me give you an example of some of the impact of churn. Studies and our plan experience confirms this -- indicates that as many as 38%, 40% of adults actually experience a loss of Medicaid eligibility within 6 months of entering a Medicaid program. So there is a large churn of members who gain and lose eligibility. And as they lose eligibility, they now will have alternatives to look at on exchanges with subsidies.

This, by providing the exchange solution, we're going to provide tremendous value to members and providers. In our Medicaid Managed Care plans, our philosophy of looking at an exchange solution is to try to very much come up with as much as possible a product that offers as seamless or easy, a comfortable transition from people who are receiving Medicaid today or have family members receiving Medicaid to transition to an individual insurance product. We're doing that by building on our existing provider networks. We're looking at benefit designs that can again be a comfortable transition for members that are used to experiencing having health coverage and Medicaid, and also, we're planning to deliver service through the same infrastructure that we have today, deliver for our Medicaid Managed Care programs through our regional health plans.

That value to members means that we can help eliminate a gap in coverage that exists as they lose eligibility. It'll ensure no disruption to their provider relationships, ensure continuity of care to continue to enhance their health outcomes, and it reduces split families by having families that have certain members covered under Medicaid can now have their whole family covered under the Centene umbrella by also using our exchange solution. It also offers tremendous value to our providers by again no disruption in continuity of care for patients that they may have had as part of the Medicaid plans, and also offers insurance coverage for what were previously the uninsured numbers coming off of Medicaid.

We have the capabilities in-house to win in the exchange marketplace. Most importantly, our managed care footprint provides us a multistate presence. Over 2.7 million pool of members that can be potential participants in the exchange product over time that will be leveraging the provider networks that we have within the states that we participate in. We have Celtic which has individual insurance licenses in 49 states across the United States. We have participated in these transitional or hybrid programs, as well as the Massachusetts exchanges, which gives us practical experience for this market. We'll be leveraging our medical management and specialty company expertise in designing this product, and as well the low-cost, central administrative infrastructure that we have.

Now to give you some idea of what that can mean for Centene. As we look across the entire exchange opportunity in the United States, it represents an estimated $120 billion annual market or about 24 million enrollees as we start to get to near complete expected penetration in the 2016 timeframe and beyond. To bring that down, again a little bit more to Centene's situation, as Jesse mentioned, that $120 billion translates to a $52 billion opportunity in the markets that Centene currently participates in today or 10 million potential exchange members. Very importantly, studies indicate that approximately 40% of exchange membership is expected to be in income levels below 200% of the Federal Poverty Limit. And clearly, that represents a sweet spot for Centene in terms of targeting potential exchange members. Even though we're going to initially focus on income levels close to where we've historically participated in Medicaid, and again geographies where we have Medicaid Managed Care plans, there will be the opportunity to expand over time both geographically as we expand our Medicaid footprint, as well as up the income continuum for our exchange product.

Now I'm not here to give you a financial forecast or financial projections today for the exchange business. But if you look at the large potential we have by capturing Medicaid members who leave our plans and members' families, and we do see 3% to 5% turnover per month in our plans, which again, means a pool of approximately 1 million members leaving our Medicaid plans at one point or the other during any one year. And if we look at any reasonable share of the other potential from other uninsureds in our target market, this clearly represents a multibillion-dollar premium opportunity for Centene.

Now this is a 2014 opportunity, but we're heavily focused in 2013 in preparing for a successful launch. In particular, let me highlight 3 key priorities. We're looking at our launch in 2014 from the perspective of making sure we do it in a smart fashion. And what that means is we may not be a participant in the exchanges in all the states and all the service areas that we currently offer Medicaid Managed Care programs today. On the other hand, there may be certain states that initially or over time where we don't have a Medicaid footprint, that we decide to actually enter through an exchange product. But we are committed to being prepared for a launch on January 1. We will be a participant on the exchange, and we're very much focused on making sure we're a meaningful participant to give us the path to the ultimate potential that we see for the company in the 2016 kind of timeframe when exchanges start to get more fully penetrated.

We have a large team that will be executing, and invest – we're investing significant resources in 2013 to prepare for this launch, leveraging again the capabilities across the company. And finally, as everyone knows, not all the rules, regulations are set with respect to exchange products for this launch and timeframe. That's a reality that we have to face into. We're committed to being prepared to be in the market on January 1, but we do expect changes to come our way during this timeframe before we launch, and we'll adjust nimbly and adjust our plans and our programs in reaction to them.

So I want to thank you very much for your time this morning. I think we're going to have a question-and-answer period now, and I'm going to turn it back over to Michael.

Michael F. Neidorff

Mary, Jesse, Rone, we thank you for your presentations. Yes? Questions. Do we have a microphone handy?

Unknown Analyst

Can you talk a little bit about how your efforts have been going with contracting with hospitals set up for the exchanges? Will they allow you to use Medicaid type rates for exchange members? Or are you going to see more like a more commercial or Medicare-type rate?

Michael F. Neidorff

I think we're looking at the bottom end of the exchanges initially, and it will be more compatible with a Medicaid-type situation. But we're talking with them, and we're looking at risk sharing with hospitals and so there are all kinds of alternatives as we work through it, have a team working on. It'll be a combination, depending on the services involved.

Unknown Analyst

So you don't see it affecting your existing Medicaid rates with the hospitals for [indiscernible]?

Michael F. Neidorff

I think that the Medicaid will be very discreet. We have licenses in 49 counties. We're working with [indiscernible] in a lot of these hospitals already. So it will be just a matter of using the appropriate rate for the appropriate business. Josh?

Joshua R. Raskin - Barclays Capital, Research Division

Would you be willing to give the 2013 guidance, breaking it out along the existing store, new-store model? So of that 260 to 290, how much would be from existing markets versus what would the earnings be for the new markets?

Michael F. Neidorff

Bill do we [indiscernible]? We'll keep it – we're going to keep it at a consolidated basis. So we'll be giving you the -- we'll be reporting it on a new and existing store basis.

Jesse N. Hunter

But we're going to concentrate on revenue and HBR, we weren't going to go down to the EPS level for new and existing.

Michael F. Neidorff

So as I said earlier, it's kind of hard to get to the margin level because then you have allocation of G&A and other things. So we think we can give you the revenue, the HBR, we're giving a lot more transparency than what we have historically done it. These typically see in this industry. Josh?

Joshua R. Raskin - Barclays Capital, Research Division

One question I should have asked earlier, and I apologize for asking this now. It was just in Texas, as you're negotiating, you're having these discussions around these new members and some of the issues. What is the ultimate margin that Texas thinks is fair and equitable in your partnership?

Michael F. Neidorff

The state understands it and most of states we work with existing books of business that we look for the 3% to 4% margin. And we also have the margin sharing programs in several of these states, so that if it starts to get above a given amount then we deal back. Historically, we've refunded money to Texas. I think it's about as high, Bill, as $100 million, $120 million over 4 or 5 years? It's some number out there. And so that becomes less of a concern in their mind.

Joshua R. Raskin - Barclays Capital, Research Division

So it's part of the sort of short-term fix. They understand that part of the negotiation, et cetera as you're building up your total costs and providing them with data, they understand that the 3% to 4% margin is embedded in what you are looking for in the state.

Michael F. Neidorff

Yes, they understand clearly. I mean they're letting us -- they want to see a viable, robust situation for the companies like ourselves.

Joshua R. Raskin - Barclays Capital, Research Division

Okay. And then just a second question, you talked about the capabilities that you guys have in-house for exchanges, et cetera. I just -- and I understand the footprint and the contracting and some of the medical management. But just from an underwriting perspective, I think as Celtic is kind of your initial foray, that didn't go particularly well. So are you looking to sort of beef up your underwriting or your pricing actuaries, or are there new hires coming in or just how are you attacking it?

Michael F. Neidorff

Yes. Let's bifurcate the Celtic. There was the hardly -- the legacy business, which was the individual plans that they had when we took over the company versus the connector and other new products that Celtic Care institutions, as opposed to Celtic insurance. And we applied that new underwriting and the underlying capabilities in what they had for the existing or for the new hybrid-type products as we referred to at that point in time. And you may recall, first year we're in Massachusetts, everybody thought we bid low, we ended up refunding money there, and we've been a low cost producer for that state.

Joshua R. Raskin - Barclays Capital, Research Division

So you don't anticipate a big ramp in hiring or other capabilities or bringing people in from...

Michael F. Neidorff

We're going to continue. I mean, as Rone indicated, we are beefing up some of those capabilities. And we have the -- part of, in acquiring both Celtic and the TPA in Arkansas was to get the capabilities on the underwriting, the deductibles, the copayments, administering all those aspect, and then overlaying now to managed care on top of it which is what we're doing in connector. So that's really why we acquired it, not for the individual plan that they -- in that legacy business.

Sarah James - Wedbush Securities Inc., Research Division

This question goes back to medical management, maybe for Mary or anyone that wants to speak to it, but at the last Investor Day, you guys talked about bringing your capabilities of frequent or daily clean surgeries that you've had physician and some of the more -- cost categories that are more like CHIP and bringing it to those that are more applicable to duals or the new complex population looking at some outpatient clean surgery processes. But I think at that time, you didn't really have an estimate on how long that may take. So I'm just wondering where are you in the process? And is it likely to be [indiscernible]?

Michael F. Neidorff

Sure. So I think there's 2 elements. I'm going to ask Rob to comment on our recent hires on medical management and ask Don to comment on the systems. Rob?

Robert T. Hitchcock

Sure. Going to the increased capabilities of the organization, we just hired a Senior Vice President of Medical Management. Actually, there's going to be a press release on that, I guess, on Monday or so. So a little bit of preview to that, comes with a lot of experience. And so we're really further investing in our medical management capabilities. And I would say on the duals, it is a bit different than the traditional Medicaid population in that the duals are more senior and more elderly and have a little bit different healthcare needs. So we are very aware of that and making those investments to make sure that we can manage their costs as well.

Michael F. Neidorff

Don, do you want to talk about the system a little bit, Don, and we'll come back there.

Donald G. Imholz

Yes, Sarah. When we spoke with you in June we mentioned the non-inpatient cost dashboard that we had preliminary designs on that; we've since implemented it. It was there in a matter of weeks. Having said that, we continue to refine it. We do continue to build out capabilities for complex and acuity members.

Michael F. Neidorff

I think it's different when we had some issues come up in Texas before this time, but we can say we now have a letter with the states working on it. The conversations have been taking place on an ongoing basis. So some of this is allowing us to recognize it sooner, give them the kinds of facts that they needed, so the actuaries can have a very realistic discussion. You have another question, Sarah?

Sarah James - Wedbush Securities Inc., Research Division

Yes. I was just going to clarify sort of implementing it mean that you're able to review it as quickly as the inpatient, or is it still a little bit longer?

Jesse N. Hunter

Yes, it's still much longer, because with inpatient, we can utilize authorization capability to get a more leading indicator and the lag on non-inpatient claims is longer.

Michael F. Neidorff

It's going to be longer, but there's still newer capability there that's being provided.

Unknown Analyst

Just quick question on Kentucky, is there any scenario where you guys can't exit next year? I mean via litigation, whatever it may be, is there any way that you feel like Centene could be compelled to fulfill the full contract?

Michael F. Neidorff

A very long time ago, never say never. Our legal counsel and Keith may want to comment on this. Our legal counsel and others believe that, that is the case that we can. Keith, anything you want to add to this? I want to be careful because we are in litigation but, Keith?

Keith H. Williamson

I guess, Michael, all I would add is I think you said it very well. Obviously we don't want to comment on litigation. Look, we are pursuing very aggressively 2 tracks. One is an administrative appeal process, and that will come to an end, there's a sort of timeframe for those to be acted on. But while we can't speculate, we can't say that we are, certain issues -- indeed the issue of whether or not we can terminate on July 5, 2013, is in front of a Kentucky court at the moment. So we expect to have visibility. We feel very, very strongly that the contract allows that right, and we are making those arguments in court. And obviously, we also think it's in the best interest of all of the parties, the state and particularly the members, to get a resolution of that particular issue, so that we can transition members in a very responsible way and move forward.

Michael F. Neidorff

Are there any other questions? Ed, do you have one?

Edmund E. Kroll

Yes, from the email. You highlighted flu is starting earlier than normal in 3 states. Could you comment on flu experience in Florida, Georgia and Kentucky? And does seeing flu early in the 3 states allow you to take proactive steps, vaccines for example, in other states to help reduce the impact?

Michael F. Neidorff

We'll have Mary respond, but we have been pushing the vaccine ongoing. We have highlighted that the flu is more in the southern states, which are our larger populations.

Mary V. Mason

Right. And I think it's fair to say that if you look at the CDC website, we're basically mirroring the experience that we're seeing on the CDC website.

Michael F. Neidorff

And we don't know. We know the last time we saw this, once it was in an area, it tended to move on. And if we could be that clairvoyant to say, yes, it's done or whatever is going to happen -- would be nice, but it's not there. Yes?

Unknown Analyst

Sorry, the 3 states, Florida, Georgia and Kentucky, can you comment on those?

Mary V. Mason

I know in Georgia, we are seeing some cases, as well as Florida.

Michael F. Neidorff

Matt?

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Just a follow-up question on the expansion pipeline. When you talked to $36 billion Medicaid expansion potential nationally by 2016 and $19 billion in your existing markets, is that just from health reform coverage expansion? What about the further conversions of Medicaid populations in those states into managed care?

Michael F. Neidorff

Jesse, you want to...

Jesse N. Hunter

Yes. That's really designed to be an inclusive number. Obviously, a significant proportion of that is coming through ACA-related implementation and the capacity for that, but it's not exclusively the opportunity there. And it's based on where we have a reasonable visibility in terms of what states may or may not do with respect to Medicaid expansion -- managed care expansion.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

One last question. Maybe you've addressed this already, and I think it came up on the -- may or may not have come up in the third quarter call. But the question is, as you look at one of your peer companies in California entered into a deal with the program administrators in that state that would protect, to some extent, their downside risk on new lives coming in the duals. Is that something that you are -- do you have some of that in your existing contracts? And is that something that you're exploring, particularly given the experience you've had for 2012?

Michael F. Neidorff

Jesse?

Jesse N. Hunter

Yes, so I think obviously that's a market-specific dynamic in California, but we do have -- a number of states that we work with are mindful of those issues, right, in particular, the volatility that we talked about on some of the new stores. And states have handled that in different ways. So I think that's a unique approach with respect to California. We've talked, I think, in some venues about our new contract in Kansas. So there's a risk corridor for the contract in Kansas, so it's the same concept, just a different kind of implementation. So we do think that states are taking an increasingly kind of sophisticated view of how to get these programs started the right way so they can be both successful and sustainable.

Michael F. Neidorff

The ultimate test is, is the state really trying to create it, Kansas we believe is; most states – other states where we have won a sustainable program. And they're very open to this, Matt. So it's -- and we have a team that's looking very carefully at the contracts both legally and qualitatively. Any other questions?

Well, if there's no other questions, we thank you for your attendance and your interest. And we'll be speaking with you on the year-end call February 5. Thank you. A very Merry Christmas, happy holidays to everybody and a successful New Year.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!