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Centene Corporation (NYSE:CNC)

Barclays Global Healthcare Conference

March 13, 2013 8:00 am ET

Executives

Michael F. Neidorff - Chairman, Chief Executive Officer and President

Edmund E. Kroll - Senior Vice President of Finance & Investor Relations

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

All right. Are we all set? Mic's on? All right. Good morning. Welcome to Day 2. Kudos for those that are here for the 8 a.m. presentation. I'm taking notes, I'm writing it down. You guys will get a special prize.

So kicking off the morning with Centene Corp. I'm going to introduce Michael and Ed in a minute. But first, as we've been doing for all the presentations, I want to start with some of the audience response questions, so get your little keypad ready. We're going to ask 7 quick questions.

The first one, I think, should be pretty easy for Centene. Do you think the health realm [ph] will be a positive in '14? Very negative is a 1, very positive is a 5 and sort of everything in between. Go ahead and click your answers as soon as the music's done.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. People are paying attention, it sounds like.

Question number two, do you expect the company to contract rates on exchange is going to be closer to the Medicaid rates at 1 or commercial at 5? What do you think?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Well, it looks like you've got some work to do, Michael, to convince them.

Number two, -- number three, I'm sorry, utilization trends, broadly for 2013, do you expect significant increase is 1 and all the way down to a significant decrease in 5? And again, we're doing sort of company-specific, so think about the Centene specifics.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. I would say, I don't know, mixed bag, tough to tell with the weighted averages there. We'll figure that out. We'll crunch the numbers at home.

Next one, how would you like to see the company deploy your capital: M&A repurchases, increase the dividend, repay the debt or invest in the core? 1 through 5 there.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow, some repurchases. That's old -- surprising. All right.

Next one, do you think the company will have [ph] earnings in 2014, yes or no?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

A much more balanced approach there, interesting.

All right, so appreciate that. Let me do a quick introduction. To my immediate right, I'll start with Ed Kroll, who coordinates Investor Relations, and he's been doing that role for several years now. To his right, and I apologize I've already taken up a long time so I won't do a long intro, but Michael Neidorff, the Chairman and CEO of Centene. He's been in that role since the company went public. It's now been -- are we at a decade yet? Are we...

Michael F. Neidorff

Oh, yes, 2001.

Joshua R. Raskin - Barclays Capital, Research Division

Yes, yes. So we've been there. So I've known Michael, obviously, for a long time. I could go through some of the statistics on where revenues and membership, et cetera, were. Let's just suffice it to say that things are significantly larger than our first meeting. We're going to do a fireside chat format today, so I'm going to ask a bunch of questions of Michael, and then we're going to hold some audience questions to -- until we get to Poinciana 3 for the Q&A. So hopefully, my mic is working, which it is.

Question-and-Answer Session

Joshua R. Raskin - Barclays Capital, Research Division

Michael, why don't you start with the management team? You guys have actually -- there's a lot going on in Medicaid land and your company specifically. You've made some changes. You've seen changes at the board level, but then specifically at the management level as well. How are you kind of preparing for what we see as a huge increase in the Medicaid opportunity?

Michael F. Neidorff

Sure, appreciate it. First, importantly, we just added 1 board member. It's for support [ph] . We -- as we talked last year, we know that we had to increase the bandwidth with the growth. When you go from $4 billion 3 years ago or so to $10 billion this year, you want to make sure you're building your team. We added 3 new people to what was a very strong team to begin with. We added Dave Minifie, who came out of Procter & Gamble, he's been there 10, 15 years, as our Vice President of Marketing -- Chief Marketing Officer, Executive Vice President. He's getting us ready and working out positions, brand positions and things, the company positioning, the strategies for going forward in the new environment. We added Rob Hitchcock, who joined us out of Humana. He's been there for many years, and he took over all the Health Plans. Mark Eggert who had, had that job, took a leave of absence for some personal reasons, has now rejoined us in a very senior position in the legal department. He was a practicing attorney when he -- before he joined us. And we recently added in the last 5, 6 months, Rone Baxter (sic) [Baldwin], who joined us out of Guardian and GE Capital, and he's used to large scale. He knows the insurance business, knows insurance sales. And he has joined us in a -- as the head -- Executive Vice President in charge of the exchanges. So they've been added to Bill Scheffel, our CFO; Jesse, our Chief Development Officer, so to speak; and the others on the team. And it's really -- the intent is, we're developing alternatives for somebody to be in the managing partner role that I have, between this partnership. And the whole idea is that, in 4 years or so, the board's going to have a decision to make which person will rotate through the management partnership first, so it's that type of approach.

Joshua R. Raskin - Barclays Capital, Research Division

Great. One of the big key differentiating factors of Centene relative to its peers has been your sort of multiline, specialty approach. You guys -- your most recently announced acquisition of a specialty pharmacy business is different than what we've seen from other Medicaid plans. And so I think I understand the strategy, but I guess my question, if I were to push back, would be, there is such a huge opportunity in what we think of as the management of the Medicaid population. Do we need these specialty businesses right now and how is your thought around the allocation of capital to those businesses?

Michael F. Neidorff

Okay. When I look at the Specialty Companies we've added, they're all very closely aligned to the services we deliver. We believe it's giving us a significant agility in how to -- how we respond to opportunities in the market. A good example is when we had our first request out of Texas for a foster [ph] care product, which had a very large behavioral component, I didn't have to negotiate with a lot of people outside of the base. I could say to our President down there, Sam Donaldson, "Sam, so whereabouts what's your rate? What portion of the premium is yours? We'll sort that out, and let's get it done in the next 2 months," and we did it. There is a pharmacy component where we would add that. So as you look at what the Specialty Companies are, they really contribute significantly to the flexibility and agility. They also provide a lot of free cash flow. When we did our bond offering, we were able to show a 10x to 12x ratio on our fixed charges. We're not asking the states for dividends, we do at times, but we don't have to with our management contracts, et cetera. So we see it also as important from a diversification standpoint, where we diversified by the number of states. It's now 18. With California, it will be 19. We'll drop back when we pull out of Kentucky, back to 18. We have many contracts within those states. We plant the flag with 1 contract and grow it from there. And then the Specialty Companies give us an added diversity. And by selling outside of the company, it keeps them very sharp and very agile.

Joshua R. Raskin - Barclays Capital, Research Division

That's great. Your track record around RFP procurements has been particularly strong in the last couple of years, industry-leading for win percentages. I don't know if there's an answer, but is there a secret sauce to the Centene RFP approach? Or what is it you think that's led to the success?

Michael F. Neidorff

I think there's really 3 factors. First, we can demonstrate systems that allow us to manage the care and deliver a quality product. Secondly, in 99% of the plans that we operate, the states will give us a very positive recommendation. They recognize that quality is, in our opinion, long-term, low-cost health care. And they recognize that we're implementing against that. And thirdly, I think we have a team that is sensitive to what the marketplace wants and looks for and doesn't look at an RFP as something "where were we the last time", it's more "where should we move to". So the one they did last was last year's news, let's move ahead. So I think they're always thinking about what can they do that's innovative and constructive for that particular state.

Joshua R. Raskin - Barclays Capital, Research Division

How involved does the board get? I mean, are they helpful in navigating some of that political waters around all of these [ph] ?

Michael F. Neidorff

We have a very strong board, very actively involved. Tommy Thompson and Dick Gephardt, they -- when we were putting Dick on the board, Tommy made the nomination for me to the board. Two of them remember the days when parties worked in a very bipartisan way, they work well together. We're going to see a Democrat, either one could go -- either one will probably come but they will travel with us, they will meet with me, and they have been incredibly strong in helping us design products. They told us, before the first time President Obama was elected, "No matter who's elected, health care reform is coming. Here's what you have to do," and we spend 2 days away at a retreat, designing what would happen with their help and support, and others on the board. So the whole board is very active. We do a 2-day retreat every year, and if there's time, we may play 9 holes. But more often than not, they say, "Let's keep working."

Joshua R. Raskin - Barclays Capital, Research Division

Great. One of the questions that I get a lot is, if you run the models out, you project the balance sheet, there's going a need for capital, if we're right, right? So how do you think about the timing and the mix of capital that Centene will need in the future for all of the potential growth?

Michael F. Neidorff

We hear that question a lot, so I'm really glad that I'm on open mic, so to speak, to get it out there. We have said that we feel, as we sit here today, we're adequately capitalized, have adequate access to capital to cover us through this year. You have to remember the states always look back a quarter to determine what the RFP [ph] . We ended last year with an untapped $400 million revolver. Last year, we disclosed that we had $280 million of free cash flow. We expect that to be significantly more this year. So a combination of free cash flow and the access to debt, we view as strictly reserves, as nonproductive -- not literally, but nonproductive capital uses with the returns you get. You have to do it to grow the business. We also are taking an approach for future capital needs of saying, if we can do when we need to do a deal, and we're not doing deals for this purpose. But for example, this pharma deal we just did, it had a component of stock and cash. The cash was to retire their existing debt, the stock puts equity on our books. If we do other deals like that, that's going to increase the equity component on the balance sheet, that improves the -- or increases the debt capacity. So we see this, going forward, that we will still be able to do it. If we don't do it -- we don't find the right acquisitions, we don't do it. Next year, at some time, we may have to go out. But as we get closer, we're constantly forecasting our cash. And through the end of this year, it looks like we're fine, even with the growth.

Joshua R. Raskin - Barclays Capital, Research Division

Great, which is helpful now, and as you said, an open mic, we've got that out of the way. One of the trends, obviously, in Medicaid Managed Care is the increase in the acuity or the complexity of the member that is being managed. The states are moving, obviously, more complex, higher-cost members into Managed Care. It's no longer a business of taking care of tenants [ph] . And so how does Centene think about capabilities, whether that's human capital or systems or clinical staff, et cetera? What are you doing to prepare to take care, for all intents and purposes, a new type of patient?

Michael F. Neidorff

Ed, you may want to add to this after I'm done. But we anticipated this. We have been advocating for the higher-acuity cases. Mississippi, Illinois, we started off with the ABD cases. We have the systems to manage it. We've spent $40 million, $50 million, $60 million, over the last 3, 4 years, developing those systems. There's a whole array of them. We're doing realtime, dashboards, so we can look today at what our trends are across the company, an individual plan or network who claims paid last night. We have CENTELLIGENCE. Part of it is a system. It's a core medical management. It looks at everything that's been done, looks at everything that's been ordered. The case manager has a realtime record that they can circulate through the various doctors that are involved with a complex case. They then can consult based on factual information, and we have a very strong positive trend for ABD and long-term care. The big contract we won in long-term care here, 10 out of 11 servicers I think it was, has a lot to do with the fact we have a long-term care product here and they see how well that's done. Ed, did you want to...

Edmund E. Kroll

Well, let me just add. You were mentioning multiline before, Josh, I think the Specialty Companies really enable us to tailor the med management programs having our own PBM, which will, of course, be even stronger with the specialty pharma acquisition. The behavioral health is a key component for dual eligibles, in particular, so I think those will really help us succeed with the high acuity.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. The most recent win in California, a new state for you. It's the big one. It's probably more of a toehold. I can't imagine they've -- long-term strategy is to just get in there in a couple of rural areas. So I'm curious how do you think about the progression of the state. And as we look at some of the peers, the state has been not the easiest to deal with, right? The rate increases have not kept up with the pace of cost. You've seen loss ratios fluctuate significantly and run higher than national averages, et cetera. So how do you weigh that sort of just pure size opportunity versus what historically has not been the greatest operating environment?

Michael F. Neidorff

I think it's all a matter of timing. We've said for some time there will be a time and place to enter California. This was a -- the right one. It is rural, but it's a new area, where you have 18 counties that we're servicing. We will have somewhere, as I recall, between 125,000, 150,000 lives, significantly need capital [ph] . So you have a large enough base. There's only 2 of us there, so you don't worry about selection and that type of thing to get started. In the business we're in, at any given time, you're going to have a state that have some financial problems, where you're working on premiums, you're working on some medical management, some policy changes. The benefit of having 18, 20 states is that you have -- they're not all going to be at the same place at the same time. That's why California was the right time now, because we have so much complexity -- not complexity, but diversity, and we are able to look across all our plans and say, "Let's move into California." It's large, it's important to be at, and you're so right. I think, if anything, this company has demonstrated is that, over time, it's not how fast, but how well. If we get into a state, we expand the product lines, we expand our presence. I think back when we first entered Texas, many, many years ago, we had 1,800 members the first year in El Paso. Of course, now, we have 950,000 lives statewide.

Joshua R. Raskin - Barclays Capital, Research Division

So 9 years from now, possible California is the new Texas? Is that...

Michael F. Neidorff

Well, let's see if we can do it a little bit sooner.

Joshua R. Raskin - Barclays Capital, Research Division

Fair enough. Speaking of Texas, there were challenges, obviously, several plans had challenges last year, and I think those are growing pains, anytime you see a massive expansion, and so what we talked about, the new members and levels of complexity. Any updates on what's going on in the state there, it's now you're largest so certainly top of mind when I think about the company?

Michael F. Neidorff

The state, the department of social services, the Medicaid department recognizes the need for an interim rate adjustment. They have been working through the activity [ph] required, a bill in the House and Senate. The leadership of both houses, we've never seen a leadership as supportive. They know what we're doing and what the managed care is doing in the state by and large. They're behind it. They're moving the necessary bills through. It still has to go through the governor for signature. And this is not an expansion, that's important to draw that distinction for the state. This is just correcting some rate adequacy in the rural market. So there's -- we're hopeful to get it done in the next short while. It will probably take CMS approval, if it does. When the revenue gets recognized, whether it be Q1 or Q2, it really -- it doesn't change the year. We'll have it for this year. The forecast and guidance for the year stays the same.

Joshua R. Raskin - Barclays Capital, Research Division

Fair enough. The other one, maybe to get on record, Kentucky, July 5 is your date. You guys have been talking about it, there's been no change. It doesn't seem like there's been much progress in the courts recently. Just any comments on expectations.

Michael F. Neidorff

Just one. The court -- the state asked the court to dismiss our case because we have not exhausted administrative review procedures, the complaint procedure. The judge did not dismiss the case. He stayed it, pending their review. He also told them they had an obligation to work with us on a transition plan. Don't presume that we're not going to be able -- not to meet[ph] . Our contract is different, it has different language than the other 2 players, and we believe we have that right. So we expect later this month to hear the state's response to our complaint. If it's not appropriate, we will then pursue our recourse and our exit.

Joshua R. Raskin - Barclays Capital, Research Division

Got you. The industry fee is keeping people up at night. It's more impactful in Medicaid than anywhere else. Where are you in terms of discussions with your states? You're going to start getting some midyear rate updates, and I'm sure those discussions have probably started. How would you characterize the states' recognition of that cost?

Michael F. Neidorff

The states recognize we have to have actuarially sound rates. They understand that this 2% fee jeopardizes that. The State of Florida put a line item in to cover it. So what they've just done, so they're the first one that -- [indiscernible] was still working with the states, the governors, who are writing to their congressional delegation, asking them to take the corrective action. So we're doing that on multiple fronts. There is a bill in the house, has several hundred people signed on at this point to change this tax and do it in other ways. So we're working on multiple fronts, and I continue to see the glass half-full, that people know that we have to correct this to be actuarially sound.

Joshua R. Raskin - Barclays Capital, Research Division

Last question before we move to the breakout room. Last year, we probably spent 20 minutes talking about the duals, so we should at least spend 1 minute talking about the duals. There still seems to be a couple of hundred million dollars of opportunity out there. Which states are you most excited about, whether it's some of your shorter-term opportunities where you've already won contracts, or are there longer-term opportunities? And do you feel more comfortable with the -- it seems to be relatively limited savings expectations, in that sort of 1% range in the first year. Do you think the duals will be at little bit easier? And again, what states are you most excited about?

Michael F. Neidorff

We are looking forward to increasing the duals. We currently have 100,000, of which 95,000 -- which is on the Medicaid side; which is 5,000, where we're doing both. So we have proved to ourselves we know how to manage this business, have the capability to do it. We like the fact that we won 3 regions in Ohio. We like the fact we're now expanding the business in Illinois, where we've been successful. We think we see ourselves continuing to expand it, if there's opportunity in California, elsewhere. And so we see it as a way to save the states significant money and, at the same time, improve outcomes.

Joshua R. Raskin - Barclays Capital, Research Division

Perfect. Thank you, Michael. Thank you, Ed. I appreciate all the answers. We're going to move to Poinciana 3 for the breakout and Q&A session. Thank you.

Michael F. Neidorff

Thank you.

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