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Centene (NYSE:CNC)

Q1 2010 Earnings Call

April 27, 2010 8:30 am ET

Executives

Michael Neidorff - Chairman, Chief Executive Officer and President

Edmund Kroll - Senior Vice President of Finance and Investor Relations

Jesse Hunter - Executive Vice President of Corporate Development

Mark Eggert - Executive Vice President of Health Plan Business Unit

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

Analysts

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Brian Wright - Collins Stewart LLC

Joshua Raskin - Barclays Capital

Scott Green - Bank of America/Merrill Lynch

Daryn Miller - Goldman Sachs Group Inc.

John Rex - JP Morgan Chase & Co

Scott Fidel - Deutsche Bank AG

Operator

Good morning. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Centene Corporation First Quarter 2010 Earnings Call. [Operator Instructions] Thank you. I'll now turn the call over to Mr. Ed Kroll, Senior Vice President, Investor Relations.

Edmund Kroll

Good morning, everyone, and thank you for joining today's call, our first quarter 2010 earnings call. Michael Neidorff, Centene's Chairman and Chief Executive Officer; and Bill Scheffel, Centene's Executive Vice President and Chief Financial Officer, will be hosting this morning's call. The call is expected to last approximately 45 minutes and may also be accessed through our website at www.centene.com. A replay will be available shortly after the call's completion also on our website, or by dialing (800)642-1687 in the U.S. and Canada or (706)645-9291 from other countries. And for both, enter access code 63527302.

Any remarks that Centene may make about future expectations, plans and prospects constitute forward-looking statements for 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 April 27, 2010, 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.

I'd also like to remind everyone that our annual Investor Day is on June 2 this year in New York City, and that's a Wednesday this year. Normally, we do it on a Tuesday, but Memorial Day falls on a Monday. So please contact Libby Abelt in our New York office to RSVP to this event.

And with that, I'd like to turn the call over to our Chairman and CEO, Michael Neidorff. Michael?

Michael Neidorff

Thank you, Ed. Good morning, everyone, and thank you for joining Centene's First Quarter 2010 Earnings Call. Before I begin to comment on another solid quarter, I would like to take a moment to share my thoughts on Centene's position in a health care reform era. I will then briefly review some of the first quarter highlights, and then turn the call over to Bill who will walk you through the financial details.

Health care reform legislation, as we all know, was signed into law on March 23, 2010. Many of the details of reform have yet to be determined and more importantly, regulations has to be written and employees for the multitude of new government departments has to be hired. We recognize the importance of our role in facilitating the expansion of access to affordable, quality coverage for the additional 30 million Americans. This expansion will be accomplished by extending Medicaid eligibility and creating exchanges in the states. These exchanges will help working poor and other underinsured and uninsured individuals gain access to health care insurance via subsidized coverage.

Reform presents a large growth opportunity for us. Providing effective quality coverage to this vulnerable population as a low-cost producer is at the core of Centene's competency. We have the systems and infrastructure in place that will allow us to be ready as reform continues to unfold over the next three to four years and believe we are extremely well positioned to benefit in this new era.

As you know, beginning on January 1 of 2014, Medicaid eligibility in all states will increase to 133% of the federal poverty level or FPL for all of all non-elderly individuals. This will add 16 million new Medicaid beneficiaries, more than half of the total expected coverage expansion.

From 2014 to 2016, the federal government will pay 100% of the incremental cost of the new beneficiaries. This will come down to 90% by 2020 and will reach a more normalized 55% level by 2024. The increased FMAP over the 2014 to 2024 time period will provide extra help for state Medicaid budgets and the support needed for the additional Medicaid lines.

As we have discussed for the past 18 months, we have been working on repositioning Centene from a Medicaid-focused company to an organization that provides products and services to all individuals that fall within the underinsured and uninsured spectrum. We began this endeavor with the purchase of Celtic in July of 2008 which allowed us to tap into the underinsured and uninsured market.

Celtic was important in terms of having the systems and capabilities to cover individuals and small groups. In July of 2009, our CeltiCare subsidiary began serving low-income working adults up to 300% of the federal poverty level through the Commonwealth Care Program in Massachusetts. And in October 2009, CeltiCare began managing the health program for legal immigrants through Commonwealth Bridge Program in Massachusetts.

Additionally, we were aware and awarded a contract for the small group Commonwealth Choice Program which began during the first quarter of this year. We are currently the only public-managed care organization participating in the Massachusetts Connector Authority. This unique exchange experience will be very important as reform is implemented as it provides us with an opportunity to demonstrate our capabilities with the individual and uninsured populations.

Also, the passage of the Drug Rebate Equalization Act, known as the DRE, along with health reform has moved a financial disincentive for states to carve out pharmacy benefits. DRE essentially levels the playing field, with respect to manufacture rebates and will allow states to focus on the clinical and other financial benefits of an integrated approach to medical and pharmacy management for our membership.

Now I will discuss some highlights from the first quarter, a quarter with numerous achievements. In January of 2010, we raised $104.5 million dollars to a follow-on secondary offering of 5.75 million additional shares of common stock at a public offering price of $19.25. In addition to strengthening our balance sheet, the proceeds provided us with the liquidity and flexibility to take advantage of acquisition targets which meet our strict accretion and return criteria.

In February of this year, we announced the definitive agreement to acquire Columbia-based Carolina Crescent Health Plan, CCHP. CCHP serves more than 40,000 Medicaid members in all 46 counties across the state. I am happy to say that upon closing this acquisition, we will expand our South Carolina membership to approximately 90,000 members or 13% share of market. It is expected to close in the second quarter of this year and add revenues of approximately $60 million and $0.02 to $0.03 earnings per share for 2010. In addition, we expect approximately $125 million of revenue and $0.09 to $0.11 EPS on an annualized basis.

In March of 2010, Moodys upgraded our debt rating to Ba2 from Ba3 with a stable outflow, reflecting favorably on our financial strength. Also in March, we completed the strategic sale of our New Jersey health plan University Health Plans and subsequently recorded a pretax gain of $8 million to discontinued operations during the first quarter of 2010.

In March 2010, we also announced that our specialty companies, Sympatico Behavioral Health, was awarded an expanded contract by the Arizona Department of Health Services. Sympatico currently manages behavioral health services in four counties in Arizona. In addition to renewing the contract in these counties, the new agreement expands Sympatico's coverage to an additional four counties effective July 1, 2010.

Finally, we were disappointed that our Southeast Wisconsin contract was not renewed which would have been effective November 1. The resulting 2010 financial impact is immaterial to us given the current market environment for that region.

Now for our first quarter details. First quarter Premium and Service revenues grew more than 12%, driven at-risk membership growth across all states, net premium rate increases and a conversion of members to our at-risk plan in Florida. Both the Indiana and Ohio pharmacy carve-outs went into effect the first quarter of 2010. As we have previously stated, these two carve-outs will reduce our full year 2010 revenue by $185 million. Excluding the carve-outs, the first quarter revenues would have grown by 17%, exceeding our 15% long-term growth target.

Our consolidated first quarter HBR increased 50 basis points year-over-year and 10 basis points sequentially to 84%, the low end of our guidance range. Improvement in our existing markets were offset by new market reserved at higher rates and the impact of the pharmacy carve-outs.

Turning to general and administrative expense. The G&A ratio for the first quarter of 2010 was 13.3% compared to 13.5% in the first quarter of 2009. This 20 basis point improvement reflects improved leveraging of our cost over a higher revenue base and the impact of additional revenue from new business. Partially offsetting this was start-up cost and a $4.6 million increase over last year's contribution to our charitable foundation. Note that the start of our Mississippi contract has been pushed out to October 1, resulting in a slight reduction in our revenue forecast and moving the bulk of the associated start-up cost to Q2 and Q3.

Further G&A reduction beyond 2010 remains the top priority and our ongoing assistance improvement should enable us to accomplish this goal.

A quick comment on the rate environment. As we previously discussed, our early 2010 rate changes came in lower than historically experienced. We currently have known rates representing approximately 70% of our projected member months. We continue to forecast low single-digit rate increases for the state which adjusts in the second half of the year. Overall, we now expect full year 2010 rate to increase in the range from flat to 2%, slightly below our previous 1% to 2%.

We continue to work with our state customers to provide them with proactive solutions for the tight budget environment they are currently working in. While the U.S. economy is slowly recovering, state budgetary pressures and high levels of unemployment do exist. States will continue to have a need for our products and services, and we are well prepared to meet the needs of both our current and future customers.

We are confident that the diversity and effectiveness of our multi-line strategy will allow us to successfully operate and maneuver in a reform environment and are very excited about the abundance of growth opportunities to come. In the meantime, our pre-reform pipeline is full, and we expect strong growth in the years leading up to 2014.

Finally, I would like to remind everyone what Ed has mentioned earlier. Our eighth annual Investor Day will be held in New York City on Wednesday June 2 at 8:00 a.m., and we hope you can join us. We appreciate your support and interest in the company, and I will now turn the call over to Bill.

William Scheffel

Thank you, Michael, and good morning, everyone. For the first quarter of 2010, Premium and Service revenues grew to $1.02 billion, an increase of 12.5% compared to the first quarter of 2009. This year-over-year increase was driven by several factors. First, membership grew in all of our states, particularly in Florida, with the continued conversion of non-risk managed care membership from Access Health System Solutions to Sunshine State Health Plan on an at-risk basis.

Second, the commencement of operations in Massachusetts under the Commonwealth Bridge and Commonwealth Care Programs. And then last, it should be noted that the 12.5% increase in revenue was moderated by the effects of the pharmacy carve-outs in Indiana and Ohio which took effect in the first quarter and reduced revenue by approximately $35 million in 2010 versus 2009. Our consolidated Health Benefits Ratio was 84.0% for the first quarter of 2010 compared to 83.5% in the first quarter of 2009 and 83.9% in the fourth quarter of 2009.

The 50 basis point increase between years was primarily due to recording higher costs in our new markets, particularly Florida, of approximately 100 basis points offset by improvements in our existing markets of approximately 50 basis points.

With respect to flu costs in the first quarter, we experienced a relatively mild flu season this year. And recognizing the immateriality, we will not be separately reporting these costs going forward unless flu costs materially rise in the future.

Our general and administrative expenses ratio for the first quarter of 2010 was 13.3% compared to 13.5% in the first quarter of 2009. The 20 basis point year-over-year improvement in the G&A ratio reflects the leveraging of expenses over higher revenues, partially offset by a small amount of business expansion cost in Massachusetts and Mississippi, as well as a $4.6 million increase in our contribution to our charitable foundation. $3 million of this contribution was funded by the gain on the reserve primary fund distribution which was recorded as other income.

Excluding the year-over-year increase in charitable contributions, our first quarter 2010 G&A ratio would have been 12.8% which is relatively flat compared to the 12.7% recorded in the fourth quarter of 2009. Our first quarter investment and other income was $7.1 million, a $3.4 million increase year-over-year. The increase in investment and other income reflects increased investment balances as well as $5.4 million in distributions from the reserve primary fund received in January of this year. A gain of $3.0 million was recorded for the distributions received in excess of our adjusted basis, and I as I just mentioned, an offsetting $3 million distribution was made to the company's charitable foundation.

Excluding the effects of non-controlling interest, our first quarter tax rate was 38.4% compared to 36.5% in 2009. The increase was primarily due to higher state taxes as a result of the change in the estimated benefit from New Jersey net operating loss carry-forwards and a decrease in tax exempt interest. For the full year of 2010, we expect our tax rate to be approximately 38%.

Our diluted earnings per share is $0.41 this quarter versus $0.43 a year ago. The 2010 results are $0.04 less as a result of the dilution from the additional shares issued as part of the stock offering in the quarter. We also benefited by approximately $0.02 during the quarter by not incurring the level of Mississippi start-up costs in the first quarter as previously estimated as a result of the shift in the start date to October 31.

I would like to now review our discontinued operations in the recently completed sale of our New Jersey health plans. During the first quarter of 2010, we recorded a pretax gain of $8.2 million related to the New Jersey sale. Overall, New Jersey contributed $3.9 million in after-tax earnings or $0.08 per share which is classified in discontinued operations. At March 31, the New Jersey statutory capital totaled $10 million. Over the next 12 months, as we pay out the remaining claims and subject to receiving regulatory approval, the majority of the capital will be transferred from the statutory entity.

In March 31, 2010, cash investments held by our unregulated subsidiaries totaled $51.3 million while regulated cash investments and restricted deposits stood at $917.9 million. We have estimated our risk-based capital percentage to be approximately 350% of the authorized control level.

Our total debt was $232.7 million, and our debt-to-capital ratio was 23.7% at March 31 compared to 33.2% at December 31, reflecting the additional equity and pay-down of the revolving debt balance with proceeds from the stock offering.

Our medical claims liabilities totaled $444.8 million, representing 47.7 days in claims payable. This is a 2.4-day decrease from December 31. As I discussed on our year-end call, our days and claims payable were higher at December 31 as a result of the holiday schedule the last two weeks of December. Thus, as expected and predicted, at March 31, the medical portion of our days and claims payable decreased by 1.5 days, reflecting the additional processing days at the end of this quarter. Also, the pharmacy portion of the medical claims liability decreased by almost one day as a result of the impact of the pharmacy carve-outs implemented during the quarter.

For the first quarter, operating activities used cash resulting in negative cash flow of $38.5 million. This was primarily caused by a $73 million decrease in unearned revenue from December 31 to March 31 as a result of the timing of receipt of monthly premium payments. As we mentioned on our year-end call, certain states prepaid their January 2010 capitation payments in December of 2009. These prepayments caused a decrease in our cash receipts in the first quarter as reflected in the lower amount of unearned revenue at March 31 of $18 million. Excluding this timing issue, cash flow from operations would have been a positive $34.8 million or 1.7x net earnings. We still expect full year 2010 operating cash flow to be strong and in the range of 1.5 to 2x net earnings.

Now I want to discuss our updated guidance numbers. At this point, we have updated our revenue and earnings guidance to reflect first quarter results, the impact of the Arizona behavioral health award, the loss of the Wisconsin Southeast region and the shift in timing of the Mississippi contract start date to October 1. We have not included the pending acquisition in South Carolina in our guidance numbers since that transaction has not yet closed.

Also during our guidance call in January, we indicated that we would be incurring start-up costs for Mississippi in the first half of 2010. But since the start date changed to October 1, we did not incur a significant amount of Mississippi start-up costs in the first quarter. We still anticipate incurring the same level of expenditures for Mississippi start-up costs, now on the second and third quarters, of $0.06 to $0.09 a share which has been adjusted for the additional shares from the offering.

So excluding the pending South Carolina transactions, we expect Premium and Service revenues in the range of $4.30 billion to $4.40 billion, consolidated HBR of 84% to 86% and a consolidated G&A ratio in the range of 12.4% to 12.9%. Our estimated diluted shares outstanding for 2010 is 50.5 million shares, and the 2010 earnings per diluted share are expected to be in the range of $1.73 to $1.83 for 2010.

Last, I would like to point out that our calendar of earnings calls for the remainder of 2010 has been established, similar to our pattern for the last several years and is available on our website. Operator, you may now open up the line to questions.

Question-and-Answer Session

Operator

[Operator Instructions] You're first question comes from the line of Daryn Miller [Goldman Sachs].

Daryn Miller - Goldman Sachs Group Inc.

I was wondering if you could just talk a little bit about what's going on in Florida and maybe some of the opportunity there given some of the potential political changes?

Jesse Hunter

It's obviously a fluid process in Florida right now. So what we say, at this point, could change very quickly. But there has been a lot of momentum in this legislative session from both the House and Senate to expand Medicaid Managed Care, different ways to get there. But both proposals would represent meaningful expansion of the Medicaid Managed Care model, both geographically and so transitioning fee-for-service into managed care and the potential to add some other products. So obviously, that's something that we're following very closely and something that we're supportive of, and we will see where it ends up.

Daryn Miller - Goldman Sachs Group Inc.

I'm not sure if you had any commentary on the flu. It seemed like first quarter flu activity was pretty light. Just your thoughts around what you saw and your approach towards reserving in the first quarter regarding flu.

Jesse Hunter

One, we saw very light, as you know, from our data we showed you, our dashboard and assistance that things were confident with the numbers. And of course, we used the same methodology quarter-after-quarter for booking our reserves and we're comfortable that we adequately reserve for flu or any other medical expense.

Daryn Miller - Goldman Sachs Group Inc.

Would you say you reserved then for a lighter flu season? Or did you reserve, given how much visibility, there's point for a more of a kind of standard flu season?

Edmund Kroll

I would say, we reserve based on the experience we had, what our assistants tell us we should which reflects probably a normalized flu season, more normalized flu season.

Daryn Miller - Goldman Sachs Group Inc.

It seems like there's a good amount of new business opportunities coming up, and it seem like there was a good amount of ABD opportunities. So there seem like there's been a shift towards more ABD moving towards managed Medicaid at this point? Or is this kind of at a level that we've seen historically?

Michael Neidorff

Well, I think we've been encouraging states to move in that direction as this is their highest-cost area and they need to help. And Jesse, anything you want to add to that?

Jesse Hunter

We've been talking about our Investor Day the last couple of years, so I think it's consistent with our expectation.

Michael Neidorff

I might also add that our experience in ABD is solid. It's something that -- all the assistance I showed, really are very supportive of helping us manage it .

Operator

Your next question or comment comes from the line of Scott Fidel [Deutshce Bank].

Scott Fidel - Deutsche Bank AG

First question, just interested on what you're seeing with the duration of your members at this point and just interested if you're seeing the members stay on the platform longer just as unemployment remains at elevated levels and whether you've started to see some benefits from lower utilization because of that, because obviously last year, we saw a lot of pent-up demand as the uninsured came on to the Medicaid system.

Michael Neidorff

I think first, I would -- just to be consistent, we never experienced that same level of pent-up demand, and others see it, too. We did report historically, we see an increase, about 10% of our population, Bill, have been...

William Scheffel

Who were members for more than nine months, I think that's what it was, yes.

Michael Neidorff

Yes. So yes, I mean people are staying on longer. But we've had very flat demand across the membership, Scott.

Scott Fidel - Deutsche Bank AG

Then second question, just on the industry fee piece of health reform, and I know that there's a lot of efforts by Medicaid, MCOs to work with the states to try to get an exemption from that. Just if you can give us an update on how, I guess, those lobbying efforts are moving forward at this point and whether you're seeing receptivity from lawmakers in D.C.?

Michael Neidorff

We are obviously keeping a lot of pressure on it. We have a very active group who demonstrated their capabilities of the BRE and other things and it feels like [ph] -- there's so many areas that has to be understood and worked on that it's just one of many things that we just continue maintain the pressure. It doesn't come in for a few years, so they did reduced the amount. But you have to look in out in Canada [indiscernible] the bill, I think when they passed the Senate Bill, it's the only one they could. It was still a work in progress, and it had not been fully completed. So we have to work with everybody across the whole bill and all our constituencies to see if we can make some sense out of something.

Scott Fidel - Deutsche Bank AG

Then just a question on the New Mexico behavioral contract that is being taken out of Optum and rebid, just an update on what type of opportunity you think that might be? And is that something that Centene would be interested or Sympatico in bidding on?

Michael Neidorff

I think we typically don't respond to what we're going after until the state discloses it. Anything of that size, of course, is something I would expect the Sympatico people to look at. And they'll make a decision as to the opportunity, starting with returns and profitability on it, reasonable profit on it, and we'll go from there. So obviously, it's something we're looking at. And if we decide to bid on it and the state discloses that, you'll know then.

Scott Fidel - Deutsche Bank AG

Then just one last question maybe for Jesse, do you have an estimate at this point of how many independent Medicaid operators there are in the U.S.? And how much share of the Medicaid Managed Care market they have maybe in terms of total Medicaid Managed Care enrollment or just the market share of the independent operators?

Jesse Hunter

We've got those things that we track generally, Scott. So I mean we can provide an update on some of those things at the Investor Day.

Operator

Your next question or comment comes from the line of Brian Wright [Collins Stewart].

Brian Wright - Collins Stewart LLC

Can you give us a little update on Massachusetts, post all the upheaval in the news and the small group market there? Has that had any meaningful change post-March 31 on enrollment?

Jesse Hunter

Yes, Brian, this is Jesse. I'll take that one. So we have seen, obviously, a lot of activity, particularly in the commercial market with respect to the Department of Insurance and rate setting there. That has not impacted us. So we were one of, I guess, the relatively few people who did not get any pushback from the -- so we have approved rates and everything looks fine for us from that prospective. It's a little early to tell I would say in terms of the membership impact from that. Where you would see the preponderance of that would be in the Commonwealth Choice program, which is new for us. We are enrolling members into that, but it's early stage. So we are seeing the impact just generally of being the low-cost health plan in Massachusetts.

Michael Neidorff

I think, I mean I'm comfortable that we're -- I think the state sees us bending the curve for it. And the other low-cost consumer [ph] to my knowledge at this point, it has approved rates going forward for Choice.

Brian Wright - Collins Stewart LLC

But you're not willing to tell us whether you've actually enrolled anybody as a result of all the upheavals from your competitors in that market?

Jesse Hunter

It's already -- So Brian, we do not have high expectations for the Commonwealth Choice program in the near term. So as we said before, we don't expect that to be material. So as we get -- and we just started enrolling people at the end of the first quarter. So it is early for us to give something specific about the impact of that.

Brian Wright - Collins Stewart LLC

And then, I guess, could you just talk about general kind of RFP likelihood of activity going forward because I think there are some people out there who are saying, "Okay, looking forward, it looks like some of the political intricacies of the Florida market." And then they are saying "Well, look, Florida may not happen -- this is one of the markets that was going to be one of the first of the expansions that we are all looking forward to." Could you just kind of talk to whether Florida is indicative of other states maybe slowing their rate of managed medicaid expansion.

Jesse Hunter

I think we expect there is going to be a consistent flow of activity between now and 2014. So every market has its own dynamics. I think -- so take Florida, for example, there is uncertainty as it relates to what will happen in this session, but I don't think that there is long-term uncertainty that something will happen, so positive. So I think there will be activities. I think it's all still, as Michael indicated in his opening comments, I think it's still early with respect to the details of healthcare reform. But I would expect states who are not doing anything today to move in a Medicaid Managed Care direction between now and 2014.

Michael Neidorff

I think, Brian, hear me, with regards to Florida, I would not generalize on that specific. I think everybody has been reading the political issues that are taking place there, which are signing on all of this. And it's a more unusual approach to politics at this point.

Brian Wright - Collins Stewart LLC

And so I guess the takeaway here is what you see as future backlog hasn't shifted outward as a result, that like your view of that x Florida isn't that it's shifting outward?

Michael Neidorff

No, we continue to see a very full pipeline of RFP activity.

Operator

Your next question or comment comes from the line of Tom Carroll [Stifel, Nicolaus].

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

A question on the change in the pharmacy rebate that we've seen as a part of reform. It sounds like the changes could encourage more states to carve RX back into the cap rate. However, we've seen Ohio and Indiana I think carve it out recently as you discussed. Will this come back at some point into Centene? And do you expect to see other markets where you don't have pharmacy risk come back in?

Michael Neidorff

I think, one, they carved out before the act was signed. And they were the states who were scrambling for pennies and do not take any risk on that. But obviously, I think there's clear incentives to carve in, and I think states are taking a good hard look at it. I expect some to carve it back in or carve it in. It's a matter of economics versus political will, and our will to just going to continue to work on it. We have confidence. We have our own PBM. We have the tools to make it work for our state clients that want to do it. And we can be supportive of them.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

So in the near term, you don't see any one or two-year visibility on reversal of those two states?

Michael Neidorff

I'm not going to -- in the absence of incentive, do it now [ph]. In a political year, with this elections coming up, particularly Ohio, they have a highly contested mature rates. I'm not pushing them on it, but they understand where we're at, and we've had pre-carved out discussions about their evaluating and considering strongly carving back in once DRE [ph] in price. So I'm not going to sit here and say, "They've told me they're going to do it until they have."

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

A question on Celtic. You've established a nice Massachusetts presence there, and that certainly should help you in the future. But outside of Massachusetts, how much revenue does Celtic have right now?

Jesse Hunter

That's about $80 million annualized.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

So $80 million annualized outside of Massachusetts. Is that correct?

Jesse Hunter

Correct. That's right.

Operator

Your next question or comment comes from the line of Kevin Fischbeck [BofA Merrill Lynch].

Scott Green - Bank of America/Merrill Lynch

This is Scott Green in for Kevin. My first question is on MLR seasonality. On the 2010 guidance call, you emphasized that 1Q is seasonally higher in part due to flu trends. So given a weaker flu in the period, is it fair that we might not see that same seasonality this year? Or what should we be considering thinking about MLR going forward?

Michael Neidorff

I think in Q1, we had a more normalized flu season and you can see how we adjusted our annual guidance, which probably gives some indication that the Q1 results in the MLR that we reported at the low end of our range was a better-than-expected year, right? And now I expect having recognized that improvement in Q1, we will march [ph] along the balance of the quarters. If we'll to put it in the range, in the 84 to 86 range.

William Scheffel

I think obviously, Q1 was impacted by the pharmacy carve-outs. And so there's sort of a realignment of what the ratio will be. So that's why we were at 84.0 for the quarter. Last year, we did incur sizable amounts of H1N1 flu costs in particularly the third quarter and the fourth quarter. And so the absence of those costs for this year that comes to past would obviously help bend the trend in that regard.

Michael Neidorff

And I think as you look out, we have new businesses coming on, which impacting -- we always reserve a minimum of 90% MLR, but new book of business, we have Mississippi. We have a new business coming on in South Carolina, which we expect the first month of operations there would be able to quickly normalize. But there's still a higher medical cost experience there. So all those things come into play.

Scott Green - Bank of America/Merrill Lynch

And can you talk about the outlook for the Commonwealth Bridge program? Is that a contract do you think you'll be able to extend during the year? What's in guidance? I think it was supposed to be a temporary program?

Michael Neidorff

Jesse?

Jesse Hunter

Yes, there's not a lot that we can say. That's in active procurement as we speak. So not a lot we can do to comment about kind of where things stand on that, but they have been funded.

Michael Neidorff

If you talk about private. It has been funded. They initiated funding in June. Or to a clear time [ph] with this session has now -- we have the funding for it, so we expect it to continue.

Scott Green - Bank of America/Merrill Lynch

So it's in your guidance that it will be continued?

Jesse Hunter

I think what we have said previously, so outside the procurement stuff, we had said previously that there was some level -- we were expecting to retain some level of the contract.

Scott Green - Bank of America/Merrill Lynch

It looks like you revised or adjusted your reimbursement rate outlook at least slightly. Did you actually receive any new rates that drove that decision? Or is it just general macro factors being considered?

Michael Neidorff

No, I think it's macro. And we like to talk about the abundance of conservatism we apply to things. You can see that we think we'll be able to diminish [indiscernible] of where our guidance has been in spite of that. But why not create a realistic expectation that some states could be flat. We're just starting to enter into negotiations with a couple of things. We've seen no rates from here. So why just now? It's a better spot to be in our judgment.

Operator

Your next question or comment comes from the line of Josh Raskin [Barclays Capital].

Joshua Raskin - Barclays Capital

Just following up on Jesse's comments around Florida and the legislative process that's going on this week. I guess my understanding is that legislature gets out at the end of this week. So is your thought that there's still a chance that there could be an expansion for 2011? Or do you think that's really not necessarily too realistic based on just timing?

Michael Neidorff

Well, it was a timeframe, and there are political pressures. I wouldn't be surprised if nothing does get out, but it doesn't mean that we're going to stop talking to people and attempt to work through that. But I would -- just looking at the Howard's turnaround of a bit short term, I wouldn't be surprised if we're still out of tip for the next legislative session. It's not the end of the world. I'm a little more concerned that if done right then we quickly would see what happens if we turned quickly.

Joshua Raskin - Barclays Capital

But it's fair to characterize this legislative in Florida as being the closest that we've seen for a state-wide expansion, right? It seems as though -- I think you mentioned momentum there. I guess as we think about next year, it seems like we're closer than we've been. Is that fair?

Michael Neidorff

Yes, and I don't think the people that are involved in making that decision. Their term limited out, so I think there's -- now you're going to have a lot of same leadership in the legislature that we have now. So I mean that's kind of something, too. It's just a matter of -- sometimes, it's a matter of timing. It's a little bit like a tedious question on medical laws and the various states and the rates. We have to look at it, and we keep coming back to a pretty very much a macro view of all these things. We're optimistic. We're comfortable. We're able to increase guidance a few cents. Why? Because that's how we see it in spite of all these issues. And so we're always going to give you our best thoughts on that as that time as we see it the same thing here, Josh, in Florida.

Joshua Raskin - Barclays Capital

You guys break out 87,000 lines as ABD/Medicare, and I know Medicare standalone is relatively small with the net total. But as you think about the minimum MLR requirement, and I know that's until 2014. But is your sense that the ABD or the Duals could potentially be subject to a minimum MLR? Or do you think because that is on the Medicaid side, it would not be part of the Medicare MLR floor?

Jesse Hunter

Josh, on some of these things -- the people that will be helping to write these regs. There's not a lot of track record. It's high end. And yes, we will put forward our cases what we think should be done, I expect there'll be some consistency on how they want it done. And they're working to it, finally get passed. We have people in place that can make our position well known. And I think we'll come out of it just fine. It's hard to give a real specific yes or no for this question.

Operator

[Operator Instructions] Your next question comes from the line of John Rex [JPMorgan].

John Rex - JP Morgan Chase & Co

So just first, on your post-Wisconsin ending and the resolution of that. Are there any significant contract rebids due up in 2010 at this point?

Michael Neidorff

No, we have an Indiana contract. Our affiliates where we have better response to it right now.

John Rex - JP Morgan Chase & Co

And when do you expect a decision on that?

Jesse Hunter

Approximately June 1.

Michael Neidorff

Some of it already due.

John Rex - JP Morgan Chase & Co

In that one, in terms of kind of the direction and moving on that, as expected to be a consolidation of vendors? Or expansion? Or kind of what's your view on that?

Michael Neidorff

Well, I think, and Mark commented, they are requiring we'd be able to grow on both businesses. So Mark do you want to...

Mark Eggert

Right, the state has given no indication that they're looking for consolidation. But they are merging two programs, their Medicaid program and their Healthy Indiana program. So bidders have to participate in both.

Michael Neidorff

They're having technical -- the important part of our idea is to bid on that.

John Rex - JP Morgan Chase & Co

So you said the decision is due June 1?

Jesse Hunter

Approximately June 1.

Michael Neidorff

And John, there's always the chance that states will be on time.

John Rex - JP Morgan Chase & Co

Well, speaking of timing, should we expect kind of the annual late-Georgia rate update? I don't know if there's been a year we spent on time, so it's kind of the expectation that that's kind of similar to this year? Or do you feel like they're further along and we should get it timely this year?

Michael Neidorff

I think each year, they've done better. And I think my earlier attempt to humor, right, I actually clarified that states are under some of the same pressures everybody else had, trying to get the data, trying to get it in, trying to get to see them ramp. There's so many factors. That they didn't have the best intention of putting something else on June 1. Probably CMS has not responded to them in a timely fashion, or wants more information, that type of thing. It's pretty hard to guarantee that to anybody beyond that.

John Rex - JP Morgan Chase & Co

I guess maybe I'm trying to get kind of a sense of kind of your visibility on that one in the process. Are we still extremely early staged? Or kind of is your sense that we're far off the line, we'll get this on time and that just give me a better sense of kind of maybe where your visibility is on the process?

Jesse Hunter

We haven't received draft rates yet from the state. We're on about the same timetable, I would say, that we were on last year, except our hope is that the issue will be a little simpler this year. Last year, the state is creating a new payment methodology for the below birth rate infant switch delayed the rate approval by CMS. So it's still early in the process. We don't have draft rates yet, and so it's very difficult for us to estimate when that process will be...

John Rex - JP Morgan Chase & Co

Back on the kind of excise tax issue. I know that's a long ways out. But can you just like maybe in your key markets, maybe in focusing on Texas because I think Georgia is kind of less relevant on this aspect. But how prevalent are the tax-exempt NCOs in the market like Texas? Like kind Of roughly, what kind of share do you see them having? And I'm just saying that because for now, right at the moment, they're exempt from the excise tax?

Michael Neidorff

The proponents in Texas tends to be the both private healthcare.

John Rex - JP Morgan Chase & Co

Do you have any sense of kind of the share of the tax-exempt? So some of these are going to be provider sponsored, I'm sure. But I'm just trying to kind of get...

Michael Neidorff

John, it's small. I mean when you look at it, we're already a big provider. You have the other public companies down there or major players so or these players -- when you look at the EPO, it seems they're not one of the planned out sales, so those types of things. And I think this is not a big presence.

John Rex - JP Morgan Chase & Co

Do you have any markets where there is a bigger presence?

Michael Neidorff

I think probably Minnesota. I think Michigan has a bigger presence will be...

John Rex - JP Morgan Chase & Co

I'm thinking kind of markets that you guys are in?

Michael Neidorff

Yes, I think Georgia. You have Ohio. Massachusetts has a lot of them. You'll find out as much information as we do on that.

Operator

Your next question or comment comes from the line of Tom Carroll [Stifel, Nicolaus]

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

I was thinking a little more about your reserving levels and what you reported this quarter and just the timing of things. I guess I expected to see some positive development in the quarter given flu and kind of some of the medical cost trends that the industry has been battling through over the last year. And you've managed to challenges well. So just I guess two quick questions. Do you feel comfortable with your current level of reserving? And secondly, did any PPD kind of impact the income statement this quarter?

Michael Neidorff

I think it's important that we've said -- there are three people looking at the reserve level. We have our internal people. We have an outside actuary with the expertise. And we have our accounting firm actually. So we have three views of it. So we're comfortable at what we've booked and that we've maintained the same level of conservatism that we have at Medicaid.

Jesse Hunter

Yes, I think nothing is changed really in our reserving practices. The total balance of our medical claims liability changes every quarter based on the two weeks before the end of the quarter, how many claims were processed a little bit there in terms of number of days, and shifts around a little bit. But if you look in our press release, for example and what we've shown over the last three or four quarters, the amount of prior period development, which is included in there, I think it's $49 million for last year at this time and so that's been pretty consistent over the last four quarters. So we don't think we've changed anything. We think we have the same level of conservatism as we're establishing reserves for the more current periods. And so we don't think that really impacted our income statement in any material way in the quarter.

Michael Neidorff

And I'm going back to what I've said historically or in the past couple of quarters. One, we have some systems. We have a dashboard we tried showing people. We have some predictive modeling that we showed to people in New York that give us another cusp to where we are. The dashboard gives us realtime based on the downturn today that's going to have some claims paid last night, a realtime type of information which makes a major difference. And we manage it. We use date received versus paid triangles. And one of the companies tends to just acknowledge that's how they do it. So I think a lot of it is systems of being consistent. And if you look back over the years, the negative surprise is, I think, we had, one that I can think of, a year that's comparable, 2006. Now with the pharmacy thing, and I'll never forget, it started Indiana, Ohio, increase use until the people worked something like pharmacy issue in terms of how they're using some drugs. And they were putting some things that should have gone through one system to the other. So we closed that depot.

Operator

[Operator Instructions]

Michael Neidorff

There's no more questions. We thank you for participating, and we'll see some of you at various conferences, and others, we'll talk to you another quarter. Thank you.

Operator

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

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