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Centene Corporation (NYSE:CNC)

Citi Global Healthcare Conference

February 26, 2013 11:00 AM ET

Executives

Ed Kroll - SVP and IR

Analysts

Unidentified Analyst

Up on stage with me is Ed Kroll, Senior Vice President and Investor Relations at Centene. so we do have a microphone in the audience for when questions come up, but starting with the number one question that I get from people these days on Centene is, when are they going to risk capital and yes I think you did take on the $150 million in debt not that long ago but seems like that basically just went straight to Kentucky to Beckville there. So I guess get the first question around that would be, what do you think is a reasonable debt to capital ratio? So if I look at sort of 40% the norm and that would translate to sort of 100 million in incremental debt that you could take on, is 40 the cap or would you be willing to go above that?

Ed Kroll

And thanks for having us here Carl. We appreciate all the work you do on our stock and in this space. At 12.31 we were just under 33% if you exclude the building loan which is like a mortgage, its nonrecourse, our second headquarters power is nonrecourse to Centene. So you if exclude that, it’s just under 33% and I think it can go higher from there and we do have a pending acquisition that we’re doing of carrier health, a specialty pharma company that we will be paying for about 60% of that with stock, Centene’s stock.

So I think from a debt to cap standpoint, that will bring it down slightly a little bit, and I think we’re comfortable with the strength of our balance sheet. The transaction you mentioned from November where we increased the size of the senior note offering that brought the revolver down to zero and that as a $350 million revolver, it’s expandable to $400 million, so we’ve got that available to us. And we will manage the balance sheet as we always have. We’ll do it very efficiently, appropriately, always with our shareholders' best interest in mind. So I think we’ve got some room to go, I don't want to put a number out there specifically, but I think we've certainly got the ability to tap the revolver and some room to move up on the debt to capital where we ended 2012.

Unidentified Analyst

So when you think about it internally, then you think about our debt to capital as 33% as opposed to 37% without the non-recourse loan?

Ed Kroll

Yes we do, and in our press releases, all of them, not the latest one of course for the fourth quarter we disclose it both ways with and without the non-recourse loan, of course. The other thing to keep in mind, we have had some good internal cash flow generation over the last couple of years and 2013 should be no different, and so that will certainly be helpful for this whole process as the year unfolds as well.

Unidentified analyst

So, you mentioned you'd be using $90 million in stock to pay for Acaria. Is that stock is going straight to their shareholders, or is that stock you're going to issue to the market and then use cash to…

Ed Kroll

Yes, that will go the current owners of Acaria.

Unidentified analyst

In Kentucky Wellcare, Coventry I should say and Wellcare just announced big rate increases, you guys haven't said anything, so is that your penance for leaving early and doing the state or are you working on something?

Ed Kroll

I guess all I can say on that, there are some, certainly some legal issues pending there we announced last year that our intention to exit the state and we're continuing to proceed down that path. We booked a premium deficiency reserve that had about $42 million left on it at 12.31 so I think we're just proceeding as we have been and I'll just leave it at that. Our view was that the program had some serious flaws and it was unsustainable situation for us and we took appropriate action.

Unidentified analyst

So in the scenario where you've got to stay in Kentucky beyond July for whatever reason, would the current thinking be, essentially we just take another charge for however long if we had to stay in another quarter beyond July, we just take a charge to account for that?

Ed Kroll

Well, first let me say we feel like our position is, to our contract that we signed with the state that we do have the ability to exit on July 5, and so we're confident in our ability to do that. If, or I should say more broadly, at any point in time, one would look at the operating issues in a market like Kentucky such as we did increase the premium deficiency reserve during the fourth quarter of 2012 because that’s what the formulaic, the calculation told us we should do so I suppose and again, we're very confident in our ability to exit on July 5th. If for some reason we were found ourselves in the market beyond that date, we would reevaluate what we’ve got, sitting on the balance sheet in terms of the premium deficiency reserve there.

Unidentified Analyst

And can you just walk us through the milestones that we should think about in Kentucky in terms of the major events between say now and July?

Ed Kroll

Well, I think the first thing that has to play out is the so-called administrative appeal and the health cabinet has already rejected it. This is part of the process that any health plan would have to go through to exit the first part of the process and now it’s in the hands of the finance cabinet and so they will next rule up or down on our appeal and we have also filed a lawsuit as you know in the commonwealth against the state and so once those administrative appeals are ruled on, then the matter will move forward in the courts and the judge in the case actually when the commonwealth of Kentucky asked him to dismiss our case, he did not and he said what the administrative process play out first and then it will come back into the court.

Unidentified Analyst

Okay, so the finance cabinet meeting is the ruling coming at the end of March or is that when the hearing is held then the ruling comes?

Ed Kroll

I think they have until the end of March to make a ruling naturally, to make a decision.

Unidentified Analyst

A big topic in the fourth quarter and then into January at least the CDC data and Google data suggest that things have improved since then, anything in your claims data that’s a supporter of that?

Ed Kroll

To support, we’ve been pretty much all along tracking with what the CDC data in particular have said and or has indicated I should say and that continues to be the case, so that would suggest that the peak was at some time middle of January there about and we continue to track in line, our internal data continues to track in line with the CDC.

Unidentified Analyst

On the exchange front maybe I just start, just give you a chance to walk through what the exchange strategy looks like from your perspective?

Ed Kroll

Sure. Well, I think we feel Centene, we feel like we’re very well positioned for the advent of the exchanges. We have contracts with the connector in Massachusetts. We’ve also got a hybrid contracts as we would call them that would look similar to what one would see in exchanges in 2014 and beyond in the states of Indiana and Texas where people are getting subsidized. They are purchasing their own health policies either individuals, families, small groups but they are getting them through a state government-sponsored exchange and in some cases depending on their income, they’re getting subsidized by the state for those monthly premium. So, this goes back to our Celtic acquisition of 2008 where we acquired the tools, the skills to do individual and small group policies so the advent of the exchanges through the ACA, it’s good for us, it’s consistent with the steps we've taken previously. We haven't been all that specific as to where or how we will play but I think we did say at our December 14th investor meeting that certainly the states that we already have a footprint in, where we already have a presence, those would make sense to take a good look at, whether or not we want to participate in exchanges and then it would be at least initially more logical work or I should say logical for us to focus at the lower income levels; maybe somewhere between 133% and 250% of the federal property, somewhere along that line.

And then we think an important concept is this notion of churn, people moving in and out of Medicaid eligibility. If someone in the household gets a job or a better job that moves their income above the threshold for Medicaid coverage. We think it would be strategically a very good place for us to be if we could offer that person a seamless transition into an exchange product once they lose their Medicaid coverage and we would hope to leverage our existing networks of physicians and hospitals to service those people, whether they are in our exchange product or in Medicaid.

Unidentified Analyst

And as you go through that exchange process, where are you on the provider negotiation, I think the thought, I think from a lot of Medicaid companies initially was; we're going to try to pay Medicaid rate. And what we know at least for their part, at their investor day last week, they said, look we're far off enough into the process and we can tell you it is Medicaid we are paying commercial and so just be interested in what your perspective is.

Ed Kroll

Well, I don't think I could make that broad a statement as they did but certainly we're in the process of talking to providers about what the rates would look like that we would pay them and I think quite frankly there is still, even though I am sure October 1, which is I believe when the open enrolment will start, or assuming everything stays on schedule, October 1, there is still a lot of work to be done, I think from both, getting information from the Federal government, the States as to what benefit packages will look like. So that’s still all work in process that we are working very carefully on. But I will say that I think the bottom line if you will, we think the cost structures and the actual premium rates will, they will be in sync if you will, so if, what Malena says turns out to be the case in some states, then I would suggest that the premiums in those states would be at a corresponding level to ensure that the health plan that’s executing properly can earn appropriate returns on capital and operating margins.

Unidentified Analyst

Yes, health insurance industries tax, so we've had somewhat recent example where at least the Governor’s budget in Florida included a line item for getting plans more money to compensate for the tax, any other examples you are aware of where the states have been sort of that discrete about things, we are going to pay for it?

Ed Kroll

No other names to be named or states to be named, but I think there is an understanding out there in the states about how the math works on this and the level of our pre-tax margins as a percentage of revenue, and without that sort of adjustment in the rates, that our pre-tax margins, would then be at levels that are too low to be actuarially sound. So I think I don’t have any, as I started with, I don’t have any other examples to give you or states to name but I think that concept is well understood and we're certainly bringing it up as we talked to States about future rates and we continue to believe that the reasons behind putting that tax in to help pay for the ACA really don’t apply to the Medicaid industry. We’ve always had to take all comers; we’ve never been able to discriminate against preexisting people with preexisting conditions.

Most of our members get auto-assigned to us and we’ve never had benefit packages with lifetime caps on them as one if you go back far enough, you could have seen those in the commercial arena. So we’re still hopeful that there will be some action to eliminate the tax at least for the Medicaid players and we won’t have to go through that exercises as Governor, Scott, has already baked it in.

Unidentified Analyst

Can you walk us through the latest thinking on the off cycle rate increase in taxes, it sounds like at Investor Day the viewers was getting on March 1st, we’ve got some documents from the statement, the latest (inaudible) it seemed like it chipped that a little bit into, we still think we’re going get it, it may not happen on March 1st, there is some legislative process that may have to go through, so what’s the latest thinking there?

Ed Kroll

While we still believe that that process is an appropriate one to play out for us to get additional premium and the Texas legislature is in session, they will be through the end of March and we continue to expect when all is said and done, we’ll have the type of rates that will enable us to get to normalize margins in Texas in 2013.

Unidentified Analyst

On the Medicaid expansion in 2014, I think at least from the market perspective, originally everybody sort of intrusion, 16 million people show up on January 1st, I think the latest CDO number is something around 8 million. Does Centene have a view on how that rolls out and do you think you’ll get a significant number on January 1st but it takes a while to ramp up or is the view that it’s going to be a fairly steady increase over the course of '14 and '15 but without that sort of tidal wave effect at the beginning.

Ed Kroll

Yes, and things can change, it's still a fluid situation, right, we're just still hearing from states like Florida that have maybe expressed initial thoughts about not participating that will be participating now, so, but I think the way you've described it as certainly a big incremental boost during 2014 and 2015, but yes maybe not a tidal wave on January 1st.

Unidentified analyst

And as you look at the people that are eligible for Medicaid coverage today, but haven't signed up, is there any detail or work that you guys have done in terms of determining of that because people don’t know they're eligible or is it just because it's a hassle to sign up and so just easier to wait until you show up in the emergency room and actually need some care to sign up.

Ed Kroll

Well I think it's a combination, and people that just aren't aware that they have that benefit available to them but also those that maybe feel they don't necessarily have any healthcare needs in the near term. But I think through various outreach programs, informational programs, I mean, the cost to a Medicaid beneficiary is negligible and so I think most people when they find out that they are eligible, they will take the trouble to sign up.

Unidentified analyst

And there's studies on both sides in terms of what the cost impact of those members will look like, is it going to be people that haven't had care or coverage for a number of years and have a lot of pent up demand, something what we saw a few years ago when you guys had picked up a lot of membership, when the economy went bad, or is it going to be 30 year olds that never go to the doctor and they're extremely low medical loss ratio, any insight that you guys have put together in terms of which way that's going to slant.

Ed Kroll

I think there will be both types, there will be people who have pent up demand who has been uninsured, who have slipped through the cracks of the old system that will now be covered, and then I think there will be some more young invincible types that rarely use their benefits so I think it will be a combination. I think now we've got, a lot of data we've accumulated, our geographic footprint continues to get bigger, so we've got a lot of data on a lot of different types of people and from the plans that we've started in places like Missouri and Washington getting the higher acuity, the mix continues to shift to the higher acuity for us so I think, we will book those new members conservatively to start out and I think the profile of those new members, it will be a combination of higher and lower acuity types.

Unidentified Analyst

Can I ask a question on health exchanges and Centene's involvement in those, have you started to file those products with states that are looking for health plans to participate?

Ed Kroll

We are in full swing with that process. As I mentioned, the open enrolments, if everything stays on schedule, will be October 1 later this year and I think filling deadlines are in the April sort of area in terms of the calendar as to letting states know which ones we want to participate in, so there is a lot of work being done at our company to figure out where we want to go and we'll get those decisions made and we'll be ready for that October 1 open enrolment.

Unidentified Analyst

Can you talk about the manner in which you will talk to the street about the Texas rate increase in terms of when the rate increase is granted and how that squares up with the assumptions imbedded in the 2013 guidance?

Ed Kroll

Well, I think the next, we'll report the first quarter, don’t hold me to this exact date, but it’s either April 22nd or 23rd which is it will definitely be a Tuesday. So, certainly we would comment that day, that will be webcast of course when the press release out for the Q1 earnings and we’ll be presenting obviously at a competitor conference in the middle of March and that will also be webcast, so I think those would be two opportunities to give updates in the appropriate way.

Unidentified Analyst

Have you assumed, how many months of 2013 have you assumed the overseas of rate increase from the state of Texas?

Ed Kroll

Well, remember we got a rate increase back on September 1st of 2012 that was approximately 4% so this additional amount that we’re talking about here, that Carl asked about and then we talked about on Q4 call, basically we have not said, we don’t give quarterly guidance. So we’ve got something baked in to the full year EPS of 260 to 290. But we have not quantified just exactly how many months or member months that is baked into that.

Unidentified Analyst

There was a fair amount of change in the management at the end of last year in terms of number of new people coming in and then existing executives either being eliminated or demoted in some ways, was that entirely related to Kentucky or whether other factors that went into that as well.

Ed Kroll

Firstly I would say it’s pretty much additive as we look at it; the two big hires, three really if you go back just a little bit more, hiring Dave Minifie as our Chief marketing Officer since we will be participating in exchanges, we will need to have somebody in that function. So he comes out of Procter & Gamble; so certainly that was a newly created position.

And then Ron Baldwin, heads up, what we call our insurance group; and that was another new category if you will, on the senior team, all three other people I am going to mention are Executive Vice Presidents, starting with Dave Minifie, Ron under his group will follow the exchange operations and so that's a new category.

Again, we had the Massachusetts connector and those hybrids I mentioned in Indiana and Texas but I think it is going to get a lot bigger starting in 2014. And then we hired Rob Hitchcock to head up the health plans and he is a seasoned executive; came out of Humana, so he got a good background coming out of that organization.

So, I think those are the three major changes if you will and tend to view those as additive given the growth of the company looking at somewhere in the neighborhood of $10 billion this year in top line and the build out of the exchanges. Rest of the senior team, I mean myself, I can't believe I am going to be here six years in May, time flies when you are having fun and we are having fun. It’s nice to be growing. Michael Neidorff, has been the CEO for many years; Bill Scheffel as CFO, Jesse Hunter on the development, Don Imholz, our IT head, Mary Maison, our Chief Medical Officer; you know those are names you have all heard for many years.

Unidentified Analyst

The RFP calendar les of a focus this year just given the number of opportunities. So you look at what’s out there, anything that you'd highlight other than Florida as being sort of the biggest targets for you.

Ed Kroll

Well that’s a very important state for us. We did well in long-term care, RFP that they had announced earlier this year, nothing that I'd highlight, but I think the ACA, the expansion, the advent of the exchanges, that’s all getting a lot of coverage now, but as are the dual eligibles and those all remain opportunities but there will be many others of the existing populations like you mentioned, existing populations that qualify for Medicaid today, there is still billions of dollars not of the spend associated with those people who are not in managed programs, think about ABD in Georgia, at some point that RFP will, we've been talking about that for a couple of years. But at some point that will be a pretty big one, even if say, add an additional vendor, nothing in that works near term. But I think we've said all in between now and the end of 2016 the total pipeline is $250 billion or some, $100 of that $250 in our existing markets, so big opportunities.

Unidentified Analyst

The contrast and that goes, when you look at that sort of, that pipeline now versus the pipeline that we have historically looked at is, the new pipeline includes a lot of market. The exchanges as an example were sort of the share of the likelihood of success lower given the new program and differences there, so if we think about 14, I think the biggest non-reform opportunity is probably the tools in Texas, is that still from what the status that on track to start in January ‘14?

Ed Kroll

I have not heard an update on that date for a while so I can’t answer that but I think if you think about Texas certainly I mean they run a good program I guess is what I would say the short version is, they typically do stick to their debt because they run a good program, they know how to do these things, they typically do stick to their deadlines. And I think it will be more of an incumbent driven rollout as oppose to a full blown RFP takeout comers. So I think that would also create a bias to hitting the deadline but I haven’t heard an update on that in a while, last I heard it was on tract.

Unidentified Analyst

(Inaudible) on the dual perspective, your dual strategy that you’ve already (inaudible) or in the rank for those and to follow that up what is your ’14 estimated dual or numbers up line?

Ed Kroll

Well the first part, we have one to dual demonstration projects, one is Illinois and one in Ohio and those are both state where we already have well developed provider networks for high acuity patients. We do a lot of ABD in both of those states and those are both scheduled to start in the fourth quarter of this year. As to 2014, we haven’t given guidance for 2014 of course but we said that over the next say between now and the end of the 2016 that we saw in our existing markets, we see total opportunity for dual eligible and that’s again only through the end of 2016. Somewhere in the $30 billion ballpark, so as our chairman likes to say, if we got 20% of that that would be okay. But that's about all we've said on that, we haven't given any specifics, we only give guidance out for the coming year.

Ed Kroll

Any last question? Great, thank you very much.

Unidentified Analyst

Thank you, Kroll.

Question-and-Answer Session

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