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Centene Corporation (NYSE:CNC)

Q2 2009 Earnings Call Transcript

July 28, 2009 8:30 am ET

Executives

Ed Kroll – SVP, Finance and IR

Michael Neidorff – Chairman, President and CEO

Bill Scheffel – EVP, CFO and Treasurer

Mark Eggert – EVP, Health Plans

Jesse Hunter – EVP, Corporate Development

Analysts

Daryn Miller – Goldman Sachs

Greg Genova [ph] -- Deutsche Bank

Tom Carroll – Stifel

Greg Nersessian – Credit Suisse

Nakomie Smith [ph] – Wells Fargo

Joshua Raskin – Barclays Capital

Operator

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Corporation Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions).

I will now turn the call over to Mr. Kroll, Senior Vice President of Investor Relations and Finance. Mr. Kroll, you may begin your conference.

Ed Kroll

Thank you, Michelle, and good morning everyone. I am Ed Kroll, Senior Vice President of Finance and Investor Relations at Centene Corporation. Thank you for joining our second quarter earnings call this morning. Michael Neidorff, our Chairman and Chief Executive Officer, and Bill Scheffel, Executive Vice President and Chief Financial Officer of Centene will host this morning’s call.

The call is expected to last approximately 45 minutes and may also be accessed through our website at centene.com. A replay will be available shortly after the call’s completion, also at centene.com or by dialing 800-642-1687 in the US and Canada or overseas at 706-645-9291. The access code for both of those is 15407585.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in Centene’s Form 10-Q dated today, July 28, 2009, and other public SEC filings.

Centene anticipates that subsequent events and developments will cause its estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. And with that, I would like to turn the call over to our Chairman and CEO, Michael Neidorff.

Michael Neidorff

Thank you, Ed.

Good morning, everyone, and thank you for joining Centene's second quarter earnings call. I will briefly review some of the highlights of the quarter and then turn the call over to Bill Scheffel who will walk you through the financial details. But first, I would like to take a moment to briefly discuss Centene's view of the ongoing federal health-care reform process in Washington DC.

We continue to believe that budget realities will ultimately limit reform driven changes to those that are affordable. One cannot help but notice the influence of the conservative Democrats in the house and the moderate Democrats in the Senate to slow down the process and act responsibly in a financially disciplined and policy centric manner. Recent public opinion polls show increasingly that Americans are wary of too much government intrusion in healthcare and of the higher taxes that would be necessary to fund it. The focus must be access to affordable care for all.

Centene is an agile organization and we believe that we are well positioned as any managed-care organization to work effectively in a post reform environment, given our focus on helping underserved, vulnerable populations gain better access and cost efficient health care through our wide array of products due to our unique multiline strategy.

Our new contract in Massachusetts offers evidence of our ability to meet needs of different markets and customers in a dynamic fashion. We are well versed at operating as a government contractor and while there are no guarantees, it is difficult to imagine a type of health reform under which our skills, flexibility and focus will not be valued. Importantly, if there is no mini reform enacted, under our current strategic plan, we see a very long runway ahead of us to reach our growth targets and deliver better outcome at lower cost to our state customers.

As capital markets remain volatile, we continue to stress the importance of being prudent balance sheet manages with a focus on liquidity and capital adequacy. Strategically, we will continue to build our multiline strategy, coordinating efforts between our health plans and specialty companies to drive product innovation, continue to become a low cost producer, enhance are members' health outcomes, and win new business. We have significant new market opportunities. However, it is essential that we continue to maintain an abundance of conservatism and remain selective in our pursuit of these new opportunities.

Now back to the second quarter results. The quarter's performance demonstrates that the actions we began taking last year in an effort to produce more predictable earnings and achieve financial targets are working. We had solid revenue growth in the quarter at 16.1% year over year and our risk membership grew in all states. We added almost 42,000 risk lives in quarter two across all markets and have started to see a modest lift from high unemployment and expanded CHIP eligibility.

We continue to expect average rate increases for this year in the low single digits and believe that increased FMAP funds should maintain rate stability in 2010. We understand the strain this economic environment places on our state partners and we're committed to working with them to maintain access to quality care in the most cost effective manner. Our consolidated HBR improved 40 basis points sequentially to 83.1%, which is consistent with our usual seasonal pattern, and essentially at the midpoint of our long-term expected range of 82% to 84%.

We did see an increase in outpatient service utilization for flu testing in the quarter due to swine flu concerns. This was decidedly driven by our concern and not actual cases as nervous citizens reacting to media coverage visited their doctors. Lower inpatient and pharmacy costs as well as ongoing medical management efforts offset these moderately higher outpatient costs.

We will be vigilant and proactive on the H1N1 front as CDC warns of a possible recurrence later this year. Centene has a detailed response plan in place that was developed in 2006 during the bird flu pandemic to manage major disease outbreaks, which allows us to be proactive rather in our actions. We communicate and coordinate with providers, state and local agencies, and our members, as we continuously monitor the disease incidence in our markets. A swine flu vaccine is likely to be available in time for possible reoccurrence and if so we will put all our efforts in to get our members vaccinated.

Turning to our general administrative expenses, the G&A ratio for the quarter was 13.9%, a year-over-year increase of 40 basis points and a 30 basis point sequential increase. We maintain our focus on achieving G&A leverage but the increase this quarter was due to the Massachusetts ramp up costs, the consolidation of Access for the full quarter and Celti acquisition, which only affected the year-over-year comparison.

Now I would like to highlight our newer growth drivers. In February 2007, we began converting managed-care membership in Florida from Access Health Solutions to our new subsidiary Sunshine Health Plan on an at risk basis. We began operations in South Carolina in 2207 where we first employed the strategy of converting lives to full risk. The conversion process continues to grow well in both of these markets, but as we noted on our Q1 call, as expected, we experienced some member attrition in Q2 in both markets due to occurrence of a choice period for members. Also as indicated on our Q1 call, we expect growth ramps in both states to resume later in the second half of 2009 as additional counties convert to risk.

We are pleased to announce that are CeltiCare Health Plan subsidiary had a successful launch and began serving low income Massachusetts residents enrolled in the Commonwealth Care Program July 1. Prior to go live, Caritas Christi elected to withdraw from the CeltiCare joint venture. Despite Caritas departure as an equity holder, they will remain an important healthcare provider in CeltiCare's network and a key stakeholder in Commonwealth Care.

Like most others states, Massachusetts is facing tremendous budgetary pressures as a result of escalated healthcare costs and broader economic conditions. As a result, the state recently announced to the healthcare reform program that it will initially slow the membership ramp for CeltiCare. As a result, we expect minimal enrollment in Massachusetts for the remainder of 2009.

CeltiCare was also awarded the Connector Seal of Approval for the Commonwealth Choice program. Commonwealth Choice targets individuals, families and small groups who don't qualify for public health programs such as Medicaid, Medicare or Commonwealth Care. This product line is consistent with Centene's strategy to offer innovative, affordable coverage solutions, that will increase the continuity of coverage for all Americans as their income fluctuates over time. CeltiCare is now participating in two of the three health coverage programs in Massachusetts. We continue to believe that our experience in Massachusetts will provide us with a competitive advantage.

In Texas, we recently were notified that we would be retained as a vendor for the rural CHIP program in that state. The new contract is still subject to negotiations with the state but will be or should be effective September 1, 2010. Until that time, we will maintain our status as sole vendor to Texas under our current rural CHIP contract. As a reminder, we will not comment on our New Jersey transaction with Amerigroup as it is our long-standing policy to not comment on active litigation.

We appreciate your support and interest in our company. And with that I will turn it over to Bill for the financial details.

Bill Scheffel

Thank you, Michael, and good morning.

As I begin I would like to remind everyone that the financial results discussed will be in the context of continuing operations and therefore exclude our New Jersey health plan and also include the consolidation of the operations of Access Health Solutions of Florida beginning January 1, 2009. Prior to January 1, Access was presented under the equity method of accounting and earnings were included in other income.

I would like to point out at the beginning of this quarter we have presented a subtotal for premium and service revenue in our income statement to better enable the readers to understand our revenues before the impact of premium taxes. Premium taxes are an item we don't control and can vary from state to state as I will discuss later. We believe calculating the health benefits ratio based on premium revenue and the G&A ratio based on premium and service revenues is a more conservative and representative presentation of these ratios.

For the quarter ended June 30, 2009, premium and service revenue grew to 931.3 million which is an increase of 16.1% over the second quarter of 2008. Earnings per diluted share from continuing operations were $0.47 for the second quarter of 2009 compared to $0.40 in the second quarter of 2008. This represents a 17.5% increase year over year. The revenue increase was driven by significant membership growth in each of our states, the acquisition of certain assets of Amerigroup's healthcare line on March 1, 2009, the initial conversion of Florida Access Health Solution's members to the full risk Sunshine State Health Plan model beginning on February 1, 2009, the commencement of the Arizona acute care contract in Yavapai County on October 1, 2008, the July 1, 2008 acquisition of Celtic, the health insurance carrier focused on individual health insurance market, and premium rate increases which have been in the low single digit range.

As you may know, premium taxes increased significantly in the second quarter from 21.5 million in 2008 to 108.2 million this year. 84.7 million of this increase represents a pass-through hospital assessment in Wisconsin which we recorded in the second quarter. This assessment is in turn paid by us to hospitals in the state. The second quarter amount represents the total amount related to the state's fiscal year ended June 30, 2009. We expect that the hospital assessment will continue in the future at a more normalized quarterly rate of approximately one fourth of this quarter's amount.

Our consolidated health benefits ratio or HBR was 83.1% for the second quarter this year. This compares to 83.0% for the second quarter last year and an 83.5% in the first quarter of this year. The 40 basis sequential decline was the result of normal seasonality. Although we did see increased outpatient expense attributable to swine flu concerns in the second quarter, it was offset by lower inpatient and pharmacy costs.

As indicated in the health benefits ratio table provided in our earnings release, the Medicaid and CHIP health benefit ratio increased from 81.6% last year to 83.7% this year. The increase between years is primarily due to a decrease in premium taxes in our Texas CHIP product. While the premium declined, our margin was not significantly impacted after consideration of the premium returned to the state of Texas through their experience rebate calculation. The ABD and Medicare health benefits ratio declined between years from 88.5% to 82.6% which reflects improvements we have made in Ohio such as exiting the Northwest ABD market and growth in other states particularly South Carolina.

Turning to our general and administrative expenses, the G&A ratio for the second quarter of 2009 was 13.9% compared to 13.5% in the first quarter of 2009 and 13.6% in the second quarter of 2008. The 40 basis point increase from the first quarter is a result of the previously discussed start up cost associated with the CeltiCare Health Plan in Massachusetts and transition costs incurred in Florida related to the upcoming conversion of members. The 30 basis points year over year increase reflects the acquisition of Celtic, the consolidation of Access Health Solutions, and start up costs associated with the CeltiCare Health Plan.

Our second quarter investment in other income was 4.4 million, a decrease of 1 million year-over-year. The year-over-year decline in investment income was due to an overall decline in market interest rates as well as the change in classification of Access Health Solutions earnings which was included in other income under the equity method of accounting in 2008 and is now presented on a consolidated basis in 2009.

Our 2009 second quarter effective tax rate was 37.2% compared to 38.9% in the 2008 second quarter. The decline is consistent with the discussion during our first-quarter earnings call where we indicated we expected a lower effective tax rate for 2009 as a result of lower estate taxes and the effect of consolidating Access Health Solutions. We expect this lower rate to continue in the second half of 2009.

Balance sheet highlights at June 30, 2009 includes cash, cash equivalents and short-term investments of 445.7 million and long-term investments of 408.9 million. At June 30, 2009, cash and investments held by our unregulated subsidies totaled 27 million, and our regulated subsidiaries held cash and investments of 825.8 million. At June 30, 2009, our subsidiaries including New Jersey had aggregate capital statutory capital and surplus of 431 million compared with the required minimum aggregate statutory capital and surplus requirement of 267.4 million. We estimate our risk-based capital percentage to be 362% of the authorized control level.

Our total debt was 288.8 million and debt to total capitalization was 33.0%. Our medical claim liabilities totaled 394.8 million at June 30, 2009, representing 47.5 days in claims payable. This is an increase of 2.2 days from 45.3 days at March 31, 2009. The sequential increase was driven by the timing of checks being processed for mailing as well as an increase in our claims processing inventory. We expect days in claims payable to continue to fluctuate within our previously discussed range of 45 to 50 days.

For the quarter, cash flows generated from operating activities were 38.7 million, approximately two times net earnings. During the second quarter of 2009, we executed an agreement as a 50% joint venture partner and a real estate development entity Centene Center LLC for a development project which will include a new headquarters building to accommodate our growth. In accordance with the accounting standards, we will consolidate the financial statements of this entity in our ongoing results. The debt and property balances will continue to increase as the project progresses over the next 12 months.

With respect to guidance, we are increasing our estimates for 2009. We expect premium and service revenue in the range of 3.75 billion to the 3.85 billion and earnings per diluted share of $1.88 to $1.96. During the second half of the year, we are scheduled for rate increases in several states including Georgia and Texas. While these adjustments are not yet finalized, we anticipate increases in the low single digits. These rate increases will have more of a positive impact on the fourth quarter as the rate increases should be in place for the entire fourth quarter while only partially in effect in the third quarter.

In addition, as Michael indicated in his comments, during the third quarter, we expect additional conversion of members from Access Health Solutions to Sunshine State Health Plan. We expect the membership conversions to have more of an impact in the fourth quarter as more revenue from additional member months will be in place for the fourth quarter versus the third quarter.

And with that, we can open up the call to questions.

Michael Neidorff

Thank you, Bill. Michelle, we are ready for questions.

Question-and-Answer Session

Operator

Okay. (Operator instructions). Your first question comes from Daryn Miller from Goldman Sachs. Your call is open.

Daryn Miller – Goldman Sachs

Hi, good morning.

Michael Neidorff

Good morning.

Daryn Miller – Goldman Sachs

Hi. Quick questions. I'm sorry if I missed it, did you guys make any comment on the duration effect some competitors are seeing, higher utilization, new lives coming into the Medicaid program?

Michael Neidorff

We took a look at it and while there is some, a few basis points here and there in some markets, there's nothing meaningful there and we just – we have not seen it to that extent. Now I bifurcate that and distinguish it where we have a brand new market we enter of course, there you have the case of new members having not had any healthcare, a lot of pent up demand there. And that is why we book at 90% and will roll it through anywhere from two to three, four quarters. But in the existing market, the additions we have seen, we have taken a look at it, and we're not seeing it to any meaningful effect.

Daryn Miller – Goldman Sachs

That is great. Again sorry if I missed this, did you guys comment on Georgia rates?

Michael Neidorff

We did not. We are still in negotiations with it. We believe that the state is working hard to try and resolve it earlier all the time but I'm not prepared to say if it is going to fall this quarter or next quarter, but we should see it before the end of the year.

Daryn Miller – Goldman Sachs

Okay. Would you expect that to be retro July 1?

Michael Neidorff

Yes, it will be retro to July 1.

Daryn Miller – Goldman Sachs

Great. Thank you very much guys.

Michael Neidorff

Thank you.

Operator

Your next question is from Greg Genova [ph] from Deutsche Bank. Your line is now open.

Greg Genova – Deutsche Bank

Hi. Good morning.

Michael Neidorff

Good morning.

Greg Genova – Deutsche Bank

Can you talk about Wisconsin? I know the state has talked about making some changes there, including changing, putting the program out to bid next year, can you talk about what is going on there, what you guys are expecting?

Michael Neidorff

We have been in discussions with them. The industry has been in discussions with them. Nothing has been stated in terms of what they actually will do. The last talks were a RFP to be effective for July 10 which expired. I mean a lot of the states we have procurement where we do RFPs on an ongoing basis. So that is where it is now. Mark, would like to add more to it? Mark Eggert, who head up health plans.

Mark Eggert

The only thing I would add is the informal discussions we have had have centered on southeast portion of the state so discussions are really procurement only for the counties in the Southeast.

Greg Genova – Deutsche Bank

Okay. And is that a decent part of your membership there or not really?

Mark Eggert

It is probably somewhere just under 50% of our total membership.

Greg Genova – Deutsche Bank

Okay. And then can you talk about the new revenue guidance and what the behind that if there are certain markets maybe Texas that was strong or the reasons for the increase in revenue guidance?

Bill Scheffel

I think if you look at our second quarter actual and you start analyzing it and look at the rate increases, we expect to have in the second half of the year from Georgia and Texas additional membership coming from conversion of members in Florida, all of that is what leads to the numbers that we're currently giving out.

Greg Genova – Deutsche Bank

Okay, great. Last one would be in Com Care, you said I think enrollment is going to pretty much be pretty stagnant for the rest of the year. Do you have maybe an enrollment that you have right now, that is probably just a few thousand lives I guess but maybe just where you guys are right now even though it is obviously very early?

Michael Neidorff

It is very early. It is July 1. In fact as we normally we discuss membership at the end of the quarter – well, Jesse, you want to add something?

Jesse Hunter

Right. So Greg, I think Michael referred to some changes that are happening at the state level with respect to – the biggest one being the temporary suspension of the auto enrollment feature for the Com Care product. So that obviously has an impact on us as a new plan and as a bidder where there was a preference for auto enrollment. So at this point we are well under a thousand lives.

Greg Genova – Deutsche Bank

Okay. Thanks guys.

Michael Neidorff

And I want to come back on the Wisconsin thing. The glass could be half full or half-empty. It also gives us an opportunity to maybe see a narrowing and pickup more membership. So it is a two edged sword, Greg.

Greg Genova – Deutsche Bank

Thanks guys.

Operator

Your next question comes from Tom Carroll from the company of Stifel. Your line is now open.

Tom Carroll – Stifel

Hi good morning. A couple of quick comments here. Are you guys doing anything differently this year in preparation for a potentially higher utilization flu season related to H1N1?

Michael Neidorff

I think we are doing a couple of things. One is we have our programs that we have had in place and we used earlier this year where the plans work with the physicians and a whole series of pandemic things I mentioned we did with the bird flu a couple of years ago. And so we are continuing those programs, we are monitoring it, working with the CDC as everyone does to understand where it is to put in place.

We cannot forecast specifically, nobody can, what the total impact is. We will only be ready, have things ready, ensure that the Tamiflu and other things are properly used when needed and ensure that those that need it get it. We have got to work on the vaccination programs and as the government defines how it is done, if it is through government offices, we will make sure people get there. If it is to through other locations, just ensure that our population gets it.

The other thing we're doing that is really important is we've had in place policies and practices for our own offices if somebody is exposed to the swine flu. But what would sort of – when somebody reported – has happened in one of our markets, we had the isolation program and just how to handle it so as to minimize disruption to our operations as well .so we are ready to the extent we can.

We have – we see normalized flu that comes in place late third quarter, fourth quarter, and some in the first quarter of next year and beyond the normalized type flu which took place below our forecast, but there is not a whole lot more we can do there, considering there needs to be a little bit more testing, and we tried to consider those kinds of things. But based on what we saw this year, it was minimal.

We looked at what the impact was in our markets and looking at CDC, there were approximately 12,500 incidents in our specific markets that they have reported confirmed flu. We saw the greatest impact in people who had concerns going for testing that they have thought they might have it. And our calculations looking at the CPT codes and things during that period was about $1.5 million of expenses incurred there for us overall market. And with the majority of that in Texas at the border state where people have the greatest concern. So we have looked at that everyway we can and we're going to continue to do it in that fashion, Tom.

Tom Carroll – Stifel

So it is fair to say that it is perhaps on the radar screen, a bit more intently this year than it has been in prior years? That is fair? Okay.

Michael Neidorff

Absolutely, it is there and what is important to us is we have to continue to estimate what is the impact of the testing. Somebody thinks they have it, so they're going to go get tested. It is probably hundred dollars per test or something of that nature. So you just kind of think that through and try to anticipate a reasonable level but beyond that it is just be ready.

Tom Carroll – Stifel

And just as a clarification on the comment you made about Georgia and Texas, you said there were going to be rate increases, you just didn't know what they where yet, but you are expecting a positive number, is that correct?

Michael Neidorff

We are looking for a modest single-digit rate increases in Texas which is effective September 1 and to have a real impact in Q4, those comments. And Georgia is a July 1 and the one-year of course where we got really – they didn't sign the papers till January, we never forget that one. But we this past year they got it a little earlier, they recognized the impact it had, and so we expect we will see it late Q3, but as we think it through, we see it in Q4 probably.

Tom Carroll – Stifel

But again the states have given you comfort that it will be a positive number as opposed to a slight negative? Okay.

Michael Neidorff

Yes. Mark, you have been in the negotiations.

Mark Eggert

Yes. I mean the discussions we had with Georgia involved increases in the rate, very modest as Michael said, and we're still working through it. We don't have any final numbers.

Tom Carroll – Stifel

Excellent, thank you.

Operator

Your next question is from Greg Nersessian from Credit Suisse. Your line is open.

Greg Nersessian – Credit Suisse

Thank you. Good morning. Just the increase in the premium taxes this quarter, sorry if I missed that, but did you isolate I guess which state that is from or what that relates to?

Michael Neidorff

Wisconsin, Bill, you want to comment, please?

Bill Scheffel

We said Wisconsin instituted a hospital assessment. During the quarter, we recorded a 84.7 million for that, which essentially represented the entire amount for the states fiscal year ended June 30, 2009. We expect this to continue going forward, but we expect it to be on a more normalized quarterly basis where we would get roughly one fourth of that amount each quarter going forward.

Michael Neidorff

Greg, I commented that is why for several years now, as I recall, we have always reported medical loss ratio, G&A, net of those premium taxes, and net of interest income, because some states has varied amounts. And so we want to be able to be as transparent as possible so that you can really see it is no different than ensuring that medical expenses are in appropriated columns, that type.

Greg Nersessian – Credit Suisse

So what would be the like normalized run rate for premium taxes going forward, not just Wisconsin, but the whole consolidated amount?

Michael Neidorff

It will very. It will vary by the states and the products within the state. I mean some states still have – I think there is some sort of (inaudible).

Bill Scheffel

In some states, you have 5% to 6% rates, and some start some stop. But if you look at what we recorded this quarter, I would say three quarters of the $84 million was sort of prior periods, and they paid us in the second quarter, so that would be a more normalized amount.

Michael Neidorff

If I pull that out…

Greg Nersessian – Credit Suisse

And a quarter of 84 million to what your previous run rate of premium taxes were added to that?

Bill Scheffel

Or take second quarter's actual and take three quarters of the 84 out.

Greg Nersessian – Credit Suisse

Okay.

Michael Neidorff

So, if you think about it, and you just, if you just remove the premium tax in the calculation which we have you the information to do it, if we grow membership in Wisconsin or Georgia at a faster rate with their higher premium taxes, that is going to affect that count. So if you grow faster in a state that has no premium taxes, it is going to pull down. That is why it is hard to say the normalized amount. That is not something that we are – that we control.

Greg Nersessian – Credit Suisse

I mean I was just trying to ballpark. It doesn't really affect the numbers anyway, I was just trying to ballpark how to model it going forward. Second question, the prior period reserve development in the go forward was significantly higher, looks like about 26 million higher sequentially on a rolling 12 month basis, I guess could you isolate what that relates to, I guess the highest level we have seen in some time?

Bill Scheffel

Right. I think first of all I remind everyone that what that does is we are demonstrating the reserve adequacy as of June 30, 2008, looking at it a year later. So I think that the number has been higher than normal for two reasons. First, that at June 30, 2008, we had reserves initially established related to new products for foster care and South Carolina, and so those were conservatively set and have obviously developed positively since then.

And then second, what we have seen is, we received a much higher level of payments from third parties for coordination of benefits. We have been – we have increased our efforts here over the last year to increase the payments that we have received from third party payors and this has resulted in a significantly higher amount of these payments which were not originally anticipated, and so we would expect that going forward that our efforts to collect on third-party payor coordination of benefit amounts will continue and that really is what represents a lot of the increase between what would be a normal amount and what was recorded this quarter.

Greg Nersessian – Credit Suisse

So was it I guess – could you quantify how much of the reserve development you reported this quarter would you characterize as sort of not recurring, as sort of kind of the one-time benefit, either related to those new markets or the coordination of benefits item you know that you wouldn't expect to sort of continue on a normalized basis, on a permanent basis?

Michael Neidorff

I think (inaudible) something here, but if you look at it what we have tried to do using the rolling four quarters, so different – one looks at investments over four quarters, this is as Bill started out, this is a look back at 2008, and it is just a confirmation that reserving has been conservative and that is does impact specifically what we do this quarter. We don't look at that and say what we have – what it can do. We just use the same methodology every quarter on how we reserve and so we will have a look next year in this time that will confirm that what we did in our normal methodology because these are all estimates we do all the time that, yes, we were adequately reserved to that point. Bill, anything you want to add to that?

Bill Scheffel

You know clearly with respect to the coordination of benefits, those efforts are ongoing. I think we have probably benefited higher at this point in time because as we initially started those efforts, say went back and farther back and where we could recover since Medicaid is supposed to be the payor of last resort. And so that amount is probably high than now and will be going forward.

Michael Neidorff

But that has not influenced what we have booked this quarter. we used the same methodology we always use. We had three actuaries look at it. We have our – so it has not changed all the days claims payable, we are up several days. So those are discrete separate calculations. One is just this look back is a confirmation and (inaudible) gee, you know, you are conservative, and you understand why back in that period it was so much higher.

Greg Nersessian – Credit Suisse

I will just make my ultimate question is you went into some new markets last year which you know I think you have appropriately identified, you had to be very conservative, you set your reserves you know in a conservative fashion, and it is turned out that you were right that those reserves were set conservatively even if have got the benefit of you know a look back period. You are now where you can say, we didn't need that level of reserve conservatism, you are making an adjustment in this period. I guess my question is, is that, you're not viewing that as sort of a one-time thing related to those new markets? Do you think that this level of reserve development is sustainable going forward?

Michael Neidorff

I think what we're saying is that we do have a methodology we use every quarter for our reserving. Now a year from now reversing how well we reserved this year and what we look at next quarter would be still a four quarter rolling average as opposed to one snapshot. So it does not impact – we didn't – we don't look at that and determine how we are going to reserve this quarter.

we book our reserves for this quarter based on what we see (inaudible) everything for this quarter and our IBNR and then later on subsequent to all that being done, we've run that number, and that is how (inaudible) it is just a reassurance that we were more than conservative or put it in now way – we don't know what it is going to look like for the next three quarters until we run it again next quarter, and that would say, it could continue, we may see it come off, if we had turned out to be a little less conservative. So it is… Bill?

Bill Scheffel

We continue to reserve in a conservative manner in new markets as we go into Florida and do these things. That is continuing and so which new market we are in in any one year so changes but the methodology continues to be the same and we would expect that to continue going forward.

Michael Neidorff

We don't look at that at all. You can't look at that and say, gee, you have excess reserves a year ago, so you can take it down now, because we have been reserving every quarter since then. And so if you try to make a judgment of what you did four quarters ago, you would be – you could create real problems for yourself this quarter. So you use the same methodology that is nothing more than a confirmation of a year ago, that the only value it has for us and for all us, it says we did a year ago what we told you we did.

Greg Nersessian – Credit Suisse

Okay, thanks.

Michael Neidorff

Thank you.

Operator

The next question is from Matt Perry from Wells Fargo. Your line is open.

Nakomie Smith – Wells Fargo

This is Nakomie Smith [ph] for Matt Perry. All of my questions have been asked. Thank you.

Operator

(Operator instructions). Your next question is from John Ruskin [ph] from Barclays capital. Your line is open.

Joshua Raskin – Barclays Capital

It is Joshua. I apologize if I missed the question but just wanted to hear swine flu any impact that you saw in the second quarter and then any expectations for you know a more than normal or a higher than normal flu season in the fall?

Michael Neidorff

Good morning JOSH. We commented that we had looked and saw 12,500 incidents of flu the CDC reported in our markets. We looked at it and the only thing that we were able to find of any magnitude of normal medical expense was about $1 million of expense that was quoted as testing for the flu. So there was nothing to show in the second quarter. Going forward we commented that we have all our pandemic and epidemic policies practices in place. The medical management people are trained to work with the providers. They know what to expect from us as we identify and we have gone further. We have a program for the company employees that works through do everything we can to protect them, our staff and to ensure continuity of service to providers and members.

Joshua Raskin – Barclays Capital

Got you, okay. And the million and a half quoted as testing, did that come through as provider, as physician claims, or was that…

Michael Neidorff

Yes (inaudible).

Joshua Raskin – Barclays Capital

Okay, so you have already…

Michael Neidorff

And some lab expense.

Joshua Raskin – Barclays Capital

Got it. So you have already seen the business, so there'll be no sort of additional expense to, even if this was mostly in June, you wouldn't expect more to come through, it sounds like…

Michael Neidorff

Well, may be within the normal lags that we build in there, in the reserving that we have done for. What Congress said that there'll be a – that they say there could be a worse flu season this year, maybe going to the second year. Until things these, things mutate (inaudible) real experts on our Board, Tommy Thompson and others have really have dealt with this for a long time, and so we're taking their advice in terms of how to go about it.

Joshua Raskin – Barclays Capital

Perfect, perfect. And then just second question on the M&A environment, you know I think a lot of reform discussion, you have talked about Medicaid expansion. I don't think there's anything certain in reform, but it certainly feels like most of the proposals include some form of growth and opportunity in the Medicaid space. Do you see some of the sort of smaller competitors, the local plans, looking to access sort of your scale, your size in terms of opportunities for the future, you know if you think there will be a active M&A environment I guess over the next couple of years?

Michael Neidorff

I think there is always a chance that we might be a able to consolidate some of them. But right now we have such a runway with opportunities and the knowledge we're gaining in working with the Connector of Massachusetts, really puts us in a strong position to talk to other states about how it works. I think it is a model that makes a lot of sense because of the continuity of care and a continuum as people move to the different products to be able to keep the same network as a real, as a significant opportunity to contain costs, because they're not changing doctors because they are in a different network. So it is – and I think it puts us all in a very strong position, all this puts Centene where we would like to be.

Joshua Raskin – Barclays Capital

Okay, thanks.

Operator

There are no more further questions at this time. You may go ahead you’re your closing remarks.

Michael Neidorff

We thank you and we will talk to you at the end of Q3. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Centene Corporation Q2 2009 Earnings Call Transcript
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