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WellCare Health Plans, Inc. (NYSE:WCG)

Q4 2012 Earnings Conference Call

February 13, 2013, 08:30 AM ET

Executives

Alec Cunningham - CEO

Thomas L. Tran - SVP and CFO

Gregg Haddad - VP, IR

Analysts

Carl McDonald - Citigroup

Tom Carroll - Stifel Nicolaus

Scott Green - Bank of America Merrill Lynch

Chris Rigg - Susquehanna Financial Group

Josh Raskin - Barclays Capital

Matthew Borsch - Goldman Sachs

Michael Baker - Raymond James

Sarah James -Wedbush Morgan

Peter Costa - Wells Fargo Securities, LLC

Scott Fidel - Deutsche Bank

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2012 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Wednesday, February 13, 2013.

I would now like to turn the conference over to Gregg Haddad, Vice President. Please go ahead, sir.

Gregg Haddad

Good morning and thank you for joining us. Today, we will be making forward-looking statements, including but not limited to, our 2013 financial guidance. Various risks and uncertainties such as those described in our filings with the SEC, including our 2012 Annual Report on Form 10-K that we expect to file later today, may materially impact those statements. While these risks and uncertainties may cause our future results to differ from today's statements, we are not undertaking any obligation to update or revise any forward-looking statements.

Certain financial information that we will discuss this morning, includes adjustments to expenses related to previously disclosed government investigations and related litigation that we believe are not indicative of long-term business operations. We will identify results that have been adjusted. In addition, please refer to our news release published this morning for supplemental schedules that reconcile results determined under generally accepted accounting principles, or GAAP, to our adjusted results.

Our news release is published on our website at www.wellcare.com. In addition, today, we will be discussing medical benefits ratios or MBRs for the Kentucky Medicaid program that are modified to reflect the development of medical benefits payable in the period in which the services were provided. A reconciliation of these non-GAAP and GAAP measures was published in our news release.

Following our prepared remarks, we will address your questions. We request each participant to ask no more than two questions. Our discussion today is led by Alec Cunningham, WellCare's Chief Executive Officer; and Tom Tran, Chief Financial Officer.

I will now turn the discussion over to Alec.

Alec Cunningham

Thank you, Gregg, and good morning, everyone. Today, I will update you on our recent activities including results for 2012 and also talk about our priorities and plans for 2013. Following that, Tom will discuss the fourth quarter and full year 2012 financial results and detail our 2013 financial guidance.

2012 was a remarkably active year for WellCare. Premium revenue of $7.3 billion was up 22% year-over-year. And at year-end, we served nearly 2.7 million members for the first time in the company's history. We obtained new contracts, service area expansions or contract extensions for our Medicaid programs in Florida, Georgia, Hawaii, Kentucky and New York. We organically grew our Medicare advantage membership by 29%, including growth in our dual special needs plan or DSNP membership of more than 50%.

We repositioned our prescription drug plan or PDP business to strengthen our focus on Medicare eligibles who choose a Part D plan. And since last July, we have closed or signed agreements on four acquisitions that have established or expanded our presence in attractive states with meaningful growth opportunities that complement our three-product strategy.

Of course, 2012 also brought challenges as we will discuss during today's call. That said, as a result of our 2012 accomplishments, we are better positioned than ever to deliver profitable growth over the long term. We begin 2013 with the most diversified portfolio of revenue and earnings streams in our history in a number of markets that have sizable government programs growth prospects. We intend to capitalize on those opportunities through ongoing improvements to our infrastructure and processes designed to further advance our health care and service quality as well as our operating efficiency and effectiveness.

Turning to health care quality and access, our highest priority for 2012 was investing to accelerate our progress on this important dimension of our business. In fact, our operating expenditures for quality improvement increased by more than 60% in 2012 compared to 2011. For 2013, we again expect to meaningfully increase our investments in this top priority.

Our recent quality accomplishments include the commendable NCQA accreditation of our Florida health plan for both our Medicaid and Medicare products. We continue to target accreditation of all of our health plans and anticipate further progress in 2013. In addition, our New York health plan met the 2012 performance requirements for the state's quality incentive for Medicaid managed care plans and is now designated a quality health plan. As a result, our New York Medicaid plan is eligible for member auto-assignment and enhanced premiums.

With respect to our second priority, which is ensuring a competitive cost structure, 2012 was a year of continued progress. Our adjusted administrative expense ratio decreased 120 basis points year-over-year to 8.7%. Since 2010, the ratio has decreased by 190 basis points. As we enter 2013, our growth and other initiatives create the need for certain investments. In particular, the integration of our four acquisitions will result in incremental expenditures this year. In addition, we will make investments to enhance the performance of these businesses and to position them well for future growth.

We also plan to invest in other business initiatives, including technology for care management and quality as well as service infrastructure enhancements. Finally, as we plan for 2014, we will be making investments in anticipation of the implementation of the provisions of the Affordable Care Act.

I will now turn to our third priority, which is prudent profitable growth. Starting with Medicaid, 2012 was a year of significant activity in a number of our states. Medicaid premium revenue for 2012 increased 25% year-over-year to nearly $4.4 billion. Our Medicaid segment membership increased 9% year-over-year to almost 1.6 million as of year-end.

Of course, the largest driver of our 2012 growth was our Kentucky Medicaid program upon which we have continued to focus intensely over the last several months. In particular, we have worked closely with our customers in the Commonwealth to achieve our collective goal which is ensuring that Kentucky Medicaid managed care program delivers quality, cost effective care to our members on a long-term sustainable basis.

We commend Governor Beshear and Secretary Hayes for their leadership and commitment to this goal. Our discussions and collective efforts have resulted in a premium rate increase of approximately 7%, effective January 1 of 2013. In addition, the approximate 3% rate increase we were scheduled to receive on October 1 will be accelerated to July 1 of 2013. These rate increases apply to all regions other than the newly launched Region 3.

These rate actions follow other needed program and policy changes that have been implemented over the past few months that enhance program stability and effectiveness. Beginning in the fourth quarter of 2012, Kentucky eliminated the cap on a risk adjustment of premium rates.

In addition, for members who joined our plan in November following the open enrollment period, we received immediate risk adjustment of our premiums. Had the prior practice been maintained, we would not have received risk adjustment for those members until January of 2013. Finally, beginning in January, Kentucky stopped retroactively assigning SSI members to health plans thereby eliminating claims costs that could not have been managed.

Another important activity in January was the launch of our program in Kentucky Region 3 which as of January served more than 20,000 members in Louisville and the surrounding counties. These members have the opportunity to change health plans until the end of March. The Region 3 implementation is proceeding consistent with our expectations.

As of February, we served more than 220,000 Kentucky Medicaid members statewide and anticipate 2013 premium revenue from that program of more than $1.1 billion. While we have more work to do in Kentucky, we are confident that Governor Beshear and his team are committed to maintaining a high-quality managed care program for all parties that is sustainable over the long term. The recent economic and policy changes I described are evidence of that commitment.

Regarding other growth in our Medicaid segment, we are excited about our agreement to acquire Missouri Care. As of December of 2012, Missouri Care serves more than 100,000 Missouri HealthNet Medicaid members in 54 counties across the state. The plan has an extensive provider network that includes more than 50 hospitals and 9,500 physicians. Missouri Care has enjoyed a long-standing and sizable presence in the state, serving the Medicaid program for approximately 15 years.

We look forward to reentering the Missouri HealthNet program under the very capable leadership of Missouri Care's management team and staff. The acquisition also complements our Medicare advantage and prescription drug plan offerings in the state. As of January of 2013, WellCare serves approximately 3,000 Medicare Advantage members and 13,000 Medicare PDP members in Missouri.

Separately, at the end of January, we closed our acquisition of UnitedHealthcare's South Carolina Medicaid business. South Carolina is an attractive Medicaid and Medicare growth opportunity that will leverage our presence in Georgia and is well aligned with our multiproduct strategy. We believe the state is making policy changes that should improve the Medicaid program and offer the potential for increased membership.

In the Florida Medicaid program, as of January of 2013, we are serving every county in the state and are the only Medicaid plan doing so. Our work now is focused on the procurement for the new managed medical assistance or MMA program. The implementation of this program will result in statewide mandatory managed care for more than 3 million Floridians, including the approximately 1.5 million individuals who are currently served by managed care plans or similar organizations. Bids for this procurement are due in March, contract awards are expected in September and implementation is anticipated to begin in 2014.

As we look toward 2014, we are working closely with our state customers on their plans for the potential expansion of their Medicaid programs as part of the implementation of the Affordable Care Act and we continue to expect these programs to provide growth opportunities over the long term. We will provide additional perspective on these potential new programs as we have more information regarding their details.

Moving to our Medicare Advantage segment; 2012 revenue exceeded $1.9 billion, up 31% year-over-year. Membership was 213,000 in December of 2012 including 39,000 in California resulting from the Easy Choice Health Plan acquisition which closed in November. Excluding Easy Choice, December membership was 174,000, up 29% from December of 2011.

Strong performance during the Medicare Annual Election Period positions us well for 2013. Excluding Arizona and California, our January 2013 Medicare Advantage enrollment was approximately 194,000 members, an increase of 11% from 174,000 members as of December of 2012. In addition, our Easy Choice plan in California achieved January enrollment of approximately 52,000, an increase of approximately 33% from December of 2012. Combined, our AEP growth rate was approximately 15%.

In addition, with the closing of our Arizona acquisition, we added approximately 4,000 members to our January membership in what is our 14th Medicare state. We are also offering MA plans for the first time in 2013 in 10 Kentucky counties and we have enrolled approximately 1,300 new members for January 1. Our Kentucky Medicaid program currently serves more than 20,000 full duals, providing a meaningful MA growth opportunity for the balance of the year.

Combining Kentucky with our other service area expansions and acquisitions, in 2013 we are serving 204 counties in 14 states with more than 15 million Medicare eligibles. We are offering dual special needs plans in nearly all of those counties. In total, our January 2013 MA enrollment was approximately 249,000 members, an increase of approximately 104,000 members or more than 71% compared to January of 2012.

We anticipate continued growth in our MA membership through the balance of the year. Our benefits and costs sharing terms for 2013 have been designed to achieve what we believe is an appropriate financial rate of return with plans that are attractive to both current and prospective members. Our ongoing administrative and medical expense management initiatives are important to helping ensure that we continue to offer competitive products.

Our PDP segment revenue was $993 million for 2012, down 4% from 2011. Despite the contraction in premium, our PDP segment outperformed expectations in 2012 as gross margin for the year increased 19% compared to 2011. This performance largely resulted from lower than anticipated pharmacy costs. Our January 2013 PDP enrollment was approximately 750,000 members, down from 869,000 members as of December of 2012.

The decrease was caused primarily by the loss of auto-assigned, low income subsidy membership in California. This reduction was offset in part by 2013 enrollment from Medicare eligibles who choose a PDP, and we are continuing to strengthen our focus on that segment of the market. Our focus on those who choose their PDP is based on the longer duration we attained with these members compared to members auto-assigned by CMS. This stability helps us deliver better results in terms of quality, medication management and financial performance.

For 2013, we launched a new PDP product that we believe is well positioned as a low cost enhanced plan targeted to value conscious choosers and more than 110,000 members choose this plan during the annual election period. As of January 2013, more than 75% of our PDP members had chosen WellCare as their Part D plan. We currently anticipate that our PDP membership will remain relatively flat throughout the remainder of 2013.

Our 2013 bids resulted in our plans being below the benchmarks in 14 of the 34 CMS regions and within the de minimis range of the benchmark in five other regions. As a result, we expect modest continued erosion of our auto-assigned membership, offset by continued growth for members who choose their Part D plan.

Now, Tom will review our full year and fourth quarter financial results and describe our initial 2013 outlook.

Thomas L. Tran

Thank you, Alec, and good morning. Today, I will first talk about the result of our operation for the year and the fourth quarter of 2012. I will then discuss our balance sheet and liquidity. And conclude with some comments about our 2013 financial guidance.

For the year 2012, adjusted net income was $216 million. Adjusted net income per diluted share was $4.92 which was consistent with our guidance range of $4.90 to $5.05. Our adjusted net income for the fourth quarter of 2012 was $58 million compared to $93 million for the same period in 2011. Adjusted net income per diluted share for the fourth quarter of 2012 was $1.32 compared to $2.15 per share for the same period in 2011.

Adjusted net income was lower in the fourth quarter of 2012, mainly because of unfavorable development of prior year's medical benefits payable compared to favorable claims reserve development in the fourth quarter of 2011. This was offset in part by higher premium revenue in the Medicaid and MA segments, the decrease in the PDP segment MBR and the decrease in our adjusted administrative expense ratio.

For 2012, premium revenue was $7.3 billion, an increase of 22% from 2011. MA segment growth of 31% result mainly from membership added organically and from the Easy Choice acquisition which closed in November. Medicaid segment growth of 25% was driven mainly by the Kentucky program operating for a full year in 2012 compared to two months in 2011, as well as membership growth in that program.

In addition, our New York Medicaid premium revenue including managed long-term care and other programs increased 39%. And our Florida Medicaid premium revenue grew 10% both driven by membership increase. PDP segment premium revenue for the year decreased 4% compared to 2011 which was driven mainly by lower membership.

Premium revenue for the fourth quarter increased 25% year-over-year to $2 billion with the MA segment up 49% and the Medicaid segment up 23%, offset in part by the PDP segment down 9%. Sequentially, premium revenue increased 9% in the fourth quarter driven by the Easy Choice acquisition and growth in the Kentucky Medicaid program from the November open enrollment.

Regarding Medicaid premium rates, for Georgia our rates effective for July 2012 were decreased on average by approximately 0.3% because the rate change was not determined until November. In the fourth quarter of 2012, we record the entire effect of this rate change for the July to December period.

Separately, our Florida Medicaid premium rate effective as of September 2012 were increased on average by approximately 3.0% to 3.5% because the rate change also was not determined until November, we record the full effect of the rate change from the September to December period in the fourth quarter of 2012.

For the full year of 2012, medical benefits expense was $6.3 billion, a 27% increase compared to 2011. 2012 medical benefits expense include favorable reserve development that increased pre-tax income by $77 million or $1.10 per diluted share compared to favorable reserve development that increased 2011 pre-tax income by $191 million or $2.78 per diluted share.

The reserve development recorded in 2012 lowered the company's MBR by approximately 100 basis points. Medical benefits expense for the fourth quarter of 2012 increased 33% year-over-year to $1.7 billion, which includes unfavorable reserve development related to prior periods that decreased pre-tax income by approximately $15 million or $0.22 per diluted share.

The $15 million was comprised of $3 million of unfavorable development related to prior years and $12 million of unfavorable development related to the prior quarters of 2012. The fourth quarter of 2012 unfavorable development was primarily attributable to the MA segment and to a lesser extent, the Medicaid segment.

The fourth quarter of 2012 results also were impacted by higher incidence of flu than we had anticipated and much higher than the relatively low incidence we have experienced during the past few years. We also have seen elevated flu costs in January, but recent data indicates flu incidents have stabilized. Our year-to-date results as well at our expectations based on that experience have been factored into our 2013 outlook.

Turning to our segment MBRs, for the fourth quarter of 2012, the Medicaid segment MBR increased 4.9 percentage points year-over-year, mainly as a result of the favorable prior period reserve development reflected in the fourth quarter of 2011 results. In addition, the growth of the Kentucky program and that program's higher than segment average MBR contributed to the year-over-year increase.

Sequentially, the Medicaid MBR decreased 2.4 percentage points due primarily to better results in Georgia and other states. This was offset in part by the growth of the Kentucky program and that program's higher than segment average MBR.

Regarding the Kentucky program, for the full year 2012, the MBR was 105% as reported on the GAAP. The fourth quarter MBR was 100% as reported on the GAPP, including the members who joined our plan during the open enrollment period, effective November 1, 2012.

As described in our news release, on a recast basis, the fourth quarter of 2012 MBR was 97% compared to the third quarter of 2012 recast MBR of 104% and the fourth quarter of 2011 recast MBR of 116%. We have achieved a 19 percentage point year-over-year MBR improvement that has resulted primarily from the successful implementation of a number of our medical expense initiatives, as well as the 3% rate increase that was effective October 1, 2012.

As Alec described earlier, effective January 1, 2013, Kentucky implemented certain rate actions that we believe would have a meaningful impact on the long-term stability and soundness of the program. We now expect that the program will make a meaningful contribution to our 2013 earnings. We remain focused on our two key medical expense initiatives for Kentucky.

First, we continue to strengthen the management of our provider network, leveraging the data and analytics we have developed over the past 15 months. Our work includes provider network resizing and re-contracting as well as unit price initiatives that are appropriate for the market conditions we have encountered.

Second, we are also addressing clinical management capabilities to ensure these are appropriate for the population characteristics and utilization activity. In particular, we're executing on emergency room, in-patient, behavioral health and pharmacy cost management activities, all of which are reducing medical costs.

Regarding our MA segment MBR for the fourth quarter, the 7.1 percentage point year-over-year increase result primarily from five factors. First, in the fourth quarter of 2012, we experienced unfavorable development of prior periods claim reserve. While in the fourth quarter of 2011, we record favorable development of prior periods reserve.

Second, our quality improvement expenditures increased in 2012 compared to 2011. Third, of Easy Choice Health Plan acquired in November operates at an MBR that is higher than our historical MA plans, due to the significant level of capitation in the California market. Fourth, our strong membership growth in 2012 has resulted in new members with low risk scores and the result in risk adjusted premium rates comprising a larger portion of our total membership than in prior years when we grew more slowly. And fifth and finally, utilizations was somewhat higher in 2012 than it was in 2011.

Adjusted SG&A expense was $639 million for 2012 and $179 million for the fourth quarter. Both of which reflect a 7% increase over their respective periods in 2011. The fourth quarter increase primarily results on the addition of the Easy Choice Health Plan expense to our cost base, other growth initiatives and our Medicare Annual Election Period expenses.

Sequentially, our adjusted SG&A expense increased 9%. The increase was caused by the addition of the Easy Choice expense to our cost base as well as the Medicare Annual Election Period related expenses. The adjusted administrative expense ratio for 2012 was 8.7%, a 120 basis points improvement compared to 2011.

The fourth quarter of 2012 adjusted administrative expense ratio was 9.1%, down 150 basis points year-over-year. The year and quarter decrease result from increased premium revenue as well as improvements in operating efficiency, partially offset by costs incurred for growth initiatives.

Turning to the balance sheet and liquidity, as of December 31, cash and investment held by our unregulated entities were $194 million, down from $350 million on September 30. The decrease during the fourth quarter result principally from acquisition activities as well as capital contributions to certain of our regulated entities, offset in part by dividends from some of our regulated companies.

We have recently entered into a $230 million expansion of our credit facility. We have borrowed $230 million under the term loan facility. Out term loans and revolving credit facility are still said to expire in August of 2016. The other principal terms of the credit facility, including fees and rates, are also unchanged.

Regarding the priorities for our capital, we continue to see opportunities to deploy capital for growth through organic business development as well as potential strategic acquisitions.

Turning to consolidated cash flow, cash provided by operating activities modified for the impact of the timing of receipts from and payments to our government customers was $145 million in 2012 compared to $253 million in 2011.

The decrease in operating cash flow with due primarily to the lower level of GAAP income before tax in 2012 compared to 2011, as well as an increase in federal and state income tax payments, offset in part by a decrease in payments related to resolving government investigations and related litigation.

Modified cash provided by operating activities for 2012 with equal to approximately 0.8 times our 2012 GAAP net income. Medical benefits payable on December 31 was $733 million, an increase compared to September 30 and resulting in days in claim payable or DCP of 40 days. DCP was unchanged sequentially. Our medical benefits payable remains consistently calculated.

With regard to our 2013 financial guidance, we are including results from our three closed acquisitions but not the acquisition of Missouri Care which is pending regulatory approval. For 2013, we expect our aggregate company premium revenue will be in a range of approximately $8.7 billion to $8.8 billion, an increase of 19% to 20% compared to 2012.

We expect Medicaid segment premium revenue to increase approximately 14% to 16%, mainly as a result of the Kentucky program, 2012 membership growth and the Region 3 expansion as well as the South Carolina acquisition. We currently expect premium revenue for our MA segment to increase approximately 50% year-over-year, driven by the Easy Choice acquisition and our organic membership growth. We anticipate that PDP segment premium revenue will decrease 20% to 25%, as a result primarily of decreased membership as well as reductions in the regional benchmarks applicable to all plans.

With regard to segment MBR, we expect our Medicaid segment MBR to be in a range of approximately 87.25% and 88.25%, down from 88.7% in 2012. The decrease result principally from improved Kentucky program performance, including the premium rate actions described earlier. We expect this improvement to be offset in part by MBR increase in certain of our other programs, the continuing shift in the mix of our Medicaid segment programs towards high MBR populations and increase quality improvement costs.

For the MA segment, we expect an MBR in the range of approximately 86.5% and 87.5%, up from 84.2% in 2012. The increase is driven by our 2013 bids, the inclusion of the Easy Choice Health Plan acquisition for a full year in 2013 compared to two months in 2012 and increased quality improvement costs.

For the PDP segment, we anticipate an MBR in a range of approximately 83.75% to 84.75%, up from 78.7% in 2012. The year-over-year increase result mainly from the outcome of the 2013 bids, including the decrease in benchmark premiums experienced by all plans and from the addition of our new enhanced product, while both of our MA and PDP segment MBRs are anticipated to increase in 2013 compared to 2012, the financial returns for each of these segments continue to be appropriate.

Our adjusted administrative expense ratio for 2013 is expected to be between approximately 8.7% and 8.9% compared to 8.7% in 2012. This results primarily from our growth and other initiatives, including the need for certain investments. In particular, the integration of our acquisitions will result in incremental expenditure this year. In addition, we will make investments to enhance the performance of these businesses and to position them well for future growth.

We also plan to invest in other business initiatives, including technology for care management and quality as well as service infrastructure and enhancement. Finally, as we plan for 2014, we will be making investments in anticipation of the implementation of the provisions of the Affordable Care Act.

Combining the elements that I have described as well as some others, we anticipate that our 2013 adjusted net income per diluted share will be in the range of approximately $4.50 to $4.85. As a reminder, we do not include in our guidance any future potential development of medical benefits payable.

For 2012, favorable development of prior year's reserve add approximately $1.10 to our adjusted net income per diluted share, of which $0.76 was recorded in the first quarter of 2012. Excluding the favorable reserve development, 2012 adjusted net income was approximately $3.82 per diluted share.

I will now turn the call back over to Alec.

Alec Cunningham

Thank you, Tom. So to conclude, through our work in 2012, we believe we demonstrated our position as the government program's leader with the capabilities to capitalize on the meaningful growth opportunities available to us across each of our segments. Driven by changes in the economy, government fiscal issues, health care and in particular the Affordable Care Act, we anticipate significant increases in government health care program enrollment. We believe we are well positioned to take advantage of these sizable growth opportunities through our internal business development and sales capabilities as well as through acquisitions.

That said, in periods in which we achieved rapid revenue growth like 2012 and its forecast 2013, our operating margin likely will be pressured. In addition, we are more likely to experience greater fluctuations in our margins than during periods in which we grew more slowly. We do not view these pressures as long-term structural issues for our business, but rather as a function of the nature of the new programs that are the primary drivers of meaningful growth.

While the first year of our Kentucky program brought challenges, the difficulties encountered by all of the stakeholders in that program are examples of the types of issues that are common to periods of high growth. But, as we have also experienced in Kentucky with the Commonwealth's recent actions to ensure the soundness of the program, we are confident that our state customers will work with us to ensure program stability. And we are confident in our ability to perform for them and delivering quality, cost effective health care solutions.

In closing, I would like to recognize the hard work, commitment and significant accomplishments of our associates and I would like to extend a special welcome to our newest team members in California, Arizona and South Carolina.

Operator, we are now ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Carl McDonald with Citigroup. Your line is open. You may proceed with your questions.

Carl McDonald - Citigroup

Great, thank you. So I'm calculating the benefit from the 7% rate increase in Kentucky at around $0.90 a share. So I guess, first, is that a reasonable estimate? And then, second, if we didn't have that adjustment, would we have gotten guidance maybe somewhere in like the $3.60 to $3.95 range?

Thomas L. Tran

Hey, Carl, this is Tom. Directionally your calculation of the rate increase impact was in the right direction. So, we are obviously pleased with the action taken by the Commonwealth to make the program more solid and stable for the long term. And we expect the program to obviously make a significant contribution to our numbers.

Regarding your second part of your question, directionally you are in the right ballpark if your calculation of the rate impact was there. However, even without the rate impact, we have been making significant progress for the program and we expect that to really head in the right direction as well from a lower MBR for 2013, even without a rate action.

Alec Cunningham

Hey, Carl, it's Alec. In addition to Tom's financial response there, I think it's also keenly important to think about the strategic dimensions of the 2013 outlook. First, it's important to consider the three acquisitions that we closed in the fourth that we expect to close soon. Each of those requires a substantial investment for the integration into our technology, operations, compliance, et cetera.

And in addition, there's a strategic element that really has to be considered in the analysis surrounding the initial results. Each of these is really meant to further enhance our three-product strategy and to expand and enhance our geographic footprint. And not only are we investing in 2013 to integrate these companies, but we're also investing to improve the performance and position them well for future profitable growth.

For example, the California acquisition has more than tripled its memberships since December of 2011 and that rapid growth means that the business requires significant investments and infrastructure to ensure not only the strong performance for existing members, but also to position it for future strong growth and enhanced profitability. In addition, the rapid growth has led to relatively high sales and marketing costs in 2013, which over the longer term are going to normalize.

If you think of South Carolina, while we acquired an operating presence in membership, we knew we would be making meaningful investments in the plan in 2013, really almost as if it was a Medicaid greenfield operation. So, these investments are important to positioning us to capitalize on the state's continued use of managed care and we're also investing for a future launch of Medicare Advantage.

If you think about Arizona, we acquired a small MA presence in the northwest corner of the state, but we knew from the onset that this was simply going to be a toehold in a highly attractive market. So, during 2013, we're investing to expand our service areas south and east and into other counties of the state. So, I think there's a helpful strategic dimension to thinking about the financial components that Tom described.

Carl McDonald - Citigroup

Great. And then a separate question. Do you have an estimate of how much you think the days claims payable is going to fall in the first quarter? Just thinking about it, it looks like the Easy Choice deal given the timing would have inflated base claims payable in the fourth quarter, so that will be a hit next quarter. And then you have also talked in the past about some pretty significant seasonality associated with the PDP business. So any guidance that you've got for that?

Thomas L. Tran

Hey, Carl, this is Tom. We don't provide guidance on DCP but it will be fair to say that generally the Easy Choice plan is running at a lower DCP because of its significant capitation in that program. And as you look into 2013, our business mix has changed significantly. So that certainly will create some potential change in DCP. But at this time, I'll refrain from making any kind of prediction on that. But we're still comfortable from where we are on the DCP structure at this time.

Carl McDonald - Citigroup

Great, thank you.

Operator

Our next question comes from the line of Tom Carroll with Stifel. Your line is open. You may proceed with your questions.

Tom Carroll - Stifel Nicolaus

Good morning. Another question on kind of the headwinds to your outlook for this year. On flu, what do your first quarter '13 expectations kind of bake in, in terms of how they compare to what the last quarter was? So the higher claims that you saw in the fourth quarter, did you kind of take the same amount and kind of build that experience into first quarter or a little more, a little less?

And then, secondly, could you give us a sense of -- and, Alec, I think perhaps you touched on this a bit in your response to Carl's question, but could you give us a sense of the headwinds you see in 2013 related to the recent acquisitions made? And it sounds like you've got no accretion at all from those deals built into your 2013 view.

Thomas L. Tran

Okay, Tom, this is Tom Tran here. I'll provide some context and Alec can add some additional comments to that. Relating to the flu costs, we certainty have seen flu expense to be quite high in December, much high than we normally see over the last couple of years and it came in earlier this year, this past year in December. Typically, you see it more in January and February. In January, we did also see higher flu expenses but it seemed to be somewhat less than December. So we believe that the flu incident has stabilized.

Now regarding to factoring that in the quarter, obviously we know about it. It's in our quarter one expense, but we don't provide quarterly guidance here. So we factored it in 2013 guidance range obviously. Regarding the headwinds you talk about, the three acquisitions that we have included in our 2013 guidance, they are accretive. They are making contribution from the earnings. However, as Alec mentioned before, they are operating at somewhat lower margin than the average of the WellCare book before the acquisitions. And we're making significant investment and integration to enhance the operation to improve the earnings going forward as well to grow in those markets.

Alec Cunningham

Tom, just to reiterate that, each of those states really is a launching pad for new geographies, new counties and products. So as we mentioned earlier, we're making – what we view as appropriate expenditures under our three-product strategy whether it's improving operations to prepare for future growth or expanding the service areas for future years in the programs or in the case of South Carolina as I mentioned, that's really got many of the characteristics of a greenfield launch there.

In addition to the specific acquisition that you asked about, we are continuing to make investments to strengthen our business for longer term success primarily around quality and care management. We continue to invest in technology and the capabilities to improve our care management, the indemnification and closure of care gaps, et cetera. And then of course the various provisions with the Affordable Care Act will be taking effect in '14 requiring attention and financial resources this year. So, I'd really characterize these as investments that are necessarily and appropriate for the long-term performance of the business.

Tom Carroll - Stifel Nicolaus

Great, thank you.

Operator

Our next question comes from the line of Scott Green with Bank of America Merrill Lynch. Your line is open. You may proceed with your questions.

Scott Green - Bank of America Merrill Lynch

Hi. Thanks for the questions. My first question is around the Florida RFPs. What is your confidence level in your competitive position on the upcoming TANF RFP? And what feedback have you received from the state around the long-term care RFP results that supports your outlook?

Alec Cunningham

Thanks, Scott. Since the MMA is an active procurement, I won't comment on the specific details of the RFP or planned approach other than to say that we think we are well positioned. As you know, we're a Florida-based company and we have significant relevant experience since we've served the Florida Medicaid program for over two decades and in addition, our Medicare and Medicaid plans have recently gotten accredited and we have a substantial presence across Medicaid, Chip and Medicare Advantage.

I would say in terms of the feedback from the long-term care product, we've gotten the responses and it's been helpful to us to be able to have the question-level detail scoring narrative and other things that can inform our thinking and our strategy for the MMA response. But given that we are in the middle of that competitive procurement, I won't diagram our strategy, so to speak.

Scott Green - Bank of America Merrill Lynch

Okay. My other question is related to the Medicare MLR and it looks like there are new MLR disclosures there, so that's appreciated. The fourth quarter Medicare MLR I believe was 86.9% and Tom, you talked about how that includes some unfavorable development, investments in care quality, I imagine some flu costs, low risk scores on new members. But the 2013 segment MLR guidance is flat, I believe, from that number at 86.5% to 87.5%. So, first part, why wouldn't there be improvement in 2013? And then in broader context, that seems to be a more elevated ratio still versus what you historically operated at. Is there room for improvement, generally speaking?

Thomas L. Tran

Good question there, Scott. Let me just talk about, chip away at some of the key drivers of how we look at MBR in 2013 that is higher than 2012, so that's the outcome of (inaudible) obviously, number one. Number two, Easy Choice which is becoming a larger -- a significant portion of our MA book of business, almost 20%. And it is operating at a higher MBR than our average book. Certainly that's going to obviously drag the average up.

Also contributing to that is that, as you know, in 2012, we -- for the whole year, I'm looking at, we have some obviously favorable development for the whole year and that fourth quarter, we obviously have unfavorable development. So, if you take that out, certainly the number was somewhat better in the fourth quarter.

So those combined experience plus what we have seen in terms of somewhat, as I mentioned before, high utilization in 2012 for MA inform us on how we should factor that into our 2013 projection.

Scott Green - Bank of America Merrill Lynch

Okay, thank you.

Operator

Our next question comes from the line of Chris Rigg with Susquehanna. Your line is open. You may proceed with your questions.

Chris Rigg - Susquehanna Financial Group

Good morning. Thanks for taking my question. I just wanted to come back to Easy Choice real quickly. Can you give us a sense for how that entity sort of on a stand-alone basis did during the annual enrollment period? And I guess more generally on that, how comfortable are you that the plan design out there is adequate and that you're sort of protected, and if the enrollment growth was fairly meaningful that basically we're not going to see a problem there sometime this year?

Alec Cunningham

Sure, Chris. Two comments of that. First, I'd talk about the contracting structure to the second part of your question. And almost all of Easy Choice's membership is served under some form of capitation which is the prevalent physician reimbursement model in Southern California. Roughly 40% of Easy Choice's membership is under full risk global capitation and then the remainder is operating under profession capitation. So that's substantially more risk transfer and greater use of capitation that we have in many of our other markets and we think that provides obviously a helpful protection on the claims cost side.

In terms of growth, the plan ended 2012 at about 39,000 members. As a result of the Annual Election Period, membership reached about 52,000, so net increase of about a third. And in terms of the populations and benefits that they serve, they're focus is on the lower income segments of the Medicare population, including the duals and that, as you know, is complementary to WellCare's focus on the same segments of the population. They've also done a good job of strategically developing their network in terms of primary care physician community in California that serves the low income Medicare eligibles and particularly with focus on certain demographic and cultural segments.

And that's led to them being an attractive provider network to a similar population of those that WellCare concentrates on more broadly. And those plan terms and the designs and the network relationships then have made them an attractive plan choice to the agent and broker community. We've also then since acquiring them have crossed sold approximately 2,500 of our PDP members and we think that's going to be a continued attractive growth opportunity for us.

So, in terms of the populations they focus on, how that informs their network strategy, how that has then made them attractive to the agent and broker community, we think it's a good sustainable model. It complements well the way we run our business on a national basis and particularly the effective cross-sell of the Part D membership, I think, is something that -- it's a hallmark of our three-product strategy and I think that's going to provide us continued opportunities, particularly in the LA area.

Thomas L. Tran

There are a couple of other things here, Chris, is that since the acquisition in November, we have instituted WellCare medical management practice and model in California, that we believe that over a period of time will help enhance the medical cost structure as well.

Chris Rigg - Susquehanna Financial Group

Okay, thank you. And then a follow-up -- well, not a follow-up; in Missouri Care, will that be immediately accretive to this year's earnings?

Thomas L. Tran

Yes. We believe that when the transaction is closed, which we expect either late first quarter or early part of second quarter will be accretive to our earnings. And when that is to happen, then we'll provide some additional information.

Chris Rigg - Susquehanna Financial Group

Okay. And then one last quick one here. On the debt, you ended the year with $120 million of long-term debt. You talked about $230 million of new term. Is that on top of the $120 million, or is there a net there?

Thomas L. Tran

So at the end of the year, we finished with about $135 million debt outstanding. So the $230 million additional term loan we just closed yesterday will provide us with approximately $365 million of outstanding debt. So that's where we stand as of today.

Chris Rigg - Susquehanna Financial Group

Okay, thank you.

Operator

Our next question comes from the line of Josh Raskin with Barclays Capital. You may proceed with your questions.

Josh Raskin - Barclays Capital

Hi, thanks. Trying to figure out sort of the underlying change in guidance, excluding Kentucky again, so I think if you talk about this 7% rate increase and then another 3% for the second half of the year, sort of blended 8.5% on revenue even excluding Region 3, maybe that's $900 million or so. You're talking about something north of $75 million of incremental profits there after-tax. I'm getting something a little bit north of $1.

So if I think about the guidance, excluding PPRD in '12, I think your guidance is up $0.68 to $1.03. And then you mentioned the acquisitions weren't actually accretive. So I'm just trying to figure out what's going on with the rest of the book? Is it all these targeted investments, et cetera, or is there just no assumed improvement and we'll just see if that comes in later?

Thomas L. Tran

Yes, Josh, this is Tom here. So obviously in 2013 that we detail in our prepared remarks that we certainly have had wins relating to Part D. As you know, our Part D premium revenue, if you look at the range of premium reduction could be over -- between $200 million and $250 million.

Furthermore, the medical benefit ratio for that is also higher. Certainly, so there's margin contraction as well as total gross margin reduction relating to that. And a second piece of that, as I mentioned before, is that the MBR for the MA is also higher and that certainly has some impact on the overall EPS buildup.

Then a third component of that is potentially that we're making significant investments in many of our infrastructure as well as investments in the integration of these three acquisitions and the Affordable Care Act preparations. So those higher SG&A expense certainly have an impact on our EPS there.

Josh Raskin - Barclays Capital

So I guess I don't know, your G&A ratio is not really going up so -- and then I guess specifically on the acquisitions, are you saying they were accretive even including these incremental expenses or investments that you have to make? Or are you just looking at them on a stand-alone basis before WellCare's strategic sort of improvement?

Thomas L. Tran

Yeah, they are accretive at both directions, before and after certain investments we made to really enhance operations.

Josh Raskin - Barclays Capital

Okay. And then just last follow-up on the Florida long-term care scores. Your scores obviously probably didn't come in where you had expected. Was there something specific that drove the actual scoring process, or the scores relative to your peers? Do you think there was any impact from sort of prior indiscretions in the state?

Alec Cunningham

Josh, it's difficult to pinpoint any one factor that had a meaningful impact on the outcome. It sounds like you've seen overall, it appears that those with incumbency and the Florida nursing home diversion program had the strongest results from the procurement. And so we didn't enter that program until last summer and had just a handful of members at the time of the procurement. But I would say it's very helpful to have those details and the scoring from the MLTC procurement as we think about our response and our strategy for the MMA response. But given that that is an active procurement, I wouldn't offer more commentary.

Josh Raskin - Barclays Capital

But, Alec, you don't think it was related to the investigations in Florida previously?

Alec Cunningham

As I said, it sounds like you've seen the score in detail and I wouldn't pinpoint one item of differentiation.

Josh Raskin - Barclays Capital

Okay. Thank you.

Operator

Our next question comes from the line of Matt Borsch with Goldman Sachs. You may proceed with your questions.

Matthew Borsch - Goldman Sachs

Yes, hi. Good morning, guys. Just looking ahead a bit here on the Medicare Advantage side, can you tell us -- I realize we haven't gotten the preliminary rate for '14 yet. But as you look ahead and you look at the benchmark change and the industry fee and the step up in the risk adjuster, would you anticipate that you'll need to make some significant benefit reductions going into 2014 based on what you know at present? And a related question is, although this would be for '15 really, but do you think that the star scoring methodology may change to better address the population that you're serving?

Thomas L. Tran

Matt, this is Tom here. So, 2014 certainly -- we're still waiting for obviously CMS guidance relating to rate structure that will be coming out very shortly. However, put that aside, we certainly have a number of levers and tools that we can still apply to, including risk adjustment which we are investing in to make sure that we are not optimizing the reimbursement structure.

We are obviously working very hard with our providers on managing the medical cost structure and then managing our SG&A to hopefully improve that, so that we can have a better structure in bid for 2014. So they are still obviously too early for us to dive into the benefit structure at this time, but certainly that can also be a lever for us to look at as well.

Alec Cunningham

Matt, it's Alec. On your last question around stars, I do think there's a growing awareness of how some of the health status demographic, economic, other characteristics of the lower income and populations has really been a focus of our program create a unique set of issues relative to the broader Medicare population and there is certainly active dialogue about the potential appropriateness of doing something different in terms of evaluating quality and outcomes for those populations. That's a dialogue we've been involved in. We're working to share data and information in our perspective with our federal customers. So, we welcome that discussion. I wouldn't handicap a policy decision but I am pleased that there seems to be a heightened awareness around that issue.

Matthew Borsch - Goldman Sachs

And if I could throw one follow-up, your rate increases for Kentucky Medicaid, are they intended to somehow be inclusive of the industry fee that's going to obviously not start this year but January 1, 2014?

Thomas L. Tran

Matt, it's Tom. The answer is no and we expect that as we work through our state customers that we expect to see will somehow be an element of the cost structure to be part of the development of actuarially sound rates. So we expect that to be part of that structure.

Matthew Borsch - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from the line of Michael Baker with Raymond James. You may proceed with your questions.

Michael Baker - Raymond James

In terms of the quality initiative spending in 2012 compared to 2011, you gave us a sense of how meaningful that grew, the 60%, if you will. Can you give us some range for what you would expect for 2013 and a sense of in terms of how much that spend is relative to Medicare and Medicaid?

Thomas L. Tran

Michael, this is Tom. We don't break down those expenses at that detail level. But I would say that directionally, they are proportion to the premium revenue increase that we are investing in. So it will be a significantly higher number on an absolute dollar basis because of the premium growth of about 19%, 20% in 2013.

Michael Baker - Raymond James

That's helpful. And then in terms of -- is there work that you're doing to improve your technical scores as it relates to kind of going out for new contracts? And was wondering if you could give us some color on what those are and when you would anticipate some pay off there?

Alec Cunningham

Sure, Mike. There are a number of different things that seemingly have the same definition of the technical scores that everything on the accreditations that we mentioned earlier of NCQA and (inaudible) that we've achieved historically to the different components of the stars system, be it (inaudible), caps, various other things. So, broadly, early indemnification of care gaps and finding that through our clinical work and our claims harvesting and indemnification initiatives to close those care gaps, improving the service experience, meeting our customers' expectations are the broad set of initiatives across our clinical programs, our customer service programs, our network, making sure that we have the appropriate network and the right set of aligned incentives and our reimbursement for pay-for-performance, pay-for-quality, those sorts of things. And then as Tom mentioned, significant investment in our infrastructure, upgrading care management and quality systems capabilities in our shared service infrastructure as well.

Michael Baker - Raymond James

Thanks for the color.

Operator

Our next question comes from the line of Sarah James with Wedbush Morgan. You may proceed with your questions.

Sarah James -Wedbush Morgan

Thank you. I'm still just trying to get a better understanding of the underlying earnings of the business. So some of the headwinds you mentioned today as far as enrollment Part D margins can be considered part of your ongoing business, but the incremental investments in integration spend, it sounded like that was a '13 specific event that wouldn't repeat. So can you help us size headwind-related, just to the non-repeating parts of the investment integration spend?

Alec Cunningham

Well, Sarah, just to clarify -- Tom can give a financial answer. But some of the growth, development and expansion expense for some of these acquisitions certainly could recur in the future years to the extent that we're building out networks and a service area expansion for 1/1/'14 or 1/1/'15, particularly in some of these markets where we currently have a smaller footprint relative to the number of counties in a given state, that's certainly something that can be an ongoing expense into the future years.

And as also we mentioned, for example, in South Carolina, currently what we're working on is the launch of -- internally on our operating platform of the Medicaid business, but as we've said previously we do look forward to in the future years adding the Medicare Advantage product as well. So those acquisitions are viewed as a vehicle through which we can expand products, geographies or both within our three-product strategy.

Thomas L. Tran

Sarah, this is Tom. I would not want to detail all the components of the expense that we mentioned before. However, it would be fair to say that '13 will be more of a "transition year" for a number of our spending, including obviously the three and four acquisition we just discussion before, investment in the ACA. Some of that investment in ACA will continue in 2014 obviously. And furthermore some of these investment in infrastructure will be higher in this year and that will have some payback for us in the future years in terms of operating efficiency.

Sarah James -Wedbush Morgan

Got it. And are there some tax headwinds built into your guidance as well? One of your peers had mentioned some key tax changes for treatment of management comps, so is that a factor, a headwind?

Thomas L. Tran

Yes, there is some but it's not material. And that we look at our tax rate to be in the 38.5% to 39% or so.

Sarah James -Wedbush Morgan

Okay. Second question here, you extended your credit agreement by $230 million yesterday and drew down another $230 million. So I was hoping that you could update us, given your current capital position, on how much incremental revenue you believe you could fund without further capital raises?

Thomas L. Tran

So our risk-based capital is very strong and we're at approximately 450% RBC at the end of 2012. So we do have still a strong capital base really sustained additional growth at a very, very significant level. So we don't need to really pump any additional capital into our regulated subsidiary to really support the growth in '13 and potentially '14. However, the additional fund raising which is complete give us more flexibility on how we obviously need any kind of business development activities, both organically or through acquisition and that's why it gives us much more flexibility to deploy the capital.

Sarah James -Wedbush Morgan

Thank you.

Operator

Our next question comes from the line of Peter Costa with Wells Fargo. You may proceed with your questions.

Peter Costa - Wells Fargo Securities, LLC

Hi. Thanks for squeezing me in. A couple of questions, just kind of going back on a couple of things that you already talked about, but the 7% rate increase in Kentucky, was there any incremental spend that you would have otherwise been able to avoid had you not gotten that rate increase? In other words, did you offer up any concessions that you'd do something that you otherwise wouldn't have done to get that 7% rate increase?

Alec Cunningham

Peter, as we've talked about for the last couple of quarters, we've been working very, very hard to reduce our overall medical expenditure through a number of different levers in the marketplace, vis-à-vis different network activity utilization management and other things and all of those were works in progress. I think we and others have talked about those efforts. But this really, as I've mentioned earlier, was a collective effort, a commitment by Governor Beshear and his team, us in terms of identifying what's it going to take to stabilize the program to make sure that it works on a long-term basis. And that was the theory and the tone of what [underlied] the negotiations.

Peter Costa - Wells Fargo Securities, LLC

I guess I'm not understanding. So there were or there were not any offsets that you agreed to, to get the 7% rate increase?

Alec Cunningham

No, there weren't. If I understand your question, no.

Peter Costa - Wells Fargo Securities, LLC

Okay. And then moving on to the Medicare MLR, you identified sort of five items that caused the 700-point increase in the MLR in the fourth quarter and maybe three items that were responsible for sort of the 250 basis point increase in the year-over-year MLR for your guidance for 2013.

A couple of those items that weren't there from the fourth quarter into the future I would expect to recur and you didn't have them recurring, including the lower risk scores on new members and then the higher utilization. You didn't mention either of those two for informing your guidance for 2013. Are those factors that will go away, or I would think that they'd still be sort of around?

Thomas L. Tran

Peter, let me just check away that and first of all, on the risk adjustment relating to our new members, obviously for new members especially Asia, and we have very low risk score for those members -- we have none actually. So you are assigned very low risk score for that in the first year of operations. And that you can see the growth that we had in 2012 was much more significant than in prior years.

So that obviously has an impact on our lower premium PMPM which we believe that going into 2013, we'll have an enhancement in that structure in terms of reimbursement. So 2013 obviously we also had significant growth. You can look at that, obviously Alec mentioned before, our growth MA during an AEP was about 15%. So obviously we'll continue to have some of that impact (inaudible) is a smaller level in 2013.

Relating to utilizations, obviously we did see some higher elevated utilization for flu and then a normal utilization for MA. We did see that slightly higher than the past few years, if you will. However, '11 and '12, as you know, we're up normally lower, especially 2010. So while the utilization trend is somewhat higher, we don't believe that that is going to have really materially impact the MBR that we just discussed before. However, we did factor some of that into the MBR as we developed a new projection.

Peter Costa - Wells Fargo Securities, LLC

Okay, that's helpful. Then sort of on the same point, you mentioned quality in both the fourth quarter and for the full year. Your star program scores this year will be very, very important for 2015. Have you stepped up the quality initiative spending to try to get higher star scores?

Alec Cunningham

Yeah, Peter, we actually -- we certainly have and that started last year. It's reflected in some of the data that Tom has shared that we -- yes, we've absolutely spent across the different dimensions of stars from the HEDIS care gap closure and the aligned incentives, pay-for-performance, pay-for-quality and then other investments and our infrastructure around the caps, the member experience and our care management program. So we absolutely have.

Peter Costa - Wells Fargo Securities, LLC

And then by what amount? Can you quantify that at all for us?

Thomas L. Tran

We don't detail that expense, Pete, but I would say that as Michael asked before or someone asked before that proportionally to the premium, we obviously will incur about a same level, as you look at our MA premium growth almost 50%, so you can think about it from that proportional dollar view point.

Peter Costa - Wells Fargo Securities, LLC

Yes, I heard you say that, but that doesn't really increase the spend to try to get higher quality scores. That just increases it on a per member basis, so it's not really targeting more. I guess I'm trying to figure out why wouldn't you have pushed it even further this year?

Thomas L. Tran

The answer is yes, we have pushed a lot this past year, 2012. And that from a -- I would say that from a percentage premium viewpoint, it was high in 2012 versus 2011.

Peter Costa - Wells Fargo Securities, LLC

Okay, thank you.

Operator

Our next question comes from the line of Scott Fidel with Deutsche Bank. Your line is open. You may proceed with your questions.

Scott Fidel - Deutsche Bank

Thanks. Just had a question on expectations for Part D earnings seasonality in 2013 and whether you're expecting that will differ from 2012 just relative to the mix changes with the reduction in lower income subsidy members? And then also, just with the move to more enhanced membership, how that affects seasonality of the MLR? I know United had been talking about how they expected MLRs in the enhanced products are higher in the first quarter and then lower throughout the course of the year, and whether you expect that same type of seasonality in that product?

Thomas L. Tran

Yeah, this is Tom here. So, as you're aware, the PDP in our first quarter always run fairly high MBR. It's not uncommon to see MBR in a level 100% plus or minus. And that's what we expect from the seasonality viewpoint for both the base product as well as the enhanced product. So, the seasonality pattern at least from our viewpoint is quite comfortable from what we have seen over the last couple of years or so; very high first quarter, somewhat tame in the second quarter and then dropped third and fourth. And that's the same seasonality pattern that we are expecting.

Scott Fidel - Deutsche Bank

Okay, so there's really no seasonal difference between the enhanced product relative to the other PDP products in terms of thinking about sort of first half versus second half?

Thomas L. Tran

For the enhanced product, I would say it's too early for us to make that kind of so called specific read into it. That's obviously a new product for us and we're watching that carefully. But we don't have anything more to say until perhaps going into the next quarter or earnings call when we have a better sense of what that looks like. But that's our pattern projection.

Scott Fidel - Deutsche Bank

Okay. And then just had a follow-up, just back on Kentucky and clearly a lot of rate relief you're getting there. Have you been able to analyze sort of how much impact on your margins or on your MLRs can happen if Centene does exit as planned in the middle of the year in terms of the acuity profile of their membership?

Clearly, the rate relief would suggest that you'll have some significant cushion for that, but would you expect that the acuity profile would deteriorate a bit if Centene does exit and you get a lot of their members? Thanks.

Thomas L. Tran

From what we know -- from what we have learnt from the state is that the Centene population has a much lower risk score than the average of the market. So, obviously, as you assumed the number, if that was to be the case, and the state allocated numbers to the other remaining MCOs should they exit the market and the state is still formulating their strategy, their policy on that, so we cannot comment on that. However, with a lower acuity there, so obviously your premium will be adjusted. But as you know, our premiums per member per month are higher than the other two MCOs. So we view that. That should put into a potential advantage position should the medical cost structure aligned with the acuity of the members.

Alec Cunningham

Scott, it's Alec and what I would say is that the changes that came through this contract and the recently policy changes from our perspective stabilized the program and made it long-term sustainable. And with that as a backdrop, we're frankly prepared to serve as many Kentucky program members as our state customer and partner deems is appropriate. So, we're very pleased with the actions that they've taken both from a policy and an economic perspective and would welcome the opportunity to take on additional membership under these terms.

Scott Fidel - Deutsche Bank

Got it, okay. So the bottom line is that the Centene membership actually did not have a higher acuity profile than the rest of the market. So if their loss ratios are running a lot higher that could be due to other factors like relative pricing?

Thomas L. Tran

Yeah, we obviously don't have visibility into their claim experience. However, the risk score disclosed by the state seems to indicate that the members have a lower risk score than the average of the markets.

Scott Fidel - Deutsche Bank

Okay, got it. Thank you.

Alec Cunningham

Thanks.

Operator

Mr. Cunningham, at this time, we have no further questions. I'll turn the call back over to you.

Alec Cunningham

Great. Thank you, operator. Thanks to all of you for participating in today. We look forward to speaking with you next quarter. Have a great day.

Operator

Ladies and gentlemen, this does conclude the conference call for today and ask that you please disconnect your lines.

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