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Centene Corporation (NYSE:CNC)

2013 Investor Day

June 17, 2013 8:00 am ET

Executives

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

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

Robert T. Hitchcock - Executive Vice President of Health Plan Business Unit

Jason M. Harrold - Executive Vice President of Specialty Company Business Unit

K. Rone Baldwin - Executive Vice President of Insurance Group Business Unit

Jesse N. Hunter - Chief Business Development Officer and Executive Vice President

William N. Scheffel - Chief Financial Officer, Executive Vice President and Treasurer

C. David Minifie - Chief Marketing Officer and Executive Vice President

Donald G. Imholz - Chief Information Officer and Executive Vice President

Mary V. Mason - Chief Medical Officer and Senior Vice President

Analysts

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Justin Lake - JP Morgan Chase & Co, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Edmund E. Kroll

Good morning, everyone. I'm Ed Kroll, the Head of Investor Relations. Welcome to Centene Corporation's 2013 Investor Day. Please note that a replay of this meeting will be available on our website, centene.com, shortly after the meeting adjourns.

A couple of housekeeping items. We do have WiFi here in the room for you. You should see the information right at your seat, right with the agenda, the instructions. And just note that when you're logging in, the network is Centene Corporation, you'll see that, and the password, there's no space between Centene and 2013, just an FYI.

We'll have 2 Q&A sessions, as you can see, on your agenda. And for those of you in the room, you'll be able to ask questions. We'll have a microphone circulating. And for those of you out on the webcast who have a question, you can email me, ekroll@centene.com and I'll relay those questions to Michael Neidorff, our CEO.

And then a reminder, our next investor meeting is in December 13. It'll also be here in New York City. That's the one where we do our annual guidance. In this case, that'll be for first time guidance for 2014. So stay tuned. Mark your calendars and stay tuned. We'll have more details coming in a couple of months on that.

Now for the obligatory forward-looking statement. During the course of this presentation, we may make projections or other forward-looking statements regarding future events or future financial performance of our company. Any remarks that we make about future expectations, plans, prospects constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities and Litigation Reform Act of 1995.

We caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our annual report form 10-K and our most recent quarterly report Form 10-Q, both of which are filed to the SEC earlier this year, February 19 and April 23, respectively, if you look at the disclosures we made in both of those documents, as they contain and identify important factors that could cause actual results to differ materially from those contained in our projections.

And as for our earnings guidance policy, we undertake no obligation to update earnings guidance other than as part of quarterly or yearly earnings disclosure and that silence on guidance by the company or company officials should not be interpreted that guidance has or has not changed. In any event, no updated guidance would ever be given that's not previously or simultaneously disclosed in an SEC filing or other broad, non-exclusionary means. And finally, our policy is to not hold discussions with investors commencing 2 weeks prior to an earnings release. This -- that's known as a quiet period that we go into in advance of every quarterly report.

Okay. Well, with that, we're ready to commence the program, and I'll turn it -- turn the meeting over to our Chairman, President, Chief Executive Officer, Michael Neidorff.

Michael F. Neidorff

Okay. Thank you, Ed. I want to welcome everybody to our mid-year investor conference. We believe that we have put together an informative program with a lot of useful information on the various products and things that are recurring and about the industry, as well as Centene. I also believe that we'll showcase an experienced, knowledgeable, effective team that is working effectively as a team to manage our $10-plus billion company, with a capability to manage for the longer term, one that will be far larger. We will be a strong team and that's in -- that's at any level.

A major issue on everyone's mind is our exit from Kentucky. To that end, I will read a statement and ask that you understand and respect we cannot comment beyond that statement. And as I speak and as I read this to you in a moment or two, it's being filed in an 8-K, so it will be available momentarily to anybody and everybody to ensure full transparency on it.

The statement is as follows. 2 years ago, we we're one of 3 successful bidders chosen by the Commonwealth of Kentucky to improve the health outcomes of its Medicaid members while reducing costs. We delivered on those goals.

For example, our Kentucky Spirit Health Plan increased diabetes A1C testing by 300%, increased childhood hepatitis B vaccinations from less than 1% to 75% and dramatically increased well child visits. In these latter 2 categories, Kentucky Spirit ranks in the 90th percentile nationally, according to NCQA. We have also reduced hospital readmissions by 22% and pharmacy costs by 41%. We are proud of the Kentucky Spirit employees who have delivered these results and the people across Centene who have supported them.

We were and are the lowest cost plan, bidding consistent with past experience in other markets. Throughout our challenges in the market, we have continued to focus on improving health outcomes, which is our company's mission.

While we are serious about serving our members, we also have a fiduciary obligation to our shareholders, many of whom are represented here. After a few months of operation, it became clear that our financial performance was much different than our projection based upon the data provided by the Commonwealth during the bid process. Our analysis concluded that inaccurate and incomplete data led to actuary unfound rates for our health brand.

Unlike our experience in other states, efforts to resolve these issues with the regulatory agencies have been unsuccessful. Having exhausted all other paths to resolution, we pursued our only option short of unfairly impacting our shareholders. We've filed a lawsuit against the Commonwealth to recover losses associated with the data errors and to recover damages for other actions taken by the Commonwealth that we believe are inconsistent with the contract.

We also took action last October, consistent with our understanding of the contract, to terminate effective July 5, 2013, to protect our interest. We sought a declaratory judgment in the Franklin Circuit Court to confirm our right to terminate. The court denied our request, finding that the contract does not contain an early termination right. We have appealed that decision.

We have initiated discussions with the Commonwealth regarding transition planning to ensure an orderly exit and protect the recipients. Given the Circuit Court's ruling, the Commonwealth has the option under the contract to take certain steps that may cause Kentucky Spirit to extend [ph] in this performance beyond July 5, 2013. We believe that any such extension would not last beyond the third quarter of 2013. When we can fix the exact date of our imminent departure, we will update our guidance accordingly. Because these matters are a subject of litigation, I will not comment further or answer questions about them. Thank you.

Now onto the business at hand. I intend to set the table for what is to follow from our Executive Vice President officers. When you look at Centene, there is a common threat to our business, government-sponsored health care. You'll also notice that diversification has been a core strategy from the very beginning of this company, and we have discussed it widely at various meetings such as this.

Uninsured and underinsured have been our focus, and I like to remind everyone that in July 2008, long before the first election of President Obama, we acquired Celtic, recognizing the market would be moving to hybrid insurance-type products for the underinsured. That proved to be not just useful but true.

We partner with states on an ongoing basis, first, to improve the health of the communities in which we operate. Second, we generally provide the states with budget predictability. And we also find that we can address very specific needs. Foster Care is a good example. The states had an issue, we were able to develop a product, the electronic records and what was required to effectively manage this aspect. More states are looking for managed care as their solution, and you'll see later some dates in terms of how their progression has been accelerating.

We've talked a lot about geographic and product expansion. It's been a key strategy for us. Clear and consistent, we've worked hard to enter states with cost-effective solutions. We build strong partnerships with the states, state officials, providers and the community advocates, as well as, first and foremost, the members. We take an approach of sound public policy, which has served us very well. We deal with what the industry needs, not our individual needs. We never ask that something to be done that's not done in total. If we talk about rate parity, we mean just that, such as [indiscernible] with all the players. We think there are things that make for sound policy. It works.

We were in 7 states in 2008 with 1.2 million members. Today, we're in 19 states with 13 -- with -- I'm sorry, in '13, with 2.7 million members. And it's a wide, new [indiscernible] Our products in 2008 by state were very few, but growing, and we recognized we had to create a more important position for the states and that expansion. So we're expanding by states, the products within the states, the members we serve. There's a clear and constant approach. We advocate for the higher acuity businesses because we're able to save the states a lot more money.

What you see now is the overall effect, this year, in '13 year-to-date, you can see how this chart is filling out, the numbers of states. The number of products within the state, it continues to grow effectively. This is important. I remind everyone that last year, when Texas had the large re-procurement, which we did very well, at the time that I came down, half of our business had already been re-procured. So you can have a large business in a state like Texas, but it's on multiple contracts which come through [ph] at different times and via the investors, the comfort of that diversity.

And we talk a lot about high-acuity populations, which represent a very significant impact on the health care spend of the state, and you're going to hear more about this from Jesse and the others and how we're focused on the higher-acuity members and advocate for it. Left unmanaged, there'll be a lack of coordination of this care, which is not just costly, does not drive the kind of incomes everybody wishes. Since 2008, we have seen dramatic growth in this area. Rob will shortly talk about the key factors for success in all these various products.

We take our holistic and fully integrated approach that treats the whole person. We talk a lot about boots on the ground and how we go at it, working with one person at a time. The case management is key and an important part of our business. Evidence-based medicine, and Mary will be talking more about that, as well as the others, is key to driving effective -- cost-effective policy.

There's a full range of specialty solutions we've talked about and what was, I should say a small sliver, as you'll see when Jason talks about the Specialty Companies, has grown to an important part and has hoped to deliver increased control of our costs in many of these important areas. Specialty drug company is a good example of what we just acquired, Acaria, as well as a prison health program. These are all state programs that give us new tentacles in the states at various levels and to continues to expand the role we play with those states. We'll hear from Jason about the partnership on the prison health and how it's structured and why it's structure the way it is.

My comment was far from done. We will continue to grow and focus at state expansion, new products, higher-acuity populations, driving towards that as we did in Illinois and Mississippi, driving the greater savings for the states in that regard. We'll focus on the Medicaid, the health insurance marketplaces, the new names for the exchange and Medicare to [indiscernible] You add all these up, in the words of Don Imholz, who will talk about our systems, it's $0.75 trillion business out there. That is an incredibly large category, and we continue to play an increasing important role in it.

As we look at all this, I think what's important is that we talk about the differentiators for ourselves and our core strategies. So in summarizing that, our commitment is to deliver health care locally. Our local approach allows us to anticipate the needs of the state sooner, offer solution sets for those needs and evolve the capabilities in advance.

Our commitment to hiring in the states we operate in is a key element of our local approach. Being a part of the community means active local involvement, and we'll talk little bit more about that. Our holistic approach to the needs of the individuals through our integrated care model is equally important.

We impact our members through strategic, clinical innovations that improve health outcomes. Our medical management philosophy is founded on evidence-based medicine that can be replicated across our portfolio of health plans. Working with our providers, community to address an individual member's needs is a formula that delivers results. We believe that local partnerships enable meaningful, accessible healthcare. We will add to the integration of our products through our specialty health [ph] portfolio and continue to do that. As we anticipate market trends and state needs, we evaluate alternative solutions, we may buy capabilities, or when appropriate, we will build them de novo.

At times, we enter into strategic partnerships to bring key sets and skill sets together. And when we identify an asset that strengthens our portfolio, we'll pursue it. We will invest in state-of-the-art systems, and that's a something we started 7 years ago and is delivering important results today. And underpinning all the integration of all our products' integration are the state-of-the-art systems. And as we said, this is how [ph] it's done, spur of the moment.

The data center and the computing assets we have invested in were built with growth in mind. And many of you had a chance to see our new data center and how it's varied [ph] in stage for future growth. The systems are highly standardized and have both past [ph] built into the design. We will go deep in the leadership of the company as well, a lot of succession planning.

And in closing, a good example of one of the things we've done is recognizing we need to grow leaders of the future in a very material way. We have developed a new program which is an informed and advanced management program for health care. We've teamed together Washington University, which has a strong School of Public Health, with Trinity University that has a 35-year-old Masters program in Healthcare Management to put together a program to train future CEOs and leaders in the industry, giving some basic core principles.

Now I might add that this is not just for the Centene employees, but we're inviting consultants, bankers, others who wish to help people gain greater understanding to participate in this program. It's a 9-week program, so we get the cross-fertilization by the end and the multiple experiences. So stay tuned, you'll be hearing a lot more about that.

So as you look at it, I think we talk about what we've achieved, not just the future, but we plan for the future. And we want you to understand the scope and how we're focused in driving towards it. I'm now going to ask the senior team to come up: Rob Hitchcock, Executive Vice President for Health Plans; Jason, our Senior Vice President -- Harrold, our Senior Vice President -- Executive Vice President for Specialty -- excuse me, Jason; Rone Baldwin, our Executive Vice President for Insurance Products; Jesse Hunter, of course, Executive Vice President for Business Development.

With that, I'm going to turn it over to Rob.

Robert T. Hitchcock

Thank you, Michael. My name is Rob Hitchcock, I'm the Executive Vice President for Centene's Health Plans, and I'm going to focus on the health plan operations and how Centene is positioned for success.

The formula for success for Centene Health Plans is to offer diverse product offering, which Michael has touched on briefly in his comments; to implement and execute on our proven medical management programs; to align with physicians on quality, access to care and financial goals; and have a significant local presence in the markets and the states in which we serve. All of this leads to allowing Centene to provide custom solutions for our state and federal partners.

Across the top of this slide is the markets that we do business in today, and down the left side are the products that we offer. The intent of this slide is to show the diversity of products that Centene offers in the states that we serve. Expanding on what Michael said earlier, over time, our goal is to participate in the full continuum of products that states offer today, also to work with states to expand the products that Centene can participate in and continue to be a solution to the financial and operational challenges faced by all states.

This is a snapshot of the products that we participate in today. The numbers you see on this slide related to premium and HBR at are -- are at a global level and not state [indiscernible]. The intent of the slide is to highlight the differences in the products, because I know we've gotten a lot of questions in the past about HBRs and our premiums on these products.

The first difference that you see among the products is the average age. And as you can see, in the TANF, CHIP and Foster Care products, we have a similar age of between 9 and 10 years old, whereas Medicare and long-term care have a similar age band between 63 and 72. TANF and CHIP and Foster Care has -- are different populations in our long-term care and Medicare products. Both of these populations require unique tools and programs to be successful.

The next difference is the premium. TANF and CHIP premiums run from $120 to $280 per member per month, depending on the services that are offered. Long-term care has the highest premium due to the complexity of the medical conditions of these members.

Lastly, the HBRs on these products differ. TANF with the lower premium has a higher admin ratio and requires a lower HBR for Centene to reach its profitability targets, whereas long-term care runs a higher HBR because we can spread our admin cost over a larger premium.

Health insurance exchange is a different book of business. In this product, Centene must run a lower HBR due to the sales and marketing expenses, premium tax and other costs that are unique to the exchange product. Rone will discuss the exchange product more later on in his presentation. Even though these products have unique challenges and differences, the way Centene can be successful is by having the right tools.

Some of the tools that Centene has developed to manage the diverse populations and products we serve are shown on this table. I've attempted to illustrate how effective these tools are by product. Circles that are completely filled in show a high level of effectiveness, whereas circles that are not filled in show no effectiveness.

If you study this slide for a moment, you'll see that there are tools that are highly effective in multiple products such as our behavioral health, chronic condition management tools and our utilization and case management tools. For behavioral health, we use our specialty company, Cenpatico, which offers a broad range of services related to behavioral healthcare needs. For chronic condition management, we use our specialty company, Nurtur, which provides disease management programs for conditions such as asthma, diabetes and heart conditions. And finally, with respect to case management utilization management, all of our case management and utilization management resources are market-based.

Today, we have over 1,900 employees that are dedicated to these functions. These employees focus on readmission reduction, reducing emergency room usage, on-site concurrent review and many other initiatives. We also have tools that are specific to our product through [ph] population. A good example of this is the Start Smart program. This program focuses on helping expecting mothers deliver babies that are full-term. It is really targeted to our TANF and CHIP populations and to a lesser extent, the exchange products. It has no application to the long-term care and Medicare population. The Start Smart program will be highlighted by Dr. Mary Mason later on today.

No matter what product or population we are working with, our medical management principles are consistent. At our core, Centene is focused on improving the lives of Centene members by improving their health. We do this by working with our members face-to-face whenever possible, encouraging our members to live healthier lives. Our CentAccount program is great example of how we do that to help members engage in improving their own health. We also use technology to aggregate data to get a complete view of the member and also to use -- to develop our predictive modeling tools so that we can be proactive in managing our patients' health.

Obviously, improving quality is important on many different levels. But the most important reason is it is a tangible measure to improve [ph] health outcomes for our members. We collaborate on a daily basis with our physician- and community-based partners. Many of these -- many of the issues that our members face are social in nature. For example, do they have a place to go? Do they have family members to help them with their health care needs, or do they have transportation needs? And finally, we rely on evidence-based medicine to improve the health of our members. All of these principles lead to better health outcomes for our members and result in lower medical costs.

On the previous slide, I briefly mentioned our collaborative approach with our physician partners. On this slide, I'll go into a little bit more detail on that. At Centene, we are committed to partnering with our physicians to align quality, access to medical care and financial goals.

This slide shows a continuum of partnership models. On the far left is a fee-for-service contract with an additional bonus that is tied to quality or pay for performance. The next model is a fee-for-service contract that combines not only quality measures but also a targeted HBR.

When you go to the episode, episodic or partial downside risk, it combines not only quality and a targeted HBR, but also the physician now has limited downside risk. And then finally when you get to the far right, this is where the financial quality and access to medical care goals are fully aligned between the physician and Centene, where the physician takes the majority of the downside and upside risk.

This slide looks simplistic, but it is hard work, mostly because it requires operational discipline for Centene to decide on where on this continuum the physician should be placed. Not every physician can take a full or a partial risk or even be successful under a pay-for-performance contract, so we have to be very selective on how we work with the physicians. Also, it requires Centene to aggregate data in such a way that we can share it with our physician partners so that they can be educated and so that they can be very specific in their actions to improve the health of the members. An additional challenge is that it requires an upfront investment from Centene that may not see results for up to 12 months on quality or financial performance.

And lastly, you have to clearly articulate your principles on how you contract with your physicians so that you can be successful. So the contracting principles that we've developed at Centene to be successful with our physician partners are: first, as we move along our continuum on the contracting piece, we'll not delegate claims, quality or the medical management within the institutional setting. So why do we feel this way? We believe that quality claims and medical management are Centene's core competencies, and as core competencies we need to continue to own and manage these functions. In addition, our premiums and compliance with state and federal contracts are dependent upon claims processing and our ability to collect data related to quality measures. As a result, we view abdicating claims and oversight of quality would subject Centene to a level of risk that we are not willing to take.

Other principles that we use when we're contracting our physician partners is that all contracts must reinforce greater access to medical care, improve quality measures and outcome, and they must ultimately lower medical costs.

The last piece of Centene's formula for success is our belief in having a significant presence in all of the states that we serve. Each state has dedicated resources. In fact, approximately 75% of all Centene employees are market and state-based. Our local resources include having a dedicated leadership team in the market which we serve. These are highly qualified leaders that are based in the state in which the plan operates.

Our leadership team includes a market CEO, a chief medical officer, vice presidents of operations, finance, medical management compliance network, regulatory affairs and other roles. We believe that the leadership team should live where they work. Each plan also has dedicated in-market operations, including member, provider and medical management call centers. Centene is unique in this aspect.

In addition to local leadership and resources, Centene believes in being active within the community. Our plan leadership and employees serve on boards, volunteer and serve in churches, community agencies and not-for-profit organizations of all kinds.

Lastly, we work hard to be a valuable resource and partner to state regulators, legislators and community agencies. We spend a lot of effort to cultivate these relationships and provide value to our partners.

Hopefully, this brief overview has helped to shed some light on Centene's formula for success. Our diverse product offerings will provide stability in the long run. Our medical management tools and programs will improve our members' quality of life, access to medical care and will ultimately lower medical costs. Our contracts with physicians reinforce and promote a closer partnership with Centene. And finally, our commitment to the markets where we live and work enables us to have long-term relationships with state regulators, legislators and community leaders that are necessary to our success. This formula leads to Centene being able to provide customized solutions to our state and federal partners.

I'll now turn the time over to Jason Harrold.

Jason M. Harrold

Thank you, Rob. Rob, great job, by the way. Incidentally, Rob is my largest single customer, so we have to make sure we take care of him.

Good morning to all of you. Again, my name is Jason Harrold, and I'm the Executive Vice President of the specialty businesses here at Centene, and I'll be speaking for the next few minutes this morning regarding our specialty segment.

Consistent with Centene's overall strategy, we continue to diversify and expand our specialty businesses. This allows us not only to internalize the revenue of these business segments but also to grow and diversify further their external sales.

I want to walk through a timeline that will show you the progression of our various specialty businesses. So starting with the NurseWise, our telehealth and nurse triage organization, which began operations in [indiscernible] in 1998.

We move to Cenpatico, our behavioral health and now specialty therapy company, which began operations in 2003 and serves all of our health plan customers where behavioral health is included as well as a standalone business in the state of Arizona.

Nurtur is our health, wellness and disease management organization that works with our health plans and also sells and services large Fortune 1000 employer groups either through direct agreements or through third-party relationships.

OptiCare, my Alma Matter, is our managed eye care organization that provides services for routine eye care, medical eye care, contact lenses and glasses, and also sells to our health plan customers and external MCOs.

US Script began operations for Centene in 2006, and has shown significant growth for Centene as we internalize pharmacy through our health plans.

Celtic is our individual and smaller group plan that has allowed us to have the infrastructure that's been the basis for our hybrid and now our exchange products, which Rone will speak to later.

Casenet is our medical management software organization. We took a majority interest in Casenet in 2010 and 100% interest in 2012.

And in a few minutes, I'm going to speak about our 2 newest additions: Centurion, our correctional healthcare joint venture relationship; as well as AcariaHealth, our specialty pharmacy business, which we recently acquired.

You can see here that we've been able to grow Centene's specialty segment as a percentage of Centene's overall revenue significantly over the past few years. Again, this is consistent with our long-term strategy and strategic plan that Michael often speaks of. The overall size of the pie has also grown significantly, and you'll see that on the next slide. And I should note that these figures represent gross revenues prior to eliminations and also prior to segment realignment, which we completed in January of this year.

This slide gives you a better picture of the actual revenue growth of the specialty businesses over the past few years, and it breaks out internal versus external revenues; meaning, the revenues that we service for our health plans, the Centene health plans, and all other sources of revenue. We've been successful in more than doubling the specialty segment over the past few years and hope to continue this trend.

A couple of things to note as a refresher. Pharmacy revenues related to Centene's Ohio and Indiana plans were eliminated at the end of 2009, with Ohio returning in 2011 as part of Drug Rebate Equalization commensurate with the Affordable Care Act. And also pharmacy revenue associated with Centene's Texas health plan Superior began in March of 2012. So you can see where the dramatic growth came from during this particular segment.

A key area of focus for the specialty businesses has been to ensure that we work towards placing all of our services in all of our markets, and I'd like to think that we've done a pretty good job with that so far. Having pharmacy carved into additional and new health plans over the past 1.5 year was significant for markets like I just mentioned, Texas, Ohio, Louisiana, as well as new startup markets that have included either all or most of our specialty services.

It's important to point out, with this said and it looks like there's a lot of dots that are filled out here, there are still significant opportunities for the specialty segment. Just to name a few: specialty pharmacy with Acaria, which I'll speak to, which will significantly open up new opportunities for growth and better management of our specialty pharmacy spend; other new states that have yet to start that are on this grid, like California; as well as new states that Centene may enter or could potentially enter through our future procurements. There are some products within some states that may currently exclude certain specialty products, so we have -- we might have a dot for a state, but it only is related to 1 or 2 or 3 products and not all of those product lines that we service in that state, so there's growth opportunities there. There's other specialty products that are not yet on this grid, like Centurion, and that will continue to see opportunities with Centurion in new markets as well as existing Centene health plan markets. And there may be other specialty products that we may opportunistically pursue as part of our ongoing diversification strategy.

Now let's talk about Acaria. Acaria, we closed that transaction on April 1 of this year, and we're currently going through the integration process with our Centene health plans. Acaria is our specialty pharmacy business that allows Centene to take on and better manage complex conditions like hepatitis C, hemophilia, MS, RA and various oncology products to treat cancers. Acaria is a pure-play national specialty pharmacy business that has multiple locations throughout the U.S. and is expanding. And they also are currently contracted to be able to provide services to all of our Centene health plans in markets in which we control pharmacy, and again, we will continue to expand and internalize that business over time.

One of the most important things about Acaria is its management team. We believe in strong CEOs and leadership teams for all of our health plans in all of our specialty businesses, and Acaria is no different. Donnie Howard, their CEO, has over 30 years of experience in the specialty pharmacy business and was Co-Founder of CuraScript. Jeff Fisher, our COO, has 25-plus years experience and founded Three Rivers Pharmaceuticals. Our CFO, Steve Jensen, and our Senior VP of Sales and Marketing, Carmen Fontanez, also have many years of experience with Donnie and Jeff and their team. And it really represent the best of the best in terms of the specialty pharmacy world, and we're looking forward to continuing to expand that relationship. Also keep in mind, like all of our specialty businesses, that Acaria has many external clients and robust external sales pipeline.

You can see from some of these data points on this slide that we are the only ones who see the opportunity in specialty pharmacy. You can see a few of these data points that show that the growth in spend over the next few years is significant. There'll be new agents approved. And by 2018, we believe that specialty drugs will represent over half of our overall pharmacy spend.

A couple of notes on some of these data points. The 7.8% increase is overall pharmacy related. We see that the specialty trend is about 15% right now. And the bottom data point, the $290 to $845, is based on commercial data, but again, we see similar types of trends in the businesses that we operate. A lot of this growth in specialty pharmacy is going to be related to inflammatory conditions, MS, oncology product, HIV, hepatitis C, growth deficiency. On the hepatitis C front, there've been several new agents approved in 2011, and there are several other new agents that are being fast-tracked to the FDA right now. We see in 2013 approximately 35% growth or increase in trend and a greater than 50% in 2014 on the hep C front.

Now I'd like to talk about our partnership that has created Centurion. Centurion brings together the correctional experience of MHM and their strong leadership team again through Mike Pinkert, founder; and through Steve Wheeler, CEO; along with the managed care and financial strength of Centene. Again, this a joint venture between Centene and MHM to provide a comprehensive solution to the correctional healthcare market. We've recently announced wins in the state of Massachusetts, as well as in Tennessee. We plan to go live in Massachusetts on 7/1; and in Tennessee, are working with the Department of Corrections to plan an orderly transition of that business as well.

About the correctional healthcare market, we see this market is about a $9 billion to $10 billion market and there are significant opportunities over the next several years with new procurements, states that are converting to outsourcing their business, and we have already demonstrated this insuring can be successful in this space. And it should be noted that MHM had several existing behavioral health agreements in markets that present themselves as good opportunities for Centurion to be converted to both physical and behavioral agreements.

Centurion really is a unique correctional managed care model that brings together the core competencies of both groups for Centene with case management, network development for outside-the-walls provided care, inpatient specialty care, claims management in payment, as well as integrated data management; and on the MHM side, through our onsite services, recruiting, QA, staffing, training, site management, as well as pharmacy with management inside the walls. And before Centurion, really no other company serving the correctional agencies had the depth of tools, resources, focus and financial resources to deliver real savings to our state partners for their inmate populations. And we will utilize managed care principles in providing better care at lower cost, in line with Centene's mission, and placing incarcerated individuals into care programs that will help keep them from needing higher-cost venues of care in the future. And we'll deploy tools, including things like CENTELLIGENCE for disease [indiscernible], higher levels of data automation and deploying our disease management programs via Nurtur and our other specialty businesses.

So in summation for all of our specialty businesses, we look toward certain key factors for success. Some of these include diversification, which I've spoken about, Michael as well Rob. We continue to focus on external sales and supporting our internal health plan customers. Health plan integration, we know that each of the components of specialty care we provide need to be integrated to treat the whole person and work with our health plan and other external partners and not just focusing on one particular segment or component, but working towards managing the totality of care provided to our members.

Product differentiation. Creating unique and specialty client solutions for our state and other clients and anticipating the needs and future opportunities as you've seen we've been able to do, for example, this year with our acquisition of Acaria and our joint venture partnership with Centurion.

So I thank you for your time. And I believe up next, we have Rone Baldwin who's going to be talking to us about our exchange products. So with that, said, Rone, come on up.

K. Rone Baldwin

Thanks, Jason. I'm Rone Baldwin, the Executive Vice President for Centene's insurance group. I'm going to provide an overview of how Centene is positioning itself for the health insurance marketplace or exchange opportunity, including some highlights on where we stand in thinking about our entry and launch in 2014.

Centene is pursuing the health insurance marketplaces for 3 key reasons. First, the opportunity aligns with our mission, which Michael Neidorff described to you earlier, of providing better health outcomes in affordable costs for the uninsured and underinsured low-income population.

Second, we have key capabilities to succeed today, leveraging our health plan presence in 18 states, our individual insurance platform with Celtic, and the 2014 exchanges will be Celtics-focused. We intend to leverage our experience on the Massachusetts Connector and other hybrid insurance programs, as well as our specialty company capabilities, which Jason Harrold just described to you, as well as our medical management expertise. Finally, marketplaces represent a significant of opportunity, with 26 million insurance expected on the exchanges by 2017. And with just our current health plan footprint, we can access over 40% of that projected membership.

This slide shows most clearly how the exchange opportunity fits along our core Medicaid and CHIP presence. The exchanges are expected to attract mostly individual seeking the subsidies which are exclusively available by buying on exchange. Our exchange solutions are intended to address the needs of the population eligible for those subsidies, above 138% of the Federal Poverty Level for states that are expanding Medicaid and above 100% FPL for those states not expanding.

We have tried to be very thoughtful and targeted about where we want to participate long term and in 2014. We do not view the exchange opportunity as won or lost in 2014, but rather 2014 is about being actively present on the exchanges, getting valuable experience from a select but diverse set of states and then expanding in states and service areas for 2015 and beyond. We intend to participate in the subset of the states, where we have health plans for our launch in 2014. We have been selective in our service areas for each state, focusing on areas where we can contract and partner with a narrow set of high-quality providers at attractive rates that can support an affordable product for the subsidy-eligible population.

Our focus is on the subsidy eligible member, below 400% FPL, and in particular, those below 250% FPL, who are eligible for both premium and cost-sharing subsidies. Some key groups we plan to target include members turning off our Medicaid plans, who may be looking for private insurance solutions on exchange, relatives and split families where 1 member may be on our Medicaid plan, and broadly, other low-income, uninsured individuals.

We are focused on 9 states for potential participation in 2014. They represent states where we have a strong health plan presence and represent a range of states, state-based marketplaces, state partnership marketplaces and federally facilitated marketplaces. We're also looking at the one market that is expanding Medicaid through premium assistance, Arkansas, where we have administered a number of benefit plans for our NovaSys subsidiary, including Medicaid waiver plans for the state.

For all these states, we have been selective about our service areas, primarily based again on where we can contract with a high-quality provider network at attractive rates. We will not be statewide in any state, except potentially Massachusetts, where we already compete effectively state-wide on the Massachusetts Connector. Based on our disciplined approach to the exchange opportunity, we have turned down opportunities in states and in service areas where we did not see a path in 2014 to contract with providers that met our criteria. While these are all the states where we might potentially participate in 2014, we still have to complete all the steps involved in a successful approval process for these markets. And there's always a chance that the final outcome of that process or the market competitive situation in the state and the risk we see there will lead to us not being present in one of more of these states in 2014.

Our value proposition for the exchange product is built upon a set of key drivers. First, to achieve a low price point that maximizes federal subsidies and minimizes member out-of-pocket exposure. As part of this, as I mentioned earlier, we target a narrow provider network that is low-cost, high-quality, that utilizes many of the same core community providers that our Medicaid members use today. One point here, the persons handling the contracting for our exchange product are the same ones who handle the provider contracting for our Medicaid product, and we have incorporated that same discipline and set of principles, as Rob Hitchcock described to you, in this network build as we have in our Medicaid network.

Our product designs and value adds are intended to represent a comparable transition for people who may be used to getting health insurance benefits through Medicaid, and we are pretty much only offering an in-network only product, with assignment of PCPs to members who do not specify one as part of our consistent medical home philosophy. We will incorporate the same medical management processes and philosophy as we do in our Medicaid plans today, as again, Rob Hitchcock described to you. Our member and provider experience will leverage Centene's local approach and local health plan resources, with the focus on simplifying and improving the healthcare experience for members. We'll have branding that leverages the local health plan names, and our distribution will continue to focus on many of the same community-based organizations that play a key role in helping guide and support the low-income individuals of government-sponsored health insurance programs today.

Our priorities for this year through our marketplace launch remain unchanged. First of all, to prepare for a smart launch, focus on participation in the 9 states that I mentioned previously. Second is a focus on execution, to be prepared for the October 1 open enrollment date and the January 1 planned launch date. We have teams across the local health plans, as well as across key functional areas in Centene working to prepare for these key dates. Finally, the environment has been and remains very fluid in areas such as rulemaking and potential competition, and we remain committed to adjusting our approach as required to achieve key goals to be an active participant on the exchanges in 2014, but in a smart way where we can learn and build upon successfully for the future.

Thank you, and I'm going to turn it over to Jesse Hunter now who will cover Centene's pipeline and growth outlook.

Jesse N. Hunter

All right, thank you, Rone, and good morning. So as Michael mentioned at the top, we do have very big categories. We've got a lot to talk about this morning. So we'll start with the broad market opportunity, translate that into the Centene-specific pipeline, and importantly, how we leverage our assets and experience into specific revenue growth for Centene through our growth strategies. We'll talk about both RFP and M&A opportunities. And then broadly, our growth outlook, which includes visibility on near-term growth, as well as how we use our revenue growth to achieve the diversification that we have talked about so far this morning.

So first, as Michael talked at the top, we really are a government healthcare solutions company, and we're narrowly focused on subsidized government healthcare programs. So the starting point for us is really the Medicaid programs, so there's a number of subcategories, and we'll talk about this more in the moment as we go through some of the market and pipeline conversations.

But this is the anchor for us. We have nearly 30 years of experience, serving nearly 3 million people in this category. But what we're seeing is a significant overlap in some of the other opportunities that are becoming more apparent in the market. So one of which, as we move up the age and income continuum, is moving into the Medicare dually eligible populations. So obviously, a big market with overlaps, and duals by definition, have an overlap between Medicaid and Medicare. And there's a CDO report that came out at the end of last week that highlights a couple of the data points around that, one of which is approximately 40% of duals are less than 65 years of age and 44% of the dually-eligibles receive long-term service and supports. And we think this really leverage a lot of things, the principles and other things that we have talked about and experienced on the Medicaid side. And then as Rone just mentioned, moving into the health insurance marketplace and moving up the age income continuum from the Medicaid population to the lower end of the exchange.

So while this is a range of products and opportunities cutting across the government healthcare side [ph] universe, we certainly have the ability to leverage our local approach, our contract and medical management principles in systems to consistently support these markets.

So as Michael mentioned at the top, there's -- we view this as a $760 billion category. And one of the common threads is within these government programs, there's a need for a low-cost and a high-quality solutions for members within these categories. So one of the things we want to do is break that out a little bit further. So one, the first subcategory of that is Medicaid, and we've recategorized some of these things, to put the broader definition of Medicaid within this $470 billion number. So that would include long-term service and supports and other things we will talk about here momentarily, including the Medicaid portion of the dual eligible populations.

So the Medicare portion of duals is $175 billion, and as Rone mentioned, we have a large opportunity on the health insurance marketplace, at $114 billion.

So I think what's important here, as we look at the market opportunity, all of these are big categories, but where the biggest category, at approaching $500 billion, is in the markets that we know best. So we will move this a little more specifically within the Medicaid category. And really, this chart is intended to walk through the progression of Medicaid Managed Care over time. So as most of you will know, going back a number of years ago, the starting point for Medicaid Managed Care was in the traditional Medicaid populations, TANF and CHIP, higher number of individuals, generally lower cost. So you can see, and as reflected here, $164 billion of market, almost 50 million people and a 60% managed care penetration rate. That number has increased significantly over the last number of years, and we have been a beneficiary of that.

But also, as we talked about -- we started talking about a few years ago, movement into the higher acuity portions of the Medicaid populations, in particular, the Aged, Blind and Disabled populations. So you can see here, a very big category in of itself, significantly fewer people and an even lower managed care penetration rate. And that number has increased significantly over the last few years as well.

And then moving further on that continuum into the long-term service and supports. So this is in the category of the highest-need individuals, nearly the same, and from a revenue standpoint, of the ABD population at 128 million but only across 4 million people. And I think most importantly, the managed care penetration rate for this population is only 12%.

So when we're looking at these populations, you can see that there are dual eligible beneficiaries that will be both in the ABD and the LTSS categories, which aligns very well with our experience. The investments we've made in terms of supporting those populations which has allowed us, as Michael said before, to advocate for the inclusion of these higher-acuity populations as evidenced in markets like Mississippi and Illinois, which started with higher-acuity populations, we think there's opportunity to expand those into the other parts of the continuum over time.

And then finally, Medicaid expansion, which is obviously an untapped market and I'll talk more specifically about that here in a moment, no managed care penetration to date, but a $43 billion opportunity. So when you put these things together and you think that the inverse of the managed care penetration rate as we look at the market opportunity, so across each of these categories, in combination, we're talking about nearly $300 billion of untapped opportunity within the Medicaid market. Obviously, we believe we're well positioned to support that. In particular, nearly $200 billion of opportunity in this high-acuity population of the Aged, Blind, Disabled and the long-term care. So those are particular areas of focus for us as part of the growth strategy we move forward.

So moving from kind of the broad base of the market opportunity and the size of the universe, we narrow that into the targeted Centene pipeline. So we, over time, we've tried to give some visibility in terms of how we look at the -- our pipeline. This is a subset of known opportunities, whether they're markets, products or combination of those. Again, broken out between $54 billion on the Medicaid side, $19 billion in the more traditional duals definition so including both Medicare and Medicaid since we think that's how a lot of these opportunities will be procured, and then significantly, $60-plus billion in the health insurance marketplace. Since Rone talked about the -- has already talked about the health insurance marketplace, I won't go into much more detail there but will talk a little further about the Medicaid and dual opportunities here. One of the things that we've mentioned in the past is it's not just about the issues, not just having a pipeline and having a big pipeline of opportunities, but how well can we execute against those opportunities. So we want to take a couple of examples that demonstrate our ability to do that successfully, the first of which is Florida. So this a situation where we've been in a market for a while, and as Rob and Jason talked about a little bit earlier, been able to add capabilities, products, fill in more dots on the chart over time to have a stronger position and growth story there, building from a position strength within an existing market.

So just to go back, in 2007, we entered Florida through a partnership with Access Health Solutions, which was not a traditional HMO on the Florida Medicaid side. So we had a goal of being a market leader, but there were a lot of other plans in the market so we had to be really thoughtful about how we would achieve that market leadership over time and Access provided us a good partnership and a path to scale within that market. And over time, we had a combination of M&A activity and our key wins, which has positioned us -- put us in the position we're in, which we'll talk about here in a second. So one thing I would note on the M&A front, a couple of smaller transactions but gave us an important capability such as the Citrus Health Care transaction a couple of years ago had a nursing home diversion contract, and so that was a precursor for getting long-term care experience within the state of Florida which bridges directly to the right side of the chart here and the recent long-term care, statewide long-term care procurement where we were very successful. So you take that combination of experience on the -- in Florida and our multi-year, multistate, long-term care experience, that led to a very successful outcome in that procurement. We won 10 out of 11 regions, and we expect the phase-in of that -- those contracts to begin in the third quarter of 2013.

So another way to look at Florida is on a market share basis. So what we're looking at here is these are competitor market shares, HMO market shares in 2008. So obviously, we weren't on the chart in 2008, so we had 0 market share at that point in time. Through a combination of activities that we've talked about, we're now #2 in terms of the market share in Florida. And so we're obviously -- we've been able to successfully execute this strategy of growth through diversification and -- in order to achieve market leadership and now we're working from a position of strength relative to significant additional growth opportunities in the state of Florida.

So now we'll talk about a new state, so we mentioned California as a new market opportunity and there are some similarities with respect to very big Medicaid markets, a number of existing players, so the question is, how do we enter the market effectively? So what we identified is coming in, in California, coming in through the RFP process. So while there are a lot of incumbents in the state of California, this world market RFP that came out earlier this year was the only one where we had visibility of a level playing field, so not competing incumbents on the -- in those existing services and the existing service areas. So that was attractive opportunity for us, and as a result, we were successful largely based on our national experience in rural markets and we became the first new for-profit plan in over 2 decades. We separately announced a contract win in Imperial County in California, so that's obviously a different model. And I think it speaks to the fact that we have 2 recent contract wins, both through a competitive procurement. Two different models speaks to the flexibility of our approach, and that's been well received in the market. But also, as we talked about, we're not done in California. We see additional growth opportunities, be it geographic, states got pretty good visibility on re-procurements of existing Medicaid contracts, but also on the product front. And we talked a bit this morning about the range of products and our positioning to support those. And we look at California between the Medi-Cal and SPD dual opportunities and then the bridge program, which is a precursor to the health insurance marketplace. Those aligned very well with what we've been talking about in terms of our areas of focus between Medicaid, duals and exchanges. So we continue to be excited about future prospects in California.

So in talking specifically about Medicaid expansions, there's a lot of charts that people have seen in various maps. We now have some more visibility on Medicaid expansion coming out of the legislative sessions, and there's various categories that we look at here. So while we have more visibility, there is still some opportunity for movement, be it in special sessions or other ongoing political activities, which could impact 1/1/14, but this is how we see things today. So when we put that -- apply that to our pipeline, within those states that are in the strongly participating category where we have an existing presence, we see an opportunity for 2 million people and an $8 billion kind of market opportunity for 2014, and that is included in our Medicaid pipeline.

So another way to look at Medicaid expansion, which I think is important, is to look at history for some perspective here. So when Medicaid was first initiated back in 1967, not everybody came in, in the first year. And so when you look at the rate of adoption over time, 26 people -- 26 states that came in at the beginning of 1967 and you see the rate of adoption over -- high rate of adoption over the first few years then a couple of states that came in later. But when you overlay that with where we are right now, it's very similar with respect to the starting point, 26 states in 1967 and 24 plus D.C. in -- for 1/1/14. So when we look at that and you look at the progression over time, we do believe that there's opportunity for additional state participation over the next few years.

So shifting to the dual demonstration opportunities, this is one of the few areas where there has been consistent alignment between political, economic and health policy constituencies, which has given momentum for these dual programs, in particular, the dual demonstration programs as part of the ACA. There have been some challenges, obviously, in getting those launched. There's some reduction of the states and some impact on timing, I think largely because of the challenges working between CMS and the states and plans. But there has been recent information coming out of Massachusetts with respect to rate adequacy that I think is a positive indicator, I think will be a catalyst for moving some of the dual opportunities forward.

And then where do we fit in? As we've talked over the last number of quarters, we've been reporting how many dual eligibles we have across our various products, and as I said before, particularly on ABD and the long-term care front, but we now have over 100,000 dual eligibles that we're serving across our markets. And we have continued to expand our presence on the Medicare Advantage Dual Eligible Special Needs Plans. We have now those available in 6 markets, so we believe that there is meaningful conversion opportunity for our existing dual eligible populations over time. And then specifically on the dual demo programs, we have been selected to participate in 2 markets, Illinois and Ohio. And as I've mentioned in the top here, those markets were originally expected to go live at the -- in the fourth quarter of 2013. We now believe that those will start to launch in the beginning of 2014, but they will be good test markets for us to participate in these new demonstration programs. And we continue to invest in our Medicare pipeline, so this is going -- there's big market opportunity and we continue to invest in people, process, systems, et cetera, with a particular focus on the integration and coordination of care to support the alignment between the Medicaid and Medicare programs.

So now we'll shift gears to talk about our growth strategies and how we execute on growth, so we'll start on the RFP front. And we continue to believe that you cannot be successful in the government health care business without being successful in the RFP process. So we've put a lot of time and attention against the RFP process and I think that's shown in our track record over time. So as you see here, over 86% over -- and 86% success rate going back to the beginning of 2010 and 80% over 15 opportunities since the beginning of 2012. And there are a number of criteria that go into success for -- or state evaluations for these competitive procurements. So there's technical responses, there's the network care management program systems, and in some cases, price. That's one of the things we wanted to give a little additional perspective on this morning is how we think about the price component for RFPs. So what we've done is break the last 15 RFPs into 3 categories from a pricing and rate development standpoint. The first is those where the state actually sets the rates and we have rate parity. The second is where the state gives a defined range for people to bid and provides some variability in scoring based on where people bid within those ranges. And then finally, open range or blind bidding for the competitors. So obviously, you can see here over half of the -- in over half of those procurements, the state is actually setting the rate. And in over 80% of the procurements, we have a high degree of visibility on either rate parity or on a narrow range of rates across the successful bidders. So we think that is important from a policy perspective in order to create a stable and sustainable health care program. And despite our success in the RFP front, we are very focused on continuous improvement. So every RFP we submit, we get new earnings. We try to apply those earnings, whether that's on the financial side or, more recently, we've enhanced our contract review process as a way to apply our earnings and make sure we have the right protections in our contracts between the Health Plans and the states. And that is a decision point for us as we're entering a new market. And if we can't get the right terms and conditions in those contracts, it will be -- will reflect that in our decision to proceed. And there are situations where we have not -- we've been successful in RFP, but ultimately not sign the contract and enter the market because of those issues.

So moving to the M&A front, we continue to apply our disciplined approach to M&A. So ever since the IPO, we've had the same criteria for financial metrics, so accretive to earnings within the first 12 months and clearing our internal rates of return. Bill will talk about this a little bit more in some of his comments, but we are looking to use stock as a way to maintain financial flexibility. We have a number of growth activities, and to the extent we can maintain our preferred capital structure by using stock on the M&A front, we're very open to doing that. And we're making investments in new capabilities. So Jason talked about Acaria and how we have added some new resources and expertise in the specialty pharmacy front, but there are also some complementary capabilities that we've added for nurture on health and wellness and in areas like the individuals with intellectual and developmental disabilities, which we see as an important emerging market and made some investments in order to be in a position to support that population. And finally, we have a number of the businesses which are scaled businesses, so we'll continue to look for investments both on the Health Plan and Specialty side to achieve the economies of scale.

So final category on the growth outlook, so we've talked in the past about how much visibility we have on future growth, so we wanted to give an update here. So first of all, this is not revenue guidance for 2014. This is based on where we are right now, in middle of June 2013, what do we know for 2014, so based on known and announced opportunities where we have been successful, and taking the midpoint of our 2013 guidance, we know we'll be at least 15% revenue growth in 2014. Now it's also important to note that, that excludes any impact from the health care reform initiatives that we've been talking about this morning, so there's no Medicaid expansion included in that. There's no exchange or health insurance marketplace opportunity included in that, and obviously, no M&A or new RFP activity included in that as well. So while we have very solid visibility on 15-plus percent revenue growth for 2014, you could expect when we do give revenue guidance at the end of the year that we should have visibility on a number that will be higher than 15%.

And then coming back to this concept of diversification where our growth strategies are a way for us to achieve diversification, particularly on the product front. As Michael talked about at the top, diversification is one of our core strategies and we've applied that whether it's working across states or across products. What I'll show here is kind of a progression over the last number of years on the product front and some perspective on the future. So when you look back at 2008, 75% of our revenue is in the traditional Medicaid business, with a small but increasing portion on the higher-acuity Medicaid populations for ABD and long-term care and a specialty presence that Jason had mentioned. When you fast forward to 2013, you see that we've gone from about 75% of our revenue through the traditional Medicaid business into closer to 50%. And as the market has expanded in the higher-acuity Medicaid populations based on our participation in that and the RFP success, that's become a much more meaningful part of our revenue picture. And then you can start to see the Medicare and dual presence and even a sliver of participation ahead of the health insurance marketplaces. So that's, I think, the positioning for us in gaining some valuable experience ahead of what we view as very meaningful opportunities into the future. So given the combination of market opportunities and our positioning, as we think about a hypothetical future, and this is really for illustrative purposes, but when you look at where we're positioned, where the market is, we see an opportunity to have a very well-balanced government health care services business over the next few years.

So in conclusion, we talked about, obviously, a very large pipeline of over $760 billion in total market opportunity and nearly $140 billion for us, and we're very well positioned in a good segment, so high-growth category and we're a leader in those categories. We will continue to focus on diversification of both revenue and earnings and through execution on the organic growth pipeline and Bill will be executing against that and then disciplined M&A where appropriate. And then our ability to leverage our past success, whether it's on RFP or identifying and capitalizing on market trends, will position us very well to capture the meaningful revenue opportunities into the future.

So thank you. With that, I'll turn it over to Michael.

Michael F. Neidorff

Thank you. Some of the analysts here know that you've had these fireside chats, and I want to share with you that I've learned from that. So we're going to do it as I have a couple of questions I want to start with and then I'd like to open up the floor for any questions on any of these subjects that these individuals have been talking about. Let me start with Rone, you -- or Rob, excuse me, Rob, you've talked a lot about the right tools, medical management, provider contracts, et cetera. What are some of the tools in addition to those you've talked about that Centene will need going forward?

Question-and-Answer Session

Robert T. Hitchcock

I don't know that it's so much additional tools that we need. I think we have really, really good tools that have been developed over the years. So one of the things that I think we have to remain committed to going forward in the future is our commitment to the local approach, especially as we diversify our products and we get more and more into other products other than the TANF, CHIP, Foster Care, so a great example of that is the Medicare product. On Medicare, we have one customer, really, and that's CMS and they expect you to act and to have your operations be consistent across the country, whereas on Medicaid, we're very local and very attuned to the states that we serve. So for me, the opportunity for us as a challenge, I guess, is to still act globally or act more on a national level, but still maintain that local presence because, at the end of the day, the members we serve, the providers we serve, those services are highly individualistic. So I think that's the area we have to continue to focus on.

Michael F. Neidorff

I think we -- we've often said we're a provider-driven organization. We're physician-driven. You talked about the continuum of physician contracting and sharing this and trying to create some better opportunities there. What about the hospital side?

Robert T. Hitchcock

Yes, I didn't talk a whole about in the hospitals in my presentation. I really believe that the physicians are -- they control health care spend and also utilization. Having said that, hospitals also represent 40% to 45% of the total medical spend, so they're incredibly important. I would say how I view hospital contracting is more along the lines of how does it fit into that continuum of partnership that we have with the physician. So as those physicians start to move along that continuum, if they start off on the pay for performance on the far left side and they start to go to more of the full partnership model on the far right side, what we have to do at Centene is to remain disciplined in our approach to how we contract with hospitals. So in other words, we cannot contract with hospitals on, say, a percentage of charge basis or have unreasonable terms in the contract like stop-loss provisions. Whereas as you get further along on that continuum, that if you do those things that are kind of irrational, you place the physician in an awkward position where they cannot be successful on that continuum of products. So to me, it fits into the overall partnership we have with the physicians, but we just have to be very disciplined in how we do it.

Michael F. Neidorff

And we are in a lot of robust discussions about this in the office in terms of how we're going to do it. I'm going to jump to Jason and I want to talk little bit about, get a little more granularity as to why we wanted to enter correctional and why we chose to work with MHM is your question.

Jason M. Harrold

Sure. So Centene has been looking at the correctional space for some time prior to me joining the organization, so you can probably elaborate a little bit more on how long we've been looking at this space, but it had to be the right time for us and had to be the right-size market. And we have now the right partner. That's a unique set of services that need to be provided in the correctional space, and we knew that we have a lot of the claims and system and outside of the walls contracting experience, medical management tools. But in terms of being providing the care directly inside the walls, we knew that we needed to have a partner to do that and a partner with significant experience. So it was the right time and the right fit and the right place with MHM and we did last year, and it has been successful so far in both Massachusetts and Tennessee. And I can't say enough about the MHM team, not just their founder Mike Pinkert and their CEO who's the CEO, I think, CEO for Centurion, but about the entire team there from HR and quality and the people who are providing the care inside the walls and their infrastructure for that. So that's really the genesis of why we got into that with the strength of the team and the tools that they have and the size of the market. And like I said earlier, we see the size of the market at about $10 billion right now, total, and that's again segmented between companies like ours that provide this care, university systems and then some of the carriers still directly provided by states, but we see significant opportunities for growth over the next few years.

Michael F. Neidorff

I'd say I looked at this space many years ago. It was about $1.5 billion to $2 billion. And as part of that process, I went to visit an institution. And when you go through the gates and you hear that clink, clink, clunk, that's where I made up my mind, "We needed to find somebody who wanted to go inside the walls to do the work." So there's a certain finality about that, that kind of gets your attention. Rone, there's a lot of uncertainty, a lot of questions about the marketplace, insurance marketplace or exchanges, can you provide some more color on the contracting process? I get at various Investor Days or the health -- or the meetings at Goldman Sachs or various ones I thought I'd commercial for any one bank, but everyone wants to know about the contract and how we're doing the contract?

K. Rone Baldwin

Well, let me cover a few aspects of where we stand on contracting. First of all, as I described, our approach has been to look the contract with a narrower set of providers, building off of our relationships we have through Medicaid, focus on providers that are high quality, but also providers that are looking to work with us to contracted rates where we can provide an affordable contract that minimizes the -- maximizes the subsidies and minimizes the out-of-pocket for our members. And I think that because we are -- traditionally have been focused on Medicaid, the fact that we don't have a large or any, really, any commercial in-force block of business that we're looking to preserve as part of the exchange launch, we represent a different proposition to providers who are concerned about potential impact or erosion of an existing commercial base of business. So we've gone out and been able to discuss with a lot of providers the proposition that we bring, clearly trying to come up with rates that are as below prevailing commercial rates as possible. And the outcome of that has really varied across a spectrum of states and service areas and providers. It's broadly -- we've been able to contract at rates that are at -- above Medicaid, Medicare rates but below prevailing commercial rates. And really, where we are on that spectrum varies so much that it's difficult for me to kind of characterize overall. But I would -- as indicated also, we have declined to enter certain areas where we didn't see the possibility to come up with something that was attractive there. With respect to where we stand on actual contracting results, out of the 9 states that I mentioned for potential participation, we've completed now all the contracting that we need for 5 of those states. And what I mean by that is executed contracts that meet our targeted network build, certainly our internal, and we expect as well, state network adequacy requirements. We'll continue to do some contracting in those states, but there's nothing more that we need to do. For the remaining states where we sell contracting work to do, for the most part, those are state-based exchange states or state partnership states where the deadlines are a little bit later, and so we're well along the road but we'll continue to do some more work in those states to prepare for the launch.

Michael F. Neidorff

Let me jump to Jesse. Jesse, I -- some people have been in my office and seen that sign that says, "I want it all, I want it delivered," and we have this huge opportunity. How -- it might be helpful to talk a little bit about how we established our priorities and what they are.

Jesse N. Hunter

Sure. We're certainly fortunate in the context of having a lot of market opportunity and a lot of growth. There's a number of industries who don't have that same luxury, but it is a challenge nonetheless and we have to be really disciplined around how we prepare and position ourselves for that. And I think it really started a handful of years ago when we started to see a large number of Medicaid procurements in new states, and in particular, states we're dealing with the issues around budget predictability and lack of quality outcomes, et cetera and really the genesis for the value proposition of Medicaid Managed Care. And we had to make a conscious decision at that point, are we going to go after everything and throw our hat in the ring and try to win our fair share? Or are we going to be really thoughtful about where we want to participate and try to win a much higher proportion of those opportunities? And so as you can tell from what our results over the last [indiscernible] actually shows the latter, and we have a number of criteria that we go through. Obviously, there's a number of things on the quantitative side, making sure we understand the size of the opportunity, the expectations on the ability to achieve our targeted margins over time. But also, there's some qualitative aspects of it as well.

And at the end of the day, on the new RFP as an example, we have to combine the probability of success with the outcome of that and what does success look like, and there are a number of opportunities we do not pursue on that basis. And now we've extended the discipline on the Medicaid contract, the RFP front, into our evaluation of these other opportunities, whether it's on the dual side or on the exchange side. And Rone has just mentioned kind of how we're applying that targeted approach in terms of the number of states. And we look at where we have positions of strength. And certainly, our local approach, strong local management teams, good relationships in those states puts us in a good position to understand those opportunities and how likely we are to be successful. And that's one of our key filters as we're prioritizing the platform.

Michael F. Neidorff

I want to open up to the floor in a moment, but I might come back and -- a question I have had a lot recently from investors is, last year in this time, you were on a hype and talked about dual eligibles, and it seems they've settled down a little bit now. Do you want to talk little bit about the delay in dual eligibles, or were some individuals just too optimistic a year ago. What's the genesis there?

Jesse N. Hunter

Sure. I think as we just said a bit this morning, it remains a huge market opportunity and there's a lot of motivation to do the right thing here, both from a cost and quality standpoint, there's the individuals who are eligible for both Medicaid and Medicare benefit significantly from care coordination of those services. And I think we're in a good position to do that. I think that's the right thing to do. So ultimately, we'll get there. I think the challenge is creating a new program through the dual demonstrations, in particular, where you got a multiparty transaction. So CMS working with the states and then working with the plans, these are in a competitive procurement or in kind of an application-type environment. So I think there have been challenges in trying to get those programs defined, get the MOUs in place and then ultimately get the things we're talking about for other new products like the exchanges where you need the networks and the people and all the other things in place. So I think we'll get there, but there's certainly, I think there's a timing issue relative to the hype that was in place last year. And the other variable, I would say, is you've got -- because you have 2 programs, Medicare and Medicaid, you have 2 ways to achieve the financial incentives. And so for those of you that haven't looked at the CBO report that came out last week, I think it does a good job of articulating how both sides, the Medicaid side and how states can impact that, and the Medicare side and how CMS can benefit from the coordination on that front. But there are opportunities for us outside to serve through the dual members outside of the dual demonstrations. So I think we'll continue to see more of those opportunities as an alternative to the dual demos in the near term, and that's where we see the dual component of H1 and disable then the long-term service and supports, in particular.

Michael F. Neidorff

Very good. I think we also find that CMS has a lot of its states right now.

Jesse N. Hunter

Fair enough.

Michael F. Neidorff

To say the least. I'd like to open up to anybody on the floor. May I ask that you take a microphone because we are on webcast. So we have some microphones that we'll pass around. Let's start here in the front.

Michael F. Neidorff

Go ahead, Pete.

Peter Heinz Costa - Wells Fargo Securities, LLC, Research Division

You've done a good job of laying out all the different things you guys do and all the different areas that you're in. Can you give us an idea, as you expand into all of these areas, how are you controlling them as price becomes more and more important? Can you talk about your actuarial background and skills and controls that you have in place and what you're doing to make sure your pricing is right going forward because we all saw the Kentucky, one bad situation could be a big factor for the company?

Michael F. Neidorff

Yes, I might just -- we're fortunate that's 1 of 19, and it has been exceptional. But maybe some others -- maybe you would like to comment, Rob and Jesse, on that.

Robert T. Hitchcock

Well, I think what we do within the company, and again, I've been with the company for 8 months, but what we've done, and perhaps they could elaborate more on this, but we take our unit costs. I think we're very disciplined on what our unit cost is within the market, what we think our utilization of service is going to be and then we put some conservatism in that, and then we use that to roll it up on our pricing strategy. So I would say, I don't know that it's necessarily a lesson, a specific lesson, but the process we use now, it's really kind of a ground-up, build-up of the premiums, and that's a pretty robust process, lots of opportunities for debate and making sure that we have our assumptions correct before we agree to that final price.

Jesse N. Hunter

Yes, and a couple of things there we want to talk about. There's a process around were there components that are driving price, so unit, cost utilization, trend, all kinds of other things, and Andrew is doing the work. And I think, Pete, here to your question, we have obviously growing our internal capabilities with respect to the actuarial team. But we also work with external folks as well, so we work with one firm, in particular, for a long time across products. They've got a lot of that experience that's both with us and with others across the industry. But as a data point, when we went through the pricing exercise on the health insurance marketplace front, and we had our internal actuaries, we had the firm that we've worked with traditionally and then we added another third-party firm as a peer review actuary on the back end. So we're very sensitive to the importance of pricing, particularly as we're going into some of these new markets and we've taken steps to address those.

Michael F. Neidorff

Actuary services report to the internal, any comments you'd like to add to that? I don't know if this is on or not.

William N. Scheffel

No, I think that as the company has grown, so has the actuarial group in our additional reviews, let's say, of the pricing that is done on any of our bids. We do ROI-type calculations on M&A, RFPs, everything to make sure that we've got the right discipline. And as Rob indicated, we have what's sort of called the checkbook review, which really just means is, when we look at a market, we say, what are we going to pay the physicians, what are going to pay the hospitals, what are we going to pay each component, and let's say -- we'll just say that's 100% of Medicaid for physicians. Then as we're out contracting, we're making sure that as we write those contracts, we're staying within the amount that we put down in our original estimates, so that at the end of the day, we're not going to be off on unit cost. The issue then converts to utilization, so how much can you have in managed care savings. In that, we have quite a bit of experience in that and how much can ER come down, et cetera, and we try to apply that experience in these categories. And one thing we've learned prior to the last 12 months is that managed care savings does not all show up on day 1. We saw in some markets where their assumptions was that obviously it takes a period of time for that to happen. So I think we've gotten more disciplined in the whole process. And as Jesse mentioned, we've gotten several actuaries involved in looking over our shoulder, particularly in the exchanges, which is a brand-new product and feel reasonably comfortable that the bids that we're making are vetted quite a bit within the company and with others outside the company.

Michael F. Neidorff

Now I just would highlight, also last year this time, we were talking about how in Texas, we had won a contract and we were discussing the ways we thought it was inadequate, and Dave and I said a year before in Dallas, we said the activity was adequate. But we also said that they will work with us and take the corrective action. You've heard about that today that in those kinds of things, most states were able to work through it and deal with it. I think we have a pretty robust approach. And when it comes down to the final quote, it's Bill, it's Jesse, it's Rob, Jason, everyone and myself sits down and has a final review of just what it is, and it's a go or no go at that point. Other questions? Did I get that one?

Unknown Executive

Ralph Giacobbe.

Michael F. Neidorff

Ralph.

Ralph Giacobbe - Crédit Suisse AG, Research Division

So just a question on the exchanges, it sounds like you're going to be selective obviously in terms of the markets you play, but you also talked about targeting select groups, those that churn or split family, so I guess, can you help us understand like how do you just sort of get that population pool, how do you protect against sort of capturing a wider net, if you will? And then second, given that there's a new population base, you talked about the narrower networks, but how do you protect yourself against out-of-network? What's the backstop if you don't have essentially commercial rates in place relative to sort of, again, charged out-of-network?

Michael F. Neidorff

Rone.

K. Rone Baldwin

Well, in terms of the targeting of groups of individuals, it pretty much work backwards, if you're talking in that group of individuals, what kind of product design is going to appeal to them and appeal less potentially to others, what is the network that's going to be more used by them as opposed to others. And then clearly, in terms of our sales and marketing efforts are already around those target markets with respect to it. So in terms of the product, again, it is a product that is an in-network only product pretty much. It's not going to offer an out-of-network option for people. That's something that people that are used to a Medicaid or other plans like that are very much used to. It's going to have a set of value-adds and other features and benefits that are, again, what I would say more typical in what people see in Medicaid plans as opposed to what might exist in some of the large group commercial plans in terms of that. The network, clearly, is going to be built upon providers that have been servicing members, a lot of community-based providers, a lot of FQHCs, so those -- one of the #1 things that people look at in selecting product carriers is my provider in the networks. So I think network is probably one of the biggest levers in terms of driving the membership towards that population as opposed to others. Clearly, our sales and marketing efforts are going to be targeted from a direct marketing standpoint, as well as from getting to a community-based organizations and other influencers and again, people that are more in that sort of target demographic. That's not to say that we don't expect that there are going to be some people that choose our plan that are outside of that core group. But when you look in total at the proposition we're putting together from a product network and again from a sales marketing perspective, we're pretty confident that it is going to be something that's going to appeal to people that are, again, our target demographic in terms of -- so the -- and I forgot the second question, was on the...

Ralph Giacobbe - Crédit Suisse AG, Research Division

Protection out of the network.

K. Rone Baldwin

Out-of-network. Yes, I mean we're not offering an out-of-network benefit, so we don't think that we're exposed to that, primarily because of that reason. There may be one state that is part of the regulatory process that will require an out-of-network option and [indiscernible] product.

Michael F. Neidorff

We also have year Dave Minifie, who has a strong consumer marketing background at P&G. He's our Chief Marketing Officer. Anything you would like to add to that, David?

C. David Minifie

I would just reinforce what Rone says, which is the art of our targeting and marketing is to really take a look at what we want to go after from a product design standpoint, as well as from a how do you approach this household standpoint. Are we're going to have a product that is appealing to somebody beyond who we target? Potentially. Will we offer to them? Yes. But this is really about identifying we want to go after and putting together a total proposition that appeals to them.

Unknown Executive

Scott Fidel,

Michael F. Neidorff

Scott?

Unknown Analyst

I just want to ask a question about how the rate setting process is going for 2014 on Medicaid with the states, and in particular, how things are developing along the lines for the industry tax, of getting appropriate rates for the new expansion populations and then also for physician parity to Medicare. So interested if you can give us some thought processes, when we see the rates start coming out to 2014, what type of average increases should we be seeing that would make us comfortable that all of those different factors have been embedded into the Medicaid rates?

Michael F. Neidorff

Rob, do you want to start?

Robert T. Hitchcock

Yes, I was trying to write down all the things he talked about there, from the physician...

Michael F. Neidorff

He'll remind you.

Robert T. Hitchcock

From physician parity, our stance has been and will continue to be that we will not pay a physician to 100% of Medicare until we are paid for that. So we view that as a pass-through that the states will give to us. So until we -- until that happens, then we continue to pay the physicians at our current rates. From a premium tax, I'm probably going to defer to somebody who has a little bit more expertise on that. Jesse and others might be more familiar with the state regulations, but we -- the only thing I'll say on that is that we also expect that to be a pass-through and anticipate that to be the case.

Michael F. Neidorff

I'll start and some others would pick it up. We have Washington office that's very active and it's a -- we've said all along that the plan A is to work with the Congress and get the corrective legislation. And it's a matter of finding a healthcare bill to put something on that deals with that. The House has a bill that has a large support. And the Senate -- actually, we're working with the Senate side. We've worked with the RGA and the DGA, Republican Governors Association, Democratic Governors Association, they've all written letters to their delegations to the Congress and their senators, talking about the issue. It's a very circular issue. It's going across the federal government [indiscernible] we believe because they're matching a lot of it, and so it becomes very circular. Plan B is as you've seen in Florida and some other states now talking, putting a line item in that will give us the incremental revenue to offset that to ensure we have actuarially sound rates. And so when you combine those 2 things, there's a plan A and a plan B, and it's really being driven by the government regulatory people. Anybody else want to add anything to that?

C. David Minifie

I can -- the discussions that we've had to date with rates that will be going into next year have all included a discussion on including amounts for this. The preliminary at this point in most cases about the discussions we've had are very encouraging and I understand it realizes it, and I don't -- I can't give you a percentage increase that you should expect for 2014 at this point in time, but everybody is -- it is on everybody's radar screens.

Michael F. Neidorff

And it really will vary from state to state. We're not hearing the same as we have cut as the people have heard historically, and realize that there's new population there. And so we've always been able to work through it with the states and expect that it will be the case with the be expansionary, of course, the states [indiscernible] Rone said it's 100% match, and so we're looking at that from that standpoint. So I think kind of stay tuned, but we see nothing that has caused it operate a high-level of anxiety. We just to -- we want to always wake up cautious and continue to work it, both from the federal side and the state side. I think it's pretty much the response to how we're doing. Justin?

Justin Lake - JP Morgan Chase & Co, Research Division

First question and then just a couple of quick follow-ups. On duals, just you mentioned, there is good news on rates out of Massachusetts, any details you can share with us?

Jesse N. Hunter

We're actually not participating in that program directly, but there's public information about some rates that were increased to get to the finish line in terms of the alignment between CMS, the states and the plans for the implementation of that program. So the net results was a kind of mid-single-digit increase in premium rates for that program.

Justin Lake - JP Morgan Chase & Co, Research Division

So has anything actually been contracted at Massachusetts because I've heard that there isn't. They're still at disagreement on rates in Massachusetts, they haven't gotten to the finish line there yet?

Jesse N. Hunter

Yes. I mean, I understand. We're not a party to that directly, so we're an interested participant, an interested party in terms of following what's going on there, but I think there were certainly some questions with respect to the rates and adequate rates and some of that, there has been movement in that direction. So my comment is really around there's some positive indicators on trying to get alignment on all fronts for these dual programs going forward.

Justin Lake - JP Morgan Chase & Co, Research Division

And is there anything you could share with us on how those rates are being built up, for instance on the Medicare side? Are they taking a Medicare Advantage rate and just saying this is what we'll pay for Medicare and we'll risk-adjust it and all that, or is there something more to it?

Jesse N. Hunter

Yes. So I think because these -- each of the programs are working with both CMS and the states, there are some differences in terms of the program design, and there are also differences with respect to the rate setting process. But generally speaking, putting the pieces together and then there are expectations of managed care savings as a result of the benefits of care coordination between those population. So the degree of that, I think, is the primary subject of conversation.

Justin Lake - JP Morgan Chase & Co, Research Division

The primary -- I'm sorry, the degree of savings?

Jesse N. Hunter

The degree of managed savings associated with the combination of -- aligning the models between Medicare and Medicaid and the funding streams.

Jesse N. Hunter

Okay, so it's not -- the 124% is where the discussion is being had in terms of the wellness to agree to that.

Jesse N. Hunter

Yes, I mean, I wouldn't get into the particular percentages because there are some variability from state to state.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And then just to follow-up quickly, how should we think about Medicare -- or I should say, Medicaid margins and expansion and exchanges in 2014, specifically, given it concerns around adverse selection, et cetera? Should we think that's going to be profitable business on whatever revenue comes in there in 2014 or should that be a ramping process?

Michael F. Neidorff

Bill?

William N. Scheffel

I think [indiscernible] and we'll be looking at that in the second half of this year, particularly exactly which markets we're in and everybody else is in and make an assessment of that. So I would say that's still work in progress.

Justin Lake - JP Morgan Chase & Co, Research Division

Okay. And then just a last followup on Ralph's question, what do you pay for -- you mentioned that you only have an in-network contract, that you only have an in-network benefit. But if someone goes to the ER and -- are you paying full charges there or do you have some kind of contracted rates on out-of-network when it's emerging? Typically, you have to pay that bill.

William N. Scheffel

Yes, if somebody goes to the ER, clearly, that's something that has to be allowed even if it is out-of-network. And I believe that there's a prescribed set of reimbursement rules for that situation, which basically will be put in and again will cap our exposure with respect to ER visits like that.

Michael F. Neidorff

We also have a very robust program that look at ER utilization in the appropriateness of it.

Unknown Executive

Kevin Fischbeck.

Michael F. Neidorff

Kevin?

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

A couple of questions on the Medicaid expansion. I appreciate you not wanting to provide 2014 guidance at this point, but you cited the $8 billion revenue opportunity in your state, I think. Is there any reason to think that the penetration on those new contracts will be any different than what you're existing penetration is in your existing contracts in those states? Any thoughts about how that membership would be allocated at the existing auto-assignments with that methodology?

Michael F. Neidorff

Jesse?

Jesse N. Hunter

I'll take that. So I think certainly, looking at our existing market share within geographies, right, as some of the numbers were talking about were statewide, where we may not have a statewide presence. But if you think about kind of aligning market share within a geography, for existing business and expansion, that's certainly a reasonable starting point for the analysis. And I think because we're just now getting, I think, more visibility in terms of which states are landing in terms of Medicaid expansion and now shifting into some of the more of operational details which would include membership assignment and things along those lines, but I certainly would expect it to include an element of number choice and then some kind of default mechanism beyond that.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

And would it be tenets that we think about as far as auto-assignments, high percentages or a gap of long-term care contracts, the kind of contracts, how do you think about how they might think about those?

Jesse N. Hunter

In terms of choice rates for individuals coming in?

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

As far as how the state might auto-assign or prioritize when they reimburse with another plan.

Jesse N. Hunter

Yes, I think the states would have -- I mean, they would look to leverage the kind of the infrastructure and kind of process for auto, something they would have for the populations. So I think it would be fair and I wouldn't expect materially different choice rates for the Medicaid expansion population.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

And when you think about the rate setting, I think you mentioned before that obviously, contracts usually are unprofitable at day 1 because it takes a while, be it medical management, but from the rate perspective of the state, on an expansion that's not a population that was managed last year, so it's not one they necessarily have a 5% or 10% target rate savings day one. Any thought about how they're thinking about the contract terms and their targets of savings versus an undefined spend in the prior year?

Jesse N. Hunter

Yes, similar to what Bill had indicated, I think, the states are -- certainly, they understand that this has been generally an unmanaged population and that there are -- they're sensitive to that and you combine an understanding of kind of the history and a lot of these individuals will be new to the system, so to speak, with the, as Michael have mentioned, the economics and financing, the expansion in the near term, I think that is a place into the state's thinking with respect to pricing for the expansion.

Michael F. Neidorff

I think also, Kevin, that hopefully, our new business, new sourcing sort of approach will really give some transparency to it over time, so you can see how it's coming in and we'll be able to talk about our expectations there. And then on the market share, of course, there's a given number of players in the business today in a particular market and market share is going to dependent on how many players, if anybody decides to play in the expansion. In some of those variables, as you model it, we all have to think about. That's a good question.

Unknown Executive

[indiscernible]

Unknown Analyst

So you talked about the smart start for exchanges next year. In states that decide not expand Medicaid in year 1, are you taking a different strategy to how you purchase those markets?

William N. Scheffel

With respect to the exchanges, no. I mean, fundamentally, people above 100% FPL will be eligible to be on the exchanges versus 138%. And that's not -- it'll impact clearly some of our sales and marketing efforts with respect to that, but we're not taking a broadly different approach with respect to the exchanges on states that are expanding or not expanding Medicaid.

Unknown Analyst

Okay. And then, I guess, Jesse, you size the in-state Medicaid expansion opportunities of $8 billion. What is the similar number for in-state exchange opportunities?

Jesse N. Hunter

Yes, we didn't give that specifically, Jack, at this time, so we've got -- we talked broadly about the market opportunities and we talked about the targeted pipeline in the number of $65 billion. So that gives you a sense of kind of where we're looking, but that's not all kind of aligned with -- it's a subset of states, et cetera, that we've talked about before.

Unknown Executive

Sarah James.

Michael F. Neidorff

Sarah.

Sarah James - Wedbush Securities Inc., Research Division

Jesse, the breakdown that you gave of the growth pipeline was very helpful in laying out of the MLR ranges, it was from the high-70s to mid-90s. So given the wide range in HBRs, is there any difference inherent in that in how you reserve for these products? Is it a standard percentage of Premium revenues just across-the-board and are some products requiring those to be upfront versus other types of products after 1 year of operation?

Jesse N. Hunter

I'll defer to Bill very quickly here on this one. But I think it's fair to say that we recognize the difference across those products and our reserves methodology and the level of those reserves would be targeted in those particular programs and populations and what we think is adequate. Bill, please help on this.

William N. Scheffel

That's a totally different subject, reserving. I think that there's a couple of things you have to take into account. We usually start in a new product, and Rob particularly gave in his slides ranges of HBRs for the different products. And that really -- what that was is the states' actuaries, where do they rate the product. And so if you have a low premium -- lower premium, like a TANF, and it could go around as low as $120 a month, you're going to have a certain amount of administrative costs to execute and implement that program. So you'll end up with a lower rate of HBR in that particular example. Maybe you have an 85% HBR if you have a $120 premium versus if you have a $3,000 a month premium for a long-term care product, there's more money there for administrative costs, so which means you'll have a higher HBR. So obviously, we take that into account in each of the products and how it was originally rated and how we're running compared to what the original actuarial assumptions were. But at the end of the day, the reserving is pretty much the same because it's by bucket and in total, meaning, what's your ER costs, what's your in-patient costs, what's your pharmacy cost and things. So we have a consistent methodology, which we've talked about from time to time in our reserving and we apply that against all of the products, but there are nuances within each of the products that have to be taken into account.

Sarah James - Wedbush Securities Inc., Research Division

So there's no real difference in timing, like certain products that require it upfront versus after the contract began operating?

William N. Scheffel

Well, I'm not exactly sure of your question. But at the beginning, there are certain managed care savings assumptions, there are certain things that take some time to come into play. In the first 6 months, typically, you're building margin and dealing with continuity of care provisions in the book of business. So all those things are normal in the business or expansion area, and we work through those with the states and look to make sure that managed care savings assumptions are reasonable and come in over time, and we have lots of discussions really between our actuaries and the state's actuaries and these subjects on an ongoing basis.

Sarah James - Wedbush Securities Inc., Research Division

And last question on the MLR ranges that were given for the exchanges, it was 78 to 82, which dipped down 200 basis points below the MLR minimum, so I just wanted to understand, is that a classification issue, maybe there's 200 basis points of reclassification? Or is that shows some inherent conservatism and maybe a cushion if cost end up differently?

William N. Scheffel

Well, we were trying to show an indicative kind of range compared to the other products. But there are some fees that do not -- that will be expenses from a GAAP perspective that will not be factored into the MLR calculation for the 80% threshold, and that's why you could see, on a GAAP basis, the HBR dipped below 80%.

Unknown Executive

There could be taxes. They could be just cost of care. The exchange fee in particular, I would highlight there.

Michael F. Neidorff

One thing, just before we take the next question, I want to assure you, at our staff meetings, whether it be how many states we're going to, what states we're going to, the rating, all those kinds, what levels of conservatism. The discussions are variable process. The team cooperates. And it's a good team. But we know how to push each other around when we get into those questions, and it serves everybody very well. Other questions from the floor?

Unknown Executive

We're running late here, but...

Michael F. Neidorff

It's okay.

Unknown Attendee

Maybe the answer is obvious. But when you look at the exchange products, obviously, they're heavily subsidized. And the actuarial values run very high, particularly in the lowest cohort that sort of 133 to 200. Are you getting -- get paid that small amount that's owed by the member upfront every month?

Unknown Executive

Yes, I mean, in -- well, there is a possibility that a member could -- you could end up with a situation depending on the competitive situation that the product the member selects where actually, they could choose a product that does not require any monthly premium for them to keep the product in force, but down at the very heavy -- heavily subsidize low income cohort, as you mentioned. But in general, if you think they're going to target a silver-tier product based on the way the premium tax credit subsidies work, there will be some premium. And in some cases, it could be down around $20 per month, for example, at the very -- heavily subsidized kind of levels for income. So that has to be -- there are rules [indiscernible] with respect to how the premium has to come in, in order to continue to be eligible for the premium tax credit. And basically, and then the way grace periods work, but fundamentally, yes, you have to collect that premium in advance in order for the member to stay -- to be able to continue to have his policy stay in force and good standing. Absent the grace period issues that are pretty complicated to get into.

Unknown Attendee

Did you have -- I'm sorry, did that answer your question, Chris?

Unknown Attendee

Yes.

Unknown Executive

I do have a question that came in over the Web. [indiscernible]

Michael F. Neidorff

Sure, well, I'd love for that, please.

Unknown Attendee

The question on -- so I understand you're not giving any guidance for '14 on exchanges, but back to the ranges [indiscernible] those were very helpful, and you talked about leveraging your experience in Massachusetts. So can you give us a sense for, based on your under-rating philosophy at the time and your trajectory of margins, can you give us anything on the read across to what we might look for in '14, in year 1, and then steady state?

Michael F. Neidorff

Jesse?

Jesse N. Hunter

Well, basically, with respect to the exchange product from a pricing perspective, we priced it based on our view of the claims costs, the administrative expenses, the other taxes and fees in order to allow Centene's target profit margin, which is a 3% to 5% profit margin. So that is how we priced the product and that's the intent. And again, how that will actually develop for 2014, as Bill mentioned, I think, it's premature to provide any kind of guidance. But that is our view on the economics of the product.

Unknown Attendee

And how comfortable are you with reinsurance as a way to backstop the downside in the early years?

Jesse N. Hunter

Well, just with -- broadly speaking, we've done a fair amount of stress testing about different scenarios with respect to the exchange product obviously because it is new. And that stress testing reflects the impact of the, first of all, the risk adjustment, the reinsurance program offered by the government, as well as the [indiscernible] programs. And those programs do offer significant risk mitigation with respect to what might happen in an adverse scenario. So we, given all told, we feel comfortable with respect to where -- how those programs will work and how it looks with respect to a stress test kind of scenario. In addition to that, we are actively looking at purchasing additional potential reinsurance coverage beyond what's offered through the federal reinsurance program. And we've gone through the process -- we think it will be available, we think it will be available at a price that's reasonable to pursue. But we'll be looking at that more intensively kind of as we get towards the third and fourth quarter.

Unknown Attendee

That's helpful. Just one final question on the duals, the range of 86% to 92%, what is the SG&A load that the state actuaries are assuming, and is that differing state by state? What's the range of margins that you would expect against steady state and duals?

Unknown Executive

Yes, it definitely have been [indiscernible] the rate development. But I think part of the point of that slide is when you look at the various revenue ranges across products, the end result, when you look at the targeted margins, they generally would be aligned with, as Rone said, a 3% to 5% pretax margin opportunity.

Unknown Attendee

The 3% to 5% on duals as well?

Unknown Executive

Obviously, it depends state to state over time, but I think that is -- we believe that each of the kind of government programs is [indiscernible]

[indiscernible] and margin expansion and see a consistent 3% to 5%, and start to move up that line. And one question and we'll take our break.

Edmund E. Kroll

Okay. This one's on Centurion. Can we give any detail on what the revenue contribution from the 2 contracts will be?

Unknown Executive

Yes. For the 2 agreements between Massachusetts, which is a 7/1 start date, and Tennessee, where I said that we're working with the department on transition, we are -- our plan is to update guidance after the second quarter for that. But I think there is some publicly available information on the relative size of those. And Massachusetts is approximately $100 million a year agreement, 5-year term with a couple of annual renewal opportunities. The Tennessee, we don't have finalized rates because of some of the transition issues we're going through with the state right now. So I won't comment on that other than to say that the Tennessee agreement does not include behavioral health and it does not include pharmacy, and it has a lower price point generally just from an outside the walls contracting perspective than we might see in a contract like Massachusetts. So it really is not an apples-to-oranges comparison on the 2.

Michael F. Neidorff

Okay. We'll take a 15-minute break. I might add, there's a box on the table, it should be on financial criteria. There's little pen with a stylus on the top, for those of you would -- you can put that to good use. Let's take 15 minutes and get back together for some [indiscernible]

[Break]

Michael F. Neidorff

Okay. Ladies and gentlemen, if we might, I'd like to get us back on track. The people on the webcast have had their coffee and their breaks, so we'll get back to work.

I think we -- the second half of this Investor Day this morning, the key is, a couple key factors our success that continue to surface again and again. We're going to talk about the systems, and then we'll get some more granularity on it. And it is really serving us well in terms of being able to manage the higher acuity populations, as it's very mature. Mary Mason, our Chief Medical Officer, will then take you through some of her innovative programs and how it's making a difference day in and day out. And then Bill will pour altogether for you from a financial perspective, and then we'll have another Q&A period.

So with that, I would ask Don to come up and take a seat.

Donald G. Imholz

Good morning. Thank you, Michael. As you've seen this morning, Centene has some significant growth opportunities ahead, and we plan to address them. As Jesse and other speakers have noted, the growth is just not in current products and current markets, but new markets for existing products such as California, and new products in existing markets such as exchanges or marketplaces. So my objective this morning is summarize how IT will support that growth and expansion, which of course is a continuation of what we've done in the past few years.

As some of you will remember from our past briefings, we've put a lot of emphasis on our IT architecture. Architectures are important. The building will either facilitate or limit what the occupants can do, and architecture and IT will either facilitate or limit what the business can do. Our architecture is designed around our proprietary enterprise at a warehouse. This not only gives us a very strong inherent capability for business analytics, extremely important, but it allows us to evolve our application portfolio. With the EDW [indiscernible] for most of our data on this, we eliminate the point-to-point interfaces that make system changes so challenging and expensive. This in turn allows us a high degree of standardization. All the systems that I'll touch on this morning are very common across our enterprise. This standardization eliminates the waste and expense of supporting redundant and overlapping systems.

With our growth, capacity and scalability are critical focus items. Michael mentioned the past investments we've made in state-of-the-art data centers and computing assets. They will allow us to grow in scale as required. Depending on timing and product mix, we can forecast -- we can triple size without a major brick-and-mortar facility investment. The most critical resource, of course, remains our people in IT, and we've been able to meet needs there as well. We've had the strategy in the past few years of being a source of talent for other parts of the enterprise, and that strategy has served us well.

So I'd like to dive a little bit deeper now into our systems architecture. As I've noted, our EDW, or enterprise data warehouse, is really at the core of our architecture. This investment started several years ago, 6 or 7 years ago, as Michael mentioned. And we continue to invest, have an ongoing investment in adding data and capabilities. It's not only the source of truth for our reporting, as many enterprise data warehouses and companies are, but the means to integrate it are various applications. So it's really does sit at the center of these and other applications. It's truly enterprise in scope, meaning it houses data not only on claims but on members, authorization care plan provider, payments and other key aspects of our business. We put all that data to good use with our suite of analytic and reporting tools under our CENTELLIGENCE systems umbrella.

I'd like to take a moment to highlight a couple of samples of capabilities in this area. Much has been made regarding our dashboards. The advantage here is not the exotic technology or the pretty graphics, but the use of these tools from various suppliers to reduce the cycle time between data input into our systems, turning that data into information, garnering insights from that information, and most importantly, having an impact on cost trends and health outcomes. This particular dashboard is about pharmacy use agent data, they're largely obtained from our U.S. group business unit that Jason mentioned. The data is current to the previous day, as I pulled it a few weeks ago, and shows a number of trends and possible drill downs. All the data is again sourced from our electronic data warehouse, and adding new markets to this dashboard is just about as simple as turning on a pipeline and seeing the data flow.

While the previous dashboard on Rx was based on pay claims, the lag between encounters and even claims receipt is an industry challenge, there is a lag there. As such, we base our inpatient dashboards and authorizations, Bill Scheffel with talk a little bit more about the importance of that later on. But it does allow us to quickly see transfer admissions, as well as days stayed. In this particular example, real data from a particular region a few weeks ago, and I want you to get excited about the data, we're showing green or under plan for the admissions, but over plan for days. This data is, again, for a particular region with one of our states. As we work to condense and show a lot of information on each of our dashboards, so these tend to be rather busy. This one particular one showing non-inpatient leading indicators.

It is important to note that the dashboards are only a starting point. Week can data varied -- week can data -- the data displayed -- we can vary the data displayed by region, by type of service and by a variety of other variables. More importantly, we can provide a drill down to very detailed reports. You'll notice on the lower right of this one, something called top 50 report. That allows us to quickly pinpoint the issues. We don't want people going to multiple systems to get analysis. All the data and reporting are sourced, again, off the EDW, but we have strict controls around the quality and the currency of the data. So this means we generate trust in the validity of data. Many companies, organizations, people waste time asking the same question of multiple systems, getting different answers. And then you're working time on validating the data rather than doing the analysis.

Of course, while it's easier to look backwards on what has happened, our overall emphasis is on predicting and impacting the future. Our predicting modeling capabilities have been mentioned a couple of times this morning already. This is a typical output. This synthesizes data from assessments, health risk assessments and other data sources, certainly claims and authorizations, to predict future costs. In this particular one, we're trying to stratify the risks of our various members, and -- but we can slice and dice the data an infinite number of ways. And we're constantly looking for, and currently, we're still finding new ways to enhance the value of the data that we collect.

Returning to our overall architecture picture, the business analytic, including the predictive model, are critical input to our medical management operations that have been touched on already this morning, and Dr. Mason will describe in more detail. The priority system our clinical staff uses is a system called TruCare. You may have noticed a reference in Jason's slides, the Casenet is one of our specialty Companies. And as Rob noted, this area, our medical management is certainly one of our core competencies. Casenet is a health care IT company, relatively small at this point, but absolutely vital to our future.

As we -- a few years ago, as we defined our strategic medical management needs and we look at our current systems and systems available on the market, we did find what we need, so we took an investment, made an investment with Casenet. And as Jason mentioned, we now own it outright. Casenet develops and are supporting in marketing TruCare product we use across our company for our core management needs. In this way, owning this company, we have the strategic advantage of having state-of-the-art technology, having it evolve to continue to meet our needs while also marketing that software to other industry players, and we could then get the benefit of sharing development costs with those other buyers.

This is a screenshot of TruCare. It access our dashboard for cases, utilization, and these management personnel. So again, whether someone is in nurture handling a particular days stayed, or one of our nurses on third shifts handling triage requirements, or one of our case management specialists, they all get the same data. They can access the same date, but their dashboard is unique to them. And as I'm saying this, you can see that it really does provide that case manager everything they might need, their schedules, their cases open, any alerts that come in from other parts of the team or from providers. And our design objective here is really all that they need is in TruCare. We don't want them having to hop around to other systems for data. They do need data whether it's on providers, members, policies or whatever, it can be displayed here on the screen. Ours is only a click away. And again, our enterprise data warehouse is constantly updated backwards and forward with these capabilities.

The second TruCare screen example shows them the drill down to a particular member. They can work with multiple members at once. They can access and they can modify standard care plans, view or update authorizations and really document all the interactions with members or caregivers. They can even handle transportation requests.

One of the important aspects about TruCare is, candidly, it sounds a bit like a contradiction. It's standardization and it's customization. In other words, it comes with many, many standard templates out of the box for care plans, for reporting and other aspects of the system. But it also enables, and in fact, encourages our users to customize those items to respond to individual market, region and especially individual needs. Rob talked about our local approach, and that is enhanced with this kind of system is able to handle multiple diverse populations.

Once again, returning the overall architecture, I'd like to highlight our member services capabilities and how it sits with our business model and architecture. We realized a few years ago that our organization and systems are going to evolve to create more value for our member interactions. Like most health plans, we have call centers that handle administrative needs, whether that's obtaining information to our members on benefits, handling eligibility requests from providers, getting ID cards, et cetera. Those organizations tend to be separate from our medical management organization. Just as we found that our medical management organization can benefit from information obtained as part of those interactions such as the latest comtech or cell phone information, which we then display in TruCare incidentally, we realize that our administrative personnel could support our clinical objectives. Using our call center application, which you'll notice looks a lot like around the edges, like Exchange and other similar Microsoft products. But if a member contacts us with an ID card or other request, that contact and really every contact is an opportunity to help improve the member's health.

To illustrate, as this screen shows, the call center personnel are alerted if there are gaps in care. That data is generated from our CENTELLIGENCE predictive modeling tool. That's really the flip side of the risk. It is then displayed in TruCare, but also displayed on our Web portals, and most importantly, as shown here, in our call center application. This really is a good example of our capability for systems to be integrated through our architecture and repurposing the data that's entered once and used multiple times.

As our last example of systems integration, repurposing data. Let me show you just a small piece of our provider portal in a second. Here too, we've worked to maximize value, evolving the portal from one that handles primarily administrative tools to also one that supports clinical applications. I don't have enough time this morning to go over each of these functions, but some of the critical ones are noted here. Certainly, the support for electronic health records and the interchange of care coordination documents or CCDs. We will continue to evolve both the administrative and clinical uses of our portal, as well as continue to support and enhance the support for things like mobile devices. One of the most valued functions of the portal is something we call the health record. We continue to improve those both in terms of usability, as well as in terms of the content.

And as shown here, one of our real value propositions is that we can present a very comprehensive view of a member to a provider. Our members go to clinics, to emergency rooms, to other providers who may not tell one about the other. They may have allergies or they may have diagnoses that are not apparent as they move from one care setting to the next. Even if a provider has an electronic medical record, the chances are that we'll have more data on many of our members than they will. This again illustrates our system's integration and data repurposing meeting the needs of our partner providers and improving health outcomes. Our overall goal with our Web portals is to create such a high value set of Web functions that it becomes a strategic -- that it becomes strategic for our providers and an enduring means for interaction between us and them.

Let us now transition -- let me now transition, talking about our systems in terms of different populations. You've heard a lot this morning from other speakers about the expansion into multiple products and a question comes up, "Do our core systems handle those different products?" I'm very pleased to say that in terms of reporting their needs, our finding is that our systems, major systems, work just fine, but the intensity of the usage and requirements for those different populations does vary. Retrospectively, looking back, we've found that our CHIP population isn't terribly taxing on our systems. We thought it was at the time, but it's gotten more so with new populations. I've noted the importance of provider portals and business analytics, and certainly care management. But the other needs are relatively moderate. When we started having more ABD members, we found higher levels of intensity of almost across the board compared to our CHIP [indiscernible] population. Business analytics intensity was about the same, but very different metrics were needed for those populations. And of course, we've now since provided those. As we increased the number of long-term care, long-term services and support members, we really see high intensity for many of our care core systems. In-home systems such as electronic health records -- I'm sorry, electronic visit verifications, assessments and telehealth and telemonitoring becomes vitally important for that population. Fortunately, our core capabilities have nicely extended into these areas.

Lastly, exchanges or marketplaces. We definitely have noted seeing more diversity in this population in terms of medical needs. The characteristic we see here, as I talked to a couple of about, is much more administrative, more commercial-like requirements for our systems, for capabilities such as sales support, for billing and collections. These members, too, are more likely to use our portals, which is good for us, and contact our call centers. This overall area for exchanges has been a major focus of investment for this year as we prepare for 2014.

In summary, we see requirements across the populations, to repeat myself, that vary, but not so much that our core platform had to be replaced.

Summarizing, Centene IT has been able to evolve with our business, meeting requirements for these new complex and other products without compromising our basic architecture or basic strategies. We will continue to invest on a thoughtful and on a focused basis to stay abreast the market needs and continue to strive to yield competitive advantage.

At this point, I'd like to turn it over to Dr. Mason, who will illustrate, with some case examples, some of the intersections of members with our programs and technology. Mary?

Mary V. Mason

Thank you, Don. Good morning. Today, I want to walk you through 4 case studies to give you a better appreciation of the impact that we have on members. And these patients are very diverse, but what you'll find is that there's some common themes that we can highlight, and you've heard several of them this morning from Michael and Don, a holistic patient approach, standardization of best practices with evidence-based medicine, collaboration with our providers and innovative IT tools.

So let's start with the first case. This is a 17-year-old woman who presents to a local clinic, complaining of abdominal pain. Past medical history is significant for obesity. She has also had a previous pregnancy at age 15, which resulted in a premature birth at 30 weeks. And she also had gestational diabetes. She smokes 1 pack of cigarettes a day. And on evaluation, she was found to be 21 weeks pregnant.

So let's look at our problem list. We have late initiation of prenatal care. We have a history of premature birth. And as many of you know, as I've talked about 17P over the years, this is a high-risk patient to have a subsequent premature birth. And she also has several other risk factors that can lead to a complicated pregnancy.

So we utilized our award-winning Start Smart For Your Baby program. The health clinics fills out a notification of pregnancy form. So we can immediately get the risk information that we need so we can stratify her to high risk OB case management. We then immediately start to work with the OB office to initiate 17P treatment and also to make sure that she gets a flu shot that will not only protect the mother, but also the baby in the first 6 months of life from influenza. She is screened for gestational diabetes. And her case manager arranges for enrollment in Puff Free Pregnancy through our nurture company to make sure that -- and also make sure that she gets a dietitian, so we can make sure that she optimizes her weight gain during pregnancy.

Since this is a teenager, we want to also make sure she takes advantage of one of our new programs, and this is off its chain teen pregnancy educational series. And this is a curriculum that we developed in conjunction with the National Urban League. Our member can participate in an educational course, we put it on a Microsoft Service RTs, and they can earn 3 credit hours of high school credit to help them graduate. And also, we have a website that they can go to that has all sorts of information and educational resources. And we will be passing out Web keys that you can take home with you, so you can plug them into your computer and you can be one of the first to look at that site.

We also have a new website for children as well, so the child of this mother can benefit from this as they age. And you also will have a bracelet that if you open it up, it is a Web key as well. And these sites will both be functional in fall.

So let's look at the outcomes of this patient. She had an uneventful pregnancy. She delivered a normal full-term infant. She quit smoking and she is now working to achieve a normal weight.

You can also see how Start Smart has helped the child. The child is getting their well visits. They're getting their immunizations, and they're staying out of the emergency room and out of the hospital.

Second case, this is a 37-year-old gentleman with a history of asthma with frequent ER visits. In fact, he's been in the emergency room 3x over the last 6 weeks. And he also has untreated depression. So he has not been taking his Advair inhaler. Because he does farm work, he makes money 1 month, he loses his Medicaid eligibility, can't afford his medication, and then when he stops working, he comes back on Medicaid and he ends up in the emergency room.

Problem with moderate persistent asthma and untreated depression, very common with patients with chronic diseases and something that we definitely need to address. Our approach is identification and stratification into our asthma program. We do a field visit into the home with a respiratory therapist and have discussions with a primary care physician to formulate a care plan and to make sure the patient gets into health coaching.

We also work with a Cenpatico behavioral health nurse, who is able to address the untreated depression. And using our CENTELIIGENCE reports that Don just showed you, we are able to monitor that patient coming on and off our plan to make sure that we are alerted when they come back on, so we immediately can get them back in to disease management.

Outcomes on this patient, they saw a pulmonologist, and they were actually switched to a less expensive inhaler, FLOVENT. And also, he was notified of prescription assistance programs support, so when he loses his eligibility, he would be able to still get his medication.

Now going forward, we now have the opportunity that going between our exchange and our Medicaid products, that this patient, if he did move between those 2, we would have all that patient information and we wouldn't lose that in the transition, and we could continue his disease management coaching.

Third case. This is a 60-year-old gentleman with a history of oxygen-dependent chronic obstructive pulmonary disease. And over the last 6 years, he's had numerous hospitalizations because he does not keep his appointments with primary care physicians, he waits till he goes into respiratory distress and he calls the ambulance. He also has an unstable housing situation, often living in shelters and he is about to be discharged from the hospital, and that's when our nurse gets involved. This is a difficult situation. He also has infection or cellulitis on his legs, and due to his overall poor health status, he needs a wheelchair and has very little social support.

Our case manager visits him before discharge and arranges for transfer to a skilled nursing facility where he receives therapy. They also work with the social worker and they find that he is married. And he has never gone to his wife's housing voucher because he didn't understand how Section 8 Housing worked. So they were able to help him with that. Once he was discharged at the home, they made sure that he had a wheelchair that actually could access the home. He also got an electric bed as well as oxygen supplies. He received his first eye exam in 20 years, as well as a much-needed dental visit. And he continues to receive support on a regular basis, so we can continue to make sure that he is going to his primary care physician. This patient has been a true success. He's now able to function in the home setting. He's compliant and he has much better quality of life.

Our final case is a 20-year-old woman who entered foster care at age 15. She has insulin-dependent diabetes, which is poorly controlled, and she's had several hospital admissions for diabetic ketoacidosis. Additionally, she did become pregnant at age 16 and has multiple social risk factors including medical neglect.

Problem list includes uncontrolled diabetes, social and behavioral issues, and a lack of support and education about her disease. Using our care coordination model, we use a very integrated approach with the medical caseworkers and the behavioral caseworkers working together on a care plan. The patient is given 2 glucose monitors, one for home, one for school, and is educated about them and instructed how to use them.

We also have medical compliance and wellness goals that are reinforced with joint conferences with the whole medical team, as well as the member and her foster care parents. And she also now has one of our CONNECTIONS Plus phones, so she can call her physicians, including an endocrinologist that she's now seeing, and that we can reach her as well.

This member is now thriving in the foster care system. She has much better control of her diabetes. Her child now lives with her foster parents and she is continuing to do well in junior college.

So when you think about these patients, the pregnant mom, the non-compliant asthmatic, the homeless gentleman with COPD and the young woman in foster care, they all have very different needs. Yet they all benefit from our holistic approach that is based on best practices and in evidence-based medicine. We are using state-of-the-art IT tools to identify, monitor and manage these patients. And along with physicians and other health care providers, we are making a difference in improving the lives of these patients.

With that, I'd like to turn this over to Bill Scheffel, our CFO. Thank you.

William N. Scheffel

Thank you, Mary, and good morning, everyone. I think, this morning, what I would like to do is to talk for a few minutes about some of the issues that came up last year, about this time, that we talked about in this very room, I think, and then talk about a few key trends and indicators and what we used to help manage the business and then a few of our summary financial metrics.

First, with respect to Kentucky, Michael covered that. That statement is out on the SEC's website with an -- via an 8-K. So I'm really not going to say anything more with respect to that.

Well, I'll start with Texas. In Texas, we have signed a rate amendment, the state has already put this together and they gave it to us. It includes a 2.9% rate increase for the Medicaid rural service area, as well as a nominal increase in some of the other -- remainder of the business. And the increase covers the fiscal year, which is from September 1, 2012 through August 31, 2013 and were recorded by Centene in the June, July and August time frames, because that's when it will be effective.

We are awaiting the state's counter signature to the amendment, which we do expect to receive in the next few days. And we believe this rate action is -- it demonstrates the commitment that the state has to maintain adequate premiums and ensure actuarial soundness. And so this -- what the rate amendment that we're getting is consistent with that which we expected to get as we put together our guidance at the end of April. So there's really no change there other than the fact that it's almost a fait accompli.

Next, Celtic. Last year, we talked about some of the issues with Celtic, particularly in a book of business that we put out in early 2012. And we've undertaken a number of steps to try to improve the financial performance there. I think we've talked about the fact that we had a new network that we put in place, July 1, 2012, for lowering our medical costs. We've implemented rate increases in most of the markets, beginning July 1, 2012, and ongoing into 2013. We've reduced G&A costs, we've exited some of the underperforming products and market areas and we've expanded our medical management and clinical programs. And at this point, Celtic is pretty well dedicated to focusing in 2014 on the exchange programs, working under Rone's direction.

A couple of things on new business. We've talked about it in general. In California, as others have talked about the operations in Northern California expected to begin September 1, and the results of that were included in our April guidance. Imperial County is expected to begin in late 2013. We have not yet included that in our guidance, we're still working through some of those issues. We expect to add statutory capital of about $8 million for calendar -- for California in the remainder of 2013.

In New Hampshire, operations are expected to be, again, in the late 2013. The start-up costs were included in our April guidance, and we don't expect to have to add any additional statutory capital this year. We funded some of these organizations -- some of these operations in advance, so we set them up and so that's history. Capital will be sufficient in the near term.

We want to talk about today, with Centurion. That's going to be the 51% owned joint venture. Expect operations in Massachusetts on July 1, Tennessee later in the summer. No additional statutory capital is required, but we will just have normal working capital needs as that operation progresses.

Now a little bit about Acaria, Jason gave a discussion of that. Just in general, the cost for that acquisition ended up to be $146 million. It was funded with $91 million of Centene stock, 2.1 million shares. And again, we thought that was an opportunistic approach to putting equity on the balance sheet as part of the consideration. And with all said and done, we think it changed our ratio of debt to capital by 0.2%. And I think, as we go forward, we expect to use equity as a key component for future acquisitions to the extent possible.

Now I'd go into some of the key trends and indicators that we use to help manage the business. If we start with our HBR slide for existing and new markets, we started talking about this, I think, in December. Again, what we see here is where it's operated over the last few years. There's generally a 500- to 700-basis point difference in the HBR between the existing and the new. And as a reminder, the new is considered like same-store sales on a retail concept, till you have a full 12 months of operations that shows up as new. And as we look at this remaining part of the year, our forecast, we expect those trends and differences to continue. There's a slight uptick there, I think in the third quarter, as we have the Ohio expansion area starting up and also a little bit in California.

And then when you look at this slide, the -- sort of a 1-2 combination, it's the percentage of our revenues that come from new business. And as what we've been talking about, as over the last several quarters, we've seen a very high proportion of our total revenue coming from new business, up to 35% in the last couple of quarters. So what we will see beginning in the second quarter of this year, for example, Texas will convert to be a part of the existing business calculation. So you'll see that come down quite a bit for the rest of 2013, more in the 10% to 20% range depending on how everything works out.

Now a couple of our -- just trends and data that we use, and there's been a little bit of discussion of our reserve setting this morning. The first one is pharmacy data. We showed this slide a couple of years ago, I think just to show there's a very -- we see a high correlation between the number of scripts and the primary care physician cost, and you can see that correlation over quite a few quarters. This is not a cost trend analysis. This just shows, for example, the number of scripts. So when you look at March of 2012, you see it go up. That's when we started in Texas and added in all the Texas pharmacy and then a few states after that. So again, we don't set reserves off of this. But we use this for purposes of analyzing some of the areas where we have to rely on claims receipts.

In pharmacy, we have real-time data, so we know exactly how that trend goes from day-to-day. And in physician costs, you're waiting for claims to come in, so you're lagged there a little bit, and this helps us to make sure that correlations are appropriate and makes sense, given everything else that we know.

In a couple of reports that we get, Don spent time talking about a lot of our dashboard and reports. And some of these reports are actually pushed out. You can go in and you can go into the website, look at these things, or you could be like me in some cases, sitting in my table right there. They pushed out a couple of these reports this morning from last Friday. So this is are real-time, in terms of where we are.

So this one is a pharmacy flash report. It's an example, don't worry about the numbers per se. What I've circled is -- you cut to the chase. Under this report, it would say that our projections for pharmacy for this month, based on actual results through the 14th of June, would say we would be -- we would have a positive variance in pharmacy of 1.7 million versus our forecast. You can put any number in there, that's just an example. But it does show you that we take -- what the trends are during the course of the month, we got that. We extrapolate that to the whole month, based on prior experience, and we're able to then say how we're doing well before waiting till the end of the month to see what the trends are.

Same thing on claims received. We get a lot of detail on that and keep track of the claims received by what period they represent. So in this particular slide, this says that in the month of May, in this plan we would have received $11,668,000 of claims. And there's a distribution at the bottom, what period did that relate to. For example, $5.4 million came out of May. And then what we're able to see is how that develops from a standpoint of completion. So it ranges from 98% complete in January down to the 53% in May. And again, we -- it gives us an opportunity to see how things are going during the course of the month as we watch the claims come in every week.

Similarly, when you look at inpatient authorizations, we authorize all our inpatients. We keep track of the number of days in an inventory basis for purposes of estimating our reserves. And again, this is one of the reports that's pushed out this morning. I received this report through last Friday, updated for all the admissions and the day estimates. And this would say, in this example, the 2 green circles says that, at this point in time, we're estimating we have 422 days per thousand as our inpatient days for the month of June versus a forecast of 448. Obviously, I'm going to give you a favorable number when I put an example up here. I'm not going to show unfavorable -- but again, this is just example data.

Now we'll go through some of the financial highlights in the typical slides that we have. Start with revenue. Our forecast for 2013 revenue's $10.1 billion to $10.4 billion. That will represent about a 25% increase in revenues in 2013 over 2012. Obviously, 2012 was a pretty good year for revenue growth at 59%. FORTUNE 500 came out with their rankings a month ago or so, and when we went from 453 to 303, like 150-point change in the FORTUNE 500 rankings, and indicative of the growth that we've been incurring.

Now what we'd like to be is we like to be market leaders in the states that we go in. Here, I've just given our 4 largest states and where we stand in terms of the marketplace. This isn't based on members, membership, total membership. We normally get total state membership, by plan, from the states on a regular basis from these states. So this just is in Texas, which is our largest state, we're the largest out of 19 plans. And in Georgia, we're second out of 3. In Florida, as Jesse gave in his study there, we're second out of 13 plans. And in Ohio, we've 3 of 7.

Take that look at some of our new states that we've just gotten into. We'll start, Louisiana, we're

[Audio Gap]

and a debt-to-capital ratio at the end of the first quarter of 31.9%, slightly down from the end of the year. And we're very comfortable with that level in the low- to mid-30s, in terms of a debt-to-cap ratio. Given the interest rates that are out there, we think it makes more sense to take advantage of borrowing at those low interest rates than issuing equity. And so we would expect to continue to be in that range, absent a large acquisition which might cause it to go up closer to 40% and then we'll work that down, if that were to happen.

And the rating agencies have continued to reaffirm their ratings. S&P reaffirmed BB and changed the outlook from negative to stable. And just recently, Moody's reaffirmed our rating of Ba2.

So if you look -- last month, we entered into a new revolving credit agreement. I know there are some of those involved that are in the room today, with that from different banks. It increased from $350 million to $500 million, and we added $100 million -- before you look at our borrowing facilities, there's 2 pieces, the senior notes and the revolver. Since last year, we did add 120 -- $175 million of senior notes in November at 4.29%. We have an interest rate swap on the first $250 million of those senior notes and we're in the money for $14.8 million at the end of the first quarter. So the weighted average interest rate on that $425 million of senior notes was 4.17% for Q1. And as I said, the revolver, and again, at the end of the first quarter, there was no borrowings on the revolver. We do think there will be borrowing on the revolver starting at the end of the second quarter going through the rest of the year, probably in the $50 million to $150 million range over the next 3 quarters.

Looking at our investment portfolio, no real changes. As we've reported in the past, we think we're fairly conservative, in terms of our ratings that we require, our investment policy, $8.5 million almost of unrealized gains at the end of the first quarter, average duration of 2.9 years.

And cash flow from operations has continued to be strong, even last year at $279 million. We think the target of 1.5% to 2.0% -- 2.0x net earnings is a realistic target for this year and that helps fund a lot of things for us.

Looking at our adjusted EBITDA, we expect 2013 EBITDA to be in the $380 million to $410 million range, which is a consistent trend with some of the prior years of 2010 and 2011.

Capital contributions, we put in $235 million in first quarter into our subs through statutory capital additions. So for 2012, we added $554 million. In 2013, we expect to still put in about $270 million for the remainder of the year, so that put us just over $500 million for this year. And most of that is coming from internally generated funds, as we look back. So last year, we added $175 million in senior notes and, this year, we'll be drawing on our revolver. We generally have been very fortunate to be using -- with the cash from internally funded operations to fund that. And I think we continue to maintain a 350% RBC level.

Looking at the days in claims payable, a couple of things here. First of all, our EDI rate continues to go up in a lot of our new states and a lot of our old states all encourage EDI for the providers and we've got a lot of participation in that regard. So we're up to 91.6% of EDI at the first quarter here, which is up 5, 6 percentage points from a year ago. So we continue to believe that DTP range will continue to fall, and our target range, at this point, is 37 to 42 days going forward

Okay, 2013 guidance. This is the guidance that we gave at the end of the first quarter in late April. Revenues, $10.1 billion to $10.4 billion and earnings per share of $2.60 to $2.90. Now this guidance has not been adjusted to reflect anything related to the legal decisions relating to our exit in the Kentucky business, it doesn't reflect the Imperial County operations yet, nor the recently awarded Centurion, Texas and Massachusetts contracts. We expect that we will update guidance, in connection with our second quarter earnings release, around July 23. In that point in time, we can give everybody a better picture for all -- where all these other things are going to come out.

With that, I am going to turn it back to Michael, and he will lead us to the next section.

Michael F. Neidorff

Thank you, William. Before we go into the second set of Q&A, I want to do a risky thing and try and thank some people, and hope I don't leave anybody out. I want to thank the whole team, the officers that put a lot of hours in working on this. Michelle Williams, my assistant Louise Bajo [ph] who does all our facilities planning, I thank her. Jerry Williams [ph], Justin Hansen [ph], I want to thank the IT department, put together a lot of equipment back there with the help of the local New York people. Vivi Halbent [ph] and Erica Silver [ph], who most of you know here in the New York office. Just a lot of energy and work to get this put together and I just want to personally, on behalf of everybody, thank you for that.

With that, I'll open it up to any questions you might have on the second half of our discussion.

Michael F. Neidorff

Matt Borsch.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Thank you, Michael. Just a couple of ones here. I may have missed the context on the slide you put up with the inpatient claims. Is that a sort of favorable update for June, or was that just a hypothetical for one market?

Michael F. Neidorff

Sorry, I missed the question. Days claims?

Matthew Borsch - Goldman Sachs Group Inc., Research Division

No, it was on the...

William N. Scheffel

Those were all hypothetical at this point. As I said, I wasn't going to put up negative there.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

All right, I just want to make sure.

William N. Scheffel

No, those are all examples.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Got it. Okay.

Michael F. Neidorff

Matt, don't assume that it's a negative, if he's not talking about it.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Well, all right.

Michael F. Neidorff

Anytime we put data, it tends to be for demonstrative purposes.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

On Texas, with the rate increase. So we're now coming up pretty quickly on the end of August when you'll need a new rate. Are you -- what do you expect the timing on that is going to be?

Michael F. Neidorff

I'll take that and Rob, if he wishes, could add to it. But we tend to not get too far ahead of ourselves on that, because what this -- we've learned, the states respect is that we have real-time data. So we like to get a little closer to when the data is the shown data that's current versus then here's some 3-year -- 3-month-old data that we are trending forward, actuarially, and that type of thing. We're in discussions now, Rob, but I mean, we really will get serious as we get closer. And we can show them this little dashboard you showed us last night. Anyone add to that?

Robert T. Hitchcock

Just that we are in discussions with the state. They're very preliminary at this point. And -- but we don't see why they would not be finalized by the 9/1 effective date.

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Thank you. And just one last one on Celtic. Can you just address, with the market exits that you've made, where your footprint is now, relative to what you expect your health insurance exchange participation is going to be? And how much overlap there's going to be with the business approach there anyway?

Michael F. Neidorff

Right.

William N. Scheffel

The Celtic business, legacy business, that exists has pretty much been individuals that have been -- had enough income to be able to purchase individual health insurance. And it's pretty much been business that's been developed through brokers. So when we look at that business, it really is significantly different than the business that we are trying to pursue on exchange, which is very much aligned as I went through with our core lower income uninsured population. So that's not a business that plays significantly into our plans going forward, we will see that -- we expect that business to run off significantly, clearly it's going to be offset by the growth that we are seeing -- we expect to see on the exchanges. We will continue to have a footprint with Celtic pretty much on -- in a number of states that we participate in today beyond where we're targeting for the exchange product, but it will be an -- a minor off-exchange presence really intended to maintain our ability and licenses, if we choose to reenter a state going forward.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

I just wanted to get clarification, Texas, that 2.9% in Texas. Once the state agrees, are you saying you'll receive the retroactive premiums in June, July and August? Is that...

Michael F. Neidorff

So that's...

William N. Scheffel

Pretty much, yes. What -- the way they set it up is it's for a 12-month period but it's going to be paid in 3 payments for June, July and August. Because of the way they've set the agreement, we have to record it the same way. So we will receive 1/3 of that in the third -- second quarter. So basically we're saying we're going to receive 4 months for a 3-month period. So it's not going to be that much different for the quarter. And then in July and August, we'll get an extra payment.

Michael F. Neidorff

Anyway, Keith, our [indiscernible] and our general counsel is leaving, so now we can answer those questions differently.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

And then just on -- with regard to the 15% growth, I know that year-to-year, going into next year, I know that's not guidance, but that does not include any growth related to the ACA Medicaid expansion as well as the health insurance exchange?

Michael F. Neidorff

That's correct.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

And so, is the $270 million of statutory capital that you expect to infuse this year, does that assume growth from the ACA? Or should we expect additional capital related to that?

William N. Scheffel

The way that capital contributions normally work is going to be based on revenue, so trailing 12 months revenue. So if you start up something new, you don't have a very heavy capital requirement on day 1, it builds over a 12-month period. So the $270 million that we're are talking about is for the remainder of 2013 based on the products that are more or less already in place. Things that we start up later in the year, we start up in 2014, that will be 2014 capital requirements that would come into play. As the slide shows, we're putting in every quarter additional capital. A lot of that has to do with the 59% revenue growth we had in 2012 and making sure we -- once you catch up with a full trailing 12 months, we can have the capital set for that. We will have less of that in 2014 related to 2013 because our growth is more like a 25% than it is 59%.

Michael F. Neidorff

Any other questions?

Unknown Analyst

A high level exchange question which is, if I'm a highly subsidized member on the exchange and I want to buy a silver product and it's $20 a month, or $40 a month, do I actually have the ability to afford that? I'm just thinking about, in Medicaid when states have put in $1 or $2 co-pays on pharmacy, inability to collect that, does the highly subsidized portion of the population have the ability to pay a premium or sort of, by default, do they have to gravitate to a bronze plan where they may pay no premium?

William N. Scheffel

Well, the basic contract between -- behind the premium subsidies is to bring the cost of the insurance down at the lower income levels to where it's expected to be 2% of somebody's income. And then the subsidies go up, as a percent of income, as you go more towards 400% FPL. So the other thing is that -- so we do think that for people at that level, they're going to see the value in expending that much of their income for health insurance. The issue with choosing between a bronze and a silver plan is going to be the substantial additional out-of-pocket exposure that they're going to have by choosing a bronze plan. So at the very low income tiers, by choosing the silver plan, they get that premium subsidy, they do have to pay a certain amount of premium every month, but they get a substantial subsidy with respect cost-sharing reductions, so they're effectively able to buy a -- -- with the silver plan, again, at lowest income level, a 94% AD product. So their remaining out-of-pocket exposure is substantially diminished. And again, people at this income level are concerned about health insurance because they're concerned about the potential risk that has -- they don't have a lot of financial resources to handle a health event that causes them to pay money out-of-pocket. So reducing their out-of-pocket exposure, in addition to reducing their premium, is something that's been confirmed with respect to the research that we've done for people in this kind of population. So we do think, in the end, there is going to be a take up in willingness to engage at that level of premium, particularly, given the cost-sharing subsidiary that it exists.

Michael F. Neidorff

I think, Carl, it's a good question. I think in -- Dave Murphy [ph] and others who do our research, we'll probably do a little bit of digging seeing -- it's a matter of individual needs and priorities, but there may be some work to be done on that. It's a very good question. Any other questions?

Unknown Analyst

One separate question was just on the Texas duals has a potential to be a significant revenue opportunity. So just be interested in where Texas is in their process and, I mean, that -- probably not a 1/1 start date like they anticipated, but how far back that, that might get pushed?

Michael F. Neidorff

Where are we on Texas?

Robert T. Hitchcock

I'll take that one. It's very much on the radar. It's obviously a big market and things have been fairly clear about their objectives there. But you're not allowed a specificity, at this point, in terms of what's going to happen, when. So hard to comment, it's hard to disagree with you with kind of expected timing on that. But it's hard to comment further about Texas at this point.

Michael F. Neidorff

Any other questions? One from -- while you're getting up, I'll just share a light-hearted moment with you. When Steve Halper was here and he was on the IPO committee. I remember I came up here and I found his pointer. I remember running the IPO roadshow and I was using it and we all do those kinds of presentations, I turned around and half the room was ducking. They were afraid I was going to point at them. Seeing that brought back that memory. Go ahead.

Unknown Executive

This question is from the field. It's just clarifying Chris Rigg's question that Bill answered before for the Texas rates. So what -- do you book 1/3 in June, 1/3 July, 1/3 August, so 4 months of premium in each of those months?

William N. Scheffel

As it relates to the 2.9% increase, yes. And again, that was pretty consistent with what we have been anticipating at the end of April when we gave our April guidance. And so shouldn't be any difference in that regard.

Michael F. Neidorff

If there's no other questions. I want to thank everyone for being here. We'll see you in December and I'm sure we'll have conversations in between. Thanks.

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